9 leverage and an increase in dividends. The changes in both profitability and efficiency were larger for firms in middle-income countries than for those in low-income countries.

20. One of the biggest issues in evaluating privatization, both in the cross-cutting studies as well as the country studies discussed below, lies in comparing the outcome of privatization with the counterfactual, i.e. what would have happened in the absence of privatization. There is the possibility that performance improvements would have happened without a change of ownership-if general economic conditions improved and boosted all firms, or if public sector managers and owners were able to put in place and sustain reform measures. Omran (2001) argues that this was the case in Egypt. He reviewed indicators in privatized and remaining stateowned firms in the 1990s, and found that all firms improved, regardless of ownership typeconcluding that general liberalization was more important than privatization in explaining firm behavior. But it could also be argued that previous liberalizing reforms without privatization had accomplished little in Egypt; and that only when privatization was a realistic option and credible threat did remaining SOE managers take seriously the calls for reform. Few studies evaluate the counterfactual in any systematic way, the most notable being that of Galal, Jones, Tandon, and Vogelsang (1994); this study is discussed in further detail in section (iii) below.

21. A final issue is one of timing, again applying to both cross-cutting and country/enterprise level studies. Dewenter and Malatesta (1997) and Hodge (2000), while supportive of the positive effects of privatization, argue that some of the performance improvements occur before privatization due to the "announcement" effect, rather than to privatization per se. True, many of the most difficult reforms have often been made in the run-up to privatization but in most of these cases the announcement was accompanied by: (i) a change of management; (ii) large layoffs and other cost-cutting measures; and (iii) other departures from previous inefficient procedures. And these measures were implemented with the clear threat of privatization. Moreover, the extent to which these improvements could have been sustained in the absence of eventual divestiture is highly questionable, and many have argued and there is evidence to show that privatization was necessary to "lock-in" the gains and prevent backsliding (World Bank, 1995).

# Developing countries

22. Most (not all) of the growing body of work assessing the impact of privatization in developing countries shows that privatization has improved enterprise performance. For example, La Porta and Lopez-de-Silanes (1997), in a study of all 218 non-financial firms privatized in Mexico in the period 1983-1991, show that SOEs, in competitive and noncompetitive sectors, went from being highly unprofitable before privatization to being profitable thereafter, closing the performance gap with control groups of similar firms in the private sector. Output (inflation adjusted) increased 54.3 percent, sales per employee roughly doubled, and profitability increased by 24 percent. Controlling for changes in the macro environment, they found that improvements were due mainly to productivity gains resulting from better incentives and management associated with private ownership, and partly to lower employment costs resulting from labor reductions.