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                    PRIVATIZING EASTERN EUROPE
                      By Robert W. Poole Jr.
                 Introduction by Jarret Wollstein

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INTRODUCTION
There are two fundamental alternatives for the ownership of any
property: individual ownership or state ownership. As we approach the
Year 2000, the folly of state ownership has been well demonstrated: by
the failure of totalitarian socialism in the East and of economic
socialism in the West. As humanity has learned, at the cost of
immeasurable suffering, state ownership means massive bureaucracy,
corruption, waste, stagnation, poverty, and slavery.

Individual ownership means the freedom to control your own property and
your own destiny. Individual ownership is the necessary economic
foundation for any prosperous and free society.

Privatization is a logical and humane way of returning property from
state control to individual control. It is a movement that is now
sweeping the world. In this essay, Robert Peal explains how
privatization can quickly move Eastern Europe from poverty and
stagnation, to prosperity and progress.


WHAT IS PRIVATIZATION?
Around the world in the 1980s, governments sold off $185 billion worth
of assets and enterprises. This dramatic shift from state ownership by
individuals and businesses is unprecedented in human history. But an
even larger and more dramatic shift will take place in Eastern Europe
during the 1990s.

Privatization can take many forms, but the word generally refers to
three main types of activities. The first is denationalization, in which
assets or enterprises are shifted from state ownership to private-sector
ownership. The second form of privatization is government purchase of
services from private-sector firms instead of producing the services
itself. This is usually called contracting out, and is especially common
for providing municipal services. The third type is the provision of
infrastructure by a private concessionaire, a firm or group of firms
which receives a government franchise or concession to finance, build,
own, and operate the project.


A WORLDWIDE PHENOMENON
Because much privatization has taken place in Britain, it is sometimes
mistaken as a phenomenon only of conservative governments such as
Margaret Thatcher's. But in fact, privatization is taking place in
countries governed by every type of ideology. Spain's socialist
government sold off $1.3 billion of state enterprises in 1989, and New
Zealand's Labor government is one of the most radical converts to
privatization, even selling off the trees in its national forests. The
social welfare states of Israel and Sweden are also privatizing state
enterprises.

And privatization is not limited to first-world countries. In terms of
numbers of privatizations, Africa leads all other continents in
privatization, with major programs in Guinea, Nigeria, South Africa,
Togo and others. South America's new generation of democratic reformers
- in Argentina, Brazil, Mexico, and Peru - are strongly promoting
privatization. They have observed how the government of Chile, despite
its shortcomings on human rights, made dramatic economic improvements by
shrinking the role of the State.

Major new infrastructure is being developed by private enterprise: the
Channel Tunnel between Britain and France, new airports in Japan and
Hong Kong, toll highways in Spain, Mexico, and Malaysia, and sewage
treatment plants in the United States. And municipal services are
increasingly provided by private contractors in Britain, Japan, the
United States, and West Germany.


EASTERN EUROPE: PRIVATIZATION'S NEW FRONTIER
While privatization has found widespread acceptance in the First and
Third Worlds, the task will be more difficult in the countries of
Eastern Europe. Most Third World countries already had significant
private sectors when they acquired their independence. Moreover, they
possessed a legal framework in which business could take place.

Consider some of the basics that are lacking in Eastern European
countries:

* A legal framework for private ownership of land, buildings and
equipment.

* A code of business law, setting our legal procedures for setting up
corporations and partnerships, enforcing contracts, etc.

* A price system which accurately reflects the real values of goods and
services.

* Normal accounting practices and expertise.

* Commercial banks, bond markets, and stock markets.

In Eastern Europe, these institutions have to be created - very quickly
- in order for privatization to take place.


HOW TO PRIVATIZE?
There is a growing agreement that land, housing, and industry must be
returned to private ownership in order for Eastern European economics to
be revitalized. Yet there is an even more fundamental reason to
privatize: To prevent the return of centralized power and control over
people's lives and property. Decisions to buy or sell, to own or lease,
must be made by those directly affected, and not by distant officials
with arbitrary power. It is essential that property be privatized as
quickly as possible.

