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Enterprise reform in Eastern Europe

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  • van Wijnbergen, Sweder

Abstract

Enterprise reform is emerging as the core economic problem in Eastern Europe. As privatization has been delayed, a new problem has emerged, largely unanticipated by outside advisers: It is probably possible to run a clear-cut state enterprise efficiently, and it is certainly possible to get efficient performance from a private enterprise. But it is utterly impossible to get anything like efficiency from an enterprise for which the current and future ownership status are in limbo. What has happened in Poland, where reform started earlier than elsewhere, is probably a harbinger of things to come. Two years after the crumbling of central authority that used to exercise both ownership and control, ownership of state-owned enterprises remains ineffective and control diffuse. Lacking sharply defined control rights, various groups (workers, incumbent managers, and local authorities) often had no other way of demonstrating their clout than by disrupting the enterprise. And with changes in ownership announced but not implemented, managers and workers councils alike have every incentive to decapitalize the enterprise and increase its debts. Eastern Europe is not well served with straight textbook advice. The common wisdom on privatization fails to address the problems created by diffuse ownership and conflicts over control that exist before privatization. Regular cash auctions may fail to match managers and capital stock efficiently because of pervasive wealth constraints. Standard service on enterprise restructuring does not allow for the sheer scale of the problem or the special reasons why, in Eastern Europe, current profits are a poor guide to potential profitability. Simply applying Western bankruptcy procedures based on current data about enterprise profitability introduces a destructive bias toward liquidation and delay. And, the author argues, introducing Western style unemployment insurance, although it would lower the social costs of unemployment, could also contribute to its indefinite extension. The author sketches how these problems can be addressed by incorporating all the incentive problems specific to Eastern Europe into the design of the policies to be implemented. Sometimes the advice that results is novel and as yet untried; sometimes examples exist of its successful implementation. But the alternative is a long period of declining incomes and, presumably, increasing social unrest as the consensus underlying the reform programs begins to erode.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1068.

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Date of creation: 31 Jan 1993
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Handle: RePEc:wbk:wbrwps:1068

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Related research

Keywords: Municipal Financial Management; Financial Intermediation; Strategic Debt Management; Banks&Banking Reform; Financial Crisis Management&Restructuring;

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References

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  1. Philippe Aghion & Oliver Hart & John Moore, 1992. "The Economics of Bankruptcy Reform," CEP Discussion Papers dp0093, Centre for Economic Performance, LSE.
  2. Jean Tirole, 1991. "Privatization in Eastern Europe: Incentives and the Economics of Transition," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 221-268 National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Buch, Claudia M., 1995. "The emerging financial systems of the Eastern European economics: A progress report," Kiel Working Papers 716, Kiel Institute for the World Economy.
  2. Aizenman, Joshua & Isard, Peter, 1996. "Production bottlenecks and congestion externalities during the transition to a market economy," International Review of Economics & Finance, Elsevier, vol. 5(3), pages 225-241.
  3. Buch, Claudia M., 1993. "An institutional approach to banking reform in Eastern Europe," Kiel Working Papers 560, Kiel Institute for the World Economy.
  4. Buch, Claudia M., 1995. "Bank behavior and bad loans: Implications for reforms in Eastern Europe," Kiel Working Papers 679, Kiel Institute for the World Economy.

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