Institutional Change
and Poland’s Economic
Performance
since the 1970s
incentives and transaction costs
Joost Platje
Institutional Change
and Poland’s Economic
Performance
since the 1970s
incentives and transaction costs
© Copyright by Joost Platje, 2004
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without the prior written permission of the
proprietor.
ISBN 83-915211-7-6
Publisher: CL Consulting i Logistyka, Oficyna Wydawnicza “Nasz Dom i Ogród”,
Wroc∏aw, Poland
RIJKSUNIVERSITEIT GRONINGEN
Institutional Change
and Poland’s Economic
Performance
since the 1970s
incentives and transaction costs
Proefschrift
ter verkrijging van het doctoraat in de
letteren
aan de Rijksuniversiteit Groningen
op gezag van de
Rector Magnificus, dr. F. Zwarts,
in het openbaar te verdedigen op
donderdag 30 september 2004
om 14:45 uur
door
JOHANNES CASPARUS PLATJE
geboren op 11 juli 1968
te Oosthuizen
Promotor:
Copromotor:
Prof. dr. Herman W. Hoen
Dr. Henk W. Plasmeijer
Beoordelingscommissie:
Prof. dr. Hans Renner
Prof. dr. hab. Janusz S∏odczyk
Prof. dr. Jörg Glombowski
v
CONTENTS
List of Tables and Figures ........................................................................................................ viii
Acknowledgements .................................................................................................................... xi
Chapter 1 – Introduction ............................................................................................................ 3
1.1.
1.2.
1.3.
1.4.
Background of the problem ............................................................................................ 3
The core of the research: transaction costs and incentives in the Polish economy .... 4
Research outline .............................................................................................................. 6
Some final introductory remarks .................................................................................. 10
PART I
NEW INSTITUTIONAL ECONOMICS AND TRANSACTION COST THEORY
Chapter 2 – New Institutional Economics as a Framework for Analysis of Transformation
of Economic Systems ................................................................................................................ 15
2.1.
2.2.
2.3.
2.3.1.
2.3.2.
2.3.3.
2.3.4.
2.4.
Introduction .................................................................................................................... 15
Institutions and incentives ............................................................................................ 16
Transaction costs ............................................................................................................ 22
The use of transaction cost economics ........................................................................ 22
Transaction costs defined .............................................................................................. 23
Transaction costs and transport costs .......................................................................... 25
The Coase Theorem, the public domain and opportunistic behaviour .................... 27
Concluding remarks ...................................................................................................... 30
Chapter 3 – Transaction Costs, Institutions and Economic Performance .......................... 33
3.1.
3.2.
3.3.
3.4.
Introduction .................................................................................................................... 33
Transaction costs, institutions and economic performance ........................................ 34
Strong and weak economic systems ............................................................................ 36
Transaction costs in Soviet-Type Economies and Market-Type Economies:
a comparison .................................................................................................................. 37
3.5. Factors that lower transaction costs ............................................................................ 40
3.5.1. Market competition and law of contract .................................................................... 40
3.5.2. Social capital .................................................................................................................. 41
3.5.3. Physical infrastructure, transport and logistics .......................................................... 44
vi
3.6.
3.7.
3.8.
Contents
Inefficient institutions.................................................................................................... 49
Phases of transformation – when is transition over?.................................................. 53
Concluding remarks ...................................................................................................... 56
PART II
TRANSACTION COSTS, INCENTIVES AND THE PERFORMANCE
OF THE POLISH ECONOMY
Chapter 4 – Transaction Costs and Incentives in the Polish Soviet-Type Economy – from
classical to „decaying” socialism ............................................................................................ 61
4.1.
4.2.
4.3.
4.3.1.
4.3.2.
4.3.3.
4.4.
4.5.
Introduction .................................................................................................................... 61
The promises of socialism and a typology of prototypes of socialism ...................... 62
Problems of planning .................................................................................................... 64
Transaction costs .......................................................................................................... 64
Incentives, plan-bargaining and information ............................................................ 66
Opportunistic behaviour and knowledge .................................................................... 68
Poland 1971–1989 – Institutional weakening: from Classical Socialism
to „Decaying Socialism” ................................................................................................ 70
Concluding remarks ...................................................................................................... 79
Chapter 5 – Transaction Costs and Incentives in the Construction of the Polish Market in
the 1990s .................................................................................................................................... 81
5.1.
5.2.
5.3.
5.4.
5.4.1.
5.4.2.
5.4.3.
5.5.
5.5.1.
5.5.2.
5.5.3.
5.5.4.
5.5.5.
5.6.
5.7.
Introduction .................................................................................................................... 81
Transformation: the choice and the aims of the transformation strategy ................ 82
Economic performance ................................................................................................ 85
Causes of the decline in output – statistics, demand and supply .............................. 88
Statistics .......................................................................................................................... 89
Demand factors .............................................................................................................. 91
Supply factors ................................................................................................................ 92
Causes of the decline in output – a new-institutional explanation .......................... 94
Adverse incentives and high transaction costs due to weak and missing
institutions .............................................................................................................. 95
Adverse incentives and high transaction costs in the process of transforming
the property rights order .............................................................................................. 98
High market transaction costs for state-owned enterprises .................................... 103
Mental models and social capital .............................................................................. 106
Private economic activity counteracting the decline in output................................ 107
Institutional strengthening and recovery .................................................................. 109
Concluding remarks .................................................................................................... 113
Contents
vii
PART III
A CLOSER LOOK AT TWO ASPECTS OF ECONOMIC PERFORMANCE
UNDER DIFFERENT ECONOMIC SYSTEMS
Chapter 6 – The Transaction Costs of Queuing in a Soviet-Type Economy .................... 119
6.1.
6.2.
6.3.
6.3.1.
6.3.2.
6.3.3.
6.3.4.
6.3.5.
6.4.
Introduction .................................................................................................................. 119
Queuing and transaction costs .................................................................................... 120
Results and interpretation .......................................................................................... 124
Gender, age and party membership .......................................................................... 124
Who was queuing with whom, and what were they queuing for? ............................ 126
Costs and benefits of queuing .................................................................................... 128
People’s assessment of queuing activities .................................................................. 133
In what way is the time gained with the disappearance of queues being used? .... 135
Concluding remarks .................................................................................................... 137
Chapter 7 – Transaction Costs during Transition – logistic challenges ............................ 139
7.1.
7.2.
7.3.
7.4.
7.5.
Introduction .................................................................................................................. 139
The state of Polish infrastructure .............................................................................. 140
Development of logistics in Poland ............................................................................ 142
Integrated logistic centres .......................................................................................... 148
Concluding remarks .................................................................................................... 152
Chapter 8 – Summary and Conclusions .............................................................................. 155
8.1.
8.2.
Summary of main findings and conclusions .............................................................. 155
Some implications ........................................................................................................ 160
APPENDIX – A survey among firms – empirical indicators of the development of transaction
costs during the 1990s ............................................................................................................ 165
A 1.
A 2.
A 3.
A 4.
A 5.
A 6.
Introduction .................................................................................................................. 165
Description of the research ........................................................................................ 165
Business start-ups, development of employment and financial results .................. 167
Transaction costs .......................................................................................................... 170
Social capital ................................................................................................................ 184
Concluding remarks .................................................................................................... 189
Literature ................................................................................................................................ 193
Samenvatting (summary in Dutch) ...................................................................................... 213
viii
Contents
LIST OF TABLES
Table 1.1.
Table 1.2.
Table 3.1.
Table 3.2.
Table 3.3.
Table 3.4.
Table 4.1.
Table 5.1.
Table 5.2.
Table 5.3.
Table 5.4.
Table 5.5.
Table 5.6.
Table 6.1.
Table 6.2.
Table 6.3.
Table 6.4.
Table 6.5.
Table 6.6.
Table 6.7.
Table 6.8.
Table 6.9.
Table 6.10.
Table 6.11.
Table 6.12.
Table 6.13.
Table 7.1.
Table 7.2.
Table 7.3.
Table A1.
Table A2.
Table A3.
The likely effect of transaction costs and incentives on economic
performance ........................................................................................................ 5
Transaction costs and incentives in different stages of the Polish
economy ................................................................................................................ 9
A classification of economic systems .............................................................. 36
Three different types of trust .......................................................................... 42
An industrial column ........................................................................................ 46
Relationship levels between firms and means of communication ................ 48
Period of rule of the First Secretaries of the Polish Communist Party (PZPR)
and the type of socialism .................................................................................. 70
The development of real GDP per capita in countries in transition
(1989–1999) ........................................................................................................ 86
Inflation – percentage change in retail/consumer price level (1989–2000,
annual average) .................................................................................................. 87
The share of different sectors in the creation of GDP (percentage)
(1989–1994) ........................................................................................................ 87
The ratio of the product of the hidden economy to the official GDP.
Household electricity approach (1989–1995) .................................................. 89
FDI (net flows recorded in the balance of payments, 1989–1999) ............ 111
Development of market structure in different countries in transformation .. 112
Gender and age .............................................................................................. 124
Comparison of the sample population with the actual population age
distribution in the years 1985 and 1996 ........................................................ 125
Company in the queue. Division by gender and party membership .......... 126
Company in the queue. Division by age group ............................................ 127
Products people were queuing for ................................................................ 128
Opportunity costs of queuing ........................................................................ 129
Queuing during work ...................................................................................... 130
Benefits of queuing ........................................................................................ 131
Benefits of queuing. Division by gender ...................................................... 132
Assessment of activities while queuing ........................................................ 134
Assessment of queuing .................................................................................. 134
Benefits of the elimination of queues .......................................................... 135
A comparison between costs of queuing and benefits of the elimination
of queues .......................................................................................................... 136
Three generations of logistic development .................................................. 143
Services offered by road forwarding and transport companies .................. 145
Possession of web-site, use of e-mail and/or fax in contacts with clients ...... 146
Speed of banking transactions within Poland ................................................170
Speed of international banking transactions ................................................ 171
Speed of payment by customers .................................................................... 172
Contents
Table A4.
Table A5.
Table A6.
Table A7.
Table A8.
Table A9.
Table A10.
Table A11.
Table A12.
Table A13.
Table A14.
Table A15.
Table A16.
Table A17.
Table A18.
Table A19.
Table A20.
ix
Speed of payment of bills by your own company .......................................... 173
Speed of customs clearance ............................................................................ 175
Speed of legal procedures enabling obtaining money from late payers .... 176
Development in different factors; comparing the periods 1989–1993,
1993–1997 and 1997–2000 – average ............................................................ 178
Professionalism of tax officers between 1989 and 2000 .............................. 178
Rank order of different periods – Professionalism of tax officers .............. 179
Rank order of different periods – Clearness of tax law .............................. 179
Rank order of different periods – Settlement of damages by insurance
companies ........................................................................................................ 180
Rank order of different periods – Theft ........................................................ 181
Rank order of different periods – Corruption .............................................. 181
Rank order of different periods – Transport infrastructure in Poland ...... 182
Problems with late payment for the periods 1989–1993, 1993–1997
and 1997–2000 .................................................................................................. 183
Problems with late payment for the periods 1989–1993, 1993–1997
and 1997–2000 – mode, median and mean .................................................... 183
Who is trusted .................................................................................................. 185
Who is trusted – mode, median and mean .................................................... 185
Perceived co-operativeness of “institutional governance” and market
participants ...................................................................................................... 188
Perceived co-operativeness of “institutional governance” and market
participants – mode, median and mean ........................................................ 188
LIST OF FIGURES
Figure 2.1.
Figure 2.2.
Figure 3.1.
Figure 3.2.
Figure 6.1.
Figure 6.2.
Figure A1.
Figure A2.
Factors influencing economic performance .................................................... 17
Causality between learning processes under uncertainty, mental models
and institutions .................................................................................................. 19
Relationship between institutions, transaction costs and economic growth .... 35
Transaction costs in Soviet-Type Economies and Market-Type Economies .... 38
The effect of a maximum price ...................................................................... 120
The shopping process ...................................................................................... 122
Number of firms established yearly, 1981–2000 .......................................... 168
Number of firms established per 5 years, 1945–1999 .................................. 168
xi
ACKNOWLEDGEMENTS
In the process of writing this thesis and conducting research many people have been helpful. First of all, I am very grateful to Henk Plasmeijer, who not only convinced me that I was
capable of writing this thesis, but also provided me with invaluable advice on many theoretical matters. Hans-Jürgen Wagener made the importance of transaction costs and incentives in transformation processes clear. Henk Plasmeijer and Joop de Kort significantly reduced the transaction costs of finding a supervisor. Herman Hoen strengthened the incentives to continue the high transaction cost venture of writing a PhD and very skilfully directed
the venture onto an efficient development path.
I am also indebted to Wytze van der Gaast, Michael A. Giacomin, Remko Kampen,
Adam Kokoszka, Renata Matuszkiewicz, Tammo Platje, Stephen Purdom, Julian Ross and
David Ramsey for their useful comments on different parts of the research. The research on
queuing presented in this thesis was greatly facilitated by the help of Szymon Horaczuk, the
late Zdzis∏aw Juchimiuk and Marcin Winiarski. Special thanks go to students from Gdaƒsk
University, Opole University and Wroc∏aw University, who were very helpful in carrying out
the survey. For the survey among companies on transaction costs and trust Maarten Allers,
Jerzy Dudek, Janusz Paw´ska, John Stepan and Tomasz Stepan were very valuable sources
of information and reflection in the preparation phase. I am indebted to Daniel Ka∏asznik,
Jacek Krzekotowski, Grzegorz Kubacki, Marcin Paw´ska, Magda Skorupa and Hanna Spychalska for their help with carrying out the survey. For comments on the interpretation of
the results I would like to express my gratefulness to Dirk Akkermans, Jarl Kampen and
Rafa∏ Kulik. Jacques Dehue and Tammo Platje proofread the summary in Dutch. David
Ramsey deserves special thanks for proofreading the manuscript with regard to correct use
of the English language. Of course, the remaining “Dutchisms”, as well as other mistakes
remain the responsibility of the author.
Professor Hans Renner, Professor Janusz S∏odczyk and Professor Jörg Glombowski are
gratefully acknowledged for reading the manuscript and their useful comments.
Finally, I would like to thank my family and friends for the support they have given me,
and especially my mother and Julia, who provided me with the strongest incentive to finish
this high transaction cost venture, and made clear that in such a case transaction costs may
be absolutely unimportant for finishing the job.
INTRODUCTION
3
Chapter 1
INTRODUCTION
1.1. Background of the problem
This study addresses economic performance of Poland since the 1970s. During the 1960s,
when the economic reconstruction after World War II had been completed, the Polish economy started to face economic problems. One of the problems was that it could not shift the
emphasis from heavy to light industry. Development of light industry, increasing the production of consumer goods, was needed in order to fulfil a promise of socialism, an increase
in the standard of living.
In the 1970s attempts were made to stimulate the economy by way of a policy of importled growth. An aim was to produce under licences from Western-Europe, thereby taking
benefit of the relatively low production costs in Poland. Since much was imported on credit,
increased exports should have made repayment possible. However, due to many co-ordination mistakes economic performance was worse than expected, and at the end of the 1970s
Poland faced an economic crisis. Furthermore, the promise of an increasing standard of living had to be fulfilled. As a result less goods were available for export, and at the end of
the 1970s Poland was not able to repay the foreign debt it had built up during this decade.
The reforms during the 1970s led to one of the main pillars of the Soviet-Type Economy
(STE)1 as existed in Poland – public or state property – starting to weaken. In the 1980s
attempts were made to improve economic performance by half-hearted Hungarian style
economic reforms. Some elements of a market were introduced, while de facto planning
stopped existing, being replaced by a system of state purchases [Przeworski, 1993]. Planning
did not function properly, while, although some market elements were introduced, no other
co-ordination mechanism replaced it. As a result public property was weakened even more,
as it became more unclear who in the planning hierarchy was responsible for what.
The belief in the socialist system had also started to weaken as a result of, inter alia, disappointing economic performance. This process of hollowing out the belief in socialism
speeded up in the 1980s, in particular as a result of Martial Law of December 13th 1981,
which was aimed at breaking the increasing power of the independent non-communist labour union Solidarity. At the end of the 1980s in fact hardly anyone, not even most members
of the Communist Party (PZPR), believed in the system anymore [Poznanski, 1996].
1
Also called command economies, centrally directed economies, planned economies, socialist economies or communist
economies. The term Soviet-Type Economy is used in the remainder of this study.
4
Chapter 1
Martial Law further undermined the Communist Party [Poznanski, 1996]. The PZPR was
already unique, compared to their counterparts in other STEs. It never had such a broad popular basis as, for instance, the Czechoslovak Communist Party, while strong internal division
clearly appeared in the 1970s. From 1981 onwards, attempts were made to loosen the traditional ties between the state and the Communist Party, although it is not clear whether this
was intentional or not. At the end of the 1980s the economic system had been transformed
to such an extent, that there was fertile soil for determined institutional change in Poland.
An implication of the developments sketched above is that a change in the fundamental
characteristics of the Polish STE, public property and the Communist Party, can be traced
back to the 1970s, and even earlier [see Murell, 1995; Poznanski, 1996; Rosati, 1998]. An
economic system is a dynamic entity that changes all the time, and for that reason it is difficult to establish the beginning of Poland’s economic transformation exactly. Therefore, it
is important to look at the “legacy of the past” when analysing institutional explanations of
economic performance. This is a focal point of New Institutional Economics (NIE) applied
in this study. As described above, in the 1970s reforms took place which significantly influenced the institutional framework of the Polish economy. During this period attempts were
made to solve economic problems by way of reforms. However, the reforms caused new economic problems. For this reason the 1970s have been chosen as the point of departure for
this study.
The main theme of this study is incentives and transaction costs in the Polish economy
since the 1970s, their influence on economic performance and their importance in the transformation of a socialist economic system to a market-oriented economy. Different types of
incentives and transaction costs during the period 1970–2000 and their influence on economic performance are described. The analysis of the 1970s and 1980s focuses on transaction
costs of planning and the incentives given by the disintegrating system. In a planned economy
prices were not used as an indicator for scarcity, leading to transaction costs of resource
allocation specific to such an economic system. With the radical introduction of a market
economy after 1989, prices became the most important scarcity indicator. Consequently, the
transaction costs of planning disappeared. However, the use of the market leads to other
transaction costs and influences incentives in a different way. Furthermore, the process of
such institutional change creates specific incentives and transaction costs, which may negatively influence economic performance.
1.2. The core of the research:
transaction costs and incentives in the Polish economy
The core of this research is the influence of transaction costs and incentives on Poland’s economic performance since the 1970s. From a micro-perspective, transaction costs indicate how
easy or difficult it is to make an exchange. From the point of view of an economic system,
transaction costs are important for solving the allocation problem: which barriers and difficulties exist for factors of production and final goods to end up in the place where they are valued
the highest. Standard neo-classical economics assumes transaction costs to be non-existent.
5
Introduction
Transactions would take place without friction due to complete information and institutions
are taken as “allocationally neutral”. In such a situation a market economy using a price mechanism is theoretically as efficient in solving the problem of allocation of resources as
a central planner [Furubotn and Richter, 1997, 9–10].2 Using such a theoretical framework,
it is difficult to explain why Market-Type Economies have economically outperformed STEs.
However, with the help of NIE in general, and transaction costs in particular, it is expected
to be possible to explain it.
With the help of transaction cost economics it can be explained why some forms of
governance structures (co-ordination structures) used to solve the allocation problem are
more efficient than other governance structures. Markets are supposed to face lower transaction costs than a bureaucracy or a planned economy. A reason for this is that monitoring
costs and information costs are lower due to the working of the price mechanism in the
non-hierarchical governance structure, which facilitates the solving of the allocation problem.
Furthermore, markets tend to provide stronger incentives for economic activity and efficiency than hierarchies such as a bureaucracy, leading to increased economic activity [see
Williamson, 1985; Pejovich, 1995]. In other words, lower marginal transaction costs, ceteris
paribus, lead to more economic activity. Although high transaction costs tend to lower economic activity, this does not necessarily mean that an economy will stagnate. In addition to
transaction costs, incentives are an important factor influencing economic activity.
Incentives provided by the constraints under which economic actors undertake economic
activity are an important factor when analysing the performance of an economic system. These
constraints influence the expected benefits of such an activity. When transaction costs are
high and incentives are strong, economic activity is undertaken when the expected (marginal)
gains exceed the expected (marginal) costs. When transaction costs are high and incentives
weak, economic stagnation is likely as the expected payoff of a transaction drastically declines.
Table 1.1. presents a picture of the possible relationship between transaction costs, incentives
and economic performance. A more detailed picture can only be obtained by a study of the
different factors influencing transaction costs and incentives in particular situations.
Table 1.1. The likely effect of transaction costs and incentives on economic performance.
Transaction Costs
Incentives
Economic Performance
High
Weak
Negative effect
High
Strong
Effect depends on which factor
Low
Weak
has the largest influence
Low
Strong
Positive effect
This study applies the tools of NIE to the transition of the Polish economic system from
classical socialism to a market economy. The focus is on the influence of incentives and transaction costs on economic performance. These tools contribute to explaining the demise of
the socialist system. Furthermore, in combination with other explanatory variables, they are
2
Enrico Barone had recognised this as early as 1908 in his article “The Ministry of Production in a Collectivist State”
(published in Hayek [1935]). He developed a model in which there is collective ownership of factors of production except
for labour. When production costs are minimised and prices are set by the planner (Ministry of Production) equal to production costs, resource allocation is as optimal as in the case of competitive markets.
6
Chapter 1
helpful in explaining the fall in output at the beginning of the 1990s. They also may explain why
Poland quickly returned to a path of economic growth, and many other former STEs did not.
NIE explains why institutional change is a rather slow process. Path-dependency is of
crucial importance – where we come from is an important factor influencing where we are
going to. A reason for this is that people’s mental models (e.g. values, ideology, mentality)
change at a slower pace than the law can be changed, firms can be privatised, et cetera.
Thus, when a market system is introduced but people’s mental models do not change at a similar pace, this can lead to individuals reacting adversely to incentives given by the market.
With this in mind, a central question of this research is:
To what extent have incentives and transaction costs changed in the Polish economy in the period
1970–2000 and influenced economic performance and how can these changes be explained with
the help of New Institutional Economics?
1.3. Research outline
The general research question stated above can be refined through a number of sub-questions,
which focus on the different stages of the “Polish road to the market” and the use of NIE
as an explanatory framework. The first question is to what extent can a change in transaction costs and incentives explain the demise of the socialist system, and have paved the way
for transformation towards a market economy. The second question is related to the notion
of path dependency. How did the situation that had come into being at the end of the 1980s
influence the economic situation at the beginning of the 1990s and how did the process of
institutional change towards a market economy proceed? In other words, to what extent did
transaction costs and incentives change and in what way did they influence economic performance in the period of “market construction”?
This book is divided into three parts. In part one (Chapter 2 and 3), the theoretical
framework of NIE and the theory of transaction costs is presented. In part two (Chapter 4
and 5) the relation between transaction costs, incentives and the performance of the Polish
economy is analysed. In part three a closer look is taken at two aspects of economic performance under different economic systems in Poland – the transaction costs of queuing
(Chapter 6) and logistic challenges in creating a market economy (Chapter 7).
In Chapter 2 the theoretical framework used for analysing changes in incentives and transaction costs in the Polish economy is developed. First the relationship between institutions, incentives and transaction costs is described. Institutions provide incentives for economic activity and influence the level of transaction costs. Then the importance of the notion of value in
the public domain, where property rights are not completely enforced due to high transaction
costs, and the relation to opportunistic behaviour and the concept of rent-seeking is discussed.
An important point is that when there is large value in the public domain, wealth maximising
individuals direct their efforts to redistributive rather than productive activities.
In Chapter 3 the relation between transaction costs, institutions and economic development is analysed. This is important in discussing the demise of the socialist economy and
Introduction
7
prospects for economic growth in the process of constructing a market. Strong and weak
economic systems are distinguished. Generally speaking, a system is strong when property
rights are enforced, transaction costs are low and incentives strong, positively influencing
economic activity. An economic system is weak when property rights are poorly enforced,
leaving opportunities for rent-seeking, increasing transaction costs and weakening incentives. With the growth of an economy, transactions become more complex, creating the need
for transaction cost lowering solutions and hence institutional change. When an economic
system is not capable of doing this, and reforms are carried through halfway, then the economic system is expected to weaken. As a consequence, transaction costs increase and incentives weaken, which can lead to economic stagnation, as was the case in Poland in the
1970s and 1980s. The question as to what extent transaction costs and incentives created by
institutions stimulate economic development is relevant for assessing the path of institutional change in Poland towards a market economy up to the present day.
Afterwards, some factors that lower transaction costs such as markets and law of contract,
social capital and physical infrastructure, transport and logistics, which are relevant to the
analysis in the rest of this thesis, are presented. Then the following question is addressed:
how is it possible that an inefficient economic system, as the socialist system was, existed for
such a long time, although it was clear that it did not function efficiently? In other words, why
can inefficient institutions continue to exist? Finally, the question “when is transformation
over” is addressed. The theoretical framework developed in Chapter 2 and 3 is used for analysing the changes in transaction costs and incentives in the process of institutional change
from a socialist system towards a market economy in Poland in subsequent chapters.
In Chapter 4 the focus is on the collapse of the socialist system. Different factors contributing to the decline of the Polish STE are described. The emphasis is on increasing transaction costs and problems regarding a lack of incentives within the framework of Poznanski’s [1996] argument that the institutional fundaments making up the STE were slowly hollowed out. After World War II the system was relatively strong and characterised by low
transaction costs and relatively strong incentives. The growth of the economy increased the
transaction costs of solving the allocation problem by way of planning, creating the need for
reforms. These reforms were rather unsuccessful, weakening the economic system. As a result, transaction costs rose even more and incentives weakened, which may explain the poor
economic performance and paved the way for radical change at the beginning of the 1990s.
Furthermore, some (imperfect) market-type institutions had been appearing through the
years due to attempts to reform the Polish socialist economy, which may have facilitated the
process of market construction that started in 1989.
In Chapter 5 transaction costs and incentives since the introduction of the Balcerowicz
plan at the beginning of the 1990s are elaborated. This plan, named after the then minister
of finance, Leszek Balcerowicz, aimed at macroeconomic stabilisation and introduction of
a market economy. Since this stabilisation program aimed at introducing a market economy
in a short period of time, it is often referred to as “shock therapy”.3
The core of the chapter concerns a discussion of reasons for the decline in output at the
beginning of the 1990s. In order to do this, aggregate demand and aggregate supply factors,
as well as an institutional and transaction cost perspective are considered. The institutional
3
The term “shock therapy” in the context of the Polish stabilisation plan was first used by Jeffrey Sachs, a Harvard economist, who was a key advisor to the Polish government in the early 1990s.
8
Chapter 1
weakening of the socialist system is an important determinant of the fall in output, while the
existence of some market institutions helps to explain why the recession in Poland was one
of the shortest of all former STEs. The weak institutions inherited from socialism weakened
even more in the process of fast change initiated in 1990. The old economic system did not
function anymore, while a new system was not functioning yet. Thus, it was difficult to play
according to the rules of the game, which hardly existed. Transaction costs of restructuring
state-owned enterprises (SOEs), privatisation and institutional change were high, there was
a lack of trust, and it was not clear in what direction the economic system would develop.
As a result of large uncertainty many economic actors worked according to the old socialist
rules of the game. Consequently, transaction costs are expected to have increased at the beginning of the 1990s, and incentives adversely influenced, contributing to the decline in output. On the other hand, the productivity enhancing effect of the introduction of more market incentives and the rise of small private enterprises in sectors such as distribution and
food-processing were factors counteracting the recession and creating the basis for growth.
In Chapters 6 and 7 two specific aspects of the socialist period and the period of market
construction are discussed. The topic of Chapter 6 is the transaction costs of queuing in socialist Poland. Shortages were a crucial feature of classical socialism. However, these shortages increased with the “decay” of the socialist system, when more and more difficulties arose
in solving the co-ordination problem. Shortages led to the phenomenon of queuing. This
caused a different type of transaction costs than those discussed in Chapter 4, where increasing transaction costs and weakening incentives from the supply side are the main topic
of interest. Time spent in a queue is a transaction cost from the demand side of obtaining
a good or a service. The cost of time differs for different types of people such as housewives,
unemployed, pensioners and people who work. Based on a survey carried out in Poland, the
main question addressed is what people were doing while queuing, what they were likely to
have done otherwise, and what they do with the time gained due to queues disappearing.
Queues were not only a visual sign of transaction costs to the consumer, they also largely contributed to the general dissatisfaction of the population with the socialist system.
In Chapter 7 some logistic challenges in the construction of a market economy are discussed. The use of logistic solutions and infrastructural improvements may not only lower
transaction costs, strengthen incentives and positively influence economic performance. It
also can stimulate rather evolutionary step-by-step institutional change. In this chapter the
state of Polish infrastructure, the development of logistics in Poland and integrated logistic
centres as a tool for stimulating the use of logistic solutions and giving incentives for institutional change towards a stronger economic system are elaborated. Based on analysis of
the state of infrastructure and the development of logistics, it is concluded that Poland has
not finished its economic transformation yet and that many opportunities remain for lowering transaction costs by infrastructural and logistic improvements.
In Chapter 8 an attempt is made to answer the main question of this research. This
amounts to filling in the transaction costs – incentives – performance matrix for Poland from
a historical perspective. Table 1.2. gives a general overview of the different stages of the “Polish
road to the market”, institutional change that has taken place, the expected development of
transaction costs and incentives, and the expected influence on economic performance.
9
Introduction
Table 1.2. Transaction costs and incentives in different stages of the Polish economy.
What happened
(Institutional Change)
Marginal
transaction
costs
Incentives
Influence on
economic
performance
Classical
Socialism
(until the end
of 1960s)
• Building up after the destruction caused by the
war.
• Strong encompassing interest of the Central
Committee of the Communist Party
Relatively
low
Strong
Positive
Reform
Socialism
(1970s)
• Weakening of the planned economy.
• De facto dispersion of property rights due to
reforms and decentralisation.
• Increasing planning problems.
• Adaptive inefficiency.
• Creation of a high level of expectation for the
standard of living.
• Growth of labour movement.
• Weakening belief in the system.
Increasing
Weakening
Becoming
more
and more
negative
“Decaying”
Socialism
(1980s)
• Hollowing out of institutional fundaments – can
the system still be called socialist?
• Weakening of the Communist Party after 1981.
• Further weakening of public property rights.
Stronger labour influence. After 1982 Hungarian-type reforms.
• Weakening incentives due to more unclearly
defined property rights.
• Further weakening belief in socialism, also
among party cadres.
• Conscious introduction of some market-type
institutions, speeding up at the end of the
1980s.
• Rather indicative planning.
• Shortages increased. High transaction costs
for consumers.
• Transaction costs faced by firms increased
due to shortages (e.g. planning problems,
stock procurement).
High
Weak
Negative
Market
Construction
(1990s)
• Shortages eliminated. Reduction in market
transaction costs for the consumer.
• Increasing uncertainty.
• Lack of social capital.
• Weak economic system – some old socialist
institutions still existing, new institutions
lacking, etc.
• High transaction costs of restructuring SOEs
and adapting to market rules of the game.
• High transaction costs of privatisation and
other institutional change.
• Strong incentives and low transaction costs for
small enterprises.
Initially
high and
increasing,
especially
for SOEs.
Should
decrease
later
when the
economic
system
strengthens.
Strengthening, with
initially
strong
incentives
for small
private
business
and adverse
incentives
in the state
sector.
From
negative
towards
more
positive.
“PostTransformation”
(not achieved
yet)
• Evolutionary adaptation of institutions.
• How did transaction costs and incentives
change? What is the state of social capital?
• Logistic solutions can decrease transaction
costs.
Decreasing
Strengthening
Positive
10
Chapter 1
The first column shows the different periods taken into consideration. Classical socialism, reform socialism and “decaying” socialism are discussed in Chapter 4, while transaction costs for the consumer connected with shortages are the topic of Chapter 6. It will be
argued that the economic system weakened (see column “what happened”) due to diffusion
of characteristics of property rights among a larger group of people in the process of reforms, the weakening of the Communist Party and the hollowing out of belief in the system.
This resulted in an increase in marginal transaction costs and weakening of incentives, negatively influencing economic performance. Although transaction costs and incentives are
not the only determinants of economic activity, it is argued that in the 1970s this situation
contributed to a worsening of economic performance. In the 1980s increasing transaction
costs and weakening incentives contributed to economic stagnation.
The period of market construction in the 1990s is the topic of Chapter 5. Initially transaction costs in the state sector involved in the privatisation process were high and companies in this sector faced adverse incentives due to, among other things, a lack of market institutions and increasing uncertainty. This contributed to the fall in output in 1990–1991.
For small private newly established business transaction costs were low and incentives were
strong, counteracting the fall in output.
When the economic system starts to strengthen and transaction costs decline, this has
a positive influence on economic activity. The question is to what extent this has happened.
“Post-transformation”, a stage in which institutions adapt in an evolutionary way, should lead
to strengthening incentives and lower transaction costs, positively influencing economic
performance. In Chapter 7 some challenges and opportunities for Poland to enter this phase
in the field of logistic development are addressed.
In the Appendix a survey among 1,116 Polish companies is presented. The aim of this
survey is to indicate the development of some transaction costs during the first 10 years after
the introduction of the Balcerowicz plan and the state of social capital in the form of trust.
The focus is on small enterprise, as the rise of small private business at the beginning of the
1990s largely contributed to a fast transformation and economic recovery. Social capital is
an important determinant of transaction costs in trade and of the transaction costs of establishing new forms of governance. The higher the level of social capital, the more easily an
economy can adapt to changes such as technological development. In other words, social capital is important for adaptive efficiency in an economic system.
1.4. Some final introductory remarks
With respect to the change of the economic system towards a market economy, significant
change has been taking place. In many fields institutional change proceeds step-by-step, but
in many other fields a lot of work has yet to be done. Lessons learned from the process of institutional change up to the present day are helpful in facing challenges of institutional change
in the future. In the case of Poland the process of joining the EU is such a challenge.
Of course, the framework of analysis used in this thesis has a much broader application
than analysing institutional change in economies in transformation. Many studies have been
Introduction
11
conducted on the importance of institutions for the economic development of a nation, of
which North and Thomas’s [1973] pioneering study on the rise of the Western world was one
of the first. Currently, new-institutional economic theories are applied in a wide range of
areas, and have recently been used in studies on sustainable development, such as sustainable agriculture [Gatzweiler et al., 2002].
It may be one of the most important challenges in developing theories of NIE to create
an institutional framework for sustainable development. The topic of this thesis is the influence of incentives and transaction costs on economic performance. Stronger incentives and
lower transaction costs, ceteris paribus, lead to increased economic activity. However, it is
important that such growth can be sustained.
The socialist system was unsustainable in the sense that it did not create the desired
growth and caused huge environmental problems. The introduction of a market economy
should stimulate economic growth. However, although economic performance in developed
market economies is very impressive, there are many problems. Economic theory indicates
the existence of market failures. Can the price mechanism reflect environmental costs?
How can long-term costs and benefits be taken into consideration when the market focuses
rather on short-term gains? Will an alternative source and income base be available when
non-renewable resources are depleted, as will be the case in the Legnica region in Lower Silesia in Poland in about 20 years?
I hope that the framework developed and applied in this study will be a step in the direction of a new-institutional theory on sustainable development that is able to provide some
answers to these and many other questions.
PART I
NEW INSTITUTIONAL ECONOMICS
AND
TRANSACTION COST THEORY
15
Chapter 2
NEW INSTITUTIONAL ECONOMICS AS
A FRAMEWORK FOR ANALYSIS
OF TRANSFORMATION OF ECONOMIC
SYSTEMS
2.1. Introduction
Current mainstream neo-classical economics explains the reaction of perfectly rational buyers and sellers to changes in relative prices and is concerned with the functioning of prices
and markets [Hazeu, 2000, 19]. Neo-classical economics views the firm as a “black box”, and
it cannot explain why it comes into existence. The firm is treated as a production function,
not as a trading device. Firms are often assumed to maximise profits under constraints. One
of these constraints, institutions, is taken as given and complete information is assumed.
However, in reality there is no perfect foresight, and transaction costs exist. For this reason
institutions are a relevant factor influencing economic activity. Transaction costs consist of
information and negotiation costs connected with the conclusion of a contract (e.g. the
transfer of a property right) and control costs of enforcing such a contract. These costs exist
because of heterogeneous goods with different features and quality characteristics, as well
as opportunistic behaviour.
The process of institutional change is of extreme importance for studying transformation towards a market economy. Private and public property rights provide different incentives for economic activity. The process of privatisation is not frictionless and gives specific
incentives. Neo-classical economics is a poor tool for analysing transformation issues, as its
theories assume a rather frictionless and static world. In this research, New Institutional
Economics (NIE) is used as a toolbox for analysis, because of its emphasis on dynamic
processes and its interdisciplinary (and sometimes eclectic) approach to economic analysis.
It analyses the economic importance of sciences such as sociology, cultural studies, law and
political sciences. Furthermore, it combines descriptive richness with analytical strength.
One of the main fields of interest is the incentives provided by different types of property
rights.
16
Chapter 2
This chapter provides a description and analysis of the toolbox used for the research presented in the following chapters. The notions of institutions, transaction costs and incentives are discussed within a framework of comparative economic systems, as co-ordination
mechanisms are central in this thesis. In Section 2.2. the notions of institutions, the formal
and informal “rules of the game”, and governance are discussed. The emphasis is on the influence of institutions on incentives for economic activity. The notion of transaction costs is
dealt with in Section 2.3. After an attempt to define the notion of transaction costs, the difference between transaction costs and transport costs is discussed, as both of them are fundamental in facilitating or hampering economic activity. Then the significance of the Coase
theorem and the importance of opportunistic behaviour and poorly delineated and/or enforced property rights during transformation is discussed.
2.2. Institutions and incentives
In the 1980s, the emphasis of comparative economic systems was on co-ordination mechanisms, in particular different types of planned economies and market economies.1 The rapid
changes in the former Soviet bloc at the end of the 1980s and the beginning of the 1990s
have completely changed this subject. The Soviet-Type Economy (STE) has become history, except maybe in China, Cuba and North-Korea. The emphasis has shifted towards the
“economics of transformation”, which focuses rather on the dynamics of a changing economic
system than on a static comparison. In particular it concerns the change from a (planned) STE
towards a market-oriented economy.2
An economic system can be defined as “a set of mechanisms and institutions for decision making and for the implementation of decisions concerning production, income, and
consumption within a given geographic area” [Wagener, 1988, 21–2].3 Property rights (e.g.
private versus public) and the co-ordination mechanism (e.g. market versus plan) are essential features in comparing economic systems. From this perspective, an aim of economic
transformation is to change the property-rights order by way of privatisation or the setting
up of private companies and to develop market institutions. The task of every economic
system is to solve the allocation problem. Whatever co-ordination mechanism is chosen,
choices have to be made due to the existence of scarcity [see Wagener, 1988].
Gregory and Stuart [1994, 16–22; see also Wagener, 1992] argue that economic systems
are multidimensional, and consist of many characteristics. This means that an economic
system consists of a theoretically infinite number of attributes or characteristics. One
characteristic, like property rights, does not define an economic system. There are many
forms of decision-making processes (e.g. centralised versus decentralised) and co-ordination
mechanisms possible. This implies that we can imagine many different forms of economic
systems.
1
Plan and market are not the only co-ordination mechanisms. Other types of co-ordination mechanisms can be distinguished, such as self-governing co-ordination, ethical co-ordination and family co-ordination [see Kornai, 1992, 103–8].
2
The term STE is not only used in order to indicate the general similarities between the economic systems of the different countries in the former Communist world based on the economic system of the Soviet Union, but also to emphasise the
national differences.
3
Wagener [1988, 21–2] distinguishes between an economic system and a political system. Important concerns of the political system are formulating collective goals, regulating constraints and value statements. This means making value-laden
(normative) decisions about how to organise the economic system. The state plays a very important role in this field. One
should not forget that the state is an overlap between the economic and the political system. The state is, besides a political
institution, also a market participant.
New Institutional Economics as a Framework for Analysis of Transformation…
17
Economic Performance
Governance
(play of the game)
“Institutional Governance”
(judge and enforcer
of the game)
Formal and Informal
Institutions
(rules of the game)
Hardware
(“tools of the game”)
Figure 2.1. Factors influencing economic performance.
Figure 2.1. gives an overview of the theoretical framework of NIE used in this thesis. In
terms of NIE, an economic system consists of institutions (institutional environment), structures of governance (institutional arrangements) and “institutional governance”. The emphasis of NIE is on the economic effects of institutions and the way in which institutions are
shaped under the influence of economic behaviour. Institutions, “the rules of the game”,
provide incentives for economic activity (economic performance) by influencing constraints
on economic transactions. Transactions take place at the level of governance, “the play of
the game”. “Institutional governance” by way of enforcing (or not enforcing) the rules of
the game has a similar effect on economic performance as institutions by way of influencing
incentives. However, the efficiency of “institutional governance” is also an important factor
influencing the level of transaction costs by facilitating contract enforcement. Physical capital and infrastructure are important components of hardware, “the tools of the game”. It is
obvious that information systems can create new opportunities for governance structures,
while a proper infrastructure is important for the functioning of markets. Transaction costs
can be found at the level of governance. The level of transaction costs influences the level
of economic activity.
North [1990, 3] defines institutions as the rules of the game in a society. These rules of
the game are devised by human beings and shape human interactions. Consequently, institutions structure incentives in human exchange. They define and constrain choice sets of individuals, and influence the performance of an economy. A distinction can be made between
formal and informal rules of the game. Examples of formal rules are the system of property
rights, government regulations and laws. An important formal institution is the property
rights order. The property rights order determines the possible governance structures, and
thus, besides providing incentives, influences transaction costs.
18
Chapter 2
First, the notion of property in economics, which differs from its legal definition4, has to
be explained. Property can be seen as norms that arrange the relationship between people
with regard to scarce means.5 In other words, property can be regarded as a contract between
individuals with respect to an economic good. It makes clear who owns a good, who has the
use of or control over a good, and who does not. A property right is in fact a “wealth title”.
If someone has property, such as a factory, he can obtain income out of it. This implies that
property determines the wealth of individuals. If the system of property rights changes,
as during the transformation from a planned to a market-oriented economy by way of privatisation, this implies that also the wealth of individuals changes.
A good has several valuable attributes, and can be defined as a bundle of characteristics
(or property rights). Commonly, the owner of a good does not always have the possession
of the whole bundle of property rights. There are many regulations. For instance, the owner
of a car needs a driving licence to drive the car, there are limits to maximum speed and he
is not allowed to set the car on fire. As Bajt [1993, 87] argues, property rights can be constrained by public law, the failure of civil law to adapt to technological changes, stealing, and
sheer coercion (e.g. confiscation).6
According to Roman law, three broad types of ownership can be distinguished: the right
to utilisation (usus), the right to use the product and/or services generated (usus fructus)
and the disposition of the object in question (usus abusus). In principle, each of the three
types of ownership can be defined for each characteristic of a good. In general, private,
public and common ownership can be distinguished. Each type of property rights creates its
own specific incentives and transaction costs, which in turn “have specific and predictable
effects on human behaviour” [Pejovich, 1995, 65]. Private property gives stronger incentives
for economic activity than public property, as in general people care more about their own
property, because they face the direct results of their actions.
Pejovich [1995, 101] argues that although economic analysis cannot tell whether private
property is always or sometimes efficient, together with contractual freedom it gives individuals incentives to exchange more and more.7 This economic freedom creates incentives to
“negotiate contractual agreements that move resources to their higher-valued uses, … spontaneously … seek new opportunities for exchange and production, and … spontaneously …
seek ways to reduce transaction costs”. The essence of property rights economics is to formulate such a “contract” that creates an interest (incentive) for all parties to achieve a common goal, and prevents shirking or free-riding. In other words, we talk about incentive-compatibility [Hazeu, 2000, 71].
4
“In the legal sense, the owner of a thing-good is the one to whom the law assigns maximum authority over its use, in the
sense of including entitlements to all allowed uses and of excluding interference with these by all other persons, provided he
acquired it lawfully (through production, exchange, inheritance, gift, etc.)” [Bajt, 1993, 85].
5
Property rights have to be considered in the broadest sense, they not only concern material resources but also immaterial resources such as intellectual property rights and human rights.
6
Bajt [1993, 90, 92] argues that traditionally public law was neglected by the property rights school. However, public law
is important in property rights economics, because it contributes to the “creation, protection, and enforcement of property
rights” by way of anti-monopoly regulations, competition laws, etc., and stimulates efficient resource allocation by contributing
to secure property rights.
7
Although private property in general provides strong incentives for economic activity and efficiency, there can be
cases where private property provides adverse incentives. In the case of woods, it can be in the interest of the private owner
to cut down all the trees, which may lead to the erosion and degradation of land. An extreme example of adverse effects of
privatisation is a story I once heard about a former state-farm in Russia. Each of the Kolchoz workers obtained a part of the
farm. Thus, someone could be the owner of a wall of a barn. The owner of a wall considered it to be profitable to sell the
stones of this wall. However, without this wall the rest of the barn was useless. Property rights economics argues that clearly
defined property rights are expected to give the strongest incentives for economic efficiency. However, what type of property
rights order provides the strongest incentives for achieving efficiency depends on other institutions and transaction costs
[see Li, 1996; Sarkar and Sarkar, 1998].
New Institutional Economics as a Framework for Analysis of Transformation…
19
Informal rules include culture, values, conventions and norms of behaviour. The importance of making a distinction between formal and informal institutions becomes clear when
looking at institutional change. In theory, formal constraints can be changed overnight by
political/legal decisions. However, implementation and interpretation of new rules takes time.
Differences in interpretation can be material for court cases. Informal rules such as culture,
something that has developed through the ages, change less quickly, slowing down the speed
of institutional change.
Another reason why informal rules change less quickly than formal rules is connected
with the fact that it takes time before people get to know the new rules and the rules can be
enforced. When people get to know the new rules, which also depends on the effectiveness
of dissemination of information by the government, it takes time before they start to accept
these new rules. Improper information flows can lead to situations where old and new rules
are applied together for a long time, so hardly anyone knows what rules are in force.
Besides the fact that people defending their own interest can hamper the implementation of new rules, people’s value system also has a large influence on the speed of implementation of new formal institutions. Suppose, a majority of society considers capitalism to
be bad for religious reasons. This can be a huge brake on the development of a market economy. In other words, because informal institutions change more slowly than formal institutions, the values, ideologies, mentality and culture (“mental models”) developed under
the older system will influence the working of formal institutions under the new system
(path-dependency).
Institutional change from plan to market in former STEs is accompanied by uncertainty. When decisions are taken under uncertainty, “mental models”, in the sense of subjective
perceptions and explanatory models determined by experiences and learning processes
by individuals with similar experiences, play an important role in decision making [see Denzau and North, 1994; Groenewegen et al., 1997]. Thus, due to different mental models, the
same formal institutions can have different outcomes. When there is large uncertainty in
transformation processes, economic subjects tend to fall back on mental models that took
shape under the socialist system. This increases difficulties with the introduction of efficient
institutions. The causality between learning processes under uncertainty, mental models
and institutions is shown in Figure 2.2.
learning processes in
situations of uncertainty
fi
mental models and
ideologies
fi
institutions
Figure 2.2. Causality between learning processes under uncertainty,
mental models and institutions.
According to North [1990, 6], the most important role of institutions is to reduce uncertainty by establishing a stable (not necessarily efficient) structure for human interaction.
20
Chapter 2
Pejovich [1995, 30] emphasises that the most important function of institutions “is to enhance
the predictability of human behaviour”. A stable legal framework that protects property and
enhances contract enforcement is likely to stimulate entrepreneurship and economic activity.
When the formal system does not work properly, informal mechanisms often come into being.
Suppose the legal system does not facilitate contract enforcement. This can be an incentive
to choose “private enforcement”, i.e. using Mafia practices.
When institutions like laws and regulations change very often, this increases uncertainty in the economy, and makes it almost impossible to keep up with all the changes. As a consequence economic subjects have less reliable information, which negatively influences economic activity in turn.
An interesting question is whether institutions decrease distrust or are actually an indication of it. It seems that some institutions come into being because of distrust, like contractual arrangements made in order to prevent cheating. Other institutions can be a sign of
trust. Without trust the use of money in its current form or the functioning of the banking
system would be difficult. An essential point is that transactions (exchange of goods and/or
services) are not without cost.
As mentioned, an important role of institutions is reducing uncertainty. There are three
fundamental reasons for uncertainty [Van de Mortel, 2000, 14–5]. First, the transaction costs
of obtaining all the possible information are too high. This leads to incomplete information,
creating uncertainty. Second, human calculative abilities are limited. The more complex
the institutional environment and the more limited human calculative abilities, the larger
the probability of making the wrong decisions. This makes the use of “mental models”,
rules of thumb, conventions and routines more attractive [see Heiner, 1983]. The third
reason for uncertainty is the impossibility to predict the future outcome of an action, e.g.
in cases where some information will only become available in the future. This is a situation
of “Knightean uncertainty” [see Knight, 1921; Van de Mortel, 2000], where, in contrast to
the two cases mentioned above, it is not possible to calculate the probability of the possible
outcomes. Thus, “mental models” help decision making under “Knightean uncertainty”.
Limited cognitive abilities and “Knightean uncertainty” can be used to explain the existence
of inefficient institutions and development paths.
Governance can be considered as “the play of the game“. Here transaction costs come
into play. It is the level at which transactions and the production of goods and services take
place and concerns the organisation of decision making arrangements. Williamson [1975]
distinguishes between markets and hierarchies as different forms of governance at any given
level. According to Williamson [1985], organising production and concluding transactions in a hierarchical organisation, such as a firm, may be preferable to a market in the
presence of opportunistic behaviour. This happens when lying and cheating lead to the transaction costs of using the market exceeding the transaction costs of organising production
within a firm. When people are honest, and the rules of the game are enforced, the market
becomes more attractive, because of a decrease in market transaction costs [see also Hazeu,
2000, 75].
Using the market becomes more costly in the case of the existence of asset specificity
(transaction-specific investments), such as specific-purpose technology [Williamson, 1998, 38].
New Institutional Economics as a Framework for Analysis of Transformation…
21
This creates a mutual dependency between different parties involved in a transaction. The
threat of opportunistic behaviour, as in the case of a firm who is dependent on one supplier
who may change the contractual conditions, makes safeguards necessary. When the transaction costs of such safeguards are too high, it is advantageous to internalise activity within
the firm. Some forms of asset specificity are: physical assets, human capital, location and
brand name [Williamson, 1998, 36]. Examples are place-related investments, investments in
specific skills (e.g. use of special computer programs), acquisition of special machines, and
relation specific provisions – such as when we expect a new customer will buy much for
a long period [see Hendrikse, 1998].
Incentives differ in markets and firms [Williamson, 1998, 37]. First of all, markets provide high-powered incentives due to competition, while incentives in firms are low-powered
due to the lack of competition. Furthermore, firms use many administrative rules and procedures. Third, markets, in general, adapt faster to changes in relative prices. Firms have an
advantage when co-operative solutions, for which trust is important, are needed. Finally,
market disputes are often settled in court, while disputes within firms are often settled by
the firm itself.
When there are no transaction-specific investments, as is the case when general purpose
technology is used, the means of production can easily be transferred. In this case the market
would be the most efficient form of governance. Transaction-specific investments make
transfer of means of production more difficult. In such circumstances safeguards against
opportunistic behaviour may be needed, in which case a more hierarchical governance
structure becomes more attractive. According to this reasoning, central planning and/or
production by the state is an option when market institutions fail or are not developed –
when market transaction costs are too high. Following this type of reasoning, the rationalisation for strong state intervention in Western Europe after World War II might have been
the lack of properly functioning market institutions in many sectors and the huge cost of
using the market.
“Institutional governance” is a trickier concept to define than institutions or governance.
This concerns organisations that interpret and enforce the rules of the game such as the
judiciary, police and government. In other words, the referee/arbitrator, facilitating enforcement of the rules of the game, can be found at this level. “Institutional governance” could
be included in institutions as it strongly influences incentives in the way the rules of the
game are enforced (or not enforced), while some parts are involved in the creation of formal rules of the game (e.g. government). However, the referee function implies a governance
structure and transaction costs are faced when carrying out this function. “Institutional
governance” is distinguished separately in order to emphasise the importance of enforcement of the rules of the game, which of course in reality poses difficulties.
“Institutional governance” influences the level of transaction costs. In this way it determines, together with institutions and hardware (“tools of the game”), which type of governance structure is most efficient. But it also influences incentives for economic activity, by
influencing the expected transaction costs of a venture. It should be obvious that when
bribery is the rule, major disincentives for small business enterprises exist, as in general
they lack the resources for influencing decisions of “institutional governance”.
22
Chapter 2
2.3. Transaction costs
In this section first the predictive and explanatory power of transaction cost economics is discussed (Section 2.3.1.), and an attempt is made to come to a definition of transaction costs
(Section 2.3.2.). Then, the difference between transaction costs and transport costs is discussed (Section 2.3.3.). Afterwards, the importance of the Coase Theorem for transformation
towards a market economy is elaborated as well as the concept of the public domain in
relation to opportunistic behaviour (Section 2.3.4.).
2.3.1. The use of transaction cost economics
Transaction cost economics, which concerns the functioning of governance structures, connected with property rights theory, is a powerful tool for explanation. Although it is used
here mainly for explanation, it is possible to make transaction cost economics operational
for predictive purposes as well.
The frequency of transactions, the uncertainty involved in transactions and transaction
specific investments (asset specificity) are important for the predictive value of transaction
cost economics. Asset specificity creates bilateral dependency between economic actors. An
initial competitive situation can change into a bilateral monopoly/monopsony after a contract has been concluded. When a contract has been concluded, the party that has made the
most transaction specific investment is in the most disadvantageous position. Due to the
specific purpose of the investment, this party has less possibilities to “walk away” and sell
the asset to another party, because often such an asset is useless outside the contractual arrangement. The party that has made the least transaction-specific investment can engage in
post-contractual opportunistic behaviour (also called moral hazard 8) by trying to renegotiate
the contract to his own advantage.
When connecting transaction cost economics with the institutional environment, it is possible to explain and predict why in general institutional change proceeds slowly. Under socialism state-owned enterprises (SOEs) and individuals had made “system-specific” investments (e.g. behaviour, contacts, skills), which lose value when transforming to market economy. This can lead to behaviour protecting old institutions and governance structures,
slowing down system transformation. However, also new system specific investments have
to be made, such as obtaining new skills, knowledge of markets and changing mentality
and behaviour. Of the transaction costs related to institutional change, probably investment
in human capital is the most costly.
As was argued in Section 2.2., mental models developed under the old system is a source
of reference for economic actors, especially in case of high uncertainty. In such a case the old
informal institutions and new formal institutions may not reinforce each other, which is called
an “institutional disequilibrium” [see Furubotn and Richter, 1997, 23–4]. This can lead to
higher transaction costs within the new governance structure. This is reinforced by the fact that
it also takes time before the new formal institutions are established and function properly.
8
“Moral hazard is a problem of “post-contractual opportunism”, in that the presence of some unobservable (or unverifiable) action provides people with an opportunity to cheat after the deal is signed.” It is the existence of private information that creates possibilities for opportunistic behaviour [Molho, 1997, 8].
New Institutional Economics as a Framework for Analysis of Transformation…
23
Thus, at the beginning of a transformation it can be expected that market transaction costs
increase, also due to the fact that individual behaviour and organisational behaviour adapt
slowly.9
Furthermore, the creation of new institutions requires large fixed transaction costs, which
cannot be used for alternative purposes. As a result economic activity can be expected to decline. However, one difficulty in analysing transformation processes is that in the case of increasing economic freedom, due to change in formal institutions, incentives can be created
for increased productivity and new economic activity, counteracting the decline in economic
activity due to factors such as the high transaction costs resulting from fast institutional
change.
2.3.2. Transaction costs defined
Following Furubotn and Richter [1997, 43], three different types of transaction costs10 can
be distinguished: market transaction costs, managerial transaction costs and political transaction costs. Transaction costs arise because information is never complete. Furthermore,
people have limited cognitive and calculative abilities, and they make mistakes. Barzel
[1989, 2] defines transaction costs as “the costs associated with the transfer, capture, and
protection of rights”. Hazeu [2000, 9] defines a transaction as a transfer of property rights.
Thus, when an object has different characteristics for which property rights can be defined,
a transaction can also be the transfer of one or more characteristics of a good. Generally
speaking, a transaction concerns a contract between two parties.
According to Furubotn and Richter [1997, 43] “[t]ransaction costs embrace… the costs of
establishing, maintaining, or changing a system’s basic institutional framework”. Each of the
three types of transaction costs distinguished by these authors can be subdivided into “fixed”
and “variable” transaction costs. “Fixed” transaction costs are “the specific investments made
in setting up institutional arrangements” (governance structures) and are connected with
the need for market safeguards against opportunistic behaviour. “Variable” transaction
costs are the costs “that depend on the number or volume of transactions”. “Variable” transaction costs are the costs of “running an organisation” which can be divided into (i) information costs and (ii) what Williamson [1985, 1] calls “costs associated with the physical transfer
of goods and services across a separable interface”. In fact, transaction costs are the costs of
solving the co-ordination problem, which takes place at the level of governance.
Market transaction costs are related to friction in using the market, and like any type of
transaction costs consist of search, negotiation, and control costs. Search costs are the costs
9
In Poland many formal rules were changed overnight on 1 January 1990 by the so-called Balcerowicz plan. Prices were
liberalised, legal institutions for creating a market economy were established, a lot of private companies came into existence.
However, habits of people changed less quickly. Imagine someone who had worked for twenty years in a state-shop. Due to
shortages, customer power was quite low and shop assistants could be quite rude to customers, because customers had little
possibility of buying anywhere else. In a developed market economy suppliers have to compete for customers, while in the
socialist shortage economy customers had to compete with each other in order to buy something. Habits developed under
such a system are quite difficult to change.
10
Measuring transaction costs is quite difficult. Wallis and North [1986], in an attempt to measure the level of transaction costs in the American economy, describe specialised transaction resources that are bought or hired. They distinguish
wholesale and retail trade (not transportation), finance, insurance and real estate as private-sector industries providing transaction services. Besides this non-government occupations for facilitation, co-ordination and monitoring exchange were distinguished: owners, managers and proprietors for co-ordination, clerical workers for processing of information, foremen
and inspectors for co-ordination and monitoring of labour inputs, and police and guards for protection of property. However,
various transaction costs borne by individuals should also be included, such as queuing and resources used for search in the
factor or commodity market.
24
Chapter 2
of obtaining information.11 Examples are: searching for buyers and sellers; information about
their culture and behaviour; existence, interpretation and means of enforcement of laws and
regulations; and what is written in a contract and what is meant by it (e.g. hidden clauses,
meaning of language, small print).
An important problem is asymmetric information. This means that not all information
is public. Private information exists, creating possibilities for opportunistic behaviour. In
this case transaction costs are the costs of obtaining information about a trading partner
(e.g. reliability) or product (e.g. quality). These costs can be significant in terms of time and
money. Poznanski [1996, xvii] argues that private information cannot become completely
public “because of different experiences and perceptions of actors and the conditions under
which information was accumulated by an actor”. In other words, due to what Sen [1992]
calls differing personal characteristics, communication of information is hampered. As
Poznanski goes on, the “best” conditions for communicating information are trust and repeated interaction. However, achieving such a situation again involves high transaction
costs.
Negotiation costs are the costs involved in concluding a contract. Suppose a representative of a firm wants to conclude a contract with another firm. He has to negotiate with this
other firm, as well as with the people responsible within his own firm. Besides, the necessary
bureaucracy and paperwork are also included in these costs. Pejovich [1995, 84] argues that
negotiation costs can be substantial when exchange partners do not know each other. These
costs increase when not all the relevant information about goods and services is available.
