Possibilities for and Limitations
to a "Mixed Ecomomy" in
Post-Socialist Transformation:
Reflections after Thirteen Years*1

Tsuneaki Sato
In Retrospect - 'Continuity' and 'Discontinuity'
Just thirteen years ago, in 1983, this writer presented a paper
at the International Symposium on "Order Orientation and
Liberalizing Tendencies in Soviet & East European Societies",organized by the Slavic Research Center, Hokkaido University,
August 23-25, 1983, under the title "Possibilities for and
Limitations to a 'Mixed Economy' in Socialist Planned
Economies", which was later published in "Acta Slavica
Japonica" (Tomus 2,1984) [Sato, T., 1984]*2.In that paper I paid
special attention to the then on-going changes which started toappear in the course of the so-called "third wave" of economic
reforms from the beginning of 1980s (in Hungary and China inparticular). I raised the question that "something essential" wasshowing itself, which could not be disregarded when we
considered the future economic system of 'socialism'. Taking
particular notice of the incorporation of different types, of
non-state ownership, (namely private, cooperative (smallcollective) and mixed types of ownership) into the thendominating socialist economic system, I termed these changes a"creeping" approach to a "mixed economy" in socialist
economies.
My way of thinking was repeated in my papers presented at
different international conferences held in 1987 [Sato, T., 1987]
and 1988 [Sato, T., 1988], and finally took shape in mydiscussion paper presented at the International Round-Table
Conferenceon"MarketForcesinPlannedEconomies",

318

Possibilities for and Limitations to a "Mixed Ecomomy"organized jointly by the International Economic Association(IEA) and USSR Academy of Sciences in Moscow on March
28-30, 1989 (just five months before the onset of the 'Revolution'in the Central-Eastern European countries (hereafter CEECs)),
under the title "Rethinking Market-oriented Economic Reforms
in Socialist Countries"*3.
In this paper inter alia I stated as follows:"Taken together, there is a clear tendency toward a 'mixed
economic system', based on the recognition of the 'universality'of the market economy common to all economic systems,
capitalist or socialist... [Then] the difference between capitalist
and socialist economic systems might be interpreted eventually
not so much in terms of ownership and relations of plan andmarket, but in terms of macropolicy (regulation) exercised overthe market with due attention to such values traditionallyassociated with socialist ideas, as security, stability, equality andsolidarity" (P. 254-55).
This might be called a very social-democratic view of'socialism', in so far as it recognizes the market economy as an'universality' and only sees the difference between capitalism
and 'socialism' in the 'quality' of macro-economic regulation
exercised over the market.
People are very forgetful even of the near past. After thesystemic changes inaugurated by the 'East European
Revolution' of 1989 and the 'New Russian Revolution' two years
later (this writer uses the latter term for the sake of convenience
only, as it differs greatly from the 'Civic Revolution' in CEECs, inCzecho-Slovakia, Poland and Hungary in particular, in the sensethat those who came to power were not new political elites, but
the second echelon of former Nomenklatura as opposed to theformer hence it resembled the 'Romanian' model), many writers
forgot what they had been writing before 1989 and concentrated
mainly on 'discontinuity' in the processes before and after 1989,
while disregarding the elements of 'continuity' which threaded

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319

through both processes [Sato, T., 1990]*4.
As Bravant [Bravant, J. M. van, 1994, p. 77] rightly observed,"it is simply unhelpful to draw a caricature of the past forty years,
to pretend that the transformation can be inaugurated in a tabularasa." With the same line of thinking, Köves [Köves, A, 1994, p.
158] noted that "the to-be-established 'full-fledged' market
economy" was conceived as "just the opposite of what theplanned economy used to be", but also 'overemphasis on
dis-continuation', namely building up "a type of Chinese Wallseparating pre-1989 economic reforms from those following thepolitical changes-led to a neglect of real economic potentialities
and constraints of different countries". This, in turn, brought
about far bigger costs than were initially anticipated, especiallythe social costs of transformation to find their clear reflex in thechanges of political trend in CEECs since 1993 and quite
recently in Russia.
History seems to have avenged itself. This applies to theeuphoria over rapid privitization in particular. Contrary to the
inflated expectations for a market economy with an ownership
structure of the Anglo-Saxon type, in which private owners
prevail, what we now see in all transition economies (hereafterTEs) is a peculiar type of 'mixed economy' ('post-socialist mixed
economy', as the author calls it)*5, peculiar, not only in the
traditional sense that some parts of the economy still remain in
public hands, but more importantly, in the ownership structure ofindividual firms, a peculiar type of 'mixed ownership' (state,cross, quasi-collective and private etc.) seems to have been
incorporated [Sato, T., 1995, p. 12]. As this seems not to be atemporary phenomena, "there will not be any clear-cut dividing
line between the state-owned sector on the one hand andnon-state-owned enterprises on the other in the years tocome" [Köves, A., 1994, p. 162]. Hence the problématique(problem-setting) of a 'post-socialist mixed economy' to seems
quite real, and this is also closely related to the question 'whatkind of capitalism in CEECs and Russia will emerge in the
future?'320

Possibilities for and Limitations to a "Mixed Ecomomy"

