2. TRANSITION2. TRANSITION

Privatization

Macroeconomic stabilization

CHANGES OF THE ECONOMIC SYSTEM

Ownership

Management

State or social Private

Centralised state/

centralised

Soviet Union

private/

centralised

South Korea

Decentralised social/

decentralised

Yugoslavia

private/

decentralised

USA

COMPONENTS OF TRANSITION

• 2.1. Privatization• - objectives - efficiency, justice, democracy• - complexities of privatization• - privatization models• - outcomes of privatization• 2.2. Macroeconomic stabilization• - assumptions and Washington consensus• - transformational depression • 2.3. Microeconomic restructuring• 2.4. Creation of a new economic system• A Case: Slovenia; Could SEE countries follow

Slovenian experiences?

DILEMMAS OF PRIVATISATION MECHANISM

Distribution Sales

to whom to whom

to everybody - to employees to citizens - to foreigners

- equally - Patterns

- by age - stock market

- by years of employment - auctions

- Patterns - workers-managers by outs

- direct - debt equity swaps

- indirect - direct sales

- Restitution - increase of capital

- in kind

- compensation

Privatizations in CEE Countries

Czech Republic: a rigid socialist system, 96.7% of production in state industries, Vaclav Klaus, shock therapy to market without adjectives, restitution (100.000 units), small privatization - sales (12300 units), large privatization – public auctions, public tender, direct sales, sales of shares for vauchers, employees stock ownership plans; vauchers collected by private investment funds, direct sales of companies Avia Praha, Skoda auto, Tabak Kutna Hora, banks, telecomunications etc. To foreign owners

Estonia: small scale privatization in 1990, large scale Privatization Act of 1992- direct sales to foreign investors, vauchers in 1994 marginal, Eesti Telekom, Estonian Air (Denmark), Estonian Shipping Company (American/Norwegian), Tallina Vesi (utilities), electricity, banking sector

Hungary: “gulash socialism”, centralized privatization for small scale privatization, management by-outs, former owners, new phase in 1995 by selling companies to multinationals, golden share in some companies

PRIVATIZATION BAROMETER

SHARES OF FOREIGN STOCK IN CEE COUNTRIESSHARES OF FOREIGN STOCK IN CEE COUNTRIES

Country stock FDI/GDP in % Share of foreign banks1994 1999 2003 in assets 2001

Czech Republic 11.0 14.1 48.0 90.0Estonia 9.2 19.3 77.6 98.9Latvia 7.6 13.9 35.1 65.2Lithuania 0.7 5.7 27.2 78.2Hungary 17.1 25.3 51.8 88.8Poland 4.1 5.8 24.9 68.7Slovakia 6.1 4.2 31.5 85.5Slovenia 9.2 9.5 20.7 20.6

MACROECONOMIC STABILIZATION

Assessment of economic situation: D>S, Washington consensus;

Increase of Supply: liberalization of imports, pure socialist production goods;

Decrease of Demand: price liberalization, restrictive credit policy, restrictive fiscal policy; freeze of wages, fixed exchange rate;

Results: economic depression, measured and actual, unemployment, social diferentiation;

Slovenian transition model; ignorance of Washington agreement, gradualism, floating exchange rate

ASESSSMENTOF ECONOMIC SITUATION IN ASESSSMENTOF ECONOMIC SITUATION IN SOCIALIST COUNTRIESSOCIALIST COUNTRIES

Aggregate supply and demand curves

Demand Supply

Shortage

output

Prices

Equilibrium price

Supply Demand

Price insocialism

TRANSFMATIONAL DEPRESSIONTRANSFMATIONAL DEPRESSION

50

60

70

80

90

100

110

120

90 91 92 93 94 95 96 97 98 99 00

index 1990=100

Vzhodna Evropa

nekdanja SZ

CEE

CIS

TRANSITION MODELS IN CEETRANSITION MODELS IN CEE

1.Baltic 2.Visegrad 3. Slovenia

Starting position EE, LT, LV CZ, HU, PL, SK SI

Privatization sales to sales to free distributionforeigners foreigners MW by-outs

Stabilization fixed ex.rate switching floatingfiscal discipline adaptable adaptable

Social Considerations absent present important

Restructuring absent by FDI decentralized

Problems CA deficit CA deficit balanceemigration budget deficit EMU problems

MODEL neoliberal emmbeded neocorporativistneoliberal

PUBLIC EXPENDITURES AND SOCIAL PUBLIC EXPENDITURES AND SOCIAL COHESIONCOHESION

20

24

28

32

36

40

32 36 40 44 48 52 56

Public expenditures/GDP

Gin

i coe

ffic

ient

3

4

5

6

7

8

32 36 40 44 48 52 56

Public expenditures/GDP

Ineq

ualit

y co

effo

cien

tBG

CZ

CY

EE HU

LT

LV

MT

PLRO

SI

SK

BG CZ SI

CY

EE HU

LT

LV

MTSK

PLRO

EXPENDITURES FOR HEALTH AND EDUCATION EXPENDITURES FOR HEALTH AND EDUCATION 1994-20031994-2003

8

9

10

11

12

13

14

CZE EST H LAT LIT PL SLK SLN

% GDP

GINI COEFFICIENTS, 2000-2006GINI COEFFICIENTS, 2000-2006

20

25

30

35

40

EU15

BG CS

CY

EE

HU

LT

LV

MT

PL RO

SI

SK

Gini(2000)=28.4Gini(2006)=30.2

SOCIAL COHESION INDICATORS IN NMSSOCIAL COHESION INDICATORS IN NMS

2000 2006

Public expenditures/GDP 41.6 40.5

Gini coefficient 28.3 30.3

Inequality coefficient 4.35 4.91

Social Security Expenditures/GDP

11.9 10.9

ECONOMIC PERFORMANCE IN 2007ECONOMIC PERFORMANCE IN 2007

(1) (2) (3) (4) (5) (6) (7) (8)

