The Permanent Income Hypothesis: A Test on Czech Privatisation

Since the late eighties, economists have been regarding the transition from command to market economies in Central and Eastern Europe with intense interest. In addition to studying the transition per se, they have begun using the region as a testing ground on which to investigate the validity of certain classic economic propositions. In his research, comprising three articles written in English and totalling 40 pages, Mr. Hanousek uses the so-called "Czech national experiment" (voucher privatisation scheme) to test the permanent income hypothesis (PIH). He took as his inspiration Kreinin's recommendation: "Since data concerning the behaviour of windfall income recipients is relatively scanty, and since such data can constitute an important test of the permanent income hypothesis, it is of interest to bring to bear on the hypothesis whatever information is available". Mr. Hanousek argues that, since the transfer of property to Czech citizens from 1992 to 1994 through the voucher scheme was not anticipated, it can be regarded as windfall income. The average size of the windfall was more than three month's salary and over 60 percent of the Czech population received this unexpected income. Furthermore, there are other reasons for conducting such an analysis in the Czech Republic. Firstly, the privatisation process took place quickly. Secondly, both the economy and consumer behaviour have been very stable. Thirdly, out of a total population of 10 million Czech citizens, an astonishing 6 million, that is, virtually every household, participated in the scheme. Thus Czech voucher privatisation provides a sample for testing the PIH almost equivalent to a full population, thus avoiding problems with the distribution of windfalls. Compare this, for instance with the fact that only 4% of the Israeli urban population received personal restitution from Germany, while the number of veterans who received the National Service Life Insurance Dividends amounted to less than 9% of the US population and were concentrated in certain age groups. But to begin with, Mr. Hanousek considers the question of whether the public percieves the transfer from the state to individual as an increase in net wealth. It can be argued that the state is only divesting itself of assets that would otherwise provide a future source of transfers. According to this argument, assigning these assets to individuals creates an offsetting change in the present value of potential future transfers so that individuals are no better off after the transfer. Mr. Hanousek disagrees with this approach. He points out that a change in the ownership of inefficient state-owned enterprises should lead to higher efficiency, which alone increases the value of enterprises and creates a windfall increase in citizens' portfolios. More importantly, the state and individuals had very different preferences during the transition. Despite government propaganda, it is doubtful that citizens of former communist countries viewed government-owned enterprises as being operated in the citizens' best interest. Moreover, it is unlikely that the public fully comprehended the sophisticated links between the state budget, state-owned enterprises, and transfers to individuals. Finally, the transfers were not equal across the population. Mr. Hanousek conducted a survey on 1263 individuals, dividing them into four monthly earnings categories. After determining whether the respondent had participated in the voucher process, he asked those who had how much of what they received from voucher privatisation had been (a) spent on goods and services, (b) invested elsewhere, (c) transferred to newly emerging pension funds, (d) given to a family member, and (e) retained in their original form as an investment. Both the mean and the variance of the windfall rise with income. He obtained similar results with respect to education, where the mean (median) windfall for those with a basic school education was 13,600 Czech Crowns (CZK), a figure that increased to 15,000 CZK for those with a high school education without exams, 19,900 CZK for high school graduates with exams, and 24,600 CZK for university graduates. Mr. Hanousek concludes that it can be argued that higher income (and better educated) groups allocated their vouchers or timed the disposition of their shares better. He turns next to an analysis of how respondents reported using their windfalls. The key result is that only a relatively small number of individuals reported spending on goods. Overall, the results provide strong support for the permanent income hypothesis, the only apparent deviation being the fact that both men and women aged 26 to 35 apparently consume more than they should if the windfall were annuitised. This finding is still fully consistent with the PIH, however, if this group is at a stage in their life-cycle where, without the windfall, they would be borrowing to finance consumption associated with family formation etc. Indeed, the PIH predicts that individuals who would otherwise borrow to finance consumption would consume the windfall up to the level equal to the annuitised fraction of the increase in lifetime income plus the full amount of the previously planned borrowing for consumption. Greater consumption would then be financed, not from investing the windfall, but from avoidance of future repayment obligations for debts that would have been incurred without the windfall.

