Stabilization and State Enterprise Adjustment: The Political Economy of State Firms after Five Months of Fiscal Discipline

, Poland 1990
By Janusz M. Dabrowski, SGPiS, Warsaw Michal Federowicz, IFiS, PAN Warsaw Anthony Levitas, Dept of Political Science, M.I.T. Program on Central and Eastern Europe Working Paper Series #6

The Enterprise Adjusbnent and Labor Market Research Group of The Institute for Marketization and Property Reform Gdansk 80-236, ul, Grunwaldza 8 This report describes the behavior of Polish state firms after six months of fiscal stabilization. On the one hand, it is shown that state firms are attempting to adapt to fiscal constraints and the fall in domestic demand caused by the Mazowiecki government's stabilization plan. On the other hand, it tries to demonstrate that the continued confusion of both property rights and managerial authority impede the formulation and implementation of strategic adjustment plans at the firm level. The report also challenges a number of the governing stereotypes concerning managerial, union, and Employee Council behavior during the process of firm adjustment. In the final section, a proposal for the partial, indirect give-away of state assets is sketched. It is argued that the commercialization of state enterprises, and their partial assignment to publicly held investment associations presents the possibility of both clarifying managerial authority and more clearly introducing external market pressures into the strategic calculation of firms.

Table of Contents

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..


Part I: The stereotypes "Good" and "Bad" Firms Manag ing Directors Employee Councils Trade Unions

of the Current

Debate 3 6 9 10

Part II: Observations The Role of Internal --Cases 16 --Conclusion 25 Conflicts •.•••.••.•••..........•..•..• 14

The strategic Behavior --Cases 29 --Conclusion 44 Perspectives for Change --Cases 52 --Conclusion 57

of Firms •..•.•.•............•.....•.


in the Property

structure ....••.••. 47

Part III: Conclusions and Propositions: Intermediary organizations and Property Reform ....•.......... 59

This report was made possible by grants from the German Marshall Fund of the United states and the Polish Ministry of Education.


since March 1990, the Enterprise Research Group of the Institute


and Labor Market and Property of state inter-

for Marketization

Reform has been researching enterprises.

changes in the behavior

The investigation unionists

has been based on in-depth and Employee Councils

views with directors,

leaders in changes

15 state firms. The goal of the research

is to understand

in the state sector of the Polish economy, and to develop a picture of the structures firm restructuring of industrial authority that aid or block

and adjustment. between the

We believe that there is a direct relationship authority production, structure

of firms and their capacity to restructure sales, and assets, to meet the challenges Moreover, we are convinced


of a rapidly changing


that the current confusion adversely

of authority

at the plant level a

affects the performance

of firms and that without

real understanding be mis-directed

of this confusion, macro-economic

policy may

or worse, entirely besides the point. firms were chosen more or less randomly. An

The researched effort however,

was made to cover the major productive


of the economy, to visit firms in with both 'good' and 'bad' market situations, interviews examined and to look at regional differences. The and

were conducted with each of the actors separately, financial and

a number of critical areas: the current of the firm;

market position

changes in production,


tion, trade and employment

since the end of 1988;



to adjustment:

and the relationship

between management in banks,

and labor. Supplementary Employment unions.

interviews were conducted

Bureaus, Ministries

and regional offices of the

We have also made use of CUP (Central Office of Plan(Center for Union Research, Region the size

ning) data, OBZ reports Mazowsze),

and press accounts of firm behavior. conclusive statements


of the sample precludes

about the frequen-

cies of the observed behaviors, strong enough to challenge

we feel that our findings are stereotypes of firm behavior


and to suggest certain broad policy directions. The report is divided into three parts. In the first we address some of the typical characterizations of firm performance dis-

that are found in the press and in the current economic course. Our aim here is to indicate how the existing debate grossly real economy, oversimplifies the processes


taking place in the stated positions does

and how none of the typically

justice to the variety of responses section,

that can be seen. In this to

and to save space, we do not make direct reference

our case studies, though our conclusions read-back strategy from the more empirical and property

can fairly easily be of conflict,



that follow in the second

section of the report. In the second section, we examine the role of conflicts improving or hindering firm performance, the conditions within in

that gen-

erate different

types of economic


firms, and

the role of property


in the changes taking place Each of these

--and not taking place--

in the real economy.

themes is discussed

in direct reference to the case studies. On

the one hand, we show that firms are doing more than simply waiting for the return of the old order. On the other hand, we argue that the continued confusion of authority and property relations

at the firm level is inhibiting more dynamic responses. In the third part of the report we make a number of policy suggestions. Our main concern here is to indicate the type of that might facilitate more dynamic behavior economy on the

state policies

part of firms and not to propose an "alternative program". structure Our suggestions

focus on ways in which the authority returning to direct and

of firms might be clarified without

state control,

and on how local actors might be encouraged strategically about the survival of their

aided in thinking enterprises. connected

These proposals

are, by their very nature, deeply regime.

to changes in the property

"Good" Firms. "Bad" Firms

Since January,

there has been an unbroken

debate over and restruc-

whether tight monetary ture the economy.

policy alone will rationalize

In general, representatives

of the state -and

though not only-- have argued that strict fiscal discipline the collapse of demand provide the only real background of the economic potential

for a

true verification prises,

of Polish enterout of opera-

and that tight money will force loss-makers

tion and profit-takers

to replace them. Meanwhile,

others argue

that the depth of the current recession affects all enterprises without respect to their real potential demand is producing firms. Our observations suggest that neither position accurately the bankruptcy and that the collapse of

of both "good" and "bad"

reflects the working of the real economy. We have found firms whose current financial situation are being grossly mis-managed is relatively good, but which

and whose futures are suspect. And is terTheir

we have found firms whose current financial situation rible, but which are nonetheless prospects are potentially reacting dynamically.

bright. In other words, it is not that both "good" and "bad" firms, or that selection of

the recession the recession potentially market

is killing-off

itself is leading to the automatic

viable concerns. Rather, at the current level of it is impossible to use normal financial


criteria as the most important instrument to divide firms into potential winners and losers.

By saying this, we do not mean to suggest that bad firms are good, and good firms are bad. Nor are we calling into question the government's tight fiscal policy. On the contrary, we regard necessary and for we are

the tight fiscal policy of the state as an absolutely condition

for the creation of a stable market environment in firm performance. Furthermore,

any general improvement convinced

that a radical loosening of fiscal policy would produce

a rapid return to the inflation of the past and to the reembedding of old habits and structures.

But while tight fiscal policy is a necessary the improvement macro-economic ditions of firm performance equilibrium



it is not a sufficient


does not at this point create the confinancial performance indicator of

in which the micro-economic

firms can be used as the most important viability.

of a firm in firm

Or put another way, the information


balance sheets is insufficient of performance. supposedly

for judging the real possibilities is

Many of the "good" firms that the recession are disasters,


and some of the "bad" firms are viable opera-

that the recession tions. Moreover,

is supposedly weeding-out

given that the market is still extremely

imperfect to

--and likely to remain so for some time-- it is unreasonable expect that the information contained in financial statements

will suffice for the rational determination

of potential


and losers. As such the current debate is rather hollow: The state is right to claim that a release of financial discipline would produce a return to the past, but wrong to believe that financial discipline will naturally separate good firms from bad. out that for

critics of state policy, in turn, are right in pointing the recession restructuring,

alone does not create an automatic mechanism

but are wrong to think that the answer lies in of financial discipline or the creation of

either a loosening

some broad brush sectoral policy that will make up for market imperfections activity. Instead, what we will suggest later in our report, what is needed is a state policy that will encourage

through the state determination

of viable economic

is that

the forma-

tion of micro-level hand, encourage rently contained


and institutions

that on the one that is not cur-

the creation of the information in firm balances,

and on the other hand are

capable of distinguishing information-past practices.

--on the basis of this enriched at the firm level from

dynamic economic behavior





about the managers

of state enterprises


late between two extreme positions.

Some argue that most direc-

tors should be fired because their habits were created by the political economy of the command system and therefore in a market environment. against working they can

not operate effectively that directors

others claim class desires frustra-

should be defended

to settle past political

scores and current economic

tions, because they have irreplaceable

skills. Like the division does jus-

between good and bad firms, neither of these positions tice to the variety of reactions

taking place at the firm level, legitimate

and neither gets at the real problem of creating industrial authority.

What we have found, quite simply, is that there are good and bad directors; politics good directors who were deeply involved in the

of the old regime, and bad directors More importantly, director presents

who tried to stay sense the dif-

out of these politics. ference: strategy If a managing


a clear and coherent support him, even

for adjustment,

workers will generally

if this strategy not encounter adjustment

carries high costs for the labor force. We did in which a director had a convincing past

a situation


and yet was attacked

for his political

or even because the strategy was painful. This does not mean that workers and always fire bad ones. It indicates blindly attacking management always keep good directors only that workers are not

for either the politics of the present.

of the past is that of

or the economic


The problem

in many cases management

is incompetent,

has no clear vision

change, or has only a partial vision that it is reluctant close for fear of being fired. If management the firm faces a difficult force will move against the way of alternatives. situation,

to disand

is floundering

it is likely that work having much in class reac-

it, without necessarily Similarly,

fear of working

tion may restrain managerial


though again it must be workers generally accept

noted that where we see real initiative it in the name of firm survival. Equally disturbing,

are the cases of apparently


firms that are being terribly mismanaged ment is not contested the workforce because

but in which mismanage-

its costs have yet to be felt by costs

(no layoffs, high wages). Here, the overall

to the economy of poor leadership facing difficult capacity or hopeless

may be higher than in firms profitable productive


is going unused while in the other cases 1) it is not won't

clear that anybody can save the firm or 2) that conflict lead one or another actor to develop a viable On the positive vengeance, strategy.

side, workers do not act out of political are not fired, even when their firms

and good managers

have profound high.



and adjustment

costs are we have


in firms with financial difficulties of a competitive

observed something

search --between management side, the some

and labor-- for an economic strategy. On the negative tenuous political

position of directors may be restraining

of them from making painful, but necessary decisions. lack of legitimate ment. managerial authority adversely

Here, the

effects adjust-

Worse, in nominally healthy authority

(zombie) firms (il)-legitimate because it costs have in these situaand no


is going unchallenged

yet to be felt by the workforce. tions means that management force is demanding change.

