Privatization and Its Limits in Central and Eastern Europe: Property Rights in Transition

Privatization and its Limits in Central and Eastern Europe Property Rights in Transition

Hella Engerer

Studies in Economic Transition General Editors: Jens Hölscher, Senior Lecturer in Economics, University of Brighton; and Horst Tomann, Professor of Economics, Free University Berlin This new series has been established in response to a growing demand for a greater understanding of the transformation of economic systems. It brings together theoretical and empirical studies on economic transition and economic development. The post-communist transition from planned to market economies is one of the main areas of applied theory because in this field the most dramatic examples of change and economic dynamics can be found. The series aims to contribute to the understanding of specific major economic changes as well as to advance the theory of economic development. The implications of economic policy will be a major point of focus. Titles include: Irwin Collier, Herwig Roggemann, Oliver Scholz and Horst Tomann (editors) WELFARE STATES IN TRANSITION East and West Hella Engerer PRIVATIZATION AND ITS LIMITS IN CENTRAL AND EASTERN EUROPE Property Rights in Transition Hubert Gabrisch and Rüdiger Pohl (editors) EU ENLARGEMENT AND ITS MACROECONOMIC EFFECTS IN EASTERN EUROPE Currencies, Prices, Investment and Competitiveness Jens Hölscher (editor) FINANCIAL TURBULENCE AND CAPITAL MARKETS IN TRANSITION COUNTRIES Jens Hölscher and Anja Hochberg (editors) EAST GERMANY’S ECONOMIC DEVELOPMENT SINCE UNIFICATION Domestic and Global Aspects Emil J. Kirchner (editor) DECENTRALIZATION AND TRANSITION IN THE VISEGRAD Poland, Hungary, the Czech Republic and Slovakia Julie Pellegrin THE POLITICAL ECONOMY OF COMPETITIVENESS IN AN ENLARGED EUROPE Gregg S. Robins BANKING IN TRANSITION East Germany after Unification Johannes Stephan ECONOMIC TRANSITION IN HUNGARY AND EAST GERMANY Gradualism and Shock Therapy in Catch-up Development Hans van Zon THE POLITICAL ECONOMY OF INDEPENDENT UKRAINE

Studies in Economic Transition Series Standing Order ISBN 0–333–73353–3 (outside North America only) You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and the ISBN quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England

Privatization and its Limits in Central and Eastern Europe Property Rights in Transition Hella Engerer Senior Researcher German Institute for Economic Research Berlin Germany

© Hella Engerer 2001 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 0LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted her right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2001 by PALGRAVE Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PALGRAVE is the new global academic imprint of St. Martin’s Press LLC Scholarly and Reference Division and Palgrave Publishers Ltd (formerly Macmillan Press Ltd). ISBN 0–333–75142–6 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Engerer, Hella, 1963– Privatization and its limits in Central and Eastern Europe : property rights in transition / Hella Engerer. p. cm. — (Studies in economic transition) Includes bibliographical references and index. ISBN 0–333–75142–6 1. Privatization—Europe, Central. 2. Privatization—Europe, Eastern. 3. Right of property—Europe, Central. 4. Right of property—Europe, Eastern. I. Title. II. Series. HD4140.7 .E54 2001 338.947—dc21 2001021196 10 10

9 09

8 08

7 07

6 06

5 05

4 04

3 03

Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire

2 02

1 01

Contents vii viii x

List of Tables General Editors’ Foreword Preface

Part I

Introduction

Part II

1

Property Rights in Philosophy and Economics

9

1 1.1 1.2 1.3

Theories of Property in Classical Philosophy Contractarianism and theories of natural law Utilitarian interpretations Philosophical stimuli on property rights in transition

14 16 30 40

2 2.1 2.2 2.3

The Neoclassical Definition of Property Property rights and privatization Demsetz’ analysis of the changes of property rights Buchanan’s contractarian version of the emergence of property rights North’s approach to an explanation of institutional change Central and Eastern Europe as area of application

48 49 55

The Monetary Theory of Private Property From the coherence of monetary and planned economy to transition Transformation of property in formerly planned economies

74

2.4 2.5 3 3.1 3.2 4 4.1 4.2 4.3 5

The Genesis and Changes of Property as Portrayed by Old Institutionalists Commons: property rights as concerted action for settling conflicts Veblen’s theory of the leisure class: property as a trophy Comments on property reform in Central and Eastern Europe Property as an Institution: Summary and Prospect

Part III 6

57 66 70

74 80 83 84 94 98 102

Property Rights in Planned Economies

107

Legal Types of Property and Ownership Guarantee

110

v

vi Contents

7 7.1

Ownership of the Means of Production Development of the private and “socialist” sectors as mirrored in statistics Property and economic reform Private activities in planned economies Increasing enterprise autonomy, quasi-privatization and spontaneous privatization

114

8

Employment Guarantee and Social Security

136

9

Property Erosion and the Initial Situation before Transformation

141

7.2 7.3 7.4

Part IV 10 10.1 10.2

Property Rights in Transition

114 116 119 124

145

The Course of Transformation Economic development as mirrored in statistics The transformation crisis: reasons and specific characteristics of the countries

149 149

11

The Question of Property

157

12 12.1 12.2

The Legal Solution Codified law: shortcomings and contradictions Private (il)legal law-making

163 164 174

13 13.1

The Economic Patent Remedy: Privatization “from Above” The privatization debate: the British model versus voucher privatization The problem of acceptance Privatization in the individual countries Evaluation of privatization in country comparison

178

The Spontaneous Solution: Bottom-up Privatization Measuring bottom-up privatization Problems and promotion of small and medium-sized enterprises

235 236

13.2 13.3 13.4 14 14.1 14.2

Part V

Summary and Prospects

152

180 186 188 226

238

245

Appendix: Main Economic Indicators

253

Notes

261

Bibliography

293

Index

313

List of Tables Table 7.1

Share of the Socialist Sector in National Income in Selected Countries Table 7.2 Growth of National Income Produced in Selected Countries Table 13.1 Privatization Methods and Objectives

117 182

Appendix A1 A2 A3 A4 A5

253 254 256 257 259

Tables Czech Republic Hungary Poland Romania Russia

vii

115

General Editors’ Foreword During the past decade, privatization has been a major economic issue on reformers’ agendas throughout Central and Eastern Europe. It seemed to be obvious that the lack of private property rights was a fundamental reason for the failure of socialism. Also, even within the capitalist system, experience has been that privatization is a permanent challenge in a market society. On the other hand, the academic debate on the institution of property rights led to the conclusion that privatization programmes may result in rather unclear efficiency effects. Consequently, that debate has mainly focused on issues of strategy and design. In this study, Hella Engerer pursues a different approach. Rather than restricting her comparative country studies to the question of identifying successes and failures and to the search for potential determinants, she uses the observation of obviously paradoxical results to inquire into the very concept of property. Directed by her research interest, she does not hesitate to trace the analysis back to the theoretical and philosophical foundations of the conception of property in a civic society. This intriguing analysis leads to the hypothesis that the limits to privatization have a common root which can be circumscribed by an insufficient assignment of liability. Engerer’s working hypothesis can explain a great variety of deficiencies which could be observed in the course of systemic transformation. There is ample evidence for these deficiencies, the major obstacles being the government’s role in merging private and state enterprises, the presence of insider ownership and network property, non-enforcement of bankruptcy laws, credit-chains in the non-banking sectors, non-payment of salaries and tax debts on the side of state enterprises, and so on. That is complemented on the part of the financial sector by preferential credits provided by the central bank and business banks with the consequence of continued prolongation of bad assets and revolving recapitalization of state banks; by forced savings as for private households, and finally by keeping the central bank dependent on the government’s discretion. By identifying the shortcomings of the transition process and interpreting them as an indication of an imbalanced system of property rights the book also provides a lesson on the role of institutions in a market society. In this respect, Engerer’s analysis coincides with the results of New Institutional Economics to assign the role of reducing uncertainty to institutions, in particular of uncertainty on how market agents behave. But her analysis points beyond those results: Since self-commitment in contractual relations is the root of a functioning market society, we have to conclude viii

General Editors’ Foreword ix

that transition is a wearisome learning process. Central and Eastern European countries still have a long way to go. The book provides enjoyable reading and is outstanding in its methodological approach. It reaches well beyond the limits of a purely economic observation of transition and delivers a major contribution to the understanding of the emerging economic order in Central and Eastern Europe. JENS HÖLSCHER HORST TOMANN

Preface This study is the result of theoretical and empirical work. Conducting empirical studies on privatization in Eastern Europe at the Deutsche Institut für Wirtschaftsforschung (DIW), Berlin, I recognized that a satisfactory explanation of the shortcomings and deficiencies which I observed in privatization processes would require a theoretical analysis. This insight led me to an in-depth inquiry which traced back the concept of property rights to the philosophers of the Enlightenment. I hope the reader will follow my search for the essence of property with patience and interest. One of the many questions on property which he/she will encounter and which will hopefully make interesting reading is the one David Hume posed: “[…] I suppose a person to have lent me a sum of money, on condition that it be restored in a few days; and also suppose, that after the expiration of the term agreed on, he demands the sum: I ask, What reason or motive have I to restore the money?” The present study attempts to give answers to such questions by tracing the emergence of ownership guarantee. In this preface my main concern is to thank all those who contributed to the writing and publication of this study. I owe special thanks to my thesis supervisor, Professor H. Tomann, for his assistance and suggestions, and particularly as it was he who, together with Dr J. Hölscher as editor, offered me the opportunity to publish this study in the series Studies in Economic Transition. Credit also goes to Professor Sundhaussen, who helped me discover and understand property as an institution in Central and Eastern Europe from the historical point of view as well. I am also grateful to all my colleagues who readily invested their time in the discussion on ownership. I owe thanks to Gabriela Schmitt for her patience and her sound judgment during the translation, which was financed by DIW. My special thanks goes to Volkmar Engerer who accompanied me and gave me his support during my study of property. Nonetheless, the responsibility for any errors is mine and mine alone, so do not withhold your criticism, but pass your comments on to me. HELLA ENGERER Berlin

x

Part I Introduction

2 Privatization in Central and Eastern Europe

Introduction At first, this project was intended to be a study on transition and privatization in Romania, a country viewed with suspicion even today, due to its past, and considered a “taboo-zone”, that seems to forbid even the slightest interest. In the Western press today, Romanian current events make the news only with negative headlines, if at all. It all began with asking detailed questions and looking more closely at events on the spot. While staying in Bucharest in autumn 1992, I saw the people, experienced their candor, the difficulties of their everyday lives and the creativity they used to overcome them. At that time I had the opportunity to discuss the concept of privatization with local economists and to witness the infancy of privatization itself. Upon returning, I was interested in following up the discussion on privatization concepts which concentrated mostly on the question of which method would be suitable and which would not. I fell under the spell of the privatization debate. My doubts, however, were gradually increasing. It became evident that only the details of individual methods were being analyzed, and in an over-subtle way; above all, the “how” issue overshadowed the “whether” of privatization. In this phase I was struck by the passage in the privatization program of the Russian Federation of 1992 defining the objects excluded from privatization. An explicit privatization ban was declared for the financial resources of the national budget and the central bank. I therefore asked myself how anybody could even remotely suggest that revenue authorities and the central bank represent property and thus could be privatized. I suspected insufficient knowledge of the actual facts on my part and that the privatization debate had obscured my view. Obviously, while the West and the East agreed upon how and what should be privatized, a common conception of property was still missing. Many additional observations increased my skepticism concerning the privatization debate. For instance, the question of why the Scandinavian countries are considered market economies despite their large public sector, whereas some Central and Eastern European countries, like the Czech Republic, are still considered to be in transition in spite of tremendous privatization. Another issue was the Russian voucher privatization, which Western economists followed with avid interest, while simultaneously Western entrepreneurs complained about a Mafia-like phenomenon which was turning Russia into “another Italy”. Then there was Romania, a country demonstrating hardly any privatization, but whose to some extent “acceptable” development at first went unnoticed by all. I therefore asked myself if, indeed, there is no considerable difference between countries with speedy versus sluggish privatization, then why have privatization at all? My excitement about privatization cooled off substantially.

Introduction 3

During the ensuing months, it was not only the popular topics like the Mafia, but also phenomena like the refusal of enterprises to pay taxes, as well as the state’s defaulting on the payment of wages, that astonished Western economists as well as myself, who receive our salaries and also pay our taxes in a timely manner. I suspected the root of these phenomena to be property and I understood that the question of property cannot be resolved through simple privatization. To put it another way: to some extent, property represents a prerequisite for privatization. This is where my search for property and its “essence” began – and it still continues. The answers I found to the question of property so far are the basis for Part IV, “Property Rights in Transition”. In years past, the radical change of Central and Eastern European systems, historically unique, has been referred to as “transition”. Though its importance for society as a whole was recognized and examined, attention was mainly focused on the economic problems of transition from a planned to a market economy. In the economic subsystem, transformation was subdivided into the components of liberalization, stabilization and privatization. Privatization, that is, the transfer of state property to the private sector, was considered the main instrument for the change of the socialist property system. A rapid privatization became the standard for the success of transition per se. But equating the change of property order with a successful transfer of state resources to the private sector does not go far enough. The assumption that a private disposition of resources will bring about an increased efficiency presupposes a stable framework, which within transformation is precisely what is not given. In this context, the question of property is rather a fundamental one, namely of the emergence of and changes to property as a social institution. The main goal of this study is to analyze this process, allocating privatization its place and expounding the limits of a purely economic observation of transition. An additional concern is not to single out one country for the purpose of demonstration but to analyze transition countries considered advanced and others considered to lag behind, as well as both big and small countries, always with regard to what conception of property they develop. The reason for this approach is the author’s strong belief that the connection between transformation and property cannot be analyzed via one characteristic example, but only by comparing several countries. It was thereby necessary to fall back on statistical data on a large scale. The study initially intended as the study of one country, namely Romania, ultimately grew to include many of the European transition countries. The nature of the topic necessitated this. A postscript in this context: although I refer to “Central and Eastern Europe” I do, of course, include South-Eastern European countries, especially Romania. Admittedly, this is a terminological inaccuracy, although it is frequently found in specialized literature.

4 Privatization in Central and Eastern Europe

Questions concerning the emergence and the social justification of property, which were discussed in the ancient world and again became relevant in the later Middle Ages, have nowadays fallen into oblivion. The philosophical property theories represent the starting-point of this study, the rest of which is divided into three parts: “Property Rights in Philosophy and Economics”, “Property Rights in Planned Economies” and “Property Rights in Transition”. Part II begins with the early philosophers; they did not consider property to be a sacrosanct and unavoidable institution, but asked more fundamental questions. Their explanation of the emergence of property and the state on the basis of the construct of the social contract still reflects this complexity of the conception of property; in time this conception was, however, analyzed less and less. The events in Central and Eastern Europe will need to be studied on the basis of this examination. Starting from a philosophically inspired classification of economic property theories into individualistic (neoclassicism and monetary theory) and group-related approaches (early institutionalism in particular), neoclassical analysis will offer the economic approach. It directly takes up the old idea of a contract, which had already been proposed by philosophers, in the form of Buchanan’s contractarian theory. It additionally extends the perspective restricted to the nation-state by asking whether and why at a certain point in time property rights can take on different forms in different societies – as is evident in Eastern Europe. Monetary theory will then be addressed, instead of further following the problem of designing privatization – which after all constituted the basis of the privatization debate. The latter attributes property a new function within money economies and from this perspective explains some fundamental differences between planned and money economies that contribute to the understanding of transformation. A last change of scene to old institutionalism will lead us back to the question of how property emerges as an institution and of how it can be established socially with durable effect. With these realizations, gained from the examination of historic processes, the old institutionalism is bringing us back from philosophical speculation and economic rationality, and instead firmly sets our feet on the hard facts of Central and Eastern Europe that smoulder with conflicts. Part III is entitled “Property Rights in Planned Economies”. At the outset of transformation many economists actually believed that the radical changes in Central and Eastern Europe could be interpreted as a new beginning, but meanwhile it has been demonstrated that old patterns of behavior are a retarding factor for institutional development. It is therefore not sufficient to establish that, at the beginning of transformation, the individual Central and East European countries would have had different starting conditions. Rather, it is necessary to take the past developments into consideration more seriously than has been done so far. On that note, we will

Introduction 5

not go back too far in history, even though some transformation countries have re-established links to their pre-socialist past. Instead, priority is given to the comparison of countries that comprises events of the last decade of the planned economy phase. The closest attention is thus not paid to the functioning of planned economies, but to the changes of property order. This process will be examined from two perspectives. While one side expounds upon the extent to which private property was allowed during the 1980s, the other side takes up attempts for reform within the so-called socialist sector. According to the study, the interplay of the increasing liberalization of private activities on the one hand and the increasing autonomy of state-owned enterprises on the other led to a more or less pronounced erosion of the previous property order during the 1980s. An undesired process was thus set in motion even before the radical changes took place; it had considerable effects on the role of property within transformation. “Property Rights in Transition”, Part IV, represents the centerpiece of this study. It will first portray the transformation crisis of the individual countries as well as the attempts to explain it, before addressing the question of property. It is noticeable here that institutional deficiencies were recognized as the root cause of the crisis only at a late stage. This applies particularly to the institution of property. Surprisingly, during the mid-1990s and thus towards the end of privatization, the phenomenon of “not fully state, not fully private” is detected alongside insufficient restructuring of enterprises. It does not occur to anyone, however, that the privatization and the resolution of the property issue in Central and Eastern Europe cannot be identical (provided the second problem is identified at all). The matter of property will therefore be analyzed anew together with the three methods pursued in Central and Eastern Europe so far, namely the legal solution, privatization as economic patent remedy and the spontaneous solution. The main focus will be on privatization. The conceptions, development and results of privatization in the individual countries will first be demonstrated through a rather traditional approach starting with the theoretical privatization debate. A reassessment will follow subsequently. To come straight to the result: in Central and Eastern Europe privatization frequently remained a formal act and thus hardly contributed within transition to the change of property as an institution. In studying Central and Eastern Europe, a multitude of difficulties must be overcome. Some partly technical comments are thus necessary beforehand. The first comment concerns the examination period. Transformation means rapid changes; the important observations made today could seem of secondary importance tomorrow. In this respect it would therefore be best if a study like this could be written, so to speak, overnight. But the prolonged time period needed for completion, and the claim to be topical, required that once the end had been reached, certain earlier parts needed to be reworked and completed. A clear break had to be made: as far as it

6 Privatization in Central and Eastern Europe

was possible, this study will consider the development of each country until the end of 1997, partially even until 1998. The period of completion and the increasing amount of literature pertaining to transformation and privatization lead to a second point. Documentation concerning Central and Eastern Europe has not always been as reliable as it is today. A few years ago it was only possible to gain an insight into the events by examining Eastern European primary sources in addition to Western publications. This was my way of operation, wherever my language skills allowed it. The reading of Russian and Romanian essays, newspapers and legal texts, initially dominating the list of literature, took up much time, but also provided many interesting discoveries. The Eastern European countries meanwhile have begun to publish German- and English-language newspapers, authors write in better-known languages, and legal texts are often translated simultaneously. The bibliography has been enriched with such sources, wherever it was possible. Since sizable remaining original literature and some East European authors were quoted, the “latinization” of names and characters has to be addressed. The transliteration of the Russian alphabet was made according to the “official” way that is usual in Slavonic studies. New technology enabled the reproduction of all characters of Romanian and of the various Slavonic languages. The names of authors that publish under their latinized name have not been rendered into Slavonic subsequently. An Appendix provides the statistical basis. The countries’ original statistics have been used primarily. They represent a relatively good basis for study in recent times and are being used by international organizations. The problems of old, socialist statistics are referred to as they surface. Explicit indications are necessary in pointing out that statistical reporting is still an area of transformation and that the given information can only reflect a general trend. The statistical appendix contains tables concerning the economic development of the countries examined. The Bibliography partly gives the year of the first publication and that of the reprint used. It seems sensible to indicate the first year of publication, because among other things, philosophical quotations can thus be classified chronologically at first glance, revealing the spirit of the times. The first year of publication is not indicated for current authors. Finally, the abbreviations used need to be mentioned. A peculiarity relates in this context to currency denominations, which are abbreviated according to the rules of the International Organization of Standardization. All in all restraint has been exercised, so that the list of abbreviations turns out quite short: CMEA EU GDP

Council of Mutual Economic Assistance European Union Gross Domestic Product

Introduction 7

IMF SME

International Monetary Fund Small and medium-sized enterprises

The following currency denominations have been used: CZK HUF PLN ROL RUR TRbl.

Czech koruna (after division of Czechoslovakia; before that Kcˇs) Hungarian forint Polish zloty Romanian lei Russian rouble Transfer-rouble

This page intentionally left blank

Part II Property Rights in Philosophy and Economics

10 Privatization in Central and Eastern Europe

Property rights in philosophy and economics The question of ownership had not been discussed in economics for a long time, although property marked the central conflict between economic systems. The question of ownership became a topic again only as a result of the events in Central and Eastern Europe in 1989/90. The collapse of socialism seemed to confirm that, at long last, private property is superior to state property. In order to change their property system, Central and Eastern European countries were advised to cut back rapidly their dominant state sector in favor of the private sector. Since then, the privatization1 of state enterprises plays a key role in the conceptions of economic transition. The reasons for privatization are based on the central assumption of a higher efficiency of private property compared with state property, the relief of the government budget (in deficit) through privatization revenues, the possibility of “fairer” distribution, as well as the reduction of political influence on enterprises – to name but a few arguments for privatization. These arguments, however, stand upon the unstable ground of economic theory, and this does not apply only to countries undergoing transformation, but even to established market economies. Efficiency thus seems less a question of private versus public ownership of enterprises than a question of corporate governance and market environment. That is why, in the long run, due to privatization (non-recurrent sales revenues versus recurrent payment of taxes) even public revenues are not necessarily higher than in the case of maintaining national property. In addition, privatization is, at most, suitable as an instrument for influencing primary income distribution. After all, the argument that direct political exertion of influence on public enterprises would be reduced by privatizing them, must be confronted with the risk of the development of lobbies in the private sector. It is therefore questionable whether privatization constitutes a universal instrument for (simultaneously) resolving the problems of efficiency, stabilization, distribution and political influence. The reasons named above have been discussed on the occasion of privatization in western industrial countries over and over again, but have not yet been finally clarified. The debate on the effects of privatization on efficiency, stability and distribution continues in the course of the transformation in Central and Eastern Europe. It is considerably more significant that, due to the radical changes in Central and Eastern Europe, a new and far-reaching explanation of privatization has been added. The assertion is that privatization constitutes an important precondition of market economy, and that as a result the transformation from planned to market economy will become irreversible. This precondition is usually described using the catchword of a “critical mass” of private ownership. The problem was at first disguised by using the term of a critical mass in debates on privatization rather than being explained by it. In the course of

Property Rights in Philosophy and Economics 11

the debate, the initial qualitative argument of the critical mass was, however, altered into a quantitative standard (for instance, the number of privatized enterprises) for the success of privatization and transformation per se. As a result, the institution2 of private property was not only thought of as being a central element for the functioning of a market economy. In addition, it was also assumed that the private sector must reach a certain level, and that this critical mass could not be developed through new businesses alone, but only through an additional, forced privatization of state enterprises. Behind the argument of the critical mass therefore hides a trilevel argumentation based on the following assumptions: (1) (2) (3)

in a market economy private ownership is indispensable, the private sector must reach a certain extent, and the private sector does not develop spontaneously enough.

It is by no means certain yet that economic theory can sufficiently substantiate these assumptions. So far, there have hardly been any theoretically sound answers to the question of why the institution of private property constitutes a central element for the functioning of the market economy, and why it should be superior to public property. With its central assumption of a higher efficiency of private property, mainstream economics has answered these questions only superficially. This reason must be called superficial as, for the most part, mainstream economics observes the existing private property relating to a certain point in time and under given circumstances.3 It is, first of all, interested in the efficiency aspects of property in functioning market economies (that is, in the former planned economies), but not whether private property per se is the basis for the functioning of the market economy. If the circumstances are given, it even assumes spontaneous development of the private sector. Based on such arguments as market failure, it then derives in which special cases public ownership would allow the expectation of higher efficiency. If these exceptional facts do not exist, there is need for privatization. The minimal size of the private sector remains undefined within mainstream economics. The critical mass argument brought to bear especially for the privatization in Central and Eastern Europe, however, stands and falls by this. In the end, it is precisely the term “critical mass” that demonstrates how difficult it became after the radical changes in Central and Eastern Europe to give a new justification for private property in market economies, namely one which is no longer based on the competition between economic systems. If the superiority of private property, its unsatisfactory, spontaneous development, and the quantitative argument of the critical mass cannot be substantiated theoretically, privatization is thus no longer, a priori, a cureall for the problems within transition. Instead of demanding privatization that is specific for transformation, the reasons for privatization in Central

12 Privatization in Central and Eastern Europe

and Eastern European countries then give way to well-known arguments that have already been presented for privatization in other countries. It would then remain to be clarified what significance privatization should have within transformation programs at all, which concrete objectives could be achieved through privatization, and whether these could possibly be reached with alternative instruments (such as the “commercialization”4 of state enterprises). All in all, the modern point of view narrows the contemplation on private property to the functional, time-related aspect of already existing private property. This is, by the way, not only valid for economists, who place the extent of possible disposition (usus, usus fructus, abusus) of goods in the focus of interest. Legal experts are also in the habit of characterizing ownership by analyzing to whom already existing goods belong as of right (the victim of theft is the owner as well). Sociologists have recently been making attempts to understand existing private ownership from the viewpoint of communications and systems theory. Despite the difference in accessibility to ownership that scientific disciplines have today, they thus still have in common the fact that they investigate its momentary way of functioning as well as the problems pertaining to the juxtaposition of private and public property. With that, however, the existence of ownership of private property as well as the separation of the state and the private sector nowadays no longer seem to be among the basic facts in a modern social system that require justification. Things were not always so. Treatises on private property reach back to the Greeks and Romans. Private property has been examined through the various epochs according to various aspects that can be reduced to the following major questions: (1) (2) (3)

How does private property emerge and how is it transferred? (evolutionary aspect) How is private property to be justified? (justification aspect) Which functions does existing private property perform under given circumstances? (functional aspect)

Changing the property order is the main objective of transformation. Central and Eastern European countries are actually faced with the question of how private property (of productive wealth) can be justified, how it emerges, and how the state redefines its role. They seem less interested in the functional aspects of property discussed in the West for a long time. Rather, the evolutionary and the justification aspects are the focus of interest, both being the topic particularly of early modern theories of property. Setting the main emphasis of the following theoretical expositions on these two aspects is additionally justified by empirical observations. At the end of the 1990s, approximately ten years after the beginning of transformation,

Property Rights in Philosophy and Economics 13

it turns out that in Central and Eastern European countries the private sector is growing as a result of independent development (for example, through new businesses), rather than as a result of privatization. The approximately hundred-year-old definition of the insistence on the right to private property drawn up by Adolph Wagner (1894:417) is (in the figurative sense) still relevant: The process which can be traced back in the early history of the Germanic world, and is currently still to be observed in detail on the basis of the facts within the Russian world, is one of making farmland private property, in order to therewith give the necessary and desired scope to private economic interests and simultaneously an incentive to general interest […].

1

Theories of Property in Classical Philosophy

It is not a coincidence that in recent times questions pertaining to the emergence and justification of property were rarely the subject of the theoretical examinations of the various scientific disciplines. As a look into the history of science shows, it is precisely the acceptance of ownership that contributed to the splitting up of disciplines, especially the splitting up of economics and law, that respectively caused a distinction of functions between them at all.5 In order to answer questions on the justification and emergence of ownership, it is sensible, after a short historical review of ancient and medieval conceptions, to throw a glance at the early modern age – at that age in which the justification of ownership (and rights) was the center of attention in philosophical discussions. From ancient times to the late Middle Ages there was wide convergence between the various explanatory approaches on the emergence of ownership, namely that private property was not an original respectively natural institution, but created by man (Brocker (1992:24)).6 It was assumed that at first people were born into a community of property; the goods being distributed by people for the purpose of use (often merely to secure one’s subsistence level). In early property studies the distribution was effected according to the principle of first occupation (prima occupatio) accepted through mutual agreement between people. An explicit agreement or an implicit contract concluded between people, therefore represented the basis of justification. This justification of private property, which in the end declared ownership to be the result of human action and even of human invention, was criticized by Church elders at first. In the Middle Ages they still rejected private property as, according to their view, it represented an unlawful appropriation of the community of property willed by God (communis omnium possessio) (Brocker (1992:36)).7 In the late Middle Ages and at the beginning of the modern age, this attitude changed, especially among Protestants. On the basis of the seventh commandment, the ban of unlawful appropriation of private property, it was deduced retrospectively that 14

Theories of Property in Classical Philosophy 15

something that used to be considered a right created by God could not be banned. According to Melanchthon (1497–1560), private property and not community of property was assumed willed for man, and was therefore to be regarded as natural (Brocker (1992:58)). A new problem emerged as a result of this turnabout, which now rejected community of goods, to explain the existence of abandoned property, which was, of course, community property. Existing common ownership and the new assertion that only private property was natural led to a contradiction. Discussion about the justification of property was stimulated. It was not the fundamental concern of the late Middle Ages or of the beginning of the modern age to justify ownership primarily. The question of ownership was at first used, rather, as an instrument for the rejection of the Christian view and for the justification of a new conception of the world. An attempt was made, based on the question of ownership, to substitute the conception of divine order through individual and rational principles in the radical change between the Baroque period and the Enlightenment. The fact that the question of ownership became the center of attention was based on the problem that according to the conception of the church it was only possible to invoke the principle of hierarchy to justify political power. The principle was not simply transferable to a property system which was becoming more differentiated in the course of the transition from feudalism to market society (Böbel (1988:31)), and which now lacked any definite hierarchical figure (Luhmann (1993:12f)). The origin of property could no longer be regarded as given by nature or God. With the division of imperium and dominium, a new basis of justification had to be found, at least for the latter. For the time being, however, representatives of occupation theory made an attempt to consider the conceptions of an order willed by God and again to take up early explanations simultaneously based on the prima occupatio. In late medieval discourses, the emergence of private property was therefore first derived from the hypothetical conception of an already existing common ownership, which was interpreted as property transferred from God to man for the purpose of common use. The actual emergence of private property from this common ownership was considered to be the conclusion of a contract following occupation. This mixture of justification, which at first regarded ownership as God-given and then, however, approved occupation in a contract concluded by man, was gradually doubted more and more. The occupation theory entered a state of crisis (Brocker (1992:113ff)). Then, at the end of the seventeenth century, a change of paradigms occurred in justification theory (Brocker (1992:IX)). Occupation theory was superseded by labor theory. The labor theory still has its starting point in the hypothesis of God-given common ownership. But it then justifies private property through the God-given human right over his own body,

16 Privatization in Central and Eastern Europe

whose work is necessary to produce objects at all. Thus, it is an imaginary extension of divine right that substantiates property of goods. The conclusion of a contract is no longer necessary to appropriate goods; instead, appropriation now constitutes a natural right. It seemed to be a successful attempt on the one hand to finally overcome the idea, prevalent until the late Middle Ages, that ownership was an invention of man and had come into being through a contract (“positive right”), and on the other hand to justify private property on the basis of “natural right”.8 This philosophy of labor theory was not only taken over in the following centuries by the numerous civil representatives of property theory (among others, the utilitarians). Marx also placed the labor theory at the beginning of his contemplation of private property. With arguments based on the theory of distribution (exploitation), he postulated the abolition of private property and of the civil state and instead replaced them by the stateless community with collective ownership. Marx succeeded in drawing up an “alternative draft” because he extended and shifted the question of justification to a deterministic development of society. From this higher perspective he even explained the (just) distribution of the now collectively owned goods, which were originally appropriated through occupation, by using labor theory. The following will first illustrate the occupation and labor theory on the basis of the theories of property of some early philosophers. The main focus lies on Locke’s labor theory that was later taken up by utilitarians and interpreted anew. This approach to theory of property neglects the ancient conceptions and therefore a long tradition of contemplation on ownership. But it was in the late Middle Ages that precisely those fundamental characteristics of ownership were discussed which today seem to be undisputed premises of economic theory; they are, however, not accepted unquestioningly in Central and Eastern European countries. Concerning the Middle Ages, Luhmann indicates: This peculiar constellation of a transitional period explains that in the period which we will be looking at in the following, the question of ownership managed to become a key issue of the justification of society according to natural law and of law itself, before being subsequently converted into a primary economic understanding of modern society and cooled down into a welfare state’s point of view. (Luhmann (1993:15))

1.1

Contractarianism and theories of natural law

The background for the transition from occupation to labor theory was not only a dispute whether man can arrogate to justify ownership through a contract. It was rather about the issue of the just distribution of goods. Whereas occupation theory declared the first (forcible) occupation to be

Theories of Property in Classical Philosophy 17

legal, labor theory derived rules for the acquisition of goods. But even labor theory had its difficulties in harmonizing its just and natural rules of appropriation with the increasing shortage of goods.9 Occupation theory: from the peaceful community of property to Hobbes’ free-for-all As already mentioned, in the seventeenth century, occupation theory was caught in a crisis. On the one hand, the explanations of contract theory providing for the emergence of private property could only scarcely be harmonized with Christian conceptions, particularly with the seventh commandment. On the other hand, the conception of a contract between equals came into conflict with the prevailing political system, absolutism. In order roughly to outline this crisis, the contemplation of Grotius will the first to be described. At first, Grotius made an attempt to save occupation theory by having recourse to ancient theories and later on, in his major work, by mixing it with Christian conceptions. 10 The example of Hobbes which follows will show what a dangerous turn an absolutist interpretation of approaches to occupation theory can take. Grotius (1583–1645) begins his derivation of private property in De iure belli ac pacis with the assumption that God granted the goods of nature for common use (Grotius (1625, 1964:186, Book II, Chapter II, § II.1)). The individual was allowed to take the goods for temporary use into individual possession or even to consume them. According to Grotius, this would, however, presuppose a functioning community of property in which people lived simply and in “ignorance of vice”. However, people did not remain in this peaceful community, as the harmony between them was destroyed by their striving for a “finer way of life”. The increased needs met with an initial shortage caused by the increase of population. This problem could not be resolved through division of labor and exchange (owing to the absence of peaceful relations). The result was conflict over the division of the initial provision. According to Grotius, community members settled this conflict by concluding contracts. These contracts were either explicitly agreed upon, leading to a deliberate division of the assets, or a tacit agreement was reached which sanctioned the initial appropriation (occupation) (Grotius (1625, 1964:189, Book II, Chapter II, § II.5)). By concluding a contract, the goods were, however, not only shared out among the members of society. The contract additionally guaranteed that in future the individual’s possession would be protected against the unlawful intervention of others. Therefore, according to Grotius, the subject matter of the agreement is the pure sharing of goods as well as the exclusion of a third person from individual possession. To come straight to the point: in contrast to later theories of property, Grotius created a single-stage model contract.

18 Privatization in Central and Eastern Europe

To Grotius, the conclusion of the contract does not mean that goods are now shared among community members once and for all and that they can use the goods without restrictions. Restrictions of private ownership are considered by Grotius as thoroughly justified, for instance in extremis (Grotius (1625, 1964:193, Book II, Chapter II, § VI.2)). An infringement of private property is, however, only possible if it is the last resort and if the owner is not in extreme difficulties himself. Moreover, the retransfer of private property into common ownership requires compensation. All in all, Grotius attributes the emergence of private property to the shortage of resources (while needs increased) and an impending distribution struggle that puts social order at risk. From the chronological viewpoint, private property emerged after the community of property. Private property remains revocable as it is desired by man and created through a contract (Brocker (1992:3f)). Therefore, in times of need, it can be abolished. Christian conceptions can be included in the contract by way of social obligations. Thus it was the starting-point of the God-given community of property that allowed Grotius to reach positive law, without being a positivist and coming under fire from all sides (Brandt (1974:33)). The occupation theory of Grotius postulates the following: • An individual appropriation (occupation) is possible as long as the shortage of resources (with increasing needs) does not lead to distribution conflicts. • Conflicts are settled by an agreement, which declares the initial occupation to be individual possession and at the same time protects from infringement by a third person. • In times of need private property can be restricted; the owner is to be compensated. On the basis of the contract he proposed, Grotius solved the problems of the distribution of goods. But as he already assumed himself, man is not peaceful, and as a consequence of the scarcity of resources (with increasing needs) he tends to appropriate the possessions of others by force. It remained conceivable that even after the conclusion of a contract one member of the community could still infringe on the property of another. It was Hobbes (1588–1679), who understood that breaches of contract are probable and that for this reason an authority vested with the corresponding means of enforcement had to be created in order to guarantee exclusion.11 For Hobbes, this is the necessity that justifies the state, which in the end turns into a “Leviathan”. In contrast to Grotius, for Hobbes there is no original, peaceful community of property. It is more likely that from the beginning people participate in a “war of every man against every man” (bellum omnium in omnes) due to their

Theories of Property in Classical Philosophy 19

ambition for power. According to Hobbes (1651, 1904:176, Part II, Chapter XXIV), there is no ownership in this state of anarchy, the reason being that everybody is forced to protect his possessions against the forcible appropriation by others. Therefore, he cannot consider his goods to be secure.12 People are trying to escape this state, driven by their instinct of self-preservation: The finall Cause, End, or Designe of men, (who naturally love Liberty, and Dominion over others,) in the introduction of that restraint upon themselves, (in which wee see them live in Common-wealths,) is the foresight of their own preservation, and of a more contented life thereby; that is to say, of getting themselves out from that miserable condition of Warre […]. (Hobbes (1651, 1904:115, Part II, Chapter XVII)) In order to put an end to this war and to live peacefully, as Hobbes puts it, man must transfer his natural rights to a person or to a group of persons that is vested with the means of enforcement, for instance the state: The only way to erect such a Common Power, as may be able to defend them from the invasion of Forraigners, and the injuries of one another, and thereby to secure them in such sort, as that by their owne industrie, and by the fruites of the Earth, they may nourish themselves and live contentedly; is, to conferre all their power and strength upon one Man, or upon one Assembly of men […] This is the Generation of that great LEVIATHAN […]. (Hobbes (1651, 1904:118f, Part II, Chapter XVII)) Hobbes overcomes the possible contradiction between individual and general interest by transferring the rights of the individuals to a hierarchical ruler and by declaring the state to be the sole owner. 13 It is then the state that distributes the resources to its citizens granting them merely a right of use. The state therefore creates “mine” and “thine” which are restricted to usus fructus (Hobbes (1651, 1904:176f, Part II, Chapter XXIV)). The individual possession of one member of the community is now safeguarded against the unlawful attack of another member, but not against the infringement of the state as owner. The state has the right to restrict the right of use granted to its citizens, to claim the land and estates for itself, to set the rules for exchange etc. If the sovereign abuses his rights, it must be tolerated as he is the representative elected for the well-being of his people. The authority of the state ends where its justification started, namely with the individual’s right to self-preservation (Brocker (1992:102)). With his Leviathan, Hobbes overstepped the initial mark of putting an end to the free-for-all, so to speak. Starting from an authority vested with means of enforcement whose objective it is to guarantee the limits between the restricted “mine” and “thine” of the members of community, Hobbes creates an almighty state that remains completely uncontrolled and that

20 Privatization in Central and Eastern Europe

can expropriate its citizens at any time. 14 “The merciless logic of the Leviathan led everybody who wished for rights and property into a conflict, without at the same time wanting the state to be the only one to justify and enforce rights and property” (Brocker (1992:101)). The following main points can, nevertheless, be derived from Hobbes’ contemplation of property: • When the individual is forced to protect his goods by his own efforts against the forcible appropriation by other members of the community, it cannot be termed ownership. There is a persistent risk of a subsequent free-for-all which man seeks to escape due to his survival instinct. • With a state as monopolistic owner and uncontrolled political authority, private disposition is restricted to a right of using goods, which is revocable at any time. • Private property is only conceivable if there is an agreement or an authority (the state, for instance) that guarantees the limits of mine and thine between community members and punishes infringements. In other words: the exclusion must be guaranteed from the state’s side. This will be referred to in the following as ownership guarantee. • The state itself must be controlled to prevent abuse of power, and especially infringements on private property. Hobbes’ conception of the Leviathan shapes the discussions about the state’s authority up to present times. With his initial reasons for the state as peace-keeper and, if need be, enforcing authority, Hobbes submitted a new argument for the state’s levying of taxes, an issue that was then controversial. According to the principle of equivalence, taxes could now be justified as the price for freedom. Emphasis was, however, still put on the right and not on the limits of the state’s power to levy taxes. The state vested with all authority could theoretically burden its citizens with excessive taxes. The solution to the agreement submitted by Grotius and interpreted in an absolutist manner by Hobbes was discussed by later philosophers, especially with regard to whether and how the agreement can be canceled and changed, whether each generation was to conclude a new agreement and how far the restriction of private property (respectively the power of monarchs) should be allowed to reach (see Brocker (1992:72f)). 15 Instead of further investigating these typical problems of justification of property based on positive law, Locke made a new attempt to justify property on the basis of natural law, that is, as irrevocable by man. The labor theory of Locke The conception of an existing natural law that man is born into requires that, as far as his behavior towards his fellow man is concerned, the individ-

Theories of Property in Classical Philosophy 21

ual will accept this natural “order” and settle conflicts according to this behavioral code. With this assumption, representatives of natural law theory were able to concentrate on the individual within a given order and to push the question of how to achieve a social consensus into the background. Therefore, for Locke, relations between man and God, and man and goods, are essential. Even the inequality between people is considered by Locke to be instituted by natural law, an assertion that led Rousseau to his examination of the theories of property based on natural law. In the first part of his Two Treatises of Government, Locke (1632–1704) first justifies the individual’s right to appropriate goods from public ownership by the human survival instinct that is given to man by God. For the desire, strong desire of Preserving his Life and Being having been Planted in him, as a Principle of Action by God himself, Reason, which was the Voice of God in him, could not but teach him and assure him, that pursuing that natural Inclination he had to preserve his Being, he followed the Will of his Maker, and therefore had a right to make use of those Creatures, which by his Reason or Senses he could discover would be serviceable thereunto. And thus Man’s Property in the Creatures, was founded upon the right he had, to make use of those things, that were necessary or useful to his Being. (Locke (1690, 1988: 205, I, Chapter IX, § 86)) Self-preservation of man as the justification for the appropriation of goods is, according to Locke, a natural principle of human action. At first, Locke justifies this action by assuming that God-given reason places man above animals and plants and therefore allows their use. Only considerably later, namely in his second Treatise, does Locke derive the basic rule for the appropriation of goods as the main point of his argumentation: Though the earth and all inferior creatures be common to all men, yet every man has a property in his own person. This nobody has any right to but himself. The labour of his body and the work of his hands, we may say, are properly his. Whatsoever, then, he removes out of the state that nature hath provided and left it in, he hath mixed his labour with it, and joined to it something that is his own, and thereby makes it his property. (Locke (1690, 1978:17, II, Chapter V, § 27)) For Locke, the starting point for the justification of “ownership” is, in imitation of the representatives of occupation theory, still common ownership. The community of property, however, does not have any significance for Locke’s following argumentation.16 Instead of deriving his justification of “private property” from common ownership, Locke derives it from the

22 Privatization in Central and Eastern Europe

idea that God grants man his own body as private property by using the following steps of argumentation: First, man would have a property in his own person. Secondly, the object created by human labor from natural resources would therefore be his property. This chain of arguments is, however, by no means compelling. Whereas the first step, the unimpeachability of property in the own person, cannot be disputed today, 17 the second stage of the argumentation suggests a deduction which is not conclusive, namely that by changing the resources through physical work, property in the own person is mixed with the resources and becomes incorporated in the produced goods. In this context, Zimmerli (1993:268) asks the following question: “Why does it follow from the fact that I am the sole owner of my body that I would also be the owner of the things created by this body in the nature surrounding me?” However comprehensible it may be that objects created through the labor of man are transferred to his possession, this substantiation based on labor hardly offers an absolute justification. 18 It is, moreover, difficult to derive inheritance or donation on the basis of labor theory (Zimmerli (1993:269)). Above all, Locke merely offers a principle of acquisition based on labor, though it remains unclear how the individual could safeguard his goods against the appropriation of others. From the point of view of Hobbes’ theory of property and up to this point of his contemplation, Locke has only derived a justification for (unsecured) individual possession, but not for ownership. Locke makes an attempt to guarantee the exclusion of others through “appropriation rules” based on natural law that represent a “biblical and theological limit” (Böbel (1988:36)): • First, in the state of natural law, nobody has the right to damage the life, the possession, the health, and the freedom of another person. In case of an infringement through others, every individual has the right to punish the offender (Locke (1690, 1978:5f, II, Chapter II, §§ 6, 7)). • Secondly, everybody is allowed to appropriate for himself only to the extent that there will remain enough for others (Locke (1690, 1978:19f, II, Chapter V, §§ 31, 32)). • Thirdly, the individual is allowed to appropriate (and also exchange) through his own work only as many goods as he can use without waste (Locke (1690, 1978:19ff and 28, II, Chapter V, §§ 31, 33 and § 46)). With his first rule, Locke imposes a limit on the individual that is based on natural law. Despite this actually absolute limit, he considers violations of the law to be possible. These would, however, become unlikely, if each individual would actually observe the second rule, which is intended to defuse the problem of scarcity considered to be the true cause for the misappropriation. This does, however, presuppose that the commitment of the individual to leave enough for others does not lead to his own under-

Theories of Property in Classical Philosophy 23

supply, or in the reverse case that there is a barely sufficient supply or an over-supply from an overall economic viewpoint. The assumption of the surplus of resources actually represents the implicit basis of Locke’s theory of property, and subsequently becomes its fundamental problem: with a finite stock of resources, theoretically, the point could be reached when all resources are divided up according to the performed labor and when further acquisition through labor is obstructed for others (Brocker (1992:369)). First, appropriation through labor can then no longer justify ownership, and secondly, distribution conflicts that are excluded in the case of an infinite stock of resources will then become likely. Locke uses the actual and absolutely valid limits of natural law to resolve the problem of the predetermined stock of resources through the commitment of the individual, but ultimately, does not succeed in doing so. The forcible encroachment by others, conceivable even for Locke, therefore, has to somehow be punished. In contrast to Hobbes, Locke starts from the assumption that in the state of natural law the individual’s possession is safeguarded against appropriation through others, or, in the case of a violation of natural law, that the individual himself can impose a punishment. He asks the question of how such punishment could be enforced through inversion, so to speak: Natural law would in fact be void if nobody had the power to punish the person guilty of violating it (Locke (1690, 1978:6, II, Chapter II, § 7)). Natural law therefore has absolute validity in order to justify the punishment that would not even exist if natural law were absolutely valid. Locke’s attempt to create an equilibrium still in natural law and considering its limits fails exactly at this point (Böbel (1988:36)). He fails to construct a framework within which the relationships between people are balanced out and conflicts are avoided. In the end, Locke cannot maintain this system of natural limits and admits himself – much later in his Treatise – that the state of natural law is very uncertain and that property offenses can be prevented only inadequately. At this stage, however, Locke makes an attempt to preserve his justification based on natural law. Even if he does it indirectly, he consistently deals with the fundamental problem of the finite stock of resources. He thus extends his contemplation of the real sector by including the monetary sector. Macpherson (1962:203ff) pointed out that the assumption of the introduction of money modifies Locke’s argumentation considerably, the result of which is, that he abolishes essential limits of the appropriation of property: […] this I dare boldly affirm, that the same rule of propriety (viz)., that every man should have as much as he could make use of, would hold still in the world, without straitening any body, since there is land enough in the world to suffice double the inhabitants, had not the

24 Privatization in Central and Eastern Europe

invention of money, and the tacit agreement of men to put a value on it, introduced (by consent) larger possessions and a right to them […]. (Locke (1690, 1978:22f, II, Chapter V, § 36))19 Thus, after the introduction of money of stable value, the individual is allowed to possess more land than he actually needs for his own requirements, as he can exchange the surplus receiving gold and silver in return which can be stored without waste (Locke (1690, 1978:30, II, Chapter V, § 50)). Locke can, therefore, revoke his third rule of appropriation and institute the transition from subsistence to exchange economy. He additionally assumes that productivity is higher with private possession than with public ownership, leading to an increase in prosperity.20 Locke therefore believes the second rule of appropriation (there has to remain enough for the others) could be dropped as well, and considers it to be a problem of the distribution of surplus. So, after the introduction of money, the first rule of appropriation is the only rule maintained, namely that nobody is allowed to be harmed and offenses are to be punished individually. This shows that Locke still holds on to the idea of exclusion being guaranteed in the state of nature. Through his assumption of the productivity increase, Locke can, however, defuse the initial problem of a predetermined stock of resources for the moment. The lifting of the appropriation limits, however, gets him into new difficulties: with the introduction of money and the abolition of self-commitment, and as it is no longer restricted by any limit of natural law, the human desire of accumulating in excess of what is needed for one’s actual living will now surface (Locke (1690, 1978:23, II, Chapter V, § 37)). This desire, as well as the opportunity to appropriate more goods than necessary for one’s living, leads to scarcity of land in some regions of the world. Those having no property are forced to either emigrate to regions less populated, where, as money has not yet been introduced, land is still uncultivated (Locke (1690, 1978:27f, II, Chapter V, § 45)), or else to start employment with the landowners (Brocker (1992:218)). The appropriation rule that was based on labor is thus divided into two parts: in the economy not using money, in which land is uncultivated, the rule still applies to the land; in the money economy, where land is running short, Locke simply applies it to the earning of wages and turns it into a problem of the labor market and finally of the wage level, which he does not discuss any further.21 As a result of revoking the last two appropriation rules in money economy, of enabling an accumulation of assets, and of assuming labor as justified by his labor theory, Locke reaches for “private property acting in a capitalistic manner” (Saage (1989:54)). 22 At the same time, Locke accepts as a matter of course that the inequality in the distribution of land that was justified by hard work and enthusiasm before the introduction of money is aggravated in the money economy. He even assumes that

Theories of Property in Classical Philosophy 25

people, being equal as far as political rights are concerned, have tacitly and voluntarily agreed to the “disproportionate and unequal possession of the earth” (Locke (1690, 1978:29f, II, Chapter V, § 50)). By means of his assumption that in the state of nature people agree to the growing inequality, Locke ultimately averts Hobbes’ free-for-all. According to Locke, even after the introduction of money labor is still the initial basis of ownership.23 By transferring the problem of acquisition to the labor market, that is, earning an income or in other words derived acquisition, he can now, as far as the scarce land is concerned, develop a contractarian solution: […] and though afterwards, in some parts of the world, where the increase of people and stock, with the use of money, had made land scarce, and so of some value, the several communities settled the bounds of their distinct territories, and, by laws, within themselves, regulated the properties of the private men of their society, and so, by compact and agreement, settled the property which labour and industry began […]. (Locke (1690, 1978:27, II, § 45)) It is crucial that this allocation of goods by contract takes place in the state of nature. In contrast to occupation theory, with Locke the contract does not mean that the state of nature has been left behind and therefore no state has been established. 24 Locke can, however, model his stateless community on private property only because to him, the first rule of appropriation is still valid for the moment, and because therefore the exclusion of others is guaranteed as well. Locke seems to have succeeded in explaining the emergence of ownership within the state of nature. He can, therefore, (seemingly) separate the creation of the state from the emergence of ownership from the point of view of time and content. Locke does not submit the justification of the state in his chapter about property, but only much later, in Chapter 9: The great and chief end, therefore, of men’s uniting into commenwealths, and putting themselves under government, is the preservation of their property […]. (Locke (1690, 1978:73, II, Chapter IX, § 124)) Locke sees the fundamental reason for the creation of the state in the maintenance and safeguarding of the “ownership” already justified by natural law. But Locke can only speak about “ownership” because – to emphasize it again – at first, he started from the assumption that the exclusion of others would be guaranteed by his first rule of appropriation. If his assumption holds, a state as an enforcing authority is not needed. This makes clear again that his initial appropriation limit based on natural law experienced contradictory validity in the course of his contemplation. It is applied in

26 Privatization in Central and Eastern Europe

order to refer the justification of “ownership” to natural law. It does not apply to the justification of the state. In the end, however, Locke does an about-face. He criticizes the uncertain state of nature, in which ownership must be protected individually: first it lacks definite, organized, and well-known laws that are generally accepted as the norm for right and wrong because man pursues his own interest. Secondly, there is no impartial judge to settle conflicts. Thirdly, there is no means of enforcing rights (Locke (1690, 1978:73f, II, Chapter IX, §124ff)). Like Hobbes, Locke ultimately assumes that people seek to escape this uncertain condition by transferring their individual rights (and among other things, executive authority) to state institutions, receiving an ownership guarantee instead: But though men when they enter into society give up the equality, liberty, and executive power they had in the state of nature […]; yet it being only with an intention in everyone the better to preserve himself, his liberty, and property […]. (Locke (1690, 1978:75, II, Chapter IX, § 131)) In favor of safeguarding of their property, individuals admittedly give up some of their rights. In contrast to Hobbes, with Locke, the state’s ability to intervene in private life, especially in the private right of ownership, remains restricted. The state is thus not allowed to take away the property of its citizens (for instance to expropriate them) without consent, or to arbitrarily levy additional taxes (Locke (1690, 1978:81ff, II, Chapter XI, § 138 and § 140)). Locke particularly emphasizes that the government can be dissolved, if already enacted laws cannot be implemented any longer and if legal security is no longer guaranteed (Locke (1690, 1978:126ff, II, Chapter XIX, § 219)). If the civil government abuses its rights, especially by trying to take away the individual’s property, then it is at war with the people (Locke (1690, 1978:127f, II, Chapter XIX, § 222)). The citizens then have the right to again take over power and to appoint a new legislature. In contrast to Hobbes, Locke does not consider the state (as guarantor of ownership) to be an absolute institution, but subject to the will of its citizens. In addition to that, Locke excludes the step backwards to a free-for-all that is a state of nature or anarchy. People can, however, abolish a state that abuses its power, but will (immediately) replace it by a new one by agreement.25 In contrast to Grotius and Hobbes, Locke addresses the various contracts that developed as the result of a process consisting of several steps. At first, Locke makes an attempt to explain the appropriation of goods by labor and to guarantee the exclusion of others through self-committing clauses. People achieve a peaceful distribution of goods (through a kind of imagined contract) while still in the state of nature. Only then does Locke introduce the “political” contract – the contract based on positive law – whereas

Theories of Property in Classical Philosophy 27

in a first, initial agreement – the social contract – the members of society decide to establish a political body for the protection of their personal goods. Beyond that, the relation between government and citizens is also determined by rules (Saage (1989:55)). In the end, the doubling of a positive and a natural law contract is the decisive point of Locke’s justification of the emergence of ownership. Locke can thus trace occupation back to labor, consider the exclusion of others as guaranteed by natural law and therefore claim that ownership would be a natural institution ordained by God. Only at a much later point in his contemplation does he introduce the state based on positive law as guarantor of ownership. With this solution of a contract, ownership guarantee basically remains a human invention with Locke as well. The same questions should have sparked off again the discussion about ownership guarantee, as they did earlier with the constructs of contracts based on occupation theory (when, how, and by whom can the contract be changed or terminated?). This never occurred, however. The incompatible mixture, or even doubling of an initially Christian/natural justification of ownership and an ownership guarantee based on positive law, was not criticized by the civil representatives of the theory of property who followed Locke. The (apparent) proof produced by Locke that “private property” can be justified by natural law, that is to say, by an independent right based on the nature of man, but not created by man and unaffected by place and time, was considered rather successful. Brocker (1992:10) summarizes this fundamental turning-point in the view of private property as follows: Private property becomes “sacrosanct”. It is now no longer either a secondary right of the “ius gentium” leading to a deficit, or another “invention” of people, which, as it was introduced by agreement, could also be abolished by a new contract. Instead, it is an immediate natural right, ordained by God himself and as such impossible to abrogate and which cannot be abolished by human decisions, any more than the gravitation of the Earth could be canceled. Considering the contradictions to be found in the theory of Locke, the following conclusions can be drawn from his contemplation of ownership: • The survival instinct justifies an appropriation of goods. The first individual appropriation can, admittedly, be justified by labor. It is, however, limited due to a finite stock of resources. • Transition to money economy causes an urge for accumulation with asset holders and an increase of productivity. This dynamism, however, only develops if ownership is safeguarded. • The division of goods creates only individual, unsecured ownership. The exclusion of others, as a central characteristic of ownership, cannot be

28 Privatization in Central and Eastern Europe

guaranteed with long-lasting effect through the self-commitment of the individuals. In the end, people come to an agreement to establish the state as guarantor of ownership. After Locke, there were only a few authors who dared to attack the labor theory. Rousseau (1712–1778) was one of them. According to Rousseau, the emergence of ownership and of civil society is not to be attributed to reason given to man by God and therefore justified, but to the contrary is actually unlawful:26 The true founder of civil society was the first man who, having enclosed a piece of land, thought of saying: “This is mine”, and came across people simple enough to believe him. (Rousseau (1755, 1994:55, Part II)) Rousseau derives this forcible appropriation from a peaceful state of natural law (Rousseau (1755, 1994:55ff, Part II)). For the purpose of self-preservation, according to Rousseau, it was sufficient to consume what nature provided. Division of labor gained acceptance only after man became more skilful and acknowledged the advantages of laying in stocks. The producers of food now had to provide for the workers in other economic sectors, as well. The fields were therefore tilled systematically. The division of land which, for the moment, led to possession, had to follow as a consequence of the increasing number of workers and the increasing agricultural area under cultivation. This possession was justified by labor, precisely in the right to the crops of the cultivated land. Property (at first) emerged due to the fact that every member of the community realized that his own goods are protected only if he does not encroach on the goods of the others (Rousseau (1755, 1994:64, Part II)). A natural inequality developed as the stronger could perform more labor and the cleverer found ways to shorten his. Now, after the land was divided, agricultural areas could be enlarged only through forcible seizure of other people’s land. People who did not take part in the early occupation and settlement of land according to the “law of the jungle” remained poor. By assuming that the first occupation is justified by labor, that the first appropriation is mutually recognized, and that the different abilities of man naturally justify an unequal distribution, Rousseau’s explanation first follows Locke. In contrast to Locke and following Hobbes, Rousseau assumes that the shortage and the unequal distribution of the land will, however, result in conflicts between people. The first possession that was justified by labor is no longer protected and a free-for-all becomes likely. This development of society which is, admittedly, derived from labor theory, but also leads to a conflict, is partly taken back in his Social Contract, published later (Saage (1989:58)). Rousseau now assumes that people recognize the damage of a free-for-all themselves and that they

Theories of Property in Classical Philosophy 29

therefore conclude a social contract (Rousseau (1762, 1978:179ff, Book I, Chapter VI)). Within this contract, appropriation according to natural law is legal, if some rules have been observed beforehand: First, the land must be uninhabited. Secondly, people are only allowed to take up as much of it as they need for their self-preservation. Final, the first appropriation must be based on labor (Rousseau (1762, 1978:187, Book I, Chapter IX)). 27 Whatever the individual appropriated will become his property, as soon as exclusion is guaranteed: The Right of “first occupancy” […] becomes a genuine right only after the right of property has been established. All men have a natural right to what is necessary to them. But the positive act which establishes a man’s claim to any particular item of property limits him to that and excludes him from all others. […] In so far as he benefits from this right, he withholds his claim, not so much from what is another’s, as from what is not specifically his. (Rousseau (1762, 1978:186f, Book I, Chapter IX)) So, as far as property is concerned, Rousseau does not attach major importance to who owns what, but to the fact that the individual accepts that the possessions of the other members of the community are not his. According to Rousseau, this exclusion cannot be guaranteed in the state of nature, but only by the state as a guarantor of ownership. For Rousseau, the state is, however, not only the authority that guarantees ownership, but at the same time the actual owner. Citizens receive only a right to use their “property” (Brandt (1974:156)): Each individual member of the Community gives himself to it at the moment of its formation. What he gives is the whole man as he then is, with all his qualities of strength and power, and everything of which he stands possessed. (Rousseau (1762, 1978:186, Book I, Chapter IX)) In the end, Rousseau subordinates the first appropriation which is justified by labor as an initial, individual right of ownership, to a joint right of ownership (Rousseau (1762, 1978:188, Book I, Chapter IX)). The sovereign who represents the community can, on principle, even revoke everybody’s possessive right, but not infringe the rights of individual citizens (Brandt (1974:157)). His actions remain restricted by the general agreements (Rousseau (1762, 1978:198, Book II, Chapter IV)). With this, Rousseau does, indeed, create a “strong” state, but one that still represents the general will of its citizens (Saage (1989:59)) and is not transformed into a Leviathan. The state’s most important objective is to actively oppose the inequality between people (inégalité parmi les hommes). Rousseau therefore rejects money which, in Locke, definitely increased inequality as a matter of

30 Privatization in Central and Eastern Europe

course (Brandt (1974:157)). Rousseau is concerned with the fact that within a community all members can meet their needs through their own labor, though he assumes abundance, namely that the peoples’ labor produces more than they need (Rousseau (1762, 1978:243, Book III, Chapter VIII)). Ultimately, Rousseau confronts the labor theory of Locke with an interpretation based on distribution policy that can be regarded as a precursor of later socialist theories of property (Böbel (1988:41)).28 Rousseau held the following points of view: • If the stock of resources is sufficient and as a result of mutual acceptance between the members of society, appropriation based on labor can lead to recognized first occupation. • Continuous appropriation will reach the limits of resources. Division of labor will intensify inequality. There will be conflicts, in which the stronger will assert himself. • People recognize the disadvantages of a free-for-all and therefore conclude an agreement to transfer their rights to the community. In its function as sole owner, the state has, above all, the objective to actively oppose the inequality between people. After Locke’s attempt to justify property on the basis of natural law and after the question of distribution touched on by Rousseau intensified, the period that followed mainly examined questions of distribution, but also those concerning the increase of wealth. By placing growth in the focus of attention, the problem of labor theory, that is the allocation of a finite stock of resources according to labor performance, faded into the background. Instead, labor theory was confronted with the existing ownership structure and changed, taking utilitarian views into account.

1.2

Utilitarian interpretations

In the eighteenth and nineteenth centuries, the representatives of utilitarianism contemplated private property by dealing primarily with the question of how to achieve “the greatest happiness of the greatest number”. Besides the explanations of Bentham, which are considered to be exemplary for utilitarian views, the observations of J.S. Mill are, due to their “socialist elements”, the most interesting. Following the contemplation of previous theories of property it seems sensible, though, to introduce first the “contract theory” of Hume (1711–76). Hume’s “contract theory” can, so to speak, be regarded as a connecting link between the philosophic and the utilitarian views. However, Hume submits a quite different interpretation of the contract, a view which has fallen into oblivion for a long time.

Theories of Property in Classical Philosophy 31

Hume: property emerges through a learning process In the previously introduced theories, ownership was understood as absolute power over land and goods. The monetary aspect was mostly excluded from the contemplation of ownership.29 Even Locke had difficulty in combining his concept of ownership, based on labor theory and related to natural resources, with money which, according to him, enters the world suddenly. This changed in the period of late mercantilism.30 Hume understands money not only as a possible access to resources, but what is more, he sees a connection between credit and ownership. Hume’s explanation of the origin of the legal system and property is preceded by the following question: […] I suppose a person to have lent me a sum of money, on condition that it be restor’d in a few days; and also suppose, that after the expiration of the term agreed on, he demands the sum: I ask, What reason or motive have I to restore the money? (Hume (1740, 1878:254, Book III, Part II, Sect. I)) In the end, Hume resolves this question on the basis of man’s own interest, whose own property is only protected if he considers the property of others to be inviolable. To explain this, he introduces man as a deficient being who (in contrast to animals) cannot satisfy his numerous needs by his own efforts. He is, rather, dependent on a society based on the division of labor (Hume (1740, 1878:259, Book III, Part II, Sect. II)). Of the three types of “goods” that belong to a human being (the internal satisfaction of our minds, the external advantages of our body, the enjoyment of such possession as we have acquired by our industry and good fortune), only the third type of good is the subject of forcible appropriation through others and scarce compared with the needs. For these goods Hume deduces that: As the improvement, therefore, of these goods is the chief advantage of society, so the instability of their possession, along with their scarcity, is the chief impediment. (Hume (1740, 1878:261, III, Part II, Sect. II)) In contrast to Locke, Hume assumes that natural resources and goods cannot be increased as one likes and that, owing to human nature, conflicts over the possession of scarce goods will inevitably occur (Brandt (1974:108)). According to Hume, people will try to overcome this deplorable situation, as they are interested in protecting their own possession. In time, the rational self-interest would counterbalance greed and violence itself. Through repeated experiences people will actually discern the advantage of an agreement, “[…] to bestow stability on the possession of those external goods, and leave every one in the peaceable enjoyment of what he may acquire by his fortune and industry” (Hume (1740, 1878:262, Book III, Part II, Sect. II)). This agreement alone makes it possible to keep insatiable

32 Privatization in Central and Eastern Europe

acquisitiveness and greed for profit within limits and to keep the individual from appropriating other people’s property. It is only a general sense of common interest; which sense all the members of the society express to one another, and which induces them to regulate their conduct by certain rules. […] When this common sense of interest is mutually express’d, and is known to both, it produces a suitable resolution and behavior. […] (S)ince the actions of each of us have a reference to those of the other, and are perform’d upon the supposition, that something is to be perform’d on the other part. (Hume (1740, 1878:263, Book III, Part II, Sect. II)) With his agreement, Hume again takes up the idea of a contract, but renders it in a new form. For Hume, the agreement is the result of a learning process, in the course of which people have mutually announced their similar interest and have then created standards for behavior (that is, laws) for their living together. According to Hume, the individual does not act in isolation, but includes the behavior of others in his own actions. In contrast to Locke, the agreement does not represent a one-off concluded contract, but is based on learned rules and conventions.31 Hume shares a view discernible in The Social Contract, the work of his contemporary Rousseau, that the peaceful agreement finally constitutes the pragmatic result of a long-lasting process of communication between people. If, however, through learning processes a convention can be achieved between people, meaning that other people’s property will remain untouched, is it then necessary for the state to be the guarantor of ownership in the first place? For Hume for the sake of consistency this is not the case, at least not in small communities.32 With Hume, the state emerges primarily as a result of arguments between nations (Hume (1740, 1878:305, Book III, Part II, Sect. VIII)). The number of members within a community is important as well. According to Hume, at some time a point will be reached at which the community is too large to come to a mutual understanding regarding exclusion:33 But when men have observ’d, that tho’ the rules of justice be sufficient to maintain any society, yet ‘tis impossible for them, of themselves, to observe those rules, in large and polish’d societies; they establish government […]. (Hume (1740, 1878:308, Book III, Part II, Sect. VIII)) Whereas in small groups individual property is safeguarded automatically as every single individual meets standards of behavior voluntarily, according to Hume, large communities need an authority, the state, which forces individuals to meet the conventions. Besides its function as guarantor of ownership in large communities, Hume sees a further justification of the state in the weakness of man, who estimates present concerns more highly than

Theories of Property in Classical Philosophy 33

farsightedness (Hume (1740, 1878:302f, Book III, Part II, Sect. VII)). This preference for the present would induce him to give in to his momentary impulse of greed and to break the rules, and therefore to act against his own long-term interest. Hence, according to Hume, it would be sensible for neutral persons, who are not interested in breaking the law, to watch over its observance. The sovereigns should gain recognition for the long-term common interest and act according to the benefit of “the greatest possible number of their subjects”.34 According to Hume, it is, however, not enough that the government builds bridges, opens harbors and digs canals, and thus provides the infrastructure. Government should also force man to conclude agreements, the advantage of which he does not discern, owing to his inclination for the present, but which in the long term are to his own benefit (Hume (1740, 1878:303f, Book III, Part II, Sect. VII)). As a result of doing so, even those people preferring the present will gradually learn to appreciate the benefit of forming a government and gain further confidence in it. Only when government no longer provides the protection and the security, which were the initial reasons for the development of the state, and instead suppresses its subjects, does the obedience of citizens towards government end (Hume (1740, 1878:314f, Book III, Pat II, Sect. IX)). All in all, Hume and Locke connect the justification of the state to its fundamental function as the guarantor of ownership. What is more, Hume assigns the state the additional task of acting in a far-sighted way to the benefit of the public at large and, if need be, against the short-term interest of the individual. Hume is able to do so, as he assumes that in the long run private and common interest go hand-in-hand. Hume therewith postulates a model of harmony for the relation between state and citizen (Brandt (1974:114)).35 With Hume, ownership emerges, as people gradually realize that they can resolve their conflicts by agreements and live together peacefully. The state is created in order to maintain social order in large groups, to guarantee the declaration of the reciprocal interests of the individuals. According to Hume, the state is not the antagonist of private individuals and does not threaten them in the form of a Leviathan, but is above all a catalyst for communication between people. As a mediating authority, it is its task to formulate those standards of behavior which have so far guaranteed exclusion as generally accepted rules and to enforce them. What is more, it also guarantees intertemporal communication by validating long-term interest. With this, Hume ultimately provides an explanation for the emergence of ownership and the state from an evolutionary viewpoint. He makes attempts to further support this thoroughly new explanation by reconsidering labor theory. Hume indicates that: […] We cannot be said to join our labour to any thing but in an figurative sense. Properly speaking, we only make an alteration on it by our labour. (Hume (1740, 1878:276, Book III, Part II, Sect. III, fn. 1))

34 Privatization in Central and Eastern Europe

According to Hume, work no longer justifies the ownership of the whole object, but at most the ownership of the alterations resulting from that work. At the same time, Hume links this new interpretation of labor theory with considerations on usefulness, and compared to Locke, sets up quite different rules of appropriation. According to Hume, in the course of the initial development of a society, people would probably agree that everybody should, at first, receive the ownership of his current property, because this would be considered an appropriate regulation. After society develops, there would be four possibilities of appropriation, respectively the transfer of ownership: occupation, prescription, accession and succession (Hume (1740, 1878:275f, Book III, Part II, Sect. III)). For Hume, occupation applies especially to the first occupation of still abandoned goods. A prescription occurs if the right of the first owner has been discontinued; the current owner will become the lawful proprietor, if he has a longstanding, continuous relation to his object. The proprietor has a right to the “increase”, 36 if the increase and the already existing property are connected, and if the increase seems “minor” compared with the property itself. After all, succession is based on an approval through parents and close relatives, and the general interest of mankind. In contrast to the labor theory of Locke and by applying his utilitarian point of view, Hume also manages to find a justification for inheritance and for longstanding possession that is not created through work. Hume develops three basic principles on which appropriation or the transfer of ownership are to be based. The first principle states that property always involves a relationship between the person and the object that comes into being as a result of “imagination”. 37 According to Hume’s second principle, the transfer of ownership should not be handled differently from case to case, but must adhere to general rules. These general rules, however, must not be rigid, but should adjust to changing needs and conditions: […] and therefore the rules of justice seek some medium betwixt a rigid stability, and this changeable and uncertain adjustment. (Hume (1740, 1878:283, Book III, Part II, Sect. IV)) According to Hume, a third principle must be observed for constancy and adjustment to be simultaneously possible: Individual property may only be transferred with the consent of the owner (Hume (1740, 1878:283ff, Book III, Part II, Sect. IV)). Due to this possibility of transfer, resources and goods can become the property of the person who can use them best. It creates the precondition for the division of labor and for exchange, and thus for a “useful” purpose of goods. Particularly if the individual acts of exchange do not coincide from the point of view of time, there is a need for a guarantee to the creditor. Hume sees this kind of guar-

Theories of Property in Classical Philosophy 35

antee included in the “promise” “[…] which is the sanction of the interested commerce of mankind […]” (Hume (1740, 1878:269, Book III, Part II, Sect. V)). The principle of the pacta sunt servanda, that is, the principle of liability, in the end counterbalances the possible detrimental personal interest of the individual (for instance, greed). His contemplation on right and ownership enables Hume to come to the realization of three fundamental principles: “stability of possession”, “transference by consent” and “performance of promises”. These three principles represent Hume’s answer to his initial question about the reasons why a debtor sees himself obliged (that is, forced) to settle his liabilities. They are, at the same time, the fundamental principles of a liberal society: “ ‘Tis on the strict observance of those three laws, that the peace and security of human society entirely depend […]” (Hume 1740, 1878:293, Book III, Part II, Sect. VI)). In this context, the state acts as an (intertemporal) guarantor for the constancy and enforcement of these principles against the “momentary, spurious interest of the individual” (Brandt (1974:110)). The same way other representatives of property theory did at their time, Hume comes to the conclusion that ownership exists only if exclusion is guaranteed. Moreover, Hume realizes that in small communities exclusion can be secured through behavioral norms, whereas large communities establish the state as the guarantor of property. Furthermore, Hume draws attention to the fact that property must be transferable (freedom of contract) in order to facilitate an exchange. In contrast to early representatives of the theory of property, next to usus and usus fructus he therewith explicates the abusus as well. Hume does not only distinguish different kinds of disposition, but also particularly emphasizes that they represent proprietary rights only after all of them have been guaranteed (by the state). This guarantee also means that “promises” are being kept; inversely the owner is liable for the damages he caused to others (principle of liability). Therewith, Hume reaches the central issue of ownership, namely that private property exists only if both the exclusion of disposition (no unlawful appropriation through third persons) and the exclusion of liability (no passing on of damage on third persons) are guaranteed. The right of disposition and the obligation of liability, therefore, belong together.38 It is this comprehensive ownership guarantee that facilitates the exchange (especially if it consists of separate acts of exchange) and therefore represents a precondition for the functioning of the commodity and the credit market. Hume does, indeed, go even further. Next to the fundamental rule of exercising rights of disposition and the taking over of obligations, he is also preoccupied with the adjustment of the rules in the course of time, that is, with the additional evolutionary aspect. According to Hume, a middle course must be found between constancy and the change of rules, in order to be able to take into account changing conditions. Attention should, however, always be paid to the fact that property rights represent well-

36 Privatization in Central and Eastern Europe

known and generally applicable rules, that they can be clearly assigned and that they remain transferable, in order to ensure the functioning of the markets. Hume’s central statements modify and extend the earlier theories of property with the following points: • Ownership is the result of a learning process, in the course of which people come to an understanding about exclusion. Ownership can, therefore, not be reduced to a relation between the individual and the object. • In small communities exclusion can be secured by conventions, that is, mutual acceptance between the individuals through their behavior. In large communities the state is created as a mediating authority between people that formulates the rules of exclusion in generally applicable terms and enforces them. • Exclusion does not apply only to the aspect of individual disposition (no unlawful appropriation through third persons), but also to individual liability (no passing on of damage to third persons). In the case of private property, disposition and liability belong together, on principle. • It is the ownership guarantee that (in a money economy) facilitates the chronological separation of individual acts of exchange, as well as the development of creditor–debtor relationships. It therefore constitutes a precondition for the functioning of the credit market, that is, the interest mechanism. • Rules concerning property and its transfer should rely on general principles. Expectations should, on the one hand, be stabilized through the constancy of rules; on the other hand, the variation of rules should allow an adjustment to changing conditions. In the end, Hume resolved the dispute whether property is to be justified on the basis of natural law, or through a positive contract, quite cleverly. On the one hand, he gives a utilitarian interpretation to labor theory. Arguments of labor theory only explain the initial acquisition that took place a long time ago and to which the “relation on the basis of imagination” can be lost. Labor theory therefore represents the origin, but not the perpetual justification of a given ownership structure. On the other hand, he takes up the idea of a contract and by assuming a learning process, he deprives it of its character of being created artificially by man. Von Hayek comments on the synthesis of the two categories of “natural” and “artificial” (that is, natural law and positive law) which were separated until then, as follows: Not until the eighteenth century did thinkers like Bernard Mandeville and David Hume make it clear that there existed a category of phenom-

Theories of Property in Classical Philosophy 37

ena which, depending on which of the two definitions one adhered to, would fall into either the one or the other of the two categories and therefore ought to be assigned to a distinct third class of phenomena, later described by Adam Ferguson as “the result of human action but not of human design”. (von Hayek (1973:20)) With Hume, there now existed a basic explanation of ownership from the viewpoint of evolution theory that could, so to speak, absorb the old foundations of justification. Later utilitarians have, however, mostly not taken note of Hume’s explanation. Instead, in England, it came to a “[…] setback from the intrusion of constructivism in the form of Benthamite utilitarianism […]” (von Hayek (1973:22)). Bentham and J.S. Mill: property between security, freedom and equality In the nineteenth century, questions concerning the development of private property had faded into the background. The existing property system was now challenged by a utilitarian version of labor theory and analyzed according to the objective of “the greatest possible happiness of the greatest possible number”. This objective was divided by Bentham (1748–1832) into the four subordinate objectives of “support”, “affluence”, “equality” and “security”, whereas particularly his observations on the last two reveal his attitude towards private property.39 Bentham contemplates equality according to the principle of diminishing marginal utility (see Macpherson (1977:29ff)): if everybody experiences happiness equally and if happiness is increased through the accumulation of wealth, then the richest person is indeed the happiest. Compared with the poorer persons, the increase of wealth, however, leads to a relatively smaller increase of happiness for the richest person. In order to fulfill the subordinate objective of “equality”, fortune ought to be distributed equally between individuals. The principle of equal distribution, though, conflicts with the principle of security. For Bentham, ownership is actually only secure if the person who works can count on the fact that the returns from the use of his property will fall to him. This does, however, imply unequal positions of wealth. Even so, according to Bentham, the objective of security should have priority over the objective of equality. The argumentation on the basis of which Bentham derives the priority of security suggests that the utilitarians have instrumentalized the labor theory of Locke to fit their purposes. This instrumentalization meant that labor was now regarded as the source of wealth, and therefore, in the end, served to lift the restriction of resources that, so far, had implicitly conflicted with justification on the basis of labor theory. The chain of arguments was reversed in order to achieve this: now, the question was how to create incentives for an increased amount of labor, and therefore for the increasing of wealth. The answer was that the worker should be motivated

38 Privatization in Central and Eastern Europe

by allowing the fruits of his work to actually fall to him (Brocker (1992:320)). With that, the contemplation of ownership was shifted from the initial acquisition of resources to income (derived acquisition) (Brocker 1992:322)). Now the question arose whether interest on principal and ground rent could be justified from the point of view of labor theory, and if so, how. The lack of possibilities to justify these two factor earnings then smoothed the way for the socialist theory of property with its demand for nationalization of land and productive wealth. Even later, utilitarians, like J.S. Mill (1806–73), had to admit that the labor theory could not justify the existing property system without reservations (Brocker (1992:323ff)). At first, however, J.S. Mill characterized property as follows: The institution of property, reduced to its essential elements, consists in the recognition, in each person, of the right to the exclusive disposal of what he or she have produced by their own exertions, or received by gift or fair agreement, without force or fraud, from those who produced it. The foundation of the whole is, the right of producers to what they themselves have produced. (Mill (1849:267, Vol. I, Book II, Chapter II, § 1)) With this definition of property as “right to the exclusive disposal”, Mill refers the problem of an economic justification of property to legal science, but at the same time still holds on to labor theory. He now makes an attempt to confront this interpretation of labor theory with the existing property system, while keeping an eye on the objective of increasing the wealth of society. Mill accepts ownership of land only as long as the land is cultivated properly and as long as it serves the common wealth. If this is not the case, then there should be no individual ownership of land. An individual farmer would then only be allowed to appropriate the fruits produced by his own work (Mill (1849:280ff, Vol. I, Book II, Chapter II, § 5)). Thus, Mill does not exclude public property of land, on principle. In addition, he criticizes the right of inheritance of the children (without a will and therefore without the testator’s consent) (Mill (1849:273f, Vol. I, Book II, Chapter II, § 3)), as it proves difficult to be justified by labor theory. Instead, however, following his father, Mill manages to resolve the problem of a justification of interest on principal on the basis of labor theory by providing an explanation according to the abstinence theory of interest (Mill (1849:267f, Vol. I, Book II, Chapter II, § 1)). Although Mill manages to back up ownership of land and inheritance only inadequately, he still regards the labor theory as the best basis for justification. Falling back on to the alternative, occupation theory, in order to explain property, is considered by Mill not to be particularly sensible. According to Mill, one should instead start with the assumption of an ideal society that already occupied an uninhabited country, and subsequently

Theories of Property in Classical Philosophy 39

consider which legal and political institutions would be appropriate in future.40 One should assume that in the initial situation the means of production would be equally allocated.41 Society would then have the choice of organizing its economy according to the principle of public or of private property. According to Mill, the reference to labor productivity as a deciding factor in this choice would not produce a clear result. Mill counters the objection that community property would reduce the incentive to work with the argument that someone working in a private plant would show less personal interest in his work than a member of the communist community who would be working for his co-operative.42 Mill further emphasizes that: “In all public, and many of the largest and most successful private undertakings, not only the labors of detail but the control and superintendence are entrusted to salaried officers”, whereas “[…] in a Socialist farm or manufactory, each labourer would be under the eye not of one master, but of the whole community” (Mill (1857:250, Vol. I, Book II, Chapter I, § 3)). All in all, by pointing out that inefficiencies depending on the enterprise size and resulting from problems of control can arise even in a private property order, Mill already mentions those problems that are nowadays discussed “anew” within the context of modern property rights theory. But most of all, Mill contradicts the simple assumption that, compared to public ownership, private property would prove more efficient. Mill is certainly less concerned about the question of efficiency than about income distribution. He then observes that the return to labor is apportioned in an almost inverse ratio to the labor (Mill (1857:253f, Vol. I, Book II, Chapter I, § 3)). For Mill, public ownership and public redistribution of the “fruits of the labor” are, therefore, the fairer solution.43 He does, however, add as a qualification that there is not enough knowledge available about individual action in its best form on the one hand, and on the other hand, about socialism in its best form, in order to decide in favor of one of the two systems. “[…] (T)he decision will probably depend mainly on the one consideration, viz. which of the two systems is consistent with the greatest amount of human liberty and spontaneity” (Mill (1857:255f, Vol. I, Book II, Chapter. 1, § 3)). For Mill, there is an unambiguous hierarchy to be aimed at, namely putting freedom ahead of equality. Mill considers the safeguarding of ownership to be the primary duty of the state, the same way earlier representatives of the theory of property did. This safeguarding should, however, not be “perfect”. According to Mill, a certain degree of uncertainty concerning property rights would be economically effective, as risk and difficulties would give cause for thirst for action and discoveries. Uncertainty should, however, not assume such an enormous dimension that the individual would no longer have sufficient means for self-protection. The progress resulting from the uncertainty of a lawless situation (anarchy) should, as a matter of principle, be given preference to a situation in which excessive interventions of the government slow down the thirst

40 Privatization in Central and Eastern Europe

for action to a considerable extent (Mill (1849:441ff, Vol. II, Book V, Chapter 8, § 1)). Mill takes the view that a “perfect” state protection of ownership would only induce the individual, who can actually protect himself to a certain extent on his own, to sluggishness. On the other hand, uncertainty would make him inventive. Mill considers a privately organized protection of property to be an economically sensible completion of the “imperfect” public ownership guarantee. He recognizes that there are different ways of protecting property (existing side by side): First, the protection of property can be taken over by the individual; it then constitutes a private good. Secondly, protection can be provided by the state, as a public good, so to speak. According to Hume, it can, thirdly, be guaranteed through norms of behavior. The following conclusions can be drawn from Mill’s observations: • In the end, modified labor theory narrows ownership to income. If this basis of justification is recognized, then to be consistent, private ownership of land, as well as means of production, must be questioned. • Compared to public ownership, private property does not inevitably lead to a higher efficiency. • A “perfect” protection of property provided by the state is not appropriate. The public good of an ownership guarantee can instead be completed by a privately organized protection. It should be noted in conclusion that a “utopian”, and later on a “socialist” theory of property had been developed in parallel and in contrast to the “capitalistic” theories of property from the sixteenth to the nineteenth centuries which have been introduced here in rough outline. This socialist theory emphasized a more centralized state from the beginning and often (but not always) called for collective ownership. 44 We have, however, focused on the theory which, as far as the early English philosophers up to Locke are considered, has been described by Macpherson (1962) as “possessive individualism” and which represents the philosophical background of the kind of market economy taken as a model by Central and Eastern European countries.

1.3

Philosophical stimuli on property rights in transition

One has recently fallen back to the property theories of Locke and Hume in order to substantiate theoretically the development of property orders in the transformation countries. The requirement for the privatization of state property in Central and Eastern Europe was, at the time, derived from the theories of Locke and Hume: For the transformation countries, the obligation of extensive privatization of state property is a central implication of the property theories of

Theories of Property in Classical Philosophy 41

Locke and Hume; private property must become the dominant type of ownership. […] According to a possible interpretation of Locke, transformation countries have a commitment to extensive privatization of state ownership, so that the natural right to private property gains recognition and the incentive quality of private property becomes effective. (Feldmann (1993:15)) Whether a “natural” requirement for privatization can be derived from philosophic theories of property is, however, more than questionable. As already reviewed in detail, philosophers have most of all examined the conditions leading to the emergence of the (right of) ownership and the state.45 They have, however, not adopted an unambiguous and unanimous attitude towards the extent of the public and private sectors. The common ownership of the stateless state of natural law they described can on no account be equated with the state ownership of the means of production dominant in socialist countries. They also rarely gave attention to the question of efficiency and never showed that in this respect a private property order is superior to its socialist counterpart. The philosophers have rather addressed the connection between the emergence of private property and the state. Early representatives of the theory of property recognized above all that ownership emerges under the condition of shortage. This alone substantiates the necessity of exclusion as the central characteristic of ownership. The emergence of ownership is, therefore, inseparably connected with the question of how exclusion could be established. Hobbes postulated that individuals seek to escape the free-for-all by concluding a contract. The purpose of this contract concluded at an imaginary point in time is, according to Hobbes, the creation of an authority (the state) that guarantees the exclusion. Whereas with Hobbes the state becomes an uncontrollable Leviathan, it is subject to democratic control with Locke. Nevertheless, even with Locke, the relation between state and citizen remains divergent. It is true though that with his “preliminary contract” concluded between the community members in a natural state of nature, Locke describes a situation in which individuals communicate with each other without creating a political body (state). This idea of a self-regulating group which is left unfinished by Locke and which trapped him in his contradictions instead, is to be found with Hume in a new variant. With his approach following evolution theory, Hume can on the one hand explain why in small communities mutually agreed behavioral norms that have been learned for many years guarantee exclusion. On the other hand, he can perceive the state as a catalyst of the understanding between people – in contrast to Locke and especially to Hobbes, who models it as the opposite of private individuals. The fact that representatives of the theory of property such as Locke and Hume reached different conclusions concerning the relation between state

42 Privatization in Central and Eastern Europe

and citizens cannot least be attributed to the fact that they dealt with the factor of time in different ways. The majority of the theories of property discussed here are based on a comparative and static model of the contract, for instance the description of two situations, namely the one before and the one after the conclusion of the contract. The contract is concluded because it is advantageous to each individual and therefore (for reasons that are not always clear) for all members of the community as well. The way the process of communication takes place in detail is a subordinate topic. In contrast, Hume creates a kind of dynamic model of the continuous conclusion of a contract in respect of the permanent understanding between people. For Hume, ownership that can be observed in reality is therefore merely a snapshot, the observable result of a long development. Hume’s “agreement” is a social order that develops continuously. In contrast to this, according to Locke, the single agreement, concluded as a result of isolated individual calculations, is established irrevocably and without time limit. All in all, the aspect of time is therefore an important difference between Hume’s agreement and the actual contract. The concept of ownership, that is to say, the question of which objects could function as property, only developed in the course of time. At first, Grotius and Hobbes considered land to be the prominent object of ownership. Locke focused on the ownership of one’s own body and of the goods produced by one’s own labor. Hume connected ownership with credit, Bentham connected it with earned income, and Mill additionally with ground rent and interest on principal. The concept of ownership was gradually extended to the different objects of property and therefore adjusted to the changing market conditions. At the same time, there were discussions concerning exclusion and especially concerning the question whether everything that could be private property should also be protected by the state. As long as it involved only natural resources and simple goods, complete protection seemed appropriate and sensible. Mill was the first to point out that “perfect” protection by the state would eliminate the uncertainty that was important for progress, and that the individual would, hence, have to provide for his own protection in private, as well. What is more, Hume recognized that it should be left to the market participants to put their legal transactions in concrete terms by means of a contract. Contract law, however, should be provided and enforced by the state. As already mentioned, there are three forms of exclusion: voluntary behavioral norms (see Hume), private protection of property (see Mill), and public ownership guarantee (see Locke, among others). In the reality of a market economy these forms exist next to each other. If we speak about ownership these days, we usually mean private property guaranteed by the state, at least in developed market economies. Private protection is therefore noticed especially in those cases in which public protection is regarded as insufficient (for instance property security companies). It is then said that the monopoly of

Theories of Property in Classical Philosophy 43

power no longer lies completely in the hands of the state. It has to be noted, however that this public guarantee may not be necessary everywhere (for example in small communities), may not always be sensible (see Mill), and does not exist throughout the world (intellectual property, for instance). If in doubt, the individual must organize his protection on his own or get together with like-minded people (club solution of exclusion). It is, however, crucial that private protection can have two different meanings: according to Mill, it is first a partial amplification of the public guarantee and can therefore definitely be the result of a process of understanding. But private protection can, secondly, also indicate that a process of understanding has not yet taken place, meaning that society is experiencing a free-for-all. The principle of exclusion is, as Hume showed, always double-sided. It is not only valid for the owner, but concerns the non-proprietors as well. Regarding private property, the individual is, on the one hand, therefore protected against an unlawful appropriation through others beyond the private disposition of his resources. On the other hand, he must take on the private liability for losses he caused, meaning that he cannot shift the damage on to other members of the community, on principle. Private disposition and private liability are to be exercised jointly. All in all, the legal institution of private property is the central foundation of a developing market economy. The following key points can be filtered from the early theories of property: (1) (2)

(3)

(4)

Ownership is the result of an understanding reached between people about the extent of the mutual exclusion of scarce resources. On principle, exclusion can take on three forms: behavioral norms, privately organized protection of property, or public ownership guarantee. Behavioral norms that safeguarded ownership are no longer completely observed in large communities. A purely privately organized protection of property, as existing in a free-for-all, is uncertain and unstable. An authority (state) is therefore created which guarantees exclusion as a matter of priority. The ownership guarantee provided by the state constitutes a public good. It has to extend over private disposition as well as over private liability. The public ownership guarantee constitutes a necessary condition for the functioning of the market economy. Among other things, it facilitates the chronological separation of acts of exchange, and therefore debtor–creditor relationships.

