Abstract

When Poland began its economic transformation from a centrally planned economy in 1990,1 few observers expected the sharp declines in output that would accompany the reform (see Chart 5–1 and Appendix Table A10). Traditional economic reasoning, while recognizing the importance of adjustment costs, assigned greater weight to the positive benefits of abandoning inefficient modes of production and liberalizing trade transactions. Sharply negative rates of GDP growth in Poland and in other reforming economies, however, soon shifted opinion from guarded optimism to deep pessimism. Academic papers that investigated various explanations of the “output collapse” proliferated. Macroeconomic factors such as the disbanding of the Council of Mutual Economic Assistance (CMEA) and the concomitant terms–of–trade deterioration, a policy–induced “credit crunch,” and fiscal disinflation were investigated and assigned varying amounts of blame.2 Economists and other social scientists belonging to the “institutional” school of thought felt vindicated by developments that seemed to indicate that the profound tearing down and rebuilding of institutions necessitated by the transformation process was time–consuming and expensive, a fact undervalued by more mainstream economists and policymakers.

Background

When Poland began its economic transformation from a centrally planned economy in 1990,1 few observers expected the sharp declines in output that would accompany the reform (see Chart 5–1 and Appendix Table A10). Traditional economic reasoning, while recognizing the importance of adjustment costs, assigned greater weight to the positive benefits of abandoning inefficient modes of production and liberalizing trade transactions. Sharply negative rates of GDP growth in Poland and in other reforming economies, however, soon shifted opinion from guarded optimism to deep pessimism. Academic papers that investigated various explanations of the “output collapse” proliferated. Macroeconomic factors such as the disbanding of the Council of Mutual Economic Assistance (CMEA) and the concomitant terms–of–trade deterioration, a policy–induced “credit crunch,” and fiscal disinflation were investigated and assigned varying amounts of blame.2 Economists and other social scientists belonging to the “institutional” school of thought felt vindicated by developments that seemed to indicate that the profound tearing down and rebuilding of institutions necessitated by the transformation process was time–consuming and expensive, a fact undervalued by more mainstream economists and policymakers.

Chart 5–1

Selected Economic Indicators1

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Sources: Polish authorities; and IMF staff estimates.1 Figures for 1994 are projections.

As Poland emerged from its deep recession in 1992 and as the economy enjoyed a year of rapid growth in 1993, however, this deep pessimism itself proved something of an overreaction, and a more balanced view of recent developments in the Polish economy has become necessary. In this regard, a short overview of economic developments prior to reform will prove useful.

During the early part of the 1980s, Poland had experienced an economic crisis comparable in severity to the “output collapse” of 1990–91 (see Appendix Table A10). GDP fell by 10 percent in 1981 and by 5 percent in 1982, while prices increased by more than 100 percent and the central government deficit approached 12 percent of GDR Although these early macroeconomic imbalances were contained and GDP growth turned positive by 1983, deep structural problems persisted and the Polish economy approached the first year of reform in what could be described as a state of hidden micro–economic crisis. This crisis is difficult to document precisely because of the lack of a freely functioning price system that would signal imbalances. But hints of this crisis can be found. One such hint was the need to adjust standard econometric models of the Polish economy to account for increasing instances of sectoral excess demands for labor, labor hoarding, and wage increases that were larger for sectors deemed “strategic” by the authorities.3 Other hints could be found at the macroeconomic level, where the unofficial rate for the zloty was depreciated relative to the official rate. By 1989, the zloty experienced a 20–fold loss in its value while the inflation rate neared hyperinflationary levels.

Given this background, the Polish authorities had little choice but to embark on an ambitious stabilization program in 1990, designed to arrest the decline in the zloty and stabilize the overall price level. However, while demand management policies were being utilized to stabilize macroeconomic aggregates, it was clear that the underlying micro–economic problems would themselves have to be addressed. Thus, the Polish authorities began to correct the relative price and sectoral imbalances through price liberalization, to increase productivity through ownership transformation, and to reduce the external debt overhang through trade liberalization (as well as through debt negotiations designed to reduce both official and commercial external debt).

Since the first year of reform, substantial progress has been made in containing the macroeconomic imbalances. The budget deficit shifted from 7.4 percent of GDP in 1989 to an estimated 3.0 percent of GDP in 1993, inflation was reduced from 585.8 percent in 1990 to 35.3 percent in 1993, and the value of the zloty was substantially stabilized around a crawling peg. One way to characterize these developments is that the most pressing problems facing the Polish economy at the beginning of reform were primarily of a macroeconomic nature; that these macroeconomic imbalances were substantially contained in the years following the initial stabilization program; and that the stabilization of the economy facilitated the eventual resumption of growth. From that perspective, the stabilization of the macroeconomy was a necessary precondition for the process of microeconomic reform to begin: it is inconceivable that the economy could successfully begin to be privatized under conditions of hyperinflation, or that private investment could take place while a credit crunch existed and the public sector crowded out the private sector.

