The market and the role of the state

The position “already private” was very soon ousted from the public scene. Further discussion was only about a method of allocation of resources to possible new owners. As was the case in other transition countries, two methods were discussed. In the first camp were proponents of the distribution of assets, using privatisation coupons or vouchers. According to the second group, the state should organise the selling of companies. The method of distribution was called “spontaneous privatisation” (Babic 1992). The second method was referred to as “slow privatisation”. Therefore, two criteria for distinguishing the methods of privatisation were introduced: selling vs. distributing; slow vs. fast privatisation.

5 _{Ten years after the beginning of the process the incumbent owners who lost their property}

rights (employees, local communities, and small shareholders, assisted by the unions) attacked privatisation and its outcomes. I will come back to this point in chapter X.

The discussion about the method of privatisation was similar in the countries of the Soviet bloc and also in Britain, though their property regime was different.6

Despite the fact that the content of the discussion about the two mentioned methods is well known from other transition countries I will describe it briefly here, using Croatian sources, setting the scene for our further analysis.7 _In

1992 Croatian economists from the Institute of Economics, Zagreb created

The Conception and Strategy of Economic Development (CDERC 1992)8 _{of which}

privatisation was a cornerstone. The problem of the method of privatisation was described in the following way:

All strategic dilemmas of privatisation can be synthesised in the following chain of mutually dependent problems: fast or slow privatisation – just or unjust privatisation – distribution or selling of state owned assets – the state coordinates the process or the state collects the revenue from the sold companies – maximising privatisation or maximising the revenue from sold companies – financial restructuring of companies before privatisation or leaving it to the new owners. (CDERC 1992, p. 20, my translation and my emphasis)

The authors advocated the first element in the chain: fast and minimally unjust privatisation – distribution of ownership (the combination of distribution and selling was acceptable as well) – the state only a coordinator of the process – maximisation of privatisation (the revenue from privatisation was not a priority) – new owners should conduct the financial restructuring. However, one may imagine a different combination of the first and second elements, for

6 _{It is possible to find almost all the arguments of the two opposing sides in the discussions in}

other countries. See Estrin (1994)

7 _{The analysis of the transition so far hasn’t confirmed which of the two methods was more}

successful. It perhaps depends on the circumstances in a particular country. In the mid-1990s the Czech model of rapid and massive privatisation was judged a great success. However “as more information became available and problems of both performance and fairness surfaced, the consensus interpretation shifted in 1997-98 sharply toward the negative.”Countries which adopted a method of “slow” privatisation such as Poland and Hungary, were favoured especially in comparison with the rapidly-privatising Czech Republic and Russia. It was emphasised that quick privatisation in the wrong environment could have the wrong effect altogether. Birdsall and Nellis note that “the pendulum has once again swung back” when the Czech Republic returned to vigorous growth. Privatisations in other countries, in the UK, Argentina, Russia passed through the same shifts in interpretations and judgments. (Birdsall and Nellis 2005)

8 _{It is important to note here that the leading author and editor of this Conception was Borislav}

Skegro, who later became vice prime minister for the economy. Skegro (2007) explained that the

example fast and unjust privatisation. The authors explained that their choice was motivated by the intention to limit and minimise the role of the state in the economy and to liberate more space for market forces. To this general approach there was no opposition though it is not easy to see what kind of market was advocated: a competitive or monopolised market; a transparent or opaque market; a regulated or deregulated market. Consideration of dilemmas such as these was missing.

The proponents of the fast distribution of ownership rights described what would happen if their strategy wasn’t accepted. The majority of assets would remain in the ownership of the state for a long time; demonopolisation would be slower; the development of a financial market wouldn’t happen; the underdeveloped financial market would open the possibility of manipulation of the value of companies being sold; state administration would grow (CDERC 1992, p. 20). Then it was claimed that:

The privately owned economy cannot be a counterpart on an equal footing to the state fund that manages state assets and concentrates economic and political power. A small number of people in the fund, and people connected with the fund, would manage other people’s assets, without sufficient insight and control, similarly to how it was in the earlier period [socialism]. Taking from good performers to save bad performers would happen again. All of that would end up in an increase of unemployment, a decrease in the standard of living and in motivation, and in emigration. (PPED 1991, p. 83, my translation)

In fact, the advocates of fast privatisation accused their opponents (who proposed a slow selling of assets controlled by the state’s fund) of advocating the preservation of socialism. The first Croatian Law on the Transformation of Social Ownership didn’t accept the distribution of vouchers as a method of privatisation. The following chapter VI, which analyses the accepted method of privatisation, will show that despite various discounts, and many privileges for workers and other groups of citizens in the process of acquiring social ownership, a large proportion of capital finished up in the hands of the state. The question is, why was such an approach accepted despite early warnings? Firstly, interest groups and real-political circumstances influenced the government to take a major role in the process of privatisation. And secondly, the advocates of the method of distribution weren’t persuasive enough. Often their project looked more like a theoretical exercise

supported by a set of slogans about a free market and individual choice than a feasible project.

Before an analysis of the method of distribution I will refer shortly to the political realities and the influence of interest groups. The nationalists opposed the distribution of vouchers claiming that it would open an opportunity to a smart investor, for example from Serbia,9 _{to acquire some key assets. In a fervent public}

atmosphere it was a persuasive argument.10 _{The method of sale using public tender}

enabled the Government to more easily control the buyers. However, various interest groups advocated the method which would give them – they believed - the opportunity to negotiate directly with the government and influential politicians. One of the groups was the Croatian Diaspora, which financed the political campaign of the ruling party before it took power in the first multiparty elections. These groups were opposed to distribution. For particular strategic investors from the West, it was easier to negotiate directly with the authorities than to wait for the spontaneous emergence of an organised and transparent market (after the distribution of vouchers). Supported by politicians from their own countries, they took the opportunity to acquire substantial assets in banking and infrastructure through direct negotiation with the Government.11

Academic critics of the voucher proposal argued:

The idea of privatisation becomes popular, even fashionable, just like the idea of nationalisation (after WWII)… or the idea of self-management. It was then stated that a worker self-manager will decide about [what was called] the totality of re-production [all commercial decisions concerning an enterprise]; while today the same agent, having a new name – the shareholder will do the same thing. (Babic 1992)

It is interesting that here various forms of ownership, in fact distinct property rights, were explicitly argued to be equivalent. The conclusion, which was derived from this historical comparison, was that ownership doesn’t matter but only efficient management. It was proposed that the biggest firms should - for the purpose of an increase of efficiency - import hundreds of managers from the West.

9 _{Serbia at that time openly supported ethnic Serbs in Croatia against the Croatian Government} 10 _{The discussion occurred before the war.}

11 _{Fortunately, they were later more successful in managing their assets then were domestic}

It was assumed that a radical transformation of the property regime introduces instability, initiates damaging speculation and “a chasing for social wealth” (Babic 1992).The transformation of the property regime was not considered a priority; the discussion about a market for property rights was again neglected.12

It seems that both positions were more persuasive in the criticising of their opponents than in the designing of a realistic project of privatisation. I think that this was not incidental. The lack of feasible models was in fact a consequence of the superficial understanding of the market mechanism in general and the lack of analysis of the Croatian market and economic culture in particular. However, it is not possible to prove that the concepts of property and market that formed the framework for the discussion of privatisation directly influenced the process. But it is possible to emphasise the parallelism between what happened and what was promoted. Theoretical models structure unstructured outside worlds and legitimise the activities of agents who claim that the outcome will be as they advocated and predicted in the theoretical discussion. Now I will outline, analyse, and comment on the misinterpretation of the market, as it appeared in the “voucher proposal”.