Kornai János: “Excerpts from Ten Years After ‘The Road to a Free Economy’. The Author’s Self Evaluation,“ Transition, April 2000, Vol. 11, No. 2, pp. 3-5. Original: 6.72, in English: 2001.
Ten Years of Transition: Lessons Drawn, New Issues Discussed During World Bank Conference in Washington Since 1988 leading academics, policymakers, and researchers have gotten together every spring at the Annual World Bank Conference on Development Economics to discuss the latest issues in development. This year‘s conference—organized by Boris Pleskovic, Administrator of the Research Advisory Staff—was dominated by the new development thinking, but the new generation of transition issues received attention as well. In this issue we summarize the papers of János Kornai, who 10 years ago published the first comprehensive book on postsocialist transition; Paul Collier, who analyzes drawbacks and weaknesses of conditional aid and urges true partnership between donors and borrowing governments; and a paper of Joel S. Heilman, Geraint Jones, and Daniel Kaufmann, who analyze the roots and outcome of corruption and kickbacks in the transition economies based on survey data. These papers can be downloaded from httpj/www. worldbank. org/research/abcde/washington_ 12/agenda_ 12. html. Asa follow-up to the Washington conference, the Second Annual Bank Conference on Development Economics in Europe will take stock of “Development Thinking at the Millennium. ” That conference will be held in Paris June 26-28, 2000. The Road to a Free Economy—Ten Years After By János Kornai Ten years have passed since the publication of my book The Road to a Free Economy: Shifting from a Socialist System—The Example of Hungary. It was the first book in the international literature to put forward comprehensive proposals for the postsocialist transition. In this article I examine two issues I addressed in my book—ownership reform and macroeconomic stability—in light of 10 years of experience with transition. Ownership Reform The Road to a Free Economy supported creation of an economic system in which private ownership would dominate. In this respect, its views did not differ from many proposals originating in the West. This broad agreement on the need for private ownership left open the question of which is the best road to creating such a system, however. Strategy A: Organic Privatization Strategy A is based on four main tenets. First, the most important task is to create favorable conditions for bottom-up development of the private sector. The main impetus behind the growth of the private sector is mass de novo entry. Creation of new firms has to be facilitated by breaking down barriers to entry, ensuring the security of private ownership, establishing institutions to enforce private contracts, and, cautiously, promoting the development of the private sector (through tax and credit policy, for instance). Second, most state-owned companies must be privatized. The basic technique for doing so is sale. State assets must be sold mainly to outsiders, with preference given to those who offer a fair price and make a commitment to invest in the company. If the buyer is an insider, a genuine price must still be paid: insider privatization cannot be allowed to degenerate into a disguised form of give-away. Give-away distribution of state property must be avoided. Third, preference must be given to sales schemes that produce an ownership structure with a majority owner. The majority shareholder may be a businessperson, a group of owners, or a privately owned company (owned by nationals or foreigners). A particularly desirable type of owner is a strategic investor who is prepared to inject a significant amount of new capital into the company. If the company is held publicly, there is no need to prevent the shares from being dispersed across a large number of shareholders. Where possible, however, it is desirable to have a core owner. Fourth, the budget constraint on companies has to be hardened. This is key to ensuring the financial discipline essential to operating in a market economy. A set of new laws must be passed, including bankruptcy, accounting, and banking laws. Following the legislative phase all these laws should be consistently enforced. Strategy B: Accelerated Privatization Strategy B focuses on the rapid liquidation of the state sector. It stresses eliminating state ownership as quickly as possible. The main technique for privatization is some form of give-away, such as a voucher scheme, in which property rights in stateowned companies are distributed free and equally among the country's citizens. This Qj © 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies T RANSiTiON, April 2000