firms only). Private ownership also has a positive effect on whether a firm reinvested any profits, invested in new plant in the preceding three years, and on the growth rate in its level of employment. These findings are consistent with a large body of evidence in the literature<sup>23</sup> about the effect of ownership on performance.

What are the implications for Serbia of the strong relationship between private ownership and infrastructure and productivity? For example, to put the estimated impact of infrastructure constraints in the Serbian context, the Serbian surveys average for the combined infrastructure investment climate constraint measure is 1.9; in Croatia and Slovenia it was 1.3. If the infrastructure constraint perceived by Serbian firms fell to Croatian or Slovenian levels, the impact on TFP would be an increase in average TFP of about 40 percent.<sup>24</sup> In Serbia, many firms remain to be privatized. In particular, the economically important infrastructure, such as electricity and telecommunications, which seem to play such an important role with respect to productivity and other performance indicators (see results above), remain in state hands. However, they require considerable preparation before ownership change can be considered. Serbia thus seems to face a difficult choice, between infrastructure services furnished by a poorly regulated private provider, operating in a deficient legal-political environment, or provision by an inefficient, capitalstarved, publicly managed provider.

In transition economies, the movement of factors of production across enterprises is a source of productivity growth during the early phase of transition. This process, whereby bad firms exit and new ones replace them was dubbed “creative destruction” by Schumpeter over half a century ago. How do we encourage such “creative destruction”? Relatively easy entry and exit allow poorly performing firms to leave the market and dynamic new ones to enter.

Exit of un-restructured enterprises has proven key for putting the assets, including the real estate, of loss-makers back to productive use. It has been especially helpful to the important SME sector, where entrepreneurs are in particular need of the land and storefronts, as well as other assets, so often controlled by non-productive large firms. Exit in the sense of stopping production activity (plant closures) is not enough. What is also needed is the reallocation of the assets that are freed up, and this is what a good bankruptcy framework facilitates. Although the capacity utilization rate depends on many factors, including business sector, market conditions or business cycle, the high rates of excess capacity reported by the PICS data – 30-40percent - indicate that the exit mechanism is not working. Persistent and large scale excess capacity indicates that there are plants with obsolete machinery that is unlikely ever to be used again on a large scale, and many of these plants are occupying buildings and land and located next to infrastructure (electricity, water and sewage connections) that can be better used in other productive activities.

Access to land is another pre-requisite for the movement of factors of production across enterprises, a source of productivity growth. Lack of clear title and uncertain ownership claims remain a major constrains to the investment climate in Serbia. There is a need to 16