Although sound financial policies remain crucial, it is becoming ever more clear that a continuing and successful microeconomic reform is needed to underpin those policies and to serve as the engine of growth for years to come. While macroeconomic policy is laying the foundations for continued growth, it is microeconomic adjustment that will actually provide it. This chapter provides an overview of the microeconomics of the adjustment process. Emphasis will be given to output performance and sectoral developments, productivity, price liberalization, ownership transformation and the commercialization of state enterprises, and incomes policy and the labor market. These issues will in large part decide the ultimate fate of the reform program initiated by the Polish authorities three years ago.

The Supply Response: Output, Sectoral Developments, and Productivity

After stagnating in 1989, GDP growth turned sharply negative in 1990–91, when measured GDP fell by a cumulative 18.3 percent. Although large, the GDP fall was not as exceptional as it might appear. During its earlier economic crisis in 1981–82, Poland experienced a cumulative GDP reduction of 14.3 percent. However, this time the authorities embarked on a wide–ranging reform effort to lay the basis for sustained future growth. By 1992, GDP stopped its decline, increasing by 1.5 percent, while 1993 GDP growth is officially estimated at 4 percent.

Industrial value added, which accounts for about 40 percent of GDP, provided the sectoral basis for the rebound in GDP After falling a cumulative 27 percent in 1990–91, it increased a cumulative 8.4 percent (estimated) in 1992–93. Construction, which accounts for about 10 percent of GDP, began to rebound as early as 1991, when it grew by 6.7 percent, and continued to grow strongly in 1992–93 (by an estimated cumulative 10.5 percent in those two years). Agriculture, which accounts for about 7 percent of GDP, moved in the opposite direction, growing a cumulative 6.5 percent in 1990–91 but falling a cumulative 14 percent (estimated) in 1992–93.

The structure of production as provided in official accounts is not directly comparable to the usual categories utilized by most countries. Services, referred to officially as the “nonmaterial sphere of production.” represented about 20 percent of GDP. However, “trade,” which represented about 15 percent of GDP, was included in “material sphere production,” whereas at least part of this category would normally be classified under services. Accepting the official shares of industry and agriculture in value added as being representative. Poland is somewhat more industrialized, and is less agrarian, than the average middle–income economy.4 Even if a proxy for services is constructed by adding all of trade to “nonmaterial sphere production” data, however, the share of services in value added would be approximately 35 percent, much lower than the 50 percent averaged by middle–income economies. Thus, at least by this measure, the Polish economy has some way to go in becoming more like a typical western–style economy.

If growth in industrial production during 1992–93 is to be interpreted as an indication of a strong supply response to the reforms initiated in 1990, one would expect sectoral production patterns to begin to diverge in order to satisfy the new, market–driven, demands (see Borensztein and Ostry (1992)). Sectoral industrial production trends lend some support to this hypothesis because sectors such as food processing and wood and paper—sectors close to consumer demand—began to grow faster than average industrial production, whereas sectors such as electroengineering grew more slowly (Chart 5–2).5

Chart 5–2.

Industrial Production Index

(By sector; constant prices)

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Sources: Polish authorities; and IMF staff estimates.

Another indication of a strong supply response can be seen in productivity developments in industry. During 1990 and 1991, when gross output fell dramatically, firms initially resisted reductions in employment and productivity fell. As output stabilized in 1992, however, firms began to reduce employment, a trend that continued into 1993 when output growth accelerated. The result was an increase in productivity of 12.2 percent in 1992 and 10.4 percent in 1993 (see “Commercialization and Autonomous Reform of State Enterprises” below). The reduction in employment, though large, might have been even larger had real consumption wages not shown some downward flexibility: in the period 1991–93, employment in the enterprise sector fell by 12.8 percent, while real net wages (excluding profit bonuses) fell a cumulative 6.9 percent (see the subsections on incomes policy and labor below). In the same period, unit labor costs in manufacturing fell a cumulative 21.9 percent.

For weather–related and other reasons, developments in agriculture differed from the general trend. A drought during 1992 had a strong negative impact on agricultural production. As the stock of farm animals was reduced, agricultural production was also affected beyond 1992. Nevertheless, examining agricultural developments in 1990–91 in greater detail reveals evidence of a significant supply response that, if anything, took place even more rapidly than it did in industry. Direct evidence of this can be found in the farmers’ response to the price increases in inputs that followed the virtual elimination of subsidies after the reform. Farmers responded by reducing their purchases of agricultural inputs (including fertilizers, pesticides, feeds, seeds, and even bank credit) while managing to increase the volume of agricultural production. This was achieved both by reducing previously hoarded inputs and by improving the efficiency of input use.6

Price Liberalization

Economic activity could hardly flourish in the absence of the informational signals provided by a freely operating price system, and the Polish authorities moved vigorously ahead in liberalizing it. The movement to a new system of price control began as early as 1982, when a three–part system of prices (administered, regulated, and contract) was introduced. Administered prices were set directly by the authorities, regulated prices were closely monitored, while contract prices were theoretically free to fluctuate (although in practice they also tended to be closely watched).

