Voucher Privatization: A detour on the road to transition?

We explore an overlooked aspect of the design of the Czech voucher privatization programme, namely, the consequences of allowing individuals to distribute their vouchers among the voucher privatization funds (VPFs). We develop and analyse a model of voucher privatization in which we study the problem facing individuals who invest their vouchers in VPFs which, in turn, are able to use their skills to alter the performances of the firms in which they acquire shares. The VPFs have different skills and, by their bids and subsequent joint ownership patterns, affect the performances of the firms in their funds. We show that even in the case in which voucher holders have identical and full information, and wish to allocate their vouchers to the VPFs in a manner consistent with the maximization of economy–wide profit, a coordination failure generally prevents the implementation of this efficient outcome. Uncertainty, as well as differing payouts by the VPFs, is shown to exacerbate the problem. We conclude that there was an inherent flaw in the design of the Czech voucher scheme. JEL classification: D44, L33, P21, G11.     

The influence of owners on voucher provatized firms in the Czech Republic

This paper analyses evidence gathered via a survey of former state enterprises in the Czech Republic to investigate how far these now privatized firms have been subject to the influence and control of their new owners, principally investment privatization funds. The paper summarizes the survey evidence and sets out its findings under two broad headings: First, the extent and nature of the way these funds have sought to exercies control over the firms they own; and second, the various facets of a firm's operations that have, or have not, been altered by the change of owner. The paper discusses the reasons behing the findings, arguing particularly that Czech voucher privatization, although in itself complete, should be seen and judged as the real privatization and not the finish.     

A Spoonful of Sugar: Privatization and Popular Support for Reform in the Czech Republic

We analyze the role of privatization in creating a constituency for economic reform, markets, and democratic institutions, focusing on the Czech Republic. Drawing on a 1996 survey, we examine the 1,459 respondents' opinions on reforms, economic policies and systems, the legitimacy of transition, and democratic values. Using ordered probit estimation, we find that receiving property through restitution is strongly associated with support for reform and markets. Concerning voucher privatization, we find positive effects for participants retaining shares, but little impact of participation alone. Our simulations suggest that policy designs have substantial consequences for citizens' support of reforms, markets, and democracy.     

Non-standard methods in the privatization strategies of the Czech Republic,Hungary and Poland1

The Czech Republic, Hungary and Poland followed different strategies in the use of non-standard methods of privatization. In regard to restitution, the Czech Republic carried out physical return of property, Hungary weakly implemented financial compensation and Poland has not yet approved a programme. Management and employee buyouts were eschewed in the Czech Republic, took the form of employee stock ownership plans in Hungary and were accomplished chiefly by lease-purchase in Poland. The Czech mass privatization programme distributed a considerable amount of joint-stock company shares free through voucher auctions in which citizens participated directly or through financial intermediaries. In contrast, the Polish programme provided citizens free shares in investment trusts that exercise corporate governance over operating companies and restrure them for divestiture. Hungary's programme, which offered people only interest-free loans to buy some shares in intial public offerings, was abandoned soon after its start.     

Buy-outs in Hungary,Poland and Russia: governance and finance issues1

The governments of Hungary, Poland and Russia have used buy-outs as an important privatization strategy which can be viewed as forming a continuum from straightforward sales where management and employees generally achieve significant ownership, as in Hungary, via intermediate approaches as in Poland where both payment and free distribution of shares are involved, to the Russian case where state-owned enterprises were effectively “given away” through a voucher privatization scheme. This paper, first, presents preliminary evidence on the extent and nature of post-privatization restructuring in buy-outs in these three countries, which highlights the transitory nature of this form of organization. Second, in the light of these findings, the paper analyses the possibilities and difficulties associated with enhancing corporate governance and finance.     

The Czech economic crisis: Policy revenge?

The current Czech economic crisis is defined and its causes are analyzed. The role of policies followed after the collapse of communism—especially the privatization strategy, macroeconomic stabilization (based on a balanced budget and a stable exchange rate regime), and the microsphere liberalization in the absence of a functioning legal environment—will be assessed in view of current economic difficulties. These policies are identified as the primary cause of these difficulties. The need for policy changes and the nature of such changes are elucidated.     

