WORKERS CONTROL AS A SOURCE OF CUSTOMARY OWNERSHIP RIGHTS: EVIDENCE FROM THE PRIVATIZATION IN THE FORMER YUGOSLAV REPUBLICS

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1 11th CONFERENCE OF THE INTERNATIONAL ASSOCIATION FOR THE ECONOMICS OF PARTICIPATION (IAFEP) PARTICIPATION WORLD-WIDE Katholieke Universiteit Brussel K.U.B. (Catholic University of Brussels) Brussels 4-6 July 2002 WORKERS CONTROL AS A SOURCE OF CUSTOMARY OWNERSHIP RIGHTS: EVIDENCE FROM THE PRIVATIZATION IN THE FORMER YUGOSLAV REPUBLICS Karim Medjad (H.E.C. Paris, France) 1

2 WORKERS' CONTROL AS A SOURCE OF CUSTOMARY OWNERSHIP RIGHTS: EVIDENCE FROM THE PRIVATIZATION IN THE FORMER YUGOSLAV REPUBLICS Karim MEDJAD Professor of Law H.E.C Paris ABSTRACT Most industrial enterprises in the Socialist Federation of the Republics of Yugoslavia (the former Yugoslavia) were socially-owned. These enterprises were the flagship of the famous Yugoslav model of self-management: neither private nor state-owned, they were a collective property controlled by their employees, the "workers". The workers always felt a strong sense of ownership towards their enterprises, and in practice, their prerogatives allowed them to behave accordingly. The legal implications of this behavior are unclear: on the one hand, the very nature of social property implies that only the broader social community may claim the residual ownership of the sociallyowned enterprises. On the other hand, decades of a consistent and unchallenged practice are arguably a source of customary rights for the workers. This paper is based on a study conducted in the former Yugoslav republics during the period It describes the nature and the evolution of the workers' rights visà-vis their enterprises since the late 50s, and examines the current consensus of the former Yugoslav republics on this matter, notably in their respective privatization policies. This paper argues that the workers were recognized a customary right they did not have (a - partial - residual ownership), but denied a right they had (a right to selfmanagement). Absent an adequate institutional environment, however, the former Yugoslav republics failed to impose an alternative model of "outsider" shareholder sovereignty. As a result, employee management survived in a number of privatized enterprises, but without its original safeguards. An adaptation - and first, a recognition - of employee participation is thus an important step to improve corporate governance in the former Yugoslav republics. 2

3 INTRODUCTION Many industrial enterprises in the Socialist Federation of the Republics of Yugoslavia (the former Yugoslavia) were socially-owned. These enterprises were the flagship of the famous Yugoslav model of self-management: neither private nor state-owned, they were a collective property controlled by their workers. While these workers typically operated their enterprises as if they actually owned them, the legal implications of this behavior are unclear. On the one hand, the very nature of social property forbids an appropriation by any group other than the broader social community. On the other hand, fifty years of a consistent and unchallenged practice are arguably a source of customary rights. While the socially-owned enterprises are unique, it is now possible to examine this question from a comparative perspective, since the former Yugoslavia was replaced in the early 90s by five successor States (the former Yugoslav republics): Bosnia and Herzegovina, Croatia, the FYROM (Macedonia), Serbia and Montenegro, and Slovenia. At the time of writing of this paper, several hundred enterprises are still sociallyowned.1 But the future of this legal form is already settled everywhere, in the form of a privatization law that reveals the embarrassment of the privatization experts vis-à-vis the workers' customary rights. This paper is based on a comparative study conducted in the former Yugoslav republics during the period It is intended to describe the fate of the so-called "socially-owned enterprises" in these countries since their creation in the early 50s, and to shed a critical light on the outcome of their mass privatization. It argues that while the privatization experts implicitly recognized a workers' partial residual ownership, they imposed a questionable shareholder sovereignty model that, in effect, condemned worker management. This paper is divided in four parts: The notion of social property and its application to the socially-owned enterprises are described in a first part. The prerogatives of the workers accrued as a result of decades of self-management are examined in a second part. The legal implications of the dismantling of the former Yugoslavia and the prospects for employee participation are respectively discussed in a third and a fourth parts. 1 NOTION OF SOCIALLY-OWNED ENTERPRISE 1.1 from social property to the socially-owned enterprises 1 Only a portion of the thousands of enterprises that remain to be privatized are still 100% sociallyowned (e.g. about 350 in Kosovo), because most of them have already been taken over by the state as part of the pre-privatization process. 3

4 The notion of social property was first introduced by Tito's regime in the early 50s. A social property is neither private nor state-owned. It is not characterized by a lack of owner but rather, by a lack of identifiable owner, and may be best defined as every citizen's indivisible property. The first socially-owned properties put in circulation were state-owned properties that were denationalized on this occasion (enterprises, industrial assets, real estate ). Over time, the number and the variety of social properties increased, notably because the gradual disengagement of the State from the economy entailed a "recycling" of additional state properties. Due to the decentralized system in place in the former Yugoslavia, the system functioned as follows: in a first phase, a socially-owned property was typically in the custody of a municipality. Then, the municipal authorities decided to whom - and for what purpose - this asset would be transferred. Interestingly, the official scope of social property was not clearly spelled out until the 1974 constitution (article 12), which defines it as: The production means and other means of common work; The production and income achieved by common work; The means to fulfill common and general social needs; The natural resources and the goods for public use. This broad scope explains that from housing to business enterprises, social property eventually pervaded the whole Yugoslav economic system, albeit in different proportions: while agriculture remained relatively spared,2 socially-owned enterprises became rapidly the main economic actors in industry and services. In parallel, the traditional state-owned enterprises, so-called "public enterprises" were gradually confined to the same economic sectors as in Western Europe, e.g. utilities or transportation. Unlike the owners of the social properties, their users are identified. Depending on the property concerned, they are individuals or groups of individuals, legal or physical persons. A user's title on a movable or immovable social property, e.g. an industrial asset or an apartment, is a source of important prerogatives for its beneficiary. There lies the complexity of the notion of social property: it is its user - rather than its owner - that exercises most of the prerogatives associated with ownership, including the right to keep the property until its exhaustion. It is not possible, however, to conclude to a quasi ownership, notably because the user 2 According to certain sources, 26 million privately-owned farms accounted for 84% of the former Yugoslavia's agricultural lands in the late 80s. The remaining 16% were exploited by large state-owned combines, mostly located in the "wheat belt", i.e. the northern part of the country. "Yugoslavia: a Country Study" Library of Congress - Federal Research Division,