It was not until the reform program of 1989–90, however, that price liberalization took off. This involved letting contract prices fluctuate freely not only in theory but also in practice; increasing the number of contract prices to 89 percent of the total; and reducing the number of administered prices to 11 percent of the total. Perhaps of equal significance was the reduction in subsidies that accompanied price liberalization. Agricultural subsidies provide an important example: the share of subsidies and other budget transfers to agriculture fell from 22.9 percent of the total budget (about 4 percent of GDP) in 1989 to 9 percent of the total budget (about 0.2 percent of GDP) in 1990 (see Kwiecinski and Quaisser (1993)). The large magnitude of the subsidy reduction provides one measure of the scale of distortion that was prevalent under the old system of price control.

By 1992, a new price system emerged whereby all prices were market determined except for a core of official (administered) prices set directly by the authorities and published in the budget document for the year ahead, plus a set of prices that were influenced by the authorities through taxes. The former included electricity, gas, central heating and hot water, basic medicines, rents in housing belonging to gminas (local administrative units), television fees, and spirits; the latter included fuel for engines, beer, wine, and cigarettes. By 1993, as measured by their weight in the CPI, 12 percent of prices were officially set while 8 percent were tax controlled. In general, the authorities aimed at official price increases that outpaced inflation (see Table 5–1).

In setting specific price paths, the authorities are influenced by a number of considerations, including the need to bring inflation down and social concerns. For example, complete and immediate liberalization in the energy and housing sectors has been resisted given the importance that the energy sector has as an input for other sectors and given the social consequences that higher rents and utility charges would have for the poorest members of society. (This problem is compounded by the fact that individual housing units rarely have their own thermostats.) Also, in the second half of 1993 a number of planned administered price rises in electric energy and gas were delayed for social reasons, as were planned increases in rents. Nevertheless, for 1992 and 1993 as a whole, administered price increases generally outpaced the growth in the inflation rate, and the same is planned for 1994. It is also worth mentioning that the introduction of the VAT in July 1993 produced a one–off increase in prices whose monthly incidence complicated the phasing of some of the planned price increases.

Table 5–1

Selected Official Price Increases

(In percent; end of period)

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Sources: Polish authorities; and IMF staff estimates.

An important by–product of developments in official prices has been the early emergence and later abatement of a “wedge” between the CPI and the PPI7 The wedge in turn caused measures of the trends in the real exchange rate based respectively on the CPI and the PPI to diverge (see Section IV, “Exchange Rate Policy”). Table 5–2 shows that the “services” component of the CPI substantially exceeded the total CPI for the whole of the 1990–93 period. During the period 1991–92, the services component played an important role in creating a wedge between the CPI and the PPI. By 1993, increases in this component substantially converged to the rate of increase in the total CPI, and the wedge disappeared, in the sense that relative trends in the CPI and the PPI assumed a normal relationship. This provided an important indication of a growing convergence between administered and free prices.

Table 5–2.

Producer Price Index versus Consumer Price Index Trends

(In percent; period overage)

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Sources: Polish Central Statistical Office. Biuletyn Statystyczny and Rocznik Stotystyczny.

Toward the second half of 1993 and early 1994 three occasions are worth noting where specific government actions influenced price behavior. The first such development was temporary: increases in retail prices that were not justified by cost or tax increases were prohibited for a period of three months following the introduction of the VAT in July 1993. Second, the Ministry of Finance issued a list of products and a list of “monopolistic” state enterprises that would have to provide a three–week notice to Tax Chambers on any planned increases in prices.8 Although the planned increases could not be prevented by the Tax Chamber, they could be postponed for three months. Third, a scheme of variable import levies in agriculture was devised that would have the effect of increasing domestic prices. (Trade prices, which were also substantially liberalized, are discussed in Section VI, “Integration into the World Economy.”)

In summary, the process of price liberalization could be said to have passed through a number of phases. The first phase took place in 1990 when prices were decisively liberalized. The second phase occurred during 1991–93, when price liberalization was consolidated, a new system of price control emerged, and administered prices settled into a pattern of gradual–but faster than CPI or PPI increases. During this phase, relative price increases gradually became less important, imparting a diminishing impulse to total CPI (although specific administered prices, especially in energy and housing, still have significant catch–up to accomplish). Looking forward, administered prices can be expected to grow either somewhat faster than or in line with inflation.

Privatization

The ownership structure of the Polish economy at the beginning of reform was not as concentrated in the public sector as in some other command economies (such as Czechoslovakia, East Germany, and the Soviet Union).9 Nevertheless, except for private agriculture (which had never been collectivized to the extent that it was in the Soviet Union) the ownership structure in Poland was concentrated in public hands.10 As the command and control system of central planning was dismantled, public enterprise managers and workers acquired substantial independence in the day–to–day running of their enterprise. However, they operated in an environment of unclear property rights with inadequate market discipline and bereft of the usual range of market institutions (financial intermediaries, residual owners, investment funds) that would normally provide both capital and oversight.

