1. The Productivity Effects of Privatization Longitudinal Estimates using Comprehensive Manufacturing Firm Data from Hungary, Romania, Russia, and Ukraine J. David Brown, John S. Earle, and Almos Telegdy Presentation to the World Bank Workshop on Productivity, 31 October 2005

2. Does Privatization Raise Productivity?
Many previous studies, but none has all the following: This paper:
Large, representative sample of firms

3. Does Privatization Raise Productivity?
Many previous studies, but none has all the following: This paper:
Large, representative sample of firms 28,000 (nearly universal)

4. Does Privatization Raise Productivity?
Many previous studies, but none has all the following: This paper:
Large, representative sample of firms 28,000 (nearly universal)
Long time series before and after privatization

5. Does Privatization Raise Productivity?
Many previous studies, but none has all the following: This paper:
Large, representative sample of firms 28,000 (nearly universal)
Long time series before and after privatization 11 years average

6. Does Privatization Raise Productivity?
Many previous studies, but none has all the following: This paper:
Large, representative sample of firms 28,000 (nearly universal)
Long time series before and after privatization 11 years average
Comparable variables/samples for several countries

7. Does Privatization Raise Productivity?
Many previous studies, but none has all the following: This paper:
Large, representative sample of firms 28,000 (nearly universal)
Long time series before and after privatization 11 years average
Comparable variables/samples for several countries 4 transition economies

8. Does Privatization Raise Productivity?
Many previous studies, but none has all the following: This paper:
Large, representative sample of firms 28,000 (nearly universal)
Long time series before and after privatization 11 years average
Comparable variables/samples for several countries 4 transition economies
Different types of private owners

9. Does Privatization Raise Productivity?
Many previous studies, but none has all the following: This paper:
Large, representative sample of firms 28,000 (nearly universal)
Long time series before and after privatization 11 years average
Comparable variables/samples for several countries 4 transition economies
Different types of private owners Foreign v. domestic

10. Does Privatization Raise Productivity?
Many previous studies, but none has all the following: This paper:
Large, representative sample of firms 28,000 (nearly universal)
Long time series before and after privatization 11 years average
Comparable variables/samples for several countries 4 transition economies
Different types of private owners Foreign v. domestic
Dynamics of privatization effect

11. Does Privatization Raise Productivity?
Many previous studies, but none has all the following: This paper:
Large, representative sample of firms 28,000 (nearly universal)
Long time series before and after privatization 11 years average
Comparable variables/samples for several countries 4 transition economies
Different types of private owners Foreign v. domestic
Dynamics of privatization effect 5 years pre to 5 post

12. Does Privatization Raise Productivity?
Many previous studies, but none has all the following: This paper:
Large, representative sample of firms 28,000 (nearly universal)
Long time series before and after privatization 11 years average
Comparable variables/samples for several countries 4 transition economies
Different types of private owners Foreign v. domestic
Dynamics of privatization effect 5 years pre to 7 post
Program evaluation methods and specification tests

13. Does Privatization Raise Productivity?
Many previous studies, but none has all the following: This paper:
Large, representative sample of firms 28,000 (nearly universal)
Long time series before and after privatization 11 years average
Comparable variables/samples for several countries 4 transition economies
Different types of private owners Foreign v. domestic
Dynamics of privatization effect 5 years pre to 5 post
Program evaluation methods and specification tests Firm specific trends

14. Does Privatization Raise Productivity?
Many previous studies, but none has all the following: This paper:
Large, representative sample of firms 28,000 (nearly universal)
Long time series before and after privatization 11 years average
Comparable variables/samples for several countries 4 transition economies
Different types of private owners Foreign v. domestic
Dynamics of privatization effect 5 years pre to 5 post
Program evaluation methods and specification tests Firm specific trends
Extensive robustness checks

15. Does Privatization Raise Productivity?
Many previous studies, but none has all the following: This paper:
Large, representative sample of firms 28,000 (nearly universal)
Long time series before and after privatization 11 years average
Comparable variables/samples for several countries 4 transition economies
Different types of private owners Foreign v. domestic
Dynamics of privatization effect 5 years pre to 5 post
Program evaluation methods and specification tests Firm specific trends
Extensive robustness checks different methods

