Restructuring in transition economies: Ownership, competition, and regulation

Transition requires the reallocation of resources across activities through the closure Of inefficient firms and the creation of new firms. It also requires restructuring of existing firms where improvements in performance are feasible. This article examines experience in the transition economies with both processes. It shows that failure to restructure has generally been associated with failure to reallocate and that progress in restructuring has varied substantially across countries. In Central Europe incentives for private agents to start businesses, restructure, and invest have been largely set in place. Growth has increased, facilitating dynamic adjustment to earlier inadequacies in policy. Further east, soft budget constraints have been associated with privatizations that have strongly favored incumbents. The web of nontransparent links connecting government, firms, and banks has consequently not been broken. Productivity growth has been low, and structural change has been negligible. Throughout the transition economies substantial regulatory and institutional weaknesses remain.