The privatization of state-owned enterprises is a major step in the transformation of centralized economies into market economies. Due to the ideological aversion to capitalism, governments tend to commit to privatization when other attempt to reform the sector had failed. For large industries that remain in the state sector, the collapse of the previous system is usually as a result of the mixed aimlessness, asset-stripping, political-seeking, and corruption, and not based on the clear motivation to maximize wealth that comes with private ownership. Nevertheless, states enterprises are not only faced the lack of clear incentives for reformation, but are also faced with the organizational challenges of significant dimension. As a result of this transition from a centrally planned economy to a free market which involves the privatization of state-owned enterprises, most economists debate as to whether it is beneficial to national economy. However, the aim of this paper is to discuss this statement based on the experience of China and Russia.

Economic Theory

According to the handbook rules of ordinary market transaction, privatization has never occurred. Also it was believed that not even in advanced market economy will privatization be described by the Leontiefian or the game model of equilibrium. In these economies, privatization usually takes place in a fairly organic manner, and this means that it is driven by the dominance of market economy and private property rights (Drakic 2007). However, theories like the theory of public choice, theory of economic constitution, and the theory of collective action argue that transition from one economic system to another will not happen through isolated alteration of only few economic institutions, no matter the level of the changes (Drakic 2007).

In other words, these theories argue that privatization does not provide the required result if comprehensive changes of economic systems are not followed. This is because privatized enterprises might not operate in old environments. However, in the first half of 2007, Russia and China topped the world's privatization table with $18.3 billion and $37.1 billion respectively (OECD 2009).

State Ownership and Privatization in China

The main goal of the reform in China is not simply for the enhancement of corporate productivity and financial performance, nut also for the creation of an optimal institutional arrangement which is compatible with the reforms of a market-oriented economy. The role of such reform can not be fully understood based on the lack of a solid knowledge of the implications of the reform in wider economic reform context.

  • The initial phase of this reform in China started from 1978 to 1984, and was concentrated on increasing the managerial autonomy in order to motivate the Chinese SEOs to aim at growth and profit. The Chinese government began to weaken the relationship that existed between the enterprises and the state. Managers were allowed to sell at market prices, the surplus production in order to gain more profit. However, the most important innovation during this phase was the transfer of managerial autonomy from the government bureaucracy to enterprise managers. They also introduced a dual-price system in this phase of the reform process.
  • The second phase of the reform process is started from 1985 to 1993 which focused on the division of ownership and management by introducing a system of contract responsibility. In this period, managers signed a contract with the relevant governmental agencies, and they became The main aim of the reformation during this period was to transform SEOs into actual independent economic entities that will be responsiblr for their profits and losses, as well as establishing legal entities that will be based on common rights and obligations (Geng et al.n.d.). However, the main issues with the responsibility system is that it makes managers to easily share profits with the employees and the government without the capabilities of sharing liabilities and losses.
  • The third phase of the reform in china started in 1993 till present. The aim of this phase was to transform SOEs into modern corporations based on the policies of grasping the large and letting go small. Also it was aimed at improving the relationship between the labour and the state, as well as changing the position of the government towards shareholders under mixed ownership system (Geng et al.n.d.).

However, even with the increasing profits and revenue, chinese SOEs still exhibit some deficiencies regarding productivity and efficiency. More so, combining observations from the strategic markets and the competitive markets shows that the SOE reforms have mad ethe government to be fundamentally better off (Geng et al.n.d.).

State Ownership and Privatization in Russia

The debate concerning the economic consequences of privatization in Russia has been grouped into five categories.

  1. The first category concerns the possibilities that the ownership structures created during the privatization process would persist. That means, even if the owner-employees were to sell their shares quickly to external investors, the initial predominance of the employee ownership would not have much consequence in the longer run (Earle 1998, p. 4).
  2. The second concern is that even if the bulk of shares are to be acquired and be retained by employees, most observers believe that the managers of the enterprises will remain in firm control, and that the unity of the relationship between ownership and control by the management will help to overcome the problem of agencies in modern corporations. However, the desirability of ownership by the management concerns not only the proper provision of incentives, but also concerns the allocation of managerial talents across the firm and relevant positions (Earle 1998, p. 5).
  3. The third issue is that promoters of insider privatization may claim that there might be some advantages regarding employee ownership which includes improved opportunities and incentives for participation by individuals. However, such arguments argument is endemic in the transition whereby resources have been misallocated without assurance about the outcomes (Earle 1998, p. 5).
  4. The fourth concern is that defenders of the program may point out that external investors are severely handicapped in environments where contracts are poorly enforced, and there might be great difficulty in imposing the type of restructuring that will affect both workers and the management (Earle 1998, p. 6).
  5. Finally, it may be alleged by the defenders of internal privatization that the current pool of potential external ownership in Russia is rather not of a better quality that the internal. However, this leaves aside the criminal elements and the mafia, and few outsiders may be at least interested in value maximization, as well as asset-stripping (Earle 1998, p. 6).


In conclusion, state ownership and privatization has been the subject of debates among most economists. This is because the economic state is focused on the transformation of the economic sector into a modern corporate sector. However, to ome extent, it has some negative effects on the government because they disposses themselve of the the enterprises and transfer ownership to private bodies. On the other hand, it tends to improve private ownership of companies because individuals and private bodies will have full management rsponsibilities for enterprises especially in the case of China.

Reference List

  1. Drakic, M 2007, Privatization in Economic Theory, PanoEconomicus.
  2. Earle, J S 1998, Post-Privatization Ownership Structure and Productivity in Russian Industrial Enterprises, Stockholm School of Economics Central European University.
  3. Geng, X, Yang, X, and Janus, A n.d., State-owned Enterprises in China: Reform Dynamics and Impacts, China’s New Place in a World of Crisis.
  4. Gan, J 2008, Privatization in China: Experience and Lessons, Hong Kong University of Science and Technology.
  5. OECD 2009, Privatisation in the 21st Century: Recent Experiences of OECD Countries, Report on Good Practices.
Feb 15, 2018 in Economy
Economic Questions
Regulations and Antitrust Policy

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