They also increase when goods and services are heterogeneous, i.e. when they have many
valuable characteristics and measurement of these characteristics is expensive. Measurement
of all characteristics would go together with high transaction costs, reducing the amount of
transactions. Furthermore, when both parties try to negotiate safeguards against any future
consequence of uncertainty resulting from high measurement costs and the impossibility of
calculating the probability of certain events happening, negotiation costs are prohibitive.
Thus, contracts are always incomplete due to high information and negotiation costs.
Finally, control costs involve monitoring and enforcing the fulfilment of the contract.
Suppose a firm sells some goods and ships them using a transport company. There are costs
involved in activities such as checking whether the transport company does its job properly,
whether the customer pays, checking whether there are damages due to non-fulfilment of
the contract, obtaining the compensation of those damages and protection against theft.
Consultants, a developed market structure with self-enforcing rules and a developed legal
system are institutions that can lower those transaction costs.
With respect to an STE (centrally planned economy), the main transaction costs are costs
of planning. These costs mainly consist of information costs, which contain the costs of
decision-making (e.g. collecting and processing information), negotiation costs (e.g. plan
bargaining), the control costs of monitoring the execution of orders, agency costs and the
costs of information management. An STE can be considered as one big company. According
to such reasoning transaction costs in an STE are a kind of managerial transaction costs.
Furthermore, following Williamson, the strength of incentives in the hierarchical governance
structures of an STE is lower than in a market economy.
11
As Heyne [1994, 175] puts it, information is a scarce good. In order to obtain information a price has to be paid, including all the opportunity costs of postponing action. Saving on information collection increases uncertainty and may reduce the expected payoff of an economic activity.
New Institutional Economics as a Framework for Analysis of Transformation…
25
However, there are some significant differences in the institutional environment and the
incentive structure of an STE when compared with a large capitalist company. Although
both use bureaucratic co-ordination to solve the allocation problem – as opposed to market
co-ordination – in a capitalist firm the owner (owners), to whom managers are responsible
and whose earnings are directly influenced by the manager’s behaviour, can be pointed out.
Furthermore, a capitalist company operates within a more or less competitive market environment. In a socialist bureaucracy there is no direct owner whose earnings are influenced
directly by the manager’s behaviour, while each bureaucratic “head has another head over
him or her”. The motivation of the ultimate leader for decision-making are political rather
than monetary [Kornai, 1992, 124]. Transaction costs in an STE are discussed in more detail
in Chapter 4.
2.3.3. Transaction costs and transport costs
In this section the difference between transaction costs and transport costs is discussed, as
one part of the research in this thesis deals with the importance of transport and logistics,
which is closely linked to transport, in transformation processes (Chapter 7). Both transport
costs and transaction costs are important in the development of markets. Some authors define transport costs as a part of transaction costs [Gowland and Paterson, 1993, 37; see also
Boehme et al., 1998, 5–6]. However, transaction costs and transport costs should be conceptually separated, as they focus on different aspects of an exchange of property rights. Transaction costs focus rather on friction in the working of markets connected with information
and negotiation problems, as well as with opportunistic behaviour. Transport is more concerned with the movement of goods and services between different locations. In practice
there are difficulties in distinguishing between transport costs and transaction costs [Furubotn and Richter, 1997, 40–1].
Property rights (on characteristics of goods and services) come into being because of interactions between two or more people. Thus, there must be an exchange between two parties. Robinson Crusoe alone on his island faces no transaction costs – there are no other parties [Cheung, 1998; see also Wagener, 1988]. When Robinson Crusoe transports a tree, this
is a cost of production. When Robinson Crusoe travels over the whole island in order to
search for peanuts, this is a cost of production. When Robinson just goes for a walk, this is
transport for consumptive use. In the case there is a transaction with a second person, according to such reasoning, transport can be either a production, consumption or transaction
cost, or all three together. In other words, it becomes more difficult to distinguish between
transport costs and transaction costs. This problem increases with the introduction of logistic solutions.
The difference between transport and transaction costs can be discussed with help of Furubotn and Richter’s definition of transaction costs presented in Section 2.3.2., which is partly an interpretation of Williamson’s definition of a transaction. “A transaction occurs when
a good or service is transferred across a technologically separable interface [1985, 1].” In Furubotn and Richter’s definition, managerial transaction costs also consist of costs involved
in intra-firm transport. But how should the following be interpreted? Suppose steel factory
26
Chapter 2
X buys coal from firm Y, located close to firm X. The transport of coal is a productive activity that adds value, so the costs can be considered to be transport costs as a result of an
exchange between two market parties. However, if the two firms merge, according to Furubotn and Richter’s definition, the costs of changing the location of the coal would become
variable managerial transaction costs (intra-firm transport). Especially in more advanced logistic systems (or in hybrid forms of property rights and/or co-operation within networks)
the distinction between transaction and transport costs becomes less clear, due to the interrelationship between information systems and transport and production activities.
The difficulty of making a distinction between transport costs and transaction costs can
be illustrated by using three functions of transport for analysis. Transport has a consumptive
function, a productive function and an integration function [Rydzkowski and Wojewódzka, 1997, 20–1]. An example of the consumptive function is demand for transport by tourists. In the case of sight-seeing tours, the transport is part of the product offered, thus in this
case the transport costs are rather costs of production. The division becomes less clear in
the case of a holiday-offer in Paris, to which the tourist first has to be transported by train,
plane, bus or car.
The productive function is connected with bringing factors of production there where
they are valued the highest. In the case of shipping coal from the Upper-Silesian mines to
an electricity plant somewhere else in the country, transport costs can be counted as a cost
of production, although there are transaction costs involved in transport. An example is information. Transfer of information seems to clearly consist of transaction costs. An efficient
flow of information, in an optimal situation, reduces the problems of incomplete and asymmetric information, while at the same time reducing search/information costs. Thus, expenditure on information systems or the Internet are transaction costs. However, information
systems have become an integrated component of transport. Examples are information about
routes, tracing and tracking, protection of loads against theft and insurance. Thus, transaction costs may make up an important part of transport costs.
Transaction costs often also include transport costs. Suppose a sales representative uses
a company car to visit potential customers. The costs incurred are transaction costs. However, during this trip the car can also be used to purchase and/or distribute goods (transport
costs). In general, people tend to lower the opportunity costs of an action. The car can also
be used privately. In this case its use by the representative is part of labour income. Business
trips for a company can be combined with a holiday trip (or the other way round), lowering
the opportunity costs of one of the two activities or both. This complicates the distinction
between transaction costs and transport costs.
In the case of reducing the cost and time of transport by improving infrastructure, more
economic activity can be undertaken, and here, of course, it does not make any difference
whether we define transport costs as transaction costs or not.
The integration function of transport – the integration of the state and society through
transport services – in fact influences social capital, and as an extension of and in combination with the transport infrastructure (in fact a multiple-use capital good) leads to lower
transaction costs. Integrating Poland into the European transport network not only facilitates trade, but also facilitates contacts. This in turn facilitates the acquisition of knowledge
New Institutional Economics as a Framework for Analysis of Transformation…
27
of other languages, lowering transaction costs of communication in activities such as international trade and transfer of know-how. Getting to know the culture of other countries reduces transaction costs in trade due to a lower probability of cultural misunderstanding,
such as insulting someone because you do not know what the local, regional or national
habits are.
To conclude, a conceptual distinction between transaction costs and transport costs is
useful for analytical purposes. In reality it is difficult to distinguish between them. Much depends on a strict definition. Even if it were theoretically possible, it may be not very useful
to completely solve matters of definition. The reason for this is that the most important aim
of making a distinction is to analyse friction in co-ordination in the form of transaction costs
and to analyse transport as a factor of production which is reflected in transport costs. Both
types of costs also go “hand-in-hand”. Cheaper transport, or an extension and improvement
of the transport infrastructure, stimulates the extension of markets and increasing division
of labour, which, ceteris paribus, increases transaction and transport costs. On the other
hand, information systems are of crucial importance, in order to optimise transport and the
logistic chain and to lower information costs.
2.3.4. The Coase Theorem, the public domain and opportunistic behaviour
In this section the importance of the Coase Theorem for transformation of economic systems is discussed. This theorem, commonly used in environmental economics, is based on
Ronald Coase’s article “The Problem of Social Cost” [1960]. The central point is that when
transaction costs are zero, property rights are perfectly delineated and there is freedom of
contract, in a decentralised economic system resources will end up in the place where they
are valued the highest, independent of the initial distribution of property rights. Rational
economic agents will always take all costs and benefits into account [Eggertsson, 1990, 19].
In the planned economy, there was no contractual freedom. It was almost impossible to
transfer property rights. As a result, when opportunities for more efficient use of resources
appeared, these opportunities were often left unused. With the introduction of contractual
freedom in the process of transformation from a planned economy to a market economy,
more efficient governance structures should be established by way of privatisation.
In reality economic agents can be assumed to be boundedly rational, transaction costs
are positive and property rights are not perfectly delineated. Bounded rationality means
that behaviour is intentionally rational within the limits of incomplete and asymmetric information, human characteristics (e.g. limited calculative abilities) and limited time available
to take decisions [Simon, 1957; Williamson, 1998; Hazeu, 2000]. Thus, people make choices
that satisfy them, but these choices are not necessarily optimal from a theoretical point of
view. As a result, inefficient institutions and governance structures may be the outcome of
transformation processes.
When transaction costs are positive, it is quite possible that resources are not transferred
to the most efficient user [Eggertsson, 1990, 102], and an inefficient property rights order
may be the result. When transaction costs exist, institutions and governance structures become important factors influencing economic outcomes. As will be elaborated in Chapter 3,
28
Chapter 2
a more decentralised system of economic organisation, such as a market, leads to lower transaction costs compared to a more centralised economic system such as central planning.
Unclearly defined property rights lead to inefficiencies, which are mainly the result of
the fact that marginal social costs are not equated with marginal social benefits. On the
other hand, this leads to the shaping of institutions. When a property right is unclearly defined or enforced, individuals often try to obtain this property right. An example is interest
groups, which try to influence legislation to their own advantage, while this legislation is inefficient from a social point of view.
The pivotal point is that property rights can never be complete. A property right consists
of different attributes. This implies that several property rights are in force, which have to be
maintained. Control costs (e.g. preventing theft and unwanted use by others) are involved in
maintaining property rights. There is a possibility that someone does not want to, or cannot,
maintain property rights, leading to not completely delineated and enforced property rights,
especially when:
1. The characteristic is not scarce, so it has no value and is of no (economic) interest.
2. The control costs of enforcement are too high. If children steal apples from apple trees,
it can be too costly to protect the apple tree day and night. Time can be used for higher
valued alternatives. A weak state and an inefficient “institutional governance” increase
control costs.
3. Incomplete and asymmetric information exist, implying high transaction costs of measuring characteristics of property rights.
4. It is forbidden to let full property rights to be in force on some characteristic of a good.
Regulations are an example of this.
In other words, “when transaction costs are positive, rights to assets cannot be properly
delineated”. Because property rights cannot be properly delineated, transaction costs exist
in the process of exchange of assets. Reasons for this are that exchange partners try to establish the value of characteristics of property rights (information costs) and try to obtain
value out of the public domain [Barzel, 1989, 3].
If someone does not want to, or cannot, protect a property right, characteristics of this
property right are accessible to others. Because property rights can be seen as wealth titles,
there is a possibility of obtaining income. It is also possible that no property rights are defined
with respect to a scarce good (common property). In both cases there is value (attributes of
a property right) in the public domain.
As goods possess many attributes, the measurement of these attributes is too costly to
be comprehensive or entirely accurate [Barzel, 1989, 114]. It is very difficult (rather impossible) to obtain full information about a property right, a problem also related to the existence of asymmetric information. Costs of measuring valuable attributes tend to be especially high in a period of rapid economic change. A struggle over the distribution of wealth
worsens this problem [Eggertsson, 1990, 102]. The higher the measurement costs and costs
involved in a “distributive struggle”, the less control an owner has over his property, creating
opportunities for rent-seeking. This has significant consequences for changing the property
rights order in former socialist countries by way of privatisation. Suppose someone wants to
buy a factory in Poland and does not possess information about the government regulations,
New Institutional Economics as a Framework for Analysis of Transformation…
29
about the correctness of the financial situation as written in the books or about the existence
of an “environmental heritage”. In such a case it is possible that privatisation will not take
place as a result of high transaction costs. Another option is that insiders such as managers
of SOEs buy such a factory.
As it is impossible to delineate property rights fully because goods have so many characteristics, there is a possibility for wealth-capture in every exchange. In every exchange some
wealth spills over into the public domain, and individuals spend resources to capture it.
Whereas people expect to gain from exchange and are believed to maximise their (expected) net gains, the revenues of exchange as conventionally perceived minus the cost of effecting exchange, they always spend resources on capture [Barzel, 1989, 3].
The argument that asymmetric information makes it impossible to specify complete and
completely enforceable contracts, is connected with control costs. Asymmetric information
means that private information exists. Private information, as opposed to public information, is unobservable to outsiders. The existence of private information and/or unobservable
action that exists because of high control costs creates room for opportunistic behaviour
[Molho, 1997].12, 13
A distinction can be made between pre-contractual and post-contractual opportunistic
behaviour. Pre-contractual opportunistic behaviour concerns problems of adverse selection
(or lying) due to asymmetric information. This is well known in insurance. An insurer has
less information about the state of health of a potential client than the potential client himself. When there is a flat rate insurance premium, the insurer can expect to attract mostly
high-risk cases (e.g. old people, people already ill). Or a potential employee applying for
a job has more information about his qualities than an employer [see Akerlof, 1970]. Institutions like diplomas can lower the information problem by way of their signalling function.
Post-contractual opportunistic behaviour, also called moral hazard or cheating, involves
hidden action, and happens after the contract has been concluded. Although the notion
of moral hazard is often used in insurance theory, it can be applied more generally. The
fundamental idea of opportunistic behaviour is that people are inclined to use and/or find
opportunities for increasing their income. This rent-seeking behaviour is stimulated by
the existence of poorly defined and/or not specified property rights on characteristics of
goods.
For analytic purposes it does not make any difference whether wealth-capture happens
in an honest or dishonest way. However, opportunistic behaviour and rent-seeking are often
cases which involve what can be called “negative” co-operation between economic actors for
redistributive purposes, as opposed to “positive” co-operation for productive purposes.
As argued earlier, there can be no 100% public information (abstracting from future information). The moment that
there is no 100% public information, e.g. private property rights are established and enforced on certain information, leading
to informational asymmetry, “market failures” come into being. Private information gives an incentive to lie. However, if all
information became public immediately, the incentive to innovate or to introduce new management or distribution techniques
would be weaker. Thus, a perfectly working market gives weak incentives for innovation, because information is publicly
owned. However, it is not a public good in a dynamic world, because when someone uses the information about a new invention, the information can still be used, but its utility declines. As Heyne [1994, 183] puts it, “the most serious objection
to any full disclosure requirement is that requiring people to reveal everything they know prior to any transaction would
destroy much of the incentive to acquire costly but socially valuable information” (e.g. writers, inventors). Thus, it can be
argued that when an institution is created that discloses information immediately, transaction costs are lower, while at the same
time it gives disincentives to search for new information. In other words, private information to a certain extent stimulates
economic activity.
13
In the case of honesty there is no opportunistic behaviour. However, there still exists a motivation problem as well as
transaction costs due to the co-ordination problem and limited human capacities (like bounded rationality) and human fallibility. In the case of honesty there will also be information, negotiation and control costs, but they will become lower because the problem is more technical than psychological/sociological.
12
30
Chapter 2
When there is value in the public domain, institutions and governance structures come into
being, in order to redistribute this value. The lower the transaction costs of obtaining value
out of the public domain, the larger such an institution or governance structure becomes
(this argument returns in Chapter 6 on queuing). When “institutional governance” is inefficient and strong regulations exist, this can stimulate incentives for illegal activities. When
the causes of this rent-seeking are gone, criminal structures (e.g. gangs) are likely to survive
and to discover new opportunities of obtaining value out of the public domain.
In general, the higher the transaction costs, the larger the value in the public domain.
Consequently, there are more opportunities for rent-seeking, stronger incentives for redistributive activity and weaker incentives for productive activity.
2.4. Concluding remarks
In this chapter the tools of NIE, in particular transaction costs, incentives and institutions,
were discussed within a framework of comparative economics. The notions of transaction
costs and incentives will be used and applied in the rest of this thesis on institutional change
in Poland’s economic system since the 1970s.
Formal and informal institutions provide incentives for economic activity, which takes
place in governance structures. Transaction costs determine which type of governance structure is most efficient to solve the co-ordination problem. “Institutional governance” is needed
to enforce the rules of the game. An important role of institutions is to create a stable
framework for economic activity and to reduce uncertainty. However, uncertainty, mental
models and limited cognitive abilities help to explain the existence of inefficient institutions,
a topic to be elaborated more deeply in the next chapter. Furthermore, even when more efficient formal institutions are introduced, the effect of informal institutions acts as a brake
on the transformation process.
Values and other informal institutions are important when studying the decline of the
STE (see Chapter 4) and the economic transformation of these economies to a Market-Type
Economy (see Chapter 5). As will be argued, in the case of Poland the informal institutions supporting the socialist economic system were slowly hollowed out. The loss of belief
in the system and the ruling party led to increased opportunistic behaviour which resulted
in higher transaction costs, while incentives for productive activity weakened. However, the
system also led to, or “strengthened”, a low-trust society with a low propensity to co-operate
and values, mentality and behaviour not fit for a market economy. This caused higher
market transaction costs and difficulties with organisational adaptation and the creation of
new governance structures during the transformation to a market-oriented economy. When
transformation proceeds slowly, and there is great uncertainty about the future development of institutions accompanied by a long economic recession, this can adversely influence the already “deformed” values from the socialist times, enforcing an institutional disequilibrium. As was argued, economic actors fall back on their mental models when uncertainty exists. This in turn negatively influences economic activity, due to higher transaction costs
and adverse reactions to new market institutions.
New Institutional Economics as a Framework for Analysis of Transformation…
31
In the privatisation process the value in the public domain is very likely to increase.
Not only because many property rights are unspecified or unclearly defined, but also because during exchange some attributes of property are always accessible to rent-seekers.
The problem of rent-seeking is likely to increase also due to high enforcement costs, as
many legal institutions and “institutional governance” are not fully established yet. More
wealth-maximising behaviour will be directed towards redistributive activity, less to productive
activity. Thus, weakening property rights under socialism contributed to economic stagnation,
and weakened even more due to the privatisation process and the uncertainty accompanying
this process. This can (partly) explain the fall in output at the beginning of the 1990s. The
moment property rights (and other institutions) strengthen, the value in the public domain
decreases, which lowers incentives for rent-seeking and directs incentives towards productive
economic activity.
33
Chapter 3
TRANSACTION COSTS,
INSTITUTIONS
AND ECONOMIC PERFORMANCE
3.1. Introduction
In this chapter the theoretical framework of New Institutional Economics (NIE) as presented in Chapter 2 is further developed and deepened towards a more specific theoretical
framework for analysing processes of economic transformation from a socialist to a market
economy in Poland within the context of the influence of transaction costs and incentives on
economic performance.
First, the importance of institutions and transaction costs for economic performance is
elaborated (Section 3.2.). Then incentives and transaction costs in strong and weak economic
systems are discussed (Section 3.3.). This distinction is important for comparing the performance of different economic systems (Section 3.4.). Afterwards, three factors that lower
transaction costs are discussed – market competition and law of contract, social capital and
physical infrastructure, transport and logistics (Section 3.5). Then the question of why inefficient institutions may survive for a long time and why it is difficult to create efficient institutions is addressed (Section 3.6.). In other words, why is history not a story of “increasing
wealth of nations?” Why can societies also become impoverished or stagnate? In the next
section the question of when transformation is over is addressed (Section 3.7.). Finally, some
theoretical implications for the process of institutional change in Poland are summarised
(Section 3.8.). An important finding is that the development of institutions determines the
level of transaction costs. The level of transaction costs in turn determines which form of
governance is most efficient for solving the allocation problem. In the process of rapid
institutional change towards a market economy it is likely that transaction costs increase.
However, on the one hand, incentives for economic activity are likely to strengthen as a result of economic liberalisation. On the other hand, incentives are adversely influenced by,
among other things, uncertainty, mentality developed under the old system and high transaction costs.
34
Chapter 3
3.2. Transaction costs, institutions and economic
performance 1
Douglas North [1990, 1994] (following Adam Smith) considers an efficient solution of the
co-ordination problem, the way in which a society’s wishes are reconciled with scarce resources,
as the most important factor of growth of welfare. The process can be described as follows.
• In the long-run the advantage of further division of labour, gains from trade, and technical innovation leads to increasing returns to scale.
• When the scale of production increases (as well as the scope of the market2) the number of complex transactions also increases, leading to increasing transaction costs and
greater individual uncertainty.
• When production is organised in a technically efficient way, a large part of wealth-maximising behaviour is used for improvement of production techniques and minimisation of
transaction costs.
Pejovich [1995, 88–90] gives three major reasons why transaction costs in a growing economy increase: the replacement of personal exchange (repeated dealings) by impersonal
exchange; capital intensive production techniques stimulate growth in the size of firms, leading
to increasing managerial transaction costs; and gains from trade can lead to conflicting interpretations about the rules of the game, the institutional arrangement, and the distribution of
income leading to increased spending on “defining and enforcing the rules of the game”.
The first reason concerns the changes connected with economic growth that go together
with an expanding market. Suppose that in a traditional society people only trade with other
people they have known for a long time. In such a case the costs of searching for clients are
quite low, and so are negotiation and control costs. In the case of repeated transactions in
a traditional society, the consequences of cheating can be major, e.g. the cost of not paying
can be becoming an outcast for the rest of your life, or losing your good name. With an
expanding market, due to division of labour and gains from trade, this repeated trading is
replaced by impersonal exchange. The more the market expands, the longer the chain of
unknown exchange partners.
The increase in the working of such an expanding market’s invisible hand is not a free
ride. Search costs in the form of searching for clients and new markets increases. As exchange
becomes impersonal, negotiation costs and control costs also increase. Control costs increase
because, inter alia, if you do not know someone, it is more difficult to foresee whether he
will cheat or not. For the contract partner the incentive to cheat is bigger when he does not
know you and the exchange is not repeated.
The importance of transaction costs in economic growth is described in Figure 3.1.
A stable institutional framework is important for reducing market transaction costs and uncertainty. A market reduces the costs of searching for clients, a reputation reduces control
costs, an efficient legal system reduces enforcement costs. However, with increasing trade,
the level of transaction costs increases, as existing institutions and governance structures can
handle efficiently only a certain number of transactions. Institutions may be suitable for
a certain production- and allocation structure. At a certain moment a limit is reached where
This section is partly based on Platje [2001].
In an STE the task of the planner would increase. When the planner cannot solve the co-ordination problem efficiently, the size of the “informal market” is likely to increase.
1
2
35
Transaction Costs, Institutions and Economic Performance
the rules of the game that first stimulated the making of transactions now hamper the process, such as legal rules that do not take into account new technological developments, or
institutional arrangements that do not suit such new developments. More friction comes
into the system, making institutional change necessary in order to facilitate trade and economic growth. If this does not happen, transaction costs can become so high that economic
stagnation takes place. As discussed later in this chapter, institutional change is costly and
is very often not in the interest of all the parties in the economy. Inefficient institutions,
which are difficult to change, can be the consequence.
Institutional
framework
facilitating
economic
growth
Economic
growth
More
transactions
Higher
(marginal)
transaction
costs
Existing
institutions
and
governance
only fit
to deal
efficiently
with
a certain
number of
transactions
Change in
institutions
and
governance
structures
needed
to lower
(marginal)
transaction
costs
Figure 3.1. Relationship between institutions, transaction costs and economic growth.
Following North, the relationship between institutions, transaction costs and economic
performance can be put in slightly different words. A two-sided problem can be distinguished:
1. The problem of a technically efficient set-up of production (static and dynamic efficiency). This directs the searching behaviour of individuals in such a way that they really aim
for technical efficiency.
2. The problem of a socially efficient set-up of production. When transaction costs decrease,
technical economies of scale are obtainable.
The idea is that the social organisation is set up in such a way, that approximations to
static and dynamic efficiency are achieved. Of course there will be space for strategic or opportunistic behaviour. The main factor is not the transaction costs, but the cost of loss of
technical efficiency. North [1994, 359] argues that when economic actors aim for technical
efficiency, even when they initially use wrong models, they will change these models due to
competition of the market.
Another question is what incentives exist under different governance structures in order
to lower transaction costs. The more competition, the stronger the incentives to lower transaction costs. In a shortage economy customers will come anyway, while the market transaction
costs for firms/planner are low. This provides weak incentives to lower the transaction costs of
allocation. Also, under market competition there is an incentive for a firm to reduce costs, because gains are felt directly. In other words, which institutional environment reduces transaction costs? It is possible to imagine an organisation where everyone aims at improving
36
Chapter 3
technical efficiency, but where the advantages immediately leak away in transaction costs.3
In other words, striving for lower transaction costs can lead to a design of efficient institutions, while high transaction costs can lead to inefficient institutions and inefficient governance structures for concluding transactions [Groenewegen et al., 1997, 67].
3.3. Strong and weak economic systems
Traditionally, the property rights order (public vs. private property) and the co-ordination
mechanism (plan vs. market) are considered to be the two most important elements of economic systems. Table 3.1. presents a classification of economic systems. State socialism is
characterised by planning and public property, while the market and private property are
characteristics of capitalism.4
Table 3.1. A classification of economic systems.
Private property
Public property
Market
Capitalism
Market socialism
Plan
Excessively regulated
“mixed economy”
State socialism
Source: Poznanski, 2000, 209.
Poznanski [2000] argues that some connections are “natural” and some are not. Kornai
argues that market and private property, as well as plan and state property have “strong”
connections, while in market socialism and the excessively regulated „mixed economy” the
connections are “weak”. This is important when analysing the decline of state socialism and
transaction costs and incentives in processes of institutional change.
Poznanski [1996] broadens the simple typology given above. He argues that each co-ordination mechanism and property rights order can take two forms: “normal” or “pathological”.
When considering public property, this takes the „normal” or „strong” form when it is enforced,
and the “pathological” or “weak” form when there is large value in the public domain, leaving
much room for rent-seeking. Thus, according to this view, a market with private property is
not necessarily a “strong” economic system when the enforcement mechanism fails and control
costs are high. As each of the property rights order and co-ordination mechanism has its
“weak” and “strong” form, not four but 16 types of economic systems can be distinguished.
3
It can be argued that this was more or less the case with slavery. Suppose the owners of the slaves aim at technical efficiency, and appropriate value by paying the slave only a fraction of his marginal product (in order to survive). The slave has
a weaker incentive to produce efficiently than when he earns the entire marginal product. The relative advantage of slavery
is reduced due to the existence of transaction costs, mainly as a result of different agency problems and specific problems
connected with slavery. This concerns costs of controlling consumption behaviour that collides with productivity aims (e.g.
alcoholism), costs of controlling whether a slave is really ill and that he does not injure himself on purpose, costs of preventing the damage of productive assets on purpose, and control costs of with preventing an uprising. Although pain incentives
may increase the productivity of slave labour, control costs can wipe out any of these productive gains [Eggerstsson, 1990,
204–5; 208–9].
4
Of course in every economy there are more types of property rights than private and public (such as co-operatives, and
hybrid forms) and there are other co-ordination mechanisms at work like tradition and the family (which are still important in
developing countries). However, in former STEs and in Market-Type Economies (MTEs) the first of the mentioned property
right orders and co-ordination mechanisms are the basic forms and make comparison and analysis of change possible.
Transaction Costs, Institutions and Economic Performance
37
Generally speaking, when market institutions are developed and enforced, this leads to
lower market transaction costs. In this case the market becomes more attractive compared
with planning. As markets are supposed to provide stronger incentives for economic activity and efficiency than hierarchies, capitalism provides the strongest incentives. Regulation
weakens incentives and creates more opportunities for rent-seeking. Incentives in market
socialism are weaker than in capitalism, as public property is supposed to provide weaker
incentives than private property. Incentives in the planned economy can be strong when
there is a small group with a strong interest in good economic performance (Olson’s “encompassing interest” [Olson, 1992], discussed in Chapter 4).
Each economic system has its own rules of the game under which it (theoretically) functions. In a “normal” system enforcement of those rules is not much of a problem. The acceptation of the system is important in relation to the way the system functions, which in
turn reinforces acceptation. Thus, in capitalism an adequate and accepted property rights
order is indispensable. Enforcement and protection of this property rights order facilitates
enterprise. As was shown in Table 1.1. (Chapter 1), strong incentives and a low level of
transaction costs positively influence economic performance. However, when dirty tricks
with bookkeeping is possible, like in the case of the American company Enron that went
bankrupt in 2002, the average investor cannot trust the information that is provided anymore. Then we may come close to the “pathological” case. Here uncertainty and transaction
costs increase due to, among other things, informational problems, the demand for more
safeguards to insure against opportunistic behaviour and enforcement problems.
In the case that incentives remain strong but transaction costs increase, the effect on
economic performance becomes unclear. However, acceptation of the existing system can
fall, leading to an institutional disequilibrium. When there is large value in the public domain in such a situation, wealth maximising individuals aim their efforts at redistributive
activities (rent-seeking) rather than at productive activity, weakening the incentives for economic activity. Such a situation of weak incentives and high transaction costs negatively influence economic performance.
3.4. Transaction costs in Soviet-Type Economies
and Market-Type Economies: a comparison 5
In this section an attempt is made to compare transaction costs in Soviet-Type Economies
(STEs) and Market-Type Economies (MTEs).6 Although the market mechanism fails on
several points, which is an argument for the case of planning or government intervention, one
of its strengths is the price mechanism that lowers transaction costs. Figure 3.2. illustrates the
increasing transaction costs in a growing economy and the typically higher transaction costs
in an STE (due to inherent inflexibility and adaptive inefficiency) compared to a MTE. The
MPC (marginal production costs) curve is downward sloping due to economies of scale. The
MTC (marginal transaction costs) curve is upward sloping because with increasing production more complex transactions take place leading to diseconomies of scale.7 First the MC
This section is partly based on Platje [2001].
The factors behind the development of transaction costs in MTEs are not discussed in detail here. For transaction cost
lowering institutions in MTEs please refer to Section 3.5.
7
It is argued here that transaction costs show diseconomies of scale. However, it can also be argued that up to a certain
level of output economies of scale exist, while after that point diseconomies of scale set in.
5
6
38
Chapter 3
(marginal costs = MPC + MTC) curve shows a declining trend. However, at a certain point
exchange becomes so complex, that the economies of scale in production are more than offset
by the increasing transaction costs. While the economy was growing, institutional change took
place in MTEs, causing MTC to shift to the right to MTC’ and MC to shift downwards to MC’.
As a consequence output increased from Q to Q’. STEs did not show such adaptive efficiency,
causing the marginal transaction costs to increase, leading to lower output and less possibilities
of taking advantage of economies of scale in the production process compared with MTEs.
Neal and Barbezat [1998, 56] argue that “[t]he primary factor in the growth of European production and trade has been technological progress, which has created new goods not
even imagined in 1958, reduced the cost of producing other goods that were available in the
United States but not yet in Europe, and reduced the business transaction costs, including
the shipping charges, and costs of inventory control and marketing.” Economic integration
and an increase in international trade were important factors stimulating economies of scale,
due to specialisation and the spread of innovations throughout MTEs.
An interesting argument is given by Hazeu [2000, 47–8]. The development of market institutions reduces market transaction costs, making market-type solutions with respect to
governance more attractive. He mentions fast technological development in information
and communication technology as examples of sources of reduction of market transaction
costs, because these new technologies reduce the transaction costs of measuring external effects, in turn reducing the problem of market failure. Furthermore, this technological development makes markets more transparent, reducing information costs.8, 9
Figure 3.2. Transaction costs in Soviet-Type Economies and Market-Type Economies. 10
This is connected with logistics. Hazeu [2000, 49] gives an example of the barcode, which lowers transaction costs for
consumer and producer. When a product is sold quickly, new supplies can be arranged fast so that consumers do not have
to buy a second-best product, which would lead to lower utility. Furthermore, the company can manage stocks more efficiently and lower costs. In general, the development of information and communication technology makes new logistic solutions
possible, leading to a reduction in (marginal) market transaction costs.
9
Although transaction costs and institutions are important determinants of economic performance, they are surely not
the only ones. North and Thomas [1973] argue that efficient institutions stimulating entrepreneurship and protecting private property are the most important explanatory variables of the “economic miracle” in the Netherlands in the 17th century.
However, other factors like natural resources (e.g. water, peat), human and physical capital, external factors (e.g. war with
Spain, Treaty of Westphalen), infrastructure, geography and level of urbanisation are also important [see de Vries, 1997].
10
This figure is based on Henk W. Plasmeijer’s lecture synopsis for the course “An Introduction to Institutional Economics” given at Groningen University during the academic year 1994–95.
8
Transaction Costs, Institutions and Economic Performance
39
While the (marginal) market transaction costs declined due to the integration process in
Europe and the development of market institutions (shift to the right of the MTC curve), in
STEs planning transaction costs increased due to “failed” reforms and an increase in the
scale of the planning problem, as well as the principal-agent problem. Although there were
economies of scale in STEs, innovation, integration and specialisation (trade) lagged behind. This is discussed in more detail in Chapter 4.
When the economy was rather undeveloped, the institutions of STEs were effective for
fast development of productive forces. Because the scale of production did not cause many
complexities, economies of scale could be obtained.11 The institutional structure and the
property rights order brought the “structural production possibility frontier” (the set of possible organisations that shape the structure of property rights minimising costs and maximising output) close to the “technical production possibility frontier” (the stock of knowledge and endowments that determine the upper limits of productivity and output) and
caused the latter to expand.
Solving the co-ordination problem by way of planning became more difficult as a result
of an increasing scale of production and the use of more advanced technology. Due to increased problems of planning, the transaction costs of using technology increased. An example is the huge barriers created by high transaction costs and disincentives that existed for
applying new technology developed for military purposes in the consumption and distribution sector. MTEs were more innovative in a technological sense, making the “technological gap” compared to STEs bigger. The technological development in MTEs, stimulated by
the institutional environment, made institutional change necessary. This was more successful
than in STEs, of which the distribution sector is a good example.
Although technological change in STEs proceeded at a lower pace and the hierarchical
governance structures provided weaker incentives for finding transaction cost lowering solutions compared to the more horizontal governance structures in MTEs, institutional change
took place by way of reforms. However, these reforms were hampered by internal factors.
The most important obstacle may have been the monopoly of the Communist Party on power
[Lavigne, 1999 (b)]. As a consequence of these failed reforms, transaction costs increased.
The existing shortages and the consequent growth of the parallel economy undermined the
effectiveness of planning 12 and led to higher transaction costs in the distribution sector.13
Changing the rules of the game, with the structure of property rights as the most important one, was necessary to allow the “structural production possibility frontier” and the
Planning can be quite effective in generating investment and fast growth in key sectors (e.g. heavy industry) that are
the basis of further economic development. In Western Europe just after World War II, where the market had a bad name
and market institutions were not well developed, government planning and intervention had a large impact. “There was no
functioning private sector to which to turn in order to mobilize the investment, capital goods, and skills necessary for reconstruction and recovery; international trade and payments had been disrupted. Governments would have to fill the vacuum
and take charge. They would be the organizers and champions of recovery. There was nothing else” [Yergin and Stanislaw,
1998, 21].
12
Pejovich [1995, 112] argues that a planner in fact has an interest in keeping shortages. If shortages disappear, and the
co-ordination mechanism works without many problems, a planner loses his distribution function, a function which gives him
economic power. An implication for transformation is that a bureaucrat (planner) loses economic power, and in order to facilitate institutional change he can be given an interest in the new system. This might already have happened under the old
system, where many of them had started their own business.
13
Paradoxically, the informal economy was on the one hand a “lubricant” of the planned economy, stepping in where
there were planning failures. On the other hand, it undermined the system of central planning. The institutional environment
was hostile with respect to markets (in most cases markets were illegal) and there was a lack of institutions that facilitated
market transactions (e.g. no legal system to enforce market contracts). However, trade existed because of substantial gains from
trade and the fact that some forms of trade, in particular trade “that can be consummated on the spot”, were self-enforcing,
because the gains of the parties involved was large enough to let transactions take place, despite high transaction costs
[Olson, 1992, 62].
11
40
Chapter 3
“technical production possibility frontier” to expand simultaneously and to lower transaction costs. The co-ordination problem of equilibrating demand and supply increased. In Poland, shortages intensified at the end of the 1970s, becoming a bigger problem in the 1980s,
being very intensive in 1981, and staying, until at least 1987, at a far greater level than in the
1970s [Hockuba, 1995, 30]. The incentive structure was negatively influenced. There was too
little innovation due to the structure of property rights, labour morale declined and control
costs increased (e.g. army, police, the bureaucratic apparatus).
Thus, following the classification of Table 1.1., a situation came into being where incentives were weak and transaction costs high. This negatively influenced economic performance.
In many MTEs incentives were stronger and transaction costs lower. This helps to explain
the better economic performance of MTEs. It can be concluded that when the number of
transactions increases and transactions become more complex, marginal transaction costs in
a hierarchical governance structure increase rapidly. As a consequence a planned economy,
other things equal, faces higher transaction costs compared to a more decentralised economic
system such as a market economy, and is likely to show worse economic performance in the
long-run.
3.5. Factors that lower transaction costs
Many factors exist that lower transaction costs such as competitive markets and well-defined
property rights, social capital, signalling, economic freedom, “hardware” in the form of the
physical infrastructure and information systems, improvements at the level of governance
(e.g. logistics and organisational improvement) and efficient “institutional governance” in the
form of an efficiently functioning judicial system and properly functioning public administration. This section discusses some factors that lower transaction costs, and in this way stimulate economic activity, which are applied in the rest of this thesis. First, the formal institution
of market competition and law of contract is discussed. Then the informal institutions of social capital, and finally physical infrastructure, transport and logistics are elaborated.
3.5.1. Market competition and law of contract
The joint functioning of market competition and law of contract reduces transaction costs
[Pejovich, 1995, 85–6]. First of all, standardised contracts reduce negotiation costs. With repeated exchange, the conditions for exchange do not always have to be re-negotiated. Furthermore, under conditions of competition, suppliers have a strong incentive to offer contractual terms that satisfy consumer preferences (at least for the average consumer). Secondly, the information costs connected with the problem of asymmetric information can be reduced by way of, inter alia, warranties, guarantees and cash-refund in cases of bad quality
[see Akerlof, 1970]. In addition to this, a law of contract that can be easily enforced (efficient
“institutional governance”) lowers negotiation and control costs, because contract partners
are expected to keep their promises rather than to engage in opportunistic behaviour.
Thirdly, in most cases, law of contract can enhance efficiency by providing the contract
Transaction Costs, Institutions and Economic Performance
41
partners with the opportunity of fulfilling the contract or compensating for damages due to
non-fulfilment of the contract.
When transaction costs of using the market are lower, ceteris paribus, trade is likely to increase, and resources are likely to be allocated to the highest valued use. A properly functioning market stimulates competition. Competition ensures that repeated failure to fulfil contractual obligations means losing business to competitors. Thus, competition provides incentives to do what is promised and to lower control costs. A good reputation gives a competitive advantage in the sense that it lowers information costs because consumers tend to trust
that the quality of the product or service is good. Reputation also lowers negotiation costs
and control costs. People trust that the seller will not engage in opportunistic behaviour and
keep his contractual obligation. This is related to the notion of social capital, discussed below. However, building a reputation is costly. Besides, in the process of selecting traders with
a good reputation, resources have to be spent on providing safeguards against opportunistic
behaviour (e.g. credit bureaux and security deposits). The law of contract facilitates the selection of reputable traders, and thus in this sense also reduces transaction costs.
Another transaction-cost lowering feature of the market is that private property, competition and economic freedom facilitate the creation of new exchange opportunities, while
there is a learning-effect of repeated dealing. Pejovich argues that private property is also
a transaction-cost reducing institution, by creating incentives for economic actors (buyers
and sellers) who perceive benefit to reduce transaction costs.
Furthermore, competition in the market is knowledge creating. It stimulates innovation,
which besides new products, new ingredients and new production methods, also means
transaction cost decreasing devices and methods. The profit motive is important for transaction cost decreasing innovations. Bar codes, computer systems and logistic information
systems lower the cost of obtaining information about consumer preferences.14 The fundamental advantage of markets is that they lower transaction costs by putting a value on
goods/services, while prices provide valuable information.
3.5.2. Social capital
Social capital is an informal institution that lowers transaction costs. It consists of a set of
rules, which in sociological literature is typified as “norms and values”. In this section the importance of social capital in the form of trust for economic performance is discussed [see
Casson, 1993; Putnam, 1993]. Trust can be defined at the individual and the social level. At
the individual level, trust is important in an economic transaction as it concerns the “mutual
confidence among parties to an economic transaction” [Raiser, 1999, 3; see also Paldom and
Tinggaard Svendsen, 2000, 342]. At the social level trust has been defined as “social capital
facilitating the provision of collective goods” [Raiser, 1999, 3]. In other words, it is “the capability that arises from the prevalence of trust in a society or in certain parts of it” [Fukuyama, 1996, 26]. From this point of view, trust lowers problems with the introduction of formal institutions, which have features of a public good. This is discussed later in this chapter.
Zucker [1986, see also Raiser, 1999, 4–5 and Raiser et al., 2001, 2–3] distinguishes
three types of trust – ascribed trust, process-based trust and extended (generalised) trust.
14
Although such information systems lower transaction costs, the danger exists that they will be abused. They not only
lower the transaction costs of trade, but also the transaction costs of criminal transactions.
42
Chapter 3
These types of trust and their influence on transaction costs and adaptive efficiency, the
ability to change governance structures when (relative) transaction costs change as a consequence of technological and/or institutional development, are presented in Table 3.2.
Following Raiser, social capital in the form of trust can be formal and informal. Informal social capital consists of ascribed trust and process-based trust. Ascribed trust concerns
transactions between individuals having family ties or being close friends. Process-based
trust is trust which is built-up in repeated transactions, and is a form of transaction-specific
investment. Trust helps to build up a reputation, which has a signalling function.
Informal social capital is rather a private good, but also has features of a public good. It is
a private good in the sense that it is an investment in social networks by individuals [Bourdieu,
1993]. When trust exists, information, negotiation and control costs are lower. As the characteristics of the contract partner are known, information costs are very low, and know-how transfer is easier. Furthermore, when there is trust that the partner will not lie or cheat, no special
contractual safeguards are required. Monitoring costs are low, as contracts are rather “self-enforcing”, because of the fear of loss of reputation, which is a business-asset. Trust in workers
can be motivation enhancing, while an organisation can be organised more flexibly and responsibilities can be transferred to lower levels, due to the reduction of the agency problem.
Table 3.2. Three different types of trust.
Type of trust
Definition
Influence on transaction costs
and adaptive efficiency
Informal social capital –
Ascribed trust.
Trust with private and public
good characteristics. Between
family members (kinship), close
friends.
Lowers costs of transactions between
individuals.
Informal social capital –
Process-based trust.
Formal social capital –
Generalised or extended
trust; confidence and
trust in formal
institutions and
“institutional
governance”.
Trust with private and public
good characteristics. Between
individuals who have repeatedly
concluded transactions with
each other, not being loyal to
a specific group.
Trust as a public good,
facilitating transactions with
unknown or little known
individuals or organisations.
This type of trust can be
strengthened by common
religious values, belonging to
the same social/cultural group,
etc.
Relational capital – inefficient when
restricting outside options, hampering
innovation and change in governance
structures. Can lead to corruption, etc.
Unclear effect on economic
performance.
Extended trust facilitates efficient
third-party enforcement. Lowers
transaction costs.
Efficient third-party enforcement
stimulates extended trust.
Supports institutional equilibrium.
Positive effect on adaptive efficiency
and economic performance.
Source: adapted from Raiser [1999] and Raiser et al. [2001].
Transaction Costs, Institutions and Economic Performance
43
A lack of trust creates barriers to co-operation. This has an influence at all levels of social
and economic life. Not only market transaction costs increase and adaptive efficiency deteriorates, but within organisations agency problems increase (increasing managerial transaction
costs) and political coalitions become more difficult (increasing political transaction costs).
This makes it more difficult for the government to step in where market transaction costs
are high.
However, ascribed and process-based trust can lead to exclusion of individuals who are not
a “member of the club”, in other words, a low propensity to co-operate. This hampers innovation, adaptive efficiency and expansion of governance structures. Also, family firms are likely
to be closed to non-family members. As a consequence, small firms are likely to prevail. In
other words, there is a lack of spontaneous sociability, “the capacity to form new associations
and to cooperate with them within the terms of reference they establish” [Fukuyama, 1996, 27].
In former STEs many people relied on family and close friends, as participating in
broader networks was risky because of the suppressive system. At the “top of society” there
was the closed nomenklatura network. These networks were not open to outsiders, while often
being non-transparent. As Raiser et al. [2001] argue, when a certain group or certain people
have “connections” with public officials, this can lead to corruption and clientelism, and undermine trust in public institutions. “Otherwise admirable norms of behaviour can, under
some conditions, prove costly for economic efficiency and development” [Rose-Ackerman,
1998, 303]. This may also lead to situations where people in certain positions assign positions to people they trust (e.g. friends). Trust is important here, because people tend to cover each other in connection with corrupt deals [Rose Ackerman, 1998, 305].
Informal social capital also has public good features. At the local level it facilitates collective action and the provision of public goods in small communities [Coleman, 1998]. All in
all, informal social capital can have positive and negative effects on economic performance,
making the total effect uncertain.
Formal social capital concerns extended trust and confidence and trust in formal institutions and “institutional governance”. This type of trust supports an institutional equilibrium, hence reduces uncertainty and leads to acceptance of formal rules of the game, reducing the transaction costs from court cases. In other words, social capital can make up for
weak or missing formal institutions, such as missing property rights, and lessen problems
with incomplete contracts and rent-seeking. When there is a strong value of mine and thine,
people do not have to care so much about leaving the door of their house or car open.
Furthermore, when equity is promoted, this stimulates social cohesion and reduction of the
cost of social antagonism.
Extended trust lowers control costs, as it facilitates the enforcement task of “institutional
governance”. Only relying on formal procedures for contract enforcement can be very costly.
On the other hand, as Raiser et al. [2001] argue, efficient “institutional governance” supports
the building of extended trust. Process-based trust is a necessary, but not a sufficient condition for extended trust to develop. Experience with “institutional governance” is in fact also
a process, thus the creation of trust in public institutions is to a certain extent “process-based”.
When “institutional governance” is efficient and credible, this lowers the incentives for
opportunistic behaviour and reduces transaction costs. Extended trust and propensity
44
Chapter 3
to co-operate can improve adaptive efficiency, as networks are more open to outsiders.
Governance structures can react faster to technological and institutional changes, and the
introduction of new transaction cost minimising solutions is facilitated. Overall, formal
social capital positively influences economic performance.
3.5.3. Physical infrastructure, transport and logistics
Transport and physical infrastructure are important factors stimulating economic activity. An
efficient institutional environment, i.e. a proper economic and legal infrastructure, will not
improve economic performance without spatial and physical infrastructure. Infrastructure
includes not only roads, railways and telecommunication, but also, inter alia, warehouses,
gasoline stations, repair shops, public utilities, fire-brigades and hospitals. Transport can be
seen as a process of or system for “carrying passengers or goods from one place to another”
[Longman, 1995, 1538].
As Adam Smith already recognised in Chapter 3 of his Wealth of Nations [1776], transport and infrastructure make the spatial distribution of economic activity possible, increase
potential output in an economy by lowering factor costs, increase factor mobility, and enable division of labour and obtaining gains from trade. Transport and a developed physical
infrastructure stimulate competition by expanding markets and indirectly stimulate the
search for transaction cost lowering solutions. Furthermore, they strengthen incentives for
inefficient firms to restructure and look for new markets or to leave the market [see Boehme
et al., 1998, 17; Aghion and Schankerman, 1999].
Investment in infrastructure can lead to lower transaction costs. Investment in telecommunication lowers the cost of transferring information. The rapid development of computer hardware and software makes, besides faster communication, large cost savings possible
on information processing. This may also lead to lower transportation costs, as in the case
of a pizza deliverer using a computerised system for planning the most efficient route for
delivering pizzas. The development of physical infrastructure also increases the distribution
range of information, like newspapers and books. However, these effects are stronger in the
case of the Internet and the increased possibilities of information transfer created by telecommunication, electricity grids and cable networks.15
Transport and infrastructure stimulate regional development, and can have positive
spill-over effects on other regions and other sectors. When transport and infrastructure are
well developed in one region, this may attract industries, which in turn increases the demand
for specialist transport services and infrastructure. This is rather an example of external economies of scale. However, it is possible that some regions remain behind. An obvious example is the city-countryside contradiction. The development of physical infrastructure, information technology and information systems enhance economic activity and lower marginal
transaction costs. But when a region or country “misses the boat”, due to their comparative
disadvantage, they lag even more behind – increasing the difference between rich and poor
within and between countries.16 In this case, a kind of path-dependency exists, as it is difficult and costly to change infrastructure.
15
Although this physical infrastructure increases the availability and quality of information, there are problems with selecting and finding the necessary information in the enormous load of information available and problems with the reliability of information.
16
This argument is developed by Castells [1996] with respect to the rapid development of information technology, where
the danger exists that large parts of the population within countries, as well as whole countries (e.g. in Africa) will lag behind
economically, while due to a stronger division within society “social exclusion” of a large group is quite possible.
Transaction Costs, Institutions and Economic Performance
45
Logistics takes place at the level of governance, and is strongly related to transaction
cost economics. Although in literature many definitions of logistics exist emphasising the
importance of different details, only a broad definition is used here to emphasise the importance of logistics in lowering transaction costs.
Logistics is a broader concept than pure transport of goods from one place to another.
It consists of many activities auxiliary to the production and flow of goods and services in the
logistic chain – from the supplier of raw materials to the consumer of final products. Logistics heavily relies on hardware (see Figure 2.1., Chapter 2) in the form of physical infrastructure such as roads, railroads, reloading stations, warehouses, information systems and
telecommunication systems. Logistics concerns “… the process of planning, co-ordination
and control of flows of (raw) materials, activities connected with their storage, activities connected with the handling of goods, packaging, warehousing and the flow of final goods and
the information connected with them from the point of production to the final consumer –
with the aim of lowering total costs, while keeping a sufficient level of consumer service”
[Rydzkowski and Wojewódzka, 1997, 296].17
Although transaction costs play a significant role in logistics, also transport costs, production costs and expenditure on fixed capital are important. A conceptual separation between transaction costs and transport costs is useful for analytical purposes because transaction costs concern costs of exchange of goods and services, while transport costs are involved in the movement of goods and services from one place to another. It was mentioned
in Chapter 2 that a sharp distinction between the two is impossible and even unnecessary,
as such a “definition struggle” confuses important matters. An example is internal transport
that can be counted as managerial transaction costs, while when it concerns a transaction
between two separate firms, we talk about transport costs. When an aim of logistics is to
lower costs while keeping consumer services at a sufficient level, all costs are taken into consideration. Suppose a firm considers outsourcing. This is attractive when the cost of buying
a good or service via the market is smaller that producing it within the firm. In other words,
when the costs of production plus the managerial transaction costs are smaller than the sum
of the market price of the product, transport costs and market transaction costs.
The importance of logistics for lowering transaction costs is discussed here by way of
analysing the logistic chain. The logistic chain can be divided into physical supply, production logistics and physical distribution (distribution logistics) [Van Goor et al., 1998, 5–6].
Physical supply includes the flow of raw materials and intermediate products from supplier to producer. This part of the logistic chain mainly involves market transaction costs.
Production logistics embraces all activities involved in “the effective and efficient flow of raw
materials and intermediate goods through the production process, as well as activities connected with an optimal utilisation of the production apparatus” [Van Goor et al., 1998, 6]. As
production logistics takes place within the firm, activities such as storing, internal transport,
purchase, stock management, production planning and handling of materials [Van Goor
et al., 1998, 6] can be counted as managerial transaction costs. When the final product
has been produced, physical distribution, the management and control of the flow of final
products from the end of the production process to the final consumer, comes into play.
This process, to a large degree, consists of market transaction costs.
17
Rydzkowski and Wojewódzka’s definition of logistics is based on the definition given by by the Council of Logistic Management, Oakbrook, USA, 1985.
46
Chapter 3
In order to obtain a more detailed picture of the relation between transaction costs and
logistics, a model of an industrial column as presented in Table 3.3. is analysed. Three different flows can be distinguished: a flow of goods, a flow of information and a flow of money.
The flow of information certainly consists of transaction costs – information costs. The flow
of money consists of money and monetary institutions and governance structures facilitating
trade by lowering the transaction costs of barter trade. In both flows transaction costs that
arise as a result of spending resources on safeguards because of opportunistic behaviour
can be found. The flow of goods contains production costs, transport costs and transaction
costs. Production costs are normally significant from the raw material producer to the final
product. Transport costs concern the moving of goods between firms. Transaction costs are
incurred at the level of the firm (managerial transaction costs) and when transactions take
place between firms (market transaction costs). Factors such as trust and propensity to
co-operate are factors lowering transaction costs in all three flows, while facilitating the
creation of new governance structures. In principle, the use of logistics lowers marginal
transaction costs. But also more information may be necessary (higher transaction costs) for
faster and/or cheaper transport (lower transport costs). This pays off, as long as the increase
in (marginal) transaction costs is smaller than the decrease in (marginal) transport costs.
Table 3.3. An industrial column.
Supplier
Flow of goods
(Raw materials and
intermediate products)
Producer
(Intermediate
products)
(Final products)
Central warehouse
Wholesaler
Retail trader
Consumer
Source: van Goor et al., 1998, 7.
Flow of information
Flow of money
Transaction Costs, Institutions and Economic Performance
47
Distribution from a central warehouse to the final consumer mainly involves transaction costs. Wholesalers and retail traders are institutions that lower transaction costs by
storing and distributing goods in the sense that the consumer does not have to walk or ride
around so much to find the product he wants. On the other hand, this leads to an increase
in the cost of storage. From a logistic viewpoint, such wholesalers and retail traders create value added by transformation/production of form, place and time [Van Goor et al.,
1998, 8]. In general, whether we talk about transport, production or transaction costs often
depends on the product and on the stage in the logistic chain. Transformation of place involves transport costs as it is connected with transport and the relocation of goods. Transformation of time involves the storage of goods until they are fit for consumption (e.g. wine,
whiskey, cheese) or until there is consumer demand (e.g. Christmas presents, Christmas
trees). In the first case storage involves production costs. In the second case it involves
transaction costs that reduce the transaction costs of reacting to/predicting demand or
when the transaction costs of buying via the market are high (e.g. unreliable supply). In this
case storage pays off until marginal managerial transaction costs are equal to marginal
market transaction costs.
The effect of developing efficient logistic solutions is similar to the effect of an efficient
institutional framework, as presented in Figure 3.1. (Section 3.2.). Logistic solutions that
lower transaction costs, ceteris paribus, lead to an increase in economic transactions. This, in
turn, leads to higher marginal transaction costs. At such a moment more advanced logistics
solutions are needed in order to lower these transaction costs. This involves the introduction of new hardware such as Automatic Equipment Identification (AEI), Global Positioning Systems (GPS), Intelligent Transport Systems (ITS), Electronic Data Interchange
(EDI) and telecommunication equipment. Such hardware not only lowers transaction costs,
but also creates the need for and facilitates the creation of new governance structures.
With the development of logistic solutions and co-operation within networks, flows of
goods and flows of information become more and more interconnected. Especially when
many organisations and many modes of transport are involved, new ways of co-ordination
are required. Three major directions can be distinguished [OECD, 1996, 10]. The first direction is lowering information costs and improving the quality of information, in order to
improve operational and management efficiency. This can be achieved by the use of source
data acquisition systems such as AEI, GPS or specific components of ITS for tracking or
tracing vehicles and/or shipments.
The second direction concerns the standardisation of data processing and collection,
which reduces problems of asymmetric information and high information costs when co-ordinating logistic processes between firms. This involves the creation of networks and the use
of EDI, “the inter-organisational, computer-to-computer exchange of business information
through some standard machine-processable format” [OECD, 1996, 93]. Suppose a firm, say
a large supermarket, feels the need to reduce the costs of storage, stock management and
purchase when turnover increases. With the help of barcodes, sales and stocks are registered
in an information system. When stocks fall below a certain level, a signal is automatically sent
to the producer, in order to deliver new supplies. Such a system reduces transaction costs,
as storage space is minimised and labour costs of monitoring stocks and ordering decline.
48
Chapter 3
However, monitoring is needed to a certain extent, because in the case of opportunistic behaviour (e.g. stealing), the firm may be out of stock while computer data show something
else. In such a case the system is not only likely to fail to save on transaction costs, but can
even lead to an increase in these costs.
The third direction is the use of information technology for stimulating and facilitating
co-operation and collaboration between people. A trend in the West has been to introduce
information technology and telecommunications techniques that facilitate communication
at a horizontal level, and reduce the influence of hierarchical structures, often depending on
inflexible central units [OECD, 1996, 11].
Innovations in information technology and telecommunication have considerably lowered
the costs of obtaining and transferring information. Thus, lower transaction costs have created
opportunities to increase the number of transactions, and have, in such a way, contributed
to an expansion of the economy in Western countries. The following positive effects have
been distinguished [OECD, 1996, 51]: increasing efficiency reducing labour costs; lowering
the probability of human error by increasing the accuracy of processing, lowering monitoring
costs at the same time; increasing the speed of processing; facilitating co-operation and
communication with other units in the hierarchy, as well as other organisations; obtaining
information that in the past was technically unobtainable.
Table 3.4. Relationship levels between firms and means of communication.
Relationship levels
Means
Traditional
Present and/or future
Informal
Discussion
phone, informal meeting fax, E-mail
Semi-formal
Bargain negotiation
strict meeting
electronic bulletin boards
electronic conferences
Formal
Transaction, process
letter, telex
EDI message
Source: OECD, 1996, 92.
Table 3.4. summarises different relationship levels between firms, and presents traditional and current/future means of communication. At the informal level, telephone and informal meetings are more and more often replaced by fax and e-mail. The use of fax and e-mail
makes transactions over longer distances cheaper, and stimulates the extension of markets
and division of labour. However, when low trust prevails, this way of communication is less
likely to be used with potential new trading partners, but rather in contacts with established
trading relations. A meeting or telephone call will still rather be the most important means
of communication when obtaining information about a product or trading partner. This increases information costs on the one hand, but experience teaches that many firms and people
do not react to e-mails. Semi-formal communication methods often concern negotiation costs,
and most of the time they take place in a traditional way (e.g. strict meeting). Formal means
of communication are useful for reducing the risk of post-contractual opportunistic behaviour.
Transaction Costs, Institutions and Economic Performance
49
Furthermore, it makes the contractual arrangement clearer, because misunderstandings in
interpretation can be reduced.
EDI is more and more often replacing the traditional formal means of communication like
letters and telex in logistic networks. The main advantage is that EDI lowers information costs,
which can make internal organisation more efficient and make it possible to satisfy consumer
demands better by anticipating instead of reacting. EDI works best when it “is completely
integrated in the information system of the firm and its partner’s firms, and if information
message exchanges are significant” [OECD, 1996, 94]. Thus, here trust and co-operation are
very important, as well as repeated dealing. Repeated dealing makes it attractive not to provide services via the market, but to provide them within a firm or within a governance structure of co-operation. So here, it is beneficial when whether firms have regular/big customers
and are willing to co-operate and the moral hazard problem can be reduced.
