metadata: authors: 0: author: Ellerman, David
1: author: Kreacic, Vladimir
count: Moldova
docna: 0: docna: Transforming the old into a foundation for
            the new - lessons of the Moldova ARIA Project
docty: Policy Research Working Paper
subtopic: Investment and Investment Climate,Private Sector Economics,Labor Markets,International Trade and Trade Rules
teratopic: Private Sector Development,Infrastructure Economics and Finance,Health, Nutrition and Population,Industry,Finance and Financial Sector Development
abstracts: cdata!: This paper is a case study of what is
            recognized as one of the more successful projects in any
            country in the Europe and Central Asia region, not to
            mention in the poorest country of the region-Moldova. The
            ARIA project shows new ways to attack some of the most
            intractable problems of private sector development in Europe
            and Central Asia: how to facilitate reorganization and
            liquidation bankruptcies; how to promote small and medium
            enterprise spin-offs and new start-ups; and how to promote
            new learning at the enterprise level, both in the form of
            "Marshall Plan" programs with more advanced
            post-socialist countries, as well as continuous improvement
            programs (such as those adapted from Japanese programs). The
            prime mover for these programs is the quasi-public
            restructuring agency, ARIA, which was established as part of
            the Moldova Private Sector Development I loan. ARIA was
            structured to try to combine private sector entrepreneurship
            with a public function in the process of restructuring and
            bankruptcy. The study tries to account for the strategies
            and innovations that lead to results. And it tries to
            connect the ARIA strategy to past development literature by
            viewing the study through Albert Hirschman's work on
            social learning and change.
geo_reg_key: 517208,82689,517190,517191
repnme: repnme: Transforming the old into a foundation for
            the new - lessons of the Moldova ARIA Project
display_title: Transforming the old into a
            foundation for the new - lessons of the Moldova ARIA Project
listing_relative_url: /research/2002/07/1963447/transforming-old-foundation-new-lessons-moldova-aria-project
topicv3: Education, Skills Development and Labor
            Market m1326135 1484,Investment Climate m1326293 405,Industrial Zones m1326507 1202,Trade m1326924 698,Jobs m1503931 2670
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Private Sector Development,Infrastructure Economics and Finance,Health, Nutrition and Population,Industry,Finance and Financial Sector Development
no_of_pages: 24
model_extractions: POLIcy RESEARCH WORKING PAPER 2866

# Abstract

This paper is a case study of what is recognized as one of the more successful projects in any country in the Europe and Central Asia region, not to mention in the poorest country of the region-Moldova. The ARIA project shows new ways to attack some of the most intractable problems of private sector development in Europe and Central Asia: how to facilitate reorganization and liquidation bankruptcies; how to promote small and medium enterprise spin-offs and new start-ups; and how to promote new learning at the enterprise level, both in the form of "Marshall Plan" programs with more advanced post-socialist countries, as well as continuous improvement programs (such as those adapted from Japanese programs). The prime mover for these programs is the quasi-public restructuring agency, ARIA, which was established as part of the Moldova Private Sector Development I loan. ARIA was structured to try to combine private sector entrepreneurship with a public function in the process of restructuring and bankruptcy. The study tries to account for the strategies and innovations that lead to results. And it tries to connect the ARIA strategy to past development literature by viewing the study through Albert Hirschman's work on social learning and change.

This paper-a joint product of the Office of the Senior Vice President and Chief Economist, Development Economics, and the Private and Financial Sectors Development Unit, Europe and Central Asia Region-is part of a larger effort in the Bank to draw and interpret lessons from best practices. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Narin Jameson, room MC4-333, telephone 202-473-0677, fax 202-5221158, email address njameson@worldbank.org. Policy Research Working Papers are also posted on the Web at http:// econ.worldbank.org. The authors may be contacted at dellerman@worldbank.org or vkreacic@worldbank.org. July 2002. (19 pages)

> _The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent._

**Prc,clurp,i hv** **_thp_ RP.zPrr1i** Arivirnrv Ctrff
# Transforming the Old into a Foundation for the New: Lessons of the Moldova ARIA Project

### David Ellerman and Vladimir Kreacic World Bank

## Table of Contents

Introduction Two Strategies for Renewal: Replacement or Transformation The ARIA Project in Moldova _Achieving self-sustainability: long duration of intervention Achieving self-sustainability: large scale of intervention Project "Initiation ": Find the "Moving Trains Finding Leadership Building Mutual Trust and Understanding Horizontal Learning by ARI Building Local Consulting Capacity The "PIUSyndrome" The Foreign Advisor Syndrome ARI 's Bankruptcy Role Special Bankruptcy Agency? No Financing Capacity Cram-Down Authority ARIA Restructuring Bankruptcy Program Choosing the Entry Point: The "Best of the Worst" Principle SME Spin-Offs "Industrial Parks "for New Start-ups Horizontal Learning for Enterprises Trade Before Investment "Marshall Plan " Study Toursfor Managers "Marshall Plan" Study Toursfor Skilled Blue-Collar Workers Continuous Improvement Programs_ A Hirschmanian Approach to Social Learning and Change Conclusions References

*The findings, interpretations, and conclusions expressed in this paper are entirely those of the<sup>authors and should</sup> not be attributed in any manner to the World Bank, to its affiliated organizations,<sup>or tothe membersof its Board of</sup> Directors or the countries they represent. Vladimir Kreacic was<sup>project managerfor the projectanalyzed here,PSD</sup> I/II in Moldova.
# **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
domestic market for entrepreneurial and managerial<sup>talent.In the beginning the Moldovans</sup> would have to make do with what they<sup>had.</sup> But, more generally, there are other reasons to<sup>start with a transformationstrategy-evenif a</sup> replacement strategy had more initial feasibility..

The Bank Mission Statement principle of "helping people<sup>help themselves"and the</sup> Comprehensive Development Framework<sup>principleof the"client in the driver's seat"indicate</sup> how the two logics might be combined.' If the<sup>clientis to stay in the driver'sseat, thenenough</sup> of the home-grown old must be transformed into the<sup>new sothat theclient doesnot "lose his</sup> footing" and become so estranged from the change<sup>process that his only responseis to either</sup> cling to the old or to sullenly give in to the new<sup>(all the while hopingit willfail).With a sound</sup> foundation of footing on the home-grown but<sup>transformed old,theclient can then take chargeof</sup> throwing out part of the old and to appropriate<sup>and adapt the importednew to makeit his own.</sup> The alternative is a process externally driven by replacement<sup>of the old with theimported new</sup> where the clients are "blown off their feet" and<sup>are being sweptalongwithout any realownership</sup> by imposed conditionalities or other forces<sup>outside theircontrol.</sup> Hence the question is: how can the Bank design projects<sup>and programs on the basisof enough</sup> transformation of the home-grown old into<sup>the newso that the clientswillthereby gain</sup> "ownership" of the process and will have the foundation<sup>from which to then openup, acquire,</sup> and appropriate the knowledge and experience<sup>availableto them in a globalizedworld?</sup>

# The **ARIA** Project in Moldova

The Moldova PSD I/II project, which set<sup>up the ARIA Agency for Restructuringand Enterprise</sup> Assistance as a quasi-public NGO, made. a number of<sup>innovations(relative tostandard projects)</sup> to foster enough home-grown transformation<sup>so that theexternalknowledgeand practicescould</sup> then be imported and applied-with ownership-to<sup>theMoldovancontext.</sup> The program of PSD I/I and of the ARIA<sup>agencywas quite varied.We willgoover some of the</sup> main features of the program highlighting the<sup>featuresthat fostered enoughlocalownershipto</sup> then import knowledge and practice and make them<sup>locally ownedaswell.Thespirit was to</sup> foster a learning process to find the pragmatic<sup>answersthat would work in Moldova,not to</sup> supply a blueprint to be implemented.

