The Polish recipe

Introduction

In the last twenty-six years, Eastern Europe's countries have experienced dramatic economic and political challenges in their transformation path from centralized systems to market based ones. The intensity of these systemic changes was enormous and it affected millions of people [8, p. 35]. However, it wasn't an easy task for the new politicians to choose a development path, so different approaches were implemented and one can see the consequences even in these days. Today, it is rather obvious that the Polish recipe was the most successful when compared to other countries. Poland's post-communist economic development is certainly a unique experience. Regardless of the challenges it encountered in terms of economic, political and social democratization, today, Poland is a strong country and a developed nation that enjoys economic growth and European integration more than its closest peers Ukraine, Romania and the Baltic countries [13].

Poland's economic transformation and development from 1990 to 2013 falls into several different periods: the post-communist transition (1990-2000), the global boom (2001-2007), the global financial crisis of 2008-2012) [4, p. 8)]. This paper will focus mostly on the post-communist transition, because we believe that the basis of Poland's success lies in this period.

It is important to point out that Poland, at the beginning of the 90's, was, similar to the other countries from Eastern Europe, still influenced by the socialist ownership structure.

Within such structures the industrial production is usually above 90 % state owned, so is the service sector, and a high level of activity takes place on the black market. Agriculture is also state owned, planned and controlled in most of the Eastern European countries, except Poland where farmers managed to retain 77 % of total arable land after the World War II, though under repressive and restrictive conditions [11, p. 80]. By the end of the 1980's Poland's debt represented two thirds of its GDP [10, p. 21] and inflation had reached 250 percent by 1989 [7]. The fall of communism brought a newly democratic Poland which was forced to deal with its inherited Stalinist legacy. With the hyperinflation that seemed to lead to economic collapse and the decline of national income and productivity, Poland's new leaders were right to be concerned how could Poland face these challenges and become a prosperous country? Their answer was articulated in the Balcerowicz Plan, a shock therapy meant to rapidly reform the economic structure of Poland and to create the basis for a privatized market economy [13].

The shock-therapy represented the shared belief that the economies of the former communist countries were performing so poorly that a radical, coherent liberal program of reforms would have been absolutely necessary [2, p. 6]. The supporters of shock therapy argued that this was the only way to ensure economic growth and a much higher level of employment, with low inflation [12, p. 89]. The architect of this plan was Leszek Balcerowicz, who wrote a reform program based on privatization, liberalization of foreign trade, currency convertibility and an open economy in the spring of 1989 [3, p. 4]. Becoming Minister of Finance in September, he was effectively responsible with implementing economic reforms, so his plan was adopted.

While the ultimate goal of this program was liberalization, Poland's leaders decided to focus first on reducing not only hyperinflation but, also, excessive internal demand. More specifically the shock-therapy was based on 6 items meant to liberalize prices, reduce the inflation rate and open the economy [8, p. 36]:

1. The elimination of centrally established prices 90% of the price controls were immediately abolished [10, p. 15];

2. Austerity measures Sharply reducing government spending and the budget deficit;

3. Reducing the money supply and, thus, inflation by introducing a more restrictive credit policy;

4. Introduction of high real interest rates;

5. Reducing the role of state-owned industries in order to allow the Polish private sector to grow [13];

6. Convertibility of the national currency combined with its substantial devaluation.

Balcerowicz's programme was indeed a bold one and it did not come without short-term costs. The immediate consequence was a much deeper recession than the economic disruption imagined by the Polish leaders. One of the most evident costs was the rising level of unemployment, growing from 6.5 percent in 1990 to 12,2 percent in 1991. This huge employment decrease was due to a variety of factors. First of all, the liberalization of the economy revealed the inefficiency of the state-owned enterprises on a competitive market. Therefore, these enterprises lost almost 3 million jobs. On the other hand, large, privately owned enterprises lost almost a half of their workforce. This dramatic job loss contrasted sharply with the rise of the new created private sector. Data from the Central Statistical Office of Poland shows that by 1997, 90000 new firms were established which created 2,3 million jobs. These results show us that Poland's shock-therapy lead to the replacement of the old centralized economy with an entirely new one, rather than a transformation of the old one [10, p. 11]. Furthermore, the private sector developed greatly not by transforming existing enterprises but by creating new firms with entirely new perspectives.

Table 1 shows four basic macroeconomic indicators for the 1990-1994 period. It is obvious that the immediate consequence of these reforms was a substantial decline of economic activity. GDP per capita dropped to $ 5873 in 1991, before starting to rise again in 1992. Inflation also dropped dramatically after 1990 from 247,06 % to 29,1 % in 1994. Furthermore, the gross national income dropped in 1991 to $ 38,7 billion, before returning to the 1990 level in 1993. Other specific macroeconomic indicators followed a similar pattern (Marvin, 2010). Output levels in agriculture and industry declined in the first year of the shock-therapy implementation, but then returned to positive growth at the end of 1992 [17, p. 35].

