Table Of ContentSTABILIZATION AND PRIVATIZATION IN POLAND
International Studies in Economics and Econometrics
VOLUME 29
Stabilization and
Privatization in Poland
An Economic Evaluation
of the Shock Therapy Program
Edited by
Kazimierz Z. Poznanski
The Henry M. Jackson School of International Studies
University of Washington
SPRINGER SCIENCE+BUSINESS MEDIA, LLC
Library of Congress Cataloging-in-Publication Data
Stabilization and privatization in Poland : an economic evaluation of
the shock therapy program / edited by Kazimierz Z. Poznanski.
p. cm. -- (International studies in economics and
econometrics ; v. 29)
Inc1udes bibliographical references.
ISBN 978-94-010-4978-8 ISBN 978-94-011-2206-1 (eBook)
DOI 10.1007/978-94-011-2206-1
1. Poland--Economic policy--1981-2. Economic stabilization
-Poland. 3. Privatization--Poland. 1. Poznanski, Kazimierz.
II. Series.
HC340.3.S738 1993
338.9438--dc20 93-885
CIP
Copyright © 1993 Springer Science+Business Media New York
Originally published by Kluwer Academic Publishers in 1993
AH rights reserved. No part of this publication may be reproduced, stored in
a retrieval system or transmitted in any form or by any means, mechanical,
photo-copying, recording, or otherwise, without the prior written permission of
the publisher, Springer Science+Business Media, LLC.
Prinred Of! acid·jree paper.
Contents
Acknowledgments vii
Introduction, Kazimierz Z. Poznanski 1
PART ONE
Stabilization Program and Economic Recession
1 Poland's Transition to Capitalism: Shock and Therapy,
Kazimierz Z. Poznanski 15
2 Poland's Quest for Economic Stabilization, 1988-1991:
Interaction of Political Economy and Economics,
Branko Milanovic 43
3 Taking Stock of the "Big Bang," Keith Crane 63
PART TWO
Foreign Trade Sector: Reform and Policies
4 The CMEA Demise, Trade Restructuring, and Trade
Destruction in Eastern Europe: Initial Assessment,
~~K~H ~
5 The New East and Old Trade and Payment Problems,
lozej M. van Brabant 105
6 Liberalizing Foreign Trade in a Socialist Economy: The
Problem of Negative Value Added, Ronald 1. McKinnon 125
PART THREE
Privatization of State Capital Assets
7 East European Transformation: The Supply Side,
Wojciech W. Charemza 151
v
Contents
8 Inflation Tax, Household Wealth, and Privatization
in Poland, Przemyslaw T. Gajdecili 173
9 The Economic Transformation of Eastern Europe:
The Case of Poland, Jeffrey Sachs 197
PART FOUR
Alternative Approaches to Economic Transition
10 Evolutionary and Radical Approaches to Economic
Reform, Peter Mu.rrell 215
11 Transition to Market in a Comparative Perspective: A
Historian's Point of View, Jacek Kochallowicz 233
12 IsT here a J-Curve for the Economic Transition from
Socialism to Capitalism? Josef C. Brada and Art/lu.r E. King 251
Acknowledgments
This volume is a byproduct of the U.S.-Polish Economic Roundtable,
which is jointly organized on an annual basis by the Henry Jackson
School of International Studies at the University of Washington and the
Economics Department of Warsaw University. Funding for these meet
ings has been generously provided by the IREX (International Research
and Exchange Board) and by the University of Washington's Provost
Office. "Seed" funding by Mr. and Mrs. Dekaban, alumni of the Univer
sity of Washington, is greatly appreciated. The roundtable meetings
have been coordinated by Prof. Kazimierz Poznanski and Prof. Judith
Thornton of the University of Washington.
Introd uction
Kazimierz Z. Poznanski
Among the East European countries Poland was the first in mid-1989
to break the political monopoly of the communist party, and when its
post-communist leadership announced a radical-"shock therapy"
plan for transition to capitalism in 1990, Poland was again ahead of the
rest of the region. From the very beginning, economists have wondered
whether it was rational for the newly formed political leadership to
invest its future in such a radical program. The question has also been
raised of the practicality-and economic cost---of such an approach as
compared to a more evolutionary type of reform. Moreover, debate has
emerged on the more technical aspects of this transition (e.g., choice of
instruments, sequencing of reforms, etc.).
When the radical program of 1990 was put into action, the govern
ment, led by Mazowiecki, predicted a brief, half-year, period of modest
decline in production and increase in unemployment. The program as
sumed that to arrest high inflation and remove imbalances (i.e., chronic
shortages) inherited from the post-communist regime of Rakowski,
deflationary measures were needed, and that these would surely bring
on a recession. The policymakers, expected that the inevitable recession
would be shallow because deflations in other highly inflationary
developing countries, fashioned on similar programs, had typically
produced such results.
The outcome of Poland's shock therapy has proved to be much worse
than anticipated, as the country has slid into a very deep and ex
tended-already three years old-recession. At the end of 1992, the
gross national product was more than 20 percent below the 1989 level,
and way above the 5 percent target spelled out in the government's 1990
program (while industrial output fell approximately 30 percent below
its 1989 level). Rather than incur a 4-5 percent rate of unemployment,
for which the government was originally prepared, the country regis
tered 12.5 percent at the end of 1992 (with some regions exceeding 25
percent).
