Here I will provide a brief and mostly general critique of the Nirvana scenario from the position of the economics of property rights. A comprehensive analysis of the transition requires the introduction of basic principles and concepts of the economics of property rights, which will be provided in the next chapter.
In the interpretation of property rights economics, classical Walrasian economics failed to analyse central economic institutions like property, the firm and entrepreneurship; it ignored varieties and real distinctions between different kinds of property regimes. “In the Walrasian model, where prices are sufficient for efficient allocation, institutions are superfluous; firms, clubs, tribes, or families cannot enhance efficiency” (Barzel 1989, p. 9). This comment coincides with Bajt’s above conclusion that the priority of the reform of socialist companies, in order to increase their efficiency, should have not been privatisation in the form of the
20 The following quote illustrates the typical understanding of the relationship between private
property and unfettered market: “[P]rivate property gives property owners the rewards of their labour on what is ‘theirs’, and thus a property regime encourages them to take care of their property – to invest their time, effort, and talents on it – or to sell the property to someone who can make even better use of it. When all this investment and buying and selling reaches equilibrium… the end result of a private property system is … the biggest possible pie.” (Rose 1987)
21 Here I refer to the Washington Consensus, a set of prescriptions for the emerging economies in
crisis promoted by the IMF and the World Bank. The term Washington Consensus was created in 1989 by John Williamson, at that time an adviser to the IMF, and originally refers to the reforms in Latin American countries. The set includes fiscal discipline, tax reform, trade liberalisation, a competitive exchange rate, and privatisation… (Williamson 2002). The reformers of socialist countries accepted the Washington Consensus giving special attention to privatisation.
concentration of ownership but liberalisation of the market. The Walrasian model is not concerned with the problem of what is responsible for the fact that the ownership of one company is dispersed among a number of shareholders while in another it is concentrated. Hence the question is whether the Walrasian model is appropriate to understand the transition from socialism?
It was already indicated (section 2.2) that the public-private distinction in some cases might be arbitrary. Ronald Cass concludes that “the difference between public and private enterprise is not absolute” (Cass 1988, p. 482). The distinction might be reduced to the conclusion that in the hundred percent public property world there was no competition, and production and consumption (supply and demand) are centrally organized. In a competitive environment private firms “pursue a single, clear, joint goal: profit maximisation. Public enterprises, in contrast, seldom possess a single or a clear goal” (Cass 1988, p. 483). Such reasoning implies that transfer of ownership from a public body to a private one is not the only path of reform and increase of efficiency of a public corporation22.
When such public property is transformed into private property the issue is what is actually transferred into the private sphere. Before privatisation these corporations were very often forbidden to stop producing loss-making goods and from replacing them by the production of profitable ones. They were also limited in the pricing of goods and services and were obliged to allocate services where they weren’t justifiable economically. After privatisation a new owner might (or might not) manage a resource freely, might transform it and even might close the corporation or sell it again. Property rights economics puts emphasis on an institutional environment that creates incentives and restrains the effects of economic activity. The institutional characteristics of a market decisively shape property rights. It has been concluded that privatisation without an increase in competition (and without the exposure of a new owner to risk) didn’t enhance the efficiency of privatised companies in Eastern Europe (Birdsall & Nellis 2005).
4.4 Privatisation and initial appropriation
In Croatia, shares of companies were initially allocated to workers, management, citizens and financial organizations. Development didn’t follow the further steps that were assumed would then occur by the above neo-classical scenario. I argue
22 The proposal that instead of privatisation the orientation of the management of a public
corporation towards profit maximisation would be a priority of reform will be discussed in chapter V.
that in Croatia the process of concentration of ownership took the form of an initial appropriation. Here I will briefly criticise initial appropriation from the perspective of the economics of property rights. A complete picture will be clearer only after a detailed description of the process of privatisation in Croatia (chapters VI, VII). I would like to recall that initial appropriation by definition occurs without a relationship to any prior property regime; consequently it occurs before market exchange; in the neoclassical framework it is a precondition for market exchange.
The economics of property rights identifies several causes of the dissipation of resources in the situation of initial appropriation (Lueck 1995):
(1) Control over a resource may be established too early (a rush for establishing control); since the only reason for appropriation is to take control over a resource then it occurs at the moment when the marginal costs of doing so are higher than the marginal return of a resource;
(2) Due to the obscure method of appropriation and lack of clarity of possession23, costly litigation over the control of a resource may be frequent;
(3) Sole ownership over a resource, when established, missed the opportunity of possibly more efficient cooperative uses of resources; depending on the attributes of assets and on the characteristics of a market an alternative ownership structure may emerge, for instance partnership, dispersed shareholding, franchising and the classical capitalist firm.
I would like to say that all three effects of the rush for taking control over resources were to be found in Croatia. After an initial allocation of shares it takes time to develop a transparent market that allocates securities to the place of their efficient use. An initial appropriation occurred, the property rights analysis concludes, because: contracting between shareholders is costly while an efficient market was not yet being developed; the estimation of the value of shares is uncertain; transactions between the holders of financial claims and other input owners (labour, skilled subcontractors and so on) are too expensive to provide a return which is adequate to former investment and to expected future value. Resources - i.e. companies that were not any more under public control - were exposed to
23 Initial appropriation occurs without the prior consent of those who would be affected; it is also
important to note that later justification may fail. If ownership is appropriated under “obscure conditions” and people conclude that the new regime could not be justified, it may happen that new owners make an effort to prevent the development of the rule of law (Hoff & Stiglitz 2004)
waste; the initiative to improve resources was weak. The economics of property rights recognises that under circumstances of dispersed ownership and without formal or informal regulatory support maintaining control over a resource (e.g. a company) is very expensive and the use of resources is not efficient.24
In Croatia, after the initial allocation of assets those who aimed to take control over resources tended to avoid the financial market (specifically it was a market for securities), due to the costs of making use of this market mechanism. A rush for control over companies through non-market exchange occurred. The owners of larger stakes of shares - i.e. banks, pension funds, some insiders in companies and the individuals who had the privilege to get loans to buy shares under non- transparent circumstances - exchanged blocks of shares without pricing in order to take control of particular companies.
The question is: How it was possible that Locke supposed that initial appropriation was a method for the improvement of resources, while in Croatia it led to the waste of resources? Beside the distinction of circumstances and other explanations, I would like to note the difference between the attributes of assets that were appropriated. In the Lockean case, as well as in the cases of initial appropriation in Australia, New Zealand and America it was land and unified ownership that didn’t require further regulation than elementary protection of assets. The chapters about privatisation in Croatia and Slovenia will serve to identify methods and circumstances of the use of very different resources and possible causes of the dissipation of resources. The rising transaction costs under unregulated circumstances and the related waste of resources were the causes of the economic crises in the countries in transition (Collombatto & Macey 2001).