RESEARCH PAPER SERIES
Enterprise Behavior and Economic Reforms:
A Comparative Study in Central and Eastern Europe
and
Industrial Reform and Productivity in Chinese Enterprises
RESEARCH PROJECTS OF THE WORLD BANK
E. EROPE/FSUSERIES
21954
EE-us 31 August 1993
August 1993
RESTRUCTURING, VIABILITY AND PRIVATIZATION:
A COMPARATIVE STUDY OF ENTERPRISE
ADjUSTMENT IN TRANSITION
by
Saul Estrin
London Business School
London, England
Alan Gelb and Inderjit Singh
Transition Economics Division
Policy Research Department
The World Bank
TRANSITION EcoNoMIcs DIVISION
POLICY RESEARCH DEPARTMENT
THE WORLD BANK
ACKNOWLEDGEMENT
The research projects on "Enterprise Behavior and Economic Reforms: A Comparative Study in Central and Eastern
Europe", and "Industrial Reforms and Productivity in Chinese Enterprises" are research initiatives of the Transition
Economics Division (PRDTE) of the World Bank's Policy Research Department and managed by I.J. Singh, Lead
Economist.
These projects are being undertaken in collaboration with the following institutions: for the project in China, The
Institute of Economics of the Chinese Academy of Social Sciences (IE of CASS), The Research Center for Rural
Development of the State Council (RCRD), and The Economic Systems Reform Institute (ESRI), all in Beijing; and
for the projects in Central and Eastern Europe The London Business School (LBS); Reforme et Ouvertures des
Syst&mes Economiques (post) Socialistes (ROSES) at the University of Paris; Centro de Estudos Aplicados da
Universidade Cat6lica Portuguesa (UCP) in Lisbon; The Czech Management Center (CMC) at Celikovice, Czech
Republic; The Research Institute of Industrial Economics of the Janus Pannonius University, Pecs (RIIE) in Budapest,
Hungary; and the Department of Economics at the University of L6di, in Poland; and the National Center for
Development Studies, Australian National University, Canberra, Australia.
The research projects are supported with funds generously provided by: The World Bank Research Committee;
The Japanese Grant Facility; The Portuguese Ministry of Industry and Energy; The Ministry of Research and Space;
The Ministry of Industry and Foreign Trade, and General Office of Planning in France; and the United States Agency
for International Development.
The Research Paper Series disseminates preliminary findings of work in progress and promotes the exchange of
ideas among researchers and others interested in the area. The papers contain the views, conclusions, and
interpretations of the author(s) and should not be attributed to the World Bank, its Board of Directors, its management
or any of its member countries, or the sponsoring institutions or their affiliated agencies. Due to the informality of
this series and to make the publication available with the least possible delay, the papers have not been fully edited,
and the World Bank accepts no responsibility for errors.
For additional copies, please send your written request to:
Transition Economics Division
The World Bank
1818 "H" Street, N.W.
Room N 11-029x
Washington, D.C. 20433
Attention: Mr. Christopher Rollison
or FAX your request to (202) 522-1152
i
CONTENTS
Acknowledgement ..........................................i
1. Introduction ..........................................
2. Firms in Transition: A Framework and Methodology ................... 3
2.1 Enterprises in Transition: A Framework ...................... 4
2.2 Selection Criteria ....................................... 5
2.3 T im etable .......................................... 6
3. Preconditions to Reform and Macro-Economic Performance ............. 7
3.1 Preconditions toReform .................................. 7
3.2 A Summary of theReforms ............................... 8
3.3 Initial Results of theReforms .............................. 9
4. Findings From the CaseStudies .................................. 10
4.1 The Nature of theShocks................................ 11
4.2 The Nature of Responses ................................ 11
4.3 Enterprise V iability ..................................... 13
4.4 Managerial Motivation and Restructuring .................... 15
4.5 Privatization and the Role of Foreign Partners ................ 16
4.6 Sectoral Patterns of Adjustment . . 18
4.7 Im pact of Tax Policy ................................... 18
5. Lessons From theCases........................................ 19
6. C onclusions ......................................... 21
7. R eferences ......................................... 39
ii
LIST OF TABLES
TA B LE 1 ......................................... 23
TA B LE 2 ......................................... 25
TABLE 3: Preconditions toReform ................................. 26
TABLE 4: Summary ofReforms ................................... 27
TABLE 5: Initial Results of Transition Package ........................ 28
TABLE 6: Nature of Shocks Faced by Firms .......................... 29
TABLE 7A: Nature of Responses: ShortRun ......................... 30
TABLE 7B: Nature of Responses: Long Run ......................... 30
TABLE 8: Viability by Country and Sector in 1992 ..................... 31
TABLE 9: M anagerialM otivation .................................. 32
TABLE 10: Power of Workers 33
TABLE 10 A: Changes inManagement .............................. 33
TABLE 11: Progress inPrivatization ................................ 34
TABLE 12: Role of Western Foreign Partners in Privatization ............. 35
TABLE 13: Sectoral Patterns of Adjustment ....... .... . 36
TABLE 14: Enterprise Perceptions of Tax Regime ..................... 37
TABLE 15: Viability and Responses ................................ 37
TABLE 16: Viability and Managerial Motivation ....................... 38
TABLE 17: Viability and Privatization............................... 38
TABLE 18: Progress in Privatization ................................ 38
iii
1. INTRODUCTON
The growing literature on economic reform in the former socialist bloc (e.g., Blanchard et al, 1991; Fischer and Gelb,
1991; Lipton and Sachs, 1991) highlight macroeconomic stabilization, enterprise adjustment and institutional reform
as the foundations of successful transition to a market economy. Following the path-breaking Polish example (see
Gomulka, 1991) macro-stabilization programs have been introduced in much of the region, though with varying
degrees of success (see Bruno, 1992). Many of the essential institutional reforms have also been enacted or are under
discussion. The countries of Central Europe, notably Poland the former Czech and Slovak Federal Republic (CSFR)
and especially Hungary, have set a lead in this area. But while there has been considerable discussion of the mechanics
of privatization (see e.g., Estrin, 1991; Frydman et al, 1993), there is surprisingly little information on how the reforms
have impacted on the economic behavior and choices of firms, and how they are responding to the new market
environment. This is the deficiency which this paper seeks to redress.
The aim of this paper is therefore to analyze the effects of macro-economic stabilization programs and the
changes in both institutional arrangements and the market environment on decision-making by firms in the state-owned
sector of the three countries which were leading the transition process at the end of 1992, namely Hungary, CSFR and
Poland. Though many observers accept that the effectiveness of enterprise adjustment holds the key to a successful
transition from planning to markets (see e.g., Kornai, 1990; Lipton and Sachs, 1991), the literature on this subject
is small.' An important explanation for this lacuna is the absence of reliable or consistent data at the enterprise level.'
We have sought to resolve this in this study by sponsoring a large group of tightly structured case studies; fifteen per
country in Poland, Hungary and thirteen for what was, for the duration of the project, the CSFR.'
This paper draws on the information contained in the 43 detailed case studies. The firms were broadly matched
by size and sector, and interest was confined to industrial branches. The cases provide a wealth of information on
aspects of enterprise behavior as diverse as marketing, strategy, financial situation, organizational structures,
governance and managerial responses to the changes in their environment. The cases themselves, and the country
specific summaries of the findings, are available elsewhere (see Estrin et al, 1993). Our aim in this paper is to bring
together the findings from all the cases to discover what have been the major differences in the ways that firms have
been adjusting, and to relate these to potential determinants.
Our particular interest is the factors associated with or acting to constrain successful adjustment to the new
market conditions. Such factors could in principle include:
i) industry or sector differences;
ii) differences in national economic policies, for example with respect to price liberalization, exchange rates,
external trade and internal competition, tax policy and privatization;
I Exceptions include Gelb, Jorgensen and Singh (1991), Belka, Pinto and Krajewstic (1992), and Estrin, Schaffer
and Singh (1992).
2 The World Bank project on enterprise adjustment in Poland, Hungary and the CSFR was developed in part to fill
that gap. First analyses using enterprise level data are now appearing (see e.g., Estrin and Takla, 1993), but the limitations
of the available data leave many questions that can best be addressed within the framework of case studies.
3 Three of the cases for the CSFR were in what has since become the independent Slovak Republic, with the
remainder in the Czech Republic.
I
2 Research Paper Series: E Europe/FSU
iii) differences in internal organizational structures and the distribution of bargaining power between owners,
managers and workers;
iv) differences in the financial situation of the firm; and
v) differences in the interest and nature of the involvement of foreign partners.
In practice we find national differences to be the most important elements influencing enterprise transition;
differences in adjustments between countries far outweigh any intra-country variation. Moreover sector or industry
is not a significant determinant of the pace or pattern of adjustment. However, care must be taken in interpreting these
results since the three countries differed significantly in their institutions, policies and macro-economic situations prior
to reform.
The first few years of economic transition has highlighted a number of key issues on the micro-economic side
(see e.g., Svejnar, 1991) upon which the information in the 43 cases might be brought to bear. These include whether:
i) the structural adjustment of industry is in fact hindered or facilitated by a "big bang" macro-economic strategy
(see e.g., Lipton and Sachs, 1991);
ii) the economy should be opened inmediately to the full pressures of international competition (see e.g.,
McKinnon, 1991);
iii) privatization should be early or late, and whether it should precede or follow restructuring (see e.g.,
Blanchard et al, 1991; Estrin, 1991; Newberry and Kattuman, 1992);
iii) the privatization strategy should be based on sale, whether to domestic or foreign customers, or some form
of mass pnvatization,
iv) there is an appropriate way to stimulate appropriate managerial changes and to build effective corporate
govemance. This relates in part to whether the existing authority of workers should be institutionalized; and whether,
v) there is a need for active industrial policies.
All of these issues are addressed at least indirectly by the cases, and in the remainder of the paper. We return to them
in the conclusions.
The case study method is the only one that allows us systematically to address questions of this type. However,
the costs of such exercises are high and naturally limit the number of firms that can be included in the study. This
raises the question of whether our findings can be generalized; a particularly germane issue in the light of the
apparently clearcut and policy relevant conclusions. It must be stressed at the outset that there was no attempt to attain
randomness of the enterprise sample directly. Indeed it is not clear how this would be achieved in a sample reaching
a maximum of fifteen firms per country. The approach employed was to choose sectors according to predetermined
criteria and then to select particular firms on the basis of personal contact and willingness to participate. Given the
general paucity of firms in the formerly planned economies, the choice of sector typically narrowed the field
considerably. In so far as managerial willingness to participate and personal contact with our field participants, who
are business economists, indicates more dynamic management, our procedures might have biased the whole sample
Restructuring, Viability and Privatization: A Comparative Study ofEnterprise Adjustment in Transition 3
towards "better" firms in each country. But this source of bias should not apply to one country more than any other,
and our findings highlight differences between rather than within countries as the principal sources of diversity in the
pattern of enterprise adjustment.
