Who Will Own "Nobody's Property"?
Bogomolov, Oleg
We asked the distinguished Russian economist Oleg Bogomolov to write about the problems of "privatization." The term is slippery since it is currently used to include everything from...
...In such conditions, the redemption of state property could drag on for decades or fail to take place altogether...
...By the end of 1992, the more than 2,000 enterprises that privatized, in roughly equal proportions according to one of the two government plans had received the necessary legalization of the government...
...The vouchers can, of course, be considered an additional means of payment entering into circulation, but this means of payment has a particular purpose: the purchase of shares of an enterprise, perhaps, or of land or apartments, that is, that part of state property that can be transformed into a market good...
...Other circumstances also impede mass privatization...
...It is difficult to know what social discontent this process bears within itself, but it is already clear that privatization of this sort is in the hands of the former and new nomenklatura...
...This method, however, has met and will continue to meet with a number of objections, the most important being the surge of inflation caused by the issuance of vouchers...
...According to the laws adopted in Russia, all state enterprises with more than a thousand workers or a book value greater than fifty million rubles as of 1 January 1992 are subject to an obligatory reorganization into shareholder 204 • DISSENT nobody's Property companies and the creation of a board of directors made up of managers, workers, and government officials...
...OB: In the absence of a developed market, one can determine the market value of property being privatized only with a great degree of approximation, on the basis of expert appraisal by specialists, including specialists from WestSPRING • 1993 • 207 Nobody's Property ern consulting and auditing firms...
...Those comparatively limited savings at the disposal of the population and, likewise, those means available to enterprises (amortized deductions, technical reconstruction funds, and so on) turned out to be almost completely worthless in 1993...
...This idea was strengthened by the constitution of the Soviet Union...
...It seems to me that the most intelligent method of free distribution of property is the distribution of vouchers to the adult population assigning each person a portion of the value of state property...
...The future, however, offers the prospect of a new distribution of property according to market, and no longer administrative, laws...
...This same approach essentially underlay the "500 Days" plan for economic stabilization and market reform...
...Gorbachev repeatedly spoke out in favor of selling enterprises to worker collectives or leasing them to collectives with the option to buy...
...Meanwhile, the social gravity of the problem and the threat that many manufacturers will be disrupted by a change in owners force us to consider future steps for a more considered and carefully elaborated privatization...
...Fiscal measures alone will not succeed in stabilizing the ruble...
...Here are his views...
...Dissent: Can you say a little more on why and how the voucher arrangement has not succeeded...
...The industrial elite's acquisition of vouchers on the cheap is becoming a more widespread phenomenon and is troubling to public opinion...
...The Russian government's plan of using vouchers for privatization has many hidden dangers...
...Characteristically, the workers of the largest auto factory in Volzhsk preferred the second plan, which gave them control of the enterprise and provided considerable profits derived from the difference between the book and real value of the enterprise...
...That which arose in other countries in the course of lengthy historical development must be reconstructed in postcommunist Russia, as in the other successor states of the USSR, with the aid of social engineering, and in a fairly compressed time period...
...The term is slippery since it is currently used to include everything from selling enterprises to foreign capital to having enterprises turned into cooperatives run by the workers employed in them...
...very likely only the workers of an enterprise are certain to succeed in becoming its shareholders...
...Technically, of course, this task is extremely complicated, but as the trusteeship of the eastern lands of Germany by the Treuhandanstalt agency in Germany demonstrates, not impossible...
...The weakness of this form of privatization lies elsewhere...
...Call it naiveté by virtue of the prevailing idealism, but each citizen believed that some part of the general wealth belonged to him or her...
...Altogether, this accounts for only 11 percent of their total number...
...If shares were to be put on the market at an amount corresponding to the book value of enterprises in pre-January 1992 prices and could be obtained at face value in exchange for vouchers, then the value of the vouchers would increase in number by 50 to 100 times...
...Correcting the government's chosen course is becoming more and more urgent...
...The land and its minerals, the forests, houses, and so on, having become goods, become a better guarantee of money and a powerful means for restraining inflation...
