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. Last Updated: 07/27/2016

The Pros of Privatization

Liberalization, privatization and stabilization are the cornerstones of economic programs now being implemented in postcommunist countries. Russia is no exception. Until now, privatization amounted to the most radical and consistently implemented aspect of Russian economic reform. By the end of 1995, more than 11,000 large and medium-sized enterprises -- or 70 percent of the country's industry -- had been privatized.


That privatization has been criticized by both the extreme left and the extreme right suggests that the program has been on the right track.


Extreme leftists assert that as a result of privatization, Russia's accumulated riches have been sold to foreigners for a song. This is hard to agree with since at the end of the voucher privatization stage, the government retained controlling blocks of shares in joint-stock companies in key branches of industry -- including more than 50 percent of companies in the energy and military-industrial complexes, more than a third in communications companies, and more than 25 percent in car manufacturing plants.


Moreover, the general volume of foreign investment in Russia, portfolio as well as direct investment, has not exceeded $6.5 billion in the course of economic reform. In the same period, Russian companies and citizens have invested no less than $300 billion and simultaneously received a share of state property in exchange for vouchers. It's hard to believe that Russian citizens were sold property at inflated prices as compared with what foreigners were charged. Russians and foreigners alike paid the going market price.


That the government may not have received as much money as it banked on is another matter. But this is thanks to the ongoing economic and political instability and legal chaos. Instability and chaos are what make for the enormous risks associated with investments in Russia and what drive down the prices of property sold.


Leftists claim as well that only "a handful of New Russians" has profited from privatization. What happened in actual fact? One hundred and fifty million Russians picked up their free vouchers and paid a small administrative duty for the privilege -- in other words, all voucher recipients made a conscious decision to incur this expense and hoped for a certain return on their investment. As a result of the voucher stage of privatization, 40 million people became stockholders. This significantly exceeds the number of stockholders in the United States both in absolute terms and in terms of percentage of the population.


After completion of the initial allocation of stocks, many people began parting with their securities. They did this on a voluntary basis and received the full market price. As a result of these assets changing hands, a redistribution is occurring. Some people are making money, naturally, while others are losing. The only thing one can blame the government for is inadequate attempts to make clear the real value of the assets received in exchange for vouchers and the opportunities for their future use.


Critics on the right claim that privatization has put enterprises in the hands of management insiders. This type of owner pursues goals which are not typical of a market economy -- he raises salaries and uses any means he can to maintain levels of employment, social benefits and productivity. This impedes the financial and industrial restructuring of enterprises. These critics say an individual approach to privatization should have been adopted, with careful pre-sales preparation and selection of strategic investors.


Each of these arguments taken on its own makes sense. In fact, a piecemeal approach to privatization does dramatically increase the efficiency of production at each enterprise and appreciably improve its finances. The only problem is that with this approach, the process in Russia would take over 100 years to complete.


Indeed, as a result of the initial allocation of stocks, 48 percent of the stock in privatized enterprises belonged to employees, 21 percent to management, 20 percent to outside investors, while the remainder was controlled as before by the state. Insiders controlled 84 percent of these enterprises.


But this is hardly grounds for pessimism. The mobility of the work force in Russia is fairly high. Every year, 24 percent of the employees in industrial enterprises either go or are let go and 22 percent are hired to take their place. Many of the workers who leave enterprises take their stocks with them. The consequent scattering of outside stockholders cannot guarantee effective control. But the accumulation of stocks by institutional investors that goes hand in hand with this process will quickly correct this situation. Thus, over the course of the next two to three years, the process of redistributing stocks and control in favor of major outside investors should be complete.


Privatization must be applauded for the rapid creation of a stock market infrastructure. Russia's stock market is fast outstripping the stock markets in other East European countries which began privatization earlier but opted for a slightly different mechanism. The popular understanding, too, has changed. Only three years ago, many people sincerely believed that the value of stocks was a function of how difficult it would be to counterfeit them. Today, almost everyone knows that in determining the value of a stock one must look first at the real assets it represents.


But most important of all, the process of privatization, even now, is the best guarantee against the country's slipping back into the Soviet past. New political forces empowered as a result of the presidential elections could put a stop to privatization. But not without a fight. Nationalizing private property by peaceful means will be impossible.





Pavel Teplukhin is director of the London School of Economics' Moscow office and a member of the Russian-European Center for Economic Policy. He contributed this comment to The Moscow Times.