Privatization as a Means to Property Redistribution in Republic of Armenia and in the Russian Federation

Abstract

Privatization in Eastern European countries and Newly Independent States that have been established after USSR collapse is proceeding at a high speed. It has caused dramatic changes in social life, strong effect on the whole economy. Privatization can serve a variety of purposes, from reducing budget deficits to restructuring industries to compete in the European Common Market. Privatization deals with the distribution of property rights, which strongly affect to profitability of enterprises, physical capital and public sector restructuring. However, if developed countries usually use only one privatization method, the former socialist countries are demonstrating the most extensive privatization programs and adopting almost every privatization methods available.

Privatization is not a panacea for all economic problems as in developed as in transitional countries, but it can be big push for creating a new relationship between private and public sector. Privatization itself is not a competition, but it leads to create regulatory framework, which ends goal is free market, based on competitive origins.

The privatization process in Republic of Armenia and in the Russian Federation is the central point of the research. In order to address the central point properly by studying and analyzing the privatization process in focal countries, its problems and benefits, analyze of the above mentioned process in both countries based on the case study, empirical and statistical studies.

The problems in former socialist world are connected with changes and development of the property right, frame of work motives and also private sector creation, which will dominate in economics. Launching conditions of the given country also important. In a number of countries with transient economics privatization can be more actual than in others.

This study leads to better understanding of the advantages and pitfalls of privatization process and its impact on enterprise efficiency, help to find the issues-subject for new research into case understanding of the processes in focal countries.

This study was conducted to understand when and how privatization works. This question is actual because many developing countries only began to undertake large-scale privatization in the 1990s. The results of this study should, therefore, will be of interest to investors, government policy makers as well as officials of international agencies, such as the World Bank and the International Monetary Fund, by providing insights on the way privatization works.

This thesis focuses on the effectiveness and economic impacts of various forms of privatization, their political impacts including their perceived fairness, their political legitimacy, the extent to which they create new decentralized centers of political power, and their contribution toward creating a class of property owners who favor and support continued liberalization and reforms.

The purpose of this thesis is also to contribute to understanding of the impact of the Russian and Armenian privatization process through an empirical investigation of its effects on the performance of industrial enterprises.

Small scale privatization in both countries had the best positive result and creates the middle class owners that produce vast majority of countries GDP. The final result in both countries spikes for itself. Mass privatization became a very important step, but only the first step towards efficient ownership and production. Despite this overnight change of ownership of thousands of enterprises, little has changed in terms of governance, management or efficiency, clearly not as much as was expected. Massive abuses, running down assets, tax evasion, non payments crisis, corruption and personal enrichment of management at the expense of their companies well-being largely offset any efficiency gains that could have happened due to freeing of the private initiative, releasing market incentives and hardening budget constraints. The mentality of the management remained the same. Being accustomed to soft budget constraints, they continued their lax financial practices, preferring to credit each other through mutual arrears and save on tax arrears and salaries to employees instead of trying to raise efficiency and productivity.

Both Russia and Armenia have made profound progress in their privatization programs, with both positive and negative results. The final conclusion on which country has done better in its transition efforts is left to the population of these countries, and they will use their own criteria for comparison. This study tries to provide some arguments and objective information on which to base these conclusions.

Privatization in focal countries shows that the role of the government is important in the transition process. A weak government that cannot or does not bother to control the process only provides the chances of opportunistic behavior. Markets do not guide the process towards Pareto optimality because a functioning market does not exist yet. When the legal framework is vague, informal rules become more important. Legal rules were largely ignored and social networks counted more. Russian and Armenian privatization did not lead to an efficient result. Insider groups were able to secure their positions and financial conglomerates, led by a few oligarchs, took over the earlier state monopoly in the economy. Privatization strengthened the role of informal institutions at the cost of formal legal rules. Privatization made clear that informal social networks among the new elite are powerful, while the formal rules are weak and not respected. It was also a process that rather weakened than strengthened the development towards the rule of law. It proved that the political and economic elite does not show respect to the developing legal system as long as good relations among the elite can supersede the law.

