# I IN T RODUCTION

Nearly three years into the Polish Economic Transformation Program (ETP), the state manufacturing sector remains vital to fiscal balance and the restoration of a healthy banking sector. It also holds the key to growth and the supply response in view of its unutilized capacity, export potential and economic linkages typical to manufacturing. State-owned enterprise (SOE) behav.or and reform, the subject of this paper, are as relevant today as in the early stages of the ETP owing to slow privatization and the continuing large size of the state sector ir. GDP, exports and taxes. Initial readings suggest that the same is likely to be true of other eiierging riarket economics owing to similar starting points. There is much to be learnt from Poland's experience as a front-runner.

This paper reports on the second phase of the experience of 75 large SOEs drawn from five dlisparate manufacturing sectors and scattered all over Poland. The initial selection was non-random, size as measured by 1989 sales being used as the criterion. However, the fortunes of the firms have evolved in random-walk fashion following the "big bang" and three years later, the non-randomness of the initial selection seems of limited relevance. The paper combines three years of data on the 75 SOEs - 6 months before and 30 months after the "big bang" - with manager interviews to form a much more positive picture of SOEs than the stereotype of a decapitalizing, myopic firm, paying everythiig out in wages and then approaching the government for a bailout.

The focus on large SOEs is valuable because these still account for a large part of economic activity. They also embody many of the more complex problems in transforming the r.manufacturing sector because of their size and bargaining power. Further, their behavior will not only influence the responses of smaller SOEs but also affect the credibility of the ETP. Annex I describes the sample.

The big bang was accompanied by an immediate and sizable drop in aggregate industrial output. Both 1990 and 1991, when CMFA trade was dismantled, were years of recession marked by declining sales and profitability and rising inventories, with little apparent adjustment. After the travails of 1990 and 1991, seasonally adjusted industrial output data displayed an upward trend in 1992 corroboraced by surveys of business anticipations, which indicated more optimism among state enterprise managers. These developments fuelled the expectation that the recession might be at an end, surprising because: (a) fundamental structural reform (privatization of manufacturing, banking sector reform) have yet to take place; (b) the political system was marked by considerable short-run instability following the fragmenting effects of the 1991 elections, culminating in a change of government in mid-1992.

It was decided to re-survey the very same enterprises first visited in mid-1991 to determine whether the recovery indicated by aggregate data w..- underpinned by solid microeconomic adjustment and to obtain insights into the nature of the revival.

There is little doubt, given its size and potential, that state manufacturing suitably restructured and privatized can provide an important source of energy for medium-run growth. Quantitative data are used to show that there are emerging success stories among SOEs based on solid performance. Qualitative data based mainly on structured interviews with managers are used to answer the central issue of what SOEs can be reasonably expected to deliver and the related incentives and instruments. What do managers expect from the Government of Poland (GOP)? Are they optimistic? How do they assess the credihility of the ETP? What is their response to excess wage taxation and the modifications proposed