3.6. Inefficient institutions
An important question is how institutions come into being. In NIE the individual is the carrier of institutional change [Poznanski, 1996, xix; Pejovich, 1995, 37]. In many cases institutions develop step-by-step in an evolutionary way (endogenous change). When institutions
develop spontaneously, there is in fact a “market” for institutions. Values, in particular, seem
to develop in an evolutionary way. Rules of the game often develop by “trial-and-error”.
In this trial-and-error process, in which repeated dealing is important, the contractual arrangements that provide the highest expected benefit will survive. Individuals accept rules
because they are advantageous for them [Pejovich, 1995, 41]. However, inefficient institutions exist, and revolutionary change may be desirable. This requires “institutional engineering”, also called institutional design or exogenous change.
An advantage of evolutionary institutional change (supposing a non-polarised society),
is that formal rules are often supported by informal rules. This creates an institutional
equilibrium where informal institutions reinforce formal institutions, which lowers the cost
of enforcing rules. Furthermore, a large proportion of society is informed about changes in
formal rules and knows what they imply due to their gradual development.
Political freedom stimulates the development of efficient institutions, and in turn contribute to an improvement in economic performance [Colombatto and Macey, 1999; see also
Gwartney et al., 1999]. According to Colombatto and Macey [1999], political freedom lowers
the information part of political transaction costs – it is easier to figure out whether leaders
are performing well. This facilitates replacement of a failing political leadership, providing
an incentive for them to satisfy the population’s desires and expectations.
As Rapaczynski [1996] argues, in former STEs market transactions were relatively simple
after the fall of the socialist system. For this reason, institutions could develop in an evolutionary way along with an increasing amount of transactions. However, this underestimates
the importance of “institutional governance” for such a complex venture such as privatisation in a situation where many property rights were unclearly defined. “Auxiliary” institutions such as banking, a financial market, a stock market and efficient public administration
50
Chapter 3
were needed for facilitating the transfer of property rights. These institutions had to be
created rather by design, because the costs of evolutionary development would be too high.
With “institutional engineering” there is a larger danger of institutional disequilibrium,
which increases control costs. Outcomes of institutional change may be different to those
expected. Furthermore, society must get to know the new rules (information costs) and
a “learning-by-doing” process has to take place. In practice one has to find out what the implications of the new rules are [see Pejovich, 1995; Poznanski, 1996; Van de Mortel, 2000].
In addition, transferring information is a process for which knowledge is required, as well
as the capability to “translate”, while the other party must have incentives to absorb the
information. How can a Dutchman explain economic experience in capitalist countries to
people in former STEs, who have a distorted view of the reality in capitalist countries? On
the other hand, there are problems for this Dutchman with communicating this experience
when he does not know the cultural background of the people in former STEs. These
problems imply significant difficulties for creating institutions by design.
There is another problem. Economic systems are multidimensional, they consist of many
characteristics. Revolutionary change or evolutionary change depends on what institution
we are talking about. The situation in Poland in 1989 was one where many institutions had
been changing, while many other institutions had still to be changed. Even in the case of
revolutionary change, in practice such changes take place slowly. This complicates the discussion regarding evolution versus revolution/design. The case becomes even more complicated when we introduce informal institutions into the discussion. Formal institutions can
be changed relatively revolutionary, but the informal part always remains slow and almost
impossible to design (except maybe when using crude indoctrination techniques).
In reality inefficient institutions survive, and difficulties exist with the introduction of
more efficient institutions. This finds its explanation in the notion of path-dependency,
transaction costs and differing bargaining strength of different parties. The first two reasons
are related with “Knightean uncertainty”, the impossibility of calculating the probability of
future events. Another important factor explaining why inefficient institutions survive is the
free-rider problem of creating efficient institutions. The free-rider problem is of importance, because the creation of market institutions has features of creating a public good due
to non-excludability and non-rivalry in use. Who has an incentive to create an institution,
when it becomes accessible to everyone at zero market price? 18 [Douglas North, 1981, 1990;
see also Groenewegen et al., 1997, 67, and Van de Mortel, 2000, 17–8]
The first reason for why inefficient institutions survive is the existence of path-dependency. When people live in an inefficient institutional environment for a long time, they
adopt values/mental models in accordance with this institutional environment. Thus, a
learning effect may reinforce an institutional equilibrium. When people do not know another
situation than the one in which they are oppressed and exploited, this strongly hampers
eventual institutional change. There is a “lock-in”.
The higher the genuine uncertainty, the less likely it is that inefficient institutions will
disappear, even in the presence of competition. A well-known example of an informal institution that is difficult to change is the QWERTY keyboard [see David, 1985]. When developing
the typewriter, the inventor put the letters in such an order that the type-hammers would
18
Of course transaction costs may be sacrificed when using “institutional governance” (e.g. the judicial system) for enforcement, which weakens the public good argument.
Transaction Costs, Institutions and Economic Performance
51
not collide. With a computer keyboard there is no such technical need. However, like many
people I am so used to the system, that changing the system would go together with very
high uncertainty about success. In other words, informal institutions are the reason for why
path dependency exists, and make institutional change more difficult or impossible due to
high fixed transaction costs.
Path-dependency implies that institutional change is costly. Pejovich [1995, 38] argues
that change in informal rules is less costly than change in formal rules. Such a cost includes
losing some contacts or offending friends, and a long-run problem can come into being. However, the cost of changing values differs according to the institutional setting. In some religious groups breaking informal rules has the consequence of becoming an outcast, implying
expulsion from your family and the surrounding social environment. In an atomistic society
this problem is likely to be smaller, but in smaller, more family and network orientated societies the cost can be considerable. More important, from a transformation perspective it
can lead to an institutional disequilibrium, with all its adverse effects on economic activity.
Besides path-dependency, high transaction costs is another reason for why inefficient
institutions are not replaced by more efficient institutions. In an ideal situation, people will
learn from their mistakes and do not repeat them. However, in the case of high uncertainty,
information that a mistake has been made does not have to become public [Charemza, 1992;
Van de Mortel, 2000]. As a result, efficiency improving changes are not made because of
deficient feedback. This effect was very strong in former STEs, where mistakes were often
covered, greatly reducing the possible learning effect. Covering mistakes or lying or telling
half truths is common in any organisation, but institutions like freedom of press and freedom
of speech reduce this information problem.
High political transaction costs may prevent the replacement of badly performing leaders.
Such leaders have an incentive to protect their power by limiting civil liberties and creating
institutional barriers that limit growth. Examples are restricted access to education, which
increases information costs, and limited organisational freedom, which reduces the risk of
an opposition coming into being [Colombatto and Macey, 1999]. As a result high political
transaction costs hamper institutional change – it could produce an institutional environment
and governance structures that show very little adaptive efficiency.
The third reason for inefficient institutions surviving is that different groups have different bargaining power. The more bargaining power, the more likely a group is to influence
institutions to their benefit, at the cost of total economic performance. When a powerful
group has a large enough advantage, it is likely to block any efficiency improving change.
An example is interest groups lobbying for protection in international trade, where the gain
for the protected industry (and, eventually, the state) is smaller than the loss of wealth for
consumers.
A problem with introducing efficient market institutions in former STEs is that they can
have characteristics of a public good. Market institutions such as freedom of contract, competition and legal enforcement can be used by an economic actor without lowering the possibility of use by another actor (non-rivalry in consumption), and it is difficult to exclude
someone from using these institutions (non-excludability). Furthermore, market institutions
show positive externalities and there are large economies of scale on the use of the market
52
Chapter 3
due to the large fixed transaction costs of creating its institutions. Who wants to pay the
price for developing such institutions in the face of incurring costs, while the benefits are
distributed among a large group of free-riders? Thus, there may be a role for the government
to provide society with market institutions.
Ovin [1998] argues that the state was able to do this, because the knowledge about institutions and their efficiency was in advance of the existing institutional environments in former STEs. However, the question remains as to whose knowledge. Politicians and decisionmakers can have a distorted view of a market and lack economic and political education.
Furthermore, the state, which was a factor of decline in the STE, was in transformation itself.
An implication of the factors hampering the introduction of efficient institutions is that
transformation from an inefficient economic system (e.g. plan) to a more efficient system
(e.g. market) is cumbersome, while there are many threats of entering a wrong path towards
even more inefficient institutions. In reality efficient institutions, stimulating economic activity, co-exist with inefficient institutions in any economic system. However, the proportion
of inefficient institutions in an economic system vary, while adaptive efficiency, the ability
to replace inefficient by efficient institutions, is essential. Thus, in practice institutions are
often a mix of exogenous and spontaneously developed rules. One problem is that the difference between these two is often difficult to see.
When analysing the economic transformation in former STEs, it is important to note
that this institutional change is accompanied by uncertainty, high transaction costs and
path-dependency. As Van de Mortel [2000] and Poznanski [1996] argue, old institutions are
gone, and new institutions are not in place yet or developing in a primitive form. The bigger
the gap, the bigger the institutional disequilibrium, as well as the problems accompanying
“framework uncertainty” [Van de Mortel] or “institutional vacuum” [Poznanski]. Larger uncertainty leads to higher transaction costs of economic exchange. Consequently, economic
actors are more likely to be careful about undertaking economic transactions, resulting in
lower economic activity.
Van de Mortel [2000, 16] defines framework uncertainty as “the kind of uncertainty following from the collapse of the formal institutional framework”. Economies in transformation often faced a collapse of formal and informal institutions, accompanied by many unknowns about future institutional development. Furthermore, history matters, as institutions
and governance structures inherited from the old system influence the level of institutional
disequilibrium and the transaction costs involved with institutional change. For instance, the
social capital destroyed under the old system increases the transaction costs of institutional
change and hampers restructuring and the creation of new governance structures.
It is difficult to predict which way institutional change will go. This fact is, according to
Van de Mortel, strongly connected with framework uncertainty. She argues that the existence
of uncertainty about future institutional development makes the concept of bounded rationality, that people take rational decisions based on the available information, less useful. The
expected results of an action cannot be predicted, because the future is unpredictable. This
does not mean that people make irrational decisions, but that they often make use of mental
models to facilitate decision-making and reduce uncertainty [see North, 1994]. The greater
the uncertainty, the greater the reliance on mental models, the greater the path-dependency.
Transaction Costs, Institutions and Economic Performance
53
In such a situation a learning-by-doing process is hampered, as it becomes more difficult to
evaluate information, and much information on mistakes may not become public.
Another problem is that feedback of information is difficult, because there are no formalised decision-making models. Feed-back has little effect, especially when mental models,
which are “hard-wired”, are used for making decisions, because there is little to refer to.
Thus, as Simon [1986, 133] and Van de Mortel [2000] argue, learning concerns the process
of searching for good solutions rather than for the best solutions. In other words, when
aiming at introducing more efficient institutions, this may lead to the introduction of satisfactory, but not the most efficient institutions.
In conclusion, there are significant difficulties with introducing efficient institutions. However, the existence of an influential group with strong process-regarding preferences (e.g.
ideology [see Ben-Ner and Putterman, 1998, 6–7]) reduces the free-rider problem. Furthermore, when political transaction costs are lowered by way of freedom of speech and a properly functioning democratic system, inefficient leaders hampering institutional change can
be replaced more easily. Finally, examples of efficient institutions somewhere else, which in
the case of Poland is relevant within the context of the aspirations to join the EU, is another
factor stimulating the introduction of efficient institutions.
3.7. Phases of transformation – when is transition over?
A question is when has economic transformation, a complete change in fundamental characteristics of an economic system such as the system of property rights and the co-ordination mechanism, ended. In other words, “when is transition over?” Van de Mortel [2000]
discusses phases of transformation within a new-institutional context. Independently of
how the transition started, it ends when people accept the new system. In other words, when
an institutional equilibrium has been reached. Thus, besides change in formal institutions,
behavioural changes are important. She distinguishes three stages of transition [2000, 22–3].
These stages can overlap, and there may be reversals in the direction of institutional change.
There can be a development of “pathological” institutions.
Countries start institutional change, the first stage of transition, when they have the freedom and the will to change, or when they are forced to do so. In the first case this stage is
rather short, while in the second case many difficulties can be expected with the formulation
of a general transition strategy.
Reforms of formal institutions make up the second stage of transition. This stage is reached
when structural change in the property rights order begins, together with the decentralisation
of economic decision-making. In Chapter 4 arguments will be presented to show that Poland
entered this stage as early as the 1970s. The first stage had not been entered, because there
was no will nor freedom to reform to a market economy.
A question is whether Stage 1 is a necessary condition for entering Stage 2 – should
transition be conscious? An argument in favour of the statement that Poland entered
Stage 2 in the 1970s, while only entering Stage 1 in 1989, is connected with the argument
that property rights can be viewed as a bundle of characteristics, as discussed in Chapter 2.
54
Chapter 3
Although formally property remained public, characteristics in the form of the right to utilisation (usus) and the right to use a product generated (usus fructus) came into the hands
of managers, interest groups and in the 1980s into the hands of workers. This was the result
of decentralisation of decision-making through reforms. When talking about what I would
call “privatisation of usus abusus”, the transfer of the right of disposition of state-owned
property to private economic actors, it can be argued that Poland only started slowly entering Stage 2 in the 1980s by way of a developing private sector and “spontaneous” privatisation, discussed in more detail in Chapter 5. When considering large scale privatisation,
Stage 2 was entered in the 1990s. However, when talking about “privatisation of usus and
usus fructus”, this stage had already started in the 1970s.
As Van de Mortel argues, during the second stage informal institutions also change, but
only slowly. Thus, the different patterns of change in formal and informal institutions lead
to an institutional disequilibrium, where framework uncertainty exists. It can be argued that
the more “pathological” the formal and informal institutions, the larger the framework uncertainty. The uncertainty people face makes them fall back on their mental models in decision making. These mental models differ according to country, for which reason the outcomes resulting from similar changes in formal institutions are likely to be different.
The third stage starts when formal institutional change is more or less complete, and a
rather evolutionary change begins. During this stage the emphasis is on the behaviour of economic agents and acceptance of the formal rules. In other words, the aim is to achieve harmony between formal and informal institutions and to reduce framework uncertainty. Informal institutions supporting formal institutions are needed, because otherwise regression is
likely, with a return to the previous stage and the development of “pathological” institutions,
or in the case of “pathological” institutions to extraordinarily “pathological” institutions.
When looking at transformation from the point of view of institutional design, it is easier
to distinguish different phases of transition than when transformation is viewed as a rather
evolutionary process. In the second case the division of the process into different stages is
complicated, because of the continuity in the process of change. Which characteristics of the
economic system are taken into consideration is also important.
There is a process of “learning-by-doing” at any stage of institutional change. As time
goes on, people perceive the loopholes and imperfections in a system. Aims and expectations are important. When expectations with respect to changes in the (performance of the)
economic system are not fulfilled, informal institutions reinforce formal institutions less and
less, which ultimately leads to an institutional disequilibrium. This phenomenon is closely
connected with the notion of cognitive dissonance.
Cognitive dissonance is a notion used in social psychology on which an extensive literature exists. This notion finds its origin on the work of Festinger [1957, Festinger and
Carlsmith, 1959]. A synonym for cognitive dissonance may be “disturbed observation and
perception”. It is possible, as Anderson [1973] argues, that satisfaction will be adjusted to
the perceived gap between expectations and perception. This can occur by perceiving the
system in a different way (e.g. increasing dissatisfaction with the system), or changing
expectations. When an individual did not have any expectations in advance, the assessment
of the outcome (in general) will be more positive, because there is no frame of reference.
Transaction Costs, Institutions and Economic Performance
55
However, when the outcome is far below the expected results, which certainly seemed to be
the case in the socialist system, due to the promise of socialism and the function of the West
as a model, dissatisfaction is likely greatly to increase. Of course, it is possible that people
see what they want to see, as is the case with smokers taking the risk of cancer from smoking less seriously than non-smokers, or with communists who had a strong ideological belief in the system and neglected problems or interpreted them as being temporary.
When there is a discrepancy between the results and expectations, this does not have to
lead to significant dissatisfaction. What the effect will be, assimilation or a contrast reaction,
is important in the process of institutional change. Whether there will be a contrast reaction
depends on whether there is a threshold of discrepancy where dissatisfaction is the result
[Stipak, 1979]. Another important question is whether this dissatisfaction results in action.
In general, this threshold differs according to an individual. When thresholds are exceeded,
dissatisfaction leads to a weakening of informal institutions. In other words, return to a
“pathological” variant of an earlier stage of transition is possible.
For the answer to the question as to when transition is over, Brown [1999, 10] argues that
transition is over when the rather revolutionary change in governance structures connected
with the production structure has been transformed to a situation where institutions adapt
to changes in the economy in a rather evolutionary way. Thus, applying this to Van de Mortel’s framework this would mean that transformation is over when entering the third stage
of transition. Criteria for assessing the end of transition that have been brought forward are:
• a successful stabilisation and liberalisation policy [Lavigne, 1999 (a)];
• establishment of conditions for sustainable growth [Poznanski, 1996; Lavigne, 1999 (a)]
and reduce rent-seeking to “normal” levels [Åslund, 1999];
• the degree of integration into the world economy (e.g. EU accession) [Ellman, 1997; Lavigne, 1999 (a)];
• change from a bureaucratic to a market co-ordination mechanism [Ellman, 1997; Švejnar, 1999; Kornai, 1999];
• emergence of a modern capitalist enterprise sector (regarding ownership, financing and
behaviour) [Ellman, 1997; Kornai, 1999] and eliminating the monopoly of the Communist Party;
• achieving the pre-transformation GDP level [Ellman, 1997];
• achieving a point where institutional change is irreversible [Ellman, 1997];
• reaching an institutional equilibrium.
Using EU accession as a criterion for the end of the transition would exclude most of the
former Soviet republics [Gelb, 1999]. It seems that the emergence of a modern capitalist
sector and the market as the main co-ordination mechanism can be used as a good indicator by measuring the share of the private sector in GDP or employment, but this does not
evaluate the functioning of markets and market institutions. A similar argument is valid for
reaching pre-transformation GDP levels. A combination of criteria to assess whether transformation is over may be used. The share of the private sector in the economy and the rate
of GDP growth are good indicators as to whether the economy is going in the direction of
a strong economic system. Besides this, economic transformation should be a path from
a “pathological”/weak socialist economic system to a “normal”/strong market economy.
56
Chapter 3
Adapting Van de Mortel’s, Poznanski’s, and Åslund’s ideas, transformation is over when
a strong economic system has developed with, which is implicit, little value in the public domain, few opportunities for rent-seeking, efficient “institutional governance” and values
and mental models (informal institutions) reinforcing the formal institutions. In general, it
can be argued that transformation is over when radical changes and shocks in institutional
changes make way for rather evolutionary, step-by-step adaptation. This does not mean that
in market economies radical change never takes place. The following are important for
finishing transformation: strengthening of the system, the reduction of framework uncertainty and achievement of institutional equilibrium, less uncertainty about institutional development and informal institutions generally supporting the new system. This is a long and complex path full of booby-traps.
3.8. Concluding remarks
In this chapter the theory discussed in Chapter 2 has been developed further in order to create a more specific theoretical framework that can be applied in the rest of this thesis. The
main findings are summarised below.
Formal and informal institutions, together with transaction costs, are important determinants of what type of property rights give the strongest incentives for achieving efficiency. In the case of a lack of market institutions, a planned economy with public property can
be quite efficient in developing an undeveloped economy. However, as the economy grows,
the size and the amount of planning variables increase. This may, inter alia, lead to an agency problem of increasing complexity, problems with plan elaboration and enforcement as
well as higher information costs of solving the co-ordination problem. As a result marginal
transaction costs increase and incentives weaken. This development is described and analysed in more detail in Chapter 4.
As an economy develops, planning shows diseconomies of scale with respect to the
transaction costs of solving the coordination problem. In such a case, a more decentralised
system, like a market, lowers marginal transaction costs as they are spread among more economic units, stimulating economic activity. Since transaction costs increased and incentives
weakened in STEs, an implicit aim of introducing a market economy is to introduce institutions, “institutional governance” and governance structures that lead to lower transaction
costs and stronger incentives, in order to improve economic performance. This has to be accompanied by the development of spatial and physical infrastructure, without which the effects of an efficient institutional environment will be limited and the development of markets hampered.
In this chapter many theoretical arguments have been presented that transaction costs
are likely to increase when transforming an STE towards a market economy. On the other
hand, incentives for economic activity strengthen, while old mental models can lead to adverse incentives. This is elaborated in Chapter 5.
Economic freedom (liberalisation) at the beginning of the 1990s significantly lowered the
transaction costs of setting up a business, and created strong incentives for economic activity.
Transaction Costs, Institutions and Economic Performance
57
On the other hand, the fixed transaction costs of creating new institutions are high. Furthermore, companies and individuals had made “system-specific” investments under the old system, which lose their value under the new system. This could have slowed down the transformation, as many individuals had an interest in protecting old institutions or governance structures. This may have led to a prolonged co-existence of old “degenerating” institutions with
new developing institutions, accompanied by a lack of institutions (institutional vacuum).
Because the path of institutional change is difficult to predict, a high level of uncertainty is likely to exist. In such a situation, people tend to fall back on their “mental models”,
the way they used to act under the old system. Thus, old “socialist” values are used to act in
a situation where market institutions have to be constructed. This leads to an institutional
disequilibrium. In such a situation not only market and managerial transaction costs increase, but economic actors are also more likely to react adversely to market incentives. As
a consequence, output/economic activity is expected to decline in sectors, which were strong
under the old system (e.g. state industry). This loss has to be weighed against an increase in
the economic activity in sectors traditionally strong in developed market economies, such
as the service sector. Due to a learning process, transaction costs are likely to decrease at
a later stadium, of course under the condition that stable market institutions develop.
Although an aim of transformation is the introduction of efficient institutions, inefficient institutions may be introduced or survive due to the influence of mental models, uncertainty, among other things hampering information on mistakes becoming public and in
turn complicating a learning-by-doing process, and interest groups with strong bargaining
power. A problem with the creation of efficient institutions is that they possess features of
a public good, creating a free-rider problem. Thus, when evolutionary change is not feasible, the question is who is willing to pay a positive market price for the creation of institutions. In such a situation interest groups have an incentive to push for institutional change,
which can be disadvantageous for society as a whole. In order to prevent this, there is a role
for the government in developing institutions, a problem being that the government itself is
in transformation.
The general goal of transformation is to create market institutions and governance
structures in order to improve the poor economic performance of the socialist period.
Transformation is over when the economic system is strong, with little value in the public
domain, an efficient “institutional governance” and an institutional equilibrium. This implies low transaction costs, strong incentives for economic activity and a change from a path
of radical reforms to a path of evolutionary step-by-step change.
PART II
TRANSACTION COSTS, INCENTIVES
AND THE PERFORMANCE
OF THE POLISH ECONOMY
61
Chapter 4
TRANSACTION COSTS
AND INCENTIVES IN THE POLISH
SOVIET-TYPE ECONOMY
– from classical to “decaying” socialism
4.1. Introduction
The change which has been taking place in the economic system of the former Soviet-Type
Economies (STEs) in general, and Poland in particular, is of main interest in this chapter.
Nowadays it seems to be clear that Soviet-type planning has been outperformed by Western
style capitalism. As early as in the 1920s and 1930s Austrian economists, notably Mises and
Hayek, had strong arguments against Soviet style planning. However, Oscar Lange argued,
using neo-classical assumptions, that market socialism could be as efficient as a market economy. After World War II, for many economists the question was not whether, but when the
Soviet Union would economically overtake the West. In the aftermath of the Great Depression of the 1930s and the Second World War, the belief in properly working market institutions was very low. During the 1970s and 1980s the economic performance of STEs deteriorated, while the western Market-Type Economies (MTEs) were able to recover from economic problems. In analysing these phenomena, the importance of institutions like property
rights for incentives and economic activity were emphasised more and more, as well as the
importance of transaction costs in an economic system.
The tools of New Institutional Economics developed in Chapter 2 and 3, especially the
notions of transaction costs and incentives, will be applied in this chapter, in order to analyse the decline of the socialist system in Poland. Emphasis is on the influence of weakening
incentives and increasing transaction costs. The picture of the “Polish road to capitalism”
sketched in this chapter helps to understand the economic difficulties faced at the beginning
of the 1990s when a conscious process of market construction started.
Along the lines of Kornai, in Section 4.2. a typology of prototypes of socialism is given,
which is used later to describe the development of the Polish economic system from classical
socialism to “decaying” socialism. Also the promises of socialism are briefly discussed,
62
Chapter 4
for the reason that the inability of the socialist system to fulfil its promises undermined its
credibility.
In Section 4.3. problems of planning are analysed in the context of transaction costs and
incentives. First, the development (increase) of transaction costs under planning is discussed. Then, problems with incentives, plan bargaining and information are elaborated, as
well as moral hazard problems and problems with knowledge in the Hayekian sense.
The process of institutional weakening in the Polish STE that started in the 1970s is
elaborated in Section 4.4. The two crucial formal institutions of the planned economy, the
Communist Party and public property, became weaker and weaker due to reforms which
were aimed at reducing the increasing transaction costs of solving the allocation problem.
Informal institutions, such as the belief in the system, were hollowed out due to continuing
shortages, non-satisfaction of demands from labour and the functioning of the West as a role
model – media and travellers to the West provided information on the higher living standard
in the enemy countries. As STEs were adaptively inefficient, transaction costs increased,
inter alia, as a result of increasing problems with opportunistic behaviour and information.
Furthermore, weakening institutions weakened incentives for economic activity. Increasing
transaction costs and weakening incentives, due to institutional weakening, led to deteriorating
economic performance, paving the way for institutional change.
The “Polish road to capitalism” is presented as a development of the Polish STE from
classical socialism in the 1960s, via reform socialism in the 1970s to “decaying” socialism in
the 1980s. In hindsight the reasons for change can be relatively easily explained, while in advance few people thought that STEs would collapse. As discussed in Chapter 3, North argues that inefficient institutions can survive when there is a party with strong bargaining
power interested in this system (e.g. the Communist Party [see Murrell and Olson, 1991; Lavigne, 1999 (b)]) and the political transaction costs of output-increasing reforms are high.1
In this chapter arguments are given which may explain why this problem was overcome, although institutional change does not necessarily mean turning to a path of economic
growth, as the economic malaise in many former Soviet republics shows.
4.2. The promises of socialism and a typology
of prototypes of socialism
The development of the socialist system has to be put in the light of some of the promises of socialism – economic efficiency and higher welfare than in capitalist economies. Socialist economic theory assumes that people can organise the economy in a rational and
efficient manner, which can only be realised in a socialistic organised society. Socialism
claims that it can outperform its predecessor, capitalism, in economic rationality. Planning is supposed to be rational, while the market would lead to chaos. The existing potential for economic production will be completely utilised, which implies, among other
things, full employment. Resource allocation will be efficient and resources will be uti1
Eggertsson [1990, 61] argues that the communist party was conscious of the fact that a change in the structure of
property rights would lead to an increase in the net output, but the “agency problem” was a hampering factor. Most of the reform proposals considered decentralisation of economic power, which meant more power for agents of the state or, in other
words, diffusion of characteristics of property rights. There was a fear of increasing “agency costs” (control costs of monitoring agents) and a loss of control. Because of the self-interest of the ruling elite, the inefficient system of property rights remained and a more advanced system of rules was not introduced. High transaction costs caused the failure of reforms aimed
at stimulating economic activity.
Transaction Costs and Incentives in the Polish Soviet-Type Economy
63
lised as efficiently as possible. Thus, socialism is presupposed to be allocative efficient and
x-efficient.
In theory transaction costs under socialism would be lower than under capitalism. This
idea is based on a mix of the classical assumption of complete information, and that capitalism (the market) cannot deliver efficiency due to high transaction costs and disincentives,
because of exploitation of labour. This is a “metaphor” used to place the promise of the efficiency of socialism in a transaction costs framework and to connect this with increasing
transaction costs in STEs.
An idea, that can be found amongst (early) socialist thinkers, is that when people are
lifted out of alienating material poverty and exploitative production relations, they can work
for their self-fulfilment and their efforts are aimed at production for the social good. Thus,
in other words, the transaction costs of opportunistic behaviour would be eliminated, while
the social property of factors of production would give incentives for economic activity. An
important criterion in socialist ideology is the question of whether human nature can be
changed and a “better man” will result. In reality, as emphasised by property rights economics, socialised factors of production provide weak incentives for efficiency.
The promise of socialism is important for understanding the continuous efforts to reform STEs. It contributed to the disillusion that grew over the years when socialism did not
perform economically better than capitalism, while many capitalist countries increased the
already existing difference in the level of welfare and economic achievement. People’s disillusionment, both of party members and non-party members, due to the disappointing economic achievements, hollowed out the belief in the system. This helped to pave the way for
system transformation. Furthermore, the existence of a planner/party that directed the economy made it easy to point at them as the cause of failure.
Kornai [1992, 19–20] distinguishes three prototypes of the socialist system: the revolutionary-transitional system, the transition from capitalism to socialism; the classical system, or
classical socialism; and the reform system, or reform socialism. With respect to the development of the Polish planned economy, one type is added here. The following phases in the
development of the types of socialism in Poland are distinguished. Firstly, classical socialism, which in Poland existed in its strong form until the end of the 1960s/beginning of the
1970s and started to weaken under the Gierek administration. Secondly, reform socialism,
which, as will be argued in Section 4.4., started in the 1970s. Finally, “decaying” socialism,
which started in the 1980s and became especially visible towards the end of this decade,
when unsuccessful reforms in the Polish planned economy in fact led to a state of disintegration. There are no clear borderlines, different stages overlap.
The difference made in this research between reform socialism and „decaying” socialism
is a subtle one. “Decaying” socialism is, in the Polish case, the last phase of reform socialism, where the institutional fundaments of the socialist system were hollowed out so much
that the system could not even be called socialist anymore. Important formal institutions
that were hollowed out were the leading role of the Communist Party and public property,
while the will to govern by those in power and the loss of belief in the system are examples
of hollowed out informal institutions.
64
Chapter 4
4.3. Problems of planning 2
In this section some problems of planning are dealt with. First, transaction costs in STEs are
discussed (Section 4.3.1.). Then, incentives, the process of plan-bargaining and informational
problems are elaborated (Section 4.3.2.). Finally, opportunistic behaviour and the problem
of knowledge are analysed (Section 4.3.3.). A more detailed description of the development
of transaction costs and incentives in the Polish STE is given in the next section (4.4.).
4.3.1. Transaction costs
Transaction costs in STEs can be thought of as the managerial transaction costs of running
a bureaucracy. Here transaction costs are the costs of running the economic system. Transaction costs concern the elaboration and implementation of plans by way of commands and
administrative procedures, and intervention from the top of the bureaucracy in the production process, the allocation process and the running of subordinate organisations [Kornai,
1992, 117]. The lack of freely established prices increases the information costs of planning,
as prices provide information about real scarcity. Transaction costs, in fact, comprise all
costs involved in solving the allocation problem – answering the questions of what, how, how
much, where, when and for whom to produce, as well as who produces it. This, among other
things, involves plan preparation, control of information quality flowing through the hierarchy, monitoring and motivating agents, plan enforcement, maintenance and protection of
the institutional environment (e.g. army, police and secret service) and costs of preventing
subjects lower in the hierarchy (e.g. managers and workers) falsifying information.
In STEs market transaction costs were very low for firms, due to the existence of shortages. Due to these shortages, there was demand for almost whatever was produced. This,
on the other hand, led to high transaction costs for consumers, who had to queue. Shortages also created an informal (black) market, which is connected with high transaction costs
(especially search costs). As opposed to this so-called shortage economy, where demand is
not constrained by the budget of consumers and producers but by supply, MTEs are rather
demand-constrained economies, in which the budgets of the consumers and producers determine how most of the goods are allocated. In MTEs suppliers have to compete for customers and thus bear search costs.
An example of the influence of different institutional environments on transaction costs
is the struggle for customers that in MTEs led to institutional arrangements, such as providing credit and loans, coming into existence. In Poland during the 1970s some goods like cars
were delivered on a pre-payment basis. Such a system lowers the possibility of post-contractual opportunistic behaviour (e.g. cheating by not paying). The system of selling with
payments made afterwards increases the amount of transactions, but also increases the possibilities for opportunistic behaviour, which leads to an increase in transaction costs (control
costs). Total transaction costs may increase, but marginal and average transaction costs per
unit of product sold are likely to decrease when opportunistic behaviour only appears on
a smaller scale than the increase in the amount of transactions. The level of the marginal
2
This section is partly based on Platje [2001].
Transaction Costs and Incentives in the Polish Soviet-Type Economy
65
transaction costs, and in turn the influence on economic activity, depends on the extent to
which there are institutions and “institutional governance” that lower incentives for opportunistic behaviour and facilitate the enforcement of contracts.
The shortages had significant consequences for economic efficiency and for consumers
and firms [see Kornai, 1980, 1992; Poznanski, 2000]. When maximum prices exist, price is
not a good indicator of scarcity. This in contrast to a free market setting without maximum
prices, where the price mechanism would lead to an equilibrium. A maximum price leads
to excess demand. As a consequence, consumer welfare declines because of queuing and
forced substitution. When consumers could not buy their desired product, they had to buy
a less desired product. Another phenomenon in the shortage economy reducing welfare was
forced saving. When there was nothing to buy, consumers had to save their money. Besides
such de-motivating aspects, firms, due to lack of competition, could almost sell everything
they wanted and faced very weak incentives for innovation and quality control. Furthermore, as firms also faced shortages, they could not benefit from logistic processes which lower
transaction costs, and may have had to choose sub-optimal technologies and lower quality
inputs as a consequence of forced substitution. This, for sure, lowered their dynamic efficiency. The already weak incentives to innovate were weakened by shortages of high quality
inputs and machines and uncertainty as to when these goods would be available and whether
there would not be a shortage in the future.
The organisational structure of STEs started to become dysfunctional, because the scale
of the agency problem grew and changes in the technological environment led to increases
in transaction costs. Firstly, there was the cumulative effect of an incentive structure that
did not stimulate minimisation of costs in the production sector, but emphasised meeting
(volume or value) output quotas. The main cause was the existence of soft-budget constraints [Kornai, 1980]. Basically, the losses of a firm were paid by the state, while profits
went to the state-treasury. Under a hard budget constraint a company can keep profits and
is responsible for losses, facing bankruptcy, so it has an incentive to produce more efficiently.
Doing more than was specifically required very often did not pay off. In the long-run this
had disastrous consequences, like higher resource intensity (e.g. energy) per unit output [see
Cole, 1995]. While in Western industrialised countries resource intensity decreased through
time, STEs did not show such a trend. Economic growth was rather extensive, i.e. increasing
output by using more inputs. Eggertsson [1990, 335] gives as possible reasons for this the
lack of specialisation due to the aim of national self-sufficiency and a self-contained industrial base without regard for economies of scale and comparative advantage. International
trade was under-utilised, because of high transaction costs in this sector, mainly due to restrictions on trade and high measurement costs as a result of a non-convertible currency. As
a consequence a kind of barter trade came into existence, as was the case with a Dutch firm
exchanging computers for jam with a Soviet-company. Within the country trade was difficult
due to the lack of scarcity-prices, which made international trade even more difficult.
Secondly, transaction costs went up, because of changes in the technological environment. Due to more division of labour and technological change, qualitative attributes of
commodities tend to grow more complex, which leads to higher measurement costs, as well
as more difficulties in monitoring agents. As Eggertsson [1990, 336] argues, the hierarchical
66
Chapter 4
management structure of STEs works best when final outputs have relatively few quality dimensions (low measurement costs), a horizontal production structure exists, substantial economies of scale at the level of an enterprise can be achieved (thus, no external economies of
scale) and such technology is used so that each unit is both supplier and purchaser of inputs,
so horizontal connections between enterprises are not required. Technical development
worked against the central management structure. The world trend in industries like steel,
cement and bulk chemicals was horizontal integration, where two firms are both each other’s
buyers and sellers of inputs and outputs [Winiecki, 1986, 328]. When measurement costs
rise, competition is likely to work towards new contractual arrangements that lower these
measurement costs. However, hardly any competition existed in STEs. As a consequence,
transaction costs were high and incentives weak for changing governance structures needed
for increasing efficiency. All the factors mentioned contributed to economic stagnation.
4.3.2. Incentives, plan-bargaining and information
Increasing transaction costs, weak incentives and low adaptive efficiency in STEs will be first
discussed with the help of problems that Kornai [1992, 117–129] points out with respect to
the centrally planned economy. He argues that direct bureaucratic control (planning) of an
economy is viable in the sense that it solves the allocation problem in many important fields.
However, the adaptive efficiency in the sense of institutions able to adapt to changes through
time, and institutions giving incentives for gaining knowledge, introducing innovations, and
solving problems and bottlenecks in society through time [North, 1990, 80] is very low.
Following North’s explanation of adaptive efficiency, a system of direct bureaucratic
control adapts very slowly to technological change, while technological development is slow
due to a lack of incentives for initiative, entrepreneurship, and innovation. In the former
centrally planned economies technological change was rather exogenous (planned). The
previously mentioned disincentives for individuals and firms and high transaction costs of
adapting or changing the plan to the introduction of new technologies were huge barriers to
endogenous technological development. There was a high risk associated with taking initiative, being creative, and criticising superiors within the bureaucracy, implying high transaction costs for correcting mistakes and improving distorted information. “The character-forming and training effect, and the selection criteria of bureaucratic control, reinforce each
other: servility and a heads-down mentality prevail”3 [Kornai, 1992, 121]. Part of adaptive
efficiency is learning from mistakes [North, 1990, 81], which was a very weak point of STEs
because many mistakes were hidden. The main problems of STEs were the incentive structure, conflicts in interests between different strata of the economy, and a huge information
problem (distortions in collection and utilisation).
Negotiation costs in the vertical bargaining process were high and increasing.4 Although
there were more players, for simplicity it is assumed that there is a branch minister, a branch
director, and a manager of a state-owned enterprise (SOE). The minister provides the branch
director with the annual plan, who on this basis assigns targets for firms concerning production,
material allocation, and manpower. This is a classic example of a problem with asymmetric
3
An implication for the transition period of this informal institution that developed during socialism is that entrepreneurship as a mentality/culture is something that has to be developed. Formal rules change much faster than informal rules.
However, how fast a culture of initiative and self-responsibility is created depends on the incentives given by the changing
formal rules and how strong ideology/culture enhances or hampers such development.
4
In markets bargaining between buyers and sellers takes place on a horizontal basis, in hierarchies bargaining takes
place on a vertical basis.
Transaction Costs and Incentives in the Polish Soviet-Type Economy
67
information (as explained in the general “principal-agent framework”), where the person at the
lowest level possesses most of the information, giving incentives for opportunistic behaviour.
The information problem lies in the firm’s production capacities and its production function. An easy life is in the interest of the manager, giving him an interest in easy production
plans and the availability of as much material and labour as possible. This is a case of moral
hazard where the manager distorts information by reporting a lower capacity and a greater
need for materials and labour than is the case in reality. It pays off to bargain for a looser plan
than the one proposed by the branch director. The drafter of the plan has two lines of defence: draft a more ambitious plan than in “normal” cases and “plan in” the level of input and
output achieved the year before (“ratchet effect”). This gives the manager an extra incentive to
hold back performance and exactly achieve the plan, as underachievement would be punished.
The branch director, interested in higher production and lower use of materials by the SOE,
faces a similar role as the manager when bargaining with the ministry. It is in his interest
to keep some “capacity reserve” and bargain for a looser plan. This makes the bargaining
position of the branch director with the manager weaker, because the manager is his “natural
partner” when dealing with the highest level of the bureaucracy. Consequently, the stream of
information from the bottom to the top is methodically distorted. This means that when the
bargaining process in an STE took definite shape, planners had to deal with distorted information, leading to having to guess more and more. Plans based on estimates rather than reliable information are more likely to cause distortions. The moment there are more products
to be planned and the bargaining chain becomes longer, other things equal, the chance of distortion also becomes higher. Improvisation rather than planning is likely to become practice.
The major objective of the leading institute of an STE, the Communist Party, was rapid
economic growth with an emphasis on quantity. This had a negative effect on product quality
and product range. The rather politically motivated “quantity drive” led to inner insecurity
in leaders, such as managers and branch directors. The cause of this was a conflict of motives.
On the one hand the political task of a leader was to raise output. On the other hand, as
mentioned above, he had an interest in underreporting actual output, but an increase in costs
or a fall in quality could get him into trouble one day. Furthermore, the “politicisation” of
the economic management process, rather than making decisions based on economic or
technical arguments, often contributed “to a distortion of information over and above the
distortions” [Kornai, 1992, 127] described above.
The planning process itself leads to a huge information problem, which increases when
the amount of transactions to be planned increases. The tasks of assembling and processing
the incredible amount of information and the co-ordination of decisions based on this information are too great for one central body. This, together with the low level of computerisation of STEs, led to an increasing problem of dealing with information. While the development of information technology was slower than in MTEs, STEs had greater need for
information processing for solving the allocation problem. The mathematical problems had
to be solved by trial-and-error, while there was a lack of time for working out the plan. This
trial-and-error process and lack of time led to a plan full of inconsistencies, which revealed
themselves during implementation. Modifying the plan was a cumbersome process, because
a change in one part causes a change in other parts.
68
Chapter 4
Simplification of the planning task is a way to circumvent the huge transaction costs
of full planning by emphasising the main tasks in order of importance. But this can leave
holes in the plan, distorting resource allocation and giving incentives for opportunistic behaviour. The bureaucracy did not particularly like this, and could introduce new regulations
rather than fixing the holes. Calls for simpler planning were counteracted by the tendency
to be “complete, comprehensive, and watertight” [Kornai, 1992, 129], leading to a further
increase in bureaucracy, which went together with managerial diseconomies of scale. In total, an increasing amount of transactions called for more planning variables to be calculated, which, when simpler methods were applied, left more loopholes. In other words, there
was more value in the public domain. As a result, there were more opportunities for opportunistic behaviour, which increased transaction costs and weakened incentives for productive activity.
4.3.3. Opportunistic behaviour and knowledge
As discussed in Chapter 3, North relates the technical and social set-up of production in
a vision of the cause of the wealth of nations. Some countries may face relatively low transaction costs, but lack incentives for dynamic efficiency (e.g. in the case of state monopolies).
Other countries can have strong incentives for technical efficiency, but face high transaction
costs (e.g. the “Asian way”). When discussing transaction costs and incentives in the planned
economy, the question of the technical feasibility of planning is not the main problem, although there are diseconomies of scale in planning. Incentives given by the institutional
environment for opportunistic behaviour are important in weakening incentives for productive activity. Furthermore, the transaction costs of obtaining knowledge on consumer preferences are almost prohibitive in the planned economy.
Increasing costs of transaction in the organisation of a centrally planned economy are
related to the Leninist principle “trust is good, control is better”. At the beginning of the
20th century in Russia, when the Communist Party operated underground and faced a strong
enemy, this principle was understandable. In the long-run, however, this principle is disastrous for an organisation. As was argued in Chapter 3, social capital in the form of trust lowers
transaction costs. Permanent control implies higher transaction costs, which increase over
time when existing social capital is destroyed. It can be said that Stalin carried through the
principle that “control is better” to the extreme.
The moment that controlling a fellow human being becomes an important element of the
economic system (or organisation), control costs increase (monitoring, enforcement), and
the incentive to manipulate information from below becomes greater, which causes the information costs for the planner to increase. On the other hand, information provision and
processing was in fact monopolised by the planner. As a consequence, decisions at lower
levels were taken more often based on wrong/less complete/manipulated information.
Competition in the field of provision and distribution of information (e.g. by way of
freedom of speech) can lead to “better information”.5 More trust leads to a lesser necessity
of control (complete control is impossible due to high control costs). Because of technological development (e.g. cameras and telecommunication) control becomes relatively easier,
5
However, this is not necessarily the case under conditions of “market power”. Private information has value (e.g. inside information, information on production processes and knowledge useful for one’s own career) and thus hampers the
spread of information. Furthermore, limited human calculative/information processing capabilities and transaction costs make
selection necessary – also hampering the diffusion of information.
Transaction Costs and Incentives in the Polish Soviet-Type Economy
69
but this can lead to a greater extent of opportunistic behaviour. In other words, the moment
that the government loses the trust of the population (or the other way round), it will be
more difficult to implement a policy, because the lower levels have incentives to manipulate
information and to show opportunistic behaviour.
As discussed in Section 4.3.2., one problem is that the system of central planning is a system of directives that stimulates opportunistic behaviour. It is impossible to give perfect directives, therefore individuals can basically do what they want. The idea is simple: a command or contract can never be complete, due to high transaction costs connected with “[t]he
presence of private information and/or unobservability of behaviour” [Molho, 1997, 12]. The
more one aims at completeness, the more the possibility of control decreases, increasing
the possibilities for opportunistic behaviour, leading to high transaction costs that cause
efficiency losses.6
Molho [1997, 18] argues that, ceteris paribus, when the planner defines a product broadly
and/or poorly defines quality requirements, there will be value in the public domain [see also Barzel, 1989]. In this case an agent of the state such as a farmer has a strong incentive to
deliver the minimum amount of products of a minimum quality, keeping the rest of his output for his own consumption or for selling on the black market. Thus, the value in the public
domain leads to a process of adverse selection, where good quality is driven out of the legal
market by worse quality.
Molho argues that the process is similar to Akerlof’s [1970] “market for lemons”. The
market price plays two roles: equilibrating the market and determining the average quality
of a good. Prices in STEs showed large deviations from equilibrium prices. Many prices
were below equilibrium levels, leading to shortages, leaving an agent having a distribution
function with an incentive to distribute the lower quality goods (which would be sold anyway)
and acquiring the higher quality goods himself. Furthermore, this gave a weak incentive
to improve quality of industrial goods while quality improvement did not have the highest
priority in the plan. There were also incentives for aiming at easier fulfilment of the plan.
When lying about the fulfilment of the plan (under- or over-reporting), there was an opportunity to confiscate value (e.g. by way of stealing or selling on the black market). This
process stimulated the tendency to export better quality goods for hard currency.
Hayek [1935, 1937] posed another problem with planning. Even if the planner knows all
the production techniques (which is not very likely), it is still impossible to estimate the
preferences of individuals. Hayek’s point is that it is not the information problem but the
knowledge problem that is crucial. It is an important fact that in order to increase their
welfare individuals have to appropriate it privately. Preferences of individuals only take
a definite shape when they start searching for a product. To make the idea intuitively clear,
would you be interested in all the details of a car that you cannot afford? Probably not.
You start looking at what types of cars there are only when you have the money available,
and you might not like the cars produced according to the plan. Hayek’s knowledge problem
is at least two-sided. The planner needs to have knowledge available to him that consumers
of a product often do not have themselves. The planner cannot look into the future, so
he cannot start with product innovations. The only solution to this is, according to Hayek,
trial-and-error, something a planner cannot do, but a market can.
6
A good example is a tax declaration form. The more items that have to be reported, the more difficult (costly) it is to
control the truth of the reported items.
70
Chapter 4
4.4. Poland 1971–1989 – Institutional weakening:
from Classical Socialism to „Decaying Socialism”
As Kornai [1992] argues, different countries have gone through different stages of socialism.
Czechoslovakia was on its way to a kind of reform socialism when the “Prague Spring” started in January 1968. However, this reform was ended in August of that year by the military
intervention of the Warsaw Pact. Thus, it can be argued that classical socialism existed until
the “Velvet Revolution” of 1989. On the other hand, it can also be argued that the invasion
of other members of the Warsaw Pact in August 1968 utterly destroyed a fundament of the
informal institutions – the belief of a large part of society in the system. According to Kornai [1992, 393], the transformation in Hungary that started in 1989 was a continuation of the
reforms started in 1963, while Poland “bypassed” reforms. It will be argued here that Poland
did not “bypass” reforms, and that Poland’s transformation after 1989 is, to a certain extent,
a continuation of reforms that started in the 1970s and 1980s.
Reform socialism in Poland started as early as 1971 with the introduction of new economic reform plans, when Edward Gierek had replaced Stanis∏aw Gomu∏ka as First Secretary
[Poznanski, 1996; see also Murrell, 1995; Rosati, 1998] after the political problems of 1968 and
the December protests of 1970 in Gdaƒsk, where labourers were killed in riots. The periods
of rule of First Secretaries of the Polish Communist Party are presented in Table 4.1. The period of their rule runs more or less parallel to changes in the type of socialism. Although the
preconditions for change in the type of socialism had their roots in the preceding period, the
beginning of “decaying” socialism can be found in the very early 1980s, when Wojciech Jaruzelski became First Secretary. Some features of this stage were the emergence of a large civil
movement (Solidarity), the loosening of the connections between the strongly internally divided
Communist Party and the state apparatus, the abandonment of already weakened central
planning, the ongoing loss of belief in the system (many people left the Communist Party after
Martial Law was introduced on 13 December 1981) and the exceptional economic problems
compared to other socialist countries. Three (unsuccessful) attempts at reform in 1982, 1985
and 1987 speeded up the decay, especially after the market style reforms proposed in 1987.
Table 4.1. Period of rule of the First Secretaries of the Polish Communist Party (PZPR)
and the type of socialism. 7
Period
First Secretary
Type of socialism
December 1944 – March 1956
Boles∏aw Bierut
Classical socialism
March 1956 – October 1956
Edward Ochab
Preconditions for reform socialism
October 1956 – December 1970
Stanis∏aw Gomu∏ka
developed
December 1970 – September 1980
Edward Gierek
Reform socialism
September 1980 – October 1981
Stanis∏aw Kania
“Decaying” socialism
October 1981 – January 1990
Wojciech Jaruzelski
Source: Encyklopedia Powszechna PWN, 1975, 629–33; Pankowicz, 1990, 223–77; Rosati, 1998, 31.
7
The Polish Communist Party (PZPR – Polish United Workers Party) was established in December 1948 and dissolved
itself in January 1990.
Transaction Costs and Incentives in the Polish Soviet-Type Economy
71
Why could a system that had so many internal weaknesses, exist for so long? An important reason is the influence of the Soviet Union, making a third way between planning and
market rather infeasible. Furthermore, the Communist Party with its strong ideology provided huge barriers to entry into the political process, and controlled the flow of information. This made the transaction costs for obtaining information about the real state of the
economy, as well as the transaction costs of engaging in political opposition such as (the risk
of) imprisonment and career problems, very high. Individuals had the choice of trying to
change the system from within (e.g. reform) or opting for rivalry with the state by forming an
opposition. However, the bargaining power of the opposition was weak. One basic means
they had was “exit”. An example is “voting with your feet”, which 2 million Poles, as well
as many citizens from the German Democratic Republic (GDR), did before 1990. Another
option for achieving their goals was “voice”. The Solidarity movement in Poland and
“sabotage” in the form of un-co-operative behaviour are examples of this. As a result of
the high political transaction costs, the ruling elite was able to obtain privileges and other
advantages from the fact that they managed state property. This gave them an interest in
keeping the status quo.
However, when looking at the economic performance and difficulties of STEs, after World
War II the situation looked good and systemic problems became more and more visible and
aggravated only with the development of the economy and the political scene. Murrell and
Olson [1991] argue that during the period 1950–1965, the average performance of plan and
market economies did not significantly differ. In both camps there were good and poor
performers. In the socialist camp GDR and Bulgaria performed at their potential, while the
performance of Poland and Czechoslovakia was disappointing [Murrell and Olson, 1991,
249–50]. The authors argue that high rates of investment and savings may have compensated
for system weaknesses. Furthermore, there was the stimulating effect of rebuilding the economy after the destruction from the war and, as Eggertsson [1990, 338–9] argues, an STE
like Poland in the 1960s still had resources for extensive growth, as many natural resources
were available in the USSR.
An explanation of the fast growth of STEs in the 1950s is based on Olson’s [1992, 55–6]
notion of encompassing interest. “If an individual, or an organization with enough coherence
and discipline to act with rational self-interest, obtains a substantial proportion of any increase in the output of a society and bears a large proportion of any drop in this social output, then this individual or organization has an encompassing interest in that society.” In
such a case the incentives for this individual or organisation with an encompassing interest
to care about productivity and increasing output are strong, as this would improve their own
situation. In the case of “narrow interest”, where an increase or decrease in society’s output
influences the income of an individual or organisation only to a very small extent, the incentives to increase society’s output are likely to be very weak. In such a situation economic actors face stronger incentives to try to increase their income by way of rent-seeking at the cost
of the rest of society.
Using an argument from Olson [1992, 56–8], it can be said that in the USSR transaction
costs increased after the death of Stalin. Olson argues that Stalin as a “dictator” and de facto owner of the USSR had an “encompassing interest”, which furthered economic growth.
72
Chapter 4
A similar situation may have existed in Poland until the beginning of the 1970s, when the
classical socialist system started to reform. Until that time the economy was directed by
a small group concentrated in the Politburo. The Politburo was small and membership often
stable, which helped to overcome problems of collective action. They had an encompassing
interest in stimulating economic growth, because this strengthened their position. In the
Polish case, the unpopular communists had to prove that they were the right group to govern
the country, although internally divided.8
A period of relatively good economic performance was the period of classical socialism,
which lasted until the end of the 1960s. The classical socialist system was not capable “of
a renewal that could free its dysfunctional features, while retaining the sole rule of the Communist Party and the dominance of the state sector” [Kornai, 1992, 377].9 The internal
strength of the system was its internal weakness at the same time [Kornai, 1992, 383]. In
other words, the system was not adaptively efficient. A system is adaptively efficient when
changes in one or other part comprising the system do not negatively affect the working of
the system itself. Parameters of the components of the system can change within a relatively large margin, while the influence on the system as a whole stays small. The socialist system was rigid. It looked like a solid building, in which there is no flexibility of movement.
An incident or change in a small part works through the whole building, which as a result
significantly changes and often collapses.
The stage of classical socialism in Poland was in fact the period of the “strong” economic
system of central planning under Gomu∏ka. The planner had control over the economy,
and orders were carried out relatively obediently. However, an accumulation of internal
problems created the need for reform.10 Kornai [1992, 383–6] mentions some symptoms.
Firstly, there was an accumulation of economic difficulties such as shortages, waste, lagging
technological development and neglect of consumption. Furthermore, although ideology
and the belief in state property was relatively strong and informal institutions supported the
system [Poznanski, 1996], public dissatisfaction increased as a result of economic problems,
lack of civil liberties and bureaucratic arbitrariness.
In the period 1965–1980, according to Murrell and Olson [1991], the market economies
performed as well as in the period before, when considering their growth potential.
However, the planned economies experienced a slowdown of growth. An explanation is
a shift from “encompassing interest” to “narrow interest”, leading to higher transaction
costs and weakening incentives. The power that at the beginning was largely in the hands
of the “dictator” “was diffused throughout a “new class” of apparatchiks (bureaucracy),
and sometimes even to groups of workers in individual establishments”. In Poland this
process of institutional weakening proceeded because of reforms. These reforms were
not very successful, but turned out to undermine the system by weakening the property
8
“Despite the affection of monolithic solidarity, the Polish communist movement differed from the Soviets on many
essential issues, and was deeply divided against itself. … The end result, when Stalin was left ruling Poland through his
reserve team of faceless puppets, was much as a failure for him as for the Polish communists themselves” [Davies, 1981,
576].
9
“…property is not the only sphere of phenomena in which the classical system is unable to cohabit lastingly with institutions, customs, attitudes, and norms alien to it. The mature classical system cannot tolerate contrary political opinions,
self-governing institutions, and organizations independent of the political institutions organized from above; cultures
and world views other than the official ones; or free-market exchange between autonomous economic entities. All these phenomena, though they may recur time after time, are confined into an ever narrowing area. Individual behaviour is deeply
imbued with conformism: spontaneous use of the ideas and working abilities deriving from a spirit of enterprise is virtually
ruled out, as are independent critical opinions and rebellion against superior organizations” [Kornai, 1992, 367].
10
It may be argued that classical socialism was in fact a sort of “decaying” socialism, because of its inherent internal
contradictions.
Transaction Costs and Incentives in the Polish Soviet-Type Economy
73
rights order and governance structures, which was accompanied by increasing transaction
costs.11
The process of institutional weakening can be explained as follows. In Chapter 2 a good
was described as having many characteristics, on which property rights can be delineated.
In the classical “strong” socialist system most of the characteristics of public property were
under the control of the Communist Party, in particular the Politburo. Due to the reforms
aimed at improving economic performance, de facto property rights or characteristics of
property rights were transferred to lower levels in the hierarchy, such as regional authorities,
branch ministries and industrial lobbies [Poznanski, 1996]. The reforms in Poland in the 1970s
led to a similar problem as in other reforming STEs. The dispersion of (characteristics of)
property rights as a result of loosening financial discipline and decentralisation of power by,
for instance, administrative reforms led to a weaker form of state property and a situation
where it became less and less clear who in fact was the “owner”. The reforms caused the disintegration of the centre and a competence struggle between branch ministries, weakening
the central planning system. Another consequence was that the principal-agent problem became more complex, because it became less clear who was the principal. As Czekaj [1993, 81]
argues, in practice the function of the principal was realised by different structures of the
political and administrative apparatus with unclear decision-making power and economic interests. In relations with agents their competence was not only limited to defining contract
conditions. Also, free intervention in a decision made by the agent was allowed, which made
it impossible to specify unambiguously responsibility for the decision. Thus, solving the motivation problem became more difficult. Furthermore, information flows in the process of
plan-bargaining, as discussed in Section 4.3., became even more unreliable.
The economic system weakened and changed from a “normal” to a more “pathological”
form [Poznanski, 1996]. System weakening is related to what Poznanski calls “growth fatigue”. This is “a combination of economic stagnation and internal instability (manifested in
shortages and/or open inflation) resulting from a serious decline in economic institutions,
i.e., incentive structures and information quality” [Poznanski, 1996, xi]. In other words, incentives weakened and transaction costs increased. However, informal institutions still supported the formal institutions of property rights and the Communist Party. The party/state
was still viewed, as far as was possible for Polish circumstances, as the guardian of Polish
interests.
The Gierek administration wanted to stimulate the economy at the beginning of the 1970s
with a South-Korean style economic policy [Przeworski, 1993]. The change in Poland towards
the world market is also an indication that the country had entered the phase of reform socialism. The government borrowed money from abroad, in order to build up an export-oriented industry, while trying to keep wages low by way of repression. The production increase
between 1971 and 1975 was largely the result of investment. One important problem was difficulties with the continuation of investment, due to the lack of spare parts, of which most
had to be imported. Foreign debt increased steadily, and in 1976 investment was downsized.
11
Grosfeld [2000, 176–8] argues that improvement of the centrally planned economies in the 1960s and 1970s was
rather on an ad hoc basis when conflicts and contradictions appeared, and not a conscious choice of an institutional order
in accordance to economic analysis. Ideologically the institutions of public property and the Communist Party were rather
untouchable. She argues that reforms failed, because the lower levels in the hierarchy only obtained specific characteristics
of property rights (e.g. control and income – part of usus and usus fructus), but not the usus abusus. Thus, reforms failed to
create incentive structures and information structures for efficient use of resources (e.g. by giving property rights to those
who possess more information). However, these reforms fundamentally changed the economic system, and once away from
the strong classical economic system, a way back was impossible.
74
Chapter 4
The economy fell into a crisis between 1979 and 1982. Foreign debt servicing was an important factor in the 1979–1982 recession, but domestic factors seem to be more important, because other STEs with a similar foreign debt did not face such a deep economic crisis.
Misuse of imported capital, due to weak incentives, may have contributed to the economic crisis. However, Poznanski argues that imported capital was not so much misused
as often assumed as there were incentives not to completely waste imported technology.
