Cement

Fyodor Gladkov published his novel Cement in 1925. One of the first examples of socialist realism, it depicted the post-revolutionary construction of the Soviet Union from the point of view of a cement factory. Gleb, a Soviet soldier who returns to his hometown, discovers that in a few short years everyone has forgotten about the revolution. He throws himself into starting up the cement factory with revolutionary zeal.

Throughout the novel Gleb is in near-constant motion. He “rushed hither and thither, dripping with sweat, laughed, caught up tools, cut, sawed, drilled and could not keep pace with the mad tempo of his heart.” The new Soviet state, to survive, somehow had to rebuild the entire country. It needed cement. Even more so, it needed dynamic spirits like Gleb and his equally fervent wife Dasha to energize the torpid countryside. Cement is a humble solid material. But in the hands of Gladkov and the Soviet state, it had revolutionary potential.

Aside from the Soviet Union itself, Poland was a top cement producer in the Soviet bloc. During the economic reform period, the transformation of the cement sector was a top priority. Seung-Hee Nah worked for the World Bank in the early 1990s. She was part of the team responsible for overseeing the privatization of the cement sector. Once again, cement proved to be an essential ingredient in the rebuilding of a country – this time after the failures of Soviet-style Communism. If Gladkov were still around in the early 1990s, he could have written a sequel to Cement set in one of the large factories that played a pivotal role during the economic transition.

“Poland had 15 or 16 cement factories at that time,” she told me in an interview in Washington, DC last July. “Under our contract with the government, we did the work in two phases. The first phase was to analyze the entire cement sector by visiting all cement factories in the country and assess their business viability and prospects for sale, and present recommendations for each factory in terms of whether to privatize or not, and if so in what priority. The second phase would be the actual sale of selected factories. We had three or four teams; each team would come back and make a report for the government that provided a clearer picture of the condition of each factory and whether or not it could be privatized as is. We went through that first phase, and out of the 15, three or four were recommended for immediate closure because they were in such bad shape. Out of the dozen remaining, we probably ended up privatizing six or seven.”

There were innumerable challenges during this privatization process. Investors had to be found – and these were almost exclusively foreign since no one in Poland had enough capital to buy these large firms. Then there were the negotiations inside the factory, with management and the trade unions. Finally, there was dealing with the Polish government officials.

“In accordance with the guidelines, the potential investor first had to talk with the trade union and get the consent from the head of the trade union,” Nah remembered. “They had to sign a piece of paper saying that the trade union was okay with the government starting negotiations with this investor. Often there were a side agreement between the trade union and the potential investor laying out the potential investor’s commitments to continuing certain benefits that the employees had enjoyed in the old days. The period of commitments was usually for three years. This was very important to both trade unions and the government at that time. The head of the government division handling the sale at some point said to us, ‘We have to make sure that our workers are taken care of forever into the future,’ or something like that. So the negotiations with the Polish ministry were sometimes in a way more difficult than the negotiations with the potential investor.”

She remembered one official in particular. “He must’ve been in his early thirties, 32 or 33 probably,” she told me. “He wanted to go to America to get his MBA. He was there because he could speak English, and I think he worked at some factory before. We had many discussions to try and explain these concepts to him, and he was resisting so much. Only years later, I started to realize what a difficult position he was put in, because he really didn’t have enough understanding of these financial concepts, and he himself must’ve been worried about his own future and whether his next job would be in jeopardy because of what he said or did. Some nights we were there in his office until 2 am. He would get angry and go home a little before midnight after dealing with us, and we would be sitting in his office till 2 am, waiting for his phone call after he got his anger out of his system.”

Could the process have been handled differently, more smoothly? “The one thing that keeps coming back to me was the question of whether it might’ve been better for the government to come up with some big plan to keep the factories alive, say for two years, and do a massive training of the government officials, the factory managers, and the trade union representatives about building a future for the factory,” she concluded. “That might’ve helped. But then, it would have been very difficult because Poland didn’t have money, the government didn’t have money, and there was no way they could keep the factories going and pay the salaries.”