Path-dependence in Systemic Transformation
The concept of path-dependency refers not to revolutionary,
but rather evolutionary features of system trajectories. According
to Avner Greif, who coined this concept, path-dependency
means that the present framework of economic systems depends
greatly on historical conditions, and, therefore, in order tounderstand a given economic system at any given time it isnecessary to study in depth its formation, tracing back to the past
[Greif, Avner, 1996]. So, a path-dependency approach will focus
on both heritage from the past and active creation. Hence, weshould focus on evolution in the era of 'socialism', during thelate-80s in particular, as well as paying attention to the trajectory
after the big political changes since 1989.
When former socialist countries ushered in the era ofpost-socialist transformation, they had already followed diverse
paths of change since the introduction or imposition of theSoviet-type model. In the following years, especially in the
1980s, an increasing variety of national paths could beobserved, while some common trends coexisted with divergent
tendencies. This was eloquently stressed by Csaba [Csaba,
László, 1995, pp. 2-4] with the main emphasis on the'peculiarity' of Hungarian development which "did not badly
need social engineering" (i.e., the 'shock therapy' approach).
In the first years of transformation, a conventional approachdominated which clearly underestimated such diversity in initialstarting conditions. Moreover, the notion of a standard text-bookview of the 'market economy', explicitly or implicitly of an
Anglo-Saxon flavour, was dominant. Quite recently, especiallyafter the changes in political trends in CEECs and Russia from1993 onwards, various searches for different paths could bediscerned, but it appears to me too early to reach somepersuasive conclusions about to what extent they would lead to astabilized similarity or dissimilarity in the future economic
systems of these countries. So, at the time of writing, instead oftaking a simplified view of the 'market economy' that might be*6

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321

established in these countries, we need to make a careful
comparative analysis of these initial trials that will help us in ourfurther analysis of the emerging patterns of economic systems intransition countries.
As stated in Notes*2, the last decade of 'socialist' systems insome CEECs (Hungary, first of all) and China saw the emergenceof a creeping 'socialist mixed economy'. Janos Kornai himself
also refered to a "mixed economy of a socialist type" [Kornai,
Janos, 1983, pp. 236-237]*7. Many authors, including myself,have focused on the development of the private sector as well asof alternative forms of ownership (as opposed to that of the state)in these countries, and the shift away from the organizational
homogeneity of the traditional 'socialist' economic systems. By
contrast, Czecho-Slovakia, where the reform attempts of 1968
had been radically suppressed, and the former USSR (at least
until 1989) were still close to this traditional model when theregime collapsed in 1989 or in 1991.
The era of radical systemic transformation was inaugurated
by an unexpected and somewhat unprecedented form of politicalchange. As Lavigne [Lavigne, Marie, 1995, p. 248] rightly
concluded, "the collapse of the system was a political act fromwhich the transition started." This change, although almost
simultanious, took different forms according to the then existingsocio-political conditions. While in two Central-Eastern
European countries (Poland and Hungary) it took the form of'negotiated retreat' and in Czecho-Slovakia the 'surrender' ofcommunist leaders, in which new political elites came to power,in Romania those who came to power were from the second
echelon of the former ruling elite and hence the former power
structure has remained essentially the same - just like a'shadow' structure. Bulgaria lies just in-between. In time, thesedifferences, to which not so much attention was devoted at thetime, were to influence the path of systemic changes moreheavily.
Following the strong advice and recommendations frominternational economic organizations, most notably from the322

Possibilities for and Limitations to a "Mixed Ecomomy"

IMF, all governments of the region proclaimed macro-economic
stabilization and institutional changes, especially privatization,
as the most important and immediate means to reach thecommon target model of a market economy based on private
ownership. However, differences in initial conditions and inpolicy orientation resulted in different paths: Poland was the firstto apply 'shock therapy', but the political conditions associated,first of all, with the incorporation of 'self-management' at theenterprise level constantly delayed the plans for massprivatization, and the actual change in the ownership structure of
the former state sector was rather slow.
In Czecho-Slovakia, too, shock therapy was introduced, but
this was after rather a longer preparation (one year after Poland)
and under far better initial conditions than in Poland. A mass
'voucher' privatization was organized and implemented
successfully seemingly (at least in the sense that it has secured anincreased support for the ruling party led by Prime-Minister
Vaclav Klaus). Hungary, on the other hand, where theevolutionary change towards a 'mixed economic system' hadbeen most pronounced in the 1980s, adopted from the beginninga more gradual approach to macro-stabilization and privatization,
opting for conventional methods rather similar to theprivatization schemes applied to some developed market
economies in the 1980s.
These differences in privatization schemes were connectedwith other differences in initial economic conditions. In the
Czech case, where foreign indebtedness was small and the statebudget could afford to maneuver, the distrubution of the assets ofSOEs among the population could be carried out through the
distribution of vouchers which could be exchanged for shares in
the corporatized SOEs.
In the case of Hungary, where foreign indebtedness was
already big and therefore badly needed an increase in foreign
direct investment (FDI), direct foreign participation in
privatization was placed at the top of the agenda, which in turnheavily influenced the chosen pattern of privatization. On theTsuneaki Sato323

other hand, in Poland, where rescheduling and the reduction offoreign debts had been undertaken, and the inflow of fresh
foreign money was stopped for a considerable time, privatization
had to rely mainly on the limited domestic capital which
considerably affected the pace of privatization of large SOEs.
In the above three countries, followed by Russia two years
later, 'small privatization' of small state or cooperative
enterprises, notably in retail-trade, proceeded quite fast andsuccessfully, while an impressive development of newly-createdprivate firms, generally small ones, took place especially in theservice sector. Another common feature was the almost
immediate disruption or distruction of vertical dependence offirms, closely linked to previous "bureaucratic coordination"[Kornai, J., 1992], either in its direct from (Czecho-Slovakia) or its
indirect form (Hungary, and to a considerable extent also Poland).
An unexpected development affected all these countries, themost severe case being Russia, namely the huge decline in
output linked with hyper-inflation which was termed (notcompletely accurately) by Kornai as the "transformational
recession" [Kornai, J., 1993] (this author himself has been using
the term "inflationary depression")*8, with considerable
path-dependent effects on further developments. Somepeculiarities in the development of hybrid ownership forms
discussed below are closely linked with the adjustment efforts tothe consequences of the 'depression' [Stark, D., 1994]
In all countries a wide array of 'continuities' became
manifest in the over-all systemic transformation. A'self-reorganization' process of the economic system is now atwork, where rearrangements or recombinations of inheritedorganizational or institutional forms are combined with a more orless genuine creation of new forms. Among the latter, somehave a close resemblance with their western capitalist
counterparts ('managerial capitalism'), but others have peculiar
post-socialist features.

