Politicians and Firms in Seven Central and Eastern European Countries

31 Pages Posted: 20 Apr 2016

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

Simeon Djankov

London School of Economics & Political Science (LSE); Peter G. Peterson Institute for International Economics

Date Written: August 1998

Abstract

This study of how privatization and stabilization (hard budget constraints) affect enterprise behavior shows that privatized firms consistently outperform state enterprises in productivity growth. Total factor productivity improves in privatized firms, where there is also less overemployment than in state enterprises. Claessens and Djankov test several propositions derived by Shleifer and Vishny (1994, 1996) about how privatization and stabilization (hard budget constraints) affect enterprise behavior. They document the changes in financing, employment, and operating efficiency that have occurred in more than 6,300 manufacturing enterprises in seven Central and Eastern European countries (Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovak Republic, and Slovenia). They then compare the relative performance of privatized and state-owned enterprises. Controlling for institutional differences and the endogeneity of privatization choices, they find that privatization is associated with significant improvements in total factor productivity and reductions in employment. Reductions in soft financing are associated with further productivity gains. State-owned enterprises employ more workers, have lower worker productivity, receive more financing and direct subsidies, and have higher variable costs than privatized firms, particularly firms privatized for more than three years. Privatized firms also consistently outperform state enterprises in productivity growth. Over time, the role of politicians in allocating bank financing and subsidies appears to have declined, however, and banks have played a greater role in (efficiently) allocating resources. And the institutional environment appears to have improved in most countries, suggesting that the influence of corruption has declined over time. The results - which provide significant support for the Shleifer-Vishny model - demonstrate the beneficial effects of privatization in the presence of stabilization and decreasing corruption. This paper - a product of the Financial Economics Group, Financial Sector Practice - is part of a larger effort in the network to study transition economies.

Suggested Citation

Claessens, Stijn and Djankov, Simeon, Politicians and Firms in Seven Central and Eastern European Countries (August 1998). World Bank Policy Research Working Paper No. 1954. Available at SSRN: https://ssrn.com/abstract=597213

Stijn Claessens (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Simeon Djankov

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

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