Building a Market Economy in Poland
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SCIENTIFIC AMERICAN Building a Market Economy in Poland How is a previously centralized economy to be transformed? Poland's experience thus far offers lessons for other Eastern European nations and a challenge for the West by Jeffrey Sachs uring the past two years, the production at all costs had led to envi with the restructuring of Poland. Its nations of Eastern Europe have ronmental degradation well beyond that economy is widely recognized as one abandoned an economic sys which sparked the environmental move of the worst-off of Eastern Europe. Its temD based on state ownership and the ment in the West. The average Czech, heavy industrial sector is overgrown, centralized control of production and Pole or Hungarian enjoys-though that inefficient and completely protected prices. In its place they hope to con is hardly the word-a living standard from international competition. Light struct free-market economies like those far below the levels of even the poorer industry, services and distribution have that have brought such visible prosper countries of the European Community been neglected, as has the nation's ity to Western Europe during the post and about on a par with the some of the financial system. Millions of poor peas war period. How is this transformation developing nations of Latin America. ant farmers form the core of the agri to be accomplished? Although citizens want the benefits of cultural sector. They work tiny plots of The changeover was made possible a market economy, national leaders still land, typically no larger than five hect by the democratic revolutions that end face political and logistic challenges in ares (2.5 acres). ed communist control in Eastern Eu implementing reforms. Last fall's parlia To remedy these conditions, the coun rope, but the change in economic direc mentary elections in Poland, for exam try is aiming to put in place a political tion reflects more than political develop ple, show the limits of people's patience and economic system similar to that of ments. By 1989 the perverse incentives for unemployment and lower real wages members of the European Community. of communist rule had led to near eco during the period of economic transi Its fundamental goal, like that of the nomic collapse. State bureaucrats ex tion. (Architects of other restructurings, other former Soviet bloc countries, is panded outmoded heavy industries far such as Germany's postwar economic the closest possible integration with beyond sensible limits while neglecting miracle, were also widely criticized in Western Europe. By the turn of the cen the provision of consumer goods and early years for the turmoil they allegedly tury this course should lead to full services. The push to expand industrial caused.) Meanwhile the sheer bulk of membership in the European Commu state-owned enterprises poses a task of nity. There is to be no "third way"-the unprecedented dimensions in turning mix of continued socialist ownership them over to private hands. with market forces rather than central JEFFREY SACHS, who serves as an eco planning that some have called for as a nomic adviser to several governments in estern aid will be essential to compromise between the old system Latin America and Eastern Europe, is and modern capitalism. one of the architects of Poland's eco this restructuring. Not only are nomic reform program. Between 1986 vast resources required to re Former finance minister Leszek Bal buildW worn-out industries and crum cerowicz put it bluntly: "Poland is too and 1990 Sachs helped to design and im plement a stabilization program for Bo bling cities, but the West must make it poor to experiment. We will therefore livia that reduced annual inflation from clear that the newly free economies, follow working models. Let the rich 40,000 percent to 15 percent. He is cur once established, will be welcomed into countries experiment if they want." rently leading a team of economic advis the community of European and global The urge to harmonize with and even ers for Russian president Boris Yeltsin. trade. Failure to do so could threaten tually join the European Community Educated at Harvard University, Sachs now holds the Galen L. Stone Chair in not only the economic health of Eastern has deep roots. Poland desires to re International Trade there. Europe but also its nascent democracy. gain its place in the mainstream of I have been most closely involved European society and culture. The slo- 34 SCIENTIFIC AMERICAN March 1992 © 1992 SCIENTIFIC AMERICAN, INC gan of the revolutions of 1989, after living standards between them and After Portugal and Spain joined the Eu ail, was "return to Europe." In addition, richer nations such as Germany and ropean Community in 1986, the rest Poles are virtually unanimous in their France. More generally, the economic of Western Europe increased its invest admiration for the social and political evidence suggests that outward-orient ment in those