23 remained. Competition increased in all sectors of the<sup>economy,andassetstrippingwas</sup> minimized. Thus, when it was finally decided to privatize<sup>thelarger enterprises,therewas</sup> something left to sell, and market conditions were generally competitive-all<sup>of whichledto</sup> positive outcomes. China's success is also in good part due<sup>to openingentrytodomesticquasi-</sup> private enterprises and to foreign investors. In changing the<sup>public-privatemix, privatizationwas</sup> for long less important than the emergence of new private<sup>businesses.</sup>

# **Box 4: Is** Ownership Change Enough?

Sachs, Zinnes, and Eil'at (2000) examine the emnpirical evidence across<sup>24transition economies andconclude that</sup> ownership alone is not enough to generate economic performance improvements.<sup>It is whenownershipchangeis</sup> combined with institutional reforms-aimed at removal of barriers<sup>toentry andexit,improvingprudential</sup> regulation and corporate governance, hardeniing. budget constraints, and<sup>developing capitalmarkets-thatone</sup> sees large and enduring progress.

Maximum impact is produced when market competitiveness, hardened:<sup>budgetconstraints,andimproved</sup> regulatory frameworks coincide with privatization. Thie higher<sup>the levelof institutionalreforms,, themore positive</sup> the economic performance impact from a change of.oownership. In, fact,<sup>thestudyfindsathtesholdlevelof</sup> reforms in order for privatization, to have positive eco'nomnic-outcornes.<sup>At Ihe sametime,institutionalreformsdo</sup> not guarantee performance improvements unless there is a<sup>minimuimlevelof ownership:change.</sup> The authors insist that economies must have private ownershipmanpro-competition,policies<sup>to progess;theygohandin hand</sup> with one another. While ownership-matters, policies-and institutions<sup>matter justas much.</sup> Source: Sachs, Zinnes, **and** Eilat, 2000 62. Ultimately, competition means freedom to fail. As allowing closure<sup>andexitisclear</sup> evidence of mismanagement, governments the world over have proved<sup>reluctanttoalloweven</sup> obviously non-viable firms to fail. Instead, they continue<sup>tosubsidize and support them,even</sup> when they are candidates for privatization. In some countries<sup>(Turkey'sinitial privatization</sup> efforts, for example), loss-making and unviable enterprises<sup>in theprivatizationportfoliocontinue</sup> to be subsidized and kept alive, leading to continued inefficiencies<sup>andfinancialdrain.Funds</sup> that could be used to pay for items facilitating privatization, e.g.<sup>severancepay,aredivertedto</sup> meeting current operational costs of firms on the sale bloc, such<sup>assalariesofworkersand</sup> managers. This delays sales; and assets deteriorate further, reducing<sup>their valueand making them</sup> even harder to sell. By contrast, effective exit mechanisms<sup>andhard budgetconstraintswere</sup> another and important factor explaining the (eventual) success<sup>of privatizationinPoland(Pinto,</sup> 1993).

63. Privatization has sometimes led to the liquidation or exit of nonviable<sup>firms.In anumber</sup> of cases, purchasers have incorrectly estimated the market<sup>or theirabilitytorestructurefirms.</sup> Closures and liquidations have resulted, and private<sup>ownerswere abletodo what publicowners</sup> could not. Critics have seized on such cases (in places as<sup>differentasArmeniaandGuinea)to</sup> claim that privatization is a failure. But closures do not indicate that privatization was necessarily misguided, or that the policy failed. Had<sup>these firmsbeen retainedby thestate it isa</sup> near certainty that they would have continued<sup>to receiveaflowofnon-productiveand</sup> unsustainable subsidies, using scarce resources with<sup>highopportunitycosts.Giventhe political</sup> difficulties associated with closure of SOEs, privatization<sup>isa key mechanismallowing the</sup> liberation and transfer of assets from problematic management<sup>in thepublicsectortobetter</sup>