Re: Sachs on privatization

[Shann Turnbull <sturnbull@mba1963.hbs.edu>]

To solicit an answer to the question raised by the last posting I am
sharing a copy of this post with Jeffrey Sachs who I invited last month to
participate in the COG discussion at http://cog.kent.edu/

Let me explain from my own perspective why all privatisations are flawed,
not just those in Russia.  It is for the reason noted by Sachs that
"Philosophers have long noted that power corrupts".  All privatisations are
based on the Anglo system of corporate governance where control is
concentrated in a unitary board.  Directors of a unitary board have
absolute power to manage their own conflicts of interest.  They posses the
power to corrupt both themselves and the performance of their business.  

The adverse consequences of the flawed Anglo system of corporate governance
is held in check in mature market economies which have developed a web of
external checks and balances.  The intrinsic flaws of the Anglo system has
been hidden by the ethnocentricity of US scholarship in the theory of the
firm and the past ignorance of US scholars of alternative self-enforcing
systems of corporate governance described in my survey of corporate
governance listed at http://cog.kent.edu/lib/turnbull4.html  

As a result, the UK government has had to introduce special regulators to
supervise their privatisations but this did not stop directors paying
excessive salaries. The solution is to introduce divided power WITHIN
privatised firms to introduce internal checks and balances.  Competing
centers of power can be established by involving different stakeholder
constituencies as discussed in my articles such as 'Stakeholder governance'
http://cog.kent.edu/lib/turnbull6/turnbull6.html and 'Stakeholder
Cooperation' http://papers.ssrn.com/sol3/paper.taf?ABSTRACT_ID=26238  Ways
in which elements of self-governance can be introduced to public sector
firms without privatisation are set out in: 'Best Practice in the
Governance of GBEs', in The Australian Public Sector: Pathways to Change in
the 1990s', ed. J. Guthrie, pp. 99-109, IIR Pty. Limited, Sydney, 1995.

