Enterprise Reform in Eastern Europe

Enterprise reform is emerging as the core economic problem in Eastern Europe. As privatization has been delayed, a new problem has emerged, largely unanticipated by outside advisers: It is probably possible to run a clear-cut state enterprise efficiently, and it is certainly possible to get efficient performance from a private enterprise. But it is utterly impossible to get anything like efficiency from an enterprise for which the current and future ownership status are in limbo. What has happened in Poland, where reform started earlier than elsewhere, is probably a harbinger of things to come. Two years after the crumbling of central authority that used to exercise both ownership and control, ownership of state-owned enterprises remains ineffective and control diffuse. Lacking sharply defined control rights, various groups (workers, incumbent managers, and local authorities) often had no other way of demonstrating their clout than by disrupting the enterprise. And with changes in ownership announced but not implemented, managers and workers councils alike have every incentive to decapitalize the enterprise and increase its debts. Eastern Europe is not well served with straight textbook advice. The common wisdom on privatization fails to address the problems created by diffuse ownership and conflicts over control that exist before privatization. Regular cash auctions may fail to match managers and capital stock efficiently because of pervasive wealth constraints. Standard service on enterprise restructuring does not allow for the sheer scale of the problem or the special reasons why, in Eastern Europe, current profits are a poor guide to potential profitability. Simply applying Western bankruptcy procedures based on current data about enterprise profitability introduces a destructive bias toward liquidation and delay. And, the author argues, introducing Western style unemployment insurance, although it would lower the social costs of unemployment, could also contribute to its indefinite extension. The author sketches how these problems can be addressed by incorporating all the incentive problems specific to Eastern Europe into the design of the policies to be implemented. Sometimes the advice that results is novel and as yet untried; sometimes examples exist of its successful implementation. But the alternative is a long period of declining incomes and, presumably, increasing social unrest as the consensus underlying the reform programs begins to erode.