There might be a second reason to question the broader significance of the findings in this paper. This is the
almost exclusive focus on enterprises that were in the state owned sector at the start of transition process (though some
have been privatized in the past three years). Kornai, for example, has argued (see Kornai, 1990) that state owned
fimns will be too arthritic and bureaucratic to respond to the opportunities opened up by the move to a market system
and free trade. The inference is that, with the possible exception of state owned firms purchased by foreign companies,
industry level supply responses will rely disproportionately on the growth of the new private sector, including perhaps
their gradual absorption through a bankruptcy procedure of the assets of the old state sector. The adjustment of the
new private sector has been addressed in a set of parallel studies for Poland, CSFR and Hungary by Webster (1992).
However, our study provides strong evidence against the Kornai hypothesis, with the possible exception of Poland.
In all three countries, but especially in CSFR, most state owned enterprises are making major adjustments in the light
of their new circumstances and these responses, which are not solely sponsored by foreign participants, appear to
represent the bulk of industry level adjustment.
The paper contains a further five sections. The framework for the case studies themselves, including the
selection criteria and general methodology are the subject of the second section. Since preconditions to the reform and
the macro-economic situation of the three countries during the period of the study are clearly crucial in interpreting
the findings, these are briefly surveyed in the third section. The major findings of the case studies are surveyed in the
fourth section. The material is grouped into seven topics, namely;
a. the nature of the shocks faced by firms,
b. the nature of firm responses in the short term and in the longer term,
c. financial viability,
d. managerial motivation and responses, and workers' power,
e. privatization and the role of foreign partners,
f. sectoral patterns of adjustment, and
g. tax policy.
The fifth section is devoted to the main lessons to be drawn from the cases, and conclusions are drawn in the sixth
section.
2. FIRMS IN TRANSITION: A FRAMEWORK AND METHODOLOGY
The diversity of firms within and between countries implies that a project which proposes to derive comparative results
must formulate a common conceptual framework at the outset. This is discussed in the first subsection below, and
provides the basis for the common questionnaire which was applied in all 43 firms. The remainder of this section is
devoted to case study methods, including the criteria for the choice of sector and the timing of the interviews.
4 Research Paper Series: E. Europe/FSU
2.1 Enterprises in Transition: A Framework
1. Managerial and Financial Autonomy
a. Managerial Autonomy: Before reform, enterprises were not really interdependent in terms of decision-making.
Reform greatly widens the range of activities in which the firm is permitted to engage, and in the absence of effective
"ownership" arrangements may greatly increase the autonomy of management or an employee-manager coalition to
make choices.
b. Financial Independence: The initial increase in managerial autonomy during the early phase of transition may
be offset by increased constraints on managers and workers imposed by creditors and ultimately new owners.
Financial arrangements were passive under central planning, and hardly more demanding under market socialism
because ex-post subsidies or credits plus automatic cost-plus pricing rules relaxed enterprises' liquidity and solvency
constraints- This "softness" of budget constraints was exacerbated at the macro-economic level by a chronic tendency
to excess demand.
Reform in principle introduces full financial accountability, including by bank and trade creditors, and by owners
when these are well-defined. By implication, the specter of bankruptcy for insolvent firms is also raised. These
factors should partially offset the increase in managerial autonomy, or at least prevent "perverse" behavior by
managers in response to reform initiatives.
2 Changes in Product Markets
After reforms, prices are freed for both outputs and material inputs, and international competition becomes a reality.
In economies that were previously planned, direct horizontal supply relationships between sellers and customers, begin
to replace the inefficient mix of plan orders for material inputs and the distribution of output, and the semi-legal or
illegal market transactions undertaken to ensure plan fulfillment. In market socialist economies, the array of price
regulations. trade and hard currency quotas and investment credits along with inherent shortages which distort nascent
inter-firm supplier relations are eliminated. The opening of markets introduces alternative sources of supply and
marketing opportumties.
The distortion of prices in pre-reform economies reflected the priorities of the communist regimes (see Ellman,
1989) Pnces of consumers necessities such as food or rent were kept very low, and of luxuries very high. Within the
intermediate sector, inputs such as raw materials and especially energy were kept very cheap, while outputs were sold
at higher prices. Thus activities such as engineering, capital goods manufacture, chemicals and electronics were kept
artificiall% profitable at the expense of production for final consumers--consumer durables, light engineering, etc.
The reform changes relative prices in the direction of world prices. The opening of product markets also coincides
%Nith dramatic shifts in the relative attractiveness of domestic, ex-CMEA and Western markets. Export markets within
the CMEA zone contract sharply because of the move to convertible-currency trade, the deteriorating situation in the
former USSR, and the loss of most of the former GDR's market with German reunification. The relative attractiveness
of Western markets also rises, because of real devaluations initiated to regain macro-balance and because of the
relaxation of trade restrictions by the EC and USA.
3. Development ofFactor Markets
In socialist economies, wages were determined centrally and bore little relationship to relative labor scarcities. The
emergence of free labor markets, including the development of institutions for bargaining at the level of plant, industry
and region, is likely to be slower than for product markets. Markets for financial capital and real capital assets,
Restructuring, Viability and Privatization: A Comparative Study ofEnterprise Adjustment in Transition 5
including land, will also develop slowly. Private ownership of productive physical assets has been virtually unknown
and even of land has been rare. The banking system itself has been monopolized in the hands of the central bank and
investment has either been financed directly through the state budget or indirectly via the state controlled banking
system. The locus for important investment decisions has not been with either firms or with specialized financial
institutions. Enterprises must learn for themselves about how to evaluate and finance projects. The relative prices
faced in factor markets will also change considerably. In particular, tightening macro policies cause increases in
nominal and real interest rates, and quantity constraints on the volume of bank credit.
4. Changes in Ownership and Management Environment
Previous to reform, enterprises were owned by the state, either "strongly" (under centralized socialism) or "weakly"
(under market socialism). Weak ownership of firms implies ambiguous property rights, with workers and managers
having some rights to surpluses but not the right to realize the value of assets directly. One of the key elements of
reform should therefore be to define the concept of ownership, and its associated rights and obligations, clearly (see
Estrin, 1991). This will legitimize its varied forms, in particular private ownership. Because privatization may include
the possibility of foreign participation, the process may also have a major impact on management behavior and
company performance. The impact on management in any given firm will, of course, depend on the structure of
corporate governance that evolves in the course of reforms.
2.2 Selection Criteria
The initial terms of reference of the project focused attention on firms which had been state owned pre-reform and,
partly as a consequence, on manufacturing industry rather than services. This was because it was felt that the problems
of transition faced by state owned firms were in principle quite different to those of manufacturing industry, and the
same argument applied to service activities such as banking or insurance. It was also decided to exclude the public
utilities, such as power generation or telecommunications, because once again these presented very particular and
specialized problems deserving separate study.
Finally, we did not seek representativeness of industrial branches across each economy as a whole, but rather
selected a range of sectors to illustrate the diversity of enterprise adjustment. The most important consequence of this
decision was that the military/industrial defense sector, which is very large in all the countries and especially in CSFR
and is typically in a very poor shape, is under-represented in the sample. This leads the study to present a rosier picture
of enterprise adjustment than would pertain if more of the military dinosaurs were included. However, such firms have
very poor prospects for survival in the medium term. The study therefore provides a snapshot of state owned enterprise
adjustment in the first years of transition in a sample of industries biased towards those with some potential to survive
and flourish in an mternationally competitive market economy.
In choosing particular sectors, it was felt that there should be variation in the following characteristics;
i) Stages of production: the principal categories to be covered were raw material and basic industries;
intermediate products and goods for final consumption.
ii) Viability: whether the sector was felt a priori likely to be viable in the medium term, given the collapse of
the CMEA and changes of relative input and output prices. Also relevant might be the previous share of hard currency
exports.
6 Research Paper Series: E. Europe/FSU
iii) Market conditions: whether the industry faced competitive, oligopolistic or monopolistic conditions.
iv) Size: from small firms (say less than 150 workers) through medium (150 to 1500 workers) to large ones
(greater than 1500 workers).
v) Capital intensity: from labor intensive to capital intensive activities. Of related significance for capital
intensive sectors was the source of the investment funds, ranging from sectors heavily dependent on state munificence
to those with large current or potential future foreign investments.
Of course, in practice many of these characteristics were found together in particular firms under the traditional
planning system (see Ellman, 1989). For example, basic and intermediate sectors were typically large scale, capital
intensive, monopolistic and are frequently not viable in the new market conditions, at least not without major
restructuring.
In addition, the field participants were advised to seek diversity in the following areas when selecting firms
within the predetermined sectors:
i) Ownership, ranging between state owned, state owned but being privatized to already privately owned.
ii) Establishment Status: whether the firm was a single or a multi-plant operation.
iii) Organizational Status: whether the firm was a holding company or had unified financial status.
iv) Regional Spread, to include the major industrial regions, most significantly Slovakia within the CSFR.
v) Where possible to cover interesting constraints or advantages such as environmental or pollution problems,
e.g., firms affected by an EC quota or which are heavily R&D, design or patent dependent.
The five criteria for choice of sector above led to the selection of the fifteen sectors outlined in Table 1. The table
also summarizes the advice given to the field participants to assist in the selection of firms according to the criteria
for selection of enterprises listed above. The actual firms chosen are listed in Table 2. The chosen sectors differ
slightly from those proposed in Table 1, because it proved virtually impossible to obtain participation from any firms
in the defense sector. Additional firms in food processing or in engineering were substituted. Moreover, because the
cases were undertaken during the first wave of the CSFR's mass privatization program, it proved harder to obtain
approval for participation in the project there. As a consequence, the project surveyed only thirteen of the proposed
fifteen firms in the CSFR.
2.3 Timetable
The project was undertaken in four phases during 1992. Between January and April, the fifteen sectors were selected
and a common questionnaire to be applied in all three countries was devised and tested in the field. The questionnaire
was implemented between April and the summer 1992, and preliminary drafts of the cases were completed in
September. The project team met in September 1992, with the objective of ensuring that the cases were consistent in
their coverage of issues and to discuss the emerging findings. The discussion formed the basis for return visits to the
firms before Christmas 1992, and for revised cases to be completed by February 1993.
Restructuring, Viability and Privatization: A Comparative Study ofEnterprise Adjustment in Transition 7
It is important to note that the first wave of the CSFR mass privatization was also completed during this period,
with the result that the cases reflect the impact of this policy on for example enterprise governance and ownership.
It is likely that the general impression of enterprise adjustment in CSFR would have been less favorable if the
questionnaire had been implemented six or twelve months earlier.
3. PRECONDITIONS TO REFORM AND MAcRo-EcoNoMIC PERFORMANCE
In order to evaluate the extent of enterprise adjustment, it is necessary to know the situation of the company sector
prior to the reform, and the situation in the macro-economy since the reforms. Fortunately, there is already a large
literature on this subject (see e.g., Fischer and Gelb, 1991; Gomulka, 1991; Bruno, 1992; Calvo and Coricelli, 1992)
and in this section we merely draw from these secondary sources the information necessary to inform the ensuing
discussion. We first summarize the preconditions to reform, before outlining the specific reform programs including
the timetable and sequence. Finally we describe the initial effects of reform for the state owned sector.
