Various Roads to a Private Market Economy Leszek Balcerowicz

Privatization is usually conceived in a narrow sense as a transformation of the ownership of state firms. This concept of privatization emerged in the developed economies in the 1970s and 1980s and reflected the reality of these countries. It is, however, unsuitable for a comparative analysis of various groups of countries, and especially for the discussion of the institutional transformation of the postsocialist economies.

For these purposes the concept of the privatization of the economy is appropriate.1 This concept denotes a transition from the less to more private economy, as measured by the share of the private sector.2 A privatization of the economy may result from various privatization processes, and the set of these processes depends on the inherited conditions in the economy. This relationship is discussed in the next section, which also examines the specificity of the postsocialist privatization in a comparative per­spective. Various privatization processes, in turn, result from different economic policies, and some of these policies, especially macroeconomic stabilization and microeconomic liberalization, would appear at the first sight not to be very relevant for privatization. In fact, they may be very important instruments of privatization of the economy.

Three main types of privatization processes in Central and Eastern Europe—spontaneous growth of the private sector, asset privatization, and transformational privatization—are defined and discussed below, and an attempt is made to clarify the links between these processes. Drawing on this, I analyze the problem of the optimal rates of decline of the state sector and of the optimal rates of growth of the private sector and the privatized one. Then I take issue with the “evolutionary” approaches to privatization that criticize rapid transformational privatization, especially that which is based on nonconventional techniques (e.g., privatization vouchers).


The Inherited Conditions for Privatization and Some Privatization Scenarios

There are at least six interrelated variables which describe the initial conditions that have mattered for the subsequent privatization of the economy in various countries3:

(1) the extent of entrepreneurship in the regime (ER) and the related scope of the private sector;

(2) the type of government controls that have existed and the consequences for the extent of the resulting quasi- or pseudoprivate sector;

(3) the development of the capital market;

(4) the development of the legal infrastructure and of the enforcement apparatus;

(5) the size of proportions of the economy and type of state sector;4

(6) the macroeconomic situation.

Based on these variables, we can distinguish five broad privatization scenarios related to five groups of countries.

The first category includes the OECD countries at the start of their rounds of privatization in the late 1970s. They inherited an open regime of entrepreneurship (ER0) and the related capitalist ownership structure (SOc). Therefore, the proportion of the economy in the state sector available to be privatized was small. Typically, it accounted for less than 20% of GDP. These countries also had well-developed capital markets and strong legal infrastructure and enforcement apparatuses. Consequently, even if the size of the state sector had been large, its privatization could have been carried out rapidly by conventional means (trade sales, public offerings, etc.) without producing any major legal complications. The initial macroeconomic situation was stable, so the governments could focus on privatization and there were no interactions between the inherited monetary overhang, stabilization policy, and the privatization processes so typical for some postsocialist economies. Finally, except for public utilities, the regulatory environment was relatively liberal. Therefore, there was no quasi- or pseudoprivate sector which could be turned into a private one by a massive deregulation. To summarize, the privatization of the economy in the OECD countries could have been reduced to conventional privatization processes operating with a relatively small state sector.

The second category consists of more developed economies in the Third World such as Chile, Mexico, and Argentina. Their entrepreneurship regime was usually fairly restrictive in nature (ERr), so privatization policies had to include the liberalization of this regime. This opened the way for foreign direct investment and for the development of the domestic private sector. Government controls were typically much more extensive than in the OECD countries; they were responsible for the existence of a quasi-private sector, which could be turned into a private one once these restrictions had been lifted. Liberalization policy—i.e., the transition from ERr to ER0, and deregulation—were, therefore, important for the privatization of the economy in these countries. The state sector was relatively more extensive than in the OECD countries but its size relative to the potential of the capital market and that of the legal infrastructure still enabled conventional privatization techniques to be applied without causing any major logistical or legal problems. However, the macroeconomic situation was typically much more unstable than in the developed economies. Privatization thus began under much more difficult macroeconomic circumstances and—through its fiscal implications—had important implications for macroeconomic stabilization.

The third category includes most of the less developed countries of the Third World. The importance of liberalization for privatization of the economy was even greater here than in the second group. This is especially true for India, which accounted for 20% of the population of the developing countries.5 The proportion of the economy in the state sector was also higher in the third group; in infrastructure and in banking it was sometimes almost as high as in the socialist economies of Europe and Asia. However, unlike those latter countries, their agriculture and trade was not under state control. The capital market and the legal infrastructure were less developed than in the second group countries. This, as well as a relatively high proportion of the economy in the public sector, made rapid conventional privatization—on average—a much more difficult logistical and legal problem than in the second group countries, except in those cases where foreign direct investment provided a solution.

