Privatization In Bosnia

Privatization Theory

Privatization is the essential process in both the political and the economic transition from socialism to capitalism. Property rights are one of the most important differences between the two systems because they create a system of incentives, which ultimately leads to a more efficient utilization of resources. Additionally, individuals can respond to market conditions faster and more efficiently than the state itself. Hence, the transfer of ownership from the state to private agents is a key process in transition. Some authors even argue that privatization is transition (Bennett et al. 5), since it leads to redistribution of power and lays the foundations for development of a free market.

The basic definition of privatization is a transfer of ownership rights from the state to individuals. In a broader sense, privatization includes all processes that help countries move from socialism to capitalism. These processes emphasize the rights and responsibilities of individuals and reduce the role of the state (Ledyaeva). A broader view of privatization helps to explain the interplay between the politics and the economic system of any country. Political forces played an important role in the transition of most Eastern European countries. Bosnia was certainly no exception, and politics and corruption both played determining roles in the process of privatization .

Privatization is supposed to result in a better allocation of resources in an economy, in the sense that resources can be used more efficiently to create social wealth. The new governing model in a privatized economy would respond to consumers’ preferences (demand) rather than state preferences. In addition to these macroeconomic improvements, privatization is supposed to improve the performance of individual companies. Bayliss lists several factors in a privatized economy that result in this improvement (4). Some of the factors include clearer management objectives, better monitoring of the firm’s activities, ability to resist political pressures, and more efficient ways of responding to market conditions (ibid.).

Management in a socialist economy can have many objectives including the fulfillment of production targets, ensuring that current employees keep their jobs while providing new job openings, participating in creating better living standards for all members of society, etc. In a privatized economy, the immediate goal of management is profit maximization, which provides clear guidance in management’s decision-making process (Bayliss 4). By closely monitoring firm’s activities, management can make sure that resources are used efficiently and that operating activities such as production are constantly improved. Since managerial positions are closely linked to political affiliations, managers in a socialist economy might be forced to comply with political pressures. In a privatized economy, however, the managers would normally do what is best for the company. Finally, responding to consumers’ preferences and market conditions is much easier if the state is not involved. In the Soviet Union, for example, long bureaucratic procedures would make the smallest adjustments difficult.

Although privatization might appear to be a simple process where the state gives up its commanding role, the process is very difficult to achieve in practice. Certain fractions of the state bureaucracy and politicians are generally not willing to give up the power. In addition to this power struggle problem, the question of distribution of ownership rights over the state assets arises. Because of the complexity involved in the process, there were several privatization methods that have been introduced in Eastern European and other transition countries. Peculiar conditions in each country and the level of political determination to execute the process have led to mixed results (Bennett et al.).

The main three approaches to privatization are full privatization, mass privatization, and mixed privatization (Bennett et al. 7), all based on the sale price of the state assets. Full privatization implies that the assets are sold at a value greater than the company’s balance sheet indicates. Mass privatization occurs when the assets are simply given to people or sold for the value indicated in the company’s books. Mixed privatization is self-explanatory, and includes the combination of the other two methods (ibid.). Each of the three methods can be implemented through different means.

Full privatization usually occurs through direct sales method. The firms are publicly offered for sale and the potential buyers bid up the price. The highest bidder usually purchases the assets, but it is possible that some buyers offer more favorable sale conditions (i.e., promise of investment, increase in employment) and get the sale. In most of the cases, full privatization leads to outsider ownership (Bennett et al. 3). This means that the employees of the firm lose the ownership to investors from other countries or, less frequently, domestic investors. Foreign investors, such as the ones from already developed capitalist countries, have more capital and are more willing to invest than the domestic investors who lack capital and do not have the necessary experience in dealing with investments.

Foreign investors are expected to bring outside expertise, improve efficiency and help develop market institutions (Ledyaeva). Additionally, the government receives revenue from the sale of assets (ibid.). The fact that full privatization can cause the country to lose its assets to foreigners can be troublesome. In addition to this patriotic concern, full privatization can experience practical problems. Lack of domestic capital and undeveloped financial institutions (ibid.) imply that this method relies on significant foreign investment, which might not occur due to the fact that most transition countries are considered high-risk zones. This lack of foreign investment was particularly true for Bosnia, since many foreign investors were reluctant to engage in investment activities due to corruption and unstable political situation that resulted from the civil war in 1990s. Some of the countries that implemented direct sales method, however, include Hungary, Estonia, Tajikistan, Latvia, Bulgaria, Poland, and Slovakia (Bennett et al. 3, Bayliss 6).

Mass privatization occurs through the use of vouchers, which are also called coupons and certificates. Vouchers usually have a nominal value and can be exchanged for ownership in a company. Vouchers are distributed to general population using different criteria. Most adults are given a certain minimum number of vouchers. The number increases with the years of employment, military service, etc.