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Central/East Europe: Looking At Privatization Darkly

Prague, 4 August 1997 (RFE/RL) -- Five highly-placed economic experts from Central and East European transition countries examined privatization this weekend and did what economists do. They disagreed.

The economists -- from the Czech Republic, Hungary, Latvia, Poland, and Romania -- joined in a panel discussion at RFE/RL headquarters in Prague. They reported on the efforts in their countries to make the transition from centrally planned into free-market economies.

With the wisdom and perspective gained from eight years of history since the fall of communism in 1989, the economists proffered firm conclusions. For the most part, they were five different conclusions.

Jan Bielecki, former prime minister of Poland and now a director in London of the European Bank for Reconstruction and Development (EBRD), put forth one proposition that all the experts could accept. He said the economies in transition to the free market have found that there are "many routes to the same goal."

The economists' panel concluded a three-week symposium on political and economic systems conducted by The Fund for American Studies. One hundred fourteen students from 22 countries attended the symposium, the Fund's sixth, this year.

Bielecki noted that the Czech Republic led the way in speed of transition by distributing ownership in state-owned enterprises to the citizens by issuing vouchers. Poland privatized through an eclectic mix of methods. Hungary emphasized sales to outside investors. Romania, he said, allowed existing managements to buy out enterprises, leaving 58 percent of them in the same management hands.

He said the Czech Republic's voucher privatization was economically flawed but was "politically the most successful."

Its strengths, he said, were its speed and its success in involving the citizenry in ownership. He said its great flaw was that it dispersed the new ownership so that power remained in the hands of old managements who were reluctant to restructure and adopt change.

The deputy governor of the Bank of Latvia, Ilmars Rimsevic, said Latvia originally set out to model its transition after the Czech Republic's success. But, he said, spotting the flaws in voucher privatization, Latvia delayed. And now Latvia is glad.

Rimsevic said that Latvia will seek to privatize mainly through direct foreign investment, which will bring in new capital, technology, and management expertise. He said the value of involving the public in ownership is overstated.

He put it this way: "What is the public? Just people like you and me who watch television and read newspapers. They don't know how to run a chemical company."

Hungarian economist Tomas Bauer, a Liberal Party member of Parliament, ruefully confessed that his party colleagues have asked him to stop defending Hungarian privatization in speeches. Everytime he makes a speech in defense of government economic policies, his party's popularity drops in the polls, he said.

"Privatization is not popular in Hungary," he said.

Bauer said one value of voucher privatization, in which citizens decided for themselves whether to trade their vouchers for stock in this company or that one, is that "it solved the valuation problem." In Hungary, Bauer said, the actual value of former state enterprises is about a sixth of their nominal book value. The Hungarian populace remains convinced the government is engaged in giveaways when it sells enterprises at fair market value.

Economics professor Robert Holman, since 1992 advisor to Czech Prime Minister Vaclav Klaus, spoke on behalf of the Czech Republic. He said privatization must be as rapid as possible. He added that the ultimate success of any particular privatization policy will be determined only several years from now. Holman said that indicators of Czech success include that 80 percent of its commerical property now is in private hands, that the country operates on a balanced budget, and that its investment rate is higher than that of other transition economies and double that of Hungary.

The chief economist of the Central Bank of Romania, Daniel Daianu, said that corruption has been a central issue in privatization. Nearly any privatization program will work if it is conducted honestly and fairly, he said. He added that corruption will disrupt the best designed system.

A student from Estonia, in a question from the floor, seemed to transform the entire panel of experts into one defensive alliance.

"If we are supposed to be believers in a free market," he asked, "Why do you central bankers control currency and interest rates? Why not leave it to the market? What makes you believe you know best?"

The panelists responded that they consider themselves imperfect at best, but that some regulation is essential. Said one: "You'll notice that we don't even agree among ourselves."