The problems of the state-owned enterprises (SOEs) in many former centrally-planned and emerging economies have been the poor performance in their provision of public goods and services, which is largely due to the significantly higher costs comparing with those provided by the private firms. Many empirical evidences point out that the inefficiency of SOEs is due to their pursuing political objectives such as excess labor spending set by elected officials whose interest is to secure votes from workers and labor unions for re-election. Since the control over the SOEs' employment policy is in the hand of a few politicians, political resources might be misused, misguided, and are not fairly distributed to the relatively less powerful groups (RLPGs) in the markets and the society as a whole who also depend on the public goods and services.

The next section will briefly introduce the theory of privatization from the perspective of the economists, followed by Section three which I will discuss how political resources in the SOEs can potentially be redistributed through privatization initiative based upon this theoretical framework. In Section four, I will attempt to outline various possible ways for privatization program to empower the RLPGs whose political and economic resources are limited. Section five explores some limitation and tradeoff of the privatization programs that cannot be resolved when pursuing the objectives of economic resources allocation (efficiency) and political resources allocation (efficacy) simultaneously. In Section six, I will provide some critical ideas on how to strike to balance between economic efficiency and political efficacy. Finally, my conclusion will appear in Section seven.

Theory of Privatization Back to Top

Boycko, Shleifer, and Vishny (1996) define privatization program as a strategy available to the reformers to reduce inefficiency of public enterprises. They provide two methods of improving organizational efficiency and public-goods and services delivery performance of SOEs through privatization programs as follows:

1. Reallocation of "control rights" over employment policy from politicians to managers/private shareholders whose interest is different from those politicians. This change in control rights is also referred to as corporatization.
2. Increase in "cash flow ownership" of managers/private shareholders while reducing the cash flow ownership of the state's Treasury department whose fiscal policy could be indirectly influenced by the politicians. This method of reallocating the cash flow rights is often known as privatization, although in fact it only represents one part of the whole privatization program.

Either the combination of the two methods or each one in isolation should lead to the restructuring of the SOEs (or reform in political science terminology) which would result in an improved organizational efficiency and public goods and services provision performance. However, the theory of privatization presented here does not explicitly discuss the impacts of restructuring on the reallocation of political resources and the political empowerment of the RLPGs. Therefore, it is my task to extract their implications from the body of this theoretical framework in the later sections.

The problem of privatization program regarding its inability to stimulate organizational reform stems from the fact that politicians could sometimes find ways to circumvent privatization's reform objective to persuade the new managers of the privatized firms not to restructure especially by halting the initiative to reduce the excess employment through subsidization from the Treasury over which they might have indirect influence. If privatization program were implemented using only the corporatization method, it would be easier for the politicians to persuade the incumbent managers to accept subsidies and remain inefficient and irresponsive to the RLPGs' demands. However, if the managers were outside professionals whose interests do not coincide with those of the politicians, then corporatization method alone would be able to ignite restructuring.

Privatization method in terms of reallocation of cash flow rights is more effective in reducing the influence and increasing the cost of the politicians to use subsidization program to maintain control over the excess employment policy, since subsidies to privatized firms necessary to force them to remain inefficient are politically more difficult to sustain than wasted profits of the SOEs. The authors suggest that both methods be utilized in concerted efforts for privatization programs to be effective.

The authors also discuss about the desirable ownership structures of the privatized firms, which are more relevant to the two issues of political efficacy. Even though the corporatization method does not limit the positions of the managers to be taken by the RLPGs, we may want to assume that the managers are the third-party and impartial professionals appointed by the private shareholders whose interests are limited to the improvement of the firms' performance and the remuneration package provided. Thus, if the majority of the private shareholders is from outside, then control over both the employment policy and the cash flow would be almost free from political influence, since the politicians could neither dictate the managers whom they do not appoint nor use subsidization to persuade them because the Treasury no longer owns the firms' profits which are the main source of subsidies. However, if the ownership falls into the hands of the workers whose interest is in their employment security, then restructuring after the privatization program has been implemented is less likely to occur.

The main cause that enables outside shareholders to promote reform within the privatized firms stems from their interest in profits. The authors provide two contrasting examples in Russia and Poland in which privatization programs have different degrees of effectiveness in initiating structural reforms. Politicians in Russia attempted to establish industrial holding companies that form a core investors in privatized firms. In this case, it is expected that political influence still prevails after the privatization. In Poland, many government-sponsored mutual funds become the controlling shareholders through an allocation of shares to these funds which are owned by Polish citizens. This particular example tends to favor restructuring provided that citizen shareholders are not entirely dominated by the politicians. When either the industrial holding companies or the mutual funds come to represent the preferences of politicians, they might work against restructuring rather than promote it. In short, large shareholders must be from outside private groups whose objective is to maximize profits in order for the privatized firms to be effective.