Private property was the main subject in most of the introduced theories of property. However, Hobbes understood the state as sole owner. Mill indicated that public property can to some extent be useful. Philosophers

44 Privatization in Central and Eastern Europe

have therewith discussed private property on the one hand, and public property on the other, more or less explicitly. On that occasion, it became indirectly discernible that both forms of ownership also demand different forms of exclusion. Private property guarantees private disposition and private liability, and as Hobbes indicated, in the case of state property, the state restricts its citizens’ rights (of use) to a large extent. The state’s disposition is connected to public liability and this can imply the nationalization of losses. The contrast between private and state property is often invoked for the distinction between market and planned economy. In this context, the aspect of exclusion is, however, relatively rarely quoted explicitly. The private ownership of the means of production which is guaranteed by the state is, however, characteristic for market economies. On the other hand, state ownership of productive wealth that is guaranteed by the socialist state is a central feature of planned economies. 46 Thus, transition from planned to market economy requires the change of guarantee and of the state’s role as guarantor. Calling this the central question of ownership could now seem simple, or even banal. Perhaps for the very reason that it was common knowledge that the (formerly socialist) state was to guarantee private property in the future, economic science rarely addressed the change of the ownership guarantee as a public good, but instead referred it to the law (legal system). The process of altering ownership guarantee definitely has economic consequences. As long as the principle of exclusion is not changed, there is still a condition missing that is important for the functioning of the market economy. 47 Without the guarantee, private resources must be privately protected. Under these circumstances, a privatization will probably not lead to the expected efficiency increase. Within transition, the change of ownership guarantee meets with particular obstacles. It is obviously less problematic that a private disposition now replaces a public one, but rather that at the same time, public liability (nationalization of losses) is to be replaced by private liability. This change of disposition and liability was assumed to take place in the course of privatization. Privatization could, therefore, have a knock-on effect as it is made clear that the new principles of disposition as well as of liability are deliberate and that they will definitely be performed in the future. On principle, commercialization of public enterprises also shows a similar effect. In the course of commercialization, however, the risk that, in the end, the state will not actually make its enterprises subject to complete liability for political and social reasons is assessed to be higher. If need be, it will preserve them from bankruptcy due to employment reasons, for instance. Central and Eastern European countries also justified the fact of not applying bankruptcy law, and at the same time the inadequate implementation of the liability clause, among other things, by the social consequences of a cutback in employment.

Theories of Property in Classical Philosophy 45

The cutback in employment in the public sector is particularly precarious in Central and Eastern European countries. It reveals the abolition of the non-market-conforming employment guarantee, which secured the earning of (planned) incomes through employees in planned economies. The socialist understanding of ownership which legitimated only earned income as personal property was hidden behind job security. In the individual’s view, the abolition of this work-related “income guarantee” can now cause disadvantages. So, in the course of the change of ownership guarantee and of the abolition of the “income guarantee”, individual burdens could arise which, moreover, do not necessarily have to be equally distributed. Property reforms in Central and Eastern Europe show certain similarities with the development of ownership described by early representatives of the theory of property: at first, it was difficult to reach a consensus about the introduction of a new ownership guarantee at all. Among other things, there were debates about the justification of private property in the course of which arguments based on labor theory had been brought up as well. There were demands that the state assets that had been created by the workers in previous decades should be returned to them in full and free of charge. In addition, private property of land was disputed in some countries. As far as politics is concerned, it became apparent that the problems of democratization and of finding a new definition for the role of the state were underestimated, without exception. On the basis of the previous explanations, the following points can be formulated concerning property rights in transition: (1)

(2)

(3)

(4)

The public ownership guarantee of the means of production constitutes a necessary condition for the functioning of the market economy. Property reforms therefore require a change of the ownership guarantee. The change of the ownership guarantee within transition is difficult and time-consuming, as individual burdens will also be distributed anew. As long as a new guarantee is not firmly established, individuals must defend their property privately and bear the arising costs themselves. In this phase individual positions of power are important. A privately organized protection of property is uncertain and, in addition, involves higher costs than a public ownership guarantee. It is therefore likely that a consensus will be reached and that a public ownership guarantee is established for private property. As long as there is no public ownership guarantee, privatization is hardly suitable to increase efficiency. It is questionable whether privatization has a knock-on effect on establishing the new property rules and on increasing their credibility.

46 Privatization in Central and Eastern Europe

The following chapters will deal with the more recent economic theories concerning the emergence and change of ownership. These theories are mostly based on the early theories of property. In accordance with the approaches that refer to economics, we can roughly differentiate two theories: first, those theories that explain the importance and emergence of ownership as based on an isolated individual calculation and that take up the idea of a contract, and then proceed in a comparative and static way (for example, neoclassicism). Approaches that also start from the assumption of an individual calculation, but in which ownership plays a dynamic role, can, with reservations, be integrated into this class (for example, monetary theory). Secondly, those theories, for which ownership is the result of a mutual understanding between people and which therefore follow the tradition of Hume, pursuing a course based on evolution theory (for example, older institutionalism). The points of view used by the various theories to study ownership are, however, quite varied. But, as in early theories of property, they always revolve around the same questions: how does private property emerge and is this emergence inevitable? How do people reach an understanding on ownership? Can ownership only be guaranteed by the state? How is the Leviathan to be avoided? Already, as far as the answer to the first question is concerned, there is no agreement to be found within the more recent contemplation of ownership. Not all the theories can prove that the emergence of ownership is inevitable. But where it developed, it was created as a result of a conflict over the use of scarce resources. In most of the more recent approaches, ownership is therefore seen as a socially initiated solution to the conflict. Taylor (1982:44), who has devoted most of his attention to anarchy, reaches the following conclusion: “On a somewhat broader view, social order is security of property […] as well as of persons”. As was done in early property theories, the question of ownership is always linked to the question of social order. It is then not necessarily ownership that is the focus of attention, but rather the conception of the society that again divides the opinions supported by the various theories. There is, for instance, support for the view that people can come to an understanding with each other peacefully without the sanctions of a powerful state which towers over the community; in other approaches, the state is necessary to enforce the social order, but frowned on as a Leviathan. In one, the understanding between people is based on a cost/benefit calculation of individuals, who are absolutely “full of fighting spirit” and interested in their own profit; in another, it is the individual’s conscious and experienced insight that only a solution of the conflict will maintain social order. Starting from ownership and social order this does, however, raise the question of the conception of man: egoist or altruist, Hobbes’ fighter versus the pacifist. The fact that this question is sparked off particularly by ownership seems to be explained as a consequence of the special characteristic of ownership,

Theories of Property in Classical Philosophy 47

namely that it represents freedom and restriction of action at the same time: ownership always represents a restriction to the individual in the sense that the property of another must not be infringed upon. To this extent, individual freedom is, indeed, restricted. Nevertheless, ownership creates a scope for action for the individual that he would not have without protection. According to von Hayek (1973:52), the individual philosophers have considered the connection between right and freedom in different ways: for Hume and Locke, right and freedom belonged together, whereas for Hobbes and Bentham the right represented an encroachment on freedom. Even in the more recent theories of property, that frequently refer to philosophers, the conception of right sways back and forth between restriction and extension of (the freedom of) action. In economic thought, the problem also appears in the form of (property) right as a public good. Compared to private protection of property and from an overall economic viewpoint this is, however, connected with reducing costs. Its provision means that for some individuals freedom of action is restricted and for others it is extended. According to the starting-point they use, namely overall economic advantage or individual preferences, the theories also differ in their answers to the question of whether the emergence of ownership is inevitable or not; in this context, the way they handle the aspect of time does matter. Before moving on to the more recent studies of ownership, it has to be pointed out that, as in the earlier theories of property, terms such as ownership, state and community nowadays often remain undefined, and that comparisons between the individual theories are therefore hindered. In principle, however, whenever “property” is mentioned in the following, the meaning is private ownership of the means of production. The “socialist” or “state” property will be explicitly denoted as such.

2

The Neoclassical Definition of Property

Following the radical changes in Central and Eastern Europe, the question of how property came to be and how it is changing was of minor importance. Discussions were held mainly about the functional aspects of ownership, especially pertaining to its efficiency. The superiority of a market economy in comparison to a planned economy was often justified based on the argument of the increased efficiency of private property. The countries in the midst of transformation were advised to permit private property and to strengthen the private sector by forcing privatization of state enterprises. At the beginning, it was therefore assumed that a quick single jump from a planned system to a market economy could be accomplished. It has become obvious meanwhile that changing the framework, more precisely the rules of the game, is a long and difficult process. It could even lead to negative, unexpected repercussions for the economy. Sometimes, such problems are attributed to an insufficient implementation of reform programs, or to a lack of willingness of the persons involved in economic policy. This means that the problem of institutional changes is being referred back to politics. Indeed, and that is my project in the following, economic theory can also contribute to explaining and solving problems occurring during institutional changes, including property reform. In the past decades, neoclassical theory addressed the emergence of ownership, that is, the changes of institutions, quite rarely. A reason for this is the fact that, for a long time, mainstream economics assumed the existing system to be a prerequisite for analysis and avoided a confrontation with institutional arrangements. The property rights theory was the first to make an attempt to close this gap. The effects of positive transaction costs began to be examined on the basis of the examinations of Coase, who at first demonstrated that the allocation of rights of disposition had no influence at all on allocative efficiency as long as transaction costs are zero. 1 The analysis was expanded in the course of the development to include, among other things, the effects of asymmetrical information, as well as principal agent problems. These and other approaches are clustered together under 48

The Neoclassical Definition of Property 49

the heading of “New Institutional Economics”, which does not yet constitute a closed theory. Based upon these approaches an attempt is made, among other things, to answer the question of what effects already existing and nevertheless differing institutional arrangements have, and how property rights should be best defined, for example concerning efficiency. Institutions were now understood as a component of economic theory. What was being dealt with was, however, a comparative and static analysis of optimal institutions, or a comparison of different, already existing ones. The question of why and how institutions change was rarely examined. 2 So, for the majority of the supporters of property rights theory, a positive explanation of how these rights come to be and how they change was not an issue.3 Hesse (1983:82) notes: This merely names the driving force behind changes, namely pursuit of profit. With that, nothing is being said about the process of change in rights and about the assessment of the consequences. Confusion about the property rights approach, however, begins with the discussion of exactly these questions. […]. The first of the following sections will roughly illustrate what importance neoclassical theory attaches to ownership in a market economy and which arguments for the privatization in Central and Eastern Europe it brings forth. It will become evident that the recommendation made to countries in transition, namely to rapidly privatize their state enterprises, assumes a well-functioning environment. The problem of institutional change was not taken into account. Neoclassicism did, however, consider, even if only occasionally, the problem of unsatisfactory institutions and of those in the process of being created. A second chapter will therefore illustrate those neoclassical theories which deal with institutional changes.

2.1

Property rights and privatization

It is conspicuous that economic theory only rarely examined the key question of the importance of private property in a market economy.4 Due to the long existence of private property in market economies, it seems that some aspects of its emergence and justification were thrust to the background. The question of the importance private property actually has for the functioning of a market economy became a topic once again only in the course of transition. But even within the privatization debate, the main points focus only on functional aspects of ownership. They will only roughly be outlined in the following. This study aims, rather, to demonstrate that neoclassical approaches attribute fundamental importance to private property in market economies only under very specific assumptions, and that this is the reason why they can derive a requirement for privatization.

50 Privatization in Central and Eastern Europe

Property rights theory does not define ownership in a legal sense, but as a legal compound made up of all economically relevant rights. This compound of legal rights can be split into the following rights (Furobotn/ Pejovich (1974:4)): (1) the right of use of the asset (usus), (2) the right to appropriate returns from the use (usus fructus), (3) the right to change the asset’s form and/or substance (abusus). Depending upon whom these rights were granted to, whether the rights are traded on the market, or if a vote decides their fate, a distinction can be made between private and state property (see Willgerodt (1988:179)). Private property exists, if, for example, an individual is in possession of all three rights and if he makes use of his rights through market-economic contracts. However, even in private corporations decisions are made not only considering the market, but by means of votes as well. In the case of public property, the individual cannot directly and entirely dispose of ownership. He can, however, influence the decision concerning the use of resources through the process of voting. If the right to vote is denied (for instance in a dictatorship) and if property rights are completely centralized, the individual can obtain a right of disposition through delegation, which he is, however, not permitted to use as he would choose. This succinct description has already shown that, by a definition formulated on the basis of property rights theory alone, no differentiation can be made between the economic systems. Public property is also to be found in market economies. A differentiation between the systems, however, demands an added number of assumptions about the economic “environment”, that is to say, the mechanism of allocation (market, plan, polls). As far as its possible functions are concerned, property is dependent on the specific environment. The main role of private property in market economies is considered to be the incentive it creates. On the precondition of freedom of trade and contractual autonomy, property rights define a range of disposition over resources for the person involved and offer him a scope for action he will use as theoretically assumed in order to maximize his profits. In a competitive market setting, an increase in technological as well as allocative efficiency is to be expected. The thesis has underlined that the clearer the property rights are defined, the better will property take on its incentive quality. Property is clearly defined, even if the rights definitely lie with the state. Therefore, the incentive property creates does not offer sufficient justification for privatization. On the contrary, additional specific assumptions pertaining to the behavior of the private and public sectors are needed. The privatization of public enterprises is usually based on the assumption that the private sector is run more efficiently than the public one.5 Two arguments are given, above all, to substantiate the assumption of the

The Neoclassical Definition of Property 51

lower efficiency of public enterprises: first, it is claimed that its internal incentive and monitoring system (bureaucracy, for instance) is inferior to the one in private enterprises. The reason being, among other things, the fact that politicians are less interested in the efficient business practices of public enterprises, but more in their own re-election, which depends only indirectly upon the success of public enterprises (Koop (1994:296)).6 Secondly, it is pointed out that public enterprises are not always subject to the market and are also pursuing other objectives than profit maximization. Among other things, they are not free of political influences. If there is no market failure, public enterprises should be privatized in order to reduce the exerted political influence, to strengthen their economic function and to increase their efficiency. Certainly, the assumed efficiency advantages of private enterprises do not stand unchallenged. Private enterprises are only more efficient if certain conditions prevail. Vickers/Yarrow (1988:39ff) and Bös (1991:6ff) point out that, among other things, the efficiency advantages depend upon the incentive and monitoring system of (private and public) enterprises and upon the market conditions.7 Incentive and control problems may appear if the three rights mentioned by property rights theory are not concentrated in one hand. This is bound to happen especially in big enterprises. The company owner does not personally manage the company, but instead entrusts a management to represent his interests. Under the assumption that the management pursues its own objectives (such as maximization of income), there is a chance for typical principal–agent problems to occur. Such problems are compounded if, as practice permits in joint-stock companies, numerous shareholders represent the actual owners. 8 The influence the individual owner can exert upon the management and thus upon the business practice of the enterprise is therefore limited, especially if the costs of information and the costs of forming an association of small shareholders are considered. Berle/Means indicated as early as 1932 that the shareholders are in fact merely formal owners and that the actual decisions are taken by the management.9 These typical principal–agent problems, that occur due to the separation of ownership from control, are not limited to market economies. Principal–agent problems were also present in planned economies, when the central organs transferred rights of disposition, usually usufruct, to the managers of state enterprises. It was then up to the central authority to ensure that the enterprises exercised the rights granted to them according to the true nature of the plan. If the enterprises were additionally granted collaboration on the working out of the plan, the problem of “soft plans” appeared in the planning phase and was rooted in the company’s own objective function (Leipold (1983:200f)). The co-determination rights

52 Privatization in Central and Eastern Europe

granted to the employees additionally contributed to the fact that the rights of disposition were no longer clearly defined, but instead diversified. In the end, according to the neoclassical viewpoint, problems of control and unclear property rights were responsible for the inefficient running of state enterprises.10 It would therefore be necessary to clearly define the rights (in the course of privatization). Incentive and control problems are, however, mainly a problem related to the enterprise’s size, rather than to types of ownership. These problems occur independently of the economic system and can, moreover, exist in public as well as in private enterprises. If property rights are diversified and the costs of collecting information are important, as is the case in Central and Eastern Europe, from a theoretical point of view, private enterprises are not necessarily more efficient than their public counterparts (see Hölscher (1996:101)). In this case, a privatization requirement cannot be derived by means of the efficiency argument. It is moreover difficult to make a fundamental statement concerning the extent of the public sector beforehand. In market economies, the control problems mentioned here are, among other things diminished by the capital market, which, according to Williamson (1992:28ff), carries out finance-based, organizational, and contextual control. The term finance-based control is understood as control through lenders of outside and of equity capital. This is how in the case of the failure to repay the credit they granted, the lenders of outside capital can threaten the enterprise with bankruptcy proceedings. The threat of bankruptcy is, however, only partially effective in public enterprises, since these can, if necessary, be subsidized by the state and the credits extended through the lenders are thus also (implicitly) guaranteed by the state (Koop (1994:295)). In contrast to public enterprises, private enterprises are quoted on the stock market, and continually provide information to the lenders of equity capital. In the case of inefficient conduct of business, the management is exposed to the danger of a takeover and must fear it will be replaced. In contrast to this external finance-based control, Williamson (1992:32ff) understands organizational control as the control exercised by banks, for instance through their participation in and collaboration with the Board of Directors, as practiced in Germany and Japan. Even concerning organizational control, it is assumed that it is less effective in public enterprises than in private ones. Contextual control finally relates to formal and informal rules and moral suasion. All in all, the capital market exercises more control over private enterprises than over their public counterparts. In market economies, privatization of public enterprises can, therefore, be argued for on the grounds of increased capital market control over private enterprises. A functioning capital market is the precondition for finance-based, organizational and contextual control aimed at achieving increased efficiency in privatized enterprises. In Central and Eastern Europe, this precondition was

The Neoclassical Definition of Property 53

not given at the beginning of transformation. The issue of the development of the capital market thus had to be addressed. Relating to this issue, the finger was again pointed at privatization, in two regards. First, in the course of the privatization of business enterprises, company shares were to be made tradable on the stock market. In addition to the valuation of the enterprise as a whole and the provision of information depending on the privatization method, this was also meant to contribute to the creation of “shareholder consciousness” in large sections of the population. Only relatively few business enterprises were thought suitable to be listed on the stock exchange, so that even a few years after the re-opening of the stock exchanges, the volume of trading remained modest. Secondly, there were discussions about the privatization of the public banks dominating the financial sector. This would have required a solution to the so-called bad loan problem. From the theoretical viewpoint of the sequencing debate and as demonstrated in practice at a later point in time, the privatization of banks was delayed. In the mid-1990s, this delay was regarded as an important reason for the inadequate control of the (meanwhile privatized) enterprises as well as for their insufficient “restructuring” (ECE (1995:205ff)).11 This is the reason for demanding forced privatization of banks. But as long as capital markets are underdeveloped in Central and Eastern Europe, precisely those control mechanisms are missing which would create the circumstances for the privatization of enterprises to make sense at all. The competition existing on the capital as well as the commodity markets is an important precondition for an efficient allocation. Under the pressure of competition there are incentives for management to conduct business efficiently.12 Competition does not, however, mean that perfect competition need already be present on the markets; the threat of potential competitors (contestable markets) can suffice (Hemming/Mansoor (1988:14)). In order to achieve this, there must be free market entry. The licensing of private property as well as freedom of trade and of contract are important preconditions for competition, which can stimulate technological progress, structural change, and with it dynamism. In order to strengthen competition in Central and Eastern Europe, demands were voiced to liberalize the market entry for domestic and foreign suppliers, as well as to break up the large-scale state enterprises, which had not been under competitive pressure within the planned economy. 13 The argument for the promotion of competition justifies the liberalization of market entry and the breaking up of public enterprises, but not privatization. The argument is reversible though: under competitive market conditions, private enterprises conduct business more efficiently than public enterprises, as a rule. All in all, the neoclassical arguments that were put forward and from which a basic privatization requirement for Central and Eastern Europe is derived are not very sound. Privatization was, on the one hand, supposed

54 Privatization in Central and Eastern Europe

to increase the efficiency in former state enterprises, while implicitly it was assumed that competition and a functioning capital market could be developed quickly. On the other hand, privatization was thought to contribute to the emergence of a capital market. In other words: privatization was regarded as an instrument for the creation of institutions that conform to market conditions, and under the assumption that these conditions already existed, privatization was at the same time seen as a method for increasing efficiency.14 With an economic framework which is unstable or just being developed, as is the case in Eastern Europe, it is not possible to derive a clear privatization requirement from the neoclassical approach. Under the given circumstances and after having decided that the privatization process should be effected, neoclassical approaches can, however, shed light on the effects of the various privatization methods. The methods clearly differ due to the existing positive transaction costs, incomplete information and bounded rationality with regard to efficiency effects. These and other effects have also been analyzed for the privatization methods applied in Central and Eastern Europe. The question whether a (temporary) retention of state property and a commercialization of public enterprises causes lower transaction costs than privatization because of the specific problems of Central and Eastern Europe, that is, as a result of inadequate rules of the game, remained, however, unanswered. In the end, the basic problem of Central and Eastern Europe is that, first of all, the rules of the game have to be created before any game can begin and any moves can be made. Since the rules of the game and game moves cannot always be distinguished, property rights theory can only make limited statements pertaining to this. Even though the property rights theory views itself as a theory of rights, most of the time it builds upon existing rights and quietly assumes ownership as being already instituted. The property rights theory explains the microeconomic disposition over resources without addressing the question of exclusion and, therefore, the question of the ownership guarantee. The importance of rules of the game, such as the ownership guarantee, can be illustrated as an example. The greater efficiency of a private enterprise is only to be expected if the owner has free access to his resources, if he additionally “works on his own account” and if he is liable for incurred losses (Schmieding/Koop (1991:4f)). Here, exclusion represents liability for losses. In the market economy private enterprises are (usually) exposed to the risk of bankruptcy and are forced to work under “hard microeconomic budget constraints”.15 Even state enterprises can be exposed to a risk of profit loss by being commercialized. As already mentioned, though, the risk that the sanctioning function of bankruptcy be canceled by subsidizing is higher with state enterprises than with their private counterparts. This assumption that private enterprises are more likely to be made liable for incurred losses than public enterprises is an important argument calling for

The Neoclassical Definition of Property 55

privatization in Central and Eastern Europe. Still, the precondition remains that the principle of liability be applied to private as well as privatized enterprises. The advantages of efficiency that justified private property in the market economy and the superiority of the latter over the planned economy only become effective if, first, there actually is ownership, meaning that exclusion is also guaranteed, and secondly, if the market conditions have been developed accordingly. The topics of the debate on transformation were, on the one hand, the market conditions (such as competition on the commodity markets, creation of a capital market, and so on) and, on the other hand, the demand for a clear definition of property rights. It was implicitly assumed that, together with the clarification of the disposition of resources, the principle of liability would be established as well. This was and is, however, not always the case in Central and Eastern Europe. Disposition as well as liability remained disputed for a relatively long time. It was often unclear whether the resources were to be ascribed to the state, as formal owner, or to the employees, who were granted the usufruct. Discussions were held concerning the question of restitution or compensation. The extent of the public sector, as well as the so-called strategic areas in which the state remains the sole supplier, still need to be determined. 16 Beyond that, exclusion was and is not guaranteed. First, individual property is frequently not protected against appropriation through others (see Olson (1992:71)). Secondly, the principle of liability is also not established. This proves to be symptomatic, if state as well as privatized enterprises work under “soft budget constraints” and if bankruptcy law is not applied. 17 However, in this situation an important rule of the game of market economy is missing. The traditional neoclassical approaches to explain functional aspects of property are therefore to be completed by a theory of ownership guarantee, a theory of the rules of the game. In principle, the point is again to take up the matter of the emergence of rights, a problem which has always been of central importance to philosophers, and to explain it in economic terms. The following will therefore introduce those neoclassical approaches which address the emergence of and changes to property rights.

2.2

Demsetz’ analysis of the changes of property rights

The development and the change of institutions had been neglected for a long time and only Demsetz’ analysis of ownership among the American Indians living on the Labrador peninsula first published at end of the 1960s produced the major impetus to take up the subject within economic theory. Demsetz’ analysis is nowadays described as an “optimistic theory of the creation of property rights” (Richter/Furobotn (1996:119)), as it postulates that efficient property rights will develop in a market economy.18

56 Privatization in Central and Eastern Europe

The basis of Demsetz’ analysis are the historical descriptions of E. Leacock and F.G. Speck, who report that, in contrast to other regions, American Indians living on the Labrador peninsula knew private ownership of land. This ownership, however, developed only with the beginning of fur trading. Before that, Indians had shared the hunting grounds and used them only to meet their own requirements for food and furs. Every Indian went hunting and this had no noticeable impact on other hunters, meaning that the external effects were of little significance. This situation changed after foreign traders reached the region at the beginning of the eighteenth century and after demand for beaver furs increased. Due to the increased prices for beaver furs, Indians extended their hunting to exceed their own requirements. The unimpeded hunting in the commonly used hunting grounds was now connected with noticeable external effects and, unlike the times before the beginning of the trade, the gains of internalization were higher than the costs involved in the division of the land. The hunting grounds of the individual families were divided. Demsetz (1974:34) generally explains the economic background of this change from common ownership to private property by stating that: […] property rights develop to internalize externalities when the gains of internalization become larger than the cost of internalization. Increased internalization, in the main, results from changes in economic values, changes which stem from the development of new technology and the opening of new markets, changes to which old property rights are poorly attuned. With his comparison of the gains and the costs of internalization, Demsetz addresses the central condition for the change from common ownership to private property. According to Demsetz, the reasons why the cost–gain relation changes are exogenous factors, like new technologies and the opening of markets. Even for Pejovich (1972:314ff) exogenous factors are the cause of a change of property rights. He additionally lists the change of factor shortages and factor prices along with technological progress and the opening of markets. Moreover, he indicates that even the state can have an interest in changing already existing property rights. This would be the case if public revenue from new, respectively changed property rights (for instance licenses) exceeds the cost of protecting these rights. Pejovich therefore makes clear that the state draws up its own cost–benefit calculation and that it is a major “player” as far as the forming of property rights is concerned. This does, however, presuppose that the state and a property system already exist. In the end, Pejovich’s explanations show how difficult it is to theoretically justify the initial development of ownership (and state). As already stated, Pejovich as well as Demsetz have not described the development of ownership, but merely the change of property rights (caused by

The Neoclassical Definition of Property 57

exogenous factors) within a functioning community. Buchanan (1975:23) notes in his examination of Demsetz’ analysis that: We should not, however, make the mistake of saying that this approach explains the origin or emergence of rights among individuals or families (tribes) independently of contractual agreement, whether this be explicit or implicit. In his conceptual model, the rights of the several participants must have been mutually recognized by all participants before further contractual negotiations could be undertaken to change the structural characteristics. According to Buchanan, the Indians in Demsetz’ example must already have mutually accepted rights before they can negotiate their change. Thus, Demsetz does not investigate the questions of how the negotiating parties identify themselves in the first place, how an understanding concerning the mutual exclusion is reached, and whether it is intended as a convention or whether an authority is created that punishes offenses against property. All in all, Demsetz does not give a clear explanation of how the hunting grounds are allocated anew.

2.3 Buchanan’s contractarian version of the emergence of property rights Buchanan developed a version for the emergence of property rights beyond Demsetz’ approach that again takes up the philosophers’ idea of a contract.19 Assuming the potential conflict between people over the disposal of scarce resources, he succeeds in explaining the opening of contractual negotiations and the new kind of distribution of resources to the individual. Beyond this, he offers a justification for the emergence of an ownership guarantee.20 At the beginning of his observation, Buchanan (1975:23ff) presents a simple chain of thought: in an economy without ownership rights and law, the two individuals A and B can freely dispose of all goods, except for good x which is assumed scarce. A certain quantity of the good x simply falls in their lap at the beginning of each new period of consumption. The amount of x that individual A consumes constitutes an “external diseconomy” to B and vice versa. Both persons therefore have the incentive to increase their own quantity of x, for instance by stealing it from each other. As they both simultaneously recognize the risk of theft on the part of the other, they both attempt to prevent this by taking precautionary measures. In the end, a “natural distribution” is reached, a kind of “natural equilibrium”, within which the individuals’ benefit of the expenditure they additionally spent for protection equals the corresponding marginal costs. This natural distribution is not yet based on a formal agreement; rather, it creates the basis

58 Privatization in Central and Eastern Europe

for identifying the negotiating parties and for concluding agreements. Both individuals will therefore probably understand that the resources used for protection and the efforts made in order to steal are wasted. For this reason, they will be encouraged to come to an agreement concerning “disarmament”. The individuals will ultimately impose behavioral restrictions upon themselves and by this means internalize the negative externalities. The agreement does not have to lead to an equal division of resources, as the latter did not necessarily already exist in the state of natural distribution: The inequalities among persons that may be conceptually observed in the “natural distribution” will result both from the inherent differences in personal capacities and in the types of behavior actually adopted. (Buchanan (1975:26)) Buchanan therefore emphasizes that due to differences in abilities in the “state of nature”, the natural distribution is probably unequal 21 – which Locke saw as originating in the unequal enthusiasm for work and which Rousseau saw as originating in the preferences and behavior patterns. The inequality is likely to remain (in a similar form) after the individuals have reached a disarmament agreement. After having demonstrated the way natural distribution comes about by means of his simple model, Buchanan (1975:55ff) extends the ideas he had so far developed and creates a model which includes the production of goods besides consumption and which allows for stockbuilding. Buchanan’s chain of arguments is now roughly outlined. If two individuals A and B live isolated from each other on two islands (Robinson case), then both will be producing goods corresponding to their preferences by using the resources of their island and their (different) abilities. As each person lives in isolation, he can simply use the resources. There is no necessity and no reason for the emergence of ownership. The situation changes, if A and B live on the same island. Due to the changed circumstances, the preferences of the individuals might have changed as well. It is however crucial that now they must use the resources in common. Each individual understands the other as part of his environment in which resources are scarce. If, in addition, there is the possibility that production and consumption do not coincide chronologically and stocks are created, A could, for example, feel encouraged to stockpile goods. A must, however, protect his stock of goods against theft by B, and therefore has to put aside for precautionary measures some of the scarce resources he could have otherwise used for the production of goods. It is also conceivable that if B hoards goods A is improving his position through theft. A may even give up his own production of goods and live on theft alone. B will also try to react to the existence of A in a similar way. The behavior patterns of both individuals are therefore interdependent. If it is additionally considered that the individuals have different abilities for the production of

The Neoclassical Definition of Property 59

goods and that they display divergent behavior concerning defense/theft, the individuals’ interaction can eventually result in an equilibrium in which the individuals direct a (varying) share of their efforts towards theft and part of their resources for defense. A natural distribution has been established between the two individuals again (this applies to n-persons accordingly). Both individuals presume which goods they can dispose of in the future. Buchanan (1975:58) sums up: Something akin to “property,” therefore, emerges from the noncontractual struggle in anarchy. Individuals achieve identifiable bases from which it becomes possible to make contracts.22 On the basis of natural distribution, individuals can now not only identify each other. In contrast to the pure model of consumption, they even have an additional motivation to negotiate over means of attack and of defense, as the resources they must use for the protection of their stock are lost for the production of goods. They conclude a kind of disarmament treaty concerning the reduction of their theft and defense efforts. They have thus imposed individual restrictions of action on themselves. According to Buchanan (1975:59), in certain respects “a law” has emerged and: “the first leap out of the anarchistic jungle has been taken”. The consent to disarmament, however, does not make clear how resources will be distributed between the two individuals in the future. For the reaching of an agreement and the new distribution of goods, it is rather important whether the individuals can achieve a Pareto-superior position. In this context, two cases can be distinguished (Buchanan (1975:60ff)): (1)

(2)

In contrast to natural distribution, the at least partial disarmament puts both individuals in a Pareto-superior position. In this case, the distribution of goods consists of the simple recognition of the individuals’ own production. The situation of natural distribution is a Pareto-superior position only for one of the individuals. This is the case if, for example, A disapproves of theft for moral reasons, but B does not. A transfer of goods must then take place first of all, meaning that A voluntarily transfers a part of his goods to B, for B to agree to the recognition of property rights at all.

In his analysis of the new division of goods to the individuals, Buchanan (1975:60) points to the parallels between his conception and earlier property theories. According to Buchanan, the early contract theories consider merely the above-mentioned first case. They additionally assume that robbery and/or defense measures do not exist at all or are completely removed. In early property theories, individuals’ own produc-

60 Privatization in Central and Eastern Europe

tion was therefore ultimately defined as property. At the stage of concluding an agreement, the individuals still had disposition over the first occupation (Grotius) or the goods produced as a result of labor (Locke).23 The problem that occupation or different labor performance could lead to very different starting positions and that compensation will possibly be necessary to make sure that all individuals give their consent to the agreement – the second case mentioned above – was not discussed by philosophers any further. All in all, with his construction of “natural distribution”, Buchanan extends his idea of an agreement by adding the question of the unequal initial distribution, which had been neglected by most of the early representatives of property theory. It is exactly the “natural distribution” that allows individuals to identify each other as negotiating parties. The agreement is then based on an economic calculation taking into consideration costs of defense and of attack, and possible additional transfers. Up to this point in his analysis, Buchanan demonstrated how individuals resolve their conflict concerning the use of scarce goods, namely by reaching an understanding about disarmament and the distribution of the goods.24 A state as guarantor of property does not yet exist. Rather, both individuals mutually respect their rights. They recognize the disadvantages of offenses against property through anticipating the actions of the other, and can mutually assess their own actions.25 In the end, this situation corresponds to Hume’s case of a small group, within which property is secured by behavioral norms. The extension of the prisoner’s dilemma concerning two persons on to a large group changes the situation decisively.26 Buchanan (1975:66ff) points out that the larger the group becomes, the less the individual notices the effect his actions have on the other members of the group. This is understood as the large-number dilemma (Buchanan (1977:161)). According to Buchanan, at some point the “critical group size” will be reached. From this point the individual will act rationally by assuming that his behavior has no influence on the behavior of other persons. The concluded agreement concerning disarmament and distribution of goods (“initial inclusive contract”, see Buchanan (1975:64)), which was quite stable within the twoperson model due to mutual acceptance, will now become unstable. The individual is tempted to break the agreement.27 Compared to the situation in small communities, carrying through the contract in large communities involves progressively rising expenditure. Now that the voluntary observance of rules no longer functions, it could (but must not!) be that the individuals agree on an authority which controls the observance of the contract for all members of society (Buchanan (1975:67)): They have an indirect interest insofar as such punishment makes their own claims more secure, but unless they make such a connection in

The Neoclassical Definition of Property 61

their own conception of enforcement, they may be reluctant to approve particularized punishment. This problem may be handled by an agreement by all persons on the purchase of the services of some external enforcing agent or institution […]. The “public good” is the generalized security of rights or claims, and not the particular enforcement action which produces this security. According to Buchanan, the individuals probably recognize the advantage of an enforcing authority (the “protective state”) that increases their security over the disposal of resources through providing ownership guarantee as a public good, equally valid for all.28 Buchanan therefore assumes that the individuals expect to achieve a better position in a future situation (that is still unknown to them).29 According to North (1990:58), the provision of the ownership guarantee, justified by the Pareto improvement, can also be explained as follows: The transaction costs of a purely voluntary system of third-party enforcement in such an environment would be prohibitive. In contrast there are immense scale economies in policing and enforcing agreements by a polity that acts as a third party and uses coercion to enforce agreements. Compared to individual protection, public ownership guarantee provided by an enforcing authority is connected with increasing returns to scale, and therefore with overall economic cost savings. An individual will agree to the establishment of the authority if his expenditure for private protection of property is higher than the financing share he has to contribute (in the form of taxes) to the general provision of this public ownership guarantee. Such cost saving must, however, not necessarily be experienced by every individual (especially not by those who like taking risks). In addition, it cannot be excluded that the initial cost savings resulting from increasing returns of scale is consumed by high costs caused by the agreement, that is, the communication process. In the end, this means that a public ownership guarantee must not necessarily come into being as a result of cost–benefit calculations. 30 In those cases, however, in which there is no constitutional contract and in which the members of society have not agreed upon the ownership guarantee, that is, the enforcing authority, it is not ownership that is addressed, but possession which must be defended by one’s own efforts.31 But then, traditional economic approaches fail to give an explanation. They can only be applied to exchange processes in the post-constitutional stage (Krüsselberg (1983:76)).32 Besides the already mentioned cost–benefit relations, the agreement on an ownership guarantee is also connected with the problems typical of the provision of public goods. What value do individuals actually attach to their

62 Privatization in Central and Eastern Europe

need for protection and how can their preferences be revealed? How can the quite different individual conceptions of the extent of public ownership guarantee lead to a consensus, particularly in a large group?33 Above all, however, can the unanimity necessary for the “social contract” be achieved at all? On principle, it is impossible to achieve unanimity within a vote on the provision of a public good in the course of which costs are spread. The concealing of individual preferences is the reason why, in large groups, ultimately no financing plan is unanimously accepted; there will always be an individual, who does not agree to his share of the financing and tries to exploit the others (Zintl (1983:76)).34 In this context, Buchanan (1975:39) points out that: Paradoxical as it might seem, the conclusion must be that an allinclusive collectivity could scarcely be organized voluntarily […]. Certain assumptions increase the probability of a general agreement. 35 Brennan/Buchanan (1985:27ff) indicate that the unanimous-vote rule shows analogies to a bilateral monopoly game and that it can therefore imply strategic behavior. Precisely the public character of the good (of the resulting rule of the game) would, however, reduce the motivation to behave strategically and make an agreement probable. This would be the case as, due to the increasing generality and permanence of rules the individual could become worse at estimating his net wealth based on various legal alternatives. The individual who feels uncertain about the effect of the various legal rules would, however, be interested in reaching an understanding with all others on those rules, the observance of which he would consider generally acceptable (“fair”). 36 However, even though Brennan/ Buchanan do not address this aspect, this process of understanding would probably run up considerable costs and take a significant amount of time. All in all, certain assumptions pertaining to the factor of time and the individuals’ knowledge and willingness to take risks increase the probability that rules of the game including ownership guarantee will be established.37 The way in which ownership guarantee will be formulated is unforeseeable. There is no such thing as an optimal ownership guarantee, but a multitude of conceivable forms. In this context even Buchanan (1975:75) indicates that: That set of rights which might be widely accepted as being within the limits of what we call here the “renegotiation expectations” of individuals will not be uniform over communities and over time. […] (T)he contractual terms, including the mix among the several elements in the constitution, will depend directly on the personal differences that exist in fact or that are thought to exist. […] This suggests that there can be no resort to idealized general standards through which a legal or constitutional structure in a particular stage of historical development might be judged.

The Neoclassical Definition of Property 63

From the contractarian view, constitutions and the ownership guarantee are shaped by the various preferences and abilities of the community members. Various communities can therefore emerge from the constitutional phase demonstrating various forms of ownership guarantees. 38 Ownership guarantee can consequently differ considerably from country to country.39 In the long term, the problem of reaching an understanding and enforcing an ownership guarantee cannot be resolved through an agreement concluded once and for all. As Buchanan (1975:74ff) indicates, the ownership guarantee remains uncertain and changeable even in the postconstitutional phase. Observance of the law actually represents a positive externality and is therefore not connected to a particular advantage for the individual. Rather he is tempted to break the law. The observance of laws therefore depends on whether the individual expects his infringement thereof to be punished at all, and on his estimation of how heavy the punishment will turn out. In addition, it is important to know to what extent the initial social contract still corresponds to the ideas of the generation living at that time. It can therefore be that the following generation will (due to changes of preferences) consider other constitutional regulations desirable and that breaches of contract will thus occur increasingly. The authority implementing law can react to this either by increasing punishments and therewith reducing the motivation for breaking contracts, or by suggesting the renegotiation of the constitution. Increasing violations of the law and frequent changes to the social contract can, however, destroy the nature of law as public capital (Buchanan (1975:123ff)).40 The capital-goods feature of the law roughly stems from the fact that law increases the stability and possibilities of planning between people. If considered a capital good, the law, including ownership guarantee, will show a profit only after maturing. At the same time, this means that law can come into effect only after a longer period of observance. In order to gain credibility and reduce the costs of its implementation, the ownership guarantee established in the constitutional phase thus also requires further investments in the post-constitutional stage. As Hume already indicated concerning ownership guarantee, “something inbetween” constancy and change should be aimed at. The individual’s advantage from the law implemented by a public authority is the guarantee that the other members of society observe the law and that his own property is protected. However, the individual has to accept restrictions of action being imposed. For the legal security he gains, he must pay a “freedom tax” (Buchanan (1975:112)). The question is how to guarantee that it actually is a freedom tax. In contrast to other public goods, the implementation of the law actually includes physical constraint. This particular measure of sanction can be abused by the law-enforcing authority. In this context Buchanan (1975:164) indicates that the

64 Privatization in Central and Eastern Europe

Leviathan can be controlled only if politicians and the judiciary respect the law. This assumption of a self-commitment of public figures is considered by North (1990:59) as being unrealistic: Third-party enforcement means the development of the state as a coercive force able to monitor property rights and enforce contracts effectively, but no one at this stage in our knowledge knows how to create such an entity. Indeed, with a strictly wealth-maximizing behavioral assumption it is hard even to create such a model abstractly. Put simply, if the state has coercive force, then those who run the state will use that force in their own interest at the expense of the rest of the society. North reaches this conclusion, in contrast to Buchanan, on the assumption that it will always be an individual person who is supposed to be “impartial” but could actually abuse his power. Nevertheless, North (1990:60) indicates that in countries that have developed a stable constitution and social cooperation, the uprightness of the judiciary and respect for the law must have been of fundamental importance. Ultimately, in Buchanan as well as in North, the continued existence and the change in social order cannot be attributed to cost–benefit calculations alone. Attitudes to morality and behavioral norms are of crucial importance as well. In this context Buchanan (1994:133) wrote: A community that contains a larger number of members who exhibit a sense of fair play, mutual respect, a reciprocal understanding has less need of formal laws, and can avoid many of the social costs of enforcement by comparison with a community with a larger share of “natural criminals”. For Buchanan, societies can thus be differentiated according to the extent to which the compulsory law enforcement through a public authority is rendered superfluous by the valid behavioral norms. 41 A mixture of (codified) rights and behavioral norms that can change in the course of time, thus exists in different societies (Buchanan (1975:108)). As far as the change in behavioral norms is concerned, Buchanan considers Hume’s assumption that they are the result of a lengthy development as being confirmed in practice: As the citizens of the former Soviet Union are discovering in the 1990’s, the behavioral constraints that are necessary for a functioning market economy do not emerge spontaneously, at least within a limited time period, even if the formal institutional structures are largely in place. (Buchanan (1994:125))

The Neoclassical Definition of Property 65

In summary, the following points can be derived from Buchanan’s explanations of the emergence of ownership: • Conflicts about the disposition of scarce goods between individuals lead to a natural distribution that depends on the various preferences and abilities and that does not have to be equal. In this situation individuals feel motivated to take up negotiations on “disarmament”, which will at first allow savings and subsequently the productive use of their resources. • In large groups “ownership” is created only through the agreement of the members of society on mutual exclusion and a law-enforcing authority, namely “the protective state”. This is, however, not inevitably the case. • If an ownership guarantee is actually established as a public good, its development depends on the preferences and the abilities of the individuals. This means that in various societies the ownership guarantee can take different forms. • Due to preference changes of the members of society, among other things, ownership guarantee can change in the course of time. Frequent changes, however, cause the destruction of law as public capital. • Traditional neoclassical analyses demonstrate their effectiveness not earlier than in the post-constitutional stage, when the rules of the games already exist. As Buchanan made clear, ownership guarantee can develop differently from country to country. This is actually the case in Central and Eastern Europe, for instance regarding the rights of acquisition of land, especially by foreigners. The frequently restrictive conditions foreigners met in the beginning were, however, improved in the course of transition, as it was considered an important precondition to capital inflow. Countries undergoing transformation thus adapted their legal requirements over time. In the international context, there are apparently smaller degrees of freedom left than postulated by the contractarian model. In reality, even a kind of “contest of ownership guarantees” seems to have started. The international competition leads to the consequence that the contractarian model, which applied to a nation-state, has to be extended. Obviously, the improvement of institutions in other countries has an effect on the development of institutions in the home country. Zintl (1983:145) indicated that, as a result of this, existing institutions can even be destroyed: The way the introduction of new technologies forces all competing individuals to either take them over or to leave the competition, the same way the “invention” or “import” of an institution can destroy another institution, without necessarily being welcomed by all individuals con-

66 Privatization in Central and Eastern Europe

cerned. The superiority of capitalistic forms of property over traditional ones and the corresponding economic manners can be of this kind […]. In the course of time, “good” institutions will, according to Zintl, become widely established. This can also be interpreted as a Schumpeterian process of creative destruction. As a consequence of competition, not only “bad” institutions should be replaced; the institutions of the various countries should rather gradually be brought closer together and improved. At the same time, it is still possible to find examples of countries with “bad” institutions worldwide. The question is whether this is a consequence of insufficient competition or whether institutions are subject to other circumstances than market conditions. This problem has been addressed by North.

2.4 North’s approach to an explanation of institutional change North has made an attempt to explain the existence of the various, partly inefficient institutions existing in different countries, also considering the interaction between behavioral norms and (codified) rules, that is to say, the constitution. In this context, he partly modified the neoclassical approaches. This particularly affects the assumptions of transaction costs of incomplete information. Some of the terms used by North will be roughly explained prior to the introduction of his contemplation on the changes of institutions. According to North (1990:3), institutions are “[…] the rules of the game in a society or, more formally, are humanly devised constraints that shape human interaction”. Institutions or rules42 establish the framework within which the players will be acting. The purpose of institutions is to reduce uncertainty. Existing institutions affect economic activity as they also determine transaction costs (North (1990:5f)). Institutions can, in principle, exist as formal or informal rules. In North (1990:47), generally applicable (codified) rules (for instance the constitution), as well as rules established in a single contract,43 represent formal rules. Informal constraints serve the purpose of coordinating the continuous interaction between people. They can be divided into those informal rules that enlarge or even restrict formal rules, and additionally into socially sanctioned behavioral norms and finally into internally enforced standards of conduct (North (1990:40)).44 A distinction must be drawn between institutions and “organizations”. North (1990:5) subsumes enterprises, trade unions, associations, and so on, under organizations that constitute a group of persons pursuing a common purpose. Which organization is established and for what concrete purpose depends on the institutional framework. Conversely, the representatives of

The Neoclassical Definition of Property 67

organizations try to influence the development of institutions in order to assert their interests. Ultimately, according to North (1990:16), institutions are not created to be socially efficient, but to serve the interests of those who have bargaining power. The bargaining power is important because transaction costs are not zero, but positive. With positive transaction costs and considerable indivisibility, which in North are particularly typical for institutions, bargaining power determines the change of institutions. According to North (1990:33), “property rights” are “[…] the rights individuals appropriate over their own labor and the goods and services they possess”. These rights are never completely specified and enforced under the condition of positive transaction costs. 45 The incomplete assertion is thus based on a cost–benefit calculation that compares the additional supervision expenditure with the marginal utility. 46 It also means that there are areas that are not regulated by law. In these areas, the individual must either protect his property using his own means or using the existing informal self-restraints (behavioral norms, to name but one) that are specific to culture and voluntarily observed by every member of society. All in all, according to North, there are various possibilities for the protection of property that exist alongside one another: the ownership guarantee as a public good, the individually organized protection of property as a private good, and behavioral norms (informal rules). For North institutional change consists among other things in changing the mixture of protection measures existing in society (ownership guarantee, private protection of property, behavioral norms). This change is not purely coincidental, but depends on the corresponding stage of economic development. As uncertainty increases with the growing complexity of exchanges, reliable institutions, such as the enforcement of contract fulfilment through third parties, gain importance (North (1990:34f)). Informal restrictions are thus increasingly replaced by formal rules. The development from the exchange within small communities which consist of families and relatives and are characterized by general business manners, to trading with large anonymous groups was, according to North, the reason for the emergence of the state (as a guarantor of ownership, among other things).47 The development from mainly informal to increasingly formal rules is connected with technological progress, as formal rules result in supervision and enforcement costs which can be reduced by means of modern methods of measuring and means of communication. The mixture of formal and informal restrictions is, however, not based on a simple (economic) cost–benefit calculation. The reason for this is that informal constraints do not always correspond to a deliberate wealth-maximizing behavior. Additional values that do not maximize wealth (for instance religious conceptions) are also included in the individual utility function. In the end, human behavior can no longer be adequately characterized by the usual economic assumptions and following the simple model of expected

68 Privatization in Central and Eastern Europe

utility. This also means that “irrational” factors have an influence on the development and change of institutions. As far as formal rules are concerned, inefficiency can be explained through the interaction between politics and economics. Rules have the purpose of reducing uncertainty, facilitating exchange and defining the limits within which wealth maximization is possible. On the basis of these important functions, economic players will make attempts to change formal institutions in their own favor, if an investment in altering institutions seems more lucrative to them than in alternative projects within existing institutions (North (1990:79)). As a result, rules are being created that are not necessarily efficient. The reasons for this happening at all lie, above all, in the specific way the political market is functioning. This way of functioning is explained by North (1990:48f and 1981:26ff) through the simple example of a contract between a ruler and his constituents: the ruler enters negotiations with his constituents, offers them security of ownership and demands taxes in return. Economies of scale can be achieved due to general provision of the security guarantee. As a monopolist, the state will try to divide its subjects into different groups, conclude agreements concerning security guarantee (as a semi-public good) with the individual groups and thus maximize its income. Nevertheless, pertaining to the maximization of its net income, the state has first of all to consider the costs of the collection of taxes and of the provision of the security guarantee. Secondly, it experiences a certain competitive pressure, as citizens dissatisfied with its security measures will emigrate to countries providing more favorable means of protection or appoint another ruler. The ruler will therefore be forced to make concessions to powerful groups. Ultimately, the development of a generally applicable and efficient protection of ownership is by no means guaranteed.48 The question is whether inefficient institutions are eliminated through international competition and whether the institutions of the various countries are brought into line with one another. According to North (1990:45 and 91), this would not be the case in the short term, as a quick adaptation could only be expected with formal rules. In contrast, informal rules that are specific to the culture and that develop through learning and on a selective basis demonstrate a certain persistence. Their insistence is the reason why, in the case of an abrupt change in the formal rules, a comprehensive reorganization of the entire structure of rules does not take place immediately. Instead, a relationship of tension is built up between formal and informal rules that can be removed only gradually. The tough rules that are specific to the culture therefore establish the institutional differences between countries. A further explanation for institutional characteristics and even for noticeable inefficiencies is that, within the societies in question, various groups possess bargaining power which they put into action in order to form the institutions according to their interests.

The Neoclassical Definition of Property 69

Within institutional change, a fundamental role is attached to path dependence (North (1990:92ff)). In a given initial position institutions are not simply created or changed. Setup or fixed costs have to be considered. Additionally, individuals and organizations have first of all to learn to use the new institutions and to develop them to their own advantage. Informal constraints are also developed in the course of the new creation of formal rules in order to complete and extend them. A complex structure of rules emerges, but its credibility will increase only through observance of the rules over a longer period of time. Changes are caused by the fact that organizations take cases to court. Within common law, which is based on precedents, the courts rule by taking the past into consideration. The administration of justice therefore induces the gradual adaptation of established law. All in all, North (1990:100) indicates that: “Path dependence means that history matters.” Path dependence can create inefficiency. But for North, inefficiencies obviously seem to be a temporary, although lengthy phenomenon. Along with formal rules, informal rules will in the course of time adapt as well. The evolutionary development of informal rules, learning and selection is influenced by the competition that is based on cost–benefit calculations and that is, however, confronted with the problems of incomplete information and positive transaction costs. According to North, it remains a theoretical challenge to model a policy which removes inefficiencies and encourages the creation of efficient property rights (North (1990:140)). In the end, North does not abandon the conception of creating institutions in an optimal way. He explains the radical changes in Central and Eastern Europe using the higher efficiency of market-economy institutions: Clearly the existence of relatively productive institutions somewhere in the world and low-cost information about resultant performance characteristics of those institutions is a powerful incentive to change for poorly performing countries. That appears to be the case in the striking changes in Eastern European societies in 1989. (North (1990:137)) Tracking the collapse of planned economies back to the higher efficiency (of adjustment) of market-economic institutions seems plausible at first glance. For North, it does, however, remain unclear why the higher efficiency of market economies became noticeable precisely at the end of the 1980s and why institutions were not brought into line earlier. One answer could be that planned economies managed to seal themselves off from the international competition of institutions, meaning that the free entry of efficient institutions was impeded (this is demonstrated in an exemplary fashion by the ban on private property which was maintained for a long time and defended against the black economy). A further answer

70 Privatization in Central and Eastern Europe

could be that changing rules entails such high costs that investments will only be worthwhile if one starts with a certain expected efficiency gain. Finally, it can be mentioned that institutional competition was related to the formal rules only as a small component within the entire structure of rules and that, all in all, adaptation was prevented by the persistence of informal rules. It is, however, questionable whether such far-reaching assumptions should be made based on an “economy” of rules at all. The economic competition for rules, explained by North, presupposes that the number of rules is limited and that they are handled similarly to goods. The content of rules – the conception of how property should be protected by the state – represents an idea that is generally available and cannot be patented. The limiting factor is obviously rather to be seen in the structure of rules which, if they are to remain working, cannot be mixed arbitrarily. North’s approach to institutional change can be summarized as follows: • Property rights are never specified and enforced by the state completely, due to positive transaction costs. Formal and informal protection of ownership exist alongside and in concert with one another. • A public ownership guarantee is developed based on the increasing complexity of exchange, the growing uncertainty and the reduction of the costs of its provision which accompany technological progress. • Organizations (having bargaining power) have considerable influence on the development of institutions. Inefficient institutions can develop for a short time. • Within international competition, only the formal rules of a society are subject to rapid changes. Due to the persistence of informal constraints and the path dependence, change of the entire institutional structure will take place slowly.

2.5

Central and Eastern Europe as area of application

Neoclassical analysis can provide some explanations for the problems of the emergence of ownership and privatization in Central and Eastern Europe. It will thus become clear that in the various stages of the change of ownership guarantee, different supply and demand-side factors take effect and exert influence on the development of institutions. As Buchanan indicated, institutions are only accepted if they have not been imposed “from above”; the members of society must have agreed upon them voluntarily. It is, however, by no means guaranteed that such an understanding will be reached. First, a “natural distribution” must be achieved on the basis of which the negotiating parties can identify themselves. The negotiation process is long and costly. Its result cannot be foreseen. Buchanan’s analysis cannot, however, be transferred to Central and

The Neoclassical Definition of Property 71

Eastern Europe without modifications. However, it does provide explanations for some of the phenomena within transformation. At the beginning of transformation, the old, still formally valid laws were frequently obsolete and no longer observed. Thus, a temporary phase without a valid constitution began in which the persons involved acted according to Buchanan’s situation of anarchy. This included, among other things, “spontaneous privatization”, the heart of which was nothing less than appropriation, that is, robbery of goods. A further typical phenomenon was the privately organized protection of ownership, which, from the overall economic point of view, does, however, run up higher costs than an ownership guarantee as a public good, but which can be advantageous for the individual according to his preferences and his willingness to take on risks. Groups with considerable willingness to take on risks, which are to be found particularly in illegality (for instance the Mafia), are therefore hardly interested in the provision of an ownership guarantee and will impede its enforcement if they hold positions of power. Privileged persons and groups that were interested in maintaining their (political) status have in addition so far impeded the introduction of new rules in Central and Eastern Europe (Leipold (1991:35)). All in all, there has been only limited demand for market-economic institutions. As long as property rights remain uncertain, most individuals will make attempts to secure the assets they already own rather than to increase them, due to the costs of private protection of ownership. Investments will only be made if there are prospects of high returns, short periods of amortization and a simple safeguarding of the expected capital appreciation. On the one hand, this explains why, in Central and Eastern Europe, activities within the trade and service sector are preferred. On the other hand, this sheds light on the reasons why the transformation crisis has been characterized by a strong reversal of production and investment. With uncertain property rights, acts of exchange are preferred in the course of which service, on the one hand, and service in return, on the other, take place simultaneously, as could be observed in Central and Eastern Europe in connection with barter as well as cash payment (see Cooter (1992:92)). From the viewpoint of contract theory, individuals will probably recognize that an agreement on a law-enforcing authority protecting their property is advantageous. Beforehand, they have to reach an understanding on the distribution of goods, that is to say their new provision. In this context they will probably not recognize the “natural distribution” as being property. It is rather that a transfer is necessary in order for everybody to agree to the constitutional contract or, generally speaking, for the demand for institutions to be increased. As far as Central and Eastern Europe are concerned, the free voucher-privatization can be understood as such a transfer. In some countries, employees who were formerly granted extensive rights of disposition received pre-purchase rights in the course of privatization. It

72 Privatization in Central and Eastern Europe

is conspicuous that compensation in the form of voucher-privatization was not implemented in all countries. There were, rather, countries which more or less sanctioned the initial appropriation (of spontaneous privatization) and which sold their state enterprises directly afterwards. All in all, an agreement on the initial distribution had to be achieved first, before efficiency aspects could be discussed within privatization at all. According to Buchanan, there is no such thing as an optimal ownership guarantee. Depending on the preferences and abilities of their individuals, societies emerging from the negotiation process can take different forms. This can be seen in Central and Eastern Europe in the commitment of the public sector and the restrictions of private property (for example property in land). Minimum requirements on ownership guarantee have, however, been conveyed through international competition and existing regulations adjusted accordingly (the acquisition of ownership by foreigners, for instance). Thus, as North indicated, rules that are considered efficient seem to become generally established in international competition on principle. In addition, Central European countries introduce required by the European Union, which they would like to join. Even if as a result of this formal rules are changed rapidly, it still has to be considered that the informal constraints will adjust to changed circumstances only slowly, because of their culture-specific nature. It could also be that formal and informal rules are not compatible and that there is considerable tension between them. The adoption of institutions of Western industrial nations or the European Union does not bring about the immediate and complete change of the entire institutional structure in Central and Eastern Europe. According to North, public protection of ownership will only be established if the complexity of exchange and thus uncertainty are increased. In this respect, institutions represent a reaction to economic development. It can be concluded from this that, in Central and Eastern Europe, the scope and kind of institutions depend on the stage of development. Thus, there is a risk that institutions themselves represent an obstacle to development. As the high costs of the provision of formal rules are reduced by technological progress, foreign countries can give assistance by facilitating the development of modern institutions through the transfer of know-how. Law as public capital is of use only after a period of maturity. For the individual, it is therefore difficult to estimate his net benefit taking into consideration future rules. This means that, at first, the actual value of the institutions offered will remain unclear. The law-enforcing authority will, especially in the initial phase, meet with little acceptance. This problem is intensified in Central and Eastern Europe where, so far, the individual has little trust in the administration of justice. In addition, the creation of lawenforcing authorities represents only the first step towards a permanent credibility of public ownership guarantee. To achieve this, further invest-

The Neoclassical Definition of Property 73

ment is necessary, although it could sink in the course of time. In order to enhance credibility, the new regulations should not be changed too often. The public ownership guarantee as a public good developed in market economies over a long period of time.49 However, this is not the only conceivable way of safeguarding ownership. In reality, it can often be seen in combination with other protection measures (private protection of property, behavioral norms). Neoclassical approaches partly attempt to explain the emergence and mixture of ownership guarantee from the efficiencytheoretical viewpoint, without completely abandoning the idea of an institutional optimum. Departures from the path of efficient development are explained by among other things the evolutionary character of informal rules; their slow change delays the adjustment process and reduces adjustment efficiency. Evolution appears to be a disruptive factor, so to speak. 50 This is a judgment not shared by representatives of older institutionalist theory.51 In neoclassical approaches, individuals aim at maximizing their profit. In this context they feel disturbed by the uncertainty of the circumstances they live in. Thus they make attempts to minimize uncertainty by establishing institutions. The motivating force behind the development of institutions, including ownership guarantee, is thus primarily the pursuit of profit, whereas uncertainty merely represents an additional element. The models do, however, invoke the risk of a free-for-all, but do not presume an actual danger to life. The monetary view, in contrast, reverses the cause and effect of the creation of institutions. From the monetary viewpoint, it is not the pursuit of profit but the uncertainty that determines human behavior and the emergence of property.

3

The Monetary Theory of Private Property

Whereas the contractarian model illuminated particularly the correlation between the emergence of ownership and the new definition of the state’s role, the point of view described herein as “monetary” establishes a connection between ownership and money. Unlike neoclassical theory, which assumes the neutrality of money, monetary analysis attributes money a fundamental function. From the monetary viewpoint, the specific ways of functioning and the initial problems of transformation economics require a particular development strategy. In contrast to neoclassical analysis, private property, but not necessarily privatization, is accorded central importance.

3.1 From the coherence of monetary and planned economy to transition Whereas neoclassical theory focuses on the disposition of physical resources, interest is the centerpiece of monetary-Keynesian analysis. The rate of interest is understood as a liquidity premium that the debtor has to pay to a creditor for his temporary abandonment of liquidity. From the monetary-Keynesian view, the main difference between capitalism, that is, the monetary economy, on the one hand, and socialist planned economy, on the other hand, is that in capitalism – where the means of production are privately owned – interest (or profit) is acquired privately, whereas in socialism it is socialized (Riese (1990:9)). The conflict between economic systems is therefore marked by the private or social assignment of wealth and the various resulting opportunities to appropriate interest, and not by the private or social use of resources suggested in neoclassicism. Due to the interest claim in the monetary-Keynesian view, socially owned resources already constitute property, and not pure possession (for another view, see Heinsohn 1984). According to the monetary-Keynesian view, the key element in the way monetary economies work is the symmetry of creditor and debtor. The 74

The Monetary Theory of Private Property 75

debtor, who within the monetary economy must pay back the loan amount plus interest, is forced to work profitably to assert himself in the competition and to obtain means of payment to repay the loan. At the same time, he tries to make a profit which is tangible as a quasi-rent and which can lead to innovative competition (Riese (1991:134)). A potential debtor, in the form of Schumpeter’s entrepreneur, will therefore only raise a loan if he assumes he is able to achieve a (quasi) rent. If his investment fails, he faces the risk of bankruptcy. At the same time, a potential creditor is willing to abandon liquidity only if he is offered interest in return and if the repayment of the loan (including interest) seems to be guaranteed. Otherwise, he will keep his assets of money or tangible assets and refuse the financing of investment projects. He therewith limits the credit supply. In order to obtain his interest, the creditor competes with other creditors on the asset market, which is a central element of economic development since it is the dominant market. It is not only the granting of credits, and thus the evaluation of investment projects that are decided upon on this market. Decisions made on the asset market determine production and employment via the investment–income mechanism. Full employment is therefore not a feature of the coherence of monetary economies (Herr/Westphal (1991:310)). The evaluation of the stock of resources arranged by the asset market and the limitation of the use of resources presuppose money with a stable value (Herr/Westphal (1991:311)). Money with a stable value produces the effect that owners do not invest their money in tangible assets or replace monetary holdings in domestic currency by foreign exchange holdings. Creditors are willing to grant loans. This makes an evaluation on the asset market and in turn on the commodity market possible. Money only fulfills these functions if it is generally accepted and if it serves as medium of contract. In this respect, it represents a public good. The task of the central bank in this context is to protect the creditor in his function as owner and the debtor in his function as possessor, that is to say, to preserve the creditor from inflation and the debtor from deflation (Riese (1990:82)). Pertaining to money supply, the central bank therefore has to take into consideration the interests of creditors, namely the realization of their interest claims, and in this sense to guarantee a macroeconomic budget constraint by keeping money in short supply. It is money that, as a budget constraint, allows the valuation of the initial supply and a surplus of resources (Riese (1991:133)). The assets market develops within the framework of this macroeconomic constraint. A specific principle of liability applies here. As already mentioned, a creditor will refuse lending if he fears a loss of property due to a bad debtor. The debtor’s bankruptcy will affect him as the owner in the form of a loss of property. The employees of the debtor’s enterprise, however, only hold a partial owner function due to the provision of collateral (Riese (1990:84)). They lose their

76 Privatization in Central and Eastern Europe

work and the entrepreneur his creditworthiness. From the monetary view and in contrast to the neoclassical conception, bankruptcy weakens above all the creditor’s position. Basically, he has to make up all losses that cannot be socialized. The selective function of bankruptcy in money economies will also be alleviated if the state subsidizes enterprises and therewith softens the so-called “hard microeconomic budget constraints”. In this context, the fundamental avoidance of the socialization of losses in monetary economies functions as an important principle of exclusion: in his function as owner, the creditor knows ex ante that he is exposed to the danger of a loss in property, he cannot externalize in the end. The monetary theory, therefore, stresses particularly the aspect of the owner’s liability as a creditor. In contrast, according to the neoclassical conception, exclusion is seen especially in the fact that the owner disposing over his resources can safely use them to his own advantage, without the intervention of others. All in all, neoclassical analysis focuses on the pure use of resources and thereby neglects their evaluation, whereas in monetary-Keynesian analysis, the valuation and change of the value of property are pivotal. Whereas in capitalism short money supply represents the macroeconomic budget balance, in socialism, coherence was guaranteed by quantitative planning and administering prices. The central planning authority gives instructions pertaining to production to the enterprises according to their capacities. The money supply was subordinated to the planning of goods.1 Money did not represent a primary budget constraint; rather, compared to commodities, there existed a relative oversupply of money. As a result of the scarce resources, the seller’s markets of socialism replaced the buyer’s markets of capitalism which resulted from tight money. As goods and not money represented the primary budget constraint of planned economies, the wealth formation particularly of enterprises focused not on money but on commodities (Riese (1990:36), Lohmann (1986:116)). This way of making provisions was used by enterprises in unsafe environments and under the pressure of plan fulfillment for potential losses of input supply. The enterprises’ stockpiling of commodities, however, undermined the planning, as the central authority could no longer establish whether the input requirements of an enterprise developed due to their urge to stockpile or due to the actual shortage of resources. Therefore, unlike the suggestion of neoclassicism (principal–agent theory, for instance), the inefficiency of a planned economy was not primarily based on the insufficient control of the authority over enterprises. 2 Information problems between central organs and enterprises are rather the product of the stockpiling of goods and therefore of the way the planned economy functioned (Riese (1990:39)). In the planned economy, “soft microeconomic budget constraints” represented the reflex of the missing monetary macroeconomic budget constraint. According to the conventional interpretation, they developed

The Monetary Theory of Private Property 77

because of given administered prices. Enterprises had to concentrate on plan fulfillment and not on the criterion of profitability. In order to attain the planned target, enterprises were intentionally provided sufficient credits and if necessary protected from bankruptcy. In order to guarantee the coherence of the planning, the central authority was therefore forced to credit enterprises through the monobank, whereas in market economies enterprises receive credits only if the creditor considers the repayment, including profit, to be guaranteed (Kraft (1993:154)). According to Riese (1990:35), soft budget constraints may also be interpreted differently; so that, as a consequence of the enterprises’ stockpiling of goods, the central authority is unable to plan. Apart from the question of how the soft budget constraints are ultimately caused, it must be stated that they were connected to the credit creation in the enterprise sector. Credit creation can lead to uncontrolled income in private households and thus to an imbalance between goods and money (monetary overhang, that is, suppressed inflation) on the consumer market due to administered prices. Therefore money circulation in the commercial sector was separated from that in the private household sector and the wages fund was pre-set. The separation permitted the supervision and correction of the financial resources of the enterprise sector through, among other things, the so-called “control by the rouble”.3 Soft budget constraints and administered prices were held responsible by Kornai and others for the problems of inefficiency and shortage occurring in planned economies. According to Riese (1990:70), a restoration of the price mechanism will not eliminate the stockpiling of goods as long as there is no monetary budget constraint. This cannot be achieved even by attempting to establish a capital market whose supply side is represented by the state alone. Assuming that the state takes over the function of sole creditor, the entire claim of interest will be nationalized, respectively the losses will be socialized. Admittedly, the state can attempt to limit credits to unprofitable enterprises; refusal of the credit, however, does not lead to revaluation of assets. If the principle of quantitative planning should take precedence in the future and guarantee the coherence of the system, in the end, the state is forced to credit its enterprises and thus to bail them out instead of closing them. Even if bankruptcy proceedings are opened, the enterprise as the pure possessor of resources (Riese (1990:84)) is actually not affected at all. Enterprise management and staff are merely forced to find new employment that they are guaranteed by the state anyway. 4 As the state is the actual owner, the losses will ultimately be socialized.5 The revaluation of assets does not take place. In order to achieve this, an asset market is needed. On the supply side of this market, competing creditors make their lending decisions on the basis of the liquidity premium, which can, however, only be calculated within the framework of a money-related budget constraint.

78 Privatization in Central and Eastern Europe

In order to increase efficiency, the attempt was made to actually introduce criteria of profitability at a microeconomic level through economic reforms within the framework of aggregate planning. Enterprise autonomy was therefore extended, among other things, concerning pricing and disposition of resources. This is valid for (Russian) perestroika, within which corporate autonomy was increased and the attempt was made to reorganize enterprises according to “economic bookkeeping” (khozraschet), as well as for those countries following the model of market socialism. The increase of enterprise autonomy held the risks of losing control over monetary processes and of generally rendering the coherence function of planning meaningless, without replacing it by a money-related budget constraint. 6 The termination of socialism as a planning economy could therefore be noticed from the mid-1980s (Riese (1990:1)). The acceptance of the norms of liberal economics which were oriented towards welfare economics ultimately caused the fall of socialism (Riese (1991:130)). A change from a planned economy to a monetary economy presupposes that the stockpiling is transferred from goods to money. Hard microeconomic budget constraints are to be established as a further element of the minimum threshold of the transformation process next to tight money (Herr/Westphal (1991:319)). According to Herr/Westphal (1991:325), rapid privatization is not a pre-condition for the formation of hard microeconomic budget constraints. It would more likely encounter the problem of insufficiently developed capital markets and thus of lacking valuation of enterprises as a whole. Instead of rapid privatization, state property should temporarily be maintained. State enterprises should be broken up in order to increase competition and then both corporatized and exposed to the risk of bankruptcy, that is, to a hard microeconomic budget constraint. From the monetary-Keynesian point of view, the point is not primarily to establish whether the means of production lie in private or state hands, but to avoid long-lasting socialization of losses, even those of state enterprises. Additionally, a clear definition of property rights is needed. The definition of property rights, the emergence of the legal institution of ownership, is, however, not further investigated by monetary-Keynesian analysis, but presupposed. Together with privatization, it is accorded a subordinated role compared to the formation of a market-conforming monetary order. Consequently, there are differences to neoclassical suggestions of transformation. From a speedy privatization of resources, neoclassicism derives the advantage that the private use of resources encourages efficient economic activity. The monetary-Keynesian analysis, by contrast, focuses on the claim of interest, the “privatization” of which could prove successful under the premise of hard microeconomic budget constraints even for state enterprises. Therefore, there is no imperative for privatization. By stating the minimum threshold, monetary analysis indicates two rules of the game that have to be realized to achieve a working monetary

The Monetary Theory of Private Property 79

economy, namely hard microeconomic budget constraints and a moneyrelated macroeconomic restriction. They do, however, represent public goods in both cases. Hard microeconomic budget constraints are the reason that losses are no longer socialized, but instead “privatized”, that is, decentralized; they represent a principle of exclusion, which is the main characteristic of ownership. The introduction of hard microeconomic budget constraints therefore affects the problem of the formation of a corresponding ownership guarantee as a public good, a process not further investigated in monetary-Keynesian analysis. A money-related macroeconomic budget constraint is the reason that money is generally accepted by economic subjects to fulfill contracts, and in this sense, represents a public good. As Schelkle (1992:24ff) indicates, there are two sides of establishing money as a public good, namely the inside and outside constitution of the monetary economy. If the latter is successful, in the portfolio of economic subjects claims are held in domestic currency, besides tangible assets and foreign currency. In existing monetary economies, the inward constitution was historically pushed forward by the state through the levying of taxes. This led to the registration of property in land similar to a land register and constituted the precondition for land to be eligible as collateral and to be disposed of (Schelkle (1992:34)). From the monetary-Keynesian view, pledging is the consequence of the state promoting the circulation of money. This position has been challenged (Heinsohn 1984). However, it seems that nothing speaks against combining the explanation by philosophers and the explanation of recent representatives of contractarian theory pertaining to the emergence of state and ownership as a startingpoint for monetary theory. In contrast to the neoclassical conception, monetary theory derives a different way of administering of private property in the form of the liquidity premium as soon as the legal institution of ownership exists. The following points can be derived from the discussion of the monetary-Keynesian approach to the transformation from a planned economy to a monetary economy: • The stockpiling must shift from goods to money. As a macroeconomic budget restriction, tight money brings about the surplus of resources and the possibility of evaluating the initial supply. The emergence of money as a public good requires a process of gaining confidence. • Not fast privatization, but the clear definition of property rights is crucial. Private as well as public enterprises therefore have to be subject to hard microeconomic budget constraints. The decentralized liability for losses represents an important principle of exclusion. • The macroeconomic budget restriction and decentralized liability are the precondition for the emergence of an asset market that brings about an evaluation of assets and potentially allows their devaluation. In his func-

80 Privatization in Central and Eastern Europe

tion as creditor, the property owner is aware of the ex ante risk of a property loss. That is why, if need be, he will refuse to grant credits and thus limit the credit supply.

3.2 Transformation of property in formerly planned economies With its concept of the minimum threshold for transformation, the monetary-Keynesian approach indicates that the working rules of the game are an important prerequisite of an efficient monetary economy. In this context, it includes the money-related budget restriction and hard microeconomic budget constraints. It clarifies that, in a monetary economy, the creditors’ liability is an important principle, no matter if they are state or private agents. It can therefore be derived from monetary theory that transformation does not primarily address either the creation of privately used resources on a large scale or the reduction of the state sector. Rather monetary theory suggests making both private and state enterprises subject to the principle of decentralized liability. A critical mass of private property, that is to say, disposition over resources without the principle of exclusion, therefore, does not guarantee the functioning of the market economy or efficiency. The validity of the critical-mass argument which only takes into account the extent of the private sector instead depends on the institutional arrangement. The more that market-conforming rules of the game are established and generally accepted, the more likely it is that the criticalmass argument referring to the extent of private property will be applied. The transition from planned economy to market economy means that full employment could be replaced by unemployment. Job security is to be abolished. Unprofitable enterprises are to be shut down. This presupposes that the state exposes the state-owned enterprises to the bankruptcy risk as well. At the same time, state representatives see themselves forced to keep employment high as they wish to be reelected. Next to the employees, the creditors of an unprofitable state-owned enterprise are also not interested in closing the enterprise. (State) banks would particularly be affected by bankruptcy, as in the planned economy they acted as pure credit distributors, and as a result of the practice of socializing losses they did not calculate the risk of a loan loss and therefore refuse to take it on. As a result of its permanent justification problem (Schelkle (1992:63)), it could well be that in the end the state gives in to pressures and keeps enterprises alive artificially through subsidies. A comprehensive socialization of losses which is moreover expected by the economy instead of at most a selective one, however, contradicts decentralized liability. In the market economy, this principle is valid ex ante and is applied to everybody. In the planned economy, particularly, creditors are not interested in its introduction. A

The Monetary Theory of Private Property 81

generally applicable insolvency law establishes the order of precedence for the satisfaction of creditors from the company’s assets in case of their debtors’ bankruptcy. The creditor’s losses are compensated only partly, at the most. A creditor who likes taking risks, therefore, probably prefers the private (forcible) recovery of debts to the generally applicable insolvency law. It can therefore occur that (temporarily) private protection of property is pursued instead of an ownership guarantee. The impediments standing in the way of the development of ownership guarantee mentioned above are ultimately based on the fact that private property not only implies individual use, but individual risk as well. On the one hand, this is valid for the property owners who can be affected by a loss of property. On the other hand, this also concerns employees, who in the monetary economy face the danger of losing their jobs. The collective protection which appeared within the planned economy as the one side of the coin as socialization of losses and on the other as guaranteed jobs, is to be given up in the course of transition. Market economy only offers incomplete social security; the individual has to complete it by making own provisions against risks. Instead of taking risks themselves, the various agents in transformation prefer a combination that combines the collective protection of planned economy with the scope of action of a free disposition over resources. They therefore attempt to achieve a combination that offers the maximum individual possibility of disposition and nearly complete protection. However, the employment guarantee is incompatible with the conditions of a monetary economy; the socialization of losses prevents the privatization of the interest claim and thus the development of an asset market. In the neoclassical conception, incentives due to private property are undermined. According to Mill, the risk that gives cause to thirst for action and discoveries is missing as well. Generally speaking, Central and Eastern Europe demonstrate that it is not simply a question of establishing institutions, such as the legal institution of ownership, and of subsequently rendering them efficient. Rather, the question is arising increasingly of whether there is (sufficient) demand for market-conforming institutions at all. In Central and Eastern Europe, crucial impediments that are based on the countries’ experience of a planned economy stand in the way of the “urging of development towards granting private property” observed by Adolph Wagner. The question of which rules of the game (ownership, money, competition) are to be regarded as a matter of priority in a market and/or monetary economy is given different answers by the neoclassical and monetary views. Both approaches, however, have difficulty in explaining comprehensively the emergence and acceptance of game rules. The monetary approach rarely addressed this problem. As already demonstrated, even neoclassicism fails to provide answers for the emergence of and change in ownership. In the neoclassical world, the informal rules were an exogenous

82 Privatization in Central and Eastern Europe

disruptive factor that prevented the rapid adaptation and efficient development of formal rules. Evolution was subordinated to the idea of efficiency. Cultural influences on individual activity and collective aspects like social responsibility remained exogenous in neoclassical approaches most of the time. The concept restricted to the rational individual predominated instead. That is the basis of critique for the representatives of the earlier institutionalist theory.

4

The Genesis and Changes of Property as Portrayed by Old Institutionalists

The portrayal of property of the old institutionalists J. R. Commons (1862–1945) and T. Veblen (1857–1929) is presented last, even though it evolved at the beginning of the twentieth century and thus lies between the philosophical and economic approaches discussed in the previous sections. The reason for discussing old institutionalism last lies in its exhaustive analysis of the philosophers, as well as of the neoclassicist models existing at the time. In their approach, old institutionalists point out common ground between philosophy and neoclassicism, namely that property is reduced to the relationship between man and object. The representatives of old institutionalism instead consider interaction between people as central, rather than that of man and object. The motivating force behind man’s actions is not, however, self-interest which would be isolated from other agents in the economy. In lieu of self-interest, Commons places the “going concern”, which is the imaginary sum of individual coherent wills (will-in action) (Kröner (1930:12f)). This rather sociological view of human behavior is represented through the motive of envy in Veblen’s work. In addition to the rejection of the conception of man as homo oeconomicus, the institutionalists have other points of criticism of the models of mainstream economy existing at that time (Reuter (1994:135ff)): Firstly, they criticize the neoclassical belief of a balanced and harmonious development of the economy and the related negation of conflicts. Secondly, they reject the central position of prices and markets that, according to institutionalism, are only the result of regulatory factors (legal system, customs, distribution of power). Thirdly, they reject the neoclassical theory aiming at the development of a pure, supertemporal theory free from value judgments and based on a mechanistic philosophy, namely Newton’s conception of the world. Institutionalists are rather concerned “[…] to help solve economic and social problems and thus contribute to further development of the economic course of events” (Reuter (1994:100)). Institutionalists understand economic activity as an evolutionary process. Their methodology is referred to as being holistic and pragmatic. Working hypotheses are 83

84 Privatization in Central and Eastern Europe

formulated that have to be proved empirically; theoretical and empirical research being thus treated equally and brought into correlation with each other by means of trial and error. The first section of the following will discuss Commons’ basic approach. Commons’ analysis opens with a classification of the interpretations of property at that time; this is then compared with his own approach based on transaction analysis, which is in keeping with his theoretical concept of himself, not a construct of ideas. Among other things, Commons bases his investigation on the observation of the historical development of the term “property” in the administration of justice. It is these observations that are in turn used to illustrate that the genesis of property rights is primarily to be understood as an evolutionary process. This marks a clear difference between Commons’ basic approach and the neoclassical explanations of the creation of working rules, even though Commons basically anticipated and developed the fundamental elements of the later property rights theory. The section 4.2 will deal with Veblen’s analysis of the genesis and function of property. Veblen’s Theory of the Leisure Class has been referred to as an amusing criticism of society at the turn of the century; the style moves from sarcasm to cynicism: leisured men degrade their “pitiable” women to their own private property and subsequently present them as trophies of their social superiority. What is of greater significance is that Veblen criticizes the absolutized interpretation of property based on natural law. Therefore, with Veblen, we come full circle to the Middle Ages used as our starting point in the search for property.

4.1 Commons: property rights as concerted action for settling conflicts Before introducing Commons’ analysis of ownership, his consideration of the economic theories current at that time will be reviewed briefly. On the one hand, this provides an opportunity to introduce the terms used by Commons that are central within his observations and to approach his conception of ownership. On the other hand, it is an opportunity to illustrate his points of criticism of classicism and neoclassicism. According to Commons (1924, 1974:2ff), classical economic theory stated that value consists of labor accumulated in the past, while being purely geared to producing goods; this theory is represented by Locke and Ricardo. The subsequent, hedonistic theory determines value by the individually perceptible pain and pleasure of the present; its representatives were Bentham, as well as the neoclassicists Jevson, Menger and Walras. This approach would emphasize the subjective view more strongly. Both theories are modeled following mechanics, that is to say the Newtonian principle. Commons does not reject mechanism completely, but he con-

Property as Portrayed by the Old Institutionalists 85

trasts it with volitional theory, of which Hume is one of the most important representatives.1 Volitional theory does not focus on the production of goods or on a subjective perception of a relationship between man and object, but rather “[…] purposes of the future, revealing themselves in rules of conduct governing transactions which give rise to rights, duties, liberties, private property, governments and associations” (Commons (1924, 1974:4)). Thus for Commons the actual essence of economics is not the single individual, but the future transaction, understood as an act of exchange between people (Reuter (1994:276)). 2 Commons thinks he has observed that economic theory would actually have changed in this sense: “Thus economic theory began with a Commodity as its ultimate scientific unit, then shifted to a Feeling, in order to explain a Transaction which is its practical problem” (Commons (1924, 1974:5)). The Newtonian principle was thereby extended by the principle of scarcity, which could only specify the already existing theory. But according to Commons, only the principle of the working rules of going concerns would open up a new perspective to understanding economic activity. In reality going concerns, that is a joint expectation of individuals, lead to the noticeable organization of people in the form of a state, business, family or club. 3 The state is the highestranking going concern (Kröner (1930:16)) if given collective power, or if it has the executive monopoly in accordance with the collective will. 4 Working rules (normative rules) define the rights and duties of individuals within going concerns.5 The authoritative agency need not be the state (Dugger (1980:48)). However, if a state is created, then conflicts will be settled by means of common or reinterpreted statute or constitutional law. This can be understood as the formalization and state enforcement of the working rules of going concerns. The formalization, however, signifies the end of a long development.6 According to Commons, the rules originated in manners and customs and later developed due to artificial selection (Commons (1934:45)). The impetus for further development of the rules generally stems from changes in the economic, political and ethical conditions. The process of selection is slow and not automatically free from conflict and continuous. On the contrary, there are rather four stages to be passed (Commons (1924, 1974:142)): firstly, the stage of ignorance and confidence, in which rules concealed and interpreted by those having authority are observed without objection; secondly, the phase of skepticism and protest that is overcome by disclosing the rules; thirdly the stage of resistance or revolt that culminates in the demand for participation in amending and recasting the rules; and fourthly, the stage of the creation of an independent judiciary interpreting the rules as conflicts arise. 7 Public interpretation through the courts enhances the transparency of rules as regard content for all members of the group. Thus the democratic constitutional state is, according to Commons, the result of an evolutionary

86 Privatization in Central and Eastern Europe

process, in which the currently valid rules remain changeable. The scope and speed of such change depends on interaction within the group and does not depend on individual utility maximization orientating to economic circumstances. Commons rejects the idea that the state originates from economic individual calculations and by means of a formally concluded social contract. To Commons, there is no God-given law of nature legitimized once and for all. The socio-economic process is, on the contrary, indeterminate (Elsner (1986:376)). Independent of whether rules are only implicitly effective, that is to say not yet written down, or already codified, according to Commons, their effectiveness depends on whether or not generally accepted symbols are developed. Commons mentions the symbols words, prices and numbers that are only “nominal” and not “real”, serving merely the operation of working rules. Commons (1924, 1974:8f) reaches this judgment because he differentiates between three meanings of “value”: firstly, the psychological or subjective value of anticipation; secondly, the real value of the commodities produced, exchanged and consumed; and thirdly, the nominal value, the price that emerges in the process of purchasing and borrowing and which can be measured by accepted standards. All three values are determined during every transaction because a transaction involves the coming together of subjective ideas, transfer of commodities and fixing their prices. Thus Commons considers prices as nominal values to be just one dimension of the actual final value resulting from transaction. This would be illustrated by the fact that prices can inflate and deflate, if they do not reflect the real value. It is the interpretations of the courts that, according to Commons, bring the nominal value closer to the real and psychological value. The objective of the courts would be to create reasonable values, meaning the social values attained in social compromises (Elsner (1986:369)). Thus jurisdiction is given a central position in Commons’ theory. It is an authority intended to make rules transparent and generally known, not only on the grounds of its function to interpret the law, but an authority also expressing the common will and influencing economic activity by giving rules some meaning. The rules emerging from a process of selection, define the limitations of individual action that in the past have proven to be appropriate and sensible. Moreover, they are intended to provide better foresight into the future: Each rule, if it can be depended upon, permits each individual to know in advance what he can, cannot or may do with the help of the group, and what he must or must not do, so that within these limits he knows where security lies. (Commons (1924, 1974:138)) So rules increase an individual’s “security”, in the sense of being able to form well-founded expectations of other group members’ behavior. This

Property as Portrayed by the Old Institutionalists 87

view of Commons therefore shows analogies with Buchanan’s conception of right as a capital good, though emphasizing more strongly the reciprocity of the formation of expectations. This is also manifested in the fact that in Commons, contrary to monetary theory, individuals do not calculate and invest their “stock of security” isolated from each other. The rules rather provide the individual with a point of reference as to how far he can rely on help from others and to what extent he must make provisions himself. Rules are a fundamental element of an institution that Commons characterizes thus: Since liberation and expansion for some persons consist in restraint, for their benefit, of other persons, and while the short definition of an institution is collective action in control of individual action, the derived definition is: collective action in restraint, liberation, and expansion of individual action. (Commons (1934:73))8 As opposed to North, who sees institutions merely as restrictions to individual action, it is Commons’ opinion that an institution not only imposes restrictions on the individual, but furthermore, it provides scope for action in the first place. The creation of appropriate institutions relieves the individual of force, discrimination and unfair competition, and offers him the prospect of personal development that would not be feasible if he were on his own. It is collective action that permits “[…] expansion of the will of the individual far beyond what he can do by his own puny acts” (Commons (1934:73)). According to Commons, in this context an individual action can only be understood as a transaction between the individuals. Thus the transaction as such would represent the smallest unit in institutional economics. However, transactions are not characterized by an exchange of commodities taking place at the present time, which was a belief held by the older theories. Rather they are […] the alienation and acquisition, between individuals, of the rights of future ownership of physical things, as determined by the collective working rules of society. The transfer of these rights must therefore be negotiated between the parties concerned, according to the working rules of society, before labor can produce, or consumers can consume, or commodities be physically delivered to other persons. (Commons (1934:58)) Transaction therefore does not mean the transfer of physical (stocks of) resources, but rather of rights to future resource ownership. (Property) rights are transferred before physical process of production and consumption can take place. According to Commons (1934:512f), the transfer of rights, ultimately aiming at the production and exchange of goods, leads

88 Privatization in Central and Eastern Europe

first of all to the creation of claims and liabilities that have to be settled either simultaneously or at a later date. The exchange of rights precedes the transaction on the money market (here: credit market) where actually it is liabilities that are exchanged and not money (Commons (1934:427)). 9 In addition, transactions on the credit market precede the production of goods. To sum up therefore, Commons considers the definition and transfer of property rights being vital prerequisites for the emergence of the credit market, for production to occur and for exchange taking place at all. The development of property rights influences economic activity; it affects market prices, among other things (Elsner (1986:375)). For Commons a transaction shows three characteristics: conflict, dependence and order (Commons (1934:58)). Of these three characteristics, it is conflict resulting from (economic) scarcity that is pivotal. Commons (1934:71) points out: “David Hume found the unity of these social sciences in the principle of scarcity and the resulting conflict of interests. […] Institutional economics goes back to Hume.” Conflict is the actual reason for the creation of rules and subsequently the emergence of ownership. The need to find a way of peacefully overcoming conflict represents the motivation for people essentially willing to compromise to develop a style of coexistence that is well-ordered and self-regulating; for instance, to establish working rules and an authoritative agency, as Commons puts it.10 Contrary to Buchanan, who characterizes conflict as a disruptive factor to be overcome, Commons considers it not only the reason for the initial establishment of rules, but also the driving force behind permanent development. Economics, jurisprudence and ethics, according to Commons, all have the common element of conflict, but the mechanism of imposing sanctions to settle them varies accordingly. The physical force, for instance, represents the mechanism of enforcing within the administration of justice. Moral sanctions are constituted by the influence of collective opinion or propaganda on individuals. Concerning economics, it is rights of ownership that act as sanctions. Property does not only presuppose that the owner can manage his affairs by making use of his resources (holding). It empowers him to deny others his resources (withholding). In brief: “Holding is economy, withholding is economic power” (Commons (1924, 1974:54)). Should the occasion arise, the owner could then temporize and refuse an exchange (waiting-power). As the exchange of rights of ownership precedes the granting of credit and the production of goods, the denial of the exchange of rights means that production cannot take place. It is true that Commons did not develop an economic criterion regarding when and why exchange can be denied; nevertheless he submits an indication of the way economies operate, which was further explained by monetary theory later on. He makes it quite clear that the central aspect of the right to sell property is not actually the permission to do so and to obtain a high price for it, but rather not having to do this and to be able to wait.