5 of a social property lacks the right of legal disposal: a socially-owned property may neither be sold3 nor pledged.4 Yet, the cumulated prerogatives of the user of a social property exceed those that would result from a curtailed ownership,5 or for that matter, from any other known right, whether in civil law or in common law (tenancy, trusteeship etc). The sui generis nature of this right has inspired an extensive and sometimes contradictory literature.6 But one aspect remains unquestioned: vis-à-vis third parties, and in particular vis-à-vis the State, the prerogatives associated with the right to use a social property exceed by far those that would result from a mere possession.7 This presumably explains the reluctance of the former regime to entrust social properties to private individuals. Rather, it favored socially-owned enterprises, whose legal personality ensured that their employees would be mere "sub-users" of their socially-owned assets. 1.2 The "Yugoslav" model(s) The originality of the Yugoslav model The Yugoslav model is a so-called "anthropocentric model" based on the predominance of the employees, the "workers". Socially-owned enterprises do not have shareholders: they are administered by a board of directors elected by, and reporting to, the "workers' council". The workers' council is the highest governing body, and its operational mode (i.e. one worker - one vote) suggests an authentic blue-collar management. 3 I. Zherka, R. Malazogu, S. Tullumi: "Some Issues Regarding the Ownership and the Evidence of Immovable Property Registration in the Republic of Kosovo", Op. Cit. 4 There are a few exceptions to the prohibition to pledge a social property, limited to certain movable properties under specific circumstances. See Law on Obligations, article Curtailed ownership typically entails a separation of the "bare" property (nuda proprietas) i.e. the right of disposal from all the other rights attached to ownership. It may be tempting to conclude that the social community retains the former, whereas the user retains the latter, but in fact, that the users of socially-owned assets enjoy - and lack - rights in both ownership realms. 6 See, e.g. S. Pejovich: "A property-rights analysis of the Yugoslav Miracle", The Annals of the American Academy 507 (January 1990): For a survey of the "classical" Yugoslav literature on the question, see e.g. D. Winter: "Study on the Interim Administration of non-residential property in Kosovo" (UNMIK / Dpt. of Civil Affairs, September 2000). 7 See A. Fetahu, "Legal Aspects of the transformation of Social Property", proceedings of the Workshop on Legal and Economic Aspects of Transformation of Socially-owned Property and Privatization, Kosovo Law Center / World Bank / Economic Chamber of Kosova, October 6,

6 In practice, the Yugoslav model was diversely applied. The workers and managers interviewed in the course of this study indicated that the workers' ability to monitor the management decreased as their number and their geographical dispersion increased. Such control shift in favor of the management in large firms is well known, and resembles the pattern identified by Berle and Means in large publicly traded US enterprises.8 In the case of the Yugoslav firms, however, the phenomenon had a "local" cause as well: in large socially-owned enterprises, the directors were often supported - and monitored - by the Party, an aspect which further discouraged the workers to challenge the management. On the surface, the Yugoslav model is almost banal. In every Western market economy, it is found in various types of enterprises e.g. partnerships or cooperatives, and in a broad range of economic activities e.g. legal and medical practices, transportation, construction, farming etc. 9 The literature on cooperatives, e.g. the Spanish Mondragon complex,10 or the Italian cooperative sector describes a similar governance structure,11 including the distorting effect of the "size" factor,12 or the existence of political ties. 13 The true distinctive feature of the socially-owned enterprises lies in the presence of an employee management model in the absence of any form of direct or indirect 8 A. Berle and G. Means: "The Modern Corporation and Private Property", New York, MacMillan Company, Since then, their classical description of the separation of ownership from control in large publicly traded US enterprises has been significantly rephrased. See e.g. H. Hansmann, who notes that " one cannot really speak of the separation of ownership from control, since ownership means (formal) control. Rather, one can speak only of the separation of ownership from effective control". "The Ownership of Enterprise", Op. Cit. note 1 p See H. Hansmann: "The Ownership of Enterprise", Op. Cit. Chapter For a comprehensive study of the Mondragon model, see S. Kasmir: "The Myth of Mondragon. Cooperatives, Politics and Working Class life in a Basque town", Albany, NY - State University of New York press, See also M.A. Lutz: "The Mondragon Co-operative Complex: an Application of Kantian Ethics to Social Economics", International Journal of Social Economics 24(12), 1997: Source: T. Huet: "Can Coops Go Global? Mondragon is trying", The Economic Affairs Bureau, In socially-owned enterprises and in Italian cooperatives, unions mitigate the impact of the firm's growth, in the sense that their activism typically increases as the powers of worker's council fade away. In the Mondragon model, unions are absent. (See T. Huet: "Can Coops Go Global? Mondragon is trying", Op. Cit.) 13 In Italy for example, a vast majority of the cooperatives belong to the Lega, an association affiliated to the Democratic Party of the Left (the former Italian Communist Party). R. Oakeshott: "The Case for Workers' Co-ops", London: Routledge & Kegan Paul Ltd.,