Privatization in Eastern European countries and Newly Independent States that have been established after USSR collapse is proceeding at a high speed. It has caused dramatic changes in social life, strong effect on the whole economy. Privatization can serve a variety of purposes, from reducing budget deficits to restructuring industries to compete in the European Common Market. Privatization deals with the distribution of property rights, which strongly affect to profitability of enterprises, physical capital and public sector restructuring. However, if developed countries usually use only one privatization method, the former socialist countries are demonstrating the most extensive privatization programs and adopting almost every privatization methods available.

Privatization is not a panacea for all economic problems as in developed as in transitional countries, but it can be big push for creating a new relationship between private and public sector. Privatization itself is not a competition, but it leads to create regulatory framework, which ends goal is free market, based on competitive origins.

The privatization process in Republic of Armenia and in the Russian Federation is the central point of the research. In order to address the central point properly by studying and analyzing the privatization process in focal countries, its problems and benefits, analyze of the above mentioned process in both countries based on the case study, empirical and statistical studies.

The problems in former socialist world are connected with changes and development of the property right, frame of work motives and also private sector creation, which will dominate in economics. Launching conditions of the given country also important. In a number of countries with transient economics privatization can be more actual than in others.

This study leads to better understanding of the advantages and pitfalls of privatization process and its impact on enterprise efficiency, help to find the issues-subject for new research into case understanding of the processes in focal countries.

This study was conducted to understand when and how privatization works. This question is actual because many developing countries only began to undertake large-scale privatization in the 1990s. The results of this study should, therefore, will be of interest to investors, government policy makers as well as officials of international agencies, such as the World Bank and the International Monetary Fund, by providing insights on the way privatization works.

This thesis focuses on the effectiveness and economic impacts of various forms of privatization, their political impacts including their perceived fairness, their political legitimacy, the extent to which they create new decentralized centers of political power, and their contribution toward creating a class of property owners who favor and support continued liberalization and reforms.

The purpose of this thesis is also to contribute to understanding of the impact of the Russian and Armenian privatization process through an empirical investigation of its effects on the performance of industrial enterprises.

Small scale privatization in both countries had the best positive result and creates the middle class owners that produce vast majority of countries GDP. The final result in both countries spikes for itself. Mass privatization became a very important step, but only the first step towards efficient ownership and production. Despite this overnight change of ownership of thousands of enterprises, little has changed in terms of governance, management or efficiency, clearly not as much as was expected. Massive abuses, running down assets, tax evasion, non payments crisis, corruption and personal enrichment of management at the expense of their companies well-being largely offset any efficiency gains that could have happened due to freeing of the private initiative, releasing market incentives and hardening budget constraints. The mentality of the management remained the same. Being accustomed to soft budget constraints, they continued their lax financial practices, preferring to credit each other through mutual arrears and save on tax arrears and salaries to employees instead of trying to raise efficiency and productivity.

Both Russia and Armenia have made profound progress in their privatization programs, with both positive and negative results. The final conclusion on which country has done better in its transition efforts is left to the population of these countries, and they will use their own criteria for comparison. This study tries to provide some arguments and objective information on which to base these conclusions.

Privatization in focal countries shows that the role of the government is important in the transition process. A weak government that cannot or does not bother to control the process only provides the chances of opportunistic behavior. Markets do not guide the process towards Pareto optimality because a functioning market does not exist yet. When the legal framework is vague, informal rules become more important. Legal rules were largely ignored and social networks counted more. Russian and Armenian privatization did not lead to an efficient result. Insider groups were able to secure their positions and financial conglomerates, led by a few oligarchs, took over the earlier state monopoly in the economy. Privatization strengthened the role of informal institutions at the cost of formal legal rules. Privatization made clear that informal social networks among the new elite are powerful, while the formal rules are weak and not respected. It was also a process that rather weakened than strengthened the development towards the rule of law. It proved that the political and economic elite does not show respect to the developing legal system as long as good relations among the elite can supersede the law.