discussion paper

FS I 93 - 103

R ecom binant Property in East E uropean C apitalism

David Stark *

Collegium Budapest, Institute for Advanced Study andDepartment of Sociology, Cornell University

Research for this paper was supported by a grant from the National Council for Soviet and East European Research. An ealier version was presented in the Department of Sociology, Princeton University and at the Wissenschaftszentrum Berlin. My thanks to Laszlo Bruszt, Ellen Comisso, Paul DiMaggio, Istvän Gabor, Gernot Grabher, Janos Kornai, Laszlo Neumann, Claus Offe, Monique Djokic Stark, Eva Voszka, and Harrison White for their criticisms of an earlier draft.

D ecem ber 1993 ISSN Nr. 1011-9523

Research Area: Labour Market and Employment

Research Unit: Organization and Employment

Forschungsschwerpunkt: Arbeitsmarkt und Beschäftigung

Abteilung: Organisation und Beschäftigung

ZITIER W EISE/C ITA TIO N

David StarkR ecom binant Property in East European Capitalism D iscussion Paper FS I 93 -103 W issenschaftszentrum Berlin für Sozialforschung 1993

Forschungsschwerpunkt:A rbeitsm arkt und B eschäftigung (FS I) A bteilung:O rganisation und B eschäftigung

R esearch Area:Labour M arket and Em ploym ent R esearch Unit:O rganization and Em ploym ent

R eich pietsch ufer 50 10785 Berlin

Abstract

This paper examines the changing character of property relations in Hungary where a process of decentralized reorganization yields new property forms that are ne ither statist nor private. M anagers at the en terprise level are fragm enting property into num erous lim ited liability companies in orbit around corporate headquarters. Nominally independent, majority shares of the new units are typically held by the paren t enterprise in partnersh ip with private individuals and dense institu tional cross-ownership. In such recom binant property, the instrum ents of state ownership are also changing from jurid ical ownership by state m inistries to shareholding by state property agencies. Ironically, such corporatization finds agencies responsible for privatization acting as agents of renationalization.

These pseudo-private property forms are examined from the perspective of evolutionary econom ics. E arlier work in tha t trad ition was focussed on policy prescrip tions for prom oting a class of private p roprietors emerging from the second economy. The current research turns the tools of ecological-evolutionary analysis to the large m anufacturing enterprises at the core of the economy. Do the new recom binant property forms fac ilita te or impede creative destruction? W hat are the sources of organizational innovation tha t brought about these new form s? How does the em ergence of these new form s exemplify processes of organizational innovation in general as well as those specific to the East E uropean context? W hat is the character of rela tions between state and economy when state ownership of the m ajority of productive assets is exercised as a shareholder?

Zusammenfassung

Dieses Papier untersucht die V eränderung von Eigentum sverhältnissen in Ungarn. D er Prozeß dezen tra lisierter R eorganisation m ündet in neue E i­gentum sform en, die w eder staatlich noch privat sind. Die M anager sp lit­tern das E igentum der vormals staatlichen U nternehm en in zahllose G e­sellschaften m it beschränkter H aftung auf, die mit U nternehm ensholdings verflochten sind. Die E igentum santeile an diesen nom inell unabhängigen neuen G esellschaften w erden typischerweise vom M utterunternehm en in K om bination mit privaten A kteuren und engen institu tionellen K reuzver­flechtungen gehalten. Ü ber diese Form von "recom binant property" voll­zieht sich auch ein Form enwandel des Staatseigentum s vom juristischen Eigentum von Staatsm inisterien zu den E igentum santeilen diverser s taa t­licher A kteure. Ironischerweise finden sich in diesem Prozeß der U n te r­nehm ensbildung ausgerechnet jene A kteure, die für die Privatisierung verantw ortlich sind, in der Rolle von W ieder-V erstaatlichern wieder.

Die pseudo-privaten E igentum sform en w erden aus der Perspektive der Evolutionsökonom ie untersucht. F rühere A rbeiten in dieser T radition konzentrierten sich auf politische M aßnahm envorschläge zur Förderung einer Klasse von Privateigentüm ern, die sich aus der Zw eiten W irtschaft herausentw ickeln. D iese Forschungsarbeit w endet die Instrum ente der ökologisch-evolutionären Analyse auf die großen Produktionsunterneh­men im K ern der Ökonom ie an. Begünstigen oder erschweren die neuen Form en von "recom binant property" den Prozeß schöpferischer Z e rs tö ­rung? W elches sind die Q uellen der organisatorischen Innovationen, die diese neuen Form en hervorbrachten? In w elcher W eise veranschaulicht die E ntstehung dieser neuen Form en organisatorische Innovation im a ll­gem einen und im osteuropäischen Kontext im speziellen? W elcher A rt sind die Beziehungen zwischen Staat und W irtschaft, wenn der S taat seine E igentum srechte über die M ehrheit des Produktionskapitals als A nte ils­eigner ausübt?

ContentsPage

A Science of Transition After aCentury of Transition 1

Property Transformation in Hungary:The Policy Debate 5

Recombinant Property 8

Recombinant Property and Economic Development:A Research Agenda 15

1) Developm ent depends on creative destruction 15

2) Because systemic change is less a productof change (reform ) within organizations than of aggregate changes in the population of organization, dynamic growth depends onorganizational diversity 17

3) Econom ic developm ent depends not only on newlegal codes but also on new codes of conduct 19

A Market Economy or Modern Capitalism? 21

Bibliography 23

Figure 1 28

Figure 2 29

A Science of Transition After a Century of Transition

How can m ainstream economics explain the m om entous transform ation in E astern E urope when it lacks a theory of change? The answer has been an undisguised borrowing of the p r o b le m a tic o f tr a n s i t io n from sociology, the discipline founded at the turn of century on studies of transition w hether from trad ition to m odernity, gem einschaft to gesellschaft, rural to urban society, feudalism to capitalism , or m echanical to organic solidarity. For the founders of sociology, the crisis of E uropean societies in the last decades of the N ineteenth Century was diagnosed as a norm ative and institu tional vacuum. The old order regulated by trad ition had passed, but a new m oral o rder had not yet been established. The crumbling of the trad itional structures had, D ürkheim wrote,

swept away all the older forms of organization. One after another, these have dis­appeared either through the slow usury of time or through great disturbances, but without being replaced.