16. Policy and Business Environment
Four Economies
Reform Progress
Policy and Business Environment
Privatization
World Bank
grouping
“Government
Effectiveness”
“Regulatory
Quality”
“Rule of
Law”
Speed
Type
Hungary
1 (advanced)
0.78
1.21
0.90
Fast
Sales
Romania
2 (second)
-0.33
0.04
-0.12
Slow
Mixed
Russia
3 (lagging)
-0.40
-0.30
-0.78
Insider/mass
Ukraine
4 (way behind)
-0.74
-0.62
-0.79
Insider

17. Cross-Country Hypotheses
1. (alphabetical) The magnitude of the privatization effect is increasing in alphabetic ranking of a country (i.e., strongest for Hungary, second in Romania, third in Russia, and lowest in Ukraine).
2. (reverse alphabetical) The privatization effect is decreasing in alphabetic ranking.

18. Data Comparable samples and variables.
Sources: statistical offices, tax authorities, privatization agencies, private data providers.
Cover nearly all “old” manufacturing firms (existing prior to 1990 or had any state ownership): the firms “at risk” of privatization.
Coverage by year:
Hungary:
Romania:
Russia:
Ukraine: ,
Number of annual observations per firm as high as 18, with an average of about 11 across countries. Total number of firm-year observations approximately 300,000.

19. Data (2): Coverage in 1992 Number of firms Percent of all old firms
Total
employment
Percent of old firm
Hungary
1,800
82.2
513,596
92.1
Romania
1,943
95.1
2,399,904
98.8
Russia
17,505
92.2
13,511,852
93.7
Ukraine
5,587
99.3
3,894,269
99.9

20. Percentage of Firms Privatized Majority Private and Majority Foreign

21. Pre-Privatization Relative Employment and Output

22. Pre-Privatization Relative Productivity

23. Estimation Strategy: Previous Research
In general literature on effects of private and foreign ownership, two approaches:
1. Cross-sectional comparisons. Regression-adjusted version:
yi = δ0 + δ1Privatei + Xi δ2 + ui
Problem of endogenous ownership. (e.g., ui = μi + Є i, where μi is
the “quality” (inherent productivity) of firm i) => selection bias.
2. Time-series comparison of pre- and post-ownership change:
yit = δ0 + δ1Postt + Xi δ2 + uit , estimated using a sample of changers.
But other factors may be changing in the same period (e.g., ui = γt + Є i, where γt is a time effect that cannot be distinguished from Postt).

24. Estimation Strategy: This Paper (1)
Use panel data, large in both the cross-section (i) and time (t) dimensions.
Start with a basic 2-factor Cobb-Douglas specification, treating any private effect as Hicks-neutral technical change:
yit = αkit + βlit + δ1Privateit-1 + uit.
Permit shape of production function to vary across industries (j, 10 in sample) and include unrestricted industry-year effects (up to 170 dummies):
yit = jαjkit*Dj + jβjlit*Dj + jtjtDjDt + δ1Privateit-1 + uit,
δ1 = mean within-country-industry-year difference in multifactor productivity between firms majority private and majority state-owned.

25. Estimation Strategy: This Paper (2)
Identification of δ1 involves assumptions about the error term uit.
Suppose δ0 = difference in productivity between firms that become privatized at some point or other and those that do not,
so that uit = δ0 + νit for firms that are privatized.
The difference-in-differences (DD) estimator adds a group fixed effect,
EverPrivatei = 1 if Privateit = 1 for any t in the data:
(DD) yit = jαjkit*Dj + jβjlit*Dj + jtjtDjDt + δ0EverPrivatei + δ1Privateit-1 + εit.
Key identifying assumption is strict exogeneity conditional on all independent variables and the group fixed effects:
cov(Privateit-1, εis) = 0 for s, t = 1,…,T,
so that the error term in any year s is uncorrelated with the ownership of the firm in any year t.

26. Estimation Strategy: This Paper (3)
Or suppose uit = μi + εit, with μi a fixed firm effect (FE):
yit = jαjkit*Dj + jβjlit*Dj + jtjtDjDt + δ1Privateit-1 + μi + εit.
Identifying assumption is strict exogeneity conditional on all independent variables and the fixed effects μi : cov(Privateit-1, εis) = 0 for s, t = 1,…,T.
Or suppose uit = μi + ωit + εit, with ωi a firm-specific time trend (FT):
yit = jαjkit*Dj + jβjlit*Dj + jtjtDjDt + δ1Privateit-1 + μi + ωit + εit.
Identifying assumption is again strict exogeneity conditional on all independent variables, the fixed effects μi and the time trends ωi.
Similar equations can be specified for Foreign and Domestic private ownership.