Property as Portrayed by the Old Institutionalists 89

For Commons, the above-mentioned kinds of sanction are not necessarily of equal ranking. On the contrary, their hierarchy can vary in different societies. As Commons indicates, in capitalistic America, the state having the monopoly on the use of force ranks first in the hierarchy; the action of withholding in the economy ranks second, and the moral sanction (of the church) takes third place (Commons (1970:75ff)). This division into three has not always existed. On the contrary, there has to date been a process of differentiation of the sanctioning authorities. In particular, the separation of political control, and thus of the monopoly on the use of force, on the one hand, and the economic power of withholding through the owner, on the other hand, had taken place. Up until the signing of the Magna Carta in 1215, ownership as an economic power of excluding others, and control as a physical power were not separated. Following this date, economic and physical power were continuously split further apart. In England this process was finalized by the transfer of land to the Lords and the creation of independent judges through the Act of Settlement in 1700 (Kröner (1930:44)). In America, it was the Constitution of 1787 that completed this process.11 All in all, Commons thus make it plain that at a particular point in time property rights can vary significantly in different societies. According to Commons, property rights in (modern) societies are protected by the ruling sanction of physical force. In the field of economics this means exclusion in the form of withholding. This enables the owners to refrain from participating in an exchange, thus making a negative decision. If a transaction does take place, then it is not primarily the physical resources that are transferred, but the property rights first. With this view, Commons, on the one hand, extended the classicists’ conception of ownership that was orientated towards physical objects. On the other hand, as the originator of the property rights theory he differentiated more precisely than they did between the disposition of resources and the actual property right: Property is the claim to exclusive control for one’s own use, or for the use of others if a price is paid, of the materials of nature which are scarce or expected to be scarce. But property rights are the collective activities of government or other concerns apportioning to individuals an exclusive claim against others in the use of anything that is expected to be scarce enough to create conflicts over exclusive use. (Commons (1934:303)) Property is therefore merely a claim to the exclusive use of scarce goods, whereas property rights represent the working rules for exclusion that the community has developed and the authoritative agency has enforced. This is connected with the fact that possession of goods can exist. However, property rights cannot be reduced to the man/object relationship; they

90 Privatization in Central and Eastern Europe

rather represent collective protection (Dugger (1980:47)). At the same time this means that, as far as Commons is concerned, an individual is not capable of permanently protecting his property from the (forcible) infringement of others, that is, of withholding it from them. The protection of ownership as a private good, therefore, cannot exist long term. Property rights rather represent the concerted action of all members of society to settle conflicts: Thus property is not only a claim but is also a conflict of claims to whatever is scarce, but rights of property are the concerted action which regulates the conflict. (Commons (1934:303)) Commons’ view is that this meaning of property has slowly evolved with time. The concept of property changed according to the predominant principle of explanation (Commons (1924, 1974:6f)). The Newtonian principle understood property as exclusive ownership of physical things. Under the principle of scarcity, ownership became a form of control over limited resources. Finally, the aspect of transaction brought to the fore the exchange of intangible property, that is to say the transfer of groups of rights that must, however, be guaranteed by the state: The individual does not transfer ownership. Only the state, or, in medieval times, the “market overt”, by operation of law as interpreted by the courts, transfers ownership by reading intentions into the minds of participants in a transaction. (Commons (1934:60)) According to Commons, the role of jurisdiction is significant in the development of the conception of “property” in a society. Commons explains this with the help of historical considerations pertaining to the interpretation of the American constitution (Commons (1924, 1974:11ff)): “Property” and “freedom” in the passage “no person shall be deprived of life, liberty and property without due process of law” were, for instance, until about the end of the nineteenth century, interpreted as the power of disposition of physical things respectively as freedom from slavery (Kröner (1930:44ff)). This interpretation of property as the exclusive use sufficed in the economy at that time, which was above all dominated by farming and craft industries, in which everybody owned some land, and where division of labor hardly existed and the owner cultivated the land with his family and farmhands. However, the population increase, the growing scarcity of resources and the development of division of labor changed this picture. The exclusive use of a resource by an individual was now no longer prominent, rather it was the power to withhold it from others. Differences in the varying groups of society finally resulted in a reinterpretation, on the one hand, of property as expected earning power and, on the other hand, of

Property as Portrayed by the Old Institutionalists 91

freedom as a right to personal development. This represented, so to speak, a compromise: whereas the new interpretation of property as withholding sanctioned the growing inequality in negotiating power that had arisen out of the development of industry, the new concept of freedom created compensatory rights and the state’s duty to provide equal opportunities (Reuter (1994:180ff)). State measures aiming at removing discrepancies in bargaining power were recognized as being constitutional by those courts that had previously assumed equal negotiating powers in exchange processes only with time. It was one of Commons’ concerns to draw attention to the problems of increasing inequality. To him, this included not only the growing bargaining power of industry concerning market exchanges, but also the weaker position of those employed there (Reuter (1994:181)). In order to analyse such inequalities Commons (1934:59ff) divides transactions into three kinds, namely “bargaining”, “managerial” and “rationing” transactions. These kinds of transaction are, however, reminiscent of those relationships between individuals, as analyzed in the principal–agent theory and the public choice theory. But contrary to the neoclassical approach, Commons does not examine transaction types independently of each other. Furthermore, these are not purely economic in nature. Commons rather describes them as units of social activity between legal equals, or between superiors and subordinates, whose relationships are also marked by ethical aspects. The purpose of a bargaining transaction is the transfer of property rights on the basis of voluntary agreements (Reuter (1994:279)). Four parties are involved in this transaction; two sellers and two buyers. This is the minimum number of parties for a transaction (Commons (1924, 1974:65)), as it is only possible to create alternative exchange partners and thus other options with four individuals. The seller and purchaser estimate not only their reciprocal bargaining positions, but also take into consideration the actions and decisions of their potential rivals. Under the condition that exchange partners are treated by a fifth superior authority (government) as being equal under the law, and being obliged to observe the working rules (for instance fair competition), the question of whether or not exchange takes place then depends on their bargaining powers. With his model of at least four individuals and considering bargaining power, Commons has thus significantly modified the neoclassical idea of an exchange between two (equal) individuals who act separately and whose decisions are coordinated through an auctioneer in his capacity as independent third party. Commons even goes beyond the pure market model by introducing his two additional kinds of transaction that are not voluntary market relationships, but “structural involuntary relationships” due to the inequality of individuals (Reuter (1994:280)). Thus, Commons (1934:64) understands the managerial transaction as a transaction between only two individuals, who are not equal, for example employee and employer. This form of transac-

92 Privatization in Central and Eastern Europe

tion is not based on voluntary negotiation between equals, but rather the relationship between two individuals is characterized by the command and the obedience based on the economic or legally guaranteed position of superiority of one of the individuals. Commons considers the purpose of a hierarchic transaction as the creation of wealth. Finally, Commons defines the relationship between state and citizen as a rationing transaction. This transaction is in no way independent of the other two kinds. Following the transfer of rights of ownership through bargaining transactions and the creation of wealth through managerial transactions, the losses and gains thus created are (re-)distributed with the help of rationing transactions by the superior authorities (Commons (1934:68)). The rationing transaction thus serves to correct the distribution of wealth that has come into being through market and hierarchic transactions (Reuter (1994:281)). Commons believes that one such correction is, for instance, distribution via the budget. Commons, however, gives the state not so much the task of subsequently correcting the distribution of income by direct and discretionary intervention. It rather ought to promote equal opportunity and by setting clear rules have a positive effect on people’s expectations. The latter is important for Commons in modern societies because the meaning of property has, in the course of history, increasingly shifted from the pure man/object relationship, and thus from the pure use-value, to the interaction between people, in other words to the exchange value. The exchange value is the behavior expected from people when buying, selling, borrowing and paying debts (Commons (1924, 1974:25)). In these transactions the individual forms expectations about, on the one hand, the extent of restriction imposed by the rules and, on the other hand, what scope of action he has. In other words, he secures a clear understanding of his rights and duties granted by the state. In Commons’ theory the state takes an active part in securing and correcting existing property rights, as well as in stabilizing anticipated property rights. The state assumes this role without becoming Leviathan because it is itself subject to the supervision of the common will. In Commons the state is thus no uncontrollable counter-pole of the individual (Parsons (1963:17)), but is similar to the communicator in Hume, who maintains and promotes understanding between people. 12 Commons succeeds in closing the “circle of checks”. Commons’ analysis of property and property rights focuses our attention on the following points: • The individual cannot permanently secure his property against the infringement of everybody else. Rather, he is dependent on society establishing property rights which are guaranteed by the state. The genesis of law is a long-lasting process of selection, which has its origin

Property as Portrayed by the Old Institutionalists 93

in customs and manners. Existing property rights merely provide a provisional settlement to conflict within a society. In different societies property rights may take different forms. • Property rights not only guarantee the individual exclusive use of his resources in the present. They also make it possible for every individual to form reasonable expectations regarding the future behavior of all other members of the group. Jurisdiction is particularly important here, as it not only enhances transparency by making the law known, but also lends it meaning by interpreting it. • Property rights establish economic power in the form of withholding. The transfer of property rights preceding any production can be denied by the owner. If it comes to market transactions, then only property rights will be transferred first of all. The concrete creation of wealth occurs in hierarchical transactions that are characterized by relationships between superiors and subordinates. It is the duty of the state to intervene in this process to “correct” discrepancies, not through interventions, but primarily by establishing generally applicable rules that provide equal opportunities and have a positive influence on the forming of expectations. Later representatives of the “New Institutional Economics”, which leaned on the neoclassical tradition, either considered Commons as a precursor, or they criticized him strongly. The following is a rough outline of some of the points of criticism regarding his contemplation of ownership: Commons analyzed the genesis of property law stemming from manners and customs and passing through several stages of development. The neoclassical interpretation understands ownership guarantee as a public good. In Commons this is readily available because it gives each member of society scope for action while limiting actions only to a minor degree. The creation of an institution is thus for every individual automatically linked with increased benefit. Free-rider problems just do not appear. On the contrary, expectations are correctly expressed and mutually processed. It can be said that collective action thinks ahead and provides more scope for potential individual action in the future by making the necessary institutions available here and now. Along these lines, Commons constructed a model for the provision of future public goods. From the neoclassical viewpoint, it is the basic conception of man that must be criticized in this model most of all: man is not someone active in economic transactions, who is interested in his own ends, assuming a free-rider position and not disclosing preferences. It is the unrealistic assumption of his orientation of a social order that keeps the individual from being caught in a prisoner’s dilemma. He communicates peacefully with others and even accepts compromises. From the neoclassical viewpoint, Commons does not provide true economic justification for the genesis of state and ownership, but

94 Privatization in Central and Eastern Europe

instead he puts their origin simply down to manners and customs of an (unknown) past. But is it possible to interpret property in Commons as a public good from the viewpoint of standard economics? Commons himself would reject such a neoclassical interpretation. He just would not want to be judged exactly by the extent to which he had considered cost–benefit calculations in his examination of the emergence of public goods. For Commons, the actual value of public goods can only be determined in a society that creates reasonable values by solving conflicts pragmatically. Property as an institution is, according to Commons, one such reasonable value. The decision regarding how to define property rights (including the determination of the extent of the public sector) would also be described by Commons primarily as a process of searching for reasonable values that does not ignore efficiency-theoretic arguments. Because of this permanent search process, it is not possible to forecast how the existing property rights of a society, which represent the perceivable limit of hitherto conscious selection, will develop in the future. Thus Commons characterizes the genesis of property similarly to Hume who, according to von Hayek (1973:20), was one of the first to recognize that there are phenomena that are “the result of human action but not of human design”. The order that either develops from this or occurs spontaneously creates a non-teleological balance (von Hayek (1973:51)).13 The balance is destroyed when the rules of operation it is based on are eroded as a result of individual interventions, for instance, interventions of the state. Commons therefore feared mere academic planning and rejected utopian outlines of a society. Commons’ conception of peaceful cooperation through permanent concerted action is based on Hume’s picture of mutual learning among people. Without this socially orientated ability to learn, society would lose its equilibrium and reach near-crisis state. Veblen developed such a scenario characterizing human action as being motivated by envy.

4.2

Veblen’s theory of the leisure class: property as a trophy

It is not by chance that Veblen’s examination of ownership is the final statement of theoretical treatises on this subject. In his most important work The Theory of the Leisure Class, first published in 1899, Veblen turns all the theories laid down here upside down: in his view, the development of ownership does not follow natural law,14 neither is it the result of scarcity. Rather, ownership is created by a change in the ways of thinking; it is to demonstrate the social hegemony of the upper class and leads to sabotage of affluence in society. Veblen describes the genesis and change of ownership by means of two phases in the cultural development. These phases are not always ethnologically perceptible but can be mentally construed. In the first phase, accord-

Property as Portrayed by the Old Institutionalists 95

ing to Veblen (1899, 1953:24), people lived peacefully together and private property hardly played any role. The individual’s incentive to commit himself to the group was based on his “instinct of workmanship”.15 In this peaceful phase, which was marked by a minimum of economic competition, the individual proved his industry mainly through the advancement of the community life. This peaceful phase was followed by the barbaric cultural epoch. The reason for this transition to predatory practices was that people had got used to a belligerent way of thinking that was influenced by the development of weapons and tools. This change meant that conflict replaced productive work as the recognized form of selfaffirmation. Therefore, during the early predatory cultural epoch, the seizure of items of practical use was more important than their production. At a later date, it was seized trophies that served as proof of social superiority instead of the captured items of everyday use. During the early years of this phase women were, according to Veblen, considered much-desired trophies. Thus, the earliest form of ownership was the physical power of men over women, leading to this development: From the ownership of women the concept of ownership extends itself to include the products of their industry, and so there arises the ownership of things as well as of persons. (Veblen (1899, 1953:34)) Veblen’s apparent reliance on Locke’s labor theory of value is certainly not pure chance. The labor-theoretical attempt to justify ownership as a natural right based on labor, and consequently to absolutize it as a Godgiven institution, is destroyed by Veblen by means of an occupation-theoretical twist: “Wherever the institution of private property is found […] the economic process bears the character of a struggle between men for the possession of goods” (Veblen (1899, 1953:34)). In the early stages in the history of mankind this may indeed have been a fight for survival. In modern society, however, it is a (seemingly peaceful) fight for wealth. In the course of this fight, guided by envy, an upper class emerges based on financial wealth, who make a point of not doing any work, but rather demonstrate their social prestige at first through leisure and then through conspicuous consumption. 16 This wealthy class, which Veblen (1899, 1953:143) calls “parasitic”, is only interested in gain, which in turn guarantees social distinction. In the competition for prestige and power, the wealthy owner endeavors to accumulate more riches than his rival. This leads to ruinous rivalry within the leisurely business class, within which the owners of small and medium businesses are pushed out of the market (Reuter (1994:161)). In order to prove that they do not belong to the growing working class, the remaining upper class increasingly indulges in conspicuous consumption and has mainly luxury goods produced at the cost of sufficient supply for the masses. As the dominant owner that class

96 Privatization in Central and Eastern Europe

can limit the volume of production in order to enforce price increases and to maintain its profits. In the end, this striving for wealth of the business class, which stems from social prestige, leads to the “sabotage” of affluence in society (Reuter (1994:221)). Losses of affluence were accepted for the time being because, due to their work instinct, the working class consider their activity as useful, and additionally, because they are guided by the norms set by the leisure class and are thus primarily interested in their social advancement.17 Property rights are basically respected as a way of thinking, due to the established moral code of the “sacredness of property” (Veblen 1899, 1953:89)). However, the prestige connected to wealth does lead into theft. A caught thief is not punished according to the seriousness of his crime. On the contrary, those using fraud to accumulate great riches, which they then openly flaunt to demonstrate their conspicuous leisure and acquire prestige, are punished more leniently than a petty thief. Property offenses are forgiven more readily if the purpose is to enable the robber’s wife, as his proxy, to flaunt time and money. Veblen (1899, 1953:89) summarizes his view on the social disapproval of property offenses: […] that all that considerable body of morals that clusters about the concept of an inviolable ownership is itself a psychological precipitate of the traditional meritoriousness of wealth. In their pecuniary habit of mind (Veblen (1899, 1953:144)) the wealthy classes decide how their business conventions are to be secured by law. They alone profit from contract, liability and bankruptcy laws. Changes are only effected if they allow easier orderly exploitation. In this process the state becomes the mere agent of the business class. In order to enable that class to hold its own in international competition, it may, for instance, use diplomatic channels between the states and even military resources (Veblen (1904, 1958:139)). Therefore, according to Veblen, not the state but the whole business class is considered to be the real Leviathan. The business class decides on how property rights, which are only useful to them anyway, are to be formulated and secured by law. However, due to its conservative and backward-looking thinking, it is hardly interested in fundamentally changing institutions. As institutions represent traditional modes of thinking, they tend to be inert. They will only change, if at all, as a result of external pressure, thus as a reaction to stimulus. Its selection is based on the experiences of the past and represents an adaptation to past circumstances. And this is why existing institutions can never completely come up to the requirements of the present. Contrary to Commons, who believes that institutions open up scope for action and have a positive influence on the development of society as a result of conscious selection, Veblen (1899, 1953:142) reaches the conclusion that “[…] the law of

Property as Portrayed by the Old Institutionalists 97

natural selection, as applied to human institutions, gives the axiom: ‘Whatever is, is wrong’”. It is exactly the private property that Veblen considers as an imbecile institution that lags behind current developments. In the course of events, it had increasingly lost its original function as a means of satisfying needs it had fulfilled in peaceful times. In the predatory phase its ultimate purpose was a demonstration of leisure (Reuter (1994:220)). Ownership that has been rid of its original meaning can only continue to exist because the conception of property as a “sacred” institution, that is its legitimization under natural law, survived. Sabotage of the affluence of society founded in the conspicuous consumption among the rich upper class is then really a foregone conclusion. Veblen does, however, stop his institutionally founded scenario of the development of society. Salvation comes in the form of technical development as an exogenous factor, and teaches the working class rational thought. In Veblen the hitherto course of development is abandoned with a manner of argumentation similar to Marx (Reuter (1994:226)): the working class challenges the norms which were established by the upper class and which they themselves have so far accepted without questioning and protests against the business class. A revolution does not, however, take place. Veblen thought rather that reasonable, altruistic technologists and engineers would take over control of the economy by organizing a general strike. They would then proceed to curb the prevailing waste, improve the inadequate provision of the people and generally act in the best interests of society (Reuter (1994:332f)). In the distant future Veblen (1919, 1990:399) even saw a society “free of envy”: With the abolition of private property, the characteristic of human nature which now finds its exercise in this form of emulation, should logically find exercise in other, perhaps nobler and socially more serviceable, activities; it is at any rate not easy to imagine it running into any line of action more futile or less worthy of human effort. Contrary to Commons, for Veblen ownership is not a way of solving conflicts that originate in the scarcity of resources. He sees it rather as a breeding-ground through which “negative” human instincts are given complete expression at the expense of social prosperity. His assumption, that the abolition of private property opens the prospect for a better society, is disproved after the experiences in socialism. In later years, Veblen himself was disappointed that technical progress had not resulted in the social development he had forecast (Reuter (1994:226)). He, who had rightly considered the justification of ownership by natural law as misguided ideology, for the most part, himself fell victim to the ideology of trusting in technology. This is one of the many points of criticism that are brought against Veblen. In Veblen’s opinion, mere technical progress is grounds for a rational way of

98 Privatization in Central and Eastern Europe

thinking.18 Veblen thus denies people their ability to learn, he downgrades the masses to passive “worker bees” who thoughtlessly adopt the value-judgment of the upper class and orient themselves towards the conspicuous consumption they display. An ever higher level of consumption seems to be attainable for the working class who follow their work instinct and therefore occupy themselves in “useful” activity. Their subsistence level is obviously secure, despite the sabotage by the upper class. At least they have no cause to rebel out of hardship. On the contrary, the quite violent elements of society during the predatory phase shy away from conflict in the peaceful modern period. A fighter as portrayed in Hobbes is not among them. Veblen’s view of property can be summarized as follows: • Ownership is the result of rivalry for dominating social positions. • In the process of development, ways of thinking are handed down. On the one hand, a moral behavioral code, such as respect of other peoples’ property, is anchored in society. On the other hand, the conservative attitude of the dominant owners obstructs the institutional development. • Institutional changes only take place as a result of pressure from outside. They merely bring about an adjustment to the requirements of the past. • In the concrete definition of property rights, the state fulfills the expectations of the property owners. In the end, Veblen expressed a negative view of the course of evolution. The drama of the situation described is certainly exaggerated. But despite this, Veblen’s pessimistic attitude towards institutions is not completely misplaced. In a less categorical interpretation Veblen supplies skeptical, and therefore quite useful, suggestions for property reform in Central and Eastern Europe.

4.3 Comments on property reform in central and eastern Europe For his Theory of the Leisure Class, Veblen chose the sub-title An Economic Study of Institutions. But for a long time neoclassical economics questioned the economic content. Its representatives also accused early institutionalism of a lack of scientific accuracy, in particular because of the inductive approach based on description. But it is exactly this inductive approach that permits the description of phenomena, that are disregarded in the neoclassical approach concerning the development of institutions. In particular, property rights in transition can be seen in a wider context on the basis of old institutionalism. According to Commons, property rights are a concerted action towards settling conflicts. Contrary to Buchanan, who restricted conflict to

Property as Portrayed by the Old Institutionalists 99

economic facts and understood it basically as a surmountable, disruptive factor of the constitutional phase, Commons considers permanent conflicts about ethical and economic issues as the driving force behind institutional change. Conflicts lead to the emergence of ownership and the state as the authoritative agency. In the further course of events, they provide for revision and development of institutions. Skepticism, protest and the call for co-determination are characteristics of conflicts. The radical (and not always peaceful) change in Central and Eastern Europe, as well as the subsequent public discussion on issues such as the granting of private property and the development of property rights, are an outstanding example of this. The institutional view suggests that the change in rules is an adaptation to changing conditions. Changes can also be stimulated by, among other things, exogenous shocks. The collapse of communism in Central and Eastern Europe towards the end of the 1980s can thus be interpreted either as the conclusion of a long-drawn-out institutional erosion, or it can be understood as an exogenous shock. The latter confronted the transforming countries with completely new circumstances, exposing them, among other things, to competition with institutions of market economies. The gradual reform programs of some countries (for instance, Romania) can then be considered as an attempt to soften the impact of the exogenous shock, and to gain time for institutional adjustment. Even as far as the socalled shock therapy is concerned, one should bear in mind that the process of adaptation is, on principle, a slow one, and that a swift change in institutions is unlikely in transition. Commons assumes that, initially, manners and customs were binding for the individual, and that as such they constituted community. In the framework of a functioning community, the implicitly effective norms were further developed into (codified) law with law-enforcing authorities. In Commons, the individuals apparently take part as equal partners in this process of establishing the rule of law. On the other hand, in Buchanan, the constitutional phase is characterized by bargaining power. North emphasized that the economic players, that is, the pressure groups, exert considerable influence on the development of the rules of the game. Veblen even thought that powerful owners were forcing their smaller and medium-sized competitors off the market, and that the remaining conservative business class alone determined property rights; the state is merely their agent. Veblen’s conception of an all-dominating hegemonic class is not transferable to Central and Eastern Europe in this form and without reservation. In these countries there are, however, numerous examples proving that in such a phase when the role of the state as authoritative agency is to be newly defined and hence weak, strong groups abuse their position of power in order to influence the establishment and enforce rules which are in their interest. It can therefore be observed that lobbies of rather conservative state enterprises try to assert their interest against the

100 Privatization in Central and Eastern Europe

newly established small and medium-sized businesses. Existing laws (for example, the bankruptcy law) were declared invalid under pressure from these lobbies. The various groups receive a welter of various privileges, so that the existing legal regulations tend to lose their general validity. This even goes so far that (national) law is ignored and replaced by private (illegal) law-making. According to Veblen, former rules are suspended and replaced by new ones simply through a change in the way of thinking. The change of rules is therefore not only a process of development but also a process of decay and devaluation. It does not have to reach a state without rules, described as anarchic in Buchanan. However, old rules may decay without new ones becoming immediately effective in all areas. Between the “creative destruction” of old rules and the development of new ones there is a time lag. In particular, according to Commons, time is needed until the new rules have become commonly known as relevant. This is something Central and Eastern European countries should also apply when they formulate new laws or take them over from Western countries. Instead of taking over laws, some countries reinstated old laws from pre-socialist times, thus continuing their own tradition. These laws must, however, be adapted to the new circumstances. As a matter of principle, the content of the old orthe new laws must be published and interpreted by independent courts. The will-inaction only becomes apparent through interpretation and application, and gives the individuals a basis to form their own expectations on (future) restrictions and scope for their actions. For Commons, it is the point of orientation of reasonable values that gives the necessary framework, according to which the individual can establish reasonable expectations regarding the behavior of other group members, or estimate the effects of his actions and can thus calculate the economic viability of investment projects. If there is insecurity in this respect, the owner will probably use his waiting power and refuse the transfer of property rights, which has to precede production. From the institutionalists’ viewpoint, the marked reduction in investment and production at the beginning of transformation can thus primarily be explained by the insecurity regarding socially founded reasonable values; individual calculation in investment projects, investigated by the monetary theory, is of secondary importance compared to that. The state’s most important duties, according to Commons, are to improve expectations and to establish a counterpart to the owner’s power of withholding through working rules (for instance competition law). In addition, Commons also advocated a strengthening of the employee’s position. He saw a compensatory element in the promotion of equal opportunities through the state. This promotion should, however, not degenerate into intervention, but should be based on general laws and on the development and strengthening of the employees’ representatives. As regards

Property as Portrayed by the Old Institutionalists 101

Central and Eastern Europe, the state, which in the planned economy was sole producer and sole employer therefore has to completely redefine its role. Job guarantee, leveling-off of income, as well as United (Single) State Trade Unions are to be replaced by a market-conforming constitution of the labor market. On principle, state subsidies to support a high level of employment, as well as state intervention in wage agreements, must be abolished. On the condition that general rules of the market are in force, the state can continue to be a producer, with the scope of the public sector having to be determined through social consensus. According to Commons, institutions are adapted to the changes and further developed through conscious action. They are “the result of human action but not of human design”. Commons believed that manners and customs constitute society, and that the readiness of man to compromise makes peaceful changes possible. Veblen dreamt of technical progress teaching people rational thinking, and that people would give up their behavior motivated by envy, which is detrimental to coexistence. In compensations Buchanan saw a means of bringing egoistic individuals to agree to the constitutional contract. A contract concluded once and for all, which for Locke legitimized ownership as a sacrosanct institution, is, however, not sufficient. Further investments are necessary, according to Buchanan, to make people adhere to it. In Commons, ownership as a concerted action to settle conflict assumes permanent justification, less through the investment of financial resources than through the invested commitment of each individual. Thus property is a flexible institution which will adapt to changing conditions. This became apparent in Western countries when, in addition to physical property, intellectual property, that is inventiveness, according to Mill, was also protected by the state. As will be shown, even within planned economy and transforming countries, property was, and is, not a rigid institution.

5

Property as an Institution: Summary and Prospect

Hobbes explicitly pointed out that property exists only if the exclusion of others is guaranteed by the state. People must come to an understanding with each other for such an ownership guarantee to develop. The question of how to reach a consensus concerning property and state, and what effects it produces, was the central topic of his contemplation on property. It may well be that after working his way through the jungle of theories, the reader has gained the impression that they merely differ in nuances. It should, however, have become clear that the conceptions of man supported by representatives of property theory diverge strongly. Philosophers have still explicitly discussed the question of the conception of man and the purpose of private property; utilitarians have then already accepted property as an institution useful to man. For representatives of neoclassicism, who assume the individual pursuit of profit, property has an incentive quality and leads to increase of welfare. In monetary theory, it generates existential fear and is the precondition of the dynamic system of money economy. Finally, institutionalists again take up Hume’s idea of a learning, understanding man, attempt to stem injustice in accordance with Rousseau and to open up scope for action. In the end, theories differ from each other according to their emphasis on either freedom, security, justice or efficiency. Contemplating ownership above all or even exclusively from the aspect of efficiency, as neoclassical approaches do, represents a recent phenomenon. The argument pertaining to the evaluation of freedom, security, efficiency and justice that, if one starts with Grotius, has lasted for 400 years, is not in the least brought to an end. On the contrary, it is the background of discussions on property and privatization in Central and Eastern Europe. Two theories can be identified on the basis of the question if and how a consensus is reached. The first assumes that on the basis of his self-interested calculation, the individual considers for himself whether he agrees to a contract or not. The second starts from the point that individuals come to an understanding concerning ownership and state through mutual learn102

Property as an Institution: Summary and Prospect 103

ing. The difference between these two approaches lies, besides their particular conception of man, in the consideration of the time factor. Whereas approaches according to evolution theory presuppose long-lasting processes of understanding, in individualistic contract theories the agreement is concluded at an imaginary point of time and parts of the agreement are only amended if, owing to changed conditions, this seems efficient. Due to their assumptions and by investigating the prisoner’s dilemma, pure contract theories can also address the problem of non-cooperation. To escape the dilemma they draw “the veil of ignorance”. Representatives of game theory suggest promoting altruism to surmount the individuals’ preference of the present or to repeat the game every once in a while, and ultimately to get learning processes going all the same. These kinds of outside stimuli, however, presuppose an arbitrator, the state. In contrast, approaches based on evolution theory break or get round the vicious circle of producing an agreement “from above” as they assume mutually learning people, who bring about the state as the communicator described by Hume. It cannot be foreseen what the result of the mutual understanding, the deliberately concluded agreement, will look like. Even representatives of contract theory indicated that the resulting ownership guarantee will depend on the preferences and abilities of the individuals and that in different societies it could take different shapes. Although both theories describe man differently and also evaluate the time factor differently, they both indicate that there can be three various kinds of exclusion. In small groups members mutually accept and enforce their property through behavioral norms. In large groups there can temporarily be a privately organized protection of property. As the latter is, however, considered unstable, ownership guarantee is provided as a public good. Even if it exists, certain parts will still be regulated through private protection of property or behavioral norms. In the end, exclusion consists of a mixture of various formal and informal restrictions. In the individual theories this mixture is not only explained, but also evaluated differently: neoclassical contemplation of ownership tends to postulate anarchy without statute law, whereas earlier institutionalists give priority to behavioral norms considered to create society. Irrespective of how informal and formal restrictions come into being, the commitment to an ownership guarantee always involves the fact that there was an (implicit) decision on the mixture of the various forms of exclusion. This mixture can only partly be explained (micro)economically. Ownership is merely one of the necessary institutions in a market economy. Even Locke had referred to a connection between ownership and money, both being entities that were later on investigated by monetary theory. The latter sees the function of money as a macroeconomic budgetary constraint to be completed by the microeconomic budgetary constraint, that emphasizes the central aspect of property through the principle

104 Privatization in Central and Eastern Europe

of liability and pushes the question of private or public disposition of resources into the background. This is opposed by the neoclassical assumption of the neutrality of money, as well as the efficiency-theoretic call for a clear definition of property rights and for rapid privatization. Competition is seen as the precondition of efficient allocation on the markets and, for institutionalists like Commons, restricts the owner’s power of withholding within the transfer of property rights that preceded transactions on the credit market. In the end, the individual theories can, on the one hand, be distinguished according to which institutions (money, competition, commodity or credit market) they focus on and thus on the other hand to which aspect of ownership (disposition or liability) they regard as central. On principle, however, ownership is a fundamental institution of a market economy. Even if ownership is established as an institution of an economy and codified as ownership guarantee, further efforts have to be made to ensure its enforcement, and the observance of law. According to representatives of contract theory, it is necessary to effect investments in order to lend the ownership guarantee the character of public capital. From the transactional viewpoint, it is the disclosure and the legal interpretation that create reasonable values, and not the measurable costs of a punishment. According to Hume, a middle course between constancy and change must be found to ensure that property remains a capital good or reasonable value. Only in the course of history did the adaptable, flexible institution of property allow the dynamic development in Western industrial countries. Even today, it is necessary to reconsider existing property rights, if national economies are to be overcome and if larger economic areas, such as the European Union, are to be created. The problem of reaching a consensus continues to be relevant at international level. In Western countries ownership was differentiated. Political, economical and social demands are attested within democracy, market economy and social security. The various working rules of the bargaining, managerial and rationing transactions distinguished by Commons are established. According to this given environment, property and privatization can be examined by economics focusing on efficiency. In the course of transformation, however, a consensus on freedom, security, justice and efficiency must be reached first and political, economic and social demands identified as such and evaluated against each other. Transformation is definitely not a process taking place following given rules, but a process producing them. That is the reason why traditional neoclassical approaches can only give explanations and recommendations to a limited extent. The contractarian view already allows a closer examination of the development of ownership and state, but so far leaves many phenomena which are assumed non-economic out of the reckoning. Monetary theory indicates minimum requirements for the transition from

Property as an Institution: Summary and Prospect 105

planned to market economy and mainly deals with the establishing of money, but not with ownership guarantee as a public good. Finally, institutionalism does not as such claim to be a mature theory. It does, however, provide beneficial advice for the events in Central and Eastern Europe in addition to the other theories. On the one hand, its explanations of institutional change are unaffected by the formulation of an optimal economic system. The emergence of property rights is derived using historically observed (Commons) or presumed (Veblen) events. On the other hand, institutional methodology requires that empirical observations and the development of theory go hand in hand. Institutionalism can therefore make a contribution to explain property rights in transition, for which there is a (certain) vacuum of theory and at the same time an enormous amount of empirical data.

This page intentionally left blank

Part III Property Rights in Planned Economies

108 Privatization in Central and Eastern Europe

Property rights in planned economies The theoretical part advocated the thesis that property is the result of an agreement between people. Some of the general problems concerning the changes in the institution of property in Central and Eastern Europe have already been mentioned by discussing the various theoretical approaches which modeled this process. The following analyzes the property reforms in Central and Eastern European countries in more detail and interprets them on the basis of theoretical explanations. A period of time must first be delimited. Theoretically, the starting-point of the observation could be the point in time when the transition to market economy was officially announced. This would, however, presuppose that transformation began completely anew, that at the end of the 1980s the old institutions were destroyed and that a process of understanding was triggered off which was uninfluenced by the past. This study does not follow this view. Transformation is, however, regarded as a decisive change of course, but the change in institutions, which accompanied it and which included property order, was influenced, among other things, by the role of the state within socialism, the earlier reforms of the planned economic system and the simultaneous experiments with (private) property. Therefore, it will firstly be analyzed whether and how the property orders had already changed in the individual Central and Eastern European countries before transformation, particularly during the 1980s. The countries which will be observed will be selected next. After the radical changes in Central and Eastern Europe and the collapse of the Soviet Union, the region now includes more than 20 national economies. As far as transformation and privatization are concerned, these countries are typically divided into those considered advanced, as for example the Visegrad Group, the South-Eastern European countries demonstrating moderate progress, and finally, the so-called stragglers, including many of the succession states of the Soviet Union. It remains to be analyzed whether this division also applies as far as the change in property order is concerned. The following countries will be studied within the section dealing with planned economies: Hungary, Poland, Czechoslovakia, Romania and the Soviet Union. After the division of Czechoslovakia, the section dealing with transition will only consider the Czech Republic. As far as the succession states of the Soviet Union are concerned, the Russian Federation will be analyzed here, as it represents the largest economy. Finally, it must be noted that, in retrospect, it can hardly be assessed how the property order in Central and Eastern Europe actually changed during the 1980s. On the one hand, this is the consequence of insufficient statistical information, which, at least so far, has not always been revised retrospectively. On the other hand, the purely legal, formal division into the various forms of property (state, private, and so on) made by the socialist

Property Rights in Planned Economies 109

countries can hardly describe the way a socialist or private company actually worked. Neither can it show who used the resources due to specific rights of disposition, who claimed the returns and who was able to transfer assets, as well as who was to bear possible losses. The following will thus make an attempt to relativize the idea that the typical private or state enterprises existed in socialist countries as well as to demonstrate that property order changed during the 1980s and that some countries experienced an erosion of property.

6

Legal Types of Property and Ownership Guarantee

In their constitutions, socialist countries have established the state planned economy as their economic system and the socialist property as its foundation. The socialist property of the means of production included the two forms of state and cooperative property. Besides socialist property, the countries experienced so-called personal property, which included “earned income” along with consumption goods, household plots and (partially) real estate. The earned income was supposed to secure the individual’s share of the national income following the principle of the distribution according to labor performance. This share was established from the macroeconomic view within planning, by distributing the national income to the so-called accumulation and consumption funds.1 The special consumption fund for remuneration according to labor performance, which represented the sum of labor incomes, was distributed through the division into pay scales and determination of wages (and bonuses) and therefore allocated individually. In the form of his earned income, the individual was entitled to a consumption determined by planning. This individual entitlement, which started on the earnings side of national income, represented the counterpart of the socialist property of the means of production as the foundation for the output side. The collective property of the means of production therefore opposed the individually determined consumption income. In view of the various forms of property known by the planned economic system, it is not sufficient to narrow the observation of property to the ownership of the means of production and, thus, ultimately observe only the basis of the planned output. If, according to the thesis, there was anything the individual considered to be individual property in planned economies, then he particularly meant his earned income, essentially his job. This view was even reflected in the constitution, which not only guaranteed socialist property of the means of production, but the individual earned income resulting from the right to work as well. This double guarantee materializes in the Soviet constitution of 1977 (Brunner/Meissner (1980:388ff)): 110

Legal Types of Property and Ownership Guarantee 111

Art. 10: Art. 40:

The state protects socialist property […]. The citizens of the USSR have the right to work – this means the right to receive a guaranteed employment with pay according to the quantity and the quality of the work performed and not below the minimum determined by the state […].

The ownership and the employment guarantee were, however, not defined as public goods to be provided by the state alone. State and individual rights and obligations rather doubled, so to speak. Socialist property was thus protected against the infringement by unauthorized persons and not only by the state; simultaneously, every citizen was also obliged to contribute to this protection. Even personal property in the form of earned income was not just secured because the state guaranteed its citizens jobs and the pay they earned by working; rather work was considered a bounden duty of every citizen. The duties of the state established in the two articles mentioned above opposed the following individual obligations (Brunner/ Meissner (1980:397)): Art. 61:

Art. 60:

[…] The citizen of the USSR is obliged to fight the theft and the waste of state and social property and handle national wealth carefully. Conscientious work within the chosen field of socially useful activity and keeping work discipline are the obligation and a matter of honour of every citizen of the USSR able to work. The refusal to perform socially useful work is incompatible with the principles of socialist society.

The doubling of state and individual duties concealed the fundamental difficulty of socialism that, as a result of the vision of the state withering away, the state could not be constructed as the sole coercive authority; social and individual rights and obligations had to be harmonized instead. Due to this double obligation to indicate reasons individually and of society as a whole, the constitution assigned the duty of providing ownership guarantee not only to the state; the citizens were also obliged to contribute to its provision. During the 1980s, ownership guarantee experienced certain changes. Socialist property remained the kind of property primarily protected by the constitution. Some countries, however, have defined areas in which private property could be developed or in which already existing possibilities for private activities were extended. In some countries, changes were so extensive that a mixed property order was legally justified and the primacy of socialist property was thus given up even before the beginning of the officially announced transformation of the economic system. This can be

112 Privatization in Central and Eastern Europe

demonstrated on the basis of the Soviet Constitution of 1990 (Brunner/ Schmid/Westen (section “Soviet Union”, July 1991, Sect. I 1, p. 1)): Art.10(1):

Art.10(2):

The economic system of the USSR develops on the basis of the property of Soviet citizens, as well as of collective and state property. The state creates the conditions necessary for the development of the various forms of property and guarantees their equal protection.

The new constitution of the USSR formally turned the state into the sole guarantor of property of the means of production; individual obligations were dropped. The various kinds of property were still differentiated. The citizen’s property now existed besides state and collective property, capable of including not only consumer goods, but means of production as well. If it was acquired through earned income, it was considered individually owned assets. Thus, labor was still the primary justification of property. At the same time, the state still guaranteed its citizens jobs (Article 40), which, according to the constitution, were secured by the socialist economic system. The state controlled the level of work and consumption (Article 14). The regulations demonstrate that, in 1990, the Soviet Union did not yet intend to clearly turn away from the previous economic system. Private property of the means of production and employment were guaranteed by maintaining essential elements of a planned economy. After dropping individual obligations, both guarantees existed in the form of a public good. At the same time, the state guarantee of private property opened up new scope for action for young entrepreneurs and the employment guarantee offered the employee a secure income. A combination was thus chosen that promised advantages to important sections of the population, but which, in the end, was incompatible with the incentive effect of private property under market conditions. The constitutional regulations of the Soviet Union are merely one example. There were similar legal changes in many countries towards the end of the 1980s. Admittedly, in some cases, it was not the constitution that was changed but its interpretation. It must be considered that the scope for interpreting socialist constitutions was relatively wide. Law had to subordinate to the primacy of politics and the constitution had a mainly ideological and propagandistic function (Brunner/Meissner (1980:12f)). It was precisely the constitution’s function as a mouthpiece of politics which demonstrated that the legal innovations signal changes in the property system that were already taken into account in the run-up to transformation. The following will now analyze the development behind the constitutional changes of the 1980s. Two main ideas will be followed in this

Legal Types of Property and Ownership Guarantee 113

context. The change in property of the means of production will be studied first. The areas in which individual countries allowed private property will be investigated on the one hand, and on the other hand, it will be demonstrated how the disposition of state property and, with this, the interplay between the private and socialist sectors changed in the course of economic reforms. The second major point is the question of whether the change in ownership of the means of production was accompanied by the reshaping of the claim to earned income.

7

Ownership of the Means of Production

Even if so-called socialist property was regarded as the primary form of property during the planned economic phase, there still existed private property of the means of production in all Central and Eastern European countries. Private property was not only created illegally in the black economy, but was also allowed by the state on a limited scale, as can be demonstrated on the basis of the Soviet Constitution of 1977 (Brunner/Meissner (1980:390)): Art. 17

Within the USSR, individual work in the field of trade, agriculture and the rendering of services to the population, as well as other activities which are based on the personal labor of the citizens and of their family members are allowed according to the law.

This formally granted right to establish and run a family business was interpreted differently by the individual countries and over the course of time. The attitude towards the private sector changed with the economic reforms particularly during the 1980s. This point will be taken up again later. In order to gain an impression about the extent of the private and socialist sectors, the development during the 1980s will first be portrayed on the basis of statistical information.

7.1 Development of the private and “socialist” sectors as mirrored in statistics Recent estimates of the extent of the private sector during the 1980s are not available for all countries. The following will therefore fall back on the “old” statistics of the individual countries, those of the former Council for Mutual Economic Assistance (CMEA). These statistics, however, do not define the private sector but merely the extent of the socialist sector. 1 Even so, the private sector can inversely be regarded as the difference and thus be roughly estimated. 114

Ownership of the Means of Production 115

Using these statistics does, however, entail some problems. It must be assumed that, as a consequence of the political objective of abolishing the private sector, the extent of the socialist sector was overestimated, on principle. In addition, the share of the socialist sector can only be measured on the basis of national income, as the information necessary for other reference values are not available for all countries or for a longer period of time.2 The national income,3 however, does not include a large extent of services – a sector in which the private activities, in particular, were expected. Even if the share of the socialist sector is overestimated, the “old” statistics nevertheless demonstrate that the importance of the socialist sector (respectively of the private sector) differed from country to country and partially even changed in the course of time (see Table 7.1). Table 7.1 shows that the officially established share of the socialist sector does not change in Czechoslovakia and the USSR during the 1980s. This was probably also the case in Romania, a country which did not supply any information on its socialist sector during the 1980s. 4 The only changes worth mentioning (and measurable) were experienced in Hungary and Poland. Hungary, which still established that the share of its socialist sector was more than 97 per cent in 1970, is demonstrating a continuous decrease since the 1970s. This reflects the early effect of the economic reforms which allowed private property to a limited extent. The share of the socialist sector in Poland, in contrast, did not decrease until the 1980s. The reason why Poland’s share of the socialist sector is small compared to other countries can be attributed to the importance of private agriculture.5 In contrast, in 1988, Polish industry still produced approximately 96 per cent of its gross output in its socialist sector. There is no considerable difference between Poland and other Central and Eastern European countries here, as their share reached 98 per cent to 100 per cent accordingly. Official information about the socialist sector reflects only a rough trend. Admittedly, the extent of the socialist sector was large in all Central and Eastern European countries, but, as already mentioned, due to the primacy Table 7.1 Share of the Socialist Sector in National Income in Selected Countries (percentages)

1

Poland Romania Czechoslovakia USSR Hungary 1

1980

1988

84.6 95.5 99.5 100.0 96.5

81.2 (88.0)a) 99.3 100.0 92.9

For 1980 at 1977 prices; 1988 at 1984 prices. Share of the state sector of GDP 1989. Sources: Ezhegodnik SEV (1989:49), The Government of Romania (1993:163). a)

116 Privatization in Central and Eastern Europe

of socialist property, private activities were systematically (and at least slightly) underestimated in official analyses. Over and above the official statistics, it is therefore sensible to measure the importance of the private sector using criteria of quality, by analyzing, for instance, to what extent the private supplier was allowed to enter a market and to which restrictions private entrepreneurs were subject to in practice. There is a further reason why statistical information pertaining to the socialist or inversely to the private sectors is only meaningful with reservations – namely that private activities which are not based on the complete property rights (usus, usus fructus, abusus), but merely on the usufruct of state ownership were only insufficiently recorded. It is precisely the transfer of usufruct, which demonstrated the considerable gradations existing between countries, watered state property down and blurred the dividing line to the private sector. Thus, private ownership of the means of production will be defined quite widely by the following. Property is defined as private if at least the usufruct of an asset is transferred to a private producer and guaranteed by the state.6 If such a guarantee does not exist, the hence illegal activities are included in the black economy.

7.2

Property and economic reform

The extent of allowing full private property rights, as well as the transfer of usufruct, was closely connected with the economic policy followed by the individual countries during the 1980s. This is demonstrated particularly by the importance of the concept of property within the discussions about economic reforms. Thus it must be considered that the economic systems of the individual countries already differed from each other considerably; the model of market socialism was followed by Hungary, for instance, and the model of a planned economy, for example, by Czechoslovakia. These models determined the respective potential framework of economic reforms and, thus, the extent to which the weighting of the various types of property (state, collective, private) could change within the existing property order. The economic reforms represented the reaction to the ever worsening economic situation in most of the countries. The increase of national income produced lessened considerably during the 1980s, whereas high growth rates could still be achieved during the 1960s and 1970s (see Table 7.2). During the 1980s, CMEA countries were interested in preventing a further drop in growth rates and also in overcoming the shortage economy. The elimination of seller’s markets was also attempted through (administrative) increases in commodity prices. The major starting-point, however, remained the increase of supply which resulted from the more intensive use of resources. Two approaches were attempted in order to achieve this goal. Firstly, the decentralization of decision-making, that is, the increasing

Ownership of the Means of Production 117 Table 7.2 Growth of National Income Produced in Selected Countries (average annual growth rates as percentages)

Poland Romania Czechoslovakia USSR Hungary CMEA

1961–65

1966–70

1971–75

1976–80

1981–85

1986–89

6.2 9.1 1.9 6.5 4.1 6.0

6.0 7.7 7.0 7.8 6.8 7.4

9.8 11.4 5.5 5.7 6.3 6.4

1.2 7.0 3.7 4.3 2.8 4.1

–0.8 4.4 1.7 3.2 1.3 3.0

3.0 5.1a) 2.0 2.1 0.8 2.5

a)

1986–88 Sources: Ezhegodnik SEV (1989:26) and (1990:5ff).

of the autonomy of enterprises and the extension of horizontal relations between them were supposed to improve the efficiency of the state sector and to increase production. Secondly, the partial legalization of private activities was supposed to lead to an improved use of factors of production with regard to time and also to mobilize manpower in order to generate additional supply. The two approaches were, however, not attempted simultaneously. Instead, all countries used the instrument of decentralization within the state sector first before allowing private activities. Countries like Hungary, which had already implemented decentralization within earlier attempts at reform, experimented with private property as early as the 1980s. Other states (the Soviet Union, Czechoslovakia), which still concentrated mainly on the planned economy at that time and thus on the primacy of socialist property, first discussed the decentralization of decision-making and the possibility of reforms within the socialist sector during the 1980s, before the question of private property was raised towards the end of the decade. Decentralization was, however, not instituted simultaneously, but always enjoyed priority over allowing private activities. The main reason for this was that decentralization could be effected within the socialist sector without directly addressing the question of property, whereas the restricted legalization of private property ran the risk of being understood as a signal for the turning away from the ideal of socialist property order. In order to avoid infringements of the supremacy of state property, private persons were thus frequently only transferred incomplete property rights, for example usufruct, as was the case with after-work-activities. Full property rights were mainly granted in areas in which the private sector could fill the supply gap left by state enterprises, independently and on the fringes of the socialist sector (such as small workshops, repair shops). Decentralization and legalization of private activities did not extend over all markets either simultaneously or equally, and again followed a chronological sequence. Reforms first applied to the consumer market where the

118 Privatization in Central and Eastern Europe

shortage was revealed. Innovations on the factor markets were considered and experiments with capital markets were only made at a later point in time. In this context, Hungary (and Poland, with reservations) again led the way. In order to improve the supply of consumer goods, Hungary had already increased the scope of decision-making by raising the autonomy of firms in 1968, as far as their production and planning of capital expenditure was concerned. Later on, small entrepreneurs were increasingly allowed to engage particularly in the fields of trade and services. At the beginning of the 1980s, Hungary started to let private individuals use the state fixed assets outside official working hours, in order to increase the rate of capacity utilization by extending working hours. Early forms of a capital market were additionally experimented with. In other countries (the Soviet Union, for instance), the creation of an additional supply of consumer goods not only was intended to be achieved by increasing enterprise autonomy, but especially by increasing labor supply through the mobilization of previously jobless employees (pensioners, housewives) for private activities. Then, within perestroika, the idea of establishing a so-called wholesale trade of the means of production between state enterprises was considered as well. State enterprises still had to concentrate on self-financing from internally generated funds. The establishment of a securities market was only thought of at the end of the 1980s. At a certain point in time, the scope of the intended reforms proved quite different within the individual countries. Similar approaches to reforms were, however, discussed in all countries. Even if countries which orientated towards a planned economy, like the Soviet Union, allowed private property to a limited extent only towards the end of the 1980s, it should not be deduced from this that only countries like Poland and Hungary, which had already experienced reforms, experimented with property during the 1980s. Rather it seems that it was precisely the increase in the autonomy of state enterprises which raised the question of property. In discussions on the economic reforms of the Soviet Union, the criticism was made during the mid-1980s that the individual worker would perform his work inadequately and regard state property as if it did not belong to anybody. According to the argumentation, it would therefore be necessary to implement precisely those reforms which cause the individual to understand himself as a responsible co-owner of state property and to treat state property as if it were his own. It was, therefore, the declared aim of the reforms within the USSR to develop the incentive effect ascribed to private property within the socialist sector. Allowing new private firms was, thus, less discussed. Instead the USSR strove for the restructuring and the flexibility of socialist property. This did not just include the decentralization of decision-making within state enterprises and the increase in their autonomy. In addition, the Soviet Union enhanced the status of cooperatives which formally belonged to the socialist sector by granting them property rights during the second half of

Ownership of the Means of Production 119

the 1980s. In the end, the introduction of lease and, thus, of a restricted transfer of property proved to be pivotal. Means of production could now be exchanged and transferred to the private sector more or less legally. The fact that lease was possible and the enhanced status of cooperatives did not represent new inventions within perestroika. In this context, Hungary led the way as the first member of the CMEA which codified laws relating to cooperatives in 1971 and which has been experimenting with small cooperatives and the leasing of state assets since the beginning of the 1980s. Apart from this strengthening of the cooperative sector as part of the socialist sector, Hungary had additionally allowed so-called “work associations”. It was possible to establish these teams through private initiative and/or hive them off from the enterprises and work on their own account. They could thus no longer be classified as clearly belonging to the socialist sector, though they still demonstrated a close connection with it. Thus, the erosion of property order started where the decentralization of decisions was accompanied by the partial legalization of private activities, which were frequently still carried on within the socialist sector or which demonstrated a close connection to it. The way the individual’s attitude developed as a co-owner of state assets was consequently attributed crucial significance within decentralization. This belief seems to have become firmly established to the same extent that the usufruct, which was transferred to the employees and which was initially subject to strict conditions imposed by state authorities, became independent of directives in the course of time. The considerable reduction of this dependence of directives increased the scope of decisions for individuals (for example, the managers) or groups (for instance, the employees) within the state enterprise to such an extent that even an individual and/or group-related entitlement to full property rights was asserted; this entitlement was, however, not always guaranteed by the state. Besides the Soviet Union, Poland and Hungary could be used as examples for the so-called (partial) privatization of the state’s property rights and could thus demonstrate how the “quasi-private” rights (mostly usufruct) of the employees, which developed within the course of reforming state enterprises, turned into full “rights” which were not guaranteed by the state.7 As a result, employees transferred resources from the state sector into their own disposal without authorization. The opportunity of “misappropriating” state property partly existed even before so-called “spontaneous privatization”. Spontaneous privatization was a mere continuation of the previous property erosion that increasingly blurred the line between the state (as well as the cooperative) and the private sectors.

7.3

Private activities in planned economies

During the 1980s, the attitude towards the private sector diverged within the individual countries. Countries which concentrated on the planned

120 Privatization in Central and Eastern Europe

economy considered the private sector to be an enlargement of the state sector at most, and made attempts to prevent their interconnection. In particular, the Hungarian attitude towards the private sector differed from this isolation and enlargement strategy. Here, the original intention was rather to use private activities as the driving force, namely to integrate them in the economy as an intermediate supplier. The main benchmark figures of the individual countries in liberalizing private activities will be briefly introduced by the following.8 Hungary In 1981–82, Hungary was the first country to considerably extend the possibilities for the development of private initiative. At first, this included private lease of state and cooperative small shops and restaurants. Subsequently, the restrictions for small entrepreneurial firms were relaxed and new forms of organizations were allowed.9 The “work associations” belonged to the latter; they could be established outside (“individual contract work associations”) as well as inside an existing concern (“enterprise contract work associations”). Whereas outside teams represented a new kind of collective of independent private firms, inside teams were established by groups of employees whose work followed state instructions and was done on their own account mostly after working hours. In addition, Hungary allowed the establishment of private small cooperatives (in the production and service industries) and the creation of specialized sections within existing cooperatives. As a consequence, this enhanced the status of those forms of organizations which could either still be formally included in the socialist sector or which belonged to the private sector, but were connected to the socialist sector. In 1982, a first attempt was made to reduce the problems small entrepreneurs experienced with procurement as well as their tax burden in order to facilitate their activity. Later on, the economic entities which formally belonged to the private sector were taxed an additional 10 per cent on their supply and services. As a result, in most cases, private activities were no longer carried out as full-time jobs. This led particularly to the creation of inside teams. More than 60 per cent of the approximately 330 000 small enterprises existing in 1986 represented inside teams. Originally, the many and diverse newly created opportunities to act on one’s own account were not only supposed to serve the development of an isolated private sector and to overcome the shortage economy. “Demands for the creation of a network of small and medium-sized businesses to complete the activity of large-scale enterprises […]” (Bakcsi (1987:458)) were voiced as well.10 As a consequence of the restrictions directed towards originally private companies, this could, however, only be achieved to some extent. Although Hungary led the way in Central and Eastern Europe as far as the legalization of private economic activities was concerned, the dynamic extension of the private sector was impeded here too. The

Ownership of the Means of Production 121

primacy of state property was not formally abandoned until the end of the 1980s and, in discussions about reforms, the majority of Hungarian economists did not question it.11 Nevertheless in order to be able to legalize the aforementioned variety of private activities at all, the existing laws were completed by juridical imaginativeness during the 1980s. The implementation of the Act On the Transformation of Economic Organizations and Economic Associations in 1989 created the formal basis for a new company law; freedom of trade was introduced in 1990. Poland The Polish attitude towards private activities was contradictory during the 1980s.12 On the one hand, a liberal attitude towards the private sector had already been demonstrated against the background of the economic crisis at the end of the 1970s/beginning of the 1980s. Poland granted the most licenses for the establishment of small enterprises and, according to a decree of 1981, they should no longer be discriminated against. In particular, small entrepreneurs were supposed to gain improved access to the inputs they needed. On the other hand, individuals engaged in private activities, and particularly the leaseholders of small state-owned firms which officially worked within the socialist sector, but on their own account, were publicly criticized as a consequence of the high income they earned and their business activity was impeded.13 The attitude towards legal private activities, which was particularly unclear after the introduction of martial law in 1981, and the existing procurement difficulties of small entrepreneurs, probably contributed to the expansion of the black economy. The black economy was not only tolerated but, according to Cichy (1990:196), developed to become a public phenomenon. As of the middle of the decade, legal private activities were again increasingly promoted. The establishment of a private limited liability company on the basis of the old Commercial Code of 1934 has been possible since 1985. The so-called second stage of the economic reforms of 1987 represented a new attempt to replace the previous half-hearted ideas of a reform by a clear concept. As far as property order was concerned, reforms were directed mainly towards the state sector at the beginning of the 1980s, and therefore the cooperative and private sectors were now supposed to be promoted and discriminations between the sectors eradicated (Quaisser (1988:58)). The formal equality of the state, cooperative and private sectors was confirmed by the consolidation plan of the Rakowski government in 1988. The law On Economic Activity, which came into force in 1989, actually established that, as far as taxes are concerned, state and private enterprises must be treated equally and that both should have the same access to bank loans and means of production. The law additionally allowed every citizen to establish a company without having to apply for a state concession. In Poland in 1989 more than 10 000 new businesses were formed (Polkowski (1990:78)).

122 Privatization in Central and Eastern Europe

The Soviet Union The law On Individual Labour Activity, which came into force in the Soviet Union in 1987, allowed private activities in small, restricted areas. 14 The aim of this limited liberalization was to render the enormous activities of the black economy more transparent. This is confirmed by the simultaneous enacting of a law against illegal income (Höhmann (1987:158)). The mobilization of those sections of the population which were not working yet, such as students, housewives and pensioners, represented an additional aim. Employees, however, could only follow private activities outside their working hours in state enterprises. The law thus allowed a secondary occupation, but private business activity was, however, de facto impeded. Privately acting individuals had difficulty in procuring operating resources and private income was subject to high taxes. The number of citizens who officially followed an individual activity outside agriculture thus remained small (Statistisches Bundesamt (1993:71)), as it only amounted to approximately 126 000 (representing 0.2 per cent of the employable population). An expansion of private activity was not even intended. The Soviet Union still held on to the primacy of socialist property, in contrast to Poland and Hungary, which formally equated private and socialist property in the 1980s. Instead, the USSR enhanced the status of cooperatives in the socialist sector within perestroika. As a consequence, the number of employees of the state sector, which reached about 68.2 million in 1985, dropped by approximately 1.6 million until 1989, whereas the number employed in the cooperative sector increased by 1.4 million (see Statistisches Bundesamt (1993:71)). After the law On Co-operatives came into force in 1988, citizens were allowed to establish a cooperative, to work independently with the invested or leased assets, and to conclude contracts with customers. The new cooperatives were thus granted extensive property rights, so that they could de facto be included in the private rather than the socialist sector, or at least be seen as a connecting link between these two sectors. The various forms of property were equated and established within the Soviet Union in 1990 by a special ownership law. Freedom of trade and contract was guaranteed by a new corporate law which came into force on 1 January 1991. Czechoslovakia In Czechoslovakia, private activities were forbidden almost completely for a long time.15 Large enterprises and banks have been nationalized since 1945 and agricultural undertakings collectivized in the 1950s. Small private entrepreneurs were expropriated until the beginning of the 1960s (Fischer (1992:35)). Apart from the period of the Prague Spring, Czechoslovakia was the country with the smallest private sector within CMEA. Reforms started to be considered in Czechoslovakia only as a consequence of perestroika. Considering their scope and implementation, and comparing them to the Russian model, the reforms established as “The Comprehensive Reconstruction of the Economic Mechanism in Czechoslovakia” at the end

Ownership of the Means of Production 123

of 1988 fell short of expectations. In 1998, the formation of service enterprises was, however, made easier for the first time. The private entrepreneur still had to apply for a license that was granted only hesitantly by the local administrative organs, which maintained municipal enterprises and presumed private enterprises to be competitors. Even as far as cooperatives are concerned, compared to the Soviet approach, Czech reforms were less extensive. The founding and the activity of cooperatives were regulated by the state. Thus, cooperatives could hardly exercise property rights, if at all. Their status was de facto not even enhanced within the so-called socialist sector. On the contrary, state property remained the main form of property in the phase of the so-called mini-reforms. The radical change came after the “velvet” revolution. Entry into the market was extensively liberalized in Czechoslovakia by a law concerning the regulation of private business activity in 1990 and the right of ownership, guaranteed by the Constitutional law On Fundamental Rights, enforced in 1991. Romania Romania demonstrated a very restrictive attitude towards individual economic activity.16 Admittedly, the law concerning independent hand craftsmen of 1968, which was enforced at a point in time considered to belong to a rather liberal phase in Romanian policy, was not abolished during the following phase of Romanian centralization. The granting of a business license was, however, handled very restrictively. Even the possibility for private individuals to take over the running of small state-owned service enterprises, which existed as of 1980 due to a decree, was restricted again. The small entrepreneurs in trade and services, therefore, remained insignificant. During the 1980s, they did not even account for 1 per cent of GDP (Brezinski/Petersen (1987:235)). Romanian policy ultimately aimed at allowing private activities only in order to render the black economy more transparent. The strengthening of the private sector was not intended. Romania extended the possibilities for private activity much later and to an even more limited extent than the other Central and Eastern European countries. The country allowed the foundation of small businesses with up to 20 employees, of so-called economic associations with up to 10 employees as well as of family businesses, and let individuals take up an independent occupation not earlier than 1990 on the basis of the Decree-Law On Free Initiative and Small Private Establishments. Further liberalization was experienced at the end of 1990, as a consequence of the law Regarding Trading Companies, which even small private businesses had to convert into.

The countries chosen as examples demonstrate that the attitude towards private activities was not uniform in Central and Eastern Europe during the

124 Privatization in Central and Eastern Europe

1980s. Private activities were increasingly legalized within that decade, particularly in Hungary and (with reservations) in Poland. At first, the policy of the USSR hardly aimed at allowing genuine private activity, but rather at enhancing the status of cooperatives. Similar changes which followed Soviet perestroika were considered, but hardly implemented in Czechoslovakia. Instead, the country experienced extensive liberalization of private activities shortly after the “velvet” revolution. In Romania, in contrast, liberalization was instituted belatedly after the “bloody” revolution. The original private sector was viewed skeptically during the 1980s, on principle. The countries first and foremost enhanced the status of those private economic activities which were formally carried on within the socialist sector or which were closely connected to it. In this context, various legal changes took place, particularly in Hungary, without, however, touching on the primacy of socialist property. The division into private and socialist sectors made on the basis of the legal form is thus meaningful only with reservations. The problem of drawing a line between the private and the state sectors is not only apparent when investigating the changes during the 1980s from the viewpoint of private economic activity. It also arises during the investigation of the reforms within the socialist sector, especially in state enterprises.

7.4 Increasing enterprise autonomy, quasi-privatization and spontaneous privatization State enterprises enjoyed a certain degree of independence within planned economies. As explained in the theoretical section, according to neoclassical interpretation, this independence resulted from the deficient information between central authority and enterprise. As the central authority did not succeed in fully planning and controling the events within the enterprise, the latter was given scope to follow its own objectives. It particularly attempted to hide its actual production capabilities in order to receive planned production targets which it could easily fulfill (so-called ‘soft plans’). From the monetary view, the budget constraint, which related to resources and not to money, caused the enterprises to build up stocks, which eluded the control of the central planning authorities. The independence of the company particularly manifested in the fact that the company was supposed to work on the basis of the so-called economic accountability (khozraschet), which represented a form of accountancy within the system of a planned economy. It was economic accountability that allowed the creation of categories such as costs and operating results and, therefore, the monetary description of enterprise activities. These activities could now be additionally measured on the basis of a financial ratio (for instance, for the operating result) besides direct quantitative targets, and monitored through “control by the rouble”. Attempts were thus made to

Ownership of the Means of Production 125

exert some influence on the statement of operating results of the enterprise through indirect instruments, such as state-determined prices and interest rates.17 An incentive system, particularly the payment of bonuses, was finally supposed to make the employees more interested in fulfilling and overfulfilling the planned target and to create incentives for the efficient use of material and financial resources. The economic accountability already introduced in the Soviet Union in the 1920s and later taken over by other countries can be regarded as an attempt “[…] to incorporate a mechanism into the central planning system that was regulated by law, steered by guidelines and […] supposed to direct enterprises within their scope of decision-making towards an efficient use of resources” (Haffner (1978:122)). A further performance criterion on the microeconomic level was implemented within planning as a coordination instrument designed to stimulate the economic use of resources. The attempt to establish and to use an additional efficiency mechanism within planning repeatedly proved difficult in practice.18 Improving the efficiency mechanism, therefore, has been considered a central element of economic reforms since the 1960s. The reforms of economic accountability can roughly be reduced to two approaches: firstly, the approach to replace indirect control of enterprises based on economic accountability within planning by the juxtaposition of market and plan, that is to say, to follow the model of market socialism; secondly, the attempt to perfect economic accountability as the dominant coordination mechanism and the application of indirect control methods within planning, as was the declared intention during perestroika. As far as the compulsory nature of overall economic planning and the scope for decentralized decisions are concerned, considerable differences had emerged between the countries already at the beginning of the 1980s. These differences increased during that decade. Concerning the question of property, it is important to note that the various attempts to achieve an efficiency increase through decentralization led to a differentiation of actual property rights. The range extends from Hungary and Poland, where the employees of a company possessed extensive rights, to Romania, which still demonstrated centralized structures of decision-making at the end of the 1980s. The idea that an entity such as “the” state enterprise or even “the” state property existed in Central and Eastern Europe is too vague. The following will, therefore, outline the most important changes of the status of state (that is, cooperative) enterprises in the individual countries, analogous to the benchmark figures on private economic activities. In addition, it will particularly observe the extent to which the company is bound by the instructions of state authorities and the extent to which property rights are granted to the employees starting from the compulsory nature of the overall economic planning and the way enterprise activities are directed.

126 Privatization in Central and Eastern Europe

Hungary With the introduction of the “New Economic Mechanism” in 1968, Hungary attempted to complete planning at the economic level through a coordination of the market. 19 Enterprises were increasingly granted rights to decide over their operational business activity. Direct planning of enterprise activity through planned production directives was reduced in favour of indirect regulation through parameters such as prices, credit, and so on. Rights to decide were further decentralized by the State Enterprise Act of 1977 and the additional legal changes of 1985. However, the foundation and the closing down of enterprises were left up to state authorities, whereas the enterprises were only granted the use of the assets. Interventions of superior ministries into day-to-day business activity were not officially permitted. In exceptional cases (to fulfill international commitments), the founding authorities were, however, allowed to enforce plan targets at enterprise level until 1985. The director of an enterprise was still appointed by the respective ministry. He was supposed to conduct the enterprise according to the one-man command principle and the principle of individual responsibility. The interference of central organs could, however, de facto be noticed. The powers of central authorities were, thus, further restricted. In many enterprises the director was appointed by the socalled enterprise council, which was made up according to the employees’ and management’s decisions. In order to harmonize the overall economic plan and the planning at enterprise level, enterprise activity continued to be controlled by the so-called regulators (price, interest, wage). This control had an effect on profit. Part of the enterprise’s net profit was, however, supplied to an incentive fund, also feeding the payment of bonuses to the management and the employees. Besides this incentive to realize profits, the enterprise was legally required to work profitably. Losses had to be reported to the supervisory authorities, which were subsequently supposed to decide over the restoring to profitability or termination of the business. It is true though that enterprises were closed only rarely for the time being, even after the bankruptcy law was amended in 1986. Most closures affected smaller enterprises. In most cases, creditors did not institute bankruptcy proceedings against defaulting large-scale enterprises, which frequently held monopoly positions. Moreover, bankruptcy proceedings were supposed to be instituted only if the worst came to the worst. The decisive step of Hungarian corporate reforms was the enforcement of the Act On Economic Associations of 1988 and the Transformation Act of 1989. These laws granted the enterprise councils further property rights, next to their right of using the state assets. The enterprise council could convert the company into a joint-stock company and also decide upon a (partial) disposal. The introduction of the multi-party system stemmed the control which was previously exercised on enterprises by political bodies. Owing to their considerably extended scope of decision-making, the corpo-

Ownership of the Means of Production 127

rate management could use the assets in an almost uncontrolled manner. This is how so-called spontaneous privatization emerged,20 in the course of which the managers of state enterprises founded their own private companies and, so to speak, either sold state property to themselves at low prices, or initiated the hiving off of operating units from state enterprises. This was done in order to subsequently take over the majority stake and the management of the new business which was now privately owned. As a consequence, state enterprises frequently represented merely so-called “shell companies” (Grosfeld/Hare (1991:137)), and/or consisted of stakes of hived-off private businesses. Spontaneous privatization came in for public criticism due to this ultimately one-sided money-making of managers at the expense of the population. The State Property Agency was founded in 1990 in order to bring privatization back under state control, meaning that property rights were re-centralized. Poland 1 October 1981 was a key date in Polish enterprise reforms, as the law On State Enterprises came into force that day and as the self-management of employee’s councils was significantly extended.21 Due to these laws, Polish management structure was drawn up as a compromise between the Yugoslav model of employee self-management and the directorial management prevalent in Hungary at that time. Workers’ councils were appointed by general meetings of the work-force. In most cases, the director was appointed by the workers’ council. 22 Only in enterprises which were attached much importance, was his appointment left up to the central organs. Employees participated in taking decisions on investment projects as well as in the distribution of the proceeds into the various funds (such as wages and social funds). The director was only allowed to revoke the decisions of the workers’ council if they infringed existing law or did not reflect national interests, whereas the state organs were entitled to dismiss the director when the fundamental “interests of national economy” were put at risk. The state organs thus retained some ways to influence state enterprises, which were supposed to be run only through indirect methods of control now and to work with the assets they were left autonomously according to the principles of “independence”, “self-management” and “self-financing”. These principles were partially revoked with the imposition of martial law in December 1981. The workers’ councils were dissolved and the regulation which provided that the director of an enterprise of national interest can be appointed by state organs was frequently applied; central planning was strengthened again. The increase in enterprise autonomy would not have led to the intended efficiency increase anyway, because the price system did not take scarcities into account, the existing lending policy was not oriented towards profitability, and bankruptcy regulations were

128 Privatization in Central and Eastern Europe

insufficient. An improvement could not be achieved, even after the renewed appointment of workers’ councils and after enterprises which did not belong to key industries were expected to work again according to the laws enacted in 1981. Enterprises could hardly be directed towards efficiency increase through indirect control; despite the passing of a Bankruptcy Act in 1983, enterprise closures were still rare. That means that businesses were not declared bankrupt and their assets subsequently sold, but restructured. Political and social objectives, such as the maintenance of full employment and of the level of consumption, were given priority instead. The Polish economic system of 1987 was considered a composite system that “[…] was neither characterized by consistent central planning, nor by the operating of a self-regulating market mechanism” (Quaisser (1988:51)). The economic reforms continued despite the failed referendum; and the price increases which were decided upon in spring 1988 led to strikes and ultimately to the resignation of the government. The new government backed further reductions of central economic control and the strengthening of entrepreneurial initiative, among other things, by enforcing the law On Economic Activity at the beginning of 1989 and the new financial and administrative tax regulations for state enterprises.23 A consensus was reached concerning future economic policy after round-table talks and elections in June 1989, which produced the Mazowiecki government. It sympathized with Solidarnos´c´ and declared in autumn that the privatization of state enterprises would be the central feature of its program. Spontaneous privatization had already begun in Poland in 1987–88 when state enterprises were allowed to convert into joint-stock companies. Prices and the size of the offered blocks of shares were, at first, controlled by government officials, who made full use of the insider information they obtained due to their control function and bought favorable blocks of shares. A wave of spontaneous privatization was experienced after completing the Act on Enterprise of 1981 by introducing Article 29 Paragraph 1 at the beginning of 1989, which allowed the selling or leasing of a company (or parts of it) with the unanimous decision of the managers appointed by the state, union representatives and representatives of the workers’ councils. The three groups mentioned, however, were unanimous as to the prevention of the forthcoming privatization of their enterprise, as they feared losing their previously vested rights. They thus attempted to keep their enterprise alive in its previous form for as long as possible. In the case of economic problems, they thus provided liquidity by selling or leasing operating units. On such occasions, selling at cut prices was observed, for instance, to the nomenclatura, which still had relations to the old management (hence the term “nomenclatura privatization”), that is, to the private enterprises founded by the managers or their acquaintances. In the end,

Ownership of the Means of Production 129

the sales led to a self-destruction of state enterprises (Bien´kowski (1992a:759)). Following Mr Zawis´lak, the Polish Minister of Industry who first used this term, the fact that assets of state enterprises were “sold dirt cheap” to the (informal) private sector is also referred to in literature as the “Bermuda Triangle”. The disappearance could not be stopped completely in the course of the transformation which followed, as, in contrast to Hungary, Poland did not manage to clearly recentralize property rights. The Ministry of Ownership Changes founded in 1990, therefore, represents just one of the many authorities responsible for privatization. What is more, according to the Law On Privatization of State Owned Enterprises of 1990, the transformation of a state enterprise still depended on the approval of the employees. The Soviet Union The status of state enterprises was newly regulated in the Soviet Union by enforcing the Law On the State Enterprise (Association) dated 1 January 1988.24 Within planning, the enterprise was supposed to work with its assets on the basis of full economic accountability and self-financing. The law provided that the director, who ran the enterprise according to the one-man command principle with the participation of the party machinery, the union and the work collective, was elected by secret or open ballot for a term of five years and that his appointment was confirmed by a superior organ. At the same time, the interference of superior organs into operational business activity was restricted by law. Direct methods of state control were supposed to be stemmed in favor of indirect control. An additional instrument was created for the drawing up of the decentralized plan and its implementation, the so-called state order (goszakazy), whose extent and price was centrally determined and which was compulsory for the enterprise. In the course of time, state orders were supposed to be replaced by direct contracts between supplier and buyer, and a wholesale trade in the means of production created simultaneously. The new regulation on the creation of funds for wages and bonuses, which tied the payment of employees closer to the operating profit, was supposed to stimulate a more efficient use of resources and a production which concentrated more on demand. The sanctioning mechanism which could be used in the case of continuous insolvency was closure, but this occurred only rarely. All in all, the new enterprise law formally granted the enterprises more scope for action. The enterprises, however, were only able to use it legally after the state orders, which represented direct production targets and still included approximately 90 per cent of the industrial production in 1988, were reduced and after the control of superior ministries was relaxed. The increasing of the autonomy of state enterprises and in particular the enforcement of the Law On Co-operatives and a law on lease (1988 and 1989 respectively) resulted in a weakening of the property order. State

130 Privatization in Central and Eastern Europe

enterprises were now able to lend their assets to cooperatives founded by private individuals, including the directors and employees of state enterprises. The foundation of a cooperative proved advantageous because it was granted extensive authority at setting prices and wages. It also gained access to the state provisions of the usually scarce inputs in the case of a lease agreement with a state enterprise, and, in addition, it was able to obtain investment resources through cooperative banks. The law on lease even allowed employee buy-outs. These were initiated by the directors, who promised the employees the payment of higher wages and the guarantee of their employment. In the end, the connection between the increased autonomy of state enterprises and the selling, that is, leasing of state property to cooperatives, resulted in a muddled interconnection between state enterprises and cooperatives. The transfer of state assets to cooperatives vested with extensive property rights can be interpreted as a first form of (spontaneous) privatization. The independence of state enterprises was extended by the Law On Enterprises and Business Activity, enforced in 1991. State enterprises were now controlled by the state, but in principle, they were allowed to plan their production independently, to conclude their own contracts, to determine the prices to a limited extent and to claim the profits. They were supposed to be responsible for resulting liabilities and could be closed in the case of economic inefficiency. The law additionally allowed the merger of private and state enterprises, as well as the conversion of enterprises which were for the most part state-owned into joint-stock companies. Such decisions could, however, only be taken with the participation of the employees, whose status was enhanced by the new Enterprise Law and considered within the privatization laws of the USSR and the RSFSR in 1991. The State Committee for State Property (Goskomimushchestvo), which was founded in 1990 and was supposed to organize privatization, did not have the right to intervene into the day-to-day business activity of companies. Hence, the control of the enterprise was in the hands of the management and the employees to a large extent. A recentralization of ownership rights in state hands was not accomplished. Instead, this tendency of the Soviet Union towards dissolving and the “war of laws”, as well as the later unclear distribution of authority between the individual republics within the Russian Federation, de facto created a lawless situation and the state’s property rights were further watered down. In this lawless situation, it was possible to carry out the spontaneous privatization, which started in approximately 1990, at least until the distribution of vouchers and the beginning of controlled privatization in October 1992. Czechoslovakia The Czechoslovakian reforms, which started in 1988 with the so-called Comprehensive Reconstruction. An additional new Law On the State

Ownership of the Means of Production 131

Enterprise was enacted, which, however, concentrated on the model of perestroika only superficially.25 As far as the status of state enterprises was concerned, the decentralization of decision-making competence was not planned at least in the short and medium term. Enterprises were supposed to work independently, analogous to the Soviet model, and to finance themselves. The exercise of the allegedly increased rights, such as the independent drawing up of the plan, however, had to remain within the bounds of the compulsory objectives of the overall economic planning. Enterprises were still forced to comply with the directives. These were put into concrete terms through state orders and, at first, there were no intentions to reduce their extent drastically. In addition, the middle level, which included, for instance, the associations in the Soviet Union or the centrale in Romania, was abolished. Enterprises were now the direct addressee of state planning. The project of decentralizing rights proved to be only apparent as, in the end, participation within enterprises remained limited. The director ran the enterprise according to the one-man command principle and the decisions of the work collective could be canceled by central organs. As with state enterprises, the rights of cooperatives to take decisions were limited and state control was maintained. In contrast to the Soviet Union, uncontrolled transfers of assets from state enterprises to the cooperatives or even to the private sector and, therefore, spontaneous privatization, could be prevented. Various forms of state enterprises and the participation of employees were discussed in Czechoslovakia after the “velvet” revolution in November 1989. In the end, the status of employees was, however, not enhanced, even if, at first glance, some of their rights, which were established by the amendment of the law On State Enterprises and enforced on 1 May, resemble the Polish and Hungarian model. The amendment differentiated, among other things, two types of enterprise: on the one hand, state enterprises, in which a so-called business council was created, in which one half of the members was appointed by the foundation authority and the other half by the employees; it made the decisions concerning dayto-day business activity; on the other hand, enterprises demonstrating self-administration through the council appointed exclusively by the employees and which included day-to-day business activity. Regardless of the type of business, the state enterprise was supposed to work according to the principle of self-financing; the creation of various funds, however, was still laid down centrally. The foundation, the merger of businesses, as well as the closure (at the suggestion of the employees) could only be carried out by central organs. Therefore, with merely formally extended rights of enterprise, management and employees still did not have any legal capacity to sell assets and carry out spontaneous privatization. In contrast to Poland, Hungary and the Soviet Union, Czechoslovakia kept its property rights clearly assigned to the state. The streamlining of the hierarchic manage-

132 Privatization in Central and Eastern Europe

ment structure, which resulted from the abolition of associations at the middle level, even increased the transparency and centralization degree of property rights. As a consequence of the centralized property rights, it was possible to transform state enterprises into joint-stock companies at the beginning of transformation, without the consent or even the opposition of employees. The fact that property rights were clearly assigned to the state has, in principle, also furthered the development of a privatization strategy. The legal basis for the “small” privatization was created in 1990, whereas, owing to the arguments between the Czech and the Slovakian Republic, the law concerning voucher privatization could only be enforced as of 1 April 1991. At the same time, the Fund of National Property was created on the basis of this law and transferred the assets of state enterprises eligible for privatization. The fund therefore represented the state as the sole and definite owner of its enterprises. Romania Romania is the only Central and Eastern European country that did not make any further decentralization attempts in the 1980s, after a certain liberalization phase in the 1970s. 26 Even the so-called “New Economic and Financial Mechanism”, instituted in 1979 with the intention to introduce self-financing and self-management of enterprises, as well as the employment of indirect control methods, involved the strengthening of central planning from the very beginning. The participation of enterprises to draw up the plan was supposed to be increased and financial benchmark figures were supposed to play a central role when measuring the operating result. Simultaneously, the number of products which were centrally planned and for which the enterprise received compulsory production directives was, however, increased. In addition, Romania introduced so-called “overall piecework” in 1983, and this even allowed pay deductions in the case of non-fulfillment of the planned targets. 27 These incentives, which were linked to wages, led neither to the desired production increases, nor to a more efficient use of resources. Instead of following other CMEA countries’ attempt to achieve production and efficiency increases by way of decentralization, Romania tightened the “disciplining” of production, as indicated earlier, for instance, through additional overtime work and enterprise control since the mid-1980s. Simultaneously, increasingly unrealistic production targets were drawn up. According to Demekas/Khan (1991:8), the Romanian planning system ended in “[…] a vicious circle of tightening of controls, greater disorganization and further tightening of controls which, by the end of the decade, had eroded the credibility and effectiveness of the economic management system and had driven the country into an economic and institutional crisis.” After the bloody revolution of December 1989, Romania developed a gradual strategy for system transformation. State enterprises were not sup-

Ownership of the Means of Production 133

posed to receive any direct production targets, but according to the initial reform, approximately half of the annual production was still supposed to be guaranteed by state orders. The latter were still intended by the reorganization law concerning restructuring state enterprises, dated August 1990, as an instrument for the state’s economic control. On the basis of this law and mostly without the consent of the employees, state enterprises were obligatorily converted into either companies still to be privatized or into so-called regie autonome, which were supposed to remain wholly stateowned and which were run by boards of administration appointed by state authorities. In the course of reorganization, the centrale were replaced as the middle level and also organized into one of these two types of businesses. Similarly to Czechoslovakia, organizational structure was thus streamlined. With the foundation of the National Agency for Privatization in 1990 and the later creation of so-called privatization funds, the state’s property rights in the companies to be privatized were, however, shared out among several authorities. Spontaneous privatization could not be prevented completely, partly because of this watering down of property rights.

All in all, it showed that, particularly in those countries in which enterprise autonomy was actually increased during the 1980s and in which decentralization was supposed to make the individual feel himself to be a co-owner of state property, property rights were watered down. The extent of the rights granted to the employees and the management as quasi-ownership rights, however, influenced the continuing erosion of the property order. The threshold between quasi-privatization and spontaneous privatization of state enterprises was crossed only after the (legal) limitations of the exercise of rights were further weakened within the state and cooperative sectors, that is, only after the rights were no longer controlled by the state due to the unclear distribution of authority between regional authorities, as, for instance, particularly in the Soviet Union. At this certain point in time, the retreat or the decline of the state had left an institutional vacuum within which the players started to set up their own rules of the game. Spontaneous privatization was judged unfavorably in specialist literature in most cases. It was said that it would have produced unclear ownership rights, which had to be clarified before orderly privatization. It was further criticized because, due to its political rights, the nomenclatura also expanded its economic rights at the expense of the public at large. On the one hand, the consequence would be an unequal distribution of assets which was considered unjust. On the other hand, because of the nomenclatura privatization, the resources did not pass into the hands of the actual entrepreneurs, but into those of political élites that opposed free-market reforms. These arguments are countered by pointing out that it would not be

134 Privatization in Central and Eastern Europe

decisive whether spontaneous privatization was effected in a semi-legal area for the benefit of the nomenclatura. The advantage of spontaneous privatization would consist in the fact that resources reached the private sector at all. Thus, the pros and cons of privatization started with the disposal, that is, the distribution of physical resources. Spontaneous privatization, however, is not only about who will receive the physical resources. What is more, the question arises of how to share the economic risks between the state, the owners of spontaneously privatized enterprises and the employees and of the extent to which new entrepreneurs are liable for the consequences of their actions. An additional point that will have to be considered in the following section deals with the changed risks of the employees. As far as the new entrepreneurs are concerned, it is obvious that in most cases, they did not establish (hive off) an autonomous company in the course of spontaneous privatization, but that they preferred a certain interconnection with a state enterprise. As Johnson/Kroll (1991:303) demonstrated in the example of the Soviet Union, they derived four considerable advantages from this. Firstly, the new entrepreneurs were granted access to (state) loans through the state enterprises which worked under soft budget constraints (although Johnson/Kroll do not address this aspect, potentially, a socialization of losses could be carried out over the state enterprise). Secondly, the interconnection with a state enterprise offered a cheap supply of scarce inputs by using the state distribution system. Thirdly, by maintaining personal relations with the employees and customers of the state enterprise, they could secure the performance of contracts which were not yet legally protected or recoverable. Fourthly, they maintained their political protection under the cover of the state enterprise. These four points make it clear that new entrepreneurs not only aimed at protecting themselves against economic risks, but against political and legal instabilities as well. Thus, the state was not pressed to take on the tasks it would in market economies. The non-existing legal protection of the state instead was replaced by a web of personal relations. New entrepreneurs were hardly encouraged to establish a new political lobby, as long as the old political contacts they strengthened through their previous relations represented a kind of insurance against undesired reforms. The state’s retreat from finances was not desired, as new enterprises got their necessary financial resources in the form of (cheap) loans which were arranged by the state enterprise, but ultimately represented loans provided by the state. New entrepreneurs were even confident that, if need be, the state would bail them out, the same way it would if its own enterprises were affected. In this uncertain environment, the new entrepreneurs that emerged from spontaneous privatization considered the state enterprise to be a relatively reliable and extensive insurer against economic, legal and political risks.

