The Consequences of Large-Scale Privatization in Mongolia
Ref. no. 680-27
The restructuring of state enterprises is an important aspect of all reforms in formerly socialist countries. Mass privatization is one favored method of accomplishing such restructuring. But analytical work on the consequences of mass privatization is only beginning. Longitudinal studies, which can illuminate the nature and speed of firm adjustment, are still rare. Work has been largely concentrated on the western rim of Eastern Europe and on Russia, where the issues are quite different from those in the second tier of reforming countries, those with less developed legal and market systems. So there are valuable lessons to be learned from analyses of the effects of the earliest privatizations in the second tier of reforming countries. Mongolia provides a fitting case study.
This project is collecting and analyzing data on privatized enterprises in Mongolia to examine the channels by which privatization affects enterprise behavior, the significance and speed of these effects, and their relation to ownership structure. This research has two central, complementary goals--testing hypotheses on the effects of privatization and informing current policy discussions. A third objective is to generate firm-level information that permits more accurate analyses of Mongolian economic conditions and their implications for Bank and national policymaking.
The research examines links between various dependent variables and corresponding sets of explanatory variables in a series of separate econometric analyses, seeking to identify effects attributable to privatization. Three key explanatory variables are the structure of ownership, the allocation of internal influence among governance bodies, and the time since privatization.
The primary data source for the research is a survey of about 250 privatized enterprises in Ulaanbaatar and in eight provinces. Included among these enterprises are 94 firms surveyed in 1993, allowing a longitudinal analysis of the effects of privatization. Supplementing the survey is an extensive separate data set on enterprise characteristics and stock market sales constructed from data from the State Privatization Commission, the Mongolian Stock Exchange, and commercial trading data source files.
Findings to date are primarily descriptive because the econometric work is just beginning. Nevertheless, the study has identified several interesting patterns that stand in contrast to some widely held assumptions and observations relating to transition and that suggest promising avenues for deeper analysis. For example, the study has found that in Mongolia state behavior does not conform to the assumption of the disinterested owner that is commonplace in the literature and that has been demonstrated empirically in the Czech Republic, Hungary, and Russia.
Other findings reflect the differing objectives and constraints of local and central governments. The harder budget constraints of local governments and the presence of interjurisdictional competition are thought to explain the finding that, contrary to general expectations, locally owned enterprises appear to behave much more like completely privatized enterprises than like centrally owned enterprises. This suggests that the devolution of government functions to lower levels produces effects similar to those of privatization, although not of the same intensity.
In looking at postprivatization ownership changes, the study has observed a relatively weak securities market with little trading activity for most firms. For a subset of firms the study has found distinctive changes in the structure of ownership, with managers generally strengthening their ownership positions, acquiring equity both from outsiders and from workers. The results of a preliminary examination of corporate governance and the quality of governance mechanisms imply that available institutions, despite a credible legal foundation, have been largely captured by insiders, sometimes in direct violation of law.
Information and results from the study have been incorporated into the latest country economic memorandum for Mongolia (July 1997) and a public enterprise review (fiscal 1996). Additional consultations with Bank operational staff are planned to inform the development of an assistance program for private sector development, including technical assistance in such areas as enterprise restructuring and privatization.
More broadly, the research findings relating enterprise restructuring in Mongolia to various explanatory factors are expected to contribute to the general debate on best practices for new programs and remedies for more mature programs that have deviated from those best practices.
Responsibility: East Asia and Pacific, Country Department II, Country Operations Division--Natasha Beschorner (nbeschorner@worldbank.org) and Hongjoo Hahm. With James Anderson, Georges Korsun, and Peter Murrell, University of Maryland.
Completion date: December 1997.
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