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Possibilities for and Limitations to a "Mixed Ecomomy"

A Peculiar Combination of Ownership Forms
The post-socialist economy is characterized by an uniquediversity of ownership forms and owner-manager relations, ahybrid mixture of forms, ranging from private forms to public
ones with a high proportion of intermediate (quasi) ones. This
mixed combination is all the more complex, because the degreeof hardness and hardening the budget constraint varies not somuch in accordance to the ownership forms, but within the sameownership types. Moreover, a great number of enterprises arethemselves of a 'composite' nature; for example, they often
combine within a single organizational form employees'
ownership, foreign paticipation and public ownership. The
common systemic legacy of CEECs makes this new
configuration typical of transitional economies: the persistence ofsome 'socialist economy-type' behaviours (more or less softbudget constraint, risk aversion, 'good contact' or bargaining
with the state, state resources 'pumping', cheating and so on).
Two salient features can be noted in the process of emerging
configuration of ownership forms. On the one hand, small andmedium-sized private enterprises (SMEs) are mushrooming in all
countries more or less in a similar way. On the other hand,
peculiar form of interwoven ownership are emerging in all ofthese countries which makes the difference between them.
(1) The Proliferation of diversified Small and Medium-sized
Private Enterprises
The impressive increasing number of private SMEs in all
CEECs is accompanied by the proliferation of company forms:
limited liability companies, joint ventures, joint stock companies,
individual business units, partnerships, illegal entities and so on.
Another feature of this SMEs development is the diversity oforganizational forms. Here, many factors are at work: whether
ownership is separated from management or not; the size offirms; the sectors of operation (services, industry and agricultureetc.); capital-intensity, links with large domestic SOEs
(for

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325

example, sub-contracting firms); and the presence of foreign
investors (joint-ventures or 100% subsidiaries).
The similar expansion of private SMEs in transition
countries is, firstly, due to the same combination of various
privatization methods implemented in most countries:
small-scale privatization programmes; management / employee
buy-outs; and sale of all or part of the capital to foreign investors.
Also these are sometimes combined with the break-up of larger
units; in other cases only a transformation of ownership takes
place.
Secondly, it can also be explained by the 'conversion' ofsmall private businesses, illegal or semi-legal ones of theprevious 'second economy' and a few legal forms which existed
under the 'reformed' socialist system (1980s), into legal and/or
illegal business entities. Contrary to the expectations of the first
designers of transition, the 'second' (hidden, grey and black)economy has been growing in all CEECs since 1989, but thenature seems to have slightly changed. While under 'socialism'
people got involved in the second economy to compensate forthe failures of the system and to add something to their living,
now people rather go underground to avoid paying taxes and getan advantage over their business rivals.
Moreover, in Hungary, the development of a small-scale
private sector began as early as 1982 with the government
entitlement to set up quasi-private business entities. The mostimportant forms were the so-called Enterprise Contract Work
Associations (VGMK), which made it possible to form a contract
relationship between groups of a state enterprise and theenterprise management so that they could work independently
within the firm during their spare time. Other important forms
included the so-called Economic Contract Work Association(GMK) which was practically a private business to be formed
outside the SOEs, industrial and service cooperative groups(VGMK in the cooperative sector) and different types of small
cooperatives (mainly shops and restaurants etc.). The
development of this sector has served as a broad basis for thesubsequent rapid expansion of the small private business sector

326

Possibilities for and Limitations to a "Mixed Ecomomy"in Hungary (of which the small limited liability companies wereentangled in the "corporate satellites" organizational form [Stark,D., 1993]) and provided it with the first entrepreneurial
know-how and training; a clear illustration of path-dependent
development.
The diversity of private organizational forms broadened
from the early 1980s in Poland too, and the Polish private sector
experienced a period of rapid expansion. Direct investment wasalso encouraged through small-scale "Polonia" firms,
theoretically owned by 'overseas' Poles, whose growth, however,after a period of rapid expansion during 1982-84, showed aremarkable slow-down after 1984. Private individuals were also
entitled to lease shops, restaurants and kiosks and manage them
privately from the 1970s onwards. After 1987, leasing spread toother activities. Economic Working Groups, similar in principle
to the Hungarian VGMK, were permitted too, but did not expand
so much. The existence of small private or quasi-private
enterprises in the 'reformed' (1980s) socialist system may
explain the fact that entrepreneurship in Hungary and Poland
have taken off more quickly than in, say, the Czech Republic.
Thirdly, an important share of the small private sector has
emerged through the spontaneous creation of national (legal or
illegal) SMEs or of foreign groups' subsidiaries. It should be
noted that a considerable part of newly-created private small
enterprises do not correspond to their western counterparts, as
they are sometimes 'forced individual enterprises' founded inorder to avoid unemployment, their aim being surviving and not
making profits. Nearly the same version are the so-called'multiple business ventures', that is, the creation of several'sleeping' small enterprises; they are only partly active,
essentially in order to limit the tax burden.
It is not yet entirely possible to determine the relative
importance of privatization and of newly-created private
businesses in the development of whole national economy,
because firstly, the share of the private sector in the whole
economy of TR countries depends greatly on the "definition" ofTsuneaki Sato327