Lack of conflict

is allowed to waste resources

Thus, the problem is not whether directors

are generally or not.

good or bad, or whether they should generally be defended Rather the question

is, is there a better way to invest managethan to rely

ment with its authority and verify its performance solely on the reactions of the workforce, lead to the ouster of good directors

reactions which may of bad

and the maintenance

ones. On the one hand, the state can not return to old practices and pretend to think for firms --except in exceptional hiring and firing directors. cases-- by

On the other hand, it may be able to at the firm level

promote the formation of economic strategies through other policy innovations structure.

and the reform of the property sec-

We will return to these issues in the concluding

tion of the report.


Employee Councils

(Rady pracowniczy)

Here, again we do not agree with either of the two general characterizations about the Employee Councils: that they are the the most

main force against the old nomenklatura important behavior

and therefore,

source of change, or that they destroy adjustment through the excessive defense of employee interests.

Employee petencies

Councils are, despite their wide legal comconsultation etc.), often

(the hiring and firing of directors,

and/or veto right over certain strategic decisions, weak or controlled by management.

In this sense, they neither

block nor facilitate

reform. At the same time, there are firms in

which the Councils are the carriers of change, forcing management to pursue more dynamic adjustment workforce strategies, and moderating capa-

claims so that they do not exceed the financial

cities of the firm. sometimes the Councils moderate and act as a counterbalance interests. The dynamic Employee Councils represent managerial to their extra-plant

union demands


a widening


skills and a pool for future to management.

Moreover, interest to ques-

it is in such active Councils that we find the greatest in property reform and often the most informed responses

tions about different

reform plans. At the same time, our obseropt uniformly or

vations do not indicate that Employee Councils generally for majority worker ownership

schemes. Often Employee schemes in

Council activists

are inclined to support mixed ownership

in which the sale of stock to the work force is one element

speeding the reform of the property order. In this sense, it is an extreme simplification to assign to the existing Employee change.

Councils a single and unified vision of property

Again the problem is not whether the Employee Councils block or support change in firms: sometimes they support them, sometimes they are passive. rent legal competencies performance. Instead, the problem is that their curdisperse the responsibilities for firm of the of

Thus, despite a generally positive


Councils current activities, management response, modified.

we think that the subordination

to the councils, weakens the dynamism of firm and that their competencies must be significantly

At the same time, it would be unwise to try to from the management system of state enterskills

eliminate the Councils

prises because they often widen the pool of industrial

available to the firm and because they serve as a counter-balance to the unions extra-plant interests. We return to this problem in

the third part of the report.

Trade Unions

(Zwiazki Zawodowe)

Paralleling managers

the set of stereotypes

about enterprise

and Employee Councils are a set of equally dichotomous concerning the role of unions in the transition to a


market economy.

Put simply, some maintain that it is in the of firms and

nature of unions to block the painful restructuring to defend wages and employment adjustment.

at the expense of profits and

And some maintain that the unions are the only

defense against the squandering incompetent particular present managerial

of the national wealth by an

class. Again, neither of these views is of what the unions are doing in the

use in describing

situation. to what is often said, the unions are instituweakness

contrary tionally suggests

weak at the plant level. This institutional that the lack of more dramatic be attributed

efforts to restructure to that they do

firms can not generally

to union opposition

reform. At the micro-level unions strenuously

we have found little evidence reductions --though

block employment

argue over the structure

of the firings-- when they are presented justifications. At the macro level, of

with even the most primitive

the fact that profits are way up and yet the vast majority firms persist wage-tax in paying wages well under the above-normative

level, suggests that the unions are either not using or are choosing to not

their rights to get at this information,

to "eat" their firms now in the name of a potential To be sure, there are deeply paternalistic Polish industry, and the threat of working

future. in does


class protest

play its part in slowing managerial employment strength


The fact that suggests the

is falling much slower than production More importantly, presence

of this paternalism.

the current propof profit seekers

erty structure weak, allowing process.

makes the institutional

for alot of slop and delay in the adjustment this paternalism in profits and the absence of a that

But recognizing interested

force directly

is one thing. Arguing reform is another.

the unions are institutionally


Indeed, while the size of our sample precludes to determine frequencies we suspect that the opposite

an attempt is true:

that at least in small and medium sized firms (to 2500 employees) the presence of an active union actually a strategic favors plant level plans (see the or

reform and the formation following


section on conflicts).

In some cases, the unions,

more exactly Solidarity,

is directly responsible

for the develop-

ment of these plans. In some, they critically ing from management lenges to management adjustment strategy.

accept plans emerg-

or the Councils. And in others, union chalcreate a competitive search for a viable is that if a to

What is important to recognize strategy is formulated

clear, well articulated

and presented

the unions and the work force then the unions generally it even at the cost of serious cuts in employment, stagnation, hostilities and loss of membership. and present political Moreover,

support wage


despite past level,


at the national

both unions tend to work together clear choices about the prospects

at the plant level when faced of their firms.

Given that the unions are often weak, that even where they are strong, they generally do not block coherent reform projects, of reform

and that in many places they are an active instrument it is worth reflecting

briefly on another set of stereotypes: (re-vindicative of

That the unions must be either rewindikacyne "bread and butter") or wspolzarzadajacy


From what

we have seen at the plant level, this distinction irrelevant for understanding generally current working

is almost

class behavior.



that for the first time their and that without change

firms are faced by a hostile environment

they will lose their jobs. Fear of firm collapse, the plant level the dominant fusion, and an understanding emotions

means that at of fear, con-

are a mixture

that something

must be done if the of what should

firm is to survive. When management

has a strategy

be done, both unions tend to accept the strategy

even at high for

costs. In other cases, the union itself is responsible developing an adjustment strategy.

Thus, while neither union both recognize that

really wants responsibility in the current situation reform strategies,

for management,

they have little choice but to support are higher. political The has

because the cost of not reforming then, is how far the national of unionism

What is striking, debate over the meaning OPZZ's

is from the reality. union) political

(the former state supported


almost no affect on how the OPZZ is behaving Factory Committee's reform efforts. generally

in firms, where the do not block

accept, and certainly

This is not to say that rhetoric

is unimportant, strikes

and that if things get worse it won't be used to justify against the government. government But these will be strikes against

policy because

firms have failed to adjust, and not are high in

against management

because the costs of adjustment

any given firm. Worse, the OPZZ's vision of the real nature of unionism seems to have been adopted --though without Executive admitting of repre-

it-- by the state, and by the National Solidarity sentation


(KKW) itself: Both the state and the political of the union spend their time defending program,

the general defenses of

logic of the stabilization macro-policy

as if political

will resolve the confusion

at the micro-level.

Our feeling is that this fear and confusion overcome by macro-economic

can not be program

defenses of the stabilization by a concerted

alone, but must be accompanied

effort to give firm

based actors better tools for adjustment. means developing criticize the economic expertise adjustment

For the union, this

to independently

and formulate

plans. For the state, this mechanisms that would

means the creation encourage

of the institutional

actors within firms to formulate



and actors outside of firms to judge them. Again, we

return to these issues in the closing section of the report.

Part II: Observations

The Role of Internal Conflicts

The political bilization


of the last 12 months,

and the staa wave and

program that began in January have generated state firms. Conflicts in the majority

micro-conflicts labor occurred

between management

of researched

cases and we suspect in the rest of these conflicts firms' capacities

that the proportions the economy.

here are not much different to characterize

It is thus necessary

and assess their role in improving or hindering to adjust. Most conflicts groups begin "politically",

as a struggle


for control over the basic decisions

of the firm. We use

the word political

in quotation marks, because while conflicts of a wider and historically

are played out against the background

complex political the organized

arena, they are not generally forces operating


tied to


outside of plants. of the

Rather, by "political" immediate struggle

we mean to suggest the importance

for power inside the micro-world a political

represented begins

by a factory. as a personal

In this understanding,


or faction struggle between

leading groups within factional strug-

the firm. It may remain at the level of internal

gle, it may expand to the outside world as factions support, economic and it may be transformed survival strategies. by situating into a competitive

seek external search for

Our findings can be understood bipolar

them along a a

axis. On one pole, are those conflicts

which generate react to

new configuration changes

of power more able to positively environment.

in the external

Here, transitional of adaptive


opens or strengthens

the possibility

change within

the firm. In practice,

the first area in which change occurs is structure of the enterprise, is virtually a

in the formal organizational structure without

that given vested interests

immovable situations.


On the other pole, are stalemate

Here, conflict

creates a new configuration

of forces, but none of facing the enter-

them is capable of responding prise

to the challenges

(Close to the first pole are Cases 1 & 2. Close to the sec-

ond, Case 4. Case 3 is intermediary.) It is important to stress that we did not encounter conflict, a case

of clearly destructive set of reactions destroyed

that is one in which a positive environment was undermined or

to the external

by internal struggles.

We have, however,


cases in which the absence of conflict, or its delay has permitted defensive, the dominant force within the firm to pursue a

or passive strategy in the face of a rapidly changing

environment. In evaluating conflicts it is important to assess whether or moment of

not conflicts move from their initial "political"

struggle to the creation of an economic plan for the enterprise. The following cases illustrate the various proportions the sphere of internal struggle and the creation of new strategies for the enterprises. between

Case studies of Conflict


I. Conflicts that facilitate adaptive behavior tool producer in a large industrial

Case I: Medium-sized center.

The managing

director was a long time representative

of the

PZPR at the provincial system of industrial

level. He advocated the so-called brigade Indeed, the brigade system had and was used outside the The system was supand to tie pay


served as his political


plant as proof of his reformist credentials. posed to motivate

employees to greater efficiency

directly to work performance. determined

In practice however, wages were not or work time. Instead, what mat-

either by efficiency

tered was the "selection" tions with management. easier contracts

a brigade leader who had good connec-

Such a leader could be counted on to win so-called "co-

and to receive a favorable,


of brigade costs."