 

The Interview

 

When was your first trip to Eastern Europe?

 

That must’ve been in the fall of 1991, in either September or October. I think I went to Czechoslovakia first because we were starting to work on a hotel privatization project there. Then I was asked to come to Poland to join this big team that was working on the cement sector privatization.

 

When did you first start working on privatization issues?

 

In spring 1989 I started working in a new department called Corporate Finance Advisory Services, which was really focused at that time on corporate restructurings in Latin America. During the 1980s, Latin American countries were taking turns overspending, getting over-bloated, and then going over the fiscal cliff. So along with the governments experiencing this deficit problem, companies were experiencing the same thing. When the economy was overly stimulated, the companies would take on too much debt as they overspent or overinvested. When the government got into trouble, corporations did too.

So, in late 1988, the International Finance Corporation (IFC) focused on setting up a unit that would primarily work on helping private sector companies, first in Latin America to try and help them restructure and provide long-term financing. Not even a year after the unit was created, the Berlin Wall fell. Very quickly the focus of the group that was just set up switched to privatization. But during the whole of the 1980s, already the fever of privatization was sweeping across the developing countries. I remember reading something called Privatization International, a publication that was put out by some group in New York, and it was reporting on everything related to privatization — starting with England, the United States, Canada, Australia, and other countries. So privatization was not something totally new. But it reached a new stage for people involved with privatization. Our group quickly started talking about what we could do and how we could do it. The core skill set necessary for privatization is very similar to that required for corporate restructuring. So that was how our group was told to go to Eastern Europe.

 

How big a group was it?

 

At the beginning there were maybe about a dozen people in our group. But as you can imagine with what was happening in Eastern Europe, the group quickly grew. In about a year and a half we had easily 30 people working there. And Poland at that time was the biggest country where we were working on privatization deals. But there were people involved on a hotel project in Czechoslovakia, and other people were also getting involved in projects in Latin America and other parts of the world.

 

How were the projects chosen?

 

During 1989 we were very busy writing proposals to submit to governments and big corporations. We were saying that IFC is in this new game, that we could help them, that we could be the honest broker. The investment banking business was growing like crazy, with Goldman Sachs and everybody going around the world and offering to help with privatization and corporate restructuring and also charging large fees. At the same time everybody knew that these investment banks had their clients behind them. When they showed up saying they could help sell what the seller had, then obviously people were saying, “How do we know you haven’t already cooked up a deal with one of your clients as a buyer?” This became a very serious point for Eastern European countries because of the background they had come out of. It was very important that they made sure that these state-owned enterprises were sold in a transparent way, in a fair way, with no behind-the-scenes deals. We were in a very good position at IFC to approach especially the seller side and say that we didn’t have any buyers attached to us. We were part of the World Bank Group, and therefore we could be the most neutral and most honest broker.

I remember going down to Bolivia. Even though I didn’t speak Spanish, I was very lucky to be asked to join a small team to talk with the national airline company there as well as some Bolivian mining projects. We would visit them and offer to play the honest broker if they privatized the companies. In some of the projects you win the bid. In others you didn’t for a whole variety of reasons. But in the case of Poland there all these major consulting companies, investment banks as well as the IFC, that were going to the government and offering to help with privatization. Then the government decided to select the priority sectors — about four or five — and select advisors on the seller side and assign them to each sector. Booz Allen was assigned to the chemical/fertilizer sector; another company was given pulp and paper. The Polish ministry of privatization talked to a variety of players involved with the process, and then they chose these advisors. I don’t think the awarding of these advisory contracts was through an open bidding process.

