How do economic reforms affect resource reallocation processes and their contributions to productivity growth? This paper studies the consequences of enterprise privatization and liberalization of product markets, labor markets, and imports in the former Soviet Republics of Russia and Ukraine. Analyzing interfirm reallocation of output, labor, capital, and an input index with annual industrial census data from 1985 to 2001, we find that Soviet Russia displayed low reallocation rates that bore little relationship to relative labor and multifactor productivity across firms. Since reforms began, resource flows have increased in both countries, and their contributions to aggregate productivity growth have become substantial both through increased flows from less productive to more productive continuing firms and through higher exits of less productive entities – i.e., through creative destruction. Among the policy-relevant factors that may explain firm-level variation, privatization is estimated to have positive effects on productivity-enhancing reallocation, but there is less evidence of such effects from domestic product market competition, labor market competition, or import penetration.

We thank Natalia Akhmina, Serhiy Biletsky, Larisa Leshchenko, Ivan Maryanchuk, and Alexander Scherbakov for help with the Ukrainian data, and Timothy Dunne, Vladimir Gimpelson, John Haltiwanger, Rostislav Kapeliushnikov, Mark Roberts, and participants at presentations in Bologna, Budapest, Costa Rica, Kalamazoo, Moscow, Nottingham, and San Diego for valuable comments on drafts and related work. This paper is part of a larger project funded by the National Council for Eurasian and East European Research on employment reallocation in Hungary, Romania, Russia, and Ukraine. Financial support for earlier data collection was provided by the Tacis ACE Programme of the European Union, the MacArthur Foundation, the Ruben Rausing Fund, the Bank of Sweden, and the Jan Wallander and Tom Hedelius Foundation. Collaboration of the authors was facilitated by a CEU Faculty Research Grant and by a Think Tank Partnership Grant to the Upjohn Institute, the CEU Labor Project, and the Center for Labor Market Studies, funded by USAID and administered by BearingPoint and IRIS. Any errors and all views in the paper are solely our responsibility.