The imported technology was superior and wasted, but western assistance, pressure from
the central administration to pay for the new technology by exports, and ambitious and
strongly dedicated managers were the reason that there was still a productive advantage
from this technology. On the other hand, often production under licence granted by foreign
companies did not lead to extra export of the goods produced, while costs were incurred. The
agreement with Fiat to produce under licence only led at a later stage to the production of cars
that could be exported, but by that time the model was already out of fashion in the West.
High transaction costs could be an answer to the question as to why there was such a long
interval of time between the acquirement of the licence and factual production.
The influence of external shocks in the form of huge increases in the oil price in 1973 and
1979 on economic performance should not be underestimated. These price increases led to
a recession in many Western countries, which in turn lowered their propensity to import.
A factor inherent in STEs was the state monopoly on foreign trade, making this process
more cumbersome (higher transaction costs). In the 1980s Poland’s export performance did
not improve. Also, the increase in the real interest rate at the end of the 1970s had a negative
effect, in the sense that foreign debt servicing became more expensive. The problems with
debt servicing had negative consequences for investment.
Although the Gierek administration intended to keep wages low, there was continuous
pressure for real wages to increase caused by, among others, the strong labour movement
[Poznanski, 1996]. This process had already started in the early Gierek years, when real wages
increased faster than production. This increased domestic demand for consumer goods,
diverting part of production away from potential export. In 1976 real wages decreased, but
this was not enough to stimulate exports. When the government tried to lower real wages by
way of price increases, this led to mass strikes, especially in 1980 and 1981, reducing Poland’s
export capacity (e.g. of coal).
To satisfy domestic demand, export suffered, worsening the problems of foreign debt repayment. Although Martial Law in 1981 created the possibility of enforcing price increases
(on average more than 100% in 1982 [Milewski, 1999, 416]) and real wage reduction, which led
to a substantial reduction in consumption, the trade surplus of 1982 (the first in many years)
could not be sustained, due to increasing upward pressure on wages because of the strong
labour movement. In fact, social peace was bought by giving in to wage demands, which
resulted in a reduction of investment rather than of consumption, which in turn resulted in
the deterioration of productive capital built up in the 1970s, negatively influencing long-term
growth.
The 1980s can be called a period of “decaying” socialism. In Poland the decay appeared
earlier than in many other “Soviet bloc” countries, not only because of the reforms, but
mainly because of the weakening of the Communist Party and the rise of Solidarity. In 1982,
Transaction Costs and Incentives in the Polish Soviet-Type Economy
75
after the Martial Law of 13 December 1981, Poland started Hungarian style economic reforms under the leadership of the then First Secretary, Wojciech Jaruzelski. Examples are
partial price liberalisation, auction sale of currency, more entitlements for international
trade and an increasing role of the private sector [Murrell, 1995]. As a result, public property
weakened.
It has been argued that reforms in the 1980s changed the system on the surface as only
symptoms were touched, while problems remained and became more manifest [Balcerowicz, 1997, 349–50]. However, de facto, planning was for a large part replaced by state purchases. Although on the surface many features remained, such as lack of competition between suppliers and shortages, Poland had left the path of central planning without introducing a market mechanism [see Herer and Sadowski, 1993, 5; Fallenbuchl, 2000, 167]. The
superficial liberalisation of the economy had inflation as a consequence or, when inflation
was repressed by way of price controls, increasing shortages, and thus longer queues. Overall, economic growth was disappointing. Due to the weak co-ordination mechanism, the
transaction costs of solving the allocation problem increased. For the small private sector
there were many mechanisms giving disincentives to undertake economic activity. An example of increasing transaction costs is plan bargaining, which changed into a more intricate
system of regulation bargaining [Hoen, 1992, 185].
After an initial drawback during Martial Law, labour represented by Solidarity regained
power rather quickly12, and Poland started to show features of a labour-managed economy.
Formally the state had the usus abusus of public property, but there was no one to sell to, and
closing down was out of the question. Branch managers and workers in fact now shared part
of the usus and usus fructus. The further weakening of property rights led to more value in
the public domain, giving stronger incentives for rent-seeking and weaker incentives for
economic activity. An example of this is labour which managed to increase wages at the
expense of profits and investment.
The other pillar of the socialist system, the Communist Party, weakened strongly after
1981. As Poznanski argues, during the 1970s the party became more and more internally divided, which facilitated the rise of interest groups and Solidarity. The policy of the Jaruzelski administration after Martial Law was rather one of survival of the party in the face of
a powerful labour movement, while the state apparatus in the form of bureaucrats gained
power at the expense of the party. Putting it crudely, the government policy of the 1980s can
be described as “keeping the boat from sinking”.
The process of the weakening of the party was strengthened by rent-seeking behaviour.
Due to the dispersion of characteristics of property rights, a property right being a title on
wealth, individuals high in the political and economic hierarchy tried to increase their wealth.
Examples of this are tolerating black market transactions in return for favours and concluding
deals with foreign companies because of the perspective of foreign trips. This not only undermined the party structure, but also the management structure of SOEs. The payoff of collective power decreased. For party members, many of them being a member because of the
economic advantages, it became more attractive to maximise their own welfare, which
unintentionally led to the party’s demise. Bureaucrats could earn by tolerating the black
market, thus they had an interest in maintaining shortages. But these shortages increased
12
About one million members of the Communist Party had joined the Solidarity labour union [Davies, 1981].
76
Chapter 4
planning problems, and the growing illegal sector (state corruption included) undermined
the moral values and the credibility of the people in power.13
The decay of the party made control more difficult (increasing control costs), which
strengthened incentives for activities in the private domain, theft, “sabotage”, and activities in
the informal economy. The increasing level of activities in the private sector by members of
the nomenklatura created an interest in a market economy, while the troubles with governing
the country decreased the payoff of being in power.
Martial Law from 13 December 1981 increased the dissatisfaction among the population, while many people left the Communist Party [Taras, 1986, 38], a sign that at least the
lower cadres did not believe so much anymore in the centrally planned economy. Public support and belief in socialism creates “internal incentives”. When this acceptation/ideology
withered away, a process that was already visible in the 1970s, “external incentives” had to
be given by reshaping institutions, which had increasing transaction costs as a consequence.
Furthermore, the use of rules of the game is a “knowledge-creating process” [Pejovich,
1995, 91]. This means that when a system establishes itself, people find holes and weaknesses in the system and make use of this knowledge. This “institutionalisation of opportunistic
behaviour” became a bigger problem when the belief in the system (of the leaders and the
average citizens) withered away due to the reasons mentioned above and the example of
MTEs performing better than STEs.
From 1985 on, the number of private enterprises increased by way of new enterprises being set up by citizens. This was in fact another change in the property rights order, diminishing the power of the centre. Incentives for setting up a private business were provided by
simplifying rules and accounting procedures. In other words, transaction costs of setting up
and running a business decreased. Furthermore, it was now possible to freely contract with
the state sector. Also, the status of foreign investors improved. The leasing out of certain
state enterprises continued in the service sector (e.g. restaurants, hotels, retail shops, newsstands and car repair). The competition between these firms, together with a hardening of
the budget constraint, was expected to improve efficiency in the state sector. However, in
reality this did not happen.
The weakening of the socialist system accelerated at the end of the 1980s, with other
features of a market economy introduced by the Rakowski government. Agricultural and consumer food prices were liberalised, while leaving the old system of agricultural product procurement intact. Negotiable subsidies and job guarantees for industrial enterprises were
abolished, and internal convertibility (excluding capital accounts) of foreign currency was
created, increasing the importance of the private sector in this field. Another stimulus for
the private sector was that it had financial advantages compared to the state sector in the
form of lower wage taxes, more liberty in price setting and exclusion from the so-called
dividends based on the value of capital assets. The higher wages in the private sector attracted workers from the state sector. Private non-agricultural sector employment as a percentage of total employment increased from 5.3% in 1985, to 5.6% in 1986, 6.2% in 1987, 7.0%
13
Castells [1998, 20] argues that what started as a pragmatic way of circumventing shortages by doing each other favours, institutionalised as a system of informal exchange based on barter or monetary payments. Besides the fact that such
an informal market goes together with high transaction costs, it takes time before such informal institutions establish. Tolerance and help from bureaucrats was needed for the informal market to work on a larger scale. The informal market was helpful in reducing shortages, but the bureaucracy also became more and more involved, making the informal market a permanent feature of the STE. This deeply transformed the social structure, disorganised the planned economy and increased the
planning transaction costs, because bureaucrats were interested in gaining from informal market transactions rather than in
obtaining bonuses for plan fulfilment.
Transaction Costs and Incentives in the Polish Soviet-Type Economy
77
in 1988, and 10.1% in 1989. Even the share of the non-agricultural private sector in industrial employment increased from 3.2% in 1985 to 4.8% in 1989 [Poznanski, 1996, 102–114].
The first major steps towards privatisation were taken in 1988–89 by two changes in
legislation, bringing the socialist economic system to its weakest form. These changes created
the possibility of transforming failing SOEs into joint stock companies, to be owned by other
SOEs or holdings. Furthermore, privatisation took place mostly in the form of selling parts
of SOEs to “nomenklatura” managers. The scope of this phenomenon is difficult to estimate, due to its spontaneous nature. This concerned, according to Poznanski, more than 2000
firms before 1990. While the bulk of the stocks of these SOEs were owned by the state or
by other SOEs by way of inter-firm purchasing, state appointed “nomenklatura” managers,
or in some cases workers, bought the remaining (“spontaneous privatisation”). Another
change set into motion in 1988 by the Law on Corporate Associations, was that SOEs could
now form joint-stock companies, while limited liability companies could be established in
the private sector. Also setting up partnerships with foreign companies was made easier.
Control over real wages by the centre was almost completely lost due to the power of labour unions, together with monetary financing of the budget deficit leading to a wage-price
spiral and inflation.14 The unpredictability (uncertainty) accompanying high inflation on
nominal input prices and wages created liquidity problems for many firms.15 This caused
a kind of chain reaction where many firms started to lack cash, and as a consequence they
reduced output. Other factors depressing production in 1989 were a fall in output in the
coal industry and disruptions in Soviet supplies (e.g. coal and gas). After 5.3% growth in
1988, the economy was again in recession in 1989.
Besides institutional weakening, leading to higher transaction costs and weaker incentives, the international environment was an important factor in the demise of the Polish
STE [Ellman, 1993, 2]. The fast economic, technological and social progress in MTEs forced
leaders of STEs to reform, but the system inherent problems only increased in scale. The
failure of increasing the standard of living (e.g. shortages and lack of consumption goods due
to emphasis on heavy industry) and changes in the political field in the Soviet Union made
change possible, but this is not a sufficient explanation as to why change could happen in the
face of high political transaction costs. However, the “showroom effect” of the West undermined the legitimacy of STE regimes, which provided a strong incentive to change. This is
similar to what North [1990, 137] argues: if there are relatively productive institutions somewhere in the world and low costs of acquiring the performance characteristics of such institutions, this gives a strong incentive for economies with bad performance characteristics to
change. Ellman also mentions the importance of defence expenditure that could not be used
for civic purposes. Although officially estimated as 2.5 % of national income in the USSR,
he estimates the level of real expenditure to have been about 25 % [Ellman, 1993, 23].
Political factors in Poland, which significantly differed from other STEs, contributed significantly to the continuing economic problems. In a planned economy, there is direct state
control over the economy, thus a weakening of the state will lead to a weakening of the
14
The lowest level of inflation in the 1980s was in 1984 – 14.8%. Afterwards inflation increased from 15% in 1985 to
17.5% in 1986, 25.3% in 1987, 61.3% in 1988 and more than 250% in 1989 [Milewski, 1999, 416].
15
Poznanski argues that an important factor behind the disappointing growth results in the late Gierek period, under
Jaruzelski, as well as under Rakowski, was the fact that real wages increased faster than output. This had important consequences for the stabilisation plan that went into force on 1 January 1990. The growth in real wages had to be brought down,
but during the roundtable industrial workers were promised price indexation, pensioners were promised full indexation, and
workers in the budgetary sector would receive the same rate of wage increase as workers in the industrial sector. This made
reduction of the wage-price spiral more difficult.
78
Chapter 4
economic system. As Poznanski [1996, 73–8] argues, policy and plans were difficult to work
out at the central level (problem of collective action) due to political weakness, and with
such a divided background it was difficult to face the hostile labour movement. Besides that,
transaction costs of new policy and reforms were higher and uncertainty about success was
larger. The inferiority of such a system reduced the possibilities of adapting to the problems
created by the debt crisis and the economic crisis of 1979–1982. Furthermore, the elites became more aware of the disadvantages of governing such a rather ungovernable country,
while the labour movement became aware of the economic advantages of power.
The development in Poland follows Kotz’s [1992] argument describing the factors behind the collapse of the USSR. Due to decentralisation, the dominant group interested in
protecting the socialist system weakened. The ideological weakening that had already started
in Poland in the 1970s, speeded up especially after 1985 due to perestroika and glasnost.
The dispersion of de facto property rights created different interests in the economic system. The ruling class became more interested in capitalism due to economic advantages,
while the protesting working class kept an interest in the socialist system (even though they
protested). Kotz argues along Poznanski’s line of reasoning that attempts at reform, which
in Poland failed due to the lack of political legitimacy of the Communist Party [Biessen,
1993, 39]16, created a class with an interest in a capitalist system. This class consisted of the
people working in the expanding legal, semi-legal and illegal small scale private sector, the
largest part of the intelligentsia (especially after obtaining more freedom of speech due to
glasnost), and the nomenklatura. The nomenklatura in Poland was faced with a rather ungovernable country and less economic benefits than the Western elites. This argument, in
fact, implies that the changes after 1989 were the consequence of a “revolution from above”.
The huge political and economic problems made the communists start talks on power
sharing with the opposition in February–April 1989. This almost led to the self-liquidation
of the Communist Party, while in August 1989, after semi-free elections, the first non-communist government after World War II was formed under premier Tadeusz Mazowiecki.
At the moment of the power transfer to the non-communists the economic system had
changed significantly. Many firms could determine their own production, secure the necessary inputs and determine many prices and wages. Besides the weakening of public property, the main pillar of the STE, central planning, was gone. Due to reforms in the 1980s,
elements from a market mechanism were already functioning at the end of this decade
(“creeping capitalism” [Poznanski, 1996]). This may be an important factor explaining why
the transformation in Poland has been more successful than in many other former STEs [see
also Ko∏odko and Nuti, 1997]. However, the lack of market institutions in the face of abandoned and still functioning socialist institutions created an “institutional vacuum” as Poznanski calls it, meaning that many old rules of the game had disappeared, while new rules were
not in place yet. This led to a situation where “weak” state co-ordination co-existed with
“weak” public property and “weak” market institutions. This situation created uncertainty,
high transaction costs and adverse incentives, and many property rights were de facto in the
public domain. On the other hand, the liberalisation of the economy created strong incentives for small private business to develop. The influence of these factors on economic performance at the beginning of the 1990s is discussed in Chapter 5.
16
Also Sachs [1993, 35] mentions that the process of dismantling the planned economy resulted from the partial economic reforms through the years, while emphasising the political weakness of the regime as a factor behind the failure of
reforms.
Transaction Costs and Incentives in the Polish Soviet-Type Economy
79
4.5. Concluding remarks
Due to the growth of the economy in the Polish STE, as well in other STEs, the amount of
transactions increased, making the co-ordination problem more complex and increasing
transaction costs. Institutional change was necessary in lowering transaction costs, but due to
low adaptive efficiency this did not happen. Although the socialist system was able to survive
for some time, the increased transaction costs and other contradictions within the system (e.g.
social and political factors) created the basis for radical change (change in the qualitative
features of the system), which was made possible by an evolutionary weakening of the old
system.
It is never possible to point out one unique reason that is the cause of institutional
change. However, when an economy comes to the boundaries of its production possibilities
within a certain institutional framework, the rules of the game and the play of the game have
to change to shift the production potential outwards. The problem of the Polish STE was
that the rules and play of the game could only be changed within the limits of the dogmas
of public property, the leadership of the Communist Party and the influence of the Soviet
Union.
Although the system seemed difficult to be reformed, the communists were continuously
reforming. These reforms very often failed, but institutions fundamentally changed. Due to
de-centralisation de facto property rights (usus and usus fructus) diffused through a larger
group. This weakened the incentives for caring about economic outcomes at the national
level. More rent-seeking behaviour of individuals and interest groups due to a change from
encompassing to narrow interest weakened incentives even more. With the reforms, the institution of public property weakened.
Another fundament of the Polish STE, the Communist Party, was weak from the start.
During the 1970s the internal division increased, while during the 1980s, after the Martial
Law of December 1981, the party weakened even more. Besides the taking over of party
functions by the state apparatus in the 1980s, there was a loss of trust and belief in the party and the socialist system. After 1981 many party members resigned, and the economic
troubles increased dissatisfaction. An institutional disequilibrium became more and more
visible. Besides the lack of belief in the party, the lower cadres in the party itself also lost
belief in the system. In this respect the influence of the Catholic Church, to which more than
90% of the Poles belong, and the nationalist feelings against the Soviet Union should not
be underestimated. To party elites it became more unattractive to lead what I would call
a sinking ship, while a significant proportion of them became economically interested in
a new market-based system.
The weakening of formal and informal institutions coincided with increasing transaction
costs at the governance level, such as the increased problems connected with plan bargaining and in a later stage regulation bargaining, due to economic decentralisation. Weak
incentives and high transaction costs may explain the continuing economic stagnation in
the 1980s. All the problems discussed in this chapter helped to hollow out the system, and
created the conditions for rapid change without bloodshed.
80
Chapter 4
The discussion above is important in the light of changes in the Polish economy after 1989.
Did the transformation to a market economy start in 1990 with the introduction of the Balcerowicz plan? Looking from a wide perspective, in fact the transformation from a planned
to a market economy (unintentionally) started more than 30 years ago by fundamentally
changing and weakening the main characteristics of the economic system through reforms.
It turned out that the reforms changed the classical socialist system into “decaying” socialism
with features of market institutions developing, thus the system had been fundamentally
transformed.
In this chapter an attempt has been made to analyse the “Polish road to transformation”
in general within the framework of changing institutions (institutional decay/weakening),
weakening incentives and increasing transaction costs. Generally speaking, the Polish STE
evolved from a kind of classical socialism, where transaction costs were relatively low and
incentives strong, that lasted until the end of the 1960s via reform socialism (1970s), featuring increasing transaction costs and weakening incentives, to “decaying” socialism (1980s),
characterised by high transaction costs and weak incentives. This development negatively influenced economic performance and created the pre-conditions for a relatively rapid economic transformation towards a market-type economy in the 1990s. Institutional change
proceeded rather endogenously. Two of the most important formal institutions, public property and the Communist Party, were weak. Central planning did not exist in its original
form anymore. The informal institutions (e.g. belief in the system) did not support the weak
existing formal institutions, leading to an institutional disequilibrium, and economic performance was poor. However, this does not completely explain the fall of the socialist
system and the peaceful transfer of power in Poland. Not underestimating the role of the
Solidarity movement, the economic interest of the political elites in a new system is of crucial
importance, lowering the transaction costs of institutional change. Furthermore, the loss
of interest of the USSR in affairs in Poland, due to Gorbachev’s perestroika and glasnost
policy and their own economic and political problems, made change possible without intervention from this side. Thus, although fundamental characteristics of the economic system had
weakened, creating the conditions for further change towards a market oriented system,
which existed in its “embryonic” form, the final blow seems to have been a kind of “revolution from above” by the loss of interest of Polish and Soviet elites in keeping the old system
in Poland.
The weak incentives and high transaction costs in the Polish economy at the end of the
1980s were the result of a process of institutional weakening that had been proceeding for
at least two decades. This situation is important for analysing and understanding the process of institutional change and its influence on economic performance during the first years
of the 1990s, which is the topic of the next chapter.
81
Chapter 5
TRANSACTION COSTS AND
INCENTIVES IN THE CONSTRUCTION
OF THE POLISH MARKET IN THE 1990S
5.1. Introduction
In Chapter 4, it was argued that transaction costs increased and incentives weakened in the
Polish economy during the development from classical to “decaying” socialism. Economic
stagnation seemed to have become a permanent feature of the system. Serious problems
with shortages and queues were a sign of a disfunctioning economic system. The economic
problems were good reasons for applying a “cold turkey” approach for achieving structural
change and stabilising the economy.
As a result of the radical changes that started at the beginning of 1990 shortages and
queues disappeared. However, between 1989 and mid-1992 the Gross Domestic Product
(GDP) declined as a result of the transformation. The main question addressed in this chapter is as to what extent transaction costs increased or decreased and whether incentives
weakened or strengthened during the first years of the 1990s, and whether this can help to
explain the decline in output until mid-1992 and the economic recovery afterwards.
The main argument of this chapter is that initially transaction costs increased for enterprises in the state sector, while at the same time changes in the institutional environment
created adverse incentives. This negatively influenced economic activity. Small, newly established companies faced low transaction costs and strong incentives created by economic
liberalisation and an absorptive market. This in turn stimulated economic activity. The first
effect seems to have been stronger until 1992.
It will be shown that the type of transaction costs in existence after 1989 differed significantly from previous transaction costs. In the socialist system transaction costs mainly
concerned the costs of planning or the costs of solving the allocation problem in a situation
where planning had disappeared, while a market had not yet been established. Prices were
not used as a scarcity indicator under planning. After 1989 market prices became the most
important scarcity indicator. As a result, plan-related transaction costs were eliminated.
However, the use of the market and the price mechanism lead to other transaction costs.
82
Chapter 5
Transaction costs were high as the market developed in a situation where the institutional
remnants of the old socialist order still existed and many market institutions were missing.
In Section 5.2. the aims of transformation are discussed, and the question of why the particular transformation strategy used was chosen is addressed. In Section 5.3. the economic
performance during the first years of the 1990s is presented. In Section 5.4. causes for the
decline in output between 1989 and 1992 are elaborated from the perspective of statistics,
aggregate demand and aggregate supply. In Section 5.5. a new-institutional explanation of
the decline in output is presented. The focus is on adverse incentives and increasing transaction costs in the process of institutional change. The factors causing output to decline have
to be weighed against incentives for improvements in productive efficiency at the level of
a firm due to liberalisation and competition, as well as an increase in output resulting from
incentives for new business. Institutional strengthening and its contribution to improved
economic performance is the topic of Section 5.6.
5.2. Transformation: the choice and the aims
of the transformation strategy
After a period of institutional weakening, in which formal institutions of the socialist system
like public property and the Communist Party, as well as informal institutions were hollowed
out, and the socialist system was in a state of disintegration (“decaying” socialism), radical
steps towards a market economy were taken. Only some market institutions existed in an
embryonic, sometimes “pathological”, form, while many socialist institutions had disappeared. Mentality and mental models formed under the influence of the socialist system remained. Although there was an evolutionary road towards the market, Poland’s transformation in the 1990s reveals elements of both evolution and design.
The situation, in which the reform program of the Mazowiecki non-communist government had to be prepared, was very difficult. First of all, the plans had to remain secret in
order to prevent speculation. Secondly, there was a strong distrust towards economists connected with the old system, which made verification of the plans difficult, increasing the
probability of making mistakes. Thirdly, the country faced a dual transformation [Bartlett,
1997], meaning transformation in the economic and political field. Fourthly, hardly anybody had predicted the collapse of the socialist system and many had not even questioned
the feasibility of socialism. Fifthly, there were hardly any concepts available for dealing with
the transformation, and basically nobody knew how to deal with the problems. There were
some theories available which were hardly considered, such as New Institutional Economics and the German Ordnungstheorie [Rosati, 1998], probably due to the ideological
commitment of the reformers to neo-classical theories. The commonly used mainstream economic theories did not provide much help, for they considered institutions to be constant.
Finally, institutional change is path dependent. The features of old systems do not disappear so fast, especially informal institutions, not only influencing incentives from the newly developing market institutions, but also influencing the formation of new institutions.
History matters.
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
83
The political capital of the reformers was high at the time when the radical transformation plan went into force, overcoming problems that could have been posed by a low-trust
society. In the Polish situation initially the free rider problem in the creation of market institutions was overcome by a strong group that wanted to draw a line under the past, and
the ideological commitment (process-regarding preferences) of the reformers to a liberal
market economy. Stakeholders like the EU, IMF and World Bank may also have been important for providing incentives for the direction of institutional change.1
What were the main aims of transformation? The most important elements are a change
in the property rights order, the establishment of market institutions and the reduction of
the role of the state in solving the co-ordination problem. Just to mention a few aspects
of transformation: establishing a legitimate, elected government with all the institutions
and governance structures needed; creating private business; developing wholesale trade;
making the currency convertible and liberalising foreign trade; making the market the most
important co-ordination and price-determining mechanism; creating a capital market and
commercial banks; creating a tax system fit for a market economy; making public administration more efficient and professional; reforming health care and the education system;
de-monopolising markets and increasing the role of small and medium-sized enterprises;
stimulating x-efficiency; changing the environmentally unfriendly ways of production and
transport; increasing the share of services in GDP; reforming agriculture; building social
capital; eliminating black markets and nomenklatura; eliminating shortages; changing mentality; making people conscious of their responsibility for their own actions; stimulating and
developing entrepreneurship [see, among others, Ellman, 1993, 16–7].
When creating market institutions and governance structures, market imperfections have
to be taken into consideration [Ellman, 1993] and in the complicated transformation process different incentives should be used in different cases [Kierzkowski and Alsopp, 2000],
because of differing practical situations. Besides economic liberalisation and the building of
market institutions, retraining of cadres and changing the way of thinking are important.
Creating and using market institutions and finding out best practice is a learning process,
which due to the necessary changes in mental models takes time [see Fallenbuchl, 2000]. Besides creating market institutions that provide incentives for economic activity and efficient
resource allocation, new institutions, together with governance structures, should be created in such a way that they are adaptively efficient. Thus, the aim is to find and generate
information for facilitating rapid and effective adaptation to a continuously changing environment and to create institutions which support search into technological and organisational innovation [Grosfeld, 2000, 178].
At the beginning of the 1990s there was much discussion on the advantages and disadvantages of gradual transformation versus so-called “shock therapy”. From a perspective of
transformation of many characteristics of the socialist economic system, when comparing the
strategies in countries using a gradual approach with countries facing shock therapy, it turns
out that radical changes take place in some characteristics, and gradual changes in others.
For instance, privatisation in Poland, where shock therapy was applied, was slower than in
other Central European countries. As Lavigne [1999 (a), 19] states, “the choice between
the “big bang” (or “shock therapy”) model and the “gradualist” model was largely artificial.
1
Piazolo argues that the prospects of EU accession facilitate reforms and transformation towards a market-oriented
economy. He estimates the potential gain from more efficient institutions due to EU accession as “a “static” bonus in GDP
of 12% (not accounting for induced capital accumulation) and an additional “dynamic” bonus up to 24%” [1999, 325]. Hoen
[2001(a)] emphasises the importance of incentives from aspirations for EU accession for “good governance”.
84
Chapter 5
Stabilisation and liberalisation had to be conducted quickly (otherwise there could be no reform). Transformation had to take time, and what mattered was to announce what would be
done and establish credibility.” In fact the general labels “shock” therapy and gradual transformation are inappropriate. It depends on what is focused upon – stabilisation policy or
changes in different fundamental characteristics of the economic system – whether the label
“shock” or “gradual” applies. However, it is relevant to discuss why Poland chose a radical
approach – why was the intention to strive for radical institutional change and to implement
a radical stabilisation policy?
The weakening of the socialist system, the disintegration of the Communist Party and
dissatisfaction with the economic situation are arguments in favour of a radical approach to
economic transformation [see Brzeski, 2000, 129]. In fact, the approach towards institutional change was a political act – to draw once and for all a line between the old and the
new system, to create an irreversible situation [see also Przeworski, 1993]. Furthermore, the
ideological strength of the Communist Party had disappeared, so nobody could take up the
reform of socialism.
A gradual approach in Poland was infeasible, because it implied a large role for the state.
The state was weak and in transformation itself. Furthermore, public feeling in Poland was
anti-statist [Przeworski, 1993]. Reform of socialism, besides the incapability of the Communist
Party and its loss of the will to govern, was only supported by little more than a quarter of
society in 1989, according to social studies quoted by Przeworski. He suspects that the radical
strategy won, because it was the only coherent plan around.
A problem was that Solidarity, the labour movement that led the government, lacked human capital to fill all the important positions in the state apparatus and lacked control in
ministries. Political factors may have radicalised the stabilisation plan, leading to rapid liberalisation in those fields where the communists had influence in the coalition government
[Sachs, 1993, 43].
Ko∏odko and Nuti [1997, 43] argue that price liberalisation in Poland had to be rapid, because there were no budget resources for long-term subsidies. The large budget deficit was
also an incentive to aim for quicker privatisation. The share in the government budget in the
form of subsidies to state-owned enterprises (SOEs) was expected to decline and the government would have less influence on the effectiveness of enterprises. Another aim was rapid
integration into the world economy, for which swift exchange rate liberalisation would be
a stimulus. The opening of the market to international trade by lifting trade barriers would
stimulate the creation of conditions for competition and attract foreign direct investment.
The Balcerowicz plan2 that came into force on 1 January 1990 was an important instrument of economic transformation [see Przeworski, 1993]. It contained many elements mentioned above. The main aim was to create a “normal” and “rational” economy without large
disequilibria and shortages. The plan was of a rather “constructive” nature, and its key
terms were efficiency, competition and privatisation. The consumer industry would have to
develop at the cost of over-developed, inefficient heavy industry. Social aspects were not
really considered.
The transformation strategy can be distinguished into stabilisation policy and structural change. Stabilisation concerned price liberalisation, which would eliminate shortages,
2
Named after the main architect of the transformation strategy and Minister of Finance at that time, Leszek Balcerowicz.
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
85
and reduce inflation by way of real wage and income restriction, a restrictive monetary
policy and reduction of the government budget deficit. Structural change in enterprise behaviour should increase efficiency. This is strongly related to the creation of market institutions and the working of the market mechanism. Price setting by the market, also an aim
of price liberalisation, and a competitive market environment provide incentives for lower
prices, lower costs, and higher quality.
The most important steps of structural change to be carried out in the course of two or
three years were:
• Privatising SOEs, supporting business start-ups and lifting restrictions on the sale and
size of private farms;
• Making SOEs face hard budget constraints in order to improve efficiency;
• Increasing competition by way of anti-monopoly policies;
• Creating a capital and labour market;
• Creating a banking system fit for a market economy, by making commercial banks independent from the central bank, and creating the conditions for an efficient monetary and
credit policy;
• Reforming the tax system by, among other things, introducing Value Added Tax, personal and corporate taxes.
5.3. Economic performance
In 1990, the year when the Balcerowicz plan came into force, price liberalisation had a huge
influence on inflation, reaching almost 600%. Many prices immediately increased by 60%,
and meat even by 80%. As a result shortages and queues were eliminated. This, as research
presented in Chapter 6 shows, was a clear welfare improvement. After an initial jump, inflation decreased. Exchange rate liberalisation built confidence in the Polish z∏oty, which
was good for exports, and people started selling dollars for z∏oty [Przeworski, 1993].
Table 5.1. shows the growth in real GDP per capita in countries in transition. Poland
faced a recession, a decline in GDP for more than two consecutive quarters, in 1990 and
1991. While GDP increased in 1989 by 0.2%, it decreased by 11.6% in 1990 and 7.0% in
1991. In mid-1992 GDP started to increase again, and showed a total increase of 2.6%
in 1992. The main sources of GDP decline in 1990 were industry (-24.2%), construction
(-14.5%) and gross fixed investment (-10.0%). The decline in output in 1991 was mainly
caused by a decline in industrial output (-11.9%) and gross fixed investment (-4.5%). In
both years agricultural output declined by about 2%. The construction sector had already
started to grow in 1991 (6.7%), while industrial output in 1992 increased by 3.9%. In
1992 a decrease in agricultural output of almost 12% hampered the economic growth of
that year [GUS, various issues]. The decline in non-agricultural production was basically
limited to the state sector, while the private sector expanded. Although the rate of expansion
of the private sector is difficult to estimate due to underreporting for tax reasons, this
expansion did not compensate for the fall in output in state industry [Poznanski, 1996,
180].
86
Chapter 5
Table 5.1. The development of real GDP per capita in countries in transition (1989–1999).
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 GDP 1999
(1989=100)
Bulgaria
0.5
-9.1 -11.7
-7.3
-1.5
1.8
2.1 -10.9
-6.9
3.5
2.4
67
Czech Republic
1.4
-1.2 -11.6
-0.5
0.1
2.2
5.9
4.8
-1.0
-2.2
-0.2
95
Estonia
8.1
-6.5 -13.6 -14.2
-9.0
-2.0
4.3
3.9
10.6
4.7
-1.1
77
Hungary
0.7
-3.5 -11.9
-0.6
2.9
1.5
1.3
4.6
4.9
4.5
99
Latvia
6.8
2.9 -10.4 -34.9 -14.9
0.6
-0.8
3.3
8.6
3.9
0.1
60
-9.8
3.3
4.7
7.3
5.1
-4.2
62
Lithuania
Poland
Romania
Slovak Republic
11.5
-5.0
0.2
-11.6
-3.1
-5.7 -21.3 -16.2
-7.0
2.6
3.8
5.2
7.0
6.1
6.9
4.8
4.1
122
-5.8
-5.6 -12.9
-8.8
1.5
3.9
7.1
3.9
-6.1
-5.4
-3.2
76
1.4
-2.5 -14.6
-6.5
-3.7
4.9
6.7
6.2
6.2
4.1
1.9
100
2.8
5.3
4.1
3.5
4.6
3.8
4.9
109
-7.6 -12.6 -10.4
2.8
11.4
8.3
3.4
80
Slovenia
-1.8
-4.7
-8.9
-5.5
Belarus
8.0
-3.0
-1.2
-9.5
Russia
0.0
-4.0
-5.0 -14.5
-3.5
0.8
-4.6
3.2
57
Ukraine
4.0
-3.4 -11.6 -13.7 -14.2 -23.0 -12.2 -10.0
-3.0
-1.9
-0.4
36
CEE + Baltics3
-0.1
-6.6 -10.7
-3.2
-8.7 -12.7
0.3
-4.1
3.7
5.4
4.1
3.6
2.6
2.1
97
CIS4
0.6
-3.7
-6.0 -14.1
-9.3 -13.8
-5.2
-3.5
0.9
-3.5
2.8
55
CEE + Baltics + CIS
0.3
-5.0
-8.1
-5.1
-0.5
-0.2
2.0
-1.1
2.5
68
-9.3
-6.0
Source: EBRD [2000, 65] (data for 1989-1998 from the most recent official estimates from national
authorities, IMF, World bank, OECD. For 1999 preliminary data).
Compared with the other countries in the table, Poland performed relatively well. First of
all, the recession lasted shorter than in all other countries (only two years), while, when comparing 1999 with 1989, Slovenia was the only other country that had achieved a higher GDP
per capita. However, the fast growth between 1994 and 1997 slowed down to 4.1% in 1999.
After an initial shock in 1990, the rate of inflation in Poland declined steadily. The
inflation rates in chosen former Soviet-Type Economies (STEs) between 1989 and 2000 are
presented in Table 5.2. Although in 2000 the level of inflation increased to above 10%, it
declined in 2001, reaching a level below 6% [GUS, 2002(a)]. Together with Slovenia and the
Baltic States, Poland shows a healthy declining trend in inflation.
The unemployment rate increased until the end of 1993 to a level of 16.4%, after which
it declined to a level just above 10% in 1997. Afterwards the unemployment level increased
again to almost 16% in 2001 and more than 18% in March 2002 [GUS, 2002(b)].
3
Estimates for real GDP represents weighted averages for Bulgaria, the Czech Republic, Estonia, Hungary, Latvia,
Lithuania, Poland, Romania, the Slovak Republic and Slovenia. The weights used for the growth rates were EBRD estimates
of nominal $ GDP lagged by one year; those used for the index in the last column were EBRD estimates of GDP converted
at PPP USD exchange rates in 1989.
4
Estimates for real GDP represents weighted averages for countries from the Commonwealth of Independent States.
The weights used for the growth rates were EBRD estimates of nominal $ GDP lagged by one year; those used for the index in the last column were EBRD estimates of GDP converted at PPP USD exchange rates in 1989.
87
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
Table 5.2. Inflation – percentage change in retail/consumer price level (1989–2000, annual average).
Slove- Poland Hung. Czech Slovak Bulg.
nia
Rep.
Rep.
Bela-
Ukr.
rus
Ro-
Russia Lithua- Latvia Estonia
mania
nia
1989 1306.0 251.0
17.0
1.4
2.3
6.4
1.7
2.2
1.1
2.0
2.1
4.0
6.1
1990
550.0 586.0
28.9
9.7
10.8
26.3
4.7
4.2
5.1
5.6
8.4
10.5
23.1
1991
118.0
70.3
35.0
52.0
61.2
334.0
94.1
91.0 170.0
92.7
225.0 172.0
211.0
1992
207.0
43.0
23.0
11.1
10.0
82.0
1993
32.9
35.3
22.5
20.8
23.2
73.0 1190.0 4735.0 256.0
875.0
1994
21.0
32.2
18.8
10.0
13.4
96.3 2221.0
891.0 137.0
311.0
72.1
35.9
47.7
1995
13.5
27.8
26.2
9.1
9.9
62.0
709.0
377.0
32.3
198.0
39.6
25.0
29.0
1996
9.9
19.9
23.6
8.8
5.8
123.0
52.7
80.0
38.8
47.8
24.6
17.6
23.1
1997
8.4
14.9
18.3
8.5
6.1
1082.0
63.8
15.9 154.0
14.7
8.9
8.4
11.2
1998
8.0
11.9
14.3
10.7
6.7
22.2
73.2
10.6
59.1
27.6
5.1
4.7
8.2
1999
6.0
7.4
10.0
2.0
11.0
2.0
294.0
—
46.0
56.0
1.0
—
—
2000
9.0
10.4
10.0
4.0
12.0
10.0
169.0
—
46.0
21.0
1.0
—
—
971.0 1210.0 210.0 1526.0 1021.0 951.0 1076.0
410.0 109.0
89.8
Source: EBRD [2000, 67] (data for 1989-1998 from the most recent official estimates from national
authorities, IMF, World bank, OECD). For 1999 and 2000 – GUS [2001].
Large structural changes took place at the beginning of the 1990s. Table 5.3. shows the development of different sectors of the economy during the first half of the 1990s. After an initial
increase, the share of industry in GDP fell from 41% in 1989 to 33% in 1994. Construction,
after an upward trend in 1991 and 1992, which could have contributed to the economic recovery
starting in mid-1992, declined from 11.2% in 1992 to 5% in 1994. Also, agriculture showed
a declining trend, while employment in this sector did not decrease so much, implying an impoverishment of people working in this sector. The growth of “other”, which basically concerns
services, from 37.2% of total GDP in 1989 to 56% of total GDP is worth noting. A factor behind this is the emphasis under socialism on (heavy) industry, while the service sector stayed
behind. The economic liberalisation gave a strong impetus to the development of this sector.
Table 5.3. The share of different sectors in the creation of GDP (percentage) (1989–1994).
1989
1990
1991
1992
1993
1994
41.0
43.6
39.2
39.6
33.4
33.0
9.6
9.5
10.9
11.2
6.6
5.0
Agriculture and forestry
12.2
7.3
8.4
7.3
6.6
6.0
Other (e.g. services)
37.2
39.6
41.5
41.9
53.3
56.0
Industry
Construction
Source: Gorzelak [1996, 17], based on different issues of GUS Rocznik Statyczny (statistical yearbook).
88
Chapter 5
Moreover, the strong development of the private service sector can be shown with the
help of employment data (other data are presented later in this chapter when discussing factors of the fall in output and recovery). Total employment in domestic trade increased in 1990
by 0.7%. Private sector employment in domestic trade increased by 13.9%, while the decline
in the public sector amounted to 34.3%. Total employment in domestic trade increased
by 16% in 1991, while all other branches faced decreasing employment. The public part of
domestic trade reduced employment by 24.5%, while the already much larger private part
saw an increase of 24.9%. In 1992 the total increase was 16.8%, made up of a decrease in
public employment by 53.1% and an increase in private employment by 42.3%.
The fall in employment in the public sector can partly be explained by the privatisation
of many small SOEs in this sector, which explains part of the increase in employment in the
private sector. However, the increase in private employment was also based to a large degree on the setting up of many new small enterprises, while, as discussed later in this chapter, increasing transaction costs and adverse incentives provided by a change in the rules of
the game in the economic system contributed to the worse performance of the state sector.
5.4. Causes of the decline in output – statistics, demand
and supply
In all of the former STEs in transformation in Central and Eastern Europe and the former
Soviet Union, the initial phase of transformation was accompanied by a decline in output.
The Polish recession was the shortest. The country resumed economic growth relatively fast,
among other things, due to initial institutional conditions (“creeping capitalism”), system
strengthening, incentives for small private business and geographical closeness to the EU.
However, there is a price-index problem. As was shown in Table 5.1., in 1989 the Polish economy grew by 0.2%, while the Baltic states, Belarus and Ukraine showed a much higher
growth rate. Thus, for Poland it was easier to achieve the GDP level from 1989. However, this
argument does not count in relation to Slovenia, which faced a negative growth rate of – 1.8%.
Concerning explanations for the fall in output at the beginning of the 1990s, Hoen [2001(b),
22–3] distinguishes three basic views: 1. the fall in output was serious, but exaggerated;
2. the fall in output was serious, but inevitable; 3. the fall in output was serious, and unnecessarily deep. The first view is related to statistical over-estimation and incentives existing
under central planning to over-report production, in order to obtain bonuses for plan fulfilment – Winiecki [1993] speaks of “output that was not”. The second view concerns “output
that was, but should not”. Under socialism many products were produced, for which there
would be no demand in a market economy. Due to forced substitution under conditions of
shortages people bought these products, while many products were of low quality. The third
view embraces “output that was and should be”, and relates the crisis to the transformation
strategy. All three views have their merits, and probably all three mechanisms have been
at work. Furthermore, there were factors causing underestimation of the recession. The
question remains as to which view is likely to be the most valid and which factors have had
the strongest influence.
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
89
The fall in output at the beginning of the 1990s is discussed by way of official statistics
that overestimate the scale of recession (5.4.1.), demand factors (5.4.2.) and supply factors
(5.4.3.). A new-institutional explanation of the fall in output is presented in Section 5.5.
5.4.1. Statistics
It can be argued that the fall in output was serious, but overestimated. This explanation of
the fall in output is based on the argument that output in STEs was overestimated. Overestimation may have taken place in order to show the superiority of the socialist system. Furthermore, under socialism enterprises had an incentive to over-report their performance, in
order to achieve the plan. This concerns “output that was not”. However, as Rosati [1998,
106] argues, practices of over-reporting had not existed anymore in the more decentralised
planned economies like Poland since 1982 and Hungary since 1968.5 Furthermore, while
there was an incentive for firms under central planning to over-report output in order to
achieve the plan, there also was an incentive to under-report output in case of over-fulfilment of the plan, due to the fear of planning-in the extra output the following year. This
often led to an “automatic” fulfilment of the plan [see Kornai, 1992].
A grey sector already existed before 1989, implying that the initial level of output was
underestimated. In Poland many illegal or semi-legal activities became legal at the start of
the system transformation, increasing official output. This can be used as an argument for
the statement that the recession was serious, and underestimated.
Table 5.4. The ratio of the product of the hidden economy to the official GDP.
Household electricity approach (1989–1995).
1989
1990
1991
1992
1993
1994
1995
Czech Rep.
21.7
24.3
31.7
31.8
27.1
24.5
21.8
Hungary
24.6
26.6
31.1
33.3
33.6
31.4
29.6
Poland
22.9
31.6
32.5
31.7
31.1
27.9
23.9
Romania
17.3
24.4
36.9
39.0
37.5
34.2
28.3
Slovakia
21.7
24.3
32.0
32.0
34.1
32.0
28.4
Ukraine
28.1
37.4
47.0
54.6
52.8
Belarus
21.2
33.7
40.3
44.3
46.4
Source: Lackó [2000, 135].
However, a study conducted by Lackó [2000] on the development of the grey economy provides arguments for the statement that the decline in output was overestimated. In the STE,
the informal economy mainly existed in order to relieve shortages. In a market economy tax
evasion, or evasion of legal prohibition, is often a reason for the existence of an informal economy [Lackó, 2000, 118]. During the transformation the incentives in the informal economy
changed. Many activities were now allowed, legalising a large part of the grey economy.
5
This implies that this argument may have some validity for other economies in transformation, which did not undergo
such far reaching reforms under socialism.
90
Chapter 5
However, the lack of a well developed tax system and tax enforcement system provided new
incentives for hiding economic activities. The estimated ratio of the product from the grey
economy to the official GDP between 1989 and 1995 in various countries in transformation
is presented in Table 5.4.
What can be observed in Lackó’s estimate is that the share of the informal economy increased at the beginning of the introduction of radical measures to change the economic system [see also Gomu∏ka, 2000]. In Poland, a big jump took place in 1990. The data provide evidence for the argument that output did not decline so much, due to an increase in the activities
in the informal economy. From 1991 on the size of the informal economy declined. A possible
explanation is that this was the result of a developing tax system and more efficient tax enforcement. In consequence, the reduction in the share of the grey economy could be one of
the sources of economic growth in Poland since 1992 – informal activities becoming legal.
Sachs [1993] is a strong proponent of the argument that the recession was exaggerated,
and that the fall in the standard of living was for the main part an illusion. In other words,
the decline in output concerned “output that was, but should not”. He argues that the standard of living at the threshold of transformation was much lower than officially reported, due
to large shortages and the large amount of unwanted and bad quality products produced
by SOEs, such as tanks and statues. The fall in real wages in 1990 was an illusion, as it
caused a reduction of the monetary overhang, “the accumulated, unspent stock of money in
money owners’ pockets” that existed because not all money could be spent due to shortages
[Kornai, 1992, 277]. This monetary overhang was rather the result of the increase in real
wages between 1987 and 1989. In the socialist shortage economy, not all money could be
spent. Thus, consumption may be a more reliable indicator of the standard of living. The disappearance of queues, due to price liberalisation, immediately improved the standard of
living of many people6 [Kornai, 1992, 70], and the availability of a larger variety of products
and higher quality products, also from import, improved living conditions [see also Rosati,
1998]. However, some economists argue that shortages had already disappeared in many
fields at the end of 1989 [Herer and Sadowski, 1993; Ko∏odko and Nuti, 1997; Rosati, 1998].
An argument in favour of the statement that fall in output was underestimated is that
some industrial transactions in 1990 were calculated as if they were concluded between
firms, while before they had taken place within a firm [Ko∏odko and Nuti, 1997, 48]. On the
other hand, an argument for the exaggeration of Poland’s recession is that, due to high inflation, the book value of stocks was overestimated in 1989 and underestimated in 1990
when the market value was much higher [Berg, 1995].
Generally speaking, an important cause of difficulties regarding statistical measurement
was that statistical methods changed. Under socialism national income was measured by
way of Net Material Product (NMP), while market economies use Gross Domestic Product
(GDP). The service sector was underestimated in NMP, which led to an underestimation of
output. In turn, this automatically may have led to growth being overestimated due to the
use of GDP.
It can be concluded that it is difficult to prove that the recession was statistically overor under-estimated, and that a fourth category can be added to the three distinguished by
Hoen (see above): the recession was serious, and underestimated.
6
Of course there also were losers, like those who were queuing for others in returns for favours or money.
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
91
5.4.2. Demand factors
A factor considered by many economists to have been an important explanatory variable
for the decline in output at the beginning of the 1990s was the fall in aggregate demand consisting of individual consumption, private investment, government expenditure and net
exports. Aggregate demand explanations of the fall in output concerns “output that was”,
including both wanted and unwanted products produced under socialism. On the one hand,
consumption demand declined at the beginning of the transformation, due to a fall in real
wages caused by inflation and the “popiwek”, a tax on excessive wage increases that was introduced to break the wage-price spiral fuelling inflation since the 1970s [see Herer and Sadowski, 1993; Poznanski, 1996; Ko∏odko and Nuti, 1997; Rosati, 1998; Kierzkowski and Alsopp, 2000]. The fall in consumption demand hardly affected food consumption, but the demand for non-food consumption goods like textiles fell sharply [Ellman, 1993, 26]. As Herer and Sadowski [1993, 23–5] argue, a negative multiplier effect may have been at work as
a result of the appearance unemployment.
High inflation led to a fall in the real value of household savings, of which about 75%
was in US dollars. This caused a negative wealth effect reducing consumption [Rosati, 1998,
115–6]. On the other hand, the introduction of currency convertibility and the devaluation
of the z∏oty led to “de-dollarisation” of the Polish economy, and many people converted
their dollar savings into z∏oty [Sachs, 1993, 54; Poznanski, 1996, 177–8]. This phenomenon, together with catching up consumption due to the availability of products and the large shortages before 1989, increased consumption demand. However, the availability of and trust in
Polish consumer goods was limited, leading to a strong increase in the marginal propensity
to import when trade was liberalised in 1990–91. This effect was weakened by a cheap z∏oty [Herer and Sadowski, 1993, 110; Rosati, 1998, 112]. The total effect on consumption demand may have been negative, deepening the recession.
Another factor was the tight fiscal policy. Government spending declined, due to cuts in
national defence spending, central government investment and subsidies. Subsidies fell
from 11% of GDP in 1989 to 7% of GDP in 1990 [Poznanski, 1996, 174].
An important cause of the fall in aggregate demand is considered to be the tight monetary policy. The relationship between the increase in the interest rate and the fall in output
is explained by Calvo and Coricelli’s [1992] “credit crunch hypothesis”. Reserve requirement ratios were increased, interest rates went up and access to credit became more difficult, due to administrative limits on lending [Poznanski, 1996, 175]. At the same time there
was increased uncertainty about the rate of return on investments, due to high inflation. As
a consequence, in 1990 investment in fixed capital declined by 10%, and by 4% in 1991.
Stocks of working capital were reduced at the beginning of 1990. This effect lasted until the
second half of that year, when stocks rose again [Rosati, 1998, 118]. Rosati estimates this effect as 2–2.5% of GDP on an annual basis, which is lower than Calvo and Coricelli’s [1992]
(5%) and Berg and Sachs’s [1992] (7.7%) estimates. As Rosati argues, the production of
final goods by companies should not be influenced by a fall in stocks. Final output fell due
rather to a fall in consumption demand. It is possible that reduction of stocks of working
capital caused a fall in aggregate demand and that unhoarding, companies getting rid of the
92
Chapter 5
stocks that were held for safety reasons under socialism because of shortages, took place.
Stocks even increased at the end of 1989 by 20.9% due to the low real interest rates and uncertain future perspectives, while production declined by 2.5% [Biessen, 1993, 45]. These
stocks were not necessary anymore under market circumstances. However, the recession
can also have caused a reduction of stocks in order to reduce costs, which means that it was
not a cause but a result of the recession [Poznanski, 1996, 191].
Net exports on average had a anti-recessionary influence in 1990 – imports decreased
due to the cheap z∏oty, while exports increased not only due to changing price relations [B∏a˝yca, 2000, 237], but also due to the decreasing production costs resulting from lower real
wages. The trade surplus increased from $0.8 billion in 1989 to $3.7 billion in 1990 [Poznanski, 1996, 181]. This shows that managers of SOEs reacted to market signals to a certain
extent [B∏a˝yca, 2000, 238].
According to Rosati the fall in exports due to the collapse of CMEA (Council for Mutual Economic Assistance) in 1991 caused a fall in GDP by an estimated 3–4% [see also Fallenbuchl, 2000; Kierzkowski and Alsopp, 2000]. Although this decline in trade was partly
counteracted by a fast reorientation towards increasing trade with the West, this could not immediately make up for the loss of the former CMEA market. The reduction in aggregate
demand due to the collapse of the CMEA was the largest in Bulgaria and the Baltic States
[Kierzkowski and Alsopp, 2000, 150]. The large decline in Finland’s GDP in 1991 indicates
that this factor should not be underestimated [Williamson, 1993, 38; Fallenbuchl, 2000,
166].7 The import of better quality technology (e.g. machinery) probably had a positive effect on output, but pushed out less efficiently produced Polish machinery [Herer and Sadowski, 1993, 44]. Import of consumption goods increased rapidly due to the appreciation of
the z∏oty, leading to a deteriorating trade balance and a $1.3 billion current account deficit
[Poznanski, 1996, 182]. However, informal trans-border trade increased rapidly, lowering
the official current account deficit.
Rosati [1998] argues that the recession was the result of a combination of different factors, which operated with different strength in different countries. Like many other authors
he considers demand factors to have been of more importance than supply factors, which
probably had a neutral effect. Brada and King [1992] argue that the fall in output in Czechoslovakia, Hungary and Poland can be completely explained by aggregate demand shocks
connected with the excessively tight monetary policy, while aggregate supply factors had little influence. However, there are strong arguments that supply side factors were the main
cause of the decline in output [see Poznanski, 1996]. In the next section the influence of
price liberalisation and currency convertibility is discussed.
5.4.3. Supply factors
Two factors on the supply side influencing production decisions are discussed in this section:
price liberalisation, as well as the introduction of currency convertibility and devaluation of the
currency. Under socialism most prices were controlled, which was a cause of shortages. In
order to introduce a market economy, prices had to be liberalised [see Kornai, 1992]. Changes
in relative prices led to a change in profitability for firms, influencing their supply decisions.
7
Finland, which at the beginning of the 1990s was heavily dependent on trade with the Soviet Union, saw its export decline by 8.8% and its GDP by 10% in 1991 [Fallenbuchl, 2000, 166].
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
93
Formerly heavily subsidised products, such as energy-intensive products, became less competitive or uncompetitive when the price of energy went up, while the situation of products
for which prices already were close or equal to the market equilibrium improved. Thus, in
some sectors output declined, while in others output increased. No doubt, the share of heavy
industry should decline in favour of the service sector [see Gorzelak, 1996]. On the other
hand, decreased demand in the national economy due to price increases gave companies incentives to look for export markets [Biessen, 1993].
Decline in output in some sectors and the increase in output in others do not cancel out
[Herer and Sadowski, 1993, 103; Kornai, 1994, 45; Rosati, 1998, 109]. Decline occurs faster
than growth, as destruction proceeds faster than construction. Production can often be stopped
immediately, while commonly investment and time is needed to expand output. Rosati [1998,
109] argues, that because output fell in almost all sectors, this argument cannot be the main
explanatory variable. However, when looking at the state sector, which was in decline, and the
private sector, which was expanding due to privatising and restructuring SOEs and business
set-ups, its explanatory power increases.
Price liberalisation initially led to high inflation, and was accompanied by a decline in
output [Gomu∏ka, 2000, 232]. High inflation not only creates more uncertainty about expected future revenues, but also distorts relative prices, which makes the solving of the
co-ordination problem more difficult. Even before 1989 price relations were very disturbed,
thus high inflation was a clear sign of radical adjustment. However, as Poznanski [1996, 172]
argues, high inflation shortens contract periods, reduces long-term investment and negatively
influences labour productivity due to disincentives. These disincentives were caused by
negative welfare effects and not fully or non-indexed wages for part of the population.
The supply response to price liberalisation is closely related to the arguments regarding
institutions elaborated in Section 5.5. The first reply to price liberalisation and the announcement of the application of means of monetary and fiscal control contrasted to the
predicted reaction (at least officially predicted) [Kierzkowski and Alsopp, 1997, 2000]. Firms
should have reacted by restructuring and increasing efficiency, but quickly returned to old
habits of increasing wages in accordance with the increase in the price level due to, among
other things, the strong labour unions. As a result little restructuring took place. Monopolistic practices and the reaction against unexpected effects of the stabilisation policy led to
firms lowering their output and increasing prices. This was only good for the government
budget, because of the high tax that firms had to pay on wage increases (“popiwek”). Furthermore, the price rises introduced by monopolistic companies negatively influenced
expectations regarding inflation, negatively affecting the propensity to invest, contributing
to the recession.
The main reason for the opening of international trade, partial currency convertibility
and devaluation of the currency was to create competitive markets in the mostly monopolistic
industries [Sachs, 1993, 50, 54]. International trade was liberalised, tariffs were lowered,
subsidies were eliminated and many non-tariff barriers were removed, except for duties on
alcohol, natural gas, tobacco and oil [Poznanski, 1996, 202–3]. The logic of a swift introduction of currency convertibility was connected with the introduction of a properly functioning price mechanism, in order to get rid of shortages and imbalances [Kornai, 1994, 41].
94
Chapter 5
Competition is a necessary condition for such a properly functioning price mechanism, and
free trade (low tariffs) and currency convertibility would stimulate this.
However, these measures may have contributed highly to the recession [Ko∏odko and
Nuti, 1997, 37]. It can be argued that the devaluation of the z∏oty was too strong. The new
exchange rate of 9500 z∏oty per dollar was higher than the black market rate of about 8000
z∏oty per dollar (according to Biessen [1993, 49] 7500 z∏oty per dollar in December 1989).
The black market exchange rate was already high due to the monetary overhang, increasing
the demand for dollars, and the partial dollarisation of the economy. Although the cheap
z∏oty could have stimulated exports, an increase in import prices contributed to inflation.
However, this argument becomes weaker when considering the fall in average tariffs (including agriculture) from 18.3% to 5.5%, reducing import prices [Ko∏odko and Nuti, 1997, 37].
Ko∏odko and Nuti argue that the under-valuation of the z∏oty contributed indirectly to
a fall in output as foreign assets and stocks of firms increased in z∏oty terms. This increased
the tax base and intensified the problem of rising taxes due to increasing stock value resulting from high inflation.
As Kornai [1994, 45] argues, the change in relative prices, while on the one hand stimulating exports, helped Polish firms to become more attractive to Polish consumers and producers, due to the increased prices of imports. However, as mentioned earlier, in a rather
monopolistic market environment firms increase price rather than output, contributing to inflation [Kierzkowski and Alsopp, 2000, 149]. Furthermore, the “de-protection” of Polish industry, due to trade liberalisation, had negative effects on production in 1990. Polish producers
competing with imports were forced to lower their margins, and often produced goods with
a negative value added, i.e. production costs were larger than the world market price. Examples
of such negative effects are provided by the textile industry and the electro-machinery
industry, heavily exposed to foreign competition. In mid-1991 tariffs were increased again,
decreasing the importance of trade liberalisation in explaining the fall in output in this year
[Poznanski, 1996, 202–3].
5.5. Causes of the decline in output – a new-institutional
explanation
In Section 5.4. the fall in output in Poland at the beginning of the 1990s was discussed from
the point of view of statistics, aggregate demand and aggregate supply. Arguments were
presented in favour of aggregate demand as an explanatory variable. However, a new-institutional explanation can be given for why supply (output) decreased and why it is difficult
to make it grow. This is done by way of analysing the effects of the process of institutional
change in the early 1990s on economic performance.
A possible explanation of the fall in output in Poland at the beginning of the 1990s is
high transaction costs and adverse incentives in the process of institutional change. Restructuring of corporate governance of large SOEs is another factor that contributed to the decline in output. The slow restructuring of (former) SOEs could have been the result of a lack
of market institutions, creating adverse incentives. Added to this, transaction costs and un-
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
95
certainty were high due to unclear rules of the game, inefficient governance structures and
the need for investment in safeguards in an undeveloped and rapidly changing institutional
environment with increased opportunities for rent-seeking.
The arguments presented in the first four subsections are closely related to each other,
and focus on different factors causing high transaction costs and adverse incentives in the
transition process. In Section 5.5.1. the main topic of interest in weak and missing institutions. In Section 5.5.2. the focus is on the privatisation process – the transformation of the
formal institution of the property rights order. Difficulties on the level of governance in the
form of high costs of using the market for SOEs are discussed next (Section 5.5.3.). Afterwards, the creation of adverse incentives and an increase in transaction costs as a result of
informal institutions such as mental models and social capital is elaborated (Section 5.5.4.).