## _Achieving self-sustainability: long duration of intervention_

The typical World Bank project cycle of<sup>3-5yearsis tooshort for projects which aim tocatalyze</sup> such a Gargantuan task as the transformation of<sup>centrally planned enterprises and into market</sup> organizations with the accompanying change<sup>in mentality. In1994 the World Bank did not have</sup> instruments that could span a decade and a three<sup>consecutiveloansstrategy wasdeveloped:2</sup> PSD I would train hundreds of local consultants<sup>that would transform a hundredor so local</sup> enterprises, and in the process create demand<sup>for managementtraining.PSD IIprovided for</sup>

> 'See http://www.worldbank.org/cdf/.

> 2More recently, Adaptable Program Loans and other forms<sup>of programmatic lendingaddresses this problem.</sup>

3
management training and by enabling secondment of best managers<sup>abroadinitiateda process of</sup> substitution of clients and suppliers from the FSU with new ones<sup>from the non-FSUcountries.</sup> Transformed enterprises, managers, consultants now generate demand<sup>for a transformationof the</sup> business environment-which is what PSD III might have done. In<sup>thiscontext, when thereare</sup> strong local constituencies pushing for reforms, the reforms have<sup>a much better chanceof being</sup> implemented. So the first principle is taking a long term view of<sup>the transformationprocess.</sup> Even an orderly exit proved not to be implementable in short term<sup>as themost commonlyfailed</sup> conditionalities had to do with the numbers of enterprises that had<sup>to be liquidated whichthe</sup> governments refused to do or otherwise avoided doing.

## Overview of ARIA Results

Since 1995, The Moldova NGO - "ARIA" - has completed the restructuring<sup>of 90 enterprises.An impactstudy</sup> conducted of the Moldova Project indicates that outcomes have been both<sup>positiveand significant,in termsof</sup> productivity, sales growth, exports, tax payments and other areas. Highlights<sup>of the resultsof theimpact study</sup> are as follows:

- In 1995, the firms that were to receive project assistance were on<sup>average</sup><sup>_worse_offat theoutset than</sup> comparable Moldovan firms that were never helped by the project.

- * By the end of 1999, despite generally worsening economic conditions<sup>in Moldova,Project-assistedfirms</sup> were _more productive andpaid more taxes per worker,_ than their unassisted<sup>counterparts.</sup>

- * Project assistance is consistently, positively and significantly correlated<sup>with realproductivitygrowth,</sup> growth in sales and growth in exports.

- * Project-assisted firms have been significantly more successful in _attractingforeign_<sup>_direct investment,_have</sup> _changed suppliers more aggressively,_ and _rely less on barter and_<sup>_offsets_than other, comparablefirms.</sup>

- * Project-assisted firms have experienced _greater management_<sup>_turnover_than other firms.</sup> * The Project has, in connection with the restructuring of about<sup>90 enterprises, ledto the creationof more</sup> than 450 SMEs. About 80 of these SMEs are spin-offs from restructured enterprises<sup>and the remainderare</sup> either new businesses created from assets sold by restructured enterprises, or independent<sup>smallbusinesses</sup> which have been attracted to newly-created industrial parks.

- * Overall, it is estimated that 9500 employees have been laid off in<sup>ARIA restructurings,while a totalof</sup> 10800 new jobs have been created.

- [Source: 'New Firms from Old: Building Capital through Enterprise Restructuring."<sup>Memorandum by Paul</sup> Siegelbaum, Washington: World Bank, May 2001.]

# _Achieving self-sustainability: large scale of intervention_

To make the home-grown process of transformation self-sustainable,<sup>one or twofootholdsisnot</sup> enough; the inertia of inherited soviet enterprise behavior and dominant<sup>rent-seekingwould</sup> quickly choke the few firms behaving differently. So the second principle<sup>in designing self-help</sup> programs is the scaling up to a critical mass of local advisors capable<sup>of restructuring mass</sup> privatized enterprises, critical mass of managers appropriating<sup>moreglobal approachesand</sup> management style, and a critical mass of reformed and restructured<sup>enterpriseswith ownersthat</sup> understand the need for a level playing field (that does not favor<sup>well-connected,often dying</sup> firms of the past). Working with associations of entrepreneurs,<sup>publicizingwidelyachieved</sup> results in Moldova and other transitional economies accelerates<sup>formationof wider pro-reform</sup> constituencies.

4
## _Project "Initiation ": Find the "Moving Trains"_

With the agreement reached with the client about the longer duration of project (now possible through Adaptable Program Lending-APLs) and scale of program that allows for more than<sup>a</sup> few pilot enterprises to be restructured/downsized/created, the critical task of the external task manager (e.g., from the World Bank or other development agencies) becomes identification of the best entry points for the project. The third rule here would be: don't try to _start_ anything new. Instead find where there are domestic beginnings-where local trains are starting to move, no matter how slowly, on their _own_ steam. Then figure out how to use your resources and knowledge to assist-not take over-to _assist_ those home-grown beginnings.

As the poorest of the FSU countries, Moldova did not have the rather mixed blessing of<sup>natural</sup> resources (oil, gas, or minerals) to allow it to float along on the resource rents without biting<sup>the</sup> bullet of restructuring. The consensus was there in the early-mid 90s that something had to be done; the questions were who and how?

# _Finding Leadership_

In view of the politicization and failure of most state-sector "restructuring agencies," the idea was to make ARIA more of an independent quasi-public NGO. That degree of independence made it doubly important to find the right leadership and that, in turn, requires some experience and judgment on the part of the task manager to find that person-a local champion, or better champions. The first one would implement the project while the second one, usually<sup>a Cabinet</sup> level politician, would play a "godfather" role presiding over the Supervisory Board of the restructuring agency and would provide political support for thorough restructuring measures.

In the case of ARIA, the selected project leader, Georghe Efros, was a Deputy Minister of Industry. Parts of the government at the time would have preferred a less independent and less entrepreneurial individual who would be more inclined to do their bidding. The Bank Project Team insisted on Mr. Efros and it was only after a six month stand-off that the government finally agreed.

The role of the "godfather" cannot be underplayed. In case of Moldova, the Deputy Prime Minister responsible for Economic Reforms was the project champion in the GoM<sup>as wellas the</sup> Chairman of ARIA's Supervisory Council. He was instrumental in the initial years<sup>inclearing</sup> the way and protecting ARIA from opposition. Especially vocal resistance came from the lobby group of red directors who reacted strongly to proposed restructuring methodology-downsizing enterprises to a level where they (or spun-off parts) could generate positive cash flows. As the government changed and ARIA lost its champion, ARIA came under intensive and continuous scrutiny through various inspections.

Two other countries where similar projects are under implementation or in the final stages of preparation confirm critical importance of the champion. In the first country the original champion is still in power and the project is moving on. In the second, three governments changed during project preparation. In the first two, there were strong champions and the project preparation progressed very well. In the third government there is none and the project is

**_5_**
stalling. The lesson from here is-given<sup>the high uncertainty about thelength of office of high</sup> officials in the FSU-to look for multiple<sup>championsduring project preparation.A good</sup> example is a new LIL in the Caucasuses<sup>where theSupervisory Council of the PIU will have</sup> several Government officials, the Rector<sup>of the Polytechnics, and representativesof the donors</sup> and the private sector.