...The inability of state authorities to establish a strict legislative order and then guarantee its observance in trade, banking matters, accounting, quality standards, contractual obligations, the overcoming of monopolies and corruption, and, finally, in privatization itself, all lead to the aforementioned perversions...
...Obviously, the assistance of Western specialists and consulting and auditing firms is required...
...By this I do not mean only the reinforcement of social inequality and the redistribution of property in favor of certain groups of the population at the expense of others (for example, workers in public health, education, culture, employees of various institutes, not to mention the peasantry...
...Great uncertainty exists as to which enterprises will put their shares up for sale in exchange for vouchers...
...In Russia the state does not carry out the functions of a property owner in the generally accepted sense of Western practice...
...The self-confidence and ambitiousness of the architects of reform, their complete lack of any experience of government management or knowledge of economic practice on the microlevel, was telling...
...The complexity of such an appraisal and a lack of time are impelling the Russian authorities to start privatization without bothering about the real price for which state property will be put on the market...
...Urban apartments in a number of cities (for example, Moscow and St...
...Possessed of enormous riches, the state, it would appear, must compensate the population for the enormous losses due to inflation and the fall of real income...
...First of all, privatization through vouchers applies only to a small part of the national wealth: medium- and large-scale industrial enterprises primarily in the civilian economy, and, even then, not all of these enterprises...
...The sketchiness of many of the economic, legal, and technical details of voucher privatization creates the impression that this course was foisted upon the government...
...the shares remaining after this initial distribution will be sold at market prices having little in common with their face value...
...Specialists in Eastern Europe and the former Soviet Union alike have long recommended free distribution, or free distribution in combination with sale and purchase, as the principal method for privatizing state property...
...The final price is established by calculating the mean of the weighted value of the total number of demands at the base price and the total value of bids exceeding the base price...
...Given this situation, one can expect that some people will become undeservedly rich, while others will receive almost nothing from the sale of the state's goodies...
...With intelligent methods, privatization in Russia can strengthen the market and the monetary system, as it will increase the supply of goods and distribute property to broad sectors of the population...
...they turn in a bid indicating the number of vouchers they are prepared to exchange for a certain number of shares...
...The destruction of the central industrial ministries that formerly controlled and managed the state enterprises and the rise of "concerns" and similar structures with sloppily defined functions and rights in their place has pretty much left state enterprises to their own devices...
...SPRING • 1993 • 201 Nobody's Property What is more, the psychological and social atmosphere of these countries little resembles that of Russia...
...The procedures for acquiring shares in exchange for vouchers at open auction in which all willing buyers participate have not yet been definitely determined...
...According to the second plan, workers and managers together have the right to purchase up to 51 percent of the enterprise's entire capital stock, estimated at its book value as of 1 January 1992, multiplied by a factor of 1.7...
...According to the first plan, a quarter of a company's capital is to be transferred free of charge to its workers in the form of nonvoting shares of stock, with up to 10 percent of the voting shares available for their purchase at a 30 percent discount from the face value...
...Specifically, the demarcation of state property between federal and local levels has dragged on...
...The remaining shares are reserved for the state and may be sold to any willing buyer...
...Those who wish to acquire shares of "Eleks," but choose not to name an acceptable price for these shares, hand in a demand to the State Property Administration (Goskomimushchestvo) indicating the number of shares they wish to buy...
...However paradoxical it may sound, one must be concerned with state property— property that, within fixed limits, needs to be preserved and that in many cases does not lend itself to rapid privatization...
...Russian state enterprises do not bear those responsibilities of an owner borne by enterprises belonging to the state in, say, France or Italy...
...The government was forced to adopt the idea of vouchers, although internally it didn't consider the idea correct...
...q 208 • DISSENT George Cohen /IMPACT VISUALS 210 • DISSENT...
...The task is practically unprecedented...
...In other words, these enterprises will remain state property, but must switch over to working under market conditions and competition, covering all their own expenses (including capital investment) from proceeds derived from the sale of products and services and the use of bank credits...
...Therefore, it is up to us to find our own path...
...But in order to guarantee their motivation, effective material stimuli, adequate salaries in a sound currency, and the transformation of numerous lumpen into property owners are needed...