The IFC ended up winning the contract for the whole cement sector. Poland had 15 or 16 cement factories at that time. Under our contract with the government, we did the work in two phases. The first phase was to analyze the entire cement sector by visiting all cement factories in the country and assess their business viability and prospects for sale, and present recommendations for each factory in terms of whether to privatize or not, and if so in what priority. The second phase would be the actual sale of selected factories. We had three or four teams; each team would come back and make a report for the government that provided a clearer picture of the condition of each factory and whether or not it could be privatized as is. We went through that first phase, and out of the 15, three or four were recommended for immediate closure because they were in such bad shape. Out of the dozen remaining, we probably ended up privatizing six or seven.

 

When you say you were responsible for privatizing six or seven, the remaining factories were given over to another organization?

 

I’m not sure. The factory might have been in a special situation that it could not be privatized in 18 to 24 months, so they must’ve waited. The reasons varied. Sometimes the trade unions were so militant that you just could not even approach them. I remember one factory, Bukowa, had very good limestone reserves. The whole mountain right behind the factory could be quarried for limestone. Nobody wanted the factory. But everybody wanted to buy the stone because the volume and quality was very good. It was located in some far away place right in the middle of the mountains. It was in a small town that had maybe 4-5,000 people with 75% of the men were working in this factory. It was such a serious situation. If you took on the factory, you had to take care of the entire town. Even though some Germans and others knew about the quality of the limestone and wanted it, the associated issues were so serious that they just left it alone. The visit to that factory is etched in my memory. I remember the name of the factory, but I really don’t know what happened to it because I didn’t have a chance to go back and see what happened.

So, out of 12, if we sold seven of them, the remaining 5 must’ve been privatized later on. They could’ve been sold to local buyers eventually. During the first two or three years there was a fever to find foreign investors because these were factories that needed serious investment and you couldn’t find local players who had enough money to invest. Those that were left would have been in a good position four or five years down the road, if they survived, to be sold to either local companies or some individual investors.

 

It seemed somewhat arbitrary whether a sector got an honest broker like you or maybe not such an honest broker like Goldman Sachs. And this arbitrary process was determined by the ministry of privatization?

 

Yes, I think so. But in our case we argued for the cement sector because IFC had an investment history in the cement sector. Even at that time in 1991 IFC must’ve made investments in hundreds of cement factories, and we had two or three full-time in-house cement engineers. I don’t know whether that was the case with the other consulting companies. It’s possible, for example, that Booz Allen might’ve said, “In the last three years we have done X number of chemical or fertilizer or petrochemical companies, so give us that sector.” I don’t know exactly what happened. But the official decision maker was the minister of privatization. As you can imagine, there were lots of other people involved. The British Know How fund was providing a lot of money for technical assistance. The ministry must’ve gotten input from various people on how to select.

 

The first step was to do an evaluation of the cement sector to determine which factories should be closed and which factories were viable for privatization. What was the next step after that?

 

The next step was to decide which factories should be sold first, and IFC in consultation with the ministry of privatization decided which one would go first. One factory was by far the largest and in the best condition. The French company Lafarge and the German company KFW and there was another Italian cement group — they all wanted this factory. So obviously that one went first.

 

And were you involved in that?

 

No, I wasn’t involved with that. There were about six people working on that. I worked on three relatively small factories, which gave me a lot more freedom to go to the factory and just focus on that. I was not involved with that the first privatization, but I do remember it was a very tricky project because of the importance of that factory. I think in the end Lafarge took it over. At some point in time the valuation and so on became quite contentious. Probably some political input might have been made also, I would imagine.

 

You worked on three of the factories. Pick one and tell me a little bit from the beginning through what I imagine was a relatively complex process.

 

The process that was common to all sale cases was that we first prepared the document about the company. We put advertisements in various newspapers both in Poland as well as in Europe, saying that this factory is up for sale and the conditions are such and such, and the shares are being sold not the assets. We were selling 85% of the shares in the companies, with 15% supposed to go into a national privatization fund so that the government could benefit later if the companies did well. We then received proposals. Often, for the relatively small factories, we only received two or three proposals. Then we talked it over with the potential investor.

