2 in the recent SOE Pact?" What is their perception of the underlying causes of the 1990 export boom? Did it signify genuine adjustment? How are they coping with the social assets (worker housing, vacation resorts, etc.) problem? What are their attitudes and incentives?

# 1.1 Main Results From First Phase (Jan. 1990 - March 1991)

The first phase examined the microeconomic reactions of the sample firms to the macroeconomic reforms introduced as part of the "big bang" in January 1990 (Pinto, Belka, Krajewski (1991, 1992)). It tracked the evolution of output, costs and profits and examined wage setting behavior, enterprise debt dynamics and enforcement of the 'micro" hard budget constraint by banks, made a firm-level analysis of the export boom and its causes, and documented the evolving tax burden on enterprises. The findings were based on a direct survey of the firms covering the period June 1989 - March 1991, i.e., six months prior to and 15 months following the big bang. Both quantitative and qualitative information (manager interviews) were collected during the enterprise visits.

Some of the main quantitative conclusions were: (a) The high nominal interest rate on working capital (reported by mangers as between 50% and 72% for the month of January 1990 alone) inhibited borrowing and motivated firms to pay off zloty loans, leading to a squeeze on working capital. The huge decline in real wages, which were partly compressed to accommodate rising financial and input costs, led to a demand shock, witnessed by rising finished goods inventoris. Firms that could more easily pass through their costs to their customers and maintain their margins ("low elasticity of demand") were more likely to have maintained output. Consequently, the initial, unexpectedly large, decline in output could be explained by a combination of nominal interest rate shock and standard demand considerations; (b) high 1990 profits were temporary, stemming from inflationary gains on oncc-off inventory sales, devaluation gains on enterprise dollar accounts and implicit input subsidies from CMEA trade; (c) banks were lax in enforcing creditworthiness, leading to an adverse selection problem marked by loans going mainly to "bad" firms, which was reinforced by the reluctance of "good" firms to borrow; (d) SOEs tend to be myopic, with short-run pressure on wages that works to the detriment of restructuring investments essential for reducing energy and material intensity and product re-design; (e) nominal and real wages both displayed remarkable flexibility. Although significant, employment reduction has lagged output reduction partly because partial indexation of wages to inflation enforced by a punitive tax, has kept real wages low; and partly by the natural reluctance of worker-controlled SOEs to shed labor. Therefore, there is clear possibility of much higher unemployment once privatization and commercialization get underway on a large scale. Relatedly, there are few signs of an emerging factor market for labor. An impediment is the absence of a housing market, inhibiting labor mobility; (f) the hard currency export boom in 1990 resulted more from slack domestic demand than higher export profitability.

The main qualitative finding was a definite attitudinal shift in favor of profits and marketing in contrast to the old, exclusive emphasis on production targets. Further, managers tended to be the source of change and innovation, with workers playing more of a reactive, ratifying role. However, there was (and is) a serious principal-agent problem, with managers serving at the pleasure of the Workers' Council and no obvious owner stressing long-term viability considerations in decision-making.

"The 'Pact on SOEs", a framework for enterprise transformation was sent by GOP to the main TUs on September 9. 1992 in a consensus creation effort. A few details (debt restructuring) started filtering out by late August. The bulk of the enterprise visits took place between mid-August and end-September. Annex H contains a brief description.