1

Chapter 2: Output Chapter 2: Output Collapse, Reallocation, Collapse, Reallocation, Restructuring, Market Restructuring, Market SelectionSelection

2

The evolution of GDP (1991-The evolution of GDP (1991-2000)2000)

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Poland

Romania

Bulgaria

Slovak Republic

Czeck Republic

Hungary

Estonia

Slovenia

3

Causes of Output Collapse:Causes of Output Collapse:1) Statistical Artefact1) Statistical Artefact

Output collapseOutput collapsesharp, unexpected, faced by all countriessharp, unexpected, faced by all countries

most economists expected an increase in most economists expected an increase in production production important to understand important to understand

CausesCauses• Statitistical Artifact Statitistical Artifact

– official pre-transition statistics overestimated official pre-transition statistics overestimated – imperfect measures of new small firm imperfect measures of new small firm

productionproduction– pre-transition prices vs electricity pricespre-transition prices vs electricity prices

4

2) Aggregate Demand, Price 2) Aggregate Demand, Price Liberalisation and Liberalisation and StabilisationStabilisation

Output decline coincided with price Output decline coincided with price liberalisationliberalisation

Stabilisation policiesStabilisation policies Excess fall in aggregate demandExcess fall in aggregate demand

Not enough to explain such fall in outputNot enough to explain such fall in output Look at supply side explanationsLook at supply side explanations

5

3) Monopoly versus 3) Monopoly versus CompetitionCompetition

Monopoly theory (Li, 1999): Monopoly theory (Li, 1999): • Planned economy: few large firms, prices Planned economy: few large firms, prices

and quantity set by plannerand quantity set by planner• Without central planner and without Without central planner and without

competition and competition policy competition and competition policy monopolies and chains of monopolies monopolies and chains of monopolies output contractionoutput contraction

6

4) Imperfections of Markets4) Imperfections of Markets

Credit market imperfections:Credit market imperfections:• Firms needed credit but difficult to obtain Firms needed credit but difficult to obtain

(high interest rates) (high interest rates) contraction of firm contraction of firm production (Calvo and Coricelli, 1992)production (Calvo and Coricelli, 1992)– But also higher credit to clients and SBCsBut also higher credit to clients and SBCs

Labour market frictions:Labour market frictions:• Workers have to move from old to new firms Workers have to move from old to new firms

search costs search costs mean time unemployment mean time unemployment and output fall (Atkeson and Kehoe, 1996)and output fall (Atkeson and Kehoe, 1996)

• Real product wages did not change while Real product wages did not change while consumption wage did (Blanchard, 1997)consumption wage did (Blanchard, 1997)

7

4) Imperfections of Markets 4) Imperfections of Markets (cont.)(cont.)

• Cut in subsidies too fast?Cut in subsidies too fast? unemployment unemployment from state firms from state firms increase taxes to pay increase taxes to pay unemployment benefits unemployment benefits higher taxes higher taxes restrict output growth restrict output growth unemployment unemployment (Aghion and Blanchard, 1994)(Aghion and Blanchard, 1994)

Inefficient rent-grabbing and rent-Inefficient rent-grabbing and rent-seeking behaviourseeking behaviour• Example: size and number of bribes to Example: size and number of bribes to

open and run a businessopen and run a business

8

5) Reorganisation5) Reorganisation

Systemic changes Systemic changes existing information existing information osolete osolete takes time to build new takes time to build new information stock information stock output is low at first – output is low at first – explains output of new firms.explains output of new firms.• New firms wish to try new technology New firms wish to try new technology

process of trial and error until achievement process of trial and error until achievement when output increases (Atkeson and Kehoe, when output increases (Atkeson and Kehoe, 1997)1997)

• Firms have to replace old technology and Firms have to replace old technology and complete adoption of new technology takes complete adoption of new technology takes time (Sussman and Zeira, 1994)time (Sussman and Zeira, 1994)

9

6) Trade6) Trade

CMEA trade collapse (Rodrik, 1994)CMEA trade collapse (Rodrik, 1994)• Almost total collapse of tradeAlmost total collapse of trade• Disorganisation Disorganisation

– Shortage of inputs?Shortage of inputs?

• Relevant for some countries e.g HungaryRelevant for some countries e.g Hungary

10

Reallocation Reallocation

Reallocation in the production processReallocation in the production process• Liberalisation plus Removal of state subsidies Liberalisation plus Removal of state subsidies

and legal restrictions to entryand legal restrictions to entry– moving from output maximization to profit moving from output maximization to profit

maximization and cost minimisationmaximization and cost minimisation– reallocation of labour and capital reallocation of labour and capital

– from state firms producing low quality goods to from state firms producing low quality goods to new private firms producing new goods, among new private firms producing new goods, among sectorssectors

Thus state firms decreased employment and output. Thus state firms decreased employment and output. Questions: Why so deeply and why did private firms Questions: Why so deeply and why did private firms not compensate the decrease? not compensate the decrease?

