INSTRUCCIÓN DE TRABAJO

The model of distribution usually supposes that all citizens, or selected fractions of citizens (adults, or employed people), receive a portfolio of shares of all the companies to be privatised, or a voucher denominated in a particular amount of points. These vouchers are then exchangeable for the shares of a particular company in public auctions, or may be invested in a fund that competes at the auctions of shares of companies. The following analysis is not a criticism of the voucher model as such. This criticism is oriented predominantly towards the theoretical arguments that promoted voucher privatisation in Croatia, and particularly to the strong claim that the assets to be privatised at public auctions should not be valued prior to the auctions taking place.

12 _{One might think that there is a similarity between this understanding and the understanding of}

property rights theorists in Slovenia (Mencinger and Bajt) who insisted that privatisation should not destroy a company (resource). This reasoning is superficial. Both Slovenian economists insisted on such a development of the market for property rights which would increase the efficiency of the use of resources. For example, Bajt proposed that an initial step in the reforms should be the removal of barriers to the market for intangible property inside the firm (skills, knowledge, experience). We remember that the regulation of that market was rigid under socialism. Mencinger proposed that firms themselves prepare the program of privatisation ( Bajt 1992, Mencinger 1996)

The distribution of a mixture of shares or vouchers was in Croatia mainly advocated by those who were opposed to the selling proposal. The model of distribution was briefly described in The Conception and Strategy of the Economic Development of the

Republic of Croatia (CSEDRC 1992, p.26). The authors provided an illustration of

how it would look, and it was expected that this illustration would be convincing. Total assets of an estimated 25 billion dollars were assumed to be distributed to five million people (the estimated population of Croatia at that time). Every citizen was to receive shares of a nominal value of 5000 dollars. Companies that were supposed to be privatised through the voucher model issued shares. The nominal price of shares was supposed to be 100 dollars and the number of shares to be issued would depend on the book value (the nominal value) of every company. It was supposed that companies might be classified according to several criteria of efficiency into five groups. Then every citizen receives 10 shares (1000 dollars) from each of the five groups, in total 5000 dollars in shares. Then begins the exchange of shares. It was explained that the 5000 dollars in shares could actually be distributed in the form of vouchers. In this case it was supposed that vouchers would be initially exchanged for shares at public auctions. The proponents of the concept were “confident that an intensive trade on the capital market would very

soon transfer the dominant portion of ownership into the hands of really interested

entrepreneurs” (CSEDRC 1992, p. 27, my translation and my emphasis).

The authors also emphasised the advantage of this method of distribution: “The distribution of shares is an acceptable [method] for Croatia. The advantage [of the method] is that it doesn’t require an exhausting process of the evaluation of every

particular company.” (CSEDRC 1992, p. 26, my translation and my emphasis.) A

number of other authors shared this view. I will quote here two who were the most active advocates of the method of distribution. Drazen Kalogjera (1992), the first Croatian minister of privatisation concluded: “All estimations of [the value

of] socially owned companies, upon which thousands and thousands of German

Marks were spent, unless there was a market of companies, and prices formed on it, represent a purely administrative valuation without any practical use.” (My translation and my emphasis.) An influential journalist Drago Buvac (1990, p. 99) also stated: “The capital market gives the first evaluation of social assets.” (My translation and my emphasis.)

The above conclusions followed obviously from criticism of the administrative appraisal of the value of assets. It was certainly a consequence of the unfortunate experience of administrative price regulation under socialism. Seen from that

viewpoint the arguments were persuasive. The creators of the proposal believed that intensive trade would take place in the capital market. But this was an incorrect and contradictory prediction. This is the point where the understanding of the market that was promoted by the Croatian economists fails. Intensive trade in the capital market is impossible without an intensive evaluation of the assets to be traded. Croatian economists believed that any evaluation of assets and estimate of their value before market exchange is necessarily arbitrary; and that it might be misleading and even deceptive. One can agree with this belief. Therefore, they concluded that property rights were to be distributed without any evaluation of assets. This reasoning was wrong.

The principle that was promoted was – let the market evaluate assets. They explicitly believed that intensive trade would occur. Let us consider the options that were available to the person who received vouchers or a portfolio of shares: (1) to sell them immediately to the first bidder; (2) to retain them without caring or knowing what he actually owns (3) to investigate what was the value of his ownership. The first two options will be commented upon later (chapters VI and VII). As for the third option, that the owner of the shares should investigate the value of their ownership, according to the ideas advanced by the promoters of this view, it was impossible for anybody to estimate the value of ownership before market transactions take place. The conclusion leads to an absurdity: If one owns a voucher, one would not buy shares; one would “let the market estimate the value of shares first”. Going further into this absurdity, if the assessment of a company’s shares is impossible for anyone, but it is only possible for the market, then the voucher owner will let the market buy shares. In fact, without information, market participants would themselves refrain from market transactions. Instead of the sudden emergence of a capital market and intensive trade that was assumed, the proposal “let the market do its job” led to the disappearance of the capital market. In Croatia, intensive trade on the capital market did not take place. In many countries where the voucher method was implemented, a particular fraction of voucher owners refrained from participating in the market; which fraction of shareholders didn’t participate, depended on the transparency of the market and other institutional issues.

One can say that the first wave of privatisation in Croatia wasn’t exactly a voucher privatisation. The Law stipulated that the company which applies for the transformation of ownership includes in the application an evaluation of its assets. Usually it was a book value. That was to be certified by a licensed accounting office.

But the point here is that there was a missing market. Nobody in Croatia predicted that market exchange might not take place after the initial allocation of legal property rights to individuals and if there were no legal barriers to trade. In my opinion this was a reflection of an intensive propaganda of the concept ‘let the market estimate the value of shares first” which systematically neglects market information.

In Slovenia the possibility of a missing market was explicitly envisaged and a scenario for the building of a market step by step was considered (Simoneti 1997). This was a consequence of two different understandings of the market and property rights in Croatia and Slovenia. Individuals in Croatia received shares, and their value was officially estimated but this estimation was systematically disregarded and undervalued, as it didn’t have any relationship with the ‘real’ value. The accounting offices used this very idea to reject any responsibility for the estimated price of assets that was in fact certified by them. Insufficient regulation of market information and low transparency, which accompanied privatisation, has been a standard characteristic of the market in Croatia. This approach I shall describe as a market without information. It relates to the idea of “a market without property”, that is to say the concept of a market that doesn’t take into account the costliness of property, which was analysed in Chapter III. The description of the process of privatisation in Croatia in the following chapters will show that in reality it also became a market without prices.