Economics of Transition in Eastern Europe - Essay Example

Economics of Transition: Eastern Europe Socialists and economists have been perceived to hold differing views concerning whether government businesses and institutions should go private or remain state-owned. While economists may argue that local and national governments should not try what can be performed by individuals, socialists answer back by stating that labor that targets service is better one that encourages personal profit (Guyot &Baker, p1). Private and market driven companies have always been viewed as better performers in terms of production and efficiency compared to the state owned companies. The private companies have been observed to be faster in adopting improved production methods resulting in bigger profits, dividends and better service to clients (Glaeser, p664). There are several examples across many sectors that do support this view. This paper seeks to examine both the private and public systems and arguably determine if indeed the private and market driven companies are superior to the state owned systems. Advantages of State Ownership The performance of any company can usually be measured by examining four different factors. The first factor is the mean cost to consumers for services provided by the business measured by a convenient unit. Second in this category is the mean cost per unit of service production while the third is the operating and fixed profits achieved by the company. Yet another measure is employment. For each measure, the performance and rate of growth is compared between private and state owned firms to give clear direction on whether it is on the right track or not (Friedman, Gray, Hessel & Rapaczynski, p9). Several arguments are in support of state ownership. The theory of public goods states that some essential services, like say defense, have to be provided by governments as it is only taxation system of the governments that can finance these services. Good defense is considered a national pride and part of sovereignty. Defense can only be provided indirectly by private firms, but under very close government scrutiny. The defense strategies applied by governments are kept secret only known by certain government officials. The continued provision of some essential services like health care can only be guaranteed if there is government control of the firms providing health care. In situations where there exist external, environmental and commercial pressures, governments can always step in to ensure continuous provision of affordable and available health care. This is because when it comes to health, availability of good healthcare is considered more important than making profits. Government ownership and control over the health sector ensures the service can be easily accessed to all its citizens. Private and market driven providers will only target those who can afford and this may lock out most citizens, especially those who reside in third world countries. Disadvantages of State Ownership and Arguments against State Ownership State ownership encourages poor service delivery and complacency since the employees are not driven hard to perform (Guyot and Baker, p38). State owned firms offer more secure jobs. This job security can encourage complacency resulting in slow and bad service provision. Market driven and privately owned firms provide lots of incentives which may include pay hikes and the threat of being declared redundant for underperformance. These provide the motivation for better service delivery as compared with the state owned firms that have little motivation to their workforce. Political interference in state owned firms may result in over-staffing for reduction of unemployment. Some people without the knowledge and skills to work are employed due to interventions by politicians (Guyot and Baker, p51-52). These lead to inefficiency at work places making it difficult to compete with private firms in service delivery. Governments tend to control state firms to impose extra charges especially on products where they hold a monopoly. This leads to extra costs incurred by the consumer. The media is one sector that can easily be studied for performance by comparing state-owned to private owned media houses. Private media usually provide alternative news to the consumer providing individuals with choices on what and who to choose among say, goods, services, securities and even politicians during campaign period (Council of Europe, p7). Competition between privately owned media houses is beneficial to the general public who get accurate and unbiased information. State ownership creates a monopoly with the public having access to only the information that the government wants them to have (Karlekara and Marchant, 21). Privately owned media houses are deemed to be important to the general public since they ensure checks and balances in the government (Council of Europe, p9). This role has earned them the title of being named the fourth estate besides the judicial, legislative and executive arms of government. Effects of the Free Market Economy in Bulgaria Many countries have been in transition from an economy that is centrally planned and controlled to one that is controlled by market forces – a free market (Christopher, p23). Several advantages have been assigned to the adoption of the free market economy. The free market, for example, is known to help in controlling previously high inflation rates. In view of the benefits of transition to a free market system where private institutions take initiative to improve services, several countries in Eastern Europe have opted to conduct massive or considerable restructuring of their