2 By and large, the output, profitability and employmen **t** rends of the sampled firms conform to economy wide patterns obseived in aggregate data. However, the main contribution of this paper is the examination of the microeconomic issues enumerated above, which requires firm-level information. In particular, the emphasis is on the behavior of large SOEs, on which she fortunes of the state budget have critically rested.

While the focus on a non-random sample of l 1rge SOEs may seem constraining, it is in. fact valuable for the following reasons: (a) these firms account for a large part of economic activity; (b) large SOEs embody many of the more complex adjustment problems witnessed in transforming the manufacturing sector, partly because of their size, partly because of their bargaining power; (c) there are obvious demonstration effects associated with large SOE behavior, that will not only influence the responses of smaller SOEs, but also affect the credibility of the ETP. Thus, if the government is seen as refusing to make arbitrary concessions to large SOEs, this will give smaller firms a clear signal that the new rules of the game are going to be enforced. Lastly, it is probable that the variance in behavior in the population of large firms is low.

The sample findings on adjustment are used in the concluding section to suggest specific ways in which the predominantly macroeconomic focus of the ETP can be complemented by suitable microeconomic measures to speed up attainment of a market economy.

# OUTPUT AND PROFIT RESPONSE TO THE ETP

This section looks at output, profitability and cost evolution from late 1989 to the CMEA shock in early 1991. Some of its main conclusions are: (i) The sharp contraction in output at the start of the ETP can be explained by standard demand considerations and partly by the reluctance to borrow following the huge jump in interest rates, which led to a squeeze on working capital that constrained output. There is no evidence from the sample of the exploitation of monopoly power by firms. Metallurgical firms, which fit the common perception of being monopolistic, actually maintained output in January despite falling profit margins. Electromachinery firms cut back output, but were heavily burdened by cost increases and rising interest costs.

(ii) A popular myth about SOEs is that interest rate increases had no impact because zloty debt was wiped out by the hyperinflation of end 1989. To the contrary, the high nominal interest rates of first quarter 1990, which applied to the entire stock of loans, old and new, added a severe debt service burden for those firms having to rely on bank loans.

(iii) The latitude for using "cost plus constant mark up' pricing rules was quickly reduced over 1990, suggesting that while inflation was initially partly cost push, it was eventually constrained by international prices in conjunction with the exchange rate anchor.

(iv) Firms had not undertaken serious cost cutting measures over the survey period.

# Evidence in support of the above is now presented.

# Outut trends

With the launching of the ETP, some decline in manufacturing output (measured in Polish statistics by real sold production or sales) was anticipated because of the intended deflationary impact of the stabilization program. It was also felt that the drastic realignment of relative prices