Building a Market Economy in Poland

SCIENTIFIC AMERICAN

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 LatinAmerica. 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 economictransi 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 annualinflation 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 harmonizewith 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 Communityin 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. As in enterprises accounted for 90 percent of and stabilization. It has also begun the other democracies, public demand for industrial output. Another 5,000 state more complex process of privatization. such spending can easily outpace bud enterprises operated in areas such as Before the big bang at the beginning getary realities. Maintaining a proper transport, communications and trade. In of 1990, many economists and others balance between social needs and bud addition to the privatization of state expressed concern about liberalizing getary possibilities is a key economic enterprises, the formation of entirely prices while the bulk of industrial pro and political challenge that has no easy new firms made possible by economic duction was in the hands of a few state solution in sight. liberalization will also act to privatize owned monopolies. Some insisted that Although the Polish government faces the economy. price controls should remain untilcom pressure to modify policies that cause As the economy moves toward mar petitive producers had been established. unemployment and other social dislo- ket capitalism, comprehensive, rapid Fortunately, they were wrong: free trade

36 SCIENTIFIC AMERlCAN March 1992

© 1992 SCIENTIFIC AMERICAN, INC and the resulting availability of reason 1990. This surge continued in 199 1 and privatization would take the Poles sev ably priced foreign goods proved a has helped pay for a sharp rise in im eral hundred years. Without a long his much quicker and more effectiveroute ports. The import boom reflects the ea tory of performance in an open mar to price competition in Polish markets ger purchase of Western durable goods ket, it is difficult to estimate the val than any attempt at administrative de previously unavailable and a substan ue of the state-owned enterprises, and monopolization could have offered. tial increase in imported machinery as without a large stock of private capi Poland also achieved macroeconom well as energy to offset the loss of sup tal, few can buy at plausible prices. Al ic stabilization fairly quickly by elimi plies from the Soviet Union. though foreign investors might have the nating its budget deficit and tightening Although efforts at liberalizing and resources to snap up Polish firms (as monetary policy. The final breakdown stabilizing the Polish economy have suming they wanted to), such a course of the old regime led to extraordinary been largely successful, privatization, would be politically unacceptable. financial instability and a brief period especially of large enterprises, lags dan In the face of such difficulties,a deci of hyperinflation, but as part of the big gerously. This is the nation's key prob sion was made last summer to privatize bang the government cut subsidies that lem: unremedied, it could lead to the re several hundred large industrial enter had amounted to more than 5 percent turn of profound economic instability. prises by giving shares to all Poles. The of the gross national product (GNP), in The privatization of small enterprises so-called Mass Privatization Plan calls creased tax collections, put on wage (those with fewer than 500 employees) for distributing shares among several controls and sharply devalued the cur has moved forward rapidly. Trucking, private investment funds,each of which rency. The budget shifted from a defi construction and small industrial units will have a diversified portfolio of enter cit of 7.4 percent of GNP in 1989 to a are now largely in private hands, most prises. In turn, the shares of the invest surplus of 3.8 percent in 1990. either auctioned off or sold to their em ment funds will be distributed to adult These measures, together with the ployees. By mid- 199 1 more than 40,000 citizens, free of charge. Foreign man elimination of most price controls, shops had been sold or leased to private agers will be recruited to help oversee caused the consumer price level to dou operators; combined with the growth each of the investment funds, although ble during January 1990. Soon after this of private firms in the service sector, the funds will be owned by Polish one-shot jump in prices, however, the this has privatized an estimated 80 to households. At the same time, a frac new economic environmentbrought an 90 percent of all retail trade. tion of each enterprise's shares, around end to high inflation and, even more re In contrast, only a small fraction 10 percent, will be distributed free of markably, a rapid end to decades of of Poland's large industrial enterprises charge to its workers and managers. chronic shortage and lines. has been privatized. The sheer mag Once the shares are in private hands, nitude of the task is daunting. Under the reasoning goes, a market for them undreds of thousands of small the aggressive privatization campaign will develop. Workers and managers businesses started operation in of the Thatcher regime in the 1980s, may trade their shares to other inves H 1990, creating in a matter of for example, the U.K. succeeded in pri tors, and the investment funds may months a network of shops, service vatizing about five state-owned enter also trade the shares among one anoth establishments and firms engaged in prises a year. Even at that rate-which er or to other investors, both domestic international trade, construction and in the U.K. relied on a sophisticated and foreign. The households may trade transport. The development of the ser capital market and a private sector ca their shares of the investment funds, vice and trade sectors was particular pable of absorbing state-owned firms- thereby putting market pressure on the ly dramatic in an economy that had long been starved of them. In the first few months, most start-up capital came from unofficial sources rather than from the official banking sector. House holds invested hard currency (as op posed to zlotys) that they had accumu lated in earlier times. Entrepreneurs' neighbors and families contributed money, as did relatives living in the West. In addition, capital was spun off either formally or informally from state enterprises: for example, municipalities leased tens of thousands of shops to their workers. Many operations started informally (for instance, by selling meat from the back of a truck) and quickly expanded to full-fledged small business es. By the end of 1990 and throughout 199 1, the formal banking sector began to provide an increasing flow of credit to new small private businesses. The economy also adjusted quickly to the opening of markets to interna tional trade. Thanks to the new convert ibility of the zloty and the favorable ex change rate after devaluation, Polish ex POUSH AGRICULTURE is still inefficient and labor intensive_ Most farmers work ports to the West surged from around plots no more than five hectares in size. Sharp cuts in subsidies are expected to $8. 5 billion in 1989 to $1l.5 billion in force consolidation into larger, more efficient farms.