In accordance with the guidelines, the potential investor first had to talk with the trade union and get the consent from the head of the trade union. They had to sign a piece of paper saying that the trade union was okay with the government starting negotiations with this investor. Often there were a side agreement between the trade union and the potential investor laying out the potential investor’s commitments to continuing certain benefits that the employees had enjoyed in the old days. The period of commitments was usually for three years. This was very important to both trade unions and the government at that time.

The head of the government division handling the sale at some point said to us, “We have to make sure that our workers are taken care of forever into the future,” or something like that. So the negotiations with the Polish ministry were sometimes in a way more difficult than the negotiations with the potential investor.

Then we would go through the proposals to see whether they met the criteria and any other conditions spelled out in the invitation for proposals. We would make a summary of the proposals received and take it to the ministry of privatization official in charge of our projects. After showing a comparison of the proposals, we then advised the government to start negotiations with a particular investor.

So each case involved a complex process, the specifics of which differed from others. But the one that remains in my memory was not because it was a very complex process but because of the attitude of the factory’s general manager. It was Cement Factory Odra. It was not very large, but it was in good condition. The factory’s general manager was an old gentleman. He was quiet, didn’t talk much, but when he said something it made a lot of sense. He was not the type who was so concerned about what was going to happen to him or the town. What was important was to make sure that the commitment of the investor was very clear, that they play by the rules, and that they make the investment. “I know that even if at the beginning there will be pain, eventually when the investment is made in our factory we will get better in the long run,” he said. He was much more in charge of the situation in the factory compared to the others. I don’t remember seeing many trade union people coming to his office, and we were not asked to go and meet with them.

A German group that was a family-owned business was interested. It had two or three cement factories in Germany along with a waste-recycling plant that would collect trash to burn as fuel for the cement factory. They made a bid. As you know very well, Germans in Poland are like Japanese in Korea. The Poles treated the Germans very suspiciously. It took a lot of discussions back and forth. They tried to take this manager to Germany to show them what they were doing, I don’t think he even went there. He said, “It’s fine as long as the commitments are clear.”

We went to visit them in Germany. It turned out that the group was owned by a very wealthy gentleman. He also had a metal equipment factory. The negotiations were not as dramatic as some of the bigger projects. They took some time, but the deal went through and in the end we signed the contract. I spoke to my colleagues two or three years later, and they said that Odra was doing quite well. I hope that is still the case. I don’t know whether that investor is still there. He might have already sold it.

 

Before you advertised that this company was for sale you did a valuation of the company, which must’ve been quite difficult.

 

Because of the situation, we were not asked to put any valuation on the enterprise. Our job was simply to prepare a document called an information memorandum that spelled out what the company was all about. It contained different chapters on the company history, the company’s assets, everything related to the status of the shares (who owned them, when they were issued), their products, their raw materials, a list of the top 10 clients, and the volume of sales made in the previous three years. It also included all the details about the employees — how many, the age breakdown, their average salary. It was a legal document that any potential investor could rely on to gain sufficient understanding about the company before they made a decision whether or not to present a proposal. They were invited to come if they were interested. We even sold that document, which was quite common in those days because it took so much work to prepare. Then the announcement would go out along with a timetable. It would say that the information memo is available to be ordered from such and such place, and then you can come and visit the factory during this several-week period. The part that was fairly difficult was the legal due diligence.

I remember working with a local lawyer lady on what was probably her first trip with us. I told her that legal due diligence was the main focus on that particular trip. I said, “So, do you know what to do?”

And she looked at me and said, “What is legal due diligence?”

 

This was legal due diligence according to the Polish law?

 

It was according to the requirements of preparing a document like the information memo. We had to list all the outstanding contracts. We also needed to disclose if there were any outstanding legal obligations that may not necessarily have been properly documented . If an obligation existed that might have financial implications, you had to list them. The lawyer had to go through this cabinet full of legal documents and flip through and see which ones were still valid. And you also had to list all the workplace accidents.

 

Was there a minimum bid when you put them up for sale? Could a German company come and say we’ll buy it for one Deutschmark?

