- First, proponents believed socialist states had been engaging in value subtracting behavior by expending vast amounts of resources to prop up inefficient firms producing unneeded goods. Radical privatization therefore had the potential to generate huge savings for the state.
- Second, they expected rising tax revenues from the superior growth of de novo private firms and the improving performance of privatized state enterprises to compensate for revenue shortfalls.
‘To avoid a state fiscal crisis as a result of mass privatization, the enterprise sector would have to grow and be taxed effectively. … mass privatization accomplished precisely the opposite: worse enterprise performance coupled with the state’s declining capacity to tax firms.’
“We argue that a post-socialist country’s choice to rapidly privatize its enterprise holdings immediately reduced that state’s financial capacity, due to high budgetary dependence on the earnings of state-owned firms,” write King, Stuckler, and Hamm, with the result being a vicious cycle of mutual reinforcement between a failing state and a failing economy.
- First, it undermined the state by removing its revenue base—the profits from state-owned enterprises —and its ability to regulate the emerging market economy;
- Second, it created enterprises devoid of strategic ownership and guidance by opening them up to corrupt owners who stripped assets and failed to develop their firms.
Furthermore, in most cases, newly mass privatized firms were cut off from state subsidies, but unlike firms privatized to strategic owners, “they did not have access to resources such as investment capital, new managerial talent, or marketing networks … Faced with this situation, owners, managers, and workers, unable to work cooperatively for the betterment of their firms, tended to pursue short-term parasitic strategies to accumulate wealth, such as asset-stripping.”
From the beginning, however, gradualist voices stressed the importance of state-guided institutional reform, arguing that in the absence of a supportive institutional environment, “radical reforms would be damaging: privatization might lead to asset-stripping rather than investment, and rapid reforms might create economic winners who would subsequently engage in predatory behavior,” King, Stuckler, and Hamm note.