SCIENTIFIC AMERICANMarch 1992 37

© 1992 SCIENTIFIC AMERICAN, INC quences of restructuring will be re duced, because the private sector rather than the government will be doing the work. Call for subsidies and protection should also be easier to resist. This plan was still mOving toward implementation at the end of 1991, al though the inconclusive results of the parliamentary elections rendered its fu ture uncertain. At least some funds will be established, but the method of dis tributing their shares to households re mains a matter of debate. The number of firms that willeventually participate in the program is also open to ques tion. Around 200 have been designated, and policymakers intend to distribute shares in additional groups of firms if the program shows signs of success.

n the meantime, most of Poland's large state-owned industry is left Irudderless or worse. Under the com munist regime, managers were con trolled by state administrators or the Communist party, their commands backed up by the threat of state vio lence. Inthe West, and under the plans of mass privatization, managers are governed by a board of directors that is legally obliged to act on behalf of shareholders. (Although that does not always happen, at least the basic legal responsibilities and economic incen tives are in place.) As matters now stand in Poland, how ever, most managers answer neither to administrators nor to their nominal owner, the Treasury. They operate on their own behalf or under the control of a council of workers. Only in a small minority of cases has the government appointed a supervisory board to repre sent the interests of the Treasury as the legal owner of enterprises, a measure known as commercialization. As a result, managers are all too ready to pay out enterprise profits in the form of higher wages, making industri al plants even less competitive than ECONOMIC UBERAUZA TION has led to a wider availability of consumer goods (al they already were. What wage control beit at higher prices). Photographs above show a butcher shop in1989 (top), when there is in Poland comes from highly price controls were still in force, and in1990 (bottom), after they had been lifted. unpopular centralized income poliCies, which are both economically inefficient and politically debilitating. investment funds to manage their port enterprise, many of whom will be ap In addition, reports indicate wide folios wisely. Meanwhile the invest pointed by the investment funds. They spread self-dealing and conflicts of in ment funds willappoint members to willalso face the market test of the val terest among managers of state-owned the board of directors of each enter ue of the shares traded in the stock enterprises. Managers have been ac prise that they own. These board mem market. Enterprises whose prospects cused of intentionally bankrupting firms bers willscrutinize management as are bleak will find their shares falling in in order to buy them out cheaply or es they do in the West. value, rendering them liable to takeover, tablishing private firmsthat then receive Enterprise managers will therefore or at least to a change of management. preferential contracts with the state face several kinds of scrutiny and incen The value of well-run enterprises, in owned enterprises. They have accepted tives that do not exist for state-owned contrast, willclimb, potentially making unfavorable joint-venture and takeover firms. Inaddition to being motivated by additional capital available for invest offers that provide personal benefits their own share holdings, the managers ment. Furthermore, once firms are in while rejecting better offers that might willbe watched by the directors of the private hands, the political conse- put their jobs at risk. Inshort, all the ills

