Bidding for Success: Why Direct Auction Privatizations Lead to Successful Transitions

When assessing the relative performance of Eastern Europoean transition economies, most of the attention has been focused on the State’s role in the privatization process. This working paper argues that far too much emphasis has been placed on the State’s role in privatization. In addition, post-communist leaders throughout Eastern Europe and the former Soviet Union have been far too willing to take credit for their role in the transition. As Hernando de Soto’s "The Other Path" makes clear, a far more important source of economic development is the spontaneous de facto rights being created and enforced at the local level. According to De Soto, the informal sector plays a more central role in economic development than the established, formal sector. This working paper will suggest that throughout the post-communist transition, more attention should have been focused on the definition and enforcement of rights that was taking place at the local level. Unfortunately, when it came to privatization in Eastern Europe, even the most free market reformers went astray by assuming that central planning would be a more effective approach to privatization.