The Relative Timing of Privatization Policies, and the Rise or Decline of Stock Exchanges in Post-Communist Emerging Markets

As has also been the case in affluent democracies (Engelen 2008; Engelen et al. 2011; van der Zwan 2014), emerging markets – in particular those of post-communist Europe – have seen their financial sectors grow in size and become increasingly market-based ever since the 1990s (Gabor 2010; Hardie 2011; Rona-Tas and Guseva 2014). One symbol of this process of financialization has been the rapid expansion of stock exchanges and equity markets across Central and Eastern Europe. Stock exchanges are a core institution of contemporary finance capitalism as they act as a hub for a city’s or a country’s whole securities industry. There is nonetheless significant cross-national variation in the size of equity markets in post-communist Europe (e.g. World Bank data on stock market capitalization as a percentage of GDP). Why is that the case? This paper argues that the most important driver of this variation has been the interplay between, and the relative timing of, two types of privatization policies: the privatization of large state-owned enterprises (SOEs) and the privatization of old-age pensions (for earlier work on these policies, see e.g. Bruszt and Stark, 1998; Orenstein 2008). When the divestiture of a country’s largest SOEs happened before pension privatization, policy-makers had a limited capacity to sell such companies through initial public offerings (IPO) on the stock exchange due to uncertainties related as to the depth and stability of the demand side on domestic capital markets. In these circumstances, policy-makers’ preferred options for SOE privatization were to use management buy-outs or to sell significant stakes to “strategic investors” (i.e. typically foreign multinationals), thereby limiting the number of equities issued on the domestic stock exchange. By contrast, when pensions were privatized before the state divested its largest companies, pension privatization helped create large domestic institutional investors who became capable of absorbing the equities issued by privatized companies on the stock exchange, thereby creating a mechanism for a more significant expansion of equity markets. The argument is illustrated with case studies of the politics of privatization policies in the Visegrád-Four countries with a particular emphasis on the Hungarian and Polish experiences.