The organization of the industrial sector prior to 1986 was centered on the state. Between 1979 and 1984, most state-owned enterprises incurred huge losses, and industrial sector output decreased by 10 percent. At the same time, gross industrial production began to shift slightly, to the private sector: private industrial output as a percentage of gross industrial output doubled to 8 percent between 1980 and 1983, whereas state output decreased slightly from 93 percent to 89 percent. In the early 1980s, a slow increase in the number of private enterprises began, reflecting both the government's newly relaxed policy on the private sector and the private sector's greater efficiency and profitability compared to that of the state sector.

Following the introduction of the New Economic Mechanism, the private sector's involvement in industry increased even more, as industrial management was decentralized and most prices--except prices of basic utilities, air transport, postal service, and telecommunications--were freed from price controls. In 1988 Decree 19 granted state-owned enterprises expanded financial and managerial responsibilities.

As a result of these changes, some state-owned enterprises were forced to curtail production sharply or close down entirely, precipitating a short-run drop in manufacturing output. It was not until March 1990, however, that the government provided a legal basis for the actual privatization of state-owned enterprises, through the promulgation of Decree 17. Under this decree, most state-owned enterprises were transformed into enterprises under other forms of ownership, through leasing, sale, joint ownership, or contracting with workers' collectives. Exceptions included enterprises deemed necessary to the nation's security or economic and social health, such as utilities and educational facilities. The extension of credit to unprofitable state-owned enterprises was discontinued, and state-owned enterprises were required to set prices and salaries at free market levels. By the end of the year, the private sector's contribution to net material product (see Glossary) had increased dramatically, to 65 percent.

The government reported at the Fifth Party Congress in 1991 that its "disengagement" policy was succeeding two-thirds of the approximately 600 state-owned enterprises have been either partially privatized or leased to domestic or foreign parties. The remaining state-owned enterprises were granted greater autonomy in making investment decisions and setting input and output targets, in hopes of improving their productivity.

Data as of July 1994