eastern europe and the former soviet union: class 3
DESCRIPTION
Eastern Europe and the Former Soviet Union: Class 3. Poland pre-transition. More than 8,000 state-owned enterprises >90% of output and 80% of empl. industry accounted for 58% of GDP in 1988. (OECD countries 24%--41%) almost half of exports and imports with CMEA countries - PowerPoint PPT PresentationTRANSCRIPT
Eastern Europe and the Former Soviet Union: Class
3
Poland pre-transitionMore than 8,000 state-owned
enterprises>90% of output and 80% of empl.industry accounted for 58% of GDP
in 1988. (OECD countries 24%--41%)
almost half of exports and imports with CMEA countries
products of inferior qualityaged capital stock; tech. backward
1990- Balcerowicz PlanShock therapy
Price liberalizationtrade liberalizationlegal reforms end restrictions on
private ownershiptight credit policy to lower inflation
and force out loss-making enterprisesrestrictive wage policyambitious fiscal policy
Criticism
Too much; too quicklyExcessive pain on large state
enterprises, their employees and local communities
Counter-arguments
Necessary conditions for privatization, enterprise restructuring and development of an institutional system compatible with a market economy
Pre-Big Bang obstacles faced by private entrepreneurs
Hard to locate spaceDifficult to raise capitalcapricious tax authoritiesBureaucratic snagsProblem of obtaining materials
Immediate results--disappointing
0102030405060708090
Jan-90
May-90
Se
p-90
Jan-91
May-91
Se
p-91
Jan-92
May-92
Se
p-92
Jan-93
May-93
Se
p-93
Unemploymentrate
Industrialproduction (1989=100)
Longer term resultsBy 1994 Poland became the
first country to see recorded GDP exceed 1989 level.
Since 1994continued GDP growth
(6.2% per year 1994-97)investment growthexport growthdeclining inflation
Pre-1994 growth was driven mainly by exports (9% per year)
since 1995 domestic demand, led by investment, took over as the driving force
growth in domestic demand has led to increase in imports and a trade deficit
but largely offset by healthy FDI ($5 B in 1998)
Unemployment---still a problem
10-11% 1998-99pockets of very high
unemployment in regions where agricultural and industrial restructuring is difficult and incomplete
What explains Poland’s economic
turnaround???One perspective focuses on the
achievement of macroeconomic stability
Alternative. Look at categories of Polish enterprises (micro level)state enterprisesprivatized state enterprisesnew private sector firms
Contribution of Privatized SOEs
Very little privatization in early 1990s
took 3 years to work out a Mass Privatization Program
August 1994: only 121 firms actually privatized
Exception---Prochnik
Manufacturer of men’s overcoatsprivatized in April 1991. Seemed to have
unusually good prospectsquickly lost its traditional export markets
collapse of Soviet marketrecession in Western marketscompetition from East and SE Asialost old export subsidiescurrency problems cause supply problems
Need to devise new strategy
• Concentrate on domestic market (and high quality end)
• had to create a marketing division• had to create a distribution network• developed broader product line to gain
image of garment manufacturer• downsized to reduce production costs• subcontracted out sewing jobs to idle
state-owned plants• sold off unproductive assets
State Enterprises
Modest contribution: few successful examples. WHY???
Not much pressure to improve performance. Allowed to default on tax payments to avoid bankruptcy.
“Managerial purgatory”
Example of Gdansk ShipyardEastern bloc countries were major
customersclients located by central governmentPolish government provided all
financingbuilt various classes of boats to
maintain full employmentmost contracts are unprofitable.
Depend on subsidies (no specialization)Managers focus on getting concessions
from government.
With collapse of USSR lost major client
refused to reduce size of operation or variety of products
find it difficult to think in terms of profits
tried to increase employmentinsisted on continued
government support. “We are generating jobs for suppliers.”
Exception--Szczecin shipyards
USA Today article. November 9, 1999.
On brink of bankruptcy in 1991$600 M of revenue in 1998.
(9 times 1991 figure)new managing directornegotiates write-off of 1/3 of
$180 M debt and 5 year extension for the rest (buys time)
Focuses on mid-sized container ships
Downsizes. Reduces total employment from 13,000 to 5,000
implements a performance-based compensation plan for workers
reduced ship production time from 36 to 11 months.
Sheds non-productive assets like workers’ apartment and vacation facilities
New private sector firms
0
10
20
30
40
5019
88*
1989
1990
1991
1992
1993
1994
Pct of urbanemployment
35% of industrial employment
Limited access to capital BUT…
Lacked inherited organizational structures
had low fixed costshad motivation to exit
unpromising markets and pursue more attractive ones
Polish cooperatives. A transitional unit of organization
Example of Gdansk cooperativemaintenance services for state-
owned enterprisesgot into high altitude repair of
smokestacks, towers, industrial cranes etc. that had been allowed to deteriorate
accumulated capital and reinvested in specialized equipment
Source of entrepreneurial skills of managers
Entry point to manufacturing
Move into manufacturing from trading goods
Remaining constraintsRaising capital.State banks were slow to change
due to their links to state firmsNew private banks reluctant to
lend to new private businesses without credit histories or reputations.
High interest rates lead to dependence on retained earnings which slows expansion.