 

I do not recall that we set any minimum price per se, but I believe there was some threshold number. Either we had worked out some numbers in discussion with the government or there must have been some internal guideline. It may not necessarily have been some printed guideline, but the benchmark would have been the realistic value or something like that. But no one could just come in and offer a dollar, because it wouldn’t have been taken seriously.

 

So Odra was one of three cement factories, and you said another one was Warta?

 

I got involved halfway through the process with Warta. Somebody else was working on it, and then he got reassigned to something else. By the time I got involved, a lady was in charge of the factory. She and the trade union were not getting along. She wanted to push through privatization and the trade union was very concerned about what was going to happen to the workers. Warta was not in very good condition. It needed a lot of investment. But it clearly must’ve had some potential, which is why it was up for sale. It was sold eventually. I remember the signing ceremony with some 20 people who came from the factory. We signed the contract at 11 pm at the ministry of privatization’s conference room in the basement. We had to call the minister, pull him out of his bed to come. The reason was that the negotiations kept getting stalled. Even at the last minute there were question marks about whether or not it was going to go through. In the end it did.

I ended up visiting the factory three times. The lady was suffering from a very serious illness, and yet she was determined to see this privatization through. She believed so firmly that a better future lay in privatization, and she wanted to make sure that it be done properly sooner rather than later. The trade union people looked very scary. They consisted of big groups of people just waiting around. They would come in and occupy the meeting table. This woman manager was constantly coughing. She looked very ill. I remember sitting there thinking, “What is going to happen to this place?” But it did go through eventually.

I have another interesting memory about a factory that produced limestone products. They cooked these huge limestone pieces, broke them down into different sizes. They either pulverized the pieces and used them as fertilizer for the farms to neutralize the effect of the acid rain. Or they used it for housing construction for the white walls. The general manager was a very flamboyant, very charismatic guy. He was already looking ahead, trying to figure out what a successful privatization would mean for him. We had a meeting in this auditorium with all these huge portraits of Lenin and Marx, with a large sign of the hammer and sickle hanging on wall,and hundreds of the workers. We had to stand up there and explain what the process would be and why we had to this thing. During one of my visits to the factory, the general manager took me to a big banquet that he had organized for his “client companies.” This apparently was an annual event in some resort about an hour or so away from the factory in a nice wooded area. He rented this big cabin and provided a huge amount of food and music and dance and all of that for these people who were buying stones from him.

I was riding in his car with him and a couple of his staff members. One of them was doing interpretation. The manager was asking me, “Now tell me, what is the key to all of this privatization? After the privatization what is the most important thing for the company.”

I said, “One of the important things is that you have to make sure your market share will grow.”

“How do you grow market share?”

“Your marketing work has to be done right.”

And he said, “What is the marketing work? Can you give me one book that will explain everything so I can do it just right away?”

And I said, “Well, I am not a marketing expert, but I can go back and look for some books.”

You could just see the expression on his face: this woman is useless, and I’m not going to get anything out of her.

Pretty soon after the privatization he got elected to the mayor of the city. I even heard he had gone on to become a parliamentary representative. He was the one who tried to make us drink vodka during lunchtime at 11 am. He would take us to his private dining room. We would sit down and say a few nice things. And he said, “Thanks for coming. It’s 11 am, this is lunchtime. Bring vodka for everyone.” And we were supposed to drink three rounds before we even touched the soup. And when I said, “Sorry I can’t drink,” he’d be thinking: this useless Chinese woman, what am I going to do with her? He actually said to me at one point something to the effect of:“what is a Chinese woman doing in Poland?”

 

There were two trade union confederations: Solidarity and OPZZ. Do you remember any difference in their style?

 

No, I don’t think so. It really depended on who the leader of the trade union at that particular factory was rather than which national organization they belonged to. At the factory level, when it came to privatization, the issues were very common. There wasn’t much of a difference between Solidarity and OPZZ because we were dealing with what was going to happen to these facilities like the kindergarten, the hot steam distribution, the apartment allocations, the special allowances for the elderly, and so on.