3.1 Preconditions to Reform
The most important differences between the three countries prior tc the reform can be outlined with reference to Table
3. Historically, CSFR had been, along with East Germany, the most developed country in the region, with levels of
income per head in the pre-war period broadly comparable to those of Austria (see Begg, 1991). Hungary's standard
of development had been somewhat lower, but markedly above that of Poland which despite its much larger absolute
size remained largely agrarian into the communist era. These differences still pertain in purchasing power parity
indicators of GNP per head at the end of the 1980s.
All three countries had enjoyed considerable growth since the 1950s, culminating in frenzied expansion financed
largely by foreign borrowing during the 1970s. The 1980s saw stagnation or in the case of Poland actual declines in
output. The domestic financial situation in Poland was parlous by the end of the decade, with a large budget deficit
(reaching perhaps 18% GDP by 1989; see Gomulka, 1991), an enormous monetary overhang from previous credit
emissions (indicated in Table 3 by the M2/GDP ratio) and incipient hyperinflation. The external balance was hardly
better, with an exceptionally high debt/GDP ratio and external debt service ratio.
In contrast, the macro-economic and financial situation was much sounder in both CSFR and Hungary. The
Czechs and Slovaks repaid much of their external debt during the 1980s, and by the end of the decade had an easily
supportable debt service ratio. The budget was kept more or less in balance in the latter part of the decade, though
there existed a significant residue of monetary overhang. In Hungary, the internal balance was comparable to the CSFR
and the monetary overhang much smaller, but the external debt situation was worse, more comparable in terms of
service ratio to that of Poland.
The countries also differed considerably in 1989 in terms of their exposure to market forces and the degree of
autonomy already granted to managers in enterprise decision-making. Hungary led the way in this respect, having
introduced reforms which decentralized many operational decisions to enterprise managers in a market framework as
early as 1968 (see Hare and Revesz, 1992). Hence a relatively low proportion of prices were administered pre-reform,
and a relatively high share of GDP was traded with the West. Poland also introduced reforms in 1968, though they
were not so far reaching as those in Hungary, and the planning system was later largely dismantled in favor of "market
8 Research Paper Series: E. Europe/FSU
socialism" during the 1980s. The impact of these reforms is particularly noticeable by 1989 in the large share of the
private sector (though in Poland this also reflects the greater scope of private agriculture) and in the relatively higher
share of exports to non-CMEA markets.
Though the CSFR maintained a considerable degree of internal and external macro-balance during the 1980s,
there was virtually no decentralization from the traditional Soviet-type planning system until well after the fall of the
communists in 1989. Almost all prices were administered, and of the three countries the Czechoslovak price structure
probably deviated most from Western relativities. There was virtually no private sector, even in retail trade or services,
and rather little western investment. Perhaps most significantly, the country was still closely integrated in the CMEA
bloc, with around an eighth of GDP sold eastward.
In summary, preconditions to reform were most favorable in Hungary which had been gradually adjusting its
prices, building commercial and trade links with the west and reforming its enterprises for many years while
maintaining a considerable degree of macro-stability, except with respect to international debt. Poland started reform
with an almost irretrievable macroeconomic situation, though considerable experience with markets, while the CSFR,
though in a relatively sound macro-economic situation, maintained virtually intact the Stalinist central planning
apparatus.
3.2 A Summary of the Reforms
The main elements of the macro-stabilization policies enacted in the early years of the reforms are outlined in Table
4. As noted by Bruno (1992), the principal components of the policies in each country are very similar. They differ
primarily in their date of introduction-Czechoslovakia does not commence its reform program until the start of
1991 -and in the pace of reform. The Hungarians exploit the advantages of their initial situation to embark on a
gradual program of transition; a luxury not available to the new government in Poland in the autumn of 1989. Though
the macroeconomic situation in the CSFR did not necessarily merit an emergency stabilization program, the (then)
Finance Minister Klaus took the view that a sharp macroeconomic shock integrated with a microeconomic reform
package was necessary to induce the plan-oriented Czech managers to address the realities of the market place. The
duration of the Polish shock was extended, and the scale of the Czechoslovak one amplified, by the effective collapse
of the CMEA trading arrangements on January 1, 1991.
The differences in the approach to reform in the three countries is thrown into sharper relief when one compares
strategies for privatization. From the outset, the CSFR planned a program of mass privatization based on vouchers
distributed at nomial cost to the population as a whole (see Dyba and Svejnar, 1992; Estrin, 1991). The vouchers
provided domestic buyers with the necessary liquidity to purchase state owned enterprises. At the same time, the
authorities pursued a strategy directed from above of bringing firms to the market in waves, the first of which was
completed in early 1993. Enterprises had to submit restructuring and privatization plans to the appropriate ministries
for approval according to a tight deadline, on the basis of which they were put on offer for sale in part or in full in
exchange for the vouchers. The authorities then organized a voucher auction in which the newly created demand and
supply sides of the equity market cleared. In practice, individuals passed on the bulk of their voucher holdings to
pnvately owned trust funds which had sprung up. so the procedure created simultaneously a capital market and some
preliminary capital market institutions. Since foreigners could not buy vouchers, they were largely excluded from the
mass privatization except if their involvement was an element in the firm's initial privatization or restructuring plans.
Restructuring, Viability and Privatization: A Comparative Study ofEnterprise Adjustment in Transition 9
Hungarian managers had considerable autonomy throughout the 1980s and some access to capital, both
domestic and international (see Hare and Revezse, 1992). Private ownership was in fact legalized prior to the fall of
the communist regime, and encouraged a first round of privatization in which managers took an ownership stake in
the assets of their company at a low or zero price while leaving the debt as an obligation of the parent firm. The
authorities sought to supervise this process of spontaneous privatization, creating the State Property Agency to
manage privatization and to ensure that sales took place at reasonable prices. But the strategy remained decentralized
and relied on the sales of state assets to managers; to a lesser extent to workers; and especially to foreigners. The
strategy is continuously being implemented and privatization proposals can originate either with insiders-managers
and workers-or with outsiders, for example potential foreign buyers or venture capitalists. The process has ben
slower than originally intended, but Hungary has received the vast majority of the foreign capital so far invested in
former socialist bloc; as much as $2 billion per year out of a total of perhaps $4 billion.
Although Poland's big bang reform strategy envisaged privatization after stabilization, the strategy has been
erratic and confused in implementation. The original plan was to privatize by direct sales to the public along the lines
of British privatization in the 1980s, and as done in the former East Germany (see Carlin and Mayer, 1992). This was
abandoned within a few months, after several firms had been privatized, because it was proving impossible to
implement privatization of this type on a sufficient scale. It was then proposed to introduce a mass privatization
program based on the free distribution of vouchers to the population (see Lipton and Sachs, 1991). These vouchers
would be allocated to Investment Trusts that would be partly foreign managed. The Trusts would then be allocated
shares in the list of firms to be privatized. Shares would also be allocated to employees, and retained by the
government. In practice, this proposal ran into considerable opposition from the employee democracy lobby, and
because of mistrust over the possible role of foreign financiers. The plan was shelved in 1991, and replaced by a
proposal to privatize Polish industry by sector, on the basis of detailed sectoral studies. This also proved unsuccessful
and the authorities returned to the idea of mass privatization in 1992. However, as of March 1993 the mass
privatization program had just been rejected by the Polish parliament, because of fears of foreign involvement in the
Trusts.
Despite confusion in policy towards the state owned sector, the growth of the private sector has been faster in
Poland than anywhere else in the region. By 1993, more than half the active labor force was employed in the private
sector, and even in manufacturing private firms supplied more than 40% of output. One reason has been the rapid
growth of the indigenous private sector, frequently building on incomes earned abroad or profits from arbitrage in the
last decade of communism. A second is the policy of liquidating financially bankrupt but potentially commercially
viable parts of the public sector. Liquidation policy has to some extent redressed the vacuum left by the absence of
an effective privatization strategy.
These differences in policies towards the state sector during transition are closely mirrored in the findings of
our cases. In particular, they provide the context for evaluating the relatively poor showing of state owned Polish firms
in terms of restructuring and privatization.
3.3 Initial Results of the Reforms
Economic reforms have everywhere had some positive effects for consumers. Queues have largely disappeared and
instead of shortages of goods, the shelves are full. Access to foreign consumer goods, or generally to goods of higher
quality, has been opened up. But these favorable features have been swamped in the public mind by a catastrophic
decline in output throughout the region, cumulating to more than 25% of GDP and 40% of industrial production. This
is comparable in magnitude to the output fall experienced in the United States during the Great Depression, and is
10 Research Paper Series: K Europe/FSU
unlikely to have been greatly offset by a rise in the private sector not recorded in the official statistics. The initial
results of the transformation packages until 1991 are summarized for the three countries in our study are summarized
in Table 5.
The reasons for the output drop have been widely debated (see e.g., Gomulka, 1991; Calvo and Coricelli, 1992,
Bruno, 1992; Estrin, Schaffer and Singh, 1992). Explanations have focused on three causes. The first is the large
negative demand shock associated with the big bang stabilization program and the collapse in intra-CMEA trade, and
particularly trade with the former East Germany and the former Soviet Union. The second relates to the supply side
and is associated with the higher raw material and energy prices which combined with increased domestic and
international competition on product markets squeezed price-cost margins. For some firms, the collapse of the CMEA
also dislocated critical input supply chains, for example for parts, machinery, minerals and fuel. Finally, the rapid
output fall has been associated with a shortage of liquidity in the state owned enterprise sector in the early period of
the reforms.
The data in Table 5 confirm that while all three countries have experienced broadly similar cumulative declines
in output (see Bruno, 1992), the pattern of decline has been rather different and closely associated with the timing and
sequence of reforms. Hence the Polish fall is sharpest with the big bang in 1990, with a second fall at the time of the
CMEA collapse in 1991. The CSFR experiences both shocks simultaneously during 1991. Output declines slowly but
steadily in Hungary after 1989, with a peak at the time of the CMEA collapse. The Poles also gradually get inflation
back under control after the near hyperinflation at the end of 1989. The CSFR see a sharp once and for all rise in prices
in 1991, but in Hungary the price level drifts up slowly. Finally, the budget balance everywhere tends to initially
improve but then worsen.
Our case studies were undertaken during 1992, by which time though the first macro-economic shocks of the
transformation were over, firms had been facing the deepest recession for a generation for up to three years. On the
positive side, prices had everywhere stabilized relative to the levels achieved during price liberalization and (internal)
currency convertibility had been established, allowing firms for the first time to plan to sell their products and to buy
their inputs from Western markets.
4. FINDINGS FROM THE CASE STUDIES
The case questionnaires were structured to distinguish between the major shocks faced by firms, and their responses
to these shocks, in both the short run and with respect to their long run plans. The cases also contain financial and
other information that permit an evaluation of company viability, as well as data related to managerial motivation and
decision-making authority, workers' power and the impact of government policies- We here summarize findings across
cases in a simple and usually numerical way. Concerned readers can check the more qualitative evaluations and
judgements by reading the cases for themselves (see Estrin et al, 1993). The quantitative data upon which for example
the judgement conceming viability is based is exhaustive-we were provided with company accounts for the previous
five years, as well as much other data-but they were only made available on a confidential basis.
