The Polish state sector has belied the dire predictions of most outsiders. After the collapse of the communist central authorities in 1990, privatisation was looming and effective enterprise control eliminated. In these circumstances, most expected the state sector to suffer from destructive control fights and decapitalization. Instead, state losses have been curbed, and state-owned enterprises have led Poland's spectacular export performance in western markets, helping to make Poland Europe's fastest growing economy in 1993 and 1994.

In Discussion Paper No. 1273, Brian Pinto and Research Fellow Sweder van Wijnbergen paper present evidence of major adjustment efforts in the state sector in Poland well before privatisation. Extensive survey evidence is used both to establish this point and to find an answer to the question why managers instigated such reforms in spite of the absence of an effective ownership structure. The paper finds both the government and, importantly, commercial banks, exercised strong governance: the government through its refusal to give open-ended subsidies and a tax-based wage policy; and the banks through their discretion in allocating new funds. It is also shown that banks started to discipline their borrowers only after strong governance reforms for the banks themselves were instituted.