During our own f i n de s i e d e not the crumbling of trad itional structures but the collapse of communism gives new life to the transition problem ­atic. And w hereas Dürkheim saw sociology as the science of morality that could guide society from the "state of m ental confusion" to a stable moral order, today it is the science of choice that will guide the economies of E astern E urope through the transition from socialism to capitalism . The difference betw een the transition that opened the century and the tran si­tion at its close is, of course, that this time, with alm ost a century of ex­perience, we are no longer burdened by the ignorance of outcomes. Arm ed with this knowledge of destination, the m arriage of economics with the transition problem atic makes possible a genuine science of transition.

1 Dürkheim, 1897:446. Loic Wacquant’s summary of the Durkheimian diagnosis is particu­lar apt: "Because of the extreme rapidity with which the transformations involved in the advent of modern society had taken place, there had appeared a dangerous ’moral lag:’ while the old normative system of the past had become obsolete, that appropriate to the new condition of collective life had not yet developed sufficiently" (Wacquant, 1993: 4, emphasis in the original).

1

It is the starting prem ise of this paper that the greatest obstacle to un­derstanding change in contem porary E astern Europe is the concept of transition. As the science of the not yet, transitology is known to many for its engineering applications: blueprints, road maps, recipes, therapies, form ulae, and m arching orders for how to get from socialism to capitalism in six steps or sixty (Sachs, 1989; Peck and R ichardson, 1992). But working away from the glare of publicity are the theoreticians of the science. E s­chewing the p ractical problem s of how to get from here to there, they are developing a kind of social embryology for the system atic analysis of what is about to be (Nee, 1989, 1993). Common to both the theoretical and the applied sides is an underlying teleology in which concepts are driven by hypothesized end-states. As in all versions of m odernization theory, tran ­sitology begins with a fu ture that is not only desired but already known. The destination has been designated: W estern Europe and N orth Am erica hold the image of the East E uropean future.

Although it begins with the future, transitology is not silent about past and present for this science holds a distinctive diachrony and philosophy of history: The transition is undergone by a society as the passage through a lim inal state suspended betw een one social order and another, each con­ceived as a stable equilibrium organized around a coherent and more or less unitary logic.

Such a view overstates the coherence of social forms both before and after the hypothesized transition and conversely exaggerates the degree of social disorganization in the presum ed lim inal period of "institutional vacuum." Difficult to assim ilate within the transition problem atic are the num erous studies from E astern Europe docum enting parallel and contra­dictory logics in which ordinary citizens were already experiencing, for a decade prior to 1989, a social world in which various domains were not in­tegrated coherently (G abor, 1979, 1986; Stark, 1989; Mirody, 1992). Through survey research and ethnographic studies researchers have iden­tified a m ultiplicity of social relations that did not conform to officially prescribed h ierarchical patterns. These relations of reciprocity and m arket-like transactions were w idespread inside the socialist sector as well as in the "second economy" and stemm ed from the contradictions of attem pting to "scientifically manage" an entire national economy. At the

2

shop-floor level, shortages and supply bottlenecks led to bargaining be­tween supervisors and inform al groups; at the m anagerial level, the task of m eeting plan targets required a dense network of inform al ties that cut across enterprises and local organizations; and the allocative distortions of central planning of reproduced the conditions for the predom inantly part-tim e enterpreneurship of the second econom ies that differed in scope, density of network connections, and conditions of legality across the region.

The existence of para lle l structures (however contradictory and frag­m entary) in the inform al and in terfirm networks means that instead of an institu tional vacuum we find routines and practices, organizational forms and social ties, that can becom e assets, resources, and the basis for cred­ible comm itm ents and coordinated a c t io n s . I n short, in place of the dis­o rien tation expected in the transition problem atic,^ we find the m etam or­

phosis of subrosa organizational forms and the activation of pre-existing networks of affiliation.

By the 1980s, the societies of E astern Europe were decidedly not sys­tems organized around a single logic; nor are they likely to becom e, any more or less than our own, societies with a single system id e n t i ty .A mod-

2 On the importance of routines and habits see especially Bourdieu (1990) and Nelson and Winter (1982).

3 Whereas mainstream economists see collapse as the setting for the bold initiatives of designer capitalism, many political scientists perceive institutional vaccuum as leading to paralysis or even chaos. For the latter, the collapse of the party-state leaves these societies "without institutions and without a system... What we find in Eastern Europe today is an institutional vaccuum. The logic of state socialism was to render the party the central nervous system. It was the institution, giving life, logic and functions to all other subsidiary institutions. When communist party hegemony died, institutions died and, with that, roles and rules" (Bunce and Csanadi 1992:14). To be sure, fragments of the old socialist order survive - alongside new elements obeying another logic. But because the elements taken from two stable systems are mutually contradictory, post-communism is a "non-system." In an irrational environment "without patterns" the category of interests becomes meaningless. "[Tjhe impossibility of making any rational predictions about the consequences of behavior and decisions means that genuinely strategic behavior is impos­sible." (Bunce and Csanadi 1992:16).

4 "Intrapreneurial units and other mixed property forms will provoke ambivalence, and even paralysis, so long as an economy is justified on the basis of a single universalistic principle, be it market-defined ’self-interest’ or bureaucratically defined ’societal interest.’ An alternative is to step unambiguously on the road to a mixed economy and to raise the plurality of property forms from the status of the contingent and ambiguous to one in which diversity is itself a principle of justification. Hungary might yet take such a

3

ern society is not a unitary social order but a m ultiplicity of orders, a p lu ­rality of ordering principles for reaching agreem ent, a polyphony of ac­counts of work, value, and justice (B oltanski and Thevenot, 1991; W hite, 1992; Stark, 1990c). Change, even fundam ental change, of the social world is not the passage from one order to another but rearrangem ents in the patterns of how these orders are interwoven.