The fourth category was that of the Asian postsocialist countries: China since the late 1970s and Vietnam since the late 1980s. They had closed entrepreneurship regimes with socialist ownership structures. Hence, there was an extremely wide scope for privatization via the liberal­ization of the economy. As distinguished from the third group, agriculture and trade in the fourth group countries were also nationalized and, therefore, the overall proportion in the economy in the nonprivate sector was much higher, and similar to that in the postsocialist economies of Europe in the late 1980s. However, agriculture was much more important in the Asian socialist economies and their system of agriculture was technically much easier to privatize than turned out to be the case in most European socialist economies. This explains much of the difference in privatization and in the overall economic transition between these two groups of postsocialist countries.6 Also, the initial macroeconomic situation in China was much more stable than it was in Poland, Romania, and the former Soviet Union,7 though Vietnam started its economic transition with an extreme macroeconomic imbalance.

There was no capital market either in the Asian or in the European socialist economies, and the legal infrastructure for private ownership was extremely weak in both cases. However, these facts were less of an obstacle to privatization of the inherited state sector in the former than in the latter case. For, given the differences in the level of economic development, the state sector in the European socialist economies was much more concentrated in manufacturing than was the case in the socialist countries of Asia. And the conventional privatization of manufacturing is much more dependent on the capital market and the legal infrastructure than is agriculture.8

Finally, let us turn to the postsocialist economies in Europe, which are our main focus here. The previous categories have provided useful points of reference which bring the specific inherited conditions for privatization of the economy in these countries clearly into perspective. As in the Asian case, a liberalization policy was extremely important for privatization in postsocialist Europe as it was to pave the way for the spontaneous development of the legal private sector which was almost nonexistent at the start of the transition. The inherited proportion of the economy in the state sector was extremely high in both cases. However, as has just been noted, this sector differed sharply in its structure: a much lower proportion of easily privatizable agriculture and a much higher proportion of manufacturing in the state sector in Eastern Europe made its privatization a much more complex technical problem than was the case in the Asian postsocialist countries. In both cases the legal infrastructure and the enforcement apparatus which existed at the start of the economic transition were linked to the state-dominated ownership law and thus not adapted to the needs of a growing private economy.

The rate of growth of the private sector during the first period after decisive liberalization was faster than that of the restructuring and building of the legal apparatus required for private property rights. And the situation was made more difficult in most European postsocialist economies by conflicting claims resulting from the restitution of property, a problem that did not usually emerge during the privatiz­ation stage in other groups of countries.9

Finally, as distinct from the Asian postsocialist privatizations, many countries of Eastern Europe and all the countries of the former Soviet Union started their privatizations with a very serious macroeconomic imbalance.

The inherited conditions, therefore, made privatization of the European postsocialist economies a unique challenge. A closed regime of entrepreneurship and the related lack of a legal private sector was one part of the legacy. This called for the transition to an open ER in order to clear the way for spontaneous growth of the private sector.

Having an extremely high proportion of the economy in the state sector, which was dominated by manufacturing, which in turn was dominated by large SOEs, constituted a much more difficult part of the postsocialist legacy. Here was the real challenge.

There were also some important differences in the inherited conditions for privatization among the European postsocialist economies. Probably the most important one referred to the power of labor within the state enterprises. This power was especially pronounced in Slovenia, Croatia, and Poland because of the previous socialist economic reforms based on workers’ self-management. An additional factor in Poland was the strong position of trade unions within the state enter­prises and within the sociopolitical system at large.

The strong position of labor within the state enterprises ruled out a top-down approach to privatization. Instead, the privatization of the respective enterprises and the very enactment of the privatization programs required lengthy negotiations with the labor organiza­tions. Countries which had not launched syndicalist reforms under socialism and had inherited a centralized economy were—temporarily—in this respect in a better situation.

