David Ellerman

The late Joze Mencinger was the dominate voice in the privatization debates of the early 1990s arguing for pragmatism and gradualism as opposed to the shock therapy approach. Yet other smears are sometimes associated with his name, so now that he is no longer with us, I would like to set the record straight. The shock therapy approach advocated by the World Bank and other major western development advisory institutions (“The Washington Consensus”) was implemented in its purest form in Russia with devastating results for most of the population and with the creation of a domineering class of oligarchs and tycoons. We feel the repercussions today in the Russia’s Putin-fueled resentment against the West.

But there were opposing voices such as the World Bank’s Chief Economist, Joseph Stiglitz, who suggested that the shock therapy approach was a major error (“Whither Reform”, 1999 [Full disclosure: I was Stiglitz’s speechwriter]). The shock therapy approach did not fully prevail in Slovenia in spite of the intervention and advocacy by Jeffrey Sachs in 1991 in opposition to the Mencinger (or Korze-Mencinger-Simoneti) draft law on internal privatization. I was the American consultant to the Mencinger team concerning the US model of employee ownership, the Employee Stock Ownership Plan or ESOP. The Sachs approach tried to detach workers from ownership claims in their own enterprise in favor of certificates tradeable for shares in investment funds or the stock market.

The eventual Slovene privatization law (1992) was a compromise between the Mencinger and Sachs approaches and that saved Slovenia from the ravages of shock therapy and oligarchs as in Russia. But the Sachs propaganda at the time admitted that the Sachs Plan did not care about the quality of the existing Slovene management; they just wanted to substitute Government’s own choices. As Sachs admitted in an interview published in the Washington Post, “Even if they were all Lee Iacoccas [famous turnaround manager icon at Chrysler], does it make sense to simply give the country’s industry to them?” (WP, May 15, 1991). Thus, Sachs misrepresented the Mencinger Plan as giving ownership to managers and that smear is still echoes today in the idea that Mencinger was somehow associated with tycoonization. Nothing could be further from the truth as one can see by actually reading the Mencinger draft law.

“Article 4:

Section (2) The program shall specify the way in which internal privatization is to be implemented, to make it possible for the employees to become owners of the entire company or of a part of the company. Shares sold within the framework of the program shall be ordinary shares and shall not be transferable (except when redeemed by the company).

Section (3) All employees, including all new employees, shall have the right to participate in the program. Termination of employment shall also mean termination of membership in the program. In the event of termination of employment, the company shall buy back the shares for the value established by an authorized valuator.”

Thus, the employee ownership within this ESOP-style program would be stabilized over time and employees could NOT sell their shares to managers or outside would-be tycoons. Yet the compromise 1992 privatization law removed all those restrictions. Hence, it was precisely by removing the restrictions imposed by the Mencinger draft law that the possibility then arose for the concentration of shares in the hands of managers and tycoons. Now that Mencinger is gone, the least we can do is to get the story straight against who would smear his memory by ignoring the actual content of the Mencinger draft privatization law.