legal frameworks across countries. Privatized firms also reduce their excess labor by 20% more than comparable, still state-owned firms and cease to receive direct government subsidies. These differences in performance between privatized and state-owned enterprises cannot be attributed to the overall environment in which enterprises operate nor to the selection bias introduced in the privatization programs. We also find empirical evidence for the SV-prediction that lack of monetary tightness discourages enterprise restructuring, at least in the early period of transition. The role of politicians in allocating bank financing and subsidies appears to have declined over time, however, and the importance of banks in allocating resources (efficiently) increased. Finally, the overall environment appears to have improved in almost all countries, suggesting that the influence of corruption has declined.

The paper is organized as follows. Section 2 summarizes the previous empirical literature on the benefits of privatization and the arguments of its critics. Section 3 develops several testable hypotheses based on the Shleifer-Vishny 1994 model. Section 4 describes the dataset (and its drawbacks) and provides simple statistics on several variables of interest. Section 5 details the empirical research design. Section 6 provides descriptive statistics of the main variables, while Section 7 reports the results from the tests of the SV model. Section 8 concludes.

# **H. The empirical literature on privatization**

There is a substantial empirical literature examining the relative performance of public and private enterprises. This work was motivated by the notion that private ownership leads to better incentives to monitor managers which in turn would raise enterprise performance. Since there did not exist a rigorous theoretical framework to underlie such empirical analysis, the evidence remained mostly anecdotal and frequently led to conflicting conclusions. On the one hand, several papers (Kay and Thompson, 1986; Millward, 1982; Wortzel and Wortzel, 1989) argued that increased competition in product markets is a more important determinant of improved allocative efficiency than privatization. Boresherding et al. (1982), for example, find that "given sufficient competition between public and private producers, the differences in unit costs turn out to be insignificant." On the other hand, a number of other papers (Bailey, 1986; Bishop and Kay, 1989; Kikeri et al., 1994) present (mostly anecdotal) evidence of the beneficial role of privatization in enhancing enterprise efficiency.

The difficulty of the previous empirical research to establish a conclusive analysis on the benefits of privatization was in part due to the limited natural experiments of privatization prior to the programs in Mexico and the United Kingdom in the mid-1980s. In the majority of cases, privatization occurred in a small number of utility enterprises (telecoms, airlines, oil refineries). A recent survey (Vining and Boardman, 1992) covers 87 papers on the effects of privatization. Of those, only two (Broadman and Vining, 1989; Picot and Kaulmann, 1989) focus on competitive sectors rather than on regulated monopolies or oligopolies. The authors argue, as does subsequent research, that utility privatizations do not provide a useful test of the benefits of privatization since these enterprises still fall under often unchanged government regulatory frameworks. Hence the effect of privatization cannot be measured separately since productivity gains are confounded by the effects of (lack of) changes in the regulatory framework. Also, 74 of 4