Dismantling Socialism in One Country (II)

...But others are so firmly rooted in daily Polish economic life that it could take months or years to loosen their grip on commerce and allow competitors to be born...

...Only when this constitution is in place will a definitive reform of the civil service be possible, and with it the highly politicized legal system...

...And the farmers themselves are very frightened of thechanges in store...

...It is simply to remind Western observers that Polish socialism must first be dismantled and that, in the medium term at least, the government will be responsible for establishing the preconditions for a flourishing market economy...

...Until those enterprises are sold or dismantled, the Polish government will have to run them: making production decisions, hiring and firing, and perhaps even selling their goods...

...It is, as one journalist joked, a "formerly developed" nation...

...To illustrate this point we have chosen to review three areas where institutional reform will be most urgent...

...The day-to-day crises are interesting and distracting enough, to be sure...

...This is unfortunate, since the Poles will soon be making important decisions about their public institutions on the basis of very little experience—experience the United States and other Western democracies might share with them...

...This difference is decisive...

...As more than one social democrat has remarked over the past few years, even those Poles who dream of a Swedish-style welfare state now recognize that Sweden is a capitalist country, not a socialist one...

...Private training and investment will slowly fill some of these gaps, but at some point the government itself must make thesesame investments in material and education...

...Public administration now, business administration later: that is the order of priorities...

...theymust try to minimize unemployment, encourage competition, and ensure that the nomenklatura does not exploit its advantages...

...This new constitution will redefine the separation of powers among the various governmental branches at the national and local level, as well as the relative powers of national and local institutions overall...

...But it will be a very long time before a new, functional public "grid" necessary for private telecommunications can replace the present one...

...Many of the offensive members of the high nomenklatura have already left their jobs to join General Jaruzelski's presidential staff, and others are using their advantageous economic and social positions to start businesses or buy up cheap land...

...The govWestern observers seem to be under the libertarian illusion that a free market will grow up naturally in Poland so long as there is no active government or union interference in the economy...

...in Poland there has been a paralyzingly stable system of supported monopolies controlled by a central planning office...

...In Poland the most debilitating deterioration has taken place in the telecommunications system...

...ur point in presenting these examples is not to suggest that there are insurmountable barriers to building capitalism in Poland...

...The "cooperative" directors simply played their part in the economic planning game, setting unreal retail prices for the consumer and paying farmers with a phantom zloty...

...in Poland they have been provided by large incompetent staffs hired with party patronage...

...The Western press has been virtually silent about these institutional reforms and seems not to understand why Poland's economic future will depend on them...

...There is an important truth buried in this quip: because Polish Communism blocked the restoration of free political and economic institutions that once exTHE AMERICAN SPECTATOR APRIL 1990 23 isted before the war, its own sclerotic institutions now occupy the field...

...Poles are used to making do without meat or gasoline, but they have never before faced the unsettling prospect of losing protected jobs and supporting families during long periods of unemployment...

...Private banks will also have difficulty finding sufficiently trained personnel to offer standard banking services...

...There is even discussion of establishing such internships for bureaucrats as well...

...If Americans are rightly proud of their economic success and wish to share its secrets, one wonders why they are reticent about discussing their system of government and habits of public administration, from which the new republics of Central Europe might still have something to learn...

...Besides controlling the money supply like any other European central bank, the NBP also made bureaucratic decisions about particular movements of capital within the economy as a whole...

...The NBP, for example, is still staffed by the same incompetent bureaucrats who have little or no training in economics, finance, or even accounting...

...Besides this "hard" infrastructure built with steel, concrete, and copper wire, there also is a "soft" infrastructure lacking in Poland today...

...T his is simply not true in Poland— I or anywhere, for that matter...

...In short, more planning...

...Since Poland is a new market, an unstable one, andnot yet fully open, and given that few foreign businessmen speak Polish, the government will have to act as intermediary between foreign capital and local markets...

...THE AMERICAN SPECTATOR APRIL 1990 25...

...Every advanced capitalist economy in the world depends on the support of strong public institutions that capitalism by itself does not create...

...Parliament finally managed to scale back the powers of the "Cooperatives" early this year, though not until after a serious struggle with the cooperatives' administrators...