Before turning to the firms themselves, the scene is set by summarizing the case writers' evaluation of the
situation in the sectors under consideration. We find that the poor macro-economic situation is reflected in most
sectors. The most common observations concern the decline in demand, either in the domestic market or associated
with the collapse of the CMEA. Also frequently mentioned everywhere are competitive pressures from imports, or
for activities with low sunk costs such as textiles/garments, from the newly emerging private sector. The impact of
Restructuring, Viability and Privatization: A Comparative Study ofEnterprise Adjustment in Transition 11
the disintegration of the wholesale sector on sales is also frequently mentioned in Poland and Czechoslovakia. The
effects of the reform on the state owned sector are not entirely bad, however. In several sectors, improved access to
Western markets for selling products, buying higher quality inputs as well as access to managerial know-how,
technology and finance is also discussed.
Differences in the nature and timing of the reform packages underlie major variations in the effects of the
programs for the same sectors in different countries. Thus in Poland thirteen of the fifteen sectors have been hard
hit by the big bang programme two years previously, and only one has begun to recover, even slightly (textiles). The
two sectors less affected by the macroeconomic downturn are oil refining and confectionery. Eleven sectors of the
thirteen covered in the CSFR are very hard hit by the recession, though because reforms started later the downturn has
thus far been less prolonged. The sectors where conditions are slightly more favourable are pharmacuticals and once
again confectionary. The more favourable business climate engendered by Hungary's gradualistic approach to reform
is reflected in the fact that only seven of the fifteen sectors appear to be very hard hit by the changes, though problems
are accumulating in a further two or three. The serious implications of the collapse of the CMEA is indicated by the
fact that it is seen as a significant source of the shortfall in demand in 38% of surveyed sectors in the CSFR, 33% in
Hungary and 27% in Hungary.
4.1 The Nature of the Shocks
We outlined in section 2.1 a framework for classifying the potential shocks faced by the firms in our sample, as well
as their responses. The main characteristics of the shocks faced is summarized in Table 6. The information is coded
as follows. If the case seems to indicate that there were major shocks associated with product market liberalization,
for example, that category of shock is given a five in Table 6. If in contrast there is no mention in the case of a shock
emanating from product market liberalisation, or its effects are noted to have been completely unimportant, the
category is awarded a one. Table 6 suggests that the enterprises in our sample are typical of the sectors themselves
in that main impact of the reforms was felt in their product markets. We find no great differentiation in this respect
by country or by sector.
Thus, for almost every firm, the primary effects of the reform seem to have been a decline in demand, an increase
in some or all input prices as well as the cost of borrowing and the rupturing of domestic and intra-CMEA trade links.
Almost no firms mention changes in managerial or financial autonomy, or changes in ownership brought about as a
consequence of the reform. However, we are beginning to see some impact from the emergence of factor markets, most
notably in Poland which is furthest along the fast track reform path. One common example is labour market shortages
for particular skills, especially for firms in direct competition with the indigenous private sector.4
4.2 The Nature of Responses
When the findings were assembled, it proved feasible to group the responses into those of a short term and of a long
term character respectively. This was because most firms identified the same basic shock-a collapse in demand-and
their responses could be simply classified in terms of their immediate reaction to these new circumstances and their
more strategic thinking in the light of potential market opportunities.
4 Tax based incomes policies applied to the state owned but not the private sector in Poland at the time of our study.
12 Research Paper Series: E Europe/FSU
The most minimal short term responses that a firm could make involve completely passive reactions to the new
situation, for example by continuing to produce at the previous level and accumulating inventories. Such passive
reflexes could be financed by failing to pay suppliers or workers, borrowing from banks, and falling into arrears with
social obligations and tax payments. Responses of this sort are evaluated at unity in the summary table of short run
responses, Table 7a.
Managers in formerly socialist economies are typically engineers, and are therefore well qualified to make short
run adjustments in the production process, for example by closing particular product lines, changing the product mix
towards more saleable goods, laying off workers, machines or even plants and reorganizing production towards
cheaper inputs. Short term responses of this sort are awarded three in Table 7a. However such managers are also
notoriously weak at questions of accountancy, financial control, organizational restructuring, marketing and sales,
quality control, information systems, and Western orientation in terms of product outlets, technology and sources of
finance. Firms which responded primarily with changes in these areas are awarded five in Table 7a.
The table reveals that by the middle of 1992, there were surprisingly few examples of purely passive responses
in Central and Eastern Europe. There was only evidence of virtually no reaction to the reforms in two firms-one each
in Hungary and Poland; both in activities intimately related to the activities of the state. In contrast, around one third
of firms displayed rather active responses (denoted 4 and 5) and almost seventy five per cent at the minimum had made
significant adjustments to their production processes. There are marked differences in responses by country. We find
that one third of firms in Poland scored did not even display production responses over the two and a half years since
the reform. This contrasts with around 13 per cent in Hungary. Most strikingly, there were no firms scoring less than
three in the CSFR, even though the shock had been one year later than in Poland.
A similar picture emerges when we look at very active short run responses (a score of four and above). Around
one third of responding firms fall into this category in Poland as against 40% in Hungary and almost half the firms
in Czechoslovakia. The bulk of the variation in Table 7a can be explained in terms of inter-country differences; there
is little evidence of a sectoral pattern underlying the extent of short term responsiveness.
The pattern of long term responses are outlined in Table 7b. It must be stressed that the table records whether
or not firms have in place a long term strategy to address their new situation, rather than any attempt by the case
writers or the author to evaluate that strategy. The classification in the table is straightforward; either the case reveals
that the firm in question has a long term strategy in place, and is acting upon it or it does not. The situation is unclear
if the frin appears to have a strategy but is failing to implement it, or denies that it has any coherent plan but appears
to be acting in a strategic way. Most firms in the "unclear" category probably have no real long term strategy; the
classification gives them the benefit of the doubt. Because there is no apparent systematic sectoral dimension to the
pattern of long run adjustment, the sectoral spread has been suppressed in Table 7b.
We find that quite a high proportion of firms do have a long run strategy in place. The proportion is less than
for the establishment of a short run strategy; 60% as against around 75% for short term responses, but reveals none
the less that most firms had conceived a long run response to the sharply changed market environment. This finding
is rather more positive than pessimists about the flexibility of the state owned sector would have predicted, and
indicates that many of these firms are likely to continue to play a significant role in future economic development.
But the findings also provide a modicum of support for the more pessimistic view. The study reveals that around
one turd of state owned firms in our sample had not put in place any sort of long run strategy up to three years after
the start of the process of economic transformation. This compares with less than five per cent of firms which had
made no short rm response, and is quite strong evidence for the view that, at least in certain significant pockets, ti
state owned sector is proving highly inflexible over the long run.
Restructuring, Viability and Privatization: A Comparative Study ofEnterprise Adjustment in Transition 13
The table reveals very sharp national differences in the pattern of long run responsiveness, which are clearly
related to differences in their approaches to reform. We find that long run strategies are in place in the bulk of
Hungarian firms from an early stage. Indeed, coherent long run planning is slightly more common than very active
short run responses. The long run plans are frequently oriented to privatization, often with the involvement of foreign
partners, or entail restructuring with a view to future sale of the firm. Polish state owned firms on the other hand are
clearly suffering from the absence of policy to clarify property rights. The state enterprise sector is slowly drifting into
debt and decline and the vast majority of firms have no long run strategy to address their situation (though as we have
seen most have altered their operating practices). There were major changes in enterprises' attitude towards their long
run strategy in Czechoslovakia during the period of the study due to the impact of the first wave of mass privatization
on managerial thinking. By December 1992, a majority of firms had developed a long run strategy, and a further
quarter were in the process of so doing. The proportions are similar to those for the general categories of short run
adjustment. Management thinking was intimately to their proposals to restructure and privatize, and only rarely
entailed the involvement of foreigners. Only three Czechoslovak firms had no strategy at all.
4.3 Enterprise Viability
We use the confidential data attached to the cases to place firms into one of three categories describing their financial
status. The coding is as follows. The least successful firms, which are described as non-viable, are persistent loss
makers which have a very large debt, either to banks, to suppliers or to the government, and are typically unable to
meet the interest payments on their borrowing. In Western economies or with clear ownership rights, these firms would
be liquidated or financially restructured. Such enterprises are given the value unity in Table 8. The second category
of firm is making a modest loss, or a small accounting profit but has persistent cash flow problems. It may also have
considerable accumulated debts, though it is still in a position to service some or all of them. Such firms are denoted
3 in Table 8. The third category, denoted 5, contains firms which are now clearly profitable, can meet their current
debt obligations, and for the foreseeable future seem likely to continue trading. Values of two and four capture
intermediate positions.
We noted above that the cumulative macroeconomic shock has been of a similar order of magnitude in all three
countries. However, perhaps because the recession has lasted for so long, the impact on state owned firms in this
sample was markedly more severe for Poland. At the start of 1993, only four Polish firms in our sample of fifteen are
clearly viable, in the sense of having even a short run future without the looming threat of bankruptcy Almost half
the firms are simply not viable and have either been liquidated or await liquidation. The cases themselves tell a story
that. for many Polish firms, the initial "big bang" shock plunged them into debt, a problem compounded by the erosion
of their initial competitive advantage in exporting to the West by the emerging currency overvaluation. Their
unfavorable situation was made worse by growing tax obligations to the government through the dividend tax and the
excess wage tax ("popiwek"), caused in no small part by the rapid triggering of penalty interest clauses in response
to previous non-payment. If this congruence of negative factors were not sufficient to drive the firm into debt within
a year of the reform, workers would begin to consume the assets by wage demands. In effect, either the initial hole into
which firms were pushed by the transformation program was so deep that they could not climb out, or workers, often
in concert with management, reacted to the vacuum in property rights by beginning to decapitalize the firm.
It is significant that these processes of financial decline in Polish firms appear to operate independently from
factors associated with the underlying potential profitability or international competitiveness of the sectors in which
the enterprises operate. Thus, firms in our sample engaged in activities in which one might expect Poland to be highly
14 Research Paper Series: E. Europe/FSU
competitive on international markets, such as furniture or footwear manufacture, find themselves in a worse state
financially than firms in many of the less obvious candidates for sunrise industries, such as steel, plastics and
pharmacuticals.
It is tempting to speculate that the parlous financial state of Polish firms in our sample is a direct consequence
of the Balcerovic 1990 stabilization program. Provided there is no serious inter-country bias in our selection of firms
(e.g., our field participants did not oversample viable firms in Czechoslovakia, and undersample them in Poland '),
this view is in fact refuted by the material in Table 8. The CSFR also introduced a "big bang" stabilization program.
However, though this clearly had a major negative effect on the financial condition of the state enterprise sector, it did
not for the most part drive firms to an irretrievable cash flow or debt situation. Profits everywhere declined very
sharply, and there was a marked increase in payables and receivables, but actual accounting losses were rare in our
sample and many firms were even able to maintain a significant element of their investment programs. Though the
financial situation of most firms deteriorated throughout 1991 and 1992, no firms in our sample were actually not
viable by this classification by the end of the study period. One cannot therefore simply blame "big bang" programs
per se for the debilitated state of the Polish state owned sector.
