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Central planning determined the division of national income between

consumption and capital investment. The national parliament approved all such
plans each year. Production targets of specific commodities were decided by the
planning commission as were the prices and wages in key industries. The state
retained a monopoly in foreign trade. (2)
Transition from a centrally planned system to a market democratic system
In 1979-1980 a recession began to spread through the Polish economy.
Gross domestic product fell 3% in 1979, 6% in 1980 and then 10% in
1981. A primary cause was the rushed completion of a 12 million ton
steel mill in Katowice which resulted in 200 other construction projects
to be postponed after they had been started. Most of these were for
consumer goods. The government then raised the prices on consumer
goods to adjust the increased demand to the decreased supply. Workers
responded with their famous strikes which led to the creation of the
Solidarity Trade Union and the collapse of the Gierek government. (3)
In December 1981 the Jaruzelski government imposed martial law on a society
that had grown tired of strikes and social instability. The Solidarity Trade Unions
were declared illegal and forced underground. About 10.000 people were
arrested. Instead of reversing the economic reforms which had begun, however,
the government then made desperate efforts to decentralize the
economy to make it more efficient. State enterprises were freed from
many of their central planning controls in determining how and what to
produce. After the stagnation during the martial law period, the
economy did begin to grow in 1983. (3-4)
The success of the reforms, however, was limited. By the end of 1988
the growth had ended. With the population expansion, the consumption
per capita that year was substantially lower than it had been in 1978.
Social pressure forced the communist government to realize that it
could not improve the economic situation without the consent of the
public. It first called for a referendum on further economic reforms. The
opposition caused the vote to fall short of the majority needed for
passage. Finally in 1989, Jaruzelski agreed to a new election format in
which 40% of the lower house and all of the Senate would be freely
contested. The 60% majority in the Senate was preserved for the PZPR
(Polish United Workers Party) and their partners the Democratic and
Peasant parties. (4)
In the contested Senate races the party received only 1% of the votes. The
party then lost its control of the Senate when the Democratic and
Peasant parties joined the opposition. Thus the new government was
formed by the Solidarity led opposition. Fully democratic elections in 1991
confirmed the lack of popular support for the old communist party and its
successors. (4)

The electoral system, however, deprived Poland of the strong central

government needed for the reforms or a transformation to succeed. A weak
government, either elected or implanted by a single party, cannot implement the
changes which require short-term sacrifice for long-term gain. The proportional
electoral system in Poland, similar to other continental systems in France or Italy
counts all votes cast for each party throughout the entire country and not just in
each electoral district. Consequently, there are a great number of small parties
in the parliament instead of two or three large ones. The government must thus
be formed on the basis of a coalition of several parties. This makes the
government relatively weak, short-lived, and likely to change frequently. It also
leaves the government more affected by social unrest. (5)
Fighting Inflation, Economic Consequences of the First New Government
The first economic result from the new democratic government was the
freeing of prices and removing the state monopoly on foreign trade in
August, 1989. The effect was a rise in prices by 39.5%, 34%, and 54.8%
in August, September, and October of that year. Prices then grew 22.4%
in November, 17.7& in December, and finally 78.6% in January and
23.9% in February of 1990. This resulted from several factors: 1)
unnaturally low prices of many goods under the previous regime, 2) the
absence of competition in most industries, and 3) excess demand
relative to stagnant supply for many products. The inflation then
abated to single digit levels with the exception of January, 1991 when
inflation grew at 12.7%. (5)
In order to secure conditions for the transition to a market economy it was
necessary to check inflation. At the same time, assistance from the International
Monetary Fund and lowering the indebtedness to western states were made
conditional on the reduction of both inflation and the state budget deficit.
Professor Jeffrey Sachs from Harvard, once an advisor to the Bolivian
government, was accepted by the IMF as advisor to Poland. (5)
He had gained the support of the Solidarity Trade Unions by saying that
the west would forgive most of Polands foreign debt (then about 40
billion), if the new government would accept radical market reforms
later known as shock therapy. Professor Sachs transition strategy
included the elimination of subsidies for state enterprises, cuts in state
spending to balance the budget, and very restrictive monetary policy.
With Professor Balcerowicz, Minister of Finance, they strictly followed
the monetarist policies of Milton Friedman. They assumed that the
balanced budget and lower inflation would create conditions for self
sustained growth of the Polish economy without any other necessary
economic policies. (6)
To reduce demand government applied a special tax on the wage fund of state
enterprises. Such firms had to pay nearly 50% tax on any wage increases which

