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Privatization and Firm Performance: Russia in Comparative Perspective
John S. Earle
George Mason University June 2014
Questions about privatization: The focus of this presentation
Firm-level outcomes
Performance (productivity, profitability, output)
Workers (employment, wages)
Creative destruction (job reallocation)
Policy design / methods
Sale, voucher/mass, MEBO, foreign participation
Cross- and within-country variation
Role of the state (support/hindrance)
Business environment substitutes/complements)
Other questions related to privatization
Focus: estimating the direct performance effects of changes in ownership (share transfers) for going concerns
Not:
Land, housing, real estate (shop premises)
New entry
Sequencing, relationship to other policies
Political economy
“Theories” of privatization
Shleifer&Vishny 1994, Boycko et al. 1996
State firms overstaffed because politicians like higher E and W (public sector rents)
Privatization raises cost to politician of higher E, W
increased productivity, π; lower E, W
BET: scale effect may raise E, W
Early research on public vs. private and privatization
Pre-transition: too little action and data
Transition research in 1990s:
Small nobs; nonrandom surveys
Cross-section or short time series
Limited methods (x-sec or before-after)
No persuasive IVs or identification
Exs: Shleifer et al. 1995, Frydman et al. 1997, Earle&Estrin 1998: n ≈ 200, 2-3 years in early 1990s
More recently: Large nobs, long T, but caveats for estimation
Within industry-year comparisons
Firm fixed effects (FE) and trends (FE&FT)
Universal data for HU, LT, RO, UA
Limitations for Russia:
Only manufacturing industries
Small (<100 emp) private spin-offs partly excluded
No VA measure (no material cost info)
Limited ownership information (only: 100% private, mixed, state, foreign)
Data die after 2005 (but start 1985)
Data
• Comparable samples, variables for 5 countries.
• Sources: statistical offices, tax authorities, privatization agencies, private data providers.
• Cover nearly all “old” firms (existing <1990 or ever had any state ownership)
• Coverage from 1985 (RU), 1986 (HU), 1989 (UA), 1992 (RO), 1995 (LT) to 2005
• Total firm-year observations ~= 600,000. Average annual observations per firm = 14.
Evolution of privatization within the “old sector:” HU, LT, RO, RU, UA
0.2
.4.6
.8
Pri
vate
Ow
ne
rship
Du
mm
y
1985 1990 1995 2000 2005Year
Hungary Lithuania
Romania Russia
Ukraine
Estimated Effects of Privatization on Firm Performance
Return On Sales
Labor Productivity
Output
OLS (Ordinary Least Squares)
0.063** 0.239** 0.237** (0.005) (0.012) (0.025)
FE (Firm Fixed Effects)
0.052** 0.115** 0.095** (0.005) (0.008) (0.012)
FE&FT (FE & Firm-specific Trends)
0.030** 0.075** 0.058** (0.006) (0.007) (0.009)
N ~= 600,000 firm-years
Estimated privatization effects: Domestic vs. foreign
0
.2
.4
.6
.8
Estim
ate
d C
oeff
icie
nts
ROS LP OUTPUT ROS LP OUTPUT
FE FE&FT
Domestic Foreign
Estimated privatization effects: Total (100%), majority, and minority
-.1
0
.1
.2
Estim
ate
d C
oeff
icie
nts
ROS LP OUTPUT ROS LP OUTPUT
FE FE&FT
100% 50% Revenue
Estimated privatization effects: Sales, MEBO, Voucher, Foreign (HU and RO)
0
.2
.4
.6
.8
1
Estim
ate
d C
oeff
icie
nts
ROS LP OUTPUT ROS LP OUTPUT
FE FE&FT
Voucher MEBO
Outside Domestic Investor Foreign Investor
Estimated privatization effects: By country
-.4
-.2
0
.2
.4
Estim
ate
d C
oeffic
ients
ROS LP OUTPUT ROS LP OUTPUT
FE FE&FT
Hungary Lithuania
Romania Russia
Ukraine
Privatization and the business environment (EBRD avg score)
0
.1
.2
.3
.4
.5
Estim
ate
d C
oeffic
ients
ROS LP OUTPUT ROS LP OUTPUT
FE FE&FT
EBRD
Russian anomalies
Negative (≈3-5%) performance effect
Negative (≈2-8%) wage effect
Positive (≈2-5%) employment effect
None of these are large (far from zero), but in each case Russia is the outlier
Regional variation in estimated privatization in Russia
Russia: Domestic privatization effects by year
Russia: foreign privatization
Conclusions: Lessons about Privatization from CEE & Russia
“Best estimates” of initial productivity effects (domestic):
Foreign effects stronger: 0.21 - 0.35 in all countries
Method matters: Sales effect > MEBO > Voucher/mass 100% > majority > minority Trade-offs with speed, politics
Employment & wage effects are usually small
RU average masks large regional variation; effect becomes positive after 2002
Privatization and business environment are complements
RO HU LT UA RU
0.15 0.08 0.06 .02 -0.03
Supplementary slides
Sources
More outcomes: ROS, emp, wage
Dynamics and specification checks
Functional form and selection bias
Creative destruction
Policy dimensions
Tax avoidance
Heterogeneity
Principal sources (with David Brown, Álmos Telegdy, Scott Gehlbach)
“Gross Job Flows in Russian Industry Before and After Reforms: Has Destruction Become More Creative?” JCE 2002.