There is great concern in Eastern Europe over how privatization will be
carried out. Some fear foreign domination of their economies if many
assets and enterprises are sold quickly. Others fear that hasty
privatization may permit the nomenklatura to regain control of
state-owned assets and enterprises.

This can be done as follows:

1. Profitable state-owned businesses should be privatized by universal
stock distribution to all citizens. Additional capital can be raised by
issuing additional shares, to both domestic and foreign investors.

2. Unprofitable state-owned businesses, for which there are no potential
buyers, should either be shut down or given to their workers and
managers, via an Employee Stock Ownership Plan (ESOP). The ESOP can then
seek loans for restructuring or seek to issue additional stock to
investors. In either case, they must develop a business plan leading to
profitability.

3. State-owned assets - such as forests, other tracts of land, and
less-tangible assets such as specific bands of the electromagnetic
frequency spectrum - should be legally defined and privatized via
universal stock distribution to all citizens. Investors wishing to use
these assets productively will then have to buy enough shares for
majority control.

4. State-owned housing should be divested to their current occupants,
with fee-simple title to houses or apartments. Apartment buildings can
be organized as either cooperatives or condominiums.

To make all of this possible, the government must also create a proper
legal code; encourage the use of modern accounting systems; end all
subsidies and price controls; and permit the creation of private capital
markets.


HOW PRIVATIZATION WILL WORK
The complete privatization of the State's current assets and
enterprises, via widespread citizen and employee ownership, will
dramatically increase the real wealth of every citizen. This will
greatly cushion the blow of the temporary unemployment created by the
shutdowns and reductions in the workforce that will occur in
uneconomical enterprises.

In many countries, old-fashioned and greatly over-staffed industries
have been restructured and modernized via privatization. State-owned
British Steel in 1980 was the highest-cost producer in Europe. Today, a
privatized and modernized British Steel is Europe's most efficient steel
company. Likewise, British Airways (BA) used to be referred to by
passengers as ``Bloody Awful''. Today it is ranked as one of the world's
best airlines. The same kinds of transformations can happen in Eastern
Europe.

Large-scale new investment will be needed, and should be welcomed, not
only to modernize industries which are viable but also to develop a
modern infrastructure. New or expanded airports and airlines, high-speed
toll roads, high-speed rail lines, containerized port facilities,
high-tech waste-disposal plants, digital and cellular telecommunications
systems are all needed to make Eastern Europe competitive in the world
market. The private sector is creating such infrastructures in countries
all over the worl d, investing its own capital and creating numerous
jobs.

Privatization is the key to bringing Eastern Europe into today's world
economy. Done properly, it can make each citizen into a property owner
and give every man and woman a direct stake in building a modern
society.

Robert Poole is president of the Reason Foundation, a libertarian
think-tank in Los Angeles, California. He was co-founder of the Local
Government Center (now a division of the Reason Foundation) and the
pioneer privatization researcher in the United States. Peal serves as
publisher of REASON magazine and is the editor of numerous books on
public policy topics. He is also on the Board of the International
Society for Individual Liberty.

REASON FOUNDATION, 3415 S. SEPULVEDA BLVD., STE 400, LA, CA 90034. TEL:
(213) 392-0443.


                         RECOMMENDED READING:

Better Government At Half The Price - Bennet/Johnson .......   $5.95
Privatization & Development - Hanke ........................  $12.95
When Government Goes Private - Randy Fitzgerald ............  $19.95
The Private Provision of Public Services
in Developing Countries -- Gabriel Roth ....................  $15.95
Reason Foundation's Yearly International
Privatization Report -- David Haarmeyer ....................  $25.00
Privatization: The Key To Better Government/E.S. Savas .....  $16.95


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