countries Significantly, at accomplishments of postwar Western ed trade regimes stimulate growth, and least in part because of the increased Europe in creating wealthy and large Western Europe is the logical trading assurances on long-term policies. ly equitable societies based on private partner for its Eastern neighbors. Poland's economic transformation ownership, social welfare systems and Another advantage of early commit has two critical components: the re stable parliamentary democracies. ment to eventual European Community forms that convert a command econo Not only do the Poles regard Euro membership is symbolic. Many poten my to a market-driven one; and the ac pean Community nations as a model to tial investors naturally fear that the tual restructuring of industrial and emulate, but they also believe that free enormous economic turmoil of restruc trade and financial relations with the turing could lead to domestic politi European Community will directly help cal demands for protectionism or other OUTDATED HEAVY INDUSTRY is a ma them catch up with Western living stan actions inimical to long-term growth. jor weak spot in Poland's economy. New dards. Strong evidence indicates that Treaty agreements with the European ly unleashed market forces are shrink the close ties of the European Commu Community could irrevocably set Po ing industrial output rapidly. In contrast, nity have helped poorer countries such land on a free-trading course and so employment in the nation's previously as Portugal and Spain close the gap in make investment there more attractive. neglected service sector is burgeoning. © 1992 SCIENTIFIC AMERICAN, INC The State of the Polish Economy CONSUMER PRICE INFLATION 80 The breakdown of the communist regime during 1989 I 70 produced sharp inflation and a drastic fall in the value of I- the zloty (right), both arrested by the economic reforms Z 60 0 put in place in January 1990. Since then, unemployment :2: 50 (previously illegal) has increased rapidly, as have the wages a: w of those still employed. 0.. 40 I- Z 30 UNEMPLOYMENT RATE w U 12 .--------------------.-----------------, a: 20 w 0.. 10 10 !z 8 SOURCE: Polish statistical bulletin (various issues) w u ffi 6 MARKET EXCHANGE RATES 0.. 12,-------------��------------,_----_. 4 EXCHANGE RATE IN THE � PARALLEL MARKET :5 10 2 --' o : ����----......, o I o �----------------�-----------------' ffi 8 I 1990 1991 0.. (f) o AVERAGE MONTHLY WAGES � 6 150 r---------r---------r---------,---�--_, (f) ::J I o OFFICIAL EXCHANGE RATE I 4 �100 I t::. I « --' (f) --' >- I I- I 50 0 2 8 I --' I N I I I OL-------------------�--------�------� 0 1988 1989 1990 1989 1990 1991 SOURCES: Polish statistical bulletin; International Financial Statistics of the IMF SOURCE: Polish statistical bulletin (various issues) business activity that will take place as a cations, it is pressing forward with re reforms can vastly reduce public con result of the reforms. The reforms can forms. Three major kinds of measures fusion about the "rules of the game." and should be introduced quickly dominate the policy landscape: liberal Gradual introduction of new measures within three to five years at most. Re ization, stabilization and privatization. would create ongoing uncertainty, in structuring, in contrast, will necessarily Economic liberalization means introduc ternal inconsistency and political resis last a decade or more, as investors build ing market competition and creating a tance. The "big bang" approach, in con up new sectors of the economy in re legal framework for private property trast, sets clear incentives for the new sponse to the resulting market Signals. and privately owned businesses. Stabi economic system in place immediate lization fosters a climate in which enter ly. As one wag put it, gradual reforms hile restructuring takes place, prise of any kind can survive. It involves would be the rough equivalent of the the government must make limiting budget deficits, reducing the British shifting from right-hand to left certain that a safety net pro growth of the money supply and estab hand driving by just switching over the tectsW the most vulnerable members of lishing a realistic, uniform currency ex trucks at first. society-among them, farmers, pen change rate to promote stable prices In a strategy now being emulated sioners and those working in outmod and foreign trade. more or less closely by other nations of ed industries. Much of the safety net Privatization, certainly the trickiest Eastern Europe, Poland set in place the consists of measures held over from area of reform, transfers existing state three main pillars of reform as rapidly the earlier government, such as health property, such as factories, to the pri as possible. On January 1, 1990, it intro care, housing and the like. Other parts, vate sector. Under the communist re duced a convertible currency and other such as unemployment insurance, are gime, 3,000 government-held industrial substantial elements of liberalization uniquely capitalist requirements.