A selective privatization model: A valuable lesson from Eastern European countries

Headnote

Privatization has proven to be the greatest challenge of the reform in Eastern European countries. This paper identifies two very common methods of privatization employed in Eastern Europe today (government/gradual approach and market/shock approach) and to discuss the advantage and the disadvantage of each option including the economic and social costs. Finally, a selective model is proposed to provide overall framework for privatization by incorporating external and internal condition of the enteprise to be privatized.

INTRODUCTION

Privatization is defined as the "transfer of assets from the state to private sector"(Frydman, & Rapaczynski, 1993). Given the simplicity of this definition, it is important to understand that the process of privatization involves much more than the mere transfer of title, and includes a dramatic reallocation of productive resources, and the introduction of new methods of corporate governance which are free from political intervention. The process of privatization has far reaching consequences, including huge economic and social costs for all countries making the transformation from a planned economy to that of a market economy. The enormous long term benefits derived from the transition, however, far out weigh the costs incurred.

The main thrust of this paper is to identify and discuss the advantages and disadvantages of various methods of privatization and to develop a Selective Privatization Model to provide an overall framework by which we can diagnose the condition and prescribe an adequate therapy for different condition for future privatization.

PRIVATIZATION METHODS

Privatization has proven to be the greatest challenge of the reform process in Eastern Europe. When compared to similar companies in the West, most European enterprises are overstaffed, highly inefficient, and generally unprofitable. Because these factors necessitate a dramatic restructuring of the enterprise, privatization leads to very high social costs, regardless of the method of privatization employed. It is the social costs of privatization, specifically the painfully high levels of both unemployment and bankruptcy, that are at the center of the debate over what "pace" the process of privatization should take.

In essence, there are two schools of thought on the issue of privatization and the appropriate pace of its implementation. The first approach is Government/Gradual approach and the second one is Market/Shock Theraphy apprach.

GOVERNMENT/GRADUAL APPROACH

The Government or Gradual Approach is patterned...