Thus, instead of tr a n s i t io n we examine t r a n s f o rm a tio n , in which the in troduction of new elem ents m ost typically combines with adap ta­tions, rearrangem ents, perm utations, and reconfigurations of existing or­ganizational form s. Instead of i n s t i tu t io n a l v a c u u m we examine in s t i ­tu t io n a l le g a c ie s rethinking the m etaphor of collapse to ask w hether differences in how the pieces fell apart have consequences for rebuilding new institu tions. Instead of examining country cases according to the degree to which they conform to or depart from a preestablished model, we see differences in kind and ask how different paths of extrication from state socialism shape different possibilities of transform ation. Instead of building tab la rasa on th e ru in s of communism we examine how actors in particu lar locales and settings are rebuilding organizations and institu tions w ith th e ru in s of communism. Instead of paralysis and d isorien tation we should expect to see actors, already accustom ed to negotiating the ambiguity of contradictory social forms, face new uncertainties by improvising on practiced routines. Instead of grand schemes of architecture, of social engineering, and designer capitalism we examine transform ative processes of bricolage.

Most im portant, instead of thinking about institu tional or organiza­tional innovation as re p la c e m e n t, we see it as reconfigurations and re a r­rangem ents of existing institu tional elem ents. In short, we think of organi­zational innovation as re c o m b in a tio n .

To survive in a rapidly changing environm ent actors redefine and then recom bine resources. These resources include organizational form s (that are likely to m igrate across dom ains), hab ituated practices, and social ties,

step. As analysts, our next step is to accept the challenge of comparing mixed economies not only the basis of relative weights of "capitalist" and "socialist" elements but on the basis of the complex configurations of diverse and internally heterogeneous organizational forms." (Stark, 1989, p. 168.)

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w hether official or inform al. Thus, transform ation will resem ble innova­tive adaptations that combine seemingly discrepant elem ents - bricolage - more than arch itectural design. In this perspective actors are not m oti­vated from the point of view of "the system" but from the urgency of their practical situations. Instead of designating a fu ture that shapes the p re ­sent, we should examine how the fu ture is being shaped by the pragmatics of the present. This pragm atics - finding resources to survive - may yet re ­sult in private property and competitive m arkets. But is perhaps more likely that they will make property boundaries m ore ambiguous and create new forms of coordination that are neither m arket nor hierarchy.

Property Transformation in Hungary: The Policy Debate

This paper adopts this perspective of transform ation as recom bination to address a question that stands at the center of contem porary debates in the societies of E astern Europe and the form er Soviet Union. By what means can private property become the typical form of property relations in econom ies overwhelmingly dom inated by state ownership of productive assets?

Much of that debate can be organized around two fundam ental policy strategies. According to the first strategy, the institu tionalization of p ri­vate property can best be established by transferring assets from public to private hands. D espite differences in the specific m ethods designated for such privatization (e.g., sale versus free distribution, etc.), the various proposals w ithin this rad ical or constructivist perspective share the as­sum ption that the creation of a private sector begins with the existing state owned enterprises. T hat is, the basic organizational units of the em ergent m arket economy will be the pre-existing but newly privatized enterprises.

The alternative policy strategy argues from the perspective of institu ­tional (and specifically, evolutionary) economics that, although slower, the more reliab le road to institutionalizing private property rests in the developm ent of a class of private p roprietors. Instead of transferring the assets of a given organizational unit from one ownership form to another, public policy should lower barriers to entry for small and medium scale

5

genuniely private ventures. Instead of focusing on the existing state owned enterprise, this perspective typically looks to the existing second economy entrepreneurs as the basic organizational building block of an em ergent m arket economy.

R ecent evidence suggests that Hungary is adopting ne ither a Big Bang approach nor the policy prescrip tions of evolutionary economics.^

Contrary to the optim istic scenarios of dom estic politicians and west­ern econom ists who foresaw a rapid transfer of assets from state owned en­terprises to private ownership, the overwhelming bulk of the Hungarian economy rem ains state property. Two years after Prim e M inister Jozsef A ntall confidently announced that his new governm ent would privatize more than fifty percen t of state property by 1995, the d irector of the Priva­tization R esearch Institu te functioning alongside the State Property Agency estim ates that only about 3 percent of the state owned productive capital has been privatized (M ellär, 1992).

Contrary as well to the hopes of many observers that the new govern­ment might adopt a policy of stim ulating new entrants to a dynamic private sector based on the p ro to -en trep reneuria l experiences of "second econ­omy" producers, the evidence on H ungary’s private sector is similarly dis­couraging. A lthough the num ber of registered private ventures has sky­rocketed, H ungarian researchers advise caution in in te rp reting the num ­bers. Some firm s exist only in the courts’ registries having never produced any income, and a significant num ber are "dummy firms" set up to help in­tellectuals and professionals write off expenses such as rent, telephone, and heating for their apartm ents (Laky, 1992). A considerable body of evi­dence now suggests that the second economy has not becom e a dynamic, legitim ate private sector: many en trepreneurs (a m ajority in some cate­gories) still engage in private ventures only as a second job (Laky, 1992; bor, 1992); tax evasion is pervasive; and although employm ent is slowly in­creasing in the sector, most researchers agree that the proportion of un ­registered work (for which the state receives no social security payments and the employee receives no benefits) is increasing fas te r (see Kornai,

5 This terminology is drawn from Murrell, 1990.

6

1992:13).6 These tendencies together with new forms of corruption, extor­

tion, and exploitation have prom pted one researcher to label the transi­tion as one "from second economy to inform al economy" arguing that it is now, under these new conditions, that Latin A m erican com parisons are more applicable to the H ungarian setting (Sik, 1992)7. When private en­

trep reneurs looks to governm ent policy they see only burdensom e taxa­tion, lack of credits, virtually no program s to encourage regional or local developm ent, and inordinate delays in payments for orders delivered to public sector firms (see W ebster, 1992; K ornai, 1992). Through violations of tax codes, paying workers off the books, and the inability or reluctance to engage in capital investm ent (G abor, 1992), much of the private sector is responding in kind. Such governm ent policies and private sector re ­sponses are clearly not a recipe for the developm ent of a legitim ate private sector as a dynamic engine of econom ic growth.