The cases suggest that firms in the CSFR found themselves in a (relatively) more satisfactory financial situation
because of the rapid success of the stabilization program. The exchange rate was set initially at a very competitive
level, and although eroded somewhat after price liberalization it still acted as a buffer against international competitive
pressure for domestic suppliers and as a source of profits through western exports. Inflation in the CSFR was thus
brought back under control while the price-quality relationship was still relatively favorable to Czech and Slovak
firms Moreover, wages were prevented from rising sufficiently either to absorb the remaining enterprise profits or
to rekindle inflationary pressure.
Despite the gradualistic character of the Hungarian reform, according to our sample the financial position of the
state owned enterprise sector remained rather mixed. Approximately half the firms are perfectly sound financially. But
there are also three firms in the sample in a situation like most enterprises in Poland, not viable at all and awaiting
Iquidation. A further one third of the firms in the sample are in a poor or sharply deteriorating financial position. The
cases suggest that this mixed pattern arises because, though there was no sharp shock from macro-stabilization in
Hungary, the collapse in CMEA trade was a comparable blow for many firms. Moreover the recession has been
particularly protracted. Perhaps most importantly, the competitive advantage of the initial exchange rate has been
gradually eroded by inflation. Thus firms which did not have a clear strategy to counter their deteriorating position,
for example a strategic partnership with a western firm, faced the risk of being caught in a Polish-type drift to
liquidation.
There is slightly more of a sectoral pattern to the structure of enterprise viability, though it is still unclear
whether the primary explanation remains inter-country variation. Sectors in which firms in our sample appear to be
doing well everywhere are brewing, heavy chemicals, plastics and confectionery. The picture is unambiguously bad
5 Our findings seem broadly consistent with those of country specific studies (see e.g., Jorgensen et al, 1991, Belka,
Pinto and Krajewski, 1992 for Poland; Torok, 1992 for Hungary and at the macroeconomic level, Dyba and Svejnar, 1992
for Czechoslovakia). They are also consistent with interview evidence from policy makers and academics in all three
countnes
Restructuring, Viability and Privatization: A Comparative Study ofEnterprise Adjustment in Transition 15
in the defense and glass industries. The situation was tending to be favorable in clothing, garments pharmacuticals
and white goods, and tending to be unfavorable in consumer electronics.
4.4 Managerial Motivation and Restructuring
We have found that while state owned firms in Poland, CSFR and Hungary faced broadly similar types of shocks, they
had very different responses in both the short and long run. We now turn to some the factors that might have
influenced these responses, namely the character of managerial motivation and the extent of managerial autonomy and
authority. We expect differences according to whether the enterprise is following the objectives of the government,
or government agencies; of management; or of workers. Also of relevance is whether managers are closely associated
with proposed or actual ownership changes, for example whether they stand to gain personally from the privatization.
In virtually none of the cases in our sample is the government described as having any direct control or authority
over enterprise decision-making.6 We here restrict our attention to the influence and motives of managers and workers.
The situation with respect to managerial motivation is reported in Table 9. Three categories are identified. In the first
type of firm, denoted I in Table 9, managers are either poorly motivated or weak relative to other "social partners"
in the firm, most notably workers. The former eventuality arises most typically because of very low managerial pay'
but also because of poorly defined lines of command, contradictory corporate governance and limited managerial job
security. Management in the second category of firms, denoted 2 in Table 9, has intermediate decision-making
autonomy or is at least to some extent motivated to assist corporate restructuring and development. Managers in
category 3 have sufficient managerial autonomy to make decisions according to their preferences, or are highly
motivated towards company success, for example by significant personal equity stakes in existence or planned.
We find in Table 9 that almost every firm in our sample in Hungary and the CSFR has the highest category of
managerial motivation. Whatever problems there may be in the state owned sector in those countries, they are not
caused by management motivation. The picture is much more confused in Poland. Only in twenty per cent of firms
do managers have sufficient motivation or authority. However one third of firms are reported to have managers who
are poorly motivated or have insufficient decision-making authority to implement their plans. An intermediate situation
holds in almost half the Polish sample.
The key issue that distinguishes Polish state owned firms from their counterparts elsewhere in Central Europe
is thus the persistence of significant pockets of employee power and decision-making authority This can be seen in
Table 10, which addresses the question of employees' decision-making authority directly. Three categories of firm are
distinguished in the table. In the first, denoted by 1 in Table 10, workers dominate short and long run decision-making,
including the appointment and removal of managers, the determination of managerial remuneration and a veto over
restructuring or privatization plans. In the second category, workers retain considerable influence over short run
operational decisions, particularly those influencing them directly such as job losses, pay and bonus setting and the
allocation of social benefits, including access to social assets. In the third, workers have little or no effective decision-
making authority.
6 In the defense and oil refining industries however, management remains closely intertwined with the relevant
government department.
7 As low as a mere 2.2 time unskilled manual workers incomes in one case.
16 Research Paper Series: E Europe/FSU
One might have expected to see significant workers' power in enterprise decision-making in all three countries.
This is not only because of the communist heritage in all three countries. In Czechoslovakia there is also a long
tradition of an active and powerful labor movement that stretches back prior to the communist era. The more recently
founded popular labor movement was of course instrumental in bringing down successive governments in Poland and
has supplied the early governments and the President. In both Poland and Hungary, market socialist reforms in the
1980s notionally handed over enterprise management to elected committees of managers and workers, though in the
communist period their authority was in practice small.
It is therefore striking that, only three years after the fall of the communist regimes, there is almost no trace in
our sample of worker power or authority in Czechoslovakia or Hungary, even at levels common in Western Europe.
The degradation of the institution of trade unions under the communists and the threat of unemployment have left
workers virtually without a voice in the restructuring and privatization of the state enterprise sector. The situation is
markedly different in Poland. Workers are found to dominate decision-making in one third of firms in the sample, and
to have considerable authority in a further third. Managers only have autonomy comparable to that found in
Czechoslovak or Hungarian firms in the remaining one third of firms. Employee power is of course related to the
tendency, noted above, for Polish enterprises to allow wages to rise without great reference to the firm's financial
status. The cases also provide instances of workers vetoing restructuring or privatization plans and reducing
managerial pay markedly.
Managerial motivation and authority in significant parts of the Polish state owned sector is clearly a problem
in a way that it is not in Hungary and the CSFR, and one likely to impact on enterprises' capacity to restructure and
to privatize. The point is illustrated further in Table 10b, which provides information on actual changes in
management since the start of the reforms. When there has been no change, it indicates that the old communist
mangers are still in power. The Table reveals that the Czechoslovak reforms have not been associated with any great
managienal shakeout. in every firm for which there is information except one, the previous management are
implementing the changes. In contrast, half the managers of Hungarian firms in our sample have been changed. The
overall proportion is similar in Poland, but one also finds a core of firms where there have been multiple managerial
changesI in practice in the companies where powerful workers have replaced managers who failed to enact their
wishes.
4.5 Privatization and the Role of Foreign Partners
The differences in priorities towards the state owned sector and national policies towards ownership changes lead to
significant divergences between countries with regard to progress in privatization. The situation is reported in Table
1 L in which the coding is as follows. Firms which are fully or majority privatized are awarded 3. Firms which are not
pnm atized at all. and for which no convincing plans concerning majority ownership changes are discussed are awarded
1. Firms in an interim situation, either partially privatized or about to be privatized, are awarded 2. Firms which have
been liquidated (bankrupted) are awarded 1*.
The findings reflect closely national policies. In Poland, there are very few cases of successful privatization; in
fact only one firm, that was privatized as part of the very first round of sale by public tender in 1990. However, there
is one case of liquidation and others seem certain to follow.
In sharp contrast, every finn in our sample for the CSFR is either already private, is being privatized in the first
wave of voucher privatization, or is preparing plans for the second wave. Though the process of ownership changes
were only completed in four of the thirteen firms by January 1993, a timetable exists for all the other cases. This result
Restructuring, Viability and Privatization: A Comparative Study ofEnterprise Adjustment in Transition 17
makes clear that our Czech sample is biased in favor of better firms, because only these were selected for the mass
privatization program. But the sample for Poland also contains some of the best firms; only twelve enterprises were
originally selected for the 1990 privatization program, representing the best of Polish industry as an example for the
remainder. Moreover, the majority of firms in these sectors in Czechoslovakia were selected for the mass privatization
program so our sample, though not representative, is not untypical.
As with viability, the situation in Hungary is a mix between the Polish and CSFR extremes. As in
Czechoslovakia we find a lot of privatization-twenty percent of firms fully privatized and two third of the rest well
on their way or deeply involved in joint ventures. However, there are still almost one quarter of enterprises not engaged
in any form of ownership change or being liquidated.
A comparison of Tables 8 and 11 reveals a clear correlation between viability and privatization, notably in
Hungary. All the viable firms in Hungary are on the path to private ownership; none of the non-viable firms have even
started the journey. Since financial status was usually established prior to decisions about ownership changes, this is
rather convincing evidence that, in Hungary at least, viability leads privatization. Hence it would seem that the
Hungarian authorities are not using privatization as way to resolve difficulties in poorly performing firms, but to
improve further the situation in their more successful ones. Such a finding is a corollary of the privatization strategy
based on sale through public tender. The evidence from the CSFR is also consistent with the interpretation that
privatization is a consequence of prior financial viability, not a strategy to improve financial performance in the most
ailing firms. There are no non-viable or non-privatizing firms in our Czechoslovak sample however, so there is no test
of the null hypothesis. The drift to non-viability in Polish firns however seems likely to have been both a cause and
a consequence of the lack of a sustained privatization strategy.
An important explanatory factor for the central role of financial soundness in progress towards changes in
ownership in Hungary is the pivotal role in the privatization strategy played in that country by investors from the West.
The evidence on this matter is summarized in Table 12, which is coded on a scale from I to 5 as follows. Finns in
category I have no significant contacts with foreign firms, and in category 2 have contacts only of an operational
busimess nature e.g., through trade, the use of licenses etc. Firms in categories 3 and 4 are involved in a joint venture,
either for only part of their business (3) or for all of it (4). Firms in the fourth category may also have direct foreign
ownership of the main company, though only a minority stake. Finally firms in category 5 have either majority Western
ownership now, or have signed a long term contract in which the foreign stake will gradually be increased to a majority
holding.
We report in Table 12 that one third of Hungarian firms in our sample have significant ownership links with
Western firms- at minimum a joint venture. Moreover, one firm has established an hard currency joint venture with
a Russian corporation. There is no firm which has been successfully privatized without substantial Western
involvement, and there is no case in which there has been significant progress towards ownership changes without
foreign involvement. Indeed, if we refer back to Table 7b, the very existence of a long run response by the firm appears
to be contingent on Western involvement. Hence Table 7 through 12 together suggest the emergence in Hungary of
two classes of firms. The first are viable companies with both short run and long run strategies to deal with their
changing market circumstances in place, the latter typically oriented around close Western involvement and with
privatization, often to the strategic foreign partner, in the offing. The second group of firms are not financially viable
and are drifting with neither a long term strategy nor privatization plans, and attracting no foreign interest.
