The Polish motor vehicle industry as a case study in Eastern Europe's transition

This thesis examines the impact of shock therapy on the Polish economy, and within it, on the motor vehicle industry. It is argued that shock therapy has not proved satisfactory as a theory of economic transformation. The following reasons are provided:- ● Shock therapy fails to provide an adequate explanation of the collapse of the command economy. Its emphasis on problems being largely monetary, rather than structural, is misguided, as this leads to the erroneous conclusion that with a strong monetary and fiscal shock, increases in utility will ensue, despite a fall in real income. ● The above may partially explain why shock therapy has failed to satisfactorily predict the outcome of the reform programmes. The assumption of post-reform growth rates following the path of a "J-Curve" has not been borne in reality. The forecasts of various improvements after the first year of the Balcerowicz Programme in Poland were, with the exception of exports, highly inaccurate. By the end of 1993 (after four years of reforms), only one indicator (inflation) registered an improvement over the respective pre-reform level. There was, therefore, no "delayed positive response".
It is argued that the major reason for the failure of shock therapy reforms is that the theory largely neglects the significance of market failures. In particular, sufficient consideration has not been given to the problems of information gaps, absence of capital markets, structural rigidities, investment coordination and high levels of risk and uncertainty, all of which constrain the ability of agents to effectively respond to a liberalised economic regime. The role of careful government intervention - to attempt to remedy market failures - has been undervalued. Failure to take appropriate measures with respect to market failures most important in transforming economies has led to unnecessary costs.
The case study on the motor vehicle industry provided evidence that shock therapy's policy for microeconomic restructuring - trade liberalisation in conjunction with privatisation and FBI - has not proved successful, with the notable, but unusual exception of FSM. The severe recession, in combination with strong important competition, led to a slump in sales, output, and underutilisation of capacity; leading productivity to decline from already very low levels.
With respect to enterprise restructuring, it was found that this was either slow, or largely neglected in all the main determinants of plant productivity considered, i.e., work organisation, high tech capabilities, supplier network, and the Just-in-time system. In regard to management-labour relations, it was found that both parties viewed these as having improved. However, severe "macro" problems frequently override the purportedly better relations at the micro level, so that considerable friction remains - which occasionally spill over into major disputes that act against the restructuring process. The industry has experienced a severe contraction in capacity utilisation and employment - a fact that is very much at odds with the government's wish to preserve the bulk of the industry. It is concluded that an industrial policy for the motor sector would have been more appropriate than the policy that has hitherto been used.