OurresultspointtoseveralimportantlessonsforpolicyinUkraine,andingeneral,intransitioneconomies.InthissectionwediscussthecausesoflowproductivityanddownsizingofthemanufacturingfirmsinUkrainein2001–2009,andexplainsomepolicyimplications.First,evenin“goodtimes”suchasmostoftheperiodfrom2001to2009,theimprovementsinfirmproductionvolumesandefficiencyarehighlyunequalacrossfirms,pointingtosubstantialdispersionofmarketfailuresrelatedtothefirm’sindustry,exposuretotrade,andfirmentryorexit.Inthisregard,itisinstructivetolookatanalternativemeasureoffirmefficiency,called“outputwedge.”Theoutputwedgeisproportionaltotheratioofthewagebilltothevalueofgrossoutput.Itmeasurestheinefficiencyassociatedwiththeallocationofoutput,givenefficientallocationoffactorinputs.9Highoutputwedgeappliestofirmsthatfacecostsofoperatingtheirbusiness,e.g.,duetocorruptionorinflatedadministrativecosts;anditislowforfirmsthatenjoyhiddentransfersorsubsidiesfromthegovernment.Anincreaseofthemassinthemiddleofthedistributionisgenerallypointingtoanimprovementinfirmefficiencyinallocatingoutput.Fig.5providesthebreakdownofthedeformationoftheoutputwedgedistributioninourdatabyturnoverstatus.Thefigurerevealsstrikingdifferencesbetweenthetwogroups.Thedistributionoftheoutputwedgeforincumbentfirmsshiftedtowardhighervalues,pointingtoincreasedbarriersofoperatingabusiness.Bycontrast,thedistributionofoutputwedgeforenteringorexitingfirmsresultsintheoppositeshift,towardlowervalues,suggestingahigherincidenceofhiddenoutputsubsidies.Altogether,thetwoshiftscanceleachother,resultinginonlyasmalleffectontheoveralldistribution.Hence,thetrendsinmanufacturingproductivityinUkraineduringthe2001–2009expansiondidnothelpimprovetheabilityoffirmstoallocatetheiroutput.Second,despiterapidgrowthduringthisperiod,productivityoftheUkrainianmanufacturingfirmswasthesecondlowestintheregion.Weuse2009BusinessEnvironmentandEnterprisePerformanceSurvey(BEEPS)datatocompareproductivityindicatorsfortheUkrainianmanufacturingfirmswiththeircounterpartsinEasternEuropeandCentralAsia(ECA)region.Table4presentssummarystatisticsforkeyindicators.In2008,atypicalUkrainianmanufacturingfirmreported9.5thousandUSDofsalesperworker,whilethemedianforECAcountrieswas27.5thousandUSD.10Ourresultssuggestthatmostofthegrowthinsalesandproductivityin2001–2009wasduetoentryandexitofnon-tradingfirms.Furthermore,firmsinlabor-intensiveindustriesweremoresuccessfulrelativetofirmsincapital-intensiveindustries,suggestingthatincumbentsexperienceddifficultieswithexpandingtheiroperations,accessingcapitalmarkets,andtradingacrosstheborder.AccordingtoBEEPS,only49%oftheUkrainianmanufacturingfirmshadinvestedinfixedassetsin2008,whiletheECAregionaveragewas60%ofthemanufacturingfirms.Amongfirmswithpositiveinvestmentin2008,amedianinvestmentperfirminUkrainein2008was18.6thousandUSD,comparedwith41thousandUSDinPoland,126thousandUSDinEstonia,and165thousandUSDinTurkey.In2008only12%ofsalesoftheUkrainianmanufacturingfirmswereexported(noexportforamedianfirm),comparedwith19%inPoland(noexportforamedianfirm),28%inTurkey(10%foramedianfirm),and43%inEstonia(40%foramedianfirm).