The Czechoslovak experience with privatization.

• Author: Jezek, Tomas
• Position: Privatization: Political and Economic Challenges

In 1991, privatization was launched in Czechoslovakia in a relatively stable macro-economic environment.(1) Unlike a number of other post-communist countries, Czechoslovakia did not have to face a disrupted domestic currency or increasing budget expenditures.(2) What would become the Czech Republic boasted a very small budget deficit, representing 0.6 percent of its Gross Domestic Product (GDP). This compares with deficits of up to 2.2 percent of GDP for the future Slovakia, 2.2 percent for Hungary and 3.8 percent for Poland.(3) This was an important factor which made it much easier for Czech political leaders to effect economic reform in the areas of price liberalization, the devaluation of the Czechoslovak crown (Kcs) and the tax system.

Czechoslovakia was considering several strategies for economic transformation in 1991. Czechoslovak economists and political leaders were relatively familiar with traditional privatization techniques such as direct sales or public tenders, and they quickly concluded that such techniques and programs were not applicable in the Czechoslovak context. When economic transition began in Czechoslovakia in the summer of 1990, Czechoslovak leaders took a unique approach to the problem of privatization and decided to initiate a mass-privatization program, using traditional privatization techniques only marginally.

The mass-privatization scheme became the centerpiece of Czechoslovakia's privatization objectives and represents the main innovation of the privatization process. By distributing vouchers which could be exchanged for shares in state-run companies to the public and funneling them through investment funds, the Czechoslovak government sought to transfer a large number of state-owned firms to the private sector as quickly as possible. In the eyes of the government, this plan also had the advantage of overcoming the problem of private businessmen only having small amounts of savings available for purchases of state assets.

In the first part of this article, I will present in more detail the strategic considerations faced by Czechoslovak leaders in 1991. I will also discuss how the government made the decision to choose a privatization program that put an emphasis on the speed and volume of transfers of state property to the private sector. In the second part, I will present the main characteristics of the Czechoslovak mass privatization program and the successive steps undertaken by the government to create broad public support for the privatizations through a strategy of small-scale privatization and restitution. Finally, I will explain why the government was compelled to introduce traditional public auctions and direct sales simultaneously with the voucher program.

Strategic Considerations for Czechoslovak Privatizations in

1991

At the outset of the economic transition, the Czechoslovak authorities developed an original approach to the privatization of large state-owned enterprise. The primary assumption underlying their approach was that the methods of privatization traditionally implemented in industrialized countries, such as direct sales and public tenders, could play only a marginal role in the Czechoslovak context. Several factors were instrumental in the Czechoslovak authorities' decision to reject traditional privatization techniques and adopt a mass privatization program.

The first significant element behind this skepticism over the applicability of traditional privatization procedures was the environment and climate in which privatization was to be performed. The Czechoslovak privatization was expected to create the prerequisites for restoring the role of market forces in the economy. Czechoslovak leaders believed that market mechanisms had to be created first in order to develop conditions for better performance in state-owned industries. This was radically different from the context in which British privatizations were undertaken in the 1980s.

The British state decided to sell a few large companies to the private sector and based its decision on information produced by an efficient market and stable legal system. Privatization in Great Britain relied on the belief that a former state-owned company would become more profitable once privatized. Enhancing the profitability and efficiency of the company was the only objective of the British privatization program. In Czechoslovakia, the situation was different: in order to create an efficient market, a critical mass of enterprises needed to be privatized in a single move.

In this sense, the profitability and efficiency of Czechoslovak privatized enterprises had a secondary importance in the government's eyes. In practice, it meant that firms were privatized on the basis of their book value rather than at market prices, and through special laws that had the character of governmental decrees, known as taws. Even in the rare cases where it was desirable to sell state assets at market values, prices had to be determined by expert valuations because the market was simply not ready to set prices. Policymakers had no choice but to rely on the price structure inherited from the socialist planned economic system. However, due to the nature of the socialist system, these prices did not reflect the laws of supply and demand. Only after privatization had reinforced the role of private actors in market valuations would the market be able to set prices.

The second element was the ratio between the volume of state property to be privatized and the amount of savings available in Czechoslovakia. There was only a limited amount of domestic savings after 1989, and even this was negligible next to the amount of property owned by the state. Direct sales of state assets would be impossible, therefore, because the public simply could not afford to buy all of the state-owned companies. This problem was particularly acute given the importance of the Czechoslovak state sector compared with that of market economies in other post-communist countries, such as Poland and Hungary In the mids-1980s, for instance, the public sector share, in...