"Big bang" and black holes

(story to be published in tomorrow’s issue, March 23)

Poland – a bizarre case

After 1990, when Poland liberalised imports and cut subsidies to state companies, leaving them prey to capitalist competition, everyone expected a major economic crash. Surprisingly, however, state companies’ exports grew rapidly, economic activity livened up and acquired the behaviour of a western market. Before the private sector attained today’s scale, “state-owned” firms were those who carried the burden of the most spectacular economic growth in Central and East Europe. For those familiar with companies in state ownership, the case seems at least bizarre. Usually, a Romanian economic analyst would say, a state company produces losses, sometimes unemployment, it never pays its debts, and most often gives its management lengthy trips abroad in search of contracts. Then, what drove Polish firms to export ever more, pay their debts to banks and even score profits? The question is more interesting considering that Romania has eventually decided to achieve positive economic growth this year.

Where the mystery unravels

The answer to this question is that Poland’s strategy has had exactly what Romania had missed in its short-, medium- and long-term strategies – the motivation to enforce them. Why would state company managers ever wish to pay debts to the banks or the budget? Or why shouldn’t state banks keep extending bad loans when the Government itself is lending to those “black holes”? And why should private companies behave normally in an economic environment that is anything but normal? A poll among Polish enterprise managers revealed “noble” motivations (patriotism, devotion to the company) for the performance in labour, but ultimately they admit that extremely efficient motivation schemes did exist – for instance, the option to buy shares in one’s own company at half price when privatisation starts. And a Chief Executive Officer position in the newly privatised company is another incentive for efficient behaviour. But so is the existence of penalties to match. Everything has a purpose, especially when a new medium-term economic development draft is preparing to go to print. Otherwise, the previous attempts will be repeated, and social synergy, the traditional last-minute despair, or the huge stakes of EU negotiations, won’t help. More than the unanimously observed lack of an “investments” chapter in the much-debated strategy, which would have brought Romania a 6.5-7% annual economic growth, what surprises is the lack of a pragmatic attitude toward mechanisms that will transform today’s enterprise directors into tomorrow’s company managers and will attract foreign investors from their way to Poland.

The cosmogony of economic strategy

“In late 1998, the first decisions were made regarding the need to accelerate privatisation in the Romanian industry. In the last year, there was also a clear option for ‘big-bang’ reforms, simultaneous and concerted, which would establish a relatively favourable economic climate, both in the real economy and in the financial-banking system, meant to attract foreign investments and encourage domestic investors,” reads the preamble to the strategy presented in Brussels. “Big-bang” is the commercial name, used mainly by the media, for an extremely fast economic reform programme that is over in a year and is implemented fast, dominated by the element of surprise. One element of the Balczerowicz plan in 1990 in Poland was to drastically limit pay raises in the state sector through a prohibitive tax above a fixed monthly threshold. A “broad national union” programme, with the assent of all social partners, can be extremely efficient, but is under no circumstances a “big-bang.”

Was it a big-bang or not?

The talk over “gradualism” and “shock therapy,” trendy five years ago, has become obsolete and of rather academic interest. Nevertheless, ironically enough, the Balczerowicz plan – the most famous “big-bang” in the history of transition – was not even what its name suggested. Its essential but less publicised element, besides the strict decisions that made its fame, was the establishment of healthy motivations for economic agents, which automatically reduced the attractiveness of inefficient social behaviour (non-optimal, in strict economic terms) – theft from one’s own assets, failure to repay bank and state debts, driving companies to bankruptcy for the sake of parasite firms. And the instrument used to that end was not patriotism, labour culture, or even “big-bang,” but the prospect of reward for success or penalty for breaching the rules – a more than traditional strategy. For the common worker, this meant a link between work and pay, for the manager – a link between company results and personal benefits. This is exactly what is not happening now in Romania, and exactly what Romania needs now. Even the document says – “The experience of the ten years of transition to a market economy reveals the understood necessity not to limit ongoing reforms to the macroeconomic sphere but to extend them into the microeconomic area.” An area which comprises exactly the kind of subtle motivation mechanisms for state or private company management toward a socially optimal behaviour. While microeconomic reforms had abounded in all economic projects so far, the understood necessity shows the determination to enforce them practically. A fine note is that while capitalism is a discrete presence in today’s West, both in terms of linguistics and disputes, it is the subject of ardent debate in Eastern Europe, which is a rather noisy manner of building capitalism. In fact, talk of transition to a capitalist society rarefies as the state of normality sets in. In Poland, a recent marketing study showed that foreign companies in the country were employing strategies that were increasingly similar to Western standards. A natural fact since the country is becoming increasingly similar to the West. But this does not hold for Romania, where cheap products are still in demand, and talk of transition is still on top of the agenda.