# Transition economies

27. Assessing the impact of privatization on enterprise performance is particularly difficult in transition economies; the concurrent sweeping economic and social changes make it more difficult to separate privatization's effects from other factors. Further, information and analytical shortcomings are particularly acute in the transition economies, and especially those formerly part of the Soviet Union. Several recent assessments are beginning to overcome these difficulties. They generally show that privatization has yielded positive effects-though there is a marked difference between countries in Central and Eastern Europe (CEE), which includes the Baltic states, and those of the former Soviet Union (FSU) (the Baltic states excluded).

28. Djankov and Murrell (2000) have conducted the most comprehensive and rigorous review of 125 empirical studies of transition economies. Based on composite evidence that reflects the results of individual studies, they conclude that there is strong evidence that private ownership produces more restructuring (changes that prepare a firm to survive and thrive in a competitive market economy) than state ownership in just about every transition country. But sub-regional differences are acute: the privatization effect in CEE countries is more than twice the size of that in FSU countries.

29. One explanation for the varying regional results is the type of owners produced by different sales methods. CEE countries (such as Estonia, Hungary, and Poland) that privatized largely through trade sales on a case-by-case basis ended up with concentrated strategic owners, often foreigners, who have been found to be much more productive than diffused domestic owners. FSU countries relying principally on mass privatization through vouchers tended to have less positive results. Such methods led to a large amount of insider ownership by managers and employees, and/or widely diffused shareholding among small, first time equity holders. Yet, even in these cases, there is little evidence that privatization harmed firm performance, with the very important possible exception of one form of privatization in Russia, where firms privatized to workers appear to be doing even worse than SOEs (Box 2). In general, privatized companies run by insiders are least efficient, but even these do better than state-run companies, although commercialized enterprises with changed management and/or an independent board of directors perform somewhat better than SOEs. (Note that everywhere in transition the best performers of all are new private entrants; i.e., those setting up "greenfields" operations that were never in state hands.) Method of sale is not the whole of the story; another important part of the explanation for the varying regional results are differences in levels of institutional development and policy approaches with respect to new entry and hard budget constraints (see section 4 (ii) below).

30. Another survey of outcomes of privatization in transition was conducted by Havrylyshyn and McGettigan (1999). They dispute the notion that ownership change is not central for restructuring and improved firm performance, and that exposure of firms to competition<sup>and</sup> hard budget constraints is more important. Their key findings are: (i) private enterprises almost invariably outperform state enterprises; i.e. any privatization is better than none (note again the possible and important exception of one form of insider privatization in Russia to this finding), but the form of privatization matters as do pressures of competition and hard budget constraints;