institutions (Christopher, 33). Institutions in this case have been given greater freedom to be independent of state control and interference while private initiative is considerably appreciated. In Eastern Europe, notable benefits have been credited to the triumph of the free market system over the state-controlled or communist system (Christopher, 15-17). Bulgaria, for example, has achieved significant economic growth following its adoption of the free market system. It is in fact on its way towards becoming a modern country as it also regains its previously forgotten nickname “Valley”. It is worth noting that developments brought about in the country by private initiatives and entrepreneurs have much contributed to its rapid economic growth. The experience that entrepreneurs have gained from other countries is currently appreciated and readily accepted today as opposed to the past where government controlled virtually every aspect of life and business. Under communistic rule, Bulgarians and their customers who made attempts to sign contracts would be treated by the government like boring intruders. Today, due to changes in the way people perceive business, they have the opportunity to enjoy support both from citizens and government agencies. Indeed the opening up of the market has encouraged businesses to trade with people from countries such as France, Germany, Greece, Cyprus, Belgium, Malta Ireland and Holland – something unheard of under the strict communist regime. As a result, businesses that had previously collapsed have been revived, an example being the Vassilevi Bros. Group which now produces compressors and refrigerators for the international market unemployment (Winnie World Investment News). Clients on the other hand have greater confidence and security in dealing with Bulgarian traders. Several success stories in Bulgaria’s business world are associated with companies that were formally state-owned. Success, in most cases, of these businesses has been attributed to the innovativeness of private management and the contribution of highly skilled foreign-trained experts (Eytan and Luis p15-16). It is also noted that privatized companies have a great potential of making considerable improvements as they invest in up-to-date foreign developed technologies. In addition, banks across the world tend to have greater confidence in private organizations that are owned by Bulgarians as opposed to those that are state-owned. In comparison to German-made products, Bulgaria produces to a great extent goods and services that are lower in cost and yet of comparable quality. Yet another example of the developments brought about by the adoption of the free market economy is in terms of increased employment. During the communist regime, Sevlievo, a small urban centre in Bulgaria, experienced massive unemployment (Winnie World Investment News). With the purchase of Vidima Ideal, a small company that produces valves and taps in the town, by an American company, great changes have been witnessed. The company has undergone a major transformation with heavy investments in terms of technology being made in it by its new owners. Today, the company has employed several nationals living in the region while offering them modest salaries and favorable working conditions. Further, the infrastructure of the area has been improved courtesy of the private company’s initiatives. This indeed is only one case out of countless others unmentioned. In previous times, communist countries including Russia imported over 90 percent of products produced in Bulgaria according to Winnie World Investment News. This means that every crisis that affected Russia or one of the communist states would affect hugely the economy of Bulgaria. Not so today; over 50 percent of exports from Bulgaria go to member countries of the European Union. In other words a crisis in any of the communist countries would not affect the state as much as it would in the past. The country currently enjoys a stable financial system and has become a haven of peace even during world economic crises. Conclusion Both in developed and developing countries, the issue of privatization has been a main element of structural reforms. Privatization is generally aimed at achieving better micro-economic efficiency, reducing public borrowing through the elimination or reduction of subsidies as well as to foster economic growth. It is notable that in many sectors of the economy, private and market initiatives score better than state owned corporations. Corporations that are state owned are subject to lots of political interference making them very difficult to govern since the interests of the politician may not be valuable to the corporations. Private ownership brings in competition which always pushes companies to perform better in order to keep up with the competition. References Christopher C. The emergence of market economies in Eastern Europe, Cambridge. Blackwell. 1993. Council of Europe. Media and democracy. Strasbourg: Council of Europe Publishing. 1998. Eytan S. and Luis F. (2003) Privatization and its benefits: Theory and evidence, Oxford journals Vol 49 (3) Pp429-459 Friedman R. Gray C. Hessel M. & Rapaczynski A. Private ownership and corporate performance; some lessons from economies. The world Bank Development Research Group. 1997. Guyot; Y. and Baker H. Where and why public ownership has failed. BiblioBazaar, LLC. 2009. Karlekara K. and Marchant E. Freedom of press 2007: A Global survey of media independence. Rowman and Littlefield Publishers.2007. Winnie World Investment News (2009) Bulgaria: The gateway to Eastern Europe. Retrieved 13th December, 2009 http://www.winne.com/bulgaria/cr09.html Read More