Disorganisation Disorganisation

11

Central Plan vs MarketCentral Plan vs Market

B

TRA

TC

C

Output

TC

TR

profit-max BE Central Plan

12

7) Disorganisation effects of 7) Disorganisation effects of liberalisationliberalisation

Reallocation does not occur instantaneously.Reallocation does not occur instantaneously.• There are frictions. What are these and what is There are frictions. What are these and what is

the impact on the optimal speed of reallocation?the impact on the optimal speed of reallocation?• Which instruments can affect the speed of Which instruments can affect the speed of

reallocation?reallocation?– subsidy cuts ?subsidy cuts ?– enterprise closures?enterprise closures?– -information?-information?

• Look at decisions of individual firmsLook at decisions of individual firms

13

7a) Information and 7a) Information and Bargaining ProblemsBargaining Problems

Transition = systemic change Transition = systemic change (Blanchard and Kremer, 1997)(Blanchard and Kremer, 1997)• production in planned economy: production in planned economy:

– one buyer and one supplierone buyer and one supplier– centra planner making sure all produced to centra planner making sure all produced to

avoid disruption of productionavoid disruption of production

• liberalisation liberalisation free to choose from many free to choose from many buyers and suppliers buyers and suppliers

14

7a) Information and 7a) Information and Bargaining Problems (cont.)Bargaining Problems (cont.)

– while true in the West, in transition economies only while true in the West, in transition economies only few suppliers and buyers but no planner! Markets few suppliers and buyers but no planner! Markets could not do the job overnight.could not do the job overnight.

– Suppliers feel they have more opportunities in the Suppliers feel they have more opportunities in the private sector neverthelessprivate sector nevertheless

– Lack of information on suppliers and their prices Lack of information on suppliers and their prices take it or leave it offer with potentially no take it or leave it offer with potentially no agreement = bargaining failureagreement = bargaining failure

– Also short term relationships rather than long term Also short term relationships rather than long term onesones

– Plus potential close down of state firmsPlus potential close down of state firms

– Consequence: disruption! Higher the longer the Consequence: disruption! Higher the longer the supply chain. Some cases sarted before transition.supply chain. Some cases sarted before transition.

15

7b) Search frictions and 7b) Search frictions and investment specificityinvestment specificity

firms have to find long-term partners firms have to find long-term partners to invest to invest search and find or no search and find or no investment investment

disruption: fall in investment and in disruption: fall in investment and in the eplacement of capital (Roland the eplacement of capital (Roland and Verdier, 1997)and Verdier, 1997)

16

8) Initial Conditions8) Initial Conditions

Geographical location Geographical location Historical proximityHistorical proximity FDIFDI Ethnical conflict and/or warEthnical conflict and/or war Industry structure and firm sizeIndustry structure and firm size Political stability, commitment, momentumPolitical stability, commitment, momentum Inflation, Monetary and Fiscal policiesInflation, Monetary and Fiscal policies Aggregate demandAggregate demandhelp explain differences across countrieshelp explain differences across countries

17

DisorganisationDisorganisation

Disorganisation involvesDisorganisation involves• Coordination mechanisms disintegrateCoordination mechanisms disintegrate• Breaking production and trading linksBreaking production and trading links• Disorganisation exacerbated by Disorganisation exacerbated by

continuing control of the government continuing control of the government over the economyover the economy

• Multiplier effect of trade on outputMultiplier effect of trade on output

18

Empirical Evidence of Empirical Evidence of Disorganisation: UkraineDisorganisation: Ukraine

19

Konings and Walsh, 1999Konings and Walsh, 1999

Dataset Dataset • 300 Ukrainian firms300 Ukrainian firms

– 50% of the traditional pre-transition firms 50% of the traditional pre-transition firms – 50% of the 50% of the de novode novo only private firms only private firms– Manufacturing, trade, and servicesManufacturing, trade, and services– Most are privatised = 46% (mean size=452 Most are privatised = 46% (mean size=452

workers=large) negative employment growth 12%workers=large) negative employment growth 12%– 9% are SOEs (mean size=598 workers=large) idem9% are SOEs (mean size=598 workers=large) idem– 45% de novo firms (mean size=29 workers=small) 45% de novo firms (mean size=29 workers=small)

positive employment growth 10%positive employment growth 10%

20

Konings and Walsh, 1999Konings and Walsh, 1999

Privatised + SOEs = “traditional firms” Privatised + SOEs = “traditional firms” groupgroup• Survived first years of transition Survived first years of transition

– Have market demandHave market demand– Restructuring and reallocation costs relative small Restructuring and reallocation costs relative small

no exit no exit De novoDe novo group group

• Perceived that could do wellPerceived that could do well How did disorganisation limit their growth How did disorganisation limit their growth

in terms of employment and productivity?in terms of employment and productivity?