6 These observations by Hungarian researchers suggest skepticism about the confident as­sertions (in ever more excited and breathless tones) of the type "x percent of the GNP of Poland (or Hungary, Russia, or the Czech Republic) are now generated in the private sector." See, for example, the special section of The Economist, March 13, 1993. These are bold statements when one considers the tenuous validity of statistics of this kind in contemporary Eastern Europe where statistical agencies face enormous technical problems. For example, constructing even so basic an instrument as the representative sample (finding the part that stands for the whole) is difficult where the shape and contours of the economy are still unknown. Such measurement problems are compounded, moreover, by political pressures to show higher and higher levels of "private sector" activity in order to represent better the government’s case to international lending institutions, potential foreign investors, and the domestic electorate. The race among Hungary, Poland, and the Czech Republic to show the highest private sector statistics to the IMF recalls, of course, an earlier race during the period of "building socialism" (especially immediately following the ouster of Tito’s Yugoslavia from the Comintern) when the parties and governments of these countries competed for the right to claim the highest proportion of collectivized or state property in their national statistics. Indeed, it is an open secret in Budapest that high government officials urged the use of different statistical cut-offs and measures upon returning from international conferences where Polish officials proudly displayed figures showing that the Hungarians no longer deserved the yellow jersey as first place in the statistical race to capitalism.

7 Much of the current literature on the "private sector" in East Central Europe starts from the assumption that all forms of economic activity outside "the public sector" should be counted as taking place within the private sector. Yet, should our criteria for designating a private sector really be so inclusive as to include the kinds of primitive trade in house­hold articles in the "Polish markets" that one can encounter on street corners, vacant lots, and under the shelter of elevated roadways across the region? Is this the vaunted free market capitalism, or is it just flea market capitalism? Journalists and politicians can call it what they like, but as scholars our classifications should be more rigorous and this kiosk capitalism should not be included in our more restrictive category of private sector.

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Recombinant Property

But although they fail to correspond to the policy prescrip tions of either Big Bang or evolutionary economics, significant property transform ations are taking place in Hungary. A ctors within the form erly, formally state sector - that is, within the sphere of the large public en terprises - are not waiting for the econom ists or the policy m akers to resolve the debate over transferring assets versus encouraging private p roprietors. Instead of waiting, they are acting to modify and transform property relations at the enterprise level. The results, however, are not w ell-defined rights of p ri­vate property, yet ne ither are they a continuation or reproduction of old forms of state ownership. The property form s that result are not simple mixtures of "public" and "private" but ones in which these properties are interwoven and dissolved. For these reasons, instead of mixed, or hybrid, or in term ediate property I use the term r e c o m b in a n t p ro p e r ty .

C o rp o ra te s a te l l i te s . Since 1989, there has been an explosion of new economic units in Hungary. In Table 1 we see that:

- the num ber of state enterprises declined by about 40 percent from 1988 to mid-1993;

- the num ber of incorporated shareholding com panies (RT) increased dram atically (from 116 to over 2,021); and

- the num ber of lim ited liability com panies (KFT) increased by more than 100 fold from only 450 units in 1988 to over 67,000 by mid 1993.8

Table 1 clearly indicates the sudden p ro liferation of new units in the H un­garian economy. But does the table provide a reliab le map of property re ­lations in contem porary Hungary? No, at least not if the data are forced into the dichotom ous public /p rivate categories that structure the discus­sion about property transform ation in the post-socialist countries.

8 Table 1 reports only business organizations with legal personalities. It does not include non-incorporated units whether registered or unregistered with the authorities.

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Table 1. Main Enterprise Forms in Hungary, 1988 - 1992

O rganizationalForm

1988 1989 1990 1991 1992 1993June

S ta te E nterprises 2.378 2.400 2.363 2.233 1.733 1.439

Shareholding companies (ST) 116 307 646 1.072 1.712 2.021

Limited L ia b ility companies (KFT) 450 4.484 18.317 41.206 57.262 65.001

Source: H ungarian C entral Statistical Office S tatistical Y earbook andMonthly Bulletin at Statistics, 1993/7

Take first the form with the most dram atic growth, the newly established lim ited liability com panies. Some of these KFT are genuinely private en trepreneuria l ventures. But many of the units are not entirely distinct from the public en terprises on line one of the table. In fact, the form erly socialist enterprises have been active founders and continue as current owners of the newly incorporate units.

The basic process of this property transform ation is one of d e c e n ­tr a l iz e d reo rg a n iza tio n -. U nder the pressure of enorm ous debt, declin­ing sales, and th reats of bankruptcy or (in the cases of more prosperous enterprises) to fo resta ll takeovers as well as attem pt to increase autonomy from state m inistries, directors of many large public en terprises are taking advantage of several im portant pieces of legislation that allow state en te r­prises to establish jo in t stock companies (RTs) and lim ited liability com­panies (KFTs). In the typical cases, the m anagers of these enterprises are breaking up the organization (along divisional, factory, departm ental, or even workshop lines) into num erous corporations. It is not uncommon to find virtually all of the assets of a large public en terprise distributed among 15-20 such satellites orbiting around the corporate headquarters.

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As newly incorporated entities with legal identities, these new units are nom inally independent - registered separately, with their own boards of d irectors and separate balance sheets. But on closer inspection, their status in practice is sem i-autonom ous. An exam ination of the com puter­ized records of the Budapest Court of Registry indicates, for example, that the controlling shares of these corporate satellites are typically held by the public en terprises themselves (Stark, 1992a). This pa ttern is exemplified by the case of one of Hungary’s largest m etallurgy firms represen ted in Figure 1. As we see in that figure, Heavy M etal, the public enterprise, is the m ajority shareholder of 15 of its 16 corporate satellites.

[Figure 1 about here.]

Property shares in these satellite organizations are not lim ited, however, to the founding enterprise. Top and mid-level managers, professionals, and o ther staff can be found on the lists of founding partners. In the typi­cal pa ttern of mixed ownership, these private persons are joined in share ownership by o ther jo int stock com panies and lim ited liability companies - som etim es by o ther KFTs in a sim ilar orbit around the same enterprise, more frequently by joint stock com panies or KFTs spinning around some o ther en terprise with lines of purchase or supply to the corporate unit (Voszka, 1990, 1991a; Stark, 1992). Most im portant among the outside owners are banks. In many cases, the establishm ent of KFTs and other corporate form s is triggered by enterprise debt, and in the reorganization the creditors - w hether com m ercial banks (whose shares as jo int stock com panies are still predom inantly state-ow ned) or other credit institu ­tions (also state-ow ned) - exchange debt for equity. This pa ttern is rep re ­sented in the case of another H ungarian firm in Figure 2.