Ownership of the Means of Production 135

The provision of various, non-economic insurance services by the state enterprises was supposed to end as soon as they were privatized. Thus, the stimuli of new entrepreneurs to maintain close relations to the state enterprises, which were now privatized, should have decreased as well. As will be shown in Part IV, “Property Rights in Transition”, in the course of privatization, the interconnections between enterprises either remained or new types of networks emerged, which again concentrated on minimizing risks. This could have consequences on investment activity and structural change, for instance. In addition, these networks are a symptom which demonstrates that the various institutions supposed to offer economic, political and legal protection still have to be developed.

8

Employment Guarantee and Social Security

In analogy to the Soviet Union, almost every Central and Eastern European country guaranteed employment, but also established the duty to work. From the economic view, the employment guarantee was of no importance. The hoarding of labor of state-owned enterprises, considered a consequence of the lack of information between central authority and enterprise from the neoclassical viewpoint and caused by the absence of a money-related budget constraint according to monetary Keynesianism, created an overall economic shortage of labor. 1 Shortage on the labor market was particularly evident with regard to the qualification and the mobility of employees. The choice of occupation was de facto limited and was supposed to be controlled according to the educational planning derived from the labor balance. Wages differed from region to region in order to induce employees to move. This proved to be necessary particularly in the Soviet Union, where the development of the eastern regions required such action. Wage structure and wage rates were, on principle, determined by the state. The overall economic payroll and the total of bonuses were reconciled with the planning of cash in circulation which followed the planned supply of consumer goods. A planned equilibrium between the monetary and real sphere was thus achieved. It was not the formal employment guarantee that actually protected the individual from unemployment and secured his entitlement to earned income, but the scarcity of labor resulting from the way the planned system worked. The elimination of the labor shortage, which represented a declared objective of the economic reforms during the 1980s, therefore, would have had to question this entitlement. Unemployment was, however, considered a temporary “non-employment” of individuals – a short-term phenomenon. The elimination of the hoarding of labor was obviously intended just until an equilibrium was achieved on the labor market. Basically, the countries had three options in order to reduce the shortage of labor: first, the increase of labor supply, 2 secondly, the increase of working hours and thirdly, the improvement of labor productivity. These 136

Employment Guarantee and Social Security 137

three ways of overcoming labor shortage were used by the individual countries to varying extents by employing the different mechanisms. In countries which orientated towards the model of a planned economy, such as Czechoslovakia and Romania, which in addition demonstrated an increasing population of employable age, administrative measures were given priority. These measures were particularly rigorous in Romania. Additional work assignments were prescribed here, discipline at work was increased under threat of punishment if planned targets were not met and the long-term development of population was influenced through birth control. Within the market-socialist strategy in Hungary or perestroika in the Soviet Union, where the number of people of employable age was falling, an attempt was made to increase labor supply by allowing private activities (such as activities after working hours) to be followed by sections of the population not yet working (pensioners, housewives). In addition, the increasing of enterprise autonomy was supposed to increase labor productivity. As expounded in the previous part, wage fixing was partially decentralized, so that the enterprises received decision-making rights as far as the creation and the use of the funds for wages and bonuses were concerned. The decentralized control of the distribution of the total payroll was intended to increase the motivation to work, as well as to encourage a reduction in the numbers of employees. Even closure of the enterprise was taken into consideration, when an improvement in the situation of an unprofitable enterprise could not be achieved despite these measures. Romania and Czechoslovakia maintained the employment guarantee until transformation, as the control methods of planned economies and central price fixing were still kept up. The strong position of the Polish employees de facto did not allow a weakening of the employment guarantee. In the Soviet Union, in contrast, and particularly in Hungary, unemployment became conceivable for the first time in decades, due to the legalization of dismissals and bankruptcies. Therefore, the question was voiced of whether and how to maintain the full employment guarantee. Whereas in Hungary, the registration of the unemployed, which started in 1986, demonstrated that the full employment guarantee was indirectly given up (“unemployment” was recognized no earlier than 1989), in other countries, such as the Soviet Union, the problem was played down.3 Given that, within socialist society, full employment is a “social achievement”, open unemployment was considered a “social misfortune” (Aganbegjan (1989:92)). The development of open unemployment was prevented in various ways. The administrative regulations must be mentioned first. Dismissals could frequently only be pronounced with the consent of state authorities. In Hungary, for instance, until 1983, dismissals could only be effected after consultations with the unions and after the local authorities were informed

138 Privatization in Central and Eastern Europe

(Boote/Somogyi (1991:19)). As far as the Soviet Union is concerned, after amending the Labor Code in 1987/88, enterprise management was obliged to find a new job for the individual affected by unemployment within the same company first. If this proved impossible and dismissal was actually pronounced, the employee was forced to find new employment within four months, as otherwise, he would have been prosecuted as a parasite (Knabe (1989:31)). In the end, the unemployed person took the highest risk, as he had to carry out his duty to work independently of the situation on the labor market. The primary measure supposed to prevent unemployment was the subsidizing of unprofitable enterprises. It represented a measure which was actually intended only in exceptional cases. Thus, soft budget constraints were actually maintained. The latter allowed enterprises to keep a high level of employment and to go on hoarding labor. Soft budget constraints had two additional main effects: On the one hand, the enterprises’ orientation towards profits could lead to an output increase. 4 But, as the price system was distorted, supply did not meet demand and the shortage economy could not be overcome. On the other hand, as soon as administrative planning was weakened and as the separation of the circuit of money deposits and the cash circuit was no longer maintained, an unplanned increase in earned income was possible, breeding further shortage. 5 These monetary stabilization problems became apparent after the beginning of transformation. Such a macroeconomic effect cropped up in Hungary, Poland and the Soviet Union at the end of the 1980s, but not in centralist countries, like Romania or Czechoslovakia. This is one of the reasons for the varying macroeconomic conditions with which the countries started at the beginning of transformation. It is hard to establish to what extent enterprises actually pronounced dismissals despite the soft budget constraints and the numerous obstacles. Job changes due to dismissals were not documented. It is assumed that, after the enactment of the law On State Enterprise in 1988, about 1 million employees were given notice in the Soviet Union (Knabe (1989:37)), which represented about 8.8 per cent of the gainfully employed population. In Hungary, the official unemployment rate rose to 0.4 per cent up until 1989 (Sziraczki/Szalai/Lado (1993:101f)). It must be noted, however, that the unemployed quite frequently did not register, among other reasons, because labor offices still had to be created. The number of unrecorded cases of individuals who should have been classified as unemployed, but who were not registered due to the fact that unemployment was not recorded or ignored is also unknown in the other countries. Even if the employment guarantee was not infringed and if dismissals were rare, the new enterprise laws created (temporary) non-employment, for instance, in Hungary and the Soviet Union. The problem of the support of the non-employed, a kind of unemployment benefit, thus appeared as

Employment Guarantee and Social Security 139

well. In the Soviet Union, new labor legislation regulations were actually enacted, which included certain financial benefits for the unemployed; for example, continued pay of the usual wage within the first month of unemployment and a support payment, amounting to the average pay through the enterprise he was formerly employed with, for another two months (Knabe (1989:31)). If a Hungarian enterprise laid off more than ten people and if they did not find any work, it had to pay a transitional allowance amounting to 100 per cent of the last average pay during the first six months and 75 per cent afterwards (DIW (1988:255)). An employment fund was established in Hungary in 1987. The payment of some kind of unemployment benefit by the state enterprise (and not other state authorities) was characteristic for the existing system of social security. Traditionally, state enterprises had to take on many social security tasks, which in market economies are taken on by the general social security system or the citizen himself. The duties included, for instance, the provision of nursery schools, medical care and housing. These social security benefits were partially still borne by the state enterprise even in the case of dismissal. In the Soviet Union, for instance, former employees still had the right to use the company’s social and cultural institutions. For the employee (and the unemployed), the job represented not only the basis for receiving an income and a pension later on, it was his job which additionally granted the individual access to fringe benefits. These included not only the mentioned social and cultural benefits, but access to the supply of food and other goods, which represented a basic requirement and which were organized by the enterprise. These goods were subsidized by the state and, therefore, in short supply.6 It was thus of vital importance that at least one family member was employed with the state. State employment maintained this importance even in countries which allowed private activity or spontaneous privatization and in which the employee was now able to choose between private and state employment to a certain extent. In the case of full private employment, the mentioned pension and insurance benefits were, however, renounced. The employee could hardly compensate for this loss, not even by more pay in the private sector, as general insurance did not exist, access to certain benefits could only be organized privately to a limited extent and the additional supply of food, for instance, was expensive on the kolkhoz markets. The individual was therefore encouraged to remain a state employee. Thus he was stateinsured and either made a profit as an independent entrepreneur or gained additional income as a private employee outside regular working hours. Due to the existing form of social security, private activity was hardly attractive as the sole source of income. Hare (1991:8) describes the situation as follows: “Typically, everyone retained (at least) one job in the socialist sector, to assure themselves of basic pension rights and other privileges, while working for much higher wages elsewhere.”

140 Privatization in Central and Eastern Europe

Due to the social security tasks which state enterprises took on, a new aspect of the interconnections which developed in the course of spontaneous privatization between state and private enterprises became evident as well. Admittedly, spontaneous privatization had left state-owned shell companies, whose company assets either disappeared in the Bermuda Triangle, as in the case of Poland, or were sold by the company directors and reappeared in the private sector, as in Hungary. The state enterprises “stripped” of their company assets were, however, still regarded as an insurance provider for social risks by the employees and the management, who could act as private employees and independent entrepreneurs as well. From the employee’s and the independent entrepreneur’s view, the enterprises which were described as shell companies with regard to their assets thus also performed some tasks of social insurance companies. Within transformation, state enterprises were supposed to be relieved of their social functions, in order to be able to concentrate on their economic task. The overall economic employment guarantee was abandoned in most countries in 1990–91. The hoarding of labor in state enterprises was only phased out slowly, however. State enterprises continued to provide social benefits. The reorganization of the social security system and the simultaneous relief of enterprises from their social functions had been neglected within transformation.7

9

Property Erosion and the Initial Situation before Transformation

The countries of Central and Eastern Europe experimented with various forms of ownership of the means of production during the 1980s. Private activities were partially allowed on these occasions and property rights decentralized within the socialist sector. The increase in the autonomy of state enterprises, as well as the partial legalization of private activities, basically represented reactions to the reversal of economic performance, which followed the extensive growth experienced for many years. This reversal was supposed to be overcome by the more intensive use of resources and an efficiency increase, brought about by greater enterprise autonomy. On principle, the transition from an extensive use of resources to an intensive use means that scarcity appears differently, that it must be identified and assessed for the first time. The emergence and the change in scarcities thus also require us to address the questions of exclusion, of competence and liability, and thus once again the question of property. Even if increasing enterprise autonomy concentrated officially on a reform within the so-called socialist sector and even if it was not supposed to touch on the status of socialist property, it definitely touched on the status of property order. This was indirectly proven by the fact that – even within the existing economic system – the decentralization of property rights was designed to include liability. On the one hand, enterprises were supposed to receive usufructuary rights over their assets and partially be able to take independent decisions concerning production, investments, as well as the fixing of wages and bonuses. On the other hand, they were supposed to obtain their own financial means by themselves and be held responsible for their actions. On the basis of the new corporate laws, under certain conditions, enterprises could even be closed. Apart from the fact that decisive efficiency increases have not been achieved and that the reversal of growth could not be stopped, the extension of the enterprises’ scope of decision-making resulted in the quasi-private rights of the employees. These decentralized rights could, however, still be exercised within soft budget constraints. The individual considered himself to be the owner of 141

142 Privatization in Central and Eastern Europe

resources, but not responsible for possible losses. Even the private entrepreneurs who (illegally) transferred resources from the state sector to their private disposal during spontaneous privatization made attempts to shift their risk on to the state enterprises. The decentralization of rights of disposition was thus not connected with the decentralization of liability. This asymmetry of decentralization was not intended. In this respect, this can be understood as property erosion. As demonstrated, this erosion of property order did not occur simultaneously and was not equally intensive in the individual countries. The increase in enterprise autonomy also aimed at reducing the overemployment and the overall economic shortage of labor. All this and the ability to close unprofitable enterprises should have called the employment guarantee as a “social” achievement into question. Instead, unemployment was discussed as a temporary problem, and open unemployment was prevented by administrative measures as well as subsidies to companies. Employment was guaranteed until the end of the 1980s. The employment guarantee was maintained as a “social achievement”, whereas property erosion led to the dissolving of the primacy of the socialist ownership of the means of production. The partial legalization or, at least, the toleration of private property on the one hand, and the safeguarding of the state employment on the other hand, led to the development of a situation which was ideal for the individual and which seemed to combine quite extensive scope for action with quite extensive (income) security. From the overall view, at the end of the 1980s, there were considerable differences between the countries, as far as the profit prospects from private activity, the employment security within a state enterprise and the development of real wages were concerned. Due to the possibility of extensive private activities, the maintenance of the employment guarantee and real wages, which increased considerably at the end of the 1980s, the Polish combination of profit/employment security/real wage proved to be favorable for the individual. Hungary also allowed extensive individual scope for action, although the employment guarantee was abolished indirectly and real wages were decreasing. Officially, the Soviet Union allowed private activities only to a very limited extent; high wage concessions were made at the end of the 1980s and the right to labor was still guaranteed. Czechoslovakia demonstrated high employment security and slightly increasing real wages, but only a small private sector. With its strict working conditions, possible losses of income and the ban of private activities, Romania offered the individual the most unfavorable situation. Individuals did not have equal chances to follow private activities in the respective countries. For those who did not have any close contacts to the socialist sector, starting up a private business and obtaining the necessary means of production proved difficult. New private businesses were thus frequently found in the service sector and the craft professions. In

Property Erosion and the Initial Situation before Transformation 143

particular, those who received quasi-private rights, as, for instance, Hungarian management during the 1980s, managed to successfully transfer assets from the socialist sector to the private sector. In Hungary and in Poland, and before transformation started, nomenclatura privatization mainly led to money-making by managers. The Soviet Union experienced a similar development, at first in connection with the cooperative movement and later on as a consequence of spontaneous privatization. Property rights were maintained clearly centralized by the state in Czechoslovakia and Romania only. Before the “revolutions with a preceding adjective”, the state even functioned as a guarantor of its socialist property in these countries. In the rest of the countries, the pure transfer of resources indicated that the primacy of socialist property could hardly be maintained any longer, regardless of which section of the population actually succeeded in appropriating resources. The state was instead pressurized to subsequently legalize private activities and to put all forms of property on an equal footing. The explicit mentioning of both state and private property in the new constitutions or special ownership laws, therefore, did not just indicate that moving away from state property was not desired from the political view. Moreover, the authorization of private activities and the simultaneous maintaining of state enterprises visibly connected the interest of new private entrepreneurs with the interest of the employees of the state sector, who were at first granted an employment guarantee. In most cases, the specific transitional laws also established an ownership guarantee as a public good. The state formally guaranteed the protection of both state and private property. It did, however, not actually take on the function of a protective state nor was it recognized in this function. New private entrepreneurs instead used state enterprises as reinsurer. The state enterprise offered a very extensive protection, as it still represented the organization in which political and economical power, imperium and dominium respectively, coincided. In some countries and particularly in Russia, it was not the state, but rather the state enterprise which represented a kind of guarantor of ownership. This protection was mostly based on close personal relations. In contrast to an actual ownership guarantee, it was not granted to all private entrepreneurs equally, particularly not to those who made attempts to establish a new private business without maintaining relations to the state sector. The “ownership guarantee” through the state enterprise, in fact, represented an ownership protection to be organized privately on the basis of personal contacts. To some extent, this situation is similar to the phase described by Buchanan as pre-constitutional, in which an individual must use part of his resources to protect his property against the attacks of others, instead of using them productively. This could explain a further reversal of growth.

144 Privatization in Central and Eastern Europe

According to Buchanan, the conflicts of the pre-constitutional phase over scarce resources lead to a natural distribution of resources at first and also allow the identification of adversaries. On the basis of the identified (unequal) distribution, individuals will then start negotiations on disarmament. It could, but does not have to be that they (again) reach an agreement about the creation of a law-enforcing authority, that is to say the state, as guarantor of ownership. In particular, individuals who act in semi-legal or illegal areas will show no interest in establishing legal institutions. Even those persons who fear a deterioration of their situation will only approve the establishment of a law-enforcing authority if they receive compensations. If a process of understanding starts at all, its course and result will depend on the “natural distribution” as well as the preferences and the abilities of the individuals. The respective starting position and initial distribution, as well as the position of power of the persons involved, are thus of major importance. As demonstrated, the persons involved differed within the individual countries of Central and Eastern Europe at the end of the 1980s. The following part will address the further development of the conflict between the various groups who considered themselves to be the owners of resources or thought they were entitled to them, the kinds of compensation necessary for individuals to agree on negotiations at all, and whether a new state could be established as the guarantor of ownership.

Part IV Property Rights in Transition

146 Privatization in Central and Eastern Europe

Property rights in transition At the end of the 1990s, and thus approximately ten years after the radical changes in Central and Eastern Europe, there is still no complete theory of transformation. According to the most usual argument, the reasons behind it would be that the events in Central and Eastern Europe were not predictable, that from the historical view they were unique, that they represented an extensive socio-economic change and would thus face science with completely new challenges. In a general definition, “transformation” is then characterized as an overall social process, which demonstrates not only an economic, but a political, legal and social dimension as well. Even economic analyses pointed to the complex problematic nature of transformation. It was thus emphasized that the transformation of the economic system, that is, the transition from a planned to a market economy, would presuppose certain social conditions, such as the political and social consensus, for instance (ECE (1991:120f)). Along with the creation of the political framework and the reorganization of the social security system, the transformation of the economy was frequently divided into the following areas: • • • •

liberalization of prices and markets stabilization institutional change (privatization for instance) structural change.

At the beginning of transformation, discussions were held concerning the speed (gradualism versus shock therapy) and the sequencing of reforms. The majority of economists advocated rapid and extensive reforms, as they assumed this action would cause a clear break with the old system and produce important features of a market economy within a short period of time. Monetary stability and privatization were thus considered a matter of priority along with the speedy liberalization of prices. Gradualism and a slow liberalization of commodity prices was, in contrast, regarded as an advantage, as it would absorb the process of adaptation to market structures, increase the broad approval of the population for the reforms and represent a slow change, which could take the old and acquired patterns of behavior into consideration. In almost all countries and obviously independent of the speed or sequence of the measures tackled, the first years of transformation led to a negative economic development of unexpected extent. The countries experienced a considerable collapse of production and investments, high inflation rates, which frequently decreased only slowly, and decreasing real wages. In view of this economic crisis, many economists dismissed the assumption that the sequence and the speed of transformation could

Property Rights in Transition 147

be chosen to a certain extent. Instead, it was now established that: “Savant discussions about the sequencing of reforms in Eastern European countries have been made irrelevant by the course of events. Those countries now have little choice but to move on all fronts at once – or not to move at all” (Blanchard et al. (1991:XI)). Swift action was recommended even for the change of property order. In this context, the promotion of new business start-ups, which was described as privatization in the wider sense or as “bottom-up privatization”, at first played only a subordinate role. Attention was attached to privatization in the narrow sense, the transfer of state enterprises into private hands (“privatization from above”). The latter was supposed to quickly produce the critical mass of private property, which would lead to productivity increases and start a growth process due to its incentive quality. When choosing privatization strategy (“selling”, “giving away”), it was thus recommended to measure the speed of the particular method and other objectives, as, for instance, a more efficient corporate control. A balanced and clear privatization strategy of state enterprises and its rapid implementation were then considered the main instrument in order to change the property system. It was even regarded as the definite statement of a country’s willingness to institute reforms, and was (and still is) an important criterion for the lending policy of international lenders, such as the IMF. Recently, however, privatization is no longer unanimously attributed such importance. This is not because privatization could be regarded as almost complete in some countries (such as the Czech Republic) and because the problem would have resolved itself, but because the hopes pinned on it were not always fulfilled. In particular, it turned out that privatized enterprises rarely demonstrated the expected adaptation. Privatized enterprises are thus described as “not state-owned”, but also as “not fully private” in the western sense (ECE (1995:13)). What is more, there are complaints that privatization did not lead to clear property rights. A clear differentiation between the state and the private sectors would no longer be possible in Central and Eastern Europe. “Recombinant property” is the key word in this context (Stark (1996:993)). On the basis of phenomena like “not fully private” and “recombinant property”, it is indirectly asserted that a new form of property exists in transformation countries either as a transitional phenomenon or as a permanent, specific characteristic. This is, however, not the case. It is instead certain that the reforms of the 1980s and the spontaneous and, later on, orderly privatization, led to the development of a muddled disposition of physical resources, which is sometimes described as “mixed property”. The question of property, however, cannot be resolved on the basis of the disposition of physical resources, but only via the exclusion principle, on the basis of the question as to what extent (potential) losses are privatized or socialized. Stark (1996:997) holds the same opinion, as, in the example of

148 Privatization in Central and Eastern Europe

Hungary, taken up later, he shows that the “decentralized reorganization of assets” is opposed by the “centralized management of liabilities”. The difference between the privatization of physical resources and the change of the property order will constitute the main focus of the following explanations. The economic development of the individual countries will, however, be roughly outlined before addressing the question of property. It will thus not only be clearly demonstrated that, at first, all countries had to bear considerable burdens of transformation independently of their privatization strategy, such as a considerable decline of production, but, in addition, that clear differences between the countries are becoming visible recently and that particularly in the Central European region the prospects of transformation benefits are improving.

10

The Course of Transformation

10.1

Economic development as mirrored in statistics

Transformation in Central and Eastern Europe does not only pose a challenge to economists, who must rethink their theories. It also requires them to make every effort to master their empirical basis. An increasing amount of statistical data pertaining to Central and Eastern Europe has been published lately, not only by the relevant national offices of statistics but by international organizations as well. However, the comparison of comparable data still produces differences or even inconsistencies, at times. Therefore statistical data on Central and Eastern Europe should be considered carefully, and only treated as a as a mere trend. As the individual countries are not equally advanced with respect to the change of their statistical reporting, the following comparison can describe only roughly the common and the distinguishing features of Central and Eastern European countries. After the radical changes of 1989, the overall economic performance decreased considerably in all countries at first.1 In Russia, the real GDP fell until 1993 to approximately 72 per cent of the 1989 level. In Romania and Czechoslovakia, it amounted to about 77 per cent and in Hungary to 82 per cent. Poland, which initiated transformation earlier than the other countries, experienced its low point as early as in 1991, reaching 82 per cent. The development of GDP, however, conveys only a rough picture of the transformation crisis. It was crucial to learn that the crisis included all areas of trade and industry, that it involved a considerable reduction of investment activity and that in many countries it led to a steep increase of open unemployment. High inflation rates with increasing deficits of government budgets were experienced from the monetary view. The Visegrad states in particular started to demonstrate signs of an upswing roughly from 1993, whereas in most of the Soviet succession states the decline still continued. The following will first describe the course of transformation, similar in all countries until 1993. The tables of the appendix will serve as a statistical basis. 149

150 Privatization in Central and Eastern Europe

Within trade and industry, the collapse of industrial production proved particularly harsh. Between 1989 and 1993, Romanian cumulative industrial production fell to less than half the level of 1989. In the Czech Republic, Hungary and even in Russia, which initiated transformation as late as 1992, industrial production fell to about two-thirds of its basic dimension. On the demand side, the crisis was identified, above all, through the collapse of investment. In 1990 and 1991, Romania experienced declines of over 35 per cent a year. In 1992, Russia actually had to accept a drop of 40 per cent. The development of foreign trade can only roughly be reconstructed on the basis of the available data. The collapse of the CMEA led to a considerable contraction of trade within Central and Eastern Europe. Concerning the trade in convertible currencies, most countries were forced to accept trade balance deficits and even the going into deficit of their current account. Only Russia demonstrated considerable trade and current account surpluses, which should be traced back above all to the extensive energy exports, although these exports decreased as well. From the monetary view, the transformation crisis became visible due to increased inflation rates in particular. The varying annual price increases in the individual countries can, among other things, be traced back to the speed and the extent of price liberalization. One single and considerable price liberalization first caused a jump in prices which eliminated the inherited monetary overhang. This way, price increases exceeded 580 per cent in Poland after price deregulation in 1990 and then fell to 70 per cent in 1991. Russia recorded a price increase exceeding 1350 per cent in 1992, the year it established price deregulation. The Czech Republic recorded a relatively small jump in prices to approximately 56 per cent in 1991, as its monetary overhang was relatively small (Rosati (1994:432)). The gradual price decontrol initiated in Romania, by contrast, led to a continuous inflation rate increase from 170 per cent (1991) to more than 250 per cent (1993). Price increases remained continuously below 35 per cent in Hungary alone. The situation of the government budgets of most countries worsened as a consequence of the decreased revenues rather than because of the increased expenditure. Except for the Czech Republic, deficits reached a level between 4 and 8 per cent of GDP in 1992; in 1991, the Russian deficit, in fact, increased to 31 per cent of GDP. The actual situation is often reflected insufficiently by the information on the deficit established by the consolidated budget. The main reason behind this is that, precisely in the underdeveloped financial sector, the division of responsibilities between the various authorities is still unclear. Intransparent relations between budget and central bank have, for example, been discerned by the ECE (1995:171) in Hungary. The Russian past demonstrates that there were repeated interconnections between budget, central bank, commercial banks and the corporate sector.

The Course of Transformation 151

The marks left by the transformation crisis on real wages and on the labor market were probably most seriously felt by individuals. In many countries, an annual decrease of more than 20 per cent of real wages had to be accepted at the beginning of transformation. The unemployment rate increased simultaneously. It reached its peak level in Hungary at approximately 12 per cent as early as in 1992, and in Poland at 16 per cent not until 1994. In particular, the Czech Republic demonstrated lower unemployment rates. But even if the Czech Republic experienced an employment miracle, at first, the over-employment, which was considered typical for planned economies, continued to increase as well.2 According to the calculations of the ECE (1995:108), only Hungary and Poland recorded a higher cumulative decline in employment than in GDP between 1990 and 1993. In most countries, concealed unemployment was thus not overcome. In the first phase of transformation, the entire region showed strong parallels in the course of the crisis, despite some developments specific to the individual countries. This changed around 1993. Since then, economic performance has declined in many Soviet succession states, even if rates are falling;3 until the end of 1998, Russian GDP even fell to about 55 per cent of its 1989 level. In South-Eastern European countries, such as Romania, the economic decline was at least stopped for a short time, until 1997. The Visegrad countries experienced a revival in their economies and Poland exceeded its economic performance of 1989 in 1996. It is true though that the Asian crisis at the end of the 1990s and Russia’s financial crisis had a negative effect on economic development in Central and Eastern Europe. These effects cannot yet be included individually into the following observation. Industrial production revived in Central and Eastern European countries around 1993, with the increase of activities in trade and services typical for all transformation countries. Production increase proved particularly high in Poland, the Czech Republic and Romania, where, during the mid-1990s, it exceeded 9 per cent. At first, a fresh stimulus was given by increasing foreign trade. In most countries, exports increased considerably, frequently despite real upward revaluations of currencies; imports, however, increased as well. Since 1995, economic recovery is additionally traced back to the increase of domestic demand, especially to investment rising faster than GDP. In Poland and in the Czech Republic, gross fixed capital formation thus increased by 16 per cent in 1995. In contrast, in Russia, investment constantly decreased by annual rates which in some years even reached about 20 per cent. A production increase was not achieved here until 1996. After the slight revival in 1997, overall economic performance again sank during the financial crisis in summer 1998. From the monetary view, it proved that inflation rates could be lowered considerably until the end of 1997, though, in most cases, countries still

152 Privatization in Central and Eastern Europe

displayed double-digit inflation rates. Between 1993 and 1996, the government budget developed differently in the region. In Hungary, expenditure relating to social benefits contributed to a high deficit (8.4 per cent of GDP in 1994) in the consolidated budget. The consolidated budget of the Czech Republic, in contrast, showed a positive balance until the end of 1995. In Russia, the positive effects of monetary stabilization – the increase of consumer prices fell to approximately 48 per cent in 1996 – were paid for with a high real rate of interest of 10 per cent a month (beginning of 1996) (DIW/IfW/IWH (1996:322)). This slowed down investment and, in the course of an increasing national debt, also proved to be a considerable burden for the budget. The production recovery in Central and Eastern European countries was, if at all, only accompanied by a slight improvement in the labor market situation. In Poland, the unemployment rate thus only decreased to 10.5 per cent up until the end of 1997. In Hungary, it stabilized itself at 10.5 per cent. The Czech Republic managed to maintain its employment miracle until 1996. In contrast to the other countries, real wages have increased continually since 1993. In Russia, real wages also rose slightly, though to an increasing extent wages were not paid. Unemployment continued to increase. The negative economic development in Russia on the one hand, as well as the, at least, temporary economic recovery in Central and Eastern European countries on the other hand, demonstrate that common problems have faded into the background, whereas the specific characteristics of the countries have gained importance. The following section will thus also outline some distinctive features, which are specific to the individual countries, along with the common reasons for the transformation crisis.

10.2 The transformation crisis: reasons and specific characteristics of the countries At the beginning of transformation, nobody expected the production collapse to be that serious; nor did they expect the level of overall economic performance during the mid-1990s to lie below the level of 1989. It was rather commonly assumed that economic performance would develop J- or U-shaped, that after a short phase of production decline a speedy recovery of the economy or even an increase would begin. This proved to be most likely for Poland. A debate on the reasons behind the transformation crisis was sparked off, as it began to show that the economic development of most countries will not be J- but rather L-shaped. The following points were, above all, held responsible for the crisis: • The breaking up of the CMEA in June 1991 was supposed to have led to the collapse of traditional trade relations.

The Course of Transformation 153

• The legacy of the old system. 4 In this context, it was claimed that the negative economic trend during the 1980s merely intensified after the radical changes. • The transformation policy, in particular, an over-restrictive stabilization policy. • Institutional deficiencies, such as an inadequate legal framework, absence of competition, as well as unclarified property rights. Nowadays, the transformation crisis is often linked to a combination of individual reasons. Factors such as the break-up of the CMEA, the legacy of the planned economy, as well as institutional deficiencies are, however, less disputed than political errors. In addition, opinions differ made about the extent to which the individual countries were affected by these reasons. Some of these differences will be roughly outlined below. As a consequence of the break-up of the CMEA, foreign trade volume within the whole region decreased considerably. The individual countries were, though, interlinked with each other to different extents, meaning that some countries proved more affected by the break-up of the CMEA than others. Poland proved to be dependent to the least extent with other Central and Eastern European countries, as in 1989, its exports to CMEA countries amounted only to 35 per cent and its imports from CMEA to 33 per cent. In Bulgaria, the country most dependent on the CMEA, 84 per cent of exports and 74 per cent of imports involved CMEA countries (see Rosati (1992:60ff)). As far as the interdependency is concerned, it must additionally be taken into consideration that the “smaller” CMEA countries were engaged in trade with the Soviet Union rather than among themselves.5 Whereas in the 1970s, the countries still demonstrated annual growth rates of as much as 6 per cent, during the 1980s, growth slowed down throughout Central and Eastern Europe. While Hungary’s growth rate of net material product was already negative in 1989, it still increased in Czechoslovakia. There were considerable differences even as far as the level of economic performance was concerned. 6 At the end of the 1980s, Romania recorded the lowest per capita production. It did not even reach half the corresponding value recorded in Czechoslovakia (DIW (1991:488)). Centralist countries, such as Czechoslovakia and Romania, additionally demonstrated relatively favorable monetary starting conditions. At the end of the 1980s, Romania was thus almost free of debt and even Czechoslovakia recorded a relatively low per capita foreign indebtedness. Both countries demonstrated balanced budgets as a result of price controls. Poland, in contrast, showed a deficit in the national budget; the average increase of consumer prices already reached about 250 per cent a year and per capita indebtedness exceeded USD 1000 gross. All in all, in some countries transformation was thus started when monetary problems became

154 Privatization in Central and Eastern Europe

evident, whereas in others, stock imbalances (such as monetary overhang) were still concealed. At the beginning of transformation, the reform programs developed in the individual countries were divided into shock therapy and gradualism, according to the respective extent of stabilization and liberalization (for reform-cum-stabilization programs see ECE (1992:40ff)). Poland’s Balcerowicz plan of 1990 represented the epitome of a shock therapy, as it included instant liberalization and restrictive stabilization. The course followed by Václav Klaus in Czechoslovakia, (the Czech Republic, since 1991), has been considered a shock therapy as well. A big bang was supposed to provide the impetus in Russia, particularly as price decontrol was initiated in 1992. The subsequent liberalization and stabilization efforts, however, remained halfhearted. In contrast to the countries already mentioned, the Romanian program of 1990 was based on a gradual strategy. Despite certain similarities to Czechoslovakia, as far as the monetary starting conditions are concerned and as a country lacking experience with reforms, Romania initiated a slow liberalization of its economy and was thus confronted with high price increases and adverse budgets to a larger extent. To a certain extent, even Hungary’s so-called Program for National Rebirth represented a gradual strategy. It continued its previous reforms by starting extensive liberalization. Stabilization was neglected at first, but in the face of the upward trend of prices and the increasing budgetary and current account deficit, Hungary was forced to adopt a stabilization program. All in all, when choosing their program, the individual countries orientated towards their previous policy of reform. After analyses of the connection between the transformation program and the economic development often concentrated on Poland as the country which started the reforms, studies which consider more than one country have in the meantime also been published. There are still contentious issues about the effect of the programs followed by the individual countries, particularly about stabilization policy. This becomes clearly visible in the comparison of the studies of Rosati (1994:419ff) and Fischer/Sahay/ Végh (1996:45ff), for instance. According to Rosati, the initial monetary overhang was overestimated in some countries and the stabilization policy which was subsequently initiated (in Poland and Czechoslovakia) would have been too restrictive at first. Fischer/Sahay/ Végh, in contrast, support the restrictive monetary stabilization. According to their observations, an annual inflation rate below 50 per cent creates the prerequisites for growth. Even Blanchard et al. (1991:29) support a strict stabilization and an extensive liberalization of prices. They consider the unclear property rights to be a particularly pressing (institutional) problem. Blanchard et al. thus recommend rapid privatization. In many analyses published at the beginning of transformation, institutional deficiency tended to be mentioned as a cause of marginal impor-

The Course of Transformation 155

tance for the transformation crisis. The term “institutional deficiency” thus included a mixture of inadequate prevalent legal conditions, unresolved property rights, absence of competition, as well as dysfunctional financial markets. It has partly been pointed out that, where these deficiencies exist, liberalization and stabilization policy will only take effect insufficiently and that investment is impeded. Arguments have been put forward that, if the prevalent conditions are unstable, the time horizon of economic subjects shortens and investments will possibly not be made, despite attractive real rates of interest. It was additionally indicated that, as the capital market is not developed and the bad-debt problem remains unsolved, a differentiation between profitable and unprofitable enterprises is difficult. Therefore, a restrictive monetary policy, as implemented, for instance, in Poland at the beginning of transformation, will create enterprises which can no longer finance themselves adequately even if they were viable and which will thus reduce their output (Calvo/Frenkel (1991:139ff)). 7 State banks, which are actually supposed to be “nobody’s banks” (Winiecki (1991a:18)) and which continue their practice of inefficient lending to nobody’s enterprises, were considered an additional problem. On the one hand, this would render the borrowing of outside capital difficult for private enterprises. On the other hand, with unresolved property rights of state enterprises and a lack of legal security, quasi-owners would hardly be interested in investing in their enterprises and restructuring them, but rather in making money themselves (Blanchard et al. (1991:34)). At first, institutional deficiency was considered easily removable via privatization, the development of financial markets and a legal system. At the same time, it was assumed that the economic units would be able to cope with the new circumstances relatively quickly and that they would react appropriately to the impulses of economic policy. Only a few authors, such as Murrell (1992:17ff), doubted that after the destruction of the old institutions the behavior and expectations of the economic units would change quickly and that the monetary basic information produced on the macroeconomic level by stabilization policy, for instance, would be immediately understood. Murrell instead emphasized that a learning process would first have to be passed through, during which the old behavioral patterns of enterprises and private households would be thought over and changed. In this phase, however, economic policy-makers only have insufficient knowledge of the way the system actually works. Thus, there is a risk that the dose of stabilization policy is not determined correctly. For this reason, Murrell supports a gradual strategy which allows learning processes. Thus, new business start-ups should, above all, be promoted instead of forcing the expensive privatization of state enterprises, which tend to be quite persistent (Murrell (1991:15ff)). The institutional change actually occurred more slowly than was anticipated. The slow change of behavioral patterns, as well as the institutional

156 Privatization in Central and Eastern Europe

deficiency, are thus meanwhile attached much importance and considered the reasons behind the transformation crisis which cannot easily be removed. A qualitative assessment, which includes, for example, the institutional reforms of more than one country, is made by the EBRD (1996a:1ff) on the basis of so-called transition indicators. “Grades” are assigned per indicator, starting from the low value of 1 up to the value of 4*, which is valid for market economies. As far as, for instance, competitive policy is concerned, Czechoslovakia, Poland and Hungary were assigned the grade of 3, Russia 2 and Romania just 1. As far as large-scale privatization is concerned, Hungary and Czechoslovakia were assigned the grade of 4, followed by Russia, Poland and Romania with 3. The grades demonstrate that, considering the development of institutions, the countries have not advanced equally. It is, however, doubtful, whether it is appropriate to judge transformation countries by the institutions of the market economies. In addition, the separate comparison of individual institutions does not give any details about the interplay between them. It could thus prove to be more beneficial to a transformation country to be assigned the grade of 3 in all institutional areas, instead of being assigned 4 in some areas and 1 in others. The problematic nature of the interplay between the various institutions has scarcely been addressed until now. As far as the change of the property order is concerned, it was commonly approached by measuring progress merely on the basis of privatization. According to that, Poland would be as advanced as Russia or Romania. This does, however, not seem to be the case. Institutional development in other areas (for instance, the legal system) should be attached much importance precisely within the change of property. Some aspects of this interplay will be expounded in the following chapters.

11

The Question of Property

For Hume, property was the result of a learning process in the course of which people accept the reciprocal exclusion of scarce goods. In order to guarantee exclusion, they either developed behavioral norms or established the state as the guarantor of property after a transitional phase of privately organized property protection. Thus, Hume indirectly recognizes, that property, as every institution does, consists of (at least) one general rule and one enforcement mechanism. In the market economies, private property includes the rules of private (decentralized) disposition over assets and private liability for possible losses; the major sanctioning mechanism is the state guarantee of property provided as a public good. Within this guarantee of property, decentralized disposition and liability are controlled by additional market-economy institutions. Thus, according to Williamson (1992:28f), (imminent) competition on the commodity market forces efficient disposition of resources and the capital market exercises financial, organizational and contextual control. Details of decentralized disposition and liability can be negotiated and additional mechanisms developed for the observance of these principles on the various markets and in accordance with ownership guarantee. This includes the bilateral contract, as well as its enforcement by means of private arbitration tribunals. The various institutions which guaranteed decentralized disposition and liability and thus hard budget constraints do not become effective unless scarcities can be identified. In other words: an understanding over scarce resources presupposes their valuation. From the monetary-keynesian view, this is achieved by the introduction of money as a budget constraint. It is precisely this monetary constraint which causes a resource surplus as the prerequisite for the emergence of an asset market, on which private asset owners can assert their interest and creditors decide upon granting loans on the basis of their individual calculation. If private creditors refuse to grant a loan because they fear the investment will fail, they thus simultaneously limit the damage. They anticipate the threatening liability for losses incurred due to granting the loan, provided that the private asset owner is 157

158 Privatization in Central and Eastern Europe

protected against asset devaluation (inflation) though keeping money in short supply. Otherwise, inflationary developments will lead to a flight into real assets. For the individual, devaluation is a process which is not his own fault, but a socially enforced intervention in his monetary assets and thus a kind of expropriation. The principle of decentralized disposition and liability is then called into question. Various authorities have developed in the market economies, designed to guarantee the observance of the principles of decentralized disposition and liability. There is a consensus that the state represents the highest guarantor of property. As a protective state, it provides the laws necessary for decentralized disposition and liability and ensures their observance. As an autonomous authority, the central bank guarantees that scarce money will function as a macroeconomic budget constraint, which prevents the weakening of the decentralized liability principle at the microeconomic level. As a competition watchdog, the antitrust enforcement agency ensures the functioning of markets, particularly the existence of equal opportunities, which will prevent the abuse of power and thus attacks on decentralized disposition and liability. Within transformation, the various institutions and the corresponding authorities or organizations of a market economy still have to be developed. Thus, institutions, such as property, do not emerge ex nihilo. As far as ownership is concerned, it is more about decentralizing disposition over resources as well as liability for losses which were centralized by the state within socialism and all about the development of a guarantee of ownership for these principles too. The state must, therefore, change its role, as by now, it owned socialist property and protected it legally, prevented competition and ensured the automatic granting of loans to enterprises through its monobank system. Its duties must thus be newly defined and organized in such a way that the protective state, the central bank and the competition watchdog take on the guarantee for the decentralized disposition and liability in their respective sphere of responsibility. The main point of decentralizing disposition and liability is the separation of state and state enterprises, so that individual entities can be identified. The following action was suggested and partly even carried through within transformation: the legal framework, such as corporate laws, was created first and used as the basis for the transformation of state enterprises into joint stock companies. They were thus formally separated from the state (“corporatization”). In the course of corporatization large enterprises were also broken up in order to strengthen competition. The pure conversion of the legal form, according to which the state is still the sole owner of legally independent enterprises, however, holds the risk that the state will exert (political) influence on the enterprises, and that it will grant them special privileges according to its economic policy objectives. For this reason, the legal decentralization of disposition and liability

The Question of Property 159

through corporatization is no guarantee that state enterprises will actually be subject to hard budget constraints, that they are commercialized and that they work under the same conditions as private enterprises. In order to stop the exertion of influence and to separate the state and the economy, it was hence suggested that state enterprises should be privatized. Through privatization an attempt was made to simultaneously achieve the liability of enterprises. During transformation, special problems surfaced while decentralization of disposition and liability took place, and the state’s role was redefined. It proved particularly difficult to establish the state as a protective state. To the individual, whose free action was considerably restricted by the allpervading power of the state under socialism, law did not represent a capital good. Confidence in the state was, therefore, low. In some countries, the state’s monopoly of power is still not accepted even today. But as long as property guarantee does not exist as a public good, rights of disposition are uncertain on the one hand, and on the other, the principle of liability is not a general rule, but subject to private arbitrariness. Under these circumstances, the effectiveness of other rules of the game, as for example competition, will remain limited and the introduction of money as a budget restriction will be hindered. The change of the property order was not simply synonymous with the decentralization of property rights, which were formally centralized with the state. As demonstrated, the process of decentralization had already started in many countries in the 1980s and frequently led to spontaneous privatization. Due to the erosion of property order, Poland and Hungary, for instance, developed quasi-ownership rights for certain employees, or for the directors. At the beginning of transformation, this resulted in a conflict between the individual quasi-owners and the state as the formal sole owner over the question of who would be the actual owner. Thus, an agreement over the initial distribution of rights had to be reached first. In most cases, the consensus reached in individual countries consisted of a combination of subsequent recognition of quasi-ownership rights and their recentralization. If quasi-ownership rights were recognized, corporatization and privatization frequently encountered the resistance of the quasi-owners. Corporatization and privatization “from above” were simpler, on principle, where ownership rights were again or still possessed by the state. Privatization was, however, regarded everywhere as the basic instrument for changing the property order. In order to actually change the property order, the disposition of physical resources must be decentralized together with liability. This symmetry in decentralization was prevented in the state sector within a planned economy. State enterprises were not liable, not even in those countries in which quasi-ownership rights had developed. Instead, they were able to dispose of assets and, at the same time, externalize losses. The reason

160 Privatization in Central and Eastern Europe

behind the decentralization of rights of disposition and the socialization of losses was that planning was held onto as the main allocative mechanism. Planning simply excludes an actual decentralization of liability. Where the planned target was not attained, the enterprise was identified as the cause. But as the monetary-keynesian approach demonstrated, ultimate sanctioning with bankruptcy remained ineffective. On bankruptcy of the enterprise, employees and directors would have found new employment as a consequence of the full employment guarantee. As the capital market did not function, assets could not be valuated anew. Decentralization of liability thus proved to be the main task when changing the property order. At the beginning of transformation, an agreement over the status quo distribution of liability had to be reached as a rule and in analogy to the disposition of resources. Technically, falling back on the formal separation of the balance sheets of the government budget and of enterprises, already experienced in planned economies, seemed to be the thing to do. Old corporate balance sheets, however, reflected the conditions of the planned economy. They included, among other things, the valuation of assets on the basis of prices which didn’t take scarcities into account. Liabilities were, to a large extent, made up of so-called “imposed” loans at low interest rates. A special problem will surface if these balance sheets are taken over within transformation. After the transition to a market economy, enterprises must no longer stand up to the “valuation” of quantity planning on the basis of plan fulfillment, but instead (increasingly) to a valuation through the market. In the case of a market appraisal, the imposed loans must now be serviced at market conditions. Enterprises, not liable in the past, will then be liable for old debts taken up under planned-economy conditions. It could happen that actually competitive enterprises become heavily indebted and that insolvency law would require their liquidation. The balance sheets of state banks are encumbered with outstanding bad loans, if they are simply spun off from the monobank; thus, even banks are threatened by insolvency. All in all, the decentralization of enforced loans under the new conditions infringes upon the principle of liability. It would thus have been necessary to regulate the bad debts of state enterprises before commercialization and only hold enterprises and banks liable for the activity they undertake under the new conditions. In most countries, the regulation of bad debts necessary for the establishment of the liability principle was not affected. Instead, enterprises were corporatized and simultaneously they took on the bad debts of their legal predecessors. The second step, holding enterprises liable, remained insufficient due to the feared wave of bankruptcies. A solution to the bad debts problem was thus not sought. What is more, it was still unclear who was supposed to be held liable in future for the new losses incurred. Instead of tackling this problem, privatization became the major approach towards changing the property order, though the problematic nature of liability was

The Question of Property 161

revealed as inherent in the procedure and appeared only with time. In the course of enterprise privatization, disposition of resources was, at first, decentralized together with the liability, which was not the enterprises’ fault in the past and which remained unclear for the future. Similarly to the situation in the planned economies, there was an asymmetry between the decentralization of disposition, on the one hand, and the decentralization of liability, on the other. Various approaches to solving the problem of bad debts have been suggested (see Calvo/Frenkel (1991:107ff), Begg/Portes (1992:1ff), among others). The ECE (1995:207) describes the difference between them as follows: “In the most general terms they differ as to the allocation of losses linked to the restructuring among different agents involved.” When regulating bad debts, there must be a decision concerning the new distribution of liability. This burden can, on principle, be placed on either the state, the enterprises, the banks or private households. Within transformation, most of the countries refused to choose a strategy and thus find a solution to the bad debts problem, which would have been a deliberate and direct burden for private households.1 Instead, the burden was transferred individually to the enterprises, the banks or the state, or shared between them. The strategies pursued are mainly based on three approaches (see ECE (1995:207)) and described as bankruptcy solution, cancellation and socialization. The bankruptcy solution means that heavily indebted enterprises are held liable. This could, however, lead to a socially and politically intolerable wave of bankruptcies with a considerable production collapse and a decrease in employment. Within cancellation, the bad debts of enterprises are written off; they are thus taken off the load of liability. At the same time, banks must adjust their bad loans over the spread between the loan and deposit interest rate. On the one hand, this can lead to a high loan interest rate and thus impede investment. On the other hand, as a result of this task, banks would possibly be under too great a strain; this could end in a banking crisis. In addition, there is a risk that cancellation creates a moral hazard problem, meaning that after enterprises have been relieved once, they will count on further debt release. Within socialization, the state (partially) takes over the debts. The state participation can take on three forms. Firstly, the state can relieve the banks of their bad loans and recapitalize them through government bonds in return. It simultaneously transfers the bad debts to a special government authority, which will decide upon the future of heavily indebted enterprises. The problem is that it is still the state and, to a smaller extent, private creditors that valuate business activity. The second possibility is that the state grants the enterprises additional financial means, so that enterprises can thus use this means to regulate their bad debts and initiate their restructuring. This holds the risk that enterprises understand it as the continuation of automatic crediting.

162 Privatization in Central and Eastern Europe

The use of these financial means must, therefore, be controlled rigorously. The third approach is to provide the banks the financial resources which would enable them to negotiate the settlement of bad debts and restructuring directly with the enterprises. In this case, a decentralized solution is initiated by the state. On principle, bankruptcy, cancellation and socialization are about resolving the stock problem of bad debts and about simultaneously preventing a revolving lending and the development of a flow problem. To put it differently: enterprises, as well as banks, must adopt new behavior patterns, namely those of being liable. The following will illustrate the way the individual countries attempted to change the role of the state as the guarantor of ownership, to establish a protective state, as well as to decentralize disposition and liability. In this context, three approaches can be differentiated: the juridical solution, privatization “from above” as an economic patent remedy, and bottom-up privatization as the spontaneous solution. The juridical solution was generally supposed to create a legal framework including the state’s monopoly over physical power. The formal conversion of state enterprises into enterprises under private law also represented a first approach to decentralize disposition and liability, although, as already mentioned, in most cases, subsequent commercialization did not succeed. Privatization was considered by economists as an economic patent remedy for the development of ownership “from above”, because the enterprises were thus separated from the state and able to concentrate on their actual economic activities. Privatization should, therefore, be drawn up in order to transfer property rights quickly into the private sector, on the one hand, and to develop an efficient corporate control on the other. The individual countries have actually developed and realized various concepts for privatization in the area of conflict between speed and efficiency. The bad debts problem was, however, neglected and a revolving lending to privatized enterprises could not always be prevented. Thus, decentralization of liability remained insufficient during privatization. Bottom-up privatization (“spontaneous” solution), finally, was not attached much attention at the beginning of transformation. It was, however, assumed that the private sector would develop quickly due to new business starts and that a critical mass of owners, which would contribute to the change of behavior patterns, would develop as well. As a development of ownership ex nihilo, the advantages from bottom-up privatization were that the bad debts problem was resolved and that decentralized disposition and liability could develop symmetrically, on principle.

12

The Legal Solution

As Hume already recognized, property cannot only be understood as a subject–object relation. The subject–subject relation and thus the exclusion within the “stability of possession”, its “transference by consent” and the “performance of promises” must be taken into consideration along with the determination of which objects (such as physical and intellectual resources) should be protected as the individual’s property. The most important market-conforming property rights can be derived from Hume’s three principles. Personal liberty rights represent the highest rights. Property of objects requires that the individual can dispose of his resources. He can only dispose of the object if it is transferable by voluntary consent, meaning that there is freedom of contract. In case of a transfer, a temporary surrender, it must be guaranteed that the creditor is protected by observing the principle of fulfilling promises, respectively the pacta sunt servanda. In Western market economies, the mentioned property rights are set down and guaranteed by (codified) law and generally binding. As already theoretically expounded, this form of ownership guarantee is, however, not imperative. As a result of its character as a public good, the state provision of the ownership guarantee involves cost savings. Property can exist, though, if the protection of resources is (temporarily) privately organized or guaranteed through behavioral norms. Both forms of private (just and unjust) law-making are still widespread in Central and Eastern Europe. In all societies, codified law therefore only reflects the existing property order partially. Within the development of law in Central and Eastern Europe, it must also be taken into account that the provision of a codified ownership guarantee according to the Western model can cause high costs relating to specification and implementation. Modern ownership guarantees, which protect rights in detail, could prove too expensive for the level of development in Central and Eastern European countries. It seems to be important within transformation that only the central laws are codified first and, above all, actually implemented. 163

164 Privatization in Central and Eastern Europe

12.1

Codified law: shortcomings and contradictions

The fundamental principles of a market-conforming ownership guarantee, mentioned above, have meanwhile been legally established in most Central and Eastern European countries. In particular, new constitutions have been enacted, ownership rights have been specified in civil law by further details, and a modern commercial code has been created. The legal reorientation thus seems to have succeeded within a few years. On closer inspection though, it shows that the socialist past continues to have an influence and that frequently new law only exists formally. Some critical points will be mentioned before the investigation of the development of the individual countries. The continued existence of old patterns of thought is reflected by the concept of ownership. Free disposition of property is only legally guaranteed if there is a uniform concept of property protecting the right of ownership in general. If the types of ownership are differentiated, as was the case under socialism, a difference will be made not only according to the property objects, but additionally according to the functions (realization of profits, consumption need) and subjects (state ownership, collective ownership) (Roggemann (1993:323)). This way, certain persons could be excluded from acquiring ownership of certain objects (Pfaff (1993:76)) and socialist or public property could be given priority. Many of the new and/or amended constitutions of Central and Eastern Europe still formally contain such a differentiated conception of ownership. This proves quite unproblematic if the forms of ownership have equal status; this could lead to a uniform conception of ownership. Otherwise, the differentiation of the conception of ownership holds the risk that rights of ownership are restricted. Pledging is considered an important right in the market economies and is connected to ownership. According to monetary theory, it represents the temporary giving away of an owner’s emergency stock, who must enter competition with others as a debtor and who must realize productivity increases in order to be able to pay the creditor interest in addition to the repayment. Therefore, only the ownership also performing the function of securing loans which was abolished in socialism, will institute economic dynamism. Eligibility as collateral and the possibility of assigning land, both of which are still partially restricted in Central and Eastern Europe, 1 are pivotal here. The private owner is not only entitled to expect the returns from the use of resources, but is also liable for the damage incurred. Liability according to the principle of causation thus prevents the permanent socialization of losses, as observed when unprofitable production was kept up in the planned economies. In the market economies, resources are released from their previously unprofitable use as a consequence of the bankruptcy of

The Legal Solution 165

unprofitable enterprises and can subsequently be used more economically. As the prerequisite for this, Central and Eastern Europe have formally adopted bankruptcy law, though it is rarely applied. As a matter of principle, ownership enables the owner to hold his resources back at the expense of others, a situation described by Commons as withholding. Concentration of ownership and the exercise of monopolistic power jeopardize freedom of contract (Richter (1993:318f)). The institution of competition opposes this trend, as even the most powerful owner is forced back into production and as allocation is optimized. In Central and Eastern Europe, the development of competition regulations was thus an important issue after the opening up of the markets. In many cases, the new antitrust legislation is still insufficient or not applied by the antitrust authority. The fact that Central and Eastern Europe do not apply law can, on the one hand, be attributed to the fact that law is deliberately not applied. On the other hand, the legal system must still be developed and judges and lawyers still have to be trained. In addition, as Commons emphasized, after the formal establishment, laws still have to be determined as regards content, that is, be interpreted by the practical administration of justice. The following comparison of the countries will consider the differences between the interpretation and the application of law, in order to assess whether, alongside the new regulations, the old laws, which were only partially amended, are actually interpreted differently. Remnants of the old system: constitutional law (including land law) After some countries have first enacted special ownership laws,2 ownership guarantee is meanwhile established in the constitutions which were amended and revised in the past years. 3 All constitutions know about the legal institution of private property and the guarantee of the freedom of ownership. Partially, there is still differentiation according to types of ownership as there was under socialism; the types of ownership are, however, equated (Gärtner (1995:76ff)). The Polish amendment of the constitution thus first listed personal property separately from the uniform meaning of property, though it equates personal property with general property and grants the freedom of economic activity independently of the type of ownership. In the new Polish constitution of 1997 the differentiated concept of property was given up. The types of ownership also enjoy equal rights in the Hungarian constitution of 1989, as well as in the Constitutional Law on Fundamental Rights of 1991, which is still valid in the Czech Republic. In Hungary, the Constitutional Court confirmed that this equality of the types of ownership represents a uniform concept of property as regards content. The Romanian constitution enacted in 1991 establishes a right to ownership, though it differentiates between private and public property. In its constitution of 1993, the Russian Federation recognizes and equally

166 Privatization in Central and Eastern Europe

protects private, state, municipal and other types of property. The right to private property is expressly protected and its free use and disposition is allowed. Next to its individual function, ownership also has a social function, though there is tension between the two functions (Roggemann (1996:90)). In the Central and Eastern European countries, which partially intended to follow the model of the social market economy, one would expect to find the stress on the social component and the constitutional embodiment of the social obligation. In Hungary and Poland, however, there is actually no explicit clause relating to societal restrictions on individual property rights. In Poland though, it is the constitutional principle of social justice that leads to restrictions in legal practice (Gärtner (1995:77)). The Constitution of Czechoslovakia establishes a social obligation. In Romania, the owner must take on duties assigned according to law or custom. Russia clearly defines itself as a social state. A distinctive feature of Hungary and Romania is that they have explicitly established the market economy as the economic system in their constitutions.4 Thus, the aim of transformation as an independent good receives particular protection. Along with the restrictions resulting from the social function, limits must be determined within which the state has access to resources. The constitution can already concretely define the areas which will remain exclusively state property. It is, however, also possible to determine public property by subsequent laws. This way, the Romanian constitution creates the scope needed to declare not only concrete areas, such as mineral resources, for instance, but other legally determined goods to be exclusive public property as well. In contrast, the Hungarian constitution includes a legislative function dealing with the determination of state property. This function was already taken into account in 1991, when passing the law on concession, defining state monopolies and allowing the transfer of public tasks to private enterprises. The areas of exclusive state property (see third part of the Civil Code (§172)) have been reduced within the last few years. Despite the state’s tendency towards the retreat from economy, it must be taken into account that, in the long run, the state’s share should not amount to less than 30 per cent (Gärtner (1995:79)). The Polish constitution, for instance, does not contain any statement about the extent of the state sector and areas of sole state property. Seeing as liberalization has progressed considerably in most areas since the beginning of transformation, private ownership is restricted by regulations, especially as far as acquisition and use of land are concerned. Restrictions have been introduced for fear of a sell-out of the country particularly to foreigners; this resulted in a reduction of foreigners’ willingness to invest in those countries. In some countries, even national residents cannot dispose freely of the land. As, at one certain point in time, the nationalization of land was quite extensive compared to other areas, the

The Legal Solution 167

new land law demonstrates, above all, how strongly the current meaning of ownership is still influenced by the socialist past. The ownership right of land will, therefore, be analyzed in more detail. In the Russian Federation, private ownership of land is allowed by the constitution. The constitution, however, prescribes that land use is regulated by a separate land law. At the same time as the first part of the Civil Law, which came into force at the beginning of 1995, was enacted, the passing of Article 17 concerning the rights of land was delayed until the enactment of the land law (Bergmann/Glöckner (1995:445)). Since then, the acquisition of land, as well as its eligibility as collateral have been regulated by decrees, which are, however, implemented only in parts. The liberalization of land law remains controversial. In most cases, previous bills prescribe restrictions of ownership rights and thus do not accord with the constitution. Such contradictions between subsequent laws and the constitution are still frequent in Russia; this reduces the certainty of the law considerably. According to the constitution, foreigners cannot acquire rights of ownership of land in Romania. It is true though that enterprises founded by foreigners in Romania were temporarily treated according to the principle applied to national residents. In 1995, the Supreme Court decided that a legal entity created by foreigners in Romania must be considered foreign and that thus it cannot acquire ownership of land (Leonhardt (1995:390)). After the change of government, a new law was approved in spring 1997, which again allowed acquisition. This repeatedly changing legal practice has impeded the influx of foreign investors. In the Czech Republic, national residents can acquire real estate without restrictions. According to the foreign exchange law, foreigners are, however, not allowed to buy land except in a few exceptional cases. This ban can, however, be circumvented, if the non-resident authorizes a resident to buy or manage real estate on his behalf as a trustee (Koubova/Schmitz (1996:168)). Similar action concerning the acquisition of ownership was possible during privatization as well. A liberal, though often publicly criticized, attitude towards the acquisition of ownership through foreigners thus became generally accepted in practice. As far as right of ownership of land is concerned, Poland represented an exception in Central and Eastern Europe under socialism. In Poland, private ownership of land has never been nationalized completely; the acquisition of real property has been expressly allowed since 1956 (Tigges (1996:1)). But, due to a special law, foreigners could only acquire ownership of land with the consent of the Minister of the Interior, a regulation which was maintained even after 1989 and which was slightly relaxed after 1996 (Wilke (1996:209)). A further exceptional feature regulated by the Polish Civil Code is that, although state enterprises are the owners of buildings, they are only granted a usufruct (99 years) of the real estate, which is recorded in the land register and which can be mortgaged.

168 Privatization in Central and Eastern Europe

Even in Hungary, foreigners need a permit in order to acquire real property. The permit procedure was simplified in 1996. There are special regulations for land used for agricultural purposes and in 1994 its acquisition was made considerably more difficult for foreigners, as well as for national residents. The introduction of the so-called Act On Arable Land, however, explains that the law would intend to promote mortgage-backed loans. But it de facto impedes the development of land as an instrument for the collateralization of loans. The law has even been examined by the Constitutional Court and accepted for a transitional period, until the preconditions for the development of “realistic land market prices” are established; at the same time, it was emphasized that, after the transitional period, it could turn out to be contrary to the constitution (Brunner/Schmid/Westen (section “Hungary”, October 1997, Introduction p. 15)). The Hungarian Constitutional Court thus considers it necessary to take the peculiarities of the transformation phase into account. Even in countries which have developed a liberal land law in the last few years, the exercising of ownership rights fails, among other things, because land registers and land registry are still to be developed. In the Czech Republic, land registers were introduced again after 1993 (Daubner (1993:317)). In Romania, the standardization of the land registers, which were regionally different for historical reasons, began in 1996; the old laws dating from the 1930s/1940s were only supposed to be repealed after the completion of these changes. The necessity to develop a land register as the proof of ownership of land is just one example which demonstrates that further investments are required in order to implement established law beyond law-making. Law within transformation: corporatization Special laws concerning, among other things, corporate activity were enacted in some countries (such as Russia, the Czech Republic) during the period of radical change, in order to close the gap which emerged after the abolition of the old laws. Since then, many transitional laws have been amended and/or revised. Most countries have additionally created a broad legal basis, and amended the old one, or implemented new Commercial Codes.5 Some of the special laws, however, still have an influence, particularly as far as the treatment of state enterprises is concerned. The special company laws of the transitional phase were created, on the one hand, in order to allow the establishment and running of private enterprises. On the other hand, they served to legally redefine the activity of state enterprises. Conversion laws created the basis for the transfer of state enterprises into companies constituted under private law, which must be run (formally) according to the same principles as the newly established private undertakings. The first step was thus made in order to carry out the constitutional task of legally equalizing the types of ownership. The con-

The Legal Solution 169

version of state enterprises into companies constituted under private law with absolute state ownership, described as “corporatization”, was, in addition, a prerequisite for the identification and valuation of state enterprises as independent entities and for taking the second step towards their “commercialization” (see ECE (1992:205f)). The legal approach to “corporatization”, “commercialization” and the effected valuation of enterprises as a whole, represent the heart of what is described here as the legal solution of the question of ownership. From a narrowly legalistic view, the individual countries have actually pursued different methods in this context. Special conversion laws were enacted in parts, which aimed at an immediate or gradual conversion of state enterprises according to private law. Some countries, however, have also regulated conversion together with privatization through their legislation pertaining to privatization, although from the legal as well as from the economic point of view, corporatization and privatization, that is to say, the transfer of public assets into private hands, do not coincide.6 The privatization laws of the countries will only be explained by the following with regard to the regulations which were relevant for conversion. As already mentioned, in countries which carried out reforms in the past, conversion laws had already been enacted at the end of the 1980s. They created a basis for the so-called spontaneous privatization, as they granted extensive rights to the employees. Old conversion laws were amended and conversion was controlled more rigorously at the beginning of the 1990s as a result of the negative experiences gained with wild privatization. In Hungary, this included the establishment of the State Property Agency as a public supervisory body in 1990. First, the agency carried out conversions on the initiative of state enterprises (Petsche (1996:73)). This process, however, took place only slowly, because since uncontrolled conversions and spontaneous privatization were no longer possible, state enterprises were apparently hardly interested in a controlled conversion. Later on, a compulsory conversion through the Property Agency was thus ordered by the new Privatization Act of summer 1992 for enterprises which were not yet converted (Ludànyi (1995:23)). The time needed for the preparation of conversion, for which a conversion plan and asset and liability statement also had to be drawn up, was, however, underestimated. Therefore, the deadline for compulsory conversion, initially fixed at six months, had to be extended. Conversion also meant that the enterprise took on the debts of its legal predecessor in full. Poland revised its regulations governing conversion in the law On Privatization of State Enterprises of 1990, given that conversions have been possible as of 1987–88 and that the share of spontaneous privatization increased. This law particularly considers the position of employees. Conversion is thus not compulsory, but effected at the request of the enterprise concerned. It therefore depends considerably on whether the employees

170 Privatization in Central and Eastern Europe

support a conversion. During the last few years, this was rarely the case. In Poland, as well, the rights and duties of the predecessor are assumed by the converted enterprises as a rule. In Russia, the law On Property of 1990 and the already mentioned law On Enterprises and Business Activity of 1991 created a new legal basis for state enterprises as well. The state enterprise was supposed to work autonomously and be liable for its activity (Lenga (1992:80)). The way Russia would proceed in future was put into concrete terms by the Russian Privatization Law on 3 July 1991 and thus shortly after the enactment of the (Soviet) Union Privatization Law, although it did not regulate conversion. Only the Presidential Decree of July 1992 addressed the conversion of state enterprises into joint-stock companies (see Zakon (1993:36ff)). The State Committees for State Property, which also carried out privatization, appeared as their founders. The initiative for privatization, which also included conversion as the first step, could come, however, not just from the State Committees, but from the enterprises as well. Within the conversion, a valuation was carried out according to given regulations of cost accounting which considered, above all, the reduction in value due to inflation and only led to a revaluation of the old balance sheets. At the beginning of the 1990s, ownership rights were still centralized in Romania and Czechoslovakia. Conversion thus took place quite rapidly. In Romania, the state enterprises were converted into regie autonome or commercial companies on the basis of a special law in 1990 (see The Government of Romania (1991:98ff)). The commercial companies, which were supposed to be privatized, were valuated during their conversion according to given guidelines. Czechoslovakia also started to convert enterprises into companies, constituted under private law in 1990 on the basis of the law On the State Enterprise and the Act On Joint Stock Companies. Later on, conversion was effected according to the Privatization Law of 1991. Enterprises that were to be privatized were first chosen by the foundation organ on the basis of a privatization plan, which had to include a proposal for the new legal form of the enterprise; its implementation was decided upon by the Ministry of Privatization. The enterprises were dissolved and transferred to the Fund of National Property. In contrast to other countries, in the Czech Republic enterprises that were to be privatized were not forced to assume the liabilities of their predecessors in full. The bad debts of the still state-owned enterprises were written off, although only partially and as a flat amount, and transferred to the newly founded consolidation bank before the transfer to the Fund (Keilhofer (1995:216f)). The countries chosen as examples show that in those in which property rights were centralized, such as Czechoslovakia and Romania, conversion was effected quite rapidly, whereas in other countries, where employees were granted quasi-ownership rights, this process was delayed.7 The reason for this is that, at that time, the rights acquired by the employees did not

The Legal Solution 171

imply any liability. Under the new circumstances, the employees obviously recognized that conversion would not only legitimize their quasi-rights of disposition once and for all, but that it would also include a decentralization of liability, and thus opposed it. Subsequently, the state as the formal owner either managed to recentralize property rights (as in Hungary) and to prescribe conversion “from above”, 8 or a position of stalemate is reached, in which the employees still participated in the decision on conversion and bargained with the state (as in Poland). Conversion alone does not guarantee the equality of the types of ownership. Equality is only given if under private law the state enterprises cannot exercise one-sided market power and must thus face competition. Transformation is therefore also about breaking down monopolistic structures within the state sector (for instance, by breaking up state enterprises),9 to regulate monopolies and prevent a new concentration in the transformation phase respectively. At the beginning of the 1990s, most countries enacted laws to protect competition and reactivated previous regulations. Existing laws were, however, not always applied. As already mentioned, Russia and particularly Romania, which enacted new competition laws no earlier than 1997, were assigned bad “grades” by the EBRD (1996a:11), which considers not only the formulation, but the application of laws as well. Limits of the legal solution: insolvency law It must be guaranteed that the enterprises bear incurred losses and that they are called into account according to the principle of liability after their transformation. Insolvency law must be created as a precondition for this. It is true though that this has been done in most Central and Eastern European countries, but the law was not always applied to the full extent. This does not apply to countries such as Romania, which followed a gradual strategy, but in a moderate form to those countries (such as Czechoslovakia) which pushed privatization forward and whose reforms are considered quite advanced. The reason for not applying insolvency law is that the wave of bankruptcies, expected due to the insolvency of many enterprises, was supposed to be averted. The insolvency and the excessive indebtedness are thus not only consequences of the inefficient economic activity of the enterprises. They are instead connected to the fact that, in the course of conversion, old corporate balance sheets were frequently taken over unchanged, meaning that converted enterprises took on, among other things, the liabilities of their legal predecessors. The “legal” valuation within conversion ignored the bad debts problem. This problem was not addressed even in the following stages of privatization. In order to prevent bankruptcies, insolvency law instead was enacted with delay or not applied, or else fundamental regulations were relaxed. Again, it was not an economic but rather a legal solution that was searched for.

172 Privatization in Central and Eastern Europe

Russia and Romania are examples of a delayed enactment of new insolvency law. There was no legal vacuum until new laws were passed as the bankruptcy regulations of the old commercial laws continued to be in force (the Commercial Law of Romania dating from 1887). These old regulations were, however, hardly applied. Even after the new insolvency and/or bankruptcy law came into force in Russia (1993) and Romania (1995), proceedings were only rarely instituted.10 In 1991, a bankruptcy law was passed in Czechoslovakia, which was formally still in force in the Czech Republic. Due to the feared wave of bankruptcy, the law was, at first, only applied in cases of excessive indebtedness and not those concerning insolvency (Herrnfeld (1995:72f)). The Czech Republic amended the law in 1993, as it offered hardly any possibilities for restoration to profitability of heavily indebted enterprises, and instead protected the rights of creditors. Now, debtors were granted a grace period, in order to introduce measures of reorganization. A special term of protection was granted to heavily indebted enterprises, the shares of which were planned to be privatized via voucher privatization to at least 50 per cent. According to Tuma (1995:176), the privatization process which depends, among other things, on the credibility and the confidence of the market participants, was supposed to be protected that way. A further distinctive feature was that at least two creditors had to file a petition for bankruptcy. In their function as main creditors, the large state banks were, however, not interested in opening bankruptcy proceedings against the enterprises indebted to them. Only about 350 businesses were shut down between 1992 and 1994 (see Hashi/Mladek/Sinclair (1996:20)). The amendment of the bankruptcy law enacted in mid-1996 restricted the possibility of granting grace periods and tightened the statutory obligation to report excessive indebtedness again after the completion of voucher privatization (Bohata (1996:224)). In Hungary, the Bankruptcy Law of 1991 was substituted for the legal provisions of 1986.11 Within conciliation proceedings, the debtor is granted a standstill agreement, whose maximum duration was extended while the law changed in summer 1993. The amendment of the law additionally repealed the so-called compulsory bankruptcy; petitions for bankruptcy have been voluntary ever since. According to Szanyi (1995:205), the changed application for the commencement of bankruptcy proceedings is the main reason why the number of bankruptcies, which still amounted to 4169 in 1992, decreased considerably during the following period. Applications were, if at all, mostly made by suppliers of the enterprises concerned. The banks, acting as the creditors, continued to hardly be interested in the institution of bankruptcy proceedings, even after the implementation of the consolidation programs (1992 and 1993–94) which were directed towards the regulation of their non-performing loans. It is precisely these repeated consolidations, the recapitalizations directed towards solving the debt problem, which have increased the expectations

The Legal Solution 173

of enterprises and banks that even new irrecoverable debts will be “settled” by the state again and which have thus created a moral hazard problem. Ultimately, the renewed emergence of bad debts could not be stopped. Poland’s Bankruptcy Law of 1934 has been repeatedly revised since 1990 and completed by special laws (see Tigges/Lechmann-Becker (1994:126)). 12 The bankruptcy regulations also include the possibility of reorganizing an insolvent enterprise. As the claims of the state and the employees are the first to be satisfied from the bankrupt estate, in their function as creditors, the banks’ prospects to assert at least some of their claims were poor (Gray and Holle (1996:18)). The active participation of banks in regulating debts was promoted by the restructuring program of 1993–94. In contrast to Hungary, they were encouraged within the recapitalization of banks to agree with the enterprises indebted to them on the regulation of debts and on a method of restructuring which would allow privatization to follow. Quite a few bankruptcies were ultimately prevented due to this decentralized form of regulating debts.13 The examples demonstrate that attempts were made in order to avert the threatening wave of bankruptcies through relaxation (or non-application) of insolvency regulations. This legislative measure, that can be understood as a change of the supply of the institution of law, however, represents just one of the possible explanations for the relatively small number of bankruptcies. A further reason is that the existing insolvency regulations, even though they were insufficient, were only applied (or demanded) to a limited extent. Creditors were often not interested in the bankruptcy of an enterprise indebted to them. On the one hand, this applies to the state which took on a dual role. It is in fact creditor (concerning tax liabilities and outstanding social security contributions) of the indebted enterprises and at the same time, as it is their biggest shareholder, an important debtor. On the other hand, the commercial banks, which were often overburdened by the bad loans and (partially) state-owned, usually took a passive stance. Their lack of interest with regard to the institution of bankruptcy proceedings caused the banks to grant further loans to insolvent and usually state-owned enterprises; the stock problem turned into a flow problem.14 This flow problem was, however, not caused by the bad debts inherited from the planned economy alone. It is precisely in a transitional phase, when laws are still inadequate and courts are not yet working satisfactorily, that bankruptcy is hardly considered a threat. Enterprises then feel encouraged not to change their behavior and to accumulate new debts (Miszei (1995:94)). The flow problem can thus also be traced back to institutional deficiencies within the transformation phase. Revolving lending to state enterprises demonstrated its consequences for the foundation of new private businesses, meaning that loans to the latter were rationed. It is, however, relevant that the banks considered the state to be a good debtor, as it owned enterprises. Private entrepreneurs cannot

174 Privatization in Central and Eastern Europe

provide similar collateral security. This situation was aggravated as the suitability of land as a collateral was limited. What is more, an insolvency law, which gives priority to granting terms of protection to state enterprises still to be privatized (as was the case in Czechoslovakia), represents an unequal treatment of state and private enterprises. This is one of the reasons why, as suppliers and creditors of newly founded state enterprises, private enterprises do not have any or only delayed access to the assets of their debtors. All in all, it can be established that, in the transformation countries, bankruptcy law has, above all, been adjusted to the conditions prevalent in the state sector and that, at the same time, it impeded the development of the private sector. The legal resort from the passivity of creditors of state enterprises, which ultimately affects the private sector as well, could be that each insolvency must be reported by the debtor. The precondition for this would be the identification of those who caused the losses and the determination of the actual amount of the losses. At this point, the legalistic solution reached its limit within transformation countries. It is remarkable though that this limit was not reached with regard to the disposition of resources, but as far as the problem of liability is concerned. It turned out this way because disposition over resources can be regulated by law from above, so to speak. Liability, that is the additional establishing of losses, in contrast, presupposes an economic valuation of business activity and its attribution to those responsible.15 For the time being, the establishment of those responsible was not addressed within transformation. Due to the updating of old book values usually done in the course of conversion, bad debts were loaded on to the enterprises practically automatically. A compulsory bankruptcy, as temporarily practiced in Hungary, could then lead to a wave of bankruptcies. In order to evade the problem, the relaxation of insolvency law can be accepted as a temporary solution. It must still be clarified who is supposed to be held responsible for the “inherited” burdens and, above all, for the newly incurred losses. The question of liability is thus still topical and connects the past, the present and the future, more than disposition over resources does. In the end, it cannot be resolved “from above” by legal means, at a certain point of time by the simple passing of ownership laws which establish a formal equality of the types of ownership nor by conversion laws which automatically identify state enterprises as legal successors responsible for debts. A consensus must instead be achieved concerning the attribution or allocation of the burdens. This phase of achieving a consensus holds the risk though that the persons involved do not take advantage of their chance of law-making “from below”, and instead regulate disposition and liability by force.

12.2

Private (il)legal law-making

In all societies, law made “from above” constitutes only the framework of the legal system. Within this legal framework, law can be specified and

The Legal Solution 175

applied through legal private law-making and law enforcement (arbitration courts). Law-making “from above” and “from below” and the factors determining the interpretation and application of codified and uncodified law can be understood as law culture (Kranjc (1993:410)). A change of law culture thus does not only show itself in the repealing of old laws and the revision of codified law, but in the new or changed forms of law-making “from below”. This bottom-up development is often quite hard to observe as it is not organized by the state. Empirical studies in this field are, therefore, rare and mostly restricted to listing particular phenomena. This generally also applies to Central and Eastern Europe. So far, particularly law-making “from below” has been ignored. Illegal activities which can likewise be understood as an element of non-culture, are being described more frequently. 16 The supplementing and the detailed specification of codified law through private initiative demonstrates, among other things, that certain groups organize themselves, develop their own rules and create authorities for their control.17 Associations are examples of such an organization. According to Peterhoff (1995:93), associations help “[…] to organize and concentrate the economic, social or cultural interests of a group, to impart knowledge and to reach a consensus.” Due to their independent formulation of the group’s interests, associations which fulfilled this function were unthinkable within the socialist system, in which the totalitarian government party formulated the interests of society as a whole. In most Central and Eastern European countries, the development of associations was not allowed by law until the beginning of the 1990s. Chambers of Industry and Commerce are major associations which partly already existed as organizations in line with socialist party interest during socialism. Membership has been voluntary in most countries since the reorganization of the Chambers. In many countries, the Chambers’ functions are defined by law. In Russia, for instance, their legal role includes, among other things, the promotion of business activity and the procurement of information, as well as legally relevant activities, such as measures against unfair competition and the conciliation of disputes (see Peterhoff (1995:97f)). Arbitration courts can be created for this purpose. 18 The Chambers also have the right to collaborate with the examination of draft bills. Thus, they enforce laws due to their conciliatory function and, at the same time, as a result of their consulting function, devise the laws to a certain extent. Despite this ability of private enterprises to express and carry their interest through, the number of voluntary members remained small. The contribution rates and costs of special services provided by the Chambers do not seem to be the reason for this development. A major reason is that the Chambers have difficulties in overcoming their past. A further reason is that newly established enterprises are not informed about the activities of associations. All in all, the demand of private entrepreneurs for this kind of organization is still small.

176 Privatization in Central and Eastern Europe

According to the OECD (1996:87f), there is no clear distinction between the activity of the Chambers of Industry and Commerce, on the one hand, and the employers’ association on the other. The overlapping of their functions can be especially observed in Hungary, where the second largest employers’ association developed from the former Chamber, which also included small and medium-sized enterprises as compulsory members until 1989. Especially in Poland, small associations for private businesses have been established during recent years alongside the large industrial associations; they restrict themselves partly to the representation of local enterprises and are thus not attached much importance. In addition, the small associations which vary considerably from sector to sector enter into competition with each other. They cannot assert their interests effectively in the political arena and are not considered a counterweight to the large associations which organize, above all, the state enterprises. Being a shareholder of the enterprises, the state has a determining influence on the policy of associations, as demonstrated in Czechoslovakia (see Keilhofer (1995:291)), and, if necessary, it can enforce its interest against the emerging private sector. According to Peterhoff (1995:113), Russian banking associations often belong to the red business community. The underdeveloped financial markets generally seem to be a breeding-ground for the spreading of criminal wheeling and dealing. The system of payment transactions, which is being developed, for example, offers loopholes used by criminals in order to transfer illegal funds to their accounts. Illegal financial transfers to foreign countries and the subsequent money laundering are still “worth” the effort, as foreign trade is still partly regulated by quotas or tariffs. Not only entrepreneurs, but also public officials, who, for instance, pass on cheap state loans “for payment”, are participating in these financial wheelings and dealings (Shlapentokh (1996:403)). What is more, banks are being forced by criminal organizations to grant loans. The banks, in turn, order heavies to collect outstanding claims (Müller (1995:61)). As long as the legal law-making “from above” and “from below” remains insufficient, the question of liability is resolved by force. It is assumed that illegal activities have been increasing since the beginning of transformation.19 In Russia, for instance, the number of registered criminal offenses increased by more than 50 per cent between 1990 and 1993, reaching about 2.8 million (Goskomstat Rossii (1995a:101)). The offenses were largely committed by criminal organizations. 20 A common and widespread form of criminal activity is running a protection racket, which is supposed to affect about 70–80 per cent of the private enterprises in large Russian cities. Along with direct extortion (“black racket”), there is hidden extortion which can, for example, be camouflaged by a contract involving a service (Afanasjew (1994:290)). Enterprises are forced to pay 10–30 per cent of their turnover for the “services” of these protective

The Legal Solution 177

organizations (krysha meaning roof) (Shlapentokh (1996:402)). All in all, Russia is just one example for the high crime rates also prevalent in the other succession states, resulting from insufficient, inconsistent law-making and inadequate implementation of law.21 Illegal acts, such as organized crime and corruption, impair the economic development in transformation countries considerably. Corruption leads to decreasing private investment activity and growth is thus slowed down (The World Bank (1996:95)). Along with the corporate sector, which has to bear the costs for “protection services”, the state is also affected, for instance, if the tax authorities are corrupt. All in all, allocation is distorted. It is true though that it can hardly be estimated to what extent the economic development of the individual countries is harmed by crime, as these are illegal and, in most cases, undiscovered activities. According to the World Bank, corruption spreads if public officials and private persons involved have more to gain than to lose. This would be typical for transformation. 22 The World Bank considers it unsuitable to fight corruption by increasing state regulation. The rules as a whole would thus prove even more expensive, more complex and more inconsistent, and would open up new possibilities for the public officials to abuse their position of power for illegal activities. Corruption and crime should instead be fought through continued liberalization, de-monopolization and privatization, as this would increase the demand for legal institutions. The privatization suggested by the World Bank could prove to be more than just one measure designed to fight corruption. In those cases in which crime is low, it could, in addition, contribute to the reduction of state dominance within private organizations, induce privatized enterprises to exercise more influence on the activity of associations and initiate the creation of law “from below”. Even newly established enterprises would then benefit from this situation. This would, however, presuppose that privatized and private enterprises are confronted with similar problems and thus develop an equal demand for legal institutions. Whether this is the case or not will have to be questioned within the next two chapters.

13

The Economic Patent Remedy: Privatization “from Above”

The arguments usually put forward for the privatization of state enterprises have already been mentioned while discussing the neoclassical conception of property. The main argument is that private enterprises are run more efficiently than their state-owned counterparts. Efficiency gains can only be expected if the privatized enterprises work under hard budget constraints and if the decentralized principle of liability is applied. In market economies, the effect of privatization is thus linked to institutional prerequisites. Economics has traditionally discussed the question of how property changes as an institution separate from the effects of privatization, as the institutions existing in developed market economies emerged over a long period of time and as institutional changes take place almost imperceptibly. Privatization was thus analyzed under stable circumstances. This precondition was not prevalent in Central and Eastern Europe after the radical changes. A main objective of transformation was to create these new circumstances. This objective established a new task for privatization. Besides its job of stimulating efficiency, privatization was now an additional means to produce the core institution of property. It was thus assumed that the change of property order, as well as the additional prevailing circumstances, could be produced quickly. The institutional change, however, actually took place at a slower pace than expected. Privatization in Central and Eastern Europe will therefore be observed again in this chapter against the background of the experiences made in the first years of transformation and from two perspectives: first, what importance institutional shortcomings have for privatization, and secondly and conversely, what is the role privatization plays within institutional change, particularly regarding the change of the property order. The legal conversion of state enterprises represented a first approach to decentralize disposition and liability. The establishment of the liability principle was avoided by the relaxation and then the repealing of insolvency law, particularly as far as its implementation in the state sector was 178

Privatization “from Above” 179

concerned. Privatization can generally be understood as a further attempt towards decentralization. Thereby, in Central and Eastern Europe, its importance does not result from the fact that it helped to transfer physical resources into the private sector and use them there more efficiently than the state would have. The decisive assumption instead is that privatization itself would produce the circumstances necessary for the efficient use of resources. This would imply that during privatization enterprises are normally freed of the exertion of political influence, that the practice of state subsidizing is stopped, and that the new owners are held responsible for their activity. In that case, the enterprises are valuated again. There is a fundamental difference between this valuation and the legalistic valuation effected during conversion. Whereas during conversion the book values of enterprises were frequently updated or artificially determined by the state, within privatization, the valuation will be effected by non-governmental agents. Depending on the privatization procedure, this could, for instance, be the general public or a potential core investor. Due to this valuation, privatization is a “risky” process, as normally the actual situation of enterprises, including the situation of those which demonstrated bad debts, becomes evident and the burdens are allocated anew. The future private owners will not be willing to take on the liability for losses they are not responsible for if they anticipate the principle of liability. Roughly speaking, the redistribution of burdens within sale privatization is reflected by a low or even symbolic purchase price, so that public privatization revenues will prove small or even negative. Within voucher privatization, in which the state renounces direct revenues from privatization from the beginning, the price for vouchers in exchange for shares merely gives the general public a first hint; market valuation is affected and the distribution of burdens is obvious only at the time of the trading. The renewed valuation and distribution of burdens can temporarily be avoided, for instance, through restricted trading of vouchers and delayed stock trading, as well as delayed sale of enterprises. It thus seems that, for the time being, the valuation problem can be defused and shifted with regard to time, depending on the concrete shaping of the privatization method. Some countries have actually followed such “evasive strategies”. In reality, privatization was thus turned into an instrument, which (at least) delayed the change of property order. It is very important that after the privatization the new owners are not actually given any opportunity to socialize losses. The precondition for this is that insolvency regulations are created during privatization, at the latest, and subsequently implemented at least in the private and privatized sectors, even if thus a temporary unequal treatment of the state sector must be tolerated. In some countries this was, however, not the case. Privatization was effected without subsequently calling into account the privatized enterprises that reported losses. In principle, this way, the prac-

180 Privatization in Central and Eastern Europe

tice of the 1980s, namely decentralizing disposition over resources but socializing losses, was continued. The delayed valuation and the privatization without liability indicate that, at least in some countries, privatization was not understood as an instrument for changing property order. It was instead used to institute and implement transformation. The expected, positive effects of privatization, such as efficiency and welfare increases, were used as an economic policy instrument in order to gain general approval for transformation. Within privatization, many countries granted special privileges to the population and/or the employees, who acquired quasi-ownership rights during the 1980s. Privatization was thus a means to start the game of “transformation” for the time being; certain privatization methods were additionally intended to compensate the potential losers within transformation. While drawing up the privatization procedure, it had to be considered to what extent the compensatory elements were supposed to be “tinged” with additional components, which were considered to be important with regard to corporate control. In the end, the mixture of elements justified by efficiency and compensatory effects, which can be found in many privatization programs, reflects the fact that, in Central and Eastern Europe, privatization existed in an area of conflict between distribution and efficiency from the very beginning. The following section will briefly summarize the privatization debate at the beginning of the 1990s and discuss important aspects of the privatization procedures. The problem of acceptance will then be addressed separately. The course and outcome of privatization in the individual countries will be explained in detail following this general observation. In conclusion, the experiences of the individual countries with privatization will be compared with each other and thereby the change of the property order will be examined.