21

Table 1: ‘Aggregate’ Job Turnover and Net Table 1: ‘Aggregate’ Job Turnover and Net Employment Growth = early restructuring in Employment Growth = early restructuring in UkraineUkraine

Year Pos Neg Gross Net Excess1991 0.001 0.078 0.079 -0.077 0.00021992 0.006 0.049 0.055 -0.043 0.0121993 0.009 0.094 0.103 -0.085 0.0181994 0.008 0.101 0.109 -0.093 0.0161995 0.011 0.144 0.155 -0.133 0.0221996 0.025 0.153 0.178 -0.128 0.05

Note: Pos = Job creation rate, Neg = Job destruction rate, Gross = Pos+Neg = Job reallocation rate, Net =Pos-Neg = Net employment growth rate and Excess = Gross –abs(Net)= Excess Reallocation Rate

22

Table 2: The Age Composition EquipmentTable 2: The Age Composition Equipment

Age of equipment De novo Traditional

Less than 1 year 0.21 0.05

Between 2 and 8 years 0.50 0.35

Between 9 and 25 years 0.27 0.46

More than 25 years 0.02 0.14

23

Table 3: Gross Job Flows According to Table 3: Gross Job Flows According to Ownership in 1996Ownership in 1996

Pos Neg Net Excess

De novo firms 0.22 0.07 0.15 0.14

Traditional firms

Old

Young

0.02

0.006

0.05

0.16

0.187

0.06

-0.14

-0.18

-0.008

0.04

0.013

0.10

“Traditional young equipment”: a) less negative employment growth than “traditional old equipment” and b) job turnover closer to de novo firms.

24

Table 4: Disorganization Indicator ITable 4: Disorganization Indicator I

De novo Traditional

New equipment in 1996

Yes

No

0.43

0.57

0.38

0.62

New products between 1994-97

Yes

No

0.75

0.25

0.72

0.28

25

Table 5: Disorganization Indicator IITable 5: Disorganization Indicator II

Number of products De novo Traditional

1 0.45 0.44

2 0.30 0.27

3 0.14 0.11

4 0.08 0.09

5 0.02 0.09

Traditional firms have a more complex production.

26

Table 6: Structure of competition in the Table 6: Structure of competition in the product and input marketproduct and input market

Competition De novo Traditional

More than 5 competitors

More than 5 suppliers

0.67

0.57

0.50

0.45

Less than 5 competitors

Less than 5 suppliers

0.33

0.43

0.50

0.55

27

Table 7: Frequency of dependence on Table 7: Frequency of dependence on imported inputsimported inputs

De novo Traditional

Yes 0.26 0.18

No 0.74 0.82

28

Table 8: Frequency of financial Difficulties in Table 8: Frequency of financial Difficulties in 19961996

De novo Traditional

Yes 0.57 0.82

No 0.43 0.18

29

Table 9: Evolution of productivity since 1995Table 9: Evolution of productivity since 1995

Productivity De novo Traditional

Go down 0.33 0.58

Remain the same 0.24 0.19

Go up 0.43 0.23

30

Table 10: Dependent variable: Firm Level Table 10: Dependent variable: Firm Level Employment growth in 1996Employment growth in 1996

Overall Overall De novo Traditional Traditional & old equipment

De novo 0.022 * (0.06) 0.06 (0.07)

+5 competitors 0.04 (0.06) 0.03 (0.06) 0.16**(0.10) -0.09(0.06 -0.06 (0.08)

Import depencence 0.16* (0.07) 0.17* (0.07) 0.24* (0.11) 0.11 (0.08) 0.08(0.11)

+5 suppliers 0.05 (0.06) 0.06 (0.05) 0.07 (0.09) 0.04 (0.06) 0.03 (0.08)

Numbers of products -0.1* (0.05) -0.07** (0.05) -0.08 (0.09) -0.12* (0.06) 0.03 (0.08)

New equipment 0.14*(0.06) 0.16*(0.06) 0.13 (0.1) 0.18*(0.07) 0.20* (0.09)

Ln (employment)t-1 -0.07*(0.02) -0.09*(0.05) -0.05*(0.02) -0.07*(0.03)

Adjusted R2 0.13 0.17 0.07 0.15 0.12

N° of observations 215 215 98 117 63

Note: standard errors in brackets; ** denotes statistically significant at the 5% critical level. All equations include sector dummies, a dummy for Kiev and a constant.

31

Table 11: Ordered Probit results, dependent Table 11: Ordered Probit results, dependent variable: Evolution in Productivity: 1 = down, variable: Evolution in Productivity: 1 = down, 2= the same and 3 = up2= the same and 3 = up

Overall Overall De novo Traditional Traditional &

old equipment

De novo 0.51* (0.16) 0.06 (0.23)

+5 competitors -0.06 (0.16) -0.07 (0.18) -0.19 (0.27) 0.05 (0.25) -0.26 (0.36)

Import depencence 0.28* (0.19 0.33* (0.21) 0.05 (0.30) 0.70* (0.32) 0.49 (0.52)

+5 suppliers 0.22 (0.16) 0.09 (0.17) 0.03 (0.25) 0.13 (0.25) 0.42 (0.36)

Numbers of products -0.26* (0.15) -0.20 (0.16) 0.06 (0.24) -0.25 (0.25) -0.71* (0.39)

New equipment 0.60* (0.16) 0.72* (0.18) 0.58* (0.27) 0.82* (0.26) 1.02* (0.41)

Ln (employment)t-1 -0.22* (0.07) 0.01 (0.13) -0.26* (0.09) -0.11 (0.13)

Pseudo R2 0.06 0.09 0.07 0.13 0.12

N° of observations 258 214 98 116 63

Note: standard errors in brackets; * denotes statistically significant at the 5% critical level. All equationsinclude sector dummies, a dummy for Kiev and a constant.