The best route to privatization was not easily discernible at the beginning of reform. Direct sale of public enterprises was not easily accomplished, not only because of the lack of local capital markets (and therefore a lack of adequate means of valuing the assets) but also because of the small size of financial savings relative to the likely value of the state enterprise sector (Lipton and Sachs (1990)). Even at the low price–to–earnings ratio of 6, the largest 500 state enterprises would have been valued at 2.5 times the total financial savings of private households. Thus, one candidate for a quick route to privatization was a voucher system (as adopted by the Czech Republic), which would give the right to purchase enterprises without the expenditure of financial savings. At the other extreme would be a system of case–by–case, gradual privatization by direct sale, possibly including agreements with the final buyer regarding future investment requirements and employment protections (similar to that eventually adopted by Germany). In addition, choices had to be made regarding the ownership disposition of the assets—whether shares would be distributed to workers and/or managers and to the public, and at what cost.

A succession of Polish governments made a number of important strategic choices that have subsequently affected the course of privatization. The first such choice was conditioned by the view—strongly held by the authorities—that privatization through a simple transfer of ownership would not necessarily achieve the improvements in corporate governance that alone could bring about the desired improvements in efficiency and productivity. Thus, the authorities chose not to opt for a single, overall method of privatization based on a voucher system but to allow a multitrack approach. After the second half of 1990, state–owned enterprises (SOEs) could voluntarily choose to “liquidate” their assets and to sell them to private hands11 to privatize by selling equity—the so–called capital route:’12 or to remain in the public sector. The SOE “founding body” (either the Ministry of Finance or local authorities) could initiate bankruptcy proceedings for SOEs with tax arrears.’13

The second strategic choice taken by the authorities was to involve insiders (managers and the workers’ councils) by granting to them an effective veto over the privatization process. Privatization was voluntary (except in cases of bankruptcy)14 and there was no time limit by which insiders were forced to choose a privatization path. In effect, SOEs could choose to temporize by not following any of the routes of privatization then offered. The third strategic choice taken by the authorities was not to adopt a specific set of principles governing the disposition of ownership rights. For example, the mode of “reprivatization” (the settlement of claims of owners whose property was nationalized under the previous economic regime) has yet to be legally decided.

The resulting approach to privatization accordingly was the result of pragmatic considerations and has met with considerable success. By the end of 1991, some 12 percent of SOEs were assigned to a privatization path (see Appendix Table All). By the end of 1993, about 26 percent of SOEs were assigned to a privatization path, and almost 13 percent had completed the privatization process. The vast majority of SOEs were liquidated rather than sold. Within the liquidated SOEs, slightly more were assigned to the liquidation path for nonviable firms (Article 19); however, bankruptcy proceedings proved much slower than voluntary liquidations.

Significant progress in privatization could also be observed using a variety of other measures (see Appendix Table A 12). By almost all available measures—number of businesses, employment, and sold production—privatization has been making steady progress. Within sectors, privatization advanced the most in trade (where smaller businesses predominate), followed by construction; the least progress was made in industry (where larger businesses predominate). Except for construction, wages were lower for private businesses but, in the absence of data controlling for size, this is not a very meaningful comparison. Profit rates also appear to have been lower for private businesses, but reportedly costs tended to be inflated disproportionately by private businesses to avoid corporate taxes, which would bias the private sector profit rate downward.

Using official annual data sets, which cover small business establishments excluded by quarterly data surveys, strengthens the conclusions presented above. (Note that the data presented in Table Al2, based on quarterly surveys, produce different point estimates from the annual data.) As of 1992 (full–year 1993 data are not yet available), 42.7 percent of employment was in the private sector, and a similar percentage of value added was produced by the private sector. In certain sectors private enterprises became predominant, having 72.6 percent of employment and 75.5 percent of the sales of construction and assembly, and 90.8 percent of employment in trade. Even in the pivotal industrial sector, the private sector had 40.9 percent of employment and 26.1 percent of sold production. The impressive performance of the private sector was helped by the spontaneous creation of large numbers of small private businesses. By the first quarter of 1993, there were 1.6 million private sector businesses in Poland, up from 0.5 million in the first quarter of 1992. Most of these were very small businesses in the retail and service sectors, but they point nonetheless to the dynamism of the private sector.

The success with the small retail and service–oriented privatization just described went hand in hand with a de facto resolution of ownership rights. Once the price was set for the sale to the manager and/or worker, the transfer of ownership rights was essentially complete. In the case of leases the ultimate ownership of the asset was not determined,15 but the new manager did have an incentive to maximize profits throughout the lease period. By contrast, the lack of resolution of ownership rights for the larger, industrial enterprises, together with the effective veto given to workers’ councils and managers, has implied relatively little progress in that sector, as discussed below.