7 employee ownership. The very nature of social property implies that the workers of a socially-owned enterprise are not entitled to any kind of residual claim, let alone a transferable one. In contrast, the labor input of the members of cooperatives or professional partnerships are typically acknowledged in the form of a redeemable share that they are entitled to claim - or sell - when they resign or retire.14 This major difference possibly explains that socially-owned enterprises were generally spared some of the inefficiency symptoms that are traditionally attributed to labormanagement. A first illustration of this specificity appears when using the so-called Ward-Domar- Vanek model.15 This model predicts a perverse slope of the supply curve that may be summarized as follows: since worker cooperatives are operated in a way that maximizes their workers' average income, they tend to respond to a rise in demand and prices by a reduction of workforce and quantity of outputs. By extension, every labormanaged firm may thus be expected to generate more unemployment than capitalistic firms do. This prediction is regularly challenged by the literature,16 and in the case of the sociallyowned enterprises, it is further contradicted empirically: "The testing of a model using the data from Yugoslav firms in the 1970s and the 1980s has shown that the perverse behavior predicted by the Ward-Domar-Vanek model of a self-management firm did not prevail in Yugoslav practice, as firms emphasized both wages and employment. Employment response to output price changes was insignificant".17 A more original illustration is found in Hansmann's work on the ownership of enterprise. 14 See H. Hansmann: "The Ownership of Enterprise", Op. Cit. Chapter B. Ward: "The Firm in Illyria: Market Syndicalism", in American Economic Review, vol. 48, no. 4, 1958: , E.D. Domar, "The Soviet Collective Farm as a Producer Cooperative", American Economic Review, 44: , 1966 and J. Vanek: "The General Theory of Labor Self-Managed Economies", Cornell University Press, Ithaca, See also H. Miyazaki : "Employeeism, Corporate Governance and the J-firm", Journal of Comparative Economics, Vol. 17, No. 2, and M. Nuti: "Employeeism: Corporate Governance and Employee Share Ownership in Transitional Economics". Working Paper, London Business School, For a critical analysis of the Ward-Domar-Vanek model as well as for a recent survey of the literature devoted to this important landmark, see B. Jossa: "Unemployment in a System of Labormanaged Firms", paper presented at the 13th conference of AISSEC, Siena, June J. Prasnikar: "Behavior of a Slovenian Firm in Transition", William Davidson Institute Working Paper No 26, 1997, p.9. Published in Economic Analysis Vol. 1. No. 1, 1998: This article summarizes previous studies conducted by J. Prasnikar et al, including: "A Test of Enterprise Behaviour under Yugoslav Labor-Management", The Review of Economics and Statistics, (4) and "Workers Participation in Management vs. Social Ownership and Government Policies: Lessons for Transforming Socialist Economies", Proceedings of the IAE Conference on "The Economics of Partnership: A Third Way", A.B. Atkinson ed

8 This author argues that in "traditional" labor-managed enterprises with heterogeneous workforces, decision-making is necessarily more costly, for on matters such as the wage structure, the diversity of skills and tasks entails conflicting interests. This higher cost would explain that in market economies, employee ownership is traditionally found in activities where the homogeneity of the tasks allows equalitarian schemes (e.g. law firms or cab companies).18 Since there were socially-owned enterprises in almost every sector of activity, most of them had a heterogeneous workforce. Yet, the workers and managers interviewed in the course of this study indicated that decision-making within their workers' council was generally smooth. What appears to be in this case a relatively low cost of decision-making is arguably attributable to the fact that socially-owned enterprises were spared the "multiple hat problems" posed by the dual capacity of employee and owner and in particular, the confrontation between senior employees, with substantial ownership stakes and junior employees with a limited - if any - equity ownership. This latter finding does not contradict Hansmann's claim. Rather, it confirms this author's prediction that " forms of employee participation that fall short of true ownership may offer better prospects for improving on the efficiency of the classical model".19 As discussed below, the nuance is in fact more complex, for the workers never admitted their lack of ownership rights vis-à-vis their socially-owned enterprise. But paradoxically, this claim only reinforced their homogeneity: it was the legislator - and not the workers - that eventually decided that seniority would come into play to determine their respective equity share The safeguards In practice, the Yugoslav model was not as "laborist" as it seems, for various safeguards ensured that the subordination of the capital to the labor would not turn into a subordination of the firm to the workers. "Three institutions functioned as the principal bargaining parties in the self-managed firms: self-management, operative leadership and socio-political organizations. The bargaining process thus also included managers who represented their own goals, such as maximizing their income and the possibilities of promotion".20 It is also important to recall that in the former Yugoslavia, the grouping of socially-owned enterprises was strongly encouraged. Partnerships were common, and numerous 18 H. Hansmann: "The Ownership of Enterprise", Op. Cit. Chapter Ibid. p J. Prasnikar: "Behavior of a Slovenian Firm in Transition", Op. Cit. 8

