The Political Economy of Transition in Eastern Europe: Packaging Enterprises for Privatization

We propose an abstract model of the transition from a centralized command economy to a market economy. Our objective is to abstract from the details of individual privatization proposals, and to provide a general conceptual perspective that provides an overview of the entire transition, integrates the major issues currently being debated in the literature and can be used to assess the relative strengths and weaknesses of alternative proposals. Compared to the existing literature on this subject, our model focuses on the way in which government policies and enterprise-level decisions are made, and relatively less on the specific content of these policies and decisions. • Our model has been designed with five basic premises in mind. First, the privatization process in Central and Eastern Europe can be conceptualized as a multifaceted conflict between multiple interests, representing workers, management, claimants to property rights based on prior ownership, foreign investors, representatives of different groups in the distribution chain, etc. In our view, the nature of the procedures provided for resolving • these bargaining problems will have a profound impact on the ultimate performance of the post-privatization economy. Second, we emphasize the importance of modeling the dynamic interaction between the economic and political facets of massive privatization programs. Third, given the heterogeneous conditions facing state-owned enterprises, we take the view that no one method of privatization will dominate all other methods in all instances. Fourth, • if the ultimate goal is to establish a pluralistic, decentralized, market oriented system, then the transition process itself should have similar characteristics. Fifth, we maintain that both political and economic benefits can be gained by expanding the range of players that have the opportunity to participate in the transition process.