The term privatization is used to mean the sale of government’s equity either in full or in part of enterprises that are state owned to individuals in private sector. Privatization is also used to mean the transfer of management role from the government or state to individuals or private sector through use of managerial contracts or leases. Privatization is an important tool towards economic reform and policy especially in post communist countries as well as developing countries.
While this concept has led to the transformation of the economic landscape of the world, privatization raises vital questions for example does the performance of an organization or firm change as a result of privatization and also why such changes occur. One of the major outcomes of privatization for example is increased productivity, improved efficiency and a decline in labor. In communism regimes, it is the sole role of the government to provide employment to its citizens (Fitzgerald, para 3). The government does so by over employing citizens to state owned corporations and in return expect political favors such as reelection.
However, in a market oriented economy brought about by privatization, the higher percentage of employment comes from the private sector. Private sector’s aim is to maximize profits and they have no favors to ask in return for employment. They employ fewer people and employ better management and production facilities so as to increase productivity and efficiency while at the same time decreasing production costs. In most Eastern and Central European countries, productivity has been lagging behind as compared to other economies.
Although these countries have a surplus supply of labor that is skilled and low-wage, laxity towards privatization has led to its initial failure (Anderson, para 2-8). The privatization wave began in the United Kingdom in the 1980s before sprawling to Eastern and Central European countries following the defeat and subsequent collapse of the communism regime in this area and the progression of other developing and developed countries. During this period, nations were making various transitions with an aim of moving from the then centrally planned economy to an economy that was market oriented.
However, the experiences from these transitions varied greatly as well as the outcomes. Miller (1993) subdivided the eastern and central Europe countries into three development categories. The first group is the front-line states comprising of Czech Republic, Poland and Hungary. The second category is the ‘second wage’ group comprising of countries such as Bulgaria, Slovakia and Slovenia and the last category is the ‘slow developers’ consisting former USSR countries, Romania, Albania and former Yugoslavia republics (Anderson, para 11).
Despite the fact that all these countries had a common thread of control and command systems, their economic transitions began under very different circumstances. For example, there were major notable differences in their macroeconomic condition, extent of involvement in communist trading systems, natural resources, magnitude of prior reforms, and initial development levels among others.
The economic policy and initial conditions played a major role in determining the economic performance of Eastern and Central European countries prior to the commencement of privatization process. Various researchers and writers on privatization of Eastern and Central Europe argue that trade liberalization largely depended on political reform of the countries and their initial conditions. Initial conditions are used in explaining inflation while economic liberalization is used in explaining the economic growth rate differences (Fitzgerald, para 5-6).
There is a surplus of information supporting the claim that initial conditions have a great impact on political reform as well as liberalization towards an economy that is market oriented. However, the major concern today is how to develop and encourage entrepreneurial dynamism in eastern and central European countries. Prior to introduction of capitalism kind of governance, these countries were operating under the communism regime where the government or the ruling authority owned all state corporations and businesses.
As such, there were no entrepreneurial dynamisms as individuals or citizens basically used to work for the government. For progression under privatization move to be effective in such transitory economies, it is essential to develop entrepreneurial dynamism. Although there is limited research on this issue in transitory economies, it is widely accepted that effective entrepreneurship practice directly correlates to successful transition towards a market economy from a planned economy.
Despite this realization, a move towards entrepreneurial development in Eastern and Central Europe still faces an uphill battle. Some of the obstacles towards this move are the change resistance from the existing administrative structures that are bureaucratic in nature, prohibitive taxation structures, high interest and inflation rates and also lack of management competencies, skills and expertise (Iatridis and June pp 24).