what is "private", which differs significantly between countries
as was noted quite rightly by Mihályi [Mihályi, P., 1993]. This isalso related to the "pressure to produce numbers showing a highshare of the private sector in GDP, employment or in the capitalstock" (ironically, a kind of revival of the former 'socialistemulation' mentality), and secondly, though SMEs undoubtedly
represent the numerical majority, their share is somewhat more
limited in terms of economic activity measures (Table 1-2.).
(2) The Emergence of an Interwoven Ownership
As already noted, in several CEECs, similar forms ofinterwoven ownership are emerging, i.e. hybrid forms ofcomplex cross-ownership between public and private partners(perhaps with the exception of Poland where this type ofownership is only at the initial stage of development) in whichbanks play an important role, however, as a result of quite
different processes (see, Table 3.). This combined configuration
par excelence (typical of the new post-socialist mixed
economies) is related to the privatization of large SOEs and has
resulted in peculiar organizational forms. It represents, therefore,a high share of national assets and economic activity.
The emergence of an interwoven ownership form in
Hungary is linked to the 'spontaneous privatization' process,which started in 1988, in the last two years of the former'reformed' socialist system, as noted by [UN ECE, 1994]. In
some cases, large SOEs contribute some of their assets in kind,which are pooled together with other capital from foreign
investors, into new companies, and the remaining part of the
SOEs continues to operate (see, Figure 3. by Stark) [Stark, D.,
1993, 1994]. But the basic form of 'spontaneous' privatization is
the 'transformation' of large SOEs into a group of newcompanies, each with its own factories, plants and evenadministrative departments, which then distribute the assets ofthe public enterprise among themselves. The former public
enterprise center (head company) keeps the controlling shares of
the new companies [Stark, D., 1994]. In these public holding

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Possibilities for and Limitations to a "Mixed Ecomomy"

companies ("corporate satellites" according to Stark) foreign
investors, state-owned organizations, such as banks and otherenterprises (mainly business partners - suppliers and customers)
also participate in share ownership.
So, it is not 'privatization' in the strict sense of the word(hence our expression 'quasi-public' or 'quasi-private'), even if
some private investors, mainly SOEs managers buy shares of
new companies, who establish their own private firms andintegrate them in the holding as suppliers or customers.
As Stark noted, "the fastest growing new property form is alimited liability company owned by other liability companies,
owned by joint stock companies, banks, and large public
enterprises owned by the state [Stark, D., 1994]. The notions of"inter-enterprise ownership networks" and "recombinant
property", developed by Stark on the basis of socio-economic
analysis of transformation in Hungary deserve special attention(see, Figures 1., 2., 3.) [Stark, D., 1993, 1994].
The transformation of SOEs was directly motivated by thechanging economic and political environment at the end of the
1980s. Firms were on the verge of insolvency and badly needed
additional capital, due to the restrictive economic policies
including the cut-back of subsidies. After 1989, the post-socialist
depression made the insolvency problem more acute. In the caseof enterprises placed in a difficult financial position,
corporatization (the transformation of an enterprise into a
corporate company with juridical personality) offered thepossibility of a debt-to-equity swap with banks or other creditors(state, local authority, suppliers). Quasi-public and quasi-private
holdings are then linked to each other by ownership ties-"recombinant" according Stark-often through their own
subordinated limited liability companies (Kft) (see Figure 3).
Thus, in Hungary, property relations are complex andinterwoven between public (for the major part) and privateorganizations.
In the Czech Republic, the emergence of an interwoven
ownership form is the unexpected result of the voucher mass

Tsuneaki Sato329

privatization. During the first wave of privatization, some 72% of
all available voucher points of citizens were concentrated in theInvestment Privatization Funds (IPFs). Most Czech enterprises
are now controlled by a group of IPFs which, however, in mostcases are controlled by the major banks which were alsoprivatized within the voucher scheme, the state remaining, again
however, their biggest shareholder with approximately 40% of
shares in its hands (see Figure 4). Moreover, the state, through theFund of National Property (NPF), holds significant stakes in 160
companies on a permanent or temporary basis [Mladek, J., 1993].
Thus, after the first wave, the major commercial banks,
controled by the state, are the co-owners of many Czech
companies through their IPFs; they mutually hold some shares inother banks' capital and in some cases banks are indirectly
owing their own shares. For example, the Czech Investicni
Banka owns 17% of its own shares and many shares of otherbanks [Mladek, J., 1993]. This emerging unique structure ofproperty relations with major banks holding the controlling
position was called "financial capitalism" by Stark [Stark, D.,1993] and Mertlik [Mertlik, P., 1995], and "bank-based system"by Klacek [Klacek, J., 1995], illustrated in Figures 4 and 5. The
close relations between state, banks and industry with the corerole played by the state have been defined by Mertlik [Mertlik, P.,
1995] as a transition "from public ownership to public
ownership"*9.
To put it in a nutshell, all large and also a majority of
medium-sized enterprises are, with some exceptions, controlled
by IPFs, the IPFs in turn, with a few exceptions too, are controlled
by the major Czech banks, which again in turn are mostly
controlled by IPFs, thus closing the circle. Such a complicatedownership structure, in which it is far from clear "who owns
what?", seems not only to have slowed down the hardening of
the SOEs budget constraint and the restructuring at the enterpriselevel, but also was the main source of the recent bank crisis inwhich 11 small banks collapsed and the nation's fifth largest one
was driven to the brink of bankruptcy*10.

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Possibilities for and Limitations to a "Mixed Ecomomy"

In Poland, the transformation of property relations requires amore careful assessment. An interwoven ownership form is not
yet clearly emerging, but it may be a possible future scenario. On
the one hand, at least to date, only a very small part of the SOE
sector has been really privatized. The mass privatization
programme decided in late 1994, in which about 450 enterprises
were involved, is likely to change the ownership structure withthe participation of new actors, the National Investment Funds,
and with an increasing role of banks. Though weak interwoven
ownership forms are emerging between public and private
partners, what is striking here is the vitual absence - or low
development, at least - of cross-ownership relations between
enterprises.
On the other hand, banks seem to be reluctant to invest inindustrial firms. But the development of debt-equity swaps within
the framework of the Law on Financial Restructuring ofEnterprises and Banks (adopted as early as March 1993), if reallyput into practice, is likely to increase the share of industrial
equity holdings in the banks portfolio. However, the progress so
far seems to have been rather slow.
Moreover, bad debts and scarce finance have led to theemergence of industrial giants with complex interwoven
property relations. In breaking up the big monopolies, thegovernment created firms too weak to survive, which thenbecame prey to foreign and domestic investors. Elektrim, aformer state-trading monopoly for electrical goods became
Poland's biggest domestic investor in 1993; at the end of 1993, it
had stakes in 87 companies, a majority of which were former
customers put up for sale by the Privatization Ministry.
Liquidation under the Law on SOEs (i.e., real bankruptcy
and the subsequent sales of assets) has been the main method ofprivatization. The most common technique is the leasing of theliquidated firm's assets by its own workers. Workers' buy-outs
are the second most popular method of transformation of theliquidated enterprises. As early as October 1993, liquidations of
SOEs had led to the creation of around 700 workers' companies