Another difference lay in the size of the inherited nominally private sector, which typically hardly existed. But there were some partial exceptions, mainly Hungary and Poland. In these two countries the socialist authorities had allowed a margin for private entrepreneurs to develop, especially in the second half of the 1980s.10 However, this margin was still small and the nominally private sector was distorted by the conditions of the socialist economy under which it operated. On the one hand it was subjected to many bureau­cratic conditions, but on the other it profited from the shortage economy and the deficiencies of the dominant state sector. Thus, this nominally private sector was in fact a pseudo- or quasi-private one, as in many countries of the Third World. The comprehensive liberalization of the economy in Poland and Hungary during the early phases of the economic transition gave the firms in this sector a chance to operate as genuinely private ones. But only some of them were able to cope with competition as it emerged.

II / The Policies and Processes of Privatization in Central and Eastern Europe

Let us now discuss in a more analytical way the privatization problem faced by governments of the European postsocialist countries. The spontaneous growth of the private sector is the least controversial part of the whole privatization process. It is widely and rightly assumed that its pace should be as fast as possible, except perhaps for those sectors where new entrants need to be controlled because of an especially large difference between social and private risks (such as banking and insurance). It is also obvious that, to put in motion the rapid growth of the new private sector, entrepreneurs must be set free. Building a strong legal infrastructure for private property law is another requirement.

Much more controversial and misunderstood has been the privatiz­ation of the huge inherited state sector. The key distinction here is between two broad classes of privatization processes. The first is asset privatization, which results from the spontaneous downsizing of the state enterprises carried out by their managers, through subcontracting,11 through bankruptcy liquidations (as distinct from the bankruptcy reorganization), with respect to the state enterprises, and from so-called “small” privatizations—e.g., selling or leasing shops or restaurants belonging to a state cooperative organizations. To the extent that assets are transferred to the private sector through leasing or sales, asset privatization fuels the spontaneous development of this sector. The intensity of asset privatization depends on stabilization (S) and liberalization (L) policies,12 which determine, through changes in the enterprises’ budget constraints and in the number of their potential competitors, the increase in the intensity of competition faced by the state enterprises. Different S-L policies bring about different flows of assets from the state to the legal private sector.13 Also, by shaping enterprises’ macro- and microeconomic environments, S-L policies have an important impact upon the quality of the newly emerging private and privatized firms—i.e., their potential. Therefore, these policies influence both the pace and structure of privatization in the economy and the quality of its products.

Asset privatization is often overlooked in the debates on privatiz­ation, perhaps because it is less spectacular than that of the whole state enterprises and it does not reduce their number (except in bankruptcy liquidations). However, asset privatization goes beyond the traditional concept of privatization found in the developed countries. It has played an important role in the overall privatization process among the more radical reformers in Central and Eastern Europe; it may be regarded as one of the most important characteristics of that privatization.14

The second class of privatization processes with respect to the inherited state sector aims at transforming the state-owned enterprises into the private companies as going concerns. We might call this transformational privatization.15 It is this type of privatization which has been identified, not completely correctly, as privatization per se, and which has attracted the most attention.

Spontaneous growth of the private sector is usually taken for granted as a desirable kind of privatization of the economy which should proceed as fast as possible; asset privatization is often over­looked and the debate on transformational privatization is full of controversies. They focus especially on the two related issues of the desirable pace of and appropriate methods for privatization—i.e., whether nonconventional techniques of mass privatization should be used in order to carry it out faster than if conventional techniques were used alone. These and other issues can be discussed only in an analytical framework which clearly states the criteria of success (goals, objectives) to be used in choosing or assessing privatization strategies and considers the links between various privatization processes.

Let us assume that the main goal of privatization is to maximize long-run economic growth. This criterion can be largely reduced to the requirement that enterprises which result from various privatization processes display the highest possible potential growth of productivity.16 This productivity potential can be regarded as a measure of the quality of the privatization products; i.e. privatized enterprises. Let us denote by ∆STt, ∆PSt, and ∆PRVt, the rate of change of the size of the state, and of the private and privatized sectors in the respective periods: t = 1, 2 … n. At the start of the transition the state sector almost totally dominates the economy, the private sector is extremely small and the privatized sector does not exist. ∆PSt results from the spontaneous growth of the private sector and from asset privatization, ∆PRVt is due to the transformational privatization.

Theoretically, one can envisage many different combinations of ∆STt, ∆PSt, and ∆PRVt, resulting from different mixes of privatization policies. The main differences are due to the rate of decline of the inherited state sector and to the extent to which this decline is due to any asset privatization fueling the growth in PSt, and to transformational privatization, which leads to the ∆PRVt.