Finally, private economic activity as a factor counteracting the decline in output is discussed
(Section 5.5.5.).
5.5.1. Adverse incentives and high transaction costs due to weak and missing
institutions
At the end of the 1980s the weak Polish economic system was characterised by weak incentives and high transaction costs, negatively influencing economic performance. An aim of
transformation was changing the “pathological” economic system into a “normal” and strong
economic system, where stronger incentives and lower transaction costs should lead to an
increase in GDP. However, the creation of such a system takes time, and fixed transaction
costs of institution building are high, diverting resources away from purely productive activity. Important institutions for a market economy, such as a banking system and legal system fit for a market economy discussed below, were missing. When such institutions are introduced, they are not necessarily efficient. As existing institutions were weak, and many
market institutions with a signalling function were lacking, uncertainty and information costs
increased. An institutional disequilibrium probably developed, as people in a situation of
high uncertainty tend to fall back on their socialist mental models for decision making, increasing the likeliness of adverse reactions to market incentives. Due to high transaction costs
and weak “institutional governance”, there was considerable value in the public domain,
providing incentives for redistributive rather than productive activities. The high transaction
costs and adverse incentives in the situation described can help to explain the fall in output.
Building market institutions is a complex venture, and, as Rosati [1998, 122–3] argues,
introducing legal and political procedures for establishing such institutions takes time in
a democracy. The rather exogenous path of institution building is likely to have contributed
to the fall in output [Pejovich, 1995, 60–2]. The creators of the new institutions possess incomplete information and face uncertainty, which increases the chance of introducing inefficient institutions. Furthermore, the people who design new institutions are not the same
as those who implement them. The people who implement the new rules of the game have
their own interest, which can collide with the intention of the new rules, but it is also possible that they interpret the new rule differently. As a result, the outcome may be different to
the one intended.
96
Chapter 5
Besides the high fixed transaction costs of institution building and organisational change,
high transaction costs in the political process slow down institutional change. When an economy becomes more complex with respect to production and trade, major bottlenecks arise
in the field of knowledge, law, economics, accountancy, management, the ability to take
decisions, and language [Åslund, 1994, 35]. This implies that transforming institutions such
as the banking system, public administration and the legal system is time consuming. As
a consequence, for a certain period institutions will be missing, or not function properly.
This leads to increasing transaction costs and uncertainty, contributing to a decline in output
and difficulties in increasing supply. Nevertheless, “about tens of thousands, indeed millions
of economic agents learning, practising and internalising the rules and their outcomes”
[Csaba, 1993, 103] slowly strengthen the economic system.
The banking system and institutions stimulating an efficient public administration were
institutions whose importance was often underestimated [Biessen, 1993, 55; Ellman, 1997,
27]. Banking facilitates transactions (e.g. credit and quick money transfer), while in the case
of bad loans they can be a burden on the government budget. There was no clear division of
jurisdiction between central and local government over local matters [Groen, 1998, 143–4],
which hampered privatisation and regional development.
The importance of the banking system becomes clear when analysing the credit shortage that existed at the turn of the 1990s. During the 1980s the real interest rate was low or
even negative. The increase in the real interest rate indirectly affected the output decisions
of enterprises. In the short-term, output decreased because the increased price of money
made banks less willing to lend without safeguards and proof of the profitability of a project.
Thus, in other words, besides higher interest rates, the transaction costs of obtaining credit
increased in the form of information costs from the side of banks, negotiation costs, and
safeguards to reduce the control costs of preventing defaulting on payments.
Another explanation of the credit shortage is that the financial system that had developed
under socialism, was not fit to face many challenges of a market economy. Furthermore, a capital
market, as exists in developed market economies, still had to be created. The existing banking
system discriminated against new companies, and favoured non-restructured SOEs, which
already had contacts with banks. An adequate bankruptcy procedure did not exist. A question
is whether commercial banks were able to estimate risk and assess a business project. There was
a huge lack of human capital in this field. As a consequence less credit was granted to new companies, while the lack of bankruptcy procedures and long-time connections with SOEs led to
a tendency to give more credit for those firms, leading to an increase in bad debts [see Poznanski, 1996, 199–200]. The incentives to lend decreased from mid-1991, when commercial banks
could also locate money in safe government bonds. The credit shortage contributed to the decline in output, while the banking system, due to institutional weaknesses, did not significantly
contribute to the increase in output that started in mid-1992. The banking system may have
been a factor itself in the decline in output by not taking up its role in the developing market
economy quickly, while its role from the socialist days for the largest part had disappeared.
Although many market institutions already existed at the end of the 1980s, due to the
process of “creeping capitalism” during the 1970s and 1980s, the designers of the rather
neo-classical stabilisation policy wrongly assumed that developed market institutions existed
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
97
[Rosati, 1998, 120]. The breakdown of central planning created a vacuum [Stˆhl, 1993, 324;
Poznanski, 1996]. Thus, as a consequence the market mechanism could not provide adequate
incentives for activities aimed at restructuring.
The weak market economic system that existed at the beginning of the 1990s expressed
itself in many ways. There was a large degree of political uncertainty, which increased the
risk involved in investments and hampered the enforcement of property rights. When the
state is weak (e.g. political institutions are not well developed [B∏a˝yca, 2000, 238]), or faces
high costs of enforcing (private) property rights (weak “institutional governance”), economic development is hampered and “private enforcement” of property rights can come
into existence, such as the Mafia asking protection money or controlling certain sectors in
the economy [Zhigang Tao and Tian Zhu, 2000]. Although this problem was much smaller
in Poland than in a country like Russia, it increased transaction costs.
Another factor of institutional weakness was the legal system. When laws do not exist,
property rights are likely to be poorly protected, which creates uncertainty. However, when
laws frequently change and are full of loopholes, this increases uncertainty and creates opportunities for rent-seeking. Furthermore, interpretation of the law contained difficulties,
since different people in various parts of the bureaucracy had different interpretations, while
enforcement was hampered by high transaction costs. Facing such uncertainty, it is difficult
for companies to make long-term/strategic plans.
Some factors contributing to the weakness of the legal system are discussed by Wyrzykowski [1995]. The approach to law and the legislative process is very politicised and ideological.
Law is not a compromise between different interests, but rather the outcome of an ideological battle. This implies that it is often not “best practice” which is legalised and in many cases
economic implications are not taken into consideration. This leads to laws which either hamper economic activity or are not enforced. Wyrzykowski emphasises the existence of an institutional disequilibrium in the legal system. The lex, a system of strictly interpreted and applied
rules, often differs very much from the ius, which concerns the value system connected with
“promoting justice on the basis of commonly accepted concepts of morality” [Wyrzykowski,
1995, 11]. There is path-dependency in the sense that the new economic (and social) lex and
ius contain many elements from the old system. This is the case with labour, which had
a strong influence under the old system. Currently in employer-employee conflicts the employee often has an automatic advantage. Another point is that the frequent, sudden changes
in laws, that often are not well thought out, reduce the trust and belief in the legal system, and
as a consequence undermine trust in the democratic constitutional state. Thus, in such a way
values that reinforce the formal institutions are not likely to be strengthened, which leads to
a continuation or increase in the institutional disequilibrium, weakening the economic system.
The great uncertainty that Poland faced in the political and institutional fields at the beginning of the 1990s [Van de Mortel, 2000] may partly explain the fall in output [Macours and
Swinnen, 2000, 197]. When there is great uncertainty, firms are likely to take a policy of wait
and see, which delays restructuring, while it also hampers innovation. In this sense uncertainty about the institutional environment (what Van de Mortel calls “framework uncertainty”,
defined in Chapter 2) contributes to the economic recession. On the other hand, economic
recession makes institutional change more difficult, increasing framework uncertainty.
98
Chapter 5
When framework uncertainty is high and economic performance is unclear, then an unclear development path is likely to be entered into, where path-dependency is of great importance. In this case an economy can easily develop “pathological” institutions. Basically,
large uncertainty increases transaction costs in all fields of political and economic life, and
lowers the reliability of information. In such a situation it becomes more difficult to find reliable trading partners. The development of many embryonic market institutions under socialism in Poland, especially at the end of the 1980s, reduced framework uncertainty to
a certain extent, and may have contributed to the economic growth that started after the
shortest recession of all former Central and Eastern European STEs.
In a situation of framework uncertainty and lack of enforcement mechanisms the value
in the public domain is likely to be high, which creates opportunities for rent-seeking individuals. Such rent-seeking behaviour is accompanied by transaction costs of redistributive
activities, which is a social waste, because these sources could be used productively.8 Much
rent-seeking went through the state budget and boosted the budget deficit [Åslund, 1999],
as the state was the main stakeholder in the economy.
Åslund [1999, 51–6], using the example of Russia, regards upon inflation as a good indicator of rent seeking, as inflation would be mainly caused by rent-seeking behaviour, and would
be an important explanatory variable for the decline in output. The state, directly or indirectly,
subsidised enterprises by way of, inter alia, credit subsidy, price subsidies ad exchange rate
subsidies. These rents for economic agents related with SOEs lowered the gains of privatisation and the development of a transparent market economy. Fast price liberalisation, currency convertibility, liberalisation of free trade and reductions in subsidies (in the case of
credit subsidies – introducing a positive real interest rate) greatly lowered the opportunities
for rent-seeking in Poland by strengthening the economic system. It is likely that the Polish
stabilisation and liberalisation program caused a decline in output, but it may well have
prevented a larger decline in output by immediately reducing opportunities for rent-seeking.
5.5.2. Adverse incentives and high transaction costs in the process of transforming
the property rights order
In the process of institutional change towards a market economy, a change in the rules of
the game should provide strong incentives to improve efficiency at the level of governance
and stimulate the growth of small business. The elimination of bureaucratic barriers and the
elimination of wasteful production, due to more competition and the introduction of hard
budget constraints [see Herer and Sadowski, 1993; Rosati, 1998] by way of privatisation,
should lead to the improvement of x-efficiency at the beginning of market construction, increasing output while using the same amount of resources [B∏aszczyƒski, 1995, 273].
Due to slow privatisation, the development of a competitive market was hampered. SOEs
reacted adversely to incentives given by market institutions as a result of high uncertainty
in the privatisation process, leading to a reduction in output. As transaction costs were
high, there was large value in the public domain which, besides the negative effects of
8
It can be argued that those who captured value out of the public domain were the fittest in the “jungle” of the market and could use those means the most productively, so redistribution would not influence efficiency. This is an argument
in favour of the so-called “spontaneous privatisation” (see Section 5.5.5.). In many cases this concerns people making use of
their positions under the old system, facing lower information and negotiation costs, and thus capturing value due to imperfectly working markets. They may have been more efficient in running companies due to “tacit knowledge” and a scarcity of
management skills. However, the question remains as to whether the development of market institutions creates competition or that barriers to entry remain.
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
99
rent-seeking on incentives and output, led to the phenomenon of “spontaneous” privatisation, where the incentives for restructuring are unclear. Restructuring of SOEs proceeded
slowly, and as a consequence the influence of factors causing the decline in output lasted
longer and it took more time before supply started to grow.
An indicator of the speed of privatisation is the number of firms privatised. In 1992 this
number was 1401, after which the number fell to 1271 in 1993, 791 in 1994, 485 in 1995 and
385 in 1996. However, the budget revenue from privatisation increased from 484 million
z∏oty (121 million euro) in 1992 to 780 million z∏oty (195 million euro) in 1993 and 3750 million z∏oty (937.5 million euro) in 1996.9 The number of firms privatised fell, because the
most profitable firms were privatised first. The remaining firms were often less attractive,
due to low or negative profitability or problems with restructuring [Rosati, 1998, 88].
Privatisation is a complicated logistic venture [Sachs, 1993, 55–6], and because the privatisation process proceeded slowly, a large state sector had to co-exist with an expanding
private sector for a longer period of time. Among others, the following reasons for the slow
privatisation process can be distinguished:
1. High transaction costs in the privatisation process due to weakly developed market institutions, such as a lack of capital markets, a weak banking system and a lack of mechanisms and experience in obtaining information on the state of a company. In the face of
high uncertainty and many unknowns about a company (high information costs) combined with an unclear legal framework investors will be very careful about investment. Finding a strategic investor with the desired characteristics is also a time consuming process.
Strong interest groups (e.g. managers and workers)10 and unclearly defined competence
of different state organs concerning privatisation increased negotiation costs, and the
unclear state of ownership increased control costs.
2. Fragile political institutions, and the situation of a multi-party government (6 parties)
and a small majority in parliament in favour of fast privatisation [see Czekaj, 1993,
79–80; Sachs, 1993, xii; Kamiƒski et al., 2000] at the beginning of the 1990s. Until 1995
the different prime ministers and the president regularly were at odds with each other,
the last one often being a “veto-player”, threatening with or using his veto-right. Together with the existence of strong interest groups and the fact that the state itself was
in transformation, this increased the transaction costs of privatisation. The internal division in the SLD/PSL government in the years 1993–97 was a factor slowing down privatisation [Ko∏odko and Nuti, 1997, 113] in that period.
3. There was a general lack of capital in households and firms and domestic capital markets
were not well developed. As a consequence foreign capital was needed, but it took a few
years before this got wings. However, as a survey among 280 companies shows, this lack of
capital markets did not negatively affect the growth of private enterprise as much as expected [Bratkowski et al., 2000]. This was due to the strong development of small enterprises,
for which human capital, contacts and capital obtained abroad by about 2 million Poles
who had worked in Western Europe in the 1980s was important [Gomu∏ka, 2000, 225].
4. Problems that SOEs faced were the following [Gomu∏ka, 2000, 225]: weak incentives,
worn-out fixed capital, large debts to banks and other companies, over-employment, production of unwanted or low quality products at high unit costs, little money and great
The budget revenue in euro was calculated using the exchange rate of 4 z∏oty for a euro (January 2003).
During the 1980s, as was argued in Chapter 4, SOE workers and management obtained customary property rights
(part of the usus and usus fructus) due to the reform attempts [see Raiser, 1997, 26]. Thus, workers had more power than
was the case in a country like the Czech Republic, which may have hampered privatisation as they defended their interests.
9
10
100
Chapter 5
needs for restructuring and the high transaction costs of restructuring (e.g. the production
profile and production method). This made many SOEs unattractive for privatisation.
5. The aims of transformation (e. g. privatisation) and stabilisation were often contradictory [Czekaj, 1993, 79–80; Ellman, 1993, 118]. As Ellman argues, price increases wiped out
about 50% of savings, which lowered the availability of capital for privatisation. On the
other hand, as Czekaj argues, rapid privatisation leads to an increase in the money supply, which under the existence of structural supply rigidities leads to inflation. Furthermore, financial resources used for privatisation deepened the problem of lack of funding
for investment projects.
6. Mistakes made in the privatisation process. Many people had a simple view of the transformation. The view that policymakers and other stakeholders had of a market economy
may have often differed from the reality in existing market economies [see Czekaj, 1993,
80; Rosati, 1998]. Furthermore, it is obvious that there was no experience with system
transformation from planning to market. As a result the likeliness of making mistakes
increased.
Uncertainties regarding the privatisation process led to adverse reactions of SOEs to
market incentives, lowering output and investment [see Poznanski, 1996; Urban, 1997; Kamiƒski et al., 2000]. Privatisation itself, but also the announcement of privatisation, created
incentives. With the announcement of privatisation, uncertainty for managers increased in
the sense that they did not know who would be the future owner, and whether the new
owner would leave them in their position. Manager uncertainty also increased when the criteria to be used for privatisation and how fast the process would proceed were left unclarified. Poznanski [1996] argues that this uncertainty, together with uncertainty caused by high
inflation and volatile exchange rates, led to lower efforts from management, and increased
use of capital assets by managers and workers for their own purposes.11
However, this rent-seeking behaviour had its limits. Managers and workers seem to have
recognised that wage increases by way of de-capitalisation would lead to bankruptcy in the
future, leading to unemployment. With an increasing threat of unemployment the incentive for rent-seeking from the side of workers became smaller. Furthermore, when the privatisation process slowed down, property rights became more stable, leading to reduced uncertainty and, as a consequence, less opportunities for rent-seeking.
When privatisation proceeds, first value in the public domain increases, increasing the
opportunities for rent-seeking and contributing to the decline in output, while also negatively
influencing the path of institutional change. Weakly or unclearly defined property rights
and various interest groups with different bargaining power, together with high transaction
costs of acquiring information and negotiation (e.g. in the case of a lack of inside information and contacts) and the undeveloped market institutions for transfer of property rights
implied that there was a large probability of privatisation not using market procedures, as
was the case with “spontaneous” privatisation. The procedures used were rather political
and informal.
“Spontaneous” privatisation, also called “insider” or “nomenklatura” privatisation, was
common in many former STEs. This concerned the formation of private spin-off companies, often by state managers who had contacts and influence within the bureaucratic system
11
In some cases managers had an interest in worsening the financial position of an SOE when they themselves (or a relative or friend) were interested in buying the firm.
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
101
[Poznanski, 1996, 223–4, 235–7; Lavigne, 1999 (b), 176–9]. In other words, a position that
lowered the information costs and negotiation costs of obtaining value out of the public
domain was important. Under “spontaneous” privatisation the transaction costs of privatisation are lower, which is a social gain, at the moral cost of part of the old elite obtaining
property.
As Hersch et al. [1997] argue, based on a sample of small Hungarian companies in the
private sector in 1991, nomenklatura members had the least problems in obtaining loans,
while experience and contacts were also a factor facilitating obtaining loans [see also Kornai, 1994; Poznanski, 1996]. On the other hand, it has been argued that “spontaneous” privatisation hampers restructuring [Djankov and Pohl, 1998]. Much depends on incentives for
restructuring given by competition and the developing market institutions.
“Spontaneous” privatisation was a phenomenon of the last years of socialism that continued during the first years of the 1990s. A method often used was that one or more persons kept on working in an SOE, but also started one or more private companies, which
took over part of the tasks of the SOE. It was a relatively efficient way of privatising compared to other methods, and created an interest in capitalism among important groups in
the nomenklatura. However, due to moral objections, this form of privatisation was limited under the Mazowiecki government. Michielsen [1991] gives some examples of “spontaneous” privatisation. One of them is a steel factory in Inowroc∏aw. This steel factory
worked closely together with a private company named “Czas”. 158 workers of the steel
factory took an unpaid holiday. However, in the meantime they kept on working at the
steel factory. “Czas” had “hired” them for a small sum from the state company. The labourers were paid by “Czas”, and earned between 55% and 120% more than normal. Production was sold on the free market. The state company (and as a consequence the state
treasurer) lost millions of (old) z∏oty.12 Everyone else was satisfied. “Czas”, the labourers
of the state company, and also the president of the state factory, who was also the owner
of “Czas”.
The privatisation process itself was slow and cumbersome, and full of adverse incentives
with respect to reorganisation and increasing output. An important aim of privatisation
was to create incentives for restructuring towards more efficient production and to replace
soft budget constraints by hard budget constraints. However, a distinction has to be made
between short-run and long-run effects of privatisation [see Herer and Sadowski, 1993;
Kornai, 1994, 50]. In the short-run the effect can be, as previously mentioned, a reduction
in output, an effect which may be aggravated when privatisation proceeds too quickly. Output increases only in the long-run depending on successful restructuring, modernisation
and of course developments in demand for the output of the company privatised. The
food-processing industry is a good example of this [Urban, 1997]. For small private firms
there were strong incentives and low transaction costs at the beginning of the 1990s. At
the same time, (former) SOEs faced high fixed transaction costs of restructuring and, as is
elaborated in the next section, high transaction costs. However, a few years later the market
transaction costs for privatised SOEs had declined. Due to the introduction, as well as better enforcement, of laws and regulations, small enterprises faced more difficulties with
complying with these rules. In other words, they faced higher transaction costs.
12
With the money reform that came into force on 1 January 1995, 10,000 old z∏oty were converted into 1 new z∏oty.
102
Chapter 5
Restructuring of SOEs was often slow because of the lack of physical and human capital.
Experience and skills needed for restructuring were often lacking, and “learning-by-doing”
is an important, but time-consuming, element, being hampered in the presence of high
uncertainty. A problem with the privatisation process was that often political objectives
accompanied the aims of increased efficiency [Mc Auley, 1993, 203–4].
Another factor hampering the restructuring of SOEs was the discriminative tax policy
of the government [Poznanski, 1996, 181]. In 1991 about 91% of the profits of SOEs went
to the government budget compared with 47% in 1990, reducing the funds available for
restructuring. Furthermore, labour unions had a strong position, which hampered lay-offs.
There was a lack of competition in many markets and SOEs brought different types and
sizes of stocks from the planned economy. As a consequence the success of the attempts
to harden the budget constraints varied according to the company [Carlin et al., 1995,
450].
Uncertainty about the effects of eventual restructuring, due to a “property vacuum” and
uncertainty about who would gain the benefits of the restructuring, also slowed down this
process. Investment in restructuring is transaction-specific, and when uncertainty exists under-investment is likely [Bös, 1999]. Macroeconomic turbulence, such as high inflation, disturbs signals that stimulate restructuring, as well as signals showing the efforts of managers
to restructure to the owner. Another factor hampering restructuring was that managerial
behaviour and mental models developed under the old system were based on not undertaking too much initiative.
Foreign companies might have been an example to domestic firms [Van de Mortel, 2000,
160], but due to the small amount of such firms this effect was rather small. Foreign owned
companies restructured more deeply, but strong aversion existed against foreign capital,
making this way of restructuring less important.
Case studies of 43 firms in Poland, Hungary and Czechoslovakia concerning their reactions to institutional change [Estrin et al., 1995] suggest that although restructuring was
difficult, due to weak management and a lack of skills, many firms started to restructure
before privatisation. The authors of the study argue that the main reasons for difficulties
in restructuring are a lack of a clear privatisation policy (increasing framework uncertainty), poor structures in corporate governance and the poor financial condition of SOEs.
Successful macroeconomic stabilisation and the involvement of a Western partner positively influenced restructuring and developing a long-run strategy. However, it has been argued that privatised companies were not more likely to restructure than SOEs [Carlin et
al., 1995].
Although the success of privatisation at the beginning of the transformation is questionable, the shift from public ownership to private ownership has been successful. Leaving
aside agriculture, which was already mostly private, the private sector created about 24%
of total output in 1991, reaching 55% for construction and more that 80% for retail trade
[Earle et al., 1994, 239]. The private sector grew in the sectors where the planned economy
failed the most – consumer services and the construction of housing. Many people already
traded under socialism, there was a large demand to be satisfied, and the barriers to entry
were low in these sectors due, inter alia, to low capital requirement and lack of regulations.
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
103
The prevailing attitude “what is not forbidden is allowed” stimulated entrepreneurship.
The share of the private sector in GDP increased from below 30% in 1989 to over 30%
in 1990, over 40% in 1991, 45.4% in 1992 and 47.5% in 1993, 53% in 1994, 62% in
1995 to 70% in 1996.13 The importance of new private economic activities is elaborated in
Section 5.5.5.
5.5.3. High market transaction costs for state-owned enterprises
The arguments developed in this section are in fact an extension of the discussion on missing institutions and the privatisation process in Sections 5.5.1. and 5.5.2. The lack of market institutions increased the transaction costs of using the market. This was in particular
the case for SOEs, which faced difficulties with adapting to the new situation and reduced
output. New small private business faced low transaction costs and strong incentives, which
is discussed in more detail later.
Old institutions that provided signals for SOEs in the planned economy lost their function as the system dissolved. One of these institutions, which may have been more important for SOEs than for new small private enterprises, was an old “language” that had to be
replaced by a new “language”. A common language lowers transaction costs, and when
a new language has to be introduced this is accompanied by increased transaction costs of
information transfer.14 Although interpretation of such a concept and making it operational
is difficult, it can be argued that such a new language is connected with old and new ways of
communicating. “Socialist” language and “capitalist” language may co-exist. This problem
concerns understanding the rules of the game, expressing them and communicating them.
People needed to describe something, which they had never really experienced and which
they had still to experience. This increased the likeliness of communication errors. These
problems are likely to be greater in the hierarchical structure of an SOE than in the horizontal structure of small private enterprises.
Brand names, trade marks and other tacit market institutions with a signalling function
hardly existed [Stˆhl, 1993]. SOEs, being inexperienced in a market environment, also faced
the problem of unpredictable consumer behaviour after the liberalisation policy came into
force. Consumers, accustomed to shortages, started to try many different products. This
made it difficult for firms to bring new products onto the market or to keep stocks. Due to the
trial-and-error behaviour of the Polish consumer at the beginning of the 1990s, the information
costs were higher than in more developed market economies. Information costs for sellers
increased at the beginning of the transformation – before they did not have to care about
consumer demand in the shortage economy. This probably was not such a big problem
for small retailers, due to strong incentives and their small scale of operation, as for big
SOEs, not knowing what policy to follow towards consumers, as well as towards other
companies in a fast changing environment.
An interesting analysis of increasing transaction costs for SOEs is the “system explanation” for the initial decline in output given by Blanchard [1997]. The most important cause
is “disorganization”. The links between centrally planned entities were not immediately replaced by market operations [see also Williamson, 1992; Ovin, 1998, 72], which was
13
Source: 1989–95 EBRD, IMF, World bank, National Authorities, Planec., OECD. For 1996 Ministry of Finance. Mentioned in Ko∏odko and Nuti [1997, 113].
14
Sussman, O., J. Zeira, The Economics of Transition: Some Theoretical Issues, Hebrew University of Jerusalem, mimeo,
1994. Mentioned in Roland and Verdier [1999].
104
Chapter 5
accompanied by the impact of price liberalisation, the elimination of subsidies and the replacement of “soft budget constraints” by “hard budget constraints”. Furthermore, traditional lobbies did not work anymore [B∏a˝yca, 2000, 238]. The institutional environment
changed, and there was much uncertainty about the direction of institutional change. As
a result the existing governance structures became less useful.
“Disorganisation” can be explained as follows. SOEs obtained inputs from a single supplier. Although liberalisation can take place overnight, this is not the case for the situation
with respect to the number of suppliers. The difference is that under market conditions suppliers have other private market opportunities, about which the buyer has no knowledge.
Numerous “bargaining failures” occurred, and production in the state sector collapsed. This
is connected with asymmetric information. When search costs are high, firms have difficulties in finding out what prices potential buyers are willing to offer. As a result, firms are rather
unwilling (or unable) to offer their suppliers such a price that prevents them from looking
for or finding new customers.
Reallocation and restructuring are important elements in explaining the fall in output.
Reallocation means that production moves from the state to the private sector, which may
imply that some sectors decline and others expand. As mentioned earlier in this chapter,
decline proceeds faster than expansion, which implies that the reallocation process is likely to be accompanied by a fall in output. Restructuring in fact means improvement of x-efficiency as a reaction to the hardening of the budget constraint (initial restructuring). Markets should later provide incentives for deep restructuring, like innovation, investment in
new technology and replacement of obsolete capital by modern capital. However, this is
not the case when a lack of efficiently functioning markets, such as the labour market,
negatively influences investment in physical capital, and hampers the development of human
capital.
“Disorganisation” as an explanation of the decline in output does not account for the
fact that while export to CMEA countries declined, export to Western Europe increased
dynamically [Repkine and Walsh, 1999]. Disorganisation, restructuring, privatisation and
other supply-side related factors did not prevent production from increasing in the sectors
that quickly reoriented their export markets to Western Europe or were already oriented
to Western Europe. This was because of strong incentives provided by trade liberalisation,
as well as experience, foreign capital and foreign expertise. “Western” oriented firms producing for the domestic market were able to adapt and restructure faster, and contributed to
the recovery from 1992 on. The fall in output in firms that were CMEA oriented outweighed
the increase in output in the EU oriented sector in 1990–1991. It is possible, as Repkine and
Walsh argue, that the initial fall in output and subsequent recovery “is an outcome driven
by common intra-sector investment demand shocks, leading to copious intra-sector changes
in the market orientation of production” [1999, 751]. They do not disagree with the “disorganisation” explanation of the fall in output, but distinguish in fact different transaction
costs and incentives in different parts of the economy.
Other types of transaction costs than those discussed above also increased as a result of
the transformation to a market economy [Roland and Verdier, 1999]. Price liberalisation
caused some sectors to expand and others to decline, while old trade partners disappeared
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
105
and new partners appeared. A factor to be considered is the new situation of private business concluding transactions with SOEs. Both work in different circumstances and are likely to play according to different rules of the game (the “socialist” and the “market” rules of
the game).
Search frictions and transaction-specific investments are important in explaining the fall
in output. Firms have to search for new long-term trade partners in a changing environment,
meaning search costs, while relation-specific investment has to be made to build up new
trade relationships. Three effects may cause a fall in output in the search process: disruption
of previous links, a fall in investment and capital depreciation due to the absence of replacement investment. This type of explanation is of importance, because statistically the
largest decline in output took place in the year after price and trade liberalisation.
Roland and Verdier [1999] explain the fall in output by use of a simple model. Suppose
markets do not exist. When liberalisation takes place, enterprises obtain the freedom to
search for new customers and trade partners. Although the search for better opportunities
is supposed to lead to an increase in transactions and output, there is the danger of dealing
with unreliable customers and/or trading partners. Thus, the oldest existing links with
trading partners or customers (when still existing) are likely to be maintained. Relation-specific investments will only be made after a new trading partner is found. Therefore, after
liberalisation, during the search process investment will not take place, which leads to a decrease in production because obsolete capital is not replaced and there is a fall in investment
demand. Here, it is not so much bargaining failures between existing firms that cause a fall
in output, as with “disorganisation”, but high search costs that prevent the finding of better
partners. The moment these search costs decline, output is likely to increase. In this model
a decline in output is always followed by an expansion of output.
Empirical research suggests that disorganisation of production links and search friction
led to a decline in output after market liberalisation [Konings and Walsh, 1999]. Based on
data from 300 Ukrainian firms, the following conclusion was reached: disorganisation constrained the growth of employment and productivity for SOEs that had existed under central planning. The more outdated the capital stock inherited from central planning, the
greater the influence of disorganisation. Finally, disorganisation did not play any role in
newly established firms, but may have acted as a barrier to entry.
The arguments above imply that rapid liberalisation leads initially to a decline in output.
However, Wing Thye Woo [1994, 305] argues, based on the Vietnamese experience, that the
decline in output in Poland in 1990 and 1991 was not the result of the big-bang approach.
Between 1985 and 1988 Vietnam introduced piecemeal reforms. Output grew slowly and inflation increased. Vietnam introduced a big bang policy in 1989 by limiting the availability
of credit, de-collectivising agriculture, liberalising the prices of most goods, liberalising
trade, devaluating the currency and legalising private economic activity. As a result, economic growth speeded up from 5% in 1988 to 8% in 1989.
However, liberalisation has different effects in Vietnam and Poland, because of different institutional environments and governance structures. Vietnam’s SOE sector was rather small, as
was the case with China. Disorganisation, search friction and the high transaction costs of restructuring tend to affect the more complicated production and logistic structures of SOEs.
106
Chapter 5
The resulting decline in output in Poland is likely to have been greater than the increase in
production due to incentives given by liberalisation. Added to this, as discussed in Section
5.5.2., there are the negative effects on output of the large transaction costs and adverse incentives connected with (the announcement of) large scale privatisation.
5.5.4. Mental models and social capital
The importance of informal institutions in increasing transaction costs and creating adverse incentives at the beginning of the 1990s was mentioned in earlier sections. In this
section the focus is on mental models and a lack of social capital as factors contributing to
a new-institutional explanation of the fall in output in this period.
In a situation of relatively rapid institutional change, where formal institutions change
faster than informal institutions, friction between these two can come into existence, leading
to an institutional disequilibrium. When introducing a market economy, there may be a lack
of acceptance of phenomena such as inequalities, unemployment or increased individual
risk. Behavioural rules have to be changed and social capital has to be built up, for which
many repeated dealings are needed. When formal institutions change rapidly, it is difficult
for economic actors to adjust their behaviour. In such a situation “socialist behaviour” and
socialist mental models will remain strong. Mental models played an important role in the
transformation process, due to the institutional vacuum. People’s mental models and skills
developed under socialism made it more difficult for them to assess and process the new
types of information. As a consequence, transaction costs increased, economic actors were
more likely to react adversely to incentives given by market institutions and the creation of
efficient institutions became more difficult.
Teachers coming from an authoritarian environment, as well as politicians and judges
[Van de Mortel, 2000, 2], have to adapt to changes in the new institutional environment.
Politicians have to play the game of democracy, which they have never experienced. Judges,
used to applying laws and regulations under planning, are likely to have difficulties in
enforcing market rules of the game. Leaders who were used to take decisions without
consulting with lower levels in the hierarchy are not likely to change this behaviour very
quickly. As a consequence, they often make decisions based on incomplete and/or wrong
information. The need for behavioural change of management and entrepreneurs in the
face of rapid changes in the institutional environment (or rather, a slow change in behaviour [Ellman, 1993, 30]) contributed to a reduction in output or prevented output from
increasing.
Social capital also helps to explain the fall in output. Generally speaking, social capital
inherited from socialism was not fit for a market economy [see Putnam, 1993]. Personal
trust and informal networks in the planned economy were needed for survival in the system.
This is described by Rose [1995] using the term “Hour-Glass Society”. At the bottom and
the top of society closed, non-transparent networks existed, whose expansion was very limited because of the repressive system. At the bottom family/friends were invaluable to overcome day-to-day problems, and there was hardly any interaction with the nomenklatura at
the top of society.
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
107
After the fall of socialism, “survival strategies” inherited from socialism can also be
found in co-operation. “Positive” co-operation, co-operation in order to undertake economic
activity, is often lacking, while “negative” co-operation, arranging something or engaging in
opportunistic behaviour, prevails. Thus, ascribed trust was relatively high in transformation
economies, while process-based trust was relatively low [see Fukuyama, 1996; Raiser, 1999;
Raiser et al., 2001], which did not create conditions for adaptive efficiency. Impersonal
trust, extended trust and trust in institutions, was low, and is still low, as it takes much time
to build up social capital. However, as is shown in Appendices A5 and A6, research conducted in 2001 suggests that some process-based trust exists.
The high ascribed trust, low process-based trust and low extended trust led to high transaction costs, reducing the opportunities for exchange. At the beginning of the liberalisation
of the market direct payment transactions prevailed, which in the case of the successful
small firms in the service and food sector was not a real problem. However, larger scale
transactions were less likely to take place. It happened that Western firms only exported to
former STEs on a pre-payment basis. Old nomenklatura networks provided a basis for
exchange, but their closed structure did not stimulate transparency of transactions. As opposed to Russia, in Poland the situation was advantageous in the sense that these networks
did no longer have political support [Raiser, 1997, 22].
An aim of transformation is to create “open” process-based trust, extended trust and
trust in formal institutions and “institutional governance” by institutional change and creating more efficient “institutional governance”. Transparency and credibility of the state
stimulates such development. However, this is a time-consuming process, as old networks and
new interest groups try to influence the weak state to their own advantage, and repeated
dealing is needed to establish trust and reliable buyer-seller relationships [Stˆhl, 1993]. Furthermore, it is much easier to lose trust than to build it. The importance of trust in economic performance and transition is emphasised by Raiser [1999, 2], who argues that only
“extended … trust can support the transition to a modern market system” and that the “lack
of extended trust, including distrust in the state itself is one key factor behind the disappointing economic performance observed in many countries in the region”. However, lack
of extended trust is not an explanatory variable of the differences in economic performance
in former STEs, as is the case in many developed market economies [Raiser, 1999, 9].
Low trust, closed non-transparent networks and lack of co-operation help to explain the
fall in output. This is an argument connected with a lack of developed market institutions.
When old enforcement mechanisms disappear, and new mechanisms are not yet established
or undeveloped, trade has to rely on private enforcement of transactions. In the presence of
distrust, parties have to invest in safeguards, due to the uncertainty of receiving payment or
delivery. This implies high monitoring and control costs, but also increases information and
negotiation costs, leading to less transactions taking place.
5.5.5. Private economic activity counteracting the decline in output
Small firms are of crucial importance for a dynamic economy. They create the majority of
employment in market economies and account for a significant share of GDP. Because of
108
Chapter 5
competition they face strong incentives for introducing transaction cost lowering solutions. The role of small enterprises was underestimated by the central planner, as well as
in many analyses of transformation, where macro-factors are the main issue of interest. It
can be argued that successful development of small business is indispensable to a successful transformation.
As is shown in Appendix A3, economic liberalisation provided strong incentives for the
development of new economic activity. Although the development of small business did not
create so much competition for large (former) SOEs, these companies significantly contributed to an increase in the quality of many goods, such as food products. The transaction
costs of starting such a small business were much lower than the transaction costs of privatising and restructuring a SOE, and little capital was needed to start a venture such as
a small kiosk with pizza. The strong development of the private sector, especially small enterprises, counteracted the economic recession in 1990 and 1991 and contributed to the recovery in 1992.
So-called small privatisation the, “process of ownership transformation in retail trade,
catering, and the service sector”, was important for the development of the private sector at
the beginning of the 1990s [Earle et al., 1994, xvi]. The fact that in the production of many
services and consumer goods few economies of scale are faced, together with the easiness
of breaking-up large units such as a chain of state-owned restaurants or shops into smaller
ones, stimulated this process. Small privatisation was facilitated by the phenomenon that
often the property was sold to insiders (e.g. managers or employees).
An important factor in the choice of privatisation strategy was the principal-agent
problem existing in large SOEs, as well as the existence of different interest groups such as
managers, workers, government and potential investors influencing the privatisation process
[Herer and Sadowski, 1993, 65; Poznanski, 1996, 219–30]. An advantage of small ownermanaged units is that they show large adaptive efficiency. A reason for this is the low transaction costs of change in more horizontal governance structures as compared to hierarchies.
Furthermore, small companies in the service sector faced strong incentives in the fast
changing institutional environment. This was very important in a situation where consumers
showed rather trial-and-error behaviour, because of the large amount of new products
coming onto the market.
Earle et al. [1994] argue that, besides macroeconomic stabilisation and trade liberalisation, transfer of property rights in general, and the transfer of the usus (the right to use)
of real estate in particular, explain the success of small privatisation in Poland. Thus, this
did not concern, in general, the sale of a shop with its inventory or organisation structure,
but the right to use a building or location. A package deal, buying real estate together with
assets with a negative value, like the inventory and the organisational structure (e.g. transaction costs are involved in restructuring), would have hampered the process. The phenomenon that often only the property changed owner makes it difficult to distinguish between privatisation and business start-ups. An important element was that this privatisation process took place in a decentralised way, where municipalities and many real estate
owners sold off many assets of former trade and service monopolies independently of each
other, even before privatisation laws came into being [Sachs, 1993, 57; Groen, 1998, 147].
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
109
The differentiation of ownership rights gave another strong incentive for this process. An
SOE often rented a business below the market price, while the owner (e.g. the local government) possessed the usus abusus (right to sell). The introduction of the market economy increased the price of real estate, making it attractive to sell real estate to interested private
parties. This not only prevented cumbersome restructuring of a large part of the service sector, but also created the opportunity to develop new types of business. Finally, an advantage
of selling property to a business instead of renting it out was that it provided incentives for
investment and restructuring. It increased the expected payoff and widened the choice set,
because in the case of renting there tend to be more restrictions on the use of the property.
Earle et al.’s study provides evidence for the thesis that possessing the usus abusus leads to
higher investment, while there is a weak relation with faster restructuring.
An indication of the success of small enterprise in Poland is that the number of stores
per 1000 inhabitants increased from 4 in 1989 to 9.3 in 1992. Comparable numbers for Russia were 2 and 2.5, and 7 and 10 for Western Europe [Earle et al., 1994, xxix]. However, the
total number of small and medium sized enterprises per 1,000 inhabitants was lower than in
the EU and the Czech Republic [Kamiƒski et al., 2000, 184]. The total number of retail
outlets (including kiosks, stands, booths and other points of sale) increased from about
249,000 in 1989 (of which 72,000 were private) to about 750,000 in 1992 (of which 717,000
were private). The number of retail shops more than doubled from 151,000 in 1989 (of which
27,000 were private) to 353,000 in 1992 (of which 344,000 were private). In 1991 there were
about 1.5 million registered private businesses. There were only 70,000 joint-stock companies,
45,000 limited liability companies, 17,000 co-operatives and 4,800 joint-ventures. Most of
the individually owned businesses were very small [Earle et al., 1994, 239]. This shows the
very dynamic development of Poland’s small private businesses.
5.6. Institutional strengthening and recovery
This section discusses the contribution of institutional strengthening to improving economic
performance in Poland since 1992 using the examples of Foreign Direct Investment (FDI),
the banking system, stabilisation policy and the development of markets. In 1992 a developing private sector of small and medium-sized enterprises had already been established,
stimulating the economic recovery by way of informal financing (e.g. inter-firm loans) [see
Rosati, 1998]. The private sector (e.g. construction and food processing) experienced rapid
growth, while most state firms experienced slow growth or stagnation.
The private sector especially contributed to the recovery. Slowly the larger firms, especially in the private sector, began to restructure and gain from economies of scale, among
other things, due to modernisation [Barbone et al., 1999]. Furthermore, they started to recover from disorganisation and supply and distribution networks were re-established.
It can be argued, as Poznanski [1996] does, that the 1992 recovery was connected with
system strengthening. When property rights are established and enforced, this strengthens
incentives for economic activity, due to a reduction in uncertainty and transaction costs,
such as safeguards and high control costs. The private sector was developing dynamically,
110
Chapter 5
and property rights in this sector were rather certain from the start, although legal and enforcement problems existed. Although privatisation proceeded slowly, the privatisation
strategy became clearer and the state gave signals that it would not let SOEs automatically
go bankrupt, which decreased uncertainty in this sector. At such a moment firms that are to be
privatised face stronger incentives to increase their effort to restructure. When the rate of
change decreases, in other words turbulence in the institutional environment becomes smaller, and new market institutions become established, uncertainty decreases. The number of
factors that cause adverse behaviour of firms declines. Thus, there are less and less reasons
for a decline in output.
FDI did not play a very important role in Poland until 1994, due to weak institutions and
large uncertainty. As is shown in Table 5.5., after 1994 the inflow of FDI speeded up, which
may be the result of system strengthening. Uncertainty for foreign investors was reduced
after signing international agreements about debt reduction (e.g. the Club of Paris). Furthermore, property rights were more and more clearly established in the course of the privatisation process. Another important factor was the incentive to invest. The Polish economy
had been growing from 1992 on, creating good prospects for foreign investors. However, per
capita FDI inflow was still well below that of Hungary and the Czech Republic, countries
which also had a significantly higher GDP per capita.
Van de Mortel [2000, 141–2] argues that in the institutional context FDI can have positive and negative effects. On the one hand, FDI may facilitate institutional and behavioural
change, while on the other hand hampering the development of domestic infant industries
and new initiatives. Uncertainty and high transaction costs were a brake on the development
of FDI. However, this did not prevent FDI from developing. When incentives are strong
enough, interested parties are likely to find an institutional arrangement for carrying out the
investment [Zhiang Tao and Susheng Wond, 1998]. At the moment when liberalisation came
into force, local firms were interested in the technologies and know-how of foreign firms
which are easy to learn. In return they could offer exclusive access to particular resources.
Learning by doing was of significant importance for local firms in this period. When an economy develops, transactions become more complicated, as well as technology and know-how.
This requires strict contract enforcement as the transformation proceeds.
Another feature of institutional strengthening is the development of a commercial banking
system and possibilities of enforcing contracts, in this case resolving problems of bad
debt. A properly functioning banking system is of crucial importance for the facilitation
of obtaining credit needed for starting-up a new business. It has been argued that in the
mid-1990s the banking sector operated better than might have been expected [Bratkowski
et al., 2000]. The Enterprise and Bank Restructuring Programme (EBRP), which was adopted
by the Polish parliament in early 1993, strengthened this part of the economic system [Gray
and Holle, 1997]. There were three solutions introduced for enforcing a loan or debt: court
conciliation, bankruptcy or liquidation of a state enterprise. The programme provided incentives to undertake action against bad debtors. Firms could pay or enter a bankruptcy
procedure. Thus, a process of selection against weaker firms started, leaving stronger firms
in the market. Although the process worked in general, Gray and Holle argue that there
were many flaws.
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
111
Table 5.5. FDI (net flows recorded in the balance of payments, 1989–1999).
Poland
Hungary
Czech Republic
n.a.
187
n.a.
1990
0
311
n.a.
1991
117
1,149
n.a.
1992
284
1,471
983
1993
580
2,328
563
1994
542
1,097
749
1995
1,134
4,410
2,526
1996
2,741
1,987
1,276
1997
3,041
1,653
1,275
1998
4,966
1,453
2,641
1999
6,642
1,414
4,912
Cumulative 1989–1999
(USD mln.)
20,041
17,770
14,924
Cumulative FDI inflow/capita
1989–1999 (USD)
518
1,764
1,447
FDI inflow/capita 1998 (USD)
128
144
256
FDI inflow/capita 1999 (USD)
172
140
476
FDI inflow 1998 (% GDP)
3.2
3.1
4.7
FDI inflow 1999 (% GDP)
4.3
2.9
9.2
1989 (USD mln.)
Source: EBRD, 2000, 74. (IMF, Central Banks and EBRD estimates.)
Stabilisation is another factor strengthening a market system. Brenton et al. [1997] argue
that statistical analysis indicates that lower inflation is connected with a recovery in output.
No statistically significant relation has been found between the speed of transformation and
decline in output. However, there is a strong positive relation between the speed of transformation and GDP change in 1994. The private sector share in GDP, enterprise reform, trade
reform, banking reform and investment rules are important factors. This may suggest that
there is a relation between system strengthening and economic performance. Furthermore,
cutting down inflation was an important aim of the Polish transformation strategy. As was
shown in Table 5.2., inflation fell from 586% in 1991 to 70.3% in 1991, 43% in 1992, 35.3%
in 1993 and was declining in the years afterwards. High inflation is accompanied with high
uncertainty. Low inflation reduces uncertainty, stimulating economic activity.
Havrylyshyn et al. [2001] analysed the growth performance of 25 countries in transformation between 1990 and 1997, taking into consideration the initial conditions, stabilisation
112
Chapter 5
and structural reforms. The results suggest that macroeconomic stabilisation and structural reform are central to economic recovery. This is related to institutional strengthening
and the accompanying reduction in uncertainty. The earlier stabilisation takes place, the
better the results. Structural reforms in many fields are also a positive explanatory variable. With respect to decline in output the difference between rapid and slow reformers
was not clear. However, with respect to economic recovery, the rapid reformers showed the
best results. The initial situation was found to have had less influence on economic performance. Although distortions inherited from the old system slowed down recovery, this did
not seem to be a brake on the development of countries where strong structural reform took
place.
The development of competitive markets is interesting in analysing the strengthening of
the economic system. Johnson et al. [2000] present data from a survey of private manufacturing firms in 1997 in Poland, Slovakia, Romania, Russia and Ukraine on the development
of market structure in these countries. In each country about 300 manufacturing firms with
between 7 and 370 employees were investigated. The topics of this research was the destination
of sales, the importance of intermediaries, the number of customers, price determination and
provision of trade credit. The results are presented in Table 5.6.
Table 5.6. Development of market structure in different countries in transformation.
Poland
Slovakia
Romania
Russia
Ukraine
Within home city
35.3%
32.4%
46.2%
76.7%
69.5%
Domestic, outside home city
55.7%
50.7%
49.2%
21.3%
26.7%
9.0%
16.9%
4.6%
2.0%
3.8%
25.7
18.6
6.6
5.3
4.2
Average number of customers
99.7
86
107.1
9.6
12.1
Average number of new customers
17.8
15.1
19.4
2.5
2.6
Prices set by “inputs/competitors”
62.5%
59.3%
63.1%
21.1
9.9
Prices set by “bargaining/relationship
with customers”
31.3%
31.1%
25.1%
64.1
66.8
74.6
58.4
31.2
7.4
21.2
Destination of sales
Foreign destination
Importance of intermediaries
% of sales through wholesalers
Average number of customers
Determination of prices
Provision of trade credit
% of bills paid by customers later
than 8 days after delivery
Source: Johnson et al. [2000, 29].
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
113
Markets seem to be more extensive in Poland and Slovakia, as more than 60% of sales
find customers outside the home city. The middleman function is also better developed. The
percentage of sales by wholesalers in Poland (over 25%) and Slovakia (almost 20%) are significantly higher than in the other countries (around 5%). The average number of customers is high in Poland, Slovakia and Romania, implying a more competitive market from
the demand side than in Russia and Ukraine. These three countries also show a higher
percentage of prices influenced by a competitive market. Finally, the development of the institution of trade credit is most developed in Poland. The fact that 7.4% of all bills are paid
more than 8 days after delivery in Russia may suggest that many transactions take place in
cash. Although the development of credit facilitates transactions, a problem can arise with
late payment. As is shown in Appendix A4, problems with late payment have increased in
the second half of the 1990s. In general it seems that the Polish market institutions are most
developed, which is an indication of institutional strengthening.
It can be argued that system strengthening in Poland has contributed to economic
growth since 1992. A strong private sector has been established. Former SOEs were able to
restructure when uncertainty declined. Conditions for FDI have been established. The
stabilisation policy has contributed much to institutional strengthening. Furthermore, the
banking system has been firmly established, although it did not contribute to the 1992 recovery. Finally, markets seem to be more developed than in other former STEs.
5.7. Concluding remarks
The main question addressed in this chapter was what are the causes of the decline in output
in the period 1989–1992. The poor state of the economy, imbalances and shortages at the end
of the 1980s made radical change necessary. Poland applied “shock therapy”, as opposed to
“gradualism”, i.e. more evolutionary change. However, which label applies depends on what
is focused upon. Stabilisation policy in Poland was radical, while, for instance, privatisation
proceeded slowly.
Fast institutional change was a good approach to draw a line under the past and to establish credibility with respect to the path of institutional change. Formal and informal institutions had collapsed, creating large uncertainty. This uncertainty increased, because there
were many unknowns about future institutional development. The fixed transaction costs of
constructing market institutions, as well as the transaction costs of using the market, were
high. As uncertainty increased, economic actors tended to fall back on their mental models
which took shape under the socialist system, increasing the institutional disequilibrium.
Economic actors, especially in the state sector, reacted adversely to incentives given by market institutions. This led to a reduction in output.
Furthermore, there may have been insufficient information feedback due to uncertainty, hampering learning-processes. High fixed transaction costs of institution building
cause institutional change to proceed slowly, and powerful interest groups have the opportunity to influence the creation of new institutions. Thus, the institutions introduced
are not necessarily the most efficient. Added to this, the Polish reform program had to be
114
Chapter 5
implemented in a situation where there was no textbook example of transformation from
a socialist to a market-type economy. A problem was that the reforms had to be carried out
by people brought up under the socialist system, often having no experience with a market
economy.
The creation of a market economy implicitly concerns the strengthening of incentives
and lowering of transaction costs by changing institutions, governance structures and “institutional governance”, in order to improve economic performance. The emphasis of the
transformation strategy was on formal institutions, in particular the property rights order.
However, “auxiliary” institutions are needed to facilitate the process of privatisation. Although some market institutions had already developed under socialism, many institutions
(e.g. laws) had to be designed, while there was no time for an evolutionary “learning-by-doing”
process, which increased the risk of making mistakes.
It has been argued in this chapter that in Poland during the first years of the 1990s transaction costs went up, due to the process of institutional change. Examples of this are high
(fixed) transaction costs involved in institutional change, an institutional disequilibrium and
a lack of market institutions, increasing uncertainty.
Furthermore, Poland faced a “dual” transformation. The state, which was a problem in the
old system, had an important role in the creation of new institutions and was at the same
time in transformation itself. “Institutional governance”, important for the enforcement of
property rights, was weak. As a result, there were high measurement costs related to the
process of privatisation, increasing the value in the public domain, which people tried to obtain by spending resources. In general, the weakness of institutions led to an increase in the
value in the public domain, stimulating rent-seeking behaviour. This restricted competition
and weakened incentives for many economic activities.
Other transaction costs of institutional change were connected with the introduction of
a labour market, rapidly changing laws and regulations leading to higher information costs
and uncertainty, negotiation costs in the privatisation process, transaction-specific investments in new trade relationships, search costs of finding new trade partners and other market transaction costs, an unstable market with unpredictable consumer behaviour, costs connected with problems of cultural adaptation and low trust.
Under uncertainty economic actors are likely to fall back on their mental models. In this
case, these were mental models developed under socialism, which adversely influenced incentives and increased transaction costs. Higher transaction costs and adverse incentives
contributed to the decline in output in 1990 and 1991. The state sector, in particular, faced
high transaction costs. Furthermore, SOEs reacted adversely to incentives given by the new
institutional environment, as was the case with price liberalisation, due to the undeveloped
market institutions and mental models of managers.
Newly established small enterprises faced low transaction costs and strong incentives,
counteracting the decline in output. Transaction costs tend to decline when institutions stabilise after a period, due to better defined property rights, stable laws and regulations suited
to a market economy and enforced by the state, properly working market institutions, social
acceptance of the new situation and a maturing market. Lower transaction costs were faced
mainly by privatised and restructured SOEs, due to decreased uncertainty, recovery from
Transaction Costs and Incentives in the Construction of the Polish Market in the 1990s
115
disorganisation and re-establishment of supply and distribution networks. Furthermore, improvement in efficiency, together with economies of scale, was achieved.
The strong connection between politics and economic power under the old system gave
incentives for rent-seeking. Disconnecting these two is likely to have reduced this problem.
Privatisation, market transparency and democracy may have been helpful in this. These factors, together with the Polish stabilisation plan in the form of price liberalisation, liberalisation of foreign trade, unification of exchange rates and reducing (indirect) subsidising of
firms, as well as a positive real interest rate, helped very quickly to reduce opportunities for
rent-seeking in Poland. This is a possible explanation of why the transformation recession
in Poland was the shortest of all former STEs within the Soviet bloc.
Liberalisation of prices and trade was a way of strengthening the system of property rights
in itself, because of the de facto privatisation of characteristics of goods and services. However, this stabilisation plan had a cost, in the sense that it contributed to the recession in
1990 and 1991.
The Polish stabilisation and liberalisation policies was successful, many opportunities for
rent-seeking have been eliminated, inflation has been reduced to single digits, and the economy has, to a large degree, integrated into the world economy. The market is the most important co-ordination system, the private sector is firmly established, and the pre-1990 GDP
level was achieved in 1996. It seems that Poland has taken a path of “normal” institutional
development and has prevented its system becoming “pathological”. Although “pathological” institutions certainly exist, many seem to be “normal” or “normalising”. System strengthening, i.e. lowering transaction costs and strengthening incentives, has contributed to economic growth since 1992. In Chapter 7 the importance of logistic solutions in this respect is
discussed.
However, Poland’s transformation has not ended yet, although the country has come
a long way. Many formal institutions have been established, and currently these institutions
are taking shape in an evolutionary way. On the other hand, remnants of the old system remain, and there is still a large task in reforming, for instance, tax and public administration
and making laws more clear. On the informal institutional side, there is, to a certain extent,
acceptance of the new situation. However, a significant proportion of society is not satisfied
with the course and results of transformation.
It seems that transaction costs in former SOEs have declined. However, the question remains as to whether the small firms that boomed at the beginning of the 1990s can face the
challenges of the introduction of norms and standards which hardly existed at that time. As
discussed in Appendices A4, A5 and A6, there are developments that suggest that transaction costs have been increasing since the end of the 1990s. Examples of this are incompetence, unfriendliness and corruption in public administration, complex and unclear tax law,
a customer unfriendly tax collector, and an inefficient judiciary, leading to an increase in
costs for firms. These factors also provide disincentives for economic activity. The economic
growth since 1992 has been accompanied by an increasing number of transactions and it
seems that many institutions have not sufficiently adapted to handle this new situation.
PART III
A CLOSER LOOK AT TWO ASPECTS
OF ECONOMIC PERFORMANCE
UNDER DIFFERENT ECONOMIC
SYSTEMS
119
CHAPTER 6
THE TRANSACTION COSTS
OF QUEUING IN A SOVIET-TYPE
ECONOMY 1
6.1. Introduction
The transaction costs of queuing are discussed in this chapter by way of a case study. Queuing concerns transaction costs from the side of the buyer. These transaction costs highly differ from the type of transaction costs that were of main interest in Chapter 4 and 5, where
transaction costs from the production side were analysed. Queuing for goods was a common
phenomenon in classical socialism.
The idea for this case study was born when observing four stalls where apples were sold
at a market in Wroc∏aw (Poland) some time in 1994. There was one small queue in front of
one stall. When someone arrived, he joined this small queue and did not go to another stall.
Later similar situations could be observed. There are some possible explanations for this behaviour. People could have joined the queue purely out of habit. It also could be that they
joined the queue because they thought that if people are willing to queue, the quality of the
apples must be good. It could be that they knew the seller, or even that it was pure coincidence. This last option seems very unlikely, because the queuing behaviour observed was
very different from what can be observed in developed market economies.
This behaviour seems to be a leftover of the shortages in the Soviet-Type Economy
(STE). Informal institutions like black markets and queuing came into existence to solve
the allocation problem. The transaction costs of queuing were most “visible” in the socialist system, and became more visible during the period of “decaying” socialism as shortages increased due to institutional weakening. Furthermore, queuing increased dissatisfaction with the socialist system, being an important factor for hollowing out the belief in this
system.
The case study presented in this chapter is based on a survey among 418 Poles and
mainly concerns the situation in the 1980s, the period of “decaying socialism”, when opportunities for opportunistic behaviour for the consumer increased compared to the 1970s.
1
This chapter is largely based on Platje [2000].
120
Chapter 6
After a theoretical discussion in Section 6.2. on the cost of queuing and the shopping
process for consumers in a shortage economy, in Section 6.3. the following questions are
addressed. What products were people queuing for? Who had to queue? What did people
have to sacrifice in order to queue (how would they have used their time alternatively)?
Do they sometimes long for the “queuing atmosphere” (“atmosfera kolejkowa”)? Could
they arrange goods without queuing (e.g. via informal networks, on the black market or by
way of bribing)? In what way do people now spend the time they do not have to spend on
queuing? What were people doing while queuing (e.g. complaining, gossiping, talking about
politics, meeting friends or trading)?
6.2. Queuing and transaction costs
Before 1989 queuing was a common phenomenon in STEs. The main reason for queuing was
the imposition of maximum prices on many products and planning problems. Following Barzel
[1989], in the case of maximum prices, it can be said that in terms of property rights, the seller
of a product is limited in the sense that he is not allowed to ask the price the buyer is willing
to pay. As is shown in Figure 6.1., in the case of a maximum price Pm, a shortage of Qd – Qs
comes into existence. People are willing to pay a monetary price of Pw at supply Qs, but they
only can pay Pm. The difference between Pw and Pm is in the public domain. Several characteristics of the good are not delineated to a specific owner. They are accessible to others, who
can spend resources on obtaining these characteristics in order to increase their income. In
the case of maximum prices informal institutions come into existence to arrange the distribution. Examples of these are queues, package deals, quality reduction, and black markets.
Figure 6.1. The effect of a maximum price.
What happens with the value in the public domain? It cannot be said in advance who will
obtain this value, the buyer or the seller. The essence is that the buyer in any case will pay
Pw, the price he is willing to pay.
The Transaction Costs of Queuing in a Soviet-Type Economy
121
What are the different possibilities when a maximum price exists? In the case of queuing on a first-come-first-served basis the buyer will, other things equal, pay the maximum
price plus the difference between Pw and Pm in the form of time spent in the queue. In this
case the value in the public domain has leaked away in transaction costs. It happened that
in STEs an agent of the state sold goods under the counter, obtaining in this way (part of)
the value in the public domain.
