Transcript Document

The Impact of Privatization in
Post-Communist Countries
Presented by Saul Estrin
Department of Management
13th April 2007
Outline of Presentation
 The
Issues
 Policies, Institutions and Privatization
 Sequencing of Privatization
 Privatization of Growth
 Privatization and Company
Performance
 Conclusions
Objective
 To evaluate the economic effects of
privatization, focusing on experiences in
post communist countries and China
 Transition economies as a laboratory of
systemic change
Findings
 Privatization to foreign owners raises
efficiency; less clearcut in China because
domestic ownership also raises TFP
 Domestic private ownership raises TFP,
but less than foreign ownership, in CEE
and Ukraine but not in Russia
Findings
 Ownership concentration important
 Worker ownership does not have
negative effect on performance
 New firms more efficient than existing
ones, especially foreign start-ups
Policies, Institutions and
Privatization
 Megginson and Netter (2001) show
privatization improved company
efficiency and profitability in developed
and middle income economies
 Privatization seen as pivotal, even
defining, in transition process
What Were the Reasons for
Privatization?
 Problems of corporate governance in
state owned firms (SOEs)
 market for corporate control and capital markets
 ownership concentration
 outsider ownership
 soft budget constraints
Policies in Transition
Economies
 Type 1 Reforms - Stabilization, price
liberalization, privatization, social safety
net
 Type 2 Reforms – development and
enforcement of laws, regulations and
institutions conducive to market economy
Policies in Transition
Economies
 Type 2 reforms easier in EU Accession
countries
 Everywhere progress relatively slow
and modest
Corruption Perception Index 1998 - 2006
8
7
6
5
4
3
2
1
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
19
98
0
Bulgaria
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Russia
Slovak Republic
Slovenia
Ukraine
Index of Economic Freedom 1995 - 2007
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0.0
Bulgaria
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Russia
Slovak Republic
Slovenia
Ukraine
Privatization Methods
 Need for fast privatization because:
 Price reforms not enough to improve efficiency of SOEs
 State likely to continue to meddle in SOEs
 Managers would decapitalise SOEs
 Political need to forestall return of communists
 But how to privatize thousands of firms
while ensuring equity and political
viability. Led to “mass privatization”
Privatization Methods
 Serious concerns about the quality of
privatization (ie retained state
ownership, long agency chains, insider
ownership) and whether privatzation
had taken place before the relevent
legal and institutional framework were
put into place.
Private Sector Share of GDP
Hungary
Poland
Slovak Republic
Slovenia
Estonia
Latvia
Lithuania
Bulgaria
06
20
04
20
02
20
00
20
98
19
96
19
94
19
92
Romania
19
90
90
80
70
60
50
40
30
20
10
0
19
Czech Republic
Russia
Ukraine
Sequencing of Privatization
 Govenments sequence privatization
because:
 Avoid transaction and congestion costs
 Reveal information about firms to buyers
 Avoid opposition (“gradualism”!)
 Avoid unemployment
Which Firms Do They
Privatize First?
Gupta,Ham, Svejnar,2000
 Firms that are more profitable
 Firms with higher market shares
 Firms in industries subject to greater
demand uncertainty and in downstream
industries (needing flexible
management)
Important implications for reverse
causality
Which Firms Do They
Privatize First?
