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Policy ReseaRch WoRking PaPeR 4819


This paper uses firm-level data from the Business Environment and Enterprise Performance Surveys to study the process of convergence of transition countries with developed market economies. The study focuses on competition and market structure, finance and the structure of lending to firms, and how firms respond to the economic environment by restructuring. The authors find substantial evidence of convergence in a number of dimensions. The pattern of growth at the country, sector, and firm levels shows rapid growth of the new private sector and of the micro and small-firm sectors, with the size distribution of firms moving toward the

pattern observed in the surveys of developed market economies. In finance, increasing reliance on retained earnings in transition countries reflects a maturation of the sector as new firms come to rely less on informal and family sources of finance. The authors find evidence of an inverse-U pattern, with the peak of restructuring activity taking place in 2002, the middle of the period analyzed. Throughout, the regional patterns suggest greater convergence in the transition countries that joined the European Union in 2004 than in the other, lower-income transition economies.

This paper—a product of the Office of the RegionalVice-President, Europe and Central Asia Region—is part of the Region's program of flagship studies on where the transition economies of Eastern Europe and the former Soviet Union stand in their goal of convergence to institutions characteristic of developed market economies. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at pmitra@worldbank.org.

The Policy Research orking Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickl , even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/ orld Bank and its affiliated organizations, or those of the Executive Directors of the orld Bank or the governments they represent.

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