# **_Building Mutual Trust and Understanding_**

For community organizing or consulting<sup>for institutional reformto be successful,it is</sup> advantageous for the external organizer<sup>or consultant to beable to see the client's actual</sup> beginning situation (e.g., not treat<sup>it asan imagined blankslate) and,indeed,tosee thatsituation</sup> through the eyes of the client.<sup>3</sup> That,<sup>in turn,isgreatly facilitatedby sharingsomecommon</sup> cultural and historical knowledge or<sup>experience(in addition to theobviousasset of being about</sup> to converse in the client's language). This<sup>shared knowledge extendsfrom the general</sup> understanding of life in a communist country<sup>to specific itemssuch as(inthis case)Radio</sup> Yerevan jokes or the cliches of Partisan<sup>movies.Cultural affinityallows an empathetic</sup> understanding of the client which<sup>allows theclient to buildtrust of the organizeror consultant.</sup> But trust needs to be mutual. The<sup>importanceof building mutualtrust is highlighted by</sup> considering the alternative approach<sup>of mistrust of the client evidenced by conditionalities.</sup> Research [e.g., World Bank 1998]<sup>has repeatedly shown the ineffectivenessof conditionalitiesin</sup> getting reforms of any depth implemented.<sup>The promiseof aid can only buy a false-motivated</sup> "intent to reform." If the policies were<sup>not adoptedby the government independently of the aid,</sup> then the policies would tend to<sup>be</sup> adopted by aid-hungry governments in<sup>spiteof continuing doubtsof the policy</sup> makers themselves, resistance from<sup>somequarterswithinthe government,</sup> onslaught against the "deal" from<sup>theopposition,andgeneral distaste forthe</sup> whole procedure.

Naturally, doubts and reservations are not<sup>voicedat the momentof theaid</sup> compact; hence the delusion on the part of<sup>thedonorthat therehasbeenafull</sup> meeting of minds. But soon after virtue<sup>has been"bought"throughaidunder</sup> these conditions, the reservations and<sup>resistanceswillfindsomeexpression-for</sup> example, through half-hearted implementation<sup>orsabotageoftheagreed-to</sup> policies-and relations between donor and<sup>recipientwill promptlydeteriorateasa</sup> result. [Hirschman 1971, 205] The genuine desire for reform and<sup>changecan only be found,not bought,and,once found,</sup> trusting the client will cement a better<sup>relationship than"just in case"conditionalities.</sup>

# **_Horizontal Learning by ARIA_**

There are two rather different models<sup>for theknowledge-relatedfunctions of the Bank,i.e.,for</sup> the Knowledge Bank. In one model,<sup>the Bank has the answersobtainedeither from economic</sup>

> 3 "The change agent must psychologically<sup>zip him or herself intothe clients' skins,and see their situationthrough</sup> their eyes." [Rogers 1983, 316]

6
theory and first-world models or from scanning globally to find best practices from developing countries which are then extracted by Bank staff, encapsulated, and retransmitted to clients to be implemented (thus saving the clients the "trouble" of any genuine learning process). That is the storehouse-of-knowledge model. The alternative model is that of being a broker between the clients who have a problem to solve and those who have had some practical success in solving the problem. The Bank as broker then supplies the resources to implement horizontal learning directly between the clients and the people who carried out some best practice example. That is the knowledge broker model.

The learning process of the ARIA model was based on the broker model of horizontal learning. There was no global best practice or 1000-page manual delivered from Washington on how to restructure enterprises in a post-socialist economy. Instead, three companies from (former East) Germany, Romania, and Slovenia were contracted and each was "given" 3-4 enterprises to restructure and provide on-the-job training for young Moldovan consultants. The expectation that consultants from transitional environments would be at least as efficient in an FSU country as the ones from OECD proved to be correct. Best results were achieved with a rather successful model of restructuring utilized in Slovenia. This approach was a perfect example of horizontal learning initiated by the Bank under PSD I. The restructuring model was based on the extensive experience of the Restructuring Fund ("Sklad") of Slovenia and was developed by the founding director of the Sklad, Uros Korze. As Korze had then left the Fund, he was contracted through the Central and East European Privatization Network (CEEPN) to assemble a team and set up a temporary office in Moldova to supply hands-on training to ARIA.

In view of the dubious state of socialist accounting practices for market purposes, the model refocused management on clear cashflow indicators and benchmarks that could be adapted to the real existing post-socialist conditions in Moldova. As ARIA has further developed and adapted the model for their FSU conditions, ARIA has switched from apprentice to teacher to help foster ARIA-like agencies in other countries (e.g., Georgia, Ukraine, and Armenia) through a continuing process of horizontal learning.

# _Building Local Consulting Capacity_

# **_The_** _"PIU Syndrome"_

There is a common problem with Bank projects that aim to develop local human capital. The Bank sets up a project implementation unit or some other specialized Bank-related organization. The local staff in these organizations are quite keen to make themselves as indispensable as possible to perpetuate their elite status in the Bank-related organization. And Bank HQ staff are grateful to have local counterparts as guides and gatekeepers who speak good English and "know the ropes" conceming Bank procedures. This might be called the "PIU Syndrome." It unfortunately cuts against local capacity-building for the requisite skills _outside_ the PIU since that would tend to make the PIU staff more expendable.

Most Bank projects face some version of the PIU syndrome. In the case of Moldova PSD 11, the fear was that ARIA would fall prey to the PIU syndrome. The solution was simple and effective. Aside from a small support staff for the director, ARIA would have no permanent staff. All professional staff in ARIA would be there only on short term contracts with a clear understanding that they either had to find a managerial job in the companies they were 7
restructuring or find new clients for ARIA-if they are<sup>to keep their jobs.This philosophy of</sup> making local professionals responsible for implementing<sup>changesthey were proposingin the</sup> client firms was directly opposite of the standard<sup>consulting practice(brought by consulting</sup> firms from market economies). Imported practice<sup>insistedon the advisory role of the consulting</sup> services and leaving the responsibility for implementation<sup>to very enterprisemanagersthat</sup> restructuring programs were trying to teach "new non-soviet"<sup>ways of management.</sup> In many cases, the ARIA staff had to "eat their own<sup>cooking"by temporarily replacingthe failed</sup> managers in the client companies. The expectation<sup>was that, upon leaving, thestaff would then</sup> form or join private consulting companies to then<sup>be hired directly by the client companiesor</sup> even to join companies as turnaround managers. Moreover,<sup>it was part of theARIAstaff's job to</sup> write'articles for the business and popular press so this<sup>helped both to propagateARIA's work</sup> and to build the reputation of the staff member<sup>as a qualifiedconsultant (and future private</sup> consultant). Thus instead of hoarding the professional<sup>skillsin ARIA, ARIA was constantly</sup> turning over its staff and seeding the private sector<sup>with trained restructuringconsultantsand</sup> turnaround managers.

It should be noted that this staff rollover provision was<sup>part of ARIA's publicpurpose. A private</sup> consulting company would have every incentive<sup>to retainits trainedstaff,not to provide</sup> incentives for consultants to take over managerial<sup>positionsin the enterprisesthey were</sup> restructuring or to form their own consulting companies.

# _The Foreign Advisor Syndrome_

The PIUJ staff are not the only ones with an incentive<sup>to hoardknowledge to perpetuatetheir</sup> status. That is a generic problem with any external<sup>consultantswho would like a long-term</sup> relationship and who thus must be careful not to<sup>passso much knowledgeto the client so that the</sup> client could get along without them. In the development<sup>business,this is a common problem</sup> with foreign advisors usually paid by technical assistance<sup>fundsfrom their home country-the</sup> foreign advisor syndrome.

The foreign advisor problem is exacerbated by<sup>theinternalincentivesystemsof grantfunded</sup> programs and the nature of grant funded contracts in<sup>which the recipient countryhas very little</sup> leverage. Thus tenders can have specials conditions<sup>about the sizeof companies, regional</sup> distribution, or preventing companies that have<sup>already won contractsin the past-effectively</sup> limiting potentially best candidates from bidding.<sup>Low leverageof recipient country allows</sup> contractors to send their weakest consultants,<sup>leavingthe best for more competitivework in the</sup> private sector in the global markets. This combination of<sup>lowquality foreign advisorsand a very</sup> complex transitional environment has resulted<sup>in very poor results and major skepticismin the</sup> region on the value of technical assistance.This non-market selection process and poor accountability<sup>of foreign advisorsis one of the main</sup> arguments speaking in favor of borrowing for technical<sup>assistance by the FSU countries.It</sup> enables the client to control the design of the program,<sup>to specify the termsof references for the</sup> contract and the individual consultants, and to fire<sup>the advisorsin caseof poor performance(very</sup> difficult for grant-funded consultants).