The opposition

to the managing

director wanted an elimination traditional divisional

of the system and a return to the opposition companies grew

structure of the firm.

increased during 1988, when numerous semi-private up around the enterprise. (know popularly management The shareholders companies)

in these companies came primarily from con-

as nomenklatura

and huge profits were made by signing sweetheart

tracts with the state firm in which the worked. The brigade system of the firm was unchangeable alliances given the

and powers created under the old regime: The system had by an Employee Council completely controlled by

been confirmed the managing line managers

director; brigade leaders stood in line for favors, had vested interest~ in the overgrown administrafrom the the

tive structure,

and the managing director was supported

outside by the Party. When this external support disappeared, internal balance of forces within the firm quickly shifted. Despite the fact that conflict had from the start an economic base, the initial method of struggle on both sides was dominated organized by symbols. The Factory Committee an campaign of Solidarity

for the election of a new Employees


cil, using the union's logo --contrary its candidates. "Solidarity" Meanwhile, management

to the law-- to indicate sponsored its own rival of

union. The managing director

--to the surprise

many-- tried to enlist a local priest to play a role in calming the work-force. The first battles took place at the end of last year, relatively early in comparison to other plants. Concrete work on a

new economic strategy for the firm however, did not begin until the conflict played itself out in April of 1990, when the newly elected Employee Council fired the managing director of the firm. appointed in

his place the chief accountant

In this case, the engine of change was the Factory Committee of Solidarity that both forced the elections for the Employee in alliance

Council and came to dominate

it. The new director,

with the Council made immediate changes in the organizational structure of the enterprise, and a concerted effort was launched

to bring back to the firm some of the skilled workers and middle managers who had left because of the brigade system. Two sorts of external impulses sharpened the conflict within

the firm. In the first phase of conflict, the main role was played by the disappearance political of the managing director's external with the

support. In the second phase, and beginning

new year, the conflict was fueled by changes in the economy and managements reaction to it: as orders fell, the managing further director

raised prices without any new cost calculations, accelerating the collapse of production.

In effect, earlier arguments against management the overall organization by arguments concerning of work, were supplemented managements

concerning and enhanced

inability to react flexibly forces in the firm -lacked nonof the facorganizaThe

to the market. The new Solidarity-backed though far from politically economic possibilities

neutral-- nonetheless

for improving the condition

tory. Hence their determination

to search for effective

tional and economic solutions to some of the difficulties.


here facilitated

first a search for these strategies, fulfillment: Exports have to meet the

and then at least their partial increased, increased

prices lowered, and new workers demand for some products.


Case 2: Large electronics

firm in a large industrial


The managing

director had strong links to the provincial

organs of the PZPR, and for a time, even to central decision makers. In the mid-1980s, "prestigious" these ties resulted investments. in the start of the

extremely investments

By late 1989, however,

were discontinued

for lack of funds, while the prodproved to be completely

uct they were supposed to make possible unsalable on the market.

The Employee independence

Council, was not one of those know for its In 1988, Solidarity activists from a On

in the mid-1980s.

the 1980-81 period won control over the Council. cooperative relationship with the managing

Nonetheless, developed. people who


the one hand, the Council was composed shared a managerial hand, the managing

of qualified

approach to the firms problems. director himself initiated

On the other

efforts to correct

the internal problems an Expert Commission Commission

of the enterprise.

Early in 1989, he formed of the firm. The --as opposed of the

to examine the functioning

was composed

of people with professional and included members Council. 1989, producing

to political--qualifications Solidarity-dominated The Commission Employee

worked through

a series of exceeded

reports and recommendations.

The final report however, 19

the expectations organizational supervisory

of the managing director.

It called for deep of 50% of all

changes including the elimination the reduction


of the number of administraof one of the firm's director would Nonethe-

tive levels, and the virtual divisions.


Doubts arose as to whether the managing

realize or block the recommendations less, the Employee

of the Commission.

Council hoped that cooperation

with the managof the

ing director would continue. Acting on the recommendations Commission however, the Employee Council demanded manager responsible

the immediate function-

firing of an assistant ing division.

for a poorly

The firing was not considered workforce

a radical step and the larger Yet

was not involved in the conflict with management. in which the Employee Council presented its

at the meeting demands,

the managing submitted

director and two of his assistants their resignation. The Council then to serve as


invited the youngest temporary appointed director

and newest member of management

of the firm. A few months earlier he had been competition, had spent a

on the basis of an independent

number of years working elsewhere the Employee

but had also been a member of changes

Council during 1980-81. Thus unexpectedly,

were made in the top management led to the realization flict situation, progress.

of the firm, changes that have recommendations. A con-

the Commission's

and its resolution,

eased the way for further


situation II: A simple struggle for control dominates the nature of the conflict. The conflict initiates a process of positive change, but has yet to produce a mature economic strategy. Case 3: Medium-sized center. electronics firm in a large industrial

The Employee 1980-81, nificant developed

Council of this firm grew out of solidarity to win for itself sig-

and managed by the mid-1980s independence

and power. At the same time, the Council director, a direc-

a common language with the managing

tor with typical nomenklatura arrangement survived without

linkages outside of the firm. This serious difficulties until 1989 when of both

the newly reconstituted old and new activists-the relationship

trade union Solidarity began to consider


the informal

aspects of director. of a num-

between the Council and the managing

At issue here, among other things, was Council approval ber of so-call "nomenklatura companies" during 1989. situation.

The enterprise

is an extremely



orders are drying up and export prospects wave of firings,

are weak. In the first

13% of the work force left the firm and in the to be released. The

near future an equal number are expected first firings were not accompanies tional structure.

by changes

in the organiza-

only after negotiations

with the newly created

union was an attempt made to reduce the number of low level supervisory positions and to draw up more complete structure. plans for the

firms' divisional

and organizational

The union wants

to fire the current managing breaking nificant the existing


arguing that without no sigThe


within the enterprise

change in the firm's functioning

will be possible.


Council, in turn, accuses the union of "witch hunting"

and defends the director on the basis of the firm's good financial performance pragmatic and high wages in previous years. The union's is that "The director was good before. He had (zalatwic) alot


a vice-premier

as a buddy, and he could arrange

of things. This doesn't mean that he is good today. He hasn't done anything to save the firm. When he came up short for cash, he fired people, but without any plan for the future. Today, what we need is a manager." In the first quarter of 1990, neither management nor the

Employee Council have come forward with any long term plans for the firm or any comprehensive reform program .. At the moment initiatives that

there are a number of independent but separate

the union regards both as suspect and insufficient of one production hall, the separation of a training

--the renting facility into an and has

from the firm and the making of a research facility employee owned company. The lack of confidence

in management, structure,

suspicion with regards to changes in the property been strengthened nomenklatura management

by the emergence in 1989 of a number typical enriched members of

companies that simultaneously

while allowing the firm to avoid the new tax system. management and the Employphase. Each

The conflict between Solidarity, ees council has not progressed side is searching

passed the "political"

for support within the work force, and nobody of the economics of the enterprise. Nonethe

has a clear conception theless,

conflict has produced the first steps in changing


structure of the firm and moved the language of

the conflict towards an economic discourse

about the future.

Situation III: An absence of conflict permits the existing powers to operate without change. They pursue defensive and nonadaptive strategies. Case 4: Medium-sized industrial center. machine tool producer in a medium-sized

The managing Despite



the running of the firm. 1990, (c. 25% of the calm in


firings since February


the managing

director has managed to maintain high wages. The firings were They however,allow the excessive meaning

the plant through relatively motivated maintain

by a fall in production.

the firm to wage tax that manage-

high wages without exceeding

limit. The firm is managed


ment is careful keep all the indicators assess performance

used by the state to no debt, it wage

looking good: The firm is carrying

owes the central budget nothing, and has not exceeded

fund. The firm is owed by other firms 1.5 times more than it owes and production has fallen 40% for "objective" reasons. Yet, the market

price the firm charges for its products is higher than when sold abroad --where

on the domestic

it remains profitable. by lowering the

There has been no attempt to raise production domestic

price of the good or by finding new retail or wholesale

distributors. There is however an attempt to wait out external ties, to hide existing reserves, difficulauthor-

and to lobby the central

ities for new contracts.

This strategy will work to the advantage


of the firm if the government's

efforts to impose financial disin selling a

cipline on firms breaks down: The firm will persist good at artificially receiving high prices to a building

industry that is

credit at negative real interest rates. is dominated by the patterns

The reaction of the enterprise

of previous years. Now however, to maintain management has been forced to significantly of worker discontent

a "safe" wage level, reduce employment. and it possible that a

There are indications

new round of (planned) firings will produce conflict over managemente

Situation IV: Existing, long term conflict has failed to generate a positive plan of action for the firm. The different forces appear to be stalemated. Case 5: Large manufacturing trial center. enterprise in a large indus-

This enterprise

has traditionally

played an important dominates the


in national politics and moreover, social services


of the suburban area in which its base plant is for

located. The firm has recently met severe demand limitations its product and was already utilizing ductive capacity. The enterprise persed. A strong trade union, a strong Employee's newly changed management Council and a

less than 2/3's of it prodis-

is huge and geographically

composed of people persecuted

under the

old regime create a situation legitimate

in which all three groups have

claims on authority. At the same time, the problems

facing the firm are so complex that no group has a clear idea of

what should be done. As a result, there are continual over fragmentary


changes, that rather than leading to the working

out of some overall plan for the firm seem to be leading to a stalemate situation. None of the dominant forces within the firm the

has supported enterprise. paralysis

the apparently

logical idea of subdividing

Here, it can not be excluded that the general is connected to the expectation (or reality) of new

informal privileges activities

for an enterprise

widely known for its union

in the past.

Summary of Conflicts

During the first five months of 1990, conflicts enterprises were played out between management, the wider workforce

within Councils


and trade unions. Generally, and actively

was not directly

involved on one side or another,

strikes have thus

far been a rarity. Conflicts over management emerged as the economic had positive situation

of firms deteriorated.

The conflicts

effects when ecofor moved

one of the forces involved began to use the deteriorating nomic position control. of the firm as an argument in its struggle

In this way the language and structure and towards the economic

of conflict

away from "politics" the enterprise. ing between



As a result of the ensuing struggle

and bargain-

groups, we have observed projects. Generally

in some cases the emergence these projects focus on

of new economic changing

the internal organization

of the firm. Some of them grow strategies.

into wider more comprehensive


The danger of a renewal of informal, non-market between


firms and central decision makers still exists, particuconflict --unlike

larly in large firms. In smaller firms however,

in the past-- seems to be leading to internal reform projects, rather than to the expectation lead to improvement problems however, that appeals to the center will concentration on internal to the

of the situation.

leaves very little room for attention

market and too often internal changes appear to be done for their own sake and without real regard for external demands. is more often focused on organizational reducing the work-force the organization products. The observed that is required lack of patterns changes were thus often far from the dynamism for market expansion. of appropriate What is striking particularly is the the habit for Attention of

changes, problems of employment

and the structure

than on new

of trade or the prospects

of introducing


of looking at the future of the firm through economic survival.

its prospects

Instead of posing the question what can we ask themselves only what can we pro-

sell, too often respondents duce.

