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Former Soviet Union: Privatization Not Cause of Corruption

Washington, 14 May 1997 (RFE/RL) - The privatization of enterprises in the countries of Central and Eastern Europe and the former Soviet Union has been tainted by widespread corruption, but a private study of the phenomenon finds that the incidence of corruption would be larger without privatization and is more prevalent in non-privatized economic sectors.

The study was conducted by Paul Siegelbaum, chief of the World Bank's Enterprise Development Division for Europe and Central Asia, and Daniel Kaufmann, a bank employee on leave as a visiting scholar at Harvard University's Institute for International Development. Kaufmann was last Chief of Mission for the bank in Ukraine.

Their study, published in Columbia University's Journal of International Affairs, says that the scale of privatization now underway in the transition economies is "historically unprecedented," but appears to be so riddled with corruption that many now believe privatization itself is causing the crime.

Their conclusion, however, is exactly the opposite: "Taking into consideration all other characteristics of the transition, privatization - with all its inadequacies - is preferable to its absence."

In fact, they say, the theft of assets in the region "effectively started a few years before communism fell." The study says "the state's assets were being stolen by enterprise managers, politicians and bureaucrats at an intolerable rate and, for most countries, the only alternative to sanctioning wholesale theft was to make the process somewhat more transparent and participatory and to try and direct these assets to other hands -- in pursuit of socially and economically more positive goals."

The study by Kaufmann and Siegelbaum says "the formalization of privatization as a reform strategy was forced on the transition economies by the simple fact that social, political and legal/fiduciary controls had collapsed in the wake of the Soviet Union's break-up."

While there is a general belief that privatization has caused the corruption, the study finds that "in some countries in the region corruption has in large part been fueled by the lack of privatization in agriculture and in parts of the energy sector, where the old nomenklatura has continued to benefit from large handouts, kickbacks and huge monopoly rents."

There is, however, a big difference in the level of corruption depending on the type of privatization. Generally, voucher-based mass privatization and liuidation are the least corruption-prone implementation methods, says the study, because they are usually quick, the level of administrative discretion is limited and there is more transparency and access to information.

The worst forms of privatization are management-employee buyouts and spontaneous privatization, both of which are "highly conducive to corruption" principally due to their slow pace, lack of transparency and high levels of discretion left to officials.

The study says the notion that the transition economies are now fully in the post-privatization stage is wrong. The region is in fact ready for a second, more comprehensive wave of privatization. "Given the magnitude of the holdings that still remain in the hands of the state, a faster and simpler second stage of privatization initiatives and programs ought to be implmemented."

Kaufmann and Siegelbaum say that where politically feasible, some countries should try to recapture the "daring early days of mass privatization programs...suitably adapted with the lessons learned."

They do not name countries, but say speedy privatization of remaining state interests would reap "substantial benefits compared with the alternatives." They even suggest "outright cancellation of residual state ownership in partially privatized enterprises."