Adjustment by Manufacturing Firms THE ECONOMIC DOMINANCE of the state sector makes its behavior and response crucial to the course of reform in the economies of Central and Eastern Europe. This paper examines the special case of Poland in the three years following the "big bang" of January 1, 1990. The big bang-a program of radical reform to create the legal, institutional, and economic basis for a market economy-was instrumental in changing relative prices, introducing foreign competition, and signaling that tight monetary and fiscal policies would be pursued. However, changes in the ownership and governance of state manufacturing companies have lagged behind. This delay in privatizing has raised concerns because the state sector has played a central role in Poland. In 1990, the first year of Poland's reform program, state manufacturing accounted for some 30 percent of Brian Pinto was the senior economist in the World Bank Resident Mission in Poland when this study was done. Anna Krajewska and Bohdan Wyznikiewicz provided valuable help and suggestions, while Robert Sierhej did a superb job on research assistance. We thank Olivier Blanchard, Ian Hume, Mario Nuti, Raaj Sah, Stan Wellisz, and Sweder van Wijnbergen for useful comments. We acknowledge the encouragement of Greg Ingram and financial support from the World Bank. The views expressed here do not necessarily reflect those of the World Bank Group or affiliated institutions. 213 214 Brookings Papers on Economic Activity, 1:1993 GDP, 19 percent of employment, 85 percent of exports, and 60 percent of fiscal revenues. Unless rapidly privatized, many analysts argued, state manufacturing firms would not respond to the new economic environment, would decapitalize companies by paying out surpluses as wages, and would then use their bargaining power to negotiate a bailout with the government. The resulting fiscal burden would thus sabotage macroeconomic stability. This paper presents evidence that state-owned enterprises (SOEs) have been much more responsive than these fears implied. This finding suggests that hard budgets and import competition-essential ingredients of Poland's reform package-can exert adjustment pressures even when changes in ownership and governance lag behind. Two points are worth stressing along with this finding. First, credible and sustained enforcement of hard budgets and competition is difficult politically. ' Pressures occur constantly to reintroduce soft loans and protection. Second, the finding does not mean that hard budgets and competition are substitutes for changes in governance. Both, presumably, are necessary. But at least in Poland's case, the prospect of changes in governance has provided the needed incentives even before such changes have occurred. Thus far, privatization has been the most successful in services and in retail trade (although even here the change consists of leasing state shops to private operators). Privatization of manufacturing has been slow and contentious, with the mass privatization program (MPP) aimed at t...
This paper is part of the ongoing work on debt issues in Economic Policy Department of the Poverty Reduction and Economic Management Anchor at the World Bank. The views expressed herein are entirely those of the authors and do not necessarily represent the views of the World Bank, its Executive Directors or the countries they represent. We would like to thank Aart Kraay and Ashoka Mody for useful comments. Any errors are ours. The views expressed herein are those of the author(s) and not necessarily those of the National Bureau of Economic Research.
This overview introduces and summarizes the findings of a practical volume on managing volatility and crises. The interest in these topics stems from the growing recognition that non-linearities tend to magnify the impact of economic volatility, leading to large output and economic growth costs, especially in poor countries. In these circumstances, good times do not offset the negative impact of bad times, leading to permanent negative effects. Such asymmetry is often reinforced by incomplete markets, sovereign risk, divisive politics, inefficient taxation, procyclical fiscal policy and weak financial market institutions n factors that are more problematic in developing countries.The same fundamental phenomena that make it difficult to cope with volatility also drive crises.Hence, the volume also focuses on the prevention and management of crises. It is a user-friendly compilation of empirical and policy results aimed at development policy practitioners divided into three modules: (i) the basics of volatility and its impact on growth and poverty; (ii) managing volatility along thematic lines, including financial sector and commodity price volatility; and (iii) management and prevention of macroeconomic crises, including a cross-country study, lessons from the debt defaults of the 1980s and 1990s and case studies on Argentina and Russia.
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