MBA 5600 Managerial Economics Assignment #1 1. What impact will the prospect of deprivatization have on investment by managers of privatized firms? The impact will be: – Loosing corporate focus; – Missing planned CEO turnover; – Affecting planned managerial objects and strategic efficiency Obviously, normal managers invest in long-term projects, products and services, deprivatization may come up with a different strategy that not aligned with corporate goals and its profit will probably go to different parties.
Managers believe, in a privatized firm, in greater gains and therefore have different incentives to implement long-term and in many case different strategies than in a deprivatization firm. In a competitive market, manager will constantly search for better ways to sustain profits and constantly reduce the costs. In absence of these incentives and the pressure to maximize the profits and reduce the costs, the manager of deprivatization firm will only rarely be involved in such extensive exercise and will only meet his superior requirement. . What effect will the deprivatization have on foreign investment in Russia? Based on the answers of question 1, foreign investment is will decrease if deprivatization increases: The room to maximize foreign profits will be small; Long-term investment will be no longer valid as the government will have greater share in the local market and will force foreign investment to shrink; Short-term investment may not be profitable enough to return the investment; Renovation in technology may suffer as well;
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Exceptional technology and knowledge will leave the country and will be expensive to attract again. 3. Who gains from deprivatization? Who loses? Who will gain? – The local government; – Politicians; – Anyone endorses the deprivatization for his/her own goals. Politicians and wealthy businessmen will abuse their power to help them increase their power and profits. Who will lose? – Foreign and local investors; – Local economy; – Current products and services (quality, variations, healthy products, etc); – Consumers and workers; Jobs. 4. Assuming more people are hurt by deprivatization that helped, why would a local politician support such a policy? Government officials again will abuse their authority to benefit themselves. They get power and money by controlling the economy. Privatization–or “privatization,” as it is often called in Russia–did not take place in an economic or social vacuum. It was accompanied in the 1990s by the worst economic depression of modern times and the impoverishment of a great many Russians, probably the majority of them.
In the process, it created the oligarchic economic system that exists today. In 2000, Yeltsin-era oligarchs, fearfully aware that they were loathed by most Russians–they still refer to them contemptuously as a “Communist populace”–and that they lacked any real legal legitimacy, put Putin in the Kremlin to be a praetorian president safeguarding the system, its creators and its beneficiaries in business, politics, the media and even intellectual circles.
After a decade, and despite a purported “economic boom”–really little more than a bubble inflated by high world oil prices–most of the country’s essential industrial, agricultural and social infrastructure is still starved for investment and disintegrating. The human toll continues to grow in the form of more poverty, disease, crime, premature deaths and homeless children. From the vast provinces beyond “booming” Moscow, one hears persistent reports that “Russia is dying. And indeed, the population is shrinking by nearly a million people a year. Nowadays the attitude of the majority of population is negative to the market economy because they see criminal character of Russian capitalism. The new bureaucracy and oligarchs try to use public opinion in their own purposes. The state is reinforced significantly during 2000-2001. There are some works considering various variants of deprivatization. Let’s analyze one of them, namely report, prepared by the Interdepartmental analytical center (Report, 2000).
The basic mechanisms and tools, which are used or can be used for the property alienation from the today’s private proprietors. Three basic directions of transferring the private property to the state are pointed out in the report: 1) Deprivatization – partial restoration or the state control strengthening above the already privatized firms; 2) Reprivatization – repeated privatization of the enterprises where the previous proprietors have not executed the necessary investment programs (in fact it is the proprietor change); 3) Nationalization.
Mechanisms for property alienation for the benefit of the state Deprivatization Reprivatization Renationalization State -owned share reassessment(intangibles) Shares purchasing in a free market Debt structuring by the shares mortgage Shares in exchange for state investment Debt converting(to the state-owned share) It means strengthening not the “protective state”, but “productive state” (Buchanan,1975). Besides it can be covered with the patriotic slogans (strong Russia, Great state etc. ) or with communist ones (struggle with poverty, social inequality etc. “Democratic deprivatization” In case of the “democratic deprivatization” there will be another way of the development which means regrouping of the property rights to reach maximum efficiency of the market economy. Who is interested in the restoration of the power-property system or, on the contrary, in the development of pure private property? There are several interests groups , in Olson’s terms (Olson, 1965). Power-property interests in the USSR were guarded by communist nomenclature. (Kordonski, 2000). In post-soviet Russian economy this direction is asserted mostly to groups presented in the table 6.
