53827 Public Disclosure Authorized SOCIALIST ECONOMIES UNIT • COUNTRY ECONOMICS DEPARTMENT • THE WORLD BANK Conference on Privatization and Ownership in Eastern and Central Europe n June 1:(-14 a conference on Indicative of the wide range of op­ sides by advocating particular options, Public Disclosure Authorized privatization and ownership tions discussed was the paper pre­ but rather pointed out the reasons O changes in Eastern and Cen­ pared by two World Bank economists behind the positions. The essence of tral Europe took place in Washington, Farid Dhanji ofEM4CO and Branko their paper is provided below. organized by thE: European Depart­ Milanovic of CECSE. They offered ment of the World Bank and funded an exploration of the environment The plethora of divestiture options by the Research Committee of the for divestiture in Eastern and Central does not simplify choice. From an Bank. Those attending included Europe and examined the advan­ individual perspective the choice of a prominent academics and tagesJdisadval!tages of the many preferred model will vary depending policymakers from each Eastern and "models" of ownership change under on the weight given to possible objec­ Central Europelln country, partici­ discussion. The authors did not take tives and the appreciation {or dis- pants from othey' countries and from the GECD and E]~C Commission. The agenda consisted ofar. overview of the conceptual issue~:, ofpdvatization and What's inside... a review of possible ,trategies. This Public Disclosure Authorized was followed by cDuntl"ypresentations The Road to a Free Economy The Bank'. Eastern and Central from Hun !;ary , Pola'ld, Yugoslavia, European Program Czechoslovakia and Bulgaria. The Professor Janos Komai's new book second day's agenda began with pre­ provides his vision ofthe road to a free The World Bank's ECEP is an initia­ sentations on the exp'!riences of Chile economy in Hungary. For him this is a tive originally designed to deepen un· and Mexico, where wlde-ranging significant departure; although he is derstanding of the problems confront. privatization p1'ograms have been one of the most eminent writers on ing economies in transition from cen· carried out. Discussion included socialist economies, this is the first tral planning to market institutions time in 33 years that he has put forth (page 7). analysis of worker Sf If-management a comprehensive economic policy pro­ in Yugoslavia and the impact ofprofit­ posal (page 3). Quotation ofthe month (page 8). sharing scheme~; in a number of in­ dustrial countries. Legal and man­ Algeria: SequencingLiberalization On the World BankJIMF Agenda agement issues and the practice of (page 9) privatization were also covered in The Algerian economy suffers from panel discussion~,. inefficient resource allocation and a Book and Working Paper Brier. distorted incentive structure, legacies (page 10) Two lunch;~on sessioLs offered an op­ ofover 20 years of rigid central plan­ ning. The government's medium term Public Disclosure Authorized portunity to he:~r "f:'om the inside" Letters to the Editor (page 11) objective is to raise economic perfor­ about the Italian and Kew Zealand mance by sustained progress towards experience, witn presentations by BibUography or Selected Article. a market-oriented economy (page 5). (page 12) Professor R Prodi, fermer President of IRI, and Roger Douglas, former Minister of Finance dNew Zealand. Volume 1. NumbE1r 3 June 1990 Socialist Economies in Transition The World Bank/CECSE missal) of practical difficulties in objectives of reform programs will be less the strategies for financial sector implementation. In thisrespectthere considerably diluted ifthe new mar­ development and privatization are is no "correct" answer about how to ket economy is based on an extensive coordinated, weaknesses in the former privatize. From a group perspective, network of special privileges or other may reflect ad hoc and perhaps hap­ all decisions are highly political, me­ defenses against efficiency. Moreover, hazard responses in the latter. The diated through still-emerging pro­ experience elsewhere testifies to the activities of Privatization Offices cesses, invoking strong interests and difficulty of removing concessions once should, in this regard, be subordi­ lobbies, and with a genuine possibil­ given. Itis imperative, therefore, not nated to this wider perspective. ity of popular backlash in societies only that the privatization process be traditionally sensitive to wide diver­ transparent and absolutely above Finally, governments will continue gences of wealth. reproach, but that the rules of the to need to pay attention to the major­ "market" game are also clearly ity of state enterprises that will take Insofar as privatization strategies enunciated and adhered to in divesti­ a long time to be privatized or are emerge from this process, certain tures. otherwise left as government wards. questions deserve continuing reflec­ Encouraging a market orientation tion. Should the process be fast or Divestiture will be an integral aspect and fostering responsiveness to eco­ slow? Does the state