The authorities intend to advance the privatization of medium–and large–scale industrial enterprises through a Mass Privatization Program (MPP). (A description of the current status of the multitrack approach disaggregated by enterprise size and profitability condition can be found in Appendix Table A13.) The MPP is to be a voucher–based privatization scheme, in which as many as 600 SOEs can choose to participate. Shares are to be issued and given to a small number of investment funds for management. The investment funds would include bids from both domestic and foreign managers. Supervisory boards are to be selected by the Treasury from lists of qualified applicants. Fifteen percent of the shares would he given free to the workers of these enterprises; others would be reserved for pensioners. Vouchers would be distributed that could be used to purchase shares in the investment funds, which would be freely traded on the Warsaw Stock Exchange. The implementation of the MPP was delayed because of the administrative complexity involved (vouchers and shares have to be printed and distributed; bids must be solicited; supervisory boards must be elected); because of the high cost of enacting all the measures involved; and because enterprises have been slow to volunteer. Additionally, the dissolution of the Parliament in May 1993 also delayed its implementation. Nevertheless, it now appears that enough enterprises will volunteer to achieve critical mass for the Mass Privatization Program to be implemented by 1995.

Analyzing the MPP provides important insights into the pros and cons of the Polish approach to privatization. By making participation in mass privatization (and, to date, all other privatization programs) voluntary, the Polish authorities have acted pragmatically: given the inside knowledge and specialized skills possessed by both workers and management, it would be difficult to privatize successfully against their will because the value of the enterprise would depend on their cooperation 16, to However, by offering a menu of privatization choices that is not fixed (a new privatization program could always be offered in the future), the Polish authorities have allowed enterprises to engage in strategic (gaming) behavior—avoid privatization now, and wait for the possibility of a more favorable (to the managers and/or the workers) privatization plan later. Moreover, this reasoning could become self–fulfilling, since nonparticipation by enterprises might induce abandonment of a specific privatization program, especially in circumstances where the authorities are unable credibly to precommit to not changing the privatization rules. Moreover, an aspect of the MPP that has proved contentious concerns the allocation of property rights. Not surprisingly, the allocation of property rights was negotiated with legislative passage of mass privatization in mind. Clearly, the debate over the MPP raised the prospect that the distribution of ownership rights could continue to raise difficult issues in the future.

The Polish authorities recognized these and other difficulties and worked to resolve them by engaging the social partners in tripartite negotiations among employers, employees, and the Government. These negotiations resulted in a series of laws, referred to as the Pact on State Enterprises, that represented a compromise on a range of issues of interest to the social parties. Specifically, as initially formulated, the pact consisted of a series of five proposed laws setting guidelines for state enterprise privatization, specifying deadlines and privatization options, and settling the issue of property rights by determining the discount and the amount of shares that would be offered to each of the social groups. Despite the 1993 dissolution of the Parliament—which meant that laws under the pact on SOEs that had already been submitted for consideration had to be resubmitted once the new Parliament had convened—almost all legislation was passed, except the amendments to the 1990 law on privatization. This exception in part reflected disagreements concerning the percentage of free shares to be given to the “social partners” but also was due to strong political and trade union opposition to a deadline that would force SOEs to choose a privatization path within six months.

In summary, despite the numerous difficulties and constraints (many perhaps inevitable) that the authorities faced, considerable progress has been made and substantial privatization has been achieved. The authorities had simultaneously to create the financial intermediary, capital market, and Legal infrastructure required for the functioning of a modern market economy while at the same time attempting to protect the disadvantaged and achieving legislative support for the privatization program. However, the delay in approving and implementing the MPP and the reduction in the number of obvious candidates under the existing privatization paths have resulted in some slowing down of the privatization process.

Commercialization and Autonomous Reform of State Enterprises

In considering the behavior of the supply side, it is also important to examine whether the behavior of those enterprises still in the public sector has become more market oriented and subject to hard budget constraints. The Polish authorities have already begun the process of state enterprise “commercialization.” This process is intended to improve the performance of enterprises by installing supervisory boards on which the Treasury is represented to provide checks and balances to management/workers’ councils and thereby improve corporate governance. In addition, many state enterprises have begun to operate more efficiently in a spontaneous fashion because increased profits allow higher wages and salaries, and perhaps in anticipation of a future privatization plan under which ownership rights accruing to managers and/or workers would be more valuable.

In studies by Pinto and others (1992, 1993a, 1993b), the question whether the behavior of state enterprises has become more market oriented was considered. A sample of 75 large industrial enterprises was examined in mid–1991 and again in mid–1992. From the sample, a number of generalizations could be made. First, the budget constraint facing enterprises visibly hardened from 1991 onward, with bank or interfirm loans diminishing and taxes rising. (Bank behavior reportedly changed markedly by 1992: banks paid much more attention to the quality of the loans and began to charge differential interest to lower risk customers. See Section III, “Monetary Policy and Financial Sector Reform,” above.) Second, managers played a larger role, and emphasized profits and marketing over production targets. Third, wages were not set to exhaust profits, but were the result of western–type bargaining. And finally, enterprises became cost–conscious and began to reduce input use.