8
Since ARIA did tap some foreign TA funds, it had to face this problem. The simple and effective solution was two-fold. Firstly, the terms of reference for the foreign advisors were to teach the locals, e.g., ARIA staff, how to solve the problem, not to try to directly solve the problem themselves. Secondly, the TORs were written so that deliverables were precise and allowed for cancellation of the contract in the case of non-delivery. If the foreign advisor wanted to be invited back, it would have to be by the companies formed by the trained staff after leaving ARIA. Thus the incentives for the foreign advisors switched from making themselves indispensable to ARIA-to training the ARIA staff well enough so that the staff could go out into the private sector and get good enough consulting contracts to then invite the foreign advisors back.

ARIA (as well as the Georgian and Ukrainian restructuring agencies) had to learn fast how to extract maximum from the foreign advisors they have hired. The learning curve of local young consultants is very steep and very quickly the foreign advisors find out that providing advise in General Management is not sufficient. The locals soon start demanding specific and more complex techniques such as finance and ISO or continuous improvement techniques (total quality management).

The PIU and foreign advisor syndromes are present in most Bank projects. The strategy of developing and propagating local human capital needs to squarely face these syndromes and find similar solutions to fit the case.

# _ARIA 's_ **_Bankruptcy Role_**

# _Special Bankruptcy Agency?_

In "normal market economies," the bankruptcy process (either as restructuring or liquidation bankruptcy) is supervised by courts using trustees to work with the individual bankrupt firms. The first wave of western advice (even in Moldova) was oriented to getting the court system in the post-socialist countries to take on that function in addition to the other revolutionary changes necessary for the transition to a market economy. However, in light of the transitional problems particularly in the FSU, too many firms had to go through either a restructuring or liquidation bankruptcy to be handled by the court-based systems even in the West, not to mention in the transitional economies. Hence there is the need for some transitional agencies that will first "clear the way" by (a) identifying the necessary changes in laws and regulations and (b) demonstrate the benefits of releasing unused or underutilized assets to entrepreneurs. That was one of ARIA's important initial functions.

The idea of a special bankruptcy agency was not new, but there is a growing legacy of failures. In the case of ARIA its role in pilot liquidations (that was called "creation of Industrial Parks") was the most controversial one attracting fierce opposition form the "old guard". It is exactly this role of the liquidator that is-now that the Communists have won absolute majority in the Parliament and control the new Government-being used by the new Govemment as justification for attempts to shut down ARIA.

What were some of the lessons that both informed the ARIA design as a bankruptcy agency and that were reinforced by the positive ARIA experience?

9
# _No Financing Capacity_

One argument in favor of an advice-giving agency<sup>alsosupplyingfinanceis that theagency</sup> should be willing to "put its money where its mouth<sup>is."But this argument assumesthat it is</sup> acceptable for the agency to take over "ownership"<sup>of the client-sincethat is thelikely</sup> outcome. Finance is not an issue in liquidation<sup>bankruptcy.In restructuring bankruptcy,it is</sup> important to keep "ownership" and responsibility in the<sup>hands of thecompany managementwho</sup> must turn around the company, not in the hands of<sup>theagency.Otherwise,thecompany will</sup> slide into the passive role of urging the agency to<sup>supply"justone more round"of financingso</sup> that the company will not be an embarrassing "failure"<sup>of the restructuringagency.To avoid this</sup> trap, the agency should not supply finance-full stop.

While ARIA technically could have tapped into a line of<sup>credit,it never did and thusfor practical</sup> purposes, it did not have a financing capability.<sup>ARIAconsultantsand managersweretold to</sup> focus exclusively on internally generated funds obtained<sup>through saleand leasing of</sup> underutilized equipment and space. Furthermore<sup>theywere told that if they turned toexternal</sup> sources of finance such as EBRD or WB credit<sup>lines with interestrates of 22-25%per annum in</sup> dollars the project would be regarded as a failure.<sup>Thus thelack of readily available financing</sup> was turned from the agency's disadvantage to its<sup>advantagein setting the precedent of selling</sup> assets (under socialism, enterprises tended to hoard<sup>assetseventhoughthe assetswere unused).</sup> There is another reason why it is a bad idea for a restructuring<sup>agencyto havea financing</sup> capability. When the same agency is supplying both<sup>adviceand finance,thenthe two will</sup> inevitably become linked by conditionalities. That<sup>will then falsify the motive for the client to</sup> "take the advice." When restructuring plans are<sup>"undertaken"only asa conditionto obtain</sup> finance, then the company and its management will<sup>havelittle genuine"ownership"of theplans,</sup> and the agency will end up financing the costs of not restructuring.<sup>4</sup>

# _Cram-Down Authority_

In the early and mid-90s, the EBRD launched an ambitious<sup>SpecialRestructuringProgram(SRP)</sup> in a number of East European countries. The first and<sup>perhapsonly country wheretheSRP was</sup> fully implemented was Slovenia. Following an international<sup>tender,a foreignturnaround</sup> specialist was hired to come live in Slovenia and run the<sup>program.TheSRP wastied to potential</sup> finance through the EBRD. In spite of considerable<sup>expertise on the partof therestructuring</sup> team, only one company was restructured and privatized<sup>after severalyearsandthe programwas</sup> quietly discontinued.

What went wrong? One of the key flaws in the program<sup>was thelack of any cram-down</sup> authority on the part of the SRP. The bankrupt companies<sup>had balance sheetsfullof softloans</sup> from Slovene public sector banks. When the Slovene<sup>creditorssaw the -SRP, which they</sup> perceived as being backed by a deep-pocketed EBRD,<sup>enter the picture,their soft loans suddenly</sup> became "hard legal obligations" of the company. If<sup>thecompany was not refinanced to pay off</sup> its "legal obligations" then the creditors could throw<sup>the companyinto liquidationbankruptcy</sup>

> 4" There is a fundamental principle that should run through<sup>everythingwe do:</sup><sup>_the IFIs should helpfinance the costs_</sup> _of change-and. should not cover the costs of not changing."_<sup>[Stem2001,168]</sup>

10
thus giving the SRP a black eye instead of a much-needed "quick win." Thus the Slovene creditors were not inclined to "take a haircut" on their past soft loans. Since those loaned funds were long since wasted, there was no chance to turn around companies without the creditors taking their share of the losses. Thus time and again, restructurable bankrupt companies had to be abandoned by the SRP due to the lack of any cram-down authority. The wonder is that they were able to do at least one deal.

# _ARIA Restructuring Bankruptcy Program_

In spite of being sometimes seen as an NGO, ARIA by its founding legislation had a public bankruptcy function. But entry into the program was voluntary on the part of the companies. By joining the program, the company would receive assistance from ARIA to devise a restructuring plan with no finance from ARIA. If the restructuring plan, which would typically involve restructuring debts, was accepted by a sufficient majority of the Creditor Council, then it could be implemented with cram-down authority over any dissenting creditors. But if the company with ARIA's help could not devise an acceptable restructuring plan, then the company would be thrown into liquidation bankruptcy which would probably leave the creditors little recovery on their loans.

_Choosing the Entry Point: The "Best of the Worst" Principle_ As there was always some choice of firms, ARIA pursued what has become known as the "best of the worst" strategy. By the "worst" is meant enterprises that have no rents to be squeezed out by interfering bureaucrats and had no local oligarchs trying to take the firm over. Where there are still rents to be had (e.g., natural resource-based firms or tobacco companies), managers and government officials are likely to be more oriented to extracting the remaining rents than undertaking deep restructuring programs. Among the "worst" no-rents-left firms, ARIA wanted to work with the "best" ones-the ones that exhibited some initiative and potential for renewal.

