# **Introduction**

After a decade of World Bank projects in the transitional economies of Europe and Central Asia, the PSD I/II project in Moldova is recognized as more successful than projects with similar aims in other countries. The areas where the project was relatively successful include:

- Setting up a restructuring agency ("ARIA"),

- Implementing a restructuring bankruptcy ("Chapter 11 ") program,

- Implementing a liquidation bankruptcy program to seed new start-ups,

- Building up capacity in the local private consulting sector,

- Fostering spin-offs as systematic restructuring strategy,

- "Marshall Plan" study tour programs for managers,

- "Marshall Plan" work tour programs for blue collar workers, and

- Systematic implementation of continuous improvement ("Japanese-style") programs in firms.

When a project has had such relative success where other projects with similar goals have failed, some attempt must be made to understand the different strategies that may account, in part, for the different outcomes. Our task here is not to catalog those successes [see World Bank 2001 a, 200 lb and Siegelbaum 2001] but to try to give some explanation for them.

# **Two Strategies for Renewal: Replacement or Transformation**

In the face of decline, there are always two different strategies for renewal: replacement or transformation. Albert Hirschman, in his 1970 classic, _Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States,_ developed these two strategies as the logic of exit (replacement, the quintessential logic of the market) and the logic of loyalty, commitment, and voice (transformation, the quintessential logic of stable organizations).

When facing decline, a commitment-based strategy "fights" for renewal by fostering the transformation of the given people and structures. An exit-based strategy sees renewal as coming primarily and initially from the outside through "switching," the replacement of the existing people (or at least the top people) and structures by new ones. Transform the old into the new-or throw out the old (to create a _tabula rasa)_ and then import the new; that is the question. All real world situations of decline will call for appropriate combinations of transforming the old into the new (transformation strategy) and replacing the old with the externally-supplied new (replacement strategy).

It should be noted that the replacement strategy depends on finding what is needed from some external source, e.g., from the market. If what is needed is not available on the market then a replacement-oriented strategy will be of little avail. One would have to transform what one already has. For instance, a restructuring strategy for a transitional economy might assume that, as in an advanced market economy, there is a plethora of entrepreneurial and managerial talent, experience, and motivation available "on the market." It is only a matter of getting the macroeconomic conditions and the "investment climate" right, and then the entrepreneurs and managers will "come forth" to take over and restructure the failing firms. Moldova was an example where this replacement strategy was not working. The macro-conditions were stable but foreign investors were not interested given the other opportunities, and there was little or no 2