Introduction

What could cause state firms in a still nominally socialist economy to lay off large portions of the workforce? At least three processes have been suggested: privatization, liberalization, and changing of norms. Privatization entails the definition and enforcement of some type of property rights over SOEs that impose costs on individuals or entities that come to own them. These costs, which had been masked under the plan, force new market owners to take action – such as laying off workers – to stem losses.

Liberalization as defined here consists of allowing the market to set relative prices. One common facet of liberalization is the opening of competition in a market arena. Even though SOEs might remain under bureaucratic control, if they are forced to compete with market firms they must take on various attributes of these competitors, including in the field of labor relations. Finally, shifting norms among governing elites can push firms to behave differently even if formal institutions with direct bearing on management decisions remain largely in place.

All of these usually point in some way to a hardening of SOE budget constraints. No longer confident in subsidies from above, state firms cut workers as a way of trimming excessive costs that were hurting their bottom lines. I suggest that two aspects of regional political economy are likely behind most lay-offs. As business environments worsened, firms were less and less able to retain workers.