38 SCIENTIFIC AMERICAN March 1992

© 1992 SCIENTIFIC AMERICAN, INC of unbridled laissez-faire capitalism that great demographic shift from agricul fragile. Average citizens appear less tak plagued the West in the 19th century ture to industry and services that has en by the fact that the burgeoning of are runningamok in Poland. been traversed by nearly every ad firms promises future economic growth There are also the "zombie" enterpris vanced industrial country. Agriculture than by the rate at which existing in es, whose incompetent managers have still accounts for about 20 percent of dustrial enterprises are going bust. Al failed to adjust to new market condi total employment and 10 percent of though they appreciate the end of short tions. Many of the Polish firms hit by the GNP. Many small farmers are now un ages and queues, they are having trou collapse of the Soviet market, for exam der financial pressure as a result of the ble making low monthly earningscov ple, simply continued to produce goods sharp cuts in Polish agricultural subsi er the higher market prices. Many are at normal rates and build up invento dies during the past two years. In the confused-they do not understand why ries while waiting for a miracle. In mid- coming decade or two, most smaller the end of communism has not brought 1991 the money ran out, and a spate of farms will be consolidated into larger, prosperity, why they have both free politically and economically troubling more efficientoperations. markets and low living standards and insolvencies struck the country. Most important for the long term, why economic reform's most visible As long as the privatization of large however, is a complete restructuring product is unemployment. In a survey industrial enterprises is delayed, wider within what remains of the industri last summer, approximately 60 percent use of commercialization is impera al sector, away from energy-intensive of Poles said they feared losing their tive. Although appointing a superviso heavy industries such as steel and ship jobs in the near future. ry board to represent the interests of building and toward more labor-inten Significant parts of the population the Treasury does not establish private sive and skill-intensive industries that have lost ground in the first two years ownership, it does bring in some mod can compete in world markets. Poland of reforms. The hundreds of thousands icum of oversight of managerial behav offers low-cost skilled labor, particu of farmers working tiny, inefficient ior, and it does subject the enterprise larly in engineering, that should make plots, for example, have lost the subsi to normal rules of corporate behavior. it an attractive place to produce high dies that helped them stay afloat. Simi Even this step, however, is being ap value-added goods for export to West larly, hundreds of industrial enterpris plied only slowly. Some policymakers ern Europe. Already some important es employing hundreds of thousands underestimate the importance of estab restructuring is under way: the number of workers are unable to compete un lishing a clear legal framework for state of private industrial corporations grew der the new market conditions. The un enterprises, whereas others point to the by about 25,000 between December employment rate had risen to around real (but surmountable) logistic difficul 1989 and June 1991. 11 percent at the end of 1991. ty of finding qualified individuals to sit Western firms are likely to set up op Not allof the measured rise in unem on supervisory boards. Some critics of erations in Poland to manufacture for ployment is a result of reforms. Some commercialization offer concerns that export in the same way European firms people were always unemployed, but abuse of power by supervisory boards are now investing in Spain, American their numbers were not recorded by a could in effectreturn enterprises to firms in Mexico and Japanese firms in regime that considered unemployment centralized government control. Korea, Taiwan and the rest of South a crime rather than a misfortune merit east Asia. Thus far, however, concerns ing compensation. Many labor econo he structure of the Polish econo about unclear property rights and the mists also suspect that a fair propor my is already changing under the political sustainability of Polisheconom tion of the unemployed hold jobs in Tinfluence of the market forces ic reforms have kept foreign direct in the informal economy. Furthermore, that have been unleashed during the vestment at a low level. If the reforms the collapse of the Soviet economy and past two years. As additional reforms are sustained, investment should in the breakdown of trade relations with such as large-scale privatization take crease markedly in the coming years. the Soviet Union (now the Common effect, those changes will accelerate. Despite the accomplishments to date, wealth of Independent States) have led Ultimately, the pressure of internation Poland's situation remains decidedly to a rapid decline in its imports from al competition willprobably play the largest role in restructuring. Although it is impossible to predict REGISTERED PRIVATE-SECTOR ESTABLISHMENTS long-term effectspreCisely-which in 45 1.4 Z 0 dustrial sectors willflourish and which (jJ Cl <: will decline-some basic trends are al z 40 is « 1.3 c ready emerging. The industrial sector as (J) � a whole is shrinking, while the hereto => r 0 -u I 35 fore neglected service sectors (notably 1.2 JJ I- 0 shops, restaurants, banking and person LL -u 0 30 :fl al services such as plumbers and me (J) m z 1.1 -I chanics) are growing. lndeed, although w PROPRIETORSHIPS 0 !::.. 25 JJ Poland is often characterized as being in (J) z a sharp recession, that is true only of :f 0 1.0 -u the industrial sector. The service sectors i= (j) « 20 of the economy are booming. Between a: � 0 December 1989 and June 1991, individ a. a: 15 0.9 F uals started 460,000 bUSinesses, operat 0 0 0 Z ing mostly in services, and the payrolls (j) 10 0.8 - all of small private firmsgrew by an es DEC 89 MAR 90 JUNE 90 SEPT 90 DEC 90 MAR 91 JUNE 91 SEPT 91 timated 860,000 workers. Major changes are also afoot in agri EXPLOSIVE GROWTH OF PRIVATE BUSINESSES has in effectprivatized significant culture. Poland never completed the parts of Poland's economy even as large enterprises remainin state hands.