It is important to indicate that conflicts means the sole route for improving the adaptive firms. There are cases in which the existing firms, without significant

are not by any capacity of

social forces in react dynamically

change or conflict,

to the challenges

of the market. We discuss a few of these cases Here it is worth noting

in the next section on firm strategies. that managing directors, independent

of their past allegiances,


win the support of workers

if they can demonstrate environment. strategies conflicts, This

flexible strategies

for adjusting to the new

working class support for dynamic adjustment explains the general absence of destructive in which a positive

seems to conflicts

firm reaction is undermined

by struggle. must nonetheHere a new seems favors

The one case of stalemate that we encountered less be regarded as extremely configuration of authority

important and dangerous.

in the firm, born of conflict,

to expect to resolve the firm's problems through political from central decision makers. expectations are observable Symptoms of such behavior


in almost all firms. But if in other

cases these expectations reactions

do not dominate and subdue positive

it is because the chances of smaller firms to exploit are incomparably weaker than in the one If however, privileges a few large and from the new

their connections extremely

large firm we examined.

highly visible

firms won significant

state, then the optic of smaller firms would rapidly change -increasing the political pressure to abandon reform.

Part II The Strategic Behavior of State Enterprises

The strategic either as offensive acting offensively to the new economic collapse

behavior of state firms can be understood and dynamic or defensive and passive. Firms

are above all those firms who attempt to adapt situation by: Counteracting ego searching

the recessionary

of production,

for new forms of sales,

lowering the price of products, eliminating new foreign buyers; rationalizing number of supervisory production positions,




ego lowering the

limiting the number of nonlowering

jobs, changing the structure of employment; ego changing suppliers,

the costs of production, prices, resigning


from overly costly services; making more effec-

tive use of existing capital, ego the sale or leasing of dispensable assets, reducing warehouse space, rationalizing stocks;

and searching

for foreign partners, ego attempts to form joint and to acquire new technologies. are those which generally make no

stock companies,

Firms acting defensively significant internal changes and possible),

(despite the fact that they appear do not change their practices (even

both necessary

when they no longer bring the same results), attempt to win or use existing support among central decision makers, and do not attempt to understand ing, in essence, the new economic situation. They are wait-

for a return to the old model of steering the

economy and the sellers market that went with it. It is obvious that not all firms realize one of the above mentioned possible strategic formulas in all its aspects. However, it is

to indicate in virtually

all cases the type of economic

strategy a firm is pursuing on the basis of these categories.



We have observed expansionary firms in relatively

economic behavior

both in

good economic situations

as well as in firms


from serious financial difficulties.

It is impossible

on the basis of our sample population of offensive strategies

to estimate the frequency

either group of firms. But it is possible firms that are both acting strategiare firms that began

to state that in general,

cally and have good financial situations, the adjustment stabilization behaving

process early, sometimes years in advance of the program. Firms in poor financial situations, generally undertook but


their present adjustbrought on by the

ment as a response to the economic hardships stabilization program itself.

Situation 1. Offensive strategy pursued by firms in a good financial condition. (By good financial condition we mean the regular payment of obligations to the budget and to banks, positive sale balances, high profits, and the absence of work stoppages large-scale firing.) Case 1: Medium-size industrial center. machine tool producer in a medium-sized

The firm employs about 1200 people. Its financial

results The

during the first two quarters of this year were excellent.

value of sales during the first quarter was more than 25 billion zloty and profits more than 13.5 billion zloty. Despite being owed 11 bIn zl. by other firms (against 2 bIn zl. of its own arrears) does not have any financial difficulties makes no use of bank credit and basically

(less than 2 bIn zl.). Employees

state that the situation of the firm has never been so good. In previous years the economic performance of the firm was and production director

average or even poor breakdowns).

(temporary financial problems

For a number of years however,

the managing

of the firm --a PZPR member named to his post during the first year of Martial Law-- has initiated changes in the strategy of

the firm and undertaken and to prepare

efforts to make the firm more independent of the economy.

it for the eventual marketization

For the last two years, the director has sought out new buyers both at home and abroad. He won contracts with a number of west German, French and Canadian Foreseeing firms.

change --among them the decline of profitable of production and

exports to the East-- he began a reorientation

of exports. Two to three years ago exports to the USSR accounted for 30-40% of all production. in the exchange Presently, as a result of changes

rate for exports to the USSR it has become comfor his firm to trade east. As a result, the from the Ministry of Industry--

pletely unprofitable firm withdrew

--with permission contracts.

from its Russian

At the same time, the firm made constarted up the production of new

tacts with Western partners, products markets

and now sells almost 50% of production (earlier 10-15%).

on Western

Changes this year --particularly

the collapse

of domestic proThe pro-

demand, the fall of orders and the rise of input prices-duced immediate reactions on the part of the enterprise. purchased,

duction profile was altered, new machines retrained to produce entirely new goods Domestic

and workers amount of by

(a significant

which are sold in the West). foreign supplies

inputs were replaced

as soon as it became clear that Polish products than there imported counterparts. There is for

were more expensive constant monitoring

of the market and constant preparation 30

talks with new foreign firms. The portfolio tinually

of orders

is con-

being improved and the capital stock is being fully Moreover, flexibly, needs. functioning of the firm must be considered are flexible responses and improving as both labor and capital are deployed shifting with the type of orders and the

exploited. extremely immediate

The strategic expansive. ticularly

Its main characteristics


in the area of new contracts, optimization

the port-

folio of products)

of the costs of production suppliers, elimination of employof

(mainly through the choice of the cheapest of middlemen, and the reorganization observation

of the structure

ments) constant the opportunities

of the market and the exploitation

that present themselves.


Case 2: Medium sized textile The firm is composed

firm in a large industrial in

of two separate plants operating

two cities. Together in the subsidiary the firm recorded

3100 people are employed,

with about 1000 of this year

plant. After the first four months

profits of 17 bIn zl. against 40 bIn. zl. in 30 bIn zlotys by other

sales. The firm is owed approximately firms against

its own arrears of 6 bIn zl. Despite this, the firm finan-

has not made use of bank credit for two years. The current cial situation of the firm is very good.

Since 1980, the enterprise ing member

has been managed by a high rank-

of the PZPR, indeed briefly a member of the Politburo. the firm for overhaul of

For the past few years, he has been preparing changes in the economy.

There has been comprehensive 31

the firm's organizational has decreased production

structure, and since 1980 employment from 3500 to 2100 while unit

--through attrition--

has increase 25%. Moreover, using only firm earnings, modernized. The managing increasing prod-

the capital stock has been continually director has also made production uct assortment

more flexible,

and shortening product runs. This was done even

when the Polish and soviet markets would absorb any thing that the firm produced. Similarly, successively he reoriented the export strategy of the firm, it


from sales in the USSR and replacing (France, West Germany).

with exports to western Europe


exports account for about 30% of production. monitors

The firm constantly

the market and quickly r~acts to changes. Production short, and changed immediately in As a

series are as a rule relatively

when demand slackens. contacts with the West have resulted access to foreign raw materials, patterns and technology.

result of the poor function of trade, the firm has opened two distribution outlet. Their sales now account for more than 50% of

all sales. Exports are planned to increase to 80% of production in the coming years, and efforts are being made to rise the percentage of final goods The expansionary (garments) in total sales. strategy of the firm has been pursued for a

number of few years, though it could only manifest

itself in full

in the last few months. It is based above all on extreme sensitivity to market signals and rapid adjustment to fluctuaresults

tions in demand. Important was the earlier movement

for this year's good financial

away from Eastern markets and the 32

enlargement entailed

of the share of sales in the West, with all that this of goods. It is worth and the

for the quality and assortment

noting the importance earlier

of the firm's own trade network adjustment of employment

--and gradual--

and administra-

tive structures

to the needs of the market.

situation II: Offensive strategies in firms suffering from financial difficulties (eg. problems with payments to the budget, banks and other firms, distress borrowing). Case 3: Medium-sized trial center. machine tool producer in a large indus-

The enterprise

produces measuring


and employs


2300 people. There are three subsidiary and the main location economic situation is composed

units elsewhere

in Poland

of three distinct

plants. The

of the firm is poor. After the first two program the value of production was the

months of the stabilization

19 bIn zl. and the value of sales only 13 bIn zl .• Meanwhile, cost of production were 21 bIn zl .. Moreover,

the firm owes the

bank 4 bIn zl. and has arrears with other firms of 3 billion, though it is owed 7 bIn zl. by other enterprises. of finished products are presently A significant

proportion despite

being warehoused, and the

a reduction

in the level of production

underutilization The previous

of capital stock. managing director (fired in April of this year) level of the PZPR. He change

was named and supported

by the provincial

had made little attempt to prepare the firm for systemic and then reacted passively ple, when demand to change when it occurred. announced

For examlarge

fell he limited production, 33

scale reductions

in the work force and once again raised prices any sort of analysis of the market or his As a result, the economic situation of the

without undertaking costs of production. firm deteriorated difficulties firing.

further than was necessary

and the financial in his


Internal conflict culminated

The chief account of the firm was made temporary managing director. Working with the union, a corrective enterprise was developed. plan for the of the

The called for the reorganizing

firms structure,

the lowering of prices, and an increase in (USA, France, West Germany). and the goal is to

exports. Exports to Western markets

have been expanded to 50% of production,

increase them to 70%. After an initial analysis of Western markets and talks with foreign buyers, the plan appears to be realistic. Efforts are being made to use the firm's capital stock by converting capacity previously used for the

more effectively production

of undesirable

goods to those for which there are

Western markets.