It can be argued that transaction costs, in the form of the time spent in the queue, are
a social waste, because the buyer pays the price he was willing to pay anyway, while without
price control the excess demand would have given extra income to the owner. In other
words, the state could have received a higher price for the products, and consumers could
have used the time spent in the queue for more pleasant or more lucrative things. Although
the research shows that most of the respondents disliked queuing, some people considered
it to be a pleasant social occasion. Furthermore, most of the people were doing something
“useful” while queuing, like reading, meeting friends and arranging things. As a consequence,
the quantitative aspects of queuing are difficult to estimate, even if one simply calculates the
time people spent in queues.
Queuing is part of the shopping process as described by Kornai [1992, 229–30]. This
shopping process is presented in Figure 6.2. In the hey-days of the shortage economy,
option 0 (good available right away at the first store) was rather rare. Often goods were
not available, and when available, the demand exceeded the supply, due to which queues
became an allocation mechanism. Queues can be physical and non-physical.2 One example of non-physical queuing [Kornai, 1992, 234–5] is waiting for housing, which in the
1980s in Bulgaria took between 5–20 years, in Hungary 4–6 years, in the Soviet Union
10–15 years and in Poland 15–30 years. Another example is waiting for telephones. In
Poland the length of the waiting list as a proportion of the number of telephone subscribers
– in five-year averages – increased from 33.6% for the period 1971–75 to 57.1% for
1981–85.
The research conducted concerns physical queuing (outside a store or at a counter) for
certain types of consumer goods. A very common phenomenon was forced substitution in
the case of non-availability of the good, to be distinguished from voluntary substitution
when a good is available due to a change in consumer preferences. Kornai calls events 1 to
5 “shortage phenomena”. The cause is shortage, and they are annoying and inconvenient
to the customer and the customer has to sacrifice more due to the shortage. In other words,
the annoyance and inconvenience brought about by queuing (is it pleasant to queue?),
forced substitution (is the consumer happy with the fact he cannot buy the preferred product?), further search and postponement (in which case the purchasing process does not
end), and abandoning the intent to purchasing (in fact a variant of forced substitution – the
good the consumer intended to buy is substituted by nothing) can be considered to be “psychological transaction costs”. These “psychological transaction costs” can be estimated by
asking to what degree people liked queuing.
2
Before 1989 the average Pole had to queue in order to buy consumption goods, or arrange it in another way. In common language terms like “za∏atwiç”, literally meaning “to take care of”, and “kombinowaç” are still used. The term “za∏atwiç”
substituted the word “kupiç” (to buy) in the face of recurrent shortages of goods [Marczuk, 1998, 48]. Many products had
to be arranged and organised. “Kombinowaç”, literally meaning “to put together”, was (is) commonly used in the meaning
of “to get something by a wangle”. It was hardly possible to get by in a “normal” way before 1989. It can be said that there
was a culture of waiting, arranging, and wangling caused by the economic reality. This queuing, arranging and wangling must
have influenced the way of life of people.
122
Chapter 6
Shopping process starts
0. Good available right
away at the first store
1. Good available at the
first store: queuing
2. Forced
substitution
3. Search
0
1
2
3
4
5
Not available
4. Postponement
0
1
2
3
5. Purchasing
intent abandoned
4
5
Figure 6.2. The shopping process.
Source: Kornai, 1992, 230.
Transaction costs of queuing have a tendency to be lowered through time.3 First of all,
it can be expected that people with lower opportunity costs of their time (e.g. housewives,
pensioned people, people without a job) are most likely to be found in a queue.4 When
queuing becomes a permanent phenomenon, people will try to find ways to lower costs.
3
When these transaction costs are too high, less transactions take place. However, people are inclined to search for institutional arrangements, in order to lower transaction costs. It can be said that in the shortage economy there was competition between buyers (who used many of their skills and creativity to get the necessities of life, not for productive and innovative behaviour), not between sellers. Narojek [1995, 27] argues that the individual, in exchange for being deprived of his
own initiative, is freed from market competition and the connected risk of failure. He argues further that collectivisation of
economic rationality exerts a deep influence on human interactions in the mechanism of community life.
4
“Retired people and older workers (forty-five plus) find the returns from those assets irreplaceable. Hence, they have
incentives to oppose the transition from socialism to capitalism. … In addition, the shortage economy made them an important asset to their families in two ways. First, they had time to wait in line for consumer goods. Second, they specialized
in knowing what goods would be available, and where and when they were going to be available. Thus, they raised the real
incomes of their family. As scarcity prices replace price controls, retired people fear that they will become a liability to their
families” [Pejovich 1995, 59].
The Transaction Costs of Queuing in a Soviet-Type Economy
123
Examples are reading a book, queuing for each other and people specialising in queuing and
earning money or goods in return. As in many repeated processes a learning-process also
takes place in the case of queuing.
For the analysis of the research Kornai’s simple model has to be explored more deeply.
The possibility “not available” includes the case that when someone queues for a product,
it turns out that the product is sold out. In answer to the question of how often it happened
that someone queued without result, while he was in the queue at the right time, 57 of the
395 reported that this often happened (14.4%), 191 said sometimes (48.3%), 114 seldom
(28.9%) and 33 never (8.4%). One respondent explained that she never queued without result, because when queues were too long, she resigned from queuing and bought what was
available without queuing. In fact this is voluntary substitution, the good is available at the
store, but the expected transaction costs are too high. This means that even when the good
was available at the first store, there existed an uncertainty about the success of the buying
process. When the news spread that five pianos would be available, the sixth person would
not join the queue. But in the case of coffee or meat, where it was not clear how much was
available, this risk certainly existed.
People join a queue when they think they have a chance of obtaining the product – the
estimated benefits are greater than the price plus the estimated transaction costs. Queues
can be found in Western supermarkets, but then the buyer has the certainty that he can buy
something. In Poland before 1989 self-service, as can be found in most shops nowadays, was
very uncommon. This caused uncertainty about the success of the buying process, greater
than in a self-service shop in a market-type economy with no maximum prices. When it turns
out that the queue is too long, options 2, 3, 4, and 5 come into play again. This can be the
case when people wait, and it turns out that the stock is sold, or when they do not want to
wait so long in the queue. In some cases option 2, forced substitution, becomes voluntary
substitution. When someone does not want to wait so long, he can buy something else. Another possibility is buying goods on the parallel market.
The research on queuing presented in this chapter concerns physical queuing, standing
in line in order to obtain goods. The main questions addressed are what products were people
queuing for, who had to queue, what were the costs and benefits of queuing and whether
there are social gains from the disappearance of queues. In former days people had enough
money to buy goods, but shops were empty. Nowadays shops are full, but many wallets are
empty. In the current economic situation growing differences in income can be observed,
and some can buy and some cannot. Before 1989 there were queues, and it can be argued
that everyone had to queue. This would make people equal, income did not matter, only the
price of the product plus the time spent in the queue had to be paid. It might be expected
that this was not the case. The question is what was the cost of people’s time sacrificed for
queuing. People value their time differently, and it is more likely that pensioners can be found
queuing than working people, while probably, due to tradition and the opportunity cost of
time, more women queue than men. People are very inventive, and a “division of labour” may
well take place. People start queuing for each other and queuing can become a profession.
In Polish someone who queued professionally was called a “stacz”, and there were even
organised groups of them.
124
Chapter 6
6.3. Results and interpretation
During the last months of 1998 and the first months of 1999 a questionnaire was carried
out among 418 Poles.5 People under 15 were not in the target group, because it was assumed
that as they were five or six years old at most in 1989, they probably had never queued.
First, the sample is analysed for gender, age and party membership (Section 6.3.1.). Then the
questions are addressed as to who was queuing with whom, and what were they queuing for
(Section 6.3.2.). Afterwards costs and benefits of queuing (Section 6.3.3.), people’s assessment of activities undertaken while queuing (Section 6.3.4.) and how the time, which was
gained due to the disappearance of queues, is used (Section 6.3.5.) are analysed.
6.3.1. Gender, age and party membership
In Table 6.1. the sample is differentiated by gender and age. What is striking is that more
women than men filled out the questionnaire. Men were less willing to sacrifice 30–40
minutes (as was measured in a trial) to filling out the questionnaire. In Table 6.2. an overview
is given of what the proportion of a certain age group should be in the sample, if census data
from 1985 and 1996 were taken. For 1985 children between nil and six years old are excluded,
while for 1996 children younger than fifteen are excluded. This comparison is made in order
to adjust for changes in the proportion of age groups in the total population. Someone who
in 1996 belonged to the 45–54 age group, in 1985 belonged to the 35–44 age group. The aim
is to see whether the proportional representation at the time the research was carried out
was similar to the proportions in the total population in 1985.
Table 6.1. Gender and age.
Age Group
Men
Women
No gender
Total
reported
under 25
21
14
0
35
25–34
5
22
0
27
35–44
16
61
0
77
45–54
52
99
1
152
55–64
22
40
0
62
65–74
14
35
0
49
5
10
0
15
---
1
---
1
135
282
1
418
over 74
no age reported
Total
5
As a part of their coursework, students in Gdaƒsk (the Department of Scandinavian Studies), Opole (the Faculty of
Economics) and Wroc∏aw (the Faculty of Law and Administration) were asked to take questionnaires and ask their parents,
grandparents, friends and acquaintances to fill them out. The common feature is that these students attended an economics
course in English.
125
The Transaction Costs of Queuing in a Soviet-Type Economy
What can be observed is that in the sample, people under 35 are underrepresented compared with their share in the data from 1985, people between 45–54 are strongly over-represented, while the age group over 74 is under-represented, and approaches the current factual share in population. For the research I was more interested in people over 35 because
in 1985 they were older that 18, a category making the decision to queue or not. For this
reason I expressed my desire for people to take questionnaires to older people (parents and
grandparents). This is a possible explanation for the under-representation of the under 35
category. Many students, who carried out the research, still live at home, or go home at the
weekend, thus having good opportunities to allow their parents to fill out the questionnaire.
Many parents are in the 45–54 age category. The fact that the questionnaire was quite long
may explain the under-representation of the category over 74.
Table 6.2. Comparison of the sample population with the actual population age distribution
in the years 1985 and 1996.
Age Group
data from 1985*
data from 1996**
sample (n=418)
% of
population
representation
in sample
% of
population
under 25
14.75
62
20.60
86
8.37
35
25–34
16.00
67
16.69
70
6.46
27
35–44
20.24
84
20.86
87
18.42
77
45–54
14.30
60
15.40
64
36.36
152
55–64
12.58
53
11.79
49
14.83
62
65–74
11.32
47
9.76
41
11.72
49
over 74
10.81
45
4.89
21
3.59
15
no data
---
---
---
0.24
1
418
100.00
418
Total
100.00
418
--100.00
representation % of sample
in sample
representation
in sample
Source: GUS, 1997, 90. * Age group 0–6 excluded. ** Age group 0–14 excluded.
About 13% of the sample reported to have been a member of the former Polish Communist Party (PZPR), over 7% of all women and about 24% of all men. There were more
than 3 million PZPR members at the end of 1980. This number, as mentioned in Chapter 4, declined to about 2.2 million at the end of 1983, due to the effect of Martial Law
in 1981 [Taras, 1986, 38]. There were even cases that people working in some state enterprises were registered as a member without knowing it. In 1985 the population of 15 years
old and above consisted of about 27.781 million Poles [GUS, 1997, 90]. Assuming that
3 million people at any time were members of the party, this makes 10.8% of this group.
In the sample 15.2% of people of 35 years and older reported to have been in the party.
126
Chapter 6
This may suggest that the sample is from a specific strata of society, keeping in mind that
mainly students taking classes in English were asked to take questionnaires home. In general students’ parents earn more than average, and there could be a relation with party membership of relatives. However, if the population of 25 years and older in 1985 is taken, which
is 22.568 million, 3 million is 13.3% of this group. Still smaller than the proportion in the
sample, and there will also have been members in the age group between 18 and 25 years,
but the difference becomes small.
6.3.2. Who was queuing with whom, and what were they queuing for?
Tables 6.3. and 6.4. show who was queuing and with whom they were queuing, differentiated by gender, party membership and age. More than 95% of all respondents reported to
have queued before 1989, and less than 5% (19 respondents) reported to never have queued.
Among the people who never queued were 5 schoolchildren, 2 drivers, 2 managers, a civil
servant, a lecturer, an inspector, an accountant, 2 shop assistants, an architect, someone
who declared he worked, a director of a company, and a factory owner. Leaving out the
schoolchildren, about 4% of the respondents now aged 35 and older never queued. The
shop assistants explained that they supplied themselves in the shop where they worked and
made use of contacts with colleagues working in other shops. Of the 14 people working, 6
reported to work more than 50 hours per week, while the other 8 worked between 40 and 49
hours per week. Of the 19 people who never queued, 12 reported that other people were
queuing for them. Of these 12 people, 2 paid for it most of the time, 2 paid in the form of
services, while 5 of them did not do anything in return. In the last case it is likely that mainly
family were queuing for them. A total of 6 respondents declared they often managed to get
goods without queuing, 4 sometimes, and 3 seldom. This was done mainly via contacts with
people working in shops, friends/acquaintances and by way of bribing. A manager declared he
often got goods via the producer, while the director of a company managed to barter within
the company. Party membership does not seem to have influenced whether people queued
or not. Rank order within the party could have been of influence, but was not a subject of
research.
Table 6.3. Company in the queue. Division by gender and party membership.
Total
Men
Women
301 (72.0%)
105 (77.8%)
195 (69.1%)
45 (83.3%)
Queued with family
59 (14.1%)
12 (8.9%)
47 (16.7%)
4 (7.4%)
Queued with
acquaintances/friends
39 (9.3%)
11 (8.1%)
28 (9.9%)
4 (7.4%)
Did not queue
19 (4.6%)
7 (5.2%)
12 (4.3%)
1 (1.9%)
418 (100%)
135 (100%)
282 (100%)
54 (100%)
Queued alone
Total
Party members
127
The Transaction Costs of Queuing in a Soviet-Type Economy
Of all respondents, 72% mainly queued alone, while more than 23% queued with friends
or family members in the same queue. More men queued alone (77.8%) than women
(69.1%), while women queued more with their family, of which a possible explanation is the
fact that many women were queuing with their children. This at least partly explains the fact
that more than 40% of the respondents under 25 reported to have queued with their family.
More party members seem to have queued alone. A possible explanation is that more men
reported to have been a party member, but the sample size is too small to draw any definite
conclusions.
Table 6.4. Company in the queue. Division by age group.
Age Group
Queued
Queued with
Queued with
alone
family
acquaintances/
friends
Did not queue
Total
under 25
13
15
3
4
35
25–34
18
3
5
1
27
35–44
56
11
6
4
77
45–54
117
16
14
5
152
55–64
41
9
9
3
62
65–74
42
5
0
2
49
over 74
13
0
2
0
15
no data
1
0
0
0
1
301
59
39
19
418
Total
Table 6.5. presents the answers to the question “For what products did you queue?”
This question was answered by 396 of the 399 people who reported to have queued. The
top 5 products for which people often queued were meat (68.4%), toilet paper (45.5%),
coffee (41.9%), sugar (33.8%) and dairy products (29.0%), closely followed by chocolate,
gasoline and fruit. If the percentages of people queuing sometimes or often for a certain
product are added together, the result becomes: meat (87.1%), toilet paper (75.3%), coffee
(64.6%), sugar (63.1%), chocolate (56.6%), closely followed by dairy products and fruit,
while bread scored 41.7%, ahead of gasoline (not everybody had a car, thus many queued
often or not at all). Especially meat, toilet paper, coffee and gasoline were in shortage. One
respondent wrote that she stopped eating meat, due to the long queues. Other people did not
drink coffee until 1998 because coffee (or coupons for coffee) were traded for cigarettes
and they got used to not drinking coffee. People did not have to queue so often for vegetables,
probably due to the fact that a considerable proportion had a small plot where vegetables
were grown, or they had some family living in the countryside supplying them. What can be
observed is that people queued rather often for necessities.
128
Chapter 6
Table 6.5. Products people were queuing for.
Product
Never
Seldom
Sometimes
Often
Total
1. dairy products
93 (23.5%)
92 (23.2%)
96 (24.3%)
115 (29.0%)
396 (100%)
2. fruit
94 (23.7%)
97 (24.4%)
104 (26.3%)
101 (25.5%)
396 (100%)
3. bread
139 (35.1%)
92 (23.2%)
85 (21.5%)
80 (20.2%)
396 (100%)
4. sugar
72 (18.2%)
74 (18.7%)
116 (29.3%)
134 (33.8%)
396 (100%)
5. chocolate
83 (20.9%)
89 (22.5%)
110 (27.8%)
114 (28.8%)
396 (100%)
6. coffee
71 (17.9%)
69 (17.4%)
90 (22.7%)
166 (41.9%)
396 (100%)
229 (57.8%)
56 (14.2%)
40 (10.1%)
71 (17.9%)
396 (100%)
26 (6.6%)
25 (6.3%)
74 (18.7%)
271 (68.4%)
396 (100%)
227 (57.4%)
94 (23.7%)
54 (13.6%)
21 (5.3%)
396 (100%)
10. TV
284 (71.7%)
67 (16.9%)
24 (6.1%)
21 (5.3%)
396 (100%)
11. radio
322 (81.3%)
39 (9.9%)
23 (5.8%)
12 (3.0%)
396 (100%)
12. coal
314 (79.3%)
20 (5.0%)
34 (8.6%)
28 (7.1%)
396 (100%)
13. gasoline
212 (53.5%)
32 (8.1%)
42 (10.6%)
110 (27.8%)
396 (100%)
14. fridge, washing
machine, etc.
204 (51.5%)
114 (28.8%)
41 (10.4%)
37 (9.3%)
396 (100%)
15. furniture
209 (52.8%)
111 (28.0%)
49 (12.4%)
27 (6.8%)
396 (100%)
16. books
188 (47.5%)
72 (18.2%)
96 (24.2%)
40 (10.1%)
396 (100%)
17. toilet paper
54 (13.6%)
44 (11.1%)
118 (29.8%)
180 (45.5%)
396 (100%)
18. vegetables
202 (51.0%)
98 (24.8%)
63 (15.9%)
33 (8.3%)
396 (100%)
19. clothes
132 (33.3%)
98 (24.8%)
114 (28.8%)
52 (13.1%)
396 (100%)
7. cigarettes
8. meat
9. alcohol
6.3.3. Costs and benefits of queuing
The opportunity costs of queuing can be measured as the time spent in the queue. According to the survey conducted, the opportunity costs (transaction costs) of queuing for the
individual, measured in time, ranged from a minimum of 4 hours and 30 minutes per week
to a maximum of 10 hours and 15 minutes. Women, on average, queued longer than men,
minimum 4 hours 50 minutes and 3 hour 45 minutes respectively, maximum almost 11 hours
and 8 hours 50 minutes respectively. However, different people face different opportunity
costs while queuing. The opportunity costs of queuing for a pensioner are probably lower
than for someone who works. Furthermore, people can lower the transaction costs of queuing by, among other things, doing something useful or queuing during working hours. This
section analyses some costs and benefits of queuing.
The Transaction Costs of Queuing in a Soviet-Type Economy
129
Table 6.6. shows what people reported to have sacrificed for queuing, and presents the
answer to the question “What would you have to do if you did not have to queue?” Respondents could choose three possibilities, ranking them in order of importance. Slightly more
than a quarter of the respondents who queued mentioned spending time with their family/children/grandchildren (further referred to as family) as the most important alternative
that had to be sacrificed for queuing. Almost a quarter would have had to work, while work
around the house/in the garden counted for a bit more than 22% and hobby/sport/reading
was mentioned by 15% of the respondents.
The number of people that sacrificed work is interesting. This means that if they worked in
a state enterprise, they lowered the costs for themselves at society’s expense. Among this group
there were also some farmers. Poland, together with Yugoslavia, was an exception among the
Central and Eastern European socialist countries, with private farming on more than 80% of
the arable land [Lavigne, 1999 (b), 8]. Thus, time lost while queuing came at the farmer’s own
expense. As the second important activity sacrificed, family scored the highest (28.7%), while
about 20% and 14% respectively reported working around the house and hobby. Meeting
friends was mentioned by almost 10% of the sample. When the totals of all activities
mentioned are taken without ranking of order, the same pattern can be seen, family being
most important, followed by working around the house, hobby/sport/reading, and working.
Table 6.6. Opportunity costs of queuing.
Activity
Most
important
2nd most
important
3rd most
important
Work
71 (24.0%)
17 (5.7%)
10 (3.2%)
30 (11.0%)
128 (10.87%)
Work around the
house/in the garden
67 (22.6%)
61 (20.6%)
44 (14.1%)
60 (22.1%)
232 (19.71%)
Spending time with
family/children/
grandchildren
79 (26.7%)
85 (28.7%)
34 (10.9%)
55 (20.2%)
253 (21.50%)
Hobby/sport/reading
45 (15.2%)
41 (13.9%)
44 (14.1%)
57 (21.0%)
187 (15.89%)
Nothing
0 (0.0%)
1 (0.3%)
4 (1.3%)
3 (1.1%)
8 (0.68%)
School
7 (2.4%)
5 (1.7%)
3 (1.0%)
4 (1.5%)
19 (1.61%)
Study
2 (0.7%)
3 (1.0%)
8 (2.6%)
6 (2.2%)
19 (1.61%)
11 (3.7%)
28 (9.5%)
36 (11.5%)
28 (10.3%)
103 (8.75%)
Watching TV
5 (1.7%)
12 (4.1%)
59 (18.8%)
25 (9.2%)
101 (8.58%)
Something else
7 (2.4%)
5 (1.7%)
7 (2.2%)
4 (1.5%)
23 (1.95%)
Nothing mentioned
2 (0.7%)
38 (12.8%)
296 (100%)
296 (100%)
Meeting friends
Total
Mentioned but
not numbered
64 (20.4)
313 (100%)
Total
104 (8.84%)
272 (100%)
1177 (100%)
130
Chapter 6
Almost 25% of the respondents who queued mentioned work as the most important
sacrifice to queuing, 5.7% responded that it was the second most important, and 3.2% as the
third most important. Thus, a total of 33% of people sacrificed work to queuing. Table 6.7.
shows how many people queued during working hours: 6.9% queued often during working
hours, 29.1% sometimes or often, approaching the 33% mentioned to have sacrificed work
to queuing.
When people are too busy to do something, or they do not want to do it, they often try
to carry it out it in another way, one of which is letting someone else do it. To the question
whether children, parents, acquaintances and/or friends queued for them, 66.5% of the
respondents (276 out of 415) replied yes, 33.5% (139 out of 415) said no. Of the people who
said yes, 129 (46.8%) did not pay for this, 2 paid money (0.7%, these were people that did
not queue at all), 61 (22.1%) most often paid in services/favours, 59 (21.4%) queued in return, while 10 (3.6%) paid in other ways. A total of 15 respondents (5.4%) did not specify
whether they paid or not in return. While 41.1% of the respondents (163 out of 397) reported to have queued for somebody else, 58.9% (234 out of 397) never did. This result may
suggest that an informal barter economy with high transaction costs existed. The difference
to the response to the question of whether somebody queued for them might be caused by
the low number of people in the 75+ age group in the sample, due to difficulties with getting
them to fill in the questionnaire and the fact that many of the people who probably queued for
others (e.g. pensioners or grandmothers) do not live anymore. Another possible explanation
is that some people specialised in queuing for others.
Table 6.7. Queuing during work.
Never
Seldom
Sometimes
Often
Total
Total
202 (51.5%)
76 (19.4%)
87 (22.2%)
27 (6.9%)
392 (100%)
Male
65 (52.0%)
30 (24.0%)
22 (18.4%)
7 (5.6%)
135 (100%)
137 (51.3%)
46 (17.2%)
64 (24.0%)
20 (7.5%)
267 (100%)
25 (46.3%)
8 (14.8%)
18 (33.3%)
3 (5.6%)
54 (100%)
Female
Party member
When queues are long, or people are waiting for goods to arrive, there is an incentive
to arrange the distribution of the goods in question in such a way that less time has to be
spent in the queue. A good example in which transaction costs are low is a waiting list (“lista kolejkowa”). To the question of whether situations existed where they could write their
name down on a waiting list 169 out of 396 (40.9%) replied never, 117 (29.6%) seldom,
103 (26.0%) sometimes, and 14 (3.5%) often. Thus, on occasion part of the population
managed to lower transaction costs of queuing, while a small group seems to have been able
to lower these transaction costs very much.
The number of respondents (24%) mentioning work as the most important sacrifice seems
to indicate a large cost to the economy. The data are confirmed by the answers to the question
of whether people queued during work, presented in Table 6.7. Almost 29% of the sample
The Transaction Costs of Queuing in a Soviet-Type Economy
131
reported to have queued sometimes or often at a time they should have been at work. The
cost of this depends on how many working hours were sacrificed and on labour productivity.
Table 6.8. Benefits of queuing.
Activity
Never
Seldom
Sometimes
Often
Total
Complaining
96 (24.6%)
86 (22.0%)
108 (27.6%)
101 (25.8%)
391 (100%)
Talking about
politics
157 (40.1%)
75 (19.2%)
102 (26.1%)
57 (14.6%)
391 (100%)
Gossiping
171 (43.7%)
93 (23.8%)
83 (21.2%)
44 (11.3%)
391 (100%)
Study
306 (78.3%)
38 (9.7%)
35 (8.9%)
12 (3.1%)
391 (100%)
Reading
130 (33.2%)
61 (15.6%)
111 (28.4%)
89 (22.8%)
391 (100%)
Meeting friends
109 (27.9%)
90 (23.0%)
126 (32.2%)
66 (16.9%)
391 (100%)
Sleeping
370 (94.6%)
9 (2.3%)
9 (2.3%)
3 (0.8%)
391 (100%)
Praying
335 (85.7%)
30 (7.7%)
22 (5.6%)
4 (1.0%)
391 (100%)
85 (21.7%)
57 (14.6%)
133 (34.0%)
116 (29.7%)
391 (100%)
Resting
338 (86.5%)
33 (8.4%)
12 (3.1%)
8 (2.0%)
391 (100%)
Trading/making
appointments/arranging
– wangling something
326 (83.4%)
42 (10.7%)
21 (5.4%)
2 (0.5%)
391 (100%)
Making useful contacts
222 (56.8%)
90 (23.0%)
69 (17.6%)
10 (2.6%)
391 (100%)
Nothing
194 (49.6%)
50 (12.8%)
70 (17.9%)
77 (19.7%)
391 (100%)
Thinking/meditation
In order to obtain a better picture of the costs of queuing, activities that people employed
while queuing have to be considered. Table 6.8. presents the answers to the question “What
were you doing while queuing?” In other words, what were the benefits of queuing? People
waiting at a certain moment start to do something with their time. What they do depends on the
time that has to be spent on waiting, and whether they wait inside or outside. In the case of
queuing, the question is whether it is a social activity where people meet each other and communicate and whether some people make use of the opportunity to extend their network (making
useful contacts) or trade. Reading can be a useful activity, while it might be that people only
stand and think, or complain more than normally. The largest group reported that often they
were just thinking (about 30%), and this is still the case when the group mentioning sometimes
is included (about 64%). Other popular activities that people reported under the category often
are complaining and reading (about one quarter of the respondents), meeting friends (17%),
talking about politics6 (about 15%) and gossiping (more than 11%). This implies that often
time was spent in a social way, while quite a large group “reduced the waiting time” by reading.
6
Some respondents said that it was too dangerous to talk about politics. This of course depends on how well people
knew the other people in the queue. Talking about politics could also take the form of telling political jokes.
132
Chapter 6
Only a very small proportion traded often or made useful contacts. The question remains as
to whether the amount of time people were complaining differs from “normal” social situations, and to what extent complaining during these social occasions is reinforced due to
phenomena like queuing.
Looking at the categories “often” and “sometimes” together, thinking remains the most
popular, while around half of the population in the survey reports to have complained, read
and/or met friends. Two out of five talked about politics, one out of three gossiped, while
one out of five made useful contacts. This indicates that sometimes, besides reading and
studying, time was used in a productive way by making useful contacts, while more than 5%
arranged something. A category not explicitly mentioned concerns people talking about little day-to-day problems, and how to solve them. How to repair this, how to prepare that.
On social occasions quite often useful information is exchanged, and from interviews with
people I got the impression that this was also the case in queues. The fact that queuing time
was spent more or less in a useful way does of course not mean that people liked queuing.
This question is dealt with later.
Table 6.9. Benefits of queuing. Division by gender.
MEN (N=125) – WOMEN (N=265)
Often
Activity
% of all
male
Sometimes + Often
% of all
female
% of total
% of all
male
% of all
female
% of total
Complaining
20.8
27.9
25.8
44.0
57.7
53.3
Talking about politics
21.6
10.9
14.6
51.2
35.4
40.7
Gossiping
5.6
14.0
11.3
19.2
38.9
33.5
Study
2.4
3.4
3.1
11.2
12.5
12.0
Reading
25.6
21.5
22.8
52.8
49.2
51.2
Meeting friends
16.0
17.4
16.9
45.6
50.6
49.1
Sleeping
0.8
0.7
0.8
3.2
3.0
3.1
Praying
1.6
0.7
1.0
4.8
7.5
6.6
29.6
29.7
29.7
57.6
66.8
63.7
Resting
3.2
1.5
2.0
7.2
4.1
5.1
Trading/making
appointments/arranging
– something
0.8
0.4
0.5
7.2
4.9
5.9
Making useful contacts
4.0
1.9
2.6
24.0
18.1
20.2
19.2
20.0
19.7
37.6
37.7
37.6
Thinking/meditation
Nothing
The Transaction Costs of Queuing in a Soviet-Type Economy
133
It is worthwhile to analyse whether gender influences activities undertaken while queuing.
The results are summarised in Table 6.9., where only the categories often and the sum of often
and sometimes are presented. Although the sample only consists of 125 men and 265 women,
some interesting differences can be discovered. Women complained and gossiped more,
while men talked more about politics. Almost 28% of all women complained often, compared
with almost 21% of all men. Looking at respondents sometimes or often complaining, the percentage for women becomes almost 58, for men 44. With gossiping the difference seems to
be even bigger. Of all women 14% declared to gossip often, against less than 6% of all men.
Of all women 39% gossiped sometimes or often, against 19% of all men. With politics it is
the other way round. Almost 11% of the women and more than 21% of the men often talked
about politics. These numbers become 35% and 51% respectively if the people sometimes
talking about politics are added. The question why women gossiped and complained more,
while men talked more about politics, is to be answered by sociologists. However, it is possible that women complained more as they had to spend more time in the queue.
The proportion of men making useful contacts is a little higher than the proportion of
women. The difference with respect to trading/arranging something is even smaller, but could
be a stimulus for a further elaboration of the role of men and women in the parallel economy.
The existence of queuing in STEs was a sign that the allocation mechanism did not function properly. People tried to find different ways to reduce the opportunity costs of queuing,
such as queuing during working hours, undertaking productive activities while waiting and
queuing professionally. Such a situation is an indication of “decaying socialism”. The state,
due to decentralisation, lost its hold on the economy. In other words, institutions were weak,
and more and more opportunities for opportunistic behaviour appeared. Finally, the large
number of people complaining while standing in line may suggest that queues contributed to
dissatisfaction and weakening incentives.
6.3.4. Peoples’ assessment of queuing activities
Although it can be argued that many people tried to spend their time usefully in the queue
in one or various ways, the majority of the respondents considered their activities while
queuing to be a complete waste of time (more than two third of the sample), while about 30%
thought their activities were sometimes useful. The results are presented in Table 6.10. Only a few people considered their activities as being quite useful or very useful. When gender
is considered, there is hardly any difference. People under 35 mentioned “sometimes useful” relatively more often, while people between 65 and 74 mentioned “complete waste of
time” relatively more often.
A person who reads a whole book while queuing, or meets friends, probably spends the
time in a useful way. Why, then, does such a large proportion of the sample consider their activities while queuing to be a complete waste of time? To get a better view of this problem, two
other questions have to be considered: “do you sometimes miss the “queuing atmosphere”
(“atmosfera kolejkowa”)” and “how do you assess standing in queues before 1989?” (see
Table 6.11.) The number of people sometimes missing the “queuing atmosphere” is slightly
bigger (28 of 396 – 7.1%) than the number of people regarding their activities while queuing
134
Chapter 6
as quite useful or very useful (16 of 392 – 4%). Only 1 of the 396 respondents considered
queuing to be very pleasant, 1 pleasant, and 7 quite pleasant. Of all respondents, 244 (more
than 60%) assessed queuing as very annoying, 114 (almost 30%) as annoying. Someone said
he liked queuing, because he had an audience for telling jokes. Another respondent liked
queuing because of the social aspect – the possibility of talking to friends and acquaintances. The fact that most of the people did not like queuing at all could have had a large
influence on how they consider the usefulness of their activities in the queue, and may be
considered to be a “psychological transaction cost” of queuing.
Table 6.10. Assessment of activities while queuing.
Complete
Sometimes
Quite useful
Very useful
Total
waste of time
useful
Total
266 (67.9%)
110 (28.1%)
13 (3.3%)
3 (0.7%)
392 (100%)
Male
83 (66.4%)
35 (28.0%)
5 (4.0%)
2 (1.6%)
125 (100%)
183 (68.5%)
75 (28.1%)
8 (3.0%)
1 (0.4%)
267 (100%)
Under 25
16 (55.2%)
12 (41.4%)
0 (0.0%)
1 (3.4%)
29 (100%)
25–34
13 (48.2%)
12 (44.4%)
2 (7.4%)
0 (0.0%)
27 (100%)
35–44
47 (64.4%)
20 (27.4%)
5 (6.8%)
1 (1.4%)
73 (100%)
45–54
99 (69.3%)
41 (28.7%)
2 (1.4%)
1 (0.7%)
143 (100%)
55–64
41 (69.5%)
17 (28.8%)
1 (1.7%)
0 (0.0%)
59 (100%)
65–74
40 (85.1%)
5 (10.6%)
2 (4.3%)
0 (0.0%)
47 (100%)
Over 74
10 (71.4%)
3 (21.4%)
1 (7.2%)
0 (0.0%)
14 (100%)
Female
Table 6.11. Assessment of queuing.
How do you assess queuing before 1989?
Number of respondents
Very annoying
244 (61.6%)
Annoying
114 (28.8%)
A bit annoying
23 (5.8%)
No problem
6 (1.5%)
Quite pleasant
7 (1.7%)
Pleasant
1 (0.3%)
Very pleasant
1 (0.3%)
Total
396 (100%)
The Transaction Costs of Queuing in a Soviet-Type Economy
135
6.3.5. In what way is the time gained with the disappearance of queues being used?
As a result of complete price liberalization on 1 January 1990, shortages were eliminated
and queues disappeared from everyday life. People did not have to spend time in queues
anymore, and most goods were available in the shops. In this section the question is addressed as to in what way people use the time they do not have to sacrifice on queuing anymore. This is done in order to obtain a better picture of the opportunity cost of standing in
line during socialism and to assess the social gain of the elimination of queues.
Table 6.12. Benefits of the elimination of queues.
Activity
Most
2nd most
3rd most
Mentioned but
important
important
important
not numbered
Work longer hours
professionally
64 (20.6%)
16 (5.2%)
17 (5.3%)
1 (0.5%)
98 (8.53%)
Own business
15 (4.8%)
11 (3.5%)
3 (0.9%)
7 (3.4%)
36 (3.13%)
Spending time with
family/children/grandchildren
99 (31.9%)
67 (21.6%)
36 (11.2%)
53 (25.5%)
255 (22.19%)
Work around the
house/in the garden
48 (15.5%)
80 (25.8%)
45 (14.0%)
54 (26.0%)
227 (19.76%)
Hobby/sport/reading
40 (12.9%)
29 (9.4%)
59 (18.4%)
27 (13.0%)
155 (13.49%)
Watching TV
12 (3.9%)
28 (9.0%)
46 (14.3%)
34 (16.3%)
120 (10.44%)
5 (1.6%)
14 (4.5%)
23 (7.2%)
8 (3.8%)
50 (4.35%)
18 (5.8%)
8 (2.6%)
4 (1.2%)
2 (1.0%)
32 (2.79%)
1 (0.3%)
6 (1.9%)
9 (2.8%)
2 (1.0%)
18 (1.57%)
Meeting friends
5 (1.6%)
22 (7.1%)
37 (11.5%)
18 (8.7%)
82 (7.14%)
Work without paying taxes
1 (0.3%)
3 (1.0%)
2 (0.6%)
1 (0.5%)
7 (0.61%)
Something else
2 (0.6%)
3 (1.0%)
4 (1.2%)
1 (0.5%)
10 (0.87%)
Nothing mentioned
0 (0.0%)
23 (7.4%)
36 (11.2%)
---
59 (5.13%)
310 (100%)
310 (100%)
321 (100%)
More sleep
Study
Go to cinema/
Total
theatre/disco/etc.
Total
208 (100%)
1149 (100%)
Three activities could be given in order of importance to the question in what way time
is used that people do not have to spend in the queue anymore. The results are presented
in Table 6.12. More than 30% mentioned spending time with their family as most important,
working longer hours professionally (more than 20%) comes in second place, followed by
work around the house (15.5%) and hobby/sport/reading (13%). When the respondents
136
Chapter 6
working longer hours professionally and those having their own business are grouped together, it turns out that one in four spends the time gained on economic activities. It is difficult to compare the sacrifice of work under the socialist system with using the time gained
now for more work, due to possible differences in labour productivity and the large hidden
unemployment that existed before 1989. When the productivity of labour has increased, the
benefit of queues disappearing is even bigger. This also depends on how many working hours
were sacrificed and how much more time is devoted to work now.
In Table 6.13. the most important activities that people undertake due to the disappearance of queues (benefits) is compared with what people reported to have sacrificed for queuing (see Section 6.3.3.). Although there are small differences, a similar pattern between what
had to be sacrificed and what they now do more often can be observed. A larger part of the
sample (32%) reports to spend more time with their family than was mentioned as a sacrifice
(27%). When the total number of times mentioned are compared, the difference becomes
smaller (sacrifice – 21.5%, spending more time – 22.2%). Watching television has become
a bit more popular: sacrificed – 1.7%, more watching – 3.9%. When the category “second
most important” is added the following percentages are obtained: sacrificed – 4.1%, more
watching – 9%. Considering the total number of times mentioned (sacrificed – 8.7%, more
watching – 10.4%) a similar trend can be observed. Working around the house was sacrificed
most often by 23% of the population, while 15.5% reports to spend more time on it now.
Comparing the total number of times mentioned the difference becomes negligible (19.7%
and 19.8%), which may indicate a shift in preferences (as the second most important sacrifice
it was mentioned by 20.6%, as the second most important way of spending time by 25.8%).
Table 6.13. A comparison between costs of queuing and benefits of the elimination of queues.
Activity
Sacrificed
Spend more time on it now
Work/Work longer hours
professionally – own business
71 (24.0%)
80 (25.8%)
Spending time with
family children/grandchildren
79 (26.7%)
99 (31.9%)
Work around the
house/in the garden
67 (22.6%)
48 (15.5%)
Hobby/sport/reading
45 (15.2%)
40 (12.9%)
Watching TV
5 (1.7%)
12 (3.9%)
Study/school
9 (3.1%)
18 (5.8%)
Meeting friends
11 (3.7%)
5 (1.6%)
Something else
7 (2.4%)
8 (2.6%)
Nothing mentioned
2 (0.7%)
0 (0.0%)
296 (100%)
310 (100%)
Total
The Transaction Costs of Queuing in a Soviet-Type Economy
137
The last question to be mentioned is whether people nowadays also have to make use of
acquaintances/friends (“znajomoÊç”) in order to obtain goods. Only 2 of the 408 respondents said often (0.5%), 13 sometimes (3.2%), 62 seldom (15.2%) and 331 never (81.1%).
This indicates that the economy has “normalised” in this respect.
6.4. Concluding remarks
This chapter’s main aim is to analyse transaction costs and incentives in STEs using the
example of queuing and the social gains from queues disappearing. The questions that have
been addressed are: what products were people queuing for, who had to queue, and what
were the costs and benefits of queuing.
What products were people queuing for? The products that turn out to have been most in
shortage are meat, toilet paper, coffee, sugar, dairy products, chocolate, gasoline and fruit.
At the beginning of 1990 queues disappeared due to price liberalisation. Many products
could be obtained, but there still were some problems. Very few people nowadays have
to make use of acquaintances/friends (“znajomoÊç”), in order to obtain goods. There is
a strong indication that the economic situation for many people has normalised, that they
do not have to rely on a “network of friends” anymore to get by. However, it has to be mentioned that for many people in lower income groups (e.g. pensioners and unemployed) it is
currently very difficult to get by, maybe even more difficult than before 1989.
Who had to queue? A large majority of 95% of the respondents had to queue before 1989.
Only a few, schoolchildren and working people – especially in shops and with influential positions in companies – never had to queue. On the one hand, it is shown that some people
managed to get the products they wanted without queuing. On the other hand, it can be argued
that almost everyone was touched by the phenomenon of queuing. However, a “division of labour” took place, and some people specialised in queuing. Two thirds of the sample declared
that other people queued for them, while more than 40% queued for someone else. It is
known that many pensioners specialized in queuing. The point of “division of labour” has to
be elaborated more deeply by trying to answer the question how often and how long people
used to queue, which is quite difficult due to the fact that it happened more than a decade ago.
What had to be sacrificed for queuing? A quarter of the sample mentioned work, which
was, together with spending time with family and work around the house/in the garden, an
important sacrifice. The sacrifice of work is confirmed by the fact that 33% reported to have
queued during working hours. This was rather a social loss than a private loss. How big the
loss in productivity was is difficult to estimate, due to the existence of hidden unemployment. People tend to use time gained due to the disappearance of queues for similar activities as were mentioned as a sacrifice. Some differences can be observed with spending time
with family, working around the house, and watching television. Comparing how much work
was sacrificed with how much more time is now spent working is difficult because there may
be differences in labour productivity, and hidden unemployment was reduced in the 1990s.
Assuming that labour productivity increased, the gain from the disappearance of queues becomes even bigger.
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Chapter 6
What were people doing while queuing? Thinking, something that can be practiced
everywhere, was most often mentioned. People read a lot, complained quite often (more
women than men), talked about politics (more men than women), gossiped (more women
than men), and some were making useful contacts, or were trading/arranging things. Why
did women complain more? Maybe they had to queue more often, a reason for complaining.
Was queuing a complete waste of time? It could be said that time was used in a useful
way. However, a large majority of the respondents do not consider their activities while
queuing as useful, while only a small proportion sometimes long for the “queuing atmosphere”. Was behaviour in the queue different from “normal” social behaviour? This question
is difficult to answer. Many people disliked queuing. Phenomena such as queuing, shortages
and the political situation are good themes to complain about while queuing, and telling
political jokes can unload annoyance. But this does not imply that at social occasions people
do different things. When there are annoying things in life, people will talk about them at
social occasions. People will make useful contacts, arrange some business and have deep
thoughts when the company is not so interesting. I expect that at “normal” social occasions
not so many people are in deep thought, and reading is almost out of the question. Negative experiences while queuing probably will have had an influence on the motivation to
work, and have been a good reason to complain at social occasions.
In conclusion, the disappearance of queues is a social gain, although the exact gain is difficult to calculate. The consumer paid the price for a good plus transaction costs in the form
of time spent in the queue. These transaction costs were lowered due to activities in the
queue. Furthermore, for some people the value of their time was lower than for others. For
this reason, there were people (e.g. pensioners and grandmothers) who specialised in queuing. It also happened that people joined a queue when they saw one, without knowing what
was for sale, just in case something useful could be obtained. In Chapter 2 it was argued that
when the transaction costs of using the institution or governance structure that distributes
value from the public domain decreases (in this case the queue), the institution or governance structure becomes more widespread. Thus, when the transaction costs of queuing decreased, e.g. due to a learning effect, queues could have become larger and more queues
could have appeared.
The problems of queuing, the ways in which people tried to lower the transaction costs
of queuing and tried to obtain goods in a different way suggest that institutions were weak.
The state had lost its hold on the economy. When planning in the 1980s became a ritual, opportunities for opportunistic behaviour increased. Transaction costs of queuing rose, and
continuous shortages and the annoyance of queuing weakened incentives and increased dissatisfaction with the socialist system, enlarging the institutional disequilibrium. This influenced economic activity negatively. It can be argued that the transaction costs of queuing
were relatively small compared to other transaction costs in the planned economy. However, the “psychological transaction costs” were quite high. With the elimination of queues
due to price liberalisation, transaction costs to consumers of obtaining goods were reduced
significantly. Together with the increased availability of goods, this may have strengthened
incentives.
139
Chapter 7
TRANSACTION COSTS DURING
TRANSITION – LOGISTIC CHALLENGES
7.1. Introduction
The Soviet-Type Economy (STE) in Central and Eastern European countries was characterised by continuous shortages. This was mainly due to low prices, which increased the
quantity demanded. Supply could not increase so fast, because incentives for producers
were weak. This, together with disincentives provided by the institutional environment,
hampered the development of transaction cost lowering logistic solutions. The lack of
markets and the existence of shortages under socialism made it attractive for firms to
keep larger stocks (hoarding). This is, in fact, a transaction cost of a disfunctioning co-ordination system. Furthermore, due to the lack of markets, there was a tendency of organising activities not directly connected with the core activity within the firm. Examples
of this are repair, transport, construction, catering and leisure activities for employees
[Stˆhl, 1993 318]. As a result, the development of division of labour and specialisation
was hampered, implying that many potential benefits from economies of scale were not
obtained.
The elimination of shortages in 1990, by way of price liberalisation and the development
of a market, strengthened incentives to introduce logistic solutions. With the breakdown of
central planning, problems in the production and distribution system had become bigger.
Stˆhl [1993, 314–5] describes how the distribution of beer in Estonia was almost impossible
due to the lack of bottles, which was the result of various technical complications. Planning
had made firms very dependent on single suppliers, and when one line of supply did not deliver the needed input, production problems appeared and there was often a snowball effect
in the logistic chain.
Many problems exist in former STEs in the field of developing logistic solutions. Workers are skilled, but innovative capacity is lacking, due to obsolete techniques and lack of
appropriate implementation of theory in practice (research and application). Infrastructure is worn down, and was often rather developed for military purposes and not for solving
co-ordination problems in a developing market economy [see Lavigne, 1999(b)].
140
Chapter 7
In economies in transformation the use of logistic solutions and improvement of infrastructure may give incentives for step-by-step improvement of institutions as a reaction to
changes in the institutional environment, market demand and technology. This is especially important with respect to adaptive efficiency in the face of increasing transaction costs
when the amount of transactions increase due to economic growth, leading to the need for
institutional change (see Chapter 3). The increasing use of logistics and the stage of logistic development can be used as an indicator of the stage of transformation Poland finds
itself in.
In order to complete the transformation, a properly developed infrastructure is needed.
The state of infrastructure in Poland, discussed in Section 7.2., shows that this is not the
case. In Section 7.3. the analysis of the stage of logistic development that Poland finds itself
in suggests that Poland is 10 to 30 years behind highly developed OECD countries, implying that Poland has not completed its transformation and that there are still many opportunities for lowering transaction costs. The question is addressed, focussing on road transport, as to what the likely consequences for the Polish transport sector are when Poland
joins the EU. One possibility for lowering transaction costs is developing infrastructure and
logistic applications of hardware, such as information systems, while stimulating co-operation within larger networks by developing integrated logistic centres, which is discussed in
Section 7.4.
The use of logistic solutions and integration with EU markets may not only lead to the
introduction of many transaction cost lowering solutions, but can also be an incentive for institutional change towards a stronger economic system. In other words, it is a stimulus for
a country in transformation to develop by piecemeal institutional change towards a “higher
stage of market economy”.
7.2. The state of Polish infrastructure
Currently, Poland’s infrastructure, and as a consequence its transport system, is very much
influenced by the spatial development under socialism. Infrastructure was developed around
large industrial complexes and for military aims, and was not developed with the aim of
stimulating private transport and the development of car possession. Although investments
in infrastructure remained behind in the territories gained from Germany after World War
II, these parts of the country still have the most dense road and rail network, this being an
inheritance of German investments before World War II. In 1990 Poland possessed 257 km
of motorways, of which 140 km were built before World War II on former German territory. An important brake on the development of physical infrastructure was the low level of
motorisation compared to the West [Despiney and Paslawski, 2000].
The physical infrastructure (e.g. transport and telecommunications) in Poland, as in
other STEs, was rather designed for its hierarchical governance structures.1 There were few
small and medium size enterprises and in many branches production was highly integrated
vertically. There was not much horizontal co-operation between firms, while information
1
The emphasis under central planning on transport was rather on quantity than quality. Flexibility, logistics, reliability
and safety were often neglected, increasing transaction costs. Furthermore, central planning was biased towards production
of materials over services. As a result there was under-investment in telecommunications, and concerns with respect to
keeping bureaucratic control over the economy were more important than improving the often antiquated and unreliable
technology [Aghion and Schankerman, 1999, 86].
Transaction Costs during Transition – logistic challenges
141
flows to consumers and suppliers were distorted, incomplete, or sometimes even hardly
existed. The STEs lagged far behind their capitalist competitors with respect to technology,
leading to a lack of the hardware base needed for introducing transaction cost decreasing
solutions [Aghion and Schankerman, 1999, 80].
Boehme et al. [1998, 33–8] observe the following problems in existing infrastructure facilities. The technical condition of tracks, bridges and other facilities, lack of maintenance
and the small number of electrified and double track lines are problems with the railways.
Furthermore, signalling devices and traffic control systems are outdated and equipment and
terminals for combined transport, an important pre-condition for developing logistic solutions, are lacking. Internal communication systems are not at an adequate level, rolling
stock is outdated and of a low quality and operational efficiency and quality of services is
low. The road network is a little less dense than in EU countries, but the main problem is
the lack of motorways, the use of many roads by mixed traffic, the lower quality and lower
maximum axle loads than in the EU, lack of service facilities and lack of ring-roads and bypasses. Thus, the quality rather than quantity of infrastructure is the problem.
The Polish Ministry of Transport has developed plans to improve the infrastructure for
the period up to 2015 [MtiGM, 1999]. The current length of motorways is below 300 km, and
the network of motorways should be expanded to 2600 km by the year 2015. About 1600 km
of international roads are planned to be modernised, ring roads, viaducts and bridges are to
be built, new border crossings are to be created in order to facilitate international transport,
the modernisation of international rail connections is planned, the rolling stock of Polish
railways is to be changed, Polish ports and the merchant navy are to be modernised, and
airports and inland shipping tracks are to be built.
The investment costs are high. It has been estimated that for transport-related investment a total of more than 36 billion Euro is needed, of which 14.6 billion Euro in rail and
17.6 billion Euro in road transport. In 1999 such expenditure should have amounted to 1.3%
of total GDP [EBRD, 2000]. Grajnert and Krettek [2001, 64] estimate the cost of building
1 km of highway as 6.25 mln euro (see also Despiney and Paslawski [2000]), and railroad
(two-track electrified) as about 3.75 mln euro per km. This would mean a required investment of about 16.25 bln euro for the projected 2600 km of motorways.2
A problem for the Polish government is the huge public debt and the budget deficit,
while private domestic investors do not have sufficient amounts of capital available. For this
reason, financial support from the European Union is important. Developing Polish infrastructure is important for the EU, if they want to connect Poland to their transport network
and to develop access to markets in the republics of the former Soviet Union.
The building of motorways has been proceeding slowly. A question is whether this is the
result of bad government policy or even the complete lack of such a policy. Boehme et al.
[1998, 100] mention the following critique of the Polish Motorway programme: (i) plans were
developed years ago and do not consider environmental and regional development during the
1990s, (ii) procedures concerning the conflict between environment and transport policy are
cumbersome due to existing laws, (iii) property rights of land are not clearly defined, making
acquisition difficult, (iv) forecasts of traffic flow lack reliability, making the financial picture
unreliable. The toll-road Katowice-Cracow is an example (61 km – PLN 10 (€2.50) per car,
2
The exchange rate in January 2003 was about 4 Polish z∏oty for 1 euro.
142
Chapter 7
PLN 21 (€5.25) per truck in 2002). It was estimated that when tolls were introduced traffic
would decrease by 40%, but in reality it stayed at the level same (15,000 vehicles per 24
hours) [Despiney and Paslawski, 2000]. This example suggests that opportunities exist for
private-public ventures for building motorways.
As mentioned before, transport infrastructure in Poland, as well as in other economies
in transformation, bears the legacy of the past [see ECMT, 1995; Boehme et al., 1998]. The
infrastructure (and rolling stock) is not only worn down, under-invested and lacking managerial human capital, but also cannot handle the rapidly increasing demand, due to increased
trade and car use. This causes transport time to increase. Furthermore, increased international
traffic and trade causes long waiting times at border crossings. It has been estimated that,
when not breaking speed limits, total journey time in Poland is almost twice as long as in the
EU due to a lack of motorways and infrastructure bottlenecks. It has also been estimated
that at the beginning of the 1990s the maximum waiting time for trucks at the Polish-German
border was 7 hours and at the Polish-Ukrainian border even 20 hours [ECMT, 1995, 73].
However, afterwards waiting times probably increased, as investment in border crossing
facilities did not keep up with the growth of traffic. Facilities have been expanded only in
the last few years.
It can be argued that inefficient institutions cause bigger problems than infrastructural
bottlenecks [Boehme et al., 1998, III]. Solving transport policy shortcomings (e.g. non-privatised port handling agencies and inefficient regimes of charges to users) and creating efficient institutions are of larger importance than investment in infrastructure in the short-run,
as high transaction costs are likely to hamper trade and transport more that infrastructural
problems. Furthermore, infrastructural investments are very costly and time-consuming.
Creating proper institutions and governance structures that provide incentives and lower
transaction costs make it possible to get the most out of the existing situation, and prevent
unnecessary investments which may simply result from high transaction costs and the influence of interest groups.
7.3. Development of logistics in Poland 3
The European Union only developed a common transport policy, which stimulated the development of logistic solutions on a European scale, as late as the 1990s. The five main
areas were laid down in the Program for Sustainable Mobility of 1992 [Neal and Barbezat,
1998, 102–3]. This was a consequence of the Single European Act of 1987, aiming at creating a single European market. The main points of the Program for Sustainable Mobility
are removing barriers that hamper the flow of goods and people, removing barriers within
and between countries with respect to the transport market, reducing regional differences
in development by investment aid, ensuring environmentally-sound developments in the
transport sector and improving safety in transport.
Transport companies have reacted to the extension of the market, and tried to adapt to
the new challenges of increased competition and the different environment in which they
now operate. Many mergers have taken place between companies from different countries,
3
This subsection is partly based on Platje and Krzekotowski [2001].
143
Transaction Costs during Transition – logistic challenges
and there is a tendency to offer advanced, integrated logistic services. Advanced logistics
can be defined as “... the concept of synchronising the activities of multiple organisations in
the logistic chain and feeding back necessary information to organisations in production
and/or physical distribution sectors on a real time basis, by fully utilising information technology and digital communication networks. By introducing advanced logistics, firms can respond quickly to the changes in demand and, as a consequence, transport can be regarded as
an integral part of production or wholesaling or even retailing” [OECD, 1996, 15 – quoted
from OECD, Advanced Logistics and Road Freight Transport, 1992].
The integration of the European market and the extension of international markets (globalisation), together with rapid developments in information technologies, have immensely
expanded the opportunities for companies. On the one hand, there is a tendency of further
division of labour by specialisation. However, consumers demand an integrated package of
services. Companies are starting to co-operate with each other, in order to share experience and offer such a package of services, that the client does not have to search for all the
services among different companies.
With increasing division of labour and diversifying consumer demand, the demand for
transport services is also likely to increase. Infrastructure cannot change so fast, among
other things, due to the relatively low transport costs compared to the costs of production,
leading to increasing pressure on the existing infrastructure. The moment that externalities
of transport are internalised (e.g. by way of road taxes or fuel taxes), logistic solutions such
as lighter vehicles, larger truck loads, distribution centres and logistic centres become more
attractive. However, in this case co-ordination costs (e.g. transaction costs of managing a
logistic centre) are likely to increase.
Table 7.1. Three generations of logistic development.
Generation
First
Second
Third
Time Period
Before 1970
1970–1990
After 1990
Industrial Structure
Independent
factories
OEM4 and
subcontractors
Global and virtual
corporations
Focus and Organisational
Shipment
Material flow
Logistics channel
Low costs
Reduced costs
Increased revenues
System-wide
cost reduction
Involvement
Economic Impact
& revenue increase
Management Position
In other
departments
Separate function
in company
Joint function of
separate companies
Information Support
Telephone, Telex
Fax
In-house computer
systems
Computer network
EDI, DSS, AI
Source: OECD, 1996, 43.
4
OEM means original equipment manufacturer. Such a firm produces a product that is sold under its own name,
while using product components from one or more other companies as inputs [http://whatis.techtarget.com/definition/0‚,sid9_gci214136,00.html].
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Table 7.1. shows the development in logistic systems in OECD countries. The development in logistic services can be described as follows. Before the 1970s (first generation), the
industrial structure in OECD countries was characterised by independent factories and
the emphasis of logistics was on finding “cheap transport to and from cheap inventory warehousing facilities” [OECD, 1996, 45]. In this case the transaction “transport” was relatively
straightforward. In the period 1970–1990 (second generation), an increasing division of labour could be observed – factories obtained inputs from more and more subcontractors.
New logistic goals embraced “increasing revenues through the creation of customer value
and speeding up flows to reduce tied up capital” [OECD, 1996, 45]. This phase is characterised by the introduction of the fax and in-house computer systems, lowering the costs of
transferring information. Due to the increasing division of labour the amount of economic
transactions increased and the logistic chain lengthened, leading to new bottlenecks and
increasing transaction costs. When the number of firms involved in the production process
increases, the result may be higher control and monitoring costs in case of re-loading or
re-packaging due to the threat of making mistakes, mishandling, theft, smuggling, sabotage,
etc. Consequently, measures for decreasing these transaction costs are required. Third
generation logistics is strongly connected with the internationalisation of markets and the
so-called “new-economy”. This generation is developing very quickly. Global and virtual corporations are starting to dominate the industrial structure, while logistics is starting to take
into consideration the whole production and distribution chain, in other words, the logistic
chain. An important role is played by information technology (e.g. computer networks,
EDI and the Internet). Suppliers, who were independent in earlier phases, are becoming increasingly interdependent. While “in the second period links were created between suppliers
and factories, nowadays companies work within networks where flexibility and adaptation
are important features” [OECD, 1996, 43].
In the phase of third generation logistics, vertical integration (supply chain management) and horizontal integration are taking place. More and more specialised logistic companies offer some or all logistic services (third party logistics or contract logistics). “Apart
from giving access to specialists third party logistics provides opportunities of conserving
economies of scale by sharing resources within other networks, while simultaneously significantly increasing the level of service offered to individual partners” [OECD, 1996, 45].
This is a clear example where lowering transaction costs by integrating networks leads to increased economic activity. Furthermore, there is specialisation/division of labour with respect to the provision of logistic services. In other words, using Williamson’s [1985, 1998]
reasoning, the transaction costs of providing logistic services within the firm are higher than
the provision of those services by the market, while there are economies of scale in the provision of logistic services.
When one part in the logistic chain is disfunctioning, this can have significant consequences for the rest of the chain. For this reason investment in safeguards has to be made.
A possibility for reducing transaction costs is to share responsibilities between shippers, providers of logistic services, transport authorities and national authorities [OECD, 1996] in
such a way that all parties have incentives to strive for reducing the opportunities for opportunistic behaviour (incentive-compatibility). This is a case where not only efficient institu-
Transaction Costs during Transition – logistic challenges
145
tions are important, but also information technology such as equipment for tracing and tracking and route planning.
While it can be argued that many industries in the EU, as well as its transport sector, find
themselves in or are entering very rapidly into the third generation of logistic development,
the question is “which generation does the Polish transport sector find itself in?” This is related to the stage of transformation the Polish economy has reached, and answering this
question is important in assessing what will be the consequences for the Polish transport sector when joining the EU market.
