"Real Estate and Investments. Legal Regulation", the journal

Issue 1, 1999

Some Economic Aspects of Privatization

Gladyshev A.N., doctor of economic sciences, professor, academic of the Social Academy of Sciences, Bredikhina О. М.

Now there is the hardest period in Russian history. There are great changes in the society. Economic formation change has been already for ten years. How do different so-cial classes take up "privatization"? Privatization creates new economic & moral envi-ronment for forming a new social class. Privatization defines an output rise, production structure of goods able to compete, market development in Russia, etc. Privatization forms the resources that can be used for social needs.

At the beginning of the privatization the conditions in Russia were better than in Eastern Europe & especially in Community's countries, such as Ukraine, Byelorussia, etc. The Government decreased financing "prestigious" projects & spending to raise cul-ture & economy of ex-Union Republics. (Russia had a negative economic balance almost with all ex-Union republics). The Government also reduced military spending. In the USSR spending on military included finances, energy, woods, metal, construction mate-rials, qualified staff.

It took such a short time for the state property to become private. We can compare this term with the terms of "collectivization" & "industrialization" in our country. In the early 1998 two million companies & organizations in Russia out of 2,7 mln were in pri-vate property. It made 74%, & over 81% including non-profit organization's property, mixed property, foreign legal persons property (Russian State Statistics Committee).

Analyzing Russian privatization & privatization in developed countries we can make several conclusions:

  • First, our privatization terms are much shorter than they are in developed coun-tries;
  • Second, privatization in Russia is not consistent & selective as it is in devel-oped countries, but general.
  • Third, Russian share of private companies exceeded the one of England, Italy, Japan.
  • Fourth, in Russia they "dismantled" state property, centralized economy man-agement, and they almost lost the state control over the property. All of these traits were not made in any other country of the world.

The Government turned out to be unable to protect its property. So, it made an at-tempt to violate private proprietors' rights by voluntary pressure on the economy- tax pressure, budget articles' manipulations, promissory notes' refashions.

The Main distinctive traits of the privatization in Russia are:

  • Giving out for free a part of a national wealth to the community in the form of deprived of assignment securities. It is not a characteristic for most of devel-oped countries;
  • Using many forms of "privatization". In developed countries they used just several forms of "privatization";
  • Bad substantiation of the privatization ways;
  • Poor legal & normative bases;
  • Wholesale approach to the privatization. There was no individual approach;
  • Forcing to invest shares in a short time;
  • Serious drawbacks in cost evaluation (lowering it) of the state property. They lowed the cost in favor of certain group of people;
  • Poor control over the terms of privatization;
  • Pawning the property with the following companies' bankruptcy;
  • Unclear ways of the privatization for most citizens.

At last there is one more important trait we would like to tell more about. Authors of Russian privatization feared democratic form of the property, which is workers' prop-erty. When workers own share capital it means capitalism with the "human face". Prop-erty is an economic power; much property is also a political power.

Russia as against the US & other civilized countries doesn't have laws that protect workers as proprietors. This stimulates workers' property annulling in corrupted man-agement. There is the Presidential Decree that says: "workers as proprietors are supposed to elect a third of the Board of Directors, it doesn't matter how much shares they have. Senior managers & outside investors elect two thirds of the Board of Directors. That's why they control the firms.

There is the point that workers' property is not effective because they waste capi-tal. Baltimore University's Research, USA, showed that invested capital income was 50% more in the 3000 examined firms with the workers' property than in companies without workers- shareholders. Another reason is that workers' property makes foreign-ers not to invest their capital in Russian companies. But companies like "Moven", "Mos-furnityra", "Saratov's Aircraft" refuse this. Workers' property in the companies attracted investors from USA, Germany, Finland, Italy, and the companies got essential capital.

Practice proved the best method to own & to manage the property is to use the col-lective's sense. Today, some Russian enterprises like the best companies of the West, Ja-pan, China ("Energy"-Voronezh, "Elinar"-Moscow region) apply new methods based on workers' participation in solving production problems, in making decisions, etc. It's im-portant to consider social, moral, & psychological consequences from management de-mocratizing. For example, in the US there is a public opinion that property should be controlled by the state, because it helps equally distribute wealth in the society.

Privatization's organizators tried to take socially right actions by giving securities to people. But it was evident that a value of the security depended on its owner. It was very small for most people. Investing the securities into different Funds meant giving them as a gift to the Board of Directors.

It was right that huge investments were required for successful social & economic development of the country. The State drew a conclusion to create a group of big proprie-tors. English, Polish & Hungarian practice shows big groups of small proprietors form the investment resources by concentration the savings in banks, investment companies, different funds.

Privatization seriously influenced the structure of Russian economics. There were great changes in Russian economy: number of employees in the sphere of material pro-duction increased by 10%, the same rise of industries was in non-material sphere. It is explained by the following: capital, especially private one, goes to profitable industries with a fast capital turn. Those industries are: foods, trade, services, finances & credits, communications, monopolies, except agriculture. It was a positive change in our econ-omy.

The positive moment is that privatization caused an output increase. Output made 89,8% of all industry's output under condition of 86,3% of employment. Consequently, labor productivity was 4% more in private enterprises than it was in state companies. In the conditions of non-working competition system an increase in public labor cost causes a rise in prices. Material cost level had increased 18% for 4 years (1993-1997).

The process of privatization is different in the regions (Table).

We see that most private companies & enterprises are in high-developed regions. The difference between levels of privatization in the regions makes 15%. There is a big difference between regions' types of privatization ways & privatization efficacy. It de-pends on the specific regional economy, citizens' attitude to privatization, political & economic situation, number of rich people, etc. The reform program based on two factors: price liberation & privatization. The factors were essential but insufficient. Price liberation caused a production drop, hyper-inflation, decrease in citizens income. A deep economic crisis was evident. It placed Rus-sia among "third countries".

Probably, it is essential to analyze the situation to understand why the unique pos-sibilities were not used; what fundamental principles of the economy were violated.

There are some main negative circumstances of the privatization:

  • Loosing the strong base of perspective industries;
  • Slow economic modernization;
  • Bad technical equipment;
  • Fast decline in supply for Russian products;
  • A fall of quality goods able to compete;
  • A decline in home savings; investment climate became worse;
  • New technologies were not used to produce;
  • Great number of unemployed qualified staff;
  • A decrease of production efficacy that caused a drop of possibilities to invest & a drop of standard of living.

Privatization made rich very small group of people. Middle classes consisted mostly from people who worked for mew proprietors. Most citizens became poor. There was no chance for competition development. So, companies didn't have stimulus to de-crease costs, to improve quality, etc.

The basis of all legal activities in economics is forming general principles of the activities. It means a privatization strategy should be based on:

  • Laws which guarantee personal rights to everyone;
  • Everyone's equality before the law;
  • Control over activities of the authorities;
  • Social & economic policy openness for the public;
  • Ways of policy realization;
  • Full & open information about income sources & income amount of top direc-tors & important businessmen, social guaranties to everyone;
  • Rules' system of an economic behavior that states main income comes from so-cially useful business;
  • Economic mechanisms adaptable to the market, & depending on rental pay-ments & environmental protection;
  • Special rules for monopolies. It is essential to use direct centralized planning & price setting; or Strong State control over prices, outputs, wages.

In other words, we should define rules to follow when carrying out a program. The rules should regulate that income of a worker or a commercial company can increase if the activity is useful for the society. There should be no other legal sources of getting rich such as rent, monopoly effects, privileges, negative deposit, percentage rate, etc.