1. Jaromír Šindel ECES Privatisation - Liberalization - Deregulation: Other Institutional Changes - Ways and Solutions The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

2. Topics Centrally Planned Economy –Main Characteristics,... Transition Process –Requirements ( Liberalize the economy, Stabilize the economy, Restructuring the economy ), Chronology of reform measures, … The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

3. Centrally Planned Economy Main Characteristics –the nationalized economy –the system of plans, centrally planned economy (Imperative planning x Indicative planning); 5-years plans –non-existent market –non-existent prices (no real prices with their information, allocation and motivating function), the distorted price system resulted in inefficient allocation of resources –the prohibition of entrepreneurship –the external relationships under CMEA – “soft market” –lack of competition, large uneconomical companies The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

4. Transition Process Requirements –1. Liberalize the economy, –2. Stabilize the economy, –3. Restructuring the economy The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

5. Kornai´ six characteristics of transformation process 1. Changes in the economic sphere in the direction of the capitalistic economic system; 2. Changes in the political field in the direction of democracy; 3. A complete transformation, parallel in all spheres (economy, political structure, political ideology, legal system, stratification of society); 4. Non-violent transformation; 5. Transformation under peaceful process; 6. Incredible speed “The presence of all six characteristics together is unique in world history” The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: Kornai, J., 2005.

6. The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Kornai´ six characteristics Source: Kornai, J., 2005.

7. Theoretical concepts of transformation –no coherent theoretical concept of transformation (see above) -the neoclassical economics -the Austrian School (Mises, Hayek); -the Freiburg´ School – Ordoliberalism (Eucken); -the Chicago´ monetarist (Friedman, Stigler); -the Public Choice (Tullock, Buchanan); -the School of Ownership Rights (Coase); -the New Institutionalism (Olson). The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

8. Transition Process – Liberalize the economy –price liberalization – to bring price controls to an end; –external (trade and exchange rate - convertibility) liberalization – to bring domestic economy to an international competition Chronology of reform measures The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague HungaryCzechoslovakia Cancellation of binding plans19681991 First steps to price liberalization19681991 Unification of exchange rate19811990 Opportunity of entrepreneurship19821991 Trade liberalization19891991 Note: In Hungary, 1968 - price liberalization of 58 % of producer prices and 2 % of consumer prices. Source: Kornai 1998, from Schejbal, J. (2002)

9. Transition Process – Liberalize the economy Price liberalization –The end of Shortage Economy (Kornai) – price didn’t reflex supply and demand relationships –in Czech Republic July 1990 – 10% increase due to foodstuffs prices, respectively the abolition of subsidies (negative turnover tax) January 1990 – price deregulation – 85 % of GDP under price regulation in 1990 – in December 1991 only 6 % of GDP (rents, energy, water, health services, transportation and communication) Trade liberalization – in the later lecture The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

10. Transition Process - Liberalize the economy P – Poland, C – Czech R., S – Slovakia, H – Hungary, B - Bulgaria Source: Blanchard, O.: The Economics of Post-Communist Transition Price liberalization – Consumer Price Index Development (Year 0 means the year of price liberalization) The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

11. Transition Process – Stabilize the economy Stabilize the economy –tight fiscal and monetary policies, fixed ER as the nominal anchor –Introducing conditionality criteria (for access to support) – largely derived form stabilization experiences in LDCs –If the market is liberalized – quick response of markets and private sector The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

12. Transition Process – Restructuring the economy Restructuring the economy –deetatization, –the end of price controls, –the end of production plans, –the end of vertical relationships, … –New tax system and the independent central bank for the effective implementation of stabilization economic policy The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

13. Transition Process – Restructuring the economy The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague The Evolution of Subsidies to the State firms (% of GDP) Source: Blanchard, O.: The Economics of Post-Communist Transition The ratio of subsidies in the Czech economy was around 2,4 % of GDP in 2002.

14. Transition Process – Restructuring the economy The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague The Development of Private sector (% of GDP) Source: IMF. From Hanoušek, Kočenda, Lízal (CERGE-EI, 2004), p. 100.

