# INTRODUCTION AND BACKGROUND

Two years into the Economic Transformation Program, the Polish economy is in a state of deep crisis traceable largely to the SOE sector. The euphoria accompanying the exceptionally good performance in 1990 has vanished along with the factors that facilitated it: once-off inventory sales, the cushioning effect of carried-over dollar retention accounts and implicit subsidies from CMEA trade. The 1991 collapse translated into an immediate fiscal deficit and led to an increase in nonperforming bank loans, a problem which now threatens to turn into a crisis, while the linkage of inter firm arrears has raised the specter of a generalized collapse. Enterprises have reputedly failed to adjust, stalling growth and delaying the "supply response", thereby calling into question a fundamental point of design in the ETP: that macro stringency alone would suffice to press firms into spontaneous adjustment measures. Understanding how macroeconomic policy has impacted the behavior of enterprises is critically important for the ongoing design of economic policy in Poland. This study has tried to illuminate this "macro-micro" linkage.

"Supply response' does not necessarily connote an immediate jump to higher profitability or output levels. Given the initial conditions of overstaffed SOEs - socialist Poland had zero unemployment - and high energy and material intensity owing to implicit input subsidies from CMEA trade, supply response could be expected to include resource re-allocation through bankruptcy, declining output and employment and even falling profitability. Therefore, this paper concentrates on the behavior pattern of SOEs to gauge whether there is movement towards a market economy in the sense of profit maximizing behavior and the enforcement of hard budget constraints by banks, crucial for resource re-allocation, among other issues. Data covering the 21 months June 1989 - March 1991 drawn from a direct survey of 75 large SOEs are used to illuminate key aspects of enterprise behavior and performance: (a) Was the sharp initial contraction of output due to enterprise monopoly power? (b) What was the impact of the demand barrier and credit squeeze on the January 1990 output drop? (c) Did the fixed exchange rate in fact function as a nominal anchor for prices? (d) What role did banks play in resource allocation? Did they enforce the "hard budget" constraint? (e) How did the wage setting process respond to the incomes policy and tax on excess wages (PPWW)? Was there evidence of decapitalization? (f) What accounted for the export boom in 1990, higher profitability stemming from the devaluation of the zloty, or as claimed by enterprises, the domestic demand barrier? (g) How has the tax burden on enterprises evolved over time?

SOE manufacturing, the biggest subset of socialized industry, accounted in 1990 for some 30% of GDP, 19% of employment, 85% of exports and 60% of fiscal revenues. The sample examined here is from SOE manufacturing. Annex I describes the sample, consisting of 75 large firms drawn mainly from the 1989 LISTA 500 (the largest Polish firms), using sales as the criterion, and covering five manufacturing sectors - metallurgy, electromachinery, chemicals, light manufacturing (textiles, leather goods, garments) and food processing.

The included firms typically employed 1500-6000 workers, though some exceeded 20,000, and had annual sales of $ 100 million or more. Products include pipes, rails, metal sheets, wire; machine tools, transformers, electric engines, railway carriages, refrigerators, bicycles; fertilizer, plastics, organic and inorganic chemicals; fabrics, clothes, hosiery, shoes and leather goods; meat products, sugar, processed fruit, chocolate, cigarettes. At the time of the study, the vast majority of the sampled firms were traditional state-owned enterprises with powerful workers councils, two (or more) trade unions and manage-s legally subordinate to the workers council. A handful were joint-stock companies with sole ownership of the state, resulting in abolition of workers councils and freedom from the dividend tax. The enterprises were located all over Poland, both in the big industrial centers (Upper Silesia, Krakow, Warsaw, Wroclaw, Poznan) and smaller cities (SouthEast Poland, Szczecin, Torun, Bydgoszcz, Radom, Piotrkow and many more).