Privatization and the consolidation of democratic regimes: an analysis and an alternative.

• Author: Cui, Zhiyuan
• Position: Privatization: Political and Economic Challenges

What is the relationship between privatization and democratization in the post-communist countries? Will privatization hinder or promote the consolidation of these infant democracies? In order to answer these questions, I will first develop a typology of privatization strategies and then explore their effects on the transition to democracy and the consolidation of democracy. My thesis is two-fold: first, privatization has eased the transition to democracy, in the sense that power is shifting from the old political elite into a new economic elite; second, privatization, as practiced so far in Russia and Eastern Europe, makes the consolidation of democratic regimes difficult. To solve this dilemma between transition and consolidation, we need an alternative strategy of economic transformation in the post-communist countries.

A sketch of this alternative concludes this paper. Though my focus is on Russia and Eastern Europe, the conclusion of this paper will hopefully have broader implications for countries in Latin America and other parts of the world where political economies are experiencing the same kind of fundamental transformation.

A Typology of Privatization Strategies

Privatization has been topping the agenda of economic transformation in Eastern Europe and Russia for several years. Soon after they came to power, almost all post-communist governments in the region announced major programs for privatizing their state-owned enterprises. These privatization strategies can be classified along two dimensions: whether a given strategy advocates a rapid or slow privatization process, and whether a given strategy advocates privatization from below (spontaneous privatization) or from above (centrally directed privatization). This is illustrated in the following figure.

Although arbitrary, this typology enables us to focus on two crucial dimensions of the privatization debate and its relationship to the consolidation of democracy. The first dimension is the timing and pace of privatization, indicated in Figure 1 as "slow" versus "rapid." Democratic institutions vary in levels of efficiency; for example, resolutions are reached more quickly if all that is required is a presidential decree rather than a debate in parliament. A more rapid privatization strategy would require a more efficient state decision-making apparatus, and this could have important implications for the transition to a democratic regime. When the objective is to privatize as rapidly as possible, it can be argued that presidential decree power is needed to circumvent the obstacle of prolonged parliamentary discussion. The second dimension has to do with the types of privatization programs, indicated in Figure 1 as "spontaneous" versus "centrally directed." The concept of "spontaneous order" was introduced by Friedrich Hayek, one of the most influential Western economic thinkers in Eastern Europe, who considered a free-market economy without government intervention to be the most efficient. His theory has been invoked to counter any attempts to guide the privatization process through policy intervention from above, except in the form of general laws enabling the private sector to grow spontaneously and eventually outgrow the state sector. In contrast, a centrally directed strategy of privatization usually requires the government's privatization agency to sell state assets on a case-by-case basis or distribute free vouchers to the population.

Figure 1: Typology of Privatization Strategies

Slow Rapid

Spontaneous Private Sector Growing Nomenklatura/

Out of State Sector Worker Buyout

Centrally Directed Case-by-Case Sales Free Vouchers

Actual privatizations are almost always a mixture of these pure strategy types. For example, between 1992 and 1994 the Russian privatization program was a combination of insider buyout and free voucher distribution. From 1989 to early 1990, the strategy of spontaneous nomenklatura (Communist Party managers) or worker buyouts predominated in Hungary and Poland. Meanwhile, the strategy of case-by-case sales predominated in Hungary and the former East Germany after the middle of 1990. In the former Czechoslovakia, the government initially distributed vouchers for free, but the implementation of this strategy has been tainted by the restitution of assets to old pre-revolutionary owners. The strategy of case-by-case sales predominated in Poland under the first term of the Solidarity government led by Tadeusz Mazowiecki. The Bielecki government, which came into office in January 1991, changed this strategy to the free distribution of vouchers and allowed the use of mutual investment funds.

Effects of Privatization on the Transition to and Consolidation of Democracy

The privatization strategy a country chooses has a definite effect on the transition to democracy, as well as its consolidation. The thesis of the first part of this paper is that these two effects are different, and can even come into conflict with each other.

According to Adam Przeworski, one of the most respected democratization theorists, the transition to democracy is "a process of institutionalizing uncertainty, of subjecting all interests to uncertainty."(1) In a democracy, no political forces or interests are protected from competition and uncertainty. If privatization gives the old communist ruling elite reason to believe that their economic interests will be supported under the new democracy, they may lessen their opposition.(2) In this sense, privatization eases the transition to democracy by reducing the degree of uncertainty facing the former elites.

The consolidation of democracy is a different matter. As Adam Przeworski points out, "Democracy is consolidated when it becomes self-enforcing; that is, when all relevant political forces find it best to continue to submit their interests and values to the uncertain interplay of institutions."(3) There is no guarantee that a privatization program promoting the transition to democracy will also lead to the consolidation of democracy. Sometimes democratic institutions may generate outcomes that are offensive to some important political forces, who in return strive to subvert these institutions. Hence, the consolidation of democracy is only possible when important social, economic and political actors are not spending significant resources in an effort to circumvent formal democratic rules. In particular, whether a privatization strategy strengthens the consolidation of democracy depends upon whether it can realize its professed goals of revenue generation and efficiency enhancement.(4) These two goals are crucial to the improvement of macro- and microeconomic conditions in the new democracy, which in turn help to sustain broad public support for the new regime. Otherwise, disadvantaged groups will have strong incentives to subvert democracy.

Different privatization strategies have different effects on the transition to and the consolidation of democracy. First, consider spontaneous privatization, which requires general enabling laws, but not a specific government policy operation. Obviously, nomenklatura buyout--a form of spontaneous privatization in which the nomenklatura strip the state of its assets for their private benefit--favors the old ruling elite and may therefore ease the transition to democracy by reducing its opposition. However, this type of spontaneous privatization weakens the consolidation of democracy. The public is dissatisfied with letting yesterday's political elite become today's economic elite, especially because economic conditions for the majority of the population are often made worse in the initial period of the new democracy. As the 1996 World Bank's World Development Report admits, "...there is little doubt that living standards fell in the early stages of reform in most countries."(5) In Hungary, Poland, the former Czechoslovakia and Russia, public frustration at seeing the elite benefit at a time when the economy as a whole was deteriorating provoked a reaction against nomenklatura buyout and a simultaneous push to establish central governmental agencies to lead the privatization process.

The other version of spontaneous privatization, worker buyout, gives incumbent workers a stake in the new regime, but also generates discontent among the non-working...