Restructuring Enterprises in Eastern Europe

Eastern Europe's enterprises are undergoing fundamental reform. This paper evaluates alternative forms of corporate restructuring, emphasizing different sequences in which reforms can be organized. In some countries, restructuring is undertaken by the state prior to privatization; in some, restructuring is delegated to private sector institutions before shares are offered to the public at large; and in some, public share offerings are preceding restructuring. The paper develops a general framework for evaluating sequencing, drawing on recent literature on corporate ownership and vertical integration. It points to market failures that are particularly acute during the initial stages of transition. These discourage privatization through wide share ownership and explain why privatization has in practice progressed slowly. The paper examines in some detail restructuring in the one country in which reform has been rapid -- East Germany. The paper discusses the role of the government, the Treuhandanstalt, the banks, the incumbent management and Western firms in the reform process. It uses the theoretical framework to explain the contributions of public and private sector institutions and considers whether any lessons can be drawn for the design of institutions elsewhere.