13.1 The privatization debate: the British model versus voucher privatization As a key word, privatization is a Western invention.1 The privatization concepts developed in Central and Eastern Europe, however, should not only be observed against the background of experiences with privatization in market economies. These concepts were instead also influenced by discussions on property, such as those held, for instance, in Poland and Hungary during the 1980s. At first, these discussions were about the reforms for managing state property and about concepts of self-management, but the proposals they involved set the pattern for the later development. Besides the discussions in Hungary, at the end of the 1980s, the ownership debate was started anew in particular by Poland, as Leszek Balcerowicz had published an essay there, as early as 1986, in which he described the workers’

Privatization “from Above” 181

stock company as one of the legal types of ownership (see Balcerowicz (1987:75ff)). Lewandowski/Szomburg (1989:264ff) followed with their model of voucher privatization of state-owned joint-stock corporations, which also provided privileges for the employees, in 1989, and thus at a point in time when the dominance of state property was already in question. This proposal of a free transfer of state property to the population, which opposed the Western privatization procedure of selling to (selected) investors at the highest possible price (the “British model”), stimulated the theoretical discussion on privatization in Poland, as well as in the West. Lipton/Sachs (1990:296ff) described voucher privatization as an admittedly quick procedure; the result it produces would, however, be an inefficient corporate control. The authors thus suggested complete “pure” voucher privatization by allowing investment funds as connecting links between the population, as the owner of the vouchers, and the enterprises to be privatized. The fundamental methods of the so-called “large” privatization that is to say, sale and voucher privatization, were thus created.2 Thus the question was raised as to who should be admitted to privatization: outsiders (foreign core investors, investment funds and the general public) or insiders (employees). The early 1990s can be described as the period of debates over the right privatization method. There were no discussions about the “whether” of privatization, but only about alternative procedures, and the methods were judged according to criteria such as speed, corporate control, privatization revenues, and so on. The advantages of a pure sale solution were generally considered to be that it generates privatization revenues, that it increases the influx of capital for enterprises and that in the case of a sale to strategic investors, it also increases corporate control. Its slow implementation and the possible low acceptance within the population were considered disadvantages. Pure voucher privatization was, in contrast, described as a quick procedure with high acceptance, which also takes into account the small domestic savings formation. The facts that voucher privatization does not generate revenues, that no capital is injected and that corporate control is decreased as a consequence of the widely spread shares, were considered disadvantages. The so-called management/employee-buy-out was generally assessed negatively. The World Bank took the earlier spontaneous privatization into consideration and developed an overview for classification and valuation purposes (see Table 13.1). The World Bank’s valuation of the procedures, however, is insufficient. It only considers the direct and shortterm effects within determined circumstances. Problems, such as incomplete information and decisions taken under uncertainty, which were prevalent particularly during institutional changes, are thus neglected. Therefore, within the privatization debate, the effects of alternative privatization methods under special circumstances were analyzed in more detail. Neoclassical economists have, for instance, addressed asymmetrical

182 Privatization in Central and Eastern Europe

information and principal–agent problems in this context. The results of these analyses, which relate to privatization revenues, as well as the valuation of enterprises as a whole and corporate control, are briefly summarized in the following. Selling enterprises leads to higher privatization revenues than voucher privatization only at first. High privatization revenues, however, are not produced automatically.3 For the net revenues to be achieved, it depends on business value and the expenditure for carrying out sales. What is more, revenues are determined by various factors, such as selling procedure, category of buyers and number of enterprises offered to be privatized. As far as the selling procedures are concerned, the various types of auctions prove advantageous as the valuation and the selling of the enterprise take place simultaneously. If just domestic buyers are admitted, the restriction through domestic savings formation could result in undervaluation. Revenues, which are small compared to market value, are also possible if the asymmetrical information of certain groups of buyers (for instance, if managers of state enterprises exploit insider information) is prevalent (Bornstein (1992:288)). A large number of participants as well as good knowledge thus increase the probability of a valuation of enterprises in accordance with market conditions. The prices clearing the market are, however, quite low, if a large number of enterprises is offered for sale at the same time. The objective of high privatization revenues thus requires slow sale, as well as the (expensive) provision of information on the enterprises being privatized. During voucher privatization, government net receipts are, in the medium and long-term, not necessarily lower than during the sale of enterTable 13.1

Privatization Methods and Objectives Better corporate governance

Sale to outside owners Management–employee buyout Equal-access voucher privatization Spontaneous privatization

Speed and feasibility

Better access to capital and skills

More government revenue

Greater fairness

+

–

+

+

–

–

+

–

–

–

?

+

?

–

+

?

?

–

–

–

Source: The World Bank (1996:52). Published with kind permission of the World Bank.

Privatization “from Above” 183

prises. If voucher privatization contributes to quickly privatize a large number of enterprises and if the efficiency of these privatized enterprises and thus the GDP increase, tax revenue will increase more strongly (assuming that tax rates stay constant) than during sale privatization. The privatization revenues achieved through selling can thus be made up for through quicker tax receipts (at least partially). To put it another way: if privatization revenues are relinquished, they must not be made up for through corresponding tax increases or a higher deficit to provide an equal level of public services (Schmieding/Koop (1991:12f)). In the course of voucher privatization, the method of auctioning vouchers against shares can, on principle, also be used to value enterprises. In this case, the voucher/share rate is a first indication. The resulting price, however, depends, among other things, on whether the vouchers are tradable and how they are denominated. 4 The value of vouchers issued in socalled investment points (as in the Czech Republic), for example, is not expressed in a domestic unit of currency. Then, only an internal comparison of enterprises (awaiting voucher privatization) is achieved in case the vouchers (special money) are not tradable or if there is a freeze period for stock trading. In analogy to sale privatization, it depends on the admitted participants and the information of bidders, whether internal and indirect valuation of voucher privatization is realistic or not. Voucher privatization, for instance, is thus restricted to the population of the country in question.5 In addition, as a consequence of the quite high cost of collecting information, the voucher holder will make fewer inquiries about the enterprises to be privatized than a potential core investor, for whom buying a large block of shares represents a high risk. All in all, it could be observed that in countries which chose the voucher method, the population hardly showed any interest in collecting their vouchers at the issuing office and in participating in privatization at first. It is considered that the information and valuation problem could be resolved if investment funds are interposed.6 This leads to a bid procedure that consists of several stages. The valuation problem, arising within pure voucher privatization, will generally remain the first stage, representing the exchange of vouchers against investment fund certificates. In the second stage, when investment funds auction enterprise shares against the vouchers they were entrusted with, they enter into competition with each other and with those residents who exchange their vouchers directly. In this stage of bidding, one could expect an improved valuation as a consequence of the information acquired by the investment funds. The concrete result of this indirect valuation does, however, depend on how far the bid procedure is regulated. In the end, a market valuation will only take place if enterprise shares and fund certificates are traded on the stock market and if a portfolio calculation can be made. This presupposes a functioning capital market.

184 Privatization in Central and Eastern Europe

A functioning capital market also reduces the existing control problem within investment funds. It is not guaranteed that the managers of investment funds represent the interests of the population as owners of the certificates. It can instead be assumed that between the population and the investment funds typical principal–agent problems will arise even after the distribution of the shares. 7 Thus, it cannot be excluded that the fund managers act in their own interest and possibly even misappropriate the assets they manage, much the same as was done during spontaneous privatization. Management contracts represent an instrument used to counteract this development. As the wide distribution of shares also implies that the control of the fulfillment of contracts is expensive, the activity of the funds will generally become more transparent as soon as investment certificates and enterprise shares are traded, and as the stock exchange offers additional information. In the medium and long term, trading can lead to a concentration of ownership through buying-up on the secondary market, as a result of which the control problems concerning the distributed equity holding, which initially existed within voucher privatization, are reduced. A similar development can also take place in cases in which the employees participate in privatization through employee-buy-out or special employee vouchers. As far as the control problems are concerned, there are clear differences between the selling to a strategic investor and the participation of the broad masses of the population only under market-economy and idealized conditions. It must, however, be assumed that precisely under the circumstances typical for transformation, meaning incomplete information and high transaction costs, an efficient reallocation of property rights will be impeded. Pure sale privatization to strategic investors was propagated with regard to corporate control, as under transformation circumstances, in the short and medium term, control problems and efficiency losses were instead expected to arise within the free transfer of enterprises to insiders and the population, rather than within a transfer to selected outsiders. Compromise suggestions included the idea of mixing voucher and sale privatization and considering further financial intermediaries beside the investment funds. According to the model of Lipton/Sachs (1990:293ff)), 10 per cent of the shares are thus transferred to the employees, 5 per cent to the management, 20 per cent to the population over mutual funds, 20 per cent to private pension funds and 10 per cent to insurance companies and banks (6 per cent to banks, to be precise); the rest of the shares will remain state property until they are sold to selected investors. The transfer of shares to banks and private pension funds planned by this model is not only supposed to improve external control, but also to capitalize banks and funds. The capitalization of newly founded, private pension funds is thus designed to free the national budget, in the long term, of a part of its bur-

Privatization “from Above” 185

dening social security expenditure. The capitalization of banks should serve the adjustment of their balance sheets (with regard to the bad loans) and put them in a position to participate actively in the restructuring of enterprises. Lipton/Sachs thus assume that the monobank system can quickly be reorganized into a Western system of commercial banks, following a German–Japanese model, to be precise, and that the banks will act as trustees for a short period and as owners of the enterprises after their privatization, which should be carried out rapidly. At the beginning of transformation, the reorganization of the financial sphere was mostly discussed regardless of the privatization of enterprises and under the assumption that it would be possible to quickly reorganize the banking system. Only a few authors included the question of how to restructure the banking system and also resolve the bad debts problem into the privatization debate, and addressed the connection between control and the valuation problem. Calvo/Frenkel (1991:141ff) stated that a socialization of the bad debts of enterprises, which, after all, would have been state-owned, would merely reveal the implicitly existing problem. Nuti (1992:6ff) considered it necessary to stop the banks’ automatic lending to state enterprises. Releasing enterprises and banks of their bad debts and their recapitalization was supposed to be an important prerequisite for a successful privatization of the enterprises, as well as of the banks. This would allow an easier identification of viable enterprises and the new owner of the privatized enterprise would not be made liable for losses made in the past. The banks could actively participate in privatization and restructuring as shareholders and as creditors. Begg/Portes (1992:3ff) also considered privatization to be an important component of transformation. They indicated, in the first place, that the privatization of overindebted enterprises would prove difficult without resolving the bad debts problem. In the second place, they doubted that the privatization of enterprises would actually lead to the expected efficiency increase if the credit market was not functioning. Despite these objections, already expressed at an early stage in theoretical examinations, many countries de facto began to privatize enterprises without regulating the bad debts. The ECE (1995:207) indicated in the mid-1990s that the problem of bad debts would have direct implications on the financial situation of enterprises, that it would determine the speed and the extent of their restructuring and probably even their privatization, and that due to the inefficient credit allocation and the high cost of borrowing, economic recovery and growth would be impeded. Therefore, without the regulation of bad debts and thus the implementation of the decentralized liability principle, the efficiency increases expected particularly from privatization cannot be realized. Precisely these efficiency gains though have been used by economic policy as an argument to maintain the approval of the population for privatization and transformation in general.

186 Privatization in Central and Eastern Europe

13.2

The problem of acceptance

As the analysis of the legal system has demonstrated, the Central and Eastern European countries have codified the right to private property in special property laws or new constitutions in a relatively short period of time. The subsequent concrete interpretation of property laws, for instance, with regard to the restrictions of private property, however, proved difficult. Privatization developed analogous to this. In many countries, an agreement on the “whether” of privatization was reached quickly, whereas there were continuing debates on the “how”, that is to say, the concrete privatization procedure. The varying period of time needed in order to firstly develop a consensus on the “whether” of privatization (as well as the right to private property) and secondly, on the concrete privatization procedure (as well as concrete restrictions of ownership), can be explained as follows. Addressing the concrete privatization procedure means that questions of distribution are discussed and agreed upon, in contrast to addressing the “whether” of privatization, which is made up of general principles. According to the contractarian model and on the basis of the terms “prospective” rule and “retrospective” change of distribution, used by Brennan/Buchanan (1985:137ff), this could also be formulated as follows: The “whether” of privatization addresses a rule, whose distribution effect is prospective and hardly assessable and which can be considered “fair” and thus meets with approval easily, whereas a concrete privatization procedure changes the previously existing distribution retrospectively and is immediately noticeable to the individual. As far as the latter is concerned, the costs for the individual are recognized and attributed quickly. The agreement on the “whether” of privatization was reached within transformation, above all, because economic policy emphasized the efficiency and welfare-increasing effects of privatization and additionally referred to successful Western privatization. It was simultaneously claimed that the quick establishment of a large number of new enterprises would compensate the possible job-shedding within the state sector. This description of an advantageous outcome of transformation increased the present value of the transformation benefits for the individual. The ideal outcome of transformation mentioned above would presuppose, among other things, that the individual countries reached an agreement on the privatization procedure and that, once chosen, the privatization strategy was implemented without delay. The development of a clear privatization strategy, however, had already proved difficult, as by choosing the concrete privatization strategy, distribution was also focused on retrospectively. The difference between reaching an agreement on the “whether” and on the “how” of privatization became apparent in Central and Eastern Europe as the individual countries passed privatization laws which partially included options for various procedures (for example

Privatization “from Above” 187

Poland) quite quickly, although the interpretation and application of the procedures, now permissible under the law, was still debated. The course and the outcome of the discussions on the privatization procedure in the individual countries depended on whether property rights were centralized at the beginning of transformation or decentralized, that is to say, unclear, as a consequence of the property erosion during the 1980s. Where property rights were centralized (as in the Czech Republic and Romania), it was possible to reach an agreement by granting compensation to the population in the form of voucher privatization. But, at times, this general agreement on the privatization procedure was followed by an argument over the amount of the compensation, so that privatization was delayed all the same (Romania). Where the property rights were decentralized and unclear, the parties involved had to first agree upon a new initial distribution of property rights, before a decision could be taken on the future privatization strategy. The political distribution of power of the individual groups which started negotiations with each other is thus important. In some countries, however, it was only possible to reach an agreement after granting compensation; the employees were, for example, conceded privileges within privatization (as in Poland). The concrete result fluctuated somewhere in between the extremes of recentralization of ownership rights, as was the case in Hungary, and decentralization, resulting from the recognition of previously quasi-private ownership rights of enterprise directors and employees (as in Poland). Not all countries achieved an agreement on the initial distribution within a short period. As Brennan/Buchanan (1985:140ff) demonstrated, the agreement on the initial distribution of physical resources can drag on or fail, particularly if the political distribution of power, the political ownership rights, are insufficiently defined. The groups (as for instance, ministries or employees) possibly overestimate their exertion of influence, demand compensation which is unacceptable and decide that they can await events to achieve their objective. Time-consuming political negotiations result. Even the principle of privatization could be challenged in long debates on questions of distribution, if the political ownership rights are unclear, meaning that the debate on the retrospective distribution raises the awareness of the possible negative effects of the prospective rule. This skepticism towards the “whether” of privatization can be increased further by the negative experiences with privatization of other countries. Privatization as an instrument designed to increase the present value of transformation is thus becoming useless. In the end, it could be that privatization itself is again challenged, as is the case in Belarus. The countries examined by the following have not reached this stage (so far). It seems that completing the procedures by compensatory elements is the reason why most countries succeeded in developing a privatization strategy and keeping the transformation game going, although this reason is only

188 Privatization in Central and Eastern Europe

of secondary importance. The main reason instead seems to be the fact that debates on decentralization of disposition and liability took place and were decided on separately. The question about which groups were supposed to be given priority treatment when granting rights of disposition within privatization was the main topic of the discussion. The question about who was supposed to be held liable for the inherited burdens and, in addition, for the losses incurred in the future was, in contrast, hardly ever addressed or temporarily avoided through the relaxation of bankruptcy law. The problem of acceptance was thus, so to speak, discussed under the aspect of disposition, which proved advantageous for the individual, not under the negative aspect of liability. The approval of privatization was thus paid for by neglecting the issue of liability first. The individual, chosen privatization procedure, therefore, reflects above all, whether and how groups were supposed to be compensated for the quasi-ownership rights they acquired earlier. The fact that the various procedures not only cause a different redistribution of resources, that is of chances and rights, but also imply a special allocation of old, as well as newly incurred burdens, namely duties, was, in contrast – if at all – only of minor importance. The problem of distributing burdens thus cropped up again during and even after the official completion of privatization. The way the individual countries handled this issue will be an important aspect, according to which the privatization conceptions of the individual countries will be observed in the following.

13.3

Privatization in the individual countries

This section will analyze “large” privatization – and exclusively this type of privatization – in the individual countries until roughly the end of 1997. In order to achieve comparability between the countries, the sections on the individual countries all demonstrate the same structure. The starting point is the privatization strategy (such as privatization method in the enterprise sector, privatization authorities).8 The course of privatization will be examined secondly and the current state of privatization will be shown on the basis of indicators commonly used in literature (the number of privatized enterprises or the share of production of privatized enterprises to GDP). The quantitative result which, by the way, speaks well for the success of privatization in some countries, will be relativized in a third stage. As far as there are empirical observations, they will be used in order to show how the privatized enterprises actually reacted (partly in comparison to state enterprises). The frequent slow adaptation of privatized enterprises leads to point four, the problem of corporate governance. This point will, among other things, deal with the question to what extent banks or other financial intermediaries are able to play an active role in restructuring enterprises and investigate how the bad debts problem was handled. The fifth and last

Privatization “from Above” 189

point will briefly outline the expectations of the individual country with regard to the future course of privatization. Finally, the countries’ experiences with privatization will be compared and analyzed in a separate section. Poland Under the Mazowiecki government in 1989/90, Poland first attempted to privatize according to the British model, contrary to the suggestion of Lewandowski/Szomburg. The valuation of enterprises without a functioning capital market and the small domestic formation of savings proved to be problematical. The selling of enterprises was delayed (Slay (1992:17)). In order to accelerate privatization, the law On Privatization of State Enterprises was passed in July 1990 and represents a compromise of the various privatization methods. It includes the option on voucher privatization (“mass privatization”), elements of pure sale (described as “capital privatization” in Poland) and the special procedure of “privatization through liquidation” in continuation of spontaneous privatization. A large number of privatization authorities participated in the decisionmaking on privatization in Poland up until 1996–97. The Ministry of Ownership Changes acted as the main organ. Its role was, however, relativized as, on the one hand, decisions could not only be taken by the founding organ, but by local authorities, and in case of important issues by the Council of Ministers as well. On the other hand, the employees had a considerable share in the decision-making. 9 Without the approval of the enterprises, privatization proved difficult in Poland for quite some time. This strong position of enterprises has repeatedly hindered transition and even privatization. There were repeated attempts to mediate between the individual groups, to be precise between the state (respectively the Minister for Labor and Social Affairs), representatives of the enterprises and the unions. In February 1993, it was possible to conclude the so-called “Pact On State Enterprises”, which envisaged, among other things, the financial reorganization of state enterprises and banks, as well as an amendment of the Privatization Law (Lowitzsch/Hermann (1995:3)). The enterprises’ right to take the initiative within privatization was thus strengthened. The pact additionally only included few concrete guidelines and opened up scope for interpretations, and again, it was not possible to develop a clear privatization strategy. In the period following, the groups got rather caught up in political discussions. Voucher privatization also got bogged down in the political debate. The new Privatization Minister Janusz Lewandowski presented a program for “mass privatization” which followed his previous suggestions of June 1991. It was planned to establish five to twenty investment funds (that is, state holdings) and to transfer 60 per cent of the block of shares of each of the approximately 600 previously selected and converted state enterprises on

190 Privatization in Central and Eastern Europe

to these funds.10 Shares of these investment funds (certificates) were supposed to be distributed free of charge (besides issuing costs) to the population and to become tradable after a blocking period of one year. As far as the remaining enterprise shares are concerned, 10 per cent were supposed to be transferred to the employees gratis and 30 per cent to be kept as state property for the time being. It was planned that a part of the state-owned shares will possibly be used for the establishment of a pension fund later on. According to Bl⁄aszczyk (1995:80), this model was criticized for the effect that the state would exert influence on these funds, even if, as intended, they were run by domestic and foreign managers. It was criticized, in addition, that a relatively small number of funds manage a considerable part of the enterprises’ assets, and that thus a concentration of ownership with the funds is taking place. A concentration was also feared concerning the owners of certificates, as it could not be ruled out that, at the end of the blocking period, many residents would sell their certificates to a few “rich” residents. In the end, this would thwart “mass privatization”. After all, attention was drawn to the revenue shortfalls of the public budgets resulting from gratis distribution. The program of mass privatization was passed by parliament with considerable delay in April 1993 and in a slightly amended form. The share that remained state-owned was reduced to 25 per cent in favor of the employees’ participation. Mass privatization was only instituted after the government changed again at the end of 1994 (Bl⁄aszczyk (1995:81)). Until summer 1995, 414 enterprises were selected for mass privatization – this number increased to 512 later on. The 60 per cent share was distributed to the 15 National Investment Funds established in the meantime in several rounds and partly based on a system of deciding by lot. Between November 1995 and November 1996, tradable privatization certificates were distributed to the population for a distribution fee amounting to USD 7. 11 The exchange of the privatization certificates for fund shares was effected at a ratio of 1:1. The funds were first quoted on the stock market on 12 June 1997. There were only temporary market profits.12 Given that until the end of 1996, mass privatization did not get beyond the distribution of the certificates, the other privatization procedures, capital privatization and liquidation remained the most important methods up to that point. In essence, capital privatization is a classical sale privatization. It is used especially to sell the large, previously converted and “sound” enterprises to residents and non-residents. The applied selling technique is direct negotiation with a strategic investor and/or public sale of shares. The employees are granted the power to acquire 20 per cent of the shares at half the price achieved, for instance, at auctions. The remaining block of shares was supposed to be sold primarily to a core investor. In practice, the 20 per cent employee holding, however, deterred potential investors. The valuation of enterprises is a further problem of capital priva-

Privatization “from Above” 191

tization. Selling of shares presupposes that the Privatization Ministry has an idea of the minimum price it can achieve on the market for the state enterprise in question, in order to prevent a sale far below the price it could have achieved. Privatization through so-called liquidation is a Polish peculiarity. Within liquidation, enterprises are first dissolved, and their assets are subsequently sold, added to other enterprises or leased by another enterprise. Liquidation can firstly be applied for according to Article 37 of the Privatization Law on the initiative of the founding organ or the employees for solvent as well as insolvent enterprises. Former employees of the enterprise can thus also lease the assets, if among other things, at least half the former staff joins the leasehold company (the so-called employees’ leasing). It is crucial that within this type of liquidation the old liabilities, which are connected with the assets of the enterprise, must be taken on (Lowitzsch/Hermann (1995:5)). It is thus not sufficient to only valuate the assets, if parts of an enterprise are spun off. The issue of which liabilities must be allocated to the corresponding assets has also to be addressed. The second type of liquidation is applied to enterprises in a difficult financial situation and according to § 18a and 19 of the law On State Enterprises and the Bankruptcy Act. During this type of liquidation, the buyer does not assume the liabilities. Da¶ browski (1996:238) describes the two different types of liquidation as privatization dissolution and bankruptcy dissolution. Lowitzsch/Hermann (1995:5) use the terms balance-sheet deal and asset-deal, which describe the different handling of liabilities more precisely. As already mentioned, in contrast to the balance-sheet deal, within the asset-deal the liabilities are not taken over by the buyer, and in their function as creditors, the banks can only claim a part of the sales revenues. All in all, the bad debt problem, which demonstrated its existence in Poland on the share of bad debts amounting to 30–40 per cent of bank assets in 1993 (ECE (1993:179)), was still not resolved.13 In Poland, privatization was slow at first. Up until mid-1996, 1048 enterprises were converted, though only 168 enterprises have actually been sold during capital privatization (see Vwd-Mittel und Osteuropa, 1 October 1996, p. 4).14 There were another 1223 enterprises within liquidation on the basis of the Privatization Law. The majority of these enterprises were transformed into lessee companies. One thousand four hundred and one liquidation procedures were initiated under the Enterprise Law; but merely 478 enterprises have been dissolved. According to Bl⁄aszczyk (1995:94), in 1995, there were still approximately 5000 state enterprises and 4614 of them were considered eligible for privatization.15 The number of privatized enterprises, however, is not crucial, but rather the way they acted. According to Da¶ browski (1996:240ff), examinations of privatized enterprises have shown that the enterprises, sold through capital privatization, received capital either through their new owners or through

192 Privatization in Central and Eastern Europe

the issuing of shares and that third parties helped to finance modernization. In enterprises transferred through employees’ leasing, the lack of capital was prevalent, among other things, as a consequence of the fact that the leased parts of the company are not accepted as collateralization of loans and that if they wished to act as investors, non-residents needed a permit to participate in lessee companies. The restructuring of lessee companies thus remained insufficient. These differences between capital privatization and employees’ leasing with regard to capitalization correspond to general expectations of these privatization procedures. It is, however, far more interesting that the lessee companies reduced employment much more than expected during and even after their privatization. One of the reasons for this is that, in lessee companies, the managers often own quite large blocks of shares and that they manage to get the employees to agree to reduce employment. The astonishing thing is that the enterprises, which were subject to capital privatization, introduced measures designed to improve quality and marketing organization even before they were sold, and thus prepared themselves for their privatization. One of the reasons behind this is that only “sound” enterprises, which generally adjust to new circumstances more easily, are subject to capital privatization. It is important in the context of capital privatization that the state thus determines a relatively clear privatization strategy and therefore stabilizes the expectations. As Estrin/Gelb/Singh (1995:151) indicated in their study, a clear privatization strategy generally increases the probability that state enterprises will adjust to the circumstances, which will only actually prevail after they are privatized. Pinto/Belka/Krajewski (1993:219) also addressed the adjustment reactions of enterprises by studying 50 Polish enterprises. The authors indicate three important prerequisites necessary for enterprises to change their behavior: first, hard budget constraints, secondly, a quick change of the relative prices quite distorted in planned economies, and thirdly, the expectation of managers that performance is rewarded, at the latest, as soon as privatization is completed. According to this, privatization is not the crucial factor in increasing the efficiency of enterprises. This is an empirical confirmation for the fact that hard budget constraints, and the liability principle behind it, are a decisive condition for marketconforming behavior. In Poland, the attempt to establish hard budget constraints was first connected with the evasive manoeuvres of enterprises, typical of former planned economies: cuts in subsidies to state enterprises and the increased control of the (automatic) lending of banks were answered by the Polish enterprises with the non-payment of taxes and by escaping into interfirm borrowing (Pinto/Belka/Krajewski (1993:245f)). The ratio between interfirm borrowing and bank loans increased between the end of 1988 and the beginning of 1990 from 70 per cent to approximately 150 per cent

Privatization “from Above” 193

(Nuti (1993:179)). In 1991 alone, interfirm borrowing increased by 70 per cent again. After 1991, the structure of enterprise debt changed. In their study of 77 enterprises, Gray/Holle (1996:8ff) indicate that, until 1993, the share of real bank debt and supplier credits decreased, whereas the share of tax and social insurance contributions arrears increased. In this phase, it was thus mainly the state that “suffered” due to soft budget constraints. The suppliers were increasingly exposed to competitive pressures themselves and the commercial banks were increasingly unwilling to credit their customers automatically. According to Pinto/Belka/Krajewski (1993:246), the improved public supervision of banking and the beginnings of commercialization contributed to the changed attitude of banks. Since 1992, the banks’ interests in granting new loans more cautiously, as well as in collecting already existing loans have been increasing due to their partial privatization in the form of a participation by employees (The World Bank (1996:101)). Banks were already instructed in 1991 not to effect any debt rescheduling for doubtful bad loans any longer. This instruction was brought into force in 1993 within the Enterprise and Bank Financial Restructuring Law. In 1991, banks had to indicate their present amount of bad loans first, in order to participate in this program and benefit from recapitalization through government bonds.16 There were various courses the banks could then follow to regulate bad loans (Lowitzsch/Hermann (1995:5)): the institution of bank conciliation proceedings, the institution of bankruptcy proceedings, the selling of debts and debt–equity swaps. Nine large, state-owned banks have participated in the program. In spring 1994, conciliation proceedings had been instituted with a quarter of all debtors on more than half of the bad debts (ECE (1995:210)). Approximately 16 per cent of the debts were allotted to enterprises within bankruptcy proceedings. Only 4 per cent of the debts were sold. Debt–equity swaps were instituted in just 40 of the 800 enterprises. The small number of actual equity participations cannot only be traced back to the banks’ lack of interest, but also represents a consequence of tax discrimination and, as far as debt–equity swaps are concerned, of the protracted negotiations with the Privatization Ministry (Buch (1996:95)). The Polish approach of inducing direct negotiations between banks and enterprises represents a decentralized approach to solving the bad debt problem. This decentralized solution is considered quite successful. Although bad debts were settled, in most cases, the expected effect, namely that enterprises would initiate restructuring, was not noticed. Restructuring was rarely observed, particularly in enterprises whose bad debts were regulated through bank conciliation proceedings. According to Gray/Holle (1996:31ff), the position of the creditors is quite weak within insolvency procedures. The application of special procedures in a few selected enterprises would have strengthened the expectations of the enterprises that

194 Privatization in Central and Eastern Europe

the state might even initiate a regulation of bad debts in the future (moral hazard problem). In addition, the invention of such unconventional procedures, which are only applied to few selected enterprises, was supposed to hinder the further development of generally applicable standard procedures, such as judicial settlement and bankruptcy. All in all, as far as the regulation of bad debts is concerned, it proved important that particularly during transformation preference should be given to clear and generally applicable procedures over special methods, which have been developed especially for transformation and which were initially intended to take the special transitional problems into consideration. An important reason for not carrying out restructuring is often seen in the fact that the banks involved in those restructuring programs did not take an active part as equity suppliers or creditors in the enterprises, but passively supported the expectations of the management of the enterprise (see Buch (1996:94)). In most cases, when it comes to encouraging banks to act differently, their privatization is suggested. This action has been intended in Poland since 1991; it was then planned actually to be carried out together with the restructuring program and to be completed at the end of 1996 (Ludwig (1996:14)). In general, though, only a partial privatization was achieved. The most important was, so far, the partial sale of the Handlowy Bank in 1997, which included the participation of foreigners. As well as the continuation of bank privatization, the restructuring and privatization of enterprises in problematic areas (such as steel) is supposed to be pushed ahead and completed by 2001. The possibility of swift action was thus also created by the new Privatization Act, which renders privatization independent from the approval of employees. 17 Until the end of 1997, approximately 45 per cent of the former state enterprises were involved in (partial) privatization. The Czech Republic (and Czechoslovakia) After the “velvet” revolution, Czechoslovakia first passed and amended important economic laws. Due to political discussions, the Privatization Law, however, supposed to have been passed in 1990, could only come into force on 1 April 1991 (Keilhofer (1995:145)). The law mainly focused on voucher privatization (“coupon privatization”); its first wave started with the selling of coupon booklets in October 1991 and was completed in the Czech Republic on 1 March 1995, after experiencing the second wave and the issue of shares for vouchers (EBRD (1995:39)). In the Czech Republic, voucher privatization included 4000 enterprises. As a type of privatization “from above”, the Czech voucher method also comprises elements of a privatization initiated “from below”. State enterprises, for instance, had to work out a privatization project which included the valuation of the enterprise, a schedule for privatization, as well as the determination of the privatization method (Keilhofer (1995:147f)). The

Privatization “from Above” 195

enterprises were additionally committed to pass on information to others, if these persons intended to submit a competing privatization project. After the approval of privatization projects through the Privatization Ministry, the enterprise (respectively the parts planned to be privatized) was first dissolved and passed to the National Property Fund, which initiated privatization with regard to the project approved as a second stage.18 Roughly outlined, voucher privatization was carried out following the procedure described below (Wieners (1994:196)): Coupon books were distributed during each wave as non-negotiable documents for a registration fee of Kˇcs 1000.19 These booklets comprised 1000 so-called investment points. The initial bidding price of investment points for shares was determined on the basis of the book value of the enterprises and the number of potential coupon-holders. The first wave thus included the privatization of corporate shares, amounting to a total book value of Kˇ cs 270 bn.20 With a population of 8.5 million entitled to receive coupons, and after the deduction of the fee, an approximate value of Kˇcs 30 000 per booklet was determined. Considering the nominal value per share of Kˇcs 1000, a booklet thus represented 30 shares. According to this calculation, each share was the equivalent of 33 investment points. The first wave was then initiated on the basis of the starting price, calculated as mentioned above. The offered investment points were compared with the artificial starting price. In the case of an over-subscription by more than 25 per cent, the points were returned and the starting price was raised in the next round; in the case of an under-subscription, all points offered for shares were exchanged and the price was reduced in the next round (Keilhofer (1995:156)). The number of rounds was not determined beforehand, in order to prevent speculation and a possible under-valuation. The first wave was completed after five, and the second after six rounds. A so-called zero round took place before starting with the first round on 18 May 1992. This proved to be necessary as, at first, private investment funds were created spontaneously. The creation of these funds was initially not planned in the privatization concept (Wieners (1994:197)). They started to purchase coupon booklets from the population in fall 1991 and promised high returns. The registration of coupon booklets became hesitant. A run on coupon booklets was the consequence, making it necessary to extend the period of issue. During the zero round in spring 1992, the population was given the opportunity to decide whether and how many investment points it was willing to entrust the funds with or offer for shares directly on their own within the first wave. As far as the points are concerned, in the Czech Republic, 72 per cent were transferred to the funds. This high figure is, above all, the consequence of the promises made by the funds. Some of the coupon holders have also realized that the funds can gather information relatively cheaply and that they have better methods to pool the risks. Risk management was, though, restricted by the

196 Privatization in Central and Eastern Europe

fact that funds were only allowed to acquire a maximum of 20 per cent of the shares of an enterprise. It came about that after the five rounds completed during the first wave approximately 93 per cent of the offered shares were transferred to either the funds or the population. The funds received about 64 per cent. In the Czech Republic, the starting price was thus increased to 54 points in the second round. As a consequence of the lower demand for shares, the rate was reduced to 39 points in the third and 15 points in the fourth and fifth round. All in all, more than 70 per cent of the shares were transferred at the starting price or above during the first wave (Keilhofer (1995:168)). Ninetysix per cent of the offered shares were transferred during the six rounds of the second wave which, after the division of Czechoslovakia, was only carried out in its previous form in the Czech Republic. The investment funds, which received almost 64 per cent of the investment points, made every effort to acquire, above all, the shares of “healthy” companies. Ultimately, they thus received merely 28 per cent of the shares offered in the course of the second wave (Buchtíková (1995:16)). The trading of shares started, after the opening of the stock exchange on 1 April 1993, in the summer of 1993; it is true though that only a part of the shares was admitted for official trading. Besides stock trading through brokers, the population can buy or sell shares directly using the so-called RM-system (registra´cní místo), which was created in order to continue voucher privatization. According to Laˇstoviˇcka/Marcinˇcin/Mejstˇrík (1994: 22ff), however, high prohibitive participation costs (for instance, commissions) can be reached. There were no uniform prices on both markets at first. One reason for this was that only restricted price variations were allowed on the Prague stock exchange. Additional reasons were the differing trading hours and the different volumes of trade. In the last six months of 1993, the prices of the same shares increased at the stock exchange in Prague, whereas in the RM-system they went down. During the following year, the prices generally went down as the trading of shares of enterprises included in voucher privatization began, and as many shareholders tried to sell shares in order to receive liquid funds. Sudden price falls followed in 1995 after completion of the second wave of voucher privatization and resulted in the oversupply of shares (Czech National Bank (1996:50ff)). In the first six months of 1996, the share index then only showed a temporary trend towards increase on both stock exchanges (Czech National Bank (1996a:33ff)). Approximately half of the total assets were transferred to the population, to the investment funds through voucher privatization, until the end of 1995 (The World Bank (1996:53)). A further 10 per cent were sold or returned within restitution. The rest, approximately 40 per cent of the assets, remained in the hands of the state. This includes the so-called strategic enterprises showing a book value of CZK 170 bn; the value of still state-

Privatization “from Above” 197

owned enterprises even amounted to about 240 bn CZK in 1997 (EBRD:1997a:164)). This relativizes the importance of voucher privatization, which was theoretically intended to have the advantage of an extensive and quick denationalization. The outcome of voucher privatization must also be examined in terms of corporate governance and adaptability of enterprises. The dominant role of investment funds in the enterprises was prevented from the very beginning through the 20 per cent-clause applied within the transfer of stocks, even if this clause was partially circumvented. It is true, though, that even a block of shares of 20 per cent is hardly to be found in the portfolios of the funds. Stakes in the order of 10–20 per cent represent less than 15 per cent in the portfolios of the funds (Kenway/Klvaˇcová (1996:803)). Enterprise shares are thus scattered over the individual funds. The various funds would thus have to arrange the restructuring of the enterprises together. According to what Kenway/Klvaˇcová have learned from their questioning, the funds must additionally overcome the difficulty of removing the old socialist management, who consider themselves to be the owners. In answer to the question of whether restructuring has been initiated in the enterprises, funds mostly indicate that no changes have taken place yet. All in all, the advantage initially seen in the solution of investment funds, that the funds would replace a core investor and take an active part in enterprises, was not realized in the Czech Republic after the primary distribution of shares. An additional reason why funds do not take an active part comparable with that of a core investor is that they are insufficiently controlled themselves. Principal–agent problems arise between the investment funds and the population as owner of the fund certificates. The problem of corporate governance is thus shifted to the stage of fund governance. This holds the risk that fund managers do not represent the interests of the shareholders, as actually happened in the Czech Republic. The fact that competition between funds is slight and thus has no disciplinary effect also contributed to this situation. The investment points acquired by the investment funds were not equally distributed between the 445 existing funds. Approximately 60 per cent of the points collected by the funds during the first wave and about 40 per cent during the second were acquired by only six funds (Kenway/Klvaˇ cová (1996:801)). Aside from the population, the banks which were subject to voucher privatization are themselves shareholders of the funds. Five of the most important funds alone were established by banks or insurance companies. During privatization it thus occurred, for instance, that the investment fund established by bank A bought shares in its own house bank or in bank B; partially, the banks also acquired each other’s shares directly. An inscrutable tangle of ownership relations resulted from this direct and indirect participation, also described by Kenway/Klvaˇcová (1996:797) as “web

198 Privatization in Central and Eastern Europe

of cross-ownership”. The banks were not fully privatized. The state continued to reserve itself controlling stakes of the bank portfolio through the National Property Fund (Buch (1996:90)). With that, the state was able to influence the investment funds indirectly and thus the privatized enterprises through its banks. According to Keilhofer (1995:158), the state’s possible indirect exertion of influence even held the risk of a actual renationalization of privatized enterprises. Even if, so far, there were no indications of that, the private sector could still not be clearly differentiated from the state sector. Cross-control though also exists, for instance, in Germany, where banks are ascribed an active role as shareholders of enterprises. In Germany, however, the ownership relations between banks and enterprises are opposed by the competition on the credit market. According to Kenway/Klvaˇcová (1996:807), this is not the case in the Czech Republic. Here, privatized enterprises would consider bank loans to be a financing source of minor importance. In addition, the (bank’s) investment funds have bought enterprise shares during voucher privatization with earmarked coupons. The shares that the funds now held would thus not be the result of an earlier decision to increase the equity capital of enterprises. All in all, the investment funds and their owners, the banks, would not have acted as owners from the very beginning. What is more, the banks did not want to take an active part as owners or creditors at all. This becomes clear if the question about the role banks play in terms of corporate governance is turned round and now reads: what importance did privatization have for the development of the banking system? Hölscher (1996:117) understands the Czech voucher privatization as a way of delaying the bad debts problem. The new capitalization of enterprises through vouchers would help the banks to gain some time. At the same time, the problems would institutionally be shifted to the investment funds which can postpone the valuation problem through risk-pooling. Czech banks, however, are burdened not so much by bad debts inherited from the planned economy, as from those incurred after 1991. With the establishment of the Consolidation Bank in 1991, Czechoslovakia was the first country in Central and Eastern Europe to tackle the problem of bad debts. The consolidation bank assumed a part of the bad loans of the commercial banks which were estimated at approximately 20 per cent of the total bank assets (ECE (1993:179)). The commercial banks were then recapitalized by means of transfer of government bonds. A second recapitalization was effected in October 1991 through issuing bonds of the National Property Fund which were backed by privatization revenues amounting to Kˇcs 50 bn (Keilhofer (1995:216)). The major part was used to write off the bad loans of enterprises potentially able to survive. Banks participated in selecting those enterprises (EBRD (1995:158)). After these two recapitalizations, however, state as well as private banks granted new (bad) loans to

Privatization “from Above” 199

those enterprises which were partially still burdened by bad debts and were not always likely to survive. Thus, a flow problem resulted.21 In their function as creditors, the banks were not interested in instituting bankruptcy proceedings, as this would have created a difficult situation for themselves. At the same time, due to the insolvency regulations, bankruptcy proceedings could only be instituted at the request of at least two creditors (mostly of banks). In addition, enterprises being privatized were granted a term of protection. 22 The measures that were supposed to meet the flow problem remained insufficient. Instead, the Consolidation Bank which was initially intended as a “hospital” for the bad loans incurred in the planned economy repeatedly acquired new bad debts from big banks which were incurred during transformation (Desai (1996:476f)). These operations were again backed partially by means of the National Property Fund, whose scope for an active restructuring of enterprises was thus restricted. Debts of the Consolidation Bank were partially taken over by the state. A further consequence of the inadequate solution of the bad debts problem was that, due to the preferred granting of revolving loans to the state sector and the sector to be privatized, newly established enterprises were granted loans to a quite small extent and only on unfavorable terms.23 In 1996, the Czech National Bank increased the pressure on the bank sector and revoked the licenses of some insolvent banks. At first, this affected mostly small banks. But, due to the mutual interconnections between banks, this proved to have an effect on the big state-owned banks as well. The risk of a domino effect and of a banking crisis were, therefore, already in existence. The issues discussed in this situation were, among other things, by whom and to what extent would depositors of the bankrupt banks be compensated. The question of how the burdens are supposed to be distributed thus surfaced again. The imminent shifting of liability on to small depositors, the weak position of small shareholders regarding the control of funds, as well as the intransparent property rights were fought in the Czech Republic – and in other countries as well – in the first place, through the amendment of existing laws. The Deposit Insurance Fund was reformed in July 1994; the accounts of natural persons were insured up to 80 per cent or CZK 100 000 at most (Buch (1996:89)). The amendment of the Commercial Code that came into force on 1 July 1996, and the new law On Stock Exchange and Securities offer the minority shareholders better protection. The new act concerning investment funds establishes that the funds must not make any misleading statements and false promises, and that the interests of the shareholders must be protected. The tightened compulsory disclosure of stock corporations that even investment funds must convert into, as well as more detailed information about stock exchange transactions, are supposed to increase transparency. Ultimately, these measures indicate that voucher privatization was not advantageous for the population, but rather that

200 Privatization in Central and Eastern Europe

small shareholders were put at a disadvantage on the (underdeveloped) capital market. They had to be protected by specific laws. The problem of cross-ownership was met by tightening banking legislation in 1998. The shares of non-banks that the banks are allowed to hold were restricted and bank representatives were forbidden to join the supervisory boards of industrial enterprises (EBRD (1998:163)). The privatization of banks was started, partly with foreign participation. It is, however, true that due to the inadequate solution of the bad debts problem this process is taking place hesitantly. All in all, the Czech privatization which actually demonstrated quite clearly defined property rights at its starting-point, led to opaque property structures. Relations between banks and enterprises exist in the market economy as well. The difference is, however, that in the Czech Republic, banks, funds and enterprises were not legally responsible for losses. Instead, in the end, the state authorities, such as the Consolidation Bank, which were initially established for the one-time regulation of bad debts, have promoted the process of revolving crediting. The banks could thus continue their practice of granting the enterprises loans which later had to be classified as bad loans. Through the risk-pooling of the funds in case of over-indebtedness, enterprises were additionally spared the bankruptcy which could, anyway, only be instituted after a term of protection. Against this background, privatization ultimately only delayed the decentralization of liability. The aim of changing the behavioral patterns of enterprises and banks was not achieved. Hungary In contrast to the Czech Republic, in Hungary, privatization is not based on a once chosen and then consequently applied privatization strategy. Instead the sale method prevailing in Hungary was further developed in the course of time as a legalized and controlled form of spontaneous privatization. This was done by experimenting, rather than by consciously drawing up the privatization procedure. The process of trial and error led to repeated changes in the competencies of the authorities entrusted with the task of privatization. Stages of a centrally controlled privatization “from above” thus alternated with a controlled privatization on the initiative of the state enterprises. Compared to the two countries already portrayed, Hungary demonstrates distinctive features as far as privatization is concerned. Firstly, Hungary clearly decided in favour of compensation instead of restitution. Secondly, foreign capital plays a quite important role within privatization. On the one hand, this is because non-residents were granted favorable conditions in order to obtain high privatization gains. On the other hand, at the beginning of the 1990s, Hungary was considered abroad to have experience with reforms and be quite advanced in creating a market economy. The

Privatization “from Above” 201

increased importance non-residents gained during privatization, however, created concern at the country’s potential sell-out. Attempts were, therefore, made in the individual stages of privatization to encourage interested residents to participate in privatization through special privileges. In Hungary, the phase of so-called spontaneous privatization was completed in 1990 with the establishment of the State Property Agency (SPA). A first program for large privatization was launched in 1990 and included the selling of 20 state-owned enterprises.24 The centralized form of the selling method, however, hardly proved successful, due to, among other things, the bureaucratic approach of the agency and the complicated valuation procedure. Many enterprises were merely converted into corporations. In the first year of privatization, to be precise between March and December 1990, the privatization gains amounted to just HUF 670 million or 0.05 per cent of government revenue. In the following year, the figure increased to HUF 31.38 bn (National Bank of Hungary (1995:41)); this represented approximately two-thirds of the planned amount. The major part of the revenues, namely more than 80 per cent, came from foreign buyers. As from 1991, the privatization procedure was again increasingly decentralized. The so-called “management- and investor-initiated privatization” was introduced at first. The idea behind it was to develop a procedure which starts “bottom up”, to be precise through the management of the enterprise or potential, external investors, and thus initiates itself outside the ponderous centralized selling procedure. Later on, the so-called “selfprivatization” was developed and this procedure implied that privatization was not only initiated but also carried through by private consulting firms in cooperation with state-owned enterprises. If the privatization was successful, the consultants (determined by tender within a bidding process) received a share of the sales revenues and a bonus if they completed the procedures rapidly. This Hungarian method of “privatization of privatization” is considered quite successful. It proved possible to completely dispose of 260 enterprises in both stages of self-privatization between autumn 1991 and the end of 1993 (National Bank of Hungary (1994:51)). The fear of a sell-out increased as a consequence of the predominance of sales to foreigners. In the course of time, additional procedures and new forms of existing procedures were introduced with the aim of encouraging larger numbers of the Hungarian population to participate in privatization. These procedures include, for instance, interest-subsidized loans earmarked for the buying of corporate shares. At the same time, the acquired stakes serve as collateralization of a loan; this defuses the problem of unclear property rights of land. Interest-subsidized loans can also be used within the Employee Stock Ownership Program (ESOP). At least a quarter of the employees must be willing to buy shares of their enterprise in order to

202 Privatization in Central and Eastern Europe

participate in this program (Petsche (1996:70)). An additional innovation relates to the so-called privatization through leasing, which can be carried out in enterprises with assets up to HUF 500 million and which cannot yet be sold. In addition, there is privatization through franchising, meaning that particularly hotels, chains of retail shops and big department stores are split up into branches and then sold. Thus, franchising is a modern type of break-up and subsequent privatization, and one of the advantages is that the new, still untrained owners, who were unfamiliar with the market, were still in the care of the franchiser. The change in the procedures and the introduction of “privatization of privatization” both led to the fact that the role of the Property Agency was newly defined and that it had to be determined which concerns were supposed to be subject to privatization. A reform of the authorities participating in privatization followed in 1992. The Hungarian State Holding Company was established for the management of property, which was supposed to remain (at least partly) state-owned. The property being privatized was transferred to the State Property Agency which represented the state as the owner. The agency, however, was allowed to decide almost at its complete discretion, seeing as it was not bound to the criteria of decision prescribed by law and as its decisions were unappealable.25 Gross revenues of approximately HUF 415 bn were achieved through privatization between 1990 and the end of 1994. Only 73 per cent represented cash receipts. The rest constituted so-called “restitution coupons” and “existence credits” (National Bank of Hungary (1995:41ff)), the significance of which has increased in the course of time. Therefore, after the high cash receipts from privatization in 1993 (HUF about 133 bn), the sales revenues of the following year (HUF 36 bn) could only contribute to service debts of the public budgets to a small extent. The decreased cash receipts from privatization can additionally be regarded as a consequence of the continuous debate on the reorganization of privatization. During 1994, non-residents were no longer as involved as in the previous years. Between 1990 and the end of 1994, however, they still acquired almost 13 per cent of the corporate assets, which were initially held by the Property Agency. Residents account for 30 per cent; a percentage of only 7.5 per cent of it was acquired by employees. Fifty-two point five per cent were still state-owned and 4.5 per cent represented local property (National Bank of Hungary (1995:40)). Privatization was basically centralized again by the new Privatization Law, which came into force in June 1995. The separation of the Property Agency and the Holding Company was abolished and both agencies were merged into the so-called Privatization and State Holding Company. The authority was expressly assigned the task of privatizing the state enterprises put under its control rapidly and in accordance with predetermined criteria of decision. One hundred and fifty-six enterprises were excepted as they were

Privatization “from Above” 203

classified as strategic and as the state should hold at least a blocking minority in them (Petsche (1996:77)). Moreover, enterprises which proved difficult to sell can be transferred by the privatization agency to a third person as an administrator by means of tender; this represents a certain decentralization of control over state-owned enterprises. The contract of the administrator can also stipulate that he will buy the company after completion of his fiduciary duties. The administrator can thus initiate the restructuring in a state-owned enterprise first, and if this proves successful, take the enterprise over as its owner. This model grants the potential investor a transitional phase, during which he can gather additional information about the state enterprise which would, otherwise, hardly be obtainable, initiate a new business policy and test the adaptability of the enterprise. Even according to the new Privatization Act, payment by installments is accepted and so-called existence credits are granted, in order to simplify purchases through residents. The “simplified privatization”, that is, privatization leasing and employee participation, were retained. This procedure, intended for the privatization of small and medium-sized enterprises, can only be initiated if the cash sale fails. As far as sales are concerned, the position of the employees of the enterprise being privatized has basically been strengthened. The employees must be informed about important regulations of the contract before the privatization. The employees must even give their consent for the privatization of social services of the company. This reflects the changed objectives of privatization. The new law mentions the preservation of jobs and social aspects along with a variety of additional objectives, such as increase in efficiency, the structural change and the calling in of foreign investors. It is, however, unclear what decisions will have to be taken in case of conflicting objectives. It is particularly not clear whether the explicitly stated objective of the new law, of carrying out privatization as fast as possible, is actually given priority over the initial aim of achieving high privatization revenues. In 1995, it proved possible to achieve both objectives simultaneously as the influx of foreign investors increased again. At the end of the year, the revenue amounted to the equivalent of more than USD 3 bn and demonstrated an increased share of cash receipts. It amounted to about USD 1 bn in 1996 and USD 1.8 bn in 1997 (EBRD (1998:170)). Until the end of 1995, a total of 40 per cent of the former public property was sold to outside investors, most of whom were foreign. A mere 2 per cent was taken over by the management and the employees. Four per cent was transferred within restitution (The World Bank (1996:53)). Local authorities and social insurance companies possessed 12 per cent. The state still owned 42 per cent; this does, however, include strategic enterprises. In spring 1996, the Property Agency, which was initially put in charge of 1676 public enterprises, managed a state share of below 50 per cent with 1109 enterprises and a majority stake in 316 enterprises (EBRD (1996a:154)). Even if

204 Privatization in Central and Eastern Europe

in the coming years denationalization progresses quite well, the state will still take an ownership stake in important enterprises in the future, due to the amendment of the Privatization Act of summer 1997. The state has reserved itself a “golden share” in 27 enterprises (among others, of the power-supply industry) and has thus gained decisive co-determination rights in management decisions (EBRD (1998:170)). The outcome of Hungarian privatization and the division into private and public sectors, however, have to be relativized. After studying 220 of the biggest Hungarian enterprises, David Stark (1996:996f) learned that the ownership changes have not clarified property rights, at all. According to Stark, the dividing lines between the public and the private sector on the one hand, and between the individual enterprises as units of organization, on the other, are blurred. Moreover, the boundedness of justificatory principles is weakened.26 Stark (1996:1013f) understands these principles more or less as a cluster of rules, which can be followed by economic agents and perform an activity which can be calculated. But in particular under the circumstances prevalent during transformation, such points of reference do not exist. The persons involved instead find themselves confronted with various (even contradictory) principles and criteria of assessment. They do not know about the so-called “correct” value they could use as orientation.27 Due to this uncertainty, and in order to somewhat come up to the various criteria of assessment simultaneously, the actors attempt to diversify their portfolio and create recombinant property: Recombinant property is a form of organizational hedging, or portfolio management, in which actors respond to uncertainty in the organizational environment by diversifying their assets, redefining and recombining resources. (Stark (1996:997)) In order to portray the development process of recombinant property, Stark (1996:1001ff) analyzes enterprises (and banks) of various legal forms. As far as joint-stock companies are concerned, he observed that many of these companies do not represent new businesses, but are converted state enterprises, in which the state still holds the majority through the Property Agency. Thus, in 1993, 71 per cent of the 220 biggest enterprises he analyzed still demonstrated a certain state participation; non-residents held controlling interest in more than 16 per cent of the enterprises. Only 5.5 per cent of employees, though, owned blocks of shares of at least 25 per cent of the corporate assets. Beyond this participation of the state, non-residents and employees, the enterprises have also acquired a large number of shares of joint-stock companies. Legal entities even constitute controlling shareholders in almost a fifth of the analyzed joint-stock companies. According to Stark, this is therefore definitely a matter of interenterprise ownership.

Privatization “from Above” 205

There are also limited liability companies which are established by private persons. A large number of the enterprises were, however, newly established or hived off from public (joint-stock) companies (Stark (1996:1005ff)). This kind of hiving-off is, for instance, effected in order to reduce the state’s exertion of influence, to share out the debt burden and to avert the threat of bankruptcy. The separated enterprises thus group similarly to satellites on several orbits around the state enterprise. Although the satellites are formally independent, they are still closely connected with the parent enterprise through stakes. The management of the separated company often holds stakes, too. The partial, instead of complete, acquisition is advantageous to the management as, this way, it can share the ownership risk with the parent company. The management thus follows the strategy of reducing risks. After all, even banks have acquired shares of insolvent enterprises through debt–equity swaps. Horizontal relations thus arise between the big joint-stock companies, as well as vertical connections between the joint-stock company and its satellites.28 Moreover, networks are created between the enterprises. Hence, Stark also describes the Hungarian ownership link-ups as a metamorphic network. According to Stark, because of this network, it is not sensible to consider only individual enterprises when dealing with restructuring. The observation of “network ownership” is particularly necessary, as he believes that the assets and liabilities of an enterprise could be owned by different networks. Thus, Stark reaches his crucial thesis about ownership changes in Hungary: Parallel to the decentralized reorganization of assets is the centralized management of liabilities (Stark (1996:997)).29 Stark’s observation of decentralization of assets with simultaneous centralization of liabilities renders him one of the few authors who have not merely analyzed the change of disposition over resources through hiving off operating units or through privatization, but who have additionally addressed the new distribution of liabilities, and thus the question of liability. Stark therefore describes the problematic issue of implementing bankruptcy law and looks into the problem of bad debts. In Hungary, the first step towards resolving the problem of bad debts was taken at the end of 1991. The state offered guarantees for approximately half the bad loans found in the balance sheets of commercial banks before the bank reform of 1987 (National Bank of Hungary (1994:153)). Despite this first regulation of debts, the amount of doubtful loans has been increasing continually since 1991. This increase not only resulted from the renewed borrowing of enterprises, but also occurred as a consequence of the new and more cautious classification of doubtful loans. The fastworsening situation of banks caused the government to effect the so-called

206 Privatization in Central and Eastern Europe

bank-led consolidation at the end of 1992 (National Bank of Hungary (1994:154)). The consolidation program included 14 banks and 68 saving cooperatives, which were granted the opportunity to sell part of their accumulated bad loans30 to the state against so-called consolidation bonds with a maturity time of 20 years.31 As a result of this action, bad debts were reduced by more than half. The measures only improved the banks’ situation temporarily, though. A second program, the so-called bank consolidation scheme, had to start at the end of 1993 (National Bank of Hungary (1994:156f)). It was planned, within this program, to increase the equity ratio of banks to 0 per cent until the end of 1993 and to 4 per cent until May 1994. A capital increase (HUF 114.4 bn) was carried out to this effect within the eight banks concerned, during which the state purchased the issued shares. As a consequence, the state’s share with seven of the eight banks increased to over 75 per cent. Stark (1996:1011) paraphrases the state’s action as follows: “Do not acquire the debt, acquire the bank.” Within this program the banks had to submit plans for a further consolidation and privatization (EBRD (1995:158)). At first, the restructuring of banks as well as enterprises did not progress considerably after the consolidations. The banks as well as the enterprises counted on the fact that the debt problems would again be resolved by the state (Mizsei (1995:114f)). Compared to Poland, the Hungarian approach to the problem of old debts is thus not considered to be particularly successful.32 According to Stark, the state simultaneously attempted to centralize liabilities, while the networks decentralized and reorganized their resources. The state therefore behaves the very opposite of the way it did during socialism: [ . .] Whereas in the state socialist economy paternalism was based on the state’s attempts to centrally manage assets […], in the first years of the postsocialist economy paternalism is based on the state’s attempts to centrally manage liabilities. (Stark (1996:1012)) Stark believes that this centralization has supported the process of detachment from assets and liabilities. The participants in network ownership could now complete their strategy of sharing risks among themselves by the strategy of avoiding risks or by shifting the risks on to the state. Their objective read “[…] at best to thrive, at least to survive” (Stark (1996:1012)). They used all available resources to achieve this. Considering the prevalent circumstances, the difficulty they faced was, however, to find out what was supposed to be classified as assets. In an extreme case, assets and liabilities cannot be separated from each other. In the end, particularly the high debts could prove to be the precondition for receiving further loans. Assets and liabilities thus have no value as such, but this is only as a result of the justification principles. The reason why the enterprises choose to pursue a strategy of sharing and avoiding risks by creating recombinant

Privatization “from Above” 207

property was not simply that they attempted to avoid responsibility. It was rather that, within transformation, various and even contradictory criteria of justification and/or assessment were applied. The success of an enterprise is thus simultaneously or alternatively assessed according to its market share, the number of employees, its profit or even its strategic importance. The enterprise must prepare to simultaneously fulfill a multitude of partly incompatible criteria, and will therefore diversify its portfolio accordingly. This also precisely includes the fact that it “conceals” losses in order to receive further loans or subsidies.33 In the end, overabundance with criteria of accountability means that the enterprise is actually not liable for any of the criteria. Stark, therefore, expresses his opinion that, in Hungary, as well as in the other transformation countries, it is not important to clarify property rights or to determine the correct ratio between the private and public sectors. It would instead be decisive that justification principles were interwoven correctly with each other; or to put it differently: that the appropriate institutions are developed and the interplay of institutions is functioning. All in all, the Hungarian example demonstrates that from the viewpoint of the individuals involved, the creation of recombinant property under these unstable conditions represents a rational strategy. Conversely, it can also be concluded that privatization has hardly contributed to the development of market-conforming institutions. Not only has the behavior of enterprises and banks not changed decisively, it is even unchanged with the state which repeatedly socialized losses.34 It is true, though, that public authorities proved quite innovative with regard to the further development of the standard procedures, such as the “privatization of privatization”, which could in future be applied within privatization in Western countries as well. Attention is, however, directed too strongly towards procedural questions, instead of towards the implementation of general rules, such as hard budget constraints. The Russian Federation Privatization in the Russian Federation can be divided into two stages. The first stage is characterized by the priority given to voucher privatization. It was instituted on 1 October 1992 with the issue of so-called privatization checks, started by the first check auction in December 1992 and completed on 30 June 1994. The second stage – in progress ever since – is characterized by the selling of state enterprises. The insiders of the enterprises were granted special privileges in this second stage as well. In the end, this led to the fact that in Russia management/employee-buy-outs are attached much importance. The essential features of Russian privatization were determined in 1991 by the law On Privatization of State and Municipal Enterprises, as well as by an amendment (see Ekonomika i zhizn’, No. 31/1991, pp. 15ff and

208 Privatization in Central and Eastern Europe

No. 29/1992, pp.13f). The title of the act itself indicates that, in contrast to other countries, in Russia, the privatization of municipal (local) enterprises, which are usually subject to so-called small privatization, is regulated by one law together with the privatization of large enterprises. Moreover, the law establishes the requirements for privatization. The State Committee of State Property (Goskomimushchestvo) and the regional committees were responsible for working out and carrying out the so-called privatization programs within voucher privatization, whereas the property rights of the state with the enterprises which were supposed to be privatized were looked after by the Fund of the Assets of the Federation or the regional funds.35 The initiative for privatization must not only be developed by the committees, but can also come from the management and the employees, as well as from external investors. If an application for privatization is approved, the committee will work out a privatization plan, which is discussed and agreed upon by the enterprise and which determines the privatization method, the schedule of privatization and the enterprise value, according to the calculation guidelines. The general requirements of the law were first put into concrete terms by the annual privatization programs. 36 The programs established, among other things, the extent of the enterprises to be privatized during the respective year, according to branches of economic activity. The enterprises, entire sectors of economic activity, were classified into categories such as “compulsory privatization” (the retail trade, for instance), “privatization only in accordance with government decision” (for example, oil companies), as well as “privatization ban” (for instance, the national gas supply). In addition to the privatization ban and the reservation of government approval, the state can limit the extent of enterprises being privatized by reserving itself a controlling interest or a so-called “golden share”, granting it a right of veto in important enterprise decisions. By means of the golden share, in the end, the state can exert considerable influence on an enterprise, even if the corporate shares are largely sold. Dividing enterprises within privatization programs according to size groups also represented an indirect differentiation between small and large privatization.37 The classification into a certain size group thus also establishes the corporatization, the legal form and the auction method. Therefore, small enterprises are, on principle, offered at auctions. Mediumsized enterprises can be sold as whole or be converted into joint-stock companies first and then privatized. Big enterprises must convert into joint-stock companies before their privatization. Their shares are subsequently offered at auctions. Along with the usual auction and sales procedures, enterprises can also be privatized through investment tender; they only played a minor role during privatization. Moreover, the purchase of leased property is indicated by separate statistics in Russia. Between 1993 and 1995, about

Privatization “from Above” 209

20–30 per cent of the enterprises being privatized in the respective years were bought by former leaseholders (Goskomstat Rossii (1996:702)). The enterprises were sold to insiders to a quite large extent, as the former leaseholders of these enterprises were mostly work collectives. After all, the sale of assets of liquidated enterprises is statistically recorded as a form of privatization. The selling of operating units of insolvent companies, however, has been compulsory since 1994. But, as a consequence of the insufficient application of insolvency law, such sales proved quite rare. The Privatization Law determined a minimum price for the sale of enterprises: enterprises must be sold at a minimum 70 per cent of the fixed opening price. The opening price is thus calculated on the basis of book values, which, in the case of a high inflation, offer hardly any indications for a realistic assessment. It is true though that, right at the beginning of transformation, when high inflation rates led to rapid devaluation, the intervals between the revaluations were large. This relativizes the selling price (achieved outside voucher privatization), which exceeded the opening price, determined on the basis of the book values, by 3.2 times in 1992 and by approximately 5.7 times in 1993 (Goskomstat Rossii (1994:95)). The first stage of privatization is generally described as the stage of voucher privatization free of charge, even if in this stage additional payable sales were carried out as well. Tradable vouchers, so-called privatization checks, were distributed to the population totaling a nominal value of RUR 10 000. The nominal value of the checks was calculated (taking account of the issue fees) from the value of assets planned for voucher privatization (initially RUR 1.5tr) divided by the population of almost 150 million persons. After the issue, the checks were traded with considerable deductions of their nominal value. The oversupply could, on the one hand, be attributed to the fact that, due to the greatly decreased real wages, the population tried to preserve short-term liquid means for consumption purposes. On the other hand, it was important during the first months that the concept of voucher privatization was not yet clearly defined and the population therefore preferred the safe proceeds from selling the vouchers over the uncertain returns from participation in voucher privatization. 38 This effect probably even intensified, as at first the population interpreted the established nominal value as the real value, and as deductions further increased skepticism concerning voucher privatization. As already demonstrated, the Czech Republic has avoided this problem through the nontradable vouchers denominated in investment points. The employees were offered three options for the acquisition of shares at a reduced price within the privatization of joint-stock companies: according to the first option, the employees could receive a quarter of the nominal value of the equity capital as nonvoting registered shares for free and buy an additional 10 per cent for cash or privatization checks with a 30 per cent discount; the management was granted a preemptive right on

210 Privatization in Central and Eastern Europe

5 per cent of the nominal value. The second option, which was preferred, granted the employees an advanced acquisition of up to 51 per cent of the equity capital at the nominal price. A third option, which was rarely chosen, implied that employees joined together as a group that intended, among other things, to restore profitability and thus preserve the enterprise from bankruptcy. This group was then entitled to buy 20 per cent of the equity capital at the nominal value. Moreover, all employees could also acquire 20 per cent of the equity capital with a reduction of 30 per cent of the nominal value. All in all, the insiders were granted extremely favorable conditions for the acquisition of “their” enterprise – as the book value in July 1992 was decisive for the valuation of equity capital. The preemptive rights for insiders resulted in the fact that, during open public auctions, the broad population was offered just a small number of shares per enterprise. The state enterprises, which participated in the drawing-up of privatization plans, simultaneously attempted to delay their privatization. Therefore, the number of shares per enterprise was small; this even applied to the overall number of shares that could be auctioned against privatization checks. This issue also led to a conflict between Parliament and the President. In the end, the president ordered in August 1993, by decree, that sufficient state enterprises must be offered during check auctions. Consequently, particularly in winter 1993, the number of enterprises offered at check auctions and ultimately the number of (partly) privatized enterprises increased sharply (see DIW/IfW/IWH (1994:301) and (1995:51ff)). At the end of the first stage of privatization, voucher auctions and additional sales accounted for the privatization of shares of about 99 000 enterprises all in all, representing approximately 47 per cent of the state enterprises existing at the beginning of transformation.39 About 70 per cent of the small enterprises were acquired by the employees. As far as medium-sized and large enterprises are concerned, the employees held the majority of stock in 75 per cent of the privatized enterprises; the state still held a share of at least 25 per cent in more than half of them. With regard to the primary distribution of enterprise shares, the state was still in a strong position within the enterprises and thus had opportunities to exert influence. The employees represented the most important owners of privatized enterprises. The dominant position of insiders was negatively assessed with regard to the restructuring of the enterprises (see Boycko/Shleifer/ Vishny (1995:125f)). The declared objective of the second stage of privatization, initiated on 1 June 1994, was to increase the efficiency of enterprises. Another objective was to achieve high privatization revenues by no longer “giving away” enterprises, but by selling them instead. It was decided to increasingly consider the offers of enterprise outsiders, including non-residents. The involvement of foreigners, though, remained quite low in the following period. Besides the bureaucratic impediments, this could also be attributed

Privatization “from Above” 211

to the limited opportunities for non-residents to buy themselves into attractive economic sectors (the energy sector, for instance). Besides, employees were still granted the three options of participation, even if they were slightly modified. All in all, the employees have acquired about 40 per cent of the shares of the enterprises privatized between 1994 and 1996. The state maintained a share of about 25 per cent of the partially privatized enterprises; in some cases the state even secured itself a golden share. Contrary to the set objectives, the primary distribution of shares did not change the structure of ownership that much. The speed of privatization slowed down during the second stage, as generally expected with the sale method: It was still possible to privatize about 22 000 enterprises in 1994, the year characterized by the change from voucher to sale privatization; after that, the number decreased to approximately 10 000 companies in 1995 and 3000 in 1997. After selling the smaller and medium-sized companies in the early stages, from 1997 shares of large enterprises were offered as well, so that privatization revenues increased sharply to more than RUB 23 bn (1996: RUB 3.2 bn). All in all, until the end of 1997 about 60 per cent of the enterprises existing in the beginning were (partly) privatized. In regard to the number of privatized enterprises, Russian privatization can thus be regarded as quite successful. If its success is, however, judged by the number of persons gainfully employed within the private sector, this judgment must be revised: about 39 per cent of gainfully employed persons were employed within the pure private sector at the end of 1997. Sixty per cent of all employees worked within the pure state sector and the “mixed sector”, including the enterprises the state is participating in. The remaining 1 per cent is with public institutions and joint ventures (see DIW/IfW/IWH (1998:308)). The description “mixed” sector, officially used in Russian statistics, thus clearly demonstrates that Russia and other transformation countries have difficulties in distinguishing between the private and the state sector. The division into private, state and mixed sector, as well as the primary distribution of shares resulting from privatization, do not contain any indication as to who the actual owners of enterprises are and how they act. As far as corporate governance is concerned, empirical studies have meanwhile been published, but they mostly only include the control of enterprises (partly) privatized during voucher privatization. They thus do not indicate whether state enterprises act differently than partly or completely privatized enterprises. The privatization process still continues, so the studies, whose results will be roughly outlined, offer only a snapshot. Gurkov/Asselsbergs (1995) have investigated 27 enterprises that were privatized according to option two in 1993/94, that is to say shortly before the completion of voucher privatization. The majority of these enterprises were fully owned by the employees; the employees had a controlling interest in about 30 per cent of the enterprises. They did not, however, exercise their

212 Privatization in Central and Eastern Europe

ownership rights. Gurkov/Asselsbergs (1995:202ff) learned that half the employees shared the opinion that the managers were the actual owners. This belief on the part of the employees, that they were not the owners, was not only the result of lacking knowledge of their rights. The employees actually had fewer codetermination rights pertaining to decisions on the production profile of their enterprise and their payment. The managers, in contrast, promoted their interests through demonstrating an authoritarian management style. They further consolidated their position, particularly by reducing the block of shares held by employees. Various tactics were employed to achieve this: one tactic constituted in threatening employees with dismissal and forcing them to sell their shares to the management of the firm. Another method employed by the managers was to initiate the transfer of the shares, and thus the voting right, to themselves by means of a kind of contract, which was not always concluded voluntarily. As the position of the managers was consolidated after the buying-up of shares, they used it in order to deter external investors from participating. This action is described by Gurkov/Asselsbergs (1995:208) as the “Matreshka method of anti-takeover defense”. After his 1994 investigation of enterprises owned to a maximum of 25 per cent by the state, even Bim (1996:5) reaches the conclusion that the management held a dominant position. Moreover, Bim (1996:8ff) looked into the question whether the managers initiate the restructuring of the enterprise, and thus pursue a “constructive” strategy, or whether they attempt to reach high incomes and appropriate capital belonging to the enterprise for their own purposes (“destructive strategy”). He discovered that the destructive strategy is often employed. As already done within spontaneous privatization, the managers set up their own private enterprises to which they “transferred” enterprise assets. These private enterprises group around the (partly) privatized enterprise like satellites (similarly to Hungary), a constellation described by Bim (1996:10) as “surrounding business”. Whereas the managers looked after the efficient use of the “transferred” assets in their private enterprises, they did not initiate the restructuring of the partly privatized enterprises. The latter instead experienced an extraction of their assets (shell companies). According to Bim, in extreme cases, the parasitic behavior of managers will lead to the fact that (partly) privatized enterprises can no longer survive, that they go bankrupt quicker than usual and that thus a structural change would be started. From an overall economic view, the destructive strategy could therefore not just be judged negatively. As a consequence, Bim (1996:35) recommends that the state support this process by means of an active bankruptcy policy. Dolgopiatova (1996) explains the concentration of shares with management as the result of an implicit contract. The employees agree to the consolidation of the management’s position because they hope that this way the enterprise which finds itself in a tight financial situation will survive

Privatization “from Above” 213

and that thus their jobs will be preserved. Employees and management form an alliance in order to put pressure on the state to grant further financial support. The employees and the management would like to exercise “property rights”, without accepting responsibility at the same time. Dolgopiatova (1996:9) regards this strategy of survival pursued by both management and staff to be a continuation of their behavior that previously orientated on state paternalism, though the state as well as the management and the staff are supposed to have adapted their behavior patterns to the changed circumstances. The state replaced the direct aid it previously granted through indirect measures (protection against competition, among other things). The enterprises would try to reorganize the former prevalent hierarchic structure by joining together in so-called Financial-Industrial Groups (see below). Old informal channels would thus be reactivated, but new informal circles would be developed as well. Nevertheless, the information at the microeconomic level would still remain insufficient and impede the restructuring of enterprises. According to Dolgopiatova (1996:13), the state should therefore improve the infrastructure for information, including that pertaining to the legal framework. The recommendations of Bim and Dolgopiatova, according to which the state should institute bankruptcy proceedings (and thus introduce liability) and provide information pertaining to legal rules, are based on the idea that institutions can be developed “from above”. A precondition for this is that, in its function as protective state, the state actually applies existing law. As far as bankruptcy law is concerned, this was not the case in Russia. Bankruptcies were rare, although at the end of 1995 about 30 per cent of the enterprises were classified as reporting losses. This included enterprises belonging to the state and the mixed sector, as well as to the private sector. Enterprises, demonstrating various ownership types, were thus treated equally in regard to nonapplication of bankruptcy law. Ultimately, even the privatized enterprises were not subject to hard budget constraints. Similarly to other transformation countries, the problem of establishing hard budget constraints in the enterprise sector is (indirectly) connected with the problem of bad debts. In contrast to other countries, Russia “resolved” the bad debts problem to a large extent through inflation, without ever taking any effective measures to hinder enterprises from obtaining further doubtful loans and thus prevent the development of a flow problem. The enterprise sector reacted to the expansive and restrictive phases of monetary stabilization with evasive strategies, which can roughly be described as follows. After the liberalization of prices in 1992, the central bank indeed extended its real lending, but the commercial banks increased their deposits in foreign currencies, due to the negative interest rates and the real devaluation of the rouble (Russian Economic Trends (1996:124)) and therefore reduced the granting of rouble loans to the enterprises in real

214 Privatization in Central and Eastern Europe

terms. The enterprises consequently switched over to, among other things, interfirm indebtedness; in July 1992, it exceeded the value of the money supply M2 in real terms (Buch et al. (1995:38)). A clearing procedure was instituted as a consequence, meaning that the receivables and liabilities of the enterprise sector were netted out and the net debts were converted into loans (DIW/IfW/IWH (1994:313)). Owing to the insufficient bankruptcy threat, payment arrears were, however, again built up by the enterprises. In the second half of 1992, the loans of the central bank as well as of commercial banks increased in real terms, but due to its rapid increase, interfirm indebtedness was only partially replaced. Until about the end of 1993 and the beginning of 1994, the enterprises were also granted central bank loans at favorable interest rates through the commercial banks; these loans should have actually been entered as subsidies in the national budget (DIW/IfW/IWH (1994:292)). In autumn 1993 the central bank was committed by a government decision to call off the granting of “soft credits” (Deutsche Bank Research (1994:32f)). Loans were only supposed to be granted at market conditions. As from the beginning of 1994, the restrictive monetary policy led to a decline of real lending and a renewed increase of interfirm indebtedness.40 As a consequence of the high real interest rates, enterprises were no longer able to service their bank debts (DIW/IfW/IWH (1995a:887)). In May 1995, that is to say a few months before the (ultimately avoided) banking crisis in August, the share of nonperforming and overdue loans in overall bank loans increased to over 37 per cent (May 1994:20 per cent).41 During 1995 and 1996, some, mainly small, private banks had their licenses revoked. In addition, banking supervision was tightened; it remained insufficient however. Banks then attempted to limit the amount they lent to very risky customers and have acquired, above all, high-yield government bonds. Moreover, they have accumulated high net external liabilities only insufficiently secured against the exchange risk. The financial crises of summer 1998 and the strong devaluation of the rouble therefore had a considerable negative effect on the situation of banks; the fall in value of government bonds added to this. The problems of the banking sector that had been so far concealed now became obvious. Before the crisis, the enterprise sector in turn reacted to the banks’ limited lending by switching into interfirm indebtedness, as well as by not paying wages and tax arrears, which amounted to more than 10 per cent of GDP in 1997. The enterprises thus responded to the rise of credit costs and the banks’ hesitant lending, as well as the decreasing subsidies, among other things, by withholding revenues from the tax authorities.42 The fact that the state tolerated the low tax morale of the enterprises is astonishing at first glance. But transformation countries have the same problem in common, i.e. collection of taxes is difficult as long as the fiscal administration is still developed. Due to the fact that it is still a shareholder in many of the enterprises itself, the state could use its position in order to

Privatization “from Above” 215

provide the payment of taxes on time. This does, however, presuppose that the state gives priority to its fiscal interests over corporate objectives (as, for instance, tax avoidance) or concerns pertaining to labor market policy, among other things. It does, however, seem that the state is neither actively pursuing its own fiscal interests, nor has it performed its entrepreneurial function. According to Bim’s observation in 1993–94 (1996:14), during the election of the director, government representatives followed the conceptions of the other owners, such as the management in most cases, by taking a passive stance. A possible explanation for this is that the state was overburdened in its function of owner resulting from the large number of enterprises it co-owns. The main reason is, though, that by tolerating the nonpayment of taxes, for instance, it eased the financial difficulties of enterprises, thus supporting the strategy of survival described by Dolgopiatova, and therefore delayed the restructuring and the feared shedding of labor. Besides the tax arrears, in its function as shareholder the state also generally put up with a smaller dividend compared to restructuring. In the end, smaller dividends as well as tax arrears represent forms of indirect subsidies. In the end, by entering an alliance with staff and management and its passive stance, the state, which renounced revenues from the public budgets during voucher privatization, harmed itself. The first reaction to the drastically decreasing revenues were spending cuts; thus the scope for further cuts narrowed. The state was increasingly under pressure with regard to the collection of tax arrears and was forced to threaten defaulting taxpayers, including its own enterprises, with bankruptcy proceedings if necessary. The institution of insolvency procedures did, however, hold the risk that, in case of a massive shedding of labor, social harmony within society would suffer, leading to a credibility crisis for the state. On the other side, the nonapplication of existing law, including tax law, is basically connected with the problem that the state cannot establish its function as protective state and thus loses credibility. Since about 1995, the state reacted inventively in its various functions of tax authority, co-owner, social as well as protective state, but also inconsistently, as demonstrated by the following examples. The introduction of a kind of management contract constitutes a reaction to the low efficiency in partly privatized enterprises and the increasing tax arrears. Persons authorized by the state, who must be Russian citizens, should represent the interests of the state as an owner. The representatives will be judged according to whether the enterprise pays its taxes, whether it achieves a good overall company result and pays wages regularly or not. They were thus supposed to pursue fiscal, business and union policy objectives simultaneously. In their fiscal function they therefore represent a kind of enlargement of the inefficient tax inspection. It does, however, seem that, so far, the representatives have hardly changed the behavior of

216 Privatization in Central and Eastern Europe

enterprises (for example their low tax morale) (Russian Economic Trends (1996.119)). A further method applied by the state, in order to increase its revenue on the basis of its blocks of shares in partly privatized enterprises, was the socalled “shares-for-loans” campaign, which began at the end of 1995, at a time when privatization revenues fell considerably short of expectations. Within this campaign, banks had the opportunity to auction the right of granting loans to the state and receive shares of state enterprises as a pledge in return. If the state did not repurchase its share within a predetermined period, the banks were allowed to resell the shares they held as a pledge within three years and withhold 30 per cent of the difference between the sales revenue and the loan amount as their profit (DIW/IfW/IWH (1995a:895)). This period expired – after an extension – on 1 September 1996. Until the end of 1996 the pledge was only sold in one case. An enterprise that was indirectly owned by the selling bank acquired the enterprise shares at a selling price that slightly exceeded the loan amount. The state thus had practically no revenue other than the loan amount. The concerned bank, however, was able to consolidate its equity stake at a quite favorable price. Other banks participating in this campaign held their shares because they first intended to initiate restructuring measures within the enterprises, in order to subsequently sell them to strategic investors (Russian Economic Trends (1996a:124)). It seems, though, that such an active strategy was not actually pursued. The holding of state shares on trust was possible not only for banks and enterprises, but for the so-called Financial-Industrial Groups as well (DIW/IfW/IWH (1996a:841)). A Financial-Industrial Group basically represents a voluntary association of enterprises and financial institutions. The group must, however, be registered, so that bureaucratic decisions have an influence on the group’s formation; the “voluntary” status can therefore be questioned as well. The state promised the registered groups a multitude of privileges (favorable periods of depreciation, for instance). 43 The group members are basically legally independent and create a so-called central company, a kind of holding, so to speak. The state can transfer the blocks of shares it holds with members of the group to the holding company, acting as a trustee. In principle, the formally clear types of property are thus becoming blurred in practice. So far, the purpose of the state’s promotion of Financial-Industrial Groups cannot be clearly interpreted, especially because the state has not granted the registered groups any privileges so far, and as it thus remains unclear whether the groups will be supported and which will be given priority. It is possible that in future the state will attempt to promote restructuring through the development of registered groups and the fiduciary transfer of blocks of shares to the holdings. It could, for instance, reward those banks and enterprises with privileges that manage to resolve the problem of bad loans or of interfirm indebtedness.

Privatization “from Above” 217

On the other hand, it is also conceivable that the state objective, behind the creation of the groups, is to increase the direct influence it exerts on (partly) privatized enterprises and thus make up for the loss of control experienced through privatization. In addition, certain groups that experienced the state’s selective granting of privileges could derive an advantage from this; the state could thus direct the structural change and, if need be, even delay this change because of labor policy. It is noticeable that within the share-for-loans campaign the FinancialIndustrial Groups as well as the banking sector, which did not actually participate in voucher privatization, were at first attributed an active role. Banks have actually gained major importance within Financial-Industrial Groups. It was, however, not guaranteed that they would also initiate a restructuring of enterprises. Property rights are not transparent within the banking sector. At the beginning of transformation banks were mainly established by large state enterprises. In the following period, the privatization of banks was, however, not actively pursued. Partial privatization obviously occurred by way of capital increases. One cannot rule out the possibility that this way enterprises increased their block of shares in banks, so that in the end the enterprises control the banks (and not vice versa). The fact that enterprises hold shares of banks could thus even explain why, in their function as creditors, banks hardly ever apply for the commencement of insolvency procedures affecting their shareholders. There were indications for an increased application of insolvency law in 1996, when 486 enterprises were declared insolvent in the first half of that year; this figure represents more enterprises than in 1995 altogether (Russian Economic Trends (1996:122)). Even the tax authorities took more action against defaulting taxpayers. A special tax commission was founded which, for the first time and together with the Bankruptcy Agency, threatened big enterprises not paying their taxes with the opening of insolvency procedures as well. Some enterprises have partly paid their debts to the state. In some cases, it was even possible to offset debts and receivables within the enterprise sector and between the corporate sector and the state (Russian Economic Trends (1996a:110)). If this was not possible, then the insolvency procedures were continued. It would have basically been up to the courts to decide which of the officially overindebted enterprises would prove able to survive and in which profitability could thus be restored, and which enterprises were supposed to be shut down. But even after a new and improved Bankruptcy Law was enforced in spring 1998, its increased application was not apparent. Enterprises considered themselves, at best, confronted with a temporarily increased bankruptcy threat. In mid-1998, overdue arrears amounted to more than 40 per cent of GDP (EBRD (1998:186)). Barter trade had increased considerably. In the end, the state’s inventive measures contributed to the fact that soft budget restrictions were maintained in enterprises mainly dominated by

218 Privatization in Central and Eastern Europe

insiders and that banks managed to survive due to the high-yield government bonds instead of performing their function as, among other things, creditors of the enterprises. Increasing domestic and foreign indebtedness represented the other side of the coin. Although the Asian crisis and the loss of confidence of foreign investors proved to be major triggers of the financial crisis of summer 1998, this crisis was fundamentally rooted in the insufficient reforms and not least in the purely formal privatization, which ignored liability. After the financial crisis of summer 1998, Russia’s future development of economic policy is rather uncertain. Conceptions of stronger state control, or even the nationalization of the enterprise sector, stand opposed to announcements that privatization and restructuring will continue. Beyond the reforms of the enterprise sector, the question of how the largely technically insolvent banking sector should be dealt with is still pressing. Various programs developed by the government make shortterm attempts to actively cure the symptoms of the crisis and often employ contradictory measures. A strategy for overcoming this crisis or even for the continuation of market-economy reforms had not been developed by the end of 1998. Romania In contrast to the Czech Republic, Hungary and even Russia, Romania delayed privatization.44 Political opposition against privatization was huge. Only in response to pressure from the IMF in 1995 did Romania pass a law to accelerate privatization, modifying, among other things, the voucher process already established in 1991. 45 Privatization progressed at a slow pace in the following period. Not even by switching to the sales method in 1997, and the tightening of responsibility, could privatization be forced into a quicker pace. As a first step in 1990, companies were converted either into commercial companies (societate comerciale) or into self-sufficient administrations (regie autonome). While the 137 regie autonome existing at that time were to remain in the government’s hand, the 6455 commercial companies became subject to the privatization law of 1991. 46 In the second stage a so-called State Ownership Fund and five so-called Private Ownership Funds were created. Seventy per cent of the registered capital of enterprises, listed for privatization, was transferred to the State Ownership Fund and 30 per cent was distributed to the five Private Ownership Funds. According to their stake, each fund was to assume appropriate ownership rights in the privatized companies. As the majority stockholder, the role assumed by the State Ownership Fund towered above the others. With this 70/30 rule, Romania first pursued a mixed privatization model. The 70 per cent of the registered capital was assigned to sales, while only the remaining 30 per cent was intended for free voucher privatization. The

Privatization “from Above” 219

State Fund had a clearly specified mission in privatization: within seven years it was supposed to annually dispose of 10 per cent of its capital through common sales practices (direct sales and auctions, for instance), something which did not materialize in the end. The so-called Private Funds were, unlike in the Czech Republic, not funds created through private initiative, but instead set up by the government as joint-stock corporations, overseen by an administrative council assigned by the government for a transitional period of five years. The first of November 1996 marked the beginning of the transformation of Private Funds into investment companies. The legal responsibility of the funds was to maximize the value of their portfolios, while simultaneously pushing through the voucher privatization of the 30 per cent of enterprise assets that were transferred to them. Unlike in the Czech Republic and Russia, they were not to demand enterprise shares within voucher privatization, but rather to supply them. The National Agency for Privatization, already established in 1990, was responsible for the organization and realization of privatization. Book values were used in determining the 70 per cent and 30 per cent of stock to be distributed to the funds in 1992. The book values had been adjusted for inflation several times in previous years, according to the guidelines of the Ministry of Finance, and were re-adjusted after the implementation of the new accounting regulations of 1 January 1992. The total value of the 6244 commercial companies47 listed for privatization was determined at ROL 1787.2 bn, so that 30 per cent thereof or ROL 536.2 bn was to be distributed to the five Private Funds and the remaining 70 per cent was to be transferred to the State Fund (Adevˇ arul Economic, No.29/1992, pp. 4ff). The assets of the commercial companies represented about 53 per cent of the total industrial assets; the rest was concentrated in state-owned regie autonome (Popa (1992:22)). Thus – considering book values – almost half the existing industrial assets were excluded from privatization. The 30 per cent to be freely transferred to the population within voucher privatization actually amounted to just 16 per cent of the total assets. Book values, though, hardly constituted a basis for valuations in accordance with market conditions.48 The government distributed 30 per cent of the registered capital of enterprises listed for privatization through administrative ways to the five funds. Regional as well as sectoral aspects were considered within this distribution. Firstly, the five funds were established in different regions of Romania. As far as companies of local importance (such as the retail trade) and companies of individual industrial branches concentrating on a specific region are concerned, the 30 per cent of the company’s registered capital was transferred to the fund located in that region. Other companies, including those considered hard to privatize (such as the iron and steel industry), had their 30 per cent spread out on to all of the funds. Regardless of this dispersion, a regional and sectoral concentration was created, which lessened the competition between the funds.

220 Privatization in Central and Eastern Europe

While the funds were still in their early stages and awaiting the transfer of company shares, the distribution of Certificate of Ownership booklets to the adult population within voucher privatization was started in summer 1992. A booklet contained five so-called ownership certificates (certificat de proprietate), which represented shares of the five Private Ownership Funds and were basically tradable among native citizens. The certificates were denominated in so-called “units of value”, to be exact in 5000 units of value per certificate.49 These units of value, however, could not be compared to the investment points used in the Czech Republic. Each Private Fund instead had to disclose the value of its portfolio based upon the total of the revised book values of its transferred company shares quarterly, from which the value of the certificate was subsequently calculated in Romanian lei considering the number of certificates issued for this fund. In April 1993 these established nominal values of the certificates of the five funds fluctuated between ROL 23 000 and ROL 29 000 (The National Agency for Privatization (1993:6)). In the following period, the increase of the nominal value stayed below the inflation rate. The market valuation of the certificates continued to be inadequate, as the stock exchange only re-opened in mid-1995.50 The funds were nevertheless supposed to take measures to increase the market value of the certificates, among other things, by restructuring their portfolios and by investing in the companies for which they represented shareholders. To a Private Fund, however, it was only deemed profitable to invest in an enterprise if the State Fund supported the investment plan in its function of controlling shareholder. Besides selling, the population basically had the following options in redeeming their certificates (Popa (1992:27)): it could hold the certificates as shares of the Private Funds or of the investment funds upon the expiring of the five-year transitional period. It could also use the certificate of a specific fund to auction shares of an enterprise, 30 per cent of which are owned by the fund. After all, when the State Fund sold the shares of a large enterprise, the certificates of the respective Private Fund could be presented in order to obtain a 10 per cent discount on the public offering price. Only up to 10 certificates could simultaneously be traded per person, if the individual took advantage of the discount. All in all, within the simultaneous voucher and sale privatization, the regulations pertaining to the use of certificates were so complicated that they were almost impossible for the population to comprehend. The tying of individual certificates to a certain fund, on the one hand, and the administrative distribution of company shares to the funds, on the other hand, segmented the market for the exchange of certificates for company shares into submarkets and impeded comparisons between the funds and the enterprise shares in their portfolios. Additionally, Private Funds had to agree with each other as well as with the State Fund upon the privatization of companies, which did not always occur smoothly.