Which combination of ∆STt, PSt, and PRVt ensures the fastest possible growth of the economy? There is no precise a priori answer to this question, but one can make some general points.

It appears reasonable to assume that this optimal combination includes the fastest possible ∆PSt. The main reason for this is that the new private sector consists of the smaller classical owner-managed private firms driven by a simple and powerful incentive system, while the privatized firms are burdened with the problems of weak corporate governance which are even more serious than those faced by Western corporations.17 Also, private firms founded during an economic transition do not inherit the structural and cultural burden of the privatized (i.e., former state) enterprises which originated under socialism. I have in mind here the location, organizational structures, incentive systems, composition of labor, and work ethic. Accepting the argument that the fastest possible transformation to the private sector constitutes an essential part of the optimal strategy of privatizing the economy obviously has important implications for the economic policies which determine this growth. The transition from a closed to an open entrepreneurship regime appears again as extremely important, along with building the legal infrastructure for private ownership law. S-L policies are another crucial set of determinants. For they affect the pace of asset privatization in the state sector which, as noted, fuels the growth of the private sector. Besides, stabilization policy shapes the macroeconomic environment (e.g. the level of macroeconomic instability and of real interest rates) and this importantly influences the rate of growth and the structure of the private sector. If a country has inherited a highly unstable and controlled economy, then a comprehensive and tough S-L package is crucial for the rapid growth of the private sector.18

What about the other components of the privatization strategy: the rate of decline in the inherited state sector and the rate of growth of the privatized sector due to transformational privatization? If the new private sector has such important advantages over the privatized sector, should we bother at all with these two other processes? It is here that an important theoretical controversy rages, between proponents of the “evolutionary” approach to institutional transformation and other theor­ists. Some of the former emphasize, as we just have done, the advan­tages of the newly founded private firms. But above all they contrast the “organic” growth of the private sector with the “artificial” nature of the transformation of the state sector, especially if it takes the form of nonconventional mass privatization. In doing this they point out that capitalism originated in a spontaneous manner and not by government design, and that engaging in government-organized mass privatization schemes could be regarded as a spectacular instance of “constructivism,” which has been greatly criticized by Friedrich A. Hayek. Finally, some “evolutionary” theorists emphasize that if the private sector continues to grow at a rapid pace and the state sector were to stagnate, then the differential dynamics so introduced would take care of the privatization of the economy without any massive transformational privatization.19

I think these arguments do not stand up to critical analysis. The criticism based on the juxtaposition of “organic” versus “artificial” is an instance of playing on the emotional undertones of the selected words and represents a fallacy.20 The state can engage in various actions and assessments of those actions, which should not be based on the emotionally-loaded and inherently imprecise juxtaposition of “artificial” and “organic,” but on careful analysis which assumes that the state has a limited overall capacity and that its ability to cope with various problems differs sharply from the ability of other potential agents, depending mainly on informational considerations.

The argument about “constructivism” is, in my view, an example of imprecise and dogmatic reckoning which is no substitute for the kind of analysis I have just mentioned. Which state’s actions can be regarded as falling into this category and which are free of such a reproach? Was Britain’s pioneer privatization designed and carried out by Margaret Thatcher’s government an example of “constructivism” and, if so, what does that imply?

More attention should be paid to the assertion that rapid “organic” development of the private sector suffices to solve the problem of the privatization of a postsocialist economy, and, therefore, one should not worry about the decline in the size of the inherited state sector and about the pace of transformational privatization. I think this argument is based on several implicit but erroneous assumptions.

The basic error is to assume that the rate of growth of the private sector can be regarded as independent of the rate of decline of the inherited state sector. Only on this assumption can one show—in a simple, mechanistic way—that the rapid and sustained development of the private sector solves the problem of the privatization of the economy even if the state sector does not shrink and there is no transformational privatization. I have already explained the importance of asset privatization—i.e., the reduction in the size of the state sector which results from a tough and comprehensive S-L package—for the growth of the private sector. However, the scope for asset privatization is not unlimited but will be exhausted with the passing of time; there can be more of this privatization in the early phases of economic transition, and less and less in later ones. These dynamics contribute to the decline in the rate of growth of the private sector. Therefore, this rate cannot be regarded as constant and independent of the rate of decline of the inherited state sector.