9 subsidiaries were established under the disguise of so-called "association agreements".21 Officially, every socially-owned enterprise was fully independent, but "parents" were using various contractual devices e.g. "management contracts", to retain the control of their subsidiaries. Tito's regime had every reason to encourage the development of groups, notably because they reduced geographic disparities,22 and ensured the financing of their members through their own bank. For the workers, they also played a role of safety net that reduced the risk of unemployment: in the former Yugoslavia, official bankruptcies were exceptional until the major financial crisis of the late 80s. When poorly performing enterprises were impoverishing their group through high prices or excessive borrowing, they were "diluted" by means of a debt - equity conversion, and their personnel and assets were reassigned to other members of the group. In terms of governance, however, the development of groups inevitably blurred the boundaries of the socially-owned enterprises at the expense of the workers, in the sense that they mitigated "employeeism" by introducing additional stakeholders in the board. It is noteworthy that the Italian and Basque cooperatives experienced a comparable movement of concentration, with very similar results.23 Interestingly, the abundant literature devoted to the large Japanese groups, the so-called Keiretsu emphasizes a similar redefinition of the firm, comprising long-term insiders, complex contractual networks, and corporate entities revolving around a common bank.24 A last safeguard against an excessive worker domination was the high level of decentralization of the former Yugoslavia, because the local ties of most socially- 21 See the Enterprise Law, article 187a. An OOUR (Osnouna Organizacija Udruzenog Rada i.e. Basic Organization of Collective Labor) is a "basic" socially-owned enterprise, a term which also applies to subsidiaries. Groups and collective undertaking are called ZOUR (Zajednicka Organizacija Udruzenog Rada i.e. Joint Organization of Collective Labor). In the former Yugoslavia, ZOUR were open to domestic and foreign private enterprises. 22 Vertical integration strategies, in particular, were leading the enterprises of the most industrialized areas (e.g. Slovenia) to establish subsidiaries in poorer areas (e.g. Kosovo or Macedonia). 23 For example, Mondragon established a common bank (the Caja Laboral Popular) and played a similar role of safety net: during the first thirty years of the Mondragon experience, 103 cooperatives were founded and only three closed.source: T. Huet: "Can Coops Go Global? Mondragon is trying", Op. cit. 24 For a description of the Keiretsu system, see e.g. M. Gerlach: "Keiretsu Organization in the Japanese Economy" in "Politics and Productivity: The real Story of Why Japan Works" pp , C. Johnson et al. Eds., New York, Harper Business, More generally, see E. Sakakibara: "Beyond Capitalism: The Japanese Model of Market Economics", Landham MD, University Press of America, This traditional view is questioned by Y. Miwa and J.M. Ramseyer, who describe it as an academic falsification inspired by the Marxist ideology of the 60s and 70s and the urge to find a credible collective model. See, "The Fable of the Keiretsu", and "The Myth of the Main Bank: Japan and Comparative Corporate Governance",Harvard / John Olin Center for Law, Economics and Business, Discussion Papers No. 316 ( March 2001) and 333 (September 2001). 9

10 owned enterprises entailed an implicit "community duty". This latter aspect further explains that contrary to the prediction of the Ward-Domar-Vanek model, sociallyowned enterprises kept creating new jobs until the late 80s.25 2 NATURE AND EXTENT OF THE WORKERS' RIGHTS UNDER THE FORMER YUGOSLAV REGIME : The practice of the socially-owned enterprises the unchallenged predominance of the workers Socially-owned enterprises always conveyed a two-sided image: On one side, a mythical group of entrepreneurs aiming at maximizing the share of labor income in profit. On the other side, a blend of political networking and soft credit lines. On the first aspect - entrepreneurship - it is true that the creation of a socially-owned enterprises was often the result of a private initiative. A business plan was submitted to the municipality concerned by a private group of individuals and once approved, the rest, i.e. finance, land, buildings, equipment and the like, automatically followed. On the second aspect - free riding on public goods - a number of scholars of the former Yugoslav republics consider that the myth of the socially-owned enterprises could only be entertained with the help of artificial measures: bad debts were regularly written off, increases in selling prices were allowed, and new loans were granted with an interest rate below the inflation level. Under the socialist regime, it was not uncommon to find a capital made of 90% or more of debt capital, and since these enterprises' ultimate source of revenues was in fact inflation, it follows that they were de facto subsidized by the taxpayers.26 There were indeed important variations from a socially-owned enterprises to another, and it is noteworthy that their performance was not necessarily correlated to that of their workers. In some cases, the workers' talent and dedication was instrumental. In other cases, their role was marginal, notably when an enterprise's main source of income was attributable to its parent enterprise or to political favors such as import licenses. These contrasted situations or for that matter, the logic behind social ownership, never 25 See B. Horvat: "Social Ownership", paper presented at the 10th conference of IAFEP, Trient, 6-8 July I. Ribnikar (University of Ljubjana) describes this vicious circle in: "the path from social ownership to ownership of business enterprises", Journal for institutional Innovation, Development and Transition number 1, 1997 (http://www.sigov.si/zmar/apublici/iib/iib0197.html#5). Another critical opinion is also found in A. Jovanovic (University of Belgrade): "Yugoslav Institutional and Legal Setting and its Economic Inefficiency" (http://www.cecl.gr/rigasnetwork/databank/reports/r11/r11_main.html). 10

11 altered the workers' opinion that they were the actual "owners" of their respective socially-owned enterprises. And indeed, their unique prerogatives, together with the striking passiveness of the authorities, allowed them to behave accordingly. Of the thousands of Western tourists who enjoy every summer the pleasures of the Croatian shores, how many know that they often reside in resorts originally built by sociallyowned enterprises for the benefit of their workers? Beyond their personal salaries, the workers were in fact the main - if not the exclusive - beneficiaries of the profits derived from the goods produced by their enterprise in areas as diverse as education, housing or leisure. 1. Legal implications in terms of customary rights Paradoxically, the main arguments supporting a possible emergence of workers' customary rights are found in the Yugoslav law itself. First, although the Yugoslav model was more inspired by Tito's strategy of "less State, more Party" than by democratic motives, the fact remains that the Law on Enterprises evolved in a sense increasingly favorable to the workers, to the point that their prerogatives eventually exceeded those of Western shareholders.27 Second, it is because the state had waived its right to control the socially-owned enterprises that the workers could capture the two components of ownership i.e. the right to control the firm and the right to appropriate its profits.28 Legally, these enterprises were clearly distinct from the public (i.e. state-owned) enterprises, and the obligation of the State to guaranty and protect social property was clearly modeled after the traditional regime applicable to takings. As a result, hypotheses where sociallyowned goods could be taken away by public authorities were exceptional and subject to compensation.29 Third, the workers' domination was indirectly reflected in the law, in the sense that their 27 Yugoslav Enterprise Law, Sluzbeni list at no. 77/78, 40/89, 46/90 (available in English at the U.S. Dept. of Commerce - NTIS / CEE Texts). These prerogatives are spelled out in: Art: 49: "The workers' council of a socially-owned enterprise shall draw up drafts of its by-laws and drafts of other self-management enactment; determine the organization of the socially-owned enterprise; adopt the programs of work and decisions on planning the work and development of the enterprise; lay down the outlines of business policy; appoint and recall business-managing and executive bodies; direct, supervise and appraise their work; decide on the distribution of profits and consider proposal by trade unions concerning the implementation of workers' self-management rights and their economic position; and conduct other affairs as specified by the by-laws of the enterprise." Art: 50: "The workers' council shall make decisions by a majority vote of all members of the workers' council, unless another quorum is provided for by the by-laws of the socially-owned enterprise for deciding on individual issues." 28 About this definition see H. Hansmann: The Ownership of the Firm" 2d edition, Harvard University Press, Cambridge, 2000, p See A. Fetahu, "Legal Aspects of the transformation of Social Property", Op. Cit. 11

