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Privatization in Europe

Background

Dieter Bös in his "Privatization in Europe: A Comparison of Approaches,"compares privatization in Western Europe, where he uses the United Kingdom and West Germany as the examples, and Eastern/Central Europe, where East Germany, Hungary, Poland, the Czech Republic and Solvakia are the examples considered. He wanted to particularly examine the question of whether improved efficiency of public enterprises can be achieved without public divestiture; i.e. privatization. He generally concludes that the empirical studies of privatization indicate that improved efficiency comes from enterprises facing competition rather than the change of ownership per se. For Bös this raises the possibility that enterprises could be changed from public agencies to state-owned corporations and achieve most of the benefits of privatizations without the political risks of transferring public property to private ownership. Another alternative approach along these lines would be to split up a state-monopoly into a number of autonomous state-owned corporations which would compete with each other in the market. Likewise competition could be created for a public enterprise by allowing private companies to enter its markets. This approach may involve the replacement of the managers of the public enterprise with management attuned to the rigors of a competitive environment.

Sometimes privatization is motivated by a goal of reducing the power of labor unions. Labor unions in monopolistic markets have an enormous power. This problem exists in the United States in the power of labor unions in public transportation. In the San Francisco Bay Area the union for the Bay Area Rapid Transit (BART) has the power to shut down the economy. As a result the employees of BART have an extremely high income compared to their skill levels.

The Variety of Experiences in Privatization

The Eastern/Central European Cases

In commenting on the variety of experiences Bö makes the observation that the character of the privatization in Europe appears to be realated to historical stereotypes of the countries involved. For example, the Hungarians appeared to have chosen a less ideologically determined path to privatization just as the Hungarian version of socialism was not the ideologically standard form of socialism, Gulash-communism rather than Stalinism. Likewise the Poles' version of privatization was coupled with politically chaotic internal struggles.

While Bös' notion of culturally determined forms of privatization may or may not be valid there is one strong historical determinant of the form of privatization. That is the matter of whether there are legal claimants to the state properties. If an enterprise was nationalized there may be legal claimants to the property and hence privatization really means reprivatization.

The form of privatization in the former East Germany was dictated by unification with West Germany. The form of privatization had to be compatible with the legal structure of West Germany. The pace of privatization in East Germany was relatively rapid because the state-owned enterprises were an awkward element for the economy of a united Germany. Of about thirty thousand businesses 17 thousand were sold within a year and a half of unification. There were about 16.5 thousand claims for restitution of confiscated private property. By September 29, 1990 three thousnad of this claims were settled by reprivatization of enterprises. By 1992 another two thousand claims were likewise settled. The privatization of small enterprises is relatively easy. The privatization of large-scale enterprises in key sectors is much more complicated and difficult. The privatization of the large key-sector enterprises was handled by a special agency, the Truehandansalt (THA) which negotiated the terms of privatization taking into account problems of the cleanup of pollution damage, investment in new equipment and the protection of jobs. Out of slightly over 12 thousand key-sector enterprises 4223 were privatized between October 3, 1990 and July 31, 1992. Another four and half thousand components of enterprises were privatized. Thus the privatization in East Germany was in the nature of a Big Bang, in contrast to the gradualist approach used eleswhere such as in Hungary.

Next to East Germany the most impressive privatization program in terms of its rapidity was that which took place in Czechoslovakia. Out of almost 5.5 thousand state-owned enterprises there were 2400 intances of privatizations of enterprises or parts of enterprises by the end of 1992. Since this program only started in the middle of 1991 this was a rapid pace.

In assessing the privatization program some consideration has to be given to how large the state-sector was as a proprtion of total production in the 1980's. The table below gives some data for comparison.

NationProportion of Output
Produced by State
Czechoslovakia97.0%
East Germany96.5%
Soviet Union96.0%
Poland81.7%
Hungary65.2%

It was appropriate that Hungary chose a less rapid privatization program than the others in as much as Hungary was already one-third privatized at the beginning of the transition. The privatization that took place after the transition was primarily in the form of converting state-owned enterprises into corporations, which the state retained dominant share ownership. About one thousand state-owned enterprises were thus converted. The ownership of shares in these corporatized enterprises was as of the end of 1991 as follows:

Owner CategoryProportion of
Ownership
State Property Agency86%
Foreign Investors8%
Local Councils3%
Private Hungary Investors3%

Although foreign participation in Hungarian "privatization" was small Hungary was atypical in welcoming foreign investment. The other countries feared foreign ownership of key-sector enterprises.

In Czechoslovakia the key-sector enterprises were typically sold directly to buyer groups who had submitted proposals to the Privatization Ministries. Often these buyer groups were made up of the management of the enterprises.

The other form of privatization in Czechoslovakia was the voucher system. Workers could purchase books of vouchers which could be used to bid on enterprises being auctioned off. The sales of these vouchers were slow until investment funds were organized which traded fund shares for vouchers. The Harvard Capital and Consulting investment fund promised a ten-fold return on the cost of the vouchers to Czechoslovakian citizens who purchased the vouchers and turned them over to the fund.

Poland opted for a form of privatization that also involved investment funds. Initially Poland's program called for liquidation of state-owned enterprises. By May of 1992 only five to six hundred enterprises had been privatized in that form. In January of 1991 Poland initiated a program of mass privatization. The Polish state enterprises were converted into corporation in which the ownership was to be distributed as follows:

Owner CategoryProportion of
Ownership
National investment funds60%
National Treasury30%
Enterprise employees10%

The Western European Cases

In the 1980's it was only the United Kingdom that sold off public utilities such as gas, electrical power, water and telecommunication. In the other countries of western Europe there was not as much motivation and the privatization was of a less radical character. Dieter Bös states that the reasons for West Germany's more subdued privatization policy compared to that of Britain are:

Dieter Bö illustrates the quite different experience of U.K. with privatization by comparing the amount of funds raised by privatization compared to the GDP of various nations of western Europe. His results are shown below:

CountryPeriodRatio of Privatization Proceeds
to average GDP over period
Ratio of Average Annual Proceeds
to average GDP on period*
Austria1987-900.9 of 1%0.2 of 1%
France1983-911.5%0.2 of 1%
West Germany1984-900.5 of 1%0.1 of 1%
Italy1983-911.4%0.2 of 1%
Netherlands1987-911.0%0.2 of 1%
Portugal1989-914.3%1.4%
Spain1986-900.5 of 1%0.1 of 1%
Sweden1987-901.2%0.3 of 1%
United Kingdom1979-9111.9%1%
Source: Dieter Bös,"Privatization in Europe: A Comparison of Approaches," Oxford Review of Economic Policy," Vol. 9 No. 1 (1993) p. 100.
*Computed by dividing previous column figures by number of years in period and rounding to the nearest 0.1 of 1%

An important point noted by Dieter Bös is that the conditions for membership in the European Economic Community promoted privatization. Those conditions required the abandonment of the vestiges of a planned economy. The most direct way of doing so was the privatization of state-owned enterprises but some countries such as Austria retained some state-owned enterprises but stopped giving them preferential treatment and forced them to compete in the market.


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