The Cuban Economic Crisis: Its Causes and Possible Policies for a Transition
of the transition economies and generated over one-half of GDP in many countries, including Russia. By the turn of the century, the share of private sector in GDP stood at or above 60% in all of the transition economies and in most of them accounted for more than 70%. In most countries the private sector share has grown steadily since then. Given the optimistic expectations, the estimated effects of privatization on economic performance have in the first two decades been in many respects sobering or even disappointing. At the country level, some of the fastest growing economies — e.g., Poland and Slovenia (but also China) — have been the slowest to privatize. At the microeconomic level, studies from the late 1990s and early 2000s make assessments that range from finding no systematically significant effect of privatization on performance (Bevan, Estrin and Schaffer, 1999) to concluding cautiously that privatization improves firm performance (Shirley and Walsh, 2000, Megginson and Netter, 2001, and Djankov and Murrell, 2002). A later survey of literature by Estrin, Hanousek, Kocenda and Svejnar (2007) finds that privatization to foreign owners tends to increase efficiency and scale of operations, while privatization to domestic owners leads to mostly insignificant effects. Many of the early microeconometric studies suffer from serious methodological and data problems: small and unrepresentative samples of firms; misreported or mismeasured data; limited controls for other major shocks that occurred at the same time as privatization; a short period of observations after privatization; and above all, not controlling adequately for selectivity bias. Selectivity bias is likely to be a particularly serious problem since Gupta, Ham and Svejnar, 2001 show that better performing firms tend to be privatized first. This means that simply comparing the post-privatization performance of privatized firms to the performance of the remaining SOEs without controlling for selectivity bias, as many studies do, erroneously attributes some of the inherent superior performance of the early-privatized firms to privatization. More recent econometric studies that use long panel data and are able to handle carefully the selection bias (e.g., Hagemejer, Tyrowicz and Svejnar, 2018) show positive effects of privatization on productivity, scale of operations (output) and employment, but also find that carrying out privatization in a rush (privatizing unusually many firms in a given year) does not have these positive effects and may have negative effects, presumably because the matching of firms to investors is of lower quality in rushed settings.
Studies of China provide a similar though less negative picture (Estrin et al., 2007). For instance, studies of productive efficiency find somewhat diverse results, with the effect of non-state ownership being mostly positive. As in the studies of CEE and CIS, the effect of foreign ownership is more positive than that of other forms of non-state ownership. In China, an especially important role has been played by joint ventures. Their contribution to GDP has been sizable and has grown over time. Domestic and Foreign Investment. Ever since 1978 China has maintained a high rate of investment. In this sense, China has joined the East Asian tigers in emphasizing investment at the expense of consumption. China has also attracted a major inflow of foreign direct investment (FDI) that has had a positive effect on China’s economy. In recent years, one observes also a reverse flow in the form of Chinese FDI to other countries under the heading of the Belt and Road Initiative. Under central planning, the Soviet bloc countries, as well as the more decentralized former Yugoslavia, also had high rates of investment, often exceeding 30% of GDP. Investment rates declined to about 20% of GDP in the 1990s in a number of transition economies (EBRD, 1996), although some countries, such as the Czech Republic and Slovakia, maintained relatively high levels of investment for a number of years. Unfortunately, in the early years of the transition, much of this investment appears to have been allocated inefficiently in a number of these economies by inexperienced and sometimes politicized or corrupt commercial banks (e.g., Lizal and Svejnar, 2002). In the first five years of the transition, Hungary was the only transition economy attracting a sizable inflow of FDI. This was in part because from the start Hungary established a friendlier business climate than other transition countries and in part because it created well-defined laws and regulations for FDI. But by the late 1990s, major flows of FDI went to the Czech Republic, Poland, Slovakia and the Baltic countries. Overall, having about a one-tenth of the population of China, the CEE economies received during the first decade about one-half of the annual FDI inflows going to China. These sizable foreign investments have had a major positive effect on GDP growth and on export competitiveness of the CEE countries, in some of which foreign-owned firms account for a strong majority of exports. Cuba could in principle benefit similarly from FDI. Employment, Wage Setting, Unemployment and Income Distribution. China’s labor market evolution has been different from that observed in the CEE and CIS transition economies,
56
20370_Havel_Cuba Report.indd 56
12/8/20 10:25 AM