Within the sample, substantial variation was found, with some firms being profitable while others were not. The profitable firms could be found in a variety of subsectors, which indicated that managerial performance in the face of market pressures was an important determinant of profitability. Profitable firms had a better productivity performance; but, encouragingly, even unprofitable firms took measures to control labor, energy, and other material costs; this finding indicated that capacity utilization was also an important determinant of profitability. Financial flows became tighter for both sets of firms after the time state banks were commercialized in late 1991. However, profitable firms continued to have access to investment loans and were able to service their debts, whereas unprofitable firms, while maintaining some access to loans, found the interest burden to be a very substantial problem. There was also some evidence of decapitalization in the unprofitable firms, whereas profitable firms increased their investment.

The sample was also stratified according to whether a given state enterprise was commercialized or not. It was difficult to draw definite conclusions, both because enterprises were commercialized only for a year before the study began, and because there was considerable self–selection among those enterprises that became commercialized (they tended to he much larger employers and had a bigger initial debt burden). The managers surveyed expressed a preference for commercialization as a way to restructure prior to being fully privatized.

These findings have some bearing on the question of incentives to maximize profit for worker–controlled enterprises. Worker–controlled enterprises have apparently not exhausted all profits by distributing them as wages—as was expected by some observers at the beginning of reform. (Of course, the existence of an incomes policy also played a role in constraining employee payouts, as discussed below.) Since this finding was true for some enterprises that were not commercialized, it cannot be explained by claiming a loss of institutional power for workers’ councils. One reason why worker–controlled firms might be interested in profits is to protect employment. The unprofitable firms in the study sample described earlier tended to reduce employment by a greater amount than did the profitable firms. Thus, profits tended to provide some cushion from unemployment levels that reached an economywide 15.7 percent by end–1993. Another reason why worker–controlled firms might be interested in profits could be an expectation of receiving part of current profits in a future privatization deal that gave workers equity at a discount.

The favorable evidence on the behavior of state firms cited above relied on data collected at the enterprise level. Some additional favorable evidence may be found in the aggregate productivity data already described above. Although aggregate data reflected developments both in the private and in the state sector, the industrial sector is still dominated by large, state–owned firms, which implies that state–owned firms also benefited from substantial productivity increases. Despite the convincing evidence of a short–term improvement in the behavior and productivity of state–owned firms, worker–controlled state–owned firms may face obstacles in the future. Reasons for this are more fully explained in the next subsection. On the other hand, despite the progress, it is clear that serious governance problems remain in certain sectors of Polish industry. In particular, there are cases, for example, coal mining and defense, where privatization is unlikely in the foreseeable future and where significant adjustment has yet to occur, posing difficult problems for the authorities.

Incomes Policy and Wages

An important policy that affected state–owned enterprises was a tax on excess wages, the so–called popiwek. The marginal tax rate was very high: it was initially set at 500 percent, falling to 300 percent by 1993. The tax applied to the excess of average wages over a predetermined wage norm, which, however, was adjusted to take account of enterprise–specific factors as well as inflationary developments. In the early period of reform, the objective of the popiwek was to aid the task of inflation stabilization. However, as reform progressed, the popiwek became primarily a tool of indirect control over the behavior of state enterprises that were no longer under the direct control of the ministries, during a period when market discipline was still weak.

Although the consumption wage proved flexible (average wages deflated by the CPI fell by 4.6 percent in 1992 and by 2.4 percent in 1993), it is not easy to demonstrate that the popiwek’s contribution was significant in reducing real wages (see Chart 5–3). High unemployment, low profits, and the hardening of financial constraints during this period could well have been the main determinants of wage developments. However, as Chart 5–3 indicates, the wage norm was consistently set below the rate of growth in the CP1, and it is possible that downward pressure on real wages was thereby exerted. The popiwek probably played a more important role in restraining wages for certain sectors with monopoly power (such as utilities, certain mines, the railways, and telecommunications, which together account for about one–third of total state employment); some of the enterprises involved had the cash at hand to provide larger wages, had the popiwek not been operating.

Chart 5–3.

Wage Normw1

(Percent change)

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Sources: Polish authorities; and IMF staff estimates.1 Wage in six sectors of the economy, excluding personal income tax and profit bonuses.2 January 1994 only.