...In confirmation of this argument, they refer to the experience of privatization in Germany, France, Italy, and Hungary...
...Other arguments are similarly convincing...
...The face value of a voucher was determined by dividing the highly artificial book value of the above-mentioned rather small range of enterprises by the total number of the population...
...The likely errors can be corrected in the future...
...The limitation on the population's consumption has reached a critical point beyond which endurance may run out and a popular revolt (smuta) will ensue...
...Above all, the aspiration to do away with state property in one fell swoop in a short SPRING • 1993 • 205 Nobody's Property period of time, using two to three standard privatization plans, must be called into question...
...The sale of vouchers for cash should also not be considered an additional inflationary factor, inasmuch as the amount of money in the hands of the population will not increase as a result...
...In a word, the changing of property rights was put forward even at that time as the principal item of an economic reform designed to make interest in profit the moving force of development...
...Not yet possessing ownership rights, these enterprises have begun nevertheless to pursue their own interests...
...That is, it is in the hands of those who control information, possess influence, and stand at the levers of management...
...An experiment with the large-scale enterprise "Eleks" in Vladimir, which produces televisions and computers, is of note...
...The personnel, having become partial owners of their enterprises with the aid of vouchers, acquires a stimulus for more productive work and better use of the firm's plant...
...The State Property Administration then determines a base price for the shares by dividing the face value of the total number of shares demanded by the first group by the number of shares being offered for sale...
...Not to mention the generally favorable influence this type of privatization will exert on the political climate of the country which, in the end, will help it overcome its economic difficulties...
...we'll try to have others in later issues.—Ens...
...Thus even before formal privatization is implemented according to one or the other plan, directors and managers have taken control of the enterprises...
...Such a threat is fully real in Russia, where transforming enterprises into shareholder corporations and privatization through vouchers is being forced at a fast pace...
...By this I mean that "voucherization" has a weak impact on the property status of the majority of the population, but allows those people possessed of power and holding the levers of management to rapidly enrich themselves...
...Finally, the vouchers will be subject to destruction after their exchange into shares...
...Dissent: Who is responsible for the distortions in the policies of privatization...
...As for the practical realization of the government's privatization program, criticism of both its conception and implementation is intensifying...
...Other means are needed for the privatization of all remaining state property, including free distribution and the sale of property to Russia's citizens as well as foreigners...
...Thus, not all people are inclined to wait until they can exchange their vouchers for shares—many prefer to sell vouchers for cash at a price significantly lower than face value...
...Similarly, the group interests of the collectives may dominate at the expense of general national interests, especially since many enterprises have de facto monopolies on their industry and can dictate terms...
...Property ownership will awaken in millions of people an interest in increasing the production of goods and services for the market, and accumulating and effectively using property...
...To this was added the support of the IMF (International Monetary Fund) and a number of Western experts for Gaidar's policy, an uncritical assessment of the Polish and Bulgarian experiences of "shock therapy," and, not least, a passion for monetarist conceptions—a dogmatic faith in "Friedmanism...
...If "nomenklatura privatization" achieves a massive dimension, however, it is capable of engendering acute social conflicts and impeding democratization...
...OB: I attribute the errors and failures of the Gaidar team's economic policy to several circumstances...
...Otherwise a struggle for the next redistribution of what was once "nobody's" property will break out...
...One can only count on this social effect when voucher privatization has been sufficiently well thought out in all of its details and answers on the whole to the population's conception of social justice...
...Early on, the Gaidar team also preferred the sale of state property, since it considered any free distribution of property to carry the danger that people would not value and multiply such property...
...Today it seems that society and its ruling powers firmly associate transition to the market with privatization of state property...
...Here the privatization of state property acquires a fundamental meaning...
...But the well-being of those who managed this property in the name of the state directly depended neither on the size of the property under their authority nor on its effective use...
...In current prices at the end of 1992, and even more so in 1993, the face value of the 10,000-ruble voucher can only be seen as a pathetic offering to people who have been robbed...
...Privatization could follow such a stage of commercialization in the form of joint-stock companies, if conditions warranted...
...At the moment, the Russian population regards the chances for using vouchers warily...
