Does Privatization Require Policy for Reform?

Introduction

Governments are controlled by people, and where there are people, there is a human tendency toward self-preservation. This can influence people to prioritize agendas that achieve specific individual goals over those that more broadly support society. The extent of such influence on government action is evident in numerous instances of privatization. While privatization can positively impact an economy, “the success of privatization largely depends on the government commitment to legal and regulatory reforms.”[1] Unfortunately, instead of committing to such reform, decision makers often focus on the economic prosperity privatization may bring them individually. It is because of this human tendency towards self-preservation that one must ask, while it is a government right to privatize any industry, should there be policy implemented which ensures governments maintain necessary reforms to achieve successful privatization?

Discussion

The social effects of privatization are evident in Uzbekistan. The country has renounced their once perpetual use of forced labor by introducing the “cotton cluster” concept, claiming to give more sovereignty to farmers. The clusters, “groups . . . who provide capital and source the means of production to farmers,”[2] supposedly allow farmers to negotiate contracts directly with clusters instead of relying on the state.[3] At first glance, this seems to be the reform which human rights proponents have been advocating for. However, the reality is that the enforcement of the cluster concept has done little to support social stability within Uzbekistan. Unfortunately, instead of experiencing more independence, farmers are being coerced into “voluntarily” giving up their land leases to private clusters.[4] Farmers leasing their land from the state “have found themselves at the mercy of unscrupulous officials (hokims) with the assistance of the police and local prosecutors.”[5] Unfortunately, “by coercing farmers into . . . ‘voluntar[ily]’ . . . terminat[ing] their land leases, farmers have no right to compensation”[6] under Uzbek law. What was once promised to farmers as a new way of life has left them with less stability than what they experienced prior to privatization. Unfortunately, the events in Uzbekistan highlight the consequences of privatization when a government is not committed to public reform and is instead focused on their individual wealth.

Similar social impacts can be seen in East Germany. With the goal of restructuring in the late 1980’s, the Privatization Model of the Treuhandanstalt (THA) was embraced across East Germany[7]. However, the short-term impact on citizens’ standards of living during privatization brings this approach under scrutiny. One reason for this is that the THA did not transfer “people’s shares” to the general population as promised in the German Unification Treaty, and instead focused on quickly transforming East Germany to a market economy.[8] The German Unification Treaty specified that all properties that had been expropriated from 1933-1945 and from 1949 forward had to be returned unless given irreversible public use or which had been sold to new private owners.[9] Unfortunately, East Germans never saw these restitutions. To achieve economic goals, the THA adopted rapid privatization by selling industrial firms to investors.[10] To make firms more attractive, the THA sold, liquidated, or restructured firms which had once accounted for much of East Germany’s work force. As a result, many East Germans experienced sudden poverty. In fact, the total unemployment rates in East Germany doubled during the THA’s reign, from 7.3% in 1990 to 15.2% in 1994[11]. The economic shock suffered by East Germans further emphasizes the impact that privatization can have on society when the instigating party is not obligated to prioritize promises of social reform during privatization.

Unlike the negative social impacts of the approaches to privatization in Uzbekistan and East Germany, Czechoslovakia’s approach highlights the social benefits which can arise when a country prioritizes social reform during privatization. In the early 1990’s, Czechoslovakia began the process of privatization.[12] While the country began privatization during a time of favorable economic conditions,[13] it was their social focus which largely contributed to their success during privatization. The approach focused on quickly transferring about seventy to eighty percent of state-owned enterprises into the private sector.[14] Several initiatives were adopted to achieve this goal. One initiative was the nontraditional “voucher method” which focused on “distributing vouchers which could be exchanged for shares in state-run companies to the public and funneling them through investment funds.”[15] This initiative taught citizens how to invest which provided them, and thus the Czech economy, the opportunity to generate revenue. Another initiative was “natural restitution,” which involved “the restitution of nationalized property to the original owners or their heirs.”[16] This initiative quickly granted Czech citizens property rights, which allotted them social power; an opportunity to generate income; and stable housing. The Czechoslovakia approach to privatization not only benefited society by establishing social reforms but did so in a way that better prepared citizens, and the country as a result, for a successful privatization process.

Conclusion

            After analyzing privatization in Uzbekistan, East Germany, and Czechoslovakia, it is evident which countries’ approaches to privatization were most influenced by decisions of self-preservation. In Uzbekistan and East Germany, despite promises to the public that privatization would increase citizens standards of living, profits were placed over social welfare. Conversely, citizens in Czechoslovakia reaped the benefits of privatization because the government remained focused on maintaining successful social reforms. Any initiative that de-emphasizes social impacts is not one that can have long term success because a stable society is the basis for which governments can build upon. It is therefore crucial to a country’s success during and after privatization to prioritize social goals. Despite this, decision makers often focus on areas other than social stability during privatization due to their inclination towards self-preservation, as can be seen in Uzbekistan and Easy Germany. Without government commitment to true restructuring, privatization in any country will mimic the unfortunate consequences for the community as has occurred in Uzbekistan and East Germany. Therefore, it is crucial to implement policy to hold governments accountable to meet the standards of imperative social reforms.



[1] Adnan Filipovic, Impact of Privatization on Economic Growth, 2 Undergrad Econ. Rev. 1, 27 (2006).

[2] Journey of Change, Case Study: Uzbekistan Eliminates Systemic Forced Labor in Cotton Harvest, https://changeinuzbekistan.com (Last visited Aug. 30, 2022).

[3] Id.

[4] See Lynn Schweisfurth, Uzbekistan: Privatisation and land grabs by cotton monopolies leave farmers destitute, Business & Human Rights Resource Centre (2021) https://businesshumanrights.org.

[5] Uzbekforum.org, Illegal Land Confiscations in Uzbekistan, Housing & Land Rights Network Habitat International Coalition (2022), https.hlrn.org.

[6] Id.

[7] See Paul Windolf, The Transformation of the East German Economy, 124 Polish Socio. Rev. 333, 334-335 (1998).

[8] Id. at 335.

[9] See Hans-Werner Sinn, Privatization in East Germany, Working Paper No. 3998 Nat’l Bureau Econ. Rsch. 1, 3 (1992).

[10] See Dieter Bos, Privatization in East Germany: A Survey of Current Issues, Working Paper No. 92/8 Int’l Monetary Fund 1, 1 (1992).

[11] See Karl Mayer, Martin Diewalk & Heike Solga, Transitions to Post-Communism in East Germany: Worklife Mobility of Women and Men between 1989 and 1993, 42 Acta Socio. 35, 38 (1999).

[12] See Thomas Jezek, The Czechoslovak Experience with Privatization, 50 J. Int’l. Aff. 477, 477-478 (1997).

[13] Id. at 477.

[14] See Pavel Mertlik, Czech Privatization: From Public Ownership to Public Ownership in Five Years?, 35 E. Eur. Econ. 64, 65 (1997).

[15] Jezek supra note 12 at 478.

[16] Mertlik supra note 14, at 65.