The Macedonian Gambit--Enterprise cum Bank Restructuring
Author: Joseph Pernia and S. Ramachandran Date: 11/1/1995 (PDF, 200KB)
The usual practice in transition economies is for the government to sell state-owned enterprises without first restructuring them. That is left to the new owners, who, it is argued, are better able to manage the risks and opportunities. In the period before sale, the government imposes a hard budget constraint by "isolating" enterprises from banks. But this isolation rarely succeeds. Seeking more credit, enterprise managers lean on politicians, who lean on banks. Joseph Pernia and S. Ramachandran describe Macedonia's strategy to circumvent these lobbying tactics--isolating politically powerful enterprises from banks but giving them transparent subsidies in return for reforms that will ultimately lead to privatization or liquidation.