...In 1992, more than 14,000 small enterprises were privatized...
...The book value was calculated in already out-of-date prices even before the price liberalization and inflation explosion...
...The principal wealth of Russia—its productive and intellectual potential and natural resources—was withdrawn from market circulation, nationalized, and then, instead of being 202 • DISSENT Nobody's Property subject to purchase or sale, was subject only to administrative redistribution between users...
...Those who are bolder and prepared to suggest a price form the second group...
...OB: The wild, uncivilized forms in which market relations are beginning to develop in Russia are, for the most part, the result of state policy...
...Moral and ethical considerations must also be added to this picture...
...The process in question is not about the privatization of individual state enterprises located in a sea of private business, as in Great Britain or France, but the transfer of the predominant share of national wealth into various forms of private property: individual, cooperative, corporate stock, and so forth...
...These countries chose dissimilar models of privatization, and, more important, it has yet to be proven which of them is best...
...The experiences of Hungary, Poland, and former Czechoslovakia—who are outdistancing Russia in the implementation of privatization—are perhaps worthy of a bit of study, but do not lend themselves to simple reproduction...
...Practice will show how workable these procedures are and whether or not they allow for the real price of the shares to be determined...
...One can hardly expect a strong impulse for savings in order to purchase enterprises in the future, given raging inflation and the real negative interest rate paid on savings accounts...
...At the end of December 1992, the price of a voucher on a number of exchanges had sunk to 6,000 rubles...
...These firms' shares are redeemed either by worker collectives, which enjoy certain advantages, or with capital pulled together by private entrepreneurs...
...Dissent: How do you determine beforehand the real value of property to be privatized...
...The advantages received by workers of the most modern and more or less efficiently functioning enterprises when they trade their vouchers for shares explains why they are buying up vouchers from the rest of the population...
...Critics perceive a common theme in the government's plans for all-out stock issuance and "avalanche" privatization: a curtailment of state participation in economic activity and excessive deregulation of the economy...
...Under conditions of rapid inflation, this valuation can only be done in hard currency and using international prices...
...The government remains unconvinced of the plan's expediency and is not making any particular effort to ensure its success...
...Skirmishes between officials over what property should be left to the autonomous republics, regions, and cities, over what will become municipal property and whether or not this latter should be privatized last, continue to this day...
...The aspiration to demonstrate as soon as possible a resoluteness in the transition to the market did not permit the reforms to be well thought out or prepared, or all the risks and consequences associated with them to be weighed...
...Enterprises that offer their shares in exchange for vouchers receive nothing in return that would allow them to renovate their equipment or make new investments...
...For small and mid-level industrial enterprises "management buy-outs" might be the most appropriate form of privatization, while goods and services could be auctioned off...
...Thereafter the Russian government changed its position and developed a new plan of privatization, taking into account the social mood and the absence of monetary means for purchasing state property...
...Only assistance in sound money and hard currency will do that...
...In larger enterprises, where the plan is for the work collective to buy out 51 percent of the operation, the speed of privatization is worrisome...
...This is distinctly visible in the agonizing passage through Parliament of recognition of the right to private ownership of land and authorization of its sale and purchase...
...Dissent: What kinds of structural changes would you favor in the Russian economy...
...It would be better to keep them under government ownership and under government control while shifting their production to competitive market conditions to cover current expenses and capital investment without outside aid...
...Next, all bids of the second group lower than the base price are thrown out...
...The former nomenklatura, who aspire to exchange the political power now escaping them for property (the power of which is far more durable), find it is easier to get the hang of partitioning state property...
...The present injustice can probably be alleviated by broadening the use of vouchers or by issuing additional vouchers for the acquisition of land, apartments, and other property not yet involved in privatization...
...In other words, market mechanisms will only really function when the state ceases to be a monopoly property owner of land, minerals, forests, enterprises, residential housing, roads, and so on, and when a majority of independent property owners, acting at their own risk and competing among themselves, comes into being...
...This removal of wealth from monetary circulation limited the supply of goods in the extreme and deprived the ruble of the guarantee so essential to it...
...The newly arising middle class—interested in the development of market relations and, in the future, in increasing production and accumulating property— will become the guarantee of the irreversibility of reform...