[Figure 2 about here.]

The new property forms thus find horizontal ties of cross-ownership intertw ined with vertical ties of nested holdings.

W hat then is the fastest growing new ownership form in Hungary? The institutionally cross-owned corporate satellite involving the hybrid p a rt­nership of public and private property is certainly a likely candidate. An exacting term inology is cum bersom e, but it reflects the complex, in te r­twined character of property rela tions in Hungary: the fastest growing new

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property form is a lim ited liability company owned by other lim ited liab il­ity companies owned by jo in t stock com panies, banks, and large public en­terprises owned by the state (Voszka, 1991b; Stark, 1992).

Recom binant property spreads risk - and provides for private appro­priation of gain. In an entirely private venture, the en trepreneur might claim the larger pa rt of gain but he is thereby exposed to the greater part of loss at a tim e of extreme volatility when prices, regulations, and m arkets are changing rapidly and unpredictably. It is im portant to emphasize here, however, that recom binant property is not simply a result of passing on risk to som eone else (attem pts to privatize gain while socializing losses have ample legacies from the recent socialist past) but results as well from efforts to spread risk across a variety of organizational forms. Recom bi­nant property springs from hedging strategies. Because the fu ture is uncer­tain, actors are reluctan t to place all their bets on, or to use all their re ­sources within, only one organizational form .9

P r iv a t iz a t io n as e ta t iz a t io n . E lem ents of property are being re ­combined not only by actors at the en terprise level but also by the central agencies nom inally responsible for privatization. That is, parallel to the process of fragm entation is the m andated process of c o r p o r a tiz a tio n through which the form er state-owned enterprise is transform ed into a jo in t stock company or o ther corporate form . These are the shareholding companies (RT) represen t in the second line of Table 1. The question, of course, is who is holding the shares? In alm ost all cases, the overwhelming m ajority of shares in these corporatized firm s are held by the State Prop­erty Agency or the newly created State A sset Trust. W hereas "state-owned enterprise" in socialism m eant ju r id ic a l ownership by a state ministry (e.g., M inistry of Industry), corporatization in postcomm unism entails sh a re ownership by one or another state property agency. In the H ungar­ian transform ation, recom binant property is therefore not a simple mix­ture in which private owners (whether institu tional or individual) are now co-participants with the state but one in which the nature and the instru­m ents of state ownership are undergoing change as well.

9 See Sabel and Zeitlin (forthcoming) who observe similar kinds of hedging strategies in their study of firms at the turn of the century

11

Such corporatization m andated by a privatization agency in the current context has some distinctive features of renationalization . Namely, in Hungary where m anagers in the 1980s exercised de facto property rights (prim arily rights of residual control, secondarily rights over residual in­come stream s, yet virtually no rights of disposal) and in Poland where workers in the same period enjoyed sim ilar rights, c o r p o r a tiz a t io n in ­v o lv e s e f f o r t s a t r e - c e n tr a l iz a t io n . That is, property is gwast'-private in part because state elites are reluctan t to let the economy slip out of their hands. The irony, of course, is that it is precisely the agencies respon­sible for privatization that are acting as the agents of e ra /iza tio n by p ro ­viding the instrum ents for the exercise of control through share ownership (Voszka, 1992). The effective exercise of such centralized control, how­ever, varies inversely with the scope and the degree of direct intervention (the trap of centralization already well-known in the region). Thus, sim ul­taneously with this move toward centralization, one encounters proposals for p r iv a t iz a t in g th e a sse t m a n a g e m e n t f u n c t io n . In such program s, the state (through its property agenices, the SPA and SAT) retains the right to dispose of the property while engaging private actors (throughvarious kinds of subcontracting/com m ission schem es) to exercise the agency’s rights as shareholder.

Thus, some of these shareholding companies are unambiguously "public" especially w ehere designated as en terprises to be held as state property in the long run. But others have a much more heterogeneous property structure, reflected in the more diverse m em bership on their boards of directors with representatives of the SPA, the SAC, state owned banks, partially state owned banks, foreign partners, dom estic investors, senior m anagem ent shareholds, and so on.

On th e C zech v a r ia n t o f r e c o m b in a n t p ro p e r ty . The much- vaunted voucher scheme of the Czech Republic, it might seem, is more in line with the dual sector m odel that I have been criticizing. By transferring assets of the state en terprises through a voucher-auction, the Czech policy m akers appeared to favor a kind of popular capitalism with millions of citizen investors and a clear separation of public and private property. U n­til just a few months before the first wave of com puterized auctions, how­ever, only several hundred thousand citizens had en tered the privatization

12

lo ttery by paying 1000 corona to reg ister the investm ent points of their voucher coupon b o o k s . T h e problem of low participation was solved when "investment funds" (an afterthought in the in itial program ) began to prom ise citizens who signed over the ir investm ent points a 1,000 percent re tu rn , payable a year and a day following the transfer of their points into shares. Czechs and Slovaks responded from years of socialist conditions: Averse to risk, they were unwilling to play the investors’ game, but they could recognize a guaranteed income when they saw it. M illions signed up.

The consequence of the voucher privatization was not to make popular capitalism but to make Vaclav Klaus p o p u lar.H Klaus was nam ed Prime

M inister following an election held just weeks after millions had regis­tered their investm ent points by signing their names next to his signature (as Finance M inister) on their voucher coupon booklets. The outcome, m oreover, has not been a peop le’s capitalism but a strange kind of finance capitalism . A fter the first wave of voucher privatization, the nine largest investm ent funds garnished 48.5 percen t of all investible points, some 400 sm aller investm ent funds controlled about 23.4 percent of the points, with the rem aining 28.1 percent held by individual in v es to rs .^ These invest­

m ent funds, moveover, are not unambiguously private: the founder of seven of the nine largest funds are state-ow ned banks.