The firm is starting a second shift, reducing workers, and expanding blue collar costs has

the number of administrative employment

by 300-500 people. with time average production situation

will be lowered. Since April, the firm's economic improved. Moreover, the long term adjustment

strategy of the firm its pre-

appears to give it good chance for not only over-coming sent crisis, but of prospering articulated of offensive in the corrective adjustment

in the future. The strategy clearly expresses the main features internal

behavior --new western contacts,

change, and the restructuring demand.

of production

to meet market

Case 4: Large electronics trial center.

firm operating

in a large indus-

The firm primarily






employs 4500 people in the main plant, and about 1000 in the geographically separated subdivision. The present economic sales situa-

tion of the firm is disastrous. averages

The value of monthly

about 37 bIn zl. while the monthly costs of production

reach 40 bIn zl. The firm owes other firms about 60 bIn zl. and is owed 45 bIn •. Moreover, only through obligations the finn owes the banks 10 bIn zl. and is it in a position to pay its

short term borrowing

to the central budget. This year, sales have fallen is planned. situation, concern.

50%. The firing of 1000 workers

Despite the fact that the firm is in a dramatic

there are reasons to believe that the firm is a viable For a relatively has prepared changes, long period of time --9 months--,

the enterprise These

itself for the current systemic


from the firms point of view, however director

arrived to soon ..

In 1989, the previous managing sion to work out a developmental regards to production,

formed an Expert Commisfor the firm with the



and sales. Since January,

strategy has been both pursued and adapted. is that the firm must completely Consumer electronics,

Its main foundation profile. and

change its production

for which demand has fallen radically (high costs, outdated

whose prospects

for growth are minimal


foreign competition)

must be replaced by the producsUb-components. capacity Luck-

tion of mechanical

devices and electronic the technological

ily, the firm possesses mechanical advanced. Current production and more difficult production

for some are well

and talks with foreign partners

cannot be sold in the West, and is more the fall in launched

to sell at home. To counteract

demand, the firm has begun to do basic market research, a huge advertising campaign to sell its warehoused

goods, and

lowered the prices of its products. Sales have accordingly increased. nificant In accordance with the firm's corrective plan sig-

internal cost reductions have taken place. A complete of the firm led to the firing 1100 technical division.

internal reorganization people, primarily Machines buildings

from the overexpanded

and firm vehicles have been sold, a couple of factory leased, and some production moved to a new night shift itself to

to save on energy costs. The firm is also preparing compete for contracts sketched, in the telecommunication

sphere. The

and since January, pursued basic program of change of the

bears the markers of an expansive strategy. The viability accepted assumptions

and economic effects of the program will be

clear only after a few months.

Defensive strategies

Passive patterns relatively

of behavior were observed

in firms in both

good economic situations,

as well as in those with

serious financial difficulties. first group was conservative positions prosperity

The behavior

of firms in the

and amounted to trying to defend the financial

won under the old regime. The relative

of these firms is not the result of market adjustment favorable "parameters" and in

but of the legacy foreign contacts, monopoly positions achieved

in the past. Among enterprises

poor financial

straights we found a simply failure to respond to compounded by less favorable start-

the change in the environment ing points.

In both sets of firms an absence of sensible by expectations


tive plans was accompanied return to a sellers market.

of state aid and/or a

Situation III. Defensive strong financial situations. Case 5: Medium-sized industrial center.


in firms with relatively in a medium-sized

machine tool producer

The firm makes measuring industry.

devises used in the construction situa zl.

It employs 1300 people. Last year the financial Sales were about 17 bIn

tion of the firm was excellent.

and profits about 7 bIn zl .. The firm produced large units for the construction models for private the productive

about 200,000

industry and 340,000 smaller exceeded

farms. Domestic demand significantly


of the firm and there were no problems producer of these

with sales. The firm is the sole significant devices in the country.

This year, the firm planned to produce private

330,000 units for the fact

farms and 350,000 of the larger models, despite

that demand was expected to fall. In the first 4 months, orders fell by more than 50%. Production is now is at 45% of last year's

level and more than 40% of final goods are being stock piled. The fall in demand from private farms is even larger. The firm has been saved by its traditional tion) to Arab countries, export sales (about 30% of produc-

sales financed to a large degree by the

World Bank. The firm is living off last year's profits and high bonuses were paid to workers in February, but have been withheld since then. The firm has not yet borrowed money, but its situation deteriorating is

from month to month. The firm's balance sheet is

now near zero despite a positive sales of close to 3 bIn zl. The firm regularly pays it budgetary obligations but is not making

full use of its wage fund. It pays out 5% less than it could according to the above normative wage tax rules. of this year the one real adjustment and the fall in research the

Since the beginning

firm has made is the continual limiting of production firing of about 300 employees. Despite the significant

demand, the firm has not tried to diversify production, the market or advertise its products. The managing


states that the trade network has broken down and that one can no longer count on it. But he also has no intention of trying to trade for himself. The firm has successively its products, however, producing raised the prices of

a further fall in sales. Most importantly

this is not a result of a rise in the costs of produc-

tion, since the firm continues to sell abroad at half the domestic price. The managing director said that foreign sales

were profitable. aggressive.


attempts to increase exports are not

There has been no thought given to changing profile of the firm since the managing favorable director

the production believes that the


domestic market conditions

will return in of

short shrift. It is on this assumption

that the basic strategy itself for a state

the firm is based. The firm is preparing sponsored boom in the construction

industry which will recreate goods are considered

the firm's sellers market and the stockpiled as insurance The managing against director foreign competition is also counting bureaucrats

when the boom begins. contacts

on his personal

with high level government

to win contracts.

Case 6: Medium-sized trial area.

textile firm located in a large indus-

The firm is composed

of 5 plants and employees

about 2000

people. The capital of the firm amounts to about 43 bIn zl. Last year the firm had 18 bln zl in profits and a profitability ficient of 30%. The situation was considered Since January, Monthly production excellent. coef-

the firm is having a number of difficulties. oscillates between 30-80% of planned output. 3

Capital and labor are being underutilized. bln zl from the bank to meet its current this despite large

The firm borrowed financial


the fact that these obligations

are not particularly

(for example average salaries

in May were a low 670,000 zl wage fund). In

and the firms wages were only 77% of the untaxable January, one division was liquidated,

60 people

fired and a

building given over to the city while the machines were sold. 250 people will be fired in the near future while there has been a temporary internal shift of employment from divisions with low

sales to those with higher ones. The firm has tried to open its own trade network to make up for the collapse of the state trade network but thus far this effort has not led to the expected results. The director 10% of production is considering expanding exports (presently

is sold in the West, 12% on the Soviet market,

of which 4% is for dollars) but doesn't have a clear vision of how to do this. He has tried to make connections with the

National bank of Poland to get cheap, short term credit, but so far has no real idea about how to use the eventual monies. In general, the firm is confused, counting on financial support from various credit institutions, including the World of the and

Bank but unsure of how to adjust. Some of the reactions firm seem positive, but they are taking place will-nilly

within the context of a more defensive attempt to wait out the current crisis.

Case 7: Medium-sized firm in a large industrial center, producing and installing electrical goods for the construction industry.

The enterprise

employs about 1500 people. Last year, like amounted to

the years before it, were very good .• Sold production 25 bIn zl. and profitability was calculated

at 50%. The enter-

prise had no financial difficulties. monopoly position

As a result of its virtually

(particularly with regards to large investment


the firm choose its own clients and dictated


tions. This year, it has not been able to so easily pick its clients and is undertaking the firm is working practically all contracts investment (presently projects

on about 230 different

while last year it took on only 50 or 60.) Despite this, the firm is treating the general collapse of demand in the economy as a for an expansion of services.

passing phenomena

and is preparing

It appears however,

that rather the opposite


should be drawn and that the collapse of demand is slower as firms race to finish investments the first quarter, had a calculated the firm undertook

in this industry In

begun earlier.

work worth 34 bIn zl. and


of 34%. Work done on export and together, the work

markets was worth 2 bIn zl. Nonetheless, represented employment

only 70% of planned output. The firm has reduced by 170 people and temporarily employment. moved people within the

firm to guarantee currently

Only 80% of the wage fund is being director is holding the rest

paid out and the managing

as insurance

against a further deterioration

of the firm's situadirector is

tion or wage claims from the workforce. attempting particularly the variety

The managing

to find new buyers in the West, but is not doing this intensively. of services There is no thought given to increasing offered, or improving the attractiveness changes

of the conditions

under which the firm works. No internal

have been made to permit or encourage materials.

the better use of labor or


Current difficulties temporary

are clearly being treated as a

state. The strategy of the firm has many defensive and is based on maintaining its earlier position


and on minimizing

the efforts to correct the current situation. in the case of a significant worsening of

Changes can be expected the firm's position

--which may happen quite quickly. in enterprises with

Situation IV: Defensive strategies serious financial problems. Case 8: Medium-sized industrial center. electronics

firm in a medium-sized

The firm produces components industry.

for use in the electronics situation

It employs about 1200 people. The financial

of the firm last year was not bad. The value of sales was about 48 b1n zl. and profits amounted to about 8 b1n zl. No credit was taken or necessary beginning to maintain the firm's operations. Since the

of this year, orders have fallen 25% and production

about 30%. After the first quarter, the value of sales amounted to 60 billion zl. and profits were 1.5 billion. The payment of budgetary obligations has left the firm with no money for operat13 b1n zl. During

ing expenses. As a result, the firm borrowed

the first quarter the interest on this credit was 10 bIn zl. The high interest rates were an extremely deterioration important element in the

of the firm's financial situation. stands before a difficult attempt to it

The firm presently

save itself. As a result of the crisis in Polish electronics, is assumed that orders for the firms goods will continue

to fall

despite the fact that prices are being held just slightly above

costs and below world prices. Profitability, last year, has fallen by about 70%. Already employees were released. Further reductions

in comparison in January, are planned 50


for the of

future. It is not possible the firm because

to change the production


of the shortage of capital.

It is also not postechnology

sible to increase exports because of the antiquated and because of the exchange

rates in the East. For the moment the low wages (490,000 zl and trying for

firm is saving itself by paying extremely average in April), firing workers,

lowering production

to get rid of assets. There is absolutely getting out of the crisis. Management strategy

no plan or program

has clearly adopted a for a return of a

of waiting things out and of hoping

better market. A part of the workforce moving rapidly towards bankruptcy.

is aware that the firm is

Case 9: Large agricultural industrial area.



in a large

Firm employees good financial serious

12,000 workers. Presently,

Last year, the enterprise the firm is experiencing meeting



very its



including difficulties subsidization




of the price of exceeded

the firm's goods in the past meant that demand greatly the production market capacity

of the firm. The firms was in a luxurious dictated conditions. altered


and as a monopolist

The radical systemic the conditions were withdrawn

changes of this year completely

in which the firm operates.

