EDITORIAL & OPINION — Act in haste, rethink at leisure — Privatize and plunder

In a recent discussion paper entitled Time to Rethink Privatization in Transition Economies, John Nellis of The World Bank takes a sobering look at the results of privatization in transition economies. He concludes that, despite some serious problems in places such as the former Soviet Union, the solution is not to halt or retreat from privatization but rather “to find ways to carry it out correctly.”

But really now, what else could we expect from the World Bank and the International Monetary Fund (IMF) than the barely cautious caveat that “while it may be time to rethink the concept a bit, it is not time to discard it”? After all, these are the very parties that advocated such programs in the first place.

Well, there comes a time to wake up and smell the coffee. And excuse us, people at the World Bank and IMF, but privatization in the former Soviet Union has been an utter and total disaster — an exercise in pillaging and plundering the likes of which have not been seen since Genghis Khan drove his hordes across the Russian Steppes. The search for a truly successful case study has been about as fruitful as the search for the lost continent of Atlantis. Better order in some double espresso.

Don’t get us wrong. We believe private ownership is the foundation of a strong economy. But without legal and administrative institutions to ensure and enforce property rights and fair markets, ownership in some countries isn’t worth the paper the deed is printed on.

Criticism of the privatization exercise in the former Soviet Union is mounting. Recently, newspaper stories described the takeover of coal mines in the Kuzbass region of Russia as “criminal.” Economic experts have called Russian privatization “a predictable economic disaster” and “a hotbed of crime.” Others say the program has been “a principal cause of the country’s economic decline.”

Experts are now saying openly what many have suspected for a long time — that what was supposed to be a program to distribute ownership and launch enterprises for the benefit of the people “instead became a transfer of productive resources from the state to a fortunate few who, unconstrained by tradition, effective laws or countervailing powers, stripped the assets from the firms and did not restore growth and create jobs.”

State-owned companies were, in most cases, not even sold to the highest bidder but rather to companies with corrupt links to officials controlling the auction. This led to what the Russians call semibankirshchina, the rule of the seven bankers, which refers to seven tycoons who are now believed to control up to half of the Russian economy.

Private investment in the former Soviet Union hasn’t been a bed of roses either. Take the case of an American businessman who set up a broadcasting joint-stock company in the Ukrainian city of Kiev. A government representative came calling, asking for a bribe and making threats about what might happen if it wasn’t paid. Well, it wasn’t paid and the popular radio station was quickly taken off the air.

That’s only half the US$15-million story. A former employee of the radio station with strong ties to government set up a rival company. With the help of authorities, the competitor raided his former employer’s studio and helped himself to equipment and materials. Within an hour, he was on the air, using his former company’s name, trademark, jingles and broadcast materials.

When the American businessman filed a criminal complaint, no investigation was carried out and no attempt was made to regain his property.

True, the Ukrainian government in 1997 did set up an anti-corruption campaign, but the minister responsible for the “Clean Hands” initiative was quickly canned when his investigations upset his cabinet colleagues.

There are major problems elsewhere in the world. Cronyism and corruption were major contributors to the Asian crisis, and some African nations aren’t much better than Russia.

The IMF is withholding millions in donor funds to Kenya owing to concerns about embezzlement. In the early 1990s, US$200-500 million was awarded by the Kenya Central Bank to set up a gold export company, even though the country has no gold mining sector. The money is believed to have financed the ruling government party’s election campaign and who knows what else.

The World Bank and the IMF now suggest that in countries such as Russia, where the institutional underpinnings of capitalism (law and order) are not present, “it might be better to delay privatization until this effort is bearing fruit.”

Sorry fellows, it’s a bit late for that. All the good stuff has been taken. And yes, these are the same “experts” who came up with the idea of selling gold to fund debt relief in poor gold-mining nations.