This paper is concerned with the effects of privatisation in South-East Europe, focusing on the experiences of Bosnia Herzegovina and the Republic of Serbia. The emphasis of the research is on the micro-level effects of privatisation. At the enterprise level, privatisation, which originated in industrialised countries, is intended to lead to greater internal efficiency. The policy is also associated with macroeconomic objectives as privatisation is expected to contribute to improvements in resource allocation, to bring in revenue from sales and to reduce fiscal demands on the state. In the countries of Central and Eastern Europe and the former Soviet Union, much was expected of privatisation which was seen as a cornerstone of economic transition. In this context, privatisation was perceived as the means by which a private sector could be created, and was intended to bring about economic development as state enterprises were transferred to dynamic private agents, thereby creating a property-owning class which would demand the appropriate legal and institutional framework and the rule of law.

Initially the view was that privatisation should be carried out quickly by transferring shares in state enterprises to citizens for a nominal fee in order to create wide-scale share ownership. Subsequently it emerged that, while such methods quickly dissipated state control and achieved (at first) political support, without an effective institutional framework (taken for granted in industrialised economies) they failed to generate an effective system for corporate governance. Ownership was widely dispersed among shareholders who had little capacity to monitor the operation of privatised enterprises. Subsequently, greater credence has been given to a more gradual, case-by-case approach to privatisation. Aside from the effects of privatisation, overall the results from transition policies have been disappointing. While the countries of Central and Eastern Europe have experienced some economic improvements, those of the Commonwealth of Independent States (CIS countries – i.e. those that were part of the former Soviet Union) have seen a major economic decline since the start of transition.

There have been many empirical studies into the effects of ownership change in transition economies, ranging from cross-country studies of thousands of enterprises to detailed casestudies of individual firms. Research generally compares privatised with state-owned enterprises or looks at developments within privatised enterprises over time. Most studies concentrate on financial indicators of performance, but some look in greater detail at the effects of privatisation on the internal workings of the firm (Carlin et al., 2001; Estrin and Angelucci, 2003). Empirical research into the effects of privatisation faces a number of significant challenges which studies have attempted to address by various means. For example, there is a self-selection bias in that the firms that are the first to be privatised are often those that have been performing well before privatisation. Similarly, the direction of causality may be difficult to infer, since while privatisation may appear to have an impact on performance, it may be the underlying performance of the enterprise that determines whether or not it is privatised. The effects of privatisation in transition economies have been mixed. Much of the literature suggests that, of all privatisation options, sale to foreign investors is the preferred option, while transfer of ownership to ‘insiders’ (managers and employees) emerges as in general the least effective form of privatisation. One important feature to emerge from the research is that the timing of the analysis affects the empirical results as ownership structures and privatisation impacts evolve over time.

The paper looks at the effects of privatisation on a sample of enterprises mainly in the manufacturing sector in Bosnia Herzegovina and the Republic of Serbia. Both of these states were part of the former Socialist Federal Republic of Yugoslavia (SFRY) which had a unique structure of economic organisation based on worker-ownership instead of the centrally planned system that was common in other transition economies. Unlike in many Eastern European countries, enterprises in the former SFRY enjoyed considerable autonomy and traded with Western economies. SFRY was one of the first transition countries to introduce privatisation based on the sale of shares to ‘insiders’ in 1989. In the early 1990s the republics of SFRY separated and both Serbia and Bosnia Herzegovina endured several years of devastating conflict. As a result, the transition process has been about far more than adjusting to a market economy. Both Serbia and Bosnia Herzegovina have had to adapt to the redrawing of national boundaries in a way that has meant radical changes to industrial supply chains, markets and employment. Both suffered greatly from the war and, in the late 1990s, were approaching transition from a much weaker economic base than when privatisation had first been introduced ten years earlier.

While there is much shared history, Bosnia Herzegovina and Serbia have had different experiences with privatisation. Bosnia Herzegovina (with extensive input from international advisers) implemented a programme of ‘mass privatisation’ in the late 1990s which was adopted largely for political reasons and which, while promising much, created dispersed ownership and weak corporate governance, with the value of shares falling substantially. The country has now adopted a revised approach to privatisation, with the aim of selling majority stakes in selected medium-sized and large-scale enterprises to strategic investors. Progress with this new programme has so far been extremely slow. Privatisation is still seen as a policy which has major economic significance and is perceived, particularly by donors and investors, as an indicator of government commitment to reform. In Serbia, a series of laws were passed in the 1990s which were based on insider ownership but, since a change of government in 2000, the approach has been to sell enterprises to strategic investors. The programme made substantial progress in the first three years but the best enterprises have now been sold – raising substantial amounts of revenue – and it is likely that privatisation of the remaining enterprises will be considerably more difficult, as these are less attractive to investors.