## **"Best** of Worst" Oblasts in Ukraine

It is important that an ARIA-like project be initiated in a country or region that is small enough so that a critical mass of restructured enterprises, trained managers, and consultants can be reached in a 34 year period. Moldova is a small country but in the Ukraine, it was a matter of selecting a few oblasts to work with. Of the 26 oblasts, 22 qualified as being "worst" in the sense that they received more than they contributed to the central government. All oblast governors were interviewed about their readiness to improve the business environment and invited to submit a program about what business climate reforms they would implement if the project was piloted in their oblast. The four that were eventually selected not surprisingly were all from among the 22 receiving budget support from the Center; the self-selection process provided the project again with "the best of the worst".

# _SME_ **_Spin-Offs_**

Typically, socialist firms are too big-even in the best of times, not mention in the deep transitional depression in Moldova. Hence restructuring involves not only down-sizing the workforce and selling underutilized assets but also spinning off viable parts of the original firm as independent small and medium-sized enterprises. The spin-offs use what became known as "asset drop-down transactions." The new prospective owners of the spin-off (investors, managers, or workers) would form a new company with some limited initial investment. Then 11
the needed assets would be "dropped down" from<sup>the"motherfirm" into the"daughter firm"</sup> using a seller-supplied credit purchase. The daughter<sup>firm would make installment payments</sup> back to the mother firm over a period of years<sup>to pay off the credit.Sometimes the mother firm</sup> might take some shares in the daughter in partial<sup>payment forthe assets.Some sharesin the</sup> daughter might be collateral that would revert<sup>to the mother with any default on the paymentsso</sup> that the daughter might end up more as a subsidiary<sup>than as a spin-off.</sup> These asset drop-down spin-offs use seller-supplied<sup>credit so these transactionscould be and</sup> were rather widely used in spite of the rudimentary<sup>banking systemsin thepost-socialist</sup> economies.

# _"Industrial Parks"forNew Start-ups_

For the parts of the socialist dinosaurs that could<sup>not besaved or spun-off,anothercreative</sup> solution was developed. Many of the middle managers<sup>mighthave"in the backof their heads"</sup> ideas for small start-ups. They might not have<sup>enough entrepreneurial experienceto riskgiving</sup> up a job to undertake the start-ups. But when their<sup>part of the firm is facing complete</sup> liquidation, then it might be a viable option. Instead<sup>of putting the companyspaceand assets up</sup> for public auction, the company might be turned<sup>intoan "industrialpark" where middle managers</sup> could exchange some of their unpaid wages for<sup>a leasefor a certain time period of the space and</sup> assets necessary for their new start-up. They would<sup>have to scrap togetheranyneeded working</sup> capital from their own sources. Spaces not taken<sup>by these internaltenants would be offered to</sup> external tenants. In that matter, a defunct dinosaur<sup>with no futureprospectsmight be turned into</sup> an industrial park of new start-ups with a real<sup>future.Slowly some of the start-upswould grow</sup> hiring back a significant portion of the workers<sup>from the oldcompany.</sup>

## Rebirth in an Industrial Park

"One such renaissance occurred through the ARIA-sponsored<sup>liquidationof textilemakerSpectrul.Anew</sup> company, Produse Tehnice, was established to manage<sup>anindustrialparton theSpectrulsitein thecityof</sup> Chisinau. Attracted by the ideal location near major<sup>transportationroutes,fourspin-offtextilebusinesses</sup> soon opened up, followed by private SMEs who moved<sup>inlikeUnolucas,atinycustomdesignfurniture</sup> company. Its owners had searched for two years to find<sup>an affordablesite forexpanding their home-based</sup> business and were glad to purchase a dilapidated storage<sup>facilityinthe park.Afterextensiverenovations,</sup> Unolucas now has expanded manufacturing capabilities,<sup>office space,and a showroom.</sup> The furniture company is one of 30 companies currently operating<sup>intheSpectrulsite, wheretotalemploymentisnow</sup> 450." (World Bank 2001b, 3] After one or two industrial parks, a unit was<sup>formedto, be an "industrialpark developer"so that</sup> each collapsing dinosaur does not have to<sup>reinvent the idea.There are twopoints of particular</sup> interest to facilitate the propagation of this experience.<sup>Some mightargue that the insiders</sup> should not be given first option of the inside<sup>spacefor their start-ups; all assetsshould be put up</sup> for public auction. But the point is that it is the possibility of this<sup>"neat exit" from the collapsing</sup> dinosaur that entices the managers to switch from<sup>their usualstrategyof lobbyingfor more</sup> subsidies to the more entrepreneurial strategy of going<sup>for thestart-up.Giventheir meager</sup> resources, the uncertainty surrounding a public auction<sup>might lead themto cling to theirrent-</sup> seeking strategy of continuing subsidies.

12
Secondly, from the government side, the experience of seeing a few industrial parks with many workers rehired in the emerging SMEs strengthens the government's hand to resist lobbying by other failed firms. Eventually the government sees that this sort of liquidation procedure<sup>canbe</sup> supported without social upheavals and can even offer hope for economic renewal.

In developed market economies, liquidation bankruptcy and new business start-ups are seen<sup>as</sup> separate economic processes. The down-sized workers will get jobs elsewhere (perhaps<sup>with</sup> help from a social safety net in the intervening period), and entrepreneurs will come<sup>from</sup> elsewhere to buy the assets at auction. It's the logic of exit and replacement. There<sup>isa wealthof</sup> organizational capital so that one need not worry about a low-equilibrium trap that might<sup>result</sup> from destroying the old without new organization capital coming forth. But in underdeveloped and transitional economies, these market processes are too weak so that, more often than not, failing enterprises will concentrate on lobbying rather than economic renewal.<sup>And government</sup> officials, fearing the social consequences, will continue to supply the subsidies-all of<sup>which</sup> creates a low-level trap.

The industrial park idea addresses this problem. It makes bankruptcy and new business<sup>start-ups</sup> the _two sides of the same coin._ The organizational capital of the middle managers<sup>and their</sup> teams can be directly _transformed_ from the old to the new-without expecting some broader economic processes to _replace_ the old managers with the new entrepreneur-managers<sup>from</sup> elsewhere.

Spin-offs and industrial parks could be pursued systematically as key restructuring<sup>optionsin any</sup> of the transitional economies. In both these cases, as in the other cases, the overarching<sup>themeof</sup> the ARIA programs is _enabling internal transformation,_ rather than promoting<sup>external</sup> replacement.

# **_Horizontal Learning for Enterprises_**

# _Trade Before Investment_

The ARIA program was designed from the beginning to put the emphasis on the<sup>internal</sup> transformation of the Moldovan enterprises rather than trying to attract foreign investors.<sup>With</sup> sufficient internal restructuring, then the enterprise would be in a position to strike a<sup>deal with a</sup> foreign partner. From the foreign partner's viewpoint, there should be "dating before<sup>marriage"</sup> or, in other words, trade before investment.

Moreover, trade with Western companies was of great interest even if it did not eventually<sup>lead</sup> to some form of investment. Hence a new program PSD II was developed to<sup>foster trade</sup> connections with Western companies. In spite of all the sophisticated trade<sup>promotion programs</sup> developed in other countries, one of the crucial needs in Moldova was<sup>simply for managersto</sup> know enough of a Western language to start communicating first and eventually doing business in the West. ARIA purchased a set of language-training computers from Italy and set up<sup>a</sup> language training facility for managers. The idea caught on and eventually managers<sup>were</sup> coming to use the facility both day and night to learn English, Italian, and<sup>German.Moreover</sup> they were paying for it (in spite of other free courses being offered by the British<sup>Council,</sup> Goethe Institute, and the like). ARIA was building an _avant-garde_ reputation<sup>and managers</sup> wanted to be a part of it.