However, the quality of asset privatization is as relevant as its quantity. It matters for economic growth whether asset privatization consists of indiscriminate asset stripping by the incumbent managers or is part of a well-designed organizational and physical restructuring of an enterprise. The one factor which seems to influence most of these decisions is the managers’ expectation of a fairly rapid transformational privatization of their enterprise and of their further career in it after privatization. The presence of such widespread expectations may induce an efficiency-enhancing restructuring.21 Their absence would produce the reverse—i.e., an asset-stripping type of asset privatization.22 Obviously managers’ expectations depend on the actual transformational privatization. One cannot fool them just by announcing plans which are not fulfilled. And the strength of managers’ prioritization expectations depends on the perceived probability that their enterprise would be privatized in the near future, and that depends—on average—on the pace of transformational privatization. To summarize: the quality of asset privatization is positively related to the pace of transformational privatization.

There is another important link between this pace and the related decline of the size of the state sector on the one hand, and the rate of growth of the private sector on the other. Even after the scope for asset privatization is exhausted, the state sector remains very large. Let us assume that there is very little transformational privatization so that a large state sector would persist. How would this affect the development of the private sector and the overall economic efficiency and growth? The most likely scenario would consist of continuing or returning politicization of the state enterprises and financial losses in those enterprises as a result.23 These losses would absorb the country’s savings and thus a large state sector would tend to crowd out the development of the private sector.24 In an extreme case the development of the private sector would come to a standstill and the country would be caught in a very inefficient equilibrium with a large and wasteful state sector.

The above remarks suggest that rapid transformational privatization is an important component of the optimal privatization strategy. However, how can such a rapid pace be achieved? Can this be done by relying exclusively on the time-consuming conventional methods which were used outside the postsocialist world or is it necessary to combine these techniques with nonconventional ones (various types of massive, free, or quasi-free transformational privatization)? I have already noted the huge relative size of the inherited state sector in the postsocialist economies and the lack of capital markets at the start of a transition. This ruled out rapid transformational privatization exclusively based on the conventional methods and called for some use of the less time-consuming nontraditional techniques. The relative importance of these techniques for rapid transformational privatization was inversely related to the relative importance of privatization based on direct foreign investment (DFI) and the latter depended on the size and location of the country. Therefore, Estonia, for example, could rely more on OH DFI as a vehicle for privatizing its economy than, say, Russia, Ukraine, or Poland. But even small postsocialist countries would not be rapidly privatized without nonconventional mass privatization.

However, it is sometimes argued that though nontraditional privatization achieves a faster pace, it is only at the cost of the quality of the privatization produced as compared to conventional privatization. This claim is mostly based on the assumption that the latter may ensure a much better corporate governance structure than the former, and this difference will be reflected in the different potential growth rates of the enterprises’ productivity. This is an important point which, however, should not be accepted at face value. At least three comments are in order.

First, the size of the potential gap between the quality of the corporate governance obtainable—on average—under purely conventional privatization and that achievable under some mixtures of conventional and nonconventional techniques may vary, depending on the exact mixture of the privatization process. For example, with respect to large privatized enterprises a mix of privatization techniques could be used whereby they would acquire strategic investors under conventional privatization.

Second, analyzing a possible trade-off between the pace of privatization resulting in the number of enterprises privatized, say, per year, and the quality of these enterprises, we need to see the latter factor in a dynamic perspective. What matters is not only the quality achieved upon privatization but also its later developments. These consequential developments may be seen as a series of average increases in the potential productivity growth rate of an enterprise following privatization. The baseline is what the average level of productivity would have been without privatization—i.e., if the firm had remained state-owned. There is a pace-quality trade-off: a slower conventional privatization is assumed to ensure a higher initial level of the quality of its product which remains constant; a nonconventional privatization (which at least partially includes, say, the use of vouchers) generates an initially lower quality which, however, converges toward that produced by the conventional privatization. The difference in the impact on national economic growth would depend on the differences in the pace of privatization and the differences in the quality differential. The larger the first difference is relative to the second one, the stronger the case is for the economic superiority of the type of privatization involving the use of the nontraditional methods over a purely conventional one.

