Impact of Different Methods of Privatization on Performance of Enterprises in Transition States
Abstract
The paper encompasses two goals and impacts of privatization by transition states. The first goal is to draw lessons from the privatization encounters in Eastern Europe consistent with the association optional privatization methods, the ownership evolution following privatization and reorganization. Different methods of privatization taken into consideration include management-employee buyouts (MEBOs), lease buyouts, restitution and, most notably, voucher privatization, in conjunction with shares being allocated at nominal or zero prices to the populace overall. Also, how different methods of privatization may have affected development in transition countries has been analyzed. Controlling for the first status, equity assets by managers, and sector and firm-specific impacts, it was found that appointment of new directors is linked to improvements in labor productivity and profit margins, especially if those managers were picked by private owners. By applying numerous econometric stipulations, comprising fixed effect and ownership, cross-country model has been estimated. The paper further identifies that voucher privatization is connected to faster growth. Furthermore, neither capital market growth nor private sector growth per se exercised a considerable influence. Voucher privatization could have been efficient due to the speed with which relationships between state and firms were split.
Introduction
Privatization is the process by which the ownership of the country's productive assets, commonly utilities or huge industrial corporations, are transferred into private hands. Over the years, this has remained an everyday activity for states in both the developed and developing globe. During the years of transition, the earlier socialist governments have developed capitalist economies, though operating differently from one another and differently from capitalist economies that crisscrossed other old tracks. There are the individual states still adhering to the socialist-type economy, for example, Uzbekistan and Belarus. But even is such regions, privatization exist, import competition, entry of new private enterprises, import competition, and the establishment of particular organizations characteristic of capitalism. As the most fundamental features of capitalism currently established, the policy matters that East Europe, China, and the CIS now experience in their restructuring tasks are conventional across the economies of the world (Bender 203). For instance, countries face the responsibility of producing more efficient enterprise institutions and the requirement to withstand political pressures from corporate dinosaurs, whereas enterprises confront the difficulties in attracting new markets and modeling organizational structures to generate finance.
In summary, the process of transition and the study on restructuring in transition is now matured to a point wherein future studies can integrate effortlessly into a wider literature, which studies variations between capitalist economies differences of those institutions backing a vibrant corporate sector (Gimad & Dobrodei 759). Nevertheless, transition administrations encountered an exceptional challenge in implementing their privatization programs, which include how to transfer into private hands the proprietorship or the ownership of a large part of the economy within the environment with less or no internal savings and inadequate capacity attract international direct investment (Alvarez 142). Furthermore, in certain countries, revolutionary regimes saw themselves as having merely a very short window of opportunity to separate the connections between the private sector and the government.
Impacts of Different Methods of Privatization
As well as selling state properties to the highest bidder, transition countries hence used several alternative privatization methods, incorporating management-employee buyouts (MEBOs), lease buyouts, restitution and, most importantly, voucher privatization, along with shares being allocated at nominal or zero price to the populace as a whole. Practically, every transition countries used numerous privatization methods, with the option of approach reliant on factors like the political incline of the government, foreign debt, the levels of institutional and economic development and corporate specific factors. Transition countries can be divided into three categories, with the major method of privatization being either voucher privatization, privatization by sale or MEBO (Baumgarten 58).
Privatization by sale encompasses any method where ownership in the majority of enterprises is transferred regarding sale at accepted price to individuals not previously linked with the companies, including non-nationals (as cited in Mcisaac and William 2013, p. 188). Privatization by MEBO is likewise a market deal at an excellent price, although the buyers insiders to the company-managers or employees. Voucher privatization involves transferal of the enterprise at nominal or zero prices, either to outsiders, as happened in the Czech Republic, or insiders, as was common in Rwanda (Mitra & Marcelo 512).
It is widely understood that privately-owned firms are more profitable than their country-owned colleagues. Dinh (2010) explained that the privately owned firms are more efficient, more productive, financially stable, and make more capital security. It might thus be assumed that privatization contributes rapid growth. Nevertheless, numerous factors can cause various methods of privatization to impact growth in numerous forms (Gouret 333). These comprise, for any detailed methodology of privatization, both the productivity with prospective buyers of diverse business and managerial capability are matched corporations and the goals that the new proprietors later pursue, such as employment maintenance or profit maximization. Also, variations in the speed with which a varied method of privatization may be adopted can lead to different development outcomes as the breaking of the strong association between the government, and enterprise management may need an abrupt and drastic change. Moreover, various privatization approaches can have consequences for the speed by which ownership framework may shift and turn out to be concentrated, or with which original owners are probable to become entrenched.