Bureaucracies in the Russian Voucher Privatization

The paper analyses the implementation of voucher privatization in Russia in the framework of incentive theory. The central government needs the support of local privatization agencies. These agencies possess private knowledge concerning: a) their personal reform attitude; b) local privatization conditions. According to the trade-off between rent extraction and efficiency, the speed of privatization (the efficiency goal) is constrained by the informational rents that the government must pay to local agents. Through voucher privatization, the government learns about local privatization conditions. Surprisingly, this additional information does not necessarily lead to more privatization. In fact, the government may even slow down reforms in order to save on bureaucrats' rents. This result of the model matches with the facts of Russian privatization in the period 1992–93.     

Corporate governance following mass privatization

Using vouchers to privatize state-owned firms was an innovative but controversial aspect of transition. In the Czech Republic, voucher privatization created a large group of minority shareholders who coexisted with large shareholder–managers who controlled firms. Critics allege that the structure of shareholdings and regulatory failures allowed pervasive theft of corporate assets, much of it financed by irresponsible bank lending, and led to a financial crisis and an economic downturn. I argue that neither anecdotal evidence of managerial malfeasance nor the theories of tunneling and looting provide strong evidence for this view of corporate governance in the Czech Republic. A lack of small shareholder protection seems to have imposed small costs on the economy, and it may have facilitated rather than hampered the restructuring of firms.     

Macroeconomic implications of voucher privatization in a model with incomplete information

Voucher privatization implies a significant wealth transfer from state to private agents who, in turn, would increase consumption. This paper investigates the consequences of this wealth effect on the macroeconomic equilibrium in a high unemployment economy. The model builds on a two-stage sequential game between the government and private agents. We verify the existence of a pooling equilibrium in which private agents cannot guess whether a policy of fast privatization will be continued in the future or not. This configuration presents an endogenous probability of privatization slowdown; as a consequence, the wealth effect is moderated and the genuine fast privatizer government bears an “undue” credibility cost in terms of employment     

Optimal Privatization Design and Financial Markets

This paper provides a simple general equilibrium analysis of privatization, exploring its real effects. They derive from the expansion of risk‐sharing opportunities (within an incomplete markets setting) that are created by the addition of a market in the public project property rights. The principal conclusion is that an optimal combination of voucher and share issue privatization can implement the first‐best.     

Methods of privatization and economic growth in transition economies1

We examine how different methods of privatization might have affected growth in transition economies. Using several econometric specifications, including fixed effects and GMM, we estimate a cross‐country panel growth model for 1990–2003. We find only voucher privatization to have been significantly associated with faster growth. Moreover, neither private sector development per se nor capital market development exercised a significant influence. We speculate that voucher privatization may have been effective because of the speed with which links between firms and the state were severed.     

Elimination of Social Security in a Dynastic Framework

Much of the existing literature on social security has taken the extreme assumption that individuals have little or no altruism; this paper takes an opposite assumption that there is full two-sided altruism. When households insure members that belong to the same family line, privatizing social security can gain public support. In our benchmark model calibrated to the U.S. economy, privatization without compensation is favoured by 52% of the population. If social security participants are fully compensated for their contributions, and the transition to privatization is financed by a combination of debt and a consumption tax, 58% experience a welfare gain. These gains and the resulting public support for social security reform depend critically on a flexible labour market. If the labour supply elasticity is low, then support for privatization disappears.     

Privatization and Performance in Eastern Europe: Alternative Scenarios

The paper focuses on the possible outcomes of privatization and considers how different scenarios of privatization lead to varied macroeconomic performance. Alternative scenarios involve changes in efficiency, taxation, wages, income distribution and interactions with the world economy. The consequences of pursuing different scenarios of privatization are simulated using a Computable General Equilibrium (CGE) model. Illustrative simulations with the model are carried out for a representative economy, intended to depict a country at the outset of transition. The simulation results suggest that privatization can exert a favourable or adverse impact on the whole economy, depending on the way in which the performance of the newly privatized sector changes. The simulation analysis for Poland shows that some developments accompanying privatization processes might have contributed to recession and budget deficit.     

CORPORATE GOVERNANCE AND VOUCHER BUY-OUTS IN RUSSIA

This paper examines the issues which may create pressures and incentives to introduce efficiency-enhancing governance structures in enterprises which are privatized through voucher schemes in Russia. These pressures emphasize the need to view buy-outs created on privatization as transitory organizational forms with a three-stage process being suggested as the most feasible for developing governance mechanisms which produce efficiency gains, The paper uses illustrative case studies of the first major enterprises to experience post-privatization ownership changes.     