Approximately one third of firms are in each of these groups, with the remaining third somewhere in between. From
a sectoral perspective, the cases suggest that drifting is taking place for example in glass, consumer electronics and
defense. Successful transitions are occurring in confectionery, household appliances, plastics and vehicles.
18 Research Paper Series: E. Europe/FSU
It can be seen from Table 12 that there has so far been much less Western involvement in Czechoslovakia and
Poland. By the end of 1992 there were no fims in the CSFR in our sample with a majority foreign stake, though some
joint ventures were beginning to be established. In the bulk of sectors, where business had been concentrated on either
the domestic or the CMEA market, there was not even any operational business contact with western firms. There is
no correlation between progress in ownership changes and the extent of foreign involvement because the mass
privatization strategy did not rely on foreign investment. We find even less foreign interest in our sample of Polish
firms than even in our CSFR ones; there are only a few cases of even operational business contact and certainly
nothing closer is emerging. The de facto Polish approach to the problems of the state owned sector was based on
neither privatization nor the strategic involvement of Western firms.
4.6 Sectoral Patterns of Adjustment
The information on the cases' financial situation and responses is summarized in Table 13, as a basis for examining
whether there has been any sector-specific pattern to the enterprises' adjustment in all three countries. This is a
particularly speculative activity for a study based on cases rather than industry or enterprise level data. It makes sense
only to the extent that there are relatively few state owned firms in each industry and that the nature of the shocks
appears to have been common to all firms. The coding is the same as for Tables 7a, 7b and 8 respectively.
We observe in Table 13 that despite the general recession, there are a number of sectors which are making
progress everywhere - clothing, pharmacuticals, household appliances, machine tools, plastics, garments, brewing and
sweets. On the other hand, there appear to be systematic problems in financial performance and enterprise adjustment
in precision tools, vehicles, glass and footwear. Perhaps because the differences between countries is so marked, Table
13 reveals rather little convincing variation in the inter-sectoral pattern of adjustment.
4.7 Impact of Tax Policy
A final area in which government policy might impact on enterprise behavior during the transitional period concerns
corporate taxation. We noted above that macro-stabilization programs involved attempts to balance the state budget.
These efforts proved increasingly difficult because of the growth in unemployment benefits and other social
expenditures Yet as the pressures to increase public expenditure were growing, the governments' access to revenues
were declining. This is because the revenues of the state owned enterprise sector represented the main tax base, and
they were being eroded in the first years of transition by declining company profitability in the wake of the recession,
and by the gradual shrinkage in the state owned sector itself because of privatization and bankruptcy. This raises a
potential conflict of interest between those parts of the government apparatus interested primarily in tax revenues, and
those concerned to protect the cash flow situation of the state owned sector in order to encourage restructuring and
privatization.
Since most firms in our sample were state owned, at least for some part of the survey period, cash flow and the
retention of funds in the enterprise sector therefore depended in large part on taxation policy. There is no reason to
believe that corporate taxation was in principle more stringent in one country than another. However differences in
specific payments systems and in firms' financial standing could be a source of variation between countries. Our
findings are summarized in Table 14.
Restructuring, Viability and Privatization: A Comparative Study ofEnterprise Adjustment in Transition 19
The cases themselves indicate that many firms complain about the level of taxation. However only in Poland
do they regard the tax issue as a principal source of the enterprise's financial difficulty, or as a major constraint on
restructuring. We report in Table 14 that almost half the Polish firms in our sample are in this situation, being in
arrears or default of tax payments. In the other countries, taxation is regarded as a problem in nearly a quarter of
Czechoslovak firms and thirteen percent of Hungarian ones. But the problems raised are typically firm or sector
specific, such as the negative impact of the proposed new VAT on a pharmaceutical firm in the CSFR. Tax problems
are not specifically mentioned in the majority of cases in either country.
The principal source of complaints about taxation in Poland is not the popiwek, the tax based incomes policy.
In practice wage settlements have either been below the norm set by the incomes policy or, when they have been above,
the impact of the popiwek has been anticipated. The problem arises from the dividend tax, which represents the
mechanism whereby the state as owner of the firms withdraws what it estimates to be its due return calculated
according to a complicated formula related to its profitability. It would appear that the revaluation of assets and
inventories associated with the high inflation at the start of the reform created some very high notional profits not
associated with actual cash flows, upon which firms were liable for dividend tax. The poor liquidity position of many
firms led to non-payment from the outset, and given penalty clauses led to the rapid accumulation of arrears. This
problem did not affect all firms, because either they were able to afford the tax due or because their assessment under
the dividend rules was not unduly onerous. However, it was a significant factor for more than half the Polish firms in
our sample, and represents another example of how the less favorable preconditions in Poland conspired with
apparently sensible government policies to undermine the financial position of the state owned sector.
5. LESSONS FROM THE CASES
In this section, we address some of the major comparative themes highlighted by the cases. We first consider whether
they shed any light on whether transition is best approached gradually, or in a "big bang" way. We go on to consider
the relationships between the major components of enterprise responses and behavior, in particular between the extent
of adjustment, viability, managerial motivation and privatization.
Commencing with the question of speed versus gradualism, our cases provide no particular evidence that a short
sharp shock provides a greater stimulus to enterprise responsiveness than a slower induction to market methods. We
find that Hungarian firms, or at least a significant proportion of them, are indeed tending to adjust and put in place
long run strategies for survival and growth in the market place. But much of this stems from the fact that were more
oriented to the West initially, often had already been restructured, had a more rational price system in place and
perhaps had better managers, or at least managers with clearer motivation, at the outset. In short, firms have been
given time to adjust to the changing situation, and in many cases have used that time and their initial advantages
intelligently, especially to build strategic alliances with Western partners. But by the start of 1993 Hungarian firms
were not notably further advanced than their Czechoslovak counterparts, and the gradualistic policy had not, and could
not be expected to have, avoided either the recession nor the disruption following the collapse of the CMEA.
The real test of the speed versus gradualism issue at the microeconomic level comes however by comparing the
experiences in Poland and Czechoslovakia. One might conclude from looking at Poland alone that shock therapies
must debilitate the enterprise sector. But outcomes in the CSFR, though far from favorable, appear to refute that
conclusion. One observes far greater enterprise responsiveness in the short run, as well as with regard to restructuring
20 Research Paper Series: E. Europe/SU
and privatization, in Czechoslovakia. Yet that result primarily reflects the fact that the financial situation of the state
enterprise sector in our sample was stronger from the outset in the CSFR, in no small part because -the initial
macroeconomic situation was sounder and the stabilization program was therefore more speedily effective.
The success or failure of microeconomic adjustment and restructuring in the state sector is therefore not
dependent on whether macrostabilization policies were sudden or gradual in character. Indeed, the relevance of the
question itself is brought into doubt by the fact that the macroeconomic outcomes were so similar in all three countries.
If anything, the cases support the view that "big bang" stabilization programs encourage microeconomic adjustment
provided that they are supported by realistic packages for privatizing the state sector. The key distinction between
Poland and Czechoslovakia lay not in the macroeconomic program but in the absence of any coherent or effective
policy towards privatization. The weaknesses of several firms in the Hungarian similarly relate to the partial nature
of the strategy towards privatization, which placed emphasis on firms with the possibility of Western involvement
without sufficient planning for the future of those firms which remained.
We can address the question of the impact of shock therapy more directly by investigating the relationship
between the responsiveness of firms and their viability. Our findings are summanized in Table 15. We observe that
in our sample there is little evidence that particularly harsh economic circumstances force firms to relatively more
substantial adjustments and restructuring. Virtually all the firms suffered major shocks associated with the transition,
but it would appear that their viability was a crucial component in determining whether they undertook positive short
run, and especially long run steps. In the short run, almost no viable firms failed to show at least "production"
responses, while only ten per cent of non-viable firms followed an "active" short run strategy.
The results are even more striking for strategic policy making in the firm. Almost every viable and potentially
viable firm had an active long run strategy in place. The absence of a long run strategy was concentrated in firms
which were not viable. Thus we do not have the information to analyze across the spectrum whether shocks are
positively associated with the degree of response. However, the proposition that there is such an association can be
refuted at the extremes of the distribution, when we consider the lack of responsiveness of non-viable firms.
Enterprises that are pushed to non-viability from the outset of the transformation process, or soon afterwards, rather
than nsig to the occasion appear to sink under the accumulated burden of their problems.
Viability is not necessarily a simple matter of favorable or unfavorable external conditions. Highly motivated
managers will be more likely actively to seek an improvement in the firm's situation. At the same time, managers may
become demotivated when the financial situation in the enterprise is apparently beyond repair. The relationship is
explored in Table 16, in which the predicted association is very clear. Potential viability, and especially viability itself.
predominantly is found in firms with high levels of managerial motivation. Non-viability is concentrated in firms with
weak or very weak management and managerial motivation. The causality is of course in principle ambiguous.
However the cases themselves suggest that weak managerial motivation predates the financial shock which caused
non-viability. Hence Table 16 is consistent with the view that unclear ownership arrangements and the negative use
of employee power in the workplace to undermine decision-making authority may have helped to aggravate the already
poor financial circumstances of some firms. However this conclusion must be treated with caution because both non-
viability and weak managerial motivation are characteristic concentrated in Polish firms. The apparently clearcut
association in Table 16 may primarily reflect differences between national economic reform programs discussed
above.
We noted above that there is a close association between viability and progress in privatization. The data are
summarized in Table 17. We find that in practice no non-viable firms have been privatized, though a few have been
liquidated. Viable firms are almost all either being privatized, or have already been through ownership changes.
Intermediate firms in terms of financial status have begun to progress rather more slowly on the path to privatization.
Restructuring, Viability and Privatization: A Comparative Study ofEnterprise Adjustment in Transition 21
Once again, though there is strong inter-country dimension to this result, it still has important implications, especially
when the relationship between progress towards privatization and the establishment of a long run strategy is taken into
account.
We note in Table 18 that there is very strong correlation between enterprise progress towards ownership changes
and the establishment of a long run strategy. The cases themselves indicate that the causality typically runs from the
former to the latter; the process of formulating a strategy towards privatization is the most significant way that firms
develop a long run strategy for the market place. At the same time, unclear ownership arrangements appear to be a
crucial constraint on the development of any long run thinking within the enterprise.
The data in Table 18 establish that privatization is not however quite a necessary and sufficient condition for
long run strategic thinking. There is one firm in our sample which is private and appears to have no long run strategy.
However, it appears to be a rather special case in that the firm was returned very early in the transition program to its'
former owners, now domiciled abroad, who have exerted little corporate governance. Moreover, there is one firm on
the path to pnvatization which has not yet worked out a convincing long run strategy; this time an enterprise in heavy
industry and focused to the CMEA market with an enormous task to restructure ahead. Apart from these, all
privatized and partially privatized firms have established a long run strategy. In contrast, only one third of firms which
are not being privatized have undertaken coherent long run thinking about their future. The majority have no long run
strategy.