The ambiguity of leadership in Dahl's (1961) model plays a pivotal role here in the tug-of-war between politicians who still prefer to have control rights over the privatized firms and citizen shareholders who expect organizational reforms. If there were a clear delineation between the group of workers and the group of shareholders, we would expect to see the inclination of the politicians to favor either group, whichever renders more votes to them. On the other hand, if the line is blurred, politicians would find themselves in a difficult situation to decide whether or not to restructure. The Russian's example inevitable puts its politicians into that dilemma, whereas in the Polish's case it is clear that citizen shareholders command the last decisions.

Political Resources Redistribution Back to Top

Lipsky (1968) suggests one form of political resources redistribution for the RLPGs through protest, since they do not directly have both political and economic influences over public policy and programs in which they receive. This extreme and quite radical method of political resources redistribution could be successful in the short term, but faces difficulty in maintaining the group's power base in the long run. The RLPGs will never receive a full political participation opportunity, especially in terms of decision makings, unless their protesting efforts result in some forms of institutionalization of their groups which are protected against dissolution and insurgence from non-RLPG interests. As they are also the recipients of public goods and services from the SOEs, the RLPGs may from time to time use protest method to achieve their objectives, especially if they belong to the labor unions of such SOEs. However, majority of the RLPGs might not even have the jobs in the SOEs whose excess employment policy does not provide any material benefit to them. The only way to redistribute political resources within the SOEs to the RLPGs is through the privatization program (method two).

The problem with method two, i.e., the increase in cash flow ownership for the RLPGs, is that they do not possess enough funds to invest in the newly privatized firms, let alone to spend on their daily living expenses. The Poland example of government-sponsored mutual funds to be allocated to small Polish investors seems to be a good solution in the near term, but could not prevent them from selling their shares to other politically active groups of investors at a profit in the future. The result would be the same as before the privatization program has occurred.

My approach to ease this difficulty is to have the government regulate the free allocation of shares in the form of preferred stocks which are non-transferrable to other political interest groups but only within the RLPGs. These preferred stocks not only are costless to the RLPGs, they also serve as the voting rights to appoint the professional managers whom they think are capable of administering public service programs and truly representing their interests. Only by this way shall the RLPGs gain a direct access to decision-making process in the privatized firms without the influence of vote-seeking politicians and profit-maximizing private shareholders. In the long term as they share the profits from the more efficient privatized firms and receive the better public services according to their guidance, the RLPGs could reinvest their proceeds within the firms to increase their shareholding or use these sums in other privatization programs. The government would benefit from this proposed scheme in that it only subsidizes the preferred stock ownerships to the RLPGs only once in the first place instead of spending a lot of money on social welfare programs every year and still cannot accommodate the needs of these RLPGs.

Political Empowerment Back to Top

Mobilizing the RLPGs to become politically more powerful in the framework of privatization theory seems to be a harder problem in urban politics and government, since once they are empowered they no longer hold the status and own the privileges of being the RLPGs. But in the context of privatization theory discussed above, the RLPGs could be empowered to control the various policies of the newly privatized firms. One way to corporatize them is to allocate a certain number of board of directors' seats for the representatives of the RLPGs to sit in the meetings. The board of directors has a direct power to appoint the managers to implement the restructuring initiatives in the privatized firms. Another way is to have a pre-specified quota for RLPGs' representatives to assume certain management positions. If there is no well-qualified persons for such management jobs from the RLPGs, the advisory positions should be provided for them to oversee the day-to-day operating decisions of the appointed professional managers. In short, many management techniques can be employed to accommodate the presence of the RLPGs' representatives within the privatized firms in order to ensure their control over the policy of the firms.

Corporatization method of privatization program alone might not guarantee the RLPGs the success of political empowerment objective if they lack a solid ownership foundation. To increase the chance of success, both methods of privatization should be used. We can now see that political resources redistribution in this framework becomes the precondition for the success of the empowerment objective. Without it, it is very politically difficult and economically illogical to permit the RLPGs to have substantial control over the decisions of the privatized firms insofar as their lack of cash flow ownership is concerned. This poses certain limitation for the privatization programs to achieve both economic efficiency and political efficacy ends simultaneously which I shall discuss in length in the next section.

Limitation and Tradeoff of the Privatization Programs Back to Top

As briefly mentioned earlier in the last two sections, the conflict of interest between economic and political objectives tends to undermine the effectiveness of the privatization programs. The theory of privatization suggested by Boycko, Shleifer, and Vishny provides only one part of the solutions we are pursuing, while I am attempting to supply the other part.