32

ConclusionsConclusions

Small firms grew more in terms of Small firms grew more in terms of employment and productivityemployment and productivity

Lack of new investment / new equipmentLack of new investment / new equipment• constraints employment and productivity constraints employment and productivity

growth of traditional group (pre-transition growth of traditional group (pre-transition firms)firms)

The number of products = complexity of The number of products = complexity of production production • similarly especially traditional with old similarly especially traditional with old

equipment equipment

33

ConclusionsConclusions

Better performance of de novo firms Better performance of de novo firms related to:related to:• inputs imports inputs imports

– (also traditional with new equipment when (also traditional with new equipment when looking at productivity )looking at productivity )

• competitioncompetition

Disorganisation affects negatively firm Disorganisation affects negatively firm performanceperformance

34

RestructuringRestructuring

Production structure was distorted Production structure was distorted compared to market economiescompared to market economies• Relative overdevelopment of heavy (e.g. Relative overdevelopment of heavy (e.g.

military) industry vs underdevelopment of military) industry vs underdevelopment of servicesservices

• A bias toward few big firms and against small A bias toward few big firms and against small firmsfirms

• High capital intensity but obsolete equipmentHigh capital intensity but obsolete equipment• Low quality productsLow quality products• Labour and input hoardingLabour and input hoarding

35

Table 1.1:Table 1.1: Sectoral Allocation of Labour in Sectoral Allocation of Labour in OECD and CPEs (percentage shares)OECD and CPEs (percentage shares)Source:Source: OECD OECD

Agriculture Industry Services (1) OECD, 1991 Eight richest countries 5.5 29.8 64.7 Eight middle countries 5.8 30.4 63.9 Eight poorest countries 17.9 29.5 52.6 (2) Centrally planned economies (CPEs), 1989

GDR 10 44.1 45.9 Czechoslovakia 11.6 46.8 41.6 Hungary 17.5 36.1 46.4 Poland 27.2 36.3 36.4

36

Table 1.2Table 1.2 Distribution of Employment in Distribution of Employment in Industry by Size of Firms (Percentage shares) Industry by Size of Firms (Percentage shares) Source:Source: OECD. Data for West Germany, France OECD. Data for West Germany, France and Italy are from 1987, for the GDR from 1988 and Italy are from 1987, for the GDR from 1988 and for the other countries from 1989.and for the other countries from 1989.

0-100 100-500 500 and moreWest Germany 14.1 23.9 62France 22.5 24.9 52.6Italy 32.3 27.3 40.4GDR 1 11.1 87.9Czechoslovakia 0.1 3.4 96.5Hungary 4.5 16.3 79.3Poland 1.4 18.2 80.4

37

RestructuringRestructuring

With transition With transition Need change of structure Need change of structure and organisation of production plus in most and organisation of production plus in most cases ownershipcases ownership• Reduce labour (especially low productivity labour Reduce labour (especially low productivity labour

and close down obsolete plants)and close down obsolete plants)• Change products and product qualityChange products and product quality• Change capital /equipmentChange capital /equipment• Change managersChange managers

higher output, quality and productivity higher output, quality and productivity also unemployment state sector and also unemployment state sector and

potentially overall although future recoverypotentially overall although future recovery

38

Initial and Deep Initial and Deep RestructuringRestructuring

Initial RestructuringInitial Restructuring

Shedding off labour Shedding off labour that does not directly that does not directly contribute to the contribute to the production process production process (social networks)(social networks)

Wage cuts in order to Wage cuts in order to meet hard budget meet hard budget constraintsconstraints

Deep RestructuringDeep Restructuring

Adoption of modern Adoption of modern technologiestechnologies

Re-training of Re-training of management and management and workersworkers

Replacing the inefficient Replacing the inefficient production workers with production workers with the more efficient onesthe more efficient ones

Modernisation of Modernisation of obsolete equipmentobsolete equipment

39

Obstacles to Deep Obstacles to Deep RestructuringRestructuring

1.1. Those whose Those whose jobs are at risk will opposejobs are at risk will oppose restructuring:restructuring:• unskilled managersunskilled managers• workers at obsolete plantsworkers at obsolete plants

2. Restructuring is likely to require large 2. Restructuring is likely to require large capital capital expendituresexpenditures• capital equipment of state firms is obsoletecapital equipment of state firms is obsolete• financing replacement from financing replacement from retained earningsretained earnings difficult: difficult:

no well-defined rights for future profitsno well-defined rights for future profits

3. Privatisation mode (e.g.insiders), lobbies, 3. Privatisation mode (e.g.insiders), lobbies, political commitment, unemployment political commitment, unemployment compensation compensation

40

What was predicted?What was predicted?

Job Destruction (JD) but no Job Creation Job Destruction (JD) but no Job Creation (JC) in the state sector (SOEs). Did it (JC) in the state sector (SOEs). Did it happen like that?happen like that?

Jobs moving from state-owned enterprises Jobs moving from state-owned enterprises to privatised or private ones. Did they?to privatised or private ones. Did they?

