Thayer Watkins

Privatization in Poland

The stalinists were not able to impose as heavy a structure of centralization in Poland as they did in Russia and the rest of the Soviet Union. For example, after attempting to collectivize agriculture in Poland in the 1940's the stalinist leadership had to accept the reality that collectivization was not working and allowed most of the land to be farmed by individual farm families. Nevertheless the authorities encouraged coperatives and by 1987 co-operatives held 10.5 percent of the fixed assets in Polish agriculture. Thjs is a far cry from the 80.9 percent of fixed assets controlled by the state in non-agricultural industry. The socialized sector employed 67.6 percent of the non-agricultural labor in 1987 in more than seven thousand enterprises.

The stalinists "crippled but did not kill" the private sector."1 Enterprises employing less than 50 workers were never legally nationalized the way those employing 50 or more workers were. Most of the smaller enterprises were taken over by local authorities without the benefit of legal sanction but some of these smaller private enterprises survived through the Communist Party era. The stalinist structure involved three major elements:

The official administrative structure might or might not have any real authority, the real power residing in the Party network. In the Soviet Union there existed for decades figurehead administrations within the national governments with all the real power held by the Communist Party hierarchy.

In Poland the stalinist system was put together during the period 1945 to 1956. From 1956 to the 1981 the system continued unchanged. During that period the Communist Party apparatus exercised its perogative to command obedience at the enterprise level. In 1981 the state enterprises were given a degree of autonomy under the State Enterprise Act. Thereafter the central authority intervention in enterprise management had to be through ministries or local authorities called Funding Organs.

In effect, the State Enterprise Act of 1981 decentralized ownership of the productive resources. This was formalized into a division of the assets of an enterprise into Founder's Capital and Enterprise Capital. The Founder's Capital was the assets provided by the state and the Enterprise Capital was to be capital accumulated by the enterprise through its operations. The enterprise was required to pay to the State a dividend (in Polish dywidenda) proportional to the amount of Founder's Capital. An enterprise that failed to pay a dywidenda was subject to reorganization by its Funding Organ, but otherwise the Funding Organ was not legally allowed to interfer in the management of an enterprise.

Corresponding to the Funding Organ there was an Enterprise Organ which consisted of the Enterprise Management and its Employee Council. The creation of Employee Councils was based upon a possible emphasis on worker-control of the enterprise. This possibility was promoted by the Solidarity Movement in its early days. The Communist Party opposed giving much power to the Employee Councils out of fear it would diminish the power of the Party. The State Enterprise Act of 1981 gave the Employee Council of an enterprise a say, along with the Funding Organ, in the appointment or dismissal of enterprise managers. This placed the managers in the position of having to appease two quite contrary groups, the state authorities, represented by the Funding Organ, and the Employee Council.

Small Enterprise Sector

A mentioned above private enterprises employing less 50 were not legally nationalized, but most were taken over extra-legally and those that weren't were subjected to special taxation and discriminatory treatment, partically refusing them access to raw materials and supplies from the state sector. Nevertheless in 1981 there were still 375,000 officially registered small enterprises and they employed 650,000 people. From these numbers it is clear that most of the surviving small enterprises were really very small, employing one or two people. These would be family enterprises. They created 5.3 percent of national income.

These small private enterprises grew in number and significance over the period after 1981 so that by 1986 they accounted for 7.6 percent of the national income. In 1986 there were 572,000 officially registered enterprises employing 1.2 million people, clearly still mainly small-scale family operations.

Privatization by the Nomenklatura, the Bureaucratic Administrators

The State Enterprise Act of 1981 gave the management of state enterprise some autonomy in management. By 1986 these management bureaucrats were arranging privatization which would leave them owners of the state enterprises they had controlled. One method for achieving this privatization was to merge the state enterprise with a private enterprise and undervalue the state assets in the merger. The private enterprises involved in the merger were typically created and controlled by the managers of the state enterprises.

