Éva Voszka

From Spontaneous to Post-Privatization 

Tamás Sárközy:
A rendszerváltás és a privatizáció joga
(Political Transition and Privatization Law).
Budapest, Magyar Tudományos Akadémia, 294 pp.

Having already written two books on privatization (1991, 1993) Tamás Sárközy has now turned his attention to discussing the events of an entire decade and placing them in an international comparison. He claims that the fundamental difference between the Western and the Eastern European methods is that “Eastern European privatization is aimed at changing the system, while the Western European serves to preserve it… In countries of the former socialist bloc privatization eliminates state ownership and restores private ownership, while in Western Europe the reduction of the state sector serves to strengthen a full-fledged market economy” (p. 27). Consequently, the process of reducing state ownership in different former socialist countries has shown certain similarities with regard to objectives, existing conditions, legal framework and methods. Yet the dissimilarities are just as obvious. On the basis of the rate of change, Tamás Sárközy divides the countries concerned into three categories. Although he does not state so explicitly, the picture obtained from this categorization, shows a close correspondence with the depth of the socialist reforms and, not independently from this, the methods applied. Apart from privatization in East Germany, a region in a unique position, there is the group of the “bigoted” socialist countries, with a relatively slow privatization, based mostly on redistribution. This process produced some form of state capitalism, rather than a market economy—with very frail economic results, we might add. The second group is that of the “reform countries” bent on introducing market methods, where the two successor states of Czechoslovakia are the odd ones out for two reasons: one is the traditional form of
the planned economy, and the other is a significant volume of free, coupon-style privatization. Readers will get a detailed picture of corporate law and of the legal and institutional framework of privatization in the region from East Germany, through Belorussia and Albania, right on to Estonia and Latvia. This description—primarily drawing on German sources—concentrates on legislation: as to the empirical processes, conflicts and results concerning the transfer of state property into private ownership, Tamás Sárközy makes no claims to providing a detailed account.
For readers outside the legal profession, the book has one particular merit. In describing the Hungarian case, which covers almost half of the whole, the author considerably transcends this level of analysis. As a key person in the economic legislation of the 1980s, and as an active participant in the several rounds of the privatization laws, Tamás Sárközy knows just about everything about the expansion of the Hungarian private economy, and much of it he discusses in his book. Here he quotes numerous articles by Hungarian authors (conferring a honorary Hungarian citizenship on the American David Stark), including economic and sociological analyses.
“Hungarian privatization has, by and large, been successfully completed,” he describes the situation pertaining in late 1997. By and large successful? Or by and large completed? And what does the expression “by and large” mean? This element of uncertainty prompts the reviewer to contemplate the meaning of success (and the reader is invited to do likewise), as indeed Tamás Sárközy himself does in raising the question whether it could have happened in any other way. Another topic worth thinking about is how privatization can be brought to an end and on how we should proceed from there.
Let us start at the beginning of privatization, often referred to as “spontaneous privatization”. It is somewhat confusing that Sárközy often calls this process as “decentralized” or “self-privatization”, regardless of the point that this term was reserved for a later, specific construction for the transfer of property in Hungary. Still, we all know what he speaks about: the controversial and often tempestuous organizational and ownership changes of 1988–89, initiated by the firms themselves. Tamás Sárközy stands by his original view, and to my mind convincingly demonstrates it, claiming that these changes were set off not by the much-criticized Transformation Act of 1989 designed to facilitate the re-organization of firms, but by the resuscitation of two much earlier bills, of 1875 and 1930. (“Even poor Emperor Francis Joseph helped the Communists’ clutch on power,” Sárközy comments ironically.) What the managers of large firms wanted was to avoid bankruptcy and to procure tax relief, not privatization. With a few exceptions, the result was merely change of organizational and legal forms, rather than privatization.
“Spontaneous privatization” was not a Hungarian speciality; it seems to have become a synonym for corruption in all the countries concerned, although outside Hungary the expression covered different phenomena in different countries. (In many places, for example, it was used to describe the practice of the work force’s renting out the firm’s assets collectively.) A specific Hungarian feature was, however, that following the establishment of works councils in 1984, the initiatives and decisions of firms were put on a legal basis. In other words, this was the direction of organic development in Hungary. Back in 1991 Tamás Sárközy would already have preferred, for firms outside the strategic industries, a privatization based on an agreement between the management and the outside investor—under government control; thus, he would have liked to see the mechanism of decision-making (respecting the tradition of enterprise autonomy, and taking over other elements of spontaneous privatization) to be decentralized as a general rule. Although this idea was applied to a small group of firms, sales after 1990 remained basically centralized.
While the political and economic reasons for this solution are made clear in Sárközy’s analysis of 1997, he still insists that a construction based on a combination of government supervision and company decision might, in principle, have developed into “a functioning system within a few years. Perhaps Hungary could have been the only country where privatization, based on the status quo of enterprise self-ownership, could be conducted voluntarily to some degree” (p. 182.). I happen to be one of the few who agree with this conclusion, suspecting that the centralized and bureaucratic methods did more harm than good. But what criteria can we use to measure success?

