Privatization, Competition, and Budget Constraints: Disciplining Enterprises in Russia

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Abstract
We investigate whether privatization, competitive forces, and hardening of budget constraints have yet begun to play efficiency-enhancing roles in Russia. The empirical work is based on information from a 1994 survey of privatized and state-owned Russian firms, together representing around 10 percent of Russian manufacturing output. We find robust evidence of a positive impact of privatization on labor productivity: in our basic specifications, we estimate that a ten percentage point increase in private share ownership raises real sales per employee by three to five percent. The evidence for the effect of product market competition is much weaker, depending on measurement and model specification: in some equations, domestic sales concentration is estimated to have a negative impact and the geographic scope of markets a positive effect on productivity, but the results are sensitive to minor changes in specification, and import penetration is never estimated to play a positive disciplinary role. While subsidies (soft budget constraints) are estimated to reduce the pace of restructuring in most of our models, the effect is usually small and rarely precisely estimated. We find some evidence that privatization and subsidy reduction are substitutes, that privatization and competition are complements when the latter is measured as the geographic scope of markets, and that competition and subsidy reduction are independent, in their impacts on Russian enterprise productivity.

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