Privatization “from Above” 221

The majority of the population, however, only got its turn to bid during the second round. Before, enterprise employees had the right to submit bids to acquire shares of their company. In the case of a small business company, they were also allowed to “pay” the fund, which held their company’s 30 per cent, with certificates of another fund. Additionally, employees and managers were allowed to purchase 10 per cent of the shares offered for sale by the State Funds with a discount of 10 per cent; among other things, they were granted loans as well as the possibility of payment by installments. Employees were thus granted preferential treatment within sale as well as voucher privatization – all of it leading to the segmentation of the category of buyers, as in Russia. Altogether, the combination of a closed first round of bidding, the extensive privileges of employees and the insufficient market valuation of certificates and company shares enabled insiders to fully take over their company by exchanging certificates for shares at nominal value. A kind of testing phase of privatization was launched by the National Agency for Privatization before the actual voucher privatization was about to begin. During this testing phase, on the one hand, they were divested of assets or spun-off business units. On the other hand, 32 commercial companies were selected within the so-called pilot privatization. Before privatizing these companies, some of them were re-valued with the help of foreign consulting firms on the basis of various methods, and only subsequently offered to domestic and foreign buyers. Up until autumn 1993, 22 companies had been privatized. Only four of them were privatized with the participation of foreign investors, one company was sold to a local Romanian joint venture, while two companies were publicly auctioned. The remaining 15 companies were privatized through management– employee buyout (The National Agency for Privatization (1993:13)). The pilot privatization thus already indicates that the role of outsiders (as strategic investors) would remain unimportant, while the position of insiders would be strengthened. The latter were often able to purchase their company at the established nominal value or slightly beyond it.51 After closing the testing phase, 1994 was supposed to become the key year for privatization. The privatization program included 2368 companies overall. Small companies were to be sold through a simplified standard procedure, while a combination of several methods (direct sale to strategic investors, auctions) should only be used with large enterprises. Not even as a result of the simplified method could the objective of the program be realized. Voucher privatization especially, with the participation of the broad population, did not progress and the difficulty in determining the starting price, due to the revision of book values, was considered one of the causes. In particular, the renewed valuation of companies, ordered in mid-1994, contributed to considerable delay in voucher privatization (Coopers & Lybrand (1995:90)).

222 Privatization in Central and Eastern Europe

Another reason for the delayed voucher privatization was the fact that Private Funds were not obliged to offer the public shares in exchange for certificates.52 In their position as certificate-holders and therefore as shareholders in the Funds, the population was thus not able to influence the offer, since their control rights were restricted in the first five years. 53 Additionally, the population had to renounce dividend payments in the first three years. Profits were to be reinvested during this period. Private Funds, which at this point were not yet subject to any control through the capital market, however, were not really interested in acting accordingly. Based upon their portfolios, there was instead a risk that the Funds obtained a regional position of monopoly (Nicolaescu (1993:108)). A Private Fund was then able to decrease the competitive pressure between its subordinate companies, to cross-subsidize unprofitable companies through profitable ones and even to prevent the bankruptcies of unprofitable companies (OECD (1993a:119f)). Such policy obviously reflected the objectives of the government, which at the same time had the right to recommend the members of the fund management to Parliament.54 Privatization was also hindered by the enterprises themselves. Employees feared job-pruning and managers feared a tightened control of their activity. Enterprise management attempted to prevent a takeover through outsiders and abuse their positions to serve their own interests. In order to encourage more efficient business practices in the mostly state-owned enterprises, management contracts were introduced in 1993, which also included payment pending upon profits. These contracts were also permitted with foreigners, who were previously already allowed to act as advisors. In early 1994, a government-led Restructuring Agency was established. 55 The enterprises being included in the restructuring program were selected by the so-called Council for Coordination, Strategy and Economic Reform, as well as the State Fund, at the Ministries’ suggestion.56 Management–employee buyouts remained the main privatization method for the time being. Given that the takeover of enterprises by employees and management remained only indirectly regulated by the privatization law, the possibilities for buying the enterprise through insiders were even improved in 1994.57 Until May 1995, the majority of the approximately 1000 (partly) privatized enterprises were taken over by employees. This number of privatized enterprises in turn indicated a certain progress in privatization. It was, however, only possible to sell 19 larger enterprises. The privatized companies employed a total of 350 000 workers; this corresponds to just 4 per cent of the total number of employees. The lack of progress in privatization was a point of criticism from the IMF, which had already delayed the release of a tranche of the Systemic Transformation Facility in 1994 and which again urged the forcing through of privatization during new negotiations in 1995. The passing of the so-called law To Accelerate Privatization, discussed at length previously, followed as a result in June 1995.

Privatization “from Above” 223

The law To Accelerate Privatization modified voucher privatization in some points. Non-transferable “privatization coupons” were given out in addition to ownership certificates. These coupons were supposed to give each citizen a new opportunity to participate in voucher privatization, since up to then it was almost exclusively employees who were granted opportunities to use their certificates. Therefore, only those citizens obtained a coupon who had not yet used their complete certificate booklet. The value of the privatization coupon was set at ROL 975 000. The coupons were non-transferable, but traded on the black market at considerably lower rates. The certificates distributed earlier were no longer determined in standard values, but instead also set in Romanian lei, namely at ROL 5000 per certificate and thus amounting to ROL 25 000 per certificate booklet.58 An entitled citizen was thus allowed a maximum of ROL 1 million (about USD 500 in mid-1995) in the form of certificates and coupons. The coupons were distributed from August to October 1995. Afterwards, the population could enlist for the transfer of shares of the 4000 enterprises selected for voucher privatization until 31 March 1996, or opt for shares of the Private Funds until 30 April 1996. Enlistment was sluggish at first, since the population was insufficiently informed about the course of privatization and the situation of funds and enterprises (PlanEcon (1995:2)). Finally, up to the end of March, three-quarters of the entitled population decided to use coupons and certificates. Eighty-five per cent of them wanted enterprise shares and only 15 per cent shares in Funds (Leonhardt (1996:228)). The trust placed in the Funds by the population was, therefore, quite low. The direct exchange of certificates for shares was favored because, in contrast to the past, a maximum of 60 per cent of shares in a certain enterprise could now be acquired instead of the previous 30 per cent. The distribution of shares began after the enlistment period expired and the shares being transferred to the individual citizen were determined. The remaining 40 per cent of enterprise shares left within the State Ownership Fund were offered for sale to different categories of buyers in spring 1996. According to the privatization program, up to the end of the year, 2100 enterprises were supposed to be sold (Adevˇarul Economic, No. 29/1996, p. 21).59 In reality, in 1996 only 1388 enterprises were (partly) privatized by the State Ownership Fund (Adevˇarul Economic, No. 5/1997, p. 18). Altogether, the cumulated number of (partly) privatized enterprises thus increased to 2842, of which three-quarters represented small businesses. The success of Romanian privatization remained minimal since only 8.6 per cent of the work force was employed by the privatized enterprises. No detailed information is available on the primary distribution of shares at the end of 1996. The government, however, remained the majority shareholder in many enterprises because only few of the enterprise shares held by the State Ownership Fund were sold. Out of the remaining shares,

224 Privatization in Central and Eastern Europe

only a small percentage were sold to foreigners. Besides the Private Funds and the broad population, within voucher and sale privatization it was mostly insiders who considerably increased their blocks of shares. A redistribution in favor of the management obviously occurred thereby, thus resulting in control structures similar to those in Russia. As early as 1993, attempts had been made within state enterprises to encourage restructuring. These measures were mostly a reaction to the socalled financial blockade (blocajul financiar). This financial blockade was basically often traced back to the low financial discipline of state enterprises and materialized, as in other transformation countries, through phenomena such as bad debts to the banking sector, inter-enterprise arrears, as well as tax arrears. But, as in the Czech Republic, in Romania the financial blockade cannot be directly traced back to the problem of bad debt. As far as enterprise debts are concerned, the arrears which accumulated in the years 1989–90 were balanced against surpluses of the national budget. 60 Further debts with the banking sector were replaced in 1991 with government bonds; a capitalization of banks was initiated in 1992. In the following period the banks attempted to write off bad loans using a strong spread between credit and deposit interest rates. According to the EBRD (1995:54 and 1996a:25) the situation of the banks improved between 1991 and 1994. Based upon the tightened bank supervision resulting from recapitalization, banks which could not keep up with the new requirements had their licenses revoked.61 These measures proved successful only temporarily. Between the end of 1994 and 1997, the proportion of doubtful and loss-making credits increased from 19 per cent to 57 per cent of the total credit volume (EBRD (1998:184)).62 The state banks especially, which maintained their dominating role, expanded their borrowing into state lossmaking enterprises. The legal basis for the privatization of state banks was not laid down until 1997, even though it was supposed to be enacted as early as the law To Accelerate Privatization.63 The end of 1998 marked the first divestment of shares of a state bank. The accumulation of payment arrears could not be prevented in the enterprise sector, after the (partial) resolution of the bad debt problem, because there was no threat of bankruptcy. Inter-firm indebtedness reached 80 per cent of GDP in gross terms at the end of 1991 (National Bank of Romania (1993:19)). As a result, a retroactive, so-called global compensation was decided at the beginning of 1992, according to which enterprises were granted loans through the banking system in order to settle their payment arrears with suppliers. A hardening of the budget constraints of enterprises was not achieved, even after the global compensation. Interfirm indebtedness returned almost immediately. Several state enterprises were identified as the main culprits. In 1993, 30 commercial companies were at first put under special supervision. Decisions on credit warranties and on the support from public budgets in these companies were taken, based upon a restruc-

Privatization “from Above” 225

turing plan. This measure, which actually constituted an attempt at commercialization, was called isolation. In the following years many more companies, including regie autonome, had to be “isolated”, thus resulting in a number of 140 commercial companies and nine regie autonome under special supervision by the end of 1995 (The Government of Romania (1995:15)). Within the restructuring program, which incidentally was supported by the World Bank and the IMF, it was envisaged that over-indebted enterprises negotiate an agreement to regulate debts together with their creditors and under the supervision of public authorities. Deferments of tax payment were granted simultaneously. This combination of deferments and regulation of inter-enterprise indebtedness contributed to a decrease in the proportion of inter-enterprise indebtedness between 1992 and 1996, while tax arrears increased.64 Similarly to Russia, the revenue authorities thus developed into an important net creditor of enterprises.65 Following the change of government in 1996, the new government at first tried to determine the actual situation of the Romanian economy. According to their calculations, the consolidated deficit amounted to 5.7 per cent of GDP at the end of 1996, greatly surpassing the numbers expected. In autumn 1996, the indebtedness of the corporate sector with the state, banks and suppliers reached about 18 per cent of GDP. The new government subsequently announced drastic measures, by which enterprises with tax arrears and indebted large-scale enterprises were to be closed, even if this action were to result in cutting back employment. A program for the liquidation of unprofitable enterprises was actually started in 1997, but never consistently implemented. Restructuring also remained insufficient. All in all, the debt situation did not improve up to the new change of government in spring 1998. The old government had already planned on renewed changes of the privatization procedure by the end of 1997. With the end of voucher privatization, enterprises were definitely supposed to be sold. The change of the procedure was obviously not actually meant to obtain government revenue from sales. It was, rather, designed to sell companies operating in deficit even for symbolic prices instead of restructuring them beforehand. Strategic investors were to be gained as buyers; all the while employees were still also granted privileges when purchasing their company. The Privatization Ministry was created, the competencies of the State Ownership Fund were limited to the operating business, and public institutions, previously assigned with privatization, were closed in order to achieve a tightening of the responsibilities for privatization. Despite these amendments, in 1998 not even half the designated enterprises could be partly privatized. At the end of the year, more changes to the privatization law were announced. In Romania, the repeated attempts at privatization and the debates upon the procedure have drawn much public attention to the privatization

226 Privatization in Central and Eastern Europe

concept. The actual privatization, however, was delayed, among other reasons, because the Funds were under state influence and because – just as in the Czech Republic – they were allowed to pool risks. Similarly to commercial companies listed for privatization, regie autonome had not been commercialized either, thus preserving soft budget constraints. Even though, in contrast to other countries, the banks in Romania obviously played a small role in privatization, the relations between banks and enterprise sector remained more transparent. This transparency can, on the one hand, be interpreted positively, namely as a clear assignment of property rights. On the other hand, criticism is necessary since the state is frequently still tied directly to its enterprises and can thus still hold political influence.

13.4

Evaluation of privatization in country comparisons

Privatization “from above” was considered economically to be the patent solution of the ownership question, even though, as shown in the theoretical section, a privatization demand cannot be derived even from the neoclassical approach. Faced with the huge extent of state property in transformation countries, privatization seemed inevitable. The privatization debate thus did not deal with the “whether” of privatization. Instead, concentration was focused on the appropriate privatization procedure. This discussion purely on the procedure allowed for an evaluation of privatization within a given framework, especially based upon efficiency aspects. As shown, pure sale and voucher privatization were analyzed in regard to their expected speed, revenues, corporate control and social acceptance. Pure voucher privatization was thus considered a speedy process with high acceptance, which can, however, lead to the control of the enterprises through investment funds, unfamiliar with industrial activity and often themselves hard to control. Pure sale privatization, in contrast, was defined as a favorable process yielding high revenues, within which the enterprises were managed by a core investor, but which enjoyed less acceptance and proved much slower. Mixed procedures were developed to decrease the disadvantages of the various procedures. Transformation countries were advised to apply the (mixed) method yielding a quick retreat of government from economy, as well as an efficiency increase of enterprises. Neoclassical economists thus assumed that with the transfer of state resources to the private sector, two things might be simultaneously accomplished. Firstly, government would pull out of the economy and limit itself to its role as guarantor of ownership. Secondly, formally privatized enterprises would operate efficiently under the new conditions. These are the two aspects which are further analyzed. The privatization experiences listed previously for each country are therefore reviewed quickly and then compared with each other. Furthermore, the common view of privatization, based upon the

Privatization “from Above” 227

narrow aspect of state and/or private disposition over resources, is held up against an evaluation which emphasizes the aspect of liability. The countries could not choose the privatization procedure without considering their past. The decision on the procedure was instead based upon the issue whether the country had already experimented with the decentralization of property rights and private property, and upon the position the employees had obtained. Moreover, additional specific starting conditions (such as domestic as well as foreign indebtedness) influenced the decision. Hungary, which had already experimented with private property and decentralization, even decentralized the privatization procedure. Resulting from the heavy indebtedness, the sale of enterprises, especially to strategic investors, seemed advisable. In Poland, orderly spontaneous privatization was continued in the form of liquidation privatization, while still considering the strong position of employees. This was mirrored, for instance, in the relatively weak position of the Ministry for the Transformation of Ownership, representing one of the institutions participating in privatization. The Russian Federation at first decided on voucher privatization, which represented a free transfer to the broad population only to a lesser extent, but also favored employees by granting preferential status. Romania experienced the management–employee buyout too. Here, the mix of sale and voucher privatization served to resolve the problem of acceptance within the population. Arguments of acceptance, of equal primary distribution, as well as high speed also took into account voucher privatization in the Czech Republic. The preconditions for a free transfer were additionally given, on the one hand, due to the centralized property rights and, on the other hand, due to the balanced public budgets. Each country considered its specific starting conditions in view of other criteria, particularly of efficiency aspects, before deciding upon its privatization procedure. Choosing the primary privatization procedure at the beginning of transformation was no guarantee that the chosen path of privatization was consistently followed. The Czech Republic comes closest to maintaining its clear privatization strategy. Other countries, and particularly Hungary, either considerably modified the method during privatization or, as was de facto the case in Romania, the method was changed more or less visibly. Several countries ultimately ended up using a greater mix of various methods than was initially intended. The often unpredictable, specific conditions during the transformation were thus pragmatically taken into consideration. The privatization methods were further developed pursuing a trial and error process demonstrating capacity for invention, thus even offering Western countries new ideas for the solutions of their own privatization problems. According to the general estimation, the position of privatization was judged differently by the individual countries in the mid-1990s (EBRD (1998:26)). The Czech Republic and Hungary are considered well advanced

228 Privatization in Central and Eastern Europe

as regards large privatization. Poland and even Russia hold the middle ground. Compared to these countries, Romania is placed last. Such estimations are based upon quantitative criteria, such as the number of already privatized companies within the number of enterprises listed for privatization. If this ratio is high, the particular country is credited with a lot of success in privatization and even in transition. It is as striking as it is onesided to concentrate upon the scope and speed of privatization, while completely neglecting other criteria discussed in the privatization debate, such as the amount of privatization revenue and especially the conduct of enterprises. The one-sided measuring of the success of privatization, based on its speed, demonstrates that the assumptions of the effect on the individual privatization methods were not always correct. The voucher privatization effected in the Czech Republic progressed, as expected, quite quickly. But even the further development of the standard procedures of a sale increased the speed of privatization in Hungary. Regarding privatization revenue, the theory that a domestic sale, especially to employees, would only be possible at relatively low prices proved correct. But even in Hungary, which was also the only country to sell many of its enterprises to foreigners, profits remained below the budgeted amounts for several years. While it is easy to quantify the speed of privatization or the scope of privatized enterprises as well as of revenue, it is quite difficult to estimate the conduct of privatized enterprises. Empirical studies, however, show that regardless of the privatization procedure the hopes of the adaptation of enterprises were often not realized, and in particular that extensive restructuring was not instituted. The EBRD (1998:26) also assigns lower “marks” for restructuring compared to the progress of privatization. Thus Hungary and the Czech Republic are only assigned a “3” as well as a “3+” in restructuring, but with regard to large privatization they receive a “4”. It was further observed that, in their conduct, privatized enterprises did not seem to differ basically from state enterprises. Even though in details and in the individual countries certain differences exist, the efficiency increase hoped for was not fulfilled from privatization in general. After experiencing privatization for a few years, it became obvious that the hopes set on privatization could not be realized. One of the causes is to be found in the applied privatization methods. A takeover by insiders is still regarded negatively, even though quite good results were achieved by employee leasing, for instance in Poland. If efficiency problems cannot be traced directly to corporate control resulting from privatization, then the underdeveloped financial markets are especially blamed besides the insufficient competition on the commodity markets. Consequently, the demand arises to begin the privatization of banks. On the one hand, this results in the continuation of the old sequencing debate about the chronology of reform of the enterprise and financial sectors. On the other hand, it

Privatization “from Above” 229

is now correctly established that not so much privatization, but instead the particular, given framework has a decisive effect on corporate governance and the privatization outcome in general (see Brada (1996:84)). Privatization, however, was not only considered a mere means to increase efficiency within the given (even if insufficient) framework. It was, moreover, understood as the main instrument for changing property order within transformation. It was designed to force the retreat of government out of the economy and to develop the kind of conditions which allow the new private sector to use resources efficiently. This task could not be fulfilled through privatization. The main reason was that privatization was only understood, just as within a planned economy, as the decentralization of disposition but not of liability. This was demonstrated as soon as public discussions mainly focused on the issue of the distribution of physical resources, neglecting the connected issue of liability, including the bad debt problem. This problem became particularly evident in the postprivatization phase, when already-privatized enterprises began to externalize losses, which were incurred especially during transformation, by way of their own, diverse relations to the state sector. Regardless of which privatization procedure was chosen and of what legalistic ownership structures were created, from the perspective of liability, a clear demarcation between public and private sector is hardly possible. The falling apart of a decentralization (such as privatization) of disposition on the one hand, and of liability on the other hand, will be made clear again using examples from the different countries. At the beginning of privatization in Romania, ownership rights were still widely centralized and thus quite clear. Government could have proceeded with privatization ordered “from above”. Voucher privatization, however, required that, preceding the actual privatization, the general procedure should be determined, as well as the scope of the share of social wealth to be freely distributed to the population by means of vouchers. Thus, the discussion first focused on detailed questions of the distribution of physical resources. After that, the originally centralized rights of disposition were distributed to the various state-controlled funds and risk-pooling was allowed. The enterprises awaiting privatization were not held liable under a factually deferring insolvency law. Attempts to commercialize the enterprises, which remained state-owned property over a long period through the strategy of “isolation”, yielded little success. In Russia, after the buying up by employees, the management now holds significant blocks of shares. The managers do not usually institute any restructuring of the privatized enterprise, and instead trust to state support and, as a last resort, exercise pressure on the government to keep their enterprise viable. They therefore reorganized their relations with the state sector. The state did not give in to the pressure in the form of direct subsidies, but instead tolerated tax arrears. It additionally promoted the

230 Privatization in Central and Eastern Europe

formation of so-called Financial-Industrial Groups. For mixed and privatized companies, the benefit of joining such a group obviously consisted in the opportunity of externalizing economic risks through state banks and state enterprises, which were also part of these groups, and in exerting influence on economic and political decisions. The groups also provided legal protection, as long as the government does not hold the monopoly of power and illegal organizations (the Mafia) are widespread. In Czechoslovakia, the investment funds created spontaneously during voucher privatization were attached an important function in corporate control. Criticism arose later that during voucher privatization privatized companies, investment funds and state banks were intertwined; this was described as the “web of cross-ownership” (Kenway/Klvaˇ cová (1996:801)). Within this web the investment funds, which were often created by banks, did not hold, as hoped for, a role such as that of a core investor. Instead, the funds can engage in risk-pooling. At the same time, the banks, which are still state-owned and intertwined, can indirectly grant revolving loans to enterprises via their in-house funds. The banks thus even continued the granting of bad loans within transformation, instead of promoting the restructuring of enterprises in their function as lenders of outside capital or indirect owners, as was hoped for. This process was supported by public institutions such as the Consolidation Bank and (indirectly) the National Ownership Fund, which re-capitalized the banks repeatedly even after the regulation of bad debts at the beginning of the 1990s. In Hungary, direct relations between banks and (privatized) enterprises play a smaller role than in the Czech Republic. The privatized enterprises, hived off from state enterprises, created “recombinant property” at first with their parent company and with each other as well. Within this web, enterprises try to shift losses. The strategy consists of transferring losses on to those enterprises which could be spared bankruptcy most easily, for instance, because of their strategic importance, and which can count on state subsidies directly or via the banking system. Repeated attempts were made to stop this practice by regulating bad debts and new debts incurred during transformation. But precisely the multiple attempts contributed to enterprises relying on the state to subsequently regulate bad debts. Stark (1996:997) accurately characterized both the aspects of disposition and liability in “recombinant property”: “Parallel to the decentralized reorganization of assets is the centralized management of liabilities.” In contrast to the Czech Republic and Hungary, in Poland privatization could not be effected as rapidly due to opposition from employees. A breach with tradition was, however, made through liquidation privatization, meaning dissolving of state enterprises followed by subsequent new business starts. The problem of bad debts was taken on as well. The chosen

Privatization “from Above” 231

decentralized method thus had the advantage that enterprises and banks were encouraged to start direct negotiations over bad debt, without the state taking a front seat, and that a moral hazard problem could almost completely be prevented. Privatization, even though sluggish, and the decentralized regulation of bad loans, represented a promising first approach to decentralizing disposition and liability. By comparing Poland to other countries considered advanced, it shows that in Poland the participants involved are likely to be the first to learn the new behavior patterns of disposition over their resources, as well as of liability for their actions. The examples of the countries listed above show that each country decentralized disposition to a certain extent through privatization, but not always liability.66 Countries such as the Czech Republic, which are labeled as successful within the privatization (of disposition), however, have proved to be less successful in regard to the decentralization of liability than Poland, for instance, which privatized at a slower pace, but managed to decentralize liability. Not all countries apply disposition and liability evenly. Instead, the participants involved have on the whole been successful in pushing incurred losses and even future risks on to the state. Neither the conduct of enterprises and banks, nor that of the state has changed significantly. The government failed to implement a clear signal with the privatization “from above”. A new definition of its own role would have meant a limitation to its function as the guarantor of ownership. It is thus less important than that it would retreat from the position of disposing of resources from the economy, than that it would not continue to take on liability in the form of the socialization of losses. This also means that, as was shown by monetary theory, the state would have to expose its own enterprises to hard budget constraints. The reduction of the public sector through privatization (of disposition) is, in contrast, merely a secondary goal. As the guarantor of ownership, the state must draw up and implement general rules such as decentralized liability. Since the culprit of the bad debts from the planned economic phase cannot be determined retroactively, and since the state could actually be most rightly held responsible, for it “imposed” the loans, it would have seemed appropriate to resolve the bad debt problem through one single socialization. Following this expost resolution of the liability question, the state would have had to guarantee that the decentralized liability rule would come into effect as of a set date and be ex-ante generally applicable, meaning that insolvency law would apply as well. The result would have been the closing of companies which showed a negative corporate value resulting from the new evaluation.67 An abrupt ending to the subsidizing of enterprises would have resulted in a massive pruning of employment: this posed the risk that the state would enter a crisis of confidence. Thus, the state found itself in the dilemma of having to draw up and implement clear regulations for the whole economy on the one hand, while on the other hand it had to apply

232 Privatization in Central and Eastern Europe

exemption rules on to the (former) state sector selectively, and to assume its burdens. As already pointed out, the state reacted more or less passively to subsidy pressure. In Russia, the state took on subsidies indirectly in the form of tax losses, but nevertheless also tried to actively exert influence by creating the Financial-Industrial Groups. In Hungary, the state tried to minimize its support and to slowly and repeatedly establish the liability rule within the framework of consolidation programs, only achieving unsatisfactory results. In the Czech Republic, new irrecoverable loans were refinanced after the regulation of bad debts, though in a concealed way through the National Property Funds via privatization revenue, for instance. Such permanent socialization of losses drives the state to its own budget limits. This condition does not always appear directly as a tension in public budgets, created by high subsidies and toleration of low tax morals, and hence low revenue. It is also possible that the actual burden is “hidden” in extrabudgetary funds, or under the condition of an insufficient separation between budget and central bank, within the central bank or the stateowned special banks, which comes to the same thing. In essence, transformation does not simply aim at redefining the state’s role alone; the various public authorities are also supposed to do so. It must also be taken into consideration that within the planned economy, a central bank is known as such, but it did not function as such as long as private property was absent. The continued public support was often justified by saying that, due to the existing monopolistic industrial structure, many enterprises would be “too big to fail”. This argument, however, does not offer any basis for the state’s simple breach of the rule to not grant any subsidies on principle. Like in market economies, at most it offers the basis for the reconsideration of sectorally or regionally limited state support. The state must clearly limit subsidies by deadlines and their amount beforehand in order to avoid continuous subsidization. It is true though that state pre-selection entails the risk of granting privileges to the “wrong” enterprises. This risk is well worth taking, if it simultaneously clarifies that state support will only be an exception in the future. That is exactly what governments have neglected during transformation. With clear commitments, the governments could have found a way out of this dilemma of simultaneously decreasing the burdens of adaptation and setting up clear regulations. It is interesting that in Central and Eastern Europe the state did not decide which branches should be supported; it did, however, decide which sectors would be excluded from privatization. Usually, so-called strategic sectors (power and energy, for instance) were excluded, sectors whose nonprivatization can only partially be justified through the reality of market failure. Precisely the combination of insufficient determination of branches being subsidized and broadly defined areas of exemption from privatization demonstrate that the state is only willing to retreat out of the economy

Privatization “from Above” 233

reservedly. In essence, the state had its own agenda to continue as a coplayer and to not limit itself to the role of an arbitrator.68 Under the assumption that even the state only changes its conduct slowly, the privatization debate proved to have rather negative consequences. The argument that privatization brings about a quick increase in efficiency, and thus also leads to the revenue increases of public budgets led the state to believe that expenditure margins would also expand in the future. Instances in which substantial revenue from sale privatization was expected offered an additional argument, saying that broad public support within transition would be possible. 69 Finally, the income expectations voiced in the privatization debate submitted the arguments to the state to dissolve the public budget constraint ahead of schedule. Even the sequencing debate of the early 1990s basically hindered the development of the game’s rules. One of the matters discussed here was the chronological course to be followed by enterprise privatization and the reform of the financial sector. In the end, it was recommended that the privatization of enterprises be forced through. The one-sided accentuation of privatization, however, also meant that the state was not to generally redefine its role, but that it was supposed to only retreat from its position as owner within the enterprise sector and limit itself to the function of guarantor of ownership. The result was a slowing down of the privatization of banks, as well as of the improvement in the supervision of banks. Finally, via the still state-owned banking sector, the channel to the formally privatized enterprise sector remained open. All in all, the problem of bad debts remains unsolved in the shadow of privatization, and the issue of liability is only deferred. The contribution of privatization to the development of the financial sector was minimal. “After many wasted years of privatization without the creation of property […]” (Heinsohn/Steiger (1996:287)) often real owners, who could undertake the evaluation of assets on the capital market, even if this could also imply its devaluation, are still absent. Privatization was not a guarantee that the state would limit itself to its role as guarantor of ownership. On the one hand, the state itself was not always willing to do so. On the other hand, state and privatized enterprises formed a powerful lobby, which pressured the state to maintain soft budget constraints. The feasibility of a change of property order “from above” was limited. Experience up to now tells us that privatization reduced itself during transformation to its classical fields of operation. Even if it was, on the whole, insufficient, the breaking up within privatization contributed to the strengthening of competition. The transfer of rights of disposition into the private sector created a necessary prerequisite for future restructuring and possible efficiency increases. In order to achieve that, it is essential to first resolve the matter of property. The recently expressed intention of countries such as Romania, which for a long time delayed privatization, to

234 Privatization in Central and Eastern Europe

force privatization now, is to be viewed skeptically against this background. Concluding from the Polish example, it seems quite advisable to approach privatization (of disposition) slowly, while simultaneously decentralizing liability.

14

The Spontaneous Solution: Bottom-up Privatization

Bottom-up privatization, meaning the creation of private enterprises ex nihilo, received very little attention in contrast to privatization “from above” at the beginning of transformation.1 The assumption was that after the liberalization of economy and legal permission of private property, decisive conditions were set to have private enterprise develop on its own. The few economists (such as Murrell (1992:15ff)) who attributed an important role to bottom-up privatization, even held the opinion that alone through the establishment of new business the private sector would increase quickly and that thus the state sector whose privatization would be costly should not be forced since it would automatically lose importance. In analogy to privatization from above, within bottom-up privatization the scope and speed also do not play a key role. The advantage of bottomup privatization here is that disposition and liability develop at the same time. Newly founded enterprises could offer a learning experience for state as well as privatized enterprises with regard to the way disposition and liability should be exercised together. On the flip side, the danger exists that new enterprises will model themselves on the conduct of privatized and public enterprises and also try to get a taste of soft budget constraints. The importance of new enterprises has grown significantly within transformation. The enterprises are, however, still confronted with many problems, partially specific to transformation. It becomes obvious that the concrete problem areas are a reflection of all those areas in which the state fulfilled its role as a guarantor of property only insufficiently. Many countries introduced special programs in order to speed up the development of private enterprises. It is, however, questionable whether these special and frequently no longer comprehensible programs are appropriate to eliminate discrimination against private companies. Instead of the huge number of specialized programs it seems sensible to offer the new enterprises simple and clear guidelines within transformation and to go beyond that by developing and implementing general rules. Before analyzing the problems 235

236 Privatization in Central and Eastern Europe

of new enterprises and their promotion in detail, the difficulties in measuring a bottom-up privatization are outlined briefly.

14.1

Measuring bottom-up privatization

The term bottom-up privatization frequently not only stands for the establishment of enterprises after the beginning of transformation, but also for the development of private enterprises founded during the 1980s. This can partially be traced back to problems with data surveys. Statistics often do not tell whether newly founded companies actually are companies which were newly created or whether these are really just state enterprises which had been converted into a new legal form and were privatized. It is quite a challenge to distinguish between the originally private and the privatized sector. Regardless of such survey difficulties, phenomena such as crossweb-ownership or recombinant property also play a role, and thus even the distinction between the private and the state sector is often impossible.2 In order to still be able to examine the role of newly founded private enterprises in Central and Eastern Europe it seems advisable to understand the establishment of small and medium-sized enterprises (SMEs) as bottom-up privatization.3 The SMEs do, however, also include public enterprises subject to small-scale privatization, as well as big companies which were broken up and privatized subsequently. The procedure proposed above is, however, justified by two reasons. For one thing, the establishment of large enterprises rarely took place, allowing for bottom-up privatization to be limited to a certain size group. For another thing, studies of the Visegrad countries show that – measured by the number of companies – the importance of originally private SMEs is much bigger than that of privatized SMEs (see OECD (1996:21ff)). Empirical studies which make statements about the development obstacles for SMEs based on the number of surveyed enterprises and which are referred to below thus reflect the valuation of originally founded private enterprises rather than privatized SMEs. Even with the helpful limitation of bottom-up privatization to SMEs, statistical problems cannot be eliminated completely (see EBRD (1995:140)). Since only registered companies can be considered, the importance of the informal sector cannot be taken into account, although its portion is estimated to be 10–30 per cent of GDP in Poland and 25 per cent in Hungary (OECD (1996:20f)). There is no guarantee that registered companies did actually begin working, which means they could be just phantom companies. In addition, the number of newly founded enterprises is often recorded in gross terms, meaning that company closures are not taken into account. Furthermore, a categorization into size classes to filter out SMEs can mostly only be done by considering the number of employees. 4 This

Bottom-up Privatization 237

criterion is advisable only when the branch to which the companies belong is also taken into consideration. A business in the service sector with few employees could thus have much importance if measured by its turnover. Such differentiation of size according to branches is done only in few countries, for example in Russia. Under the reservations mentioned above, the EBRD (1995:140) tried to estimate the importance of SMEs in each country according to the number of employees and reached the following conclusion. The importance of SMEs in a country grows by the length of time legally allowing the formation of private property.5 However, the ERBD cannot justify this rule of thumb on the basis of the data it published. According to the ERBD, in Hungary and Poland, the countries that have experimented the longest with private property, the employees of SMEs account for merely 24 per cent and 23 per cent respectively of the total employed population.6 In contrast, in Romania and Czechoslovakia, where private property was suppressed for a long time, this number runs at 27 per cent and 37 per cent respectively. Russia had the smallest SME sector, with only 10 per cent of employees. With regard to company size, one-man businesses and family businesses are very important in Central and Eastern Europe. The number of small enterprises is generally significantly higher than that of medium-sized ones (OECD (1996:28)). Medium-sized enterprises were mostly created only in the course of the spin-off of state enterprises and their subsequent privatization, so that their number remained limited. In contrast, many of the very small enterprises were founded already during the 1980s. Their number increased further as a consequence of the small-scale privatization and the founding of mainly small enterprises. In Central and Eastern Europe, SMEs usually represent trading and service businesses. Of the companies registered in the company register, at the end of 1994 about 62 per cent belonged to the trade and service sector in Hungary; in the Czech Republic they constituted 68 per cent and in Poland 57 per cent (OECD (1996:36f)). Bigger differences between countries appear within the sectoral division of one-man businesses. In the Czech Republic and Hungary about 60 per cent of the one-man businesses belonged to the trade and service sector. In Poland, however, approximately half of the one-man businesses were agricultural businesses as a consequence of the major importance attached to private agricultural family businesses in Poland under the planned economy. The sectoral categorization demonstrates that former property structures can indeed mold the statistical image even after the beginning of transformation. All in all, statistical data are not yet sufficient to make detailed statements on SMEs. Nevertheless, remarks regarding specific problems of SMEs and their importance within transformation can already be made based upon the accumulated corporate surveys, and some of them are introduced in the following section.

238 Privatization in Central and Eastern Europe

14.2

Problems and promotion of SMEs

SMEs are granted an important role in market economies. They are considered flexible, adaptable as well as innovative and thus as promoters of technical progress. Employment effects as well as a strengthening of competition is expected from a dynamic small and medium-sized enterprise sector. In transformation countries the importance attached to SMEs is even greater. In particular the establishment of a large number of SMEs is supposed to create a large number of property-owners. This is how, according to this assumption, not only enterprise is created but beyond that the social basis for the market economy (OECD (1996:7)). The SMEs are attributed the function of stabilizing economic order by transforming existing purely formal rights into material rights, thus contributing to the interpretation and application of law (Brezinski/Fritsch (1995:5)). It is presumed that the adaptable SMEs will undergo a learning process within the changing conditions of transformation, which could have an exemplary effect. In the end, the success (or failure) of SMEs in transition economies initiates a considerably stronger positive (or negative) demonstration effect than in market economies (ECE (1996:144)). Obviously, SMEs were able to actually fulfill many of the expectations set for them. So far the studies have shown that SMEs react extremely flexibly and have been adaptable to the changing circumstances during transformation.8 Over time it appeared that the lessening problems reflected in some way the gradual institutional change. In the beginning, they were mostly confronted with the following problems:9 • insufficient legal security and an adverse climate towards private activities • financial problems (limited access to credits, tax burden) • competition disadvantages on the commodity market • lack of qualified personnel. Today, these hindrances are no longer equally distinct in all of the countries. Empirical studies have demonstrated that SMEs in Visegrad countries are faced with a climate less hostile towards private activities, insecurity and even bureaucracy than SMEs in Russia, for instance. In surveys, Russian SMEs still explained in February 1996 that they consider the unclear legislation as well as the unstable legal situation to be the biggest obstacles in performing their activity. Additionally, Russian SMEs have obviously been hit the hardest by economic crime. In Russia, financial problems are the second biggest, in other countries the main obstacle to the development of SMEs. Financial problems may be especially traced back to the fact that private SMEs are usually forced to work under hard budget constraints and that they have to assume the

Bottom-up Privatization 239

burdens resulting from the continuous soft budget constraints maintained in state and (partially) privatized areas. It can be observed that with time the financial problems change, that they lessen according to a certain pattern. At the beginning of transformation, SMEs had to rely on selffinancing to a large extent. The state banks dominating the finance sector favored the granting of credits to state and (partially) privatized enterprises, with whom they had close relations as they represented their traditional clients. Lending to this sector was considered risk-free as long as the particular company was not exposed to bankruptcy and as long as the problem of non-performing loans was resolved by the state through repeated recapitalizations. SMEs cannot compete with this kind of state guarantee. Frequently, they do not own assets, especially land, to offer as collateral. Therefore, SMEs obtain only short-term loans, if any at all, and at high interest rates. Beside the discrimination from the banking sector, SMEs also suffer directly from non-payment by state enterprises, on which, for the time being, they depend as suppliers of their inputs and as buyers of their products. Add to that the government’s obvious intolerance of outstanding taxes from SMEs, unlike its tolerance towards its own companies. 10 These unfavorable conditions, which the SMEs face and that the state sector does not, only improve in the course of transformation, when the development of the financial sector advances, and results in a hardening of budget constraints within the state sector. SMEs go through a learning process themselves in order to be able to cope with the hostile climate they face. Such an advanced stage seems to have been reached particularly by the Visegrad countries in the mid-1990s. In countries such as Russia and Romania, SMEs still have to overcome the typical starting problems. These groups of countries are dealt with separately in the following. According to the OECD (1996:48f), in the initial years about 63 per cent of the Czech, 51 per cent of the Polish, and about 46 per cent of the Hungarian enterprises faced difficulties with self-financing. Later on, only 22 per cent in Poland, but 38 per cent in the Czech Republic and Hungary still admitted financial bottlenecks. At the same time access to borrowing as well as the lending terms for SMEs in the whole region improved, even if certain differences remained between the countries. The OECD stated that especially in Hungary and Poland conditions were favorable. In contrast, SMEs in Czechoslovakia were confronted with high interest rates, lengthy periods for loan approval and high demands concerning collateral. For Czech SMEs, the access to loans was obviously eased in the course of time. In the Czech Republic as well as in Hungary, bank loans with longer periods of maturity are meanwhile granted as well (ERBD (1995:143)). The initial high proportion of self-financing was not due alone to the limited access to loans. The OCED (1996:52) found in its surveys that SMEs complain of high interest rates even in the phase of negative real interest rates. They were obviously making decisions based only on nominal interest

240 Privatization in Central and Eastern Europe

rates. The lack of knowledge on how to determine the real interest rate had thus lowered demands for loans. For the companies questioned in 1993, the tax burden represented a problem even bigger than the access to bank loans. As many as 71 per cent of the SMEs admitted that high taxes were their biggest problem (OECD (1996:56)). Partially, the tax burden was a result of the continuous application of old tax laws. In planned economies private enterprises were subject to higher taxes than their public counterparts in order to lower the attraction of legal private economic activities. What changed the tax situation of the SMEs was the equalization of tax treatment for all forms of property, the passing of new tax legislation and the changes of tax rates. It is difficult to estimate exactly how high tax burdens rate among their financial problems. The results of the surveys are meaningful only with reservations, since enterprises usually describe their burden as (too) heavy in order to obtain a tax reduction. In Central and Eastern Europe SMEs obviously hold a position as net creditors within interfirm indebtedness. The poor record concerning payment by their state and (partially) privatized clients led to complaints from half the Polish and Hungarian enterprises, and as many as two thirds of the Czech enterprises in 1993 (OECD (1996:53)). The SMEs were threatened with over-indebtedness due to the high amount of outstanding payments, and with bankruptcy, resulting from the willingness to initiate insolvency proceedings against them. On the one hand, the situation improved when, among other things, additional trade liberalization reduced their dependency on state enterprises. On the other hand, the fact that SMEs granted loans even to bad clients indicates that the SMEs themselves had to learn to weigh their risks as creditors first. In contrast to the Visegrad countries, in Russia and Romania the financial circumstances for SMEs are still very unfavorable. The financing of investment projects through bank loans is still quite rare. In Romania, according to studies of the Romanian Center for SMEs, in 1993 only 37.5 per cent of the surveyed companies had filed an application for a loan (Adevˇarul Economic, No. 9/1995, p. 17). The approved credits were mostly short-term. Besides the bank loans, SMEs considered supplier credits to be a relatively good form of financing. The number of companies using this form of credit increased between 1992 and 1993. At the beginning of 1996, over 35 per cent of the Russian companies surveyed by Avilova et al. (1996:31) admitted to not having any relationship with banks. Of those who obtained loans, the high interest rates constituted a problem for onefifth of the companies, to over 14 per cent of them it was the securing of the loan, and to over 12 per cent the credit period. When the banks decided to approve a loan, the investment project and the solvency of the borrowers played a smaller role than the actual person applying, as well as the faith in that person’s entrepreneurial abilities. Credit allocation through banks thus rests heavily upon personal relations. 11 Due to the

Bottom-up Privatization 241

limited access to bank loans, in Russia and Romania SMEs often have to search for alternative sources of financing. A common practice of small entrepreneurs is to fall back on their own savings and those of close relatives and friends. In Russia, up to about half of all investments of SMEs are financed by private individuals. The high degree of self-financing and borrowing through private persons, reflects the fact that the development of Russian financial markets is still in its infancy. According to their own estimation, Russian small entrepreneurs do not consider the problems of interfirm indebtedness and the collection of outstanding debt to be urgent. Enterprises are more concerned by the difficulty of finding a buyer for their products (Avilova et al. (1996:9)). The establishment of a regular clientele still fails due to the fact that state and (partially) privatized companies nurture their traditional supply relations. Besides other factors, based upon this discrimination, almost 17 per cent of the enterprises questioned would like to be considered by the state within so-called state orders, meaning they would welcome the state as client. Sales problems still pose a problem because the taxes independent of income still play a key role in Russia. Private SMEs are threatened much faster with bankruptcy in the case of non-payment of taxes than state large-scale enterprises. But extensive bankruptcy proceedings were not observed in the past even with SMEs; when faced with financial difficulties, they were probably subsidized by the government. That direct government support can play an important role becomes obvious through the surveys. Nonetheless, a third of Russian SMEs requested government to allow for their direct financial support, in addition to tax privileges (see Avilova et al. (1996:55)). Romanian SMEs seem to have similar expectations of government help. They even consider direct financing through the public budget as actually very favorable (Adevˇarul Economic, No. 9/1995, pp. 16f). The dominance of state and (partially) privatized enterprises upholding their traditional commercial relations, as well as insufficient consideration of private small enterprises by the state when it placed its orders already represent the most significant disadvantages new Russian SMEs face as regards competition. In contrast, SMEs in Visegrad countries view their competitive positions against the (former) state enterprises as relatively strong. In all countries, the discrimination against private SMEs is more serious in industry, where huge state and partially privatized industrial enterprises dominate, than in the trade and service sector opening up market niches. The concentration of SMEs in the tertiary sector, which resulted, among other things, from the lack of capital and insufficiently secured property rights, relativizes their attributed function of strengthening competition and promoting structural changes. Obviously, SMEs can hardly encourage the development of industry where, even after privatization, the restructuring of enterprises hardly advances at all.

242 Privatization in Central and Eastern Europe

The lack of qualified personnel and its low mobility obviously represent obstacles, particularly for privatized SMEs. In order to attract qualified employees, privatized SMEs can make wage concessions only on a smaller scale than the newly founded ones. According to the ERBD (1995:142), in Russia two-thirds of the state and privatized enterprises, but only one-third of SMEs said that they could not fill vacancies, owing to the high pay demands of qualified workers. Even in Romania and Hungary, according to the study of Bilsen/Konings (1996:11), new enterprises do not consider wage levels to be their main problem. One reason could be that, from the beginning, new enterprises had the ability to differentiate their wage structure and to control their wage burden. In their search for qualified personnel, SMEs are confronted with the fact that state employment agencies do not offer them much help. Next to personal ties, this is another reason why, in Russia, small businesses rarely rely on employment agencies, but rather fill their vacancies on the basis of recommendations from their acquaintances. All in all, the surveys clearly demonstrate that the problems of the SMEs in Russia and Romania are recognizably different from those of the SMEs in the Visegrad countries. SMEs in Romania and especially in Russia, where their environment is even more unfavorable, try to minimize their disadvantages compared to the state sector by using personal relations. The possibility cannot be ruled out that they try to tie themselves into the property network in order to enjoy softer budget constraints. This holds the risk that even new enterprises might break the rule of exercising decentralized disposition and liability. In Visegrad countries, however, SMEs seldom succeed in externalizing losses. Their access to the better developed markets has improved. They are also experiencing a more even taxation. Overall, as a minority, SMEs can only partially improve their situation in relation to the state sector by themselves. They were and still are dependent on the state to even out their disadvantages. Special promotional programs were only established after the realization hit home that privatization “from below” does not occur spontaneously. These programs are aimed, most of all, at improving the general economic environment. Thus, the promotion catalog of the EBRD (1995:144ff)) includes practically every area of transformation. The general nature of support programs is not based upon the bad conditions to be found in all of the countries. Rather, the EBRD states that knowledge of the micro-level is still insufficient. It would be impossible to design a specific program for a specific country which would live up to its own developmental stage and specific starting conditions. For one thing, the EBRD thus confirms that relevant differences exist between Central and Eastern European countries, differences whose importance in regard to a well-directed promotion of SMEs can be estimated only vaguely. For another thing, the EBRD indirectly criticizes the long period of time in which macro-perspectives dom-

Bottom-up Privatization 243

inated. The promotion of SMEs will remain difficult as long as state institutions and international financial organizations lack information on concrete activities at the micro-level. The emphasis of promotion programs rests on technical assistance as well as on financial support.12 Loans are granted at favorable conditions. The effectiveness of these measures, however, was low in the beginning. Frequently the privileges did not reach the new enterprises, particularly during transformation. Favorable loans and loan guarantees were granted far more often to privatized SMEs than to new private enterprises in Poland, Hungary and the Czech Republic (OCED (1996:77f)). The fault lay with international financial institutions (including the ERBD) who partially supported only joint-stock corporations, while the promotion of small family businesses was at first neglected. In an initial promotional phase the programs were thus subject to the general transformation politics of forcing privatization and of relying on the spontaneous establishment of private enterprises. Many countries subsequently proved to be disappointed by the low degree of support they obtained from the international community, in their view. They had hoped for comprehensive support – hope based on such historic examples as the Marshall Plan and the transfers made following German reunification (OECD (1996:79)). Even beyond the first phase, the promotion of newly established enterprises remains difficult. SMEs are often not fully informed on the wide scope and frequently confusing opportunities of support since they are usually organized in associations to a low extent. Individual countries have thus established special information centers (see OECD (1996:88ff)). The SMEs, however, rarely inquired about the services offered by these centers. This may be a result of the suspicion that these centers function bureaucratically, which itself is rooted in the lack of confidence in official authorities. The Russian enterprises questioned by Avilova et al. (1996:79) expressed mostly their wish for direct cooperation, meaning that they preferred support based upon personal relations over anonymous state support. Besides the promotional programs of international organizations, the development of SMEs is also supported by the individual national states through tax breaks, among other things. The advantage of tax breaks consists in the fact that they generally reach the intended groups more effectively than selectively granted loans (OECD (1996:78)). Besides, SMEs are very interested in information on tax breaks which have a rapid impact on business activity. However, in reality, the tax break does not always reach its intended group. Tax breaks are often not granted to SMEs evenly. In Russia, SMEs lobby in order to negotiate tax relief. Thus, they act similarly to privatized or state enterprises, which also negotiate tax relief or simply do not pay their taxes. Therefore, it cannot be ruled out that SMEs might have a negative influence upon promotional programs. Especially in the case of Russia the question arises whether support measures are really

244 Privatization in Central and Eastern Europe

intended to improve the prevalent conditions for SMEs and to lessen their specific problems. It could be that SMEs are “promoted” in such a way to retrospectively create the conditions (such as soft budget constraints) which existed initially for (former) state enterprises. This would imply the softening of the liability principle for newly established enterprises. In this case, bottom-up privatization can rather be considered a negative demonstration of property reform. The basic problem of the promotion of SMEs lies in the fact that it has a selective character. Specific promotion which grants advantages to certain groups harbors the threat to the transformation countries that the still new and still untested market economic regulations will be questioned. The creation and stabilization of the rules of the game and the simultaneous (indirect) support of SMEs are not mutually exclusive. The state can establish equal opportunities by providing SMEs with support, but it can also cancel the privileges of state-owned and privatized enterprises, thus burdening this sector. Concerning property, this means that the state must make even the (former) state enterprises subject to the principle of decentralized liability. The state should not only improve market entry for SMEs, but market exit as well, and allow even state enterprises to do so. A significant prerequisite for market exit is a generally applicable insolvency law, which strengthens the position of private creditors. According to Buchanan, the legal institution of private property as a public capital will only gain credibility with time. SMEs, especially in the Visegrad countries, have not only proved their great ability to adapt to the still unstable environment. Beyond this, their trust is an investment in the credibility of reforms.

Part V Summary and Prospects

246 Privatization in Central and Eastern Europe

Summary and prospects “Property Rights in Transition” was the motto of this examination of the changes of property order in Central and Eastern Europe. It analyzed property which has marked the difference between the economic systems, but has not itself been examined. The result of this study of “property” and the problem of its perception in Central and Eastern Europe will be summarized in the following. In closing, perspectives for theory and practice will be given. The focus of Part II, “Property Rights in Philosophy and Economics” was to acquire a general concept of property. Philosophers of the late middle ages, who were faced with the separation of imperium and dominum that was taking place, not only searched for a justification of the state conceived as a hierarchical apex. They included property in their reflections and asked whether God or man should be considered its creator. They linked the creation and justification of private property to the justification of the state by means of various constructs of social contracts and thus reintegrated the concept of property into social hierarchy. For Hobbes, the state which had become a Leviathan remained uncontrolled. While Hobbes presumed that the state was created as a result of man’s desire to escape the “free-for-all”, Locke thought that it was possible for people to agree peaceably upon property initially. Locke considered physical work to be the real (and just) justification of property, which was, at first, granted through (biblicaltheological) rules of appropriation. Later, he also acknowledged the fact that, due to limited resources, violent appropriation is likely and that, therefore, the members of society create a controllable state to function as a guarantor of property. In the centuries that followed, labor was still regarded as its justification, and was rarely applied to physical resources directly, but instead to derivative acquisition. Socialists used it in a distributive, political interpretation to justify the employment guarantee and guaranteed wages. The utilitarian interpretation, which aimed at the greatest happiness of the greatest number, focused on weighting the aspects of efficiency and justice. It was essential for Mill that, due to the individual economic scope of action, there are occasions for discoveries within the use of resources, as long as the achieved incomes were justified by labor. He therefore studied the nationalization of land, which was seen as a socialist influence. With Hume, labor is no longer the central basis for the justification of property and the contract takes on a new interpretation. Hume recognized that, in small groups, individuals develop behavioral norms (to safeguard property) through reciprocal learning and exchange, and that only large societies require the state as the guarantor of property. His starting question of “what reason or motive have I to restore the money” ultimately led him to the fundamental assumptions of “stability of possession”, “transference by consent” and “performance of promises”. He accentuates that the various

Summary and Prospects 247

possibilities of disposition (including transfer) must be guaranteed and that the fundamental principle of contract fulfillment is the basis of the sanction of decentralized liability. To Hume, decentralized disposition and decentralized liability are decisive features of (private) property. The state guarantees the enforcement of these principles as the communicator between individuals. To maintain credibility, according to Hume, a middle course between constancy and adaptation of the rules needs to be found. All in all, philosophers generally viewed property in a broad context. They reached this view as a result of their research and interpretation of the concept of property, which changed over the centuries and was extended to include various objects. They thus tried to view property from the perspective of (individual economic) efficiency, as well as justice and social well-being. In the end, they came up with different views and partly “pragmatic” assessments of the extent of the public sector and the state’s role as the property guarantor. At the same time, by naming the basic principles of property guarantee, as well as decentralized disposition and liability, they addressed the key features of property, which must be established within transformation. Economists seldom questioned the nature of property, once it was established in market economies as a sacrosanct institution. More often they presupposed stable parameters, and discussed privatization and alternative privatization procedures within this framework. Since such a framework does not exist during transformation, the demand for privatization in Central and Eastern Europe, made by neoclassical economists must be viewed critically. Instead of following the debate on privatization, the questions to ask rather were whether and how neoclassical attempts could explain the development of property guarantee as a public good. Demsetz justified the emergence of property on the basis of benefit/cost calculations of the internalization of external effects, but failed to explain how individuals reach an agreement on the principle of exclusion and the state as the law-enforcing authority. At this point, Buchanan took over with his model, which followed contract theory. In it, he addressed, among other things, the problem of non-cooperation, which ultimately can (only) be resolved through “the veil of ignorance”. It turned out that the development of property and the state can be explained only unsatisfactorily by standard economic assumptions. These approaches can only be applied to the exchange processes in the post-constitutional phase. It is, therefore, impossible to use them as a foundation to predetermine the shape of property guarantee in a society. This also applies to transformation countries, where different forms of property rights are possible and even probable. In this context, North points to international competition, which can lead to a correction of inefficient property rights. Nevertheless, according to North, the behavioral norms, which are culture-specific and extremely persistent, will adapt only slowly. This process can only partially be described by standard

248 Privatization in Central and Eastern Europe

economic approaches. Lastly, neoclassicists (implicitly) agree that the emergence and change of rules and institutions cannot yet be completely explained by their models. While, according to Buchanan, the creation of property was motivated by saving resources, in monetary theory, it is motivated by the risk-aversive individuals’ uncertainty of survival. The monetary-Keynesian analysis does not define the differences between economic systems on the basis of state or private possession of resources either. Instead, it directs attention to the private/state appropriation of interest claims on the one hand, and the socialization thereof on the other hand. From this viewpoint, the privatization of state resources takes a back seat to the establishment of microeconomic budget constraints – ultimately decentralized liability – and to money as the macroeconomic budget constraint. Monetary theory, however, does not pursue the question of how property guarantee becomes a public good. Instead, it clarifies the difficulties of changes in the property order specific to transformation. Why and how individuals agree upon property and the state is explained by old institutionalists such as Commons according to evolution theory and following Hume. In the end, Commons reaches a self-perpetuating conception of property. He regards property rights as a successful, concerted action to resolve conflicts, definitely not as a one-time contract settlement, but rather as a permanent search for consensus. Here, the interpretation of law contributes decisively to the creation of socially accepted and reasonable values. During this process, property is constantly interpreted anew and the concrete design of property rights is rethought. This enables the change of property and allows socially anchored property rights to retain their credibility. Similarly to Hume, for Commons, the state is not so much the law-enforcing authority towering over its citizens, but rather the communicator between them. In contrast, for Veblen, the state degenerates into the mere assistant of the business class, owing to its conservative attitude which prevents the change and adaptation of property rights at the expense of the majority of the population. To Veblen, property constitutes a fundamentally bad institution hindering development. Even though his judgment seems too negative, according to him, skepticism is appropriate when considering whether the managers of enterprises in Central and Eastern Europe support the changes in property order or not. New property laws, however, are not sufficient to ensure fundamental changes. According to Commons, a purely formal codification of property rights does not guarantee the fact that their importance is recognized. Rather, a process of devaluation and revaluation of the rules needs to take place. The theoretical approaches on property were often only touched upon here. The broad view of different approaches, however, shows that “property” seems to play a key role everywhere and that it has been interpreted

Summary and Prospects 249

to mean quite a variety of things. It is only a recent phenomenon to consider individual possession of resources mainly according to efficiency aspects. Aspects such as justice and security, though, still remain (subliminally) tied to property and create tensions, which are not always explained by the theories presented here. The main difference between the approaches is which aspect they emphasize. None of them can explain property completely, however. Concentration on one single theory is, therefore, not appropriate for this complex issue. A “pragmatic” approach to these theories is needed, since each of them contributes an aspect to a broader understanding of property in its special field. It seems useful to examine property in practice as well as theoretically. The reason for the examination of “Property Rights in Planned Economies” was the fact that the radical changes in Central and Eastern Europe in the late 1980s should be regarded as a major turning-point, but they cannot be counted as a completely new beginning. Changes in property order were already noted in individual countries in the 1980s. Even though the socialist legal conception of property was upheld formally, in some countries, especially in Hungary, it was interpreted more broadly, that is to say to the benefit of private activities. Alongside the question of the extent of legalized private activity, attention was also drawn to the analysis of the degree of autonomy of state enterprises, as well as the degree of decentralization of property rights. Looking at private activities on one hand and at decentralization on the other, it becomes obvious that, already in the second half of the 1980s, the transfer of resources from the state to the private sector was more or less legalized and actually occurred within spontaneous privatization, especially in Poland, Hungary and the former Soviet Union. The decentralization of liability was, on principle, not accompanied by the decentralization of rights of disposition. Instead, private (quasi) owners tried to externalize their losses via state enterprises. The latter took over the function of some sort of insurer. It gave the (semi-)official private sector some property protection in the phase in which the state no longer clearly protected its socialist property as determined by the constitution, and in which it did not yet function as the property guarantor for private property. The erosion of the socialist property order described above occurred more or less intensely in each individual country, thus explaining the differences in the circumstances at the beginning of transformation. The results of the section on planned economies create the startingpoint for the examination of “Property Rights in Transition”. The crisisridden process of transformation, which is traced back to institutional problems only in recent times, was only roughly outlined. A discussion on property followed, which considered the development of the state as the property guarantor, as well as the decentralization of rights of disposition and liability. The problem of bad debts surfaced here, its causes and importance in the transformation countries were exposed and the theoretical

250 Privatization in Central and Eastern Europe

approach to solve it by way of cancellation and socialization introduced briefly. Three strategies for the resolution of the question of property were subsequently identified and analyzed in detail. The first attempt of the Central and Eastern European countries to resolve the matter of property was to follow the legal solution. The question was voiced whether and to what extent individual countries have laid the legal foundations for a market economy. Some countries actually established the market economy as their economic system in their constitutions. Property guarantee was codified in the constitutions without exception. In some countries, though, the determination of the concrete extent of the public sector was made pending the passage of relevant backlogged laws. In addition, it was shown that public enterprises were formally corporatized, but that the new owners had to assume the debt incurred by their predecessors. The problem of bad debt which resulted from roll-overs became obvious within insolvency law and thus within the actual legal foundation of the principle of liability. In the face of the dreaded wave of bankruptcies that began to materialize in Hungary in the early 1990s, insolvency regulations were either not applied at all (for instance, in Russia and Romania) or only applied in a weakened form (for example, in Hungary and Czechoslovakia). Private (illegal) lawmaking took place in part simultaneously with the non-application of codified law. The private (forceful) collection of debts, therefore, represents the other face of the state’s insufficient property guarantee. Secondly, privatization was discussed as being an economically patent solution. The debate on privatization, in the course of which the individual privatization procedures were analyzed in the early 1990s, although most often without touching the bad debts problem, represents the starting point. Privatization went ahead in practice despite this problem. The resulting consequences for each country have been shown individually. The methods applied were first discussed in detail, followed by an analysis of how privatization developed, and judged by the usual indicators (such as the number of privatized enterprises versus those still to be privatized). This assessment was subsequently questioned by explaining the previous (mostly insufficient) measures for the restructuring of companies and the resolution of the bad debts problem, thus accentuating the aspect of liability. From the viewpoint of liability and in a cross-country comparison, it turned out that, for instance, Poland, a country which privatized slowly, made more progress with regard to the establishment of the principle of liability than Czechoslovakia, which was counted as being one of the successful transformation countries due to its quick voucher privatization. Therefore, from the perspective of liability, the countries’ progress must be viewed differently than from the usual perspective on privatization. In a certain sense, the approach taken by many transformation countries in giving priority to the decentralization of disposition in the form of merely formal privatization over the decentralization of liability constitutes a

Summary and Prospects 251

continuation of the process already observed in the phase of the planned economy. The demand for privatization made by neoclassical economists was obviously understood by many transformation countries to mean only the decentralization of disposition. If the principle of liability was established only unsatisfactorily through privatization “from above”, the question remained whether it would occur spontaneously within transition or not. The so-called bottom-up privatization as the third solution, which was ignored by economists for a long time, bears the fundamental advantage of simultaneously developed decentralized liability and disposition. It proved hard, though, to analyze this process within the transformation countries. Empirical data for actual newly established enterprises are still scarce, so that bottom-up privatization came to be understood simply as the creation of (newly founded and privatized) SMEs. As empirical studies show, SMEs developed quite dynamically even under unfavorable circumstances. This is particularly valid for the Visegrad countries, where many of the starting problems have meanwhile been overcome. In countries like Russia, though, there is fear that, as far as liability is concerned, SMEs cannot be used as learning models for state and privatized enterprises, but that instead, they try to externalize losses the way the latter did. A spontaneous “insistence on private property”, as Adolph Wagner observed, does not occur here. In order to obtain a well-grounded assessment, however, a closer look at the actual events is needed. Due to the growing interest in newly founded companies, more empirical studies are being planned, meaning that research gaps existing until now might soon be filled. Transformation is an ongoing process. Thus, it remains difficult to draw firm conclusions from it. Assumptions must often be revised and prognoses frequently prove to be wrong. Regarding property and privatization, transformation countries have, so far, taught us that the question of who should dispose over resources, the state or the private individual, does not go far enough. Both aspects must be analyzed – disposition, as well as liability. More attention has been devoted to the latter by experts recently in their analyses of the economic effects of insolvency rules. Rarely though, is liability discussed as a characteristic of property. As for Eucken, disposition alone is the criterion that determines whether it is private or public. As already mentioned, Eucken (1990:281) considered “private” companies to be “private property” even while still under state control. However, Eucken himself realized that with this “division of (centralized) control authority and (decentralized) liability”, decentralized liability is meaningless and bankruptcy useless. Moreover, he pointed out that this division could not be maintained over a long period and that the development towards a centrally controlled economy (planned economy) could only be prevented by the expansion of decentralized liability. He did not, however, characterize private property according to disposition and liability, which must be

252 Privatization in Central and Eastern Europe

exercised together and which must stand as an ex-ante principle of market economy for private, as well as for public market participants. When the framework is insufficient, as is the case with transition, it is precisely the questions of the emergence and change of property which demand a closer look. The present study is an attempt to tackle them in the context of different countries of Central and Eastern Europe. Thus, it began by examining the liability of various economic theories to explain property and thereby point out existing gaps. What needs to be emphasized here is that the complex phenomena of property cannot be adequately covered from a strictly economic point of view. This work, therefore, also included the legal and philosophical perspectives of property, even if these constitute expert areas, which often cannot be accessed easily by economists. Obviously, only even stronger interdisciplinary research can track down the nature of property. As long as everybody believes they know what property is, the danger remains real that the East and the West will continue to talk at cross-purposes. Yet, precisely the property which marked the system differences could provide new impulses for common research. The changes of property in transformation should thus not be understood as a process specific to the East. The problems surfacing during property rights reform are most evident in Central and Eastern Europe. Yet even in existing market economies, property underwent change, spread over such a long period of time that this process probably went mostly unnoticed. But even here, the process of change becomes visible from time to time, and surfaces, for instance, in the problem of protecting intellectual property on the world wide web. It can be assumed that the questions of property will be voiced anew in the future with a broader, international scope. How property – the origin of which was disputed by philosophers and characterized by them as a phenomenon resulting from human action, but not human design – will look in the future, we can only guess.

The Czech Republic 1989#

253

Output and consumption GDP1 Private consumption Public consumption Gross fixed investment Industrial production Agricultural production Prices and wages Consumer prices Producer prices Gross nominal wages2 Money, Interest and exchange rate Broad money, % of previous year Interbank interest rate3 Exchange rate, CZK/USD4 Government sector State budget General government5 External sector Exports6 Imports, fob6 Current account7 External debt stock Labour market Employment, % of previous year

1990#

1991#

4.5 – – – 1.7 2.3

–1.2 – – – –3.3 –2.3

–14.2 – – – –22.0 –9.0

1.4 0.0 –

9.7 4.3 –

56.6 70.4 16.7

3.5

0.5

26.8

20.7

– 14.3

– 28.0

– 27.8

– –2.8

–0.2 0.1

–2.0 –2.0

– – – –

– – – –

8.3 8.8 0.3 6.7

–0.9

–5.5

12.7 6.7 12.6 28.9 30.0 28.2 (Balance in % of GDP) –0.2 0.1 1.0 –3.3 0.5 0.9 (Bill. USD, end-year) 8.4 13.0 14.0 10.4 13.3 14.9 –0.3 0.1 0.0 7.1 8.5 10.7 (end-year) –2.6 1.1 –1.4

0.6

1992

1993

1994

1995

1996

1997*

1998*

(real annual growth rates in %) –6.4 –0.9 2.6 4.8 15.1 2.9 5.3 6.9 –3.1 –0.1 –2.3 –1.6 8.9 –7.7 17.3 16.1 –7.9 –5.3 2.1 9.2 –12.1 –2.3 6.0 5.0 (annual rates of change in %) 11.1 20.8 10.0 9.1 9.9 13.1 5.3 7.6 19.6 23.8 15.8 18.1

4.1 7.0 4.3 8.7 9.2 1.4

1.0 1.6 –1.8 –4.9 4.5 0.0

–2.7 –2.4 1.1 –3.7 1.6 –2.0

8.8 4.8 17.7

8.5 4.9 13.5

10.7 5.0 –

(end-year) 19.8 19.9

19.8

9.2

10.1

5.2

11.0 26.6

12.6 27.3

17.5 34.7

10.3 30.0

0.6 0.4

–0.1 –1.2

–1.8 –2.1

– –2.7

21.5 25.1 –1.4 16.5

21.7 27.6 –4.3 20.8

22.8 27.3 –3.2 22.0

26.4 28.9 –1.0 23.6

0.6

0.7

–4.0

–

Appendix: Main Economic Indicators

Table A1

The Czech Republic (continued) 1989#

Unemployment rate Private sector GDP Employment

0.0 – 1

254

Table A1

1990#

1991#

0.8

4.1

11 7

12 19

1992 2.6 17 31

1994

1995

1996

1997*

3.5 3.2 (Share in % of) 28 45 47 53

2.9

3.5

5.2

1993

56 57

66 –

75 –

1998* 7.5 – –

* Preliminary. # Czech Republic only. 1 In 1984 constant prices, 1994 prices thereafter. 2 In manufacturing. 3 Up to 30-day maturity. 4 Official exchange rate. 5 State budget, local budgets and extrabudgetary funds. 6 Balance of payments data; 1991 and 1992 Czechoslovakia; 1995 change in statistical reporting. 7 Convertible currencies, 1991 and 1992 Czechoslovakia. Sources: EBRD (1996a, 1997, 1998), ECE (1996, 1997), Statistical Yearbook Czech Republic (1995, 1998), Czech National Bank (1996).

Table A2

Hungary

Output and consumption GDP1 Private consumption Public consumption Gross fixed investment Industrial production Agricultural production Prices and wages Consumer prices

1989

1990

1991

0.7 2.3 –6.3 7.0 –2.0 –1.8

–3.5 –3.6 2.6 –8.1 –9.3 –4.7

–11.9 –5.6 –2.7 –10.4 –18.4 –6.2

17.0

28.9

35.0

1992

1993

1994

1995

(real annual growth rates in %) –3.0 –0.8 2.9 0.0 1.9 –0.2 4.9 27.5 –12.7 –2.6 2.0 12.5 –9.7 4.0 9.6 –20.0 –9.7 3.2 (annual rates of change in %) 23.0 22.5 18.8

1996

1997*

1998*

1.5 –7.1 –4.1 –4.3 4.6 2.6

1.3 –2.7 –4.2 6.7 3.4 6.3

4.4 2.0 1.8 8.8 11.0 –3.8

–5.0 3.5 3.0 10.6 10.6 2.0

28.2

23.6

18.3

14.3

Table A2

Hungary (continued)

Producer prices Nominal wages, net Money, interest and exchange rate Broad money, % of previous year Interbank interest rate2 Exchange rate, HUF/USD3 Government sector Central government4 General government5 External sector Exports6 Imports6 Current account6 External debt stock Labour market Employment, % of previous year Unemployment rate Private sector GDP Employment

1989

1990

1991

15.4 18.2

22.0 24.1

32.6 25.5

13.8 – 62.5

28.7 – 61.5

28.5 – 75.6

–0.8 –1.4

0.8 0.5

–4.4 –2.9

6.4 5.9 –1.4 20.4

6.3 6.0 0.1 21.3

9.3 9.1 0.3 22.7

–0.6 0.3

–3.1 1.9

–9.6 7.5

– –

– –

30 –

1992 12.3 21.3

1993

1994

10.8 11.3 17.7 27.3 (end-year) 27.3 16.7 13.0 – 21.8 31.3 84.0 100.7 110.7 (Balance in % of GDP) –6.9 –6.6 –7.7 –6.8 –5.5 –8.4 (Bill. USD, end-year) 10.0 8.1 7.6 10.1 11.3 11.2 0.3 –3.5 –3.9 21.4 24.6 28.5 (end-year) –9.3 –5.4 –1.4 12.3 12.1 10.4 (Share in % of) 47 55 60 – 53 –

1995

1996

1997*

1998*

28.9 12.6

21.8 17.4

20.4 24.1

11.3 –

20.1 27.8 139.5

22.5 23.2 164.9

19.4 19.7 203.5

15.5 17.0 217.2

–6.5 –6.7

–3.5 –3.1

–4.1 –4.9

– –4.6

12.8 15.3 –2.5 31.7

14.2 16.4 –1.7 27.6

19.6 21.4 –1.0 23.7

23.0 25.7 –2.3 24.5

–0.7 10.4

0.3 10.5

0.3 10.5

1.4 9.5

65 60

70 –

75 –

– –

255

* Preliminary. 1 Volume indices. 2 Up to 30-day maturity. 3 Official exchange rate. 4 State budget and extrabudgetary funds. 5 State budget, local budgets and extrabudgetary funds. 6 Balance of payments data. Sources: EBRD (1996a, 1997, 1998), ECE (1996, 1997), Statistical Yearbook Hungary (1996, 1998), National Bank of Hungary (1996).

256

Table A3

Poland

Output and consumption GDP Private consumption Public consumption Gross fixed investment Industrial production Agricultural production Prices and wages Consumer prices Producer prices Nominal wages, net Money, interest and exchange rate Broad money, % of previous year Interbank interest rate1 Exchange rate, PLN/USD2 Government sector State budget General government3 External sector Exports4 Imports4 Current account4 External debt stock Labour market Employment, % of previous year

1989

1990

0.2 –0.3 –4.6 –2.1 – 1.5

–11.6 –15.3 0.5 –10.6 – –2.2

251.1 212.8 291.8

585.8 622.4 398.0

526.5 – –

160.0 – 9730

–6.1 –7.4

0.7 3.1

7.6 7.3 –1.4 40.2

10.9 8.6 0.7 48.5

–0.6

–6.3

1991

1992

1993

1994

1995

(real annual growth rates in %) –7.0 2.6 3.8 5.2 7.0 6.3 2.3 5.2 4.3 3.3 10.2 5.9 3.2 2.2 2.9 –4.4 2.3 2.9 9.2 16.5 –8.0 2.8 6.4 12.1 9.7 –1.6 –12.7 6.8 –9.3 10.7 (annual rates of change in %) 70.3 43.0 35.3 32.2 27.8 40.9 34.5 31.9 25.3 25.4 70.6 38.9 31.3 32.9 31.8 (end-year) 37.0 57.5 36.0 38.2 34.9 36.7 30.8 25.2 21.1 24.7 11564 15879 21308 24261 2.49 (Balance in % of GDP) –7.0 –6.9 –3.4 –2.5 –2.6 –6.7 –6.7 –3.1 –3.1 –2.8 (Bill. USD, end-year) 12.8 14.0 13.6 17.0 22.9 12.7 13.5 15.9 17.8 24.7 –2.0 0.9 –1.3 0.8 5.5 48.0 47.6 47.2 43.6 45.2 (end-year) –4.3 –2.6 –1.6 1.0 0.3

1996

1997*

1998*

6.1 8.3 3.4 19.7 8.3 0.7

6.9 6.9 3.2 21.7 11.5 –0.2

4.8 4.9 3.0 14.5 – –

19.9 12.4 26.7

14.9 12.2 23.5

11.6 7.3 –

29.3 21.2 2.83

29.1 24.8 3.50

25.0 16.0 3.5

–2.4 –3.3

–1.4 –3.1

– –3.0

24.4 32.6 –1.3 41.6

27.2 38.5 –4.3 43.0

30.3 43.9 –6.8 45.0

3.4

1.3

1.4

Table A3

Poland (continued)

Unemployment rate Private sector GDP Employment

1989

1990

1991

1.0

6.3

11.8

27 46

– 46

31 51

1992

1993

13.6 15.7 (share in % of) – 35 56 58

1994

1995

1996

1997*

1998*

16.0

14.9

13.6

10.5

10.4

39 61

45 63

52 64

58 67

– –

1996

1997*

1998*

4.1 11.1 7.0 3.9 9.9 1.8

–6.6 –5.7 –2.3 –15.9 –5.9 3.1

–5.0 – – –18.0 –10.5 –8.0

38.8 49.9 49.3

154.8 156.8 97.3

59.1 18.4 55.0

* Preliminary. 1 Up to 30 day-maturity. 2 Free market rate; in 1995 denomination (10000 PLN = 1 USD). 3 State budget, local budgets and extrabudgetary funds; without privatization revenues. 4 Balance of payments data. Sources: EBRD (1996a, 1997, 1998), ECE (1996, 1997), Rocznik Statystyczny (1995, 1998), Narodowy Bank Polski (1995, 1996).

Table A4

Romania 1990

1991

–5.8 0.6 6.0 –1.6 –2.2 –5.4

–5.6 8.1 14.1 –37.4 –23.7 –2.9

–12.9 –16.2 10.5 –36.7 –22.8 –8.6

1.1 0.0 3.9

5.1 26.9 10.6

170.2 220.1 120.6

1992

1993

1994

1995

(real annual growth rates in %) –8.8 1.5 3.9 7.1 –7.7 0.9 2.4 12.9 2.2 2.6 11.8 0.7 10.8 8.3 19.4 6.9 –21.9 1.3 3.3 9.4 –12.2 12.8 2.8 4.5 (annual rates of change in %) 210.4 256.1 136.7 32.3 184.8 165.0 140.5 35.1 170.0 196.5 137.7 52.9

257

Output and consumption GDP Private consumption Public consumption Gross fixed investment Industrial production Agricultural production Prices and wages Consumer prices Producer prices Nominal wages, net

1989

258

Table A4

Romania (continued)

Money, interest and exchange rate Broad money, % of previous year Interbank interest rate1 Exchange rate, ROL/USD2 Government sector State budget General goverment3 External sector Exports Imports Current account External debt stock Labour market Employment, % of previous year Unemployment rate Private sector GDP Employment

1989

1990

1991

6.3 – 14.4

22.0 – 34.7

101.2 19.5 189.0

– 8.4

–1.9 1.2

–1.7 0.6

– – 2.9 –0.8

5.7 9.1 –1.8 0.6

3.5 4.8 –1.3 2.1

1.3 –

–1.0 –

–0.5 3.0

13 6

16 9

24 34

1992

1993

1994

(end-year) 79.6 143.2 138.1 43.6 61.4 64.3 460.0 1276 1767 (Balance in % of GDP) –4.4 –2.6 –4.2 –4.6 –0.4 –1.9 (Bill USD, end-year) 4.3 4.8 6.0 5.7 6.0 6.6 –1.5 –1.2 –0.5 3.2 4.2 5.6 (end-year) –3.0 –3.8 –0.5 8.1 10.2 11.0 (Share in % of) 26 34 38 41 44 49

1995

1996

1997*

1998*

71.6 45.2 2578

66.0 55.3 4235

75.9 90.3 8023

48.9 136.4 10445

–4.1 –2.6

–4.8 –3.9

–3.6 –4.5

–5.5

7.8 9.5 –1.7 6.6

8.0 10.5 –2.6 8.3

8.4 10.4 –2.3 9.3

8.3 10.9 –3 9.1

–5.2 8.9

–1.2 6.3

–3.1 8.8

– 9.3

45 50

52 –

58 –

– –

* Preliminary. 1 Up to 30 day-maturity. 2 Official exchange rate. 3 State budget, local budgets and extrabudgetary funds. Sources: EBRD (1996a, 1997, 1998), ECE (1996, 1997), Anuarul al României (1995, 1996), National Bank of Romania (1996).

Table A5

Russia 1989# 1990# – – – – 1.4 –

–3.0 – – – –0.1 –3.6

–5.0 – – –15.0 –8.0 –5.0

2.0 – 12.9

5.6 – 15.2

92.7 138.1 80.1

14.6 – 0.6

17.6 – 1.7

125.9 19.2 169.0

–8.5

–8.0

–31.0

– – – –

71.1 – – –

50.9 – – 67.0

0.0 0.0

–0.4 0.0

–2.0 0.1

1992

1993

1994

1995

(real annual growth rates in %) –14.5 –8.7 –12.6 –4.2 – –5.5 –9.2 –5.5 – –7.2 –2.7 1.2 –41.5 –25.8 –20.0 –10.0 –18.0 –14.1 –20.9 –3.3 –9.0 –4.0 –12.0 –8.0 (annual rates of change in %) 1354 896.0 311.4 197.7 1768 941.9 337.4 236.5 994.0 878.0 276.0 114.0 (end-year) 642.6 416.1 166.4 125.8 80.4 210.0 180.0 160.0 414.5 1247 3550 4640 (Balance in % of GDP) –18.8 –7.6 –10.1 –4.9 (Bill. USD, end-year) 42.4 44.3 51.6 64.3 36.9 26.8 28.3 33.1 – – 9.3 7.9 107.7 112.7 119.9 120.4 (end-year) –2.3 –1.7 –3.4 –2.3 4.8 5.3 7.3 8.8

1996

1997*

1998*

–4.9 –5.6 –1.5 –18.0 –4.0 –5.1

0.4 2.0 –2.0 –5.0 1.9 0.1

–4.6 –14.4 –39.0 –6.7 –5.2 –12.3

47.8 50.8 57.3

14.7 19.7 19.7

27.8 7.0 10.0

30.6 48.0 5570

28.4 28.0 5974

21.0 60.0 20650

–7.7

–5.1

–3.6

71.3 31.7 12.1 125.0

69.2 38.9 3.3 124.0

59.0 45.8 2.0 147.2

–0.6 8.9

–0.8 9.0

–0.5 11.5

Appendix 259

Output and consumption GDP Private consumption Public consumption Gross fixed investment Industrial production Agricultural production Prices and wages Consumer prices Producer prices Nominal wages1 Money, interest and exchange rate Broad money, % of previous year Central bank refinance rate Exchange rate, RUR/USD2 Government sector General government External sector Exports3 Imports3 Current account External debt stock Labour market Employment, % of previous year Unemployment rate4

1991#

260

Table A5 Russia (continued)

Private sector GDP Employment

1989# 1990#

1991#

1992

5 –

10 13

14 13.2

6 13

1993

1994

(Share in % of) 21 25 19.9 22.6

1995

1996

1997*

1998*

– 22.8

– 23.5

– 23.7

– –

* Preliminary. # Russian Republic only. 1 Monthly average. 2 Official exchange rate. 3 Without CIS countries. 4 Since 1992 data of International Labour Organization. Sources: EBRD (1996a, 1997, 1998), ECE (1996, 1997), DIW/IW/IWH (1996, 1998), Ezhegodnik Rossii (1996, 1997).

Notes 1.

Theories of Property in Classical Philosophy

NB Notes 1–4 refer to text preceding Chapter 1 1. “Privatization” is mostly understood as the transfer of public property to the private sector (see Bös (1991:2) and Vickers/Yarrow (1988:45)). From the view of property rights theory, usually the complete rights of disposition (usus, usus fructus, abusus) are thus transferred; in some definitions the transfer of usufruct is already sufficient (see ECE (1992:204)). Besides this privatization “from above”, there is so-called bottom-up privatization, relating to the establishing of new enterprises (see Murrell (1992:17)). 2. In science, the term “institution” is still used to denote very different things. Kiwit/Voigt (1995:117)) state that “[…] the term of institution serves as a melting pot for various phenomena. Traditions, conventions, laws, agreements, arbitration tribunals, supermarkets and the pricing mechanism: it seems that there is hardly a phenomenon that is not included in the concept of institution.” An “organization” is also often understood as a form of “institution”. Vanberg (1982:32) distinguishes two fundamental meanings of institution: “On the one hand, the term institution serves as a description of organized groups and on the other hand as a comprehensive description for normative regulations or socially-normative patterns of behavior of any kind.” In contrast, North (1990:3ff) defines institutions as rules of the game, within the framework of which organizations (businesses, political parties etc.) pursue their own strategies. According to Kiwit/Voigt (1995:122), institutions are composed of two elements: firstly, of a rule and, secondly, of a monitoring system. Vanberg’s second meaning of the institution as a rule of the game as understood by North, and the conception of the institution as rule and enforcement mechanism supported by Kiwit/Voigt, come close to what will be worked out in the following for ownership as an institution. 3. Only a few authors pointed out that, due to this restricted contemplation, Western ideas of privatization cannot simply be applied to Central and Eastern Europe. Bös (1991:2) points out that: “In these states it will take time for the structures of market economies to prevail in such a way as we usually presuppose when constructing our (Western) models on industrial organization and on public economics.” 4. “Commercialization” means that state enterprises are converted into a form of business organization under private law, with the state being sole proprietor (“corporatization”) and that, in addition, they work under the same conditions (hard budget constraints) like private enterprises (ECE (1992:205f)). 5. On the subject of the division of disciplines von Hayek (1973:4f) notes that: “Nowhere is the baneful effect of the division into specialisms more evident than in the two oldest of these disciplines, economics and law. […] The most serious effect of the splitting up […], however, is that it has left a no-man’s-land, a vague subject sometimes called ‘social philosophy’.” 6. The following explanation can only give a rough outline of theories of property. Brocker (1992:113f) notes: “Should the reader have reached at a stage of 261

262 Notes

7.

8.

9.

10.

11.

12.

13.

sufficient confusion in view of the completely confusing diversity of theories concerning the English property theory of the seventeenth century, his condition would then correspond to the condition of a comparable reader or a theoretician of natural law of the time when starting to deal with the problems of the theory of property.” Private property has been considered by the church to be a consequence of the Fall of Man, whose depravity is proven by the division into mine and thine (Böbel (1988:28f)). Only St Thomas Aquinas (1225–74) succeeded in combining the principles of the community of property and the prima occupatio (Brocker (1992:41f)). According to Aquinas, God is the actual and sole owner. Man is, however, entitled to use the goods. Personal possession would teach people to become hard-working and to treat goods carefully. Besides, as everybody would be preoccupied with his own affairs, this would have a beneficial effect on the peaceful co-existence of man and therefore on social order. “Natural law” and “positive law” are central ideas for the understanding of philosophical (civil) theories of property. According to von Hayek (1973:20f), the terms developed from a translation of the Latin grammarian Aulus Gellius, who used the terms naturalis and positivus for the Greek words physei and thesei. The difference between the two terms consists in the basis of the justification of ownership (Brocker (1992:3)). Positive law means that an agreement, a consensus between people, represents the basis of justification; due to this construction of an agreement, ownership is, in principle, an institution created by man and therefore changeable. In natural law, ownership is a legal institute ordained by God and unalterable by man. It has to be pointed out that the term ownership was not clearly defined in early theories. The argument over what ownership actually is led only with time to the development of more defined characteristics of ownership. With the political demand for individual freedom, ownership was no longer understood as a rule over things. The right to one’s own body was accentuated and this facilitated the emergence of a new basis for justification. The following intends to describe precisely this gradual enlargement of the concept of ownership and thus develop an idea about what is essential for the concept of ownership. In “Mare liberum” Grotius at first attempted to start from an initially historically justified community of property and to derive private property as a result of the development of human skills (Brocker (1992:66)). The cause for Grotius’ argument in “Mare liberum” was fishing arguments between England and Holland. The view that the seas were common property was to be supported for Holland, whereas for England the conditions of population increase and perceptible shortage were supposed to be used as arguments for the assumption that a better use of the seas would require their division. Luhmann (1993:21) explains the problem as follows: “Divided, exclusive, private property develops from already existing community property. This is, however, a paradoxical institution. It is property lacking the central characteristic of property, namely the authorization of exclusion. It is property that is not (yet) property.” Brocker (1992:99) describes the situation with “overlapping equal rights of access of everybody to everything”. In contrast to this, according to earlier representatives of occupation theory, the uniform division of goods to the members of community resulted in an individual’s right to his own transferred share. The coincidence of individual and community is also becoming clear from Hobbes’ imagination of his Leviathan as an artificial person, whose soul is the

Notes 263

14.

15.

16.

17. 18.

19.

20. 21.

22.

highest power and on which all individual limbs (the civil servants, for instance) are depending (Hobbes (1651, 1904:XVIII, The Introduction)). According to Macpherson (1962:93f), Hobbes’ most serious reasoning flaw was that he disregarded political class differences and class commitment. Every individual fought to have a hold over the other, so that ultimately society was fragmented to such a large extent that everybody was equally insecure. That is the reason why in the end, with Hobbes, the power-hungry man of the state of nature becomes the “self-perpetuating sovereign” (Macpherson (1962:60)), vested with all instruments of power. Even regarding the duration of the agreement and its validity, Hobbes’ “merciless logic” has led him to rigorous demands: citizens were forced to observe the agreement they have concluded with their monarch and were not allowed to conclude a new agreement (for instance with another elected sovereign or another state) (Hobbes (1651, 1904:120, Part II, Chapter XIII)). Euchner (1979:80) indicates that Locke’s mentioning of the community of property can be attributed to his argument with Filmer. According to Euchner, a recourse to old theories, like that of the community of property, can be repeatedly observed within Locke’s contemplation: “[…] first, he introduces a conception corresponding to tradition and then, in the course of his argumentation, he renders it meaningless through subjectivism and individualism.” Slavery can be understood as the abolition of personal rights to property and as “the discontinuation of the own legal personality” (Willgerodt (1988:176f)). Luhmann (1993:34) sees the idea of workmanship behind the labor theory. The idea behind this would be that God has transferred the continuation of his work (the Creation) to man. Luhmann describes this idea as being epistemologically substantiated in an ingenious way, as one does not have to make any statement concerning the essence of man or of God. In Locke, the form of the agreement and the rule of consent already imply the character of a public good that is attributed to money. Locke gets round the problem of inflation by asserting that people attach “one” (certain) value to money. In contrast to his contemporaries, who were trapped in mercantilism and assumed that “money revives commerce”, Locke realized that circulating money supply and price are connected, and thus, already formulates fundamental elements of the quantity theory of money (Blaug (1971:43 and 46)). Locke develops this idea, in particular, in the fourth edition through the enlargement of his explanations in § 37. Locke was able to develop this division because, concerning natural law, it was not defined whether labor justified entitlement to original acquisition (appropriation of abandoned goods) or derived acquisition (Brocker (1992:218)). Additionally, the entered employments and the agreed wage could have been regarded as voluntarily accepted, that is, concluded, especially because of the plain comment that somewhere else there is still enough land that lies fallow and that emigration is an opportunity. The fact that Locke considers employment to be compatible with his theory of labor is derived from the following statement: “Thus, the grass my horse has bit, the turfs my servant has cut, and the ore I have digged in any place, where I have a right to them in common with others, become my property without the assignation or consent of any body” (Locke (1690, 1978:18, V, § 28)). Luhmann (1993:36) indicates that: “This justification of ownership on the basis of labor changes the localization of the historical break between state of nature and civilized society. It is no longer the harmless introduction of ownership as

264 Notes

23.