Jobs moving from declining sectors or Jobs moving from declining sectors or regions to growing sectors or regions. Did regions to growing sectors or regions. Did they?they?

41

Evolution of Employment Evolution of Employment (1990-2000)(1990-2000)

0,6

0,65

0,7

0,75

0,8

0,85

0,9

0,95

1

1,05

1,1

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Poland

Romania

Bulgaria

Slovak Republic

Czeck Republic

Hungary

Estonia

Slovenia

42

Faggio and Konings, 1999Faggio and Konings, 1999

43

Table 2:Table 2: Description of the sample according Description of the sample according to ownership types (1993, 1997). Nto ownership types (1993, 1997). Note:ote: (i) (i) 1993 figures refer to 1994 for Romania and 1993 figures refer to 1994 for Romania and Bulgaria. (ii): the ownership classification is not Bulgaria. (ii): the ownership classification is not available for Estoniaavailable for EstoniaCountry 1993

Number Average Standard Of firms Employment Deviation

1997 Number Average Standard Of firms Employment Deviation

Bulgaria 1548 624 2059 2458 396 1549 Majority stateowned firms 586 883 3199 897 524 2308 Majority foreign-owned 33 1155 1478 60 815 1139 All foreign participated 42 1085 1340 73 775 1100 Domestic private 745 433 612 943 352 993 Romania 3776 722 1868 4558 556 1869 Majority stateowned firms 1648 860 1575 1702 670 1357 Majority foreign-owned 88 370 715 120 469 631 All foreign participated 159 360 622 209 423 555 Domestic private 1166 527 959 1323 445 966 Estonia 233 396 446 528 244 391 Poland 834 1278 2735 2130 724 1995 Majority stateowned firms 72 2448 4030 78 3053 8674 Majority foreign-owned 47 1008 1032 56 1071 1435 All foreign participated 69 1357 3510 82 1311 2526 Domestic Private 113 1104 1608 164 945 1036

44

Table 3:Table 3: Annual net and gross job flows for Annual net and gross job flows for Bulgaria, Romania, Estonia and Poland (1993-Bulgaria, Romania, Estonia and Poland (1993-1997)1997)

Year/Country Pos (JC) Neg (JD) Gross Net Excess Bulgaria 1994 0.8 7.2 8.0 -6.3 1.7 1995 3.2 3.3 6.5 -0.1 6.4 1996 4.1 7.0 11.1 -2.9 8.2 1997 1.4 5.2 6.6 -3.7 2.9 Romania 1995 4.7 10.1 14.8 -5.4 9.4 1996 3.6 7.1 10.7 -3.5 7.2 1997 3.7 9.9 13.6 -6.2 7.4 Estonia 1994 4.6 9.2 13.8 -4.6 9.2 1995 6.4 7.3 13.8 -0.9 12.9 1996 11.2 7.2 18.4 4.0 14.4 1997 9.3 8.8 18.1 0.6 17.5 Poland 1994 3.0 6.8 9.8 -3.8 6.0 1995 3.6 6.0 9.6 -2.4 7.2 1996 3.0 5.0 8.0 -2.0 6.0 1997 3.0 3.7 6.7 -0.6 6.1

45

Table 3 (cont.): Annual net and gross job Table 3 (cont.): Annual net and gross job flows for Slovenia (1993-1997)flows for Slovenia (1993-1997)

Year/Country Pos (JC) Neg (JD) Gross Net Excess Slovenia 1994 3.9 4.2 8.1 -0.2 7.9 1995 4.6 5.9 10.5 -1.3 9.2 1996 5.5 5.3 10.8 0.2 10.5 1997 3.3 5.4 8.8 -2.1 6.7

46

Table 4:Table 4: Annual average gross and net job Annual average gross and net job flow rates according to ownership type 1994-flow rates according to ownership type 1994-19971997

Country/Ownership Pos (JC)

Neg (JD)

Gross Net Excess

Poland State firms 1.6 4.2 5.8 -2.5 3.3 Foreign firms 9.4 2.9 12.3 6.5 5.8 Domestic private firms 5.0 4.3 9.3 0.7 7.9 Bulgaria State firms 1.9 5.6 7.5 -3.7 3.7 Foreign firms 3.6 4.8 8.3 -1.2 5.6 Domestic private firms 2.8 6.0 8.8 -3.2 5.6 Romania State firms 2.3 9.5 11.8 -7.2 4.6 Foreign firms 15.1 4.3 19.4 10.7 8.7 Domestic private firms 5.3 8.7 14.0 -3.4 10.6

47

Table 5:Table 5: Annual average gross and net job Annual average gross and net job flow rates according to firm size, 1994-1997flow rates according to firm size, 1994-1997