...This process does not account for the diversity of concrete working conditions of different types of enterprises in various branches of the economy...
...First of all, in the post-putsch euphoria and enthusiasm, Yeltsin and Gaidar didn't want to lose time in carrying out unpopular measures for a sharp reduction in the population's consumption...
...Two or three paradigms are not adequate, given the mutiplicity of conditions operating in individual enterprises, hence the negative consequences of similar privatization cannot be excluded...
...Unfortunately, the government has considered privatization least of all from this point of view...
...Such privatization does not correct, rather it reinforces the unfair distribution of goods that took place in the past...
...Theoretical arguments on the issue continue, but practice often takes an unexpected and far from optimal turn...
...Translated from the Russian by PEGGY MCINERNY q After this article was received, we asked the author several clarifying questions...
...Privatization of land and apartments could best be done, in my view, by free and direct distribution of property or via sale for vouchers...
...But just who will become the owner of "nobody's" property, and how...
...Ideal solutions are altogether impossible, yet it is highly desirable to reduce the social and economic costs of so cardinal a reform to a minimum...
...Here again, the legalities are vague and there is a great deal of red tape in registering the property rights, but for millions of people this kind of privatization has the most tangible effect...
...He very kindly provided answers, and below we print the questions and the answers: Dissent: To what do you attribute the errors and failures of the Gaidar economic team...
...Their chairmen act as the factual owners of the 206 • DISSENT Nobody's Property land, often leasing it to farmers on crushing terms while allotting the worst lands and often arbitrarily abrogating the lease agreements...
...OB: My point of view is that privatization must take a variety of forms depending on the nature, scale, and technical and organizational level of the enterprise to be privatized...
...In these countries it is precisely the government and not market forces or worker collectives, that implements privatization and regulates the economic activity of the firms subject to the privatization process...
...Every citizen of Russia, regardless of age, possesses the right to receive a voucher in the amount of 10,000 rubles...
...Under current conditions in Russia, only small enterprises can be privatized by sale at genuine market prices...
...The value of the land and its minerals, the forests, the state housing fund, communal facilities, intellectual potential, and much more has not been considered...
...This last proviso is absolutely essential, for in practice reasonable ideas are often transformed into their opposite...
...In both cases vouchers might be the currency of purchase...
...The notion of social justice speaks in favor of the idea of a combined distribution—free and paid—of state property...
...It is foolish to approach privatization without having determined beforehand the real value of the property being privatized—even if only roughly...
...OB: The move to issue vouchers was very rushed and poorly elaborated in its technical details...
...The skeptical attitude toward "voucherization" has serious foundations...
...State property (land, forests, minerals, enterprises, housing, and so on)— valued at market prices and in hard currency—could become an anchor securing the stability of the monetary and banking systems if a considerable part of this property becomes the object of trade on the open market...
...The idea that the country's riches—with the exception as a rule of the modest belongings that became personal property—belonged to the people was firmly established in social consciousness over the course of decades...
...In order to create a social base for market reforms, the state should facilitate the acquisition of property by broad sectors of the population in the form of apartments, houses, and plots of land, or in the form of shares of enterprise stock and allotments of joint (cooperative) property...
...I therefore strongly object to hurrying the privatization of major enterprises...
...In addition, the fact that the vouchers involve an insignificant part of the national wealth creates the impression of a forced concession to public opinion, an attempt to throw a bone to a population that has been deprived of its savings and watches as cunning people and the old nomenklatura devote themselves to the appropriation, of national property...
...The government appears powerless to restrain these enterprises' group egotism, compel them to strictly follow established rules, or accurately fulfill their budgetary obligations...
...This idea challenges a keenly felt sense of social justice and is forcing the architects of reform to turn to the idea of a partially free distribution of state property...
...Even in its most consistent and democratic forms, privatization runs up against the determined opposition of old structures...
...Petersburg) and modest garden and dacha lots are passing into the ownership of their users free of charge...
...Under favorable conditions, managers will receive 5 percent of the total stock package...
...However, one must not disregard the social effect of an enterprise making an offering of its shares...
