Reforming the Reform Process: Privatization in Central and Eastern Europe

As communist regimes throughout Central and Eastern Europe have fallen one by one under the weight of economic failure and popular discontent, the task of transforming these countries into stable and vibrant liberal democratic societies has commanded the attention of many Western governments and international organizations. Given the rapid and extremely destabilizing deterioration in the levels of production and employment in each of the Newly Liberalizing Economies (NLCs), economic renewal has become an urgent priority of the transformation process. Initially, the greatest importance was attached to reforms involving stabilization and liberalization of prices, lowering of trade barriers, fiscal restraint, and currency convertibility. Nevertheless, at a relatively early point in the reform enterprise, it became strikingly apparent that extensive micro-economic reforms would also be necessary for the transformation process to succeed. At the core of these micro-economic reforms stands privatization the policy aimed at "reducing the role of government, or increasing the role of the private sector, in an activity or in the ownership of assets." However, unlike the relatively straight-forward adoption of many of the measures aimed at macro-economic reform, the pace of privatization programs in the NLCs, as measured by the amount of existing assets transferred from the state to the private sector, has been extremely disappointing. In Czechoslovakia, Hungary, and Poland, for instance, there have been very few large-scale privatizations, although recently there have been some impressive results obtained with respect to small-scale privatization. In attempting to identify the sources of delay in the process, Western commentators have attributed the lion's share of responsibility to policy-makers in the NLCs. This line of attack implicitly assumes that the programs devised by Western policy analysts (largely economists) are fundamentally sound, and that it is only the lack of commitment to, or intellectual appreciation of, the rather unassailable case for radical privatization policies that has impeded successful policy implementation. If this assessment is accurate, then the possibilities for hastening the pace of privatization programs are extremely limited. In this article, we advance a rather different explanation for the debilitating delays and uncertainty that have plagued privatization in Central and Eastern Europe. Instead of focusing on implementation difficulties, we argue that the source of the faltering pace of privatization in the NLCs lies within the basic architecture of the programs themselves.