“Privatization Methods and Productivity Effects in Romanian Industrial Enterprises” JCE 2002.
“The Productivity Effects of Privatization: Longitudinal Estimates from Hungary, Romania, Russia and Ukraine,” JPE 2006.
“Helping Hand or Grabbing Hand? State Bureaucracy and Privatization Effectiveness,” APSR 2009.
“Employment and Wage Effects of Privatization: Evidence from Hungary, Romania, Russia, and Ukraine,” EJ 2010.
“Privatization” in Oxford Handbook of the Russian Economy 2012.
“Where Does Privatization Work? Understanding the Variation in Privatization Effects,” work-in-progress.
Performance effects of privatization: estimates for all available industries Financial efficiency Operating efficiency
Return On Sales
Return On Assets
Labor Productivity
Total Factor Productivity
Domestic Private
Hungary 0.020* 0.043** 0.087** 0.067**
Lithuania 0.043* 0.012 0.084** 0.060*
Romania 0.052** 0.052** 0.113** 0.130**
Russia -0.015* -0.060** -0.050** -0.038**
Ukraine 0.006 -0.068** 0.030* 0.031*
Foreign Private
Hungary -0.004 0.054** 0.185** 0.178**
Lithuania -0.020 -0.024 0.054 0.053
Romania 0.027 0.046** 0.116** 0.096**
Russia -0.012 0.000 0.079 0.039*
Ukraine 0.005 -0.055 0.178** 0.183**
Dynamics of the productivity effect: foreign privatization in Romania
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: foreign privatization in Romania
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: foreign privatization in Romania
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: foreign privatization in Romania
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: foreign privatization in Romania
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: foreign privatization in Romania
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: foreign privatization in Romania
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: foreign privatization in Romania
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: foreign privatization in Romania
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: foreign privatization in Romania
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: foreign privatization in Romania
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: foreign privatization in Romania
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: domestic privatization in Romania
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: domestic privatization in Romania
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: domestic privatization in Romania
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: foreign privatization in Russia
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: foreign privatization in Russia
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: foreign privatization in Russia
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: domestic privatization in Russia
-0.2
-0.1
0.0
0.1
0.2
0.3
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: domestic privatization in Russia
-0.2
-0.1
0.0
0.1
0.2
0.3
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Dynamics of the productivity effect: domestic privatization in Russia
-0.2
-0.1
0.0
0.1
0.2
0.3
-5 -4 -3 -2 -1 0 1 2 3 4 5
OLS
FE
FE&FT
Estimating Productivity Effects: Functional Form vs. Selection Bias
Many ways to estimate productivity
CD, TL, OP, LP, factor shares….
We tried them all
Does it matter?
