Everyone hates privatization, but why?

A new paper by Irina Denisova, Markus Eller, Timothy Frye, and Ekaterina Zhuravskaya on Everyone Hates Privatization, but Why? Survey Evidence from 28 Post-Communist Countries. This paper is to be presented at 14th Annual Conference of The International Society for New Institutional Economics at the University of Stirling, Scotland, UK, June 17 – 19, 2010. The abstract reads:

A 2006 survey of 28,000 individuals in 28 post-communist countries reveals overwhelming support for revising privatization, but also that most respondents prefer to leave firms in private hands. We test whether individuals support revising privatization primarily due to a preference for state property or due to concerns about the legitimacy of privatization. We find that a lack of human capital and privately owned assets affects the support for revising privatization primarily via a preference for state property over private property; whereas transition-related hardships influence support for revising privatization via both a preference for state property and concerns about the illegitimacy of privatization. These results suggest the value of analyses that not only link respondent traits with support for policy, but that also probe the motivations that underpin this support.

Denisova, Eller, Frye, and Zhuravskaya suggest several broad conclusions follow from their analysis. First, dissatisfaction with privatisation should not be equated with a preference for state property. Support among the general public for revising privatisation in postcommunist countries is broad and deep. More than 50 percent of the population in each of the 28 countries and over 80 percent of all respondents support some form of revision of privatisation from levying additional taxes on current owners of privatized assets to the full expropriation and re-nationalization of assets. However Denisova, Eller, Frye, and Zhuravskaya report that only 36 percent out of those 80 who support revision of privatization - ie 29 percent of all respondents - hold these views because of their preference for state ownership. The remaining 64 percent of supporters of privatisation revision - roughly a half of all respondents - prefer private property despite their support for privatisation revision. Such views are due to a massive discontent with the process and outcome of privatisation in transition countries. One wonders how much of the anti-privatisation feeling in New Zealand, and other western countries, is due to this factor.

While it is important to identify factors that influence peoples' preferences over revising privatisation, it is also important to explore their underlying motives for holding their views.

Discriminating between these motivations is important as they suggest very different policies to increase the legitimacy of privatization. Some oppose privatization because they prefer state ownership, which in turn could be rooted in ideology or personal interest. Others favor private property in principle, but oppose privatization because it resulted in an illegitimate distribution of wealth. When public support for the revision of privatization is rooted in relative losses from declining returns to human capital (as is the case for less skilled and long-time state sector workers), then retraining programs designed to match skills with demand from the new market sectors may prove to be an effective tool. In contrast, when public support for the revision of privatization is driven by concerns of legitimacy, and this is the case for the majority of population of transition countries, governments may have to revise privatization results through policies ranging from redistributive taxation to expropriation of current owners of privatized assets which necessarily generate distortions in the investment decisions of current owners.

When people's human capital is poorly suited for a market focussed organisation then the economic hardships suffered by these people, because of privatisation and exposure to work outside of the state sector, could
significantly increase support for opposing privatisation in the first place and for revising privatisation should it happen. Human capital changes only slowly and policy changes such as privatisation can make specific human capital largely obsolete over night. It is not hard to believe that people caught up in such changes would oppose privatisation, at least in the short term. This could be one factor in the opposition to privatisation in New Zealand.

Denisova, Eller, Frye, and Zhuravskaya close their paper by noting

Two optimistic lessons emerge from our analysis for those who are concerned about the consequences of revising privatization. First, while support for revising privatization in the region is very high, about 70 percent of respondents ultimately support private property. Second, most of the support for the revision of privatization due to illegitimacy comes from negative personal experiences during the transition, and these transition experiences are likely to play a smaller role in shaping attitudes over time.