ABSTRACT
Privatization is the mechanism which redefines property rights and should thus in transitional economies bring about ‘de novo the basic institutions of a market financial system including corporate governance of managers, equity ownership, stock exchanges and a number of financial intermediaries’ (Lipton and Sachs, 1990). We can distinguish between ‘small’ and ‘large’ privatization. ‘Large’ privatization mainly involves industrial enterprises and utilities, while ‘small’ privatization generally relates to smaller units in services or retailing sectors. The former Czech and Slovak Federal Republic1 (CSFR) led the way with voucher privatizations for large firms in 1991, based on (virtually) free distribution of shares to the population at large. Hungary’s privatization path is also unique. Unlike Poland and the Czech Republic, Hungary explicitly opted from 1990 to sell its productive assets instead of giving them away. Because of balance of payments difficulties, Hungary also chose to sell assets to the highest bidder, typically foreigners. In Poland, despite an early intention to rely on free distribution of assets, the most important element behind private sector growth has been what is termed in the Polish context as organic privatization. Gomulka (1993)2 defines this as a form of privatization from below where new businesses are established by both domestic and foreign investors sometimes as a result of asset privatization. All three privatization paths have achieved a rapid change in the shares of output nominally in state hands although the resulting size distribution of firms in the private sector is very different. This provides us with the opportunity to evaluate the link from ownership change to the establishment of corporate governance and financial market institutions.
