5.4 Short-term responses

5.4 Short- term responses

In the early stages of transition the changes in the economic environment were so overwhelming that firm-specific factors, apart from managerial skills and autonomy, did little to differentiate the short-term responses of firms. Thus the holding of debts taken out prior to transition had a much smaller impact on firms behaviour in the short run than had been expected because inflation sharply reduced the real value of this debt, and the explosion of interenterprise debt also temporarily eased the debt burden . Firms whose exports had gone to the CMEA (Council for Mutual Economic Assistance) suffered a particularly abrupt shock , but the magnitude of the output decline in the three countries was such that virtually all firms faced a sharp fall in demand. Moreover, despite the belief that it was the heavy industry of the region that was overdeveloped, consumer-oriented sectors such as textiles and food processing suffered comparable, if not greater, demand-side shocks. Regional factors played an ambivalent role, with firms located in distressed areas with high unemployment facing more serious obstacles but at the same time benefiting from good relations with their workers and local authorities due to the desire of the latter to keep firms operating.

While managerial skills at individual firms were important in determining how firms responded to these shocks, in the short term such skills were less important than managerial attitudes. Some managers did not view the government s transition measures as credible and therefore persevered with their old business policies or continued to work to satisfy old constituencies in their supervisory ministries. This failure by managers to accept the realities of transition and stabilization were often accompanied by efforts to resist the introduction of new ways of exerting outside influence over the firm. In part this manifested itself in managerial complaints about the inability or unwillingness of the government to protect the firm by means of industrial policies, tax breaks or trade policy. These managers also resisted changes in the way that the state exercised its role as owner, even if such changes implied greater managerial autonomy, and they also sought to resist the introduction of outside owners through privatization when this was proposed.

According to Estrin et al . (1995), the principal factors serving to promote short-term adjustment were the degree of autonomy enjoyed by managers and the credibility of the prospect of privatization. Managerial autonomy was related to the clarity of property rights and to the lack of workers involvement enterprise decision making. Clarity of property rights did not necessarily mean that the firm was being or had been privatized, but rather that a credible set of new owners, domestic or foreign, was in place or on the horizon, or that the state s ownership was sufficiently well defined to prevent managers or workers from appropriating the firm or its revenues . Managerial autonomy was also strengthened to the extent that the firm s budget constraint was hardened and its financial accountability to the government, its suppliers and its creditors increased. Estrin et al . concludes that managerial autonomy was weakest in Polish firms because of the influence of workers councils in the selection and retention of managers, and because of the ambiguity of property rights caused by the competing claims of workers and the state for ultimate control over these firms. ^[3]

Firms that were judged passive in the face of transition were those which made few or no adjustments to their levels of output and input, despite the sharp decline in demand experienced by virtually all firms and the large changes in input and output prices. Such passivity led to smaller profits or larger losses than experienced by other firms, and to the accumulation of debts, often in the form of payment arrears to suppliers, the government and sometimes even workers.

Active responses to the transition took two forms: changes in the real or productive sphere, and changes in the business sphere. Changes in the real sphere involved changes in output or inputs in response to changes in demand. The most obvious response was to reduce output. Firms also responded by altering their product mix, so that production was concentrated on product lines with the best market potential. In some cases this also involved improving quality so as to improve competitiveness in Western markets; in other cases it meant concentrating on the lower end of the domestic market. Such changes were generally made within the limits imposed by current capacity and technology. A second production response was to alter the input mix in response to changes in the price and availability of inputs. While a few firms temporarily found it difficult to obtain necessary inputs, supply-side bottlenecks were not a major cause of output decline. Many firms also took advantage of trade liberalization to begin importing inputs from Western suppliers, who were seen as more reliable and whose higher-quality products, albeit at higher prices, were seen as lowering production costs and smoothing the production process. The fall in real wages and the rise in the price of other inputs caused labour costs as a share of total costs to fall in most firms, and this may have served to cushion falls in employment. Changes in output and employment were relatively common in the firms surveyed, in part because they were imposed by environmental factors, above all the decline in aggregate demand and the imposition , however imperfectly, of hard budget constraints. Nevertheless there were differences in the speed and extent to which firms carried out these changes, and these differences had decided effects on firms long-term prospects.

Active responses of a more sophisticated kind, those in the business sphere, emerged in fewer firms; nevertheless a majority, particularly in the Czech Republic and Hungary, began to formulate and implement strategies for long-term survival. Such strategies involved changes in the way that these firms did business, including their internal organization and means of motivating workers and managers, the mix of business activities they carried out, their strategies to remain or become competitive, the technologies they used to produce and distribute their products, and the alliances they formed with other firms, financial institutions and government agencies. Estrin et al . (1995) identified firms that were undertaking such strategic responses, and they were able to link this behaviour more strongly to managerial autonomy and to the credible prospect of privatization than they could to responses in the physical sphere. However their study ended too soon to determine whether these strategies could be sustained and whether impending ownership change would introduce effective mechanisms of corporate governance.

^[3] Nevertheless there were positive short-term responses by some Polish firms, as Wosinska (1995), Pinto et al . (1993) and Pinto and van Wijnbergen (1994) show.