Table 1 Selected macroeconomic indicators for Poland, 1989 through 1994

Source: Jackson, E; Klich, J.; Poznanska; K. (2005)

Privatization and employment. In order to produce the expected results, these macroeconomic reforms were accompanied by stringed reforms at the microeconomic level. The purpose was to force state-owned enterprises to adapt their behavior in order to transfer existing resources into privately-owned new firms. At the beginning of 1990, 8441 large enterprises were eligible for privatization. Table 2 shows different methods of privatization. One interesting fact about Poland's transition lies in its ability to generate and grow entirely new enterprises. As a result of having low entry barriers, many firms started their activity, quickly creating a strong and viable private sector [1, p. 18]. By far, the most effective strategy was liquidation, especially for small enterprises. Managers, workers or citizens, could all lease or buy the assets of the liquidated firms (shops mostly). The result was a very rapid dissolution of enterprises owned by the state. The Act of Mass Privatization was proposed in 1991 but passed only in 1996. This means that old private owned enterprises were liquidated and not necessarily transformed, and the assets went to completely new firms [10, p. 28]. With regards to the employment problem, the newly created private sector represented by far the greatest source of jobs. Almost 84 000 of domestic owned firms existed in 1997, employing around 2 million workers.

Table 2 Firms in Privatization, 1993 and 1997

Fig. 2 Exports of goods and services 1990-1998 (billion $US)

Source: World Bank national accounts data, and OECD National Accounts data files

The difference between Poland and its neighbours was, on one hand, the prescription of early, radical and comprehensive reforms, and on the other hand its timing the simultaneous implementation of the four tenets (macroeconomic stabilization, deregulation, privatization and the reinforcement of the social safety net). Poland succeeded in taking advantage of the early democratization's window of opportunity [3, p. 4].

International assistance. Another pillar of Poland's success in its transition to a free market was its access to international assistance. The West's consensus on the Polish recovery within the G24 Forum, where it was decided to finance a stabilization fund as well, along with the IMF's standby program of US $720 million, had a major impact on helping Poland to get on its feet very quickly [3, p. 14]. The G24 and international financial institutions committed a total of $US 36 billion to assisting Poland. Additionally, the US provided $US 700 million in Overseas Private Investment Corporation financing and insurance for US businesses willing to invest in Poland, and $US 355 million in Eximbank loan guarantees and investment credits. A total of $US 2.4 billion of Poland's debts were also forgiven by its international creditors [22, p. 256].

Exchange rate policy. Poland's competitive exchange rate policy was related to its access to international assistance. In 1989 the Polish national currency the Zloty, fluctuated simultaneously with the US dollar, which started to function as an informal currency in Poland. On January 1st the exchange rate was depreciated from 6,500 Zloty/dollar to 9,500 zloty/dollar and currency convertibility was introduced. The existing system based on multiple exchange rates was replaced by the government with a single, fixed rate. The result was that exporters could exchange their foreign currency proceeds at a single exchange rate and importers had unrestricted access to foreign currency at the same official rate [11, p. 113]. Because of the international assistance and the stabilization fund, Polish financial institutions successfully pegged the exchange rate of the Zloty to the US dollar. The peg also represented a major pillar for price stabilization. Even in May 1991, when Poland was forced to devalue its currency, Polish leaders adopted a 'crawling peg' which permitted its exchange rate to stay competitive and allowed exports to expand. By comparison with the Czech Republic and Slovakia, Poland avoided having a period of overvalued exchange rates [4, p. 15].

The depreciation of the exchange rate was accompanied by price adjustments, as a result of price liberalization. On January 1st almost all of the remaining price controls on consumer and producer goods were eliminated, leaving only 5 % of the prices subject to control [11, p. 113].

Conclusions

Was the shock-therapy a success? Without any doubt Poland strongly benefited from its transition to a free market economy, but, unfortunately these gains did not come without a cost. However, no drastic economic revolution ever succeeded without any expense. In 1989 Poland's economy was in really bad shape, but its leaders decided to break every tie with the old system, to create a plan and stick to it. The Balcerowicz Plan may have had its flaws, contributing to the economic recession that soon followed the reforms and caused high levels of unemployment. Nonetheless, by anticipating and accepting the short-term costs, Poland's leaders managed to ensure that the gains of a liberalized market economy wouldn't be lost on future Poland.

It is hard to determine whether the Polish experience could be a replicable model for developing countries. The shock-therapy represented a long-term success mainly because Poland was already a developed nation with a viable private sector, regardless of its mismanagement [13]. With an educated and skilled workforce, functional infrastructure and established, thought largely corrupt, institutions, Poland possessed the basic assets to create a new political and economic order. Nonetheless, the Polish recipe was a successful one not just because it proposed a package of reforms meant to liberalize and open the economy, but primarily because the reforms were determined, radical, coherent and quickly implemented. Criticized by many economists, the shock-therapy permitted immediate gains and widespread access to many products which would remain unavailable to other countries from Eastern Europe for significantly longer periods of time. Filled shelves in previously empty shops, after half a century of economic shortages, would help alleviate the psychological impact of the downsides of shock-therapy. Another pillar of Poland's success was the rapid expansion of entrepreneurship which certainly had a major contribution to the revival and growth of the private sector.

The reforms prescribed by the shock-therapy were, without any doubt, an important pillar of Poland's economic revival, but a few other pre-existing assets were also vital. Maybe shock-therapy wasn't entirely responsible for the Polish growth miracle, but it certainly eliminated many of the old political, social and economic handicaps that stood in the way of Poland's path to a free market.

References

1. Androshchuk, A. (2006). Transition Economies: A Look at Russia, Ukraine and Poland. Pace University, Digital Commons@Pace. Retrieved from: http://digitalcommons.pace.edu/cgi/viewcontent.cgi?article=1032&context= honorscoNege_theses