Capital and Money in Hungary (continued)
My 1991 London paper as cited in 2014.11.27. 21:29 Minnesota
1.5. Financial capital in Eastern Europe
Everybody seems to agree on that Eastern Europe badly needs working capital imports but few analysts deal with the development of financial markets as their precondition. Financial markets are the realm of financial capital existing in interaction with working capital. Capital value expressed by stock prices is different from the reproduction and goodwill value of real assets. The ratio of stock exchange value and reproductory value is an important regulator of real investments. /12/ Generous tax exemptions and other measures have created incentives for working capital import into Hungary. Lack of normal telecommunication, bureaucracy and transitional risks create obstacles which can be counterbalanced only by seducing financial conditions.
Though Hungary boasts of the highest among newly emerging democracies speed of direct foreign investments the volume of their inflow is lagging behind the needs. The overruling of some takeovers already done somewhat worsened the whole climate for capital involvement. But securities markets remain all the time bearish owing to the high speed of inflation and not to some penniwise financial import policy measures. Financial markets are to be built up not only out of domestic savings which are poor but also by way of international capital involvement. Working capital imports are by no means the only alternative to growing indebtedness. Import of financial capital should be relied on to a much higher degree. This factor requires development of financial markets, which, for the beginning would not surely be ‘efficient’ ones. But if their regulation complies with business requirements exposure to foreign capital inflows might help them soon to attain a necessary degree of clearing power. So if policy-makers want to have efficient markets, first they should promote the development of any markets. And if they want to have more working capital imports they should create incentives also to non-working i.e. financial capital imports.
The above cannot be attained without letting all the national capital work and bring profits to the investors who should be able to reallocate their funds to business activities with expected higher returns. Financial markets are the most powerful instruments of capital reallocation. And corporate structure of industry and service /cf.1.2./ (cf. marks cross-references to this paper) is the most eminent purpose for their existence.
In accordance with some earlier analyses in a 1981 public discussion this writer brought forward a proposal for transformation of state enterprises into corporations. A book in line with this idea in application to the then existing and now anachronistical situation was published in 1983 and its shorter English version in 1984. /13/ Some professional conclusions have been reproduced in quite a few economic documents of both the recent administration and its opposition. A system of business enterprises based on the functional division between owners and enterpreneurs was the gist of the proposed practice. The bearing of the risk that goes with investments was selected as a base of enterpreneurial gain or loss. Reducing of the state property and confining the state activities to macro-economic policy, a social safety-net, resarch-development and environmental issues were said to be preconditions for this type of business culture. The proposal offered a wide factor liberalisation program on the level of risk takers. If the managers were willing to pay higher wages they would have to withdraw funds from some other allocations, e.g. investments providing there was an adequate monetary policy. As regards capital involvement the managers were to attain the same wide range of autonomy as in production and employment decisions. The establishment of a bond and stock exchange was also propounded in 1981. The above was concluded by an initiative to establish a Bank of emission functioning independently of the government. Proposals on currency convertibility were made earlier.
The above mentioned strategy envisaged reducing the complex form of collective ownership by incorporation to the simple form of individual ownership. Thus state property might have attained a new character: it were to act in relation to other owners as a single individual. /Legal experts created a complementary theory to the effect that if the enterprizes are incorporated the state ceases to be an owner as an actor of public law. It can retain its holdings as a subject of private law./ Securities are the proper titles of ownership for profit oriented private owners. As any other owner the state is interested in dividends, bonds and shares prices, yields, etc. This sector may be significant in Central and Eastern Europe, where, apart from some other reasons, due to constraints to domestic purchasing power and limited foreign interest in real investments the state will remain a largest owner of assets in some industries for a long time to come. The strategy propounded in the early eighties /see above/ included practical suggestions on the issue. The majority of corporations would belong to portfolio firms and investment banks with the controlling package of them remaining in some cases with government institutions within a stepwise system of participation. This pattern cannot give an overall solution to the problem of state enterprises. It can be efficient only in the framework of extensive business relations as their partial but not dominating sector.