When the Communist Party government held talks in 1989 with the leaders of the Solidarity Movements it was the Communist who were promoting privatization and Solidarity members who were resisting privatization at that time.

Privatization Under the Solidarity-led Government of 1989-1991

When the last Communist Party government fell in 1989 and Solidarity was called upon to form a new government the Solidarity leaders made clear that their goal was a market-type economy and that privatization of state enterprises would be a necessary process for achieving that goal. The Solidarity government created office of Ownership Transformation which became the Ministry of Ownership Transformation in 1990.

There was some difference of opinion as to how the privatization should be carried out. Krzysztof (Christoff) Lis, of the office of Ownership Transformation, held that the privatization should take place through the sale of the assets of the state enterprises or through the sale of equity in the state enterprises. The sale prices were to be set through either expert judgment or public auction. While this plan might be acceptable in principle it thought by some to involve an excessive amount of time. One estimate was that it would take ten years to privatize ten percent of the state sector by this means.

Representatives from Employee Councils promoted privatization by the creation of Employee Stock Ownerhip Plans (ESOPs) such as had be tried in Britain and America. The government turned this proposal down on the grounds it would unfairly transfer some valuable national assets to the small minority who worked in them whereas other workers would end up saddled with inefficient, unproductive enterprises. Furthermore there was no evidence that ESOPs were efficient in managing enterprises.

Another route, which promised to be faster than Lis' plan, was what has been called voucher privatization. Polish citizens would be issued vouchers of a specified amount that could be used to buy shares in privatized enterprises. This offered the possibility of wide-spread stock owner ship, so-called people's capitalism. This was the scheme used in Russia and some of the drawbacks were becoming public knowledge.

The legislature adopted the Privatization Act of 1990 which led to a different line of privatization. The first step in this alternate route was to convert the state enterprise into a state-owned corporation. This process has been variously called corporatization, capitalization or commercialization. Once the state enterprise was converted into a corporatization the State could sell all or a part of its ownership. This line of privatization had the very practical benefit for the government that it receives the proceeds from privatization whereas under many of the other methods the enterprise itself received the proceeds of the privatization.

There were technical aspects to the form of corporatization specified in the Privatization Act as to who can initiate the corporatization of an enterprise and who can forbid it. Once an enterprise is corporatized the Employee Council loses its rights and legal existence. The employees however get the right to elect one third of the Board of Directors, the other two thirds being selected by the owners of the corporation; i.e., the State. When a state enterprise is corpoartized the regular employees retain their jobs but the managers employment is terminated and would have to be re-appointed to continue with the corporate enterprise. The corporatized enterprises have to privatized within two years of their creation.

There were a variety of paths to privatization of the corporatized enterprises. Shares could be sold, including as much as ten percent to foreign buyers. A larger share could be sold to foreign buyers with approval from the State Agency for Foreign Investment. The employees of a privatized enterprise lose the right to elect one third of the Board of Directors but get the right to purchase up to 20 percent of the corporation at a special discount price of one half of the price other buyers have to pay.

Another method of privatization, not involving corporatization, was called liquidation which favored the employees and management of a state enterprise. Under liquidization the assets of an enterprise could be sold, leased or invested in a new company provided that a majority of the employees became owners in the new company. This method was feasible for small and medium-sized enterprises. It had similarities to what had occured under nomenklatura privatization.

The small and medium-sized were sometimes privatized by public auction with the State arranging for the bank financing for the buyers. There were state assets which were returned to private ownership after having been confiscated forty years before by the Communist-dominated State.

The Balcerowicz Plan

When the Solidarity-led government took power there was a serious threat of hyperinflation. Prime Minister Mazowiecki called upon the Minister of Finance Leszek Balcerowicz to formulate an economic policy plan. Balcerowicz in turn called upon the economist Jeffrey Sachs to make recommendations for a program to deal with the immediate economic crisis and move the economy toward a market-type structure. The ensuing plan included provisions for:

The Balcerowicz Plan was put into effect on January 1, 1990. This approach to economic restructuring is often referred to as shock therapy.


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