Above all, subsidies The price of the

and costs made more realistic.

firm's goods rose 15 to 20 times. As a result, demand dropped more than 50%. The previous managing director spring of 1990) did not anticipate or prepare (replaced in the for any of the

changes that the reforms brought about. The collapse of demand was treated as a temporary phenomena, maintained and production was to be

at the same levels as last year. One may suspect that that such a large and politically important plant

he believed,

would sooner or later receive government

support. During the

first quarter of this year he occupied himself simply with cosmetic internal changes. In April, the managing director was fired, but since then little has changed. The new management create a sensible corrective plan. is still not in a state to


Concerning the strategic Behavior of Firms

The firms clearly divide themselves

into those that are in an active

trying to adapt to the changes in the environment way and those who are not. Offensive for new solutions rationalization Defensive in the organization strategies

include searching the

of production,

of costs, the promotion are characterized

of trade and exports. by the avoidance of radi-


cal change, waiting

for the return of a sellers market and/or

state aid. This division of firms is not identical to the division of firms into profit-makers strategies and loss-takers: Offensive situations,

are found in firms with terrible strategies


and defensive moment--

among those who are --at least for the


on paper.

Firm that is reacting offensively relatively

now, and is also in a

good financial position probably began its adjustment program was put into

process well before the stabilization effect. Offensive balances strategies

in firms with poor financial crisis

are the product of reactions to the economic by the reforms themselves.

precipitated prepared immediate

The first group of well in the

firms could serve as the engines of our economy

future --at least in the state sector. Firms in the economic results in the not and aided. Both

second group might achieve desirable so distant

future if they could be identified

groups of firms have demonstrated

a capacity to react dynamically resources should be

and it is here that our limited investment placed. How these resources

should be extended,

and more impor-

tantly, how these firms can be distinguished a separate discussion report. Enterprises cial situations presently finding themselves

from others requires

that we return to in the third part of the

in passable


and behaving passively

are basically in previous favorable

still living years. --and inde-

off the financial position they achieved Important

in these cases, are the generally

pendent of the firm-- external conditions --monopoly positions,

in which they operate inherited con-

lack of foreign competition,

tracts with the West, etc .• The defensiveness here is linked to old habits -principally lack of internal and external challenges, the buyers market servative thinking

of the behavior managers, the that


and the assumption

is a temporary phenomena.

In these cases, con-

and attempts to re-create the old rules of the

game, dominate.

Despite their relatively good financial situations of these firms will show signs of collapse

now, many

in the near future as

the reserves of the past are frittered away. It is thus necessary to also identify these firms, and to encourage them to change and to adjust their behavior as soon as possible. Again how this might be done without returning to direct state control will be discussed later. is somewhat different in firms already charac-

The situation

terized by poor financial performance sively. Here, the predominance

and still reacting pasresponses results

of defensive

from the absence of internal forces capable of working out a realistic program of change, a feeling of hopelessness, actual powerless hopelessness, immediate operation and/or an

affect the situation. This real or perceived requires

combined with poor financial performance After examination


the firms current either to

and its developmental and liquidation

future it is necessary procedures

begin bankruptcy in receivership.

or to place the firm

Again in the final section of the report we dis-

cuss the formation of expert groups that might serve as receivers in such procedures. It is obvious from the above that we clearly oppose the use of the present assessing financial state of firms as the key indicator possibilities. for

their future developmental

Instead, we

propose to assess firms on the basis of their current behavior and whether they are reacting actively or passively to systemic

changes. We think that in the case of state firms --particularly in a situation where they absolutely

dominate the economy--


unconditional viability resources

use of market


to determine


does not optimize the exploitation of the economy as a whole.

of the productive

We should add, that it appears that changes are rarely radical and comprehensive. synthetically It is exceptional to find firms thinking of employin produc-

about the restructuring

and reduction

ment, the optimization tion profiles.

of the use capital,

and changes

Most often firms limit reform to the restructuring If firms are not suffering financially

of current employment. sometimes

even these efforts are not seen. In the others, efforts firings rather than rationalizing employ-

are made to minimize ment in general.

Other efforts to reduce the costs of production similarly superficial. Attempts

are often

to reduce the costs of services, and ill thought

energy and materials through.

are frequently half-hearted

More often efforts are concentrated

on the improvement trade networks, to find new

of sales through the creation of independent advertising and installment

schemes, and attempts

export markets.


for Changes in the Property


Our observations --the rights relating divided


the sphere of property

relations can be of

to the use and control of assets--

into two parts. One touches on the various the other on enterprises



as a whole entities.


regards to the first, we can say that transfers

and sales of

parts of enterprises enterprise adjustment

are increasingly strategies.


as elements of form of of parts of

The most frequently

these transformations an enterprise's

are the rent, sale or transfer

assets to other actors.

Less frequent are from parts of firms and joint stock

attempts to create joint stock companies

last years move towards the creation of semi-private companies or cooperatives around state enterprises

has been

slowed be legal restrictions The evaluation

and changes in the tax code.

of these changes, both from the economic and Joint stock com-

social point of few are often controversial. panies and cooperatives dominated political are generally

seen as being heavily of

by the old nomenklatura

and as an unjust conversion involving the

power into economic gain. Transactions

sale or lease of even small elements of a firms assets are often highly contentious. Despite the controversial transformations responses nature of these partial property rational firm

it is arguable that they represent

to changes in the environment:

Last year the dominant

reaction of firms in this regard was the creation of new joint stock companies and cooperatives around the state enterprise. of the

This year, however, we see more partial transformations ownership structure

as pieces of the assets are sold orthrough holes in the tax

leased. The first set of changes were encouraged

and price control systems that allowed dummy corporations frequently dominated by Party elites-- to raise prices for the

goods and services of the initial state firm and to avoid the above normative wage tax (thus benefiting

workers as well). This

years changes, releasing assets.

are prompted by firm attempts

to save money by

or selling underutilized

and often heavily taxed

In opposition transfer

to partial property



of ownership

rights for entire enterprises

has yet to

occur. Indeed, it generally discussions

does not even come up on its own in

with firm based actors. From what we can tell, the of state firms is still not regarded within


firms as a near term reality. To be sure, the goal of widespread privatization is generally accepted, and our informants often

said things like "these assets should have a concrete

owner." But mean

they were not inclined to specify what this should or would for their enterprises, cerning privatization and a wide variety were expressed of different

ideas con-

in the interviews.

Thus, it is fair to say that with respect to the overall economy, enterprise strategies will not include complete owner-

ship changes so long as the state does not draw up the basic legal framework in motion. for privatizations, and then set this framework significant transforma-

In other words, we have not observed for one or another other problems

internal pressure

form of property dominate

tion. For the moment,

the day to day in

affairs of firms. To much is unknown about the environment which state firms will be transformed, advantages for various and the potential

firm based actors is too unclear in the liquidation

to expect

their active participation prises

of the state enter-

in which they work. At the same time, the nature of plant demands that the social forces operating

based conflict


firms be taken into consideration legal framework for privatization

in the construction if this process

of the

is to have any

chance of relatively

rapid success. Any process of privatization the complex and confused

that does not take into consideration

set of rights and practices within firms risks serious political resistance. But while it is crucial to recognize the importance based actors in the privatization of firm

process, we can not on the

basis of our research offer much on the subject of "the true social feelings about just or unjust property transformations." We can say however, that the present public debate over whether employee stock ownership "citizens" is more desirable than so-called reflect divisions

stock ownership does not accurately

or even attitudes towards property change within firms. Different employee representatives express different opinions on this The

debate and on other question relating to ownership transfers. blurriness of the preferences

labor activists have with regards is seconded by survey data from the In response to a question about

to the form of privatization

Center for Trade Union Research. the preferred

form of property transformations

posed to unionists the largest group for "a

at the Second National Congress of Solidarity of respondents pluralistic

--about half-- declared themselves

system of ownership

in large and medium sized enterprop-

prises" and a wide variety of individual and institutional erty forms. If it is possible to say something about the dominant tudes among labor representatives,


it is only that they recognize

the need for a clear regulation resolution

of the property responsible

regime, and a for the assets. system is

that would make somebody

In this sense, firm actors recognize ineffective,

that the present

but at the same time the prospects

for change remain in the for-

so distant that they are not actively considered mUlation of firm strategies.

Without at least some basic models will not begin to

of future property think actively

change labor and management

about preparing

their firms for privatization. opt for the free distrib-

Our informants

did not generally

ution of state assets. At the same time, they were fully conscious of the huge disproportion of between the value of these reserves held by the popuwill be

assets and the low level of disposable lation. They understand perfectly

well that privatization

either a very long, slow process, non-equivalent equivalent

or that it will take place on a or even necessity of non-

basis. The possibility,

sales opens up a wide field for political particularly if it is unstructured, assets.

bargaining. may have

This bargaining,

little to do with how best to use existing

A separate problem touches on the attitudes non-politicized population employee.

of the average,

The basic issue here is that general or understanding of changes in

has little knowledge

the property a situation passively) Examples

order or their potential


This creates (actively or choices. structure

in which the actors affected by change have very little possibility

for conscious

of the first attempts to change the property show that knowledge reactions

of enterprises while emotional

on the subject grows slowly,

are quick. It is with this awareness,

rather than a preference transformation

for one or another option for property con-

that the we look on the main social problems

nected to wide scale property changes. The first case shows the weakness of thinking about property transformation in a firm where it should be of primary importance. The second case illustrates some of the social questions that arise around partial transformations. Case 10: Large agricultural industrial area. implements producer in a large

For many years the firm has been using less than 2/3's of its productive capacity. The recent collapse of demand has led to A small group of law-

even lower levels of capital utilization. yers and economists

within the firm want to improve the use of the firm on the basis

the existing capital stock by reorganizing

of a holding company. This idea however has not found support among any of the important groups of decision makers within the firm. What is more, even the territorial do not demonstrate any particular divisions of the company

dynamism with regard to becom-

ing more autonomous.

In this situation, the ideas of this small

group remain vague and undeveloped. The lack of any internal pressure explain in this case by the acceptance by all the important everybody for property change we strategies

of conservative

forces within the firm. It appears that

--in different ways-- is counting on the political importance to

power of the firm and its regional and national save it from radical restructuring.