were not justified by parallel increases in labor productivity. This proved a real
deterrent to wage growth in the state sector, but it was not applied to the private
firms. A second financial burden imposed by the new government was the
interest on a public enterprises fixed capital which was to be paid to the state.
When added to the very high rates of interest applied to bank loans the state
companies had virtually no funds to reinvest in the reconstruction and
modernization of factories. (6)
The high rates of interest, at times 60% per year on deposits, provided a new
incentive for people to keep their funds in savings banks. This further checked
spending and aggregate demand. (6)
Polish economists were caught unprepared to offer meaningful alternatives to
the Sachs-Balcerowicz-Friedman approach. Since 1950, economic science in
Poland was dominated by the Marxian paradigm mandated by the party.
This theory does not devote adequate space to the problems of the
market and the market economy as is well developed in market
dominated countries. Economists developed under the Marxian period
accepted the neo-classical monetarist approach uncritically because
they failed to question its 18th and 19th century based assumptions. They
imagined, if only enterprises were privatized and inflation controlled, fast
economic growth would develop by itself. This faith in the self-regulation of the
free market system was strengthened by the fashionable theory in America:
supply-side or Reagonomics. They did not consider the fact that during the
1980s this approach transformed the USA from the worlds largest creditor into
the greatest debtor nation with annual deficits of 300 billion. (6)
Furthermore, the developers of the shock therapy and their academic supporters
in Poland overlooked specific characteristics of the economy which would require
a different and broader role for government.
First, Poland had virtually no private capital. Models of privatization
used in western nations such as Great Britain, which had huge capital
ownership in private hands, were not applicable for Poland. A Solidarity
study in 1989 found that the total private savings in the country was
less than 10% of the value of the state enterprises. (7)
Second, the value of the facilities offered by foreign investors were not
sufficient to counterbalance the risks posed by instability. The flow of
capital into Poland was dramatically smaller than expected. Investors
saw significant political and economic risk which the plan developers
ignored. (7)
Third, during the socialist regime, people had developed behaviors and
expectations which were not conducive to the private market system.
They expected personal and job securities regardless of their effort.
They demanded that the government maintain the array of social
benefits the old system gave them. Some of their beliefs, however, even
predate the communist period and stem from a long history of

democratic socialist ideals. They also became risk and initiative averse.
Finally, Poland lacked most of the conditions and institutions which
enable a modern market system to function. Most markets were
dominated by local or national monopolists which would exploit their
advantaged situation regardless of ownership. The wholesale structure
was basically non-existent. New companies would have to replace the
old channels between the most rudimentary regulation of economic
activity. The transportation and communications systems were obsolete
and in some respects near collapse. (7)
The Privatization Process in Poland
It took Poles a few years to understand that there is not one single
model to privatize an economy. Specifically, the Made in the USA model
needed to be adjusted to the Polish economic, new political and old
social reality.
The first Privatization ACT passed by the Polish government on July 13,
1990 was a compromise between self-government and liberal options
and between employee and citizens stock ownership plan. Legislation
established the Ministry of Privatization and created a legal framework
for the large-scale privatization of the state sector compromising 80%
of Polands Gross Domestic Product. (8)
According to the scope of the transformation, privatization strategies could be
distinguished as follows:
a) Small scale privatization
b) Medium scale privatization
c) large scale privatization
Small scale privatization covers local administrative activities in
renting, leasing and selling a wide variety of small businesses, such as
shops, restaurants, land and properties, buildings, small sized state
owned enterprises.
Medium scale privatization covers the ownership transformation of
medium size companies, transforming their organizational and legal
status into private and partially state-owned companies, limited liability
companies, joint stock companies, joint venture companies, or even
companies run by contracted managers with ownership stakes.
Large scale transformation is under the control of state authorities
the Ministry for Ownership Transformation. The biggest enterprises
with strategic importance in the Polish economy are transformed into
state treasury owned companies with parliamentary approval. (8)