15. Privatisation Three different schemes 1. restitution 2. small-scale privatization 3. large-scale privatization The first round of privatization in early transition process The second round of privatization in later transition process and beginning of integration process The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

16. Privatisation Privatization techniques 1. auction 2. tenders 3. direct sales to pre-determined buyer (foreign investor, insider sale – management (MBO), m. and employees (MEBO)) 4. voucher system !!! the share of public sector in value added in Western Europe on the eve of the privatisation programmes ranged from 16,5 % in France to 10,7 % in the UK !!! The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

17. Privatisation The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: Schejbal, J. (2002)

18. Privatisation The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Privatisation and Foreign Direct Investment - comparison PeriodCzech Rep.Hungary The share of privatisation revenue in foreign currency in the total of privat. revenue 1990-961563 1997-998040 The share of privatisation revenue in foreign currency in the total FDI inflow 1990-968047 1997-995020 Source: Hunya (2000), from Schejbal, J. (2002)

19. Privatisation The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: World Bank, World Development Report: From Plan to Market, from Schejbal, J. (2002) Other Ways and Solution - comparison Method Goal Better Corporate Governance Speed and Feasibility Better Access to Capital, Know-how and Experts Higher Governmen t Revenue Greater Fairness Sale to foreigners +-++- MBO / MEBO -+--- Voucher privatization ?+?-+

20. Privatisation Voucher Scheme – the Czech case –for each wave every adult citizen –the first wave in 1992 and the second wave in 1994 –a voucher book contained 1000 investment points for 1000 CZ crowns –in each wave around 6 million Czechs –in first wave everybody gave around 35 th. crowns for voucher book, in second 25 th. Voucher system and the Regulation of Privatization Investment Funds – the Czech case –In first wave 72 % of all voucher points to IPFs, in second wawe 64 % –- Decrees - clauses restricted each privatization fund from obtaining more than 20% of shares in any company The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

21. Economic Transformation – the Czech Case Disadvantages of initial conditions –the most consistent system of centrally planned economy among the CMEA –the 98% state share of national product –the dominance of vertical relationships – conduct of enterprises –the foreign trade among the CMEA´ countries –prices were centrally set (only the cost point of view) The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

22. Economic Transformation – the Czech Case Advantages of initial conditions –the low foreign indebtedness –the low deficit in qualified labour force against developed market economies –“low inflation”, the existence of tight monetary policy in Czechoslovakia history –the financial discipline of the government and enterprises The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

23. Lessons from Transformation Rapid –Liberalize the economy Quick response of market and private sector Queues, uneconomic production and unwanted goods can be eliminated quickly –If macroeconomic and structural conditions are right – quick recovery –The macroeconomic discipline works – without low inflation no long-term growth Don’t forget on microeconomic view – the Czech Case 1995- 1997 –Essential structural reform – enterprises have to face budget constraints The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

24. Lessons from Transformation Gradualism –Danger that old system impedes the working of new forces of the market economy –Gradual price liberalization also gradual deregulation creates new deformation in the price structure. This new deformation need new subsidy, so never ending story of government intervention in market economy Flexibility –fiscal policy, exchange rate regime, … The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

25. Lessons from Transformation The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: Kornai, J., 2005.

26. Transformation - various experiences in the mid of 1990´s The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: McMaster - Transition and Transformation in Central and Eastern Europe. Leaders: Czech Republic, Hungary, Poland, and Slovenia, Slovakia, Baltic Republics: Lithuania, Latvia and Estonia. Not Loosers: Bulgaria, Romania, Croatia and Ukraine. Loosers: Belarus, Moldova, the former Yugoslavia, the former Soviet Trans-Caucasus Republics.

27. Transition or Transformation? The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: McMaster - Transition and Transformation in Central and Eastern Europe. Transition: „the predominant view (of policy makers) was that following the implementation of prescribed reform policies the state socialist countries would undergo a ‘transition’ from a state socialist command economy to a capitalist market economy“ From one point (the command economy) to second one (market capitalism). A totally broken down socialist institutions can be replaced by new institutions Transformation: „Transformation processes were not simply the result of an imposed design.“ various approaches to reform, political questions (democracy now) which approach to adopt. Best approaches were different according to political shifts (different shifts among countries) Different initial condition – different needs from reforms. Not one is suitable for all. Implementation of reform plans with huge adaptation, because the course of reforms was influenced by inherited political and social institutions and economic conditions.

28. Lessons for future. The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Make a project for privatisation at Cuba and Irag Goals, solutions, reasons.