12 responsibility was commensurate with their prerogatives. Since they were in a position to use - and sometimes abuse of - their enterprises' revenues, mismanagement was sanctioned by unemployment. The Yugoslav legal system never shielded the socially-owned enterprises from bankruptcy, and this entrepreneurial risk could only strengthen the legitimacy of the workers' behavior. Yet, in spite of several decades of consistent practice, it is unlikely the workers' de facto ownership could have evolved into a private ownership. The main purpose of social property - that is to weaken private property - never changed, and provided a customary evolution was conceivable, it could only be towards a state-owned status.30 Moreover, it is important to recall that socially-owned enterprises were mere vehicles used to exploit socially-owned assets. Irrespective of whether such assets were registered or not in these enterprises' name, they remained socially-owned by definition.31 Thus, asserting the workers' right to control a socially-owned enterprise did not entail any right on its assets. Current and former workers interviewed in the course of this study confirmed that as a group, they only treated their enterprise's sociallyowned outputs as their own private property. The status of the industrial assets was different: none could recall an episode where an industrial asset was disposed of outside of a "normal course of business" i.e. for upgrading purpose. Interestingly, this distinction between the production means and the production outputs complied with the official definition of social property i.e. "the means of production and the other means of socially-organized work, as well as mineral and other natural resources".32 In sum, decades of dominations of the socially-owned enterprises by their workers could not affect the primacy of the broader social community except perhaps with respect to the goodwill and the profits of these enterprises. Yet, this later question mark sufficed to challenge the exclusive nature of the residual ownership vested in the broader social community, and to introduce a political dynamics that later imposed 30 For an opinion that the socially-owned enterprises are de facto state-owned, see A. Jovanovic: "Yugoslav Institutional and Legal Setting and its Economic Inefficiency" Op. Cit. While admitting that the state cannot be liable vis-à-vis the creditors of a bankrupt socially-owned enterprise, this author argues that it is nonetheless the residual owner of such enterprise. In a variant, A. Schnytzer claims that the true residual owners of the socially-owned enterprises are municipalities, i.e. local political notables. See this authors comments, quoted in the proceedings of the International Conference on Institutions in transition, Institute of Macroeconomic Analysis and Development, Radenci, September, 1997 (http://www.sigov.si/zmar/akonfer/ainstin.html). In fact, both opinions overlook the main legal feature of social property: a socially-owned asset never ceases to be owned by the broader social community. Accordingly, the bankruptcy of its user implies the return of such asset in the temporary custody of the municipality, whose duty is to maximize its value by putting it as soon as possible at the disposal of a new user. 31 In that sense, see D. Winter Op. Cit. and A. Fetahu: "The origins and Regime of The Social Property", Op. Cit. 32 SFRY Constitution of 1974, article

13 the workers as a distinct category of residual owners : the Markovic Law The exclusive residual ownership of the broader social community was first challenged in 1989 by the socialist regime itself, in the midst of a severe economic crisis. In order to contain a spiraling inflation rate the international financial organizations forced the reformist government of the Prime Minister Ante Markovic to take drastic measures, including the freezing of the credit to the industrial sector.33 The Law on Social Capital of (the Markovic Law)34 was passed in this critical context, officially to allow a mass conversion of the socially-owned enterprises into joint-stock companies. Its main characteristics were the following: First, only natural persons and pension funds were eligible to receive the shares issued on preferred terms by a converted enterprise.35 Second, the conversion was only optional for each socially-owned enterprise, and the decision was to be made by the workers. Should they opt for a conversion, they (and the retired employees) would be entitled to up to 60% of the equity of the new company.36 In effect, the Markovic Law considerably blurred the original definition of social property in favor of the workers, for it was retaining an allocation formula implying that socially-owned enterprises were essentially owned by their workers. Moreover, it was asigning the jus dispodendi to the workers, i.e. the right to decide if, and to the benefit of whom, a socially-owned enterprises was to be privatized. Beyond the appearances, the bias of the Markovic Law in favor of the workers is ambiguous. At the time, the non-payment of wages by the socially-owned enterprises was a common means to delay bankruptcy, and this historical context must be taken into account. It is probable that this law was not meant to express any official opinion on the substantive meaning of social ownership, for it acknowledges 33 The so-called "exit mechanisms", established by the Financial Operation Act of 1989, imposed a broad construction of the notion of insolvency, while allowing creditors to routinely convert their loan into a controlling equity in insolvent enterprises. In a little more than a year, close to 25% of the industrial workforce was laid off and about 1200 socially-owned enterprises were steered into bankruptcy. Source: World Bank, "Industrial Restructuring Study" (Yugoslavia) Washington DC., June Quoted by M. Chossudovsky in "Dismantling Former Yugoslavia, Colonizing Bosnia", University of Ottawa, (http://www.ess.uwe.ac.uk/kosovo/kosovo-controversies4.html) 34 Law on Social Capital, published in the Sluzbeni list at no. 84/89, 46/90. (Available in English at the U.S. Dept. of Commerce - NTIS / Central and Eastern European Texts). 35 Article 1a. 36 Article 1c. 13