TsuneakiSato

331

employing 220,000 people [UN ECE, 1994].
In any case, it could safely be said that the privatization of
SOEs in Poland has been so far carried out in three basic methods
and steps: transformation into joint-stock companies(commercialization) and selling of shares in them; privatization
by liquidation, i.e. contributing their assets to new companies;
and liquidation proper which takes place in the case of SOEs infinancial diificulties. So far 1,021 state-owned enterprises weretransformed into joint-stock companies, of which only 146
companies have been sold; 26 though public offering, the rest to
strategic investors, including foreign ones. The remaining 875
joint-stock companies are 100% treasury-owned, but 514 ofthem are included in the Mass Privatization Programme whichstarted in autumn 1995. In this respect Poland could probably be
included among such countries with delayed privatization as
Bulgaria and Romania. Progress of privatization has been mainly
due to the the fact that a great number of small companies wereprivatized by the liquidation methods. It seems that a "dual"
structure of coexistence of a large SOEs sector with themushrooming small private firms, including numerous grassroots ones, has already locked-in.
(3) A Few Words on the Emerging Configurationof Coordination Modes
The classical problem of coordination modes in economic
systems has been approached in different ways. An extreme
position sees the market as the only existing or desirable
coordination mode, which seems quite unacceptable. Other
theories refer to dual models: horizontal market coordination andvertical bureaucratic coordination, including both direct
administrative and indirect (parametric) ones, most notably as
proposed by J. Kornai [Kornai, J., 1983], or markets andhierarchies (firms of different types and size). Recent discussion
conducted mainly by economic sociologists stresses theimportance of other types of coordination modes in economic
and social life as networks [Thompson, et al., 1991]. Without

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Possibilities for and Limitations to a "Mixed Ecomomy"

getting involved in the discussions proper, let us limit ourselves
here to saying that the emerging pattern of coordination modes
in TEs could not be dealt with even by the dual models
mentioned above, in so far as there seems to be working acomplex mixture of coordination mechanisms including the state,
networks, hierarchies and markets. Here the standard view of'marketization' seems too narrow and reductionist to cover the'mixed' picture of coordination modes in the post-socialist
phase.
It should also be noted that, in the 'reformed' socialist
economies as Hungary or Poland in the 1980s, the mix ofcoordination modes had been moving from the traditional
system, and was evolving in the direction of the future
post-socialist configuration, though, of course, the importance of
the 'break' (rupture) should not be underestimated. In the almost'un-reformed' Czecho-Slovakia, no transition through a 'reform'
period took place, so the elements of 'continuity' were lessimportant, though not totally absent, as could be seen in theemergence of macro-economic - notably monetary - policy as
noted by Bulír [Bulír, Alles, 1995].
The Uncertain Consequences
Post-Socialist 'Mixed' Economy

of

the

(1) Possible Outcome
Institutional and organizational transformation trajectories
in CEECs (and Russia) may become locked up into 'inferior'paths of development or, conversely, atypical capitalist(capitalism-like or imitated) forms may become institutionalized
and then may prove to be somehow efficient.
One question facing these TEs now is whether small private
enterprises will be able to grow and evolve into medium andlarge-sized enterprises. In this field, Japan has accumulated a richexperience in the course of its post-war reconstruction anddevelopment. SMEs stemming from large SOEs (sub-contracting
firms) tend to face difficulties of growth because of a narrow

Tsuneaki Sato333

specialization related to the needs of large 'head' companies.
But scarce finance may be the most serious problem. So far
the small private sector seems to be prospering without proper
access to credits. Most SMEs finance their investment out of
profit and by trying to evade the corporate income tax. Service
firms, which now dominate the private sector, anyhow need lesscapital investment than do manufacturing ones. Do-it-yourself
finance may work when firms are small, but if they want to growinto medium-sized companies, scarce finance will be a major
barrier. Moreover, as the author has suggested earlier, no small
number of small private enterprises, supposedly the best
guarantee of a shift towards the market economy, are not realmarket actors but hybrid ones still pervaded by the socialist
heritage. Some of them will undoubtedly become real market
actors, others will disappear, but some survivors may tend todirect private sector evolution to inferior development paths,
especially by getting involved in the grey or even black mafia
economies, Russia being the typical case.
In Poland, as noted earlier, the conflicting interests between
the political actors, management and workers' collective seem tohave considerably slowed down the privatization process and led
the Polish authorities to place much of their policy emphasis on
the growth of the new private sector. More than any other CEECs,
a 'dualism' could be observed in Poland between the large
state-owned firms, which have been corporatized but not yet
privatized and are in an uncertain situation under the formal
control of the State Treasury, on the one hand, and a dynamic
and prolific small private sector on the other.
However, the share of the private sector in total investment
has been relatively less dynamic, and the gross profitability ratio
seems to have been lower in the private sector than in the state
sector for most branches of the economy [UN ECE, 1994],
though, of course, this assessment may not give the full picture,
as small private firms tend to overstate their costs and understate
their profits in order to evade tax payments. The 'dualistic' aspectof the Polish economy is also the counterpart of the weaker334