The privatisation of a considerable part of the state property remains an exigency. As it appears against the background of specific circumstances it is distinct from its theoretical model. To take it in the only context of abstract theory when arguing for or against a given decision in a given country would not be quite appropriate. An explicitly theoretical line of thought will be referred to under the next subheading.
Although no limitations to privatisation can be found in neoclassical theory /14/ no exclusive importance to property issues is attributed either. As evidenced by international comparisons the relative efficiency of public as against private ownership depends on a variety of factors, incl. the efficacy of capital market monitoring, the way of the public decision-making and the managerial market. /15/
Profit maximisation is considered as an ultima ratio of decisions concerning privatisation. In contrast to this ultima ratio there is strong evidence for that firms deviate from strict neo-classical behaviour viewn as short-run profit maximisation. That is explained partially by game theory and neo-institutional theory. /16/ In capital theory the wealth-preserving function is no less important so that what used to be considered as a single motivation is broken down /with respect to profit flows and capital stocks/ into profit maximisation and risk diversity maximisation /cf.1.4./ This ramification applies also to the above issue. It is not meant to define the exact boundaries of remaining state property but gives it a capital-orientation. Apart from public goods and providing externalia for the private business the remainder of the state property itself should function in a businesslike way represented not only by profits but also by capital gains.
The dilemma of state versus private would be oversimplified without a historical reflection. According to the analysis of economic backwardness from a historic perspective made by A.Gerschenkron in Western Europe individual private capital, in the East the state and in some other, mainly central regions business banks were the engine of accumulation and industrialisation. Banks represent private but as typical not individual capital. Although not any typology is of exclusive validity this one seems to apply with some necessary modifications. When individual capital is weak and state capital slopes downward, financial mediators /and not only banks/ may acquire a considerable place in ownership and redistributive relations.
That role of state which is predicted to remain more important than in Western countries can also be performed by way of public participation in bank ownership. Mixed ownership is another option in addition to privatisation or nationalisation.
Even in some most developed countries there is a link between crediting and ownership. A good part of firms relies on the same bank in every respect. A work quoted above /16/ has proved on grounds of Swedish evidence that a bank that is a principal creditor of a firm is likely to become its main supporter also in bond issuance and ownership contracts. Antitrust or general antimonopolistic regulation prohibits only the excesses in this relations. Long-term principal bank relations are associated with high rates of technical progress for example in Japan where firms rely to much less extent on equity capital then the American ones. Comparisons between France and Great-Britain /15/ show somewhat similar differences.
In Central and Eastern Europe the speed of privatisation relates also to specific circumstances of countries in question which pertains to the multidisciplinary theory of transformation.
1.8. Process of transformation
In Central and Eastern Europe several types of changes are going on. Systemic changes represent one type. Under the heading of another type is a secular evolutionary process of modernization including moving away from peripherical situations,from authoritarian rule that was in existence well before it flourished in one-party states. Some Weberian secularisation aspects of modernisation were even forcefully promoted. But the Luhmanian requirement regarding the economy as a functionally autonomous social subsystem was not lived up to. This is regarded even a more general failure than the one embodied in distorted ownership relations./17/
The third type of change is connected with achieving high technological standards, developing postindustrial features of a modern society based on information. One has to bear in mind the new quality of capital briefly referred to /cf.1.1./. It has been unrecognisably different from its previous untransformed versions. The modus operandi has preserved its essential nature but in the context of a new social organism. Its important regeneration in a century and especially in the last fifty years gives a powerful impetus to the development of this social pattern also in other parts of the world. As a consequence, the appeal of capital is to be taken in account as the environment of transformation of the Eastern half of Europe.
A fourth type is represented by the swift restructuring of the whole world: the international aspect which, in the highly sensitive European space comprises many new security problems. Even apart from them this continent is going to acquire a new identity. The E.C. membership may double in ten years. With the republics of former Eastern federal states it may treble within some years after the end of the millenium.
The fifth type of change is the worsening standard of life that is not unnaturely a most sensitive and dangerous issue. It began in the early eighties /in Hungary/. It is the background of social and political upheavals in Eastern Europe.
