1. Eastern Europe and the Former Soviet Union: Class 3

2. Poland pre-transition
More than 8,000 state-owned enterprises
>90% of output and 80% of empl.
industry accounted for 58% of GDP in (OECD countries 24%--41%)
almost half of exports and imports with CMEA countries
products of inferior quality
aged capital stock; tech. backward

3. 1990- Balcerowicz Plan Shock therapy
Price liberalization
trade liberalization
legal reforms end restrictions on private ownership
tight credit policy to lower inflation and force out loss-making enterprises
restrictive wage policy
ambitious fiscal policy

4. Criticism Too much; too quickly
Excessive pain on large state enterprises, their employees and local communities

5. Counter-arguments
Necessary conditions for privatization, enterprise restructuring and development of an institutional system compatible with a market economy

6. Pre-Big Bang obstacles faced by private entrepreneurs
Hard to locate space
Difficult to raise capital
capricious tax authorities
Bureaucratic snags
Problem of obtaining materials

7. Immediate results--disappointing

8. Longer term results
By 1994 Poland became the first country to see recorded GDP exceed 1989 level.
Since 1994
continued GDP growth (6.2% per year )
investment growth
export growth
declining inflation

9. Pre-1994 growth was driven mainly by exports (9% per year)
since 1995 domestic demand, led by investment, took over as the driving force
growth in domestic demand has led to increase in imports and a trade deficit
but largely offset by healthy FDI ($5 B in 1998)

11. Unemployment---still a problem
10-11%
pockets of very high unemployment in regions where agricultural and industrial restructuring is difficult and incomplete

12. What explains Poland’s economic turnaround???
One perspective focuses on the achievement of macroeconomic stability
Alternative. Look at categories of Polish enterprises (micro level)
state enterprises
privatized state enterprises
new private sector firms

13. Contribution of Privatized SOEs
Very little privatization in early 1990s
took 3 years to work out a Mass Privatization Program
August 1994: only 121 firms actually privatized

14. Exception---Prochnik
Manufacturer of men’s overcoats
privatized in April Seemed to have unusually good prospects
quickly lost its traditional export markets
collapse of Soviet market
recession in Western markets
competition from East and SE Asia
lost old export subsidies
currency problems cause supply problems

15. Need to devise new strategy
Concentrate on domestic market (and high quality end)
had to create a marketing division
had to create a distribution network
developed broader product line to gain image of garment manufacturer
downsized to reduce production costs
subcontracted out sewing jobs to idle state-owned plants
sold off unproductive assets

16. State Enterprises Modest contribution: few successful examples. WHY???
Not much pressure to improve performance. Allowed to default on tax payments to avoid bankruptcy.
“Managerial purgatory”

17. Example of Gdansk Shipyard
Eastern bloc countries were major customers
clients located by central government
Polish government provided all financing
built various classes of boats to maintain full employment
most contracts are unprofitable. Depend on subsidies (no specialization)
Managers focus on getting concessions from government.

18. With collapse of USSR lost major client
refused to reduce size of operation or variety of products
find it difficult to think in terms of profits
tried to increase employment
insisted on continued government support. “We are generating jobs for suppliers.”

19. Exception--Szczecin shipyards
USA Today article. November 9, 1999.
On brink of bankruptcy in 1991
$600 M of revenue in (9 times 1991 figure)
new managing director
negotiates write-off of 1/3 of $180 M debt and 5 year extension for the rest (buys time)

20. Focuses on mid-sized container ships
Downsizes. Reduces total employment from 13,000 to 5,000
implements a performance-based compensation plan for workers
reduced ship production time from 36 to 11 months.
Sheds non-productive assets like workers’ apartment and vacation facilities

21. New private sector firms
35% of industrial employment

22. Limited access to capital BUT…
Lacked inherited organizational structures
had low fixed costs
had motivation to exit unpromising markets and pursue more attractive ones

23. Source of entrepreneurial skills of managers
Polish cooperatives. A transitional unit of organization
Example of Gdansk cooperative
maintenance services for state-owned enterprises
got into high altitude repair of smokestacks, towers, industrial cranes etc. that had been allowed to deteriorate
accumulated capital and reinvested in specialized equipment

24. Entry point to manufacturing
Move into manufacturing from trading goods

25. Remaining constraints
Raising capital.
State banks were slow to change due to their links to state firms
New private banks reluctant to lend to new private businesses without credit histories or reputations.
High interest rates lead to dependence on retained earnings which slows expansion.