Microeconomics of transformation in
            Poland : a survey of state enterprise responses
State enterprise behavior and reform
            have emerged as key issues in the emerging market economies
            of Eastern Europe because of the size of the state
            manufacturing sector as measured by its share in GDP,
            exports, and tax revenues. The difficulties experienced by
            Polish state-owned enterprises (SOEs) in adjusting and
            responding to the new economic environment have led to
            fiscal imbalance, deteriorating portfolios of commercial
            banks, and burgeoning interfirm payment arrears. The authors
            examine the economic and behavioral reactions of a
            significant sample of Poland's largest SOEs to the
            macroeconomic reforms introduced as part of the "big
            bang" in January 1990. They track the evolution of
            output, costs, and profits, and examine wage setting
            behavior, enterprise debt dynamics, and enforcement of the
            "micro" hard budget constraint by banks. They
            conduct a firm-level analysis of the export boom and its
            causes and document the evolving tax burden on enterprises.
            Their findings are based on a survey of 75 large SOEs in
            manufacturing during June 1989 - March 1991 - six months
            prior to and 15 months following the big bang. Some of the
            main quantitative conclusions were: (1) The high nominal
            interest rate on working capital (from 50 to 72 percent of
            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 led to a
            demand shock, witnessed by rising finished goods
            inventories. Consequently, the initial, unexpectedly large,
            decline in output could be explained by a combination of
            nominal interest rate shock and standard demand
            considerations. (2) High profits in 1990 were temporary,
            stemming from inflationary gains on once-off inventory
            sales, devaluation gains on enterprise dollar accounts, and
            implicit input subsidies from CMEA trade. (3) Banks were lax
            in enforcing creditworthiness, leading to an adverse
            selection problem marked by loans going mainly to
            "bad" firms. (4) State-owned enterprises tend to
            be myopic, with considerable short-run pressure on wages
            that works to the detriment of restructuring investments
            essential for reducing energy and material intensity and
            product redesign. (5) Nominal and real wages both displayed
            remarkable flexibility. Employment reduction has lagged
            output reduction partly because partial indexation of wages
            to inflation has kept real wages low and partly because of
            the natural reluctance of worker-controlled SOEs to shed
            labor. So, there is clear possibility of much higher
            transitional unemployment once privatization and
            commercialization get underway on large scale. (6) The
            hard-currency export boom in 1990 was motivated more by
            slack domestic demand than higher export profitability. The
            main qualitative change is a definite attitudinal shift in
            favor of profits and marketing in contrast to the old
            exclusive emphasis on production targets. But there 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 paper concludes by discussing the
            microeconomic transformation needed to complete the largely
            economic big bang. The importance of addressing firm-level
            managerial incentives and empowering managers is emphasized
            in the transition to eventual privatization.