Most attention had been focused on capital privatization through public

offerings or trade sales. It consisted of transforming a company into a private
company solely owned by the State Treasury and next of selling stocks and
shares to the public. Twenty percent of the shares are reserved for sale to
employees on a preferential basis. Foreign investors are permitted to buy stock
in Polish companies, become major stockholders, or set up wholly-owned foreign
companies. (8)
A second Act on Public Trading in Securities and Mutual Funds, enacted
in March, 1991, provided the legal basis for the creation of a stock
exchange (launched in April, 1991) and establishment of the Securities
Commission. (8)
The first pilot privatization project was launched in late 1990 with an
initial offering of shares in five large selected state enterprises. After
the subscriptions were completed in January 1991, the public trading of
their shares on the stock market took place in April, 1991. By the end of
1991, the Ministry of Privatization had completed public offerings in
another seven firms. Nine firms were sold outright to foreign investors,
another 11 to domestic entrepreneurs. (9)
A second less conventional path of privatization has been through the
liquidation of existing companies and transferring their assets, either in
whole or in part, to the new ownership. During 1991, the Ministry
authorized the liquidation of 875 enterprises, mostly smaller and
medium-sized companies. According to the information from the Main
Office of Statistics, by the end of June, 1992, 1250 enterprises were in a
state of liquidation. Most of these transactions involved a
lease/purchase by existing management and/or employees. 81% of the
total market value of liquidated enterprises was leased for periods of 5
to 10 years to private companies, in which the main shareholders are
employees of these companies. In a number of cases, the firms were
sold out to new owners according to simplified auction rules, while in
others the firm was shut down and its assets sold off. Privatization
through liquidation is used more often by companies with foreign
capital. (9)
The governments privatization program for 1992 intended to transfer
half of state sector assets to the private sector by the end of 1993, and
hopefully reach an ownership pattern resembling that of Western
Europe (about 80% of private ownership) by mid decade. These
ambitious goals are not assured. While private sector growth has been
fuelled by grass root development of small and medium-sized
businesses, plans to smoothly privatize large state industrial companies
have lagged behind initial expectations. The governments 1992
program underscored the need to define the states ownership role for
firms pending privatization, to resolve the issue of claims by former

property owners (reprivatisation), and to create regional and

specialized agencies to carry out the privatization process. (10)
In the meantime, Poles income fell between 3% and 7% in the first half,
while the richest 20% of the population had an average income four
times greater than that of the poorest 20%, widening from a multiple of
three last year. The draft 1993 budget provides for no growth in the
GDP or in industrial production. (10)
The present situation A Zero Sum Society
a. Inflation has decreased from 1989 but remains intolerably high. The
lack of competition remains one of its causes. Another is the budget
deficits the shock therapy advocates believed could be eliminated. (10)
b. Production has fallen dramatically. This has been caused by strikes,
insufficient demand for goods, lack of capital for state enterprises and
problems in agriculture, including droughts this year. (11)
c. Unemployment has increased significantly. Poland has a labor force
of around 18.2 million people. The data for selected months of the past
three years are given below. Unemployment benefits amount to 36% of
the average wage minus income tax. Health insurance is paid for one
year. About 40% of people without jobs have been unemployed for more
than a year and therefore do not have health benefits. (11)
d. Strikes have been increasing as real wages are falling. A deflationary
spiral seems to be developing. The late summer strikes in sulphur ore
mining, coal mining, and the automotive industry demanded increased
wages and the abolishment of the tax on state enterprise wage
increases. (11)
Restructuring, The Forgotten Necessary Link
For the simple man on the street, the situation looks hopeless. Poland
has left the socialist system to which people do not wish to return. But
after three years, Poland has not fully introduced a private market
economy and the economic condition of most people, especially those
living on fixed incomes, has deteriorated substantially. (12)
Furthermore, reliance on restrictive monetary policy reduced the ability
of enterprises to modernize their equipment and seriously restricted
total output. The economy needed stimulation, not crippling interest
rates. The inflation was not caused by excess investment or consumer
credit. Consequently, the monetarist medicine may kill the patient. (13)
The real tragedy is that Poland has shed one ideology only to adopt
another. The dogma of shock therapy is as rigid and harmful as
anything imported from the former Soviet Union. There are signs that

the Polish government now understands this and no longer will blindly
follow Sachs prescriptions. (13)