Chapter 5: Voucher Privatization in the Czech Republic

Over the last decade, the Czech Republic has emerged as one of the most successful of the eastern-European transition societies in building a market-based economy. With its comparatively high per capita income, low poverty and unemployment rate, and stable political party system, this egalitarian society has demonstrated a strong capacity to embrace rapid free market reform programs. At the forefront of public policy initiatives was the voucher privatization program, beginning in 1992, which enabled all adult citizens of the republic to purchase vouchers and use them to bid on stocks of state-owned enterprises which were in the process of privatization. One of the primary goals of this program was to expand public participation in the market economy and build public support for privatization and economic reform in general, by making individual citizens stakeholders in newly privatized entities.

Ostensibly, voucher privatization was successful. The rapid transfer of billions of public dollars into private hands brought in nearly 75% of the eligible public to purchase these vouchers. A closer look, however, at the distribution of shareholders in the Czech Republic reveals that the results of the voucher privatization program were not nearly as equitable in redistributing responsibilities and ownership as it seemed at the outset. Despite the democratic design and relatively even income distribution of the society, the responses of citizens were nevertheless determined largely by income and education levels. Smaller investors, especially those who lacked the financial and information resources to make longer-term investments, had more incentive to sell their shares immediately to make quick profits, rather than hold onto their stakes in privatization. The more privileged members of society who chose not to immediately sell their shares were able to reap much larger profits that were close to thirty times the nominal value of each stock. Individuals who were a part of the former communist nomenklatura, were some of the quickest to embrace these business capital initiatives, utilizing their social networks to maintain a privileged position in the new market economy.

Early on in the process of voucher privatization large investment funds emerged which bought out smaller investors, and quickly began to dominate the entire process of privatization. Instead of private citizens holding on to these shares, by the mid 1990s such funds possessed nearly two-thirds of the vouchers in circulation. Collusion with banks was a common practice. Czech banks, which owned over half of these investment funds, were inclined to provide open lines of credit and, in turn, exert a considerable amount of control over enterprise shares and implicitly support potentially risky acquisitions on the part of the funds. The funds, which were restricted from purchasing more than 20% of shares on any enterprise, were prevented from having a majority stake in privatization, and therefore were little concerned with the responsibility of ownership, corporate restructuring, and managerial reform. This became a huge liability for the long term success of privatization, as foreign investors shrank from what they saw as risky acquisitions, and consequently, the market value of voucher privatization began to diminish.

The initial success of voucher privatization can be attributed largely to the way the government was able to market the program with an inherently egalitarian pitch. The majority of citizens in the Czech Republic recognized the opportunity to make money at little cost the price of vouchers were cheap enough that even those in the lower income brackets could participate. The degree to which participants were to remain stakeholders, however, was linked intrinsically to levels of wealth and education among citizens. Most small investors with less available resources did not develop a sense of ownership or responsibility as a result of their investments, and hence, gained relatively little in the long-run from voucher privatization. Like most countries experimenting with the stakeholder approach, the Czech Republic was ultimately unsuccessful in achieving an equitable system in which participation was even and gains were equitable. Most citizens lacked the means of access to truly learn and profit from privatization, and were quickly swallowed by much stronger and more capable forces.