Privatizing Eastern European Economies: A Critical Review and Proposal
World Bank, Europe and Central Asia Internal Discussion Paper Report No. 119
33 Pages Posted: 25 Apr 2011
Date Written: December 20, 1992
Two years after the Polish "Big Bang," privatization In Eastern Europe, the cornerstone of transition, has been progressing at a slow pace which frustrates many reformers in these countries. Notwithstanding the considerable growth of private firms from new entry, the relative number of privatized large firms and/or their share in the value added remain modest. The tardiness of the process has been aggravated by the poor performance of these economies, and this has led to calls for increased government Intervention which in turn may diminish the likelihood of privatization in the future. As a result, there is a growing realization that the speed of privatization needs to be increased in order to avoid the "transition trap": a situation where the economy is stuck with essentially unchanged overall structure of ownership and a corresponding lack of incentives.
This paper reviews privatization plans as they have been implemented in several Eastern European countries ( i.e., Bulgaria,Czech and Slovak republics, the former East Germany, Hungary, Poland and Russia) and attempts to draw some lessons which may be useful for other transitional economies which are presently in earlier stages In the privatization process. We argue that programs which are not either highly centralized (as in the former East Germany) or highly decentralized (an approach which is as yet untried) cannot provide the speed to avoid the "transition trap." While the latest wave of new mass privatization plans, which emphasize vouchers and mutual funds, are often regarded as decentralized approaches we argue that this is not the case and that these plans may not succeed where previous approaches have failed.
The lessons from the critical review are integrated into a specific privatization proposal which is flexible enough to be applicable to a wide range of countries and initial conditions. A country can choose the degree to which it wishes to pursue this approach from the almost complete reliance on It to using It as a complementary method to other forms of privatization. The approach has merits both from the perspective of short run and long run efficiency. In the short run, privatization is achieved quickly, and correct incentives are put into place so that the transitional economies can achieve a high level of productivity growth in the post-privatization years.
Keywords: privatization, transition, Eastern Europe, Russia, Poland
JEL Classification: P31, L3, P2
Suggested Citation: Suggested Citation