EU27 100 2.9 2.3 7.1 -0.9 58.7 -0.6 4.8

BG 38.1 6.3 7.6 6.9 3.4 18.2 -21.5 3.5

CZ 81.3 6.8 3.0 5.3 -1.6 28,7 -3.3 3.5

EE 70.6 10.4 6.7 4.7 2.8 3.4 -17.3 5.5

LT 58.0 11.9 10.1 6.0 0.0 9.7 -22.9 7.9

LV 61.0 7.8 5.8 4.3 -1.2 17.3 -13.7 6.3

HU 63.5 4.1 7.9 7.4 -5.5 66.0 -4.9 5.5

PL 53.8 6.2 2.6 9.6 -2.0 45.2 -3.7 5.6

RO 40.6 8.2 4.9 6.4 -2.5 13.0 -14.1 5.3

SI 90.9 5.9 3.8 4.9 -0.1 24.1 -4.9 3.4

SK 68.6 8.5 1.9 11.1 -2.2 29.4 -5.7 4.0(1) GDP/capita, (2) GDP growth, (3) inflation, (4) unemployment, (5) budget deficit/GDP, (6) public

debt (7) current account, (8) inequality coefficient

EMPLOYMENT FUNCTIONEMPLOYMENT FUNCTIONrE=a+b*rQ+c*DrE=a+b*rQ+c*D

Labor market “a” “b” “c” consequences

traditonal + 0 0 no labor market, high hiddensocialism unemployment

selfmanaged 0 0.3 - growing hidden unemploymentsocialism low open unemployment

classical (US) - 1 0 flexible labor marketcapitalism open unemployment

traditional European - 0.5 - low hidden unemploymentcapitalism high social protection

neo-evropean - 0.7 + growth of open unemploymentcapitalism hysteresisrZ- growth of employment, rQ – growth of GDP, D- dummy,a-autonomous growth, b-elasticity, c- assymetry

EMPLOYMENT MECHANISMSEMPLOYMENT MECHANISMS

Centraly planned economy

Selfmanagement

Pure capitalism

Neo-European capitalism

Social market economy

OUTPUT

JOBLESS GROWTH?

8

10

12

14

16

0 1 2 3 4 5 6

9394

95

96

97

98

99

200001

02 03

04

05

GDP growth

unempl.rate

%

%

RESTRUCTURING BY FDIRESTRUCTURING BY FDISPILL-OVER EFFECTS OF FDISPILL-OVER EFFECTS OF FDI

THEORETICALLY POSITIVE (OECD 2003) • FDI transfers technology and know-how;• FDI contributes to enterprise development and restructuring;• FDI contributes to international trade integration;• FDI bolsters competition;• FDI supports human capital formation;

IN REALITY . FDIs were acqusitions rather than greenfield investments, thus not

investments in the macroeconomic sense;• FDIs concentrated to finance, trade, and communications; • FDIs increased imports more than exports;• FDIs increased specialization within a multinational cutting links with the

rest of the economy;• FDI brought strong monopolies forcing small emerging domestic firms out

of business;• FDI creates addiction, income account deficit, and gap between GDP and

GNP;

SUSTAINABLE GROWTH?SUSTAINABLE GROWTH?

-2

0

2

4

6

8

0 1 2 3 4 5 6

93

94

95

96

9798

99

200001

0203 04

05

CA/GDP%

GDP growth %

RESTRUCTURING BY FDIRESTRUCTURING BY FDIFDI, CURRENT ACCOUNT, AND INDEBTEDNESSFDI, CURRENT ACCOUNT, AND INDEBTEDNESS

CA/GDP FDI/GDP Net external stock FDI/GDP foreign banks

10 years average position 2004 1994 2003 in assets 2003

Czech R. -4.05 5.80 -34.6 11.0 48.0 90.0Estonia -7.46 6.03 -99.7 9.2 77.6 98.9Hungary -4.40 4.31 -96.9 17.1 51.8 88.8Latvia -5.48 5.96 -55.0 7.6 35.1 65.2Lithuania -8.36 3.42 -38.9 0.7 27.2 78.2Poland -2.64 2.73 -53.3 4.1 24.9 68.7Slovakia -6.37 3.44 -37.5 6.1 31.5 85.5Slovenia -0.51 1.04 -18.0 9.2 20.7 20.6

Average -4.91 4.10 -56.7 9.3 39.6 74.5

THE STRUCTURE OF CURRENT ACCOUNT IN THE STRUCTURE OF CURRENT ACCOUNT IN CEE COUNTRIESCEE COUNTRIES

-30000

-20000

-10000

0

10000

1998 1999 2000 2001 2002 2003 2004 2005 2006

transfers

services

goods

incomes

current account

mill. Euros

SHARE OF INCOME ACCOUNT IN SHARE OF INCOME ACCOUNT IN CURRENT ACCOUNT DEFICITCURRENT ACCOUNT DEFICIT

0

20

40

60

80

100

120

1999 2000 2001 2002 2003 2004 2005

CAI/CA

%