Restructuring large industrial enterprises
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When the transition process began, it was well understood that enterprise restructuring would require two important types of reform: liberalisation and privatisation. Freeing trade and prices would introduce competition and market prices, while private ownership would introduce profit-oriented incentives within the firm. Ten years on, progress in liberalisation and privatisation has been remarkable, but enterprise restructuring– especially in the industrial sector– has not. This chapter attempts to explain what went wrong and how it can be fixed.
Central planning has left behind many large industrial enterprises– most of them by now privatised– in severe financial difficulty. Section 9.1 describes how drastic changes in demand structures at the onset of transition led to rapid industrial downsizing. Most industrial enterprises responded by engaging in "reactive" restructuring, reducing output, employment and capacities. Industrial production has now stabilised in most countries, but only the advanced reformers are showing renewed output growth. In most other countries, firms have been slow to introduce the "deep" restructuring measures, such as the development of new products and processes, that are ultimately the basis for renewed growth and the creation of jobs. Annex 9.1 explores trends in international trade to gauge which sectors are likely to have long-term prospects for such growth and which are likely to shrink further.
Section 9.2 examines the policies and obstacles that have affected industrial restructuring. The reduction of direct state subsidies, price controls and trade protection resulted in reactive restructuring and downsizing of the industrial sector. However, deep restructuring through investments in new products and processes has remained constrained by distorted incentives at the enterprise level. Although most large industrial firms have been privatised, they lack effective new owners and their corporate governance is undermined by vested interests. Furthermore, a wide variety of "soft budget constraints", such as payments arrears and ineffective bankruptcy, have implicitly subsidised unprofitable behaviour. A poor investment climate has inhibited the growth of the new private sector in many countries, reducing competition and removing other employment opportunities for workers in the old industries. In addition, some countries, especially in the CIS, have failed to address the social challenge of large-scale structural change.
The way forward is fraught with obstacles and risks. Section 9.3 lays out some guidelines for policy, while Section 9.4 examines specific mechanisms for the restructuring of large industrial enterprises. Necessary reforms include improvements in the investment climate to allow the entry and growth of new private enterprises, reforms of the social safety net to facilitate labour mobility and to reduce resistance to restructuring, and gradual institutional strengthening that reduces soft financial support for enterprises. Ownership and management change at the enterprise level is also often needed to help break vested interests of insiders and initiate deep restructuring. Strategic investors can be instrumental in promotinglarge enterprise restructuring. Section 9.4 discusses a variety of methods to bring in strategic investors– for example, by "ring-fencing" their investment from old obligations and state interference.
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