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Economic Transformation in Poland: Success or Failure?

This guest web log by Alworth International Visiting Fellow Dr. Marek Wroblewski (University of Wroclaw, Poland) looks at changes in the Polish economy. He writes: Economic transformation in Poland is a product of the fall of the communist system and of the spread ofliberal capitalism. In the economic sphere, transformation initiated a difficult and costly process of transforming of a centrally planned economy into a market system. What were the changes and how were they implemented? What have been the outcomes for Poland?

In Poland, the first government after the fall of the communist regime was that of Prime Minister Tadeusz Mazowiecki. He started with the Minister of Finance, Leszek Balcerowicz the reorientation of the economic system. Due to a huge crisis caused by the failure of the previous economic model, it became essential to create, first, macroeconomic stability, which would then, in turn, enable implementation of a set of market reforms. Actions aimed at limitation of the national deficit were undertaken. These included the restriction of the volume of subsidies given to inefficient public companies and stopping the pace of pay increase. Further changes were included in the “Balcerowicz’s plan” covering key principles of the new economic policy and the transformation process. The strategy aimed at fighting inflation (hyper-inflation back then), restoration of the market balance, price liberalization and development of foreign trade. The instruments of monetary policy were actively applied; in particular the increase in interest rates became an important tool in macroeconomic stability. The plan included significant tax reform. The Act on Privatization of state enterprises was introduced and a special Ministry of Ownership Transformation was established.

The devaluation of the national currency started in reference to convertible currencies, enabling introduction of the internal exchange of the zloty. In settlements with the trading partners of the former block of the Council for Mutual Economic Assistance, transition to convertible currencies took place. The government decided to introduce the new exchange rate regime. Initially, it was a regime of the fixed exchange rate (1990-1991), later “moderate devaluation” (so-called “crawling pegs”), meaning fixed and gradual decrease of the zloty exchange and from 2000, the system of fully-floating rate. Liberalization of the trade of goods abroad was performed, breaking the former monopoly of public trade centers.

The whole process of economic transformation was established on the basis of new legal regulations. Private ownership in the economy became the main priority. Administrative reform, also focused on the needs of the new economic system, was implemented. In 1999 the significant changes were introduced to local government management. The institutional framework for a market economy was created.

The transformation was based on shock tactics and in Poland these partly brought the expected results. The policy towards macroeconomic stability turned out to be successful. The inflation rate decreased significantly. Slowly, balance between market and government was achieved in many economic sectors. In particular, on the consumer-related level, a permanent victory over the crisis-ridden, “shortage” economy was visible.

Significant costs of the transformation process were imposed on the society. Personal real income was reduced, which in the conditions of realistic prices, implied impoverishment of the huge part of the society and as a result a forced reduction of demand. At the same time, the process of restructuring, including liquidation of unprofitable entities and privatization of enterprises, led to unemployment. Given the previous system unemployment was a completely new phenomenon. Moreover, unemployment had a clearly structural (long-term) nature and simple methods of limiting its impact did not bring perceptible short and midterm results.

Transformation, at the time, was an unprecedented process. In fact, at the beginning of the nineties, none of the countries in the world was implementing such drastic changes in its economic and political system. Due to lack of both theoretical as practical research, as well as practical experiences Poland was on an extremely risky path.

The transformation in Poland partly brought expected basic effects: The framework for a functioning market economy was built (mechanisms and market institutions), a new financial system was built from the beginning and many legal regulations were introduced. There was a great opening towards the external environment, which meant liberalization and reorientation of foreign trade, as well as creation of conditions for the inflow of foreign capital. Significant changes took place in reference to the structure of economy and the level of its innovation. Moreover, transformation enabled preparation of the economy for meeting the economic conditions for integration with the EU.

The process of transformation also became a source of many serious problems. The introduced changes, though necessary, resulted inevitably in social stress including the rise of unemployment, unequal incomes, un-even development in the regional system and bankruptcy of many enterprises. There were also problems related to ineffective and sometimes controversial privatization, excessive bureaucracy, faults of the legal system and also general weakness of the central and local authorities' administration. Problems related to underdevelopment of infrastructure and too low competitiveness of economy, persist.

The process of transformation in Poland, after two decades, is not yet complete. It is essential to adapt the competitiveness of economy to dynamically changing conditions in the global economy. Further investment, leading to greater modernization of economy is required. The outward migration of skilled labor and visible demographic problems (ageing society and increasingly slower birth rate) are aspects that are worrying. There are those who have benefitted from the transformation process and those who have suffered. Overall, the transformation has been positive especially with respect to consumer interests. Problems remain including the issues of competitiveness, the establishment of an appropriate set of social and economic infrastructure to sustain an equitable market economy and adjusting effectively to international pressures.