Im p l ic a t io n s o f r e c o m b in a n t p ro p e r ty . Thus, in the Czech R e­public as in Hungary (and throughout the region), there has been consid­erable property transform ation - but little of it has resu lted in decisive boundaries clearly separating public from p r iv a te .^ The fundam ental an­alytic question at stake is not where to draw the boundaries of the private sector but w hether the post-socialist econom ies can be adequately rep re ­sented in a two-sector model. A lm ost every analytic stance and every po l­icy position in the privatization debate shares this dualistic rep resen tation of public sector and private sector. T hat schema is not only inadequate but m isleading, and policies based on it will yield distorted results. This ana-

10 See Stark, 1992a, for the main outlines of the voucher auction program.11 See Rutland (1993) for an analysis of the political skills of the Prime Minister.12 See PlanEcon Report, vol. VIII, 31 December 1992, pp. 8-9.13 For a compatible view of blurred boundaries and interwoven property relations in

China see especially Wälder, 1992.

13

lytic shortcom ing cannot be rem edied by more precise specification of the boundary betw een public and private: the old property divide has been so eroded that what once might have been a boundary is now a zone.

Perhaps the greatest legacy of state socialism is that at precisely the time that political and economic actors are trying to free the economy from the grip of state ownership our thinking about property rem ains essentially Marxist: everywhere we are looking for th e ow ner. But property is not only about things but about r ig h ts to do th in g s . And, as developments throughout the industrial countries suggest, property can be productively dis-integrated in ways such that different actors can legitim ately claim rights to d ifferent properties of the same thing (see, especially, Grey, 1980; Comisso, 1991). In such a view, transform ing property rights is about renegotiating relations among a wide set of actors to resolve their claims over d i f f e r e n t k in d s o f p ro p e r ty r igh ts .

Thus, we should not be surprised that reorganization in E astern Europe is yielding new property form s that are ne ither statist nor private. The econom ies of East C entral Europe are evolving in forms that are ne i­ther state capitalist nor m arket socialist. These are mixed economies not because there are state-owned firms and privately owned firms but be ­cause the typical firm is itself a com bination of public and private property relations. W hat we find are new forms of property in which the properties of private and public are dissolved, interwoven, and recom bined. Property in E ast E uropean capitalism is r e c o m b in a n t p ro p e r ty .

How do we assess these forms - will they contribute to developm ent or will they block it? In the standard property rights lite ra tu re , these blurred and ill-defined property rights would be an obvious liability from an eco­nomic standpoint. To the new school of flexible specialization, constitu­tional orderings, and affiliative networks (see especially Sabel, 1993) on the o ther hand, these fuzzy boundaries are at least potentially virtuous. Answers now are prem ature, but the research agenda is clear. The p ro ­cesses described here suggest the em ergence of a distinctively East E uro­pean capitalism that will differ as much from W est E uropean capitalisms as do contem porary East Asian variants.

14

Recombinant Property and Economic Development: A Research Agenda

In the discussion that follows I use three core principles of evolutionary economics as a heuristic to address the problem s and prospects of eco­nomic developm ent in E astern E u ro p e .^ W hereas designer capitalism adopts principles to produce form ulas, in the analytic strategy adopted here principles are im m ediately problem atized.

1) D e v e lo p m e n t d e p e n d s on c re a tiv e d e s tr u c tio n .

The major challenge confronting an evolutionary institu tionalism is to dis­cover the process whereby selection can begin to operate in the East E u­ropean setting when there are good reasons to question the Usual recipes. On one hand, insights from public choice theory provoke skepticism about proposals calling for strong states to distribute property rights according to some form ula whereby assigned property will bring about markets (Stark, 1990; K ornai, 1992). On the other, fam iliarity with problem s of m arket failures yields a healthy skepticism about proposals based on the alternative form ula that artificial m arkets can be the instrum ents to bring about private property (Levitas, 1992; Stark, 1992).

Thus, the first question we need to address is w hether the recom binant property form represen ted by institu tionalized cross-ownership at the en­terprise level contributes to processes of creative destruction. Several

14 In the ongoing research outlined here I analyze this new organizational form by conducting field research in five Hungarian enterprises in which the recombinant property form predominates. These firms - two of which were among the ten largest enterprises in Hungary at the outset of the transformation - are at the core of the Hungarian economy, in metallurgy, rubber, plastic, machining, engineering and design. My knowledge of the firms predates the current study, having done field research in these companies (in four of the five beginning in 1984) on an earlier organizational innovation (Stark, 1986, 1989, 1990). The project thus has a distinctive longitudinal component in which organizational histories need not be reconstructed after the fact. Three of the five firms were studied in June 1992, in collaboration with Laszlo Neumann of the Institue of Labour Studies, Budapest. Further research will be carried out in 1993-94 while I am a Visiting Fellow at the Collegium Budapest - Institute for Advanced Study.

15

early case studies (M oro, 1991; Voszka, 1990) and my own prelim inary in­vestigations in the firms during June 1992 suggest that quasi-private p rop ­erty is frequently a product of strategies to avoid bankruptcy. Engaging banks as owners, for example, is often m otivated by a search for continued credit in hopes that a lender who is also an owner (and itself owned by the sta te) will extend credit ra the r than allow the firm to fa il.15 The same goes for enlisting suppliers as owners - an added twist to the strategy of soften­ing budget constraints through in ter-en terprise debt, obtaining forced credit by late payment. Such strategies are, moreover, som etim es accom­panied by director-em ployee alliances to avoid layoffs. As I saw in one of the largest metallurgy firms in Hungary, the top stated priority for the strategy of grouping satellites around the (now virtually empty) corporate headquarters was "to preserve employment." In this firm the "Club of M anaging D irectors" of the sixteen nom inally independent KFTs estab­lished a closed labor m arket ("no outside hiring") in which each agreed that any new openings would be filled by workers made redundant in other units. Perhaps not surprisingly, 15 of the 16 units reported the same rate of profit for their activities in 1991 (no doubt a challenge for the accountants who worked out the various pricing, phony leasing, and subcontracting a r­rangem ents among the lim ited liability co m p a n ie s).^

N onetheless, by dividing large enterprises into sm aller and distinctly identifiable units, the H ungarian recom binant property form may con­tribu te to some creative destruction. If the pa ttern of obviously doctored books of the m etallurgy satellites is not too w idespread, it should become easier to identify clear winners and losers; and the sm aller size of the com posite units might fac ilita te the liquidation of the obvious loss-m ak­ers. Similarly, with their own balance sheets and their own boards of d irec­tors, some of the sem i-autonom ous lim ited liability com panies might more likely become targets for take-overs by foreign firms or indigenous private

15 Such circumstances are plausible in the particular Hungarian context where enterprises(and their debts) were arbitrary assigned to commercial banks (that remain owned by the state) during the reform of the banking system.

