In a column in the Washington Post (requires simple registration), Anders Aslund points out what goes wrong when even rigged privatizations are undone or called into question: property rights generally are rendered insecure. The flurry of insider-deals rigged by the former gangsterish administration of Ukraine caused a great deal of opposition among middle class Ukrainians who saw the family and close friends of the president getting special deals. Just as in Russia, where President Putin has called for reviewing such “flawed privatizations,” the new government has called for invalidating the property rights of the successful claimants and then re-privatizing them. In the process, of course, you can count on the current owners to try to strip the firms of any assets that can be taken out of the country and to milk them for revenue without investing in them. Others fear that their firms may be next. The result is worse, in general, than acquiescing in the unjust, corrupt, and rigged arrangements of the past (even the recent past) and instead focusing on freeing markets that will transfer the resources to the hands of those more able to manage them efficiently.
In the case of Russia, the results of bad economic policies have been masked by the increase in the price of oil exports. Russian economists have argued that if you subtract the increased income due to the change in the terms of trade, you find that in other respects Russia has experienced negative economic growth for the last two years. Ukraine doesn’t have that advantage/disadvantage (depending on how you look at it) to shield the public and policy makers from awareness of the results of policies that foster insecurity of property. It looks like the lesson is being learned — relatively quickly and quite painfully — in Ukraine. Let’s hope that the effect is fast enough and noticeable enough that the policies can either be reversed or very (very) quickly expedited. In general, I think that, except in cases where there are identifiable victims of theft, resource holdings should be allowed to stand where they are (“possession is nine-tenths of the law”).
Undoing old privatizations results in insecurity of property generally. Bad idea.
I think there is a problem with this method of privatization in general. Simply selling off state owned properties to the highest bidder can easily lead to corruption of the nature experienced in Russia. In addition, particularly for contries with strong socialist populations, such as those in South America, individuals perceive the transactio as a transfer of assets out of the hands of the “public”, thereby becoming lost. Instead, I propose that a fairer method of privitization would be to setup a corporation and distribute the shares of the corporation equally amongst the population. Private firms could bid for the rights to “own” this new corporation, receiving say 10% of the shares. By-laws would be in place similar to a REIT, whereby the vast majority of the profits are directly distributed to the shareholders. Of course, a stable equity market and strong property rights would still need to be in place, but you avoid the perception of a give-away and keep the assets in the hands of the population, while removing the management from the hands of the government.
Two points:
1. Re MP’s recommendation re shares: OK, but the method of dividing shares among the general population also is subject to corruption. A number of Russian firms were privatized this way; oligarchs and other insiders were then able to snap up shares at bargain prices and end up with majority ownership of the firms (sometimes they were able to influence the initial distribution of shares as well).
And auctions can be done in a non-corrupt fashion. Some of the Ukrainian privatizations under Kuchma (particularly of some of the oblast-level electricity producers) were transparent, honest, and successful, and resulted in substantial foreign capital and technical know-how coming in.
2. The more questionable privatizations were essentially theft, and ought to be investigated as criminal acts. Leaving them unexamined can also undermine private property rights, since it means that the sufficiently powerful can get away with theft.
The poster-child for corrupt privatization under Kuchma is Kryvorizhstal steel. The firm was sold to Kuchma’s son-in-law for about 1/2 of what foreign investors were prepared to pay, but the privatization was conducted in a fashion to prevent foreign participation. Reformers consider this to have been outright theft by the Kuchma regime, not unreasonably, and one of Yushenko’s campaign promises was to re-visit this.
I think we all agree that wholesale de-privatization undermines private property rights and is a bad thing. But allowing outright theft by pevious regimes is similarly bad. In egregious cases it ought to be addressed, particularly by using applicable existing law.
According to Aslund, Tymoshenko appears almost like a statist monster. Perhaps to him the prime minister’s attempts to break the Russian oil monopoly in Ukraine are a betrayal. But in Ukraine the experts are actually divided what to think about the recent crisis. Yushchenko’s approach to the problem is shallow – market pricing while there is no market in fact, the supplies are monopolized by the Russians.
Concerning re-privatizations, to me as a Ukrainian it would be a betrayal of the Orange revolution if Kryvorizhstal deal was not reversed. Perhaps foreign investors are scared but they shouldn’t be. The Ukrainian oligarchs have done a great job making foreigners believe the government is pursuing nationalization and violates their property rights. Has any enterprise with foreign investment been questioned (besides the Russian, for its own obvious reasons)? Not that I know of. So why are they allying themselves with the oligarchs?
Yushchenko has to keep his electoral promises but of course the review will be limited and has to be done through courts. Short memory is not a good thing in this case.
This is a good occasion to reflect that classical liberal or libertarian political philosophy and political economy are not merely about principles, but also about applying them to hard problems, and there is no principle to govern the application of a principle (else there would be an infinite regress). At some point one has to make judgements about the likely outcomes of different courses of action and their relative desirability or undesirability. On the one hand, one doesn’t want to allow the leaders of the state to use their positions to award resources to themselves and their cronies. On the other hand, one doesn’t want to undermine the stability of rights and the system of peaceful cooperation that is based on it. I see both issues at play in this case and I don’t see that there is an obviously best approach. I do hope that the process doesn’t drag out for a long time, as that would likely be worse than not having initiated it in the first place. As Olga notes above, the review will have to be limited (but note that Aslund indicates that the possible scope of the review — at least at the time he wrote his column — was remarkably wide) and carried out through the courts. But that indicates that it may also take some time. How much? Some means of expediting the process may be valuable to draw a line under the past and to allow everyone to proceed on the basis of well defined and legally secure rights.