Country/Size Pos Neg Gross Net ExcessBulgaria0-249 2.6 8.0 10.6 -5.3 5.3250-499 2.8 7.2 10.0 -4.4 5.6500-999 2.7 6.9 9.6 -4.2 5.3+1000 2.2 4.2 6.5 -2.0 4.1Romania0-249 7.5 15.4 22.9 -7.9 15.0250-499 5.2 13.1 18.3 -7.9 10.4500-999 3.7 11.8 15.6 -8.1 7.5+1000 3.2 6.2 9.4 -3.1 6.4Estonia0-249 7.1 12.7 19.8 -5.6 12.9250-499 6.2 9.6 15.9 -3.4 12.1500-999 9.1 4.5 13.6 4.5 7.6+1000 12.9 9.3 22.2 3.6 13.5Poland0-249 7.9 15.6 23.4 -7.7 15.7250-499 6.1 9.4 15.5 -3.4 11.9500-999 4.5 7.2 11.7 -2.7 9.0+1000 3.1 5.3 8.4 -2.2 6.2Slovenia0-249 4.4 6.7 11.2 -2.3 8.9250-499 3.7 5.1 8.9 -1.4 6.9500-999 5.5 5.4 10.9 0.2 10.1+1000 4.3 4.6 8.9 -0.3 5.8

48

Table 6:Table 6: Fraction of excess job reallocation Fraction of excess job reallocation resulting from employment shifts between resulting from employment shifts between sectors (in %) sectors (in %) Note:Note: Sectors are classified Sectors are classified according to the NACE Rev. 1, 1-digit according to the NACE Rev. 1, 1-digit classificationclassification

Country 1994 1995 1996 1997Poland 0.1 2.7 2.5 15.7Estonia 18.3 28.5 35 28.9Slovenia 14.2 27.9 57.6 10.5Bulgaria 23.7 12.3 5.0Romania 0.9 6.5 26.9

49

Table 7:Table 7: Fraction of excess job reallocation resulting Fraction of excess job reallocation resulting form employment shift between regions (in %) Nform employment shift between regions (in %) Note:ote: Regions are classified according to the Eurostat Regions are classified according to the Eurostat Nomenclature in CECs (level 3): 28 countries in Bulgaria, Nomenclature in CECs (level 3): 28 countries in Bulgaria, 41 in Romania, 5 in Estonia, 49 in Poland and 12 in 41 in Romania, 5 in Estonia, 49 in Poland and 12 in Slovenia.Slovenia.

Country 1994 1995 1996 1997Poland 14.1 20.1 12.3 26.6Estonia 3.0 16.1 13.9 26.7Slovenia 17.2 17.8 29.3 0.6Bulgaria 30.3 2.6 1.1Romania 8.0 21.9 0.6

50

ResultsResults

Average firm employment decreased Average firm employment decreased over timeover time• Poland-Estonia-Bulgaria-Romania- SloveniaPoland-Estonia-Bulgaria-Romania- Slovenia• Size SOEs decreasedSize SOEs decreased

All countries all but for 3 years: JD>JC All countries all but for 3 years: JD>JC neg. employment growth but JC>0neg. employment growth but JC>0• Romania and Bulgaria alwaysRomania and Bulgaria always• Poland and Estonia JD=JC last year, similar Poland and Estonia JD=JC last year, similar

to Belgium and UK respectivelyto Belgium and UK respectively• Slovenia values are closerSlovenia values are closer• Gross job reallocation: Estonia-Romania-Gross job reallocation: Estonia-Romania-

Slovenia- Poland-Bulgaria Slovenia- Poland-Bulgaria

51

ResultsResults

Excess job reallocation >0 = measure of Excess job reallocation >0 = measure of restructuring:restructuring:• Estonia-Romania-Slovenia-Poland-Bulgaria Estonia-Romania-Slovenia-Poland-Bulgaria

Ownership:Ownership:• Foreign firms have highest JC (pos) and Foreign firms have highest JC (pos) and

highest gross (excep.=Bulgaria) >private highest gross (excep.=Bulgaria) >private firms> SOESfirms> SOES

• Excess: Private domestic > Foreign> SOEsExcess: Private domestic > Foreign> SOEs– Privatised firms more restructuring than SOEs ?Privatised firms more restructuring than SOEs ?

Size (note firms>100 employees): Size (note firms>100 employees): • the smallest firms have highest JC, JD and the smallest firms have highest JC, JD and

excess reallocationexcess reallocation

52

ResultsResults

Sectors:Sectors:• Variation across sectors and countriesVariation across sectors and countries• Agriculture, mining and manufacturing have Agriculture, mining and manufacturing have

net negative employment growth net negative employment growth • Business and public services have positive Business and public services have positive

employment growthemployment growth Regions:Regions:

• Variation across regionsVariation across regions• More restructuring at the capital districtsMore restructuring at the capital districts• Estonia more dynamic regionsEstonia more dynamic regions• Poland highest number of expanding regionsPoland highest number of expanding regions

53

ResultsResults

Firms behave in a very heterogeneous way Firms behave in a very heterogeneous way • within defined sectors/regions/firm size within defined sectors/regions/firm size

classes/ownership typesclasses/ownership types There exists a (+) correlation between excess There exists a (+) correlation between excess

and net at the sectoral and regional levels, i.e. and net at the sectoral and regional levels, i.e. between restructuring and growth between restructuring and growth (employment)(employment)

Firms in trade and service sectors, capital Firms in trade and service sectors, capital districts, small size classes = the most districts, small size classes = the most dynamic.dynamic.