13
With the self-confidence born of learning<sup>enough Italianor English toget alongand with the</sup> quality improvements from restructuring,<sup>some managerswereable toget subcontractingdeals</sup> with Italian firms (e.g., in shoes, bags, and<sup>leather).When other managerssaw what their</sup> colleagues could accomplish with a little<sup>effort,they in turn became interestedin the program.</sup> The foreign supplier deals that grew in<sup>part out of the trade promotionprogramplayedan</sup> important role in turning around a number of<sup>companies in Moldova.</sup> The aim was _not_ to attract foreign investment<sup>to"save"Moldovanfirms but to help Moldovan</sup> firms to transform themselves enough<sup>so thatthey could takeadvantageof foreign business-to</sup> transform enough of the old so that they<sup>can appropriateand "own"what could be newly</sup> provided from external sources.

# _"Marshall Plan " Study Tours for Managers_

The "Marshall Plan" has come to mean<sup>East-West horizontallearning programs.In the case of</sup> Moldova, horizontal learning programs<sup>were developed for managersto visit firms in the</sup> "relative-West," namely the more advanced<sup>post-socialistcountriesin Central Europe (e.g.,</sup> Poland, Czech Republic, Hungary, and Slovenia).<sup>Sincethe history of East-Westtechnical</sup> assistance is littered with failed or ineffective<sup>"Marshall-Plan"programs, what was done</sup> differently in the ARIA program?

In some past programs in Russia and other<sup>FSU countries, theSoviet-era managerswould insist</sup> that they could only learn from the advanced<sup>Western countries,not from their previous</sup> "satellites" in Central Europe. They could<sup>only bring themselvesto participate in the programsif</sup> they could visit the USA or UK or other<sup>advancedWest Europeancountries.Yet when they</sup> discovered how advanced the enterprises<sup>were in thosecountries, then they invariablywould say</sup> that it was not applicable back in the FSU<sup>without purchasing the same latest technology. Thus</sup> the trips ended up as little more than enjoyable<sup>junkets.From theviewpointof usable lessons,</sup> the world they had seen might as well of<sup>been"science fiction."</sup> To avoid these "science fiction" junkets,<sup>the ARIAMarshall Plan program wasdesigned toonly</sup> take managers to see _a plausible_ future for<sup>them,e.g., the present realities in CentralEurope.</sup> Since the trips would require subsidies<sup>from the West,some educationof Westerndonors was</sup> needed to convince them that trips were<sup>needed tothe relative-West,not theactual West.</sup> Even when going to the relative-West,<sup>managersstill need preparatoryprogramsso that they will</sup> be able to understand and retain what<sup>they areseeing.HenceARIAran competitivecoursesfor</sup> managers to both prepare them and to<sup>weed out those more interested in a junket and those less</sup> able to absorb the experience.

Another problem with other Marshall<sup>Plan programsis the limitedimpact of the leaming (e.g.,</sup> only in the manager's firm) and the need<sup>to focus theminds of some managerson thelessons.</sup> Both problems were addressed by requiring,<sup>as a conditionto go on the trips, that the returning</sup> managers would have to give a certain number<sup>of lectures to colleaguesfrom other firmsand</sup> prepare a number of publications about<sup>what they had learned.That both focused the mindsof</sup> 14
the managers on what they could learn and helped propagate the learnings<sup>well beyond the</sup> managers selected for the trips.

# _"Marshall Plan" Study Tours for Skilled Blue-Collar Workers_

One of the quite unexpected innovations of the ARIA program was the<sup>extensionof thestudy</sup> tours to "work tours" for skilled workers. In the relative-West, as well as in the West, there<sup>is</sup> demand for the _gast-arbeiter_ workers with skills to perform jobs (e.g., at night or over<sup>weekends)</sup> that domestic workers might not want. Yet the usual _gast-arbeiter_ arrangements<sup>createsocial</sup> problems for the host countries.

From the viewpoint of the Moldovan firms and workers, there would be<sup>great advantagesfrom</sup> temporary _gast-arbeiter_ arrangements to learn new skills and learn about<sup>newtechnologies-not</sup> to mention the different pay scales. Returning _gast-arbeiters_ have been<sup>a traditionalsourceof</sup> skills and investment in eastern countries, such as Yugoslavia and Turkey,<sup>that were opento</sup> two-way travel.

Could the development potential of _gast-arbeiter_ arrangements be systematically<sup>promoted</sup> without the accompanying social problems in the host countries? ARIA<sup>together withSlovene</sup> counterparts worked out a solution-an unexpected consequence of the Slovene<sup>consulting</sup> relationship. Groups of skilled blue-collar workers would be selected in<sup>Moldovaaccordingto</sup> certain criteria. They would be financed by their companies to be placed<sup>for six months working</sup> in Slovene companies and living together in apartments. The workers would be paid at minimum Slovene rates which were over five times their usual wages. At the end of<sup>thesix</sup> months, they would have acquired not only industrial and technical<sup>skills butalsoa nest-egg of</sup> savings. Some workers would buy a cheap used car in Slovenia and then drive back to Moldova. Others would use their savings for investments back in Moldova.

Another consequence of the program is some subcontracting and investment of<sup>Slovene</sup> companies back into Moldova. Some workers have come repeatedly.<sup>Eventually the Slovene</sup> hosts realized that they could subcontract some of the low-end items to be produced back in Moldova by the workers they had trained-perhaps with some special machinery<sup>suppliedfrom</sup> Slovenia. Thus the "trade" in the form of temporary fixed-term migration leads to trade<sup>in goods</sup> and eventually to capital investment. Worker placements were so successful<sup>for both parties that</sup> a company was formed in Slovenia to run the program entirely on a private<sup>basis.</sup> Nearby Northern Italy has considerable demand for _gast-arbeiters,_<sup>and there have beenthe</sup> accompanying social problems. The Italian government has financed a study of<sup>theSlovenia-</sup> Moldova experience to see if it could be adapted to Northern Italy. It would seem that<sup>thisARIA</sup> innovation could be applied broadly in other relative-Western and Western<sup>countries.Indeed,</sup> ARIA-initiated worker programs in Germany and France, modeled on the pilot<sup>program</sup> developed in Slovenia, are in operation.

# _Continuous_ **_Improvement Programs_**

Interviews with some the repeat workers in the _gast-arbeiter_ program gave some surprising answers to a question about their most valuable experience. One<sup>mightthink that their most</sup> valuable learnings would be the new technologies, but the workers often<sup>said that the</sup> _15_
technologies they used were, for the most part, familiar to them. What<sup>was really new was the</sup> experience of working in an _industrial culture._ After decades of socialism,<sup>the workplacespirit</sup> and culture in the FSU countries had sunk to a rather low<sup>level.Oneworker said that before</sup> when he made a decision, he would not think about how it might<sup>causeproblems for other</sup> workers; he only thought "It won't be my problem." But in the industrial<sup>culture of theSlovene</sup> factory, he learned to think as part of a team and to take some responsibility<sup>for the broader</sup> consequences of his decisions and actions.

Some of the experience of an industrial culture could be transferred<sup>back to a Moldovanfactory</sup> if there were enough retuming workers to form a critical<sup>mass.But a more systematicmeans</sup> was,needed for this form of restructuring in Moldovan enterprises.<sup>Preparationof the PSD I/II</sup> programs in Moldova started in June 1994 with a seminar<sup>held jointly by the Bank teamleader</sup> and Prof. Michael Best<sup>5</sup> of the University of Massachusetts.<sup>The seminar presentedIwao</sup> Kobayashi's _20 Keys to Workplace Improvement_ [1990] methodology<sup>with the idea that this</sup> engineering-based approach would be better understood<sup>by ex-sovietmanagersthen moreclassic</sup> management training seminars. However very few of more<sup>than a hundredtop level managers</sup> responded positively to the ideas presented and only one understood<sup>the need for,and the</sup> principle of, continuous improvement. It is only after few dozen<sup>workers from severalMoldovan</sup> companies passed through six month in-company training<sup>programsin Slovenia,Germany,and</sup> France did ARIA's initially failing efforts to try to introduce _20_<sup>_Keys_start to producefirst</sup> results. Kobayashi's book was translated into Russian and training<sup>materials weredevelopedfor</sup> managers and for workers in the client enterprises.

