Privatization and Enterprise Performance: Evidence from Estonia

The relationship between different organizational forms and economic efficiency has long attracted the interest of many influential economists including Mill, Marshall, Pigou and Keynes.1 Important contributions which led to a widening of this debate to include labour-managed firms have also been made by Branko Horvat, including an early survey of theoretical and empirical evidence which pointed to the better performance of labour-managed firms compared to firms that were either state-owned or capitalist (Horvat, 1982: ch. 6). Since the collapse of the command economies, the main issue that has emerged in this realm of comparative organization and efficiency concerns the effects of the different forms of private ownership upon economic performance. The main aim of this paper is to provide fresh empirical evidence on this matter for the interesting case of the transition economy of Estonia. In considering the effects of privatization on economic performance, most economists expect that privatization per se will have favourable economic effects. In addition, economic outcomes are expected to vary with the specific form of private ownership with most contemporary economists viewing employee ownership as a form of privatization that is much less efficient than other forms (for example, Boycko et al., 1996; Frydman et al., 1997). However, not all theories lead to adverse predictions concerning employee ownership (for example, Sertel, 1996). Moreover, as forcefully argued by Horvat (1969), the beneficial economic effects of employee ownership are to be expected only if ownership is accompanied by institutional arrangements that provide for real participation.