Within sector and region > between job Within sector and region > between job reallocation >0 reallocation >0 • Estonia = highest between Estonia = highest between

54

ConclusionConclusion

Job flows rates varies across countries and Job flows rates varies across countries and over time. These findings might be over time. These findings might be explained by many factors: differences in explained by many factors: differences in transition phases, country’s EPL and transition phases, country’s EPL and openness of the economyopenness of the economy

55

Table 8:Table 8: firm growth regression results firm growth regression results (robust estimation), (robust estimation), BulgariaBulgaria Note:Note: *: *: significant at 1% level, **: significant at 5% significant at 1% level, **: significant at 5% level and *** significant at 10% level; level and *** significant at 10% level; standard errors are in brackets.standard errors are in brackets.

(1) (2) (3) (4) (5)Trade orientation 0.010*

(0.002)0.006*(0.002)

0.006**(0.002)

0.006**(0.003)

0.007**(0.003)

State -0.005**(0.002)

-0.005*(0.002)

-0.001*(0.003)

-0.045**(0.017)

Foreign 0.0015**(0.006)

0.013**(0.006)

0.013***(0.007)

0.028(0.043)

Ni,t-2 -0.006*(0.001)

-0.010*(0.002)

Ni,t-2 * state 0.008**(0.003)

Ni,t-2 * foreign -0.002(0.007)

Regional dummies No No Yes Yes YesYear dummies Yes Yes Yes Yes Yesn. of obs. 7865 6891 6891 4679 4679

56

Table 9:Table 9: firm growth regression results firm growth regression results (robust estimation), (robust estimation), RomaniaRomania Note:Note: *: *: significant at 1% level, **: significant at 5% significant at 1% level, **: significant at 5% level and *** significant at 10% level; level and *** significant at 10% level; standard errors are in brackets.standard errors are in brackets.

(1) (2) (3) (4) (5)Trade orientation 0.007*

(0.003)0.011*(0.003)

0.011*(0.003)

0.012*(0.003)

0.011*(0.003)

State -0.031*(0.003)

-0.032*(0.003)

-0.021*(0.003)

-0.134*(0.019)

Foreign 0.106*(0.008)

0.109*(0.008)

0.108*(0.009)

0.256*(0.038)

Ni,t-2 -0.006*(0.001)

-0.016*(0.002)

Ni,t-2 * state 0.019*(0.007)

Ni,t-2 * foreign -0.027*(0.007)

Regional dummies No No Yes Yes YesYear dummies Yes Yes Yes Yes Yesn. of obs. 11023 8146 8146 5203 5203

57

Table 10:Table 10: firm growth regression results firm growth regression results (robust estimation), (robust estimation), PolandPoland Note:Note: *: *: significant at 1% level, **: significant at 5% significant at 1% level, **: significant at 5% level and *** significant at 10% level; level and *** significant at 10% level; standard errors are in bracketsstandard errors are in brackets

(1) (2) (3) (4) (5)Trade orientation 0.012*

(0.002)0.011**(0.006)

0.006(0.006)

0.011(0.003)

0.010(0.009)

State -0.021*(0.007)

-0.022*(0.007)

-0.019**(0.010)

-0.154*(0.06)

Foreign 0.044*(0.007)

0.032*(0.008)

0.014(0.011)

0.091***(0.056)

Ni,t-2 -0.009*(0.004)

-0.017*(0.005)

Ni,t-2 * state 0.019**(0.008)

Ni,t-2 * foreign -0.012(0.009)

Regional dummies No No Yes Yes YesYear dummies Yes Yes Yes Yes Yesn. of obs. 7901 1330 1274 738 738

58

Results Firm AnalysisResults Firm Analysis

Job creation at the firm level is explained byJob creation at the firm level is explained by • initial downsizing (the largest the firm, the lowest initial downsizing (the largest the firm, the lowest

the job creation)the job creation)• ownership (foreign firms grew more, SOEs grew ownership (foreign firms grew more, SOEs grew

less)less)– Except Bulgaria where private and foreign grew the sameExcept Bulgaria where private and foreign grew the same– Large private firms = large SOEsLarge private firms = large SOEs

Thus, privatised firms that downsized have better Thus, privatised firms that downsized have better performanceperformance

• trade orientation effect: more trade = more trade orientation effect: more trade = more competition = better production structures =higher competition = better production structures =higher growth. True for Bulgaria and Romania not Poland.growth. True for Bulgaria and Romania not Poland.

59

TradeTrade

CMEA trade collapse (Rodrik, 1994)CMEA trade collapse (Rodrik, 1994)• Almost total collapse of artificial CMEA Almost total collapse of artificial CMEA

marketmarket• Loss of privileges and market demandLoss of privileges and market demand• Need to reorient trade or improve Need to reorient trade or improve

products or exitproducts or exit• Demand and supply rigidities Demand and supply rigidities hard for hard for

firms exporting to CMEA marketsfirms exporting to CMEA markets• Relevant for some countries e.g HungaryRelevant for some countries e.g Hungary

60

Pre-transition EU ExportsPre-transition EU Exports

Pre-transition in 1988 (!) all sectors of Pre-transition in 1988 (!) all sectors of manufacturing were exporting to the EU.manufacturing were exporting to the EU.