# **Sweeping Changes in Moldovan Factories**

One of the clearest indices of the deteriorated work culture in many<sup>Moldovan enterpriseswas the massive</sup> accumulation of trash. The first of the twenty keys was "cleaning<sup>andorganizing"theworkplace.In the</sup> ARIA companies instituting the _20 Keys_ program, literally truckloads of<sup>junk werecarriedoff.The newly</sup> cleaned spaces were then painted in a light color that would show any<sup>new accumulationof dirt.This actof</sup> sweeping, cleaning, and painting by the managers and workers started<sup>thelong processof rebuildingtheir</sup> self-esteem and pride in their workplace.

The _20 Keys_ program proved to be a great success in the ARIA<sup>and ex-ARIAconsultants'</sup> restructuring programs to build a quality-oriented industrial<sup>culture.Eventually contact was</sup> made with Kobayashi's company in Japan and the company<sup>in South Africathat holds of the</sup> licensing rights for the programs in the West. ARIA obtained<sup>the rightsto be the exclusive</sup> distributor of the program in the Southeast Europe region.<sup>Although only half a dozen ARIA</sup> restructured companies initially agreed to pursue continuous<sup>improvementaccording to</sup><sup>_20 Keys,_</sup> the early results were so impressive that now over ; score of<sup>Moldovancompanieshave adopted</sup> the program. The idea was re-exported to Slovenia and the<sup>Slovene governmentdevelopeda</sup> state-supported program that subsidizes introduction of the 20<sup>Keys methodology to 60Slovene</sup> companies (selected through tender). The international organization<sup>of</sup><sup>_20 Keys_practitionerswas</sup> so impressed by the applications of the program in Moldova<sup>that their next world congresswill</sup> be hosted by ARIA in Moldova.

> 5 See Best 1990.

16
A Hlirschmanian Approach to Social Learning and Change Some insight into the Moldovan ARIA experience can be gained by reflecting on Albert Hirschmnan's vision of economic change. The Hirschmanian approach of "unbalanced growth" was originally described as the contrast with the idea of a large coordinated "big push" program of change (e.g., as specified by a 'Christmas tree' of conditionalities) implemented by the central government in an underdeveloped country. The essential point was that if a country had the institutional capacity to implement a comprehensive "balanced growth" program of change then it would hardly be an underdeveloped country. Assuming that institutional capacity in project design was just assuming that which needed to be developed in the first place. Hirschman tried to outline in more practical terms how institutional change might take place.

Instead of top-down across-the-board change, one needed to find where change was afoot in the small.

I began to look for elements and processes.. .that _did_ work, perhaps in roundabout and unappreciated fashion. [T]his search for possible _hidden rationalities_ was to give an underlying unity to my work.... [T]he hidden rationalities I was after were precisely and principally _processes of growth and change already under way_ in the societies I studied, processes that were often unnoticed by the actors immediately involved, as well as by foreign experts and advisors." [Hirschman 1984, 91-3] The Best-of-the-Worst principle is a strategy for finding those entry points. Learning and change is driven by problem-solving. Not all problems can be attacked at once so attention and aid is first focused _in the small_ on the sectors or localities where some of the preconditions are in place and where initiative is afoot on its own-where the old is starting to transform itself into the new. The preconditions for learning and change are more likely to be in place among those facing the most salient problems, namely among "the Worst" where change can no longer be avoided by extracting further rents. Amongst "the Worst" there are those who are willing to take the initiative in a pragmatic learning process; they are the Best of the Worst.

Edmund Burke long ago captured the idea that difficulties (problems) give rise to learning, and that one learning leads on to more problem-solving.

[Difficulty] has been the glory of the great masters in all the arts to confront, and to overcome; and when they had overcome the first difficulty, to turn it into an instrument for new conquests over new difficulties;... . He that wrestles with us strengthens our nerves, and sharpens our skill. Our antagonist is our helper. This amicable conflict with difficulty obliges us to an intimate acquaintance with our object, and compels us to consider it in all its relations. It will not suffer us to be superficial. [1937 (1790), 299-300] Those who have more rents to collect still "suffer . ..to be superficial"; the others have to face their problems.

17
Hirschman then envisaged that the initial small successes would create pressures through the forward and backward linkages to foster learning and change that is nearby in sectorial or locational terms (in contrast to changes dictated by conditionalities). One thing leads to, induces, elicits, or entrains another thing through chains of "tensions, disproportions, and disequilibria." Hirschman at one point refers to the principle of unbalanced growth as "the idea of maximizing induced decisionmaking" [1994, 278]. The problem-solving pressures induced by unbalanced growth will call forth otherwise unused resources and enlist otherwise untapped energies. As a project moves from one bottleneck and crisis to another (in comparison with the smooth planned allocation of resources in a project), then "resources and abilities that are hidden, scattered, or badly utilized" [1961, 5] will be mobilized.

Sometimes these projects might be initially in areas more isolated from the forces reinforcing the low level traps (e.g., corrupt or predatory local governments). The successes could then be broadcast through publicity, public courses, and horizontal learning programs to those facing similar problems. That will start to break down the paralyzing beliefs that "nothing can be done" and will thus fuel broader initiatives that take the early wins as their inspiration and benchmark. The successes will be copied and emulated to slowly build a constituency for change to a scale where it can have a reinforcing political effect.

## **Putting the Pieces of the Puzzle Together**

Hirschman uses the metaphor of a jigsaw puzzle for the set of problems facing a developing country [1961, 81-2]. One could imagine a rather superhuman act of putting all the pieces together at once to solve the puzzle. Indeed don't those who have seen and studied seemingly similar puzzles put together elsewhere have that knowledge? That is the comforting fantasy of those who promote comprehensive, integrated, and balanced reform programs. Do all these things together (so that it looks like the "picture on the puzzle box") and you will have solved your problems! But for the variety of reasons outlined above, countries cannot just solve all their problems at once. They must start with a few pieces that fit together and try to work outward to find other pieces that fit. Not all entry points are equal. Certain pieces of the puzzle may have nearby connections and linkages that allow building that part of the puzzle quickly-as opposed to parts whose solution might give little insight or impetus to solving the nearby parts. Perhaps someone who has seen similar puzzles solved would be a good coach to suggest promising entry points or fruitful directions for progress. No doubt it would be helpful to study the "picture on the box." But the actual solving of the puzzle is a piecemeal process starting in one or more propitious places and working outward through fruitful linkages to finally arrive at the new overall configuration.

# **Conclusions**

The ARIA Project illustrates some of the policies open to the Bank when macro-stability is not enough, when outside entrepreneurs and managers are not coming to replace the local ones to turn around the firms.

The success of the ARIA project in Moldova could also be understood in the context of a Hirschmanian approach to social leaming and change: finding the right decentralized entry points in the small among the best of the worst, developing the project as a pragmatic learning process, spreading the early wins through horizontal learning programs and natural linkages, and building a constituency for change on a scale large enough to then support broader political and institutional change over a longer term.

18
The project also supplies a perspective on the current debate about globalization. Often that debate is posed in terms of whether or not a country should be "open" to globalization. The ARIA experience indicates that this is not the right question. Of course, a country needs to be open to whatever is compatible with and will augment its autonomous development. Gandhi used a good metaphor for the openness that is compatible with one's autonomy. "I do not want my house to be walled in on all sides and my windows to be stuffed. I want the cultures of all lands to be blown about my house as freely as possible. But I refuse to be blown off my feet" [Quoted in Datta 1961, 120] By building on enough transformation of their old into a new foundation, the local change-agents could remain "on their feet" and have the self-confidence to seek out, assimilate, adapt, and own the external knowledge, experience, and relationships available to them in a globalized world.

# **References**

- Best, Michael. 1990. _The New Competition: Institutions of Industrial Restructuring._ Cambridge UK: Polity Press.