 Firms in industries subject to greater
demand uncertainty and in downstream
industries (needing flexible
management)
 Important implications for reverse
causality
Privatization and Growth
 Plane 1997 on developed economies:
privatization has stronger positive effect
on growth when it occurs in infrastructure
and industry
 Zinnes, Eilat and Sachs, 2001:
privatization increases GDP growth when
accompanied by institutional reform
Bennett, Estrin and Urga, 2007
 Sample of 26 transition countries, 19912003. Panel data and GMM methods
with fixed effects
 GDP growth associated with investment
in physical and human capital, private
sector and capital market development
and privatization method
Bennett, Estrin and Urga, 2007
 Countries which predominatly used
mass privatization methods enjoyed
significantly higher growth postprivatization compared to those that
used other methods
 Growth not associated with private
sector or capital market development
Privatization and Company
Performance
 Foreign Direct Investors
 Strategic Owners
 Entrepreneurs
Methodological Issues
 Previous studies indicate astonishing
variation in findings, from strong positive
to strong negative effects of
privatization
Methodological Issues
 Reasons partly methodological: early
studies used small/unrepresentative
samples, unable to control for
selection/endogenity, and data peiod
too short
 We use all available studies (150 plus)
and categorise by quality of estimation
method and sample size
Overview of Approach
 Three categories of paper (C1-3); focus
on C1 ( large samples, control for
selection) papers
 Large variety of performance measures
(TFP, labour productivity, profitability,
financial performance, sales,
employment, wages)
Overview of Approach
 Look at studies in CEE, CIS and China
 Focus on TFP and profitability results
Foreign Direct Investors in
Transition Economies
 9 C1 studies of TFP (out of 21); 4 C1
studies of profitability ( out of 13). All
post 1998
 all show privatization to foreign owners
increase TFP or profitability
Foreign Direct Investors in
Transition Economies
 Holds in countries with both weaker and
stronger institutions e.g Hungary, Czech
republic, Poland, Russia and Ukraine
 Example: Brown Earle and Telegdy,
2006 (TFP), Claessens and Djankov,
1999 (profitability)
Foreign Direct Investors in
China
 5 studies, best three are C2
 Positive significant effect of foreign
ownership on TFP ( Hu, Song, Zhang,
2005)
Domestic Owners in Transition
Economies
 Domestic private ownership raises TFP
but the effect is quantitatively smaller
than for foreign ownership
 Reasons for previous ambiguity in
literature is failure to take account of
selection effects
Domestic Owners in
Transition Economies
 TFP effect positive in CEE but negative in
Russia (Brown, Earle, Telegdy); suggests
institutional quality important
 7 studies look at insider ownership; effects
insignificant in 6 and positive in one
 Two of the three C1 studies find the effects on
profitability to be positive
Domestic Owners in China
 No C1 Studies yet!
 Results mixed but generally weakly
positive for TFP and profitability
Domestic Owners in China
 Possible explanation: Tian and Estrin,
2007, find that impact of private
ownership is U-shaped. Initially ROA
decreases as private ownership
increases, and then rises. Explain by
concentration of state ownership and
benefits dominant state ownership can
bring in China
Entreprenerial Ownership
 Sabirinova et al, 2005 find foreign start
ups less efficient than existing foreign
owned firms, more efficient than
domestic start-ups, which are more
efficient than existing domestic firms
Entreprenerial Ownership
 Commander and Svejnar, 2007,find
domestic start-ups less efficient than
foreign owned firms but not different from
domestic or state owned firms.
Conclusions
 Clear picture is emerging from
methodologically sound studies on
transitions economies.
 Despite reservations about the methods
at the time, privatization not a failure
when considered more than ten years
hence
Conclusions 1
 Privatization to foreign owners clearly
raises performance relative to state
ownership, and to domestic private
ownership
 Privatization to new domestic owners
also raises performance if institutions are
better developed, ie CEE and China
relative to Russia
Conclusions 2
 Reasons for Superior Performance of
Foreign Owned Firms
 Limited skills and access to world markets of domestic owners
and managers
 Domestic ownership sometimes associated with looting,
tunnelling, defrauding minority shareholders, reducing
performance
 Privatization process prevented domestic ownership
concentration initially; it took time to squeeze out dispersed
shareholders.
Conclusions 3
 Results highlight importance of good
management and corporate
governance, access to world markets,
prescence of functioning legal and
institutional system for company
performance
 Foreign firms bring in expatriate
managers and train local ones
Conclusions 4
 Their corporate governance compensates
for underdeveloped local institutions, laws
and norms
 They bring access to global distribution
networks.
 Domestic owners can achive the same in
time, and are increasingly doing so
however.