...Thus, when Western firms abandon underdeveloped nations because "things don't work there," they do not usually mean that laws of economics fail to operate in tropical climes...

...Until recently the Polish banking system was dominated by the Narodowy Bank Polski (NBP), which served both as a central bank and finance monopolist...

...Public Infrastructure First-time visitors to Warsaw Pact cities are always surprised to see traces of the Second World War that have long since disappeared from the rest of Europe...

...Some of the larger industrial and natural-resource monopolies may prove rather simple to dissolve quickly (though the recent violent debates over the administration of coal mining show that dissolution will never be without struggle...

...But even in the long term Poland will need an able, well-trained professional civil service to build its public infrastructure and to provide standard services...

...Representatives of some peasant and workers organizations have complained that their members bear an unfair burden during this transition, and one farmer even chained himself to the gates of parliament recently in a gesture of protest...

...Poverty—the imposed poverty of a centralized economy—helps to explain the absence of modern technological wonders, but not of the most basic services such as clean running water, working telephones, and a regular electrical current...

...But before the end of 1990 an entirely new constitution will be drafted and voted upon (probably in a referendum...

...At the end of last December the Polish parliament changed the basic contours of the constitution: references to the "leading role of the Communist party" were deleted, as were professions of friendship to the Soviet Union, and the liberty to own property and organize politically are now guaranteed...

...All this is to be accomplished by people with very little economic training and certainly no real business experience...

...Such a reaction could only work to the advantage of ambitious demagogues on the Catholic-agrarian right and the nomenklatura robber barons of the Communist (now "Social Democracy") party, both eagerly awaiting the Mazowiecki government's collapse...

...The largest stumbling block, of course, is the cadre that already exists...

...In underdeveloped countries there is no legal system for settling private disputes...

...It is our impression that no rival economic theory now challenges that new consensus, and that whatever political arrangements or compromises the Poles make in the near future—on taxes, subsidies, the welfare state—there is little doubt that they are all capitalists now...

...Westerners take these institutions for granted because their governments are stable and their political customs deeply rooted, and they are often shocked to discover countries where these assumptions cannot be made...

...This is a daunting task even under ideal conditions...

...We also mean to suggest that Westerners truly interested in Poland's longterm economic health might want to consider how they might assist during this transitional period...

...In Western countries cooperatives earn their name: they are (or originated as) truly joint ventures of farmers who needed to store, wholesale, and process their products, or wanted to reduce the cost of agricultural machinery, fertilizers, seeds, and so forth...

...The country is no longer called the Polish People's Republic, but the Republic of Poland, and the official Polish eagle again wears a crown...

...Businesses need ample public utilities, postal services that function, unbribable customs officials, honest tax collectors, university-trained professionals, and so on...

...Bullet-riddled walls and rubble-strewn lots are not uncommon...

...Polish farms are extremely small, most lack electricity and running water, and there has been little investment in agricultural machinery...

...But all these banks, public and private, will suffer the effects of previous bureaucratic centralization for some time...

...We have learned (through frustrating experience in writing this article) that there are only 1,500 international lines in and out of Poland, rendering communication with the United States or the rest of Europe simply impossible for much of the day...

...T n our previous article on the present I Polish situation (see February TAS) we reviewed the postwar intellectual transformation of Polish economic opinion from an anti-capitalist consensus of Catholics and Communists to a new, if somewhat resigned, agreement on the principles of free-market liberalism...

...of meat and poultry now available for those who can pay...

...But on the supply side there is also movement...

...Even if Solidarity learned to distrust the myth that "Poles will not fire upon Poles," they think it more prudent now to let it be said that "Poles will not fire Poles...

...It has been . . . well, something of a shock...

...In Poland, however, the "cooperatives" were actually run by the government with little input from the "members" themselves...

...appointments are made and not kept, rules on bidding are unclear or suspicious, and no one wants to take responsibility...

...Thereafter the Poles will enter themedium term, where the challenges will be of an entirely different sort and equally formidable...

...Farmers have begun carting their own produce to nearby towns and have been selling it on the streets, undercutting the arthritic state stores, and there is an unprecedented variety Piotr Brozyna is a historian and journalist living in Warsaw...

...24 THE AMERICAN SPECTATOR APRIL 1990 ernment has less to fear from active resistance to its policies than from the lassitude of Communist administrative habit...