From the point of view of microeconomic adjustment, the popiwek probably played a positive role overall. One positive effect emerges from a consideration of the standard theoretical framework that is used to assess developments in transition economies’ labor markets (see, for example, Chadha and others (1993)). In this standard model, there is a declining state sector that labor is leaving to move toward an expanding private sector. However, because of adjustment costs and the initially small size of the private sector, transitional unemployment results. The interesting policy question concerns the effect of policies on the speed of adjustment. Here, a trade–off emerges, with higher unemployment compensation (an important ingredient in constructing a safety net) reducing the speed of adjustment and lengthening the period of relatively high unemployment. The popiwek, by keeping wages in certain monopoly sectors in check, reduced the wage differential between these sectors and the emerging private sector, thereby increasing the speed of adjustment. By taxing excess wages while leaving other wages untaxed, the popiwek was a socially sensitive way to achieve this.

Another positive effect may have been to reduce capital decumulation and asset stripping in certain enterprises in the period when property rights were very uncertain. Since then, although the issue of property rights is far from being resolved, workers have acquired some control over their enterprise as well as some expectation of eventually purchasing some equity at favorable rates whenever their enterprise is privatized. These developments have reduced the incentive to strip assets.

Negative effects of the popiwek were documented by Pinto and others (1992, 1993a, 1993b). They found that (i) the most profitable firms paid the popiwek disproportionately; (ii) attempts to rationalize by shedding labor often resulted in a higher average wage because workers with lower skills and lower than average wages were let go at a higher rate than workers with higher skills, which increased the excess wage tax due; and (iii) hiring new skilled workers, which profitable firms needed to do in order to expand, also increased the excess wage tax due by raising the average enterprise wage. Thus, the popiwek introduced some distortions that hindered the successful firms from expanding, which, after all, was the point of the reform. The challenge for policy in the future will be to find ways to check wage increases in the monopoly sectors while minimizing the inevitable distortions.

Labor Market Adjustment

The large rise in unemployment, defined here as those registered as unemployed with employment offices, has raised a number of policy problems. One favorable interpretation of the rise in unemployment is that it is evidence of continuing micro–economic adjustment (in line with the standard model of a transition economy previously described). However, the slow speed at which the unemployed appear to be reabsorbed into the economy has raised the issue whether labor market adjustment is incomplete, and whether it is hampered by structural impediments (not to mention the specter of a significant portion of the labor force being unemployed for years to come, which will put a strain on the budget and deplete valuable skills).

Data on gross employment flows for Poland might shed some light on these issues, but such data are incomplete (some estimates from the Central Statistical Office are shown in Table 5–3). A tentative description can nevertheless be put forward. The first important piece of evidence is the large increase in early retirements, which reduced the size of the labor force. Early retirements tapered off in 1993, indicating that this part of the labor market adjustment had finally run its course. Another development has been the virtual elimination of vacancies, whose size (in flow terms) has become insignificant compared with total unemployment. Taken at face value, the flow movements implied by vacancies would be too small to reduce total unemployment substantially, even if the flow of new unemployed were reduced to zero. 17

New labor force survey data became available starting in 1992. The definition of unemployment according to the labor force survey is considerably tighter than it is according to the “registered unemployed” definition, because the former excludes those working for more than one hour per week. Accordingly, the number of unemployed as given by the labor force survey is about 500,000 lower than it is when unemployment is measured by registration.’18 More interesting is the story on gross flows told by the labor force survey data. By the second half of 1993, gross flows to employment status increased significantly (an effect apparently not captured by the vacancy data). In effect, the stability in the unemployment rate was explained not by a reduction in the flow of newly unemployed but by a rise in the flow of newly employed, a considerably more favorable situation. This development creates the hope of an eventual reduction in total unemployment, provided that structural reforms and the growth in the size of the private sector continue, and provided that output growth remains strong.

Table 5–3.

Unemployment Growth by Main Factors

(In thousands of persons)

article image
Source: Estimates from Polish Central Statistical Office.

Data for first three quarters only.

Conclusion

The analysis provided in this section strongly suggests that microeconomic adjustment has already begun to yield benefits in terms of increased productivity, a significant increase in the size of the private sector, and a process of price liberalization that is almost complete. Moreover, although the reform process has clearly caused severe dislocation, discussed below in Section VII, “Social Impact of the Transition,” there have been a number of ways in which the reform process has been altered to mitigate that disruption: (i) a more gradual process of price liberalization in the socially sensitive sectors of energy and housing; (ii) a more gradual process of privatization for the larger industrial enterprises: (iii) the allocation of property rights arising from privatization to vulnerable groups such as pensioners and to enterprise employees; and (iv) an incomes policy designed to tax excess wages but leave low wages untaxed. Indeed, there is a sense that the “big bang” characterization of Poland’s experience is misleading in that, while it may appropriately apply to some portions of the macroeconomic reform package adopted by the Polish authorities in early 1990, it is clearly inappropriate for a broad spectrum of microeconomic reforms that are far from being completed three years into the program.

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1

For an account of earlier attempts at reform, see Wolf (1991). Briefly, reforms were attempted in the early 1980s to bring down an inflation rate that exceeded 100 percent and to reduce a fiscal deficit that approached 12 percent of GDP. In the period 1987–89, a number of “market–oriented reforms” were considered by the Jaruzelski Government. For the purposes of this section. “reform” refers to the program initiated by the Mazowiecki Government in October 1989 and put into effect in January 1990; see Kwiecinski and Quaisser (1993).