Rather than estimate, use “assumed production functions”: CRS CD with 0≤ α≤1
Estimates of the Productivity Effect of Privatization Assuming Alternative Production Functions Hungary
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Assumed Alpha
Es
tim
ate
d E
ffe
ct
of
Pri
va
tiza
tio
n
OLS
FE
FE&FT
Estimates of the Productivity Effect of Privatization Assuming Alternative Production Functions Romania
0.00
0.20
0.40
0.60
0.80
1.00
1.20
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Assumed Alpha
Es
tim
ate
d E
ffe
ct
of
Pri
va
tiza
tio
n
OLS
FE
FE&FT
Estimates of the Productivity Effect of Privatization Assuming Alternative Production Functions Russia
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Assumed Alpha
Es
tim
ate
d E
ffe
ct
of
Pri
va
tiza
tio
n
OLS
FE
FE&FT
Estimates of the Productivity Effect of Privatization Assuming Alternative Production Functions Ukraine
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Assumed Alpha
Es
tim
ate
d E
ffe
ct
of
Pri
va
tiza
tio
n
OLS
FE
FE&FT
Decomposition of the Employment Effect
into Scale and Productivity Effects
Domestic Foreign
-10
-5
0
5
10
15
20
25
30
35
40
Hungary Romania Russia Ukraine Hungary Romania Russia Ukraine
Percen
t .
Employment Output Labor Productivity
Decomposition of the Wage Effect
into Cost and Productivity Effects
Domestic Foreign
-20
-15
-10
-5
0
5
10
15
20
25
30
Hungary Romania Russia Ukraine Hungary Romania Russia Ukraine
Wage Unit Labor Cost Labor Productivity
Privatization and Creative Destruction (Job Reallocation)
Domestic Foreign
Hungary 0.014* 0.010
(0.007) (0.014)
Lithuania 0.040* 0.060
(0.016) (0.039)
Romania 0.024** 0.061**
(0.005) (0.021)
Russia -0.020** -0.011
(0.003) (0.014)
Ukraine 0.004 -0.015
(0.004) (0.015)
Effects of privatization method
Return On Sales Labor Productivity Employment
Hungary Romania Hungary Romania Hungary Romania
MEBO own
MEBO metho
d MEBO
method MEBO own
MEBO method
MEBO method
MEBO own
MEBO method
MEBO method
Domestic Investor
0.022** 0.022** 0.069** 0.078** 0.079** 0.179** -0.028* -0.028* -.037**
MEBO 0.007 0.000 0.055** 0.095* .130** 0.089* 0.051 0.048 -0.011
Voucher N.A. N.A. 0.039** N.A. N.A. 0.028 N.A. N.A. -0.041*
Cross-country differences: genuine or measurement?
The tax avoidance hypothesis: Russian privatized firms are more likely to avoid taxes relative to SOEs (e.g., Zhuravskaya, JEL)
World Bank BEEPS data:
“What percentage of the sales of a typical firm in your area of activity would you estimate is reported to the
tax authorities, bearing in mind difficulties with
complying with taxes and other regulations?”
Estimation of relative tax avoidance
TaxAvoid = f(Own*C, C, E, I, E*I)
Own: Privatized, New Private (Reference: State)
C: Country
E: Employment
I: Industry
Tax avoidance: How much more in privatized relative to state firms?
Hungary: 7%
Lithuania: 7%
Romania: 1.3%
Russia: 3.7%
Ukraine: 0%
Effect of total and partial privatization
Return On Sales
Labor Productivity
Employment
Total Control Revenue Total Control Revenue Total Control Revenue
Hungary 0.030** 0.031** 0.017 0.092** 0.093** 0.025 -0.008 0.025 0.056**
Lithuania 0.045* 0.041 -0.037 0.094** 0.014 -0.050 -0.053* -0.030 0.043
Romania 0.048** 0.036** -0.024** 0.116** 0.066** -0.036** -0.014 -0.042** 0.020
Russia -0.001 -0.018 N.A. -0.028* -0.055** N.A. 0.059** 0.051** N.A.
Ukraine 0.043 0.022 -0.051
0.052 -0.020 0.000
-0.003 -0.039 -0.142**
Potential explanations for variation in productivity effects
Policy design / owner selection
Macro context
Firm quality
Competition
Business environment / institutions
Link to EBRD, BEEPS data (by firm type)
“Better” institutions -> higher privzn effect
State support
Bureaucracy related to RU regional variation