Table 7.2. Services offered by road forwarding and transport companies.
Customs agency
Road forwarding
Road transport
Only road
Only road
(n=248; 217 also
offer road transport)
(n=260; 217 also
offer road forwarding)
forwarding
(n=31)
transport
(n=43)
61 (24.6%)
52 (20.0%)
11 (35.5%)
2 (4.7%)
Consultancy in the
area of transport
and forwarding
116 (46.8%)
102 (39.2%)
21 (67.7%)
7 (16.3%)
Encashment of due
payments from
foreign contractors
8 (3.2%)
7 (2.7%)
1 (3.2%)
0 (0.0%)
Control of the quality
and quantity of goods
7 (2.8%)
5 (1.9%)
3 (9.7%)
1 (2.3%)
72 (29.0%)
64 (24.6%)
14 (45.2%)
6 (14.0%)
0 (0.0%)
0 (0.0%)
0 (0.0%)
0 (0.0%)
41 (16.5%)
38 (14.6%)
3 (9.7%)
0 (0.0%)
6 (2.4%)
5 (1.9%)
1 (3.2%)
0 (0.0%)
31 (12.5%)
32 (12.3%)
2 (6.5%)
3 (7.0%)
6 (2.4%)
5 (1.9%)
2 (6.5%)
1 (2.3%)
E-mail
85 (34.3%)
82 (31.5%)
12 (38.7%)
9 (20.9%)
Web-site
38 (15.3%)
33 (12.7%)
6 (19.4%)
1 (2.3%)
Storing and
warehousing
Computer
information services
for transport
and forwarding
Cargo management
Repackaging
Cargo insurance
Customs clearance
Source: my own calculations based on Ogólnopolski Teleadresowy Katalog Firm Bran˝y Transportowej i Spedycyjnej 1999/2000 (Polish Transport and Forwarding Companies Nationwide Directory
1999/2000), Warsaw, 1999.
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Chapter 7
The focus here is on Polish road transport. 260 Polish companies involved in road transport and/or road forwarding were analysed according to which services they offer besides
pure transport, which may be an indication of the development of logistic services. The results are shown in Table 7.2. It has to be mentioned that the companies in question are likely to be larger companies, because they advertised in the Polish Transport and Forwarding
Companies Nationwide Directory 1999/2000, which small companies tend not to do, due to
financial constraints. A little less than 25% of all companies (about 45% of the companies
only involved in road forwarding (CRF) and 14% of the companies only involved in road
transport (CRT)) offer storage and warehousing services. Less than 40% offer consultancy
services in the area of transport and forwarding (67% of CRF and 16% of CRT). Cargo
management is offered by less than 15% (almost 10% of CRF and 0% of CRT), while encashment of payments due from foreign contractors, control of the quality and quantity of goods,
repackaging and customs clearance are offered by 2–3% of all companies (in all cases
more CRF offered such services than CRT). A wider range of logistic services is offered by
larger companies like Hartwig, Pekaes and Raben, as well as some companies specialising
in offering logistic services. Among the 53 largest Polish transport and forwarding companies, 30 offer logistic services [Rzeczpospolita, 2000]. There is a tendency that companies
focusing on pure road forwarding offer more logistic services than average. However, in
general, the emphasis of Polish carriers and forwarding seems to be on pure shipment, suggesting that the Polish transport sector is in the first generation of logistic development.
Table 7.3. Possession of web-site, use of e-mail and/or fax in contacts with clients.
Web-site
E-mail
Fax
Yes
No
NA
Yes
No
NA
Yes
No
NA
234
869
13
237
864
13
524
577
15
(n=1,116)
(21.0%)
(77.9%)
(1.1%)
(21.2%)
(77.4%)
(1.3%)
(47.0%)
51.7%)
(1.3%)
Transport
23
33
0
25
31
0
46
10
0
(41.1%)
(58.9%)
(0.0%)
(44.6%)
(55.4%)
(0.0%)
(82.1%)
(17.9%)
(0.0%)
32
33
0
35
30
0
54
11
0
(49.2%)
(50.8%)
(0.0%)
(53.8%)
(46.2%)
(0.0%)
(83.1%)
(16.9%)
(0.0%)
112
603
11
111
602
13
288
424
14
(15.4%)
(83.1%)
(1.5%)
(15.3%)
(82.9%)
(1.8%)
(39.7%)
(58.4%)
(1.9%)
All
(n=56)
Ind. Prod.
(n=65)
Retail
(n=726)
Gastr.
(n=75)
7
(9.3%)
67
1
(89.3%)
(1.3%)
7
(9.3%)
67
1
31
44
0
(89.3%)
(1.3%)
(41.3%)
(58.7%)
(0.0%)
NA = no answer
With respect to information support, many companies can be found in the second generation of logistic development. At least 30% of the 260 forwarding and transport companies in the survey have an e-mail account, while more than 10% have an Internet web-site.
Transaction Costs during Transition – logistic challenges
147
Research carried out among 1,116 Polish firms during the first half of 2001 (see also the Appendix) gives the following picture with respect to the possession of web-sites, use of e-mail
and fax to contact clients (Table 7.3.). A number of 234 companies (21.0%) reported to
have a web-site, 237 firms (21.2%) use e-mail in contact with clients, while 524 firms (46.9%)
use fax in contact with clients. There are differences between the branches: 32 of the 65 firms
in industrial production (almost 50%), 23 of the 56 transport companies (41%), and 112
of the 726 (15.4%) firms operating in retail trade have a web-site. With respect to e-mail,
the trend is similar. About 82% of the transport companies, 83% of the firms engaged in
industrial production, and almost 40% of the retailers use fax.
More and more firms in Poland have access to e-mail and make use of fax in communicating with suppliers and customers. However, the use of advanced information technology
and telecommunication systems lags behind the developments in the EU. Furthermore, most
people seem not to collaborate and co-operate more than is immediately necessary, which is
an inheritance from the past. It may not be so much the unwillingness to co-operate, but
more the lack of trust, the lack of “co-operation skills” and the lack of a “communication
culture”. This is a serious challenge when trying to introduce logistic solutions.
However, in a less developed market like Poland a computer with a modem, which is
a cheap means of communication, makes it possible to develop E-commerce in a cheap way,
reducing co-operation and co-ordination problems [OECD, 1996, 94]. Currently the introduction of advanced logistic systems in the Polish transport and forwarding sector does not
seem to be proceeding quickly. Most of the firms are small with one or a few trucks and little
capital, while many loads are small and occasional, lowering the possibilities for standardisation. Thus, e-mail would be a good means of communication. However, as mentioned, many
firms do not even have access to e-mail, and a question is whether firms check and answer
their mail regularly. Another problem with e-mail, as with fax, is that a document does not
possess legal enforceability, which in case of low trust causes an increase in transaction costs.
Although with respect to information support there seems to be a tendency of part of the
Polish transport sector to enter the “age of Information Technology”, the companies in the
first sample presented in this section are likely to be larger companies, because, as mentioned
before, they advertise in a nation-wide directory of Polish transport and forwarding companies. This implies that the percentage of other companies using e-mail or having a web-site
are likely to be lower. With respect to fax, the road transport sector is in the second stage
of logistic development. Third generation developments are rarely observed in Poland. Thus,
it can be concluded that Poland’s transport and forwarding sector is somewhere between the
first and second generation of logistic development when looking at focus, organisational involvement and information support. This implies that in this field Poland has not finished its
transformation yet. When Poland enters the European Union, and faces the competition
from integrated companies from the current EU countries, the question is whether they can
survive the competition. There are different possible scenarios, of which two are given below.
Polish carriers and forwarders start to co-operate with each other and with suppliers and
factories, in order to face competition on the domestic market, as well as to obtain a share of
the EU transport market, using the advantage of, among other things, low labour costs in
Poland. In order to achieve this, either mergers or a concentration of small and medium-sized
148
Chapter 7
firms are necessary, as well as the introduction of integrated, advanced logistic services. The
development of logistic centres may stimulate such development. Key words are co-operation, specialisation and flexibility.5 Education and training in logistics, as well as a thorough
knowledge of the EU market, is needed for achieving such development. In order to survive on their own market and to gain a share of the EU market, however, co-operation with
EU transport firms is necessary from the point of view of the transfer of knowledge/experience, knowledge of local markets and distribution systems, sources for investment, etc. To
achieve this, an adequate transport policy with respect to matters like developing local infrastructure, stimulating co-operation and information provision is required from the side
of local and central government.
Another scenario is that foreign companies will squeeze out most of the Polish transport
and forwarding companies from the EU market and reduce their share of the Polish market, leaving them the niche of shipment of goods over the Polish eastern border (Ukraine,
Belarus, Russia). Another niche could be providing services for large companies with foreign
capital on local markets and transport eastwards for those companies. Small Polish firms
have the advantage of low labour costs, knowing the local market and knowing the language and culture, while many Western drivers do not want to drive eastwards.
7.4. Integrated logistic centres 6
A reason for offering logistic services is high transaction costs for the customer of finding
different specialised companies providing such services and negotiating with them. The
transport provider does not have to provide all the logistic services itself, as it can have a
network of subcontractors, which is used in its service offer to clients. Especially when advanced information technologies are used, repeated dealings are required not only to obtain
economies of scale in the provision of logistic services, but also to lower the control costs,
which would accompany market transactions with many unknown partners. However, when
a provider of logistic services makes use of subcontractors, it is important to clarify who
is liable for execution (of parts) of the contract. In other words, property rights should be
delineated, as otherwise the control costs of the collection of damage payments in the case
of failure of the execution of a contract are likely to be high. In such a situation the value in
the public domain increases, which increases opportunities for rent-seeking, with all its
negative consequences.
An integrated logistic centre is a place where many different logistic service providers
are located. Such a concentration of firms may lower transaction costs, because of the possibility of using advanced information systems, reducing negotiation and control costs when
firms co-operate for a longer time, and generating internal and external economies of scale.
Especially when logistic processes become more complex, such logistic centres help to reduce transaction costs and transport costs, and they can create conditions for adaptive efficiency of governance structures.
Combined transport (e.g. road – rail), a multifunctional system of logistic services and
an integrated informational system are important for the functioning of a logistic centre
5
It has been argued that in Western Europe firms which do not use EDI (Electronic Data Interchange) will be out of
business [OECD, 1996, 14].
6
This section is largely based on Platje [2002].
Transaction Costs during Transition – logistic challenges
149
[Korzeƒ, 2001, 32; Nobel, 2001, 51]. A logistic centre is an independent properly organised
and managed economic subject administering a site connected with an external transport
system, equipped with infrastructure (e.g. roads, engineering structures and warehouses),
equipment for relocation and storage, and providing logistic services [Szyszka, 2001, 37].7
Integrated logistic centres8 are built in a compact organisational-functional arrangement and can often be found quite far away from the centre of an urban agglomeration. Integrated logistic centres operate at an international, regional or local level. International
logistic centres achieve the highest level of organisational and functional development and
operate within international distribution networks with a range of 500–800 km and occupy
an area of 100–150 ha. Regional logistic centres focus on regional and city distribution networks and have a distribution range of 50–80 km, while occupying an area of 20–50 ha. Local logistic centres are a gravitational point in the local/urban distribution network with
a range of 5–8 km and occupy an area of 2–10 ha [Korzeƒ, 2001, 32; Abt, 2001, 110–1].
In order for an integrated logistic centre to develop, there are certain conditions that
have to be fulfilled, related to the development of combined transport, infrastructure and
location in the transport system, personnel, capital, spatial development, the climate for
entrepreneurship and economic development and demand. Infrastructure and combined
transport are briefly discussed here.
Infrastructure is of decisive importance for the development of logistic centres. The
existence of good road, rail, water and air connections is an important determinant for the
location. Difficulties with transport faced in the European Union are also faced by Poland
[Grajnert and Krettek, 2001]. There is a rapid growth of road transport, faster than the growth
of the road transport network, which leads to congestion. Furthermore, Polish infrastructure
is neither prepared for heavy nor high levels of transport. Transport by car has increased much
in the last few years, causing the following problems: destruction of the excessively burdened
road surface; more difficulties at customs (e.g. time delays and cargo formalities); deterioration of the environment along the roads and around border crossings; traffic jams in most
urban areas; decrease in the number of cargoes in rail transport; the lack of possibilities for
planning the schedules of realising transportation, due to the increased time spent at the border [WZCL, 1999, 18]. Integrated logistic centres are able to lessen these problems, among
other things, by rationalising transport flows and the use of combined transport.
Combined transport is essential to the development of logistic centres. A good description of combined transport is the Declaration on Combined Transport adopted by the European Conference of Ministers of Transport in 1996 [Document CEMT/CM (96)16].
“[C]ombined transport has to be understood as an individual mode of transport which makes
maximum use of the advantages of the numerous modes of land transport and short sea
shipping, choosing those modes most suitable. Combined transport thus implies the organisation of inter-modal door-to-door transport by transferring goods from one mode of transport to another without changing the loading unit” [ECMT, 1998, 7].
Based on Kearney and Kearney [2000].
Integrated logistic centres have, among other things, the following functions [Abt, 2001, 109]: organise flows of goods
according to the needs of clients; association of hauliers that are most suitable for a given haulage/transport; supplement
transport-warehousing activities with logistic services; facilitate co-operation between forwarding companies and logistic
companies; use of common logistic infrastructure appliances/equipment; common management, administration, organisation and acquisition of logistic processes; development of integrated logistic systems; co-ordination of co-operating logistic
companies; use and perfection of compatible coding systems; diffusion of Electronic Data Interchange (EDI). An Integrated logistic centre may offer the following services: re-loading, re-packaging, storing; forwarding services; customs services;
technical services for means of transport; broadly understood distribution; banking and administrative services; informational
services; postal and telecommunication services; gastronomic and hotel services [WZCL, 1999, 20].
7
8
150
Chapter 7
The share of combined transport in total transport in Poland is very small. However, the
gains can be substantial. For instance, it is possible to transport 5 wagonloads by train, which normally would be transported by 5 trucks over a long distance. The advantages are that labour
costs are lower (although this is not good for employment in Poland), less fuel is used, greater
safety can be achieved, maximum speed can be higher, less noise is created and less exhaust
fumes are emitted [Grajnert and Krettek, 2001, 71]. The underdeveloped roads could be relieved
from congestion, and less transit transport would go through cities, which is currently important, due to the lack of ring-roads. Although the share of combined transport in total transport
in Europe is expected to increase [Tylutki and Wronka, 1996], large investments are needed because of the lack of proper equipment and experience, the need for terminals and adapting the
means of transport to such cargoes, as well as the need for maintenance and repair.
Special terminals for switching loads, which can be provided by an integrated logistic
centre, are essential for combined transport. A problem in Poland is the lack of combined
transport terminals, and the lack of investment in rolling stock and equipment for combined
transport. When investment takes place, the equipment and information systems of road
hauliers should be compatible with the equipment the railroad operator uses. In the case of
a lack of co-operation and lack of exchange of information it is likely that problems arise.
The size and weight of loads to be transported depends on the infrastructure and local
regulations. As Polish infrastructure is rather under-invested and low quality (e.g. roads), it
is important to make the most of the existing infrastructure. As mentioned earlier, investment in infrastructure is indispensable, but is time and capital consuming. Thus, initially it
may be better to adapt the mode of transport (e.g. smaller vehicles) and optimise logistic systems (e.g. information, just-in-time and, when possible, collecting smaller, less urgent parties until a large load is collected), not only to reduce costs but also to reduce pressure on
the existing infrastructure.
It has been estimated that 300 km is the shortest distance for combined transport to pay
off [ECMT, 1998, 13]. For this reason, combined transport facilities should be located in an
internationally oriented logistic centre. Transaction costs of re-loading increase in the case
of combined transport, as in this process there exists the danger of theft, delay, damage and
mistakes. Investment in monitoring equipment and the costs of re-loading should be compensated by lower transport cost due to economies of scale obtained by transporting large
and concentrated loads. Tracing and tracking equipment, status reporting and monitoring
equipment can lower the transaction costs [ECTM, 1998, 23]. An integrated logistic centre
can lower transport costs too, e.g. because the road haulier terminal and the rail terminal
are very close to each other.
In the Polish case combined transport will become more attractive when truck drivers are
bounded by EU law, assuming that this law will be enforced. When transporting by road over
a distance of more than 600 km, which in Western Europe takes about 8 hours, but under
Polish circumstances would take longer, the driver has to be changed or take a break of at
least 8 hours [ECTM, 1998, 23]. Thus, in this case the costs of employment would increase.
In the Eastern European case, combined transport has the advantage of spending a shorter
time at the border than in the case of road vehicles. While road vehicles sometimes even
face waiting times of 24 hours, combined transport trains cross the border almost without
Transaction Costs during Transition – logistic challenges
151
delay [ECTM, 1998, 23]. This lowers the transaction costs in the form of time, costs of frozen
capital and labour costs.
However, there are many practical problems hampering the development of combined
transport between economies in transition, like Poland and Russia, and the EU [ECTM,
1998, 27]. Many Polish trucks do not fulfil EU standards concerning road safety and pollution standards. When trucks are not checked at the border, but rather at a combined transport terminal in an EU country, many Polish hauliers are unlikely to enter the combined
transport business. Furthermore, high transaction costs connected with health standards
exist (e.g. veterinary and plant controls). This might increase the costs of standing at the border. These transaction costs can be lowered by control at a loading or unloading unit, but
then the opportunities for smuggling or changing the load on the road increase. However,
rail has a lot of spare capacity, which creates opportunities for combined transport. On the
other hand, many managerial problems exist in Polish National Railways (PKP), a monopolist in transport by rail. Another problem is that many transport companies are very small
(less than 5 trucks) and dispersed, and due to their size are not able to develop with respect
to combined transport [Külper, 2001, 190].
There are many potential advantages from integrated logistic centres. First of all, their activities may help to alleviate the transport problems in cities [WZCL, 1999, 41]. A first reason
is that the development of combined transport reduces transit traffic. Secondly, as a result of a
lack of ring-roads, many firms are located in the city centre. An integrated logistic centre may
attract such firms (e.g. transport, wholesale, production and services) and rationalise transport
of supplies to the city centre. However, the building of a ring-road around an agglomeration,
in order to reduce transit transport in the centre, is of essential importance. Without this the
logistic centre could negatively influence traffic, because it could attract new transport streams,
if it attracts investments and leads to a reviving of the economy in the surrounding area.
There are also positive effects at the level of producer and consumer from the use of
logistic solutions in an integrated logistic centre. Korzeƒ [2001, 33] mentions the following:
lower transaction costs due to the possibility of lowering stocks; improvement of quality and
time of delivery and lowering costs of physical material flows; improvement in the level of
consumer service; scale effects, causing a more beneficial operational cost structure (labour, rent, insurance, etc.); the possibility of fast introduction of innovations and business
corrections under conditions of market disturbances; offering complementary, integrated
organised logistic outsourcing services (for transport, forwarding and information services).
The development of integrated logistic centres is an example of how Poland can be
stimulated to enter the post-transformation phase of institutional change. There are still formal and informal institutions to be transformed, while currently the governance structures of
a moloch such as Polish National Railways is not fit to enter the “age of advanced logistics”.
Also the question remains as to whether the various participants (e.g. firms, banks and
government) are “ready” to co-operate. However, small and medium-sized enterprises could
play an important role in offering logistics services [OECD, 1996, 16]. This is important
for the Polish transport sector, where many small companies face tough competition from
each other. Many companies are not aware of the need to adapt to the new technological
possibilities, and governments can try to stimulate awareness by educational programs.
152
Chapter 7
Furthermore, when looking at logistic development, Poland is still in transformation.
Many infrastructure problems remain to be solved and investment in logistics equipment,
methods, information technology and logistics education to be made. Advanced integrated
logistics and integrated logistic centres are means to lower transaction costs and extend
markets by integrating with the European logistic system, which can be a stimulus in the
transformation process. Such a venture is an excellent opportunity to construct social capital by showing that co-operation with different domestic (e.g. firms, banks and local government) and foreign subjects is possible.
7.5. Concluding remarks
A problem with developing a market economy, besides institutions and governance, is the
state of infrastructure. Better infrastructure extends markets and stimulates competition.
However, as investment in infrastructure is expensive and time consuming, in the short-run
more efficient use of current infrastructure by way of improvements at the level of institutions and governance is advisable. To put it simply, if we cannot make the most of our current resources, will we be able to use new resources most efficiently? Thus, when introducing logistic systems and solutions in order to lower transaction costs, the infrastructure
constraints and need for institutional improvement have to be taken into consideration.
When looking at logistic development, Poland seems to be 10 to 30 years behind the development of a developed market economy. This implies that there are still many opportunities for introducing logistic solutions lowering transaction cost. Although in some parts of
the economy Poland is catching up very quickly, Polish transport companies need to start to
co-operate and introduce logistic services, in order to face the competition that can be
expected. For this the creation of human capital, as well as an adequate government policy,
is required (at local, as well as at central level). Otherwise many transport companies are
not likely to survive competition from large Western firms when Poland joins the EU. The
process of creating ventures such as integrated logistic centres may stimulate Poland to enter the stage of “post-transformation”, extend markets by integrating into European logistic
systems and help to build social capital. However, a danger of building process-based trust
in such a network is the exclusion of potentially efficient partners. For this reason, such
logistic networks should be as transparent as possible.
Co-operation within networks is becoming more important for obtaining a competitive
advantage. As is shown in Appendix 5, social capital, important for stimulating the creation
of more open networks and adaptive efficiency, is missing, and has to be constructed. It is
especially important to increase extended trust and trust in institutions and the government,
e.g. by way of more efficient “institutional governance” and the government stimulating
the creation of networks by providing information, chambers of commerce and organising
training and trade fairs.9 The creation of such trust not only stimulates adaptive efficiency,
but also brings the economic system closer to an institutional equilibrium. However, the creation of trust is very time-consuming and difficult.
9
See Humphrey and Schmitz [1996].
SUMMARY AND CONCLUSIONS
155
Chapter 8
Summary and Conclusions
This final chapter gives an overview of the main conclusions and policy implications of this
study on institutional change and Poland’s economic performance since the 1970s, and an
attempt is made to answer the main question of this thesis: To what extent have incentives and
transaction costs changed in the Polish economy and influenced economic performance in the
period 1970–2000 and how can these changes be explained with the help of New Institutional
Economics? Two periods were taken into consideration. The socialist system, which existed
until 1989, and the period of market construction since 1990. The main question was divided
into sub-questions. Concerning the socialist system, to what extent can transaction costs
and incentives explain its demise, and how did they create the conditions for institutional
change towards a market economy? How did the situation at the end of the socialist system
influence economic performance at the beginning of the 1990s, and how did institutional
change proceed and transaction costs and incentives develop during the 1990s?
Tools of New Institutional Economics (NIE) have been applied in order to try to find an
answer to the research question and analyse the process of institutional change. NIE analyses economic problems from a multidimensional point of view. A focal point was how the
“legacy of the past” can be taken into account when explaining the decline of the socialist
system in Poland and analysing the process of institutional change in the 1990s.
8.1. Summary of main findings and conclusions
Formal and informal institutions (rules of the game) provide incentives for economic activity. Thus, when institutions change, incentives for economic activity also change. Transaction
costs influence the payoffs of undertaking economic activity, and determine which type of
governance structure is the most efficient. The level of transaction costs is influenced not
only by institutions influencing the value in the public domain, but also by “hardware” like
physical infrastructure and by enforcement of the rules of the game by “institutional governance”. Institutions should be stable and reduce uncertainty, in order to stimulate economic
activity. However, inefficient institutions may survive, as people get used to them (mental
models), not all mistakes are uncovered, and strong interest groups may defend a status quo.
156
Chapter 8
In general, high transaction costs negatively influence economic activity, while the same
counts for weak incentives. But when transaction costs are high and incentives strong, the
influence on economic activity depends on which factor has the strongest influence.
Generally speaking, a planned economy can function appropriately at early stages of
economic development or when market institutions are not developed or fail. Thus, just
after World War II the model of central planning could provide satisfactory economic performance, especially in the period of post-war reconstruction. However, when the number
of transactions increase, the planned economy is expected to face increasing (marginal)
transaction costs, as there are diseconomies of scale to planning. Then a more decentralised economic system, like a market economy, is needed to lower transaction costs. When
transaction costs increase, there is larger value in the public domain, negatively influencing
incentives for productive activity, as more opportunities for rent-seeking appear. This is
a theoretical explanation for the economic stagnation in Soviet-Type Economies (STEs) that
appeared in the 1970s and 1980s.
The socialist system was inefficient compared to developed market economies. A question
is why inefficient institutions in socialist countries could survive for such a long time. Until
the 1960s economic performance in STEs was at an acceptable level. When economic
problems appeared, people had already got used to the system. Furthermore, the Communist Party in fact monopolised information, and had a strong ideological commitment to the
socialist system. The influence of the Soviet Union limited the room for change in Poland
to a large extent. Due to control of media, many mistakes remained uncovered. When the
power monopoly of the Communist Party was broken, market institutions that would increase efficiency could be introduced. However, there is a free-rider problem with introducing
them, as market institutions have features of a public good. This is because they are accessible for free without reducing the opportunities for use by others. Self-interest and distrust
make the problem bigger, while trust and process-regarding preferences (e.g. ideology) can
overcome the free rider problem. However, even when the free-rider problem is overcome,
there remains uncertainty about the outcome of institutional change. No-one is able to completely grasp the complex nature of institutional change or foresee which institutions are
most efficient, because of many unknowns, while much can go wrong in the process of creation and implementation.
It is expected that transaction costs increase when the introduction of market institutions is speeded up. When there is high uncertainty about institutional change, people fall
back on mental models developed under the old system, leading to adverse reactions to the
incentives given by developing market institutions. This creates an institutional disequilibrium. As many people had “system-specific” skills and contacts, they had an interest in
protecting old (inefficient) institutions, which slowed down institutional change. Thus, for
a certain period old “degenerating” institutions were likely to co-exist with new developing
institutions. This was accompanied by lack of certain institutions (institutional vacuum).
Furthermore, value in the public domain is expected to increase. During the privatisation process the opportunities for rent-seeking increased, and there were problems with the
enforcement of market rules of the game as “institutional governance” was weak. The increasing transaction costs and adverse incentives may have contributed to the fall in output
Summary and Conclusions
157
at the beginning of the 1990s, while incentives for economic activity due to more economic
freedom counteracted this tendency.
Generally speaking, transaction costs increased and incentives weakened through time
in the socialist system. This was a consequence of the system weakening from classical
socialism, via reform socialism to “decaying” socialism. Increasing transaction costs and
weakening incentives contributed to deteriorating economic performance, and, together
with other factors like the large foreign debt and the extensive growth path, resulted in economic stagnation. In the period of classical socialism, which lasted more or less until the end
of the 1960s, transaction costs were relatively low and incentives relatively strong, as the
Central Committee had an encompassing interest in good economic performance and public
property and planning were “strong”. In the period of reform socialism, which in Poland
started in the 1970s, transaction costs increased and incentives weakened. This is connected
with the weakening of the planned economy, making the solving of the allocation problem
more difficult. Reforms and decentralisation de facto led to a dispersion of the characteristics
of property rights. In other words, lower levels in the hierarchy obtained part of usus (the right
to use) and usus fructus (the right to pick the fruits). As a consequence, in accordance
with what Olson argues, there was a change from encompassing interest to narrow interest.
The Central Committee had an interest to look at total economic performance, while individuals were interested rather in maximising their own welfare, eventually at the cost of overall
economic performance. Furthermore, the dispersion of property rights made it more unclear
who was in control over property rights, while the principal-agent problem increased in
a situation where it became more unclear who is the principal. Thus, it can be argued that
value in the public domain increased, leading to increased rent-seeking, higher transaction
costs and weaker incentives for productive economic activity.
The socialist system was adaptively inefficient. The institution of public property provided weak incentives for innovation, since benefits became public property and costs and risk
were born by the innovator. Another reason for adaptive inefficiency was the impossibility
of experimenting with different forms of property rights, as state ownership was sacrosanct.
Communist ideology had never been very strong in Poland, and the Gierek administration tried to motivate people with economic incentives. This supported a development towards narrow interest. Furthermore, support was “bought” by promising higher standards
of living and a social contract of solving political conflicts non-violently. Investment and
consumption was financed by foreign loans. However, the strategy of building up industry
for exports failed due to various reasons. This may not have been so much the result of
the waste of investment due to weak incentives, as the oil crises and strong internal demand
negatively influenced opportunities for exports. The oil crises of 1973 and 1979 caused
Western economies to enter a recession, lowering the demand for Polish export products.
On the other hand, the increased expectations of society had to be fulfilled. Because of this
many products were not exported, as they were consumed on the domestic market. This
created a problem with repaying the foreign debts. Belief in the system started to weaken as
economic problems continued, especially towards the end of the 1970s. During this period
the labour movement in the form of Solidarity gained much influence, weakening the power
of the Communist Party.
158
Chapter 8
The 1980s were a period of “decaying” socialism, where the economic policy seemed to
be “keep the boat from sinking”. Transaction costs increased more and more, and incentives weakened. By way of Martial Law, which went into force on 13th December 1981, an
attempt was made to break the power of the, by that time, legal labour union Solidarity. It
is difficult to find out whether it was the Soviet Union that inspired this or not, but as a consequence the Communist Party itself weakened very much. Many members had been active
in Solidarity, and in 1982 many people left the Party. After a while labour again gained more
power, and in the process of reform attempts in 1982 and after, labour and management of
state-owned enterprises (SOEs) obtained more influence. In other words, they had more
control over the characteristics of state property. As a result, property rights were more
vaguely defined, leading to more value in the public domain. From 1982 an attempt was
made to introduce more market into the economy, and the system of directive planning was
abolished. Plan bargaining was replaced by regulation bargaining, which was accompanied
by higher transaction costs. Shortages increased, which led to higher transaction costs from
the sides of both producers and consumers. Theoretically, in a planned economy there are
no transaction costs involved in activities such as stock procurement and selling the product.
However, due to shortages it was never clear how much of the needed input could be obtained at what moment. This led to hoarding and the development of an informal market
between firms, accompanied by high transaction costs. Also many other transaction costs increased. For consumers the consequence of shortages was that more and more often queuing and informal markets became the distribution mechanism. It was quite common that
people had to queue 2–3 hours per day for the necessities of life. Such a situation was frustrating, and contributed to general dissatisfaction. Belief in the socialist system weakened, also among members of the Communist Party. In other words, the institutional disequilibrium
became larger.
The weakening of the socialist system by way of de facto dispersion of property rights,
weakening of the Communist Party, the abolition of central planning and the disappearance of the belief in the system were factors that created a situation of “decaying” socialism
in the 1980s. Transaction costs increased, incentives weakened, and economic stagnation
seemed to be a permanent feature. This created fertile ground for the creation of a market
economy in the 1990s. Economic factors alone cannot explain the direction of change. The
development of an economic interest among the ruling elites in a more market-oriented system was important. This, and the strong labour movement, lowered the political transaction
costs of change significantly. However, the non-interference of the Soviet Union in Polish
internal affairs also lowered these political transaction costs.
The situation at the end of the 1980s was one of neither plan nor market. With the
peaceful power transfer to the Solidarity movement in 1989, when a coalition with the Communists was formed, the task of the Solidarity led government was to develop a program
to improve economic performance. As transaction costs increased and incentives weakened under socialism, an implicit aim of transformation was to lower transaction costs and
strengthen incentives. Although theoretically there may have been other options, it can be
argued that the construction of a market was chosen as there were no other feasible alternatives. Reforming socialism was not a real alternative, as there was no-one to do this job.
Summary and Conclusions
159
The reformers were quite optimistic about the expected results of the Balcerowicz plan under which a market economy would be introduced in a short period. With the advantage of
hindsight, the tools of NIE can be used to explain why the fall in output was larger than
expected at the beginning of the 1990s, and why Poland’s economy started to grow again
after a short recession in comparison to other transforming former STEs.
As informal institutions change more slowly than formal institutions, mental models developed under the old system play an important role in the development of the new system
(path-dependency). This means that fast institutional change is difficult. Theoretically, formal rules can be changed at once, but implementation takes time because economic subjects
have to learn, interpret and apply the new rules and to change their behaviour. Institution
building and the creation of “institutional governance” is very costly (high fixed transaction
costs of institutional change), which implies that these sources cannot be used for other purposes, negatively influencing economic activity. Although the Polish transformation was
called “shock-therapy” as opposed to gradualism, these labels are not proper. Some institutions changed quickly, while others changed slowly. Thus, the label “shock” or “gradual” depends on which institutions we are talking about.
The development path towards a relatively strong market economy was not obvious, as
examples of former Soviet republics show. An important factor strengthening the economic
system immediately was the macroeconomic stabilisation policy in the form of price and
trade liberalisation. Although this caused a deepening of the recession in 1990–1991 on the
one hand, it reduced the opportunities for rent-seeking activities created by price regulations and reduced the remaining shortages immediately. Price liberalisation means the privatisation of property rights (characteristics of property) that the government possessed
with respect to price regulation, stimulating the development of a market economy. Trade
liberalisation provided strong incentives for small business to develop, while they faced low
transaction costs, as little regulation existed. As a result, a private sector was firmly established. When opportunities for rent-seeking are reduced (lower value in the public domain),
wealth maximising individuals use their efforts for productive rather than redistributive
activities.
Uncertainty about future institutional change was very high at the beginning of the
1990s, while the economic system faced an institutional vacuum and an institutional disequilibrium. A mix of socialist and market institutions existed and many market institutions
existed in an “embryonic” form or did not exist at all. When there is uncertainty, economic
actors fall back on their mental models, which in this case took shape under socialism. Such
a situation created many adverse incentives for economic behaviour and led to high transaction costs in economic exchange in the process of institutional change (e.g. privatisation)
and restructuring of SOEs. As a consequence, output declined. This effect was strengthened by factors such as a lack of social capital and a lack of skills needed for a market
economy. However, due to the immediate system strengthening, the fall in output was not
as deep as it could have been.
Transition has come to its end when a “normal” economic system exists where transaction
costs are low and incentives are strong, while informal institutions support formal institutions.
Although many steps in this direction have been made, transition still proceeds in many fields.
160
Chapter 8
An example is logistic development, where Poland lags 10 to 30 years behind developed
market economies. However, the development of logistics creates opportunities for finding
transaction cost lowering solutions and provides incentives for step-by-step institutional improvement. It is suggested that small firms should start to co-operate with each other, in order to survive increasing competition from larger companies offering logistic services. This
seems also to be necessary, as the “institutional vacuum” is becoming smaller with the introduction and implementation of many standards (e.g. health, safety and environmental
standards) in the process of EU accession, increasing the costs to smaller firms relatively
faster than to larger firms.
At the beginning of the 1990s transaction costs to SOEs increased, while small newly established private business faced low transaction costs and strong incentives. When property
rights became more certain, the institutional vacuum became smaller and part of the (privatised) state sector adapted to the new circumstances, causing transaction costs to decline.
A good example of a strengthening institution leading to lower transaction costs is the banking
sector. However, as is suggested by empirical research (see the Appendix), in the second
half of the 1990s some transaction costs increased, at least for small firms. It may be that the
closing of the institutional vacuum, e.g. in the form of the introduction and enforcement of
new taxes as well as environmental and health regulations posed problems for them. The
data also suggest increasing transaction costs for firms with more than 20 employees. These
transaction costs concern inefficient public administration, unclear laws, law enforcement,
the process of creating legislation, corruption, theft, and increasing problems with collecting
payments from trade partners. Furthermore, trust and the propensity to co-operate remain
low. Trust in different levels of government among entrepreneurs is very low, posing a threat
to continuing economic growth. Some trust in banks, as well as process-based (personal)
trust in suppliers and clients, exists, suggesting some prospects for developing new economic ventures.
8.2. Some implications
Tools of NIE have been used to analyse system change in Poland since the 1970s. It has
helped to explain why the socialist system stagnated economically, and how weakening incentives and increasing transaction costs contributed to the demise of the system, being an
explanatory variable in addition to political factors. Furthermore, it explains why the transformation strategy was accompanied by a decline in output, and why the economy entered
a path of economic growth rather quickly. It also helps to indicate which challenges have
come up that may hamper future economic growth.
A question is how future institutional change will proceed. A market has been introduced, generally speaking lowering transaction costs and strengthening incentives compared
to the socialist system when the economic system strengthened in the 1990s. However, although uncertainty about the direction of institutional change has been reduced significantly, there is still a long way to go as only thirteen years have passed since the introduction of the Balcerowicz plan. As much change still has to take place, uncertainty remains.
Summary and Conclusions
161
Among others, weak “institutional governance”, interest groups and a lack of transparency
hamper the introduction of more efficient institutions.
Poland’s efforts for EU accession create incentives for the development of strong institutions and good governance practices. At the moment (the year 2003) Poland is in the process of preparing accession to the European Union. In fact, this is also a process of institutional change accompanied by many uncertainties. There seems to be less uncertainty in this
process than at the beginning of the 1990s, because there are established EU institutions to
refer to and adaptation to EU institutions has been proceeding for many years. However,
the existing mental models, which still find their roots in the socialist system, as well as the
inefficient formal institutions and “institutional governance” still existing, create the danger
that an “inefficient copy” of EU institutions will be introduced. This is not an unrealistic
scenario, as in the last few years many laws have been passed and negotiations with the EU
have finished, of which hardly anyone can predict what will be the effect, simply due to the
huge amount of changes, not mentioning other factors. “Inefficient copies” of EU institutions are more likely, if these institutions are introduced without taking Polish reality into
consideration.
Furthermore, EU institutions also have to be changed in the process of its enlargement,
creating much uncertainty. For this reason experience from the transformation to a market economy gained up till now may be invaluable in facing the challenges created by the
aspirations of joining the EU. As EU accession implies a new kind of transformation,
lessons from the process of institutional change can be drawn, in order to prevent the type of
problems that came up at the beginning of the 1990s. Although many firms are prepared
for changes, due to the proceeding transformation, many are likely to have to restructure
and to invest in new trade relations when Poland joins the common market. In the short-run
there may be negative economic effects, while positive economic effects will be felt only in
the medium-term as a result of evolutionary institutional change, under the condition that
Poland is able to use the opportunities created by EU membership.
APPENDIX
A SURVEY AMONG FIRMS – EMPIRICAL
INDICATORS OF THE DEVELOPMENT
OF TRANSACTION COSTS
DURING THE 1990S
165
APPENDIX
A survey among firms – empirical
indicators of the development
of transaction costs during the 1990s
A1. Introduction
In this Appendix the development of transaction costs in the 1990s and the state of social
capital in the form of trust is analysed by way of a survey I carried out among 1,116, mainly
small, companies. The data of this survey suggest that many transaction costs have increased,
except for transaction costs related to banking and infrastructure. The level of trust seems
to be low, in particular trust in government institutions. Low trust hampers the development
of new types of governance structures, making the economy less adaptively efficient. However, the data also suggest that some process-based trust exists, creating opportunities for
development by way of co-operative solutions.
A2. Description of the research
Between January and July 2001, a survey was carried out among 3,725 Polish companies.
Firms from different areas were approached, and 1,116 of them filled out the questionnaire. These firms were located in Wroc∏aw (408 questionnaires), the capital of Lower Silesia
with about 650,00 inhabitants; Opole (289 questionnaires), the capital of the Opole region
with about 140,000 inhabitants; Wieluƒ (216 questionnaires), a provincial town with around
30,000 inhabitants; Upper Silesia (86 questionnaires); a rural region in Great Poland (101
questionnaires); and in other regions (16 questionnaires).
The questionnaire contained two central questions, while in most questionnaires there is
one central question accompanied by questions on background variables [Allers, 1994, 111].
This made the likeliness of non-response higher. A postal survey among 5,393 firms carried out
by Allers in the Netherlands on compliance costs had a non-response rate of about 80%, which
can be considered to be normal [Allers, 1994, 119]. A postal survey carried out in Poland by
166
Appendix
a company, which wanted to estimate the demand connected with a planned investment among
about 250 companies, also showed a non-response rate of almost 80%. In this case the survey
was carried out among companies doing business with this firm. For this reason, and reported
examples of non-response rates of over 95%, it was expected that in the case of a postal survey
the non-response rate would be greater, also due to the low level of trust expected (researched
in the survey). In order to prevent this problem, students were trained to go to firms in their
home town. It was emphasised in the questionnaire that data would be confidential, and that
the questionnaire could be filled out anonymously. For this reason the pollsters had an addressed envelope with a stamp. The non-response rate using this method was about 70%.
The emphasis was on small firms, for they were the motor of economic activity counteracting the fall in output at the beginning of the 1990s, facing low transaction costs compared to (privatised) state-owned enterprises (SOEs) and being an expression of Polish entrepreneurial spirit. The main aim of the survey was to find out how different types of transaction costs developed during the first 10 years after the “shock therapy” and what is the state
of social capital in Poland with respect to trust and co-operation.
In Chapter 5 it was argued that in conjunction with system strengthening, transaction
costs tend to decline. However, a question remains as to whether institutions and “institutional governance” could keep up with the increasing amount of transactions due to economic
growth. If not, transaction costs are likely to have increased. Thus, some transaction costs
may have increased, while others have declined. Overall, it can be expected that transaction
costs for small companies connected with tax law and regulations have increased, as the institutional vacuum that existed at the beginning of the 1990s closed.
As was discussed in Chapter 3, trust is important in lowering transaction costs, stimulating adaptive efficiency and the creation of new governance structures. Furthermore,
co-operation and the development of new forms of governance are important for introducing
logistic solutions. It can be expected that trust and propensity to co-operate are low, as
much social capital was destroyed under socialism and construction of social capital is a time
consuming process.
With respect to institutions and transaction costs, one set of questions concerned the
development of the speed of banking transactions, the problem of late payment, speed of
customs clearance, and speed of legal procedures in cases of late payment in the period
1996–2001. Another set of questions concerned the development in professionalism of tax officers, clearness of tax law, settlement of damages by insurance companies, theft, corruption,
and transport infrastructure since 1989. Three periods were taken into consideration:
1989–1993, 1993–1997 and 1997–2000. Finally, it was asked how the problems of late payment evolved during these three periods, and what methods firms used to solve this problem.
With respect to social capital, answers to the questions on who is trusted (a firm’s own
employees, suppliers, customers, local government, central government, competitors and
banks), how co-operative other parties are (tax office, competitors, local government, central
government and banks), and whether and for what reason the company is actively looking
for partners are presented.
The questionnaires were filled out by owners (75.5%), managers (15.4%) and others
(6.4%). About 2.7% of the respondents did not report their status in the company. Some
A survey among firms – empirical indicators of the development of transaction…
167
results are also analysed according to subgroups: location and main activity – transport
(56 questionnaires), industrial production (65), retail trade (726) and gastronomy (75).
From the 1,116 firms in the sample, the large majority are private (1,008), 26 SOEs, 9 partly privatised SOEs, 35 privatised SOEs, 9 co-operatives while 29 did not report their status.
Of these companies, 93 are limited liability companies (spó∏ka z o.o.), 31 joint stock companies (spó∏ka akcyjna), 209 civil partnerships (spó∏ka cywilna), 70 commercial partnerships
(spó∏ka handlowa), 623 one-man companies (przedsi´biorstwo jednoosobowe), 9 co-operatives, 6 with a different legal status, while 72 did not report their status. A small number of
companies (55 – 4.9%) are owned by another company, while 48 companies (4.3%) of all
companies are partly or completely foreign owned.
The majority of the sample consists of companies employing between 0 and 5 employees
(746 – 66.8%). A total of 153 firms (13.7%) employed in 2001 between 6 and 10 employees,
84 (7.5%) between 11 and 20 employees, 36 (3.2%) between 21 and 50 employees, 26 (2.3%)
between 51 and 100 employees, 21 (1.9%) between 101 and 200 employees, 9 (0.8%) between
201 and 500 employees, 4 (0.4%) between 501 and 1000 employees, and 10 (0.9%) more than
1000 employees. This question was left unanswered by 27 firms (2.4%). Transport companies
and companies engaged in industrial production tend to be bigger (e.g. respectively 32.1%
and 15.4% employed between 0 and 5 employees) than gastronomic firms (45.3% between
0 and 5 employees) and firms operating in retail trade (75.9% between 0 and 5 employees).
The firms in Wroc∏aw and Great Poland are the smallest, respectively 73.0% and 72.3% of
them employed between 0 and 5 employees. For Opole this percentage is 67.1%, for Upper
Silesia 61.6% and for Wieluƒ 53.7%. A possible explanation is the fact that more than 74%
of the firms in Wroc∏aw reported to be involved in retail trade, while the percentage for
Opole, Wieluƒ and Great Poland is slightly above 60%, and for Upper Silesia 50%.
A3. Business start-ups, development of employment
and financial results
The average company in the survey was established in the second half of 1990. For retail trade
the average year of establishment is the end of 1991. This is a result that might have been
expected, because most of the firms in the sample are involved in retail trade, a sector monopolised by the state under socialism. In this sector many new firms were established with the
break-up of SOEs that had already started towards the end of the 1980s, while the liberalisation policy that came into force on 1 January 1990 gave strong incentives for new start-ups.
Figure A1 presents the number of firms established annually in the period 1981–2000.
Figure A2 presents the number of firms established over a period of five years. As is shown
in Figure A1, 1990 is the year in which most companies were established (115, of which 85
in retail trade). This is likely to have been the result of incentives for business start-ups given
by economic liberalisation. During the 1990s much more firms were established than during
the 1980s, confirming this incentive-effect. However, during the second half of the 1980s an
increase in business start-ups can be observed, especially in 1989, probably as a result of the
reforms of 1987–8.
168
Appendix
The dynamics of business start-ups become clearer when looking at a five year period
(Figure A2). While 49 companies were established between 1980 and 1984, this number increased to 117 for the period 1985–1989. Between 1990 and 1994 a total of 429 firms were
established. This number declined to 346 for the period 1995–1999.
Figure A1. Number of firms established yearly, 1981–2000.
Figure A2. Number of firms established per 5 years, 1945–1999.
Interestingly, between 1990 and 1994 more firms were set up than between 1995 and
1999. Many firms from the first period probably do not exist anymore. Consequently, the
real difference is likely to be even bigger. Thus, there is a “survivors’ bias” in the sample,
a problem that is faced when researching existing companies. On average, the firms have already been in the market for a long period, which may suggest that governance structures
in Poland do not change so quickly. Another explanation is the fact that Polish retail trade
is characterised by many small (family) firms, and that big supermarkets, pushing small retailers out of the market, are only a recent phenomenon.
A survey among firms – empirical indicators of the development of transaction…
169
However, at the beginning of the 1990s there was a strong development of small private business due to the absorptive market, “small privatisation” (see Section 5.5.5.), the
euphoria of the starters in the new situation and the partial disappearance of social security.
Some years later there were few possibilities for “small privatisation” left. Tax law had started
to become an obstacle, holes were closed, and new types of taxes (e.g. VAT in July 1993) and
more and more regulations were introduced. Furthermore, as was argued in Chapter 5, many
privatised SOEs had recovered from “disorganisation” and had modernised, and created
stronger competition for small companies. Many standards that apply in developed market economies, such as health and safety standards or environmental standards are not in force yet
or weakly enforced. When implementing EU directives in the accession process, difficulties
for small enterprises are to be expected.
On the question of whether in the period 1996–2001 the number of employees had increased, decreased or stayed the same 18.8% of the firms reported an increase, 26.6% a decrease, while 53.8% reported that the situation had stayed the same. At a 1% level of significance, using the normal approximation for large samples, the hypothesis that on average the
level of employment stayed the same has to be rejected. When analysing the different sectors,
this result is also obtained for retail trade. Although in transport and industrial production
more firms reported a decline that an increase, this result is not significant. More firms in
gastronomy reported an increase than a decrease, but this result is not significant either. When
looking at the regional differences, for Wroc∏aw it can be concluded that at a 1% level of significance firms decreased employment, while, although there is a similar tendency, in Wieluƒ,
Great Poland, Opole and Upper Silesia this conclusion cannot be drawn. Thus, the data suggest
that especially firms in Wroc∏aw engaged in retail trade saw a reduction in employment, which
may be the result of the rapid growth of shopping centres and hyper-markets during the last
few years, but also due to the decline in economic growth and increasing unemployment.
Many more firms reported a deterioration in their financial situation than a reduction in
employment during the period researched. About 20.2% of all firms reported that their financial situation had improved, 48.4% reported that their financial situation had deteriorated, while for 30.4% the situation stayed the same. The hypothesis that on average the financial situation had stayed the same has to be rejected at a 1% level of significance. When
looking at the different branches, this effect is also observed for retail trade, while for the
other branches no significant effect is observed. Analysing the situation in the different regions/towns, the situation had changed for the worse in all of them, except for Upper Silesia. Explanations for the fact that more firms reported a deterioration of the financial situation than a decline in employment might be as follows: it was not asked whether firms made
a profit or a loss, most of the firms were very small family-owned or one-man companies (623)
and firms wait before laying off employees because of the costs connected with hiring and
firing and the possession of (transaction specific) human capital.
Using the chi-square goodness-of-fit test at a 5% significance level, a dependency has been
found between the development of the financial situation, the development of employment
and the size of the company in the period 1996–2001. Firms that reported a better financial
situation, also tended to employ more people, and the other way round. More firms with 6 or
more employees reported improvement of the financial situation and an increase in the
170
Appendix
number of employees, while very small firms with 0–5 employees rather reported financial
deterioration and a reduction in employment. One possible reason is that small firms face
smaller economies of scale. Another explanation is that the firms who employed a small
number of people a few years earlier and had been successful probably employed more people
and vice versa. Along with the previously mentioned expected introduction of EU standards,
many small firms can be expected to have difficulties with surviving in the market, as was
discussed in Chapter 7 for the transport sector in the light of increasing competition from
large forwarders from the EU, offering logistic services.
A4. Transaction costs
The aim of the question about international banking transactions and banking transactions in
Poland was to figure out whether the transaction costs of financial transactions had increased
or decreased during the period 1996–2001. Table A1 presents the answers to the question
about the change in the speed of banking transactions within Poland. The answers to the
question about the speed of international banking transactions are summarised in Table A2.
Firms could answer “faster”, “slower”, “same” or “don’t know”. The answers “don’t know”
and firms giving no answer have been grouped together.
Table A1. Speed of banking transactions within Poland.
Speed
Faster
Same
Slower
Don’t know/no
answer
Total
All together
483
(43.3%)
302
(27.1%)
89
(8.0%)
242
(21.7%)
1,116
(100%)
Transport
24
(42.9%)
22
(39.3%)
4
(7.1%)
6
(10.7%)
56
(100%)
Industrial
production
36
(55.4%)
18
(27.7%)
7
(10.8%)
4
(6.2%)
65
(100%)
Retail trade
293
(40.3%)
193
(26.6%)
62
(8.5%)
178
(24.5%)
726
(100%)
Gastronomy
27
(36.0%)
27
(26.0%)
5
(6.7%)
16
(21.3%)
75
(100%)
Wroc∏aw
143
(35.0%)
125
(30.6%)
39
(9.6%)
101
(24.7%)
408
(100%)
Opole
157
(54.3%)
59
(20.4%)
11
(3.8%)
62
(21.4%)
289
(100%)
Wieluƒ
79
(36.6%)
81
(37.5%)
26
(12.0%)
30
(13.9%)
216
(100%)
Upper Silesia
56
(65.1%)
15
(17.4%)
4
(4.6%)
11
(12.8%)
86
(100%)
Great Poland
36
(35.6%)
20
(19.8%)
8
(7.9%)
37
(36.6%)
101
(100%)
Region/Branch
171
A survey among firms – empirical indicators of the development of transaction…
There had been a large amount of foreign direct investment in the banking sector, which
had been accompanied by transfer of technology and know-how. Furthermore, investment
had taken place in information technology and cash dispensers. This should have led to faster
banking transactions. The results of the survey confirm this expectation. With respect to the
quickness of banking transactions in Poland, 21.7% of the firms answered “don’t know” or
did not answer the question. At a 1% level of significance, firms reported that the speed of
banking transactions in Poland had increased. A total of 483 firms answered “faster”
(43.3%), 89 “slower” (8.0%), and 301 “the same” (27.1%). The effect is confirmed when
analysing each branch and region/town separately (the sample for transport is too small for
statistical testing).
Table A2. Speed of international banking transactions.
Speed
Faster
Same
Slower
Don’t know/no
answer
Total
All together
204
(18.2%)
157
(14.1%)
99
(3.5%)
716
(64.2%)
1,116
(100%)
Transport
14
(25.0%)
21
(37.5%)
4
(7.1%)
17
(30.4%)
56
(100%)
Industrial
production
17
(26.1%)
16
(24.6%)
4
(6.1%)
28
(43.1%)
65
(100%)
Retail trade
114
(15.7%)
98
(13.5%)
22
(3.0%)
492
(67.7%)
726
(100%)
Gastronomy
15
(20.0%)
12
(16.0%)
6
(8.0%)
42
(56%)
75
(100%)
Wroc∏aw
46
(11.3%)
54
(13.2%)
5
(1.2%)
303
(74.3%)
408
(100%)
Opole
73
(25.3%)
31
(10.7%)
6
(2.1%)
179
(61.9%)
289
(100%)
Wieluƒ
42
(19.4%)
53
(24.5%)
27
(12.5%)
94
(43.5%)
216
(100%)
Upper Silesia
50
(34.9%)
7
(8.1%)
0
(0.0%)
49
(57.0%)
86
(100%)
Great Poland
10
(9.9%)
10
(9.9%)
0
(0.0%)
81
(80.2%)
101
(100%)
Region/Branch
A majority of 64.2% of the sample answered “don’t know” or did not answer the question
about the speed of international banking transactions. This percentage is probably so high,
because most of the firms were not involved in international trade. However, the available
data suggest that also the speed of international banking transactions had increased at a 1%
level of significance. A total of 204 firms answered “faster” (18.3%), 39 “slower” (3.4%),
and 157 “the same” (14.1%). This effect was also observed for retail trade (the samples for
transport, industrial production and gastronomy are too small for statistical testing) and
different regions, except for Wieluƒ.
172
Appendix
Using the chi-square test at a 5% level of significance, it is to observe that a dependency exists between the reported increase in the amount of workers and stating an increase
in the speed of banking transactions in Poland. Furthermore, a dependency has also been
found between the improvement of the financial situation of firms and faster banking
transactions in Poland, as well as faster international banking transactions. It is difficult to
provide an unambiguous explanation for this dependency. It may be that when firms grow,
they obtain better service from banks. It is also possible that faster banking transactions lead
to a better financial situation due to cost saving (e.g. increased liquidity and less need for
credit).
The questions about the speed of payment by customers and the speed of payment of
bills by the company filling out the questionnaire were aimed at analysing the development
of problems and transaction costs connected with opportunistic behaviour concerning late
payment. The results are presented in Tables A3 and A4. It was expected that quickness of
payment had deteriorated. This expectation was based on declining economic growth, although
it can be argued that the market was still expanding, which may have been accompanied by
an increasing risk of opportunistic behaviour, because in such a case more exchange with
unknown partners takes place. Another factor is the significant increase in the real interest
rate during the period under research due to falling inflation rates and tight monetary policy, making credit more expensive and late payment more attractive.
Table A3. Speed of payment by customers.
Speed
Faster
Same
Slower
Don’t know/no
answer
Total
All together
112
(10.0%)
516
(46.2%)
341
(30.6%)
147
(13.2%)
1,116
(100%)
Transport
4
(7.1%)
19
(33.9%)
30
(53.6%)
3
(5.4%)
56
(100%)
Industrial
production
6
(9.2%)
21
(32.3%)
33
(50.8%)
5
(7.7%)
65
(100%)
Retail trade
69
(9.5%)
357
(49.2%)
192
(26.4%)
108
(14.9%)
726
(100%)
Gastronomy
9
(12.0%)
44
(58.7%)
14
(18.7%)
8
(10.7%)
75
(100%)
Wroc∏aw
44
(10.8%)
205
(50.2%)
93
(22.8%)
66
(16.2%)
408
(100%)
Opole
22
(7.6%)
155
(53.6%)
92
(31.8%)
20
(6.9%)
289
(100%)
Wieluƒ
31
(14.3%)
85
(39.3%)
68
(31.4%)
33
(14.8%)
216
(100%)
Upper Silesia
10
(11.6%)
24
(27.9%)
37
(43.0%)
15
(17.4%)
86
(100%)
Great Poland
2
(2.0%)
44
(43.6%)
42
(41.6%)
13
(12.9%)
101
(100%)
Region/Branch
173
A survey among firms – empirical indicators of the development of transaction…
About 13.2% of the firms answered “don’t know” or did not give an answer to the question
on quickness of payments by customers. This percentage is 11.8% for the question on quickness of payment of bills by their own companies. A total of 112 firms (10.0%) reported faster
payment by customers, 341 (30.6%) slower payment, while according to 516 firms (46.2%) the
situation stayed the same. It can be concluded that at a 1% level of significance customers
paid their bills slower in 2001 than in 1996. The same result is obtained for each branch and
region/town, implying that slower payment was a common phenomenon. The result for retail
trade is interesting, because most of the transactions are paid in cash. In some cases small
shops sell on credit to well-known customers in times of financial distress, and during the end
of the 1990s the problem of unemployment worsened. In the case of deals between firms,
slower payment may have been the result of a deteriorating financial situation (which for
many firms was the case), and the previously mentioned increase in the real interest rate.
Table A4. Speed of payment of bills by your own company.
Speed
Faster
Same
Slower
Don’t know/no
answer
Total
All together
112
(10.0%)
583
(52.2%)
289
(25.9%)
132
(11.8%)
1,116
(100%)
Transport
5
(8.9%)
34
(60.7%)
13
(23.2%)
4
(7.1%)
56
(100%)
Industrial
production
9
(13.8%)
31
(47.7%)
21
(32.3%)
4
(60.1%)
65
(100%)
Retail trade
66
(9.1%)
374
(51.5%)
199
(27.4%)
87
(12.0%)
726
(100%)
Gastronomy
1
(1.3%)
40
(53.3%)
25
(33.3%)
9
(12.0%)
75
(100%)
Wroc∏aw
50
(12.2%)
208
(51.0%)
80
(19.6%)
70
(17.2%)
408
(100%)
Opole
19
(6.6%)
151
(52.2%)
107
(37.0%)
12
(4.2%)
289
(100%)
Wieluƒ
19
(8.8%)
111
(51.4%)
60
(27.8%)
26
(12.0%)
216
(100%)
Upper Silesia
15
(17.4%)
40
(46.5%)
19
(22.1%)
12
(13.9%)
86
(100%)
Great Poland
5
(4.9%)
66
(65.3%)
20
(19.8%)
10
(9.9%)
101
(100%)
Region/Branch
The answers concerning the speed of payment by the company itself suggest a similar trend
when compared to the speed of payment of bills by customers. A total of 112 companies
(10.0%) reported that they paid faster, 289 slower (25.9%), and 583 (52.2%) “the same”. At
a 1% level of significance, firms paid their bills later in 2001 than in 1996. This effect is also
significant for retail trade, but not for industrial production (although there is a similar tendency), while the samples for transport and gastronomy are too small for statistical analysis.
174
Appendix
Using the chi-square test at a 5% level of significance, a dependency has been found between firms that reported a decrease in the amount of workers and slower payment of bills
by the company itself. This is probably related to the phenomenon that when a firm has
financial problems, a first reaction is to pay bills later. The number of workers is reduced
later, due to the costs of hiring and firing and the hope that the situation will improve.
The dependency between the financial situation and the speed of payment of bills seems to
be even clearer. Firms reporting that the financial situation had improved tended to report
that they also paid their bills faster. A deteriorating financial situation is related to slower
payment of bills, and an unchanged financial situation is related to an unchanged speed of
paying bills. Thus, when there is a downturn in the economy, deterioration of the financial
situation of firms leads to an increase in payment problems, which increases transaction
costs, contributing to the downturn.