24.

25.

26.

27.

28.

29.

an individual exclusive right, but the introduction of money that provokes unlimited acquisitive greed and thus the shortage of resources, and thus the fact that free access to possibilities of labor (land) becomes problematical, and therefore triggers off a new type of requirement for settlement.” For the time being, this would, however, not mean that the labor theory had to be given up. On the contrary, according to Luhmann, the conception was followed that there would, in principle, still be enough labor, even though in economically poorer circumstances. Locke asks himself whether the newly created money or labor would create the value, but then ascribes “the greatest part” to the latter (Locke (1690, 1978:29f, II, Chapter V, § 50)). According to Locke, labor does not only give a right of ownership, but is also the standard of value. “[…] for ’tis not every compact that puts an end to the state of nature between men, but only this one of agreeing together mutually to enter into one community, and make one body politic; other promises, and compacts, men may make one with another, and yet still be in the state of nature” (Locke (1690, 1978:10, II, Chapter II, § 14)). To what extent the social obligation of ownership, as Grotius perceived it, can be derived in Locke is controversial. In contrast to the “social obligation” of ownership, Brocker (1992:9) addressed Locke’s “private benefit” of ownership in earlier theories. Luhmann (1993:37f) notes that even with Locke “[…] the person in a situation of need is entitled and, if need be, has a right to self-help on caritas. […] Under the circumstances of wage-labor, this view becomes, however, ambivalent. On the one hand, nobody can be forced to work, as that would be slavery. Though, when in need, the individual must be fed. On the other hand, nobody is in dire straits if he is offered labor and earnings. The person that encounters hard times is and is not forced to work; need leads and does not lead to people having a hold over others; and therefore, Locke is and is not a supporter of capitalistic political economy. The paradox has moved from legal science to economics.” Luhmann (1993:48f) points out the importance of this assumption of a breach in the law: “As long as one starts from a beginning without injustice and manages to justify ownership that way, the most questionable aspects of this figure, and especially the exclusion of others, will be justified as well. […] In this situation Rousseau makes the brilliant move of simply turning around the figure of justification.” There is a clear difference between Locke’s first rule of appropriation and Rousseau’s explanations of it. With his assumption that the land must be uninhabited, Rousseau even opposes Locke, who considered it legal to appropriate the uncultivated land of other peoples, if this was justified on labor (Brandt (1974:155f)). Saage (1989:60) notes that Rousseau had an ambivalent attitude towards civil society (and towards private property): on the one hand, Rousseau would disapprove common ownership and consider private property the “most sacred of all civil rights”; on the other hand, he would reject capitalistic private property accompanied by competition and wage-labor for reasons of distribution. He would, therefore, have his eye on “the republic of virtuous lower middle-class people”. The exchange rate of pound sterling, which was stable for a long time, probably played a role in the contemplation of ownership of English philosophers (see Braudel (1990:394ff)).

Notes 265 30. Polanyi (1944:69ff) indicates that, during feudalism, money was of secondary importance and that only during late mercantilism did it become an important element in industrial life, due to the transition from controlled to self-regulating markets and the division between imperium and dominium. 31. In Hume, even gold and silver emerge as means of payment and standards of value through an agreement: “In like manner do gold and silver become the common measures of exchange, and are esteem’d sufficient payment for what is of a hundred times their value” (Hume (1740, 1878:263, Book III, Part II, Sect. II)). 32. When addressing class differences at an earlier stage, Hume (1740, 1878:183f, Book II, Part III, Sect. I) already derived the necessity of the state: “The skin, pores, muscles, and nerves of a day-laborer are different from those of a man of quality: so are his sentiments, actions and manners. The different stations of life influence the whole fabric, external and internal; and these different stations arise necessarily, because uniformly, from the necessary and uniform principles of human nature. Men cannot live without society, and cannot be associated without government. Government makes a distinction of property, and establishes the different ranks of men.” Brandt (1974:113) indicates that later on Hume no longer supports this view. 33. In another passage Hume indicates that “[…] as ‘tis impossible to change or correct any thing material in our nature, the utmost we can do is to change our circumstances and situation, and render the observance of the laws of justice our nearest interest, and their violation our most remote. But this being impracticable with respect to all mankind, it can only take place with respect to a few […]” (Hume 1740, 1878:303, Book III, Part II, Sect. VII)). Hume thus suspects a correlation between group size and provision of a public good that is explained by Olson (1965:36) later on. 34. In his Theory of Justice, Rawls (1972:32f) points to common ground between Hume and Locke: “But all Hume seems to mean by utility is the general interests and necessities of society. […] But then Hume assumes that each man stands to gain, as judged by his long-term advantage, when law and government conform to the precepts founded on utility. No mention is made of the gains of some outweighing the disadvantages of others. For Hume, then, utility seems to be identical with some form of the common good; institutions satisfy its demands when they are to everyone’s interests, at least in the long run. Now if this interpretation of Hume is correct, there is offhand no conflict with the priority of justice and no incompatibility with Locke’s contract doctrine.” 35. With regard to the behavior of authorities, Hume demonstrates a very optimistic estimation: “Magistrates find an immediate interest in the interest of any considerable part of their subjects. They need consult no body but themselves to form any scheme for the promoting of that interest. And as the failure of any one piece in the execution is connected, tho’ not immediately, with the failure of the whole, they prevent that failure, because they find no interest in it, either immediate or remote” (Hume (1740, 1878:304, Book III, Part II, Sect. VII)). 36. Hume defines “increase” as follows: “Thus the fruits of our garden, the offspring of our cattle, and the work or our slaves, are all of them esteem’d our property, even before possession” (Hume (1740, 1878:279, Book III, Part II, Sect. III)). 37. Hume even develops a finite chain of relationships by regarding increase as an object connected to first possession. The farther the increase is away from this first possession, the more the idea (imagination) of a relationship “of the first degree” fades (Hume (1740, 1878:279ff, Book III, Part II, Sect. III, fn. 1)).

266 Notes 38. Hume indicates insistently: “[…] that a man either has a full and perfect property, or none at all; and is either entirely oblig’d to perform any action, or lies under no manner of obligation” (Hume (1740, 1878:296, Book III, Part II, Sect. VI)). 39. The interpretation of the first two objectives can be summarized as follows: to Bentham, a legal protection of the necessary earned living is not required, as “[n]eed armed with pains of all kinds, even death itself, commanded labour, excited courage, inspired foresight, developed all the faculties of man” (quoted from Macpherson (1977:27)). For Bentham, the protection of the subsistence level is thus not a question of redistribution and a low standard of living is not in breach of his principle of equality. The subordinate objective of “abundance” is achieved in a similar self-regulating way, namely through the needs that can never be satisfied and that cause entrepreneurs to repeatedly increase production. Bentham therefore understands man as an entrepreneur or independent producer. 40. Mill thus presupposes a working community within which only the concrete forming of political authorities and the distribution of goods are being regulated. He additionally evades the problem of distribution conflicts arising from scarcity by demanding a limitation of population. 41. Mill (1849:248, Vol. I, Book II, Chapter 1, § 2) additionally introduces the assumption that, if necessary, a compensation is granted for the various abilities (injustice of nature) in order to create equal conditions for the start. In a later passage of his contemplation, Mill traces the injustice existing at his time back to legislation which so far would have promoted concentration instead of an equal distribution. 42. This “socialist” element mentioned at the beginning is, by the way, developed by Mill no earlier than in the Third Edition of his Principles of Political Economy, in which he considerably altered the section on ownership in particular. Robbins (1978:147ff) draws a comparison between the first and third editions. 43. Mill does, however, recognize the problem that in communism a criterion must be found for the distribution of labor and thus refers to the sense of justice and human insight. Nevertheless, according to Mill, in every system demonstrating an unjust conception of labor, but striving for justice, the distribution of labor would still be fairer than under the given circumstances (Mill (1857:253, Vol. I, Book II, Chapter 1, § 3)). 44. The ideas elaborated by Morus and Campanella, for example, that were developed following Platoon’s “Polite”, are considered “utopian” (see Saage (1989:9ff)); they can be regarded as forerunners of later socialist theories (for instance Owen) only reservedly. 45. Böbel (1988:23) notes on “property rights”: “From the diversity of concrete possible combinations of property subject, object and legal contents, it can be made out how a confusing abundance of concrete formulation possibilities can arise from the abstract generic term of ‘ownership’ that can be combined under the title of property rights.” 46. Understanding the state as guarantor of his own property seems paradoxical, but in socialism was actually understood in this way. It was therefore established in Article 10 of the Soviet Constitution of 1977 that: “The state is protecting socialist ownership […]” (see Brunner/Meissner (1980:388)). 47. Grosfeld/Hare (1991:131) pointed out the importance of ownership guarantee at the beginning of transformation: “Security of private property, with its associated legal rights, responsibilities and liabilities, is an essential first step.”

Notes 267

2.

The Neoclassical Definition of Property

1. Krüsselberg (1983:67) gives a general summary of Coase’s theorem: “Subsequently following a clear demarcation of (possible) legal positions (for instance concerning liability commitments of people entitled to disposition over resources) market transactions between the parties affected by externalities ultimately result in maximizing production value. This result is independent from the legal position, whenever the pricing system is supposed to work free of charge […], meaning that no transaction costs will incur.” 2. Pelikan (1992:2) notes: “For a long time, standard economics has been built on to convenient simplifications: the Optimization Postulate, and the assumption, often implicit, that organizational structures and institutional rules are constant. For the problem of transforming economies, this is clearly to oversimplify.” 3. Lindenberg (1992:127) differentiates four groupings of property rights theorists: first, those examining the effects of rights on economic decisions (for example over investments); secondly, the group regarding rights as given and analyzing the effects of positive transaction costs or principal–agent problems. The third group addresses the emergence of property rights (for instance North) and the fourth the selection between the various alternative institutions (among other things, Buchanan’s later approaches). 4. Van Brabant (1992:103) explicitly observes: “It may seem odd that economics, even the most vociferous adherents of the so-called property rights’ school, rarely inquire into the nature of property and its associated rights.” 5. A variety of arguments were brought forth in the privatization of Central and Eastern Europe: privatization revenue was to increase the net government receipts. At the same time, the sale of public enterprises to economic subjects was viewed as a means of reducing the monetary overhang stemming from the old days of planned economy. The transfer of shares of state enterprises to the population was supposed to help it grow into the role of shareholders. Finally, it was assumed that privatized enterprises would abdicate expensive social services and limit themselves to their actual entrepreneurial function. See Inotai (1992:166ff), Åslund (1991:137f), ECE (1992:211ff). 6. Koop (1994:294) differentiates between state and public enterprises in the narrow sense: state enterprises are part of public administration demonstrating a relatively clear hierarchical structure. Their costs are covered through subsidies, whereas public enterprises must operate to cover their costs. Regarding the latter, the management’s responsibility towards the formal owners, like politicians and bureaucrats, is less defined. Accordingly, principal–agent problems are more evident. 7. “The effects of privatization in any particular context will, therefore, be highly dependent upon the wider market, regulatory and institutional environments in which it is implemented” (Vickers/Yarrow (1991:130)). Empirical studies cannot clearly demonstrate an efficiency increase resulting from the privatization of public enterprises (Vickers/Yarrow (1991:117f)). 8. With regard to the theoretical analysis of control problems in corporations see Williamson (1985:298ff). For special issues on corporate control in Central and Eastern Europe see, among others, the explanations of Frydman/Phelps/ Rapaczynski/Shleifer (1993:171ff), Hare (1991:6ff), Lipton/Sachs (1990:313ff), Corbett/Mayer (1991:62ff) and Vickers/Yarrow (1991:115f). 9. In the preface to the new edition of their book, Berle/Means (1967:X) write: “In crude summation, most ‘owners’ own stocks, insurance savings and pension

268 Notes

10.

11.

12. 13. 14.

15.

16.

17.

18.

19.

claims and the like, and do not manage; most managers (corporate administrators) do not own.” Early approaches to investigate the behavior of managers in socialist enterprises stem from Furubotn/Pejovich (1974a:203ff) and Furubotn/Pejovich (1974b:227ff). Richter/Furubotn (1996:410ff) portray the latest status of institutional research in socialist enterprises under self-management. The term “restructuring” is used very differently when addressing Central and Eastern Europe. According to Djankov/Hoekman (1997:2), three definitions can be made out: firstly, the operational restructuring that relates to changes in the use of the factors of production; secondly, the financial restructuring (for instance repayment of debt); and thirdly, legal restructuring (transformation). In the following, “restructuring” is used according to the first definition, meaning an adjustment of production. Competition on the labor market can also lead to the disciplining of managers (Koop (1994:297)). Beyond that, a regulation of (natural) monopolies was to be established. Inotai (1992:168) observes critically the high expectations of privatization: “Evidently, privatization can positively influence the establishing of a functioning market economy and the shaping of the necessary institutional background, but it cannot create them.” The terms “hard budget constraint” and “soft budget constraint” were introduced by Kornai (1980:26). Kornai (1993:315) recently listed four rules for financial discipline (hard budget constraint) in market economies: first, that buyers pay for the goods they purchase; secondly, that debtors repay their debt; thirdly, that taxpayers submit their tax payments; and fourthly, that enterprises cover their costs out of their own revenues. Kornai relates that this was to have been different in planned economies. He interprets the relation between central office and enterprise in planned economies as an insurance contract. Within this contract, the central office has taken over the debts of the enterprise as being the insurer, has tolerated tax arrears and covered drops in sales revenue. Accordingly, rules two to four were broken. This is the group of rules Kornai earlier described as “soft budget constraint”. Niskanen (1992:217) considers the establishment of the public sector to be pivotal: “A constitutional consensus on the set of services that the government is authorized to finance is more important than the specific choices made.” Even Olson (1992:72) notes the correlation between property rights and soft budget constraints: “The paucity and jumbling of individual rights is, therefore, the main explanation of the ‘soft budget constraints’ in societies that have had to endure Soviet-type arrangements.” Eggertsson (1990:249ff) considers Demsetz’ analysis to be one of the primitive models of explaining the emergence of property rights. These naive models would lack particularly the consideration of free-rider problems and of the political process. According to Zintl (1983:26ff) more recent contract theories can be classified into “true” and “untrue” theories. Contract theories that presuppose behavioral norms already given as the starting-point of the contract negotiations that contain restrictions of individual preferences or the individual’s incomplete information about his situation are considered untrue. Zintl considers Rawls’ A Theory of Justice to be an untrue contract theory. What is “untrue” in Buchanan will be discussed later.

Notes 269 20. The following will outline only the essentials of the problems of the prisoner’s dilemma and of cooperation in general. In this context, see (for instance from game-theoretical perspective) Axelrod (1984), Margolis (1982), Hardin (1982) along with Buchanan (1975) and Brennan/Buchanan (1985). 21. The consideration of different abilities and behavior patterns means that aspects of power can be included into Buchanan’s analysis. As Meyer (1983:7) observes, this is by no means usual with contract theorists: “With the exception of Buchanan, the important factor of the distribution of power is not paid special attention within the formation of property rights by any American representative of property rights.” 22. Besides Hobbes’ anarchy, to which he is referring at this point, Buchanan differentiates a second form of anarchy, namely ordered anarchy, which is voluntarily organized through privately imposed behavioral restrictions and mutual acceptance of rights (Buchanan (1975:117)). 23. Buchanan (1975:63) indicates that: “The analysis demonstrates that there is no necessary basis for any initial agreement that will simply acknowledge the rights of persons to retain those stocks of goods that they can wrest from the natural environment by their own labor.” Buchanan thus opposes the justification of ownership on the basis of Locke’s labor theory. 24. Buchanan (1975:59f) does not, however, ignore the exceptional case that individuals do not reach an understanding peacefully, but try to kill each other. In this case a natural equilibrium will only be reached if the survivors appropriated the goods. Apart from this exceptional case, Buchanan basically assumes that Hobbes’ anarchy is about the fight for resources and not about the life-and-death struggle. The individuals have thus mutually accepted a behavioral norm (“not to kill”) already before concluding the agreement (Zintl (1983:93f)). 25. According to Vanberg (1982:134), Buchanan’s two-person model includes precisely those two characteristics that make collective actions seem probable. The first characteristic is the small number of persons involved, simplifying the assessment of the other’s action and mutual understanding. The second characteristic is the continuity of contact. In Buchanan’s model, the individuals get into contact with each other (for instance through theft), because they cannot leave the island and therefore cannot leave the game. Vanberg thus observes that such a repetitive game can be described as a prisoner’s dilemma only with reservations. 26. Note that the transition from the two-person model to the large group can also be conceived very differently. Nozick (1974:12ff), for example, introduces a model of (small) protective associations that are created from the state of nature and within which ownership is secured. The associations enter into competition with each other and a dominant association emerges, which in Nozick’s model is not vested with the power monopoly the state usually exercises and also does not have its justification. 27. Vanberg (1982:137) states two reasons why the individual commits breach of contract: firstly, he assumes that with the increasing group size his breach of contract will not be sanctioned; secondly, he considers it not very likely that if he sticks to the norms this would maintain the social order. 28. The law-enforcing authority is represented in Buchanan by the protective state, in contrast to the productive state. The protective state is created in Buchanan’s model in order to channel the socially detrimental consequences of the individuals’ egoistic behavior. Taylor (1982:56) objects that the state could also cause

270 Notes

29.

30.

31.

32.

33.

34.

35.

36.

37.

preferential changes, this being the reason for the noticed egoistic behavior. It could thus not be derived from the hierarchy of needs existing after the creation of the state that the egoistic behavior was the reason behind its creation. According to Taylor, the fundamental problem of neoclassical models of the state is the assumption of stable preferences. In the present case the individuals agree to the public ownership guarantee only because they ultimately assume net benefits. This is not always the case, if at the same time the individuals agree, for example, to the introduction of free competition (Zintl (1983:102ff)). Under the condition of competition and exchange, individuals will possibly expect, while still in their initial position, that their assets can also be devalued. Thus, the negotiation process and its outcome will change, if several (alternative) rules of the game (such as property, competition) are discussed and agreed upon, instead of only one. In principle, even Locke identified this problem: the agreement on ownership, together with the agreement to introduce money and to attach a value to it, has considerably changed the initial situation in which individuals agreed on ownership alone. To derive this result from the prisoner’s dilemma see Zintl (1983:66ff). Zintl additionally makes clear that a continuum is conceivable: from the contract including the ownership guarantee that offers complete protection, to an agreement comprising incomplete protection, to the situation without a contract at all. Or quoting Olson (1993:15): “In anarchy, however, an individual may have possessions – the way a dog possesses a bone – but private property cannot exist without solid government.” This is particularly valid for the emergence of institutions. Kiwit/Voigt (1995:125) basically observe: “Tracing the existence of institutions back to an individual rational calculation first meets the difficulty that rationality as such is only conceivable against the background of institutional circumstances, as rationality presupposes a purpose–means framework, within which the subjective best possibility is chosen. For logical reasons, not even the choice of this framework can be done rationally.” Compare to Olson (1965:36): “The larger a group is, the farther it will fall short of obtaining an optimal supply of any collective good, and the less likely that it will act to obtain even a minimal amount of such a good. In short, the larger the group, the less it will further its common interest.” The problem of free-rider behavior cannot be resolved through transfers: only those persons who prefer private ownership protection to public protection and are “potential users of force”, know how high compensation payments must be for them to renounce the use of force. See Zintl (1983:91). From his game-theoretical view, Axelrod (1984:124ff) offers five suggestions to promote cooperation: firstly, the future should be attached more importance, meaning that Hume’s preference for the present should be overcome. Secondly, payoff amounts could be varied. Thirdly, altruistic behavior should be fostered. Fourthly, mutual relationships should be strengthened. Fifthly, taking past experiences and learning effects into consideration will demonstrably have a favorable effect. Brennan/Buchanan (1985:28ff) indicate that their concept is very similar to Rawls’ “veil of ignorance”, although it emphasizes uncertainty instead of ignorance. Buchanan (1975:71) derives the reasons why a person will ultimately join the social contract, even if until then he disapproved of it: “The collective decision

Notes 271

38.

39.

40.

41.

42.

43.

44.

rules present him with something akin to additional ‘rights’ and upon which he may place a positive value.” In Buchanan’s model, collective decision rules therefore represent, so to speak, an invention, that is, a new good, which is put at the individual’s disposal free of charge, prospectively increases his net worth and thus renders his joining the agreement more attractive. In this situation it is no longer the ownership guarantee alone that is provided, but the combination of ownership guarantee plus collective decision rules. Buchanan (1975:73) thus indicates: “Contrary to orthodox economic methodology, the rights of persons to property […] cannot be treated in isolation from those rights which are indirectly represented by membership in a collectivity that is constitutionally empowered to make decisions under predetermined rules.” It must additionally be considered that the constitution establishes only basic regulations pertaining to ownership guarantee. Details will be regulated by ordinary law. In this context, unanimity is no longer required. Instead, decisions are taken within the framework of the legislative competence determined by the constitution. Demsetz (1974:34) has observed in relation to the internalization of external effects that: “A proper interpretation of this assertion requires that account be taken of a community’s preferences for private ownership. Some communities will have less well-developed private ownership systems and more highly developed state ownership systems.” Buchanan (1975:125) even points to an “erosion”: “It may be privately rational for the individual to create ‘public bad’, to destroy the existing public capital, to convert this asset into privately enjoyed ‘income’. It is in this context that the term ‘erosion’ properly applies.” According to Olson (1965:34), the observance of behavioral norms can only be expected in certain situations, as in the voluntary provision of collective goods in small groups: “Such a situation will exist only when the benefit to the group from having the collective good exceeds the total cost by more than it exceeds the gain to one or more individuals in the group.” Under the assumption that several small groups are “overlapping”, Hardin (1982:212f) attempts to transfer this result on to the large group: “Thus, again, if a large group is to establish or maintain a contract by convention, it is likely to require overlapping activities that allow credible commitment within small subgroups.” North uses institutions, rules and restrictions synonymously. Lewis (1969:105), who addressed the problem of what rules actually are in great detail, indicates that “[…] the class of so-called rules is a miscellany, with many debatable members.” The (concrete) contract, according to Kiwit/Voigt (1995:123), should not be understood as an institution as it is a bilateral declaration of intent and lacks the characteristic of general applicability. North’s division is obviously based on the idea of the existence of socially justified norms on the one hand, and merely individually valid norms on the other. It must be observed that basically every (economic) division of informal restrictions, that is, behavioral norms, is difficult. Kiwit/Voigt (1995:124) distinguish between internal and external institutions (forced by the state). Internal institutions are additionally divided into formal rules (for instance the privately organized protection of ownership), and into conventions, ethical rules and manners. According to Kiwit/Voigt, conventions are observed through selfsupervision. Manners would be subject to supervision through other individuals.

272 Notes

45.

46.

47. 48.

49.

50.

51.

The observance of ethical rules would be guaranteed by an imperative selfcommitment. But it is difficult to justify these differences economically in the supervision mechanism of conventions, manners and ethical rules. There is, for instance, incomplete specification if the composition or characteristics (“attributes”) of a product are not identified in detail because the seller considers this too costly. Then, the buyer has to endeavor to obtain additional information. Some cases simultaneously demonstrate asymmetrical information, for instance buying a second-hand car. North (1990:31) observes: “As a result, the maximization of an asset’s value involves the ownership structure in which those parties who can influence the variability of particular attributes become residual claimants over those attributes.” North (1990:32) explains the incomplete implementation through the principal–agent approach and on the extreme example of slavery: a slave-owner has an enormous expenditure in order to control the performance of his slaves. It is optimal to him to reduce his expenditure until his marginal costs of control correspond to the marginal utility from the slave’s performance. Ultimately, he will therefore grant his slaves certain rights of disposition over their labor. North (1990:35) describes the role of the state as ambivalent in early modern Europe, as the state frequently increased uncertainty and transaction costs. North (1990:49ff) extends this model to create a representative democracy. In this type of government the number of negotiation partners increases, and as a consequence costs for coordination between civil servants and legislation on the one hand, and citizens and legislation on the other, increase also. The individual citizen acts rationally considering costs if he stops the procurement of information at a certain point and remains partially uninformed. Interest groups will probably develop in order to facilitate negotiations; logrolling could be observed in this context. In the end, it is crucial for political persons involved to create their own formal and informal institutions, by means of which they will attempt to assert their interests (for example their re-election). Inefficient property rights will be the result of this political market characterized by high transaction costs and the subjective perception of the persons involved. Concerning transformation countries, Helmstädter (1991:249) observes: “Private property can, however, be abolished through one single stroke of the pen, but far more than a stroke of the pen is required to introduce it again! It is not about two symmetrical processes here or a mere legal process of change. The abolition of private property is not reversible just like that; a complex ratchet effect, that results from the destruction of economic behavior patterns and experiences due to its abolition, prevents this.” Dietl (1993:65) additionally observes: “The theoretical property-rights model used for explanations represents an integration attempt of contractarian and evolutionary thought in so far as the relation of transaction costs to external effects can be interpreted as criteria of rationality on the one hand, and of selection on the other. In the first case, the property rights structures concerned are the planned result of an economic calculation, in the second case the unintentional result of long-term evolutionary processes. Khalil (1995:452) outlines the difference between neoclassical approaches (or the New Institutional Economics), on the one hand, and the earlier institutionalism, on the other, as follows: “The main thrust of new institutional economics is to relegate the range of habits and norms to the domain of external constraints. In comparison, the main thrust of old institutionalist economics is the modeling of

Notes 273 institutions as determinants of the agent’s cognitive ability and, hence, constitutive of the agent’s preference function.”

3.

The Monetary Theory of Private Property

1. Money supply could, however, only be insufficiently planned as the reflux of notes and coin, that varied due to changes in the decisions to save/consume, and could only be estimated (Haffner (1985:204f)). 2. See Dobias (1977:67ff), Hensel (1979:111ff), Eucken (1990:58ff) for the traditional planned and/or centrally planned economy. 3. The attempt to control finances of enterprises through the monobank was, at the same time, the reason for their low equity capitalization. 4. The attempt to increase labor productivity through a bonus scheme, and to give incentives for the attainment of the planned production target, was only partly effective, ultimately also because of the state’s employment guarantee. The repeated cancellation of bonuses, in case the enterprise did not fulfill the plan, could only lead to an employee’s job change. 5. The socialization of losses is synonymous with collective liability. As already indicated by Eucken (1990:281f), it will last, in principle, even if the corporations are granted rights of disposition, but the central administration is maintained. Within his observations on the principle of liability, he established that with the type of centrally administered economy with private property, the “splitting of competence” cannot be maintained in the long run. If, however, privately owned corporations received administrative instructions from central organs, decentralized liability would prove senseless and bankruptcy would have no function. The economic system would develop towards a centrally administered economy with collective property. This could only be prevented, if the splitting were canceled through an extension of decentralized liability. Eucken thus indicates that decentralized disposition of resources and decentralized liability are to be exercised jointly. This simultaneity of decentralized liability and disposition is, however, not considered a criterion of private property. In his observations, he continues to characterize property only according to the kind of disposition (private/collective). Thus, he does not mention that, in the end, collective property means collective liability. He therefore does not recognize that the differences of the valid principle of liability enhance a distinction of economic systems based on ownership. 6. The microeconomic determination of the wage fund could, among other things, lead to the cancellation of the separation between money circuits; the consequence would be an aggregated excess demand on the consumer market, which would not only increase the shortage in the official sector, but also contribute to the further extension of black economy. See Dembinski (1988:287ff) for the problem of canceling the separated money circuits.

4. The Genesis and Changes of Property as Portrayed by Old Institutionalists 1. In his book Law, Legislation and Liberty, von Hayek takes up Hume’s views and, due to this common basis, there are some parallels between Commons’ and von Hayek’s contemplation, which are referred to in the following. Considering his evolutionary approach in the tradition of the Austrian school of economics,

274 Notes

2. 3.

4.

5.

6. 7.

8.

9.

10.

11.

according to Richter/Furobotn (1996:41), von Hayek takes up the neoclassical elements within old institutionalism. Commons was considered by Williamson (1985:3) to be a previously scarcely noticed precursor of an economic theory of organization. Commons (1934:58) defines a going concern as follows: “A going concern is a joint expectation of beneficial bargaining, managerial, and rationing transactions, kept together by ‘working rules’ and by control of the changeable strategic or ‘limiting’ factors which are expected to control the others”. Going concerns as a concrete association of people are similar to the term “organization” used by von Hayek. An organization is a group, whose members pursue common objectives. Government is an organization that is created, among other things, to enforce rules of the community in a binding way (von Hayek (1977:46ff)). Commons (1924, 1974:146f) describes collective will as organized combination of everyday discretionary individual actions, briefly as “organized mass movement”. “[…] the working rules simply say what individuals must, must not, may, can and cannot do, if the authoritative agency that decides disputes brings the collective power of the community to bear upon the said individuals” (Commons (1924, 1974:138)). The question arises in this context of whether, and if so, which rules could be formalized at all, and this is not looked into by Commons. Commons indicates that these four stages must not be passed. It could be the case that through a revolution the old rules are merely replaced by new ones in a dictatorial way and that no democratic constitutional state emerges. Similarly to Buchanan, Commons thus makes clear that the democratic emergence of rules of the game is not inevitable. In another passage Commons (1934:69) states: “It is these going concerns, with the working rules that keep them agoing, all the way from the family, the corporation, the trade union, the trade association, up to the state itself, that we name Institutions.” Elsner (1986:369) explains Commons’ conception of institutions as follows: “To this extent institutions are on the one hand social working rules used to establish reasonable values, e.g. social values reached through social compromises, and on the other hand they represent such socially achieved ‘reasonable values’ themselves […]. Under the conditions of social conflicts and the demand of maintaining a minimum of social order, institutional arrangements could therefore represent goals as well as means of achieving a goal.” To Commons, money is primarily a medium for the creation, transfer and the repayment of debts. Its exchange function is secondary. It represents a social institution, originating in the manners and customs of individuals, the way they were expressed in transactions (Commons (1924, 1974:242)). If conflicts arose within transactions, they were settled by courts. Judges decided the lawsuit according to working rules and thus simultaneously defined what “lawful money”, that gradually developed into legal tender as a result of this, actually was. Reuter (1994:178) indicates that the conflict is, however, the starting-point of Commons’ contemplation, but that, at the same time, he also had the fundamental belief that conflicts can be settled by negotiations, arbitration and compromises. Commons would have thus rejected the Marxist view of the insurmountable class conflict and instead replaced it through “sensible” capitalism. Before the adoption of the American Constitution, ownership was already established in the constitutions of individual states. An interesting constitutional discussion took place in the years 1775–87 in Massachusetts, within the efforts

Notes 275

12.

13.

14.

15.

16.

17.

18.

6.

relating to independence from England, the mother country (see Schröder (1972:11ff)). Influenced by the conceptions of a social contract, the argument was brought up that, after the termination of the contract with England, man would be in a state of nature and that a new contract which must be based on the broad approval of the people, was to be concluded. Von Hayek, who explicitly relates to Hume, reaches a conclusion similar to Commons: “The effective limitation of the powers of a legislature does therefore not require another organized authority capable of concerted action above it; it may be produced by a state of opinion which brings about that only certain kinds of commands which the legislation issues are accepted as laws” (von Hayek (1973:93)). Von Hayek (1973:45) explains the creation of spontaneous order: “Although undoubtedly an order originally formed itself spontaneously because the individuals followed rules which had not been deliberately made but had arisen spontaneously, people gradually learned to improve those rules; and it is at least conceivable that the formation of a spontaneous order relies entirely on rules that were deliberately made.” Veblen (1898:378) outlines the essence of the classicists as follows: “The ultimate term in their systematization of knowledge is a ‘natural law’.” Then, Veblen (1898:378f) criticizes the belief in God-given natural laws by stating: “The development and the attenuation of this preconception of normality or of a propensity in events might be traced in detail from primitive animism down through the elaborate discipline of faith and metaphysics, overruling Providence, order of nature, natural rights, natural law, underlying principles.” In Veblen, instincts replace the neoclassical assumptions about the behavior of homo oeconomicus. The work instinct describes human preference for useful and efficient behavior. Besides work instinct, Veblen differentiates the instinct of parental bent and idle curiosity. In contrast to classical conceptions, Veblen assumes with regard to the work instinct that man has a natural impulse to work. Veblen (1899, 1953:94) derives the necessity to move from conspicuous consumption to conspicuous waste from the group size: in a small group it would therefore be sufficient for the individuals to prove their wealth through leisure, as they can rely on their neighbors’ gossip spreading their privileged position, whereas in large groups, it would be necessary to display wealth through consumption. This is the so-called Veblen-effect: “[…] our standard of decency in expenditure, as in other ends of emulation, is set by the usage of those next above us in reputability; […] all standards of consumption, are traced back by insensible gradations to the usages and habits of thought of the highest social and pecuniary class – the wealthy leisure class” (Veblen (1899, 1953:81)). As far as the status of technological progress is concerned, there is a certain parallel between Veblen and North. In North, technological progress contributes a great deal to institutional change, as it reduces transactional costs and thus increases the benefit of institutions.

Legal Types of Property and Ownership Guarantee

1. The administrative distribution into consumption and accumulation funds allowed the forcing of restraint in consumption and use of the available means particularly for investments.

276 Notes

7.

Ownership of the Means of Production

1. Social organizations, as well as the personal part-time farming of state employees, of members of the collectives or of public organizations were also included into the socialist sector. The part-time farming ought instead to be included into the private sector, but cannot be extracted from the socialist sector because of the missing statistical information. 2. Along with the national income, the employment or the number of enterprises could also be used as reference units. If the state sector is measured according to the share of employees, the problems of concealed unemployment in state enterprises, as well as double employment, are not sufficiently taken into account. The reference unit “number of enterprises” ignores their size. Using this reference value overestimates the private sector, as particularly small enterprises were run privately and as state enterprises were often very large. 3. The national accounting system of socialist countries was based on the Material Product System, which demonstrated considerable differences compared to the System of National Accounts of the United Nations. 4. The subsequently established share of the state sector of 88 per cent of GDP cannot be compared with the information supplied by other countries unreservedly. On the one hand, the reference value GDP includes the otherwise neglected (private) services. On the other hand, after starting the reforms, from the point of view of economic policy, it was no longer important to establish a large state sector. 5. Towards the end of the 1950s, Poland’s collectivization was not pushed ahead any further. Since the beginning of the 1980s, private agriculture has even been deliberately promoted (see Wöhlke (1991:325ff), Cichy (1990:183f)). In the following, agriculture will not be studied in detail. 6. Even the ECE (1992:204) supports a similar point of view and defines minimum privatization as follows: “[a] rapid assignment of the usufruct of assets to nonstate agents according to clear-cut criteria that cannot be distorted out of political or administrative expediency […]”. Decentralization within which the employees of a state enterprise are transferred the usufruct, but in which this right cannot be exercised independently from state authorities and is instead subject to directives, must therefore be differentiated. 7. The term “quasi-private” is used following Mizsei (1992:289), who described the result of enterprise reforms in Poland and Hungary during the 1980s as follows: “[…] reforms established a status quo to which managers had some ‘rights’ to ‘their’ enterprise (let us call them ‘quasi-ownership’ rights) in both countries […]”. 8. The following will analyze particularly the legal regulations pertaining to the entry to the market of residents. It is remarkable that in 1971 Romania was the first country in Central and Eastern Europe to allow joint ventures. Hungary followed in 1972. Regulations for the entry of non-residents were not established before the 1980s, in Poland, first as so-called Polish companies (1982) and later as joint ventures (1986), in the Soviet Union in 1987 and in Czechoslovakia in 1988. All in all, throughout Central and Eastern Europe, foreign equity participation can only be attached slight importance. 9. Compare the following observations particularly to Antal (1983:259ff), Bakcsi (1987:457ff), Cichy (1985:255ff) and Wass von Czege (1983:115ff). 10. The breaking up of large state enterprises at the beginning of the 1980s was a distinctive Hungarian feature as well. The small and medium-sized enterprises

Notes 277

11.

12. 13.

14. 15. 16. 17.

18.

19. 20.

which resulted from this breaking up, however, remained state-owned. This measure proves that there were early attempts to replace the cumbersome large enterprises through smaller and more adaptable entities. Tibor Liska is considered an exception, as he had already developed a model which included the temporary use of state property by private individuals during the mid-1960s. He planned to grant the usufruct in the course of auctions. See Mihályi (1992:11). For details on the private sector in Poland see Åslund (1985:21ff), Mizsei (1992:283ff), Bossak (1992:4ff). A law to combat speculation was enacted in 1981 and a special commission was entrusted with the task of controlling in particular the activity of the private sector. Besides that, entrepreneurs were controlled by the tax authorities, the State Trade Inspection, trade unions, and so on. Åslund (1985:25) notes: “The control apparatus occupied with the private sector appears to have expanded more than at any time after the death of Stalin.” Compare the following explanations to Schroeder (1988:180ff) and ECE (1990:254ff). For details on the private sector in Czechoslovakia, see Frensch (1989:20ff) and (1991:4ff). For details on the private sector of Romania see particularly Leonhardt (1990:524ff), Montias (1991:188ff). Price formation remained a major problem here. Prices had a double function. On the one hand, they were considered measuring instruments that give information on scarcity and efficiency. On the other hand, they were consciously used by the state as an indirect control instrument (for instance, for redistribution). Prices were determined on the basis of average cost and mark-up, did not concentrate on demand, and were independent of the actual costs of the enterprise. Price formation was reformed in the individual countries repeatedly in order to achieve a stronger consideration of demand and costs. Capital cost was considered within the formation of prices in the Soviet Union in the course of the price reforms of 1966–67; the capital factor was thus indirectly recognized as creating value next to the factor of labor for the first time. As far as price formation is concerned, certain authorities were decentralized during the reforms as well; in most cases, however, enterprises were forced to strictly observe central, predetermined calculation guidelines when setting their prices. In the end, reforms remained within the existing price system, they were not followed by the free formation of market prices and still connected to allocative distortions. The following will not study the price reforms of the individual countries. See Haffner (1978:165ff) and (1982:9ff) as well as Dobias (1977:146ff). The “tons ideology” which resulted from the determination of natural production indicators (such as weight) represented a phenomenon the West often met with a pitying smile. Other production indicators (or combinations of indices used for experiments) brought about allocative distortions as well. Compare the following explanations particularly to Leipold (1985:144ff), Boote/Somogyi (1991:6ff), Wass von Czege (1983:115ff) and (1987:371ff). The use of the term “spontaneous privatization” is not clearly defined in the literature. On the one hand, it includes privatization which is carried out legally, on the initiative of a company. On the other hand, the term also includes socalled wild privatization, which takes place in lawlessness or illegality. Slay/Tedstrom (1992:4) therefore observe that within wild privatization, it is “the law of the jungle” that counts.

278 Notes 21. For a description of Polish enterprise reforms see Hamel/Leipold/ Peterhoff (1982:1ff), Rondorf (1991:316ff), ECE (1990:237ff), Wolf (1991:50ff). 22. The first workers’ council was appointed as early as 1945, but after a few years it was given up again. Worker’s councils also existed temporarily in the years 1956–58 (Bienkowski ´ (1992:23)). 23. Two new funds were introduced in state enterprises and constituted the registered capital of the enterprise: the corporate fund which represented the capital of the enterprise, and the foundation fund, as the state’s share of capital and for which the enterprise had to pay dividends to the state. The payment of dividends was supposed to lead the enterprises to reduce the relative weight of the foundation fund within the registered capital (and thus its payment of dividends) by increasing the corporate fund. The new regulation was supposed to stimulate more efficient behavior (Quaisser (1989:38f)), as such an increase could be achieved particularly by financing investments from the operating profit. Despite the advantage from the point of view of efficiency, this attempt of a relative increase in the enterprise’s capital in favour of state capital could, in a sense, also be considered a kind of privatization. 24. For details on the reforms in the Soviet Union see Sieburger (1993:103ff), ECE (1990:254ff) and Johnson/Kroll (1991:286ff). 25. Compare the following explanations to Frensch (1989:16ff) and (1990:272ff). 26. For the development in Romania compare Demekas/Khan (1991:6ff), Montias (1991:179ff), Pissulla (1985:161ff), Engerer (1993:161ff). 27. The enterprises’ payments to public authorities had priority over wage payments (Demekas/Khan (1991:7)), so that in the case of non-fulfillment of the targets, the receipts of the budget were guaranteed through pay deductions.

8.

Employment Guarantee and Social Security

1. There are only occasional estimates of the hoarding of labor. It is assumed that, at the end of the 1980s, a quarter of the Polish individuals employed in industry were affected by concealed unemployment (Gora/Kotowska/Panek/Podgorski (1993:137)). 2. The short-term increase in labor supply was, however, set limits as a result of the high gainful employment in these countries. More than 70 per cent of the employable women and 85 per cent of the men were working in Central and Eastern Europe at the beginning of the 1980s. 3. There were many arguments put forward to explain why open unemployment could not develop, but they often did not hold water: it has been pointed out that the increase of employable population was low (Mogilewsky/Rifinius (1988:226)); an argument which does not consider the dependence of employment on economic development and technological progress. In addition, labor shortage was recorded in some branches and regions (meaning that only frictional unemployment had been addressed). Ultimately, Aganbegjan pointed out that the enterprises which could not be restored to profitability in the short term could be subsidized for a certain period (an argument which contradicted the objectives of the corporate law and constituted a last resort, so to speak). 4. Due to the existing price system, production increases frequently represented a statistical illusion. The companies were allowed to charge higher prices for “new” products. Instead of actually making new products, they often simply produced slightly changed variations of the product.

Notes 279 5. Due to varying competencies concerning price fixing, nominal wage increases led to diverging nominal and real wage increases in the individual countries: In 1989, Hungarian nominal wages increased by 13.5 per cent; real wages decreased by 4.3 per cent. In Poland, the increase of nominal wages amounted to 289 per cent, whereas real wages increased by a mere 8.3 per cent. In the Soviet Union, nominal wages increased by 9 per cent and the real wages by 7.3 per cent. In Czechoslovakia, in contrast, the increase in nominal wages (2.3 per cent) and real wages (0.8 per cent) remained low. Even in Romania, nominal (4 per cent) and real wage increases (3.1 per cent) were relatively low. See ECE (1991:223ff). 6. The subsidizing of basic goods had a doubtful social and political effect, as not only the needy specifically benefited from it, but the high-income sections of the population as well (McAuley (1991:100)). The problem of restricting transfers which were bound to goods in favor of those bound to persons (directly) generally appeared within transformation. 7. For details on social security within transformation see Koop/Heinrich et al. (1996), Tomann/Scholz (1996), Busch (1994) and Golinowska (1996).

10.

The Course of Transformation

1. It is frequently pointed out in this context that private production within the informal sector is not recorded. This can be countered as some countries demonstrated an informal (private) sector already before 1989. The fact that the informal sector is not recorded in the course of transformation presents a distorted picture of the economic development only if the extent of informal activities changed in the meantime. Under uncertain circumstances, such as within transformation, a change and particularly an increase is probable. 2. The OECD (1995:13ff) attributes the Czech employment miracle to the following three factors: firstly, to the decreased labor force participation; secondly, to the decreased real labor costs of enterprises; and thirdly, to the relatively favorable pattern of employment with a small share of employees in agriculture. According to Keilhofer (1995:344ff), there are, among other things, positive effects of employment creating measures and the orientation of the labor force towards neighboring Germany and Austria. However, changes in statistical delimitation have also led to this “artificial” employment miracle. 3. Belarus represents an exception. An increase of GDP has been officially recorded here since 1996, which is, above all, based on administrative interventions in the economy. 4. The legacy also included structural problems which proved hard to overcome, such as large plant sizes, an industrial structure dominated by heavy industry and the obsolete capital stock. The following will not deal with these structural problems any further. 5. The dependency of “smaller” states on Russian energy supply which had to be paid for in convertible currencies and to world market prices after the break-up of the CMEA, as a rule, proved to be a special problem. 6. After comparing the countries with regard to the GDP/inhabitants at purchasing-power parity for 1989, the OECD (1992:16) set up the following order: Czechoslovakia ranked first as it reached the highest value, recording USD 7878 and thus half the value of OECD members, and was followed by the USSR, Hungary, Poland and Romania at the bottom of the list.

280 Notes 7. This argumentation is followed by the so-called credit-crunch hypothesis of production decrease. Meanwhile, the assumption of credit rationing to enterprises at the beginning of transformation is questioned. Rosati (1994:425) indicated that, on the basis of the available data, the decreasing real credit volume, observed, for instance, in Poland, cannot be identified as the definite cause or consequence of transformation crisis. Bofinger (1993:98ff) doubts that real credits would have decreased continuously, at all. What is more, he considers the common practice of interfirm indebtedness to be a measure taken by enterprises in order to escape credit rationing.

11.

The Question of Property

1. This is a reason why a currency reform was not carried out not even to solve the bad debts problem. In order to prevent the burdening of private households, but create effects similar to a currency reform, the settlement of debts via the central bank was suggested as an alternative. The banks’ bad loans were thus supposed to be canceled and their liabilities to the central bank reduced by the same amount. The central bank was then supposed to receive compensation claims against the government budget (Tomann (1995:9ff) and Weisfeld (1996:46f)).

12.

The Legal Solution

1. Central and Eastern Europe demonstrate that other ways of securing loans (such as transfer of property by way of security, reservation of proprietary rights) are still insufficiently regulated by law or rarely practiced. The various ways of securing loans will not be further investigated. 2. Special ownership laws, as they existed in the former Soviet Union, were particularly intended to quickly close the vacuum which developed after the repeal of old laws (Roggemann (1996:92)). The introduction of the First Part of the Civil Code repealed the law On Property on the RSFSR’s Territory of 1990 as of 1 January 1995. 3. The following explanations are based on the German translation of Brunner/Schmid/Westen. Laws of inheritance as well as expropriation are not investigated any further. It must be observed that all constitutions regulate expropriation and that, with the exception of the Czech Republic, they all include the amount of compensation (Roggemann (1996:90)). 4. In contrast to this and according to the court decisions of the Federal Constitutional Court, the German Basic Law does not include commitment to any particular economic system (so-called economic neutrality). It rather leaves the legislature scope for action which is determined by the guaranteed economic and fundamental freedoms. 5. Bulgaria and Romania for instance, repealed the old Commercial Codes and replaced them with new laws. As of the enactment of the second part of the Civil Code in Russia in 1996, commercial law was given a completely new basis. The Polish Commercial Code of 1934, which incidentally was based on the German Commercial Code, was amended several times during the 1990s and completed by guidelines with regard to entry into the European Union. Hungary’s Company Law, which came into force in 1998, is also geared towards

Notes 281

6.

7.

8.

9.

10.

11.

12.

13.

14. 15.

entry into the European Union. The Czech Commercial Code, which was also amended several times, is still considered insufficient in this context. Simultaneous conversion and privatization are only unproblematic if it can be expected that after selling the enterprise to a private owner it will be subject to regulation by private law and even hard budget constraints within a short period. This is the case with the so-called small privatization. The following will thus address especially the legal regulations pertaining to the conversion of enterprises which were later on subject to the so-called large privatization. Until 1993, Romania had converted all enterprises into a new legal form. More than a quarter of the state enterprises were converted in Czechoslovakia, as well as in Hungary, while in Poland only 10 per cent of them were converted. The necessity to first re-centralize property rights and to again appoint the state as the owner before a decision on conversion and privatization can be made is at times described as the paradox of privatization. I have no knowledge that, so far, there are any comparative studies on the question of to what extent the individual countries have broken up their state enterprises during conversion or even during privatization. Quantitative estimations concerning privatization are also impeded, owing to a lack of information on the break-up and because the basic quantity varies. The number of state enterprises still to be privatized thus increases if the break-up of state enterprises is effected during privatization. With this, the number of already privatized enterprises compared to enterprises still to be privatized is, however, decreasing. Both the number of enterprises still to be privatized and the share of already privatized enterprises which frequently serve as indicators for privatization, therefore, actually do not give much information on the progress of privatization. The legal provisions will not be explained any further, as de facto they were not applied. A description concerning Russia can be found in Micheler (1996:14ff), Bergstrom (1995:251ff) and Schwartz (1993:226ff). The place to find the Romanian law, which by the way only applied to commercial companies and not to regie autonome, is Monitorul Official (1995:1ff). It must be noted that Hungarian insolvency law uses a special terminology: the Hungarian term “bankruptcy” refers to conciliation proceedings and “liquidation” refers to bankruptcy (Török/Riel (1994:409)). Bankruptcy law was again amended in 1998; this amendment is not taken into consideration in the following. It must also be noted that the Polish law allows the peculiarity of combining bankruptcy with privatization. An enterprise can be declared insolvent according to Art. 37 of the Privatization Act and its assets can be sold (so-called privatization through liquidation). Compare with section 13.3 on privatization in Poland. According to Rymaszewski (1995:247), 290 so-called conciliation procedures were instituted between March 1993 and the end of August 1994 and it was possible to conclude 139 of them. The Privatization Ministry approved debt–equity swaps in 84 cases. Thus, inflation and the resulting real devaluation of bad debts cannot be regarded as a real solution to the problem (see Weisfeld (1996:43)). In a technical sense, the difference between disposition and liability also shows in the fact that, due to the new valuation rules, the revaluation of the enterprise’s assets was frequently effected quite fast, whereas the liabilities were only insufficiently adjusted. For more details on the various possibilities on the valuation of an enterprise as a whole see Birch (1993:18ff).

282 Notes 16. The individual illegal acts, such as fraud and corruption, overlap and for this reason they cannot be differentiated easily. Kisunko (1996:13) differentiates between corruption, fraud, theft and tax evasion. Corruption thus means the abuse of power in office. Fraud means to derive financial advantages from the loopholes of regulations, through manipulation or abuse of confidence. Theft is the direct withdrawal of physical resources or ownership rights. 17. Leaving deposits for letting and leasing, and lending against guaranty or the standardization of contracts as the coordination of generally accepted rules could serve as general rules. The various forms of business practices are also considered rules. They are enforced in that the person breaking the rule loses his “good reputation”. 18. In Central and Eastern Europe, arbitration courts and so-called arbitrage must be differentiated, on principle. Arbitrages were formerly state-owned institutions of economic administration and in some countries they have been converted into commercial courts, though their competencies were partially not clearly defined (Pfaff (1996:322)). 19. The long-term development of crime can hardly be measured in the transformation countries, as the change of legal order also implies that formerly illegal action is now legal. It is difficult even to make statements on the basis of the number of criminal offenses already prosecuted in the socialist system. The reason for this is that the solving of criminal offenses was subject to some kind of plan fulfillment. The number of registered criminal offenses was hushed up, and revised downwards in order to achieve the planned target (Alexeev/Gaddy/ Leitzel (1995:679)). 20. Afanasjew (1994:286) distinguishes between three levels of organized crime: the criminal group on the lowest level, the organization on the second level, and the criminal association on the third. The latter hardly commits actual criminal acts itself, but rather develops criminal values. In Russia, the so-called vory v zakone (thieves in law), which appeared as far back as the 1930s, is considered a criminal association (Afanasjew (1994:289)). 21. Until the new Criminal Code was enacted on 1 January 1997, the prosecution of criminal acts partially proved to be quite difficult in Russia. According to the law in force at that time, it was only possible to punish criminal offenses which were directed towards socialist and personal property; protection of private property was not covered by criminal law (Afanasjew (1994:287)). The figures pertaining to theft of socialist property were, by the way, already high under socialism. There were 250 000 cases registered in 1995 (Alexeev/Gaddy/Leitzel (1995:679)). 22. According to the corruption index of the University of Göttingen and Transparency International, corruption is very high in Russia, followed by Hungary, the Czech Republic and Poland (see Transition, No.7–8/1996, pp. 13f).

13. The Economic Patent Remedy: Privatization “from Above” 1. According to Hemming/Mansoor (1988:1), the term “privatization” did not become part of general linguistic usage until the 1980s. It is first explained in 1983 in Webster’s Ninth New Collegiate Dictionary, which dates the first use of the term back to 1948. 2. Voucher privatization is only one type of free privatization. If privatization is defined in a broader sense, including restitution, restitution itself can also be

Notes 283

3.

4.

5.

6.

7.

8.

9.

understood as free transfer. Restitution as well as small-scale privatization will not be the point at issue in the following. Generating high privatization revenues is given special importance in Central and Eastern Europe, as in these countries the state financed itself, among other things, through skimming off the profits of enterprises. During the reorganization of the system of taxation and of tax collection, which can temporarily lead to shortfalls of tax revenue, privatization revenues can contribute to closing the budgetary gap. There are controversial discussions about how the vouchers should be traded and denominated. The conception of vouchers as (nontradable) registered instruments, as suggested by Borensztein/Kumar (1991:309), seemed to have the advantage that the vouchers cannot be used as a “money substitute” (Lipton/Sachs (1990:326)) with inflationary effects. But precisely the fact that they are not tradable restricts realistic valuation, as a portfolio calculation is not effected. Conceiving them as tradable, in contrast, is connected to the problem that poor segments of the population sell their vouchers to the small, rich upper class even before privatization, and that the concentration of vouchers thwarts the political intention of having all citizens participate in privatization. If vouchers are tradable and denominated in monetary units, it is possible for them to be traded at a markdown of their nominal value; the population would lose its confidence in voucher privatization as a result (Boycko/Shleifer/Vishny (1995:86)). In addition, it is possible to segment the category of buyers for instance by granting the employees the right to offer their vouchers for shares first, before the broad mass of the population gets the chance to do so. Different prices for the exchange of vouchers for shares are calculated for the various categories of buyers. There are various forms of so-called “investment funds”. They can either be privately founded (as in the Czech Republic) or be established as a kind of holding by the state (as in Poland). The privately founded funds such as the Czech funds must on principle use their acquired vouchers to auction shares of the enterprises to be privatized. In case of a fund founded by the state, shares of the enterprises could possibly be transferred to the funds by administrative action (as in Romania). The following will first roughly outline the activity and the problematic nature of privately founded funds. The other types will be investigated when dealing with the country in question. Typical principal–agent problems will already appear in the first stage, when the population exchanges vouchers against certificates. The investment funds try to exploit the information deficit of the population and to achieve a good voucher/certificate rate. This happened for instance in the Czech Republic, where funds made untenable promises of future high returns to the owners of vouchers. None of the countries carried out a pure voucher or a pure sale privatization. A certain main focus can, however, be identified despite the mixing up of procedures. The following will thus discuss above all the privatization procedure that was given priority. The Ministry for Ownership Changes was dissolved in October 1996 and its function and tasks were transferred to the Treasury. The rights of employees were simultaneously restricted. The following will not explain this new development in detail.

284 Notes 10. The 60 per cent of the block of shares of an enterprise were not supposed to be distributed equally to the funds. Thirty-three per cent thereof should rather be first transferred to a so-called lead fund and the remaining 27 per cent distributed among the other funds. This “33 per cent clause” was supposed to guarantee that, in each enterprise, one particular fund would take on the leading role. 11. The privatization certificates were first traded off the floor. Since July 1996, they have also been quoted on the Warsaw stock exchange. The first quotation of the certificates produced a price of PLN 104. In the period following, the price rose to PLN 167. The rise can be attributed to the fact that the demand of the population for certificates increased towards the end of the distribution period. About 95 per cent of the allottees got their certificate from the savings banks. The prices fell at the end of the distribution period (beginning of December: PLN 140), as approximately half the owners sold their certificate within a short period. 12. This could, among other things, probably be put down to the fact that many of the enterprises contained in the portfolio of the investment funds are enterprises operating at a loss. Holzhacker (1995:11ff) and (1995a:7ff) made a classification of the enterprises involved in mass privatization: after all, 24 per cent of all enterprises belonged in category D (= problem businesses, heavily indebted), 26 per cent were to be found in A (successful), 21 per cent in B (successful, but indebted) and 19 per cent in C (moderately successful, but not indebted). 13. According to Hölscher (1996:118), liquidation is merely the legitimized form of the so-called Bermuda Triangle, in which profitable operating units enter the informal sector as a result of spontaneous privatization and then crop up again there as newly established in a new combination. “This method of economic employment of resources resolves the valuation problem through factual destruction, which must be sanctioned subsequently by the state through deleting debts” (Hölscher (1996:118)). 14. Revenues from capital privatization have mostly increased in the past years. PLN 867 million (USD 360 million) were made in 1994, PLN 1.713 bn (USD 710 million) in 1995 and PLN 1.86 bn (USD 560 million) in 1997. The revenue is, however, quite small, if it is considered that large “sound” enterprises were privatized above all. 15. As Bl⁄aszczyk (1995:94) herself indicates, as a consequence of the effected breaking-up (or mergers) the number of remaining state enterprises cannot be compared with the figure of 8441 enterprises started with in 1990. 16. The total value of bonds amounted to PLN 21 trillion. The bonds were backed by the Fund for Privatization Polish Banks that was established on the basis of the Zloty Stabilization Fund founded by the G24-countries in 1990 (ECE (1995:210)). 17. The new Privatization Law of 1997 regulates corporatization as well as privatization. Corporatization (described as “commercialization” in Polish) can now be ordered centrally by the Minister of Finance. In return, employees can receive 15 per cent of the shares gratis when their enterprise is sold. It is also new that within capital privatization, employees are allowed to sell their shares only after a blocking period. Secondary trading and the concentration of shares with a strategic, even foreign investor, for instance, are thus temporarily impeded. 18. The National Property Fund therefore represented merely the executive organ for the privatization of enterprises selected by the Privatization Ministry upon the suggestion of the founding organ. The Privatization Ministry was dissolved

Notes 285

19.

20.

21.

22.

23.

24.

25.

26.

on 1 July 1996. Since then, the Ministry of Finance is responsible for the privatization of the remaining enterprises. The following will use the old abbreviation “K cˇs” of the Czechoslovakian Koruna until the end of 1992 and the abbreviation according to the ISO-Code “CZK” for the Czech Koruna as of 1993. This book value increased to K cˇs 300 bn as both republics registered more enterprises for voucher privatization than initially planned. In the Czech Republic, 943 enterprises with a book value of almost K cˇs 217 bn were registered for the first wave (Mejstˇrík/Burger (1992:13f)). The development of the bad loans occurred as follows: at the end of 1992, approximately 19 per cent of the bank loans were classified as risky loans. After one year, they had risen to 24 per cent (Czech National Bank (1994:35)). Since 1994, a new classification has been made which is not simply comparable to previous years. At the end of 1994, the so-called “classified” loans of commercial banks assumed a share of more than 38 per cent of the total loans; at the end of 1995 they amounted to about 35 per cent and in mid-1996 to 34.5 per cent (Czech National Bank (1995:61, 1996:101 and 1996a:40)). Later on, the share went down because, among other things, the credits of some banks were excluded from the overall calculation. It must be pointed out that the credits to enterprises supposed to be privatized made up a considerable share of the total credits of large, state-owned banks. The credits were insufficiently covered (Desai (1996:481)). Thus, even the banks were saved from insolvency by the term of protection. In addition, banks began to grant only loans with short maturity periods. The enterprises reacted to the increasingly difficult access to credits and to the payment of tax they imply by switching over to interfirm indebtedness. The latter increased in 1991 in real terms by more than 200 per cent and stabilized later on. At the end of 1992, interfirm indebtedness reached approximately twothirds of GDP (Desai (1996:484)). Two thousand two hundred and one state-owned enterprises existed in Hungary at the end of 1989 (Mihályi (1992:32)). In 1990, 1848 of them were put under the control of the Property Agency (National Bank of Hungary (1995:39)). The number later went down to 1676 as a consequence, among other things, of transfer into local property (EBRD (1996a:154)). Concerning the powerful and hardly controlled position of the State Property Agency, Petsche (1996:75) indicates that: “From the point of view of legal security and of the equalization of that state with the other owners, this situation was at least cause for concern. In the end, this restricted the right to free enterprise and equality of opportunities. Suspicions of corruption have been voiced.” Reproaches for misappropriation were expressed in the course of 1996. The Privatization Minister Tamas Suchmann, the director of the State Holding Company, as well as members of the supervisory board were dismissed in October. In another passage Stark (1995:15) explains that this weakening is not a phenomenon that first appeared during transformation, but that it had already begun in the early 1980s. Extensive economic, legal and social changes thus led to an erosion of the dividing line between the private and the public sector. Deinstitutionalization is considered by Stark to have taken place. Stark’s observations support the thesis that property erosion represents the basis of future development during transformation.

286 Notes 27. The valuation problem mentioned by Stark bears similarities to Common’s conception of the reasonable value. 28. Stark (1996:1007) submits the following exact description of the structure of ownership in Hungary: “[…] a limited liability company owned by private persons, by private ventures, and by other limited liability companies owned by joint stock companies, banks and large public enterprises owned by the state. The new property forms thus find horizontal ties of cross-ownership intertwined with vertical ties of nested holdings.” 29. If expressed in the terms used within this study, it reads as follows: The decentralization of disposition over resources was accompanied by a centralization (instead of decentralization) of liability. 30. The date nonperforming loans were taken out was also considered. A higher price was determined for loans that were granted recently, that is to say, for loans that were likely to conform to market conditions. It was thus assumed that the banks can be held liable for new loans rather than for the older ones. 31. To Hölscher (1996:117), the problem connected to consolidation bonds is the fact that it should be clear from the beginning that the bonds will not be reimbursed. Due to their long, actually unlimited maturity period and their issue through the central bank as the agent, the bonds can, in fact, not be considered government bonds. According to Hölscher, for the central bank as the agent it is its credibility regarding a stability-oriented monetary policy that is at stake within the consolidation program. 32. It must be noted that the privatization of banks was indirectly planned beforehand by the Banking Act of 1991. The Act established that until 1997 the state’s share with banks must be reduced below 25 per cent. The privatization of banks had been forced since 1995. The direct public stake rose to approximately 20 per cent in mid-1998 (EBRD (1998:171)). Non-residents have, by the way, participated in the privatization of banks to a large extent. 33. Stark (1996:1014f) indicates that: “[…] and, when even the absolute size of your losses can be transformed into an asset yielding an income stream, you might be wise to diversify your portfolio, to be able to shift your accounts, to be equally skilled in applying for loans as in applying for job creation subsidies, to have a multilingual command of the grammar of creditworthiness and the syntax of debt forgiveness.” 34. The bonds issued within the various consolidation programs have contributed considerably to the increase of the deficit of the public budget (Busch/Varga (1997:98)). On the other hand, the privatization revenues, only to be realized once, proved to have only at best short-term and hardly relieving effect. The fiscal scope narrowed with the increase of domestic as well as foreign indebtedness, and with increasing debt servicing due to higher interest rates. Belt-tightening measures were decided upon in 1995 as a reaction to the worsening situation of public budgets. Considering the prevailing circumstances, the repeat of government consolidation programs has, basically, been shown its limits. 35. This division into committees and funds at first served the purpose of mutual control. The committees were subordinated to the Council of Ministers, whereas the Supreme Soviet was put in charge of the funds. After the dissolving of the Supreme Soviet in September 1993, the funds were subordinated to the organization of Prime Minister Anatolij Tschubais, thus rendering the funds de facto executive organs of the committee (Deutsche Bank Research (1994:24f)).

Notes 287 36. The privatization program of 1993 was never adopted. See the privatization programs, Rossiyskaya gazeta dated 9 July 1992, pp. 4ff, Rossiyskie vesti, No. 23/1993, pp. 3ff, and Rossiyskie vesti, No. 3/1994, pp. 3ff. 37. The privatization program of 1992 classifies enterprises into the following three groups: an enterprise with up to 200 employees and an equity capital of up to RUR 1 million according to the valuation on 1 January 1992 was considered “small” and those with up to 1000 employees and an equity capital of RUR 50 million are considered “medium-sized”. Enterprises exceeding these characteristics are described as “large”. Since 1994, there is only a differentiation between small enterprises with an equity capital amounting up to RUR 20 million (valuation on 1 January 1994) and large enterprises (Goskomimushchestvo (1994:15)). 38. Aside from selling for cash and the direct auctioning of enterprise shares, checks could also be exchanged against shares in investment funds. In contrast to the Czech Republic, the importance of funds remained minor due to the legal restrictions. Each individual fund was not allowed to “collect” more than 5 per cent of the distributed checks; moreover it was illegal to promise the checkowners high returns, as was done in the Czech Republic. In addition, as a consequence of the preemptive right of employees the category of buyers was segmented within voucher privatization, meaning that the funds only got their chance during the second round. The funds ultimately acquired merely 5.7 per cent of the shares of privatized enterprises (Frydman/Pistor/Rapaczynski (1995:14)). 39. This high number must also be attributed to the distinctive features of the statistical registration. In Russia, joint-stock companies are already considered privatized as soon as the decision of corporatization is made and a privatization plan is worked out (Goskomstat Rossii (1995a:125)). 40. Interfirm indebtedness accounted for a share of 60 per cent of overall supplier credit in mid-1992, of 40 per cent in 1993 and of 45 per cent in 1994 (DIW/IfW/IWH (1994a:615)). From January to November 1995, the real value of interfirm loans increased by 12 per cent, whereas bank loans decreased in real terms by 40 per cent (DIW/IfW/IWH (1996:323)). The quick switching over to interfirm indebtedness is partly explained by the short credit periods. 41. It is not possible to make a statement concerning the way the share of bad loans in overall bank loans changed, as the classification of bad loans was changed in the past. It is assumed that in 1996 about 20–25 per cent of the bank loans were non-performing (Russian Economic Trends (1996a:112)). 42. This reaction of enterprises can, on the one hand, be interpreted as a continuation or a reversal of previous behavior. Whereas earlier the enterprises were granted subsidies in order to pay their taxes, they now react to the absence of subsidies with nonpayment of taxes. On the other hand, an explanation considering contract theory also seems correct: the enterprises are not willing to pay the state taxes in return, as long as it does not offer legal security. 43. Besides the registered groups, there are also associations of enterprises and financial institutions which emerged spontaneously, but which do not enjoy state help and were thus put at a disadvantage compared to the registered groups, as a rule. 44. In contrast to other already-examined countries, Romanian privatization was rarely investigated. Therefore there are only few available analyses. The following will introduce the legal regulations relevant for privatization, and will refer to analyses of Romanian privatization authorities and complement them with

288 Notes

45. 46.

47.

48.

49.

50.

51.

52.

the assessment of Western advisors in order to investigate Romanian privatization. See the Monitorul Official (1991:1ff) for privatization law and Monitorul Official (1995a:1ff) for the acceleration of privatization. The commercial companies included small and medium-sized as well as large commercial undertakings. There was thus no definite differentiation between small and large privatization. The enterprises were, however, divided into categories of sizes. Enterprises with a registered capital of up to ROL 400 million (valuation of 1992) and up to 500 employees were considered small. Medium-sized enterprises had a registered capital of up to ROL 3000 million and 3000 employees (Agent¶ia Nat¶ionalˇ a pentru Privatizare (1993a:8)). The categories were later adjusted for inflation. Therefore, not all of the 7928 commercial companies existing at the end of 1992 were included in privatization. The number of regie autonome amounted to 390; 84 of them were of so-called national interest (Adevˇ arul Economic, No. 23/1996, p.7). In a footnote, Nicolaescu (1993:109) points out: “[…] that equity capital is determined for the state-owned companies by arithmetically summing up the book value of fixed assets and financial assets of the company, with no relation to the capacity for generating future income of the replacement costs.” The determination of 5000 units of value results from the Law 15/1990, which at first established the nominal value at ROL 5 000. A certificate booklet thus would have corresponded to ROL 25 000. With the issuing of the booklets the nominal value was then higher as far as figures go: 16.5 million citizens were entitled to acquire a booklet; 15.54 million booklets were issued. A nominal value of approximately ROL 34 500 per certificate booklet, or of ROL 6900 per certificate can be calculated from this number and the book value of the enterprise shares transferred to the funds. At first, the number of persons entitled was, however, overestimated and thus a lower nominal value per booklet (ROL 31 540) was calculated. Publishing a nominal value, which was higher than the value established by law, obviously served to increase the credibility of voucher privatization. Off-board trading started in August 1992 within the Foreign Trade Bank. Here, the seller was, however, only allowed to sell five certificates. A fee amounting to ROL 100 per booklet was charged in addition (Adevˇ arul dated 14 August 1992, p. 5). These restrictive conditions contributed to the development of informal trading. On the street, certificates were traded with considerable discounts of their nominal value. In January 1993 the prices fluctuated between ROL 1500 and ROL 7000 (USD 3 to USD 15). The voucher price was, however, very sensitive to announcements concerning the change of the concept of privatization. Prices therefore temporarily increased in spring 1994 from ROL 30 000 to ROL 35000 (USD 18–21) due to the speculation concerning the progress of privatization (România liberˇa dated 7 May 1994, p.4). Some enterprises were sold below their book value. Accusations of selling at a loss were made and even suspicion of corruption arose. The National Agency for Privatization, which repeatedly insisted on enterprise valuation through consulting firms, indicates in its final report that in Romania there would be confusion concerning the market value and book value of an enterprise (Agent ¶ia Nat¶ionalˇa pentru Privatizare (1993b:5)). The funds could thus (negatively) influence the offer of shares as well as the value of certificates through their granted right of repurchase. According to Popa

Notes 289

53.

54.

55.

56.

57.

58.

59.

(1992:29) it was also doubtful whether the funds would lower the price of shares within auctions if necessary according to the value of the offered certificates or not. Popa assumed they would be interested instead in having the difference paid to them in cash. He therefore discovered a loophole within the legal regulations, which obviously was not closed until the passing of the law To Accelerate Privatization. There is, however, no information on whether in practice no adjustment of rates from share to certificate was actually effected during the “auctions”. If this was really neglected, the Romanian certificate cannot be understood as a voucher in the true sense. A right of control and recommendation could only be exercised if 10 000 certificates were submitted to the management of the fund (see Monitorul Oficial (1992:10)). In order to achieve this, either a large number of citizens would have had to club together, as the individual was assigned only five certificates; or individual wealthy citizens would have had to buy up their shortfall from other citizens. The principal–agent problems that always arise in connection with funds were therefore increased in Romania due to the weak position of the population. Earle/Sapatoru (1992:25) come to the conclusion that the Private Funds are created by an unusual mixture of private and state elements. Their administration through the state holds the risk that fund managers concentrate on rentseeking, the same way former socialist bureaucrats did, instead of maximizing profits under market conditions. Besides the State, the Private Funds and the National Agency for Privatization, a further public authority was now responsible for restructuring. Arguments concerning competencies resulted from this, which ultimately also delayed privatization and restructuring. Regarding the Restructuring Agency see Monitorul Oficial (1994:2). Thirty enterprises were already subordinated to the Restructuring Committee in 1993; they were subject to a special financial supervision (see below). Within restructuring, the examination of another 28 enterprises was started in spring 1994. A concrete restructuring program could only be submitted for four enterprises (see Monitorul Oficial (1994b:7)). This proves that the state’s selection of enterprises to be restored to profitability is problematical. The employees could, among other things, take advantage of a five-year payment by installments with an annual interest rate of maximally 10 per cent, and thus to a negative rate in real terms (Monitorul Oficial (1994a:1ff)). Moreover, the Private Funds were obliged to hand over up to at least two-thirds of their 30 per cent share of the enterprises listed for privatization to the employees against certificates. This compulsory exchange is an indication that Private Funds actually attempted to receive cash receipts instead of certificates within privatization auctions and that they were not interested in voucher privatization. This certificate value corresponded to the rate on the black market. The value of the coupon, in contrast, was calculated from the difference between the value of enterprise assets still to be privatized and the certificates not yet used (Roland Berger & Partner (1995:10)). Partially, even former regie autonome were now subject to privatization. The areas in which regie autonome were established and allowed to operate were already restricted in 1993 (Leonhardt (1996a:373)). Regie autonome must fulfill one of the criteria, such as a natural monopoly, public interest or national security: 448 regie autonome existed in September 1995 and 83 of them represented national interests (Adevaˇrul Economic (No. 23/1996, p.7).

290 Notes 60. The ability to partially balance enterprise debts through cumulated surpluses of the national budget is a distinctive Romanian feature. Surpluses of the national budget were created during the planned economic phase mainly due to the fact that Romanian enterprises were hardly allowed to withhold any profits, but instead had to transfer them to the budget. It was thus logically consistent to use surpluses to partly settle enterprise debts. 61. The Dacia Felix Bank and the Credit Bank were thus declared to be insolvent in summer 1996. After a failed re-organization attempt, their licenses were revoked in April 1997. Insolvency began to emerge with both banks by 1995. At that time, the banks did, however, hold 13 per cent of the population’s savings deposits. The National Bank therefore took action against them only as of mid-1996, when their share of the savings deposits fell to 3 per cent (National Bank of Romania (1996:82f)). A Deposit Insurance Scheme was simultaneously established. 62. During the exchange rate crisis of 1996 interventions into the banks’ activity could be observed. After a devaluation at the end of 1995, in 1996 the National Bank attempted to artificially stabilize the exchange rate by impeding the access of enterprises to the foreign exchange market. Some banks, which were allegedly responsible for the crisis, had their licenses revoked for foreign exchange business. A black market again developed alongside the official foreign exchange trade. After the change of government at the end of 1996, the leu was considerably devalued. 63. The state banks were initially included in voucher privatization. The Private Funds were first even transferred the corresponding shares of the banks. The privatization of banks, though, remained politically controversial and was not started. In return, even the participation of banks in the privatization of enterprises was restricted. During pilot privatization, banks were allowed to acquire only 20 per cent of the shares of an enterprise (Popa (1992:30)). As owners of enterprises, they are granted little importance directly after privatization. It is not known to what extent they attempted to acquire blocks of shares on the stock market. 64. In 1992, about 72 per cent of the total payment arrears represented unpaid bills of suppliers; in mid-1995, however, this number fell to about 58.5 per cent. The share of tax arrears within the same period increased from about 6 per cent to more than 22 per cent, whereas the share of outstanding loans with banks decreased slightly from 10 to 8.5 per cent (The Government of Romania (1995:92)). This results, among other things, from the fact that banks had the right to take hold of later deposits or assets of the debtor in case he did not repay so-called “borrowing intended to smooth out budgetary irregularities”, granted within the regulation of bad debts. If the banks did not manage to collect their claims in full, the difference had to be made available from the national budget (Leonhardt (1992a:203)). 65. As in Russia, the burden therefore shifted from expenditure to receipts within the public budget, meaning that, in concrete terms, the cut of subsidies was partly made up by revenue shortfalls. The public budget, however, reflects merely one part of the charges. The government instructed the National Bank in 1995 to extend the refinancing contingent of so-called structural loans. Enterprises in financial difficulty were supported by the help of these reducedinterest loans (National Bank of Romania (1996:67)). 66. For an interesting description of the insolvency law of some transformation countries see Burniaux (1995:119ff), who entitled his examination of the Hungarian Bankruptcy Law at the beginning of the 1990s “shock privatization

Notes 291 through bankruptcy”. For the Czech Republic he chooses “a story of persistent state government”, and in Poland he identifies “the decentralized approach”. In Russia, he sees “bankruptcy as a political weapon”. 67. Olson (1993:15) also establishes “[…] that many state enterprises are valueless in the transitional phase, and that the debate over privatization is a pointless one. […] The major part of the debate over privatization should therefore be recognized as a discussion on liquidation and held as such.” 68. Rapaczynski (1996:93) generally points out that: “A state that conducts much of its policy through the exercise of its own ownership rights […] tends to neglect the development of its regulatory capacities […] and thus increases the degree of arbitrariness in the pursuit of its economic policies.” 69. An alternative discussion to the efficiency aspects of privatization on the role of privatization within the establishment of the state as guarantor of property can support the conscious renunciation of extensive privatization revenues. In the transformation countries, a renouncement would have had not only the advantage that the revenues, which arise only once and are difficult to calculate, would have remained unconsidered within the amount budgeted from the beginning. The state as tax authority would have signaled by its renouncement that it sees itself as the guarantor of ownership, but no longer as an owner. It could have simultaneously made clear that it understands the physical assets transferred freely or at a low price as a starting provision of security, which covers part of the risk economic players will have to take themselves in future.

14.

The Spontaneous Solution: Bottom-up Privatization

1. This was already criticized by Sadowski (1991:48) in the course of the early privatization debate: “All in all, it may be observed that part of the responsibility for the sluggishness of expansion of the private sector is attributable to the fact that the main focus of attention tends to be laid elsewhere: on doing away with the public sector.” 2. For a short outline concerning differentiation between private, privatized and public see OECD (1996:19). 3. There is no generally applicable differentiation of SMEs. The OECD (1996:8) includes enterprises with less than 500 employees. At times, SMEs are further divided into micro-SMEs (less than 10 employees), small SMEs (more than 10 and less than 50, or 100 employees) and medium-sized SMEs with up to 500 employees (Flint (1997:36)). 4. The categorization into size groups also causes medium-sized enterprises to outgrow their group. The thesis that SMEs could lay the foundation for largescale enterprises therefore cannot be confirmed on the basis of size categories. 5. In Central and Eastern Europe the beginning of legalization cannot always be clearly determined due to the special property laws. The amendment of laws has an additional negative effect on the development of SMEs. According to Vilenskij (1996:36), the number of SMEs no longer increased that fast after the first part of the new Civil Code came into effect in Russia in 1995 and SMEs had to choose another legal form. In the end, together with the EBRD’s rule of thumb, this confirms Buchanan: that economic subjects consider stable laws to be a capital good which they can only trust after a phase of maturity.

292 Notes 6. As far as Poland and Hungary are concerned, the EBRD’s rule of thumb is rather confirmed by the estimations of Lageman (1995:28), according to whom Hungarian SMEs account for 35 per cent and the Polish SMEs for 45 per cent of all employees. 7. The high proportion in Czechoslovakia can be explained by the successful small privatization. In Romania it can probably be attributed to the fact that in the course of the privatization of large agricultural enterprises the former kolkhoz members were granted small areas of arable land, thus creating a large number of small, and frequently unprofitable, farms. 8. According to Brezinski/Fritsch (1995:6f), the SMEs founded after transformation can be distinguished from the private enterprises already established at the end of the 1980s as far as their adaptability is concerned. The “old” private enterprises enjoyed a monopoly position within planned economy, as access to markets was controlled by the state and as foreign trade was not liberalized. Their fields of activity were additionally determined by the state and prices were administered. Their major problem was in obtaining inputs. At the same time, their sales were secured as a consequence of the seller’s market. This was the reason why they were not forced to develop any marketing strategies. In this situation, the SMEs were not Schumpeterian enterprises, which could produce innovations and take on risks. According to the OECD (1996:43), the joint ventures and so-called Polish firms, which were in contact with Western enterprises and therefore with market-economy conditions, represented exceptions. 9. The following will fall back not only on the survey submitted by the EBRD (1995:142ff), but on the investigation of the OECD (1996:41ff) on the development of SMEs within the Visegrad states, the results of the questioning of Russian small enterprises by Avilova et al. (1996:8ff), as well as on the questioning of enterprises through the Romanian Center for small and medium-sized enterprises (Adevˇarul Economic, No. 9/1995, pp. 16f). Due to the varying records, the results are comparable to each other only with reservations and only reflect a rough trend. 10. It is, however, unclear to what extent SMEs manage to evade tax payment. About 60 per cent of the evaded tax payments are said to be attributable to private enterprises in Romania (Romanian Business Journal, No. 1/1996, p. 5). This high proportion can, among other things, be explained by the fact that the prosecution of a large number of small tax evaders proves considerably more expensive than the discovering of few large ones. 11. Avilova et al. (1996:30f) point out that the enterprises established before 1991, and thus before transformation, have greater difficulty in obtaining a loan than the younger enterprises, due to their low adaptability. In addition, they observed that the access to loans is more favorable for privatized SMEs which have close relations to state banks than for newly founded SMEs. Privatized SMEs, whose fixed assets are higher, are rarely required to have collateral against loans. If newly founded SMEs are creditworthy, then, according to the EBRD (1995:142), they do indeed receive better terms than their privatized counterparts. 12. The various forms of financial support cannot be introduced in detail here. An outline is submitted by the EBRD (1995:147ff) as well as the OECD (1996:74ff).

Bibliography Adevˇ arul, 14 August 1992, p. 5 (“Privatizarea. Cum a fost gînditˇ a, cum aratˇ a azi”). Adevˇ arul Economic No. 5/1997, pp. 11–18 (“Raport de activitate al Fondului Proprietˇ at i¶ i de Stat în anul 1996”). No. 29/1996, pp. 15–26 (“Fondul Proprietˇ at ¶ii de Stat. Raport de activitate pe 1995. Program de privatizare 1996”). No. 23/1996, p. 7 (“Ce acces au întreprinzˇ atorii la surse alternative de finant¶are”). No. 9/1995, pp. 16–17 (“Sectorul privat de întreprinderi mici si¶ mijlocii în România”). No. 29/1992, pp. 4–7 (“Agent¶ia Nat¶ionalˇ a pentru Privatizare ne prezintˇ a modul în care a efectuat alocarea societˇa t¶ilor comerciale cu capital de stat la fondurile proprietˇ a t¶ii private”). Afanasjew, W.S. (1994): Organisiertes Verbrechen und Wirtschaftskriminalität in Ruβland, WiRO, 3/8, pp. 286–90. Aganbegjan, Abel (1989): Ökonomie und Perestrojka. Gorbatschows Wirtschaftsstrategien, Hamburg (translated by Gabiele Leupold and Renate Janssen-Tavhelidse). Agent¶ia Nat¶ionalˇ a pentru Privatizare, Bucharest. (1993): Buletin informativ, No. 1. (1993a): Buletin informativ, No. 2. (1993b): Buletin informativ, No. 3. Akerlof, George A.; Romer, Paul M. (1993): Looting: The Economic Underworld of Bankruptcy for Profits, Brookings Papers on Economic Activity, No. 2/1993, pp. 1–60. Alexeev, Michael; Gaddy, Clifford; Leitzel, Jim (1995): Economic Crime and Russian Reform, Journal of Institutional and Theoretical Economics. Zeitschrift für die gesamte Staatswissenschaft, 151/4, pp. 677–92. Antal, Endre (1983): Mehr Raum für Kleinbetriebe und Privatinitiative in der ungarischen Wirtschaft, Osteuropa Wirtschaft, 28/4, pp. 259–75. Anuarul al României, see Comisia Nat¶ionalˇa pentru Statisticˇ a. Åslund, Anders (1991): Privatizatsiya v stranach byvshego sotsializma, EKO, No. 10/1991, pp. 135–52. Åslund, Anders (1985): Yellow Light for Private Enterprise in Poland?, Osteuropa Wirtschaft, 30/1, pp. 21–9. Avilova, A.V.; Obydennova, T B.; Pripisnov, V.A.; Chepurenko, A. Ju. (1996): Finansovye i institutsional’nye problemy rossiyskogo malogo predprinimatel’stva. Regional’nye aspekty (1995–1996 gg.), Moscow (transcript). Axelrod, Robert (1984): The Evolution of Cooperation, New York. Ayres, Clarence Edwin (1962): The Theory of Economic Progress. A Study of the Fundamentals of Economic Development and Cultural Change, New York. Bakcsi, Ildikó (1987): Alternative Betriebe und Privatunternehmen in der ungarischen Wirtschaft, Südosteuropa, 36/7–8, pp. 457–66. Balcerowicz, Leszek (1987): Remarks on the Concept of Ownership, Oeconomica Polona, No. 1/1987, pp. 75–95 (Translation of “Uwagi o poje¶ciu wl⁄asno´sci”, Studia Filozoficzne, No. 4/1986). Begg, David; Portes, Richard (1992): Enterprise Debt and Economic Transformation: Financial Restructuring of the State Sector in Central and Eastern Europe, London (= Centre for Economic Policy Research, Discussion Paper Series, No. 695). 293

294 Bibliography Behrens, Peter (1986): Die ökonomischen Grundlagen des Rechts. Politische Ökonomie und rationale Jurisprudenz, Tübingen. Ben-Ner, Avner; Montias, John Michael (1991): The Introduction of Markets in a Hypercentralized Economy: the Case of Romania, The Journal of Economic Perspectives, 5/4, pp. 163–70. Bergmann, Wilfried; Glöckner, Martin (1995): Der Zweite Teil des ZGB – ein neues Zivilrecht für Ruβland, WiRO, 4/12, pp. 445–48. Bergstrom, Lars (1995): Insolvency Procedures Regarding State Owned Enterprises in Russia, in: OECD, Centre for Co-operation with the Economies in Transition (1995): Corporate Insolvency Procedure as a Tool for Privatization and Restructuring, Paris, pp. 251–65 (= Trends and Policies in Privatisation, 2/2). Berle, Adolf A.; Means, Gardiner C. (1967): The Modern Corporation and Private Property, New York. Bie nkowski, ´ Wojciech (1992): Poland’s Bermuda Triangle, RFE/RL Research Report, 1/17, pp. 22–4. Bie nkowski, ´ Wojciech (1992a): The Bermuda Triangle: Why Self-Governed Firms Work for Their Own Destruction, Journal of Comparative Economics, 16/4, pp. 750–62. Bilsen, Valentijn; Konings, Jozef (1996): Job Creation, Job Destruction and Growth of Newly Established Private Firms in Transition Economies: Survey Evidence from Bulgaria, Hungary and Romania, Leuven (= Leuven Institute for Central and East European Studies, Working Paper, No. 59). Bim, Alexander S. (1996): Ownership, Control over the Enterprises and Strategies of Stockholders, Laxenburg (= International Institute for Applied Systems Analysis, Working Paper, No. 50). Birch, Michael (1993): Valuation and Privatisation: Main Aspects, in: OECD, Centre for Co-operation with the European Economies in Transition (1993): Valuation and Privatisation, Paris, pp. 7–21. Blanchard, Oliver; Dornbusch, Rudiger; Krugman, Paul; Layard, David; Summers, Lawrence (1991): Reform in Eastern Europe, Cambridge/Mass. and London. Bl⁄aszczyk, Barbara (1995): Various Approaches to Privatization in Poland, their Implementation and the Remaining Privatization Potential, in: Quaisser, Wolfgang; Woodward, Richard; Bl⁄aszczyk, Barbara (eds) (1995): Privatization in Poland and East Germany. A Comparison, Vol. 1, Munich, pp. 73–110 (= Arbeiten aus dem Osteuropa-Institut München, Working Papers, No. 180–1). Blaug, Mark (1971): Systematische Theoriegeschichte der Ökonomie. Vom Merkantilismus zu Ricardo, Vol. 1, Munich. Böbel, Ingo (1988): Eigentum, Eigentumsrechte und institutioneller Wandel, Berlin. Bofinger, Peter (1993): Erfahrungen mit Geldpolitik bei Existenz starker mikroökonomischer Verzerrungen, in: Herr, Hansjörg; Westphal, Andreas (eds) (1993): Transformation in Mittel- und Osteuropa. Makroökonomische Konzepte und Fallstudien, Frankfurt/M. and New York, pp. 83–108. Bohata, P. (1996): Vereinfachung des Konkursverfahrens in der CR, WiRO, 5/6, p. 224. Bonin, John P. (1992): Privatization and Efficient Contracts: The Workers’ Stake in the Transition, Journal of Comparative Economics, 16/4, pp. 716–32. Boote, Anthony B.; Somogyi, Janos (1991): Economic Reform in Hungary since 1968, Washington, DC (International Monetary Fund, Occasional Paper, No. 83). Borensztein, Eduardo; Kumar, Manmohan S. (1991): Proposals for Privatization in Eastern Europe, IMF Staff Papers, 38/2, pp. 300–26.