These processes interact. They have prompt, short run and long-range sequential layers which also intermingle. These inter-temporal, inter-spatial, and inter-dimensional cross-relations are not to be forgotten when one thinks of the specifics of each process. Change always supposes also continuity even if they combine differently in dramatic and epic phases. Continuity does not relate to everything: there are vectors that must cease to exist. The ‘command’ systemic vector belongs here in our time.
East-European history has produced a type of mutant societies which, in some crucial aspects, are not related to the same classificational dimension as the ‘feudal’ or ‘capitalist’ ones are. Particularly, in feudal times an antiintelectual establishment was not anachronistic like the one in the XX-th century. The animal-farm tale has been supplemented by new actors. The policies of the rhinoceros-like nomenclatura most perfectly personified by some soviet leaders of the seventies and eighties sometimes looked like a purposeful attempt to prove the historical inadequacy of the whole setup.
Mutation notwithstanding the past is not described exhaustively by it. The life of nations was richer than that. One cannot state that in 40 or 70 years of a nation’s life everything was evil. A mutant developmental path was not unrelated to its previous history even if it may not be explained away by earlier events. Analysis includes efforts to avoid biases of ideological thinking in terms of absolute priorities. The market system is better in comparison with the command one but there is no such thing as a perfect system. Nor the market can function without some public regulation. Pure systems anyway exist only in abstraction. In reality they always combine. Market does not combine with the command system but with regulating impulses coming from outside of it.
Politicians as against researchers incl. political scientists sometimes identify the transition to a new system with any important issues on agenda. Systemic dimension, however crucial, is not the only one. It cannot explain such simple things as different economic performance across European country borders, not to mention the Japan phenomenon. An exclusively systemic approach reflects a European way of thinking. For a major part of the world underdevelopment and starvation remain the first problem. From that some ‘command appeal’ emerges and remains in existence whenever the populace can be convinced that there is more food under dictatorship. If there is neither food nor democracy nothing remains of this belief. Command society eliminated, other dimensions or vectors continue, no matter how one likes them. For example, nationalism. But economists should warn first of all against miserable material conditions. Ethnic violence is linked not only to cultural traditions. Well to do people rarely have propensity to kill each other on grounds of ethnic diversity.
By social transformation we mean an extremal in its complexity historic matrix. From this angle the systemic change proper is but a part of a whole and, consequently, should not substitute for the whole.
1.9. A compensation problem.
The texture of national organism emerging from history determines also the social and economic contents of business culture and its implications on the speed of privatization. /cf.1.6./ Systemic transition, being a part of a whole /cf.1.8/, nevertheless is a complex issue in itself and is a deeper qualitative change than the one under way in Western societies. It is more extensive and intensive than any process of deregulation in market economies. The former include such a wide factor liberalisation as to allow the general transformation of property relations. In the field of capital movements the changes also exceed the problem of deregulation in a market economy, for deregulation is not as same as the development of financial market itself. Complexities of the situation may be demonstrated on the evidence of financial problems of denationalisation.
In Hungarian experience the revenue from privatisation is directed to the paying off state debt which is approximately 21 billion dollars or 1300 billion forints (1990 data). Some schemas of privatization credits were implemented. Refraining from the detailed examination of this process the compensation which is paid to former private owners instead of reprivatisation should be mentioned as a particularly sensitive issue linked to it.
Compensation is being paid in form of securities, it can be used for the purchase of new property. /19/ It limits state revenues from privatisation and somewhat slows down the above mentioned
paying off of the state debt. The opposition holds the view that all this is equal to diluting money because the securities can be sold while the government states that the measure does not touch upon macroeconomic equilibrium.
Both are in the wrong. The measure does not involve additional money supply or slow down economic growth which is slow /negative/ anyway. It is not a direct inflationary move. But it dilutes securities in the sense that for the same assets the state will be paid less money, because a part
of the securities will not be sold but distributed in the form of compensation. By limiting state revenues future equilibrium efforts may be weekened. To minimise this danger the compensation is gradualised in time, it will take about five years or more, owing to which it is not the compensation that will reduce the purchasing power of money but the diminishing of the latter will reduce the real sum of the compensation. The matter will boil down to a symbolic political gesture. But this is beyond the concern of economic researchers.