By Eric Hontz
The stakes for reforming Ukraine’s state-owned companies are high: these companies are the lifeblood of a corrupt, sclerotic crony capitalist system that scares away potential investors, drives off international donors, and robs the Ukrainian government of legitimacy. But privatizing them as quickly as possible is not the solution.
Even after mass privatization in Ukraine in the 1990s, the government still owns a large portfolio of companies in a variety of sectors – from heavy industry to banking — that employ over 900,000 employees, far more than any private firm. Reforming these state-owned enterprises (SOEs) has been a slow process and remains incomplete due to weak corporate governance, unmotivated management, and a near-total lack of transparency. None of these problems will be solved by simply speeding up the process.
The demand for rapid privatization is a familiar tune. Western “expert” advice in the early 1990s led to a huge transfer of wealth from the former Soviet Union to a handful of connected insiders, particularly in Russia: first through voucher privatization and later through the disastrously corrupt loans-for-shares schemes in the run-up to Russia’s 1996 election.
To get an idea of the scale involved, a 1993 paper by several Western economists who worked directly on the voucher privatization program estimated that most of the Russian Federation’s civilian industrial base – nearly every plant, factory, and mine in the country – was effectively sold off to insiders for between $5 and $10 billion, less than it would have cost to buy a single mid-sized Fortune 500 company (and roughly equal to the market capitalization of Whole Foods today). Still, at the time they regarded this program as a great success.
Unfortunately, the corrupt and predatory “oligarch” elite, created practically overnight, proved to be more interested in asset-stripping than in transforming their new firms into firms that could compete on world markets. What followed was the largest peacetime economic collapse of any country in recorded history. The sheer volume of banditry surrounding state assets during the 1990s led many average citizens in post-Soviet countries to believe that lower standards of living and a complete lack of justice were a natural part of living under democracy. Read more…