Bibliography 295 Bornstein, Morris (1992): Privatisation in Eastern Europe, Communist Economies and Economic Transformation, 4/3, pp. 283–320. Bös, Dieter (1993): Privatization in Europe: A Comparison of Approaches, Oxford Review of Economic Policy, 9/1, pp. 95–111. Bös, Dieter (1991): Privatization. A Theoretical Treatment, Oxford. Bossak, Jan (1992): Privatization in Central and Eastern Europe (Poland), Prague (Charles University, speech held at the Twelfth CERGE Lecture on Practical Aspects of Privatization, December 1992, transcript). Boycko, Maxim; Shleifer, Andrei; Vishny, Robert (1995): Privatizing Russia, Cambridge/Mass. and London. Brada, Josef C. (1996): Privatization Is Transition – Or Is It?, The Journal of Economic Perspectives, 10/2, pp. 67–86. Brada, Joseph; King, Arthur E. (1992): Is There a J-Curve for the Economic Transition from Socialism to Capitalism?, Economics of Planning, No. 25/1992, pp. 37–53. Brandt, Reinhard (1974): Eigentumstheorien von Grotius bis Kant, Stuttgart-Bad Cannstatt. Braudel, Fernand (1990): Sozialgeschichte des 15.–18. Jahrhunderts. Aufbruch zur Weltwirtschaft, Munich. Brennan, Geoffrey; Buchanan, James M. (1985): The Reason of Rules. Constitutional Political Economy, Cambridge/Mass. and others. Brezinski, Horst; Fritsch, Michael (1995): Bottom-Up Transformation: Prerequisites, Scope and Impediments, Freiberg (= Technical University Bergakademie Freiberg, Freiberg Working Papers, No. 1). Brezinski, Horst; Petersen, Paul (1987): Die Parallelwirtschaft in Rumänien – ein dynamischer Sektor, Südosteuropa, 36/5, pp. 227–44. Brocker, Manfred (1992): Arbeit und Eigentum. Der Paradigmenwechsel in der neuzeitlichen Eigentumstheorie, Darmstadt. Brunner, Georg; Meissner, Boris (eds) (1980): Verfassungen der kommunistischen Staaten, Paderborn and others. Brunner, Georg; Schmid, Karin; Westen, Klaus (eds): Wirtschaftsrecht der osteuropäischen Staaten (WOS), Baden-Baden (compendium of laws with continuing installments). Buch, Claudia M. (1996): Banken im Transformationsprozeβ – eine Bestandsaufnahme für Polen, die Tschechische Republik und Ungarn, Die Weltwirtschaft, No. 1/1996, pp. 70–102. Buch, Claudia M.; Koop, Michael J.; Schweickert, Rainer; Wolf, Hartmut (1995): Währungsreformen im Vergleich. Monetäre Strategien in Ruβland, Weiβruβland und der Ukraine, Tübingen (= Institut für Weltwirtschaft an der Universität Kiel, Kieler Studien, No. 270). Buchanan, James M. (1994): Choosing What to Choose, Journal of Institutional and Theoretical Economics. Zeitschrift für die gesamte Staatswissenschaft, 150/1, pp. 123–35. Buchanan, James M. (1977): Freedom in Constitutional Contract. Perspectives of a Political Economist, London. Buchanan, James M. (1975): The Limits of Liberty. Between Anarchy and Leviathan, Chicago and London. Buchtíková, Alena (1995): Privatization in the Czech Republic, Warsaw (= Center for Social & Economic Research, Studies & Analyses, No. 53). Burniaux, Jean-Marc (1995): Establishing Financial Discipline: Experience with Bankruptcy Legislation in Central and Eastern European Countries, OECD Economic Studies, No. 25, 1995/II, pp. 110–50.

296 Bibliography Busch, Ulrich (1994): Soziale Kosten und Sozialpolitik im Transformationsprozeβ Zentral- und Osteuropas, in: Wahl, Jürgen (ed.) (1994): Sozialpolitik in der ökonomischen Diskussion, Marburg, pp. 281–96. Busch, Ulrich; Varga, József (1997): Finanzierungsprobleme des Budgets in Ungarn, Südosteuropa, 46/1–2, pp. 90–111. Calvo, Guillermo A.; Frenkel, Jakob A. (1991): Credit Markets, Credibility and Economic Transformation, The Journal of Economic Perspectives, 5/4, pp. 139–48. Cichy, Ernst Ulrich (1990): Wirtschaftsreform und Ausweichwirtschaft im Sozialismus. Zur Rolle der Ausweichwirtschaft im Reformprozeβ sozialistischer Planwirtschaften dargestellt am Beispiel der DDR, Polens und Ungarns, Hamburg (= Univ. Diss. 1989, Duisburg). Cichy, Ernst Ulrich (1985): Parallelwirtschaft und Wirtschaftsreform. Das unorthodoxe Experiment der Ungarischen Volksrepublik, Osteuropa Wirtschaft, 30/4, pp. 243–61. Comisia Nat¶ionalˇ a pentru Statisticˇ a, Bucharest. (1996): Anuarul Statistic al României 1996. (1995): Anuarul Statistic al României 1995. (1990): Anuarul Statistic al României 1990. Commons, John R. (1970): The Economics of Collective Action, Madison, Milwaukee and London (edited by Kenneth Parsons). Commons, John R. (1934): Institutional Economics. Its Place in Political Economy, New York. Commons, John R. (1924): Legal Foundations of Capitalism, New York (Reprint: Clifton, New Jersey 1974). Coopers & Lybrand (1995): Romania, Yes! An Investment Guide, Bucharest. Cooter, Robert (1992): Organization as Property: Economic Analysis of Property Law Applied to Privatization, in: Clague, Christopher; Rausser, Gordon C. (eds) (1992): The Emergence of Market Economies in Eastern Europe, Cambridge/Mass. and Oxford, pp. 77–97. Corbett, Jenny; Mayer, Colin (1991): Financial Reform in Eastern Europe: Progress with the Wrong Model, Oxford Review of Economic Policy, 7/4, pp. 57–75. Czech National Bank, Prague. (1997): Annual Report 1996. (1996): Annual Report 1995. (1996a): Report on Monetary Development in the Czech Republic for the First Half of 1996. (1995): Annual Report 1994. (1994): Annual Report 1993. Czech Statistical Office, Prague. (1998): Statistical Yearbook of the Czech Republic 1998. (1995): Statistical Yearbook of the Czech Republic 1996. (1996): Monthly Statistics of the Czech Republic, No. 6/1996. Da¶ browski, Janusz M. (1996): Privatisierung der polnischen Wirtschaft: Fünf Jahre Erfahrung, DIW Vierteljahreshefte zur Wirtschaftsforschung, 65/2, pp. 235–47. Da¶ browski, Janusz M.; Federowicz, Michal; Szomburg, Jan (1992): Privatization of the Polish State-Owned Enterprises, Gda nsk ´ and Warsaw (= The Gda nsk ´ Institute for Market Economics, Economic Transformation, No. 29). Daubner, Robert (1993): Immobilienkauf in der Tschechischen Republik, WiRO, 2/9, pp. 317–18.

Bibliography 297 Dembinski, Pawel H. (1988): Quantity versus Allocation of Money: Monetary Problems of the Centrally Planned Economies Reconsidered, Kyklos, 41/2, pp. 281–300. Demekas, Dimitri G.; Khan, Moshin S. (1991): The Romanian Economic Reform Program, Washington, DC (= International Monetary Fund, Occasional Paper, No. 89). Demsetz, Harold (1974): Toward a Theory of Property Rights, in: Furobotn, Eirik G.; Pejovich, Svetozar (eds) (1974): The Economics of Property Rights, Cambridge/Mass., pp. 31–42 (Reprinted from The American Economic Review, 57 (May 1967), pp. 347–59). Desai, Raj M. (1996): Reformed Banks and Corporate Governance in the Czech Republic, 1991–1996, Post-Soviet Geography and Economics, 37/8, pp. 463–94. Deutsche Bank Research (1994): Osteuropa auf Reformkurs. Ruβland, No. 12, Frankfurt/M. Dietl, Helmut (1993): Institutionen und Zeit, Tübingen. DIW (Deutsches Institut für Wirtschaftsforschung, Berlin). (1991): Rumänien: Schwieriger wirtschaftlicher Neubeginn, DIW Wochenbericht, 58/34, pp. 488–95. (1988): Wirtschaftsentwicklung und Wirtschaftsreform in Ungarn: Gratwanderung zwischen sozialer Sicherheit und Effizienzsteigerung, DIW Wochenbericht, 55/19, pp. 251–7. DIW, IfW, IWH (Deutsches Institut für Wirtschaftsforschung, Berlin; Institut für Weltwirtschaft an der Universität Kiel; Institut für Wirtschaftsforschung Halle). (1998): Die wirtschaftliche Lage Ruβlands. Wirtschaftliche Wende bedenklich verzögert, DIW Wochenbericht, 65/18, pp. 293–310. (1996): Die wirtschaftliche Lage Ruβlands. Investitionsschwäche verhindert Wachstum, DIW Wochenbericht, 63/19, pp. 317–27. (1996a): Die wirtschaftliche Lage Ruβlands. Die Wirtschaftspolitik muβ Investitionsanreize setzen, DIW Wochenbericht, 63/51–52, pp. 823–43. (1995): Die wirtschaftliche Lage Ruβlands. Realwirtschaftliche Anpassung, DIW Wochenbericht, 62/2, pp. 37–69. (1995a): Die wirtschaftliche Lage Ruβlands. Kurswechsel in der Stabilisierungspolitik, DIW Wochenbericht, 62/51–52, pp. 876–97. (1994): Die wirtschaftliche Lage Ruβlands. Beschleunigte Talfahrt durch verschleppte Reformen, DIW Wochenbericht, 61/19, pp. 283–319. (1994a): Die wirtschaftliche Lage Ruβlands. Fortsetzung des Niedergangs ohne hinreichenden Strukturwandel, DIW Wochenbericht, 61/47–48, pp. 805–27. Djankov, Simeon; Hoekman, Bernard (1997): Trade Reorientation and Productivity Growth in Bulgarian Enterprises, Washington, DC (The World Bank, Policy Research Working Paper, No. 1707). Dobias, Peter (1977): Theorie und Praxis der Planwirtschaft, Paderborn. Dolgopiatova, Tatiana (1996): The Transitional Model of the Behavior of Russian Industrial Enterprises (on the Basis of Regular Surveys during 1991–1995), Laxenburg 1996 (= International Institute for Applied Systems Analysis, Working Paper, No. 57). Dugger, William M. (1980): Property Rights, Law, and John R. Commons, Review of Social Economy, 38/April, pp. 41–53. Earle, John S.; Sapatoru, Dana (1992): Privatization in a Hypercentralized Economy: the Case of Romania, Prague (= Charles University, Centre for Economic Research and Graduate Education, Working Paper Series, No. 15). EBRD, see European Bank for Reconstruction and Development.

298 Bibliography ECE, see United Nations Economic Commission for Europe. Eggertsson, Thráinn (1990): Economic Behaviour and Institutions, Cambridge/Mass. and others. Ekonomika i zhizn’. No. 29/1992, pp. 13–14 (“Zakon Rossiyskoy Federacii: ‘O vnesenii izmeneniy i dopolneniy v zakon RSFSR ‘O privatizatsii gosudarstvennych i munitsipal’nych predpriyatiy v RSFSR”’). No. 31/1991, pp. 15–18 (“Zakon Rossiyskoy Sovetskoy Federativnoy Socialisticheskoy Respubliki: ‘O privatizatsii gosudarstvennych i munitsipal’nych predpriyatiy v RSFSR”’). Elsner, Wolfram (1986): Ökonomische Institutionenanalyse. Paradigmatische Entwicklung der ökonomischen Theorie und der Sinn eines Rückgriffs auf die ökonomische Klassik am Beispiel der Institutionenanalyse (“Property Rights”), Berlin. Engerer, Hella (1996): Privateigentum, Privatisierung und Transformation, DIW Vierteljahreshefte zur Wirtschaftsforschung, 65/1, pp. 14–30. Engerer, Hella (1993): Stand und Probleme der Wirtschaftsreform in Rumänien, in: Sundhaussen, Holm (ed.) (1993): Südosteuropa zu Beginn der Neunziger Jahre. Reformen, Krisen und Konflikte in den vormals sozialistischen Ländern, Berlin, pp. 161–83 (= Osteuropa-Institut der Freien Universität Berlin, Multidisziplinäre Veröffentlichungen, Vol. 4). Eschenburg, Rolf (1977): Der ökonomische Ansatz zu einer Theorie der Verfassung. Die Entwicklung einer liberalen Verfassung im Spannungsverhältnis zwischen Produktivität und Effektivität der Kooperation, Tübingen. Estrin, Saul; Gelb, Alan; Singh, Inderjit (1995): Shocks and Adjustment by Firms in Transition: A Comparative Study, Journal of Comparative Economics, 21/2, pp. 131–53. Euchner, Walter (1979): Naturrecht und Politik bei John Locke, Frankfurt/M. Eucken, Walter (1990): Grundsätze der Wirtschaftspolitik, Tübingen (edited by Edith Eucken and Paul Hensel). European Bank for Reconstruction and Development, London. (1998): Transition Report. Financial Sector in Transition. (1997): Transition Report Update. April 1997. (1997a): Transition Report. Enterprise Performance and Growth. (1996): Transition Report Update. April 1996. (1996a): Transition Report. Infrastructure and Savings. (1995): Transition Report. Investment and Enterprise Development. Ezhegodnik Rossii, see Gosudarstvennyy Komitet Rossiyskoy Federacii. Ezhegodnik SEV, see Soviet Ekonomicheskoy Vzaimopomoshchi. Feldmann, Horst (1993): Die Eigentumstheorien Lockes und Humes und ihre Lehren für den Aufbau privatwirtschaftlicher Eigentumsordnungen in den Transformationsländern, Tübingen (= Wirtschaftswissenschaftliche Fakultät der Eberhard-Karls Universität Tübingen, Tübinger Diskussionsbeiträge, No. 30). Fischer, Bryan J. (1992): Large Privatization in Poland, Hungary and Czechoslovakia, RFE/RL Research Report, 1/44, pp. 34–9. Fischer, Stanley; Gelb, Alan (1991): The Process of Socialist Economic Transformation, The Journal of Economic Perspectives, 5/4, pp. 91–105. Fischer, Stanley; Sahay, Ratna; Végh, Carlos A. (1996): Stabilization and Growth in Transition Economies: The Early Experience, The Journal of Economic Perspectives, 10/2, pp. 45–66. Flint, Alison (1997): Klein- und Mittelunternehmen, Investmentbank Austria Research. Osteuropa Perspektiven, January 1997, pp. 34–44.

Bibliography 299 Freinkman, Lev M.; Starodubrovskaja, Irina (1996): Restructuring of Enterprise Social Assets in Russia: Trends, Problems, Possible Solutions, Laxenburg (= International Institute for Applied Systems Analysis, Working Paper, No. 52). Frensch, Richard (1991): Erste Transformationsschritte: Die wirtschaftliche Entwicklung der CSFR 1990/1991 vor dem Hintergrund der Preisfreigabe und Privatisierung, Munich (= Osteuropa- Institut München, Working Papers, No. 145). Frensch, Richard (1990): Tschechoslowakei vor dem Ende der Planwirtschaft?, in: Bolz, Klaus (ed.) (1990): Die Wirtschaft der osteuropäischen Länder an der Wende zu den 90er Jahren, Hamburg, pp. 263–317. Frensch, Richard (1989): Die Wirtschaftslage in der CSSR 1988/1989, unter Berücksichtigung einer Gegenüberstellung tschechoslowakischer und sowjetischer Reformkonzepte, Munich (= Osteuropa-Institut München, Working Papers, No. 130). Frydman, Roman; Phelps, Edmund S.; Rapaczynski, Andrzej; Shleifer, Andrei (1993): Needed Mechanism of Corporate Governance and Finance in Eastern Europe, Economics in Transition, 1/2, pp. 171–207. Frydman, Roman; Pistor, Katharina; Rapaczynski, Andrzej (1995): Investing in InsiderDominated Firms. A Study of Voucher Privatization Funds in Russia, Vienna (= Österreichische Nationalbank, Working Paper, No. 21). Furubotn, Eirik G. (1992): Eastern European Reconstruction Problems. Some General Observations, Journal of Institutional and Theoretical Economics. Zeitschrift für die gesamte Staatswissenschaft, 148/1, pp. 201–6. Furubotn, Eirik, G.; Pejovich, Svetozar (1974): Introduction: The New Property Rights Literature, in: Furubotn, Eirik, G.; Pejovich, Svetozar (eds) (1974): The Economics of Property Rights, Cambridge/Mass., pp. 1–9. Furubotn, Eirik G.; Pejovich, Svetozar (1974a): A Soviet Manager and Innovation: A Behavioral Model of the Soviet Firm, in: Furubotn, Eirik G.; Pejovich, Svetozar (eds) (1974): The Economics of Property Rights, Cambridge/Mass., pp. 203–16. Furubotn, Eirik G.; Pejovich, Svetozar (1974b): Property Rights and the Behavior of the Firm in a Socialist State. The Example of Yugoslavia, in: Furubotn, Eirik G.; Pejovich, Svetozar (eds) (1974): The Economics of Property Rights, Cambridge/Mass., pp. 227–51. Gács, János; Karimov, Il’dar A.; Schneider, Christoph M. (1992): Small Scale Privatization in Eastern Europe and Russia from a Historical and Comparative Perspective, Laxenburg (= International Institute for Applied Systems Analysis, Working Paper, No. 67). Gärtner, Wolfram (1995): Die Eigentumsgarantien in den Verfassungen Polens, Ungarns, der Tschechischen und Slovakischen Republik – Verfassungsrechtliche Grundlagen und Verfassungspraxis, Recht in Ost und West, 39/3, pp. 75–9. Gl⁄ówny Urza¶d Statystyczny, Warsaw. (1998) Rocznik Statystycny 1998. (1995): Rocznik Statystyczny 1995. (1994): Rocznik Statystyczny 1994. Golinowska, Stanislawa (1996): State Social Policy and Social Expenditure in Central and Eastern Europe, Warsaw (= Center for Social & Economic Research, Studies & Analyses, No. 81). Gora, Marek; Kotowska, Irena; Panek, Tomasz; Podgorski, Jaroslav (1993): Poland: Labour Market Trends and Policies, in: OECD, Centre for Co-operation with the Economies in Transition (1993): Structural Change in Central and Eastern Europe: Labour Market and Social Policy Implications, Paris, pp. 133–70 (edited by Georg Fischer and Guy Standing).

300 Bibliography Goskomimushchestvo (Gosudarstvennyy komitet Rossiyskoy Federacii po upravleniyu gosudarstvennym imushchstvom) (1994): Privatizatsija gosudarstvennych predpriyatiy v Rossii. Sbornik dokumentov, Vol. 4, Moscow. Goskomstat Rossii (Gosudarstvennyj Komitet Rossiyskoy Federacii po Statistike), Moscow. (1997): Rossiyskiy Statisticheskiy Ezhegodnik. (1996): Rossiyskiy Statisticheskiy Ezhegodnik. (1995): Rossiyskiy Statisticheskiy Ezhegodnik. (1995a): Rossiya v tsifrach. (1994): Social’no-ekonomicheskoe polozhenie Rossii 1993 g. The Government of Romania, Bucharest. (1995): Three Years of Governance. The Activity Carried Out by the Government of Romania between November 1992 and November 1995. Main Headlines, Actions and Measures for Year 1996. (1993): The Governing Programme. Strategy for Economic and Social Reform. (1991): The White Book of the Romanian Reform. Gray, Cheryl W. (1996): In Search of Owners. Lessons of Experience with Privatization and Corporate Governance in Transition Economies, Washington, DC (= The World Bank, Policy Research Working Paper, No. 1595). Gray, Cheryl W.; Hanson, Rebecca J.; Ianachkov, Peter G. (1992): Romania’s Evolving Legal Framework for Private Sector Development, Washington, DC (= The World Bank, Policy Research Working Paper, No. 872). Gray, Cheryl W.; Hendley, Kathryn (1995): Developing Commercial Law in Transition Economies. Examples from Hungary and Russia, Washington, DC (= The World Bank, Policy Research Working Paper, No. 1528). Gray, Cheryl W.; Holle, Arnold (1996): Bank-Led Restructuring in Poland. Bankruptcy and Its Alternatives, Washington, DC (= The World Bank, Policy Research Working Paper, No. 1651). Grosfeld, Irena; Hare, Paul (1991): Privatization in Hungary, Poland and Czechoslovakia, in: Commission of the European Communities (1991): European Economy. The Path of Reform in Central and Eastern Europe, Special Edition No. 2, Brussels and Luxembourg, pp. 129–56. Grotius, Hugo (1625): De jure belli ac pacis libri tres (The Law of War and Peace), Book II, New York and London 1964 (edited by James Brown Scott, translated by Francis W. Kelsey). Gurkov, Igor; Asselbergs, Gary (1995): Ownership and Control in Russian Privatised Companies: Evidence from a Survey, Communist Economies & Economic Transformation, 7/2, pp. 195–211. Haffner, Friedrich (1985): Monetäre Zentralplanung und Volkswirtschaftsplanung, in: Thieme, H. Jörg (ed.) (1985): Geldtheorie. Entwicklung, Stand und systemvergleichende Anwendung, Baden-Baden, pp. 189–209. Haffner, Friedrich (1982): Entwicklung der Preisbildung und der zugrunde liegenden Theorien in der Sowjetunion, in: Bohnet, Armin; Haffner, Friedrich; Schoppe Siegfried G. (eds) (1982): Anreiz- und Kontrollmechanismen in Wirtschaftssystemen II, Berlin, pp. 9–42. Haffner, Friedrich (1978): Systemkonträre Beziehungen in der sowjetischen Planwirtschaft. Ein Beitrag zur Theorie der mixed economy, Berlin (Osteuropa-Institut der Freien Universität Berlin, Wirtschaftswissenschaftliche Veröffentlichungen, Vol. 37). Hamel, Hannelore; Leipold, Helmut; Peterhoff, Reinhard (1982): Zur Reform der polnischen Unternehmensverfassung – Dokumentation und Perspektiven, Marburg

Bibliography 301 (= Philipps- Universität Marburg, Forschungsstelle zum Vergleich wirtschaftlicher Lenkungssysteme, Arbeitsberichte zum Systemwandel, No. 3). Hardin, Russell (1982): Collective Action, Baltimore and London. Hare, Paul G. (1991): The Assessment: Microeconomics of Transition in Eastern Europe, Oxford Review of Economic Policy, 7/4, pp. 1–15. Hashi, Iraj; Mladek, Jan; Sinclair, Alison (1996): The Process of Exit in the Czech Republic 1990–1994. The Nature and Extent of Formal and Informal Exit Mechanisms, Warsaw (= Center for Social & Economic Research, Studies & Analyses, No. 75). Heinsohn, Gunnar (1984): Privateigentum, Patriarchat, Geldwirtschaft. Eine sozialtheoretische Rekonstruktion zur Antike, Frankfurt/M. Heinsohn, Gunnar; Steiger, Otto (1996): Eigentum, Zins und Geld. Ungelöste Rätsel der Wirtschaftswissenschaft, Hamburg. Helmstädter, Ernst (1991): Eigentum und Kapitalwirtschaft in der Ordnungspolitik, Ordo. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, Vol. 42, pp. 235–51. Hemming, Richard; Mansoor, Ali M. (1988): Privatization and Public Enterprises, Washington, DC (= International Monetary Fund, Occasional Paper, No. 56). Hensel, Paul K. (1979): Einführung in die Theorie der Zentralverwaltungswirtschaft. Eine vergleichende Untersuchung idealtypischer wirtschaftlicher Lenkungssysteme an Hand des Problems der Wirtschaftsrechnung, Stuttgart and New York. Herr, Hansjörg; Westphal, Andreas (1991): Economic Coherence and the Transformation of Planned Economies into Monetary Economies, Journal of Post Keynesian Economics, 13/3, pp. 307–27. Herrnfeld, Hans-Holger (1995): Recht europäisch. Rechtsreform und Rechtsangleichung in den Visegrád-Staaten, Gütersloh. Hesse, Günter (1983): Zur Erklärung der Änderung von Handlungsrechten mit Hilfe ökonomischer Theorie, in: Schüller, Alfred (ed.) (1983): Property Rights und ökonomische Theorie, Munich, pp. 79–109. Hobbes, Thomas (1651): Leviathan, Cambridge/Engl. 1904 (edited by A.R. Waller). Höhmann, Hans-Hermann (1987): Gorbatschows Wirtschaftsreformpolitik und ihre osteuropäische Dimension, in: Ostkolleg der Bundeszentrale für politische Bildung (ed.) (1987): Rat für gegenseitige Wirtschaftshilfe. Strukturen und Probleme, Bonn, pp. 148–63 (= Studien zur Geschichte und Politik, Schriftenreihe, Vol. 259). Hölscher, Jens (1996): Privatisierung und Privateigentum, in: Hölscher, Jens; Jacobsen, Anke; Tomann, Horst; Weisfeld, Hans (eds) (1996): Bedingungen ökonomischer Entwicklung in Zentralosteuropa. Elemente einer Entwicklungsstrategie, Vol. 4, Marburg, pp. 97–127. Hölscher, Jens; Tomann, Horst (1996): Privatization and Structural Change, in: Hölscher, Jens; Jacobsen, Anke; Tomann, Horst; Weisfeld, Hans (eds) (1996): Bedingungen ökonomischer Entwicklung in Zentralosteuropa. Economic Policy and Development Strategies in Central and Eastern Europe, Vol. 5, Marburg, pp. 95–116. Holzhacker, Hans (1995): Take-off der Masssenprivatisierung, Teil 1, Investmentbank Austria Research–Osteuropa Perspektiven, July 1995, pp. 5–19. Holzhacker, Hans (1995a): Take-off der Masssenprivatisierung, Teil 2, Investmentbank Austria Research–Osteuropa Perspektiven, Nov. 1995, pp. 5–22. Hughes, Gordon; Hare, Paul (1991): Competitiveness and Industrial Restructuring in Czechoslovakia, Hungary and Poland, in: Commission of the European Communities (1991): European Economy. The Path of Reform in Central and Eastern Europe, Special Edition No. 2, Brussels and Luxembourg, pp. 83–110. Hume, David (1740): A Treatise on Human Nature, Vol. II (Books II and III), London 1878 (edited by T. H. Green and T. H. Grose).

302 Bibliography Hungarian Central Statistical Office, Budapest. (1996): Statistical Yearbook of Hungary 1995. (1995): Statistical Yearbook of Hungary 1994. (1994): Statistical Yearbook of Hungary 1993. (1991): Statistical Yearbook of Hungary 1989. (1984): Statistical Yearbook of Hungary 1982. Inotai, András (1992): Experience with Privatization in East Central Europe, in: Siebert, Horst (ed.) (1992): Privatization, Tübingen, pp. 163–82. Iwanek, Maciej (1992): Some Issues in the Transformation of Ownership Institutions in Poland, Journal of Institutional and Theoretical Economics. Zeitschrift für die gesamte Staatswissenschaft, 148/1, pp. 52–65. Jackson, Marvin (1991): Constraints on Systematic Transformation and their Policy Implications, Oxford Review of Economic Policy, 7/4, pp. 16–25. Jakóbik, Witold (1992): Liberalisation and De-Regulation of the Public Sector in the Transition from Plan to Market, Moct-Most, No. 1/1992, pp. 23–34. Johnson, Simon; Kroll, Heidi (1991): Managerial Strategies for Spontaneous Privatization, Soviet Studies, 7/4, pp. 281–316. Kaufmann, Daniel; Kaliberda, Aleksander (1995): Integrating the Unofficial Economy into the Dynamics of Post-Socialist Economies: A Framework of Analysis and Evidence, Kiev 1995 (paper first presented at the Odessa conference “Economic Transition in the Newly Independent States”, August 1995). Keilhofer, Franz X. (1995): Die wirtschaftliche Transformation in der Tschechischen Republik und in der Slowakischen Republik. Das Ordo-liberale Konzept der Wettbewerbsordnung und seine Bedeutung für die wirtschaftspolitischen Herausforderungen in Mittel- und Osteuropa, Stuttgart, Jena and New York. Kenway, Peter; Klvaˇ cová, Eva (1996): The Web of Cross-ownership among Czech Financial Intermediaries: An Assessment, Europe–Asia Studies, 48/5, pp. 797–809. Kerouˇs, Miroslav; Insel, Barbara (1993): Privatization of Czech Banks, Prague (Charles University, speech held at the Seventeenth CERGE Lecture on Practical Aspects of Privatization, Prague, June 1993, transcript). Khalil, Elias L. (1995): Organizations versus Institutions, Journal of Institutional and Theoretical Economics. Zeitschrift für die gesamte Staatswissenschaft, 151/3, pp. 445–66. Kirchner, Christian (1992): Privatization Plans of Central and Eastern European States, Journal of Institutional and Theoretical Economics. Zeitschrift für die gesamte Staatswissenschaft, 148/1, pp. 4–19. Kisunko, Gregory (1996): Economic Crime in Russia, Transition. The Newsletter about Reforming Economies, 7/7–8, pp. 13–16. Kiwit, Daniel; Voigt, Stefan (1995): Überlegungen zum institutionellen Wandel unter Berücksichtigung des Verhältnisses interner und externer Institutionen, in: Lenel, Otto H. et. al. (eds) (1995): Ordo. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, Vol. 46, Stuttgart, Jena and New York, pp. 117–48. Knabe, Bernd (1989): Perestrojka – Implikationen der neuen sowjetischen Arbeitspolitik, Cologne (= Berichte des Bundesinstituts für ostwissenschaftliche und internationale Studien, No. 45). Knabe, Bernd (1981): Arbeitstätigkeiten und Arbeitskräftepolitik in der UdSSR zu Beginn der 80er Jahre, Cologne (= Berichte des Bundesinstituts für ostwissenschaftliche und internationale Studien, No. 35). Koop, Michael J. (1994): Privatisierung und Effizienz, in: Hölscher, Jens; Jacobsen, Anke; Tomann, Horst; Weisfeld, Hans (eds) (1994): Bedingungen ökonomischer

Bibliography 303 Entwicklung in Zentralosteuropa.Wirtschaftliche Entwicklung und institutioneller Wandel, Vol. 2, Marburg, pp. 287–321. Koop, Michael J.; Heinrich, Ralph P. et al. (1996): Sozialpolitik im Transformationsprozeβ Mittel- und Osteuropas, Tübingen (= Institut für Weltwirtschaft an der Universität Kiel, Kieler Studien, No. 273). Kornai, János (1993): The Evolution of Financial Discipline under the Postsocialist System, Kyklos, 46/3, pp. 315–36. Kornai, János (1990): The Road to a Free Economy. Shifting from a Socialist System: The Example of Hungary, New York and London. Kornai, János (1990a): The Affinity between Ownership Forms and Coordination Mechanism: The Common Experience of Reform in Socialist Countries, The Journal of Economic Perspectives, 4/3, pp. 131–47. Kornai, János (1980): Economics of Shortage, Vols. 1 and 2, Amsterdam, New York and Oxford. Koubova, Jana; Schmitz, Wolfgang (1996): Möglichkeiten und Gefahren des Treuhandvertrages in der Tschechischen Republik, WiRO, 5/5, pp. 168–71. Kraft, Evan (1993): The Soft-Budget Constraint and the Theory of Endogenous Money: A Note on Szego’s Critique of Kornai, Journal of Post Keynesian Economics, 16/1, pp. 153–61. Kranjc, Janez (1993): Probleme der Übernahme ausländischer Rechtssätze in nationale Rechtssysteme, WiRO, 2/12, pp. 409–13. Kröner, Hermann (1930): John R. Commons. Seine wirtschaftstheoretische Grundauffassung und ihre Bedeutung für die sozialrechtliche Schule in Amerika, Jena. Krüsselberg, Hans-Günter (1983): Property Rights-Theorie und Wohlfahrtsökonomik, in: Schüller, Alfred (ed.) (1983): Property Rights und ökonomische Theorie, Munich, pp. 45–77. Lageman, Bernhard (1995): Die Entwicklung mittelständischer Wirtschaftsstrukturen in den ostmitteleuropäischen Ländern 1990–1994: Eine Bestandsaufnahme, Cologne (= Berichte des Bundesinstituts für ostwissenschaftliche und internationale Studien, No. 29). Laˇstoviˇ cka, Radek; Marcinˇcin, Anton; Mejstˇrík, Michael (1994): Privatization and Opening the Capital Markets in the Czech and Slovak Republics, Prague (= Charles University; Centre for Economic Research and Graduate Education, Economic Institute of the Academy of Science of the Czech Republic, Working Paper Series, No. 54). Leipold, Helmut (1991): Institutioneller Wandel und Systemtransformation – Ökonomische Erklärungsansätze und ordnungspolitische Folgerungen, in: Wagener, Hans-Jürgen (ed.) (1991): Anpassung durch Wandel. Evolution und Transformation von Wirtschaftssystemen, Berlin, pp. 18–38. Leipold, Helmut (1985): Wirtschafts- und Gesellschaftssysteme im Vergleich. Grundzüge einer Theorie der Wirtschaftssysteme, Stuttgart. Leipold, Helmut (1983): Der Einfluβ von Property Rights auf hierarchische und marktliche Transaktionen in sozialistischen Wirtschaftssystemen, in: Schüller, Alfred (ed.) (1983): Property Rights und ökonomische Theorie, Munich, pp. 185–217. Lenga, Gerd (1992): Ruβland: Gesetz über Unternehmen und unternehmerische Tätigkeit, WiRO, 1/3, pp. 78–86. Leonhardt, Peter (1996): Erfolg bei der Massenprivatisierung in Rumänien, WiRO, 5/6, p. 228. Leonhardt, Peter (1996a): Autonome Regiebetriebe in Rumänien, WiRO, 5/10, pp. 373–7.

304 Bibliography Leonhardt, Peter (1995): Ausschluβ des Erwerbs von Bodeneigentum durch Handelsgesellschaften mit ausländischem Kapital, WiRO, 4/10, pp. 390–1. Leonhardt, Peter (1992): Rumänien: Gesetz zur Bekämpfung des unlauteren Wettbewerbs, WiRO, 1/4, pp. 125–8. Leonhardt, Peter (1992a): Rumänien. Rumänisches Gesetz über Rückzahlung von Ausgleichskrediten und über Zahlungsunfähigkeit der Wirtschaftssubjekte, WiRO, 1/6, pp. 203–4. Leonhardt, Peter (1990): Einführung in das neue Recht der privaten Gewerbetätigkeit vom 5. Februar 1990, Jahrbuch für Ostrecht, 31/2, pp. 523–9. Lewandowski, Janusz; Szomburg, Jan (1989): Property Reform as a Basis for Social and Economic Reform, Communist Economies, 1/3, pp. 257–68. Lewis, David K. (1969): Convention, Cambridge/Mass. Lindenberg, Siegwart (1992): An Extended Theory of Institutions and Contractual Discipline, Journal of Institutional and Theoretical Economics. Zeitschrift für die gesamte Staatswissenschaft, 148/1, pp. 125–54. Lipton, David; Sachs, Jeffrey (1990): Privatization in Eastern Europe: the Case of Poland, Brookings Papers on Economic Activity, No. 2/1990, pp. 293–341. Locke, John (1691): Some Considerations of the Consequences of Lowering the Interest and Raising the Value of Money. In a Letter sent to a Member of Parliament in the year 1691, Works, Vol. 5, Darmstadt 1963, pp. 1–116. Locke, John (1690): The False Principle and Foundation of Sir Robert Filmer, and his Followers, are Detected and Overthrown (Two Treatises on Government, the First Treatise), Cambridge and others 1988 (edited by Peter Laslett). Locke, John (1690): An Essay Concerning the True Original, Extent and End of Civil Government (Two Treatises on Government, the Second Treatise), in: Barker, Ernest (ed.) (1978): Social Contract, London, Oxford and New York, pp. 1–143. Lohmann, Karl-Ernst (1986): Ökonomische Anreize im Staatssozialismus. Warteschlangen – geheime Reserven – Prämien, Berlin. Lowitzsch, Jens; Hermann, Klaus (1995): Eigentumserwerb in Polen. Teil I: Systematische Darstellung der Beteiligungsformen, Recht in Ost und West, 39/1, pp. 1–13. Ludányi, Arnold (1995): A Brief Overview of Hungarian Privatization, Warsaw (= Center for Social & Economic Research Foundation, Studies & Analyses, No. 60). Ludwig, Michael (1996): Polen privatisiert seine Staatsbetriebe nicht wie versprochen, Frankfurter Allgemeine Zeitung, 28. December 1996, p. 14. Luhmann, Niklas (1993): Gesellschaftsstruktur und Semantik. Studien zur Wissenssoziologie der modernen Gesellschaft, Vol. 3, Frankfurt/M. Macpherson, Crawford B. (1962): The Political Theory of Possessive Individualism. Hobbes to Locke, Oxford. Macpherson, Crawford B. (1977): The Life and Times of Liberal Democracy, Oxford. Margolis, Howard (1982): Selfishness, Altruism, and Rationality. A Theory of Social Choice, Cambridge/Mass. and others. McAuley, Alastair (1991): The Economic Transition in Eastern Europe: Employment, Income Distribution, and the Social Security Net, Oxford Review of Economic Policy, 7/4, pp. 93–105. McKinnon, Ronald I. (1991): Financial Control in the Transition from Classical Socialism to a Market Economy, The Journal of Economic Perspectives, 5/4, pp. 107–22. Mejstˇ rik, Michal; Burger, James (1992): The Czechoslovak Large Privatization, Prague (= Charles University, Centre for Economic Research and Graduate Education, Working Paper Series, No. 10).

Bibliography 305 Meyer, Willi (1983): Entwicklung und Bedeutung des Property Rights-Ansatzes in der Nationalökonomie, in: Schüller, Alfred (ed.) (1983): Property Rights und ökonomische Theorie, Munich, pp. 1–44. Micheler, Eva (1996): Einleitung eines Insolvenzverfahrens in der Russischen Föderation, WiRO, 5/1, pp. 14–19. Mihályi, Péter (1996): Privatisation in Hungary: Now Comes the “Hard Core”, Communist Economics & Economic Transformation, 8/2, pp. 205–16. Mihályi, Péter (1992): Privatization in Hungary, Budapest (= Hungarian Academy of Science, Institute of Economics, Discussion Papers, No. 3). Mill, John Stuart (1849): The Principles of Political Economy, Vols. I and II, London (second edition). Mill, John Stuart (1857): The Principles of Political Economy, Vol. I, London (fourth edition). Mizsei, Kálmán (1995): Enterprise Financial Distress and Bankruptcy: The Main Issues and Hypotheses, in: OECD, Centre for Co-operation with the Economies in Transition (1995): Corporate Insolvency Procedure as a Tool for Privatization and Restructuring, Paris, pp. 91–122 (= Trends and Policies in Privatisation, 2/2). Mizsei, Kálmán (1992): Privatisation in Eastern Europe: A Comparative Study of Poland and Hungary, Soviet Studies, 44/2, pp. 283–96. Mogilewsky, Stanislaw; Rifinius, Willi (1988): Die Wirtschaftsreform in der UdSSR: rechtliche Grundlagen, WSI Mitteilungen, 4/1988, pp. 218–26. Monitorul Oficial al României, Partea I, Legi, Decrete, Hotˇarâri s¶i Alte Acte, Parlamentul României – Camera Deputat¶ilor. (1995), Anul VII, No. 130, pp. 1–15, Parlamentul României: “Lege privind procedura reorganizˇarii si¶ lichidˇarii judiciare”. (1995a), Anul VII, No. 122, pp. 1–4, Parlamentul României: “Lege pentru accelerarea procesului de privatizare”. (1994), Anul VI, No. 22, p. 2, Guvernul României: “Hotˇ arâre privind înfiint a¶ rea Agent¶iei de Restructurare”. (1994a), Anul VI, No. 209, pp. 1–5, Parlamentul României: “Lege privind asociat ¶iile salariat ¶ ilor si¶ membrilor conducerii societˇat i¶ lor comerciale care se privatizeazˇa”. (1994b), Anul VI, No. 81, pp. 1–8, Parlamentul României: “Hotˇarâre privind aprobarea Raportului de activitate al Fondului Proprietˇat¶ii de Stat în anul 1993”. (1992), Anul IV, No. 208, pp. 2–11, Guvernul României: “Ordonant¶a ˇ pentru aprobarea Statutului-cadru al Fondului Proprietˇat¶ii Private”. (1991), Anul III, No. 169, pp. 1–7, Parlamentul României: “Legea privatizˇarii societˇat¶ilor comerciale”. Monthly Statistics Czech Republic, see Czech Statistical Office. Montias, John Michael (1991): The Romanian Economy: A Survey of Current Problems, in: Commission of the European Communities (1991): European Economy. The Path of Reform in Central and Eastern Europe, Special Edition No. 2, Brussels and Luxembourg, pp. 177–98. Müller, Holger (1995): Spontane Ordnungen in der Kreditwirtschaft Ruβlands. Eine institutionentheoretische Analyse des Kreditsicherungsproblems, Stuttgart and others. Murrell, Peter (1996): How Far Has the Transition Progressed?, The Journal of Economic Perspectives, 10/2, pp. 25–44. Murrell, Peter (1992): An Antidote to Shock Therapy: an Evolutionary Approach to the East European Economic Transition, Washington, DC (= The Woodrow Wilson Center, East European Studies, Occasional Paper, No. 37).

306 Bibliography Murrell, Peter (1991): Can Neoclassical Economics Underpin the Reform of Centrally Planned Economies?, The Journal of Economic Perspectives, 5/4, pp. 59–76. Naishul, Vitali A. (1994): Institutional Barriers to Market Transactions in and between CIS Countries, Kiel (= Institut für Weltwirtschaft an der Universität Kiel, Kiel Working Papers, No. 624). Narodowy Bank Polski, Warsaw. (1996): Information Bulletin, No. 12/1995. (1995): Information Bulletin, No. 12/1994. (1994): Information Bulletin, No. 12/1993. (1992): Information Bulletin, No. 12/1991. The National Agency for Privatization (1993): Privatization in the Sequence of the Romanian Reform, Bucharest (transcript). National Bank of Hungary, Budapest. (1997): Monthly Report, No. 2/1997. (1996): Monthly Report, No. 3/1996. (1995): Annual Report 1994. (1994): Annual Report 1993. National Bank of Romania, Bucharest. (1996): Annual Report 1995. (1993): Quarterly Bulletin, No. 4/1992. Nelson, Richard R; Winter, Sidney G. (1982): An Evolutionary Theory of Economic Change, Cambridge/Mass. and London. Nicolaescu, Teodor (1993): Privatization in Romania – the Case for Financial Institutions, in: Fair, D.E.; Raymond, R. (eds) (1993): The New Europe. Evolving Economic and Financial Systems in East and West, Dordrecht, pp. 101–9. Niskanen, William A. (1992): Guidelines for Delineating the Private and the Government Sector, in: Siebert, Horst (ed.) (1992): Privatization, Tübingen, pp. 217–25. North, Douglass C. (1990): Institutions, Institutional Change and Economic Performance, Cambridge, New York and others. North, Douglass C. (1981): Structure and Change in Economic History, New York and London. Nozick, Robert (1974): Anarchy, State, and Utopia, Oxford. Nuti, Domenico Mario (1993): Die Rolle des Bankensektors im Privatisierungsprozeβ, in: Herr, Hansjörg; Westphal, Andreas (eds) (1993): Transformation in Mittel- und Osteuropa. Makroökonomische Konzepte und Fallstudien, Frankfurt and New York, pp. 172–200. Nuti, Domenico Mario (1992): The Role of the Banking Sector in the Process of Privatization, Brussels (= Commission of the European Communities, Economic Papers, No. 98). Nuti, Domenico Mario (1991): Privatisation of Socialist Economies: General Issues and the Polish Case, in: Blommestein, Hans; Marrese, Michael (eds) (1991): Transformation of Planned Economies: Property Rights Reform and Macroeconomic Stability, Paris, pp. 51–68. OECD (Organisation for Economic Co-Operation and Development), Paris. (1996): Small Business in Transition Economies. The Development of Entrepreneurship in the Czech Republic, Hungary, Poland and the Slovak Republic. (1996a): Labour Restructuring in Russian Enterprises: A Case Study. (1995): Review of the Labour Market in the Czech Republic. (1993): Trends and Policies in Privatisation. Institutional Aspects of the Privatisation Process, 1/2.

Bibliography 307 (1993a): Romania. An Economic Assessment. (1992): Reforming the Economies of Central and Eastern Europe. Olson, Mancur (1993): Eigentumsrechte sind wichtiger als die Privatisierung. Sprengsätze gegen Klüngel und Lobbies in den postkommunistischen Ländern, Neue Zürcher Zeitung, 1./2. August 1993, p. 15. Olson, Mancur (1992): The Hidden Path to a Successful Economy, in: Clague, Christopher; Rausser, Gordon C. (eds) (1992): The Emergence of Market Economies in Eastern Europe, Cambridge/Mass. and Oxford, pp. 55–75. Olson, Mancur (1965): The Logic of Collective Action, Cambridge/Mass. Parsons, Kenneth H. (1963): The Basis of Commons’ Progessive Approach to Public Policy, in: Somers, Gerald G. (ed.) (1963): Labor, Management, and Social Policy. Essays in the John R. Commons Tradition, Madison, pp. 3–22. Pejovich, Svetozar (1972): Towards an Economic Theory of the Creation and Specification of Property Rights, Review of Social Economy, 30/3, pp. 309–25. Pelikan, Paul (1992): Lessons of Evolutionary Economics for Transformation Policies (paper presented at the 2nd EACES conference “Problems of Transforming Economies”, September 1992, Groningen). Peterhoff, Reinhard (1995): Verbände als Vertreter wirtschaftlicher und sozialer Gruppeninteressen in Ruβland, in: Peterhoff, Reinhard (ed.) (1995): Privatwirtschaftliche Initiativen im russischen Transformationsprozeβ, Marburg, pp. 93–120 (= Marburger Gesellschaft für Ordnungsfragen der Wirtschaft e.V., Arbeitsberichte, No. 19). Petsche, Alexander (1996): Privatisierung in Ungarn: Entwicklung, Stand und Perspektiven, Recht in Ost und West, 40/3, pp. 69–80. Pfaff, Dieter (1996): Reform der Schiedsgerichtsbarkeit in den ehemals sozialistischen Ländern Europas, WiRO, 5/9, pp. 321–4. Pfaff, Dieter (1993): Neues Wirtschaftsrecht und Privatisierung in Osteuropa – Übertragbarkeit der Erfahrungen in den neuen Bundesländern?, WiRO, 2/3, pp. 73–8. Pinto, Brian (1995): A Primer on Enterprise Adjustment and Governance in Transition Economies. What Poland Has Taught Us, in: Quaisser, Wolfgang; Woodward, Richard; Bl⁄aszczyk, Barbara (eds) (1995): Privatization in Poland and East Germany. A Comparison, Vol. 1, Munich, pp. 199–223 (= Arbeiten aus dem Osteuropa-Institut München, Working Papers, No. 180–1). Pinto, Brian; Belka, Marek; Krajewski, Stefan (1993): Transforming State Enterprises in Poland: Evidence on Adjustment by Manufacturing Firms, Brookings Papers on Economic Activity, No. 1/1993, pp. 213–70. Pissulla, Petra (1985): Rumänien 1984/85, in: Bolz, Klaus (ed.) (1985): Die wirtschaftliche Entwicklung in den sozialistischen Ländern Osteuropas zur Jahreswende 1984/85, Hamburg, pp. 161–213. PlanEcon (1995): Romanian Economic Monitor: Confidence Crises Undermines Value of the Leu, Washington, DC (= PlanEcon Report, No. 36–7). Polanyi, Karl (1944): The Great Transformation, New York and Toronto. Polkowski, Andreas (1990): Republik Polen auf dem Weg zur Marktwirtschaft – das Dilemma der Vergangenheitsbewältigung und der ökonomischen Neuordnung, in: Bolz, Klaus (ed.) (1990): Die Wirtschaft der osteuropäischen Länder an der Wende zu den 90er Jahren, Hamburg, pp. 49–140. Popa, Christian (1992): Privatization in Central and Eastern Europe (Romania), Prague (Charles University, speech held at the Twelfth CERGE Lecture on “Practical Aspects of Privatization”, December 1992, transcript). Quaisser, Wolfgang (1988): Die Wirtschaftsentwicklung Polens 1987 unter besonderer Berücksichtigung der Preisreform, inflationärer Prozesse und der Situation auf dem

308 Bibliography Konsumgütermarkt, Munich (= Osteuropa-Institut München, Working Papers, No. 125). Quaisser, Wolfgang (1989): Die Wirtschaftsentwicklung Polens 1988 – Von der “zweiten Reformetappe” zum “Konsolidierungsplan” der Wirtschaft, Munich (= OsteuropaInstitut München, Working Papers, No. 131). Rapaczynski, Andrzej (1996): The Roles of the State and the Market in Establishing Property Rights, The Journal of Economic Perspectives, 10/2, pp. 87–103. Rawls, John (1972): A Theory of Justice, Cambridge/Mass. Reuter, Norbert (1994): Der Institutionalismus. Geschichte und Theorie der evolutionären Ökonomie, Marburg. Reuter, Norbert (1994a): Institutionalismus, Neo-Institutionalismus, Neuere Institutionelle Ökonomie und andere “Institutionalismen”. Eine Differenzierung konträrer Konzepte, Zeitschrift für Wirtschafts- und Sozialwissenschaften, 114/1, pp. 5–23. Richter, Rudolf (1993): The Economic Theory of Private Property. Theme and Variations, Prague (= Charles University, Center for Economic Research and Graduate Education, Working Paper Series, No. 33). Richter, Rudolf; Furubotn, Eirik (1996): Neue Institutionenökonomik. Eine Einführung und kritische Würdigung, Tübingen (English version: Furubotn, Eirik; Richter, Rudolf (1997): Institutions and Economic Theory: An Introduction to and Assessment of the New Institutional Economics, Ann Arbor). Riese, Hajo (1991): Geld und die Systemfrage, in: Backhaus, Jürgen (ed.) (1991): Systemwandel und Reform in östlichen Wirtschaften, Marburg, pp. 125–38. Riese, Hajo (1990): Geld im Sozialismus. Zur theoretischen Fundierung von Konzeptionen des Sozialismus, Regensburg (= Riese, Hajo; Spahn, Heinz-Peter (eds): Studien zur monetären Ökonomie, Vol. 6). Robbins, Lionel Charles (1978): The Theory of Economic Policy in English Classical Political Economy, London and others. Rocznik Statystyczny, see Gl⁄ówny Urza¶d Statystyczny. Rodrik, Dani (1996): Understanding Economic Policy Reform, Journal of Economic Literature, 34/1, pp. 9–41. Roggemann, Herwig (1996): Zum Verhältnis von Eigentum und Privatisierung in den postsozialistischen Ländern, Recht in Ost und West, 40/3, pp. 89–94. Roggemann, Herwig (1993): Wandel der Eigentumsordnung in Osteuropa, Recht in Ost und West, 37/11, pp. 321–31. Roland Berger & Partner (1995): Romania (= Economic Report, No. 2/3). Romanian Business Journal, No. 1/1996, p. 5 (“1996 Fiscal and Budget Policies”). România liberˇa, 7 May 1994, p. 4 (“Certificate de Proprietate”). Rondorf, Dieter (1991): Zur Entwicklung der Eigentumsordnung in Polen, Osteuropa Wirtschaft, 36/4, pp. 316–34. Rosati, Dariusz K. (1994): Output Decline During Transition from Plan to Market – a Reconsideration, Economics of Transition, 2/4, pp. 419–41. Rosati, Dariusz K. (1992): The CMEA Demise, Trade Restructuring, and Trade Destruction in Central and Eastern Europe, Oxford Review of Economic Policy, 8/1, pp. 58–81. Rossiyskaya gazeta, 9. July 1992, pp. 4–6 (“Gosudarstvennaya programma privatizatsii gosudarstvennych i munitsipal’nych predpriyatiy v Rossiyskoy Federatsii na 1992 god”). Rossiyskie vesti. No. 3/1994, pp. 3–7 (“Gosudarstvennaya programma privatizatsii gosudarstvennych i munitsipal’nych predpriyatiy v Rossiyskoy Federatsii”).

Bibliography 309 No. 23/1993, pp. 3–6 (“Proekt: Gosudarstvennaya programma privatizatsii gosudarstvennych i munitsipal’nych predpriyatiy v Rossiyskoy Federatsii na 1993 god”). Rousseau, Jean-Jacques (1755): Discourse on the Origin and Foundations of Inequality among Men, Oxford and New York 1994 (edited by Patrick Coleman, translated by Franklin Philip). Rousseau, Jean-Jacques (1762): The Social Contract or, Principles of Political Right, in: Barker, Sir Ernest (ed.) (1978): Social Contract, London, Oxford and New York, pp. 167–307. Russian Economic Trends, see Working Centre for Economic Reform. Rybczynski, Tad M. (1991): The Sequencing of Reform, Oxford Review of Economic Policy, 7/4, pp. 26–34. Rymaszewski, Piotr (1995): Polish Insolvency Procedures as a Tool for Privatization, in: OECD, Centre for Co-operation with the Economies in Transition (1995): Corporate Insolvency Procedure as a Tool for Privatization and Restructuring, Paris, pp. 227–49 (= Trends and Policies in Privatisation, 2/2). Saage, Richard (1989): Vertragsdenken und Utopie, Frankfurt/M. Sadowski, Zdzislaw L. (1991): Privatization in Eastern Europe: Goals, Problems and Implications, Oxford Review of Economic Policy, 7/4, pp. 46–56. Schelkle, Waltraud (1992): Konstitution und Erosion einer Geldwirtschaft: Entwicklungsprobleme Indiens seit der Unabhängigkeit, Berlin (= Schriften des Deutschen Instituts für Entwicklungspolitik, Vol. 102). Schmieding, Holger; Koop, Michael J. (1991): Privatisierung in Mittel- und Osteuropa: Konzepte für den Hindernislauf zur Marktwirtschaft, Kiel (= Institut für Weltwirtschaft an der Universität Kiel, Kiel Discussion Papers, No. 165). Schroeder, Gertrude (1988): Property Rights Issues in Economic Reforms in Socialist Countries, Studies in Comparative Communism, 21/2, pp. 175–88. Schröder, Hans-Christoph (1972): Das Eigentumsproblem in den Auseinandersetzungen um die Verfassung von Massachusetts, 1775–1787, in: Vierhaus, Rudolf (ed.) (1972): Eigentum und Verfassung. Zur Eigentumsdiskussion im ausgehenden 18. Jahrhundert, Göttingen, pp. 11–67. Schumpeter, Joseph (1993): Theorie der wirtschaftlichen Entwicklung. Eine Untersuchung über Unternehmergewinn, Kapital, Kredit, Zins und den Konjunkturzyklus, Berlin. Schwartz, Michael (1993): Ruβland: Konkursgesetz. Textdokumentation mit Einführung, WiRO, 2/7, pp. 226–35. Shlapentokh, Vladimir (1996): Early Feudalism – the Best Parallel for Contemporary Russia, Europe–Asia Studies, 48/3, pp. 393–411. Siebert, Horst; Koop, Michael J. (1993): Institutional Competition versus Centralization: Quo Vadis Europe?, Kiel (= Institut für Weltwirtschaft an der Universität Kiel, Kiel Reprints, No. 41, see also Oxford Review of Economic Policy, 9/1, pp. 15–30). Sieburger, Marlis (1993): Die Finanzautonomie der Unternehmen im Kontext der sowjetischen Wirtschaftsreformen. Auswirkungen des “Gesetzes über das staatliche Unternehmen”, Baden-Baden (= Schriftenreihe des Bundesinstituts für ostwissenschaftliche und internationale Studien, Vol. 24). Slay, Ben (1992): Poland: An Overview, RFE/RL Research Report, 1/17, pp. 15–21. Slay, Ben; Tedstrom, John (1992): Privatization in the Postcommunist Economies: An Overview, RFE/RL Research Report, 1/17, pp. 1–8. Sovet Ekonomicheskoy Vzaimopomoshchi, Sekretariat, Moscow. (1990): Statisticheskiy ezhegodnik stran-chlenov soveta ekonomicheskoy vzaimopomoshchi 1990. (1989): Statisticheskiy ezhegodnik stran-chlenov soveta ekonomicheskoy vzaimopomoshchi 1989.

310 Bibliography Stark, David (1996): Recombinant Property in East European Capitalism, American Journal of Sociology, 101/4, pp. 993–1027. Stark, David (1995): The Hidden Character of East European Capitalism: Recombinant Ownership, Transition. The Newsletter about Reforming Economies, 6/11–12, pp. 13–15. Statistical Yearbook Hungary, see Hungarian Central Statistical Office. Statistical Yearbook Czech Republic, see Czech Statistical Office. Statistisches Bundesamt, Wiesbaden. (1993): Länderbericht. Russische Föderation 1993. (1992): Länderbericht. Polen 1992. Sundhaussen, Holm (1994): Institutionen und institutioneller Wandel in den Balkanländern aus historischer Perspektive, in: Papalekas, Johannes Chr. (ed.) (1994): Institutionen und institutioneller Wandel in Südosteuropa, Munich, pp. 35–54. Svenjar, Jan (1991): Microeconomic Issues in the Transition to a Market Economy, The Journal of Economic Perspectives, 5/4, pp. 123–38. Szanyi, Miklós (1995): Bankruptcy Procedures and Enterprise Restructuring in Hungary, in: OECD, Centre for Co-operation with the Economies in Transition (1995): Corporate Insolvency Procedure as a Tool for Privatization and Restructuring, Paris, pp. 193–225 (= Trends and Policies in Privatisation, 2/2). Sziraczki, Gyorgy; Szalai, Julia; Lado, Maria (1993): Hungary: Labor Market Trends and Policies, in: OECD, Centre for Co-operation with the Economies in Transition (1993): Structural Change in Central and Eastern Europe: Labour Market and Social Policy Implications, Paris, pp. 95–132 (edited by Georg Fischer and Guy Standing). Szymkiewicz, Krystyna (1992): The Private Sector in Poland: a Buffer Against the Recession?, Moct-Most, No. 3/1992, pp. 25–42. Tardos, M. (1989): Economic Organizations and Ownership, Acta Oeconomica, 40/1–2, pp. 17–37. Taylor, Michael (1982): Community, Anarchy and Liberty, Cambridge/Mass. and others. Tigges, Michael (1996): Polnisches Grundstücksrecht, WiRO, 5/1, pp. 1–7. Tigges, Michael; Lechmann-Becker, Agnieszka (1994): Polen: Verordnung “Das Konkursrecht”, WiRO, 3/4, pp. 126–35. Tomann, Horst (1995): Options to resolve the “Bad-Asset-Problem”, in: Frowen, Stephen F.; Hoelscher, Jens (eds) (1997): The German Currency Union of 1990 – A Critical Assessment, London, pp. 101–15. Tomann, Horst (1992): Die Transformation sozialistischer Volkswirtschaften: Besondere Erfahrungen mit dem deutschen Wirtschaftsraum, in: Gahlen, Bernhard; Hesse, Helmut; Ramser, Hans-Jürgen (eds.) (1992): Von der Plan – zur Marktwirtschaft. Eine Zwischenbilanz, Tübingen, pp. 309–26 (= Schriftenreihe des wirtschaftswissenschaftlichen Seminars Ottobeuren, Vol. 21). Tomann, Horst; Scholz, Oliver (1996): Strukturwandel und Soziale Sicherung, in: Hölscher, Jens; Jacobsen, Anke; Tomann, Horst; Weisfeld, Hans (eds) (1996): Bedingungen ökonomischer Entwicklung in Zentralosteuropa. Elemente einer Entwicklungsstrategie, Vol. 4, Marburg, pp. 129–77. Török, Gabor; Riel, Stephan (1994): Das ungarische Insolvenzrecht im Überblick, WiRO, 3/11, pp. 409–17. Transition. The Newsletter about Reforming Economies, No. 7–8/1996, pp. 16–17 (“Corruption – an International Comparison”). Tuma, Zdenek (1995): Economic Restructuring and Corporate Insolvency Procedures in the Czech Republic, in: OECD, Centre for Co-operation with the Economies in

Bibliography 311 Transition (1995): Corporate Insolvency Procedure as a Tool for Privatization and Restructuring, Paris, pp. 169–91 (= Trends and Policies in Privatisation, 2/2). United Nations Economic Commission for Europe. (1997): Economic Survey of Europe in 1996–1997, New York and Geneva. (1996): Economic Survey of Europe in 1995–1996, New York and Geneva. (1995): Economic Survey of Europe in 1994–1995, New York and Geneva. (1993): Economic Survey of Europe in 1992–1993, New York. (1992): Economic Survey of Europe in 1991–1992, New York. (1991): Economic Survey of Europe in 1990–1991, New York. (1990): Economic Survey of Europe in 1989–1990, New York. (1987): Economic Survey of Europe in 1986–1987, New York and Geneva. Vanberg, Viktor (1982): Markt und Organisation. Individualistische Sozialtheorie und das Problem korporativen Handelns, Tübingen. Van Brabant, Jozef. M. (1992): Privatizing Eastern Europe. The Role of Markets and Ownership in the Transition, Dordrecht. Veblen, Thorstein (1919): The Place of Science in Modern Civilization, New Brunswick and London 1990. Veblen, Thorstein (1904): The Theory of Business Enterprise, New York 1958. Veblen, Thorstein (1899): The Theory of the Leisure Class, New York 1953. Veblen, Thorstein (1898): Why is Economics Not an Evolutionary Science?, The Quarterly Journal of Economics, XII/4 (July 1898), pp. 373–97. Vickers, John; Yarrow, George (1991): Economic Perspectives on Privatization, The Journal of Economic Perspectives, 5/2, pp. 111–32. Vickers, John; Yarrow, George (1988): Privatization: An Economic Analysis, Cambridge/Mass. and London. Vilenskij, A. (1996): Etapy razvitiya malogo predprinimatel’stva v Rossii, Voprosy Ekonomiki, No. 7/1996, pp. 30–8. von Hayek, Friedrich A. (1973): Law, Legislation and Liberty. Rules and Orders, Vol. 1, London. von Hayek, Friedrich A. (1976): Law, Legislation and Liberty. The Mirage of Social Justice, Vol. 2, London. von Hayek, Friedrich A. (1968): Der Wettbewerb als Entdeckungsverfahren, Kiel (= Institut für Weltwirtschaft an der Universität Kiel, Kieler Vorträge, Neue Folge 56). Vwd Mittel- und Osteuropa, 1 October 1996, p. 4 (“1997 will Polen 120 ehemalige Staatsbetriebe privatisieren”). Wagner, Adolph (in cooperation with Buchenberger, A; Bücher, K.; Dietzel, H.) (1894): Grundlegung der politischen Oekonomie. Zweiter Theil: Volkswirthschaft und Recht, besonders Vermögensrecht, oder Freiheit und Eigenthum in volkswirthschaftlicher Betrachtung, Leipzig. Wagner, Adolph (in Verbindung mit Buchenberger, A; Bücher, K.; Dietzel, H.) (1893): Grundlegung der politischen Oekonomie. Erster Theil: Grundlagen der Volkswirthschaft, Leipzig. Wass von Czege, Andreas (1987): Wirtschaftsentwicklung und -system in Ungarn, Südosteuropa, 36/7–8, pp. 371–430. Wass von Czege, Andreas (1983): Neue Formen kleinbetrieblicher Produktion in Ungarn, Südosteuropa, 32/2, pp. 115–37. Weisfeld, Hans (1996): Stabilisierung und Entwicklung, in: Hölscher, Jens; Jacobsen, Anke; Tomann, Horst; Weisfeld, Hans (eds) (1996): Bedingungen ökonomischer Entwicklung in Zentralosteuropa. Elemente einer Entwicklungsstrategie, Vol. 4, Marburg, pp. 17–61.

312 Bibliography Wieners, Jürgen (1994): Privatisierung und Unternehmenskontrolle beim Übergang zur Marktwirtschaft. Ein Beitrag zur Debatte über die Systemtransformation in Osteuropa, Cologne (= Institut für Wirtschaftspolitik an der Universität zu Köln, Untersuchungen zur Wirtschaftspolitik, No. 92). Wilke, Maria (1996): Das Gesetz über den Erwerb von Immobilien durch Ausländer in Polen. Einführung und Übersetzung des Gesetzes, Recht in Ost und West, 40/6, pp. 209–12. Willgerodt, Hans (1988): Eigentumsordnung (einschl. Bodenordnung), in: Albers, Willi et al. (eds) (1988): Handwörterbuch der Wirtschaftswissenschaft (HDWW), Zweiter Band, Stuttgart and others, pp. 175–89. Williamson, Oliver E. (1992): Private Ownership and the Capital Market, in: Siebert, Horst (ed.) (1992): Privatization, Tübingen, pp. 27–54. Williamson, Oliver E. (1985): The Economic Institutions of Capitalism, New York and London. Winiecki, Jan (1991): Privatisation Debates in Poland Before and After Communist Demise: A Comparative Perspective, Kiel (= Institut für Weltwirtschaft an der Universität Kiel, Kiel Working Papers, No. 472). Winiecki, Jan (1991a): The Polish Transition Programme at Mid-1991: Stabilisation under Threat, Kiel (= Institut für Weltwirtschaft an der Universität Kiel, Kiel Discussion Papers, No. 174). Wöhlke, Wilhelm (ed.) (1991): Länderbericht Polen, Bonn (= Bundeszentrale für politische Bildung, Schriftenreihe, Vol. 126). Wolf, Thomas A. (1991): The Lessons of Limited Market-Oriented Reform, The Journal of Economic Perspectives, 5/4, pp. 45–58. Working Centre for Economic Reform, Government of the Russian Federation, Russian European Centre for Economic Policy, Moscow. (1996): Russian Economic Trends, 5/2. (1996a): Russian Economic Trends, 5/3. The World Bank. (1996): World Development Report 1996. From Plan to Market, Oxford and others. (1992): Russian Economic Reform. Crossing the Threshold of Structural Change. A World Bank Country Study, Washington, DC. (1991): Romania: The Challenge of Transition, Washington, DC (= World Bank Report, No. 9497–RO, Vols 1 and 2). Zakon, No. 9/1993. pp. 15–35 (Ukaz Prezidenta Rossiyskoy Federatsii: “Ob uskorenii privatizatsii gosudarstvennych i munitsipal’nych predpriyatiy”). pp. 36–7 (Ukaz Prezidenta Rossiyskoy Federatsii: “Ob organizatsionnych merach po preobrazovaniyu gosudarstvennych predpriyatiy, dobrovol’nych ob-edineniy gosudarstvennych predpriyatiy v aktsionernye obshchestva”). pp. 37–45 (“Polozhenie o kommertsializatsii gosudarstvennych predpriyatiy s odnovremennym preobrazovaniem v aktsionernye obshchestva otkrytogo tipa”). Zimmerli, Walther Ch. (1993): Privateigentum – etwas eigentümlich Menschliches? Eine ideengeschichtliche und philosophische Analyse, in: Dichmann, Werner; Fels, Gerhard (eds) (1993): Gesellschaftliche und ökonomische Funktionen des Privateigentums, Cologne, pp. 263–92. Zintl, Reinhard (1983): Individualistische Theorien und die Ordnung der Gesellschaft. Untersuchungen zur politischen Theorie von James M. Buchanan und Friedrich A. v. Hayek, Berlin.

Index abstinence theory of interest, 38 abusus, 50 acceptance problem, 186–8 Act of Settlement (1700), 89 administered prices, 77 Afanasjew, W.S., 176 Aganbegjan, A., 137 Alexeev, M., 282 (n19) American constitution (1787), 89 American Indians, ownership of land, 55–7 antitrust legislation, 165 appropriation, 34, 264 (n27) “appropriation rules”, 22–3, 24 Aquinas, St Thomas, 262 (n7) Asselbergs, G., 211–12 assets market, 75 associations, 175–6 Avilova, A.V. et al., 240, 241, 243 bad debt, 160–2, 185, 250 Czech Republic, 198 Hungary, 205–6 and privatization, 233 Bakcsi, I., 120 Balcerowicz, L., 181 bankruptcy, 52, 54–5, 76, 77, 80–1, 164–5, 173, 174, 224 Russia, 213–14, 217 see also insolvency law bankruptcy solution, 161 banks, 160, 161–2, 185, 230, 233 Czech Republic, 197–200 Hungary, 205–6 Poland, 193–4 privatization, 228–9 Romania, 224 Russia, 214, 217 barter, 71, 217 Begg, D., 161, 185 behavioural norms, 43, 64, 271 (n41) Belka, M., 192, 193 Bentham, J., on property, 37–8 Bergmann, W., 167

Berle, A.A., 51 Bien´kowski, W., 129 Bilsen, V., 242 Bim, A.S., 212 Blanchard, O. et al., 147, 154, 155 Böbel, I., 15, 22, 23, 30, 262 (n7), 266 (n45) Bohata, P., 172 Boote, A.B., 138 Borensztein, E., 182, 283 (n4) Bös, D., 261 (n1) bottom-up privatization, 162, 235–6 measurement, 236–7 Boycko, M.210, 283 (n4) Brada, J., 229 Brandt, R., 18, 29, 30, 31, 35 Brennan, G., 62, 186, 187 Brezinski, H., 238 British model of privatization, 181, 189 Brocker, M., 14, 15, 18, 19, 23, 24, 27, 38, 262 (n8), 264 (n25) Brunner, G., 110–11, 112, 114, 168 ⁄ Blaszczyk, B., 190, 191 Buch, C.M., 193, 194, 198, 199 Buch, C.M. et al., 214 Buchanan, J.M., 62, 144, 186, 187, 247–8 on property rights, 57–66 Buchtíková, A., 196 Calvo, G.A., 155, 161, 185 cancellation of bad debt, 161 capital market, 52–3, 54 Chambers of Industry and Commerce, 175–6 Cichy, E.U., 121 CMEA (Council for Mutual Economic Assistance), 114, 119 collapse, 150, 152, 153 Coase, R.H., 48 Coase’s theorem, 267 (n1) codified law, 164–74 coercive force, 64 commodities, and wealth formation, 76 313

314 Index Commons, J.R., 83, 248 analysis of ownership, 84–94 communism, collapse, 99 competition, 53, 75 and small and medium-sized enterprises (SMEs), 241 conflict, 88, 98–9, 274 (n10) constitutional changes, in socialist countries, 112–13 constitutional law, 165–8 contextual control, 52–3 contract theory, 71, 103, 268 (n19) of Hume, 30–7 contractarianism, 16–17 contracts, 17–18, 26–37, 32, 57 and property theory, 42 control problems, 51–2, 184 conversion laws, 168–70 cooperatives Czechoslovakia, 123 Soviet Union, 122, 130 Cooter, R., 71 corporate laws, 158–9 corporatization, 169–71 Russia, 208 corruption, 177, 282 (n16) credit-crunch hypothesis, 280 (n7) crime, 282 (n19) “critical mass”, of private ownership, 10–11, 80 cross-control, 198, 200 cultural development, 94–5 Czech Republic/Czechoslovakia, 153 bad debts, 198 bad loans, 285 (n21) banks, 196–200 consolidated budget, 152 conversion laws, 170 cooperatives, 123 employment, 277 (n2) gross fixed capital formation, 151 industrial production, 150 inflation, 150 insolvency law, 172 land registers, 168 main economic indicators, 253–4 ownership of land, 167 private activities, 122–3 privatization, 194–200, 227, 228, 230

reform program, 154 small and medium-sized enterprises (SMEs), 239 state enterprises, 130–2 voucher privatization, 194–9 Dabrowski, J.M., 191 ’ Daubner, R., 168 decentralization, 117–18, 119, 159–60, 162, 187–8 of disposition, 157–60, 231 of liability, 80, 160–1 of property rights, 141–2 Demakas, D.G., 132 Demsetz, H. on property, 247 on property rights, 55–7 Desai, R.M., 199 devaluation, 158 dismissals, 137–8 Djankov, S., 268 (n11) Dolgopiatova, T., 212 Dugger, W.M., 85, 90 earned income, 110, 111, 113 EBRD (European Bank for Reconstruction and Development), 156, 171, 194, 197, 198, 203, 204, 217, 224, 227, 236, 237, 239, 242 ECE (United Nations Economic Commission for Europe), 53, 146, 147, 150, 151, 154, 161, 169, 185, 193, 198, 238 economic accountability (khozraschet), 78, 124–5 economic development in Central and Eastern Europe, 149–52 and transformation programs, comparative studies, 154 economic reform, 146 and property, 116–19 economic theory, Commons on, 84–5 efficiency, 50–1, 52, 179 of market economies, 48, 69–70 private enterprises, 54 Elsner, W., 85, 88 employment, 75, 80, 81 in the public sector, 45 state, 139

Index 315 employment guarantee, 136–7, 138, 142 enterprise autonomy, 78, 141, 142 entrepreneurs, 134 envy, 97 Estrin, S., 192 Eucken, W., 251, 273 (n5) European Union, 72 exclusion, 55 forms of, 42–3, 103 and ownership, 35, 36, 41 Feldmann, H., 40–1 finance-based control, 52 financial sector, reorganization, 185 Financial-Industrial Groups, Russia, 216–17 first occupation principle, 14 Fischer, B.J., 122, 154 Flint, A., 291 (n3) foreign trade volume, Central and Eastern Europe, 153 freedom, and right, 47 freedom tax, 63 Frenkel, J.A., 155, 161, 185 Fritsch, M., 238 Furubotn, E.G., 50, 55 Gaddy, C., 282 (n19) Gärtner, W., 165, 166 Gelb, A., 192 Glöckner, M., 167 going concerns, 84, 85 definition of term, 274 (n3) Gray, C.W., 173, 193 Grosfeld, I., 127, 266 (n47) Grotius, H., 17–18 Gurkov, I., 211 Haffner, F., 125 hard budget constraints, 78–9, 192, 268 (n15) Hardin, R., 271 (n41) Hare, P.G., 127, 139, 266 (n47) Hashi, I., 172 Heinsohn, G., 74, 79, 233 Hemming, R., 53 Hermann, K., 189, 191, 193 Herr, H., 75, 78 Herrnfeld, H.-H., 172 Hesse, G., 49

Hobbes, T., 17, 18, 246 on ownership, 19–20 Hoekman, B., 268 (n11) Höhmann, H.-H., 122 Holle, A., 173, 193 Hölscher, J., 52, 198 Hume, D., 246–7 on contract theory, 30–7 on property, 163 on state, 265 (n32) Hungary, 118 bad debts, 205–6 banks, 205–6 cooperatives, 120 corporate reforms, 126–7 decentralization, 117 enterprises, 126 foreign investment, 203 industrial production, 150 insolvency law, 172–3 joint stock companies, 205 leasing, 202 main economic indicators, 254–5 ownership, 165 ownership of land, 168 private activities, 120–1 privatization, 200–7, 227, 228, 230 recombinant property, 204, 207 social benefits, 152 spontaneous privatization, 127, 201 state property, 166 State Property Agency, 169, 201, 202, 204 unemployment, 152 illegal activities, 176–7 IMF, 218 incentive problems, 51–2 industrial production, 150, 151 inefficiency, 68–9 inequality, 91 inflation rates, 150 insolvency law, 171–4, 290 (n66) institutional change, 49, 55, 99, 155–6 North on, 66–70 institutional deficiency, 154–6 institutional development, 65–6 institutions, 70, 101 in Central and Eastern Europe, 72 Commons on, 87

316 Index institutions (continued) North’s use of term, 66 property as an institution, 102–5 use of term, 261 (n2) Veblen on, 96–7 interest, 74–5 internalization costs, 56 investment funds, 183–4 Johnson, S., 134 joint stock companies Hungary, 205 Romania, 219 Russia, 209 jurisdiction, and property, 90–1 Keilhofer, F.X., 170, 176, 194, 195, 198 Kenway, P., 197, 198, 230 Khan, M.S., 132 khozraschet (economic accountability), 78, 124–5 Kisunko, G., 282 (n16) Kiwit, D., 261 (n2) Klvacˇ ová, E., 197, 198, 230 Knabe, B., 138, 139 Konings, J., 242 Koop, M.J., 51, 52, 54, 183 Kornai, J., 77, 268 (n15) Koubova, J., 167 Kraft, E., 77 Krajewski, S., 192, 193 Kranjc, J., 175 Kroll, H., 134 Kröner, H., 83, 85, 89, 90 Krüsselberg, H.-G., 61, 267 (n1) Kumar, M.S., 283 (n4) labor, 246 labor shortage, 136–7, 142 labor theory, 15–16, 20–30, 38–9 Lado, M., 138 land, ownership of, 167–8 land law see constitutional law land registers, 168 large-number dilemma, 60 Lasˇ tovicˇ ka, R., 196 law, 72–3, 250 antitrust legislation, 165 in Central and Eastern Europe, 100, 163, 164–5, 291 (n5)

codified law, 164–74 constitutional law, 165–8 corporate law, 158–9 insolvency law, 171–4, 290 (n66) private law-making, 174–7 within transformation, 168–71 Leacock, E., 56 leasing, 119, 191, 209, 228 Hungary, 202 Lechmann-Becker, A., 173 Leipold, H., 51, 71 leisure class, Veblen’s theory of, 94–8 Leitzel, J., 282 (n19) Lenga, G., 170 Leonhardt, P., 167, 223 Lewandowski, J., 181 liability, 164–5, 178–81 principle of, 35, 55, 251 Lipton, D., 181, 184, 283 (n4) liquidation, 191 Locke, J., 246 labor theory, 20–30 on ownership, 27–8 Lohmann, K.-E., 76 Lowitzsch, J., 189, 191, 193 Ludányi, A., 169 Ludwig, M., 194 Luhmann, N., 15, 16, 264 (n25) Macpherson, C.B., 23, 37 management contracts, 184 management–employee buyouts, 222 Mansoor, A.M., 53 Marcincˇ in, A., 196 marginal utility, 37 market economy, 10–11, 44 and efficiency, 48 and private property, 49, 50 Marx, K., 16 Means, G.C., 41 Meissner, B., 110–11, 112, 114 Mejstrˇ ík, M., 196 Melanchthon, P., 15 Mill, J.S., 246 on property, 38–40 Miszei, K., 173 Mladek, J., 172 Mogilewsky, S., 278 (n2) monetary theory, 74–9 money, 74–5

Index 317 Hume on, 31 and ownership, 103–4 in work of Locke, 23–4, 25 money supply, 75, 76 Müller, H., 176 Murrell, P., 155, 235, 261 (n1) national income, growth in Central and Eastern Europe, 117 natural distribution, 57–60, 65, 70, 71, 144 natural law, 20–3, 26, 27, 28–9, 36, 262 (n8), 275 (n14) natural law theories, 16–17 neoclassical theory, 48–9, 73 “New Institutional Economics”, 49, 93 Newtonian principle, 83, 84 Nicolaescu, T., 222 nomenclatura privatization, 128, 133, 143 North, D.C., 61, 64, 247 on institutional change, 66–70 Nuti, D.M., 185, 193 occupancy rights, 28–9 occupation theory, 15, 16, 17–20 OECD (Organization for Economic Cooperation and Development), 222, 236, 237, 238, 239, 240, 243 old institutionalism, 248 and property, 83 Olson, M., 55, 271 (n41) organizations, 70 North’s use of term, 66–7 ownership, 10, 14, 164–5 Commons on, 84–94 concept, 42 Demsetz on, 5–7 differentiation, 104 and economic theories, 46–7 and exclusion, 35, 36, 41 Hobbes on, 19–20 Hume on, 31–7 of land, 167–8 Locke on, 21–2, 27–8 and money, 103–4 in property rights theory, 50 restrictions, 166–7 Rousseau on, 28–30 social functions, 166

social obligation, 264 (n25) and state, 25–6, 33, 39–40 use of term, 262 (n9) Veblen on, 94–8 ownership guarantee, 57, 61–3, 65, 70–1, 81, 93–4, 104, 163, 165, 266 (n47) in Central and Eastern Europe, 72 as a private good, 143 in socialist countries, 111–12 and transition, 44, 45 Parsons, K.H., 92 path dependence, 69 Pejovich, S., 50, 56 perestroika, 78, 118, 119, 122, 125, 131 personal liberty rights, 163 Peterhoff, R., 175, 176 Petsche, A., 169, 202, 203 Pinto, B., 192, 193 planned economies, 76–8 change to monetary economy, 78, 79, 80 private activities in, 119–24 property rights in, 108–9 transformation of property in former, 80–2 pledging, 164 Poland, 153 bad debts, 230–1 Balcerowicz plan, 154 banks, 193–4 black economy, 121 conversion law, 169–70 enterprise reform, 127–9 gross fixed capital formation, 151 inflation, 150 insolvency law, 173 liquidation, 191 main economic indicators, 256–7 monetary policy, 155 ownership, 180–1 ownership of land, 167 private activities, 121–2 privatization, 189–94, 227, 230–1 property, 165 spontaneous privatization, 128 unemployment, 152 voucher privatization, 189–90 Polkowski, A., 121

318 Index Popa, C., 219, 220 Portes, R., 161, 185 price formation, 277 (n17) prima occupatio, 14, 15 private activities, 142–3 legalization of, 117–18 in planned economies, 119–24 private enterprises, efficiency, 54 private law-making, 174–7 private pension funds, 184–5 private property in Central and Eastern Europe, 114, 118 and the church, 262 (n7) early history, 14 Grotius on, 17–18 Hume on, 35, 36 and market economy, 49, 50 in the Middle Ages, 14–16 and utilitarianism, 30–7 private sector, development in Central and Eastern Europe, 114–16 privatization bottom-up, 162, 235–7 British model, 181 concepts, 180 country comparison, 226–34, 250–1 meanings, 261 (n1) methods, 54, 181–2, 226–7 nomenclatura, 128, 133, 143 sale privatization, 182, 184–5, 226 spontaneous, 119, 127, 128, 133–4, 162, 169, 181, 227 (n20) strategy, 147 see also voucher privatization property, 3, 4, 252 Bentham on, 37–8 conception of, 2 and economic reform, 116–19 economists on, 247–8 Hobbes on, 20 Hume on, 157, 163 as an institution, 102–5 meaning of concept, 90 Mill on, 38–40 and old institutionalism, 83 philosophers on, 246–7 as a public good, 94 recombinant, 147, 204, 207, 230 and state, 102, 158

transformation in formerly planned economies, 80–2 Veblen on, 94–8 property order, 159, 229 in Central and Eastern Europe, 108–9 property reform, 45 in Central and Eastern Europe, 98–101 property rights, 78, 79, 266 (n45) Buchanan on, 57–66 Commons on, 87–94 decentralization of, 141–2 Demsetz’ analysis of changes, 55–7 in different societies, 89 in economics, 10–13 North’s use of term, 67 in planned economies, 108–9, 249–50 and privatization, 49–55 in transformation countries, 40–7 in transition, 146–8 and uncertainty, 71 Veblen on, 96–7 property rights theory, 49, 54 ownership in, 50 property theory, 41, 248–9 and contracts, 42 public enterprises, 51 public ownership guarantee, 43, 61–2, 70, 73, 270 (n29) Quaisser, W., 121, 128 recombinant property, 147, 230 Hungary, 204, 207 reform programs, 154 restructuring, use of term, 268 (n11) Reuter, N., 83, 85, 91, 92, 95, 96, 97, 274 (n10) revolving lending, 173–4 Richter, R., 55, 165 Riese, H., 74, 75, 76, 77, 78 Rifinius, W., 278 (n2) right, and freedom, 47 Roggemann, H., 164, 166 Romania, 2, 132–3 banks, 224 conversion laws, 170 financial blockade, 224 foreign debt, 153 industrial production, 150 inflation, 150

Index 319 insolvency law, 172 “isolation”, 225, 229 joint stock corporations, 219 land registers, 168 main economic indicators, 257–8 management-employee buyouts, 222 ownership, 165 ownership of land, 167 private activities, 123–4 privatization, 218–26, 227 reform program, 154 restructuring, 224–5 share distribution, 223–4 small and medium-sized enterprises (SMEs), 240–1 state access to resources, 166 voucher privatization, 220–3, 229 Rosati, D.K., 150, 154 Rousseau, J.-J., 21 on ownership, 28–30 rules, 67–9, 70, 99–100 formalization, 85–7 Russia, 151, 152 banking associations, 176 bankruptcy, 213–14, 217 banks, 214, 217 conversion laws, 170 corporatization, 208 crime, 176–7 deficit, 150 financial crisis, 218 Financial-Industrial Groups, 216–17 GDP, 151 industrial production, 150 inflation, 150 insolvency law, 172 insolvency procedures, 217 joint stock companies, 209 main economic indicators, 259–60 management, 212 ownership of land, 167 privatization, 207–18, 227, 229–30 property, 166 reform program, 154 “shares-for-loans” campaign, 216, 217 small and medium-sized enterprises (SMEs), 238–9, 240–1, 243–4 taxation, 214–15 voucher privatization, 207, 208–10 Russian Federation see Russia

Saage, R., 24, 27, 28 Sachs, J., 181, 184, 283 (n4) Sahay, R., 154 sale privatization, 182, 184–5, 226 scarcity, 88, 141, 144, 157 scarcity principle, 85 Schelkle, W., 79, 80 Schmieding, H., 54, 183 Schmidt, K., 112, 168 Schmitz, W., 167 security, 37 self-financing, 239 self-interest, 83 self-preservation, 21 Shlapentokh, V., 176 Shleifer, A., 210, 283 (n4) Sinclair, A., 172 Singh, I., 192 Slay, B., 189 small and medium-sized enterprises (SMEs), 236–7, 251, 291 (n3) competition, 241 indebtedness, 240 personnel problems, 242 problems and promotion, 238–44 promotional programs, 242–3 Russia, 238–9 tax burden, 240 social contract, 62, 63 social security, 139–40 socialist sector, development in Central and Eastern Europe, 115–16 socialization of bad debt, 161–2, 185 socialization of losses, 179, 273 (n5) soft budget constraints, 76–7, 138, 268 (n15) Somogyi, G., 138 Soviet constitution (1977), 110–11 Soviet constitution (1990), 112 Soviet Union cooperatives, 122, 130 entrepreneurs, 134 private activities, 122 state enterprises, 129–30 Speck, F.G., 56 speed of privatization, 228 spontaneous privatization, 119, 133–4, 162, 169, 181 Hungary, 127, 201 Poland, 128

320 Index spontaneous privatization (continued) use of term, 277 (n20) stabilization policy, 154 Stark, D., 147, 204, 205, 206, 230 state, 85–6 access to resources, 166 changes in status, 125 and citizen, 92 employment, 139 as guarantor of ownership, 162 Hume on, 265 (n32) and ownership, 25–6, 33, 39–40 and property, 102, 158 role in Central and Eastern Europe, 101 state banks, 155 state enterprises, independence, 124 state property, 43–4 Steiger, O., 233 stock exchanges, 53 stockpiling, 78, 79 subsidies, 232 Szalai, J., 138 Szanyi, M., 172 Sziraczki, G., 138 Szomburg, J., 181 tax burden, small and medium-sized enterprises (SMEs), 240 taxation, Russia, 214–15 Taylor, M., 46 Tigges, M., 167, 173 transaction, Commons on, 87–8, 91–2 transformation, 71, 80–2, 104–5, 108, 146–7, 149–56, 186–7 and law, 168–71 and unemployment, 151 transformation countries, property rights, 40–7 transformation crisis, 152–6 transformation programs, and economic development, comparative studies, 154 transition, 3 and ownership guarantee, 44, 45 property rights in, 40–7, 146–8 transition indicators, 156 Tuma, Z., 172 uncertainty, and property rights, 71 unemployment, 137–8, 142, 152, 278 (n2)

and transformation, 151 unemployment benefit, 139 usufruct, 116, 119, 167 usus, 50 usus fructus, 19, 50 utilitarianism, and private property, 30–7 valuation of enterprises, 179 valuation problem, in privatization, 183 value, meanings of, 86 Vanberg, V., 261 (n2) Veblen, T., 83, 248, 275 (n14) theory of the leisure class, 94–8 Végh, C.A., 154 Vickers, J., 51, 261 (n1) Vilenskij, A., 291 (n5) Visegrad countries, 149, 151 Vishny, R., 210, 283 (n4) Voigt, S., 261 (n2) volitional theory, 85 von Hayek, F., 36–7, 47, 94, 262 (n8), 274 (n3) voucher privatization, 71–2, 181, 182–3, 227, 283 (n4) Czech Republic, 194–9 Poland, 189–90 Romania, 220–3, 229 Russia, 207, 208–10 wages, 279 (n5) and transformation, 151 Wagner, A., 13, 81, 251 Westen, K., 112, 168 Westphal, A., 75, 78 Wieners, J., 195 Wilke, M., 167 Willgerodt, H., 50 Williamson, O.E., 52, 157 Winiecki, J., 155 withholding, 165 women, as trophies, 95 World Bank, 177, 181, 193, 196, 203 Yarrow, G., 51 Zakon, 170 Zimmerli, W.C., 22 Zintl, R., 62, 65, 268 (n19), 270 (n29)