Privatization on outsiders is identified to have the bulk effects of enterprise reorganization, both in Commonwealth Independent States (CIS) and Eastern Europe. Harden budgets are likewise economically significant in describing restructuring (Taani 82). Enhanced competition is linked with excellent result in the European Union but not in Eastern Europe. In fact, in the first transition period, competitions in import are dangerous to enterprise restructuring in Kazakhstan, Russia, Ukraine, and other CIS states. Lastly, privatization to workforces has not improved restructuring in Eastern Europe and characterized negative impacts in CIS.
The transition economies that developed from communist ownership and a standard system of central planning, but were heterogeneous in the form of resource donations, have followed a policy of mixtures and have demonstrated a substantial difference in their growth rates (Alvarez 174). They consequently make an outstanding laboratory for analysis of the effects of varied policy alternatives on growth. The primary result is that once controlling for factor contribution, institutional development, and human capital, in addition to country state and time specified effects, no single acceleration in growth post-privatization is identified in countries that employed privatization through sale or those countries that employed MEBO. Nevertheless, growth is considerably faster in states that utilized voucher privatization. Due to the probability that the results can be explained by omitted variables, dynamic panel data estimation methodologies are used. Different experiments are conducted to control for possible explanations (Lumumba 195).
You can let y represent the yearly change in real GDP in a particular country. It is assumed that y depends on privatization method and numerous other countries specified factors, encompassing capital market development and growth of the private sector (Baumgarten 85). Therefore
y = Y (K, L, H, M, S, P) (I)
In which K denote the yearly shift in capital stock; L indicates the yearly variation employment and H are the annual change in human capital stock. It is assumed that y is positively associated to any of these variables. The M, S and P variables are the center of the analysis. M indicates the methodology of privatization; S is the extent of capital market growth whereas P represents the private sector scale.
Privatization by Sale Theoretical Context Effects
Consistent with Tedious (2015) findings, privatization through sale to the top bidder has explicitly been the desired method in developed economies since it contributes to the efficient matching of assets and buyers. Nevertheless, the efficiency of this matching depends on either a close relationship between entrepreneurial capabilities, the supply of wealth, or an established capital market. In fact, when privatization took place in transition economies, private wealth was mainly in the hands of black market operators. In general, such individuals had become rich by operating effectively in a bureaucratic economy with deficiencies, and there can be no assumption that they had the relevant set skills to become successful private-sector owner of state assets.
Furthermore, capital markets were severely underdeveloped, and prospective capitalists lack collateral in transition economies. Thus, potential “good” (as cited by Nellis 2015, p 77) owners may have been mostly barred from bidding for state resources and, consequently, privatization by sale may have led government assets to be distributed to less effective ones. Moreover, the “bad” owners might have utilized their ownership rights to seek non-economic objectives, their status, political power and employment protection, so that privatization by sale may have failed to facilitate growth in transition economies (Smetters 114).
So far as privatization by sale regarded procurement of concentrated holdings by overseas owners, these problems might not have emerged, and privatization by sale could have accelerated development. Foreign or Oversees ownership have been founded by Crivelli (2013) to have a significant factor in the efficiency growth of Czech firms. Nonetheless, foreign direct savings flow to transition economies was minuscule during the initial years of transition and never did privatization by sale to foreigners originally predominate as a privatization method. As well, privatization by sale, whether to domestic or foreign agents, was probably to be gradual, for the enterprises had to be organized for sale individually, and the potential privatization amounts to thousands of firms.
According to Richter (2011) analysis, the gradual pace of privatization by sale similarly presented current managers with substantial opportunities for tunneling assets. Therefore, privatization by sale could have improved growth in transition economies. For this to occur, the allocation of private domestic asset and entrepreneurial ability would have to be appropriately correlated, or the proprietorship structure ought to evolve quickly. Moreover, state-owned firms ought to be adequately strong to operate in a market environment in the lengthy temporary period before might be shifted to the private sector.