14 the workers in their capacity of privileged creditors, rather than in their capacity of residual owner.37 Interestingly, only a few hundreds enterprises - out of the thousands where the workers had voted a conversion completed the process. The fact that there is no mention of the groups in the Markovic Law probably contributed to this outcome: in order to preserve their controlling stake, parent enterprises often ensured that no more than 49% of their subsidiaries would be converted into equity.38 The case of Serbia is exemplary: by the end of 2000, i.e. eleven years later, close to 1000 enterprises had officially undertaken a conversion and only 18 had completed the process.39 3 THE IMPACT OF THE DISMANTLING OF THE FORMER YUGOSLAVIA A. The predominance of the state The economic crisis of the late 80s inevitably fostered the ethnic tensions that had resurfaced after the death of Tito in Starting in 1991, a series of declaration of independence turned into a political and humanitarian disaster. In effect, the former Yugoslavia collapsed as early as 1991, leaving a rump federation composed of Serbia and Montenegro, but Slovenia, Croatia and Bosnia and Herzegovina did not gain an international recognition until Macedonia - the only case of peaceful secession - followed in 1993, under the provisional name of Former Yugoslav Republic of Macedonia (FYROM). To date, the former Yugoslavia has five successors, but with respect to economic law, the complex governance of some of these states resulted in the apparition of not less than nine distinct legal systems. Slovenia, Croatia and Macedonia have one legal system, but Serbia and Montenegro (formerly the Federal Republic of Yugoslavia)40 now encompass three autonomous legal systems: in Serbia, in Montenegro and in Kosovo (now administered by the United Nations Interim Administration Mission in Kosovo -UNMIK). Pursuant to the Dayton accord of 1995 and the subsequent Brcko 37 For a detailed account of this crisis, see Michel Chossudovsky, Op. Cit. 38 In some cases, the interruption of the conversion process is also attributable to the civil war, but in Kosovo for example, this 50% threshold is particularly noticeable. 39 Source: Report of the Office for the Evaluation of Capital Values, Belgrade, November 10, Pursuant to this treaty, signed in Barcelona under the auspices of the European Union, the Montenegrin authorities agree to postpone a referendum on independence for a period of three years. It is probable that the referendum on the independence of Kosovo will be postponed accordingly. 14

15 award, there are also three legal systems in Bosnia and Herzegovina: in the Croat- Muslim entity (Federation of Bosnia and Herzegovina), in the Serb entity (Republika Srpska), and in the Brcko District. Immediately after their independence, the former Yugoslav republics faced a strong pressure on the part of the international financial institutions to reform the Markovic law and launch a "real" mass privatization. Ultimately, all issued their own privatization texts, through their nine legal systems.41 The subsequent emergence of the state as the main stakeholder of the socially-owned enterprises is a perverse effect of this privatization policy. The reason is partly technical: since these enterprises were not state-owned, it followed that the state could not decide their privatization without a prior nationalization. It is therefore not paradoxical that the pressure of the international community for more privatization resulted in a long phase of nationalization. In Croatia for example, recent data released by the Privatization Fund show that in early 2002, it still detained 520 of the 2130 privatized enterprises.42 In Slovenia, less than 80 enterprises are still controlled by the (State) Slovene Development Corporation at the time of writing of this paper, but they include most of the country's largest enterprises The main privatization texts currently in force include: Bosnia and Herzegovina: a 1998 interim "Framework Law on Privatization of Enterprises and Banks in Bosnia and Herzegovina" enacted by the OHR. (in English at: In the entities, the key texts include: Federation of B & H: the 1997 "Law on Privatization of Enterprises" (in English at: Republika Srpska: the "Law on Privatization of State Capital in Enterprises" (in English at: Brcko District: a draft privatization law is currently being prepared by OHR-North, apparently based on the Slovenian model. Croatia: the 1991 "Law on the Transformation of Socially-owned Enterprises", amended by the 1996 "Privatization Law" (in English at: Serbia and Montenegro (ex Federal Republic of Yugoslavia): a 1996 "Law on the Basic Principles of Socially-owned Capital Ownership Transformation" (in English in CEEL Release 38, February 1997) Montenegro: a "Ownership and Control Transformation Law", and a 1996 "Law on privatization of the Economy" (in English at: Serbia: a June 2001 set of three laws: the Law on Privatization, the Law on Privatization Agency and the Shares Fund Law. (in English at: Kosovo: UNMIK current draft Regulation is a "rekindling" of the Markovic Law, providing for a voluntary conversion of the socially-owned enterprises. Macedonia: a 1993 "Law on the Transformation of Socially-owned Enterprises" (in English at: Slovenia: a 1992 "Law on the Ownership Transformation of Enterprises" (in English at: m). 42 See Croatian privatization fund: "Privatization policy and Guidelines for the future" (http://marvin.globalnet.hr/www.hfp2.hr/eng/main.asp?link=privatizacija&sublink=osvrt). 43 See EBRD 2001 Investment Profile, Op. cit. 15