In my view, this issue becomes the question of goals prioritization where economic objectives precede political causes, or vice versa. In most Third World and former Eastern bloc countries, economic goals are likely to have stronger weight than political ones, since their governments are aiming at restructuring the economic systems to be more competitive in the open global markets. Most less developed countries' (LDCs) governments are also strong in shaping a unified national economic development policy along with political stability, which implies lower degree of citizen involvement. They are less likely to promote political incorporation from various fragmented groups whose interests are diverse and not contributing to the competitiveness of the countries.

By contrast, the more industrialized countries, which nonetheless do not fully achieve the status of advanced and developed countries like the U.S. and Japan, such as the ASEAN (Association of South East Asian Nations), some wealthy Middle-Eastern countries (e.g., Saudi Arabia, Qatar, and United Arab Emirates), and Latin American countries such as Brazil and Chile, tend to have more concerns about their own political development which could foster and sustain their economic successes. The model of privatization I suggest here which supports both economic restructuring and political realignment should therefore be employed in those countries.

The major limitation for privatization program to achieve both goals is that the interest of outside private shareholders is profit-maximization and not program-repercussion which yields direct benefits to the RLPGs. Once in control over the cash flow ownership and program policy, these private shareholders would separate the interests of the politicians and the managers which may or may not result in the restructuring of the employment policy. Even if the firms were restructured, the program policy to delivery public goods and services might not be targeted to the RLPGs because of their low income. This situation presents the classic problem of public versus private goods where profit-maximization motive differentiates or singles out service recipients who are not able to pay for the higher costs of public goods. Unless there are government regulations prohibiting the privatized firms to provide public goods without discriminating against income difference, privatization programs would incur more social costs to the country than the former inefficient SOEs.

It is thus necessary for effective privatization programs to incorporate citizen participation in terms of both the cash flow ownership and management control structures of the firms. Yet, the incorporation of RLPGs' participation often creates trade-off between economic performance improvement and political empowerment within the privatized firms. Since better performance and superior efficiency result from profit-motivated professional managers, there seems to be less room for the RLPGs to be involved in the decision-makings to affect the delivery of public programs demanded by them. However, when the goals of the managers are to design the programs so as to appeal mostly to the RLPGs, the privatized firms would forego opportunities to serve other groups which can pay for the same services at the higher prices.

My argument for the privatized firms to put political efficacy goals before economic restructuring is centered around the public goods problem. Even if the firms incur financial losses due to suboptimizing their service delivery at the costs higher than income, they still fulfill the original function of public enterprises with added benefit in mobilizing citizen participation from the RLPGs in the core decision-making process. To assist the loss-prone privatized firms, the government has two measures to implement: 1) subsidization, and 2) regulation. The subsidization measure, however, should not be preferred since it would be a means for the politicians to negate the restructuring efforts already done in the firms, which is the problem of our concern to resolve before. The second measure, i.e., setting up special regulations to favor the firms, is the only way the government could help protect them from undesirable effects, including financial loss and political interference. Many privatized firms still hold the privilege of being the monopoly or oligopoly in their markets. The extension of monopolistic/oligopolistic rights would provide incentives for them to be the true public goods and services providers rather than the profiteering private enterprises.

The analysis of government intervention in the distressed firms should not be considered as a prerequisite for every privatization program. With good management and continuous participatory efforts from the RLPGs, some privatized firms should be able to survive and prosper. The critical point here is how they could optimally strike the balance between economic efficiency and political efficacy within their organizations.

Economic Efficiency vs. Political Efficacy Back to Top

The way in which I approach this question is to resort to various models in urban politics and government we have discussed in class. Those models can be perceived as tackling the problem of lack of or low civic participation from two ends: top-down (politicians' initiation) and bottom-up (citizens' initiation). The top-down models include, but not limited to, Hunter's (1963) elitist theory of community power structure, Erie's (1988) political life-cycle theory of political machine, Pressman's (1972) mayoral leadership theory of political resources, and Howitt's (1984) federalist theory of intergovernmental relations. The bottom-up models consist of Dahl's (1961) pluralist theory of community power patterns and distribution, Bachrach and Baratz's (1970) neo-elitist theory of non-decision and the second face of power, Erie's (1988) political life-cycle theory of reform movement, Lipsky's theories of political resource redistribution through protest (1968) and bureaucratic power (1980), Browning, Marshall, and Tabb's (1984, 1990) theory of political incorporation, and Putnam's (1995) theory of social capital formation.

By employing the top-down models, the success of privatization programs rests upon the political leaders as individuals and/or political elites as institutions themselves who take initiative to promote restructuring of the SOEs while engaging the RLPGs into the decision-making process which directly affect their well-beings. Their leadership styles should be both entrepreneurial to take economic risk of foregone profits and mediatory to reduce political risk in empowering the RLPGs at the same time. They should also realize that public benefit as a result of higher civic participation in the policy making of the SOEs and the privatized firms will outweigh the private cost of suboptimizing the operations of public service provision. Their political efficacy goals should forerun economic efficiency in their privatization agenda. Only through this channel will the balance between the two objectives be struck optimally and less costly.