 

You said because of the law the union had to agree to the putting up of the company for privatization. Were there cases of the union refusing to agree?

 

By the time I got involved the companies had already gone over that threshold. The part I remember very clearly was the extent of the engagement by the trade union once the privatization process had already started. As I mentioned before, any potential investor interested in a particular factory had to go and present themselves to the trade union first, even before the management team, and explain to them what they were planning to do with the factory and what they could do for the workers. Then the trade union would present its list of demands. I think they gave the same list to every potential investor, and some investors would want to cross out some of the items. It depended obviously on the investor. They’d go through the list, say okay, and then get the nod from the trade union to present the proposal on the financial side and other aspects to the government. This involvement of the trade union wasn’t written into any law as far as I remember. It was pretty much an unwritten requirement that every potential investor was informed of and was directed to the trade union first when they first visited the factory.

 

You mentioned a three-year commitment to the workers at the factory. Was that also backed by the government?

 

The investor had to make this three-year commitment that no one would be fired unless the person had to leave because of retirement age. That and the investment program were the most important parts of the commitment required by the government. A three- or four-year investment program had to be spelled out: in the first year how much investment would be made and what sections would be renovated, in the second year and so on. If they violated those two aspects of the agreement there would be penalties, which were spelled out. If you failed to make the investment, a certain percentage of the investment would be added as a penalty. On the workers’ side if they fired anybody, I do not remember the details of the penalty. But as you can imagine, everybody would know about it, and they would take it immediately to the ministry and say that these people were firing them, and that would become a big political issue.

 

One of the criticisms of privatization that Treuhand did in Germany was that there were no guarantees either of investment or of continued employment. In one case in particular, a phosphorous mine, a West German company bought this facility in East Germany with the intention of simply closing it and getting rid of its competition. So they fired everybody, made no investments and simply eliminated a competitor. So it’s quite interesting that these guarantees were put into place in Poland.

 

I don’t think the IFC would stand for that kind of thing. Also, it became quite clear to most people involved in the process that there was an understanding and a desire to see these companies continue as industrial entities. Therefore making the investment was very important. So, the government had to spell out how much money in investment for each year, even in some cases each six months. On the welfare side, in some of the factories the workers wanted things like a coal subsidy or the preservation of the kindergarten. Some investors guaranteed these for 18 months. In some cases, they offered even more because they’d look at the demands and realize that it wasn’t going to cost that much money and by agreeing to it they would gain a lot more goodwill from the workers. In one case the trade union submitted a list of demands that had 45 items and went on for three pages. It even included things like: make sure the soccer stadium will continue to be there, make sure that the brass band team will get the budget for travel to the national competition, and so on. To outsiders this would seem trivial, and people quite often would start laughing. I don’t think it was trivial for the union. For the workers, this was an important part of their lives. They probably got very few breaks from the hardships of life by going on the trip with this brass band or by going to this soccer stadium for competition with a team from the next city.

 

When I was in Poland in 1989 shortly before you got there, there were rumors of insider privatization, where the owner of the factory or the top people simply started selling some of the assets for their own personal profit, because at that time there was no legal environment and the government hadn’t yet established the ministry for privatization. Everything was still in flux and they took advantage of that opportunity to enrich themselves. Did you come across any stories like that?

 

Not in Poland but a lot in China. In the mid-1990s, I went to places like Wuhan and a small city next to Wuhan called Huangshi, which means yellow stone. We were hearing stories about a match factory, an umbrella factory, and some medium-sized mines. People didn’t even know the names of these factories, and there were so many of them in China. The general manager, if he had any business sense, would go to the local government bureau and make a deal. Nobody would even know. I met a very rich person and asked him how he’d gotten so rich. Everybody else started with a restaurant and then they used the cash from the restaurant business to make a small hotel, which was the usual standard procedure in China to become rich in those days. But this gentleman was quite remarkable. He said, “I used to work at a match factory. Then I had it privatized, and now I own it.”

