Does privatization raise productivity? Evidence from comprehensive panel data on manufacturing firms in Hungary, Romania, Russia and Ukraine

Does privatization raise productivity? Evidence from comprehensive panel data on manufacturing firms in Hungary, Romania, Russia and Ukraine

Published Jan 2004

Authors

J. David Brown, John S. Earle, Almos Telegdy

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Privatisation affects firm behaviour, but its impact varies with other factors.

Does privatisation affect firm productivity?

The paper analyzes the productivity effects of privatisation using panel data on manufacturing firms in four transition economies.

The authors found that privatisation:

  • has a substantial positive effect on productivity in Romania, a smaller positive effect in Hungary, and a much lower, but still positive effect in Ukraine
  • has a small negative effect on productivity in Russia
  • can have a substantial impact on firm behaviour, but the analysis also implies that the impact can vary with other factors
  • has effects that are rather similar across countries when it comes to foreign investors
  • appears to have an immediate impact in Hungary and Romania, and nearly immediate in Ukraine; in these countries, the impacts are sustained and in Romania and Ukraine they continue to increase even after three years.

Other major findings include:

  • the profile of the dynamics remains negative in Russia until the fifth year after privatisation
  • the differences in foreign pre- privatisation dynamics may be due to anticipatory effects - managers in Hungary experience enhanced career-concern incentives to demonstrate their skills, while those in Russia and Ukraine expect to be automatically fired
  • the method of privatisation matters
  • foreign ownership has a bigger impact in all four countries
  • the largest cross-country differences concern Hungary and Romania versus Russia and Ukraine, which may also be attributed to differences in the ‘quality’ of privatisation (e.g. the extent of concentrated outside ownership)
  • no evidence that inflation and output growth matter for the privatisation effect can be found
  • for both Hungary and Romania, a similar pattern is found whereby firms with lower pre-privatisation productivity are improved more by privatisation than those whose rank in the pre- privatisation distribution was higher
  • an increase of one standard deviation in the pre-privatisation productivity distribution is estimated to lower the privatisation effect by 15 percentage points.

Finally, Hungarian firm productivity exceeds Romanian by about 27.7 percent, thereby accounting for about 4 percentage points of the 6-12 percentage point gap in the privatisation effects of the two countries. However, this factor does not help explain the difference between Russia and Ukraine.

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