Russian privatization and corporate governance: What went wrong?

In Russia and elsewhere, proponents of rapid, mass privatization of state-o wned enterprises (ourselves among them) hoped that the profit incentives un leashed by privatization would soon revive faltering, centrally planned eco nomies. In Russia, the revival didn't happen. We offer here some partial ex planations. First, mass privatization is likely to lead to massive self-dea ling by managers and controlling shareholders unless (implausibly in the in itial transition from central planning to markets) a country has a good inf rastructure for controlling self-dealing Russia accelerated the self-dealin g process by selling control of its largest enterprises cheaply to crooks, who transferred their skimming talents to the enterprises they acquired, an d used their wealth to further corrupt the government and block reforms tha t might constrain their actions. Second profit incentives to restructure pr ivatized businesses and create new ones can be swamped by the burden on bus iness imposed by a combination of (among other things) a punitive tax syste m, official corruption, organized crime, and an unfriendly bureaucracy. Thi rd, while self-dealing will still occur (though perhaps to a lesser extent) if state enterprises aren't privatized. since self-dealing accompanies pri vatization, it politically discredits privatization as a reform strategy an d can undercut longer-term reforms. A principal lesson: developing the inst itutions to control self-dealing is central to successful privatization of large firms.