Politicians and Firms: Evidence from Seven Central and Eastern European Countries

Abstract

We document the changes in financing, employment, and operating efficiency that occur in over 6,300 manufacturing enterprises in seven Central and Eastern European countries (Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovak Republic, Slovenia). We then compare the relative performance of privatized and still state-owned enterprises. The sample allows us to test several propositions about the effects of privatization and stabilization (hard budget constraints) on enterprise behavior derived by Shleifer and Vishny (1994, 1996). Controlling for institutional differences and initial conditions we find that privatization is associated with significant improvements in total factor productivity and reductions in excess employment. Reductions in soft financing are associated with further productivity gains. The results yield significant support to the Shleifer-Vishny model.

JEL Classification: F1