Other countries' experiences

Other countries that tried mass privatization schemes—such as Albania, Kazakhstan, Moldova, and Mongolia—have not yet gained much from their efforts. Dispersing ownership among inexperienced populations seems not to have led to effective governance of firm managers, who in all too many cases have not changed, have failed to restructure, and have remained largely unaccountable for their actions. These experiences and factors are being used to justify a slower, more cautious, more evolutionary, and more government-led path to ownership transfer.

Summary of critique

In many transition countries, mass and rapid privatization turned over mediocre assets to large numbers of people who had neither the skills nor the financial resources to use them well. Most high-quality assets have gone, in one way or another (sometimes through the "spontaneous privatization" that preceded official schemes, sometimes through manipulation of the voucher schemes, and perhaps most often and acutely in the nonvoucher second phases), to the resourceful, agile, and politically well-connected few, who have tended not to embark on the restructuring that might have justified their acquisitions of the assets. In many instances where ordinary citizens managed to obtain and hold minority blocks of shares in high-quality firms, they have been induced to turn over these shares to others at modest prices or have seen—without warning or much subsequent explanation—the value of their minority shares fall to nothing.

These outcomes have been most pronounced where the post-transition state structures have been weak and fractured, allowing parts of the government to be captured by groups whose major objective is to use the state to legitimate or mask their acquisitions of wealth. (Poor outcomes can also occur when stronger governments fail to create a modicum of prudential regulation for financial and capital markets.)

The international financial institutions must bear some of the responsibility for these poor outcomes, because they requested and required transition governments to privatize rapidly and extensively, assuming that private ownership would, by itself, provide sufficient incentives to shareholders to monitor managerial behavior and encourage firms' good performance. Although the international financial institutions recognized the importance of competitive policies and institutional safeguards, they believed these could be implemented later. The immediate need was to create a basic constituency of property owners: to build capitalism, one needed capitalists—lots of them, and fast.

But capitalism requires much more than private property; it functions because of the widespread acceptance and enforcement in an economy of fundamental rules and safeguards that make the outcomes of exchange secure, predictable, and widely beneficial. Where such rules and safeguards are absent, what suffer are not only fairness and equity but also firms' performance. In an institutional vacuum, the chances are high that no one in or around a privatized firm (workers, managers, creditors, investment fund shareholders, or civil servants managing the state's residual share) will be interested in or capable of maintaining the long-run health of its assets. In such circumstances, privatization is as likely to lead to stagnation and decapitalization as to improved financial results and enhanced efficiency.