In Poland I don’t remember hearing anything like that. By the time I got there I was assigned to the team, and we were immediately immersed in these projects. I don’t remember when these guidelines were put in place, but the state-owned enterprises were put into three different groups, depending on their size. The banking sector was handled differently. Before the guidelines were written, bread factories or juice factories or restaurants that were nominally in government hands might have very quickly changed ownership.

 

In 1990 there was a discussion of two kinds of privatization. There was privatization in which the shares went to foreign buyers and a percentage to the government. And then there was the civic privatization where shares went to citizens.

 

Yes, voucher privatization. I didn’t have any contact with that in Poland. I don’t think voucher privatization ever made it in Poland, but while I was working on Poland I was also working on this Grand Hotel Pupp project in Czechoslovakia. Czechoslovakia tested the voucher privatization scheme, and there were a lot of problems. They gave the vouchers to every citizen over a certain age, and the vouchers were transferable. I remember this 20-some year old guy who had just finished his MBA program at Harvard. He saw the opportunity and set up something called the Harvard Fund. He quickly got some funding from foreign investors and went around and bought a huge number of vouchers at a fraction of the price. Then he used that to buy portions of shares of the large companies up for sale. It was a big transfer of wealth, and it went totally against the core idea of voucher privatization, which was to spread out the opportunity for accumulating wealth. The same thing happened in Russia, as you know very well. It was a noble idea thought up by foreign experts using the logic and the business practices and cultural backgrounds that were mostly Western. They didn’t think enough about the local situation, the huge gap in the level of understanding, the extreme need for liquidity on the part of the public. This voucher scheme sounded so wonderful on paper, but it ended up giving privatization a bad name.

 

The most famous foreign advisor in Poland was Jeffrey Sachs. His plan became the basis for the Balcerowicz Plan, which recommended a rapid economic transformation. Were you able to evaluate the successes and failures of the shock therapy approach?

 

I was travelling there for three-and-a-half years from the fall of 1991 until probably spring of 1994. In 1991, I was so shocked by the roads, the empty shops, even near the Marriott Hotel, which was the headquarters of all the foreign consultants. The Marriott was like an island. Inside you had all these wonderful things but outside, when I wanted to buy things, just two blocs away the stores hardly had any fresh vegetables or fruit. But within a year, by the next Christmas, I was so surprised. McDonalds had already arrived by that time. I started seeing more fruit in the stores. By the second year, there were a lot more fruit. So, in less than two years, you could just see the difference in the way people looked on the streets. They were walking on the streets with smiles on their faces. Just as an occasional observer I could just see this vast difference. The first year or 18 months must have been difficult. But after two years, it looked totally different. I think it might have been a good choice.

 

You’ve done roughly similar work in other parts of the world, such as in China. Did any of your subsequent experiences prompt you to change your mind about the things that took place in Poland? In other words, would you have done anything differently as a result of your later experiences?

 

I kept thinking about privatization a lot after seeing what I saw at the factories. I’d go early in the morning and see these people so worried because they didn’t know what was going to happen and their lives were not really very good. I was told that a lot of workers would just show up, punch their cards, and do other things. They were all busy raising their pigs, selling vegetables on the street. I also remember all those heated discussions, sometimes arguments, with this government official. He must’ve been in his early thirties, 32 or 33 probably. He wanted to go to America to get his MBA. He was there because he could speak English, and I think he worked at some factory before. We had many discussions to try and explain these concepts to him, and he was resisting so much. Only years later, I started to realize what a difficult position he was put in, because he really didn’t have enough understanding of these financial concepts, and he himself must’ve been worried about his own future and whether his next job would be in jeopardy because of what he said or did. Some nights we were there in his office until 2 am. He would get angry and go home a little before midnight after dealing with us, and we would be sitting in his office till 2 am, waiting for his phone call after he got his anger out of his system.