16 The apparent hub and spoke image of Figure 1 is misleading. Decision-making does not take place in "company headquarters" but along the links of the corporate satellites in institutions such as the club of managing directors. Like many enterprises in contemporary, Heavy Metal is without a center. If ownership ties suggest a hub and spoke, the actual governance relations resemble more a kind of doughnut.

16

entrepreneurs whose lim ited means could not acquire properties left in te ­grated within the large state enterprises. T hat is, the quasi-private p rop ­erty tha t results from decentralized reorganization in the first round might set the stage for a la te r round of deeper privatization. Of course, the more dense the pa ttern of cross-ownership, the less likely we are to see liquida­tions a n d /o r genuine buyouts.

F urther research should also analyze the s ta te ’s participation as (often m ajority) shareholder and how it fac ilita tes or im pedes creative destruc­tion. How, for example, do the s ta te ’s agents reconcile the often conflict­ing goals of 1) increasing the value of a particu lar firm ’s assets, 2) p ro ­moting m acro-econom ic policies to achieve economic growth while m ain­taining social peace, and 3) improving the e lec to ra l/po litica l fortunes of the governing party?

2) B ec a u se sy s te m ic change is less a p r o d u c t o f ch a n g e ( r e fo r m ) w ith in o r g a n iz a tio n s th a n o f a g g reg a te c h a n g es in th e p o p u la tio n o f o rg a n iza tio n s , d y n a m ic g ro w th d e p e n d s on o r g a n iz a t io n a l d i ­vers ity .

W hereas the first principle refers to exit or "deaths," this second refers to entry or "births" not simply of new organizations but of new o r g a n iz a ­t io n a l f o r m s t Socialism failed not only because it lacked a selection mechanism to elim inate organizations that perform ed poorly but also be­cause it put all its economic resources in a single organizational form - the state en terprise. Socialism drastically reduced organizational diversity and in so doing prohibited a broad reperto ire of organized solutions to problem s of collective action. O rganizational forms are specific bundles of routines and the reduction of their diversity means the loss of organized

17 I first raised these issues at a conference in 1986: "Perhaps the distinctive contribution of the Hungarian experiment will be demonstrate that the path to reforming a socialist economy lies less in promoting competition among firms than in fostering competition among organizational forms. Not simply decentralization of economic decision making but diversification of property forms might be the Hungarian lesson for reconstructing the centrally planned economies" (Stark, 1989, p. 168).

17

inform ation that might be of value when the environm ent changes (H annan, 1986; Boyer, 1991; Stark, 1989, 1992b). The relative paucity of organizational diversity in E astern Europe gives added urgency to the question: where do (new) organizational forms come from ?

The conventional answer in the postcom m unist setting is that they must be in troduced from the outside. The collapse of communism and the subsequent institu tional vacuum, in this view, present both an opportunity and an im perative for grand designs and bold experim ents of institutional reconstruction. N otions of collapse and vacuum are misleading, however, because they overstate the rapidity and the totalizing character of institu ­tional change in E astern Europe. A dual corrective is required: institu ­tional change has been much less dram atic, but the de-institu tionalization that did occur began much earlier.

By "deinstitutionalization" we refer to processes whereby the taken- for-granted character of institutions is eroded as, for example when legal or o ther rules that m aintain boundaries betw een previously discrete pop­ulations of organizations are relaxed (Stark, 1989; Powell and DiMaggio, 1991). Moreover, this blurring of boundaries (as H annan and Freem an, 1986, observe) engenders new organizational forms. Such deinstitu tional­ization was taking place in the H ungarian economy throughout the 1980s. Most im portant for the current debate over property transform ation were the broad economic, legal, and social changes that eroded the boundaries betw een state and private property. W hereas the communist p o l i ty had been based on elim inating the boundary betw een public and private, the state socialist e c o n o m y had been built on an absolute barrier separating public and private, sanctified in a rigid hierarchy of collective, coopera­tive, and private property. These absolute barriers were crossed first in agriculture in the late 1970s with the blurring of boundaries betw een the property of the cooperatives and those of the household plots. By 1982, boundaries betw een state and private property were being eroded in even the most advanced sectors of H ungarian m anufacturing. With this deinsti­tu tionalization came g rea ter organizational diversity. The most prom inent new organizational form was a hybrid property form, the enterprise p a rt­nership (or VGMK), in which sem i-autonom ous subcontracting units used enterprise equipm ent to produce goods or services during the "off hours"

18

(see, Laky, 1988; Neum ann, 1989; Stark, 1986, 1989). M odified in their m igration from agricultural to m anufacturing, these "household plots of industry" had no rights to dispose of assets, but they did have a claim to the use of equipm ent during parts of the day/w eek. M oreover, the "partnerships" had captured significant rights over resididual income (their "entrepreneurial fees" not uncommonly exceeded m anagerial earn ­ings) and enjoyed significant rights of control ("From 6 to 2 we work for them ; from 2 to 6 we work for ourselves," went the common expression).

Thus, as the partnerships spread to virtually every socialist enterprise and eventually involved more than ten percent of the industrial labor force, a good part of H ungary’s m anagerial stratum had some practical ex­perience with an organizational form of a hybrid property character. The first and most obvious question is w hether the new KFTs are the literal or­ganizational successors of the earlie r subcontracting partnerships. Did the earlie r hybrid forms provide a prim itive organizational tem plate for the subsequent quasi-private com panies? If not, did the firm have previous experiences with joint-ventures or o ther mixed property form s, and did these provide the basis for possible recom bination? W hat other new organizational forms are appearing in the large enterprises? A re diffusion processes operating in these settings, and if so, through what channels and m echanisms is such diffusion taking place?

3) E c o n o m ic d e v e lo p m e n t d e p en d s n o t on ly on new le g a l codes b u t a lso on new co d es o f c o n d u c t.

