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SEE group, the downsizing of the state sector would have been expected to have been stronger.

The notable differences between aggregate employment growth and mean firm employment growth that we have observed in the above analysis suggest a closer look at the size distribution of firms is warranted. An indication of convergence in this exercise would be an increase in employment in small firms relative to employment in large firms in the transition economies. Indeed, planned economies had very few small firms, and the small firm sector would be expected to growth rapidly during the transition period to fill this gap (see, e.g., World Bank 2005 for detailed discussion of the Russian case). We would therefore expect to find that the size distribution is evolving towards the pattern of the developed market economies, and that the new EU members have caught up more than the poorer TEs.

This is indeed what we see in the BEEPS data. Figure III.9 shows the distribution of firm size in West Germany and the cohesion countries, the EU8 countries and the other TEs, by four broad size categories: micro (1-9 employees), small (10-49), medium (50-199) and large (200+ employees). Small and micro firms are most prevalent in the developed market economies of the EU, least common in the non-EU TEs, and the EU8 members occupy an intermediate position. Figure III.10 shows the size distribution of firms in the new EU8 moving steadily towards the developed market economy pattern of large numbers of micro and small firms, and by 2005 the distribution is close to that observed in West Germany and the cohesion group. Figure III.11 shows the same pattern in the poorer TEs, but these countries start in 1999 from a position of even fewer small firms, and although the small firm sector grows between 1999 and 2005, in 2005 it is still some distance from the market economy benchmark.

As noted already, another test of the convergence hypothesis is to use data on reallocation across industrial sectors in the course of transition, where we would expect to see a Kuznets-Chenery-type pattern. Raiser et al. (2004), in a study of 20-odd transition countries, divide total employment in to broad sectors (agriculture, industry, markets

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