The dilemma that political leaders face is the temptation to seek re-election and, along the way, try to patronize the SOEs' workers whom them deem as important constituents by favoring excess employment policy. Should they see that the RLPGs are no less important than the workers and behave otherwise, reform in the SOEs would be underway without the need for privatization. At the national level where a single politician seems relatively powerless among many other leaders, intergovernmental relation strategy could be used to pool and pyramid the vast resources necessary for restructuring programs. Coalition building and negotiation among many political parties and different levels of government bodies and bureaucratic machines require coordinated leaderships from all elite individuals and private institutions to make transition from SOEs to restructured firms smooth and painless.

The bottom-up methods to fine-tune economic efficiency to political efficacy without sacrificing too much trade-off seem to take longer time to make privatization programs the success, since there are potentially several hurdles for the RLPGs to gain significant attention from other competing groups in the pluralistic society. In the case of LDCs where citizen participation and the number of RLPGs are negatively correlated, the bottom-up models are usually fruitless in light of relatively strong governments and influential politicians. They might prove to be fruitful in the settings of the newly industrialized countries (NICs) where governments promote both economic and political development hand in hand. But, the formation of strong civic engagement, social networks, and neighborhood political associations in these countries still lags behind those in the developed countries. Therefore, it is a very good opportunity for the NICs to promote political resource redistribution to and empowerment of the RLPGs through their widely employed privatization programs to directly simulate the spirit of citizen participation in public policy programs which affect their everyday life.

My opinion on the usefulness of these models are to selectively apply them sequentially: entrepreneurial leadership initiatives first, followed by continuous promotion of sell-offs of SOEs' assets targeted to the RLPGs as being the first- priority shareholders, then politicians mediating the workers/labor unions about the forthcoming restructuring program after privatization, and RLPGs with other private shareholders and politicians selecting outside professional managers who could represent the interest of the RLPGs. In this sequence, the participatory role of the RLPGs slowly increases from passively holding their preferred stocks to actively determining the management and approving the policy choices. On the other hand, the role of the politicians starts from actively masterminding the privatization and restructuring schemes down to passively supporting the role of the RLPGs through the use of their available resources. The balance between economic efficiency and political efficacy of the privatized firms would be reached via persuasive negotiation style of the politicians with the workers and non-aggressive entry of the RLPGs to control the managers' policy decisions.

Conclusion Back to Top

The political resource redistribution and empowerment model through organized protest activity suggested by Lipsky offers significant theoretical and formal ground for the analysis of an alternative mode of civic participation in the fluid and pluralistic democratic regime by the RLPG as defined by Dahl, as opposed to the regular electoral representation mode. However, these modes of civic participation only capture the two extremes of the political-incorporation continuum without rendering any specific forms of compromise in which the degree of political representation of the RLPG lies in between those two ends. This paper attempts to conceptualize this moderate degree of civic participation with regard to the implementation of public policies and programs.

The frame of reference of this research is focused on democratic regimes where the RLPGs are not only socially disadvantageous in terms of being in the racial or ethnic minority groups, but also economically deprived by poverty and unemployment. These regimes are prevalent in the LDCs including the politically transitional economies in Eastern Europe as well as the newly industrialized economies in Southeast Asia and Latin America whose governments are planning to transform the countries' social settings and reform their economic configurations to attune with the new World Orders with more openness in commercial and cultural exchanges. One of the more popular avenues for economic reform in those countries is to privatize their inefficient SOEs in order to liberalize domestic competition and improve public service functions. The privatization programs have several important implications not only in economic senses, but also in social and political dispositions. Even though its economic objectives may not be fully achieved, privatization of the SOEs might prove to be very beneficial to the repercussion of civic participation within those countries.

The success of the privatization programs in achieving both economic efficiency and political efficacy depends on how politically eager the RLPGs are and how generous the political leaders would be in the process to allow the RLPGs to partake in the country's economic and/or social reforms agenda. However, it should not be expected in the immediate term that the RLPGs in many LDCs will be fully and directly able to dominate the decision-makings in the program implementation of the privatized firms, as the primary objectives in some LDCs are mainly economic and the key players are still the vote-seeking politicians and the profit-maximizing outside shareholders. But it can be argued that in the longer run as political objectives increasingly gain their stature and as economic goals have been satisfactorily met in many NICs, the RLPGs will be empowered to have certain access to make important decisions in order to choose who would represent them in the board of directors and the management team of the privatized entities to ensure that the services they receive meet their demand and expectations at the reasonable prices.