I think there are strong grounds for believing that this is actually the case. Non-conventional privatization may be very fast while the conventional kind is bound to be slow, given the already mentioned imbalance between the huge size of the inherited state sector and the underdeveloped infrastructure for conventional privatization. Further­more, conventional privatization is in danger of being slowed down over time. In the extreme case, a country may find itself in an inefficient equilibrium with a large and wasteful state sector.25 Case-case privatization becomes easily politicized as the country moves from “extraordinary” to “normal” politics.26 This danger is especially acute in the case of “strategic” sectors (e.g., infrastructure, mining) which are very much in need of privatization.27 Superimposed upon the danger of increasing politicization is the fact that purely conventional privatization usually starts with the best enterprises and moves to the increasingly inefficient ones.

The full picture of the effects of various privatization strategies should consider the developments in the remaining state sector, which would shrink at a different pace, depending on the strategy adopted. As I already mentioned, the slow decline in the size of this sector which would result from purely conventional privatization is likely to result in a renewed tendency for politicization of that sector, in the related ineffiencies, and in “wild” forms of privatization. This would not necessarily be the case under a much faster mass privatization process.

One could object that privatization involving the use of nonconventional methods would not ensure the enterprises’ productivity potential converging on that which is possible under a purely conventional privatization. If this were the case, then the two privatizations, if completed, would generate two different steady states: conventional privatization would eventually ensure a faster rate of productivity growth and the related faster economic growth. However, it is hard to prove that such a productivity differential must inevitably emerge. Even if non-conventional privatization produces initially worse corporate governance structures than that available (for small groups of enterprises) under purely conventional privatization, the development of the secondary equity market and the related institutional investors is likely to remedy this situation. Finally, a completed conventional privatization may simply not be an option, given the already mentioned dangers of the political blockage. In that case, even if the nonconventional privatization eventually produced a corporate governance structure worse than some theoretical or empirical models, it would still be the only and, therefore, the best privatization option for the country concerned.


The set of various processes which bring about the privatization of an economy depends on the inherited economic conditions. In the developed economies this set could have been reduced to a classical transformational privatization; in the less developed countries it had to be supplemented by widespread liberalization. There was, however, usually no need to launch massive nonconventional privatization measures. The specificity of the inherited conditions in the postsocialist economy: the widespread government controls, the almost total dominance of the state sector, the lack of a capital market and the legal infrastructure for the private sector, and often a highly unstable macroeconomic situation demanded an unusual set of economic policies if privatization of the economy was to be successfully completed and rapid economic growth ensured. As I have argued, this set of policies included a comprehensive and thorough liberalization-stabilization package combined with a possibly rapid transformational privatization. In the inherited conditions of the European postsocialist economies, a rapid rate of transformational privatization can only be achieved if the techniques of massive privatization are used.


1 / See M. Bernstein, “Privatization in Eastern Europe,” Communist Economies and Economic Transformation 4/3 (1992), p. 283–320. Leszek Balcerowicz, “Determinaty i kierunki prywatyzacji w Polsce: Próba przegladu zagadnien,” Prywatyzacja w Polsce Szanse i Zagrozcni, ed. Jan Bossak, SGH, Warsaw 1994, p. 3–17. János Kornai, “The Principles of Privatization in Eastern Europe,” The Evolutionary Transition to Capitalism, ed. Kazimierz Z. Poznanski, Westview Press, Boulder 1995, p. 211–228.

2 / The private sector in production can be measured by the share of the private enterprises in GDP.

3 / For the definitions of these variables, see Leszek Balcerowicz, Socialism, Capitalism, Transformation, chap. 7, Central European University Press, Budapest 1995.

4 / Excluding education and the health system, which deserve separate treatment.

5 / India’s economy before the recent liberalizing reforms did not possess a private sector, only a pseudoprivate one. This, and an important but even more constrained and inefficient state sector, largely explains India’s poor economic performance compared with China, especially in the 1980s when China carried out massive liberalizing and privatizing reforms. Therefore, to regard India as an example of capitalism and to compare its performance to China in order to draw the conclusion that socialism can work better than capitalism is a spectacular fallacy.

6 / See Balcerowicz, Socialism, Capitalism, Transformation, chap. 13.

7 / Ibid., chap. 12.

8 / The lack of privatization of manufacturing in the Asian postsocialist economies cannot, therefore, be attributed only to technical barriers but rather to political factors—their regimes are still officially based on socialist ideology.

9 / The postsocialist economies also differed in this respect. The restitution problem did not arise in the former Soviet Union, except for the Baltics. Other countries had to face it.

10 / See Balcerowicz, Socialism, Capitalism, Transformation, chap. 14, for Poland.