Inequality,Debt Servicing and the Sustainability of Steady State Growth

We investigate the claim that the way in which debtor households service their debts matters for macroeconomic performance. A Kaleckian growth model is modified to incorporate working households who borrow to finance consumption that is determined, in part, by the desire to emulate the consumption patterns of more affluent households. The impact of this behavior on the sustainability of the growth process is then studied by means of a numerical analysis that captures various dimensions of income inequality. When compared with previous contributions to the literature, our results show that the way in which debtor households service their debt has both quantitative and qualitative effects on the economy's macrodynamics.     

Precautionary savings or working longer hours?

This paper quantifies the macroeconomic implications of the lack of insurance against idiosyncratic labor market risk. I show that in a model economy calibrated to observed individual level data, households make ample use of work effort as a consumption smoothing mechanism. As a consequence, aggregate consumption is 0.6% lower, work effort is 18% higher and labor productivity is 12% lower than they would be in a complete markets setting. Not surprisingly, the welfare benefits of moving towards complete markets are very large. Accounting for the whole transition to the new complete markets steady state I find the welfare costs of market incompleteness above 16% of individual lifetime consumption.     

Does the recognition of indigenous territories impact household economic situations? Evidence from western Panama

The Government of Panama created a semi-autonomous indigenous area in 1997. The establishment of this region institutionalizes indigenous authorities and prohibits land privatization. This study investigates the effect of the recognition of common property land to indigenous groups on economic performance. By using difference-in-differences approach at household-level data, I find that non-migrant indigenous households living in the semi-autonomous territory declined their consumption relative to their counterparts living outside. Further, indigenous households living in the semi-autonomous territory have lower access to public goods and are less likely to participate in agricultural market activities.     

Household resilience to adverse macroeconomic shocks: evidence from Czech microdata

We develop a methodology for identifying financially distressed households and use it for testing the responses to shocks to the unemployment rate, the interest rate and prices of essential expenditure in the Czech Republic. We extend the approach of Johansson and Persson (2006) for Sweden and Albacete and Fessler (2010) for Austria in the literature to allow for full labour market transitions between employment and unemployment, and, due to data availability, to account for heads and spouses within households. This improvement may lead to a higher response of household distress incidence, due to the unemployment rate shock, than in both Sweden and Austria, while the effects due to the interest rate shock are of similar size as in Austria. We illustrate the use of our approach for stress testing households’ ability to pay their debts using macroeconomic scenarios from the CNB’s official forecast and from the CNB’s Financial Stability Report. The results highlight the importance of using micro-level datasets in the analysis of household distress incidence, as the impact of shocks is more pronounced among lower-income households.     

POST‐PRIVATIZATION OWNERSHIP AND FIRM PERFORMANCE: A LARGE META‐ANALYSIS OF THE TRANSITION LITERATURE

This paper aims to perform a large‐scale meta‐analysis of the relationship between post‐privatization ownership and firm performance in Central and Eastern Europe and the former Soviet Union. Baseline estimation of a meta‐regression model that employs a total of 2,894 estimates drawn from 121 previous studies indicated the superior impact of foreign ownership on firm performance in comparison with state and domestic private entities. Furthermore, the estimation of an extended meta‐regression model that explicitly controls for the idiosyncrasies of transition economies and privatization policies strongly suggested that differences between countries in location, privatization method, and speed of policy implementation strongly influence the link between post‐privatization ownership structure and firm performance. We also found that these factors not only cause a remarkable gap between countries in terms of ex post improvement in firm performance but also significantly affect the interrelationship between foreign investors, domestic outsider owners, and firm managers, and the relative superiority of various domestic outsiders. Conclusive evidence of the harm caused to ex post firm performance by voucher privatization is one of the most noteworthy empirical findings in this paper.     

Post–Privatization Effects of Management and Employee Buy–outs

Management and employee buy–outs have played a significant role in the privatization of state–owned enterprises. Key research and policy issues are raised concerning whether insider ownership promotes or impedes restructuring and adaptation. This paper reviews and synthesizes studies of the effects of privatization management and employee buy–outs in both developed and transition economies. Trends in privatization buy–outs and conceptual issues concerning the expected effects of privatization buy–outs both in terms of performance and survival are discussed. A review of empirical evidence is presented in terms of the impact of buy–outs on employee attitudes, human resource management, strategy and restructuring, financial and economic performance, together with fresh evidence on survival. Privatization buy–outs can lead to significant restructuring but their impact depends on institutional context and policy. Restructuring may be greater where insiders purchase shares rather than acquiring them virtually free through voucher programmes.