This confirms the view that progress in privatization is pivotal to enterprises' long run strategic thinking about
their future, and to the process of restructuring and reorienting to the market environment. The Polish, and to a lesser
extent the Hungarian, deficiencies in this area seem even more serious in the light of the findings in Table 18. One
might also note that western involvement is also important in enterprise restructuring, though unlike privatization it
appears to be a sufficient rather than a necessary component of successful transformation. We find that no firms that
are being privatized with significant Western involvement do not have a long run strategy in place, though of course
numerous firms have developed long run strategies without the aid of a Western partner.
6. CONCLUSIONS
The cases taken together suggest that there is no simple relationship between the sharp shocks to the firm's trading
environment associated with "big bang" stabilization programs and the extent of enterprise restructuring and
adjustment. Many firms have successfully begun to transform themselves in both Hungary and Czechoslovakia. It is
however clear that when the shock is too big, threatening the very survival of the firm in its current form, this acts to
hinder adjustment.
More important for successful microeconomic transition is the speedy establishment of a privatization program.
Ownership changes are intimately bound up with long run strategic thinking more generally. The emphasis on
privatization therefore seems to explain much of the considerable progress towards enterprise adjustment observed
in the CSFR and Hungarian cases. Given the Hungarian reliance on sale by public tender, this does not necessarily
prove that mass privatization programs devised as a component of the overall reform strategy at the outset are a crucial
ingredient of successful reform. But speed and effectiveness are of the essence, and few other transitional economies
can match Hungary's access to Western capital. On the other hand, the sustained lack of any effective Polish strategy
22 Research Paper Series: E Europe/FSU
towards privatization was clearly an important explanatory factor in the failure of much of the state owned sector to
adjust adequately to the new market conditions. Our findings are dominated by country specific differences in
enterprise reactions to the reforms, and a root cause is variation in policy towards privatization.
We have identified a close positive correlation between enterprise viability, long run adjustment and
privatization. Whether the authorities plan to sell firms or to distribute the shares at low or zero prices, ownership
changes have been largely restricted to firms which are financially sound. The authorities therefore need another
strategy to deal with firms whose economic situation is not soluble ; financial restructuring or liquidation. The dangers
of allowing the situation to deteriorate further by delay and drift are just as serious here as concerning privatization
policy.
The study has also identified a series of Polish-specific factors which have acted to hinder enterprise adjustment,
related to the poor initial macroeconomic conditions and to the power of employees over enterprise decisions. While
few if any of these factors pertain in Hungary or Czechoslovakia, they have considerable relevance for the second wave
of reforming economies, most notably Russia. Because the initial inflation was much more serious, the negative effects
of the stabilization program appears to have been even more marked in Poland than elsewhere. Problems were most
notable Via deteriorating international competitiveness, particularly debilitating tax demands and untenable levels of
enterprise indebtedness. At the same time, employees enjoyed significant power in the workplace, though primarily
of a negative sort. This was used further to weaken firms' financial standing by wage demands, to frustrate the
emergence of long run plans and to veto proposals for ownership changes. The difficulties here are particularly
intractable, and appear to have led the Polish authorities defacto to place much of the microeconomic policy emphasis
on the growth of the new private sector. Alternative solutions might lie in channelling workers' energies to assist rather
than hinder transition, perhaps by partial ownership rights.
TABLE 1
Sector! Firm Size Criteria for
Product Group # of Employees Selection
1. Engineering SOE 2,000 employees heavy, viable, capital intensive, CMEA
* machine tools dependent, producer good, monopoly, large,
* CAM/CAD establishment, SOE holding company, heavy
reliance on West for R&D, financially
constrained, moving from soft to hard budget,
financially constrained
1. Defense 5,000 - 10,000 heavy, capital intensive, viable, CMEA
Contractor employees dependent, defence conversion, SOE,
* military vehicles medium/large, financially constrained, moving
from soft to hard budgets
3. Heavy Chemicals 10,000 employees basic, viable, capital intensive, CMEA
* petrol- dependent, large, monopoly, energy intensive,
chemicals environmental problems, R&D/patent
dependent, financially constrained,
technological reconversion, multi-plant,
changing markets, glutted markets, over
capacity, EC Quotas
4. Textiles/Garments 1,000 employees small, light, labour-intensive, competitive,
* private Western-oriented, viable, single-plant, EC
" being privatised Quotas, sensitive to competitive markets, very
dependent on working capital/credits,
design/market sensitivity
5. Textiles/Cloth 500 employees medium, light, intermediate, competitive,
* being privatised viable, multi-plant, EC/MFA constrained, credit
dependent
6. Electronics 2,000 employees intermediate/final, civil/military,medium/large,
* being privatised CMEA (military), multi-plant, multi-product,
" SOE military - viable, financially constrained (bankrupt),
knowledge intensive, reliance on local and
western R&D, foreign investment, design
intensive, capital intensive, foreign
collaboration in investment, competition
7. Glass 1,000 employees small/medium, final intermediate, western
* table glass export, viable, multi-product, multi-plant,
* flat glass capital/labour intensive, design intensive,
* industrial glass foreign investments, competitive, financially
* private constrained
* privatised
8. Food Processing 500 - 1,000 final, small/medium, viable, potential exports,
(Chocolate) employees agriculture based, foreign investment,
* private competitive, large domestic market, CMEA,
* cooperatives dependent, multiple/single plant
* foreign-owned
Sector/ Firm Size Criteria for
Product Group # of Employees Selection
9. Wood Products = 200 - 800 final, small/medium, labour intensive, export
* furniture employees potential, foreign investments
* being privatised
10. Iron/Steel 5,000 - 10,000 heavy, non-viable, single-town plant, state-
* integrated mills employees owned, financially inviable (bankrupt), large
a SOE employment, high wage, energy intensive,
capital intensive, pollution, subsidised, EC
Quota, single/multi (Hungary) plant
11. White Goods; 2,000 - 3,000 medium, viable, foreign licensing/ownership,
Refrigerators; employees CMEA market, labour intensive, for re-export
Washers & Dryers to west, credit constraints, competitive, final
* being privatised good
12. Footwear z 500 employees light, small/medium, private, CMEA,
* private dependent, labour intensive, viable, financially
* being privatised constrained, competitive, export potential, FD1
potential, multi-plant, EC Quota, voluntary
restraints
13. Plastics = 2,000 employees intermediate, medium/large, capital intensive,
* being privatised CMEA input dependent, polluting, energy
intensive, viable, financially constrained,
competitive, EC Quota
14. Pharmaceutical = 1,000 - 2,000 knowledge intensive, medium, patent
Companies employees dependent, likely to be privatised, foreign
* private direct investment, joint-venture possibilities,
* being privatised capital intensive, high R&D, final product,
potentially viable and exportable, competitive,
less financially constrained, long experience of
industrial cooperation with the West, CMEA/
West exports, environmental problems
15. Auto Parts 1,000 employees intermediate, foreign investment, export
* being privatised potential, large, capital intensive, strong
international competition
TABLE 2
NO. INDUSTRY CZECHOSLOVAKIA HUNGARY POLAND
1. Auto Parts Employees: 5,000 Employees: 3,913 Employees, 1,300
Total Sales: Kes 1 B Total Sales: 3.2 B Total Sales: ca $20 M
2. Defense
3. Electronics/Consumer Employees: 1,200 Employees: 3,000 Employees: 1,540
Total Sales: Kes 350 M Total Sales: n/a Total Sales: $8 M
4. Electronics/ Employees: na
Industrial Machinery Total Sales: n/a
5 Engineering/ Employees: 5,500 Employees: 1,720 Employees: n/a
Machine Tools Total Sales Kes 2 B Total Sales: n/a Total Sales: n/a
6. Food Processing/ Employees: 1,214
Brewing Total Sales: 5,113.4 B
7. Food Processing/ Employees: n/a Employees: 2,500* Employees: 800 (?)
Chocolate & Sweets Total Sales: n/a Total Sales: 2,766 B Total Sales: $20 M
8. Footwear Employees: Employees: 260
Total Sales: Total Sales: $5 M
9. Glass Employees: 3,000 Employees: 1,200 Employees: 1,040
Total Sales: Kes 0.8 B Total Sales: n/a Total Sales: $5 M
10. Heavy Chemicals! Employees: 5,500 Employees: 6,532* Employees: 8,200
Refinery Total Sales: Kes 4 B Total Sales: 33.350 B Total Sales: ca $2.0 B
11. Iron/Steel/Metallurgy Employees: 30,000 Employees: 10,564** * Employees: 9,000
Total Sales: Kes 4 B Total Sales: H4UF 33.999 B Total Sales: $200 M
12. Pharmaceuticals Employees: 2,500 Employees: 6,182 Employees: 1,300
Total Sales: Kes 2 B Total Sales: 17.060 8 Total Sales: $15 M
13. Plastics Employees: 1,500 Employees: 1,500 Employees: 740
Total Sales: Kes 600 M Total Sales: HUF 5,000 B Total Sales: $20 M
14. Textile/Cloth Employees: 3,000 Employees: 1,752 * Employees: 652
Total Sales: Kes 1.2 8 Total Sales: 1,250 B Total Sales: $7 M
15. Textile/Garments Employees: 300 Employees: 3,977 Employees: 4,100
Total Sales: Kes 50 M Total Sales 6.226 B Total Sales: $20 M
16. Vehicles Employees: 12,494 Employees: 4,500
Total Sales: 18.176 B Total Sales: n/a
17. White Goods/Refrig. Employees: 4,704* Employees: 5,500
Washing Machines Total Sales: n/a Total Sales: $30 M
18. Wood Products/ Employees: 1,000 Employees: 1,200
Furniture Total Sales: n/a Total Sales: $ 10 M
TABLE 3
Preconditions to Reform
Hungary Poland Czechoslovakia
GNP/head 2590 1790 3450
GNP growth
(av-annual) 1970s 4.5 5.5 4.6
1980s 0.5 -0.7 1.4
Administered 15 100 100
Prices (% total) (excl food)
State ownership of
industrial assets (%) 90 70 97
M2/GDP 90 0.4 0.9 0.7
External debt/GDP 1990 65 80 19
External debt service ratio 57 56 23
Exports to CMEA 1990
% total exports 43 41 60
% GDP 16 14 25
Source: Bruno (1992), IMF Staff papers
TABLE 4
Summary of Reforms
Core Macroeconomic Policies
Date of Trade Subsidy Tight Price Internally Incomes
Reform Devaluation Liberalisation Cuts Credit Liberalisation Convertible Policy
Policies Exchange Rate
Czechoslovakia 1st January / /V/ corporatist
1991 ,
Hungary Gradual Gradual Gradual Gradual / Gradual / corporatist
since at / /
least 1988
Poland 1st January / / / / / / tax based
1990 /
28 Research Paper Series: E. Europe/FSU
TABLE 5
Initial Results of Transition Package
1990 1991
Poland CSFR Hungary Poland CSFR Hungary
GDP growth -11.6 -0.4 -4 -8 -16 -8
Consumer prices 640 18 32 249 54 33
Budget balance -7.4 -0.3 -0.1 -3.5 -2.1 4.1
Source: IMF
TABLE 6
Nature of Shocks Faced by Firms
Managerial and Product Market Development of Changes in Ownership
Financial Autonomy Liberalization Factor Markets
P C H P C H P C H P C H
1. Steel 2 1 5 - 5 3 - 1 1 - 1
2. Textiles/Clothing 1 1 3 5 5 5 2 - 2 1 1 1 1
3. Pharmaceuticals 1 1 1 5 5 5 1 1 1 1 1 1
4. Car Parts 1 1 1 5 5 5 1 1 1 1 1 1
5. White Goods 1 - 1 5 - 5 1 - 3 2 - 1
6. Heavy Chemicals 1 1 1 3 3 5 1 1 1 1 1 1
7. Vehicles 1 2 1 5 5 4 2 2 1 1 1 1
8. Consumer Electronics 1 1 1 5 5 5 1 1 1 1 1 1
9. Machine Tools/
Engineering 1 1 1 5' 5 5 2 1 2 1 1 1
10. Furniture 1 1 - 5 4 - 2 1 2 1 1 1
11. Glass 1 - 1 5 - 5 4 - 2 1 - 1
12. Footwear 1 1 - 5 2 - 4 1 - 1 1 -
13. Plastics 3 1 1 5 5 5 3 2 2 1 1 3
14. Textiles/Garments 3 3 1 5 5 5 1 3 1 1 1 1
15. Food Processing-
brewing - - 1 - - 2 - - 1 - - 1
16. Food Processing-
sweets/chocolates 1 1 1 2 3 3 2 2 2 1 1 1
17. Precision Tools/Defense - - 2 - - 5 - - 3 - - 1
P = Poland C = Czechoslovakia H = Hungary
Scale = 1 to 5; 1 means no major change at start of reforms; 5 means enormous impact from reforms in this area.