Case 11: Medium-sized center


firm in a large industrial

The Employee plan to transform

Council of the firm has come forward with a a research facility of the enterprise into a

joint stock company. The plan has received managing director,

the support of the

but has been opposed by the Factory Committee is that the with the last

of Solidarity. opposition

within the Council the general opinion

of the union is caused by bad experiences

joint stock companies

that were formed around the enterprise by plant-based party managers,

year and were dominated the present director.


The union's analysis

of these companies firms in as

revealed that the were rather typical


much as the produced very little, while selling the state firms goods at inflated prices. Paradoxically, bers of the union's and at first glance it appears that the memfactory commission are identifying the

attempt to create a worker owned company from part of the factory as another attempt to create a so called "nomenklatura The reasoning of the Committee however company."

is not simply the product

of bad associations "nomenklatura fragmentary unionists

with past, or with the simple slogan Rather it is related to the partial It is difficult loss-making and


nature of the entire project.

for the part

to accept the idea that a previously could --according

of the enterprises

to the employee exploiting

ownership the of

plan-- become a profit-making original state enterprise.

firm without

They would gladly see the formation is

a plan to transform

the entire firm, but alone the committee such a plan.

not able to formulate

A second point of contention side, and the Council of one building advantageous whether


the Union on the one is the leasing is over as

and management

on the other,

to a foreign firm. The contract

in itself

for the enterprise,

but has led to a debate

the conditions

of the contract

are as "advantageous of the market

they could be." Here, the weak development lack of precedence agreement

and the

with regards to such contracts, questioning.

makes all such

subject to political

The next three cases are from firms in which ideas about transforming the entire enterprise have appeared. At the same time however, these ideas are completely divorced from an offensive adjustment strategy. Case 11: Medium-sized industrial area. electronics firm in a medium sized

The firm is near collapse, development Council given its technology

and has poor future prospects and its product. The Employee director,


is nonetheless

trying to fire the managing of authority,


its own people into a worker operation, struggle complete situation

into positions

and turn the company in the whole political and the

owned enterprise.

What is striking

is the complete

gap between

the Councils

against management absence of thinking

and for worker


about how to improve the economic

of the firm.

Case 12: Medium-sized sized industrial area.


tool producer

in a medium-


The managing

director of this firm has maintained, an acceptable

despite a

fall in production,

financial profile and is not productive capacity that is at

rushing to utilize the significant his disposal.

He prefers not to risk trying to redeploy his

assets so long as it is not clear that he cant do better by winning a contract through his old connections at the ministry of

housing. At the same time, he has stated his intention out a plan for a property transformation existing management

of working

that would give the

group control of the firm.

Case 13: Medium-sized trial area.


firm in a large indus-

The managing

director has declared his desire to prepare his of the on the mainof the

firm to become one of the first joint stock companies Treasury, and then for privatization. He is counting

tenance of his own influence both the managing


state owned joint stock company and later as a share holder. He also considers it unlikely that his geographically dispersed work

crew will pose a serious challenge to any given process of privatization. At the same time, he considers that the long term

future of the firm is based primarily

on the renewal of invest-

ment which "at some point must happen."

The next two cases demonstrate the opposite phenomena:. Here the dominant force in the enterprise is focusing its efforts on working out the internal problems of the firm and improving the immediate economic situation, while treating changes in the ownership structure as important, but secondary at the moment. Case 14: Large electronics firm in a large industrial


The firm is in a difficult

financial situation,

but also en In an

engaged in a long term and radical restructuring attempt to improve the utilization production


of the existing assets one

facility has been leased to a foreign company. Alongchanges, attempts to sell accumulated stocks,

side organizational

and changes in employment,

the basic problem remains as to how to success and

redeploy assets that are ill suited for competitive partially unfinished as a result of discontinued

investments. pro-

Here, the firm is planning radical changes in the production file of the firm. The "purging" of the firm --the name used for the firms adjustment plan-- includes mention of the future privatization


the firm. But the form of this privatization open. Moreover,

is left completely is a task

it is clearly stated that privatization

for the future and that for the moment efforts must be concentrated on overcoming the present difficulties. Among the there as

active participants

in the reorganization

of the enterprise

exists a certain inclination the basis for privatization,

to treat employ stock ownership and from this point of few they debate on privatization.

closely observe the larger political One of the activists situation

in the Employee Council summed up the

in the following way: "What's the point of thinking changes when we have a complete mess in the firm. no buyer will want to enter into any sort of particthe

about property

Given the situation, arrangement

with us." Indeed, the desire find a co-owner,

ularly a foreign one, is fueling the attempt to restructure firm.

Case 15: Medium-sized industrial center.

machine tool producer

in a large

The prospects

for property

change in firm are more distant structure of the

than in the above case. Here, the administrative firm is being completely date the brigade

redrawn as the firm attempts

to liquifor

system that is held partially

responsible with the

the firms current difficulties. brigade

The bad experience

system has made many suspect of organizational


and for the moment normal structure is not considered

leading actors are want only a return to the But while privatization accepted as

of a state enterprise. an immediate

issue, it is generally

a goal by the main actors within the firm.





We began our research convinced formation

that the successful a rapid start-up

transof wide

of the Polish economy requires

spread property

changes. We continue to think that this is one of elements of systemic change. The generally strategies At the same set of

the most fundamental slow and partial underline


of firm adjustment

the need for relatively

swift structural.

time, the nature of firm level conflict rights and practices

and the confused

that have grown up around state assets sugof property titles in itself will It is utopian solely on the

gest that the simple transfer

not resolve the internal problems to think that privatization

of enterprises.

can be accomplished

basis of finding new outside owners for all firms --irrespective

of whether they are created by the sale of assets for minimal prices or the by giving away stocks. The current conflicts within enterprises, improvement in managerial and the partial

structures, may help in leading actors process. Indeed, if the situalegislabe an the it is

to think about the privatization tion in firms stabilizes, tion on privatization

and the outlines of government

become clearer there will undoubtedly

increase in firm based attempts to identify for themselves most advantageous form of property change. In this context, for transferring

important that the basic guidelines non-equivalent values --necessary

shares at

for hastening

the reforms-- be actors in

clear, and not created spontaneously individual firms.

by individual

A larger vision of property changes is necessary strengthen and ground the development

both to The

of these processes.

more this vision guides and stimulates

firm based actors to these for the

initiate and pursue property changes the more effective changes will be for the entire economy. For the moment,

active forces within firms, there seems to be no link between the prospects of property changes and adapting to the radical changes in the economy. The only significant excep-

that have occurred

tions are linked to the hope of finding a foreign partner. Thus, on the one hand, the question of how to distribute state property equivalent --in the face of the absolute necessity of nonbargain-

sales-- opens the possibility

for a political

ing process that could be extremely destructive

to the adjustment of firm adjust-

process of firms. On the other hand, the weakness

ment process

itself demands changes in the property changes to the stabilization structure of firms. Property

regime, and of the curtransforma-

the linking of property rent confused authority

tions, in short must both take into consideration existing array of interests and power operating

and alter the within firms if

they are to have the desired results.

Part Three: Conclusions and Propositions: Intermediary Organizations and

Property Reform

The challenge the economies world economy. been isolated

which stand before the Polish economy,


of other nations of this regions, For a generation

is to enter the

our society and its economy has as if it were

from the world market and organized Isolation and bureaucracy

one huge bureaucracy. adaptive depend capacities

have stunted our

and our future position

in the world will them. depends order. a

in large measure

on our ability to regenerate our adaptive

The ability to regenerate


first and foremost on the remaking of our institutional The authoritarian paternalism of the communist

state created

social order that criminally without changing

wasted human and material

assets. our

this order we will continue

to squander

skills and capital. We regard deep institutional nations most important threats presented shortage economic problem,

reform as the the

though we understand

by other weaknesses the hypertrophy

such as the overall of heavy industry, monopo-

of capital,

lies, antiquated workforce.


and the lack of modern


in the

We do not wish to trivialize lems. Nonetheless, tional

the importance

of these probinstituorder

we are convinced

that until we recast

legacy of the communist

state and the industrial

that went with it, new inputs of skill and capital disappear embedded in the structural inefficiencies

are likely to

that have become

in our social practices.

No one should have any illupaternalism to

sions that breaking-out won't require

of 40 years of industrial

sweat and time. out of the current morass is to

The first step in breaking

make firms plan and pay for themselves. responsibility

The state cannot assume nor can it print usurpation of

for the fate of enterprises,

money to pay for the failure that its overextended responsibility paternalistic

has caused. A return to either of these practices will only re-embed past practices. of the Mazowiecki

In this respect, government

the stabilization


is a major break from the past. For the first time, forced to think for themselves In the last six months, about costs, we have observed and no one it

firms are being markets,

and survival.

firms struggling

to take responsibility the profundity

for themselves

should underestimate means.

of this struggle

and what

The idea that nothing has really changed set on waiting

or that everybody

is simply

things out is misguided. suggest that it is stability alone

At the same time, our observations equally misguided

to believe that macro-economic restructuring

will lead to the successful

of firms --to say


of the economy as whole-- or that after six months the itself will make winners and losers easily distinguishdistinguish-


able. What we have found is that the most important ing factor between city for strategic determined a potential

winner and loser is a firm's capain turn, is largely

action. This capacity,

by the interaction

of the social forces within the by how firms with situations can

firm. We are repeatedly similar production nonetheless Whether generating-behavior reforms. political question behave

struck in our research technology


and market

in completely

apposite ways. --and be helped for strategic in adaptive

or not firms can generate sufficient social capacity

is now the most important Financial discipline,


facing the Polish and sociointo



change have thrown existing and have unleashed



a wave of conflicts

over management. are completely

What we have found is that many of these conflicts justified

and that many are not; that in some cases conflict economic strategies, in some cases to

leads to offensive dangerous

stalemate. assessment one makes about the outcome of any

But whatever given conflict,

what is most striking variation

is that across conflicts and motives of

there is an incredible

in the capacities precludes

the leading actors. This variation stereotypes in describing

the use of

firm behavior

and adds to the dangers sheets as the primary are not blindly lash-

of relying primarily means of assessing

on financial

balance Workers

firm viability.

ing out at management,

and in general the unions are not blocking


efforts if management

knows what should be done and too often

can put its case cleanly. At the same time management has no idea of what to do, while the contested trial authority practices --indeed, the complete

nature of indus-

lack of rules and past mean that disputes between


its legitimation--

actors can persist without ever generating External challenges

a clear strategy. are, on the one and adjustand inter-

and internal conflicts

hand, forcing actors to generate economic ment strategies. nal conflict


On the other hand, external disciple to guarantee

alone are insufficient information

the generation authority

of either appropriate necessary currently

or the legitimate Management

for radical restructuring. operating

and labor are

in a closed world. neither has much access to neither has a direct, and the rules

information immediate governing

about external markets, in acquiring


such information,

their struggles

remain too open. In short, it is too

easy for both sides to see success or failure only in terms of the outcome of their mutual struggles external expansion. themselves --which and not in terms of

The problem then is not in the conflicts are in anycase are both necessary fact that their institutional group or authority

and inevitable--

but in the

structure has yet to define any responsible for an outcome. has decomposed This and

as ultimately

is another way of saying that state property new rights and entitlements does not facilitate

have yet to be defined.

