Microeconomics of transformation in Poland : a survey of state enterprise responses

State enterprise behavior and reform have emerged as key issues in the emerging market economies of Eastern Europe because of the size of the state manufacturing sector as measured by its share in GDP, exports, and tax revenues. The difficulties experienced by Polish state-owned enterprises (SOEs) in adjusting and responding to the new economic environment have led to fiscal imbalance, deteriorating portfolios of commercial banks, and burgeoning interfirm payment arrears. The authors examine the economic and behavioral reactions of a significant sample of Poland's largest SOEs to the macroeconomic reforms introduced as part of the"big bang"in January 1990. They track the evolution of output, costs, and profits, and examine wage setting behavior, enterprise debt dynamics, and enforcement of the"micro"hard budget constraint by banks. They conduct a firm-level analysis of the export boom and its causes and document the evolving tax burden on enterprises. Their findings are based on a survey of 75 large SOEs in manufacturing during June 1989 - March 1991 - six months prior to and 15 months following the big bang. Some of the main quantitative conclusions were: (1) The high nominal interest rate on working capital (from 50 to 72 percent of the month of January 1990 alone) inhibited borrowing and motivated firms to pay off zloty loans, leading to a squeeze on working capital. The huge decline in real wages led to a demand shock, witnessed by rising finished goods inventories. Consequently, the initial, unexpectedly large, decline in output could be explained by a combination of nominal interest rate shock and standard demand considerations. (2) High profits in 1990 were temporary, stemming from inflationary gains on once-off inventory sales, devaluation gains on enterprise dollar accounts, and implicit input subsidies from CMEA trade. (3) Banks were lax in enforcing creditworthiness, leading to an adverse selection problem marked by loans going mainly to"bad"firms. (4) State-owned enterprises tend to be myopic, with considerable short-run pressure on wages that works to the detriment of restructuring investments essential for reducing energy and material intensity and product redesign. (5) Nominal and real wages both displayed remarkable flexibility. Employment reduction has lagged output reduction partly because partial indexation of wages to inflation has kept real wages low and partly because of the natural reluctance of worker-controlled SOEs to shed labor. So, there is clear possibility of much higher transitional unemployment once privatization and commercialization get underway on large scale. (6) The hard-currency export boom in 1990 was motivated more by slack domestic demand than higher export profitability. The main qualitative change is a definite attitudinal shift in favor of profits and marketing in contrast to the old exclusive emphasis on production targets. But there is a serious principal-agent problem with managers serving at the pleasure of the workers'council and no obvious owner stressing long-term viability considerations in decision-making. The paper concludes by discussing the microeconomic transformation needed to complete the largely economic big bang. The importance of addressing firm-level managerial incentives and empowering managers is emphasized in the transition to eventual privatization.