Possibilities for and Limitations to a "Mixed Ecomomy"

development of the interwoven property forms which in other
CEECs includes a lot of private SMEs.
(2) Ownership and Control
The Czech trajectory now seems to be locked-up by the
major role of the banks, which seem to have secured themselves
an important control over the whole economy. Some comcern
may reasonably arise from the links observed between the State,banks and industrial enterprises, caused by the 'permissive'banking attitude, the artificial survival of non-profitableenterprises, collusion risks, the limitation to the entry of new
firms and the exit of outdated ones (Grosefeld, Irena, 1994).
Unexpected conflicts may also arise between a bank's will to
initiate bankruptcy of firms and the interests of its investment
fund that holds substantial shares in them (Svejnar, I, 1994). Theinterwoven property relations tend to create a situation in which
managers are controlled neither by shareholders nor by
employees of the enterprises. Similar risks could be conjectured
in the emerging institutional framework in Hungary.
It should be noted, however, that the standard theories ofcorporate governance stressing the importance of direct orindirect control of owners (shareholders) on enterprisemanagement, mainly modeled on the American case, have
limited explanatory power when applied to such capitalist
countries as Germany, France, Italy or Japan in the first place,
and/or to other emerging capitalist institutions in East Asian
countries [Tamborini, R. and Targetti, F., 1994] [Schaede, U.,1994]. 'Managerial or corporate capitalism'*11 is more frequentin the contemporary world than 'proprietary capitalism' - amodel inherited from the 19th century which has little relevanceto capitalism today, at least as far as the large enterprise sector isconcerned.
In other words, if some disturbances arise in the relations
between owners and managers of capital, they will perhaps be
due not so much to the distance they can maintain between
themselves and the questionable normative model of efficientTsuneaki Sato

335

corporate governance, as to the specific conditions of thesetransforming economies mentioned above. The recent bankcrisis in the Czech Republic is a typical case in this respect.
Faced with these difficulties, there are trials and arguments
in some CEECs which favor the enhancement of a 'private'character of the ownership structure of enterprises, but the author
wonders whether they would lead to a satisfactory solution under
the present institutional set-up of these economies. 'Fraud
management' is often seen not only in countries where private
ownership has long been put on a firm basis (see the recent
scandals in France and Italy), but also in Japan where ownership
structure is characterized by 'cross-ownership' between big
corporations. There is no ready-made answer to the problems ofcorporate governance in which the choice is probably not
between 'perfect' and 'imperfect' solutions, but between the
degrees of imperfection. Perhaps the solution may be foundrather in raising the 'transparency' of enterprise performance andassets, than in trying to improve things in a simplistic way, basedon the 'ownership obsession' quite commonly seen in CEECs in
the first years of transformation.
At least for the last 5 years, the relationship between
ownership changes and enterprise behavior has appeared rather
indeterminate, namely, ownership changes are notcorrespondingly reflected in the changes of enterprises' behavior[Sato, T., 1995], except in the positive cases of foreign
involvement. While a diversification of managerial attitudes had
been observed, for instance, in Poland even the late 1980s within
the then prevalent state-owned sector [Beksiak, J., 1989], thevariety of behavioral responses to the new framework, seemingly,
has not yet been clearly connected with privatization. Active
restructuring could be observed in a number of still public
enterprises, while the behavior of many privatized (or formallyprivatized) ones have not undergone many changes. Firms'afloat' or 'adrift' [Estrin, S., Gelb, A, and Singh, I., 1993] could
be found in different property rights' configurations. In a periodof weak systemic coherence and of institutional uncertainty, such

336

Possibilities for and Limitations to a "Mixed Ecomomy"

enterprise-specific factors as managers' personalities andabilities when confronted with many new constraints anddifficulties, seem to be quite decisive, along with the necessarycompetitive environment.
(3) Coordination and Ownership
The strong link between ownership forms and coordination
mechanisms has been stressed in a neo-Misesian perspective by
Kornai [Kornai, J., 1990, 1992], who asserted a strong 'affinity'
between private ownership and market coordination on the one
hand, and state (public) ownership and bureaucratic coordinationon the other, with other combination as state ownership cum
market coordination ('market socialism') displaying a weak'affinity'. The author, while highly appreciating the positive sideof this argument (i.e., it stressed the necessity of a 'bold'
expansion of the private sector in order to secure awell-functioning market mechanism, the more so as it was
written as early as the end of 1988, thereby forestalling theapproaching systemic transformation), now is of the opinion
that such a reasonable view is rather dichotomic and seems notbased on rigorousely developed theoretical argument. Even if thenegative systemic consequences of 'dominant' public ownership
could easily be inferred from many historical and empiricalexperiences, the fact remains that various economic theories
have not given a satisfactory answer to the question of 'why
private ownership is important and decisive' [Grosefeld, I., 1993].
The Misesian approach or the theory of property rights
school seem to be confronted with difficulties when dealing withmanagerial or corporate forms of capitalism, and with the varietyof relations between the ownership and management of capitalobserved in contemporary economies, as well as with theircoordination and dynamic efficiency consequences. The rather
limited applicability of this standard approach could also be seen
when applied to the uncertain institutional set-up in TEs. An'intermedidiate' level and body of institutional and evolutional
analysis of various patternsof thelinks
betweencapitalTsuneaki Sato337

ownership / management and coordination modes incontemporary capitalism, emerging capitalist economies of East
Asia and in post-socialist economies remain to be done. At leastin post-socialist transformation, the emergence of interwoven
forms of ownership seems to point to the important role of new
network modes of coordination, or of these 'hybrid forms' which
are neither market nor hierarchy stressed in recent versions ofsocio-economics.
(4) Future Selection and Evolution Processes
Post-socialist transformation is associated with an enormous
increase in the degree and extent of vague organizational andinstitutional diversity. A wide number of new small private
enterprises coexist dynamically with a more restricted number oflarge firms undergoing different patterns of adaptation,
restructuring or, most importantly, survival strategies. Some of
the big old firms are becoming fragmented or gradually reducedin scale, while some SMEs are growing or trying to expand, butwith no small difficulties. The danger of detrimental
segmentation of firms seems to exist in CEECs: once formed,
many private firms do not expand, so that, as Busse [Busse, M.,
1994] rightly noted, "a shrinking large firm sector combinedwith an insider-dominated, small-firm sector could leave many inlong-term unemployment."
The increase in diversity is also an increase in complexity
with various economic and social consequences. Which type /model or pattern of stabilized order will emerge, with different
viability or growth properties, remains to be seen. A dynamic andcompetitive economy, although possible in the long-run, could
not be expected as an 'automatic' product of transition.
Selection processes taking place in CEECs are notunambiguous either. They have taken place mainly through thedifferential growth and decay of enterprises and industries rather
than by actual bankruptcies. The number of bankruptcies is still
limited, though the situation varies among countries. In the
Czech Republic, the growth in the number of bankruptcies has338