Table 6. Group interests in the process of the property system formation Groups interested in construction of a new system power-property Groups interested in a private property system New bureaucracy: federal government officials; Owners of mid-size industrial enterprises in consumer goods (services) markets; Regional authorities; Small businesses Local officials (municipal level); Households Owners of export-oriented raw branches of industry (oil, gas, metallurgy etc. ): new oligarchs; Owners of a military-industrial complex; Army leaders; Police and security service; Criminal business.
Although the definitions of these groups are rather provisional and the process of delimitation inside them still proceeds. It seems that the struggle between these interests groups will determine the contents of deprivatization process in the nearest future. The tendency of a regrouping of the existing state capital is being observed recently. It’s concentrated on the certain set of the enterprises only. The increase of state and municipal participation in the capital of joint-stock companies formed as a result of a privatization is an expression of this phenomenon.
The share of the firms in which the state owns more than 50 % has increased almost 7 times since 1994 and the share of the firms, in which the state owns no more than 15 %, have decreased 10 times. Share Joint stock companies over 50%, 25 – 50%, 15 – 25% at most 15% Share of the state. It is still early to speak though that the concentration has resulted in essential increase of efficiency in public sector. The concentration of state ownership in a number of key branches could however essentially raise efficiency of private sector performance and efficiency of economy as a whole.
It concerns industrial and financial infrastructure. But it needs a type of the state ownership formation not for personal interests of bureaucracy. The analysis has shown that the problems of modern Russia, caused by the transition to the market, are predetermined by the path dependency phenomenon, by following the traditions of the oriental despotism. Taking this circumstance into account the article represents the phenomenon of the power – property, when not the power is determined by the property, but the property by the power, i. . the position of the man in the state hierarchy. The results allow find out the phenomenon of the organizational path dependency. The soviet state’s decline does not mean the development and the efficiency of a private property yet. It is so, because these were not the private owners who became the dominant owners with market like traditions of the private property using (unity of the rights and liabilities), but the former directors of the enterprises and regional authorities.
The state is able to promote the development of the private property institute, but the protection of the property rights should become its main function. The forms of monopolization of functions in a public division of labor can be various: 1) the monopolization of distribution functions; 2) the monopolization of sphere of exchange in deficit resources; 3) the monopolization of conditions of production (infrastructure, know-how, experience, knowledge etc. ); 4) the monopolization of control and management functions in public production or in its separate branches.
The further monopolization of functions in a public division of labor could be supplemented by the property on resources. The necessity of collective work for creation of conditions of production prevent reappearing and development of a private property, limited process of social differentiation. The owners of the means of productions and bureaucratic and military machine have formed in this society not divided whole. The not economic sphere determined political, but political economic did (Wittfogel, 1957).
The rent as the tax was paid not to the owners, but to the government, which on behalf of despot allocated it between the bureaucratic device and army. The economic basis of assignment of the rent – tax served the supreme state ownership on land. The private landed property in Russia develops mainly from the top: the central government gave the right of the tax to this or that representatives of a prevailing class. As a rule similar land ownership was temporary and conventional. The state quite often redistributed them or simply replaced one possession with another.
Though the state ownership was not to 100% under pre-soviet Russia its influence was dominate, because the nominal right of a state ownership frequently became quite real due to monopolization of the supreme administrative function, appropriation of a significant part of product, control of Orthodox Church possessions, regulation of economic life etc. In these conditions private enterprises had the subject character and could not undermine the supreme property of the state on the land. State power tried to suppress any display of initiative, slightest attributes of any independence.
This process developed since Ivan the Terrible. The well-being of a representative of a ruling class entirely depends on his place in state hierarchy, from that post, which he received. In a society, in which there was no reliable guarantee of a private property, the officials occupied the special place. The representatives of state power had the direct and indirect incomes of official functions, carried out by them. In conditions of the great bureaucratic device and the absence of the reliable control of the activity of each official corruption was inevitable.
The concepts of individual occupation, possession and property developed on the basis of a state ownership and opposition to it (Nureyev, 1989). As a rule, the expansion of a private property at the expense of state was carried out during weak central authority. On the contrary, during new strengthening of centralization quite often there was absorption of private possession by state ownership. The official possession could proceed by right of succession only in case of assignment of the son to the appropriate post.
It is natural, that many people tried to transform the official possession (which they quite often used from generation to generation) into the property. To overcome these obstacles in ways of technical progress become possible only in conditions of genesis of a private property. The analysis of power – property would be not complete, if we have not shown process of its reproduction and development in system of the economic relations. According to movement of the rent – tax the reproduction can be considered: 1) at a level of patriarchal family and community, 2) at a level of an administrative unit, 3) at a level of the state.