Sárközy sees the most important achievement in the relatively rapid reduction of state ownership; in other words, in the realization of privatization as an end in itself, and I tend to agree. Another important consideration is that the majority of the former state-owned firms passed into genuine private ownership rather than into some kind of indirect state ownership or institutional ownership without small share-holders’ control. International experience confirms the view that the presence and interest of such core investors—complemented by adequate management experience and capital—form indispensable conditions for restructiring production. This reorganization of markets has been a vitally important task for almost every firm after the late 1980s. This made deep changes possible, enabling most of the state-owned firms to stabilize their situation, paying off their accumulated debts, and to become competitive on developed markets.
Tamás Sárközy adds a comment: “As for the conducting of the process, Hungarian privatization has not been a success story—and for reasons fundamentally objective, it could never have been one”
(p. 273.). The “objective” reasons were the economic crisis and the volume of the assets to be privatized, capped by such “subjective” reasons as incompetence, the lack or frequent change of governmental strategy, as well as the over-politicization of the issue and corruption. This was why “some people exploiting their privileged positions were able to amass large fortunes in the process of privatization. Nevertheless, there are already numerous examples to show that unless they prove to be competitive on the market, they will inevitably disappear, and no longer (or in any case not to a significant degree) will the state, or politics, be able to bail them out” (p. 275.).
Indeed, the key question is whether market competition, at least now with privatization behind us, is working at all. Does competition eliminate the weak? Are new actors allowed to enter the market freely and easily? Or is there still a network of personal connections, a form of state protectionism, which continues to shelter incompetent owners? Unlike Tamás Sárközy, I believe that today these are still questions rather than statements. In the matter of “yes” or “no”, the outcome is important not only from a narrower economic point of view, but also in a long-term social context. It would be difficult to deny that the legacy of ownership is uncertain, as the population broadly views the fortunes accumulated from privatization with growing suspicion. It will be difficult to quell the public outrage fuelled by the deficiencies of public control, by the evidence of direct political intervention and by the kidglove handling of the scandals reported. Public opinion will change if our everyday experience shows that good performance is rewarded—something that is an optimistic expectation at best, rather than a fact.
Therefore, the evaluation of privatization as “by and large successful’’ still needs time to be approved. As for “by and large completed”, the author himself emphasizes that the declaration of the end of institutional privatization does not—and cannot—mean the end of the process: “the continuation of privatization tasks should be expected” (p. 265.), and the sector of permanent state-ownership should also be “revised comprehensibly” (p. 267.) In Spring 1998, the portfolio of ÁPV Rt., the company managing the privatization process, still contained 278 firms, with assets worth nearly HUF 500 billion ($2.325 billion). In addition, there are 65 companies in long-term state-ownership, subordinated to branch ministries, including giants like Hungarian Railways (not mentioning here the treasury’s assets, and mainly of a non-profit character, worth about HUF 500 billion, as well as the property owned by local governments).
Bringing privatization to a close and “managing” the remaining state property pose new challenges. Existing laws and institutions, according to Sárközy, are unsuitable for meeting them. “A brand new show needs brand new actors” (p. 262). I have to repeat what I have said in connection with the evaluation of spontaneous privatization: I am one of the few who agree, without reservation, with all the basic principles expounded in the book: “in search for a new institutional framework, we should come up with a construction that is decentralized on the one hand, and is based on a variety of institutional forms on the other” (p. 262). According to the proposal, the legal successor of the privatization agency, the ÁPV Rt., should be a budgetary organization subordinated to the treasury, mostly to fulfil outstanding obligations. Having the necessary experience both in re-organization and in marketing, the fully state-owned Hungarian Development Bank would be put in charge of selling the assets that are still to be privatized. As to the small number of companies remaining on long-term ownership, their supervision would be returned to the ministries.
While one could argue about some details, at the time of writing, in the Autumn of 1998, this seems unnecessary. It would be unnecessary to elaborate on a model of a differentiated institutional framework, when people in decision-making positions favour centralization—just as was the case at the beginning of the privatization process. One might even say that whoever gets into power will automatically become a centralization addict. The successor of ÁPV Rt. was left essentially unchanged in a proposal (“Magyar Holding”) submitted to, but not discussed by, the previous government. The new government has taken over the old organization, and has declined discussions about both the conclusion of privatization and the new framework of state asset management.
Tamás Sárközy still appears in his old roles: he proposes reforms, debates passionately and, if necessary, drafts bills; he is tireless in publishing one book after another. This old role, unlike that of the state, is good. It is always worth reading Tamás Sárközy.

Éva Voszka
is Senior Economist at Pénzügykutató Rt., the financial consultants. Her main area of research has been the transformation of ownership structure and the changing strategies of the government and of firms. Her most recent book, A dinoszauruszok esélyei (The Prospects of the Dinosaurs), Pénzügykutató—Perfekt Kiadó. 1997, is on the fate of the large enterprises of the Socialist era in the years of transition.

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