27. Estimation Strategy: This Paper (4)
Specification tests:
F-tests on joint significance of fixed effects μi and the time trends ωi.
“Pre-program test”: is E(εisPrivateτ|s<τ)=0? τ is the privatization date. If privatization appears to affect firm productivity well before the privatization date, then selection bias may be affecting estimates.
Similar tests can be specified for Foreign and Domestic private ownership.
Many other robustness checks: constant-returns to scale, translog, labor productivity, assumed technologies, controlling for investment, controlling for survival selection bias, instrumenting factors of production, etc.

28. Estimation Strategy: This Paper (5)
Dynamics of the Privatization Effect:
yit = jαjkit*Dj + jβjlit*Dj + jtjtDjDt
+ π-4Pre4it + π-3Pre3it+ π-2Pre2it + π-1Pre1it + π0PrivYearit
+ π1Post1it + π2Post2it + π3Post3it + π4Post4it + π5Post5it + νit
Preprogram test: π-4 = π-3 = π-2 = 0.
Similarly for FE (fixed effect) and FT (firm specific trend) specifications.
Similar for foreign and domestic.

29. Estimated Productivity Effects of Privatization

30. Foreign and Domestic Effects

31. Effect of Foreign Ownership on Productivity: Romania

32. Effect of Foreign Ownership on Productivity: Romania

33. Effect of Foreign Ownership on Productivity: Romania

34. Effect of Foreign Ownership on Productivity: Romania

35. Effect of Foreign Ownership on Productivity: Romania

36. Effect of Foreign Ownership on Productivity: Romania

37. Effect of Foreign Ownership on Productivity: Romania

38. Effect of Foreign Ownership on Productivity: Romania

39. Effect of Foreign Ownership on Productivity: Romania

40. Effect of Foreign Ownership on Productivity: Romania

41. Effect of Foreign Ownership on Productivity: Romania

42. Effect of Foreign Ownership on Productivity: Romania

43. Effect of Foreign Ownership on Productivity: Hungary

44. Effect of Foreign Ownership on Productivity: Hungary

45. Effect of Foreign Ownership on Productivity: Hungary

46. Effect of Foreign Ownership on Productivity: Russia

47. Effect of Foreign Ownership on Productivity: Russia

48. Effect of Foreign Ownership on Productivity: Russia

49. Effect of Foreign Ownership on Productivity: Ukraine

50. Effect of Foreign Ownership on Productivity: Ukraine

51. Effect of Foreign Ownership on Productivity: Ukraine

52. Effect of Domestic Ownership on Productivity: Hungary

53. Effect of Domestic Ownership on Productivity: Hungary

54. Effect of Domestic Ownership on Productivity: Hungary

55. Effect of Domestic Ownership on Productivity: Romania

56. Effect of Domestic Ownership on Productivity: Romania

57. Effect of Domestic Ownership on Productivity: Romania

58. Effect of Domestic Ownership on Productivity: Russia

59. Effect of Domestic Ownership on Productivity: Russia

60. Effect of Domestic Ownership on Productivity: Russia

61. Effect of Domestic Ownership on Productivity: Ukraine

62. Effect of Domestic Ownership on Productivity: Ukraine

63. Effect of Domestic Ownership on Productivity: Ukraine

64. Pre-Program Tests: F-Statistics (P-Values)

65. Estimates of the Productivity Effect of Privatization Assuming Alternative Production Functions Hungary

66. Estimates of the Productivity Effect of Privatization Assuming Alternative Production Functions Romania

67. Estimates of the Productivity Effect of Privatization Assuming Alternative Production Functions Russia

68. Estimates of the Productivity Effect of Privatization Assuming Alternative Production Functions Ukraine

69. Conclusions Estimates of the effect of privatization on productivity:
0.15 in Romania
0.08 in Hungary
0.02 in Ukraine
-0.03 in Russia
Foreign ownership effects are much stronger than domestic: to 0.35 in all countries.
Controlling for selection bias is a much bigger concern than the method of productivity measurement.
Results are inconsistent with simple stories about the differences in policy and business environment and in the methods of privatization programs in these countries.