The republics of the former Yugoslavia were among the first transition economies to implement privatisation as far back as 1989. However, in Bosnia Herzegovina and Serbia the subsequent conflict meant that little was achieved until after the war, with the introduction of revised privatisation programmes in the late 1990s. This paper is concerned with the postwar privatisation experiences, but the policy has been implemented only relatively recently. Hence it is too soon to identify a definitive privatisation impact, although some conclusions can be drawn. While the results can only provide an indication of preliminary developments, the findings are of interest to policy-makers and donors as privatisation continues to be challenging and is by no means completed. Furthermore, the issues arising from this research have implications for other policy-makers considering reform of the industrial sector in post-conflict economies.

The paper explores the relationship between different privatisation methods and policy outcomes in medium-scale industrial enterprises in Serbia and Bosnia Herzegovina for alternative categories of investor. It also considers the effect on the enterprises surveyed of the years of conflict and the break-up of the SFRY. The research framework draws on the work of Carlin et al. (2001) and Estrin and Angelucci (2003), in that the focus is on internal changes implemented within the firm, and this is supported by a review of performance indicators. A survey was carried out of 40 privatised enterprises (19 in Bosnia Herzegovina and 21 in Serbia) covering more than 23,000 employees (before privatisation). The aim was to limit the survey to the manufacturing sector but this proved too restrictive in Serbia where the privatisation programme had only recently started. The analysis is based on both quantitative and qualitative data. The results were categorised in Bosnia Herzegovina by investor type and privatisation method. In Serbia, all enterprises were privatised by a similar method (tender or auction). Survey responses were analysed according to investor type. There was a considerable diversity of experience with firms reporting both strong positive and negative effects from privatisation. Overall, the findings indicate that privatisation has so far brought little improvement in the financial performance of enterprises in either state, but this is not unexpected as many of the firms in the survey had only been privatised for one or two years. However, most firms that responded had already achieved significant increases in the volume of production in the short time after privatisation. Furthermore, the majority of firms had implemented internal restructuring measures that could be expected to improve performance in the future.

In contrast with much of the literature on privatisation in transition, the findings did not indicate a substantial difference in outcomes when analysed according to the nature of the investor. In Bosnia Herzegovina over half the firms that responded had been taken over by employees (11 out of 19). The results from sales to this investor group were not substantially different from those to foreign or domestic investors. The category of employee owner was sub-divided according to privatisation method and it emerged (although sample sizes were small by this stage) that more restructuring was introduced in firms that had been transferred to employees by tender than those privatised to employees through vouchers or through direct sales following failed tender attempts.

This implies, then, that insider privatisation can be beneficial but outcomes depend on the capacity and the motivation of the insiders. In effect, tender privatisation, which requires employees to raise finance to buy the firm, can be interpreted as a fairly stringent procedure for screening the more proactive and resourceful enterprise managers. Privatisation by vouchers, which is a less demanding process on the part of the insiders, has resulted in little restructuring. This could be interpreted as an indication that the insiders who became owners by this method are not so suited to enterprise ownership as those who followed the tender route. This would imply that ‘insiders’ are not a homogenous group. Some workers and/or managers are effective enterprise owners and some are not. The findings are in keeping with other research that indicates that employee buy-outs are more successful where the employees have to pay for the enterprise rather than are given shares for free (Wright et al., 2002).

Privatisation in a country emerging from conflict presents significant challenges. There are reasons outside the scope of the enterprises themselves why it has been and will continue to be difficult to attract investors to parts of South-East Europe. These countries have only existed for a little more than ten years. Incomes are low, political stability is fragile and the institutional framework is still evolving, all of which are deterrents to investors. The diverse experiences of Bosnia Herzegovina and Serbia with privatisation suggest that the policy impact in a post-war context depends on the nature of the economic and political climate as well as the privatisation programme itself. However, both countries are now in the position of trying to find investors for a number of less attractive medium-scale state-owned enterprises. Privatisation policies generally fail to provide a solution for firms that are not easily sold, beyond the belief that privatisation of the better performing firms will contribute to general improvements in the wider economy that will ultimately benefit all.

There is a danger that a narrow focus on ownership change can obscure the wider goal of economic development. A completely ‘market-led’ approach to privatisation would interpret the failure to secure an investor as an indication of the lack of viability of a business and hence the solution would be to liquidate such an enterprise. However, the absence of an investor may also be a reflection of the wider economic and political climate. With privatisation to a strategic investor as the only policy option, potentially viable enterprises may be forced to close. In the absence of expansion in the rest of the economy, widespread closure of state-owned enterprises could have a high social cost in terms of increasing unemployment and the policy could contribute to social unrest, thereby undermining support for reform and prospects for growth.

The findings from this small survey of enterprises are not statistically robust but they do raise issues that require more detailed investigation. The survey results indicate that there are different kinds of insider owners, some of whom are good for the enterprise and some are not. In view of the policy alternative, either to liquidate enterprises for which no investor is found or to allow them to endure a protracted privatisation process while the prospects of sale decline further, this paper calls for further research into the incentives and constraints facing existing and potential insider owners and whether this can be supported in a revised approach to enterprise reform.