Entrepreneurs lead the way to growth in transition economies

The continued creation of new firms is a key to economic growth in Poland, one of Central and Eastern Europe's transition success stories where the number of individual- and family-owned firms has more than doubled since 1990, according to a World Bank report released last week. "New firms, mostly employing 50 or fewer workers, have rapidly become the major source of employment in the fast-growing countries of Central Europe and the Baltics," the bank said in a press release. "In Poland, for example, where output in 2000 was nearly one-and-a-half times that in 1990, more than half of all workers are employed in such firms, compared to a quarter a decade ago." Poland's experience contrasts sharply with experiences in the former Soviet Union, where output in 2000 stood at roughly two-thirds of that in 1990 and fewer than one in five workers were employed in such firms, the report, titled "Transition: Analysis and Lessons for Eastern Europe and the Former Soviet Union," said. Policies of "discipline and encouragement" were central to enterprise creation and remain an important consideration for governments, the report said. "An important ingredient of market discipline is the hard budget constraint on state enterprises, together with sufficient standards of corporate governance to prevent large-scale asset stripping before privatization," the report said. "Poland's economic growth - which resumed in 1992, the earliest among the transition economies - was first due largely to better use of existing assets by enterprises spun off from state enterprises. Not until 1995 was there a big boom in domestic investment - and not until 1996, with Poland in its fifth year of growth, was there a take-off in foreign direct investment." Structural reforms that generated a friendly climate for the entry of new businesses, particularly small- and medium-sized enterprises (SMEs) was also key, the report said. These new firms pressed state enterprises to become more efficient. Diverse privatization methods also assisted Poland's transition, the report said. "From the beginning Poland pursued a rich menu of privatization options, including the first five flotations on the Warsaw Stock Exchange (WSE) and the sale of assets and selected liabilities of some 1,000 medium-sized enterprises through installment sales, a process described as 'privatization through liquidation.' " Poland's privatization success and its good growth performance in the second half of the 1990s was also a result of other reforms, including early efforts to restructure and privatize the banks and address the bad loan problem. "Poland reinforces the notion that creditor discipline matters as much for enterprise restructuring and performance as effective ownership and corporate governance."