Regards

Shann


At 05:22 PM 2/11/1999 , you wrote:
>That made interesting reading. It would be nice to know why the author
>feels that the approach of mass privatisations in Russia was flawed. Many
>developing countries which have huge state enterprisesis are being advised
>to go in for mass privatisations to repay govt. debt and bring autonomy and
>benefits of privatisation for the growth of such enterprises.
>
>Umesh Gala
>
>12:18 01/11/99 -0500, you wrote:
>>Central European Economic Review
>>October 25, 1999      
>>Lessons of Transition
>>A reform architect looks at what worked --  and what didn't
>>By JEFFREY  SACHS  
>>--Mr. Sachs is director of the Center for International Development  at
>>Harvard University. He was one of the architects of Poland's economic
>>reforms, and subsequently served as an adviser to many governments in the
>>region, including Estonia, Kyrgyzstan, Mongolia, Russia, Slovenia and
>>Ukraine.   
>>
>>Once, when Chinese Communist leader Zhou En-lai was asked whether the
>>French Revolution had been a success or failure, he replied, "It's too
>>early to say." Ten years after the fall of the Berlin Wall and eight years
>>after the collapse of the Soviet Union, it's perhaps too early to assess
>>the social transformations in Central Europe and the former Soviet Union.
>>Yet, with weeks remaining until the new millennium, and many key choices
>>facing the West in policies toward Central Europe, the Balkans, and Russia,
>> it's important to learn what we can from the drama of the past decade.  
>>
>>There certainly have been surprises. Poland -- everybody's "basket case"
>>of 1989 -- proved to be the most durable and dynamic reformer. Poland's
>>economic growth easily outshines all of the other transition economies. By
>>contrast, the Czech Republic, which was everybody's favorite for a smooth
>>transition, finds itself mired in recession and controversy. Yugoslavia
>>exploded, and the rest of the Balkans remains embattled in economic
>>difficulties. The Baltic States, especially Estonia, outpaced the rest of
>>the former Soviet Union as expected, but the transition has proven more
>>difficult than predicted. And Russia has perplexed us all. It failed to
>>fall into utter chaos, as predicted by the gloomy Sovietologists. But it
>>has also stubbornly refused to become a "normal" country, as hoped for by
>>reform-minded economists like me. We thought the end of communism would
>>bring a quicker social rejuvenation in Russia, though I always argued that
>>the path would be tough and that Russia would need considerable help from
>>the West.    
>>  
>>In other words, optimists and pessimists can find evidence to support
>>their past predictions, but both have been surprised in one way or another.
>> This kaleidoscope of success and failure nonetheless offers some general
>>lessons:  
>>
>>Markets work, but require a solid legal framework to function well. The
>>end of price controls and the floating of exchange rates at the start of
>>economic reforms succeeded in ending chronic shortages and bringing
>>long-absent goods to the market. Quick liberalization unleashed the
>>beneficial forces of supply and demand, but speedy privatization didn't
>>have a similar effect. When privatization was rushed through via mass
>>voucher schemes -- as in Czechoslovakia in 1991, Russia in 1993, and much
>>of the rest of the former Soviet Union after that -- the result was usually
>> corrupt asset grabs, managerial plunder of enterprises, and paralysis at
>>the firm level. It didn't unleash the beneficial effects of private
>>ownership.  
>>
>>Civil society is critical to successful transformation. Philosophers  have
>>long noted that power corrupts. Even when governments begin with good
>>intentions, they often become corrupted, if power is left unchecked. Sure,
>>constitutions can provide some modest checks, but civil society -- with
>>associations of professions, religions and regions -- must provide the
>>deeper balance. Stalin was no fool: He kept his grip on power largely by
>>murdering and dispersing every manifestation of civil society. In Poland,
>>some vestiges of a civil society survived. (Stalin once complained that
>>putting communism in Poland was like putting a saddle on a cow.) The Roman
>>Catholic Church and the Solidarity movement deserve much credit for the
>>success of Poland's reforms, even though they often opposed many specific
>>policy proposals. In Russia, where civil society was dead, the government
>>acted with impunity and the results have been tragic.  
>>
>>Geography influences the pace and depth of transformation. Ironically,  the
>>single most important factor determining success has proven to be the
>>reform country's distance from Frankfurt. The closer the country is to
>>European Union markets, the more successful and dynamic the transformation.
>> States bordering the EU, such as Poland, Hungary, the Czech Republic,
>>Slovakia, Slovenia, Croatia and the Baltic States, have done much better at
>> attracting foreign direct investment, expanding exports and generally
>>achieving a successful transformation. Farther away, some of the Balkan
>>States are doing downright poorly. And the non-Baltic former Soviet Union
>>is in worse shape still.  
>>
>>History casts a long shadow in social life. 1989 was supposed to be a
>>fresh start, the awakening from a nightmare. But we must be honest; 1989
>>also awakened ancient antipathies and mythologies that had been repressed
>>in the Communist era. Who would have thought that in the late 20th century
>>Serbian mythologies over the Battle of Kosovo of 1389 could galvanize a
>>population behind the murderous cynicism of Slobodan Milosevic? History
>>conditions different societies to expect different things of their leaders.
>> In Russia, society expects little and gets less. In Poland, much more was
>>expected -- and demanded -- of the post-1989 leaders, and much more was
>>obtained in good governance.  
>>
>>Initial conditions matter in economic restructuring. During the 1990s,
>>glib comparisons between countries flew a mile a minute, without taking
>>into account vast underlying differences in economic structures.
>>Comparisons were often drawn between Russia and China, even though only 20%
>> of the Chinese work force was in state-owned enterprises while the Russian
>> figure exceeded 90%. Neither country smoothly solved the problem of
>>reforming the state-owned behemoths, but China didn't have to; it could
>>rely on its vast nonstate sector -- with hundreds of millions of workers --
>> to carry forward the reforms. Similarly, the chaos in Poland in the 1980s
>>helped to create the basis for rapid growth in the 1990s. By the time the
>>reforms began, the Poles had effectively smashed the stultifying hand of
>>central planning. By contrast, central planning was still very much intact
>>in Czechoslovakia until the Velvet Revolution in November 1989. As a
>>result, the Czech Republic and Slovakia are much more burdened by
>>unprofitable state enterprises today.  
>>
>>Western actions make a huge difference, but have consistently fallen
>>short. Perhaps the most damaging view in the West has been the persistent
>>feeling that the success or failure of transition was none of our business.
>> The glib optimists held that reform would be its own reward; simply
>>introduce markets and all will work out well, they said. The pessimists
>>maintained that no matter what we did, the situation would be terrible in
>>the transition economies for a generation to come, so why waste the money
>>and effort? These rationalizations of inaction proved tragically wrong.
>>When the West helped -- as with canceling Poland's debts or giving Poland a
>> special fund to stabilize the currency -- the results repaid the efforts
>>many times over. When help was withheld, such as when Yugoslavia appealed
>>for a rollover of foreign debts in 1990 only to be rebuffed by finance
>>officials in Europe, the inaction contributed to catastrophe. Ultimately,
>>history will judge the EU, the U.S., and the International Monetary Fund.
>>But overall, the slogan of the decade should be: "You pretend to reform,
>>and we will pretend to help you." The EU has delayed membership of the
>>countries of Central Europe for much too long. The EU and the U.S. were too
>> cheap and too narrow-minded to provide Russia with adequate financial help
>> in the early days of reform. And their Balkan policies have been a
>>decade-long study of neglect, missed timing, and inadequate response.  
>>
>>On a more personal note, my watchwords as an economic adviser to the
>>region were: Go for quick internal reforms, seek ample international
>>assistance, pay attention to morality, and insist on transparency in the
>>actions of all parties. This formula got a lot right, and in the places
>>where it was actually applied -- in Poland, Estonia, or Slovenia -- the
>>results have been salutary. But I was too optimistic about the
>>possibilities of mass privatization, an approach that I now think was
>>flawed. In the case of Russia, I repeatedly warned that reforms were going
>>off the rails. I even resigned from advising Moscow nearly six years ago,
>>and issued a strong public warning against Russian corruption and Western
>>inattention. Sadly, that particular forecast has proven correct.  
>>
>>Somehow, though, Russia's fragile democracy still survives, and could
>>provide a base on which to build. We can only hope that in the early years
>>of the next century, the new Russian and U.S. presidents will find the
>>wisdom and energy to fulfill the hopes of the democratic revolutions of a
>>decade ago.  
>>
>>*******
>>--
>>Dan Bell
>>International Program Coordinator
>>Ohio Employee Ownership Center
>>Kent State University
>>Kent, OH 44242
>>(330) 672-3028
>>(330) 672-4063 fax
>>dbell@kent.edu
>>http://www.kent.edu/oeoc/
>>
>>
>

Shann Turnbull
P.O. Box 266 Woollahra, Sydney, Australia, 1350
Phone: 02 9328 7466 office; 02 9327 8487 home
Fax: 02 9327 1497 home & office.  Mobile 0418 222 378
Outside Australia, replace first "0" with "61" after international access code
Life long E-mail: sturnbull@mba1963.hbs.edu
http://www.mpx.com.au/~sturnbull/index.html