The exports were clustered into narrow The exports were clustered into narrow product groups – intermediate goodsproduct groups – intermediate goods

Reorientation Reorientation NOTNOT a feature of transition a feature of transition

61

Table 11:Table 11: Share of CMEA and EU trade 1990- Share of CMEA and EU trade 1990-19961996

Country Export Growth* Share of Exports**EU CMEA

1990-93 1993-96 (90) (93) (96) (90) (93) (96)Bulgaria 13.4 22.3 40 46 51 30 16 19Hungary 7.1 14.3 50 56 71 34 14 21Poland 5.9 16.2 51 70 69 33 11 21Romania 6.2 16.7 36 40 54 35 11 10

62

Table 12: Table 12: Share of EU oriented Products Share of EU oriented Products within sectors in 1988within sectors in 1988

Sector Bulgaria Hungary Poland Romania1 0.10 0.13 0.11 0.102 0.18 0.21 0.22 0.153 0.07 0.18 0.07 0.094 0.21 0.15 0.15 0.235 0.07 0.12 0.09 0.106 0.06 0.23 0.13 0.147 0.12 0.15 0.08 0.128 0.20 0.25 0.23 0.119 0.14 0.19 0.15 0.1210 0.08 0.16 0.10 0.0811 0.08 0.17 0.18 0.0712 0.13 0.20 0.15 0.0713 0.10 0.13 0.06 0.06

63

Table 13:Table 13: Share of new EU oriented Products Share of new EU oriented Products within sectors in 1996within sectors in 1996

Sector Bulgaria Hungary Poland Romania1 0.02 0.02 0.02 0.022 0.04 0.05 0.05 0.043 0.08 0.04 0.11 0.064 0.08 0.06 0.06 0.045 0.03 0.08 0.07 0.036 0.02 0.06 0.02 0.077 0.01 0.04 0.06 0.018 0.05 0.05 0.06 0.029 0.04 0.06 0.06 0.0310 0.02 0.03 0.05 0.0311 0.07 0.05 0.07 0.0712 0.06 0.03 0.05 0.0313 0.04 0.01 0.04 0.03

64

Table 14:Table 14: Sector creative destruction index Sector creative destruction index of EU productsof EU products

Country 1989-1990 1990-1991 1991-1992 1992-1993 1993-1994 1994-1995 1995-1996Bulgaria .62 .67 .73 1.83 1.85 1.91 1.92Hungary .43 .47 .44 1.76 1.73 1.74 1.78Poland .51 .48 .43 1.76 1.74 1.76 1.76

Romania .76 1.86 1.77 1.75 1.80 1.90 1.88

65

Trade liberalisationTrade liberalisation

Transition to market system brought Transition to market system brought about boom in exports to the EUabout boom in exports to the EU• related with free movement of capital - related with free movement of capital -

increase in FDIincrease in FDI Clustering persistedClustering persisted Products traditionally exported to EU Products traditionally exported to EU

had different evolution from those had different evolution from those exported to CMEAexported to CMEA

66

Hungary

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

89-90 90-91 91-92 92-93 93-94 94-95 95-96

Eu products

Non EU products

Net Change Prediction

67

Poland

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

89-90 90-91 91-92 92-93 93-94 94-95 95-96

Eu products

Non EU products

Net change prediction

68

Romania

0,0

1,0

2,0

3,0

4,0

5,0

6,0

89-90 90-91 91-92 92-93 93-94 94-95 95-96

Eu products

Non-EU products

Net -Change

69

Bulgaria

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

1 2 3 4 5 6 7 8

Eu products

Non Eu products

Net Change

70

Sector Growth AnalysisSector Growth Analysis

Trade liberalisationTrade liberalisation• fewer restrictions and free movement of capitalfewer restrictions and free movement of capital• positive shock for products exported to EUpositive shock for products exported to EU• negative shock for those exported to CMEAnegative shock for those exported to CMEA• resources applied to production and researchresources applied to production and research• research leads to new products of higher qualityresearch leads to new products of higher quality

– Schumpeterian Creative Destruction Schumpeterian Creative Destruction

71

Table 15:Table 15: Regression analysis Regression analysis

Growth

Constant -0.34 (4.5)*

CDI -0.21 (8.9)*

ISIZE -0.15 (0.5)

IFDI 0.01 (0.02)

Hungary 0.09 (3.9)*

Poland 0.14 (6.8)

Romania -0.04 (1.9)

Year dummies Yes

Sector dummies Yes

Observations 364

72

ConclusionsConclusions

EU Trade Orientation of FirmsEU Trade Orientation of Firms• Products traditionally exported to EU had Products traditionally exported to EU had

different evolution from those exported to different evolution from those exported to CMEACMEA

• Those firms trading with the West before Those firms trading with the West before transition performed better by using foreign transition performed better by using foreign capital and expertise (Repkin and Walsh, 1999)capital and expertise (Repkin and Walsh, 1999)

• Central and Eastern Europe better off than CISCentral and Eastern Europe better off than CIS• Intra-sectoral trade reorientationIntra-sectoral trade reorientation