Privatization, Restructuring and Credit Access: the Lesson from Latvian Firms

We test the hypothesis whether gradual privatization with a soft credit constraint to enterprises with state ownership (ESOs) implies slow restructuring. The transition economics literature does not study restructuring and financial constraints to investment jointly. We provide such an analysis using a panel of Latvian firms in the years 1993-1997. We find that firms have been downsizing their inputs while their productivity has not been improving. ESOs started up with a below-average productivity that deteriorated over time. The availability of external and internal finance did not increase investment to physical capital in the whole sample. Nevertheless, ESOs had better access to credit than did privatized firms. We conclude that there was virtually no technological restructuring and external finance for investment was scarce. Further, postponed or incomplete privatization implied slower restructuring in Latvian companies.