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.
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