...The dispersion of property and the preservation of control over its use is becoming the more serious problem...
...It is significantly less than what the government had projected and is proof of buyers' lack of SPRING • 1993 • 203 Nobody's Property confidence in future business as well as of the difficulties of obtaining credits for purchases...
...The state simply registered the losses...
...The government of Ryzhkov believed that the purchase of state property by citizens would become the most acceptable method of privatization...
...Organized crime, joined to government structures and with international links, is increasing...
...The relation between the population's demand for means of payment and the supply of goods should not, therefore, worsen as a result of the issuance of vouchers if, it stands to reason, the supply of shares, land, and so on does not excessively lag behind...
...And now it is very difficult to convince those citizens of the necessity to buy their own property...
...As a result of hasty and poorly prepared privatization, Russian enterprises have lost their status as state property but have not begun to work better—they have only raised the prices on their goods and services...
...What the wind brings," declared Minister Chubais, "the wind also takes away...
...For the most part, one cannot prove that market mechanisms are beginning to function and guarantee the progress of the economy simply by virtue of the fact that producers and consumers of goods and services are now free to behave as they please...
...A number of my articles have been dedicated to the economic and social reasons that make this method expedient...
...At the beginning of Gorbachev's perestroika, a number of economists expressed the idea that so-called "socialist property" essentially belonged to no one—it lacked a subject...
...Unfortunately, privatization in posttotalitarian societies often acquires perverted forms...
...Complete or partial property losses due to bad management did not lead to those severe consequences that an entrepreneur experiences in the West...
...In the government's opinion, this experiment can become an example for other privatizations and will demonstrate to many citizens how to use their vouchers...
...in order to make the ruble sound, it is necessary to increase the supply of goods on the market and find ways to quickly widen and encourage entrepreneurial activity...
...And it is this property that will serve as real security for people...
...In their opinion, it is a mistake to suppose that state property is under all conditions absolutely inefficient, that the state must relieve itself of a maximum of regulatory functions in a period of market transformation, and that one must get rid of state property as quickly and entirely as possible, regardless of the price...
...I believe this danger has been greatly exaggerated...
...This approach to privatization sometimes goes under the name of "commercialization...
...This privatization does not encompass military factories...
...When property is dispersed among numerous, and often random, owners, the tendency to use income for consumption at the expense of future savings and renewal of fixed capital is reinforced...
...However, if we want to create an anchor for a monetary system, it's important to know approximately the value in hard currency and real prices of that which is put on the market...
...Small-scale privatization, including small firms in retail trade and the service sector as well as local industrial firms, are selling their shares at market prices at open auction...
...After this commercialization, privatization in the proper sense ought to begin, as the enterprise will receive the right to choose one of two possible privatization plans...
...the process of privatization is in many respects accommodating itself to its interests, of which many examples are already at hand...
...This may complicate the creation of substantial multinational corporations on the territory of the former Soviet Union...
...in my view, the economy can be revived if people's attitude toward work changes...
...At the moment, we are still far from the optimal solution to the problem of privatization...
...This crime is becoming a behind-the-scenes political force...
...Money will simply pass from one hand to another...
...A monstrous redistribution of wealth is taking place, as a result of which the overwhelming majority of the population is being reduced to beggary save for a few percent—by no means the most talented and competent people, but the most cunning and lacking in moral conscience or respect for laws—who are becoming unspeakably rich...
...The spontaneous division of property that has begun among state authorities at various levels and among the heirs of state structures that are being liquidated, and the subsequent sale or lease of this property, have not provided for a determination of the real value of this property...
...Moreover, there is a danger that when the collectives of such an enterprise become its owner, they will prefer to increase their own earnings at the expense of capitalization and investment...
...Collective and state farms (kolkhozy and sovkhozy), having received land for free and indefinite use in the past, do not want to let this land slip out of their hands...
...These people make up the first group of buyers...
...It may also complicate the retaining of interrepublican industrial systems that already exist in automobile and airplane manufacturing, atomic materials, and so on...
...Obviously, only workers who acquire a portion of the property of their own enterprise receive this advantage...
Vol. 40 • April 1993 • No. 2
