Lessons from Corporatization and Corporate Governance Reform in Russia and China

Abstract:     
This paper, a presentation to the Vietnamese authorities in Hanoi in October 2001 at the "International Conference on Corporate Governance Development in Vietnam", compares the history of enterprise policy reforms in Russia and China. While Russia's privatization program was more rapid than that of other EE/CEE/CIS countries, China has embarked on a slower path of corporatization in the context of a "socialist market economy". Russia's mass privatization program (MPP) created over 41 million private Russian shareholders via direct shareholdings in individual firms or in voucher investment funds, and 70% of the 76,000 privatizations under the MPP were sales of majority shares mostly to workers and other "insiders" (MEBOs). Mass privatization was conducted quickly despite nascent institutional reforms-in corporate governance, competition policy, accounting, and capital markets-to "lock in" transition to a private enterprise-based economy. But the subsequent loans-for-shares program, in which the government gave controlling shares in the largest/most attractive firms as collateral to financial industrial groups (FIGs) in exchange for loans to budget, lacked transparency and raised serious concerns about equity, concentration of market power, and weak corporate governance incentives. Today, perhaps the key policy issue confronting the Russian authorities is the weak extent of inter-enterprise competition: many incumbent firms exercise market power based on vertical and horizontal structural dominance and new business start-ups face significant economic and policy barriers to entry. In China, the SOE sector has been the Achilles heel of the country's otherwise remarkable economic performance over past two decades. Since 1978, innovative, if often administrative, institutional reforms have begun to achieve Chinese goal of "separating government from businesses." Privatization and corporatization of SOEs is occurring, mostly involving small and medium sized firms. Decentralization has engendered discretion to localities. But the Chinese State still maintains ownership/control of key enterprises. Under the "socialist market economy" government agencies attempt to carry out shareholder functions typically performed by private owners in a market economy. For largest businesses, creation of holding groups the main form of restructuring. There is real progress in some areas, but portions of the strategy are contradictory, producing unanticipated distortions and resource drains, spilling over to financial and social sectors, jeopardizing core elements of the overall economic reform program. The paper concludes by drawing several key lessons from the Russian and Chinese experiences, designed to facilitate progress in Vietnam's own program of "equitization".

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