SCIENTIFIC AMERICAN March 1992 39

© 1992 SCIENTIFIC AMERICAN, INC the Eastern bloc. Hundreds of enter populist concern over short-term hard tense pressures already facing the new prises in Poland and elsewhere are be ships, confusion over property rights democracy are likely to undermine the ing forced to close their doors or scale and a splintering of political power in course of reform and restructuring. back production dramatically. Insofar parliament will lead to a weak govern Worse yet, given the stingy attitude of as enterprises can shift their exports ment unable to take the last decisive the West to date and the undoubted from the East to the West, the reforms step to private ownership. In that case, cases of rapacious Western investors may in fact help cushion Poland from the economic situation will almost sure intent on profiteering, a xenophobic such external shocks. Nevertheless, ly deteriorate further, and as has hap backlash may already be taking shape. much of the increase in unemployment pened in Latin America, democratic To aid restructuring, the European is real, and the fears of unemployment government could be as thoroughly dis Community should signal Poland that are indisputable. credited as its totalitarian predecessor. it can indeed return to Europe. It Although Poles blame the reforms The "valley of tears" that intervenes should make it absolutely clear that for an alleged steep fall in living stan between the institution of reform and Poland can expect European Communi dards, this decline is almost surely over later prosperity has been observed in ty membership after it has passed the stated. Average wages have risen less nearly every country that has undergone key hurdles of economicreform. Noth than prices since the start of the re a radical economic transformation, from ing would so much channel energies forms, thereby reducing measured real postwar Germany and Japan to Chile and political passions for reform. take-home pay. But, in general, goods and Mexico in the 1980s. Passing quick The signing of association agree were never actually available at pre-re ly through the valley depends on politi ments between the European Com form prices, at least not without the cal leadership and a social consensus to munity and Czechoslovakia, Hungary buyer waiting in a long queue or paying maintain a stable set of poliCies. If there and Poland at the end of 199 1 marked a bribe or paying extra amounts in the is inconsistency or wavering, it is easy an important move in this direction. black market. According to survey data, to get lost-Argentina, for example, has These agreements foresee free trade be average Poles are now consuming some been wandering for 45 years. tween the three countries and the Euro what more meats, fruits and consumer Peculiar electoral traditions and so pean Community in industrial goods durables than they did before, suggest cial divisions increase the chance that by the end of the decade. Unfortunate ing that greater availability has more the country will "wander in the wilder ly, the agreements stop short of what than compensated for higher prices. ness." Poland organized its parliamen is needed, both in regard to member Furthermore, people are saving millions tary elections in October 199 1 according ship and on the important issue of agri of hours per week that used to be wast to a system of nearly strict proportional cultural trade. The European Commu ed standing in queues. ity that gives representation even to nity made some concessions, but its Some kinds of expenditures, however, small parties receiving a small fraction protectionist framework remains intact. do seem to have been cut back on aver of the overall vote. The election law am Clearly, Western Europeans still have age. One important area of reduced con plified inherent divisions between peas deep anxieties about closer links with sumption is clothing.Particular social ants and workers, church followers and the East, and these misgivingscould groups such as industrial workers and anticlericists, urban and rural voters, lead to considerable political trouble. farmers have been hard hit by the re and so on; as a result, Poles elected rep Europe stands at a crucial point in its forms. And with the collapse of Soviet resentatives of no less than 29 parties. history. The cold war between democra trade with Poland in 199 1 and the end No party received more than 15 percent cy and totalitarianism that divided the of subsidized sales of Soviet petroleum, of the vote. The new government will continent for half a century is over. the society suffered a significant loss of therefore surely be based on a large Communism has lost. But unless all Eu income, albeit not as the result of the coalition, and history suggests that such ropeans work together to help build economic reforms themselves. governments are easily paralyzed by market economies in the nations of internecine disputes. Eastern Europe and to integrate them on n the current turbulent climate, the And even if the Poles can forge a sol an equal footing in international trade, fate of poliCies for economic re id internal consensus, that will not be the victory over communism could be Istructuring is uncertain. In postwar enough for the new economic poliCies to followed by chaos and confusionrather Germany, for example, Ludwig Erhard, succeed. Attractive as the hope might be than economic renewal and growth. now remembered as the father of the that Poland and the other Eastern Euro postwar German economic miracle, was pean nations can get back on their feet

