Have Transition Economies Become More Efficient? Evidence from Russian and Czech Panel Data on Firms and Individuals

Regents Of The University Of Michigan - Ann Arbor, Ann Arbor MI

Investigators

Abstract

There are widely divergent views of what constitutes a successful transition from a planned to a market economy, how well transition economies have performed, and what policies account for differences in observed performance. This project will contribute to our understanding of this process by providing rigorous evidence on the evolution and determinants of economic efficiency in two countries that represent divergent models of transition - Russia and the Czech Republic. Similar initial conditions and widely different transition experiences in these two economies provide a useful context for the analysis of policies and other factors determining the evolution of well-functioning markets. The researchers are able to carry out this analysis because they have new micro panel data on a large number of firms and workers that are linked and span the final years of the communist system through the first decade of the transition. The research project will address the following key questions: (Q.1) How has firm efficiency changed during the transition period? Which types of firms show the greatest absolute and relative gains in efficiency and which ones are losing out? Stylized facts on efficiency are being established; the productive efficiency of different types of firms will be assessed relative to the best practice in the country in a given year and the practice of western firms in each country in 2000. (Q.2) What matters more for efficiency: ownership, economic liberalization or competition? The project ascertains the relative importance of these factors in determining the levels and changes in efficiency over time. (Q.3) Does firm turnover replace the least efficient firms with more efficient ones? The efficiency measures derived for each firm are used to assess if entering firms are more efficient than exiting firms. The analysis shows if the bankruptcy laws and continuation of subsidies slowed down the cleansing process. (Q.4) Is labor reallocation efficiency enhancing? The research assesses if workers move from firms with low marginal products of labor to firms with higher marginal products of labor, and if government policy affects these flows in a positive way. (Q.5) Are capital markets becoming more efficient? At the start of the transition, some firms had excessive and some inadequate capital stock. The project evaluates whether subsequent investment behavior corrected this misallocation.