Marketization and Stabilization

Marketization and Stabilization

The first noncommunist government in Eastern Europe was formed in Poland by Tadeusz Mazowiecki after Solidarity won an overwhelming victory in the parliamentary election of June 1989. The government came to office on September 12 and within one month announced an ambitious program of economic reforms. The objective was not to improve the socialist system, as had been the case in previous reforms, but to accomplish a rapid and complete transformation from the Soviet-type economy into a capitalist system and to reintegrate the Polish economy into the world economy.

Under the best of circumstances, accomplishing such a transformation would be an enormous task. But, like other Comecon countries, Poland had an inefficient industrial structure that was fuel- and material-intensive and a foreign trade mechanism incompatible with expansion of exports to the West. The inherited system did not support greater supply of consumer goods, nor was it any longer appropriate for trade with Poland's Comecon partners, all of which were now restructuring their economies according to national requirements and resources. Without fundamental restructuring, the economy faced further declines in production, high unemployment, and strong inflationary pressure. Therefore, the first postcommunist Polish governments pursued economic reform with great urgency, although they had limited success.

Required Short-Term Changes

Modernization was a fundamental requirement. Because a considerable part of Poland's capital stock was obsolete or in poor condition, a very large share of the country's industrial products was of poor quality. The system lacked a well-developed modern infrastructure, particularly in financial institutions, transportation and telecommunications, and housing. Without major improvement of infrastructure, the economy's overall efficiency could not be raised significantly. Reform was further hampered by a shortage of well-trained managers and enterprise staff who understood the workings of the modern freeenterprise economy and could function efficiently in such a system. Expenditures necessary to meet these needs were restricted or delayed, however, by simultaneous requirements to reduce inflation and the balance of payments disequilibrium.

The Shock Strategy

The gravity of the economic crisis and the immediate threat of hyperinflation caused the Mazowiecki government to choose a "shock strategy." Called the Balcerowicz Plan after its chief architect, Minister of Finance Leszek Balcerowicz, the program received approval and financial support from the International Monetary Fund (IMF). On January 1, 1990, a program for marketization was introduced together with harsh stabilization measures, a restructuring program, and a social program to protect the poorest members of the society. The program included liberalizing controls on almost all prices, eliminating most subsidies, and abolishing administrative allocation of resources in favor of trade, free establishment of private businesses, liberalization of the system of international economic relations, and introduction of internal currency convertibility with a currency devaluation of 32 percent.

At the same time, a very strict income policy was introduced. Although prices were allowed to rise suddenly to equalize supply and demand, nominal wage increases were limited to a fraction of the overall price increase of the previous month. Very heavy tax penalties were imposed on state enterprises whose wages exceeded these ceilings. This policy reduced real incomes and the real value of accumulated balances that, combined with inadequate supplies of goods and services, had caused prolonged inflationary pressure. Together with the lifting of restrictions on private economic activity, import policy reform and internal convertibility, the wage-and-price policy reestablished market equilibrium.

Initial Results

Within one month, stores were well stocked, and the long lines in front of them had disappeared. Individual budgets rather than the availability of goods became the primary determinant of buying patterns. A large number of street vendors appeared, contributing to the supply of consumer goods and competing with established stores. This new type of enterprise often was the starting point for launching more established business units.

Besides income policy, the new government used highly restrictive monetary and fiscal policies to reduce aggregate demand. The reorganized central bank drastically limited the quantity of money by imposing a positive real rate of interest, introducing and subsequently increasing obligatory reserve ratios for the commercial banks, and imposing caps on credits. The budgetary deficit in 1989 had been equal to 11 percent of expenditures. In 1990 this deficit was converted into a surplus of 1.3 percent of expenditures. The surplus then began to decline, however, in the second half of the year, and by the spring of 1991 negative economic factors had again created a large deficit. The government eliminated most enterprise subsidies from its budget and introduced specific tax reductions to force state enterprises to depend on their revenues. In the many cases where the government action threatened their operations, state enterprises gained time by developing a system of interenterprise credits, selling some extra equipment and materials, and obtaining extensions for the payment of taxes and debts.

Long-Term Requirements

These rapidly introduced short-term policies quickly and fundamentally changed the workings of the Polish economy. Establishment of a full market system has other requirements, however, that take more time and are more problematic. The new Polish economy required a reorganized legal and institutional framework. Financial institutions, capital and labor markets, the taxation system, and contract laws required revision. Establishing systems for protection of consumers and of the environment was another priority. For these institutional changes, legislation had to be prepared, considered, and enacted by the government; then key personnel had to be trained to gradually bring the system to full efficiency. Because many flaws in new legislation or regulations were only detectable after implementation, policy making took on an unstable, trial-and- error quality. Reform and stabilization measures did not meet expectations, and the country's economic situation deteriorated in 1990-91.

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