Privatization in Estonia and Hungary: Selling Out

The inability of state-owned enterprises (SOEs) to operate in a market setting has played a key role in the postsocialist transformation crisis. Despite evidence of the rapid growth of newly founded private enterprises, lasting economic recovery will be hard to achieve without efficiency-oriented adjustment in the existing enterprises. The behavior of enterprises depends on the degree of competition in the product and factor markets in which they operate, on the softness of their budget constraints, and on the internal incentives provided by corporate governance, i.e., the goals owners pursue, and on how they are able to enforce these goals with management.