11 / Subcontracting leads to asset privatization when a unit in the public organization (such as the laundry in a hospital) is set up as a private firm which performs the services on a contractual basis. If the contract goes to a firm other than the former unit of a public organization, then this unit will be liquidated and at least some of its physical assets may be transferred via sales or leasing to the private sector.

12 / Liberalization policy includes the liberalization both of the entrepreneurship regime and of prices, foreign trade, and other operations.

13 / It should be emphasized that “soft” S-L policies, with uncertain prospects for privatization, formally freeze the assets in the state sector but in fact are likely to give rise to widespread “wild” privatization—e.g., asset stripping. Different S-L policies combined with different prospects of privatization produce, therefore, sharply different qualities of asset privatization.

14 / This is fine, especially for the spontaneous downsizing of SOEs.

15 / See P. Jasiński, “The Transfer and Redefinition of Property Rights: Theoretical Analysis of Transferring Property Rights and Transformational Privatization in the Port-STES,” Communist Economies and Economic Transformation 4/2 (1992), p. 163–189.

16 / An additional criterion emphasized by Kornai (see note 1) is that privatization should be structured in such a way as to contribute as much as possible to the development of the middle class. To the extent that this development depends on the spontaneous growth of the private sector, the two criteria—economic growth and changes in the social structure—overlap.

17 / For the latter see John C. Coffee Jr., “Investment Privatization Funds: The Czech Experience” (paper presented at the Conference on Corporate Governance in Central Europe and Russia, Transition Economics Division, Policy Research Department, The World Bank, Washington DC 1994). Cheryl W. Gray and Rebecca J. Hanson, “Corporate Governance in Central and Eastern Europe: Lessons from Advanced Market Economies” (working papers, Policy Research Department, The World Bank, Washington, DC 1993).

18 / See Jacek Rostowski, “The Implications of Very Rapid Private Sector Growth in Poland,” unpublished paper, University of London, London 1993. Simon Johnson and Gary W. Loveman, Starting Over in Eastern Europe: Entrepreneurship and Economic Renewal, Harvard Business School Press, Cambridge 1995.

19 / See Kornai, “The Principles of Privatization in Eastern Europe.”

20 / For more on this see Balcerowicz, Socialism, Capitalism, Transformation, chap. 13.

21 / See B. Pinto, M. Belka, S. Krajewski, “Transforming State Enterprises in Poland: Evidence on Adjustment by Manufacturing Firms,” Brooking Paper on Economic Activity 1 (1993).

22 / This is what is happening in Bulgaria, where formal privatization was blocked and the state still formally controls 90% of the economy. Given this lack of progress, a so-called “hidden privatization” is taking place. (M.M. Nelson, “Slate Sell-off Shifts Gears,” Central European Economic Review, (Autumn 1994), p. 8–10.)

23 / Continuing politicization of the state sector (and the related financial loss) has taken place in China, where the state enterprises were not subjected to a tough S-L program. Countries which introduced such programs but are very slow with transformational privatization may face a return of politicization to the SOEs. Besides, the lack of privatization would—through the enterprises financial losses—undermine macroeconomic stability.

24 / For the empirical evidence of such crowding out, see S. Kikori, J. Nellis, and M. Shirley, “Privatization: Lessons from Market Economies,” World Bank Observer 9/2 (1994), p. 241–272. Irena Grosfeld (Irena Grosfeld, “Triggering Evolution: The Case for a Breakthrough in Privatization,” The Evolutionary Transition to Capitalism, ed. K.Z. Poznanski, Westview Press, Boulder 1995, p. 211–228.) raises this crowding out argument in her critique of the “evolutionary” approach to privatization.

25 / This was very likely to happen in Russia, for example, had the massive privatization not been introduced. See Andrei C. Shleifer, “Establishing Property Rights” (paper presented at the Annual Conference on Development Economics, Washington DC, April, 1994).

26 / See Balcerowicz, Socialism, Capitalism, Transformation, chap. 9.

27 / Including these sectors in nonconventional privatization may be the best, if not the only, way of avoiding a political deadlock.


Leszek Balcerowicz, “Various Roads to a Private Market Economy,” Socialism, Capitalism, Transformation, Central European University Press, Budapest 1995, p. 186–201. (This chapter was partly written when I was E.E. Wiegand Distinguished Visiting Professor of Democratization at Georgetown University in Washington, DC, in April 1995. I am grateful to Michal Meller for his help in editing this text.)