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Restructuring Enterprises in Eastern Europe

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  • Carlin, Wendy
  • Mayer, Colin

Abstract

The enterprise sectors of Eastern Europe are undergoing fundamental reform. This article evaluates alternative forms of corporate restructuring. It emphasizes differences in the sequence in which reforms are undertaken in different countries. In some countries, restructuring is being undertaken by the state before privatization; in some, restructuring is delegated to private-sector institutions before shares are offered to the public at large; and in others, public offers of shares are preceding restructuring. The article suggests that the recent theoretical literature on corporate ownership and vertical integration provides a useful framework for evaluating alternative sequences of reform. This points to four factors as being central to the reform process: contractual incompleteness between the state, investors and managers; complementarity between the assets of different stakeholders; the relative importance of assets; and the relative abilities of different stakeholders. The continuing role for the state in Eastern Europe is attributable to difficulties of contracting between the state and private firms and the complementarity between the assets of state and firms. The slow pace of privatization is due to poor public finances and inefficient bureaucracies. There is one country in which a substantial amount of restructuring has been undertaken by both the state and the private sector, however: East Germany. This paper documents in some detail the privatization process in East Germany. It notes that five parties have been central to the reform process: the state, the Treuhandanstalt, banks, Western companies and the incumbent management. It records a gradual transfer of control from the state to the management of firms. It argues that the central role played by banks and companies in restructuring reflects an important complementarity between their assets and those of former state-owned enterprises, and the fact that they can offer valuable advice to East German management. This raises the question of what East European countries that do not possess institutions with equivalent skills and resources should do. The experience of East Germany suggests that careful attention should be given to the governance of state agencies and private-sector institutions. The role of financial institutions in funding restructuring should be supplemented by non-financial companies providing management advice. Risk capital will not be available, initially, until East European enterprises have acquired adequate collateral or reputations. In the mean time, international agencies will play a central role in funding the transition.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 700.

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Date of creation: Jul 1992
Date of revision:
Handle: RePEc:cpr:ceprdp:700

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Related research

Keywords: Eastern Europe; Privatization; Restructuring; Treuhandanstalt;

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Cited by:
  1. Stefan Bojnec & Ana Xavier, 2004. "Entry and exit in transition economies: the Slovenian manufacturing sector," Post-Communist Economies, Taylor & Francis Journals, vol. 16(2), pages 191-214.
  2. Yanhua ZHANG, 2005. "Collusion and Commitment in Bank Bailout," Industrial Organization 0509011, EconWPA.
  3. Buch, Claudia M., 1993. "An institutional approach to banking reform in Eastern Europe," Kiel Working Papers 560, Kiel Institute for the World Economy.
  4. Wendy Carlin & Peter Richthofen, 1995. "Finance, economic development and the transition: the East German case," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 3(2), pages 169-195, 06.
  5. Sweder van Wijnbergen & Tim Willems, 2012. "Learning Dynamics and the Support for Economic Reforms: Why Good News can be Bad," Tinbergen Institute Discussion Papers 12-043/2, Tinbergen Institute.
  6. Djankov, Simeon, 1998. "Enterprise isolation programs in transition economies : evidence from Romania," Policy Research Working Paper Series 1952, The World Bank.
  7. Christian Weller, 2000. "Financial Liberalization, Multinational Banks and Credit Supply: The case of Poland," International Review of Applied Economics, Taylor & Francis Journals, vol. 14(2), pages 193-211.
  8. Samuel Kortum, 2004. "An R&D Roundtable," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 13(4), pages 349-363.
  9. repec:dgr:uvatin:2012043 is not listed on IDEAS
  10. Luoana D. Santarossa, 2001. "Arrears as a Sign of Financial Repression in Transition Economies - The Case of Romania," CERT Discussion Papers 0104, Centre for Economic Reform and Transformation, Heriot Watt University.
  11. Hildebrandt, Antje, 2002. "Too many to fail? Inter-enterprise arrears in transition economies," BOFIT Discussion Papers 11/2002, Bank of Finland, Institute for Economies in Transition.
  12. Schmieding, Holger & Buch, Claudia, 1992. "Better banks for Eastern Europe," Kiel Discussion Papers 197, Kiel Institute for the World Economy (IfW).
  13. Elena Yusupova, 2006. "Information Asymmetry, Share Mispricing and the Coordination Problem: Investor Portfolio Choice in Czech Voucher Privatization," CERGE-EI Working Papers wp301, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  14. Djankov, Simeon, 1999. "The Enterprise Isolation Program in Romania," Journal of Comparative Economics, Elsevier, vol. 27(2), pages 281-293, June.
  15. Gerard Rpland, 2001. "The Political Economy of Transition," William Davidson Institute Working Papers Series 413, William Davidson Institute at the University of Michigan.
  16. Antje Hildebrandt, 2002. "Too many to fail? Inter-enterprise arrears in transition economies," Development and Comp Systems 0212001, EconWPA.
  17. Wyplosz, Charles, 2000. "Ten Years of Transformation: Macroeconomic Lessons," CEPR Discussion Papers 2254, C.E.P.R. Discussion Papers.
  18. Hitchens, D. M. W. N. & Birnie, J. E. & Wagner, K., 1996. "A matched plant comparison of productivity in East and West Germany: Transition to the market economy," Omega, Elsevier, vol. 24(3), pages 321-335, June.
  19. S. David Young, 1999. "From plan to market: financial statements and economic transition in the East German enterprise," European Accounting Review, Taylor & Francis Journals, vol. 8(1), pages 157-189.

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