ABSTRACT
In centrally planned economies profits accruing from the state sector production are paid directly into the state budget. Hence it can be assumed that state enterprises aim at cost minimization. The state enterprises in the reforming countries take advantage of soft budget constraint which leads to larger size operations, inefficiency, taking high risks and increased inflation. When profitability of enterprises increase through windfall profits arising from price reform, pressure for improving efficiency lessens, the bankruptcy rate drops and real wages increase instead; when profit squeeze emerges and the threat of bankruptcy becomes real then the tempo of structural adaptation quickens. Enterprises in the Soviet-type economies are more than 10 times the average size of those in the developed market economies. In Poland, state firms to be privatized have embarked on a self-destruction course, given the present legal status of the state enterprises and their short-run economic interests.