The situation firms. --

radical restructuring

efforts within

At the same time the sociological


of the existing

and confused-of legitimate property

rights renders dubious any solution authority

of the problem transfer of

that depends on the immediate

titles to completely

new, outside owners. This is true on the basis schemes, to act

no matter how these new owners are created: Whether of "below-value"

sales or on the basis of a give-away and authority necessary

they will lack the information strategically

if they are resisted by internal actors. state enterprises on

To be sure, a plan to slowly sell-off

the basis of book or market values would theoretically problem of legitimate authority

solve the

since future owners would be But it is of


title in return for risking their own capital. financial reserves of the population the possibility section

given the marginal precisely

this principle

which eliminates

quickly extending economy. Moreover,

the process to a significant

of the

and again given the low level of the populaany attempt to sell-off state assets zero

tion's cash holdings,

quickly would mean that stock prices would rapidly approach and we would return to the basic question non-equivalent sale. between the necessity of speeding up of the politics

of a

The contradiction changes in the property

regive and the necessity authority

of both transnew

forming and legitimizing and untried potential proposals solutions.

at the firm level requires

Here, we want to present

a sketch of one and similar


We do not pretend to be original

are being discussed

not only in Poland, but in Hungary is built around a partial give-

and Czechoslovakia.

Our proposal

away of state assets, combined with the immediate


tion of state enterprises.

The numbers used in our examples

should be treated illustratively. The novelty of these propositions creation of institutions lies in the immediate

that own shares in state firms while at stock-

the same time they are owned by wide group of individual holders. We call them Investment Associations

but similar struc-

tures have been proposed under the rubric of Mutual Funds and Holding companies. The owners of the Associations would be Polish

citizens who came to possess all the shares of these association through a one time give-away plan organized by the state. The Associations in turn would own a certain percentage --say 20%-(at

of the shares of a significant least 1000 primarily of the remaining

number of state enterprises

small and medium sized firms). A percentage

stocks would be given or sold to other actors, banks and local governments. The main goal for and

for example employees, of this undertaking

would be creation of Boards of Directors of management

state firms that would include representatives

labor, as well as the newly created partial owners of the assets. All the firms embraced become joint stock companies responsible in the programs would immediately in which management would be

to the Board of Directors, of Industry.

and not to the work force

or the Ministry constructed

Initially, the Boards would not be

on the basis of one share one vote, or even one share established in such a way the new parof the

one dividend but rather politically that all interests were represents

--the workforce,

tial owners and the state. For example the composition Board could include two representatives

of the state, two from

the workforce,

two from the investment associations,

and one each

from the banks and local government. itself the deciding vote in questions away or emission of stocks.

The state would reserve for concerning the sale, give nature form with

The politically


of the boards would change to a more normal commercial the sell-off of the remaining shares. negotiation

This solution would institutionalize

between the

main internal and external actors involved with the firm. It presents the possibility of being accepted as legitimate because the on the

current social forces within the firm would be represented Board of Directors,

while at the same time all citizens would rights. The legitimation of authority at

acquire some ownership

the firm level would stabilize the position

of managers,


the new partial owners would be interested the making of profits. The new owners ~ould place pressure on management and labor, and

help insure that their internal conflicts played themselves within the constraints imposed by the market. The requirements institutionalized negotiation between of of

the market and constant, the concerned information

parties would dynamize both the acquisition

and improve its circulation. this solution would speed up the process foreclosing on the use of a variety of of

Similarly, privatization methods


at further stages of the game, since the state could sell shares at market or non-market shares to citizens prices. The indirect (through the investprivatization

its remaining

give away of enterprise ment associations)

as the first act of a widespread

program would allow us to avoid the huge problem of evaluating

state assets. Moreover, actors directly

so long as we do not have industrial in making profits, the nations assets Giving a way a part of these


are likely to remain undervalued. assets creates the possibility thing in the future.

that the rest might be worth some-

Let us briefly return to the question of the legitimation authority at the firm level and ask whether these proposals to the social forces now operating



be acceptable

in firms. On the requires the

one hand, the commercialization

of the enterprises

work force to give up certain managerial principally construction

rights now exercised

through the Employee Councils. On the other hand, the of these proposals gives us reason to suspect that gain

they would be positively

received by workers. Employees

stocks in their own enterprises, same time maintain significant

shares in other firms and at the through and

influence on management

their representatives

on the Boards. The future competencies

rights of the present Employee Councils are in this context negotiable. guaranteeing We think however, that problem is solvable by representatives of the Councils a place on the by

Boards without respect to the number of shares possessed employees. This variation

of the German model would also provide organizational interests of class

a counter weight to the extra-plant

unions with respect to the representation The potential the particular viability

of the working

of these proposals

will depend on The

solutions to a number of critical problems.

first, concerns the nature and behavior Investment Associations.

of the newly created

The citizens who will be given shares in

these associations experience

will not, in the first instance possess to immediately make reasonable


with markets


about the management their creation

of these associations.

In the moment of boards, The main

the state will have to name their managing and regulate their functioning. should be the maximization

finance their operations task of these associations dividends

of the

of their shareholders.

The engine of their activity

should be the prospect ure will be verified Boards or selling-off The problem whether

that in the future their success or failelecting their managerial Associations.

by stockholders

the stocks of less profitable

is that on the one hand, that we do not know will really by interested in maximizand

these associations

ing profits

in a situation where they have been created controlled by political

remain --at least initially--


tions. On the other hand, it is also possible centrate their efforts on the achievement

that the could con-

of short term profits of the iniseeking, par-

so as to insure high dividends tially nominated ticularly opmental management.

and the re-election

Such short term profit

in an economy short of capital, possibilities of many enterprises.

could limit the devel-

connected distributed

with this dilemma,

is the question Associations

of how long the should be --if

stocks of the Investment

at all-- non-transferable. there is that political Associations.

The shorter the time, the less risk the goals of the would allow

pressure will influence

A longer the freeze period, however,

people to assess the real value of their stocks and the Investment Associations to figure out the potential

of the firms that

the own shares of. Whatever period is ultimately state must use this time to conduct an intensive program about the functioning of capital markets,

decided upon the education and the future

values that people have been given. An equally the behavior important problem is the continued fogginess of

of state representatives

on the Boards of Directors all amount

of commercialized privatization

firms (this problem appears in virtually

schemes. The state would, for a significant

of time, continue to own more than half of all shares. Questions here touch on both the voting rights of these shares and their rights to dividends. The state could end-up returning to it role

as manager of the entire economy, and at the same time exhaust firms financial with dividends reserves by demanding high dividends. The problem of

could be resolved by earmarking

the dividends

the state's shares for the development

of the firm while main-

taining the some version of the current capital tax as a source of budgetary managerial income. The problem of state intervention could be resolved into


first through the construc-

tion of the Board of Directors enumerating

itself, and second through of the state pro-

the issues on which the representatives vote

had the deciding cedures etc.)

(eg. further sale of stock, bankruptcy

We should add in conclusion, other programs of privatization.

that similar problems The virtues

appear in and the

of an indirect, lie in improving

partial give-away authority

of state assets, however, of enterprises; presently


in breaking trapped

the hermetically between

sealed flow of information

in conflicts

management in profits; groups

and labor; in creating new actors directly in developing a system of negotiation


that includes us to

inside and outside of firm; and finally in allowing avoid the problem of valuating assets.


It should also be stressed,

that the process

of privatizato

tion cannot be limited to enterprises their environment, particularly

and must be extended commercial

to the so-called

banks. The slow nature of this undertaking, other intermediary ent institutions solutions.



It is necessary

to build independof the to the are an

that without reference on enterprises The proposed

to the politics

state place pressure changing environment.

to adapt dynamically Investment Associations that might

a potential reasonably

example of non-state


be expected to independently

assess firm performance, aid them in

put pressure restructuring.

on firms to adapt, and ultimately

But the question bureaucratically

of how to sensibly,


and non-

place pressure

on firms to adapt is so pressing should be encouraged efforts. to get

that we think that other institutions actively

involved with firm restructuring

Here we have associations, offices of to

in mind institutions the newly elected

such as the local industrial

local governments

and the regional

the trade unions. All should work directly with enterprises develop viable adjustment strategies. Moreover, these groups

should be encouraged

to work together

--and given the resources viewpoints

to do so-- so as to create a variety of institutional on the workings

of firms. Over the longer term, it is critical

that the internal problems of enterprises

are seen within the and the

larger contexts of local labor markets, the environment developing private economy.

An example of such institutions

are the expert economic are creating to advise

groups that some regions of Solidarity enterprises

on how to adjust. The efforts of the newly elected to create Chambers of Commerce and regional developments. efforts is leading The

local governments Employment

bureaus are another set of promising of regional development


and restructuring

that the union is leading in Torun and city government in Gdansk should be watched carefully as potential mediary institution building.

models inter-

In the area of information

--to say nothing of many others-it can finan-

the state has an important role to play. In general, encourage

dynamic economic behavior of firms by partially projects

cing different

such as efforts by firms to create joint

trade representatives or basic schooling

abroad, sectoral or regional trade fairs,

about how to develop foreign markets. the proposed Investment

Each of these ideas, and especially Associations

require extensive development.

We present them here,

along side a basically the virtues of anyone finding institutional

empirical analysis, not so much because of of them, but to stress the importance ways to aid firms adjust without of


to the direct state administration

of the nations assets.


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