Voucher privatization Theoretical Context Effects
Voucher privatization contributes to a highly isolated ownership structure; wherein there is likely to be fragile corporate governance, similarly enabling managers to channel out assets. This condition may not be resolved if the arbitrators that emerge to manage the multiple small shareholders create long agency chains. Therefore, the method of voucher privatization is extensively criticized for failing to develop “real owners” from the onset. One may consequently expect countries that implemented voucher privatization as their leading method to realize their growth performance rendered relative, for instance, to those who implemented privatization by sale.
Voucher privatization addressed the basic problem of transition countries in the 1990s, causing managers to concentrate on serving their political rulers inste3d of clients. The later inferred that the impacts of competition from de novo national corporations and imports were weak in government-owned corporations, which consequently were able to carry on to hoard strategic resources, including fixed assets and labor, hindering the growth of the market economy (Earle & Álmos 326). In this setting, the voucher privatization provided three potential benefits. First, it could adopt very fast, contributing to an abrupt and nearly instant rapture of the country and numerous enterprise sector. Second, after firms had departed state ownership, they may in principle exposed to stringent budget restrictions and market competition with no negative political repercussions that would come with similar policy subjected to state-owned corporations (as cited in (as quoted in Marcinèin 2013, p 615).
In most transition countries, Bender (2014) survey found that enterprise subsidies were mostly eliminated at the time of voucher privatization, although in Russia and other FSU countries, they continued in one way or another up to 998 crises. Third, because voucher privatization was centered on a very wide allocation of assets, it could accelerate a rapid evolution of ownership structure where more focus ownership could arise without the risks of entrenchment by bad owners. As a result, there may be ways wherein the option of voucher privatization can facilitate, in addition to hindering the development processes (Trump 193).
Management-Employee Buyouts (MEBOs) Theoretical Context Effects
MEBOs are the same to privatization by sale given that “real owners” (Iatridis 256) are developed, rather than proprietorship rights were being spread across population altogether. However, insider ownership could hinder efficient restructuring, particularly regarding employment, albeit budget constraints could be hardened and the organization of management can be moved from the political arena to the market (Marcinèin 484). Privatization by MEBOs can be fast, but tends led to ownership remaining instead of dispersed among workers. Once more, the impact of long-run growth is likely to rely on the evolution of rights orientation and is an empirical question.
The private sector P share is incorporated in equation (I) to pick up the system externalities from extending private ownership in a previously state-owned environment (Bender 219). The three established variables M, P and S, can produce complementarities during the growth process. To test for hypothesis that a2y/ ƏPƏS > 0, interactive effects are included, along with interactions between S and P, and S and M. Hence dynamic equation estimated comprises the lagged endogenous variable:
(II)
The estimation question above controls the state-specific heterogeneity via both initially-differencing and state-specific imitation variables, and for time-differencing factors via time-specified fixed impacts, is improbable to leave open huge potentials for misspecification lost variables (Earle et al. 372).
Competitive and Corporate Governance in Transition Countries
An effective corporate governance foundation is crucial for a transitory economy. It must integrate transparency and integrity of corporate and financial operations, balances and checks to comply with applicable laws, accounting practices, and sound fiscal practices consistent with global standards. In the legal subdivision, laws that were passed must be consistently and timely implemented. The laws ought to be consistent and clear: in sections of formal entry and exit corporates, asset and property protection of stakeholders and transparency of the reliable system (Bender 223). Creating effective corporate governance is necessary for transition states since its success is critical not only for the development of a strong business sector but also for maintaining a vigorous market economy.
Some countries such as Georgia, Romania, and Ukraine have poor corporate governance with numerous occurrences of fraud and corruption in the economic and political systems. Other states like Latvia, Poland, and Hungary have established comparatively with greater successes directed toward market-based economies. Corporate governance includes country's public and private institutions, both informal and formal that governs the association between the individuals managing corporations and investors. These systems practically comprise state's corporate laws, accounting policies, securities laws, prevailing business ethics and business practices.
The inconsistency in corporate governance problem in transition countries involve on of controlling against minority investors issue. The early privatization of state-controlled companies led to mostly focus ownership by main shareholders, providing these shareholders significant higher control over properties than their stock ownership. The influence of corporate governance to weaken competitive market approaches and Democratic political establishments is the complementing factor needed to maintain the long-standing transformation of the transition countries (Iatridis 267).
In Bulgaria, Russia, mass privatization improved the oligarchs and those with vast political connections. Lack of sound governance compromises a hostile business environment for organized crime, corruption, government interference and a bias judicial system (Marcinèin 493).
Conclusion
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