The Redistribution of Property Rights, Corporate Governance and Company Restructuring after Privatisation"

The project covered the main issues of privatisation, corporate governance and company restructuring after privatisation in Hungary and in the Russian Republic, together with a summary of the broader picture of company-level changes in Central and Eastern Europe, discussing the issues of micro-financial restructuring in the Czech Republic, Hungary, Poland and Slovakia. The two countries selected as the focus of research can be regarded as the two most widely differing cases of the economic transformation in Central and Eastern Europe. Hungary began its transition very early in 1989, while Russia was very late in doing so. Hungary first implemented a series of institutional and systemic reforms before stabilising its public finances, while Russia has struggled with financial stabilisation for years without great success. Company restructuring and the introduction of new forms of governance only began in Russia in the mid-1990s. Hungary opted for "traditional" western methods of privatisation and invited a large amount of foreign direct investment (FDI) while in Russia the bulk of state-owned property was privatised either by free distribution or by a strange blend of ESOP-MBO schemes. FDI in Russia remained modest because of the high risk and uncertainty surrounding economic transactions there. Hungary was a forerunner in privatising public utilities, while Russia has moved cautiously in this area. The group's studies show that the Hungarian economy is now over the "transformation recession" and its economic success is largely due to its successful privatisation and to the dominant participation of foreign investors in company take-overs and in the restructuring process. The study of Russia provides a comprehensive account of the main factors in the so-far modest results in Russian privatisation and economic transformation.

Implications of restructuring and privatisation for competitiveness and perfomance:two Brazilian steel companies

The thesis examines the effects of the privatisation process on productivity, competitiveness and performance in two major Brazilian steel companies, which were privatised in between 1991 and 1993. The case study method was adopted in this research due to its strengths as a useful technique allowing in-depth examination of the privatisation process, the context in which it happened and its effects on the companies. The thesis has developed a company analysis framework consisting of three components: management, competitiveness/productivity and performance and examined the evidence on the companies within this framework.The research indicates that there is no straightforward relationship between privatisation, competitiveness and performance. There were many significant differences in the management and technological capabilities, products and performance of the two companies, and these have largely influenced the effects of privatisation on each company. Company Alpha's strengths in technological and management capabilities and high value added products explain strong productivity and financial performance during and after privatisation. Company Beta's performance was weak before the privatisation and remained weak immediately after. Before the privatisation, weaknesses in management, commodity type low value added products and shortage of funds for investment were the major problems. These were compounded by greater government interference. Despite major restructuring, the poor performance has continued after privatisation largely because the company has not been able to improve its productivity sufficiently to be cost competitive in commodity type markets. Both companies state that their strategies have changed significantly. They claim to be more responsive to market conditions and customers and are attempting to develop closer links with major customers. It is not possible to assess the consequences of these changes in the short time that has elapsed since privatisation but Alpha appears to be more effective in developing a coherent strategy because of its strengths. Both companies accelerated their programme of organisational restructuring and reducing the number of their employees during the privatisation process to improve productivity and performance. Alpha has attained standards comparable to major international steel companies. Beta has had to make much bigger organisational changes and cuts in its labour force but its productivity levels still remain low in comparison with Alpha and international competitors.

Privatisation, state ownership and productivity:evidence from China

This paper examines the relationship between the transfer of ownership between the public and private sectors of Chinese industry, and its impacts on performance. We link ownership changes to productivity growth, and demonstrate that privatisation contributes significantly. We offer an extension that is generally ignored in the literature, in looking at firms that are taken back into state ownership, and evaluating the productivity growth effects of this. Further, we highlight the well-understood simultaneity problems, and demonstrate the hazard of ignoring the issue by comparing various estimators, including the modified control function approach. In general, the results stress the importance of allowing for such endogeneity when evaluating the productivity effects of ownership change.

Employment effects of privatisation and foreign acquisition of Chinese state-owned enterprises

This paper investigates the effects of domestic privatisation or foreign acquisition of Chinese State Owned Enterprises (SOEs) on employment growth, using firm level data for China and a combination of propensity score matching and difference-in-differences in order to identify the causal effect. Our results suggest that, controlling for output growth there is some evidence that domestic privatisation leads to contemporaneous reductions in employment growth compared to firms that did not undergo an ownership change. By contrast, there is some evidence that foreign acquisitions show higher employment growth in the post acquisition period than non-acquired SOEs.

Privatisation and sustainable competitive advantage in the emerging economies of Central Europe

Extant research on the impact of privatization in the Central Europe (CE) region has focused on improvements in efficiency and the nature of cost-based advantages. This study argues that the development of a vibrant privatized sector requires attention to the broader resource configurations of domestic enterprises. Empirical research was conducted on a large sample of firms in Poland, Hungary and Slovenia. Foreign investment was found to significantly impact on resource accumulation with implications for the development of strategic capabilities and competitive advantage. Foreign direct investment is an effective vehicle for the transfer of financial resources, reputation and new brands but not organizational capabilities. In terms of practice, this study demonstrates the important role of outside investment in the development of a firm's resource base (Frydman et al. 1999). Companies can gain a competitive advantage in their domestic markets through gaining access to the resources of foreign investors.