4 The second approach to evaluating the relation between ownership and performance focuses on comparing the performance of state and private firms operating under reasonably identical conditions: at the same time, in the same markets, within the same environment. This "synchronic" approach confronts its own difficulties. In order to capture the effect of ownership cleanly, a study must assure the absence of a selection bias. Such a bias might occur, for example, if state ownership was introduced in the first place to shore up firms that could not compete in the market (so that state firms were handicapped from the beginning). Or, if one wants to avoid this problem by comparing the performance of privatized: (rather than originally private) firms to that of state companies, selection bias may occur if better firms were chosen for privatization.8 A reliable study of the effects of ownership on performance must combine the two approaches, comparing state and private firms operating at the same time, but using historical data, _in addition_ to the synchronic comparisons, to eliminate the possibility of selection bias. This is the route we follow in this paper. We focus on comparisons of performance between state and privatized firms, leaving out the issue of the differences between either of these types of 1989 literature, predominantly based on small samples and lacking statistical significance, is listed and classified in Boardman and Vining (1989). An earlier review, together with an argument that private ownership is more efficient, may be found in De Alessi (1980). Among more recent studies, Caves (1990) surveys the impact of British privatization policies of the 1980; in a case-type study, Galal _et aL_ (1994) examine the pre- and post-privatization performance of 12 firms in developing countries.

Most of the literature on the postcommunuist transition and enterprise restructuring also follows the historical approach and is by now very large. Frydman and Rapaczynski (1994) provide references to the initial discussions which focused on the merits and demerits of different privatization programs. The first performance-focused studies of firms in transition dealt with so-called "small" privatization" (i.e., privatization of shops and other small establishments), which raises different issues from those discussed here. See Earle, Frydman, Rapaczynski, and Turkewitz (1994). Perfornancefocused studies of "large" privatization tend to concentrate on individual countries, particular owners, or specific problems, and usually involved comparisons of pre- vs. post-privatization performance. Some works of interest in the context of this paper are: Pinto, Belka and Krajewski (1993) and Pinto and van Wijnbergen (1994) (on the restructuring of state enterprises in Poland); Blanchard, Commander and Coricelli (1994) (on unemployment and restructuring in Eastern Europe); Djankov and Pohl (1997) (on restructuring of large firms in Slovakia); Balcerowicz, Gray and Hashi (1997) (on employment and output downsizing in the 200 largest manufacturing finns in the Czech Republic, Hungary, and Poland); Earle and Estrin (1996) (on employee ownership in transition); Claessens, Djankov and Pohl (1997b) (on the governance performance of Czech investment funds). Russian privatization, with its fairly unique problems, also produced a large number of studies: Lieberman and Nellis (1994) contains a number of essays on the restructuring of privatized firms.

s The most important "synchronic" study of performance of state, private and mixed enterprises in market economies is Boardman and Vining (1989), who compare the performance of the largest 500 non-US industrial corporations and find that private firms perform better along several dimensions than both state-owned and mixed firms, and that mixed firms do no better, and often worse, than state-owned companies. Although the Boardman and Vining control for sectoral and country influences, such controls are insufficient to exclude the selection bias hypothesis. Among the still rare synchronic comparisons of state and privatized firms in transition economies, the most important is the study by Pohl _et aL._ (1997), who examine the performance of a large number of state and privatized firns in seven transition economies between 1992 and 1995. The study by Pohl _et al,_ which appeared as this paper was going to print, begins to build a very powerful case in favor of the effectiveness of privatization. But the study fails to deal with the possibility of selection bias and is thus potentially open to the objection that the superior performance of privatized firrms it reports may be due to factors other than the ownership itself.