16 Incidentally, it is not certain that this prior phase of nationalization was lawfully implemented in every former Yugoslav republic. In Bosnia and Herzegovina, there is a clear legislative record showing that that every socially-owned enterprise was indeed officially nationalized prior to its privatization. Croatian and Slovenian officials interviewed in the course of this study also indicated that in their respective countries, nationalization was part of their pre-privatization phases. In the remaining cases, i.e. Macedonia and Serbia and Montenegro, the setting is less clear. Socially-owned enterprises have been massively nationalized, but except in some specific sectors (e.g. banking), it is not certain that it was the case for every socially-owned enterprise. The difficulty to find the relevant texts is by no means an evidence of their absence, but it inevitably casts a doubt on the legality of this prior nationalization phase. It is thus plausible that there are - or will be - cases of hasty privatization that may ultimately qualify as illegal takings.44 A. The decline of the original stakeholders The three principal stakeholders of the socially-owned enterprises that is, the broader social community, the parent enterprises and the workers were substantially modified - and affected - by the break-up of the former Yugoslavia. First, the broader social community: once a unique group comprising every citizen of the socialist federation, this group had to be broken down into nine different communities, i.e. one community per privatization law. As a result, only Slovenia, Macedonia and Croatia could retain the original definition of the social community, i.e. the sum of their citizens, whereas in each federation, i.e. Bosnia and Herzegovina on the one hand and Serbia and Montenegro on the other hand, a single citizenship was broken down into two distinct social communities. In Kosovo, even a third definition is under construction. Legally, its status of multi-ethnic Serb province precludes a breakdown of Serbia's broader social community: every Serb citizen should be a residual owner of all the socially-owned enterprises located in Serbia's territory, including in Kosovo, and vice-versa for the ethnic Albanian Kosovars. But since this outcome would be politically untenable, UNMIK is attempting to bend the notion of broader social community, so that the residual owners of the Kosovar socially-owned enterprises will be narrowed to a group entitled "the People 44 In Kosovo, this question poses a dilemma to UNMIK, because the dominant view is that its mandate does not allow it to modify permanently property rights and thus, to decide a nationalization or a privatization. Hence UNMIK current interest for a "rekindling" of the Markovic law that would leave the decision to privatize in the hands of the workers. But contrary to the appearances, this Law also contained a nationalization component, in the sense that allowing the workers to exert a prerogative of the broader social community was per se a partial expropriation of the latter. See UN Security Council Resolution 1244 (1999), and UNMIK Regulation 1999/1 "on the Authority of the Interim Administration in Kosovo" as amended. (http://www.un.org/peace/kosovo/pages/regulations/regs.html). 16

17 of Kosovo".45 Second, the parent enterprises: the limited impact of the Markovic Law proved that their residual rights could not be ignored without a cost. But after the dismantling of the former Yugoslavia, the largest groups that were formerly federal became transnational groups. Parents enterprises could no longer assert their control, and their foreign subsidiaries found themselves in a position to terminate unilaterally their management contracts, with the implicit support of their national authorities. In effect, only local groups survived but in the perspective of a privatization, the complexity of parent-subsidiary links quickly surfaced.46 The reluctance of the privatization agencies settled the matter: since their approval of an enterprise's opening balance was a precondition to privatization, they routinely used this requirement as a bargaining chip to impose a complete restructuring. As a result, most groups disappeared during the pre-privatization restructuring phase. Third the workers: as previous groups of stakeholder, the dismantling of the former Yugoslavia made their legal definition - and their identification - problematic. The reason is partly technical: in areas where ethnic conflicts entailed labor discriminations or important movements of populations, the lists of workers maintained by the socially-owned enterprises are typically inaccurate or unavailable. Political considerations also come into play: in every former Yugoslav republic, the eligibility as a member of the broader social community is de facto a precondition for the recognition of a worker's right. In other words, the refugees that were employed by a socially-owned enterprise located in a region where they cannot return - or do not want to return - cannot assert the same rights as their former fellow workers.47 In sum, none of the historical groups of residual owners of the socially-owned enterprises benefited from the weakening of the others. After the dismantling of the former Yugoslavia, each emerged in the position of a weak contender with a reduced legitimacy, which further allowed the state to freely determine the fate of the socially-owned enterprises. 45 Thus, for the fist time, a group of individuals with the same ethnic background and the same citizenship, i.e. the Serbs of Kosovo and the Serbs of other parts of Serbia, will belong to two different "broader social communities". 46 The dilemma was the following: if parent-subsidiary relationships were acknowledged in the form of an equity percentage, new questions would have to be addressed, e.g. what contribution could justify an equity claim? How would it affect the residual rights of the workers of the subsidiary? Should the residual rights of the parent's employees and those of its subsidiary's employees be "aligned"? Alternatively, parents could be denied the right to claim an equity percentage in their respective subsidiaries, but this would legitimize a contrario the right of a parent enterprise to claim the assets it contributed to its subsidiary, thereby opening a Pandora's box. 47 To a large extent, this question was eluded in Bosnia and Herzegovina and in Croatia. It is now being addressed in Kosovo, where the prospects are not any better: while the rights of such workers are officially recognized, the resolution of their claims remains to be achieved in practice. 17

