Property Rights and Enterprise Reform

Abstract

Reviews the process of creating an economy dominated by the private sector, discussing the entry by new private business—particularly, the privatization of state-owned firms, farms, housing, and commercial real estate—and analyzing why different approaches to ownership change and divestiture can be associated with positive economic results. Different countries will launch privatization at different moments, but once adopted, firms and farms transitioning from central planning need major restructuring of their production and reorientation of their incentives. Entities that face strict financial discipline and competition and have clear ownership will most likely undertake the needed restructuring or exit, leaving room for new and better firms. In the short run, financial discipline can be fostered through stabilization and liberalization measures, but in the long run, decentralized—preferably private—property rights and supporting institutions need to sustain financial discipline, respond to market-oriented incentives, and provide alternative forms of corporate finance and governance.