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In Discussion Paper No. 1058, Research Fellow Philippe Aghion, Olivier Blanchard and Research Associate Wendy Carlin begin from the twin observation that on the one hand, privatization that leaves control in the hands of the insiders has produced little restructuring, while on the other hand, state-owned enterprises (SOEs) have engaged in some restructuring even in the absence of a clear prospect of privatization. They provide a mapping between theoretical predictions and a large body of anecdotal evidence on enterprise behaviour in the Central and East European economies. A simple model of the choices facing the manager of a SOE is presented in which the manager must choose between restructuring and the status quo. Restructuring entails a cost now but offers the prospect of benefits in the future while, by contrast, maintaining the status quo is costless now but entails a certain cost in the future. Anecdotal evidence from a survey of more than 450 enterprise case studies is used to provide empirical support.The authors then analyse how the state can affect the incentives of the banks to monitor the restructuring process and to refinance highly loss-making projects. The model helps to explain the failure of Hungary's partial and unconditional bank recapitalization programme. The authors also raise the question of the relationship between the speed of restructuring and the ability of the state to finance compensation. The analytical tools for interpreting the transition are confronted with a broad range of anecdotal evidence from the former CSFR, Hungary, Poland and Russia. This approach is useful in accounting for the very different transitional experience of the former GDR. The Economics of Enterprise Restructuring in Central and Eastern Europe Philippe Aghion, Olivier J Blanchard and Wendy Carlin Discussion Paper No. 1058, November 1994 (IO) |