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Ownership and corporate control in Poland : why state firms defied the odds

Listed author(s):
  • Pinto, Brian
  • van Wijnbergen, Sweder

Survey results in Poland indicate that hard budgets and import comeption can spur state firms to adjust even when privatization lags behind. As they examine the underpinning of Polish reform, the authors address the key question of why managers instigated such adjustment. They examine how corporate ownership and control influence the behavior of state firms, as illuminated by the following survey findings and conclusions: (a) Contrary to expectations, state firms took painful adjustment measures. Enterprise managers firmly believed that privatization was coming. This belief led them to manage better, not worse; a private sector based economy means a market for managers and a premium on skilled management. (b) The excess wage tax (the much criticized"Popiwek"scheme) did restrain wage-setting behavior, judging from the wage-setting equations presented by the authors. (c) Essential to the good performance of state industries is an end to open-ended subsidies. Subsidies, rather than helping firms adjust, give them incentives to continue their past behavior and destroy any mechanism of control other claim-holders might have. (d) Commercial banks, the Polish experience shows, can be made to exercise governance over state firms. Without effective takeover mechanisms, withholding funds is their most powerful instrument. That instrument is made powerless if firms, pressured to adjust by banks, can turn to the government themselves. Banks themselves started to respond appropriately- and to play a powerful role in discipline enterprises - only after their own governance and control/incentive mechanisms had been reformed as part of the banking reforms of the fourth quarter of 1991.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1308.

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Date of creation: 30 Jun 1994
Handle: RePEc:wbk:wbrwps:1308
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