eastern europe and the former soviet union: class 3

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Eastern Europe and the Former Soviet Union: Class 3

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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 Presentation

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Page 1: Eastern Europe and the Former Soviet Union: Class 3

Eastern Europe and the Former Soviet Union: Class

3

Page 2: 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

Page 3: Eastern Europe and the Former Soviet Union: Class 3

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

Page 4: Eastern Europe and the Former Soviet Union: Class 3

Criticism

Too much; too quicklyExcessive pain on large state

enterprises, their employees and local communities

Page 5: Eastern Europe and the Former Soviet Union: Class 3

Counter-arguments

Necessary conditions for privatization, enterprise restructuring and development of an institutional system compatible with a market economy

Page 6: Eastern Europe and the Former Soviet Union: Class 3

Pre-Big Bang obstacles faced by private entrepreneurs

Hard to locate spaceDifficult to raise capitalcapricious tax authoritiesBureaucratic snagsProblem of obtaining materials

Page 7: Eastern Europe and the Former Soviet Union: Class 3

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)

Page 8: Eastern Europe and the Former Soviet Union: Class 3

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

Page 9: Eastern Europe and the Former Soviet Union: Class 3

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)

Page 10: Eastern Europe and the Former Soviet Union: Class 3
Page 11: Eastern Europe and the Former Soviet Union: Class 3

Unemployment---still a problem

10-11% 1998-99pockets of very high

unemployment in regions where agricultural and industrial restructuring is difficult and incomplete

Page 12: Eastern Europe and the Former Soviet Union: Class 3

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

Page 13: Eastern Europe and the Former Soviet Union: Class 3

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

Page 14: Eastern Europe and the Former Soviet Union: Class 3

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

Page 15: Eastern Europe and the Former Soviet Union: Class 3

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

Page 16: Eastern Europe and the Former Soviet Union: Class 3

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”

Page 17: Eastern Europe and the Former Soviet Union: Class 3

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.

Page 18: Eastern Europe and the Former Soviet Union: Class 3

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.”

Page 19: Eastern Europe and the Former Soviet Union: Class 3

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)

Page 20: Eastern Europe and the Former Soviet Union: Class 3

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

Page 21: Eastern Europe and the Former Soviet Union: Class 3

New private sector firms

0

10

20

30

40

5019

88*

1989

1990

1991

1992

1993

1994

Pct of urbanemployment

35% of industrial employment

Page 22: Eastern Europe and the Former Soviet Union: Class 3

Limited access to capital BUT…

Lacked inherited organizational structures

had low fixed costshad motivation to exit

unpromising markets and pursue more attractive ones

Page 23: Eastern Europe and the Former Soviet Union: Class 3

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

Page 24: Eastern Europe and the Former Soviet Union: Class 3

Entry point to manufacturing

Move into manufacturing from trading goods

Page 25: Eastern Europe and the Former Soviet Union: Class 3

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.