2

A nonexhaustive set of such papers could include Rodrik (1992) on the impact of the CMEA collapse, Calvo and Coricelli (1993) on the role of credit, and Kolodko and GotzKozierkiewicz (1991) and Kolodko (1993) on the role of fiscal adjustment. Other papers, such as Borensztein and Ostry (1992). Borensztein, Demekas, and Ostry (1993). Commander and Coricelli (1992), and Berg (1993) have addressed the broader macroeconomic question of whether supply or demand shocks were the predominant cause of the output collapse.

3

See Welfe (1991). Earlier versions of these models tended to ignore prices altogether (except for producer prices, determined in terms of cost, which were introduced into such models in the 1970s); these earlier versions were eventually adjusted to take account of the prices of consumables (foodstuffs) set freely at food fairs. See Welfe (1981).

4

According to the World Bank classification of middle–income economics. For the average middle–income economy, the share of industry in GDP was 36 percent, while that of agriculture was 12 percent. See World Development Report (1991).

5

The industrial sector data shown in Chart 5–2 are too aggregated w permit definitive conclusions, and they should he regarded as suggestive. Borensztein and Ostry (1992) utilized more disaggregated data, but could not prove the supply response hypothesis definitively because of the short period for which data were available. However, several researchers are continuing to work, utilizing disaggregate data for longer periods, and as evidence accumulates more definitive conclusions should become available.

6

Kwiecinski and Quaisser (1993) provide a more extensive analysis, including the effects of extensive changes in relative prices among various agricultural products. They detail various market imperfections that persisted despite the reform, such as the monopolistic behavior of buyers and distributors of agricultural products. But there is little question that the individual farmers responded promptly to price signals.

7

The “wedge” refers to a difference between the CPI and the PPE that is larger than normal. The CPI will usually tend to increase somewhat faster than the PPE because of the markup between wholesale and retail prices. For Poland, the authorities consider as normal a ratio of PPI to CPI (in terms of percent increases) of 0.86.

8

The products included medicines, liquid fuels, and domestically produced herbicides and other plant protection chemicals. The “monopolistic” firms (61 in number) included steel works, coal, copper, nonferrous metal works, metallurgical Firms, agroindustries, and optics, ceramics, magnets, and chemical works.

9

According to data provided by Milanovic quoted by Lipton and Sachs (1990). The percent of output produced in the public sector was 97.0 in Czechoslovakia (in 1986), 96.5 in East Germany (1982), 96.0 in the Soviet Union (1985), and 81.7 in Poland (1985).

10

At the beginning of reform, state farms represented less than one–fourth of total agricultural land and an even smaller share of employment. See Rozwadowski (1993).

11

Referred to as liquidation according to Article 37 of the Privatization Act of 1990. The assets could be sold directly, contributed to a joint venture with domestic or nondomestic partners, or sold to the existing insiders who could form a new, private, company.

12

Referred to as Article 6 privatization. Legally, capital privatization has to be preceded by a process known as “commercialization” according to Article 5 of the law of SOEs. Under “commercialization.” an SOE is turned into a joint–stock or limited liability company, whose equity is still owned by the Treasury and which is overseen by a board of directors jointly appointed by the Treasury, the enterprise management, and the worker councils. Given the increasing importance of commercialized enterprises, the concept of commercialization is analyzed at greater depth in the next subsection.

13

Referred to as liquidation according to Article 19 of the SOE Act.

14

Although liquidation through bankruptcy could not be an overall instrument of privatization, because it could be initiated only in cases where an SOE was in tax arrears. Also, where local authorities were the founding body (which was true in the majority of cases), political concerns regarding local unemployment would tend to impede liquidation. Finally, bankruptcy is a very time–consuming process.

15

Leases can be considered to be theoretically equivalent to collateralized loans, except possibly for incentive problems associated with maintaining the asset; the latter is usually handled through contractual maintenance obligations.

16

Even in western countries (especially in non–Anglo–Saxon countries) hostile takeovers have proved very difficult to effect. This is partly due to deliberate legal restrictions that many countries have put in place, which allow management considerable control over the disposition of voting shares in case of a hostile takeover attempt. Even in the United States, certain antitakeover defenses (such as the so–called poison pill defense) have been

17

The level of unemployment stopped rising toward the second half of 1993, stabilizing at 15.6 percent. However, in December 1993 it edged to 15.7 percent, and in January 1994 it climbed to 16.0 percent.

18

Polish law allows the registered unemployed to work, provided compensation is less than 50 percent of average wages. Also, in certain circumstances (such as when the head of household is unemployed), members of households can register as unemployed. Registration confers benefits even after unemployment benefits have expired, in the form of job search assistance and health benefits.

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