 

And why was he angry? What was it that he was objecting to?

 

The specific point I don’t remember right now. It must’ve been some of the specific wording in the contract or some formula for calculating the penalties or the way the investments were to be made. We’d say, “Let’s just describe this very generally for the first year that there should an upgrade of X amount” and he’d say, “No, that’s not good enough — spell out exactly what they should do.” It must’ve been something like that. He’d say, “How can I present this to my boss?” His boss was a guy who used to work at a fertilizer company, and he was the one who told us that we had to make sure that the workers would be taken care of forever into the future. So he was dealing with a boss like that.

 

And he was in the ministry of privatization?

 

Yes, and he would insist on this thing, and we were trying to say, “No, we already discussed this with the investor and we believe from what we have seen in other parts of the world that this is reasonable. We can’t take this back now after we have done so much talking with them and they are ready to sign and we trust that these people will carry out their commitments.”

And he would get all flushed with anger, pounding his table, and we were just sitting there not knowing how to pacify him. He’d say, “No, I’m not going to take it to my boss,” and he stomped out and went home. We’d be waiting in his office for another couple of hours waiting for his phone call.

There were several dramatic scenes like that. Sometimes we’d just say we’d come back and we’d walk around the block for an hour.

These memories were very much on my mind because I kept thinking about how the North Korean people would behave when their time comes. The Poles were Europeans who already had exposure to Western Europe to some extent and to all these concepts of capitalism. So, what’s going to happen to the North Koreans?

The one thing that keeps coming back to me was the question of whether it might’ve been better for the government to come up with some big plan to keep the factories alive, say for two years, and do a massive training of the government officials, the factory managers, and the trade union representatives about building a future for the factory. That might’ve helped. But then, it would have been very difficult because Poland didn’t have money, the government didn’t have money, and there was no way they could keep the factories going and pay the salaries — even though they used to say, “they pretend to pay us and we pretend to work.” The government just couldn’t handle this process because of what it lacked: the lack of preparation, the lack of capacity to manage the process smoothly, the lack of understanding that a factory was not just a place where you show up at 7 am and go home at 3 pm. It was an entity that could provide economic activity in a very different world.

 

Thats what you would perhaps like to see for North Korea?

 

Absolutely. I would like to see them have the opportunity to learn that businesses and factories are living things, and how everyone can play a role, especially the government people, to build up their knowledge base about the market economy and the basic principles of running a business. Once they understand that then they will understand why investors demand certain things, why you need to put certain conditions in place, and how much they can let go and it’ll be alright. It all depends on how much they understand. I would also hope that the experiences of Eastern Europe and Russia have provided the rest of the world — especially the Western world and all these experts, bankers, and consultants — how to achieve better results by investing some time and effort in understanding the people, their culture, their mindset, and what makes them anxious. It would probably help the whole process a little better.

 

Based on your experiences after Eastern Europe, have you had any second thoughts about the World Bank’s role in economic change? Has your thinking about that changed at all over the last two decades?

 

That is a question way bigger than me and what I know and what I understand. It’s a very complex question to answer because the World Bank on the one hand has all the good will and all the reservoir of knowledge and experiences in the form of all these different people from all these different countries who have worked in many different situations. It means well, and its mission is sound. But at the same time it is an organization made up of individuals who have gone through different experiences in different environments. When you put them together in one place, even though all these discussions mean very well, sometimes the outcome ends up being something that would be too theory-oriented or too much based on Western logic and Western understanding. It makes perfect sense that they miss that the people on the receiving end do not have the same level of sophistication, experience, and understanding of the principles behind the proposals. The results are varied. As you know very well there are many success stories, but also many that probably did not work out very well.

 

As with all organizations.

 

As with all organizations. Because the World Bank is so out front, it gets everybody’s attention. Everybody wants the World Bank to do what they want it to do. If there are 10,000 people in the room, they all want the World Bank to do something different or to do it differently.

Washington, DC, July 23, 2013

 


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