The speed of domestic banking transactions is also related to the speed of payment of bills.
Firms reporting that banking transactions proceeded slower also tended to report slower
payment of bills by customers. This effect is clearer than between faster banking transactions and faster payment by clients, probably because if banking transactions are faster or
slower and each of the parties still pays at the same moment, only the firm receiving the payment observes the difference. Faster international banking transactions are related to faster
payment of clients, but no dependency has been found with the payment of bills by the firm
itself. In short, faster or slower banking transactions tend to decrease or increase the payment problem, and in this way contribute to decreasing or increasing transaction costs.
Thus, although the transaction costs of late payment seem to have increased during the period 1996–2001, the faster banking transactions reported have reduced this effect.
A dependency has been found between the speed of payment of bills by clients and by
the firm itself. Faster payment by clients seems to be related to faster payment by the firm
itself, slower with slower, and same speed of paying bills by clients with same speed of paying bills by the firm itself. For instance, firms pay late, because they have to wait for money
from clients, and borrowing is expensive. Thus, there is a kind of “chain reaction” in late
payment, increasing the problem of late payment.
The speed of customs clearance is important for international trade and international
division of labour. The region where the survey was conducted is the closest to Germany
and the Czech Republic. Problems with customs clearance were big, but not so big as at
the border with Belarus and Ukraine. However, waiting times could accumulate to over
24 hours [ECMT, 1998, 23]. Boehme et al. [1998, 119] argue that by 1997 these problems
were caused mainly due to a lack of border stations and modern electronic data processing
equipment in the face of increasing transport volume. Furthermore, customs officers were
often insufficiently trained to deal efficiently with customs clearance and bureaucracy
prevailed. Organisation could be improved, as well as information provision concerning the
procedures. The authors argue that improvements at the administrative level could significantly lower transaction costs and reduce uncertainty connected with customs clearance
by improving credibility and predictability. At the end of the 1990s investments were
made at the Polish-German border and customs officers of both countries had started to
co-operate.
175
A survey among firms – empirical indicators of the development of transaction…
Table A5. Speed of customs clearance.
Speed
Faster
Same
Slower
Don’t know/no
answer
Total
All together
64
(5.7%)
146
(13.1%)
102
(9.1%)
804
(72.0%)
1,116
(100%)
Transport
6
(10.7%)
15
(26.8%)
12
(21.4%)
23
(41.1%)
56
(100%)
Industrial
production
10
(15.4%)
11
(416.9%)
9
(13.8%)
35
(53.8%)
65
(100%)
Retail trade
38
(5.2%)
86
(11.8%)
63
(8.7%)
539
(74.2%)
726
(100%)
Gastronomy
2
(2.7%)
11
(14.7%)
9
(12.0%)
53
(70.7%)
75
(100%)
Wroc∏aw
23
(5.6%)
52
(12.7%)
18
(4.4%)
315
(77.2%)
408
(100%)
Opole
14
(4.8%)
35
(12.1%)
48
(16.6%)
192
(66.4%)
289
(100%)
Wieluƒ
15
(6.9%)
33
(15.3%)
27
(12.5%)
141
(65.3%)
216
(100%)
Upper Silesia
10
(11.6%)
15
(17.4%)
4
(4.6%)
57
(66.3%)
86
(100%)
Great Poland
1
(1.0%)
9
(8.9%)
3
(3.0%)
88
(87.1%)
101
(100%)
Region/Branch
It was expected that the speed of customs clearance had slowed down during the period 1996–2001, due to expanding trade. However, this effect was counteracted by infrastructure investments that had been made in border crossings. As trade and traffic seemed
to increase faster than infrastructure investments, the hypothesis was that in 2001 customs
clearance proceeded slower than five years earlier. As is shown in Table A5, a large proportion of the firms answered “don’t know” or did not give an answer (in total 72.0%),
probably because most firms were not engaged in international trade. A minority of 64
firms (5.7%) reported that customs clearance in 2001 proceeded faster than five years earlier, 102 (9.1%) slower, and 146 (13.1%) at the same speed. The hypothesis that customs
clearance took more time is confirmed at a 1% level of significance. The hypothesis is also confirmed for retail trade, while the samples of the other branches are too small for
statistical analysis. The situation looks different when analysing different regions/towns.
Using the chi-square test at a 5% level of significance, the hypothesis is confirmed for
Opole, but not for Wieluƒ. For Wroc∏aw the data suggest that for firms in this city the
situation had stayed the same. The sample from Upper Silesia is too small for statistical
analysis, but more firms reported an improvement in the situation than firms reporting
a deterioration. An possible explanation is that there are firms in the more industrialised
Wroc∏aw and Upper-Silesia region offering logistic services in the field of customs clearance. Furthermore, in these regions more investment had been made in border crossings.
176
Appendix
The sample of Great Poland is too small for statistical analysis. It can be concluded that
transaction costs of customs clearance had increased, but it might be suggested that there
are regional differences.
Table A6. Speed of legal procedures enabling obtaining money
from late payers.
Speed
Faster
Same
Slower
Don’t know/no
answer
Total
All together
78
(7.0%)
201
(18.0%)
234
(21.0%)
603
(54.0%)
1,116
(100%)
Transport
7
(12.5%)
12
(21.4%)
20
(35.7%)
17
(30.4%)
56
(100%)
Industrial
production
9
(13.8%)
16
(24.6%)
18
(27.7%)
22
(33.8%)
65
(100%)
Retail trade
44
(6.1%)
135
(18.6%)
140
(19.3%)
407
(56.1%)
726
(100%)
Gastronomy
3
(4.0%)
14
(18.7%)
11
(14.7%)
47
(62.7%)
75
(100%)
Wroc∏aw
28
(6.9%)
87
(21.3%)
55
(13.5%)
238
(58.3%)
408
(100%)
Opole
9
(3.1%)
44
(15.2%)
95
(32.9%)
141
(48.8%)
289
(100%)
Wieluƒ
27
(12.5%)
41
(19.0%)
37
(17.1%)
111
(51.4%)
216
(100%)
Upper Silesia
7
(8.1%)
12
(13.9%)
28
(32.6%)
39
(45.3%)
86
(100%)
Great Poland
3
(3.0%)
14
(613.9%)
17
(16.8%)
67
(66.3%)
101
(100%)
Region/Branch
The question on change in the speed of legal procedures enabling firms to obtain money
from late payers concerns the transaction costs arising from post-contractual opportunistic
behaviour. As it was expected that the late payment problem had increased, it was also
expected that the quickness of legal procedures would have been negatively influenced. More
cases of late payment lead to more court cases, which in turn leads to delays in already
overloaded courts. The capacity of the courts had not increased as much as the number of
transactions. More transactions, ceteris paribus, lead to more cases of late payment, and
as a consequence more use of legal procedures to handle this. For instance, the number of
ascertained economic crimes handled by courts increased from 6,042 in 1990 to 7,459 in
1999 and 12,220 in 2000 [GUS, 2001, 64]. Thus, in conjunction with a slower increase in capacity, procedures could be expected to have slowed down. Furthermore, when there are incentives for late payment, there are also incentives for customers who pay late to delay legal procedures, which is strengthened by a “learning effect” – customers learning how to
abuse the already inefficient legal procedures and legislation.
A survey among firms – empirical indicators of the development of transaction…
177
The hypothesis that legal procedures enabling firms to obtain money from late payers
had slowed down in the period 1996–2001 has been confirmed at a 1% level of significance.
As is shown in Table A6, a majority of 54.0% (603 firms) of the sample answered “don’t
know”, or did not answer the question. Only 7.0% (78 firms) answered faster, 21.0% (234
firms) slower, and 18.0% (201 firms) the same. When analysing branches, this effect is also observed for retail trade, while, although showing a similar tendency, the samples of
transport, industrial production and gastronomy are too small for statistical analysis. The
data for the different regions suggest a similar trend. However, the trend is not so clear in
Wieluƒ. For Great Poland the sample is too small for statistical analysis, although a similar tendency is observed. In conclusion, the transaction costs connected with legal procedures enabling firms to obtain money from late payers seem to have increased during the
period 1996–2001.
Using the chi-square test at a 5% level of significance, a dependency between slower payment of bills by clients and perceived slower speed of legal procedures for obtaining money
from late payment has been found. Such legal procedures can last 2–3 years. Do people
who face more problems with late payment of clients have more experience with the system?
Or are firms abusing the slower legal procedures (opportunistic behaviour)? Also, a dependency has been found between the speed of payment of bills by firms themselves and the
speed of legal procedures to obtain money from late payment. Did firms pay bills more
slowly themselves and abuse slower legal procedures, or did they have experience of being
slow payers? Faster payers tended to perceive an unchanged speed of legal procedures, while
slower payers and firms with an unchanged paying behaviour more often perceived legal
procedures to have slowed down. This might suggest that firms who paid more slowly made
use of the slower legal procedures. Firms that reported that the speed of legal procedures
for obtaining money from late payers had increased or decreased tended to use legal procedures more often than firms that said that the speed remained the same. This may suggest
that the dependency between slower payment and slower speed of legal procedures exists
because of experience.
The firms were asked to assess development in professionalism of tax officers, clearness
of tax law, settlements of damages by insurance companies, theft, corruption, and transport
infrastructure in Poland during three periods: 1989–1993, 1993–1997 and 1997–2000. The
respondents were asked to order these three periods as follows: 1, the period where the
situation was the best; 2, the second best period; and 3, the period where the situation was
the worst.
Table A7 presents the results of the companies, which filled out the questions correctly.
The average of all three periods together should be 2. When looking at averages, it seems
that professionalism of tax officers had improved, clearness of tax laws and settlement of
damages by insurance companies first improved and then deteriorated, problems with theft
and corruption had become greater, and that transport infrastructure in Poland had improved. However, an analysis of the distributions is needed to obtain a better picture. Comparisons of averages may give a wrong picture [Kampen, 2001]. Using the chi-square test, dependency has been found between the assessments and the different periods at a 1 % level
of significance.
178
Appendix
Table A7. Development in different factors; comparing the periods 1989–1993, 1993–1997
and 1997–2000 – average.
1989–1993
1993–1997
1997–2000
Sample
2.20
1.93
1.87
N=488
Clearness of tax law
1.96
1.88
2.16
N=478
Settlement of damages by
2.02
1.89
2.09
N=411
Theft
1.53
1.97
2.50
N=506
Corruption
1.47
1.97
2.56
N=463
Transport infrastructure
2.21
1.96
1.82
N=503
Professionalism
of tax officers
insurance companies
in Poland
1 = best situation; 2 = second-best situation; 3 = worst situation – periods had to be ordered
from 1 to 3
Table A8. Professionalism of tax officers between 1989 and 2000.
1
2
3
Total
1989–1993
175
39
271
485
1993–1997
68
382
35
485
1997–2000
242
64
179
485
Total
485
485
485
1 = best situation; 2 = second-best situation; 3 = worst situation – periods had to be ordered
from 1 to 3
Table A8 presents the distribution of answers concerning professionalism of tax officers
in different periods. The periods 1989–1993 and 1997–2000 were mainly assessed with a 1 or
a 3. Comparison of both periods shows, although there is a large difference in the assessment of different periods, that there is an increase in the number of firms reporting 1 and a
decrease in the number of firms reporting 3. This suggests that, although answers are divided, problems had become smaller. The period 1993–1997 mostly obtained 2. This suggests that it was perceived as not the best and not the worst period. However, it is also possible that many respondents just indicated whether the situation had improved or deteriorated. For all the six questions the period 1993–1997 most often received a rank of 2 and
considering all the answers together 78.4 % of the respondents gave a rank order from best
situation to worst situation (1-2-3), or from worst situation to best situation (3-2-1). The
ordering 1-2-3 means that the period 1989–1993 was assessed with 1, period 1993 with 2 and
period 1997–2000 with 3.
A survey among firms – empirical indicators of the development of transaction…
179
Table A9. Rank order of different periods – Professionalism of tax officers.
Ranking of periods
Number of firms
Percentage of firms
1-2-3
157
32.4%
1-3-2
18
3.7%
2-3-1
17
3.5%
2-1-3
22
4.5%
3-2-1
225
46.4%
3-1-2
46
9.5%
Total
485
100%
1 = best situation; 2 = second-best situation; 3 = worst situation – periods had to be ordered
from 1 to 3
Table A9 presents how the responding firms ordered different periods with respect to
the professionalism of tax officers. About 46% of the respondents indicated that during the
three periods tax officers had become more professional, while 32% saw a deterioration.
Comparing the periods 1993–1997 and 1997–2000, a deterioration was reported by 46.4%,
and an improvement by 53.6%. About 60% saw an improvement between 1989–1993 and
1993–1997, while about 40% saw it the other way round. The data suggest that although the
professionalism of tax officers improved between 1989–1993 and 1993–1997, it seems to have
stayed at a similar level between 1993–1997 and 1997–2000. Small firms with 0–5 employees
tended to report a “3-2-1” ordering of periods less often than larger firms.
Table A10. Rank order of different periods – Clearness of tax law.
Ranking of periods
Number of firms
Percentage of firms
1-2-3
204
42.9%
1-3-2
22
4.6%
2-3-1
17
5.7%
2-1-3
27
3.6%
3-2-1
140
29.5%
3-1-2
65
13.7%
Total
475
100%
1 = best situation; 2 = second-best situation; 3 = worst situation – periods had to be ordered
from 1 to 3
180
Appendix
Table A10 shows how firms ranked the different periods with respect to clearness of tax
law. About 29% reported that tax laws became clearer over the three periods, while almost
43% think that they to became less clear. Comparing the periods 1993–1997 and 1997–2000,
about 60% saw a deterioration and about 40% saw an improvement. For the periods
1989–1993 and 1993–1997 these numbers are 53.2% and 46.8% respectively. This suggests
that it is unclear whether the situation improved or deteriorated between 1989–1993 and
1993–1997, while it seems that later the situation deteriorated.
A dependency has been found between firms that saw the amount of workers increasing
and improvement in the clearness of tax law (ranking order 3-2-1). A similar observation has
been made for the improvement of the financial situation of firms, while firms indicating deterioration in the financial situation during the period 1996–2001 more often assessed the
development of clearness of tax law negatively (ranking order 1-2-3). Firms with 6 or more
employees were more likely to assess the developments positively, while firms with 0–5 employees rather assessed the developments negatively. This may be related with the following,
previously mentioned fact: more firms with 6 or more employees than firms with 0–5 employees saw their financial situation improving. However, it can also be that there was lack
of expertise in small firms, and that they not could keep up with changes, which negatively
influenced financial results.
With respect to the settlement of damages by insurance companies, according to the data presented in Table A11, the situation improved steadily over all three periods according
to 32% of the respondents, while 34.5% indicated a steady deterioration. Comparing the periods 1993–1997 and 1997–2000, a deterioration was reported by 56.7% and an improvement by 43.3%. For the periods 1989–1993 and 1993–1997 an improvement was reported by
45.7%, while 54.2% report a deterioration. This suggests that, besides divided assessments,
overall the situation deteriorated. Firms with 6 or more employees assessed the situation
positively (ranking order 3-2-1) more often than firms with 0–5 employees.
Table A11. Rank order of different periods – Settlement of damages by insurance companies.
Ranking of periods
Number of firms
Percentage of firms
1-2-3
141
34.5%
1-3-2
32
7.8%
2-3-1
14
3.4%
2-1-3
39
9.5%
3-2-1
131
32.0%
3-1-2
52
12.7%
Total
409
100%
1 = best situation; 2 = second-best situation; 3 = worst situation – periods had to be ordered
from 1 to 3
A survey among firms – empirical indicators of the development of transaction…
181
Table A12 shows that with respect to theft a majority of 65% of all firms reported a
steady deterioration over all three periods, while only 18% reported steady improvement
during this time. The conclusion that the problem of theft had increased is in accordance
with the increase in the number of court cases [GUS, 2001, 64]. The number of theft cases
increased from 215,431 in 1990, to 265,421 in 1995 and 309,846 in 2000. However, the
number of burglary cases declined from 431,056 in 1990 to 304,899 in 1995, afterwards increasing to 364,786 in 2000. The number of robbery cases increased from 15,067 in 1990,
to 19,618 in 1995 and 41,893 in 2000.
Table A12. Rank order of different periods – Theft.
Ranking of periods
Number of firms
Percentage of firms
1-2-3
329
65.0%
1-3-2
19
3.8%
2-3-1
16
3.2%
2-1-3
33
6.5%
3-2-1
91
18.0%
3-1-2
18
3.6%
Total
506
100%
1 = best situation; 2 = second-best situation; 3 = worst situation – periods had to be ordered
from 1 to 3
Table A13. Rank order of different periods – Corruption.
Ranking of periods
Number of firms
Percentage of firms
1-2-3
318
68.7%
1-3-2
18
3.9%
2-3-1
13
2.8%
2-1-3
25
5.4%
3-2-1
69
14.9%
3-1-2
20
4.3%
Total
463
100%
1 = best situation; 2 = second-best situation; 3 = worst situation – periods had to be ordered
from 1 to 3
182
Appendix
The answers to the question with respect to corruption show a pattern similar to the answers to the question about theft. Almost 70% reported that the problems became steadily
worse over the three periods, while only about 15% stated the opposite (see Table A13).
This is in line with the increasing number of corruption cases handled in Polish courts, increasing from 799 per year in 1990 to 1247 in 1995 and 1899 in 2000 [GUS, 2001, 64].
Table A14 presents the data concerning the question of whether the transport infrastructure in Poland had improved or deteriorated. Analysing these data, it can be argued that the
transport infrastructure in Poland had improved, but that opinions were divided. A small
majority of 50.6% of the respondents saw a steady improvement of the situation through all
periods (rank order 3-2-1), while 33% reported a deterioration (rank order 1-2-3). For the
period 1993–1997 and 1997–2000 a majority of 56.8% assessed the situation as having improved, against 43.2% reporting a deterioration. For the periods 1989–1993 and 1993–1997
the respective percentages are 60.6% and 39.4%. Thus, the data suggest that the transport
infrastructure in Poland had improved.
Table A14. Rank order of different periods – Transport infrastructure in Poland.
Ranking of periods
Number of firms
Percentage of firms
1-2-3
166
33.2%
1-3-2
12
2.4%
2-3-1
19
3.8%
2-1-3
17
3.4%
3-2-1
253
50.6%
3-1-2
33
6.6%
Total
500
100%
1 = best situation; 2 = second-best situation; 3 = worst situation – periods had to be ordered
from 1 to 3
It was shown earlier in this section that customers, as well as the firms themselves, paid
their bills later in 2001 than in 1996. A question was asked concerning the seriousness of
problems with late payment from customers in three periods: 1989–1993, 1993–1997 and
1997–2000. For each period the respondents were asked to indicate on a scale from 1 to 7
whether they faced no problems at all (1) or a lot of problems (7). Table A15 presents the
answers, while Table A16 presents the mode, median and mean. Only the firms which filled
out the question for all three periods were taken into consideration (773 out of the total
sample of 1,116). Using the chi-square goodness-of-fit test, a dependency has been found
between periods and problems of late payment at a 1% level of significance.
A survey among firms – empirical indicators of the development of transaction…
183
Table A15. Problems with late payment for the periods 1989–1993, 1993–1997 and 1997–2000.
1
2
3
4
5
6
7
89–93
426 (55.1%) 126 (16.3%) 115 (14.9%)
56 (7.2%)
23 (3.0%)
9 (1.2%)
18 (2.3%)
93–97
344 (44.5%) 127 (16.4%) 111 (14.3%)
99 (12.8%)
54 (7.0%)
19 (2.5%)
19 (2.5%)
97–00
305 (39.5%)
73 (9.4%)
75 (9.7%)
54 (7.0%)
83 (10.7%)
92 (11.9%)
91 (11.8%)
1 = no problems at all; 7 = a lot of problems; n = 773
Table A16. Problems with late payment for the periods 1989–1993, 1993–1997
and 1997–2000 – mode, median and mean.
Mode
Median
Mean
1989–1993
1
1
1.99
1993–1997
1
2
2.38
1997–2000
1
2
3.02
1 = no problems at all; 7 = a lot of problems; n = 773
The mode (the value that occurs most often [Crawshaw and Chambers, 1994, 2]) was 1
in all three periods. This implies that a large proportion of the companies did not have any
problems with late payment at all. However, the percentage of companies having no problems
at all declined from 55% in the period 1989-1993, to 44% in the period 1993–1997, and
below 40% in the period 1997–2000. The median (the value in the middle of the ordered
list of all the data [Crawshaw and Chambers, 1994, 62]) increased from 1 in the first period
to 2 in the following periods. This suggests that problems had increased a bit. The increase
in the mean can be interpreted as an increase in problems with late payment from few
problems to some problems. However, the percentage of companies facing quite a lot of
problems or a lot of problems (indicated by a 6 or a 7) increased during the three periods
from 3.5% via 5% to almost 18%. Thus, almost one-fifth of the firms faced serious problems
with late payment in the period 1997–2000.
A dependency has been found between the speed of payment of clients during the period 1996–2001 (presented in Table A3) and the development of problems with clients’ late
payment. While the mode for the assessment of problems of late payment is also 1 for the
first two periods, firms that report slower payment by clients show an increase in the median
from 2 in period 1989–1993 (1 for the whole sample) to 4 in 1993–1997 (2 for the whole sample). For 1997–2000 the trend is even clearer, with a mode of 7 (1 for the whole sample) and
a median of 4 (2 for the whole sample). Thus, there seems to be a clear relationship between the (perceived) increase in problems and the (perceived) number of problems.
Another dependency has been found between the change in speed of payment by the
firm itself during the period 1996–2001 and problems with customers’ late payment in the
184
Appendix
period 1997–2000. Firms that paid slower tended to have more problems with late payment in the last period. This is in accordance with the dependency found earlier between
slower speed of payment of bills by customers and slower speed of payment of bills by a firm
itself.
The average firm reported to seldom or sometimes pay bills too late itself. A dependency has also been found between the development of the amount of workers employed in
firms during the period 1996–2001 and how often the own company paid bills too late.
Firms, in which the number of workers declined, paid bills too late (mentioned more often
“sometimes”, “often” and “very often”) more often than other companies where the number of workers stayed the same or increased. The case is even clearer when comparing the
development of the financial situation and how often a company itself paid bills to late.
Firms, in which during the period 1996–2001 the financial situation had deteriorated, paid
bills too late (mentioned more often “sometimes”, “often” and “very often”) more often
than other companies where the financial situation had stayed the same or improved. This
confirms the dependency found earlier between deterioration in the financial situation and
slower payment by the company itself (see analysis of Table A4).
With respect to the problem of late payment, the firms were asked what solutions they
used to solve this problem. They were asked to report whether they used a reminder, a bailiff, legal procedures, “Mafia” or default acceptance, having the possibility to answer never,
seldom, sometimes, often and very often. The average firm sometimes used a reminder,
more commonly never than seldom used a bailiff, seldom used legal procedures, never used
“Mafia” practices (with a few exceptions), and more commonly seldom than never accepted
default. Firms that reported customers to pay their bills slower than five years ago tended
to use a reminder and legal procedures more often. No dependency has been found with default acceptance.
A5. Social capital
In order to find out whether low- or high process-based trust and trust in government prevails among entrepreneurs, influencing transaction costs and the opportunities for developing new governance structures, questions were asked on who were trusted (a firm’s own
employees, suppliers, customers, local government, central government, competitors and
banks) and, in the experience of the firms, how co-operative the tax office, competitors, the
local government, the central government and banks were. With respect to trust, a scale
from 1 to 7 was used, 1 expressing complete distrust, 7 meaning complete trust. A 4 can be
interpreted as neither trusting nor distrusting. Table A17 presents all the answers, while
Table A18 presents the mode, the median and the mean with respect to trust. Using the
chi-square goodness-of-fit test, a dependency between the type of “player” in the economy
and the level of trust has been found at a 1% level of significance.
Studies suggest that former STEs inherited a relatively poor state of social capital (see
also Chapter 5). Based on data from World Values Survey 1990 and 1995, Raiser et al.
[2001, 4–7] argue that the degree of trust is significantly lower than in OECD countries.
A survey among firms – empirical indicators of the development of transaction…
185
Extended trust in the sense of the percentage of the population that think that people in
general can be trusted declined between 1990 and 1995 in both transition and market economies. Poland saw this percentage decline from 34.5 to 17.9. Economic performance is not
an explanatory variable, as Poland at that time was booming, but Russia showed a similar
decline while its economy stagnated.
Table A17. Who is trusted.
1
2
3
4
5
6
7
Total
NA
19
23
52
142
180
206
431
1,053
63
(1.8%)
(2.2%)
(4.9%)
(13.5%)
(17.1%)
(19.6%)
(40.9%)
(100%)
25
(2.4%)
41
(3.9%)
129
(12.2%)
245
(23.1%)
295
(27.8%)
183
(17.3%)
142
(13.4%)
1,060
(100%)
56
18
48
153
277
290
173
105
1,064
52
(1.7%)
(4.5%)
(14.4%)
(26.0%)
(27.3%)
(16.3%)
(9.9%)
(100%)
Local Govt.
255
(24.1%)
202
(19.1%)
232
(22.0%)
199
(18.8%)
93
(8.8%)
37
(3.5%)
38
(3.6%)
1,056
(100%)
60
Central Govt.
353
(33.6%)
245
(23.3%)
210
(20.0%)
127
(12.1%)
68
(6.5%)
23
(2.2%)
25
(2.4%)
1,051
(100%)
65
Competitors
326
(30.8%)
195
(18.4%)
228
(21.5%)
188
(17.8%)
78
(7.4%)
22
(2.1%)
22
(2.1%)
1,059
(100%)
57
Banks
57
(5.4%)
56
(5.3%)
97
(9.1%)
173
(16.3%)
271
(25.5%)
234
(22.0%)
175
(16.5%)
1,063
(100%)
53
Employees
Suppliers
Customers
NA = no answer; 1 = complete distrust; 7 = complete trust
Table A18. Who is trusted – mode, median and mean.
Mode
Median
Mean
Employees (n=1053)
7
6
5.64
Suppliers (n=1060)
5
5
4.76
Customers (n=1064)
5
5
4.52
Local Government (n=1056)
1
3
2.94
Central Government (n=1051)
1
2
2.51
Competitors (n=1059)
1
3
2.67
Banks (n=1063)
5
5
4.83
1 = complete distrust; 7 = complete trust
186
Appendix
Raiser [1997, 23] argues that most people neither trust, nor distrust political institutions
like government, parliament, civil servants and the police. Based on data from World Values
Survey 1995, New Democratic Barometer 1996 and Environment and Enterprise Performance Survey 1999, Raiser et al. [2001, 16] conclude that trust in public institutions in former STEs is not significantly lower than in OECD countries. Studies from 1995 and 1999
on trust in the Belgian parliament, the Belgian government and the Flemish government
suggest a situation of neither trust nor distrust [Kampen et al., 2001; Kampen and Molenberghs, 2002]. On a scale from 1 to 7, the level of trust would be around 4. In a survey
carried out in 9 former STEs on trust in formal institutions among 10,087 individuals in 1993,
the mean for all those countries is 3.4 (standard deviation 1.8) on a scale of 1 (maximum
distrust) to 7 (maximum trust), as used in the survey presented here. The mean for Poland
was 3.5 (standard deviation 1.6). Concerning civil servants, the mean for all countries was
3.5 (standard deviation 1.6), and for Poland also 3.5 (standard deviation 1.4).1
The data from the survey presented here suggest that in 2001 trust in the government
(local and central) was lower among entrepreneurs than was in general the case in 1993,
with a mean of 2.9 for trust in local government and a mean of 2.5 for trust in the central
government. Although the sample in this study is different, it may be that the lower level of
trust is connected with disappointment with government policy. At the time the survey was
conducted the media widely reported on huge problems with the government budget (it was
announced publicly that the budget deficit would be twice as big as assumed), while reports
on corruption were being published regularly. Another possible explanation might be that
private companies have to deal more often with certain levels of government than the
average citizen. Also the feeling that the state sector was favoured over private business, as
well as laws and regulations that changed (and still change) rapidly and often, can have
affected trust in local and central government.
Employees were trusted most of all, which is not so surprising because they have the
closest contact with the employer/manager. The mode is 7, which means that the largest
proportion of the firms in the survey, almost 40%, completely trusted their personnel. The
median is 6, which can be interpreted as a reasonable, but not very high level of trust.
Banks and suppliers were second, with a mode and median of 5. Although the means
for banks and suppliers are similar, there is a difference in the distribution of trust. Firms
tended to give more extreme assessments to banks. Banks were not trusted (marks 1 and 2)
by 10.7% of the firms, while 6.3% of the firms did not trust suppliers. Banks were rather or
completely trusted (marks 6 and 7) by 38.5% of the firms, while the percentage for suppliers
is 30.7. Suppliers more often received 3, 4 and 5 than banks, 63.1% and 50.9% respectively.
It is possible that experience with banks have differed greatly from bank to bank. Another
possible explanation is based on the results of a survey among 1,037 Poles held in March
2002 by the OBOP (Centre for Public Opinion Research) [OBOP, 2002]. According to this
survey more than two thirds of the Poles trust public banks. Only 38% trust private banks,
while 39% distrust private banks. The difference between private and public banks was not
taken into consideration in this survey. The data suggest that some trust in banks and suppliers exists.
1
Data from Paul Lazarsfeld Society [1994] and Rose et al. [1997, 17]. Presented in Raiser et al., 1997, 24.
A survey among firms – empirical indicators of the development of transaction…
187
Trust in customers is at a similar level when looking at the mode and the median. However, when comparing trust in customers with trust in banks, a similar observation is made
to the comparison between suppliers and banks. More firms assessed banks with very low
trust (1 or 2) or high trust (6 or 7), while customers received 3, 4 and 5 more often. Clients
seem to be a little bit less trusted than suppliers, as suppliers received 5, 6 and 7 more often,
while customers tended to be assessed with lower values.
There is a tendency that the “farther away” individuals or organisations from the firm,
implying less repeated dealing, the lower the reported trust. While trust in customers is at
a rather low level, local government, competitors and central government are distrusted.
The mode for the three last categories is 1, implying that a large proportion of all companies completely distrust these parties. The trust score for central government has a median
of 2, while for competitors and the local government the median is 3. The largest proportion of firms (33.6%) has absolutely no trust in central government, followed by competitors
(30.8%) and local government (24.1%).
Summarising, some process-based and personal trust in economic partners seems to
exist, creating room for development and co-operation. However, a question remains as to
how open networks are. If networks are closed and not transparent, this hampers the development of new governance structures. Low trust in competitors has positive and negative
aspects. The positive aspect is that this hampers co-operative behaviour in the form of collusion, price agreements and creating barriers to entry. However, as many firms are small,
they may have difficulties in facing the challenges of increasing regulation and increasing
competition in the process of EU accession (see Chapter 7). The very low trust in the different levels of government hampers third-party enforcement and is a sign of an institutional
disequilibrium, negatively influencing economic performance.
Distrust of citizens can be an important stimulus for initiating quality improvement [Van
de Walle and Kampen, 2002]. However, the incentives for local and central government provided by distrust depend on political transaction costs and the strength of interest groups.
Of course the measure of trust used here is quite crude. As Van de Walle and Kampen remark, it is important what people perceive as being government and whether they distinguish individual services as being provided by the government. Furthermore, it is rather
the perceived functioning of the government (and other actors) than the real functioning
that often influences the evaluation of the government. Thus, this evaluation is partly based
on the existing level of trust. When the existing level of trust is low, it is very difficult to get
out of such a situation. Even when the government (or another actor) tries to improve the
quality of its services, it can take a long time before trust increases. In other words, building
social capital is a time consuming process.
The general tendency concerning low trust in the government is confirmed when looking
at the answers to the question about how co-operative, in the experience of a company, the
tax office, competitors, local government, central government and banks are. The results are
presented in Table A19 and A20. Respondents had the possibility to choose on a scale from
1 (totally un-co-operative) to 7 (very co-operative), with 4 implying neither being un-co-operative nor co-operative.
188
Appendix
Table A19. Perceived co-operativeness of “institutional governance” and market participants.
Tax Office
1
2
3
4
5
6
7
Total
NA
182
(17.4%)
119
(11.4%)
184
(17.6%)
235
(22.4%)
164
(15.6%)
107
(10.2%)
57
(5.4%)
1,048
(100%)
68
362
197
201
159
88
24
13
1,044
72
(34.7%)
(18.9%)
(19.3%)
(15.2%)
(8.4%)
(2.3%)
(1.2%)
(100%)
417
(40.4%)
231
(22.4%)
180
(17.4%)
110
(10.6%)
60
(5.8%)
21
(2.0%)
14
(1.4%)
1,033
(100%)
83
550
195
137
79
36
19
1,023
93
(53.8%)
(19.1%)
(13.4%)
(7.7%)
(3.5%)
(1.9%)
(0.7%)
(100%)
120
62
137
206
205
205
117
1,052
(11.4%)
(5.9%)
(13.0%)
(19.6%)
(19.5%)
(19.5%)
(11.1%)
(100%)
Competitors
Local Govt.
Central Govt.
Banks
7
64
NA = no answer; 1 = totally un-co-operative: 7 = very co-operative
Table A20. Perceived co-operativeness of “institutional governance” and market
participants – mode, median and mean.
Mode
Median
Mean
Tax Office
4
4
3.6
Competitors
1
2
2.55
Local government
1
2
2.31
Central government
1
1
1.96
Banks
4
5
4.27
1 = totally un-co-operative: 7 = very co-operative
Using the chi-square goodness-of-fit test, a dependency between the type of “institutional governance” or market participant and co-operativeness has been found at a 1% level
of significance. Banks were reported to be the most co-operative. However, a mode of 4
and a median of 5 imply co-operativeness at a relatively low level. Tax offices are rather at
the level of being neither co-operative nor un-co-operative, although almost 17% of the respondents perceived the tax office to be totally un-co-operative. Tax offices were considered to be less co-operative than banks. Competitors, local government and central government were considered to be un-co-operative, with competitors having the highest trust score
of these three, followed by local government and central government with a very low level
of perceived co-operativeness. More than 53% of companies considered central government to be completely un-co-operative, while this percentage for local government is 40%
and for competitors almost 35%. These low averages suggest a low level of co-operativeness
A survey among firms – empirical indicators of the development of transaction…
189
when those stakeholders are involved in new economic initiatives, hampering economic
activity.
The low mode, median and mean for tax offices, local government and central government may suggest the existence of inefficient public administration. Tax offices have the
image of making life difficult and being quick to give fines when an entrepreneur makes
a mistake. Central government at the time of the research (shortly before parliamentary
elections) was not very popular. However, in all regions the mode, median and mean for local government were also low, although different political coalitions governed these areas.
A complaint heard very often is that civil servants are not employed because of their qualifications, but because of their political connections. Furthermore, politicians are often considered to be in politics because of the financial advantages. These factors may suggest high
transaction costs of arranging the permits necessary for a new economic activity. In the case
of the tax office, no dependency has been found between the co-operativeness of the tax
office and clearness of tax law or professionalism of tax officers.
Higher transaction costs, due to low trust in the form of safeguards for contracts and
transaction costs of forming new governance structures or creating coalitions for undertaking new economic ventures, are connected with the question of whether firms were actively looking for partners. A total of 271 firms (24.3%) answered yes, 822 (73.7%) no, and 23
(2.1%) did not answer the question. Firms could give a maximum of three reasons for
why they were seeking partners. Of the 271 firms actively looking for partners, 85 reported
that they were looking for a partner in order to avoid problems with unreliable companies.
This suggests that 7.6% of all companies had large enough problems with opportunistic
behaviour (high market transaction costs), in order to actively look for a solution. A total of
61 firms reported to be looking actively for a partner because of problems of buying certain
products/services via the market, also suggesting that some firms faced high transaction costs.
Other reasons given were that the company is too small to survive on the market (97 firms),
finding new capital for investment (66 firms), gaining new management know-how/new ways
of organising the business (74 firms), offering a more integrated package of services (143
firms), and obtaining new technology (51 firms).
A6. Concluding remarks
By way of a survey among more than 1,100, mostly small, companies an attempt has been
made to analyse the development of transaction costs in the 1990s and the level of trust at
the beginning of the 21st century. Most of the companies investigated were established at the
beginning of the 1990s, confirming the strong incentives created by economic liberalisation.
However, less firms were set up during the second half of the 1990s, suggesting a slower
change in governance structures.
Only infrastructure and banking in Poland seem to have improved between 1989 and 2001.
This implies lower marginal transaction costs facilitating trade and the development of markets. However, because of the increasing number of transactions and the resulting increase in
traffic, many bottlenecks in infrastructure have appeared. Furthermore, increasing problems
190
Appendix
with customs clearance suggest increasing transaction costs in international trade. Professionalism of tax officers initially improved, while afterwards it stayed at a similar level. However,
many problems still exist due to a lack of skills. Tax law became less clear during the second
half of the 1990s. Settlement of damages by insurance companies seems to have deteriorated,
although assessment of this situation by firms is divided. Problems with late payment became
larger, while transaction costs connected with legal procedures to obtain money from firms
that pay their bills too late, theft and corruption increased. Although there are many more factors influencing transaction costs, these findings suggest that transaction costs increased.
A few reasons why transaction costs, especially for small firms, increased can be distinguished. Institutions may have become more inefficient and changed often. The clarity of
tax law may have deteriorated, because many changes have taken place since 1990 in parts
of the law, while not taking the whole into consideration. Often when parliament had to pass
the government budget, tax laws were prepared in a rush and in the political process ad hoc
changes took place. Furthermore, it is possible that while the number of economic transactions increased, “institutional governance” did not adapt enough, leading to an increase in
control costs. Another problem is a lack of physical and human capital, incompetence,
unfriendliness and corruption in public administration, complex and unclear tax laws, a
customer unfriendly tax collector and an inefficient judiciary. The tax collection infrastructure and information flows remain underdeveloped. Computerisation was started only towards
the end of the 1990s. Inefficient “institutional governance” hampers economic activity by
increasing transaction costs and negatively influencing incentives.
The perceived increase in theft and corruption can have led to increasing transaction
costs. Of course, as is always the trouble with the type of research presented here, it is possible that there is a difference between a perceived and a real deterioration of the situation.
It is possible that corruption remained at the same level, but that more cases were uncovered
and/or published in the media, leading to a feeling that the problem of corruption had increased. However, it is possible that experience of entrepreneurs is reflected in the answers.
Whatever the case, the moment that people perceive an increase in the problem of theft,
this is likely to lead to expenses on safeguards and monitoring equipment, which implies increasing transaction costs. When these problems are not resolved by further institutional
change, the related transaction costs remain high, or even increase further when exchange
becomes more complex and sophisticated.
A problem exists with respect to the low trust in and perception of un-co-operativeness
of “institutional governance”. Some process-based trust exists, creating opportunities for
economic activity. The data for the tax office, local and central government suggest an inefficient public administration (or at least perceived as inefficient). With such a poor state of
social capital it is likely that more resources are spent on contractual safeguards. In addition, information and negotiation costs are likely to increase when dealing with different
levels of government, as well as with unknown trade partners, or with establishing privatepublic partnerships. But problems can also arise with competitors when co-operation is
needed for a larger venture, as low trust in the government increase difficulties with thirdparty enforcement. Furthermore, a low level of trust in “institutional governance” hampers
the introduction of efficient institutions.
A survey among firms – empirical indicators of the development of transaction…
191
To conclude, although some transaction costs have declined, it seems that many transaction costs to small firms in Poland increased at the end of the 1990s and the beginning of
the 21st century. The data suggest that problems also existed for firms with more than 20 employees. As transaction costs for small firms seem to be increasing, while large companies
have lowered the high market transaction costs they faced at the beginning of the 1990s, the
result may be increasing concentration of firms and less competition. Further institutional
change is needed in, among others, public administration and the judiciary. Inefficient
public administration not only suggests high (marginal) transaction costs, but also provides
disincentives for economic activity. Complying to EU standards in the process of EU accession is likely to be difficult for small firms, due to a lack of human capital, and when the accompanying procedures are too difficult this adds to the already high transaction costs and
strengthen the disincentives. Besides further institutional change, there is a need for small
firms to create larger governance structures in order to meet the challenges of a developing
market. There exists some process-based trust, which facilitates such a high-transaction-cost
venture. Extending networks is important, because of the trend identified in EU countries
of an increased use of logistic solutions. As outsourcing of non-core activities becomes more
important, firms are co-operating more and more in networks. When the different levels
of government are able to reduce transaction costs and strengthen incentives for small and
medium-sized enterprises, this stimulates the increase in economic activity which is needed
if Poland wants to catch up economically with EU countries and improve the standard of
living of its citizens.
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SAMENVATTING
(SUMMARY IN DUTCH)
213
Samenvatting (Summary in Dutch)
Instutionele verandering en Poolse economische prestaties vanaf
de jaren zeventig van de twintigste eeuw – prikkels en transactiekosten
Doel- en vraagstelling van het onderzoek
De jaren negentig van de vorige eeuw in Polen worden gekenmerkt als een periode van
economische transformatie van een centraal-geleide naar een markteconomie. In deze
studie wordt geprobeerd het Poolse transformatieproces te beschrijven en te analyseren
met behulp van het theoretische kader van de Nieuwe Institutionele Economie (NIE).
Cruciaal in NIE is het concept van padafhankelijkheid, waardoor de introductie van een
nieuw economisch systeem, in dit geval een markteconomie, niet Pareto-optimaal verloopt.
De vorming van het nieuwe systeem heeft zijn wortels in en wordt beïnvloed door het oude
systeem.
De centrale vraagstelling in deze studie luidt: In hoeverre zijn de prikkels en de transactiekosten in de Poolse economie veranderd, op welke wijze zijn deze veranderingen van invloed geweest op de economische prestaties in de periode 1970–2000 en hoe kunnen deze verklaard worden met behulp van de Nieuwe Institutionele Economie?
Deze vraag is verfijnd met betrekking tot het socialistische systeem en de periode van de
opbouw van een markteconomie.
• In hoeverre kunnen verandering van prikkels en transactiekosten de ondergang van het
socialistische systeem verklaren en de weg hebben gebaand voor transformatie naar een
markteconomie?
• Hoe heeft de situatie die aan het eind van de jaren tachtig bestond de economische
situatie aan het begin van de jaren negentig beïnvloed en in hoeverre zijn de prikkels en
de transactiekosten veranderd in de periode van de opbouw van een markteconomie?
Opzet van het onderzoek
Voor de uitwerking van dit probleem bestaat dit proefschrift uit drie delen. In deel I
(hoofdstukken 2 en 3) wordt het theoretische kader van NIE en de transactiekostentheorie
uiteengezet. Vervolgens komt in deel II (hoofdstukken 4 en 5) de invloed van transactiekosten en prikkels op economische bedrijvigheid in Polen in de periode 1970–2000 aan de
orde. In deel III (hoofdstukken 6 en 7) worden enkele specifieke aspecten van economische
prestaties behandeld: de transactiekosten van in wachtrijen staan en logistieke uitdagingen
in de periode van de opbouw van een markteconomie.
214
Samenvatting (Summary in Dutch)
In hoofdstuk 2 worden definities gegeven en wordt het theoretische raamwerk voor
het onderzoek geschetst en toegepast op de transformatieproblematiek in Polen. Transactiekosten bepalen hoe makkelijk of moeilijk het is een transactie af te sluiten of af te dwingen en bepalen welke vorm van governance het meest efficiënt is voor het oplossen van het
allocatieprobleem. Instituties, de regels van het “spel van economische bedrijvigheid”,
beïnvloeden de prikkels voor economische activiteiten die plaatsvinden op het niveau van
governance. Van belang zijn stabiele instituties die onzekerheid verlagen en contractnaleving
makkelijker maken. Voor naleving is echter “institutional governance” nodig in de vorm van
een organisatiestructuur.
Tijdens de transformatie van een centraal-geleide economie naar een marktorde bestaat
er een zwak systeem van eigendomsrechten. Vele eigendomsrechten zijn onduidelijk gedefiniëerd. Dit betekent dat er zich meer waarde in het publieke domein bevindt, hetgeen
kan leiden tot productiedaling. In het algemeen geldt dat des te hoger de transactiekosten,
des te meer waarde zich in het publieke domein bevindt. Dit creëert meer mogelijkheden
voor rent-seeking, en sterkere prikkels voor activiteiten gericht op herverdeling van eigendomsrechten, terwijl prikkels voor productieve economische activiteit verzwakken.
In hoofdstuk 3 wordt de theorie uit hoofdstuk 2 verder ontwikkeld om een meer specifiek theoretisch raamwerk te creëren dat toegepast wordt in de rest van dit proefschrift. De
institutionele omgeving en transactiekosten bepalen in grote mate welke eigendomsrechtsvorm de sterkste prikkels geeft voor economische efficiëntie. Een economisch systeem kan
“sterk” danwel “zwak” zijn. Eigendomsrechten zijn “sterk” als ze worden afgedwongen en
er zich weinig waarde in het publieke domein bevindt. Als het “afdwingingsmechanisme”
faalt en de controlekosten hoog zijn, is de eigendomsrechtenorde “zwak” en verzwakken de
prikkels voor economische activiteit.
Efficiënte instituties bevorderen economische groei. Deze leiden tot meer transacties
en toenemende (marginale) transactiekosten. Het gevolg is dat het bestaande institutionele
raamwerk en de governance-structuur die in staat waren een zekere hoeveelheid transacties
efficiënt af te handelen veranderd moeten worden. Om dit te bereiken moet het economische systeem adaptief efficiënt zijn. Planning en publiek eigendom kunnen efficiënt zijn voor
het ontwikkelen van een economie wanneer marktinstituties onontwikkeld zijn. Marginale transactiekosten van planning stijgen en prikkels worden zwakker wanneer het aantal
economische transacties toeneemt. In deze situatie kan een gedecentraliseerd economisch
systeem, zoals de markt, marginale transactiekosten verlagen.
Een impliciet doel van transformatie van plan naar markt is de introductie van efficiënte
instituties, “institutional governance”, en stucturen van governance die transactiekosten verlagen en prikkels versterken. Zonder “infrastructuur” blijven de effecten van een efficiënte
institutionele omgeving echter beperkt en ontwikkelen markten zich niet.
Wanneer het pad van institutionele verandering moeilijk te voorspellen is en een aantal
instituties ontbreken (institutioneel vacuum) neemt onzekerheid toe. In deze situatie hebben
vele economische actoren de neiging terug te vallen op hun socialistische “mentale modellen”, de manier waarop ze gewend waren te handelen onder het oude systeem. Dit gegeven
leidt tot een institutioneel onevenwicht (institutional disequilibrium), waarin “oude” mentale
modellen bestaan die de nieuwe formele instituties niet versterken. Het gevolg is dat de
Samenvatting (Summary in Dutch)
215
transactiekosten stijgen en individuen meer geneigd zijn pervers te reageren op marktprikkels. De verwachting is dat productie daalt in die sectoren die sterk waren onder het oude
systeem. Deze productiedaling moet vergeleken worden met de toename van economische
bedrijvigheid in sectoren die traditioneel sterk zijn in ontwikkelde markteconomieën, zoals
de dienstensector. Transactiekosten kunnen in een later stadium dalen als gevolg van een
leerproces en de ontwikkeling van stabiele instituties.
Hoewel het introduceren van efficiënte instituties één van de doelen is van transformatie, kunnen inefficiënte instituties ontstaan of voortbestaan als gevolg van mentale modellen,
onzekerheid en belangengroepen. Marktinstituties vertonen kenmerken van een publiek
goed. Dit leidt tot een paradox dat de staat, die zelf in transformatie is, een belangrijke rol
heeft in het creëren van instituties die een competitieve markt en een kleinere rol van de
staat zouden moeten genereren.
Transformatie is voltooid wanneer een economisch systeem sterk is, er zich weinig waarde in het publieke domein bevindt, “institutional governance” sterk is en er een institutioneel evenwicht bestaat. Deze elementen houden in dat de transactiekosten laag en de prikkels
sterk zijn, terwijl instituties zich in een evolutionair proces aanpassen aan veranderende
omstandigheden.
In hoofdstuk 4 worden transactiekosten en prikkels in de Soviet-Type Economy (STE) in
het algemeen, en in Polen in het bijzonder, besproken en geanalyseerd. Er wordt een ontwikkeling van het socialistische systeem geschetst van klassiek socialisme in de jaren zestig,
via hervormings socialisme in de jaren zeventig tot “vervallend” socialisme in de jaren tachtig van de twintigste eeuw. In deze laatste fase ontwikkelden zich karakteristieken van een
markteconomie in “embryonale” vorm. De transformatie naar een markteconomie heeft
zijn wortels in de jaren zeventig van de vorige eeuw toen in Polen een proces van institutionele verzwakking in gang werd gezet.
Twee fundamentele instituties van de plan-economie, de Communistische Partij en publiek eigendom, verzwakten, onder andere door hervormingen die gericht waren op het verbeteren van economische prestaties. Door de adaptieve inefficiëntie van de STE namen de
transactiekosten echter toe. Dit feit hangt samen met toenemende problemen met moral
hazard, planonderhandeling (plan bargaining) en informatie. Prikkels voor technische en institutionele innovatie, alsmede voor het vinden van transactiekosten verlagende oplossingen, waren al zwak en werden nog meer verzwakt door het systeem van centrale planning,
het instituut van publiek eigendom, de Communistische Partij en tekorten. Informele instituties, zoals het geloof in het systeem, werden langzaam uitgehold, onder andere door permanente tekorten, onderdrukking van werknemerseisen en de modelfunctie van Westerse
kapitalistische landen. Toenemende transactiekosten en verzwakkende instituties leidden
tot verslechterende economische prestaties, en bereidden het pad voor institutionele verandering naar een markteconomie voor.
Hoewel hervormingen meestal faalden, veranderden ze fundamenteel de karakteristieken van het economische systeem. Door decentralisatie werden de eigendomsrechten (usus en
usus fructus) de facto verspreid over een grotere groep, hetgeen de prikkels voor betere economische prestaties verzwakte vanwege toename van rent-seeking gedrag van individuen en belangengroepen. Zo verzwakte dus het instituut van publiek eigendom door de hervormingen.
216
Samenvatting (Summary in Dutch)
Na de staat van beleg op 13 december 1981 nam de staat vele functies van de intern verdeelde Poolse Communistische Partij (PZPR) over. Een groot aantal leden zegde hun lidmaatschap van de PZPR op. Voor de politieke elite werd het duidelijk dat de machthebbers
in een vergelijkbare positie in een kapitalistische samenleving meer economische voordelen
hebben. Door de economische hervormingen in de jaren tachtig, toen de centrale planning
werd verlaten zonder een echte markt te introduceren, verzwakte het economische systeem
nog meer. Het verzwakken en uithollen van formele en informele instituties ging gepaard
met toenemende transactiekosten en zwakkere prikkels voor economische bedrijvigheid.
Naast de verzwakking van instituties en economische stagnatie, zijn er andere factoren
van belang om de teloorgang van het socialistische systeem te verklaren. De druk van de
kant van de vakbond Solidariteit, het belang van de politieke elite in een nieuw systeem en
de non-interventie van de Soviet Unie verlaagden de politieke transactiekosten van institutionele verandering. Een soort van “revolutie van boven” lijkt de doorslag gegeven te
hebben doordat Poolse en Sovjet-elites hun interesse in het behoud van het oude systeem
verloren.
In hoofdstuk 5 worden verschillende oorzaken voor de daling in productie en nationaal
inkomen tussen 1989 en 1992 behandeld. In deze periode werd geprobeerd in korte tijd een
markteconomie te introduceren. Behalve aan vraag- en aanbodsfactoren wordt aandacht
geschonken aan factoren die samenhangen met prikkels en transactiekosten in het proces
van institutionele verandering. Zwakke en ontbrekende instituties, onzekerheid, socialistische mentale modellen, alsmede het privatiseringsproces, veroorzaakten perverse prikkels.
Transactiekosten waren hoog, waardoor de waarde in het publieke domein steeg. Dit verzwakte de prikkels voor economische activiteit en versterkte de prikkels voor rent-seeking.
Het macroeconomische stabiliseringsbeleid, geïntroduceerd in 1990, leidde aan de ene
kant tot een verdieping van de recessie. Aan de andere kant werd het economische systeem
direct versterkt door de prijsliberalisering, hetgeen de mogelijkheden voor rent-seeking in
geval van prijsregulering juist weer reduceerde. Prikkels voor productieve activiteiten werden versterkt, hetgeen een verdere productiedaling voorkwam.
Toen er meer marktinstituties waren ontstaan en deze zich stabiliseerden, zoals beter gedefiniëerde eigendomsrechten, en geprivatiseerde staatsbedrijven zich hadden aangepast
aan de nieuwe omstandigheden, daalden de transactiekosten voor deze geherstructureerde
en geprivatiseerde staatsbedrijven.
Alhoewel er nog vele inefficiënte instituties bestaan, lijkt het erop dat Polen een “normaal” pad van institutionele verandering volgt. Empirisch onderzoek onder 1116 bedrijven
wijst uit dat de transactiekosten aan het eind van de jaren negentig en aan het begin van de
21e eeuw zijn toegenomen. Dit kan onder andere het gevolg zijn van inefficiënt openbaar
bestuur, een inefficiënte rechterlijke macht, instituties die niet mee-evolueerden met de
toegenomen hoeveelheid transacties in de groeiende economie en povere vormgeving en
introductie van nieuwe instituties. Alhoewel het vertrouwen in centrale en locale overheden
laag is, bestaat er een zekere mate van vertrouwen opgedaan in het proces (process-based
trust), hetgeen mogelijkheden voor economische ontwikkeling biedt.
In hoofdstuk 6 wordt een case-studie van transactiekosten voor de consument in de
Poolse STE gepresenteerd: het in de rij staan voor het verkrijgen van consumptiegoederen.
Samenvatting (Summary in Dutch)
217
Deze transactiekosten verschillen significant van het soort transactiekosten besproken in
hoofdstuk 4, waar het vooral de transactiekosten van planning betrof. Het in de rij staan holde het geloof in superioriteit van het socialistische systeem uit. Het onderzoek is gebaseerd
op enquetes onder 418 Polen.
Ongeveer 95% van de respondenten heeft voor 1989 in de rij gestaan. Mensen stonden
vooral in de rij voor consumptiegoederen als vlees, toiletpapier, suiker, melkproducten,
chocola, benzine en fruit. Er was sprake van arbeidsdeling, aangezien er mensen waren die
“gespecialiseerd waren in het in de rij staan” voor anderen. Twee-derde van de respondenten
in de steekproef verklaarde dat anderen voor hen in de rij stonden, terwijl 40% voor iemand
anders in de rij stond.
De meest voorkomende activiteiten in de rij waren: “denken”, lezen (vrij veel), klagen
(tamelijk vaak en meer vrouwen dan mannen), praten over politiek (meer mannen dan
vrouwen), roddelen (meer vrouwen dan mannen), en nuttige contacten leggen of het regelen
van dingen (sommigen). Een grote meerderheid van de ondervraagden beoordeelde hun
activiteiten tijdens het in de rij staan evenwel als nutteloos. Alhoewel de tijd die men in de rij
stond in zekere zin nuttig besteed werd, waren de “psychologische” transactiekosten hoog.
De resultaten van het onderzoek duiden erop dat het verdwijnen van de rijen in 1990 een
groot sociaal voordeel opleverde.
In hoofdstuk 7 wordt het belang van infrastructuur, transport en logistiek voor institutionele ontwikkeling en het verlagen van transactiekosten besproken en geanalyseerd. Gebaseerd op onderzoek van logistieke diensten aangeboden door 260 transportbedrijven en
communicatiemiddelen gebruikt door 1116 onderzochte bedrijven wordt gesteld dat Polen
10 tot 30 jaar achterloopt in logistieke ontwikkeling ten opzichte van EU landen. Als Poolse bedrijven niet snel de logistieke trend oppakken, dan kunnen ze de concurentieslag verliezen als Polen tot de EU toetreedt. De ontwikkeling van geïntegreerde logistieke centra in
Polen kan niet alleen leiden tot introductie van transactiekosten-verlagende oplossingen,
maar kan ook een prikkel zijn voor institutionele ontwikkeling naar een sterker economisch
systeem.
Conclusies van het onderzoek
In hoofdstuk 8 worden de belangrijkste conclusies uit het onderzoek getrokken en een
antwoord geformuleerd op de centrale vraagstelling van deze studie: In hoeverre zijn de prikkels en de transactiekosten in de Poolse economie veranderd, op welke wijze zijn deze veranderingen van invloed geweest op de economische prestaties in de periode 1970–2000 en hoe kunnen
deze verklaard worden met behulp van de Nieuwe Institutionele Economie?
Ten gevolge van de teloorgang van het socialistische systeem door de facto verspreiding
van eigendomsrechten, het verzwakken van de Communistische Partij, de afschaffing van
centrale planning en het verdwijnen van het geloof in het systeem ontstond een situatie van
“vervallend” socialisme in de jaren tachtig van de twintigste eeuw. Transactiekosten namen
toe, prikkels werden zwakker en stagnatie leek een permanente karakteristiek van de Poolse economie. Dit creëerde een vruchtbare bodem voor de transformatie naar een markteconomie in de jaren negentig. Onder de heersende elites had zich een economisch belang
in een meer marktgeoriënteerd systeem ontwikkeld, terwijl de Sovjet-Unie zich niet langer
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Samenvatting (Summary in Dutch)
met interne Poolse aangelegenheden bemoeide. Tezamen met een sterke arbeidersbeweging die het oude systeem wilde hervormen, verlaagden deze omstandigheden significant de
politieke transactiekosten van veranderingen.
Een belangrijke factor die het Poolse economische systeem direct versterkte in 1990 was
de prijs- en handelsliberalisering. Hoewel deze aan de ene kant leidden tot een diepe recessie in 1990–1991, leidden ze ook tot een reductie van de mogelijkheden tot rent-seeking, hetgeen de prikkels voor productieve activiteit versterkte. Door hoge transactiekosten waren
er echter nog legio mogelijkheden tot rent-seeking. Gedurende deze periode was onzekerheid over toekomstige institutionele verandering erg hoog. Er bestond een mix van socialistische en marktinstituties, en veel markinstituties bestonden in een “embryonale” vorm of
in het geheel niet. Door de grote onzekerheid vielen vele economische actoren terug op hun
socialistische mentale modellen. Deze situatie creëerde veel perverse prikkels voor economisch gedrag en leidde tot hoge transactiekosten.
Prijsliberalisering betekende in feite een privatisering van (karakteristieken van) eigendomsrechten die de overheid bezat toen die de prijzen nog reguleerde, hetgeen de ontwikkeling van de markteconomie stimuleerde. Liberalisering van handel creëerde sterke prikkels voor de ontwikkeling van het kleinbedrijf voor welke de transactiekosten laag waren.
Hierdoor kreeg de private sector snel vaste voet aan de grond en als gevolg van systeemversterking was de productiedaling kleiner.
Aanvankelijk stegen de transactiekosten voor staatsbedrijven. Toen de eigendomsrechten zekerder werden, het institutioneel vacuum kleiner werd en een deel van de (geprivatiseerde) staatsbedrijven zich aan de nieuwe situatie aanpasten, daalden deze transactiekosten. Sommige transactiekosten stegen echter later in de jaren negentig, in het bijzonder
voor het kleinbedrijf.
Met behulp van de Nieuwe Institutionele Economie, in het bijzonder prikkels en transactiekosten, is een verklaring geboden voor de ondergang van het socialistische systeem in
Polen. Daarnaast biedt dit model een verklaring voor de vraag waarom de radicale transformatiestrategie in het begin van de jaren negentig gepaard ging met een zo sterke productiedaling, en waarom de economie daarna snel een pad van economische groei betrad.