Voucher privatization with investment funds : an institutional analysis

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Abstract
Common wisdom among post-socialist reformers has beento use voucher investment funds to provide the corporate governance needed to restructure newly privatized enterprises after mass privatization efforts. The idea has been that mass privatization would spread the ownership too wide and make corporate governance difficult. The author examines the likely institutional behavior of voucher funds and the possible effects of their development on a transition economy. Since most policy advice has been in favor of voucher privatization with investment funds, the author can be seen as playing the devil's advocate, but his argument is institutional, not statistical. Policymaking requires insight and foresight into how institutions will tend to function. He concludes that voucher funds will introduce a bias in the economy away from the real industrial sector toward an ersatz"financial sector"that will have little if any positive financial role but will be well-protected by friendly regulators. One long-term consequence of voucher privatization with investment funds, according to this view, is a de facto"industrial policy"of real sector decapitalization in favor of short-term rent-seeking by fund managers through board sinecures and lucrative side deals with portfolio companies and through financial market manipulation and paper entrepreneurship in the"financial sector."Without strong corporate governance from the funds and without stable ownership of their own, many enterprise managers will exploit the post-socialist version of the"separation of ownership and control"to grab what they can in the form of salaries, bonuses, perquisites, and side deals. The most likely results of the strategy of voucher privatization with investment funds may be a two-sided grab fest by fund managers and enterprise managers -- together with the accompanying drift, stagnation, and decapitalization of the privatized industrial sector.
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