widely criticized as the creator of high by themselves, that view is Simply not FURTHER READING unemployment rather than high living realistic. The West has a crucial role to CREATING A MARKET ECONOMY IN EAST standards. Not until several years after play. The former Soviet satellites are in ERN EUROPE: THE CASE OF POLAND. the start of his reforms did prosperi dire need of financial assistancefor re David Lipton and jeffrey Sachs in ty arrive. The Adenauer government of structuring now and in the next few Brookings Papers on Economic Activity, which Erhard was a member just barely years. The U.S. and Western Europe No. 1, pages 75-147; 1990. THE ROAD TO A FREE ECONOMY: SHIFT survived the first difficult years, in large must help assure that resources are ING FROM A SOCIALIST SYSTEM: THE Ex part thanks to the money flowing into available for the modernization of fac AMPLE OF HUNGARY. janos Komai. W. Germany through the Marshall Plan. tories, roads and other utilities during W. Norton & Company, 1990. In Poland, Balcerowicz will be remem this delicate period. ACCELERATING PRIvATIZATION IN EAST' bered as the father of his country's eco Perhaps just as important as ready ERN EUROPE: THE CASE OF POLAND. jef nomic miracle only if his reforms are cash and technical assistance, however, frey Sachs. Washington, D. C, World given time to work. And time may be is the West's symbolic role. The "return Bank Annual Conference on Develop very scarce indeed, given the limited pa to Europe" is the glue that so far has ment Economics, 1992. STRUCTURAL ADJUSTMENT AND INTER tience of the population and the power held the social consensus for reform NATIONAL TRADE IN EASTERN EUROPE: ful political forces supporting protec together. If Western Europe shows no THE CASE OF POLAND. A. Berg and ]. tion and subsidy of failing industries. interest in the return of Poland (or the Sachs in Economic Policy (in press). The greatest risk in Poland is that rest of Eastern Europe), then the in-

40 SCIENTIFIC AMERICAN March 1992

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