- Burke, Edmund 1937 (1790). Reflections on the French Revolution. _The Harvard Classics: Edmund Burke._ C. Eliot. New York: Collier: 143-378.

- Datta, Dhirendra Mohan 1961. _The Philosophy of Mahatma Gandhi._ Madison: University of Wisconsin Press.

- Hirschman, Albert 0. 1961 (1958). _The Strategy of Economic Development._ New Haven: Yale University Press.

- Hirschman, Albert 0. 1971. _A Bias for Hope: Essays on Development and Latin America._ New Haven: Yale University Press.

- Hirschman, Albert 0. 1984. A Dissenter's Confession: "The Strategy of Economic Development" Revisited. _Pioneers in Development._ G. Meier and D. Seers Eds.. New York: Oxford University Press: 87-111.

- Hirschman, Albert 0. 1994. A Propensity to Self-Subversion. _Rethinking the Development Experience: Essays Provoked by the Work ofAlbert 0. Hirschman._ L. Rodwin and D. Schon. Washington: Brookings Institution: 277-83.

- Kobayashi, Iwao 1990. _20 Keys to Workplace Improvement._ Portland OR: Productivity Press.

Rogers, Everett 1983. _Diffusion of Innovations._ 3rd edition. New York: Free Press.

- Siegelbaum, Paul 2001. _New Firms from Old: Building Capital through Enterprise Restructuring._ Memorandum May 2001. Washington: World Bank.

- Stem, Nicholas. 2001. _A Strategy for Development._ Washington: World Bank.

- World Bank 1998. _Assessing Aid: What Works, What Doesn't, and Why._ Washington.

- World Bank 2001 a. _Redeploying Moldovan Assets: Creating New Enterprises from Old._ Report of Private and Financial Sectors Development Sector Unit. Washington: World Bank.

- World Bank 2001b. SME Spin-offs: Industrial Restructuring in Moldova. _SME Facts: News about World Bank SME Initiatives._ 2 (6 April), 1-4.

19
# **Policy Research Working Paper Series**

||**Title**|**Author**|**Date**|**Contact**<br>**forpaper**|
|---|---|---|---|---|
|WPS2837|Reform,Growth,andPoverty<br>inVietnam|DavidDollar|May2002|E.Khine<br>37471|
|WPS2838|Economic MobilityinVietnam<br>inthe1990s|PaulGlewwe<br>PhongNguyen|May2002|E.Khine<br>37471|
|WPS2839|Marketing Externalitiesand<br>Market Development|M.ShaheEmran<br>ForhadShilpi|May 2002|F.Shilpi<br>87476|
|WPS2840|Public SpendingandOutcomes:<br>DoesGovernanceMatter?|AndrewSunilRajkumar<br>VinayaSwaroop|May2002|H.Sladovich<br>37698|
|WPS2841|ContractualSavingsinCountries<br>withaSmall FinancialSector|GregorioImpavido<br>AlbertoR.Musalem<br>DimitriVittas|May2002|P.Braxton<br>32720|
|WPS2842|FinancialSector Inefficiencies<br>andtheDebtLaffer Curve|Pierre-RichardAgenor<br>JoshuaAizenman|May 2002|M.Gosiengfiao<br>33363|
|WPS2843|APractical GuidetoManaging<br>SystemicFinancialCrises:AReview<br>ofApproaches TakeninIndonesia,<br>theRepublicofKorea,andThailand|DavidScott|May2002|L.Yeargin<br>81553|
|WPS2844|MoneyDemandinVenezuela:<br>MultipleCycle Extractionina<br>CointegrationFramework|MarioA.Cuevas|May2002|M.Geller<br>85155|
|WPS2845|The SpatialDivisionofLabor<br>inNepal|MarcelFafchamps<br>ForhadShilpi|May2002|F.Shilpi<br>87476|
|WPS2846|IsIndia'sEconomicGrowthLeaving<br>the PoorBehind?|GauravDatt<br>MartinRavallion|May2002|C.Cunanan<br>32301|
|WPS2847|TheNatureandDynamicsofPoverty<br>DeterminantsinBurkinaFaso<br>inthe 1990s|HippolyteFofack|May2002|P.White<br>81131|
|WPS2848|AdministrativeBarrierstoForeign<br>InvestmentinDevelopingCountries|JacquesMorisset<br>OlivierLumengaNeso|May2002|M.Feghali<br>36177|
|WPS2849|Pooling, Savings,andPrevention:<br>Mitigating the Riskof OldAge<br>PovertyinChile|TrumanG.Packard|May2002|T.Packard<br>75841|
|WPS2850|DeterminantsofCommercialBank<br>PerformanceinTransition:An<br>ApplicationofDataEnvelopment<br>Analysis|DavidA.Grigorian<br>VladManole|June2002|S.Torres<br>39012|
|WPS2851|Economic Developmentand the<br>World TradeOrganizationAfterDoha|BernardHoekman|June2002|P.Flewitt<br>32724|
|WPS2852|RegionalAgreementsandTradein<br>Services:Policy Issues|AadityaMattoo<br>CarstenFink|June2002|P.Flewitt<br>32724|
|WPS2853|Private InterhouseholdTransfersin<br>VietnamintheEarlyand Late 1990s|Donald Cox|June2002|E.Khine<br>37471|
# **Policy Research Working Paper Series**

||**Title**|**Author**|**Date**|**Contact**<br>**forpaper**|
|---|---|---|---|---|
|WPS2854|RichandPowerful?Subjective<br>PowerandWelfareinRussia|MichaelLokshin<br>MartinRavallion|June2002|C.Cunanan<br>32301|
|WPS2855|FinancialCrises, Financial<br>Dependence,andIndustryGrowth|LucLaeven<br>Daniela Klingebiel<br>Randy Kroszner|June2002|R.Vo<br>33722|
|WPS2856|Banking PolicyandMacroeconomic<br>Stability:AnExploration|Gerard Caprio,Jr.<br>PatrickHonohan|June 2002|A.Yaptenco<br>31823|
|WPS2857|Markups,ReturnstoScale,and<br>Productivity:ACaseStudyof<br>Singapore's ManufacturingSector|Hiau Looi Kee|June 2002|M.Kasilag<br>39081|
|WPS2858|TheStateofCorporateGovernance:<br>ExperiencefromCountry<br>Assessments|OlivierFremond<br>MiertaCapaul|June2002|G.Gorospe<br>32623|
|WPS2859|Ethnic andGenderWage<br>DisparitiesinSriLanka|MohamedIhsanAjwad<br>PradeepKurukulasuriya|June2002|Z.Jetha<br>84321|
|WPS2860|PrivatizationinCompetitive Sectors:<br>TheRecordtoDate|SunitaKikeri<br>JohnNellis|June2002|R.Bartolome<br>35703|
|WPS2861|Trade-Related TechnologyDiffusion<br>andtheDynamicsofNorth-South<br>andSouth-South Integration|MauriceSchiff<br>YanlingWang<br>MarceloOlarreaga|June2002|M.Kasilag<br>39081|
|WPS2862|Tenure,Diversity,andCommitment:<br>CommunityParticipationforUrban<br>Service Provision|SomikV.Lall<br>UweDeichmann<br>MattiasK.A.Lundberg<br>Nazmul Chaudhury|June2002|Y.D'Souza<br>31449|
|WPS2863|Getting Connected: Competition<br>and DiffusioninAfricanMobile<br>Telecommunications Markets|FrewAmareGebreab|June2002|P.Sintim-Aboagye<br>38526|
|WPS2864|TelecornmunicationsReformin<br>Uganda|MaryM.Shirley<br>F. F.Tusubira<br>FrewAmareGebreab<br>Luke Haggarty|June2002|P.Sintim-Aboagye<br>38526|
|WPS2865|BankruptcyAroundthe World:<br>ExplanationsofitsRelativeUse|StijnClaessens<br>LeoraF.Klapper|July2002|A.Yaptenco<br>31823|