TABLE 7A
Nature of Responses: Short Run
Poland Czechoslovakia Hungary
1. Steel 3 - 3
2. Textiles/Clothing 3 3 5
3. Pharmaceuticals 2 3 5
4. Car Parts 4 3 3
5. White Goods 5 - 4
6. Heavy Chemicals 1 3 3
7. Vehicles 3 4 3
8. Consumer Electronics 3 4 3
9. Machine Tools!
Engineering 3 3 4
10. Furniture 2 4 -
11. Glass 2 - 2
12. Footwear 2 (5) -
13. Plastics 4 4 3
14. Textiles/Garments 4 4 3
15. Food Processing-
brewing - - (5)
16. Food Processing-
sweets/chocolates 4 3 5
77. Precision Tools/Defense - - 1
1 denotes "passive" response only, e.g., accumulation of debt and arrears,
non-payment of suppliers, accumulation of inventories.
3 denotes mainly "production " responses e.g., closing production lines,
altering product mix, laying off workers, reorganising production
towards cheaper inputs.
5 denotes more active response new organisation, marketing! sales
development/ export orientation/ quality development/ information
systems! cost control etc.
TABLE 7B
Nature of Responses: Long Run
Poland Czechoslovakia Hungary
I nq Rijn .3A?g f n
Plare
Yes %) 47 54 73
No (%] 47 23 13
Unclear (%) 7 23 13
TABLE 8
Viability By Country and Sector In 1992
Poland Czechoslovakia Hungary
1. Steel 3 - 3
2. Textiles/Clothing 3 5 5
3. Pharmaceuticals 3 5 5
4. Car Parts 1 3 4
5. White Goods 3 - 5
6. Heavy Chemicals 5 5 5
7. Vehicles 1 5 3
8. Consumer Electronics 1 4 1
9. Machine Tools!
Engineering 1 5 5
10. Furniture 1 5 -
11. Glass 1 - 1
12. Footwear 1 5 -
13. Plastics 5 5 4
14. Textiles/Garments 5 5 3
15. Food Processing-
brewing - - 5
16. Food Processing-
sweets/chocolates 5 5 5
17. Precision Tools/Defense - - 1
1 non-viable: persistent loss maker or insoluble cash flow problems
3 potentially viable: small loss, cash flow problems, perhaps mounting
5 viable: profitable firm, short term future not in doubt
TABLE 9
Managerial Motivation
Poland Czechoslovakia Hungary
1. Steel 1 - 2
2. Textiles/Clothing 3 2 3
3. Pharmaceuticals 2 3 2
4. Car Parts 2 3 3
5. White Goods 1 - 3
6. Heavy Chemicals 3 3 3
7. Vehicles 2 2 3
8. Consumer Electronics 1 3 2
9. Machine Tools/
Engineering 2 3 3
10. Furniture 2 3
11. Glass 1 - 3
12. Footwear 1 3
13. Plastics 2 3 3
14. Textiles/Garments 3 3 3
15. Food Processing-
brewing - - 3
16. Food Processing-
sweets/chocolates 2 2 3
17. Precision Tools/Defense - - 3
I denotes management either poorly motivated (e.g., badly rewarded) or
weak relative to either unions or government.
2 denotes management have some decision-making autonomy and to
some extent are motivated to assist company restructuring.
3 denotes significant managerial autonomy and high managerial
motivation.
Table 10
Power of Workers
Poland Czechoslovakia Hungary
1. Steel 2 - 2
2. Textiles/Clothing 3 3 3
3. Pharmaceuticals 2 3 3
4. Car Parts 2 3 3
5. White Goods 1 - 3
6. Heavy Chemicals 3 3 3
7. Vehicles 3 3 3
8. Consumer Electronics 1 3 3
9. Machine Tools/
Engineering 3 3 2
10. Furniture 3 3 -
11. Glass 1 - 3
12. Footwear 1 3 -
13. Plastics 2 3 3
14. Textiles/Garments 2 3 3
15. Food Processing-
brewing - - 3
16. Food Processing-
sweets/chocolates 1 3 3
17. Precision Tools/Defense - - 3
1 workers dominate short run and long run decision making, e.g., appoint
managers, veto privatisation plans etc
2 workers influential in short term decision-making, e.g., in job losses, pay
determination etc -
3 workers have little or no decision-making authority
TABLE 10A
Changes in Management
No. of firms with
No. change in 1 change in 2 or more unknown
management management changes in
since 1990 management
Poland 7 4 3 1
Czechoslovakia 8 1 - 4
Hungary 7 6 1 -
34 Research Paper Series: E. Europe/FSU
Table 11
Progress in Privatization
Poland Czechoslovakia Hungary
1. Steel 1 - 2
2. Textiles/Clothing 1 2 2
3. Pharmaceuticals 1 2 2
4. Car Parts 1 2 1
5. White Goods 1 - 3
6. Heavy Chemicals 1 3 2
7. Vehicles 1 2 2
8. Consumer Electronics 1 2 1*
9. Machine Tools!
Engineering 1 3 2
10. Furniture 1 2 -
11. Glass 1 - 1
12. Footwear 1 *-
13. Plastics 1* 2 2
14. Textiles/Garments 3 3 2
15. Food Processing-
brewing - - 3
16. Food Processing-
sweets/chocolates 1 2 3
17. Precision Tools/Defense - - 1
1 not privatised
2 partially privatised or about to be privatised
3 (majority) private
liquidated
TABLE 12
Role of Western Foreign Partners in Privatization
Poland Czechoslovakia Hungary
1. Steel 1 - 2
2. Textiles/Clothing 1 3 1
3. Pharmaceuticals 2 2 2
4. Car Parts 1 2 2
5. White Goods 1 - 5
6. Heavy Chemicals 1 2 2
7. Vehicles 2 1 3
8. Consumer Electronics 2 1 1
9. Machine Tools!
Engineering 1 1. 3
10. Furniture 2 1 -
11. Glass 1 - 2
12. Footwear 2 1 -
13. Plastics 1 3 3
14. Textiles/Garments 1 1 2
15. Food Processing-
brewing - - 2
16. Food Processing-
sweets/chocolates 1 4 5
17. Precision Tools/Defense - - 1
1 no role of foreign partners
2 operating business contacts - licences/trade etc
3 partial joint venture - with subsidiary or single plant
4 full joint venture - partial foreign ownership (< 50%)
5 majority foreign ownership planned or actual
TABLE 13
Sectoral Patterns of Adjustment
Average Average Long Average
Short Run Run Response' ViabilitW
Response'
1. Steel 3 - 3
2. Textiles/Clothing 4 5 5
3. Pharmaceuticals 3 4 5
4. Car Parts 3 3 3
5. White Goods 5 - 4
6 Heavy Chemicals 2 4 5
7. Vehicles 3 2 3
8. Consumer Electronics 3 4 2
9. Machine Tools/
Engineering 3 4 4
10. Furniture 3 3 -
11. Glass 2 - 1
12. Footwear 2 1* -
13. Plastics 4 4 5
14. Textiles/Garments 4 4 5
15. Food Processing-
brewing - - 5
16. Food Processing-
sweets/chocolates 4 - 5
17. Precision Tools/Defense - - 1
excluding private firms
a 1 denotes passive response; 3 denotes mainly "production" response;
5 denotes "active" response
b I denotes no long run strategy; 3 denotes some strategy or not clear;
5 denotes long run strategy
c 1 denotes non-viable; 2 denotes potentially viable; 5 denotes viable
TABLE 14
Enterprise Perceptions of Tax Regime
Poland Czechoslovakia Hungary
No. of firms believing tax 7 - -
policy a major constraint on
restructuring or source of
financial difficulty
No. of firms who believe tax 1 3 2
policy is a minor constraint
or source of difficulty
No. of firms not mentioning 7 10 13
tax problems
TABLE 15
Viability and Responses
Viability
Non-viable Potentially Viable
Viable
Short Run Adjustment
% firms with passive adjustment 50 12.5 4
% firms with active responses 40 75 32
10 12.5 64
I nng Run Arijuvstment
% firms with no long run strategy 80 0 16
% firms with partial long run strategy 10 12.5 12
% firms with active long run strategy 10 87.5 72
no. of firms 10 8 25
TABLE 16
Viability and Managerial Motivation
Non- Viable Potentially Viable Viable
% firms with poorly 30 25 4
motivated or weak
management
% firms with partial 50 25 24
management autonomy
and profit orientation
% firms with high 20 50 72
management autonomy
and motivation
TABLE 17
Viability and Privatization
Viability
Privatization Non- Viable Potentially Viable Viable
not privatized (% firms) 80 50 12
partialy privatized (% firms) - 50 52
private (% firms) - 32
liquidated (% firms) 20 - 4
TOTAL 100 100 100
TABLE 18
Progress in Privatization
No progress Partially (majority)
priva tized privatized
no long run strategy (% firms) 56 6 13
partial long run strategy (% firms) 11 13 -
long run strategy in place 33 81 88
TOTAL 100 100 101
NO. OF FIRMS 18 16 8
Restructuring, Viability and Privatization: A Comparative Study ofEnterprise Adjustment in Transition 39
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