Legal and o ther changes that modify official rules w ithout a ltering the dis­positions, expectations, routines, and habits of social actors are changes that have not been institu tionalized as taken-for-granted rules of the game. Given that economic institu tions include not only regulatory fram eworks but also e x p e c ta tio n s a b o u t b e h a v io r (see Schotter, 1981), the efficaciousness of a convention depends on assessm ents about the probability that others are recognizing the convention. It follows from this prem ise that institu tional changes introduced across a population of ac­tors are less likely to be successful in structuring conduct than those in tro ­

19

duced only among a buffered subset of the population. T hat is, institu ­tional changes are more likely to take root and diffuse throughout a pop­ulation if they have a chance to structure behavior among some (tem porarily) buffered group of actors (see the gam e-theoretic argum ent of Boyer and O rlean, 1991). Consistent with these principles, in the con­tem porary East E uropean setting, private property and m arket processes are more likely to take hold when stim ulated to develop deeply among ex­isting en trepreneurs ra ther than spread thinly across all organizations (K ornai, 1990; Stark, 1990; M urrell, 1992a). But we should also examine w hether and how codes of conduct are changing at the core of the form erly socialist economy where deep-rooted expectations and habits are thinly covered by new property forms and legal regulations. How quickly does conduct change where legal environm ents are alterred? If actors assume that the tax auditor is corrupt or at least corruptable, if they assume that the tax regulations were drafted based on assum ptions of tax evasion, and if they expect that others in their position are tax evasive, will new regula­tions and standards of enforcem ent shape new behavior? Might old p a t­terns of soft budget constraints be perpe tuated by old codes of conduct? For example, m anagers of socialist en terprises were subject to efficiency testing: the problem was (and might continue to be) that survival chances were affected more by efficiency in m obilizing resources than by technical efficiency in producing a product. Similarly, directors of "flagship en te r­prises" accustom ed to calculating the firm ’s indispensability on the basis of the num ber of its employees, might not suspend these calculations overnight - especially when the predom inant share holder is represented on the firm ’s new board of directors by political appointees of the govern­ing party.

G rand schemes of privatization m istake the assignment of rights over property as the institu tionalization of property rights. Instead, I anticipate that actual property relations are shaped by the interactions of new regulations and past practices. For property rights to be clarifed, they must be w ell-defined not only in legal codes but in everyday routines. The "rights of shareholders" can be inscribed in legislation, m andated in corporate charters, and in terp reted in court rulings. How are these rights negotiated and clarified in circum stances where everyone in the room has

20

executive experience and yet no one has ever been a m em ber of a body just convened as a "board of directors"? We should expect that the resulting practices will draw as much from old rules and roles as from new regulations.

Old rules and roles, however, need not imply stagnation. U nder what circum stances are new opportunities exploited in attem pts to preserve old identities? Conversely, how are established resources and practices u til­ized for new goals? How are relations among the managing directors of the corporatized satellites redefined across new organizational bound­aries? Do interlocking d irectorates follow the paths of old networks of af­filiation or are they based on new logics? In what circum stances does an attem pt to survive using an old tactic yield new configurations and a l­liances? Are new codes of behavior diffusing from small and medium scale en trepreneurs? How do m anagers of transform ed enterprises in teract with agents representing the state as shareholder? How do these interactions differ depending on w hether the representative is an official of a property agency or a "private" consultant exercising the asset m anagem ent func­tion?

A Market Economy or Modern Capitalism?

Will this bricolage, this m etam orphosis of organizational form s and adap­tations of social ties result in dem ocratic m arket econom ies? It is too soon to tell. But functioning m arkets are more likely to come from trials and e r­rors that can be corrected, and new opportunities are more likely to be perceived and exploited when transform ative processes are decentralized than by grand experim ents that are centrally im posed on society. The more im portant question is w hether the most far-reaching m arketization of all aspects of econom ic life should be the policy goal in contem porary Eastern Europe. Advocates of such a goal suffer from two analytic shortcomings: (1) they mistake one possible means as the end itself and (2) they operate in a theoretical universe in which the dichotom ies of state and m arket ex­haust the range of coordinating mechanisms in m odern economies. But (to take the first poin t) surely one goal of m arketization has been to m od­

21

ernize the production processes and improve the in ternational com peti­tiveness of these damaged economies. Yet (the second point), as various currents of thinking in political economy recently indicate, there are sec­tors in which the most com petitive form s of economic coordination are n e ith e r m a r k e t n or s ta t i s t but new forms whose alternative operations we are only beginning to understand and identify (with prelim inary labels such as "networks," "alliances," "inter-firm agreem ents," and the like) (see esp. Boyer 1991; Hollingsworth et al 1992; Powell 1990; and Sabel 1993). An exclusive policy of all-encom passing m arketization across all sectors would therefore hinder in ternational com petitiveness.

Such a tragedy is likely so long as the theoretical debate rem ains trapped in a view that m istakes the trium ph of capitalism as the trium ph of the m arket and look only to the "market revolutions" of Reagan and T hatcher when the real victories went to the industrial reorganizations in Germany and Japan that were ne ither m arket nor h ierarchal. M odern capitalist economies should not be reduced to only one of their constitu­tive parts: m arkets are but one of a m ultiplicity of coexisting coordinating mechanisms in m odern capitalism (Boyer, 1991). T ransform ative schemes that rely on an exclusive coordinating mechanism do not so much emulate existing capitalism as echo the im plem entation of state socialism and, like it, carry the danger of sacrificing the dynamic efficiency and flexibility that depend on diversity of organizational forms.

This diversity of organizational arrangem ents will appear discordant from the viewpoint of social theory that can accomm odate complexity only as functional d ifferentiation or as the transitional juxtaposition of the con­tradicting principles of overlapping systems. Marxism and m odernization theory are equally inadequate for the task. The East E uropean transform ­ations of our era offer not only a laboratory to test existing theories but also an opportunity to develop new theories of complexity to understand and explain societal change.

22

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Figure 1

ooo

Figures indicate percentage of shares held (SOE).

by the state-owned enterprise

28

Figure 2

Kft - Limited Liability Company

RT - Shareholding Corporation

SPA - State Property Agency

-------- Ownership tie- -■ ~ ~ Cross—ownership

— ------Lease

29