Corporate and Public Governances in Transition: The Limits of Property Rights and the Significance of Legal Institutions

Article excerpt

Abstract

Post-socialist transition raises crucial issues about the institutional setting of a market economy. The priority has been given to property rights, and privatization has been advocated as a means to depoliticize economic activities. The dismissal of external interventions, allied with the attraction to the American model and Hayekian ideas, often led to the introduction of minimal laws and wait for their evolutionary development. The failure of corporate and public governance, notably in Russia, helps to show why, on the contrary, democratically established legal rules are essential. Legislation should not only protect corporate shareholders and stakeholders, but more fundamentally all citizens against predatory collusive behavior of political, economic and criminal elites.

JEL Classification: D23, K2, P3

Keywords: transition, institutions, property rights, privatization, depoliticization, corruption, governance, law

"No question is ever actually raised as to the State limiting freedom of contract in many directions and encouraging agreements of other sorts. It also necessarily appropriates through taxation a considerable part of the usufruct of things privately 'owned', thus modifying ownership in both its phases. And this modifying influence on private property extends rapidly in scope as the laissez faire theory of the State loses ground in the modern world".

Frank H. Knight, 1921, Risk, Uncertainty and Profit

"Above all, we must bear in mind that the critical issue should be how to strengthen the legal base of free market capitalism: the property rights of shareholders and other owners of capital. Fraud and deception are thefts of property. In my judgment, more generally, unless the laws governing how markets and corporations function are perceived as fair, our economic system cannot achieve its full potential".

Alan Greespan, July 16, 2002, testimony before the U.S. Senate

Privatization and transition strategies implemented in post-socialist countries have been widely criticized (Kornai, 2000, Stiglitz, 2000, Andreff, 2003). The attention given to privatization, it was said, was too exclusive, leaving unanswered crucial issues about the general institutional setting of a market economy. Institutions should create order and reduce uncertainty, transaction costs and opportunism which hinder exchanges (North, 1990, 1991). According to the theory of property rights, private property rights and corporate ownership structures emerge endogenously as an optimal response balancing benefits and costs (Demsetz, 1967, 1983). Institutional economics tends however to reject this view of optimal outcomes. And the historical record shows that institutional environments are rarely conducive to efficient behavior and economic growth.

The recent experience proves that reasoning in terms of universal "models" to imitate is hazardous. The Japanese system with the peculiar Japanese firm, praised in the 1980s, has shown its limits. The Asian crisis in 1997 threw light on the perverse incestuous connections between governments, banks and big companies. The Rhineland capitalism based on developed social relations exhibits deep troubles. The Parmalat scandal questions the virtues of Italian family capitalism. The Enron and WorldCom affairs violently unveiled deep inadequacies of the American corporate governance system. Concerning transition economies, the Czech strategy based on massive voucher privatization has been initially favorably assessed, but scandals revealing flawed corporate governance qualified this judgment. Poland has then been the focus of attention, thanks to its impressive growth partly attributable to new private start-ups. Its current fiscal problems, combined with rising unemployment, put these achievements into perspective.

Interestingly enough, corporate governance and the behavior of enterprises are central components of each story. Studies of corporate governance arrangements conclude that practices change over time, and no single optimal model can be identified (Shleifer and Vishny, 1997, Mayer, 1998, OECD, 1999). …