Private firms are generally more efficient than state-owned ones. Economists, a fractious lot, generally agree about that. Unsurprisingly then, in the early 1990s, when the former Soviet bloc countries wanted advice on what to do with their awful state firms, economists told them to privatise them. 'How?' the governments asked. 'As fast as you can,' replied the economists.
One can understand why. Policy advisers, as well as the reformers themselves, feared the return of their communist opponents and so wanted their market reforms locked in. Privatising as much industry as quickly as possible was one way of doing this.
A second reason was that the economic theory at the time assumed that the way you privatised did not really matter. This goes back to the great economist Ronald Coase and his theory of property rights. He argued that as long as ownership rights over a group of assets (a firm, for instance) were well-defined and secure, then the market would ensure that they ended up in the hands of the most productive user. Therefore, it did not matter how public assets were initially sold - or to whom.
Some 10 years on, we are older and a little wiser. We now know that it matters how one privatises. Coase's logic still stands - the problem lay in the premise that there is always a functioning secondary market in ownership rights. This entails a stock market, a decent mergers and acquisitions regime, courts able to make under-performing firms bankrupt - all the things we take for granted in the United States, parts of Europe and Hong Kong.
It was not so in the former Soviet bloc in the 1990s - and they are not yet properly present in the mainland. So, it matters how one privatises and who one sells to, since there is no secondary market to correct a mistake if the firm lands in the wrong hands. Bad things happened in the former Soviet bloc because of this error. Small firms were sold to their employees. This might seem fair, but it was not particularly efficient. No one 'owner' had the ability to make a decision at these firms.
Another problem was that many large firms were sold to outsider investors, often friends of government officials, at knock-down prices. With little incentive to restructure the firm (and little experience in running one) the new owners sat on their hands. Unsurprisingly, the privatised firms did not improve. The problem here was that the sale method was open to abuse.
There are lessons to learn. First, it is critical to note that, overall, privatisation in the former Soviet bloc was a success. Privatised firms have done better, on average, than those which remained state-owned. Countries that got on with privatisation, like the Czech Republic and Poland, have performed better than those, Ukraine for instance, which decided to persist with state ownership. Beijing might take note of this and support more sales.