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.