18 4. WORKER MANAGEMENT IN A POST YUGOSLAV CONTEXT 4.1 The current setting A seen above, there is no compelling evidence that over time, the workers acquired a customary right on the residual ownership of a socially-owned property. Yet, none of the former Yugoslav republics dared to challenge the workers' longstanding opinion that their labor contract entailed a patrimonial right on their enterprise. As a result, every privatization law takes some liberty with the theory of social property by recognizing that, in proportion increasing with seniority, the workers share the residual ownership of their enterprises with the broader social community. While the methods vary,48 the rights of these two groups - and these two groups only - are systematically acknowledged.49 From a strict patrimonial angle, the former Yugoslav republics' respective privatization laws are ahead of the Markovic law, in the sense that they recognize the principle of a residual right of the workers. But unlike the Markovic law, they challenge the predominant role of the workers and in turn, their "managerial" rights. First, they deny the workers the right to decide if their enterprise is to be privatized, although they sometimes allow them to decide how within a limited menu of options, and when within a limited timeframe.50 Second, the maximum equity percentage that may be offered on preferential terms to the workers is never a majority stake: 50% in Croatia 40% in Montenegro, 30% in Macedonia, 20% in Slovenia and 15% in Serbia.51 In Bosnia and Herzegovina, current and retired employees do not even have a preferred right on their own enterprise: they are only entitled to additional vouchers. 48 Bosnia and Herzegovina opted for a distribution of vouchers to domestic citizens and various investment funds. Serbia, Montenegro and Macedonia chose a direct sale of the privatized enterprises to their workers and outside investors. Slovenia, and eventually Croatia opted for a mixed system. In Kosovo, the unclear scope of UNMIK mandate and the slippery meaning of the notion of "broader social community" only allow a direct sale method. 49 The idea of a free distribution of shares was generally rejected, based on the argument that this option would not improve these enterprises' financial condition. In Kosovo the matter is not settled, however, and there may possibly be an exception. 50 In the Croatian and Serb Privatization Laws, enterprises select their mode of transformation in a predetermined menu (articles 7and 10, respectively). A prior approval of the privatization agency is required for large enterprises by the Macedonian Privatization Law (article 13) and for every enterprise by the Slovenian Privatization Law (article 19). 51 Articles 19, 2, 26, 23 and 49, respectively. 18

19 Kosovo will possibly be an exception: it is envisaged that up to 60% of each enterprise's shares may be assigned to its workers. But this rather high percentage cannot be construed as a dissenting view on the part of UNMIK: as seen above, the scope of its mandate in Kosovo imposes a privatization based on pre-existing legislation (hence the 60% retained by the Markovic Law). In sum, one would find it difficult to verify the cliché of the Balkan diversity in the privatization strategies followed by the former Yugoslav republics: although privatization schemes vary, all seek to eradicate the Yugoslav model by ensuring a predominance of outside capital. 4.2 The prospects for employee participation The convergence of the former Yugoslav republics towards an outsider shareholder sovereignty model was not accompanied by in-depth institutional reforms that could ensure a sufficient level of outsiders' protection. This gap, together with the current political and economic situation in the region has had a logical consequence: in most former Yugoslav republics, outsider financing is now scarcer than at the time of Tito's regime. Absent a sufficient number of individual or institutional investors, none of the former Yugoslav republics was able to establish a credible market for corporate governance. And quite logically, the former workers and managers often emerged as the only investors willing to fill the vacuum. As a result, the replacement of the Yugoslav model by a Western shareholders sovereignty model was not followed by an in-depth change of corporate culture, for employee management survived de facto in a number of privatized enterprises. In such cases, only the legal rationale behind the workers' prerogatives changed: it is in their capacity of default investor rather than as a result of their labor input that they continued to control their enterprise. An extreme illustration is found in Slovenia, the "most" Western of the former Yugoslav republics, where about 71% of the privatized enterprises had an initial majority employee ownership.52 As in the other republics, the local authorities attempted to impose a radical change of model. At the same time, it quickly appeared that in order to contain a predominance of foreign investors on the domestic market for corporate control, the only option was to encourage employee buy-outs but. Albeit the extent of the phenomenon varies form a former Yugoslav republic to another, it is possible to say that employee management survived through the dismantling of the former Yugoslavia and the privatization. In fact, the prerogatives of the former workers 52 This rather high percentage needs to be put in perspective: the enterprises concerned were mainly small and medium size firms, and their cumulated value only represented 35% of the total value of the privatized enterprises. Source: Agency of the Republic of Slovenia for restructuring and Privatization. 19

20 and managers have been potentially reinforced. But it is no longer question of workers' customary rights, for this progression is merely a symptom of dysfunction of the new corporate model.53 In a setting designed to ensure a control by the market and in the absent of the former governance safeguards, insider abuses have become commonplace: workers are now more exposed to dubious management methods, and outsider investors are more repelled than ever. Time has come for a new round of reforms. And perhaps some former Yugoslav republics are now ready to recognize that for the foreseeable future, adapting - and safeguarding - the pre-existing culture of employee participation is a more sensible economic objective than a securities transaction market. Such adaptation needs to be substantial, for the Yugoslav model has partly lost its raison d'être in a modern market economy. Now that life-employment is no longer a credible prospect, re-investment decisions are less likely to be made by the workers when needed, unless their capacity of shareholder ceases to be accessory to their status of employee. This "horizon problem",54 together with the need to cut their enterprises' longstanding ties with local politicians, call for a new framework for employee management. In contrast, some traditional features of the Yugoslav model that have disappeared with the break-up of the former Yugoslavia need to be reintroduced. Specifically, given the current reluctance of the banks to enter the corporate market, it is probable that groups and cross participation schemes must be encouraged, in order to restore a source of financing and as well as an external governance safeguard that is now missing. As noted by N. Garod, " it is paradoxical that privatization schemes modeled on a broadly held outsider system have created the circumstances in which only the insider system appears to offer a workable structure for corporate governance in the short and medium term."55 Equally important is the area of taxation, notably to develop the proper incentives to increase the number of institutional investors. Also, an articulation of the income tax and the capital gain tax is required to monitor the usual conflicts of interests arising from the dual capacity of manager or employee and shareholder.56 Finally, tax adjustments 53 See J. Prasnikar: "Behavior of a Slovenian Firm in Transition", Op. Cit. 54 For a description of the horizon problem, with a reference to the Yugoslav model, See H. Hansmann: "The Ownership of Enterprise", Op. Cit. pp N. Garod: "Environmental Contingencies and Sustainable Modes of Corporate governance", International Conference, Faculty of Economics, university of Ljubjana, September 1996 p. 23.(www.sigov.si/zmar/akonfer/garrod.pdf). 56 In that sense, see J. Prasnikar: "Behavior of a Slovenian Firm in Transition", Op. Cit. 20

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