...In short, they are being asked to eliminate jobs and to save them, to run factories and to dissolve them, and to sell off hardware without enriching a previously favored class...

...Such a cadre will not be easy to establish...

...This monopoly ended on January 1 of this year, and soon there will be private banks to join the handful of smaller government banks that once controlled the accounts of individuals and private firms...

...This is the real challenge facing the Mazowiecki government in the medium term, and it deserves the attention of all those in the West whose interest in Poland extends beyond the present crisis...

...It is inevitable that farms will be consolidated in the future, and this is what the peasants fear most...

...The World Bank has offered to put up $300 million and the Polish government is now planning to end the government's monopoly over telecommunications in the hope of attracting private capital...

...The trick will be to transform or replace them without threatening the existing economic tissue or the social consensus underlying the reforms now under way...

...While the "cooperative" coffers filled, the farmers had no incentive to produce, and stocks of already expensive products were declining in the stores...

...Countless professionals trained under the Communist regime left Poland in the brain drain of the last decade or two, and at this stage they are unlikely to disrupt their lives in the West to return to the new Poland...

...It has already learned that there are few "guardian angels" like Barbara Piasecka Johnson ready to buy up unprofitable factories and shipyards in the hope of turning them around...

...This too will take time...

...Poland is not an underdeveloped country...

...The most visible example of such a monopoly today is the system of agricultural "cooperatives...

...American telephone experts have estimated that an investment of $15 billion would be required to bring Polish communications up to European standards—clearly an impossibility in the near future...

...More important still, the hyper-inflation that once reached 1,000 percent has already slowed to 70 percent in January and was predicted to fall even further to nearly six percent in February as the debt-inflated Polish economy grinds to a halt...

...There is fewer than one telephone for every ten individuals in the country, and the number of receivers would have to be quintupled if Poland were simply to reach the European average...

...The fact is that these "socialist" regimes felt no need to provide such services to their voiceless masses, and chose instead to waste resources on heavy-industrialization projects that never became profitable...

...The nomenklatura problem has two faces, national and local...

...Without strong public institutions, Polish capitalism won't have a chance...

...The new managers of these monopolies will share the additional burden of having to work within severe political constraints...

...in Poland there has been an enormous one filled with lawyers and judges whose job until now had been to follow party directives...

...Unable or unwilling to let the price mechanism function, the "cooperatives" raised retail prices to unheard of levels while reducing payments to farmers as much as possible—a perfect monopoly/monopsony strategy...

...At the national level, the problem is less severe...

...Government agencies were obliged to pass all their receipts through it and received their loans and subsidies in return...

...Moreover, many of the basic tools of modern banking simply do not exist in Poland today—telephones, computers, even zloty counting-machines...

...Mark Lilla, a former editor of the Public Interest, lives in Paris...

...Previously controlled prices now float with the market and the zloty, creating a revolution in relative prices that will take some time to stabilize...

...But by and large the Poles seem to accept the necessity of suffering through these additional hardships...

...During this period of transition the government is going to have to gain the confidence of the peasant population by taking other measures to stabilize the agricultural markets...

...The results were predictable...

...Every indicator is that few individuals in the Polish government know how to play that role today, and we have already heard complaints from businessmen that "there is no one to talk to there...

...No one knows how to build public institutions de novo in underdeveloped nations, but the Poles at least have them, if only in their perverse forms...

...Public Monopolies Officially, Polish government policy is that economic planning has been abolished and that most public monopolies will be dissolved shortly...

...Oddly enough, these differences could all work in Poland's favor...

...But Western observers also seem to be under the libertarian illusion that a free market will grow up naturally in Poland so long as there is no active government or union interference in the economy...

...But even to render the system reliable enough to guarantee the transmission of electronic data would require a $3 billion investment...

...Since we wrote that article, the first phase of the economic "shock" plan drawn up by Harvard professor Jeffrey Sachs has begun under the watchful eye of Finance Minister Leszek Balcerowicz...

...Deep in the bowels of state bureaucracies we find functionaries who are, for the most part, simply scared and incompetent clock-punchers...

...Piotr Brozyna and Mark Lilla DISMANTLING SOCIALISM IN ONE COUNