Privatization and the transition to a market economy

The Chinese government has announced its intention to privatize thousands of state-owned enterprises. Such an effort would dwarf recent privatizations in the industrialized West and be comparable only to the Eastern European experience following the fall of the Soviet Union. As such, an examination of the Eastern European privatization may provide valuable lessons for China and any other developing economy that embarks upon a large-scale privatization program. In this article, Jason Saving considers three problems with which Eastern European privatizations have had to contend: a scarcity of information, an inability to exercise managerial oversight, and the absence of competitive markets. He suggests that a lack of information need not prevent privatization. He explores the holding company as a potential solution to the managerial-oversight problem. And he suggests that effective privatization requires both managerial oversight and a legal framework that permits freedom of entry for competing firms.