The decline in economic activity during 1990-1992 has been serious
enough for economists observing Poland's transition to capitalism to
determine whether certain policy errors have been made. This question
1
2 Kazimierz Z. Poznanski
is addressed by Sachs (1992), who dismisses any such suggestion that
shock therapy has been misguided on the grounds that most of the
collapse in 1990 was due to the decline in demand for inventories.
Inventory stocks at the outset of shock therapy were far above rational
levels, reflecting chronic hoarding, which was encouraged both by low
cost credit and disorganization of the production process under
previous communist regimes. However, it could be that the actual
decline in inventories-undeniably sharp-removed not only the excess
stock but cut deeper (so that inventory rationalization was combined
with recessionary panic sell-out needed to improve cash flow (see Berg
and Sachs, 1992).
The 1991 output reduction was in tum due, as Berg and Sachs claim,
to another demand-shock, one stemming from the disintegration of the
CMEA. No doubt, the demand-shock related to the breakup of the
CMEA regime in 1991 had some negative effect on production,
particularly in the machinery, drug, and textile industries, once heavily
oriented toward the vast Soviet market. However, at a time when
demand for Poland's exports was declining sharply, one could expect
the economy to be recovering from the earlier demand-shock, i.e., the
utilization of unnecessary inventories. Also, one wonders why the
national product declined in 1992, even though at this stage trade with
the former CMEA was not continuing to fall but in fact showed signs of
recovery (and exports to hard currency market were surging).
Another argument raised in defense of shock therapy is, as Milanovic
argues in this volume, that the radicalism of the steps taken in 1990 was
largely dictated, or predetermined, by the failures of Rakowski's
policies. In particular, his regime's price operation for farm products
combined with removal of agricultural subsidies brought about near
hyperinflation in mid-1989, making harsh deflationary measures
unavoidable. In fact, what Mazowiecki's regime did in 1990 was to
continue to fight the inflation produced by former communist leaders,
though under more favorable political conditions, i.e., with greater
willingness on the part of the workers to accept the costs of disinflation.
At the time Rakowski's government was making decisions on food
prices and farm subsidies, voices were raised that the moves were
politically motivated, that is, that the outgoing communist elite wanted
its opponents to be left with as difficult an economic situation as
possible. However, the food shortages were so severe that even
opposition economists argued for price adjustment upward. In addition,
actions taken by the opposition did not make economic conditions any
better, but had the opposite effect. By winning almost full wage index
ation (and fixed cross-sector wage parities for workers, farmers, and
office staff) during the early 1989 roundtable negotiations, the opposi
tion contributed to price acceleration as well.
Introduction 3
Although the post-communist government of Mazowiecki inherited
an economy that demanded immediate care, critics claim that none of
the problems left over from Rakowski's days were unsolvable without
resorting to shock therapy. Kolodko (1991) has argued that inflation in
1989, while high, lacked the characteristics of a hyper-spiral, since its
numerical values did not fall in the critical range nor was there any
mechanism in place capable of causing such uncontrolled, escalating
price increases (i.e., expectations of further price increases built into
contracts). If anything, at the very end of 1989, the rate of inflation was
falling-due to the diminishing impact of farm price hikes, but also
because of early budgetary restrictions introduced by Mazowiecki.
That inflation rates accelerated again in early 1990, resulting in al
most doubling of the price index for the whole year, had little to do with
the Rakowski regime but rather was caused by the decision by Mazo
wiecki's cabinet to quickly eliminate the remaining subsidies. This was
an attempt to cure the economy through hyperinflation, though hyper
inflatipn should hardly have been considered an instrument for any
thing. Importantly, faced with self-imposed price escalation, the govern
ment then felt compelled to apply measures far harsher than those
undertaken with such success before the adoption of shock therapy.
Crane does not find the "corrective inflation" of 1990 problematic,
but argues in this volume that the reason why initial monetary contrac
tion-composed of reduction in real wages, imposition of low credit
ceilings, and removal of subsidies-produced a drastic output decline
was the government's indecisiveness. The demand-shock instituted by
Mazowiecki in early 1990 was not only needed but also well-measured,
and its positive effects were mostly lost due to the premature mid-1990
relaxation of restrictive monetary policy. Moreover, this has been fol
lowed by a cycle of tightening and softening caused by policy miscal
culation and political pressure from frustrated workers.
In contrast, Brada and King find Poland's disinflation program
generally excessive, even with the temporary relaxations mentioned by
Crane. They blame the radicalism of Mazowiecki's approach for the
output collapse of 1990 and add that another demand-shock, i.e., the
reduction in Soviet imports, caused damage as well. By using an
econometric estimate of an aggregate demand model, they conclude
that indeed these two shocks explain almost the entire decline in output.
Not only has Poland become the victim of a largely man-made
recession, but so have two other economies in transition included in the
test, Czechoslovakia and Hungary, both of which experienced a too
drastic decline in total demand (in part related to corrective inflation,
which had a negative wealth effect on consumers).
On the basis of their estimate, the two authors argue that, as output
losses were due to policy errors, it does not follow that transition from
