22 fail and go out of business. Instead, soft budgets continued. Where direct transfers were<sup>reduced,</sup> they were often replaced by government guarantees and concessionary credits from the banking sector. Indirect support through deferment of tax payments, dividends, and custom<sup>duties was the</sup> norm. In the absence of exit options, there were few meaningful pressures and incentives<sup>on</sup> government officials, managers, and workers to reform.

58. Shirley and Walsh (2000) analyze and sum up the ownership debate based on<sup>areview of</sup> some 50 empirical studies covering a variety of countries and sectors (competitive<sup>and</sup> noncompetitive). They found greater ambiguity about ownership in theory than in the empirical literature, the latter being skeptical of SOEs as a tool to address market failures<sup>for thereasons</sup> outlined above. The majority of empirical studies conclude that privatized-and private-firms perform better than SOEs, a finding that is robust across all sectors and market<sup>structures.Better</sup> private performance is evident in both developed and developing countries; while<sup>afewstudies</sup> show better public performance in developed countries in infrastructure sectors, in developing countries there are no studies where SOEs do better in any sector or market situation.<sup>Private</sup> firms do better in fully competitive markets. This advantage persists but is less<sup>pronouncedin</sup> monopolistic markets where the evidence is less conclusive; however, no studies in<sup>developing</sup> countries find that public ownership does better in potentially competitive industries.

59. The difficulties of SOE reform and the substantial empirical evidence on<sup>privatization</sup> strongly supports the importance of ownership. Ownership change is<sup>neededtomake</sup> competition effective. But competitive markets are also important if privatized-and privatefirms are to perform well. Privatization realizes its full potential when competition<sup>is promoted.</sup> Competition means free entry and the freedom to fail. Privatization allows inefficient<sup>firms that</sup> cannot compete-and that would otherwise have been kept alive-to fail. Removing these barriers to exit also means removing barriers to entry. Private firms will not enter if inefficient firms are not allowed to fail and if there is no level playing field. Subsidizing<sup>such firms and</sup> keeping them in operation also makes it harder for private firms to access credit<sup>andtoenter</sup> markets. The issue is thus not one of privatization vs. competition. Privatization<sup>and pro-</sup> competition policies are in fact complements that are mutually reinforcing.

60. Thus, alongside privatization of existing assets, removing entry barriers is key for the development of dynamic and competitive private sectors. In tradable sectors,<sup>this involves</sup> simplifying procedures and licenses required to start and register a business, eliminating<sup>import</sup> restrictions, and deregulating pricing. In infrastructure, maximum economic benefits are realized when privatization is combined with new entry, the break up of large entities, and price deregulation with development of regulatory frameworks. Galal et al (1994)<sup>showthat,while</sup> ownership matters, competitive markets reinforce the benefits of private<sup>ownership.Divesting</sup> into competitive markets may reduce the revenues from sale, but efficiency, not<sup>revenues,should</sup> be the primary objective of privatization.

61. Removal of entry barriers is particularly important in transition economies<sup>where state</sup> enterprises dominated all markets and where legal and other restrictions on private<sup>participation</sup> and entry were powerful (Box 4). For example, in Poland, privatization of<sup>large SOEsinitially</sup> proceeded slowly (though most small firms were quickly sold off). However, entry was permitted and vigorously encouraged, and harder budgets were imposed on most SOEs that