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05/13/91

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Privatization expected to continue in Eastern Europe

STANFORD -- The drive to privatize businesses will continue throughout Central and Eastern Europe, participants in the "Out of the Red: Economic Transition in Eastern Europe" conference at the Hoover Institution said.

The focus now shifts to the reassignment and redistribution of property rights, the means by which that will occur, and the speed with which the change will come.

During the Wednesday, May 8, session on privatization, Jacek Michalski, senior legal counsel with Poland's ministry of ownership changes, pointed to the recent revival of the Polish stock market and the privatization of almost 140 enterprises in about six months in that country.

Hoover Senior Fellow Thomas G. Moore said the good news of continuing privatization is tempered by the bad news that it could take decades before Eastern Europe catches up with the rest of the world in terms of private property ownership and free markets.

Moore noted that in the United States, it took the South more than 100 years after the Civil War to catch up with the North in open trade.

That view was disputed by Jeffrey Sachs, professor of economics at Harvard University, who insisted that communication and high technology will speed the closure of the trade gap.

"What we really need to do is think of ways to reassign property rights," Sachs said. "That's what this all comes down to. What's happening now is not the right kind of privatization."

He recommended the use of a modified voucher system that would, with some speed, distribute shares of an enterprise among workers, investment funds, pension funds and state commercial banks.

"We do have two problems," Sachs said. "One is that since 1989, Eastern Europe has been a dream world for technocrats. This has been a most apolitical moment. But this could be a fool's paradise, and we could wind up seeing multi-party coalitions dictating policy.

"The other problem is that capitalism is not understood. We see the stock market deified, but this is not the point to start. Let the stock market evolve over 20 years. We first need to work on property rights."

Michalski and Ventislav Antonov, economic adviser to the president of Romania, expressed reservations about current methods used to assign those property rights. They said a tension exists between the desire to compensate the current owners of property and the need to open the process to potential owners. They also said distribution of shares among current workers may not be in the best interest of a business.

Roman Ceska, adviser to the minister of privatization in Czechoslovakia's Ministry of Economic Reform and Privatization, and Csaba Szabo, economic counselor for the Hungarian embassy in Washington, D.C., related the experiences of their respective countries as they embark on privatization.

Szabo pointed to Hungary's long-running good experience with privatization, and enumerated the factors that assisted with the development of the situation: a favorable investment climate, a good banking system, tax holidays, low manufacturing costs, free ownership of real property and access to the country by foreign firms for the creation of joint partnerships.

Venture capitalist Franklin Johnson, who is a lecturer at Stanford's Graduate School of Business, agreed with Szabo, but countered with his own list of factors essential for a strong, free economy: a functioning democracy, understanding of entrepreneurship, stable legal structure and organizational rules, a national pool of talent and research programs for new ideas.

Hoover Senior Fellow Rita Ricardo-Campbell, a member of the board of directors at Gillette, related how that company built a razor factory near Leningrad. She recommended, based on Gillette's experience, that governments reduce layers of bureaucracy to expedite business establishment, that nationals be trained to lead the firm and that good communications systems including telephones, facsimile machines and computers be considered to be of the highest priority from the planning stages onward.

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