need the rev­ of the development of financial sec­ nomic signals in these enterprises enues from privatization? Should en­ tors. The continuing evolution of will present a major challenge. The terprises be demonopolized before banking systems, pension funds, in­ wide variety of incentive devices­ being privatized? Should enterprises surance companies, securities mar­ management contracts, leases, bo­ be financially and technically re­ kets, etc., will depend on the decisions nuses tied to performance-should structured before being privatized, or concerning the depth, scale, speed be explored in this context. Equally can this be left to the new owners? and mechanisms of privatization. as important, governments will need How can ownership arrangements be There is great benefit in considering to insure that there is no discrimina­ instituted where the new owners take the two together. In particular, a tion in favor of state enterprises (credit an interest in performance? pure "case by case" approach to allocation, state orders, looser finan­ privatization may well overlook sub­ cial discipline), as against the rules These questions invite multi-dimen­ stantial opportunities to strengthen applied to the developing private sec­ sional, not simple, answers. and construct a modern and sophisti­ tor. • Divestiture models are not exclusive. cated financial system. Indeed, un- Itmay be perfectly possible, in fact, to give workers and managers a stake in their firms, give away a proportion of Milestones of Transition enterprise equity to thegeneral popu­ • North and South Yemen declared The ruling council of the General lation (either directly or through in­ their unification into one state on May Agreement on Tariffs andTrade agreed stitutions), and obtain revenue for 22. Institutionalizingthe union is well to Soviet observer status after Wash­ the state through general sales. These under way: on May 26, the two parlia­ ington and Tokyo dropped its objec­ "combination" options are beginning ments were merged into a single 301­ tions. However, the Soviet delegation to surface in the privatization de­ member assembly; the central banks at GAIT is not allowed to take part in bates and deserve considerably more are in the process of merging; the riyal the Uruguay Round negotiations. elaboration and defense than they and the dinar are now legal tender ata The Soviet Union is interested in be­ have thus far achieved. YR26=SYDl rate; ajointcurrency will coming a full member ofGAIT. be introduced by the end of the year; Whether the privatization process is and the first joint budget is being pre­ • The Supreme Soviet, the standing pared. A multiparty system of govern­ parliament of the Soviet Union gave fast or slow is really only relative. mentis envisaged, with elections in 30 President Gorbachev a mandate on Even in thebest scenario, itis unlikely months. In the meantime, a loose fed­ June 13 to speed the introduction of a that the most state assets can be eral system will enable the North and more market-oriented economic sys­ divested in less than a few years. The South to smooth differences in laws tem. Gorbachev may use his power of near complete unpreparedness of the and regulations. Yemeni unification, presidential decree - overriding both legal, financial and fiscal environ­ with amarketofl2 million people, win the parliament and the government­ ments underpin this expectation. improve the climate for foreign invest­ to de-nationalize state property, draft ment: market-opening moves in the anti-monopol y controls, establish joint During this period when firms are South, as illustrated by the new in­ stock companies and a stock exchange, readied for divestiture, it may be ex­ vestment law in March, will be con­ reform the banking system, and pro­ solidated. vide new legal status for small busi­ pected that governments will be be­ nesses and entrepreneurs. Gorbachev sieged by requests for exemptions, • The Soviet Union, stepping up its will likely go ahead in July with a concessions, protection etc., from firms drive to integrate into the world series of presidential decrees on insti­ about to be privatized or from new economy, took a seat as an observE'r at tutional reforms, and by autumn the owners. It will be extremely impor­ GAIT in May for the first time s:ince government is expected to produce a tant to resist these pressures. The the 96-country trade forum was con­ legislative package to supplement improvemen t in overall economic vened more than four decades ago. these decrees. performance that is one ofthe major June 1990 2 Volume 1 • Number 3 Socialist Economies in Transition The World Bank/CECSE The Road to a Free Economy rofessor ;Janos Komai's short over for a couple of weeks from, say, Schumpeter mold) endowed with the book published recently ("The the World Bank, may fall under the technical and managerial know-how P. Road to a Free Economy ­ spell of such simulations"). "Market involves complex cultural and insti­ Shifting from a Socialist System: The socialism", therefore, is an impossible tutional changes (Komai calls the Example of Hungary, W.W.