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

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1.0

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1.6

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OLS

FE

FE&FT

Dynamics of the productivity effect: foreign privatization in Romania

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0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

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-5 -4 -3 -2 -1 0 1 2 3 4 5

OLS

FE

FE&FT

Dynamics of the productivity effect: foreign privatization in Romania

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0.6

0.8

1.0

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1.6

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-5 -4 -3 -2 -1 0 1 2 3 4 5

OLS

FE

FE&FT

Dynamics of the productivity effect: foreign privatization in Romania

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0.6

0.8

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1.4

1.6

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OLS

FE

FE&FT

Dynamics of the productivity effect: foreign privatization in Romania

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0.6

0.8

1.0

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OLS

FE

FE&FT

Dynamics of the productivity effect: foreign privatization in Romania

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0.6

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OLS

FE

FE&FT

Dynamics of the productivity effect: foreign privatization in Romania

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OLS

FE

FE&FT

Dynamics of the productivity effect: foreign privatization in Romania

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OLS

FE

FE&FT

Dynamics of the productivity effect: foreign privatization in Romania

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-5 -4 -3 -2 -1 0 1 2 3 4 5

OLS

FE

FE&FT

Dynamics of the productivity effect: foreign privatization in Romania

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0.0

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1.0

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OLS

FE

FE&FT

Dynamics of the productivity effect: foreign privatization in Romania

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1.0

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OLS

FE

FE&FT

Dynamics of the productivity effect: foreign privatization in Romania

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0.6

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1.0

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-5 -4 -3 -2 -1 0 1 2 3 4 5

OLS

FE

FE&FT

Dynamics of the productivity effect: domestic privatization in Romania

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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

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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

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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

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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

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0.0

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0.4

0.6

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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

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0.0

0.2

0.4

0.6

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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

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-0.1

0.0

0.1

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-5 -4 -3 -2 -1 0 1 2 3 4 5

OLS

FE

FE&FT

Dynamics of the productivity effect: domestic privatization in Russia

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-0.1

0.0

0.1

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-5 -4 -3 -2 -1 0 1 2 3 4 5

OLS

FE

FE&FT

Dynamics of the productivity effect: domestic privatization in Russia

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-0.1

0.0

0.1

0.2

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-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

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0.35

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0.45

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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

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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

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-0.05

0.00

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0.20

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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

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0.05

0.10

0.15

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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

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-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