Restructuring in Transition Economies : Ownership, Competition and Regulation

Transition requires the reallocation of resources across activities through closure of inefficient firms and the creation of new firms. It also requires restructuring of existing firms where improvements in performance are feasible. Both processes are closely tied together and are aimed at raising productivity. This paper examines experience to date in the transition economies on both counts and indeed shows that failures to restructure have generally been associated with failures to reallocate. For restructuring to occur requires imposition of hard budget constraints and increases in competition. These in turn will ensure that changes in ownership have the desired positive effect on governance. We find that progress in restructuring has varied substantially across countries. We identify a profound divide between the countries of Central Europe and those further east, particularly in the CIS. In the former, incentives for private agents to start businesses, restructure and invest have been largely set in place. This has promoted growth and has had the added advantage of facilitating dynamic adjustment to earlier inadequacies in policy. In the latter, soft budget constraints have been associated with privatisations that have strongly favoured incumbents. The web of non-transparent links connecting government, firms and banks has consequently not been broken. The failure to provide appropriate incentives and an environment for restructuring has passed through into low productivity growth and negligible structural change. Despite these differences across the region, there remain substantial and common regulatory and institutional weaknesses