Eastern Europe
Privatization in Hungary

Privatization is fundamental to economic reform in Hungary, where the government intends to reduce its holdings of state-owned enterprises (SOEs) by more than 50% by 1995. Its intention to achieve this through sales rather than give-aways, as found elsewhere in Eastern Europe, reflects the evolution of the Hungarian economy over the last 30 years and the series of reforms and organizational changes at the enterprise level during 1985-9, when two-thirds of SOEs became `self-governed'. In Discussion Paper No. 642, Research Fellow Konstantine Gatsios argues that these methods were a good compromise at the enterprise level between enterprise and factory managements; they pre-empted possible government attempts to split up and privatize from above and enabled many SOEs to avoid bankruptcy, and outside partners preferred funding the formation of new associations to initiating bankruptcy proceedings. This `spontaneous privatization' created a more decentralized company structure, but it often made an SOE's centre an `empty shell' holding company and sometimes confused the starting-point for privatization, while the absence of a supervising authority contributed to the undervaluation of state assets.

In the 1980s, laws permitting new organizational forms stimulated the growth of private sector employment, which, together with decentralization, increased the number of units from 11,000 to around 40,000 between 1988 and mid-1991. Gatsios maintains that these are primarily small limited liability companies employing fewer than 20 people, which reflects the SOEs' transformation into corporate forms or the legalisation of semi-legal economic entities rather than any `real' expansion of the private sector. The rise in joint ventures with foreign capital, from 1,500 to 9,000 between 1989 and June 1991 represents the clearest case of private sector expansion.

Gatsios examines the activities of the State Property Agency (SPA) since its creation in February 1990, focusing on its own privatization programmes, continued `spontaneous privatization' by enterprises, and the as yet limited `self-privatization' programme. Given the modest performance of the programmes initiated by the SPA to date, Gatsios advocates `organized decentralization', which can combine speed with transparency, efficiency and high revenues for the state budget. `Self- privatization' offers the decentralization of privatization decisions to managers and consultancy firms that is required to accelerate the whole process, while allowing for mechanisms that promote transparency, efficiency and high revenues for the state budget. Enterprise managements and their consultants could organize open auctions to secure competitive prices, with the SPA taking a supervisory and regulatory role, which would enable it to concentrate primarily on large-scale privatizations, such public utilities and large SOEs of strategic importance to the Hungarian economy.

Privatization in Hungary: Past, Present and Future
Konstantine Gatsios

Discussion Paper No. 642, March 1992 (AM)