Possibilities for and Limitations to a "Mixed Ecomomy"

been very slow and has essentially been concerned with private
enterprises. In Hungary, the new Bankruptcy Law on January 1,
1992, has resulted in the reaching of agreements between debtors
and creditors, including state-owned commercial banks andother state or central institutions (tax, customs, social security
offices etc.). In Poland, we have noted that liquidation ofenterprises in poor financial situations has been used as the mostpopular method of SMEs privatization. The balance-sheet of the
detrimental and the creative aspects of on-going changes still
remains unclear in the medium-term. At least, it is rather dubious
whether the on-going selection process simply favors the 'fittest'
enterprises.
Post-Socialist 'Capitalism' - What Kind of?
In place of an abstract and simplistic notion of 'transition toa market economy', we have seen in CEECs the emergence ofvarious path-dependent post-socialist mixed economies. They
represent a type in some sense close to managerial capitalism ora peculiar corporate economy, with combined and fuzzyownership and a composite corordination set-up. Hybrid orinterwoven ownership forms are quite common. Though theprivate sector has become important everywhere, it is imbricatedwith the public sector (Hungary), or in a dualistic relation with it(Poland), or it has itself a dualistic structure - large (quasi-)
privatized enterprises alongside small greenfield (grass-roots) or
privatized ones (Czech Republic). The above distinction between
the three CEECs should rather be seen in relative terms, because,
first of all, new important developments are now going on
everywhere - the process which could be termed as'post-privatization redistribution of property rights' inwhich managers' 'buy-outs' of enterprise assets is playing a bigrole, which may lead to the attenuation of these distictions,and secondly, as Karel Kouba [Kouba, K., 1996] told me, themost important is the "hidden, invisible transfer of economic
power" linked to the strong 'lobbies' working behind the politicalscene.

Tsuneaki Sato

339

As Lavigne rightly noted [Lavigne, M., 1995], whileobserving that "a country in transition is a mixed economy,
whether it likes or not", "what is missing in the countries intransition is a clear perception of the role of the state at large."*12This also raises the question of the role of the state in economic
coordination again. As Köves [Köves, A., 1995] frankly noted,
the state "should not rely solely on the market and market
mechanisms, but influence the progress of the economy by directgovernment intervention as well." With very much the same
thought in mind, I have also stressed that "excessive reliance on
the market forces in immature transition economies may result inserious 'market failures' and bring about critical, social andpolitical consequences" [Sato, T., 1996], the most vivid
demonstration of which we have just seen in the political
spectrum of Presidential elections in Russia in June / July thisyear 1996.
These peculiar features of a 'post-socialist mixed economy'
have been recognized and emphasized by several authors notrefered to earlier*13 including myself, who was prompted to say
in more general terms that "no one is entitled to say thattransition to a market economy should always be a process
infinitely approaching the Anglo-Saxon model, as is often
explicitly or implicitly suggested by many neo-classicalmainstream economists" [Sato, T., 1995]*14.
Whileanevolutionary
approach,stressingpath-dependency gives some clues to the emerging shape of
post-socialist 'capitalism', the medium and long-term dynamic
perspectives of these economies remain uncertain and open. The
same applies to the question of models /variants of capitalism to
be shaped in CEECS in future: so far we have to restrict ourselvesto agreeing with Stark [Stark, D., 1994], who said that theanalysis of 'recombinant property' "suggests the emergence of a
distinctvely East European capitalism that will differ as muchfrom West European capitalisms as do contemporary East Asian
Variants." To add to this right observation, the author would liketo say that the most unlikely outcome would be an Anglo-Saxon

340

Possibilities for and Limitations to a "Mixed Ecomomy"

type of capitalism.
A Few Concluding Remarks
The 'creeping approach to a mixed economy' in the courseof the 'third wave' of economic reforms in the late 1980s wasinterrupted by the 'political revolution' of 1989 (or 1991). The
political change coincided in time with the revival of the post-war
Hayekian negative assessment of interventionist policies andtendencies towards a 'mixed economy', which the author has
considered from the outset as a not very happy coincidence.
There was a strong convergence of the free-market orientation of
new governments (often with the active participation of
economists who had been until the late 1980s proponents ofradical reforms of the 'socialist' economy) and the influence frominternational economic organizations - notably from the IMF -,the leading experts of which strongly and repeatedly assessedthat a model of a 'mixed economy' should be avoided to guidethe 'transition'.
The refusal of a 'mixed economy' was at that time part of thepolitical struggle of pro-market forces against neo-communist or
social-democratic tendencies (both trends being often confusedand identified with the same in political debates) in thesecountries. International influences worked generally in the same
direction, even though critical assessments of this trend weremade by numerous economists early in the process.
Economic liberalism criticizing or refusing in principle thenotion of 'mixed economy' has obscured both the nature anddiversity of contemporary capitalism as it 'really exists'(including its West European, Japanese or emerging East Asian
brands), and the challenging specific problems of systemictransformation in the post-socialist world. The concept of a'market economy' understood as a kind of pure system reducible
to a single universal coordination mode is misleading. In place ofa rnonocausal pure system, we find combined or mixed
economies in which various forms are present and different

Tsuneaki Sato341

principles are at work.
The same applies to post-socialist transformation, which,quite contrary to earlier expectations, has produced until now
complex developments in the economy which cannot be
reduced either to marketization and privatization as generaltrends, or to simple obstacles and delays encountered on the way
to this goal. Such heterogeneity does not boil down to the simple'transitory' nature of economies moving from one alleged puresystem to aother one.
Quite recently, to the author's happy surprise, our views
seem to have been joined by an U.S. economist, who usually
might not be very enthusiastic about West European idea of a'mixed economy'. Martin Spechler (Indiana University), under
the challenging title "Privatization Is not the Key to Successful
Transition"*15, wrote that "it appears that the most prudent
course for Eastern Europe and the former Soviet states would beto accept mixed forms of ownership in a competitiveenvironment so as to encourage growth and political support"[Spechler, Martin, 1996][Postscript] The author wishes to thank Professor Hiroyuki
Okada who gave some valuable comments on my paper andother conference discussants, first of all Professor Ivan Berend
who found my line of thinking quite close to his own and said,"we belong to the same church."
Notes
In choosing this subtitle I had in my mind the admirable article
by the late Professor Jan. Tinbergen " De Convergentietheorie- Balans na 20 Jaar" ("The Convergence Theory - Balance
after 20 Years", published in 1980 [Tinbergen, Jan, 1981], inwhich he gave a self-critical reassessment of his famous article[Tinbergen, J., I960]. Had he written it a few years later andwitnessed the on-going changes in the course of the "Third
Wave" of economic reforms in Hungary and China, he might

342

Possibilities for and Limitations to a "Mixed Ecomomy"

2

3
4
5
6

7

8

have written it in a slightly different tone.
Also interesting enough is the fact that the term 'socialist mixed
economy'wascoinedbyU.S.
institutionalist
economicsociologist [Nee, V., 1989] who paid great attention to theChinese economic reforms in the 1980s. However, please notethat here the author does not use the term of 'market socialism'(which is a separate question), but plainly 'mixed economy',though these two notions are sometimes confused. The latter ismore or less a common feature of contemporary capitalism,
especially of its West European and Japanese variants, wheresome portion of public enterprise sector is still retained, thoughnaturally in an environment dominated by the private sector,
and active regulation over the market is exercised bythegovernment. No one would call Austria a 'market socialist
country' on the grounds that there is "a comparatively greater
proportion of various kinds of public ownership" [Nowotny,
Edwald, 1996, p. 1], although this portion is gradually declining.
[Sato, T., 1990]
The same idea of 'continuity' and 'discontinuity' is also foundin Chavance [Chavance,Bernárd, 1994].
The same term is also found in Chavance [Chavance, Bernárd,
1992,1994].
To the best of my knowledge, the term 'path-dependence' as
applied to transition economies was first used by Stark [Stark,David, 1992].
Komai noted, "In
theofficial economics of thesocialist
countries the idea was dominating for a long time that thesystem proceeds towards the exclusivity of the state-owned
sector (the sector in 'general social ownership') and even
within that towards the state-owned large firms... The reality ofthe socialist economy never agreed with this idea... In my view,
the present Hungarian economic system may be called a 'mixed
economy' of a socialist type, in the sense that it relies on thesymbiosis of different kinds of ownership, and this entails adiversity of organizational and institutional forms."
See this writer's paper [Sato,T., 1995].

Tsuneaki Sato343

9 See very interesting article by P. Mertlik [Mertlik, P., 1995], in which
he wrote that what has happened is " very far from the simple ideasof private ownership of the neo-liberal economic ideology... Insteadof the responsible individual owner, a new,... or perhaps quasi-new
hierarchiai structure has emerged." (p. 329)
10
Siegfried Mortkowitz and Ladka Bauerová wrote in theircontribution to a Czech weekly that " a combination of freemarket overexuberance, rapid privatization, lack of experienceand inadequate legistration has produced a chaotic Czechbanking sector that has seen 11 small banks fail and thenation's fifth-largest bank driven to the brink of collapse" (ThePrague Post,Sept. 25-Oct. 1,1996).
11
In this respect critical analysis of 'corporate capitalism' and'cross-ownership' between enterprises in Japan by Hiroshi
Okumura is quite interesting. See "Take-overs and the Market
Economy: The Japanese Case", a paper presented at the 4th
EACES Conference in Grenoble, 12-14 Sept., 1996.
12
The same views are to be found in different expressions. "theparadox of the present situation is that the transition toeconomic liberalism requires a strong state... To maintain,
integrate, and enhancemarkets along withthetransition
process, state intervention of the right kind and in the rightareas is indispensable."[Bravant, J. M. van, 1994]. Bravant,Principal Economic
Affairs Officer at the
Departmentof
Economic and Social Information and Policy Analysis, United
Nations, N.Y., also strongly argues for the "role of industrial
policy during the transition".
" First of all, there was a dominant conception of transition as aprocess whereby the state simply withdraws from the economy
leaving room for private agents. This conception, prevalent in mostof these countries, was reinforced by the initial attitude of theinternational economic organizations and by the conditions that they
attached to the granting of loans and other forms of aid andassistance." [Dallago, B., 1995]
13
For example, Nuti, D. M., who once wrote a very interesting344

Possibilities for and Limitations to a "Mixed Ecomomy"

14

15

article "Market Socialism: The Model that Might Have Been,
but Never Was" [Nuti, D. M., 1990], four years later spoke
about " a temporary state of forced market socialism" [Nuti, D.
M., 1994], which is mainly the outcome of the slow process ofprivatizing state-owned assets.
Ronald Dore, a British sociologist, strongly arguing against theapplication of a single success criteria of 'efficiency' which
seems to favor the U.S. model, has emphatically stressed that"one's judgement of success or failure clearly differs if [another- T. S.] objective function [for example, preventing widening
inequality - T. S.] - is adopted." [Dore,D., 1996]
Most outspoken arguments against the notion of privatization
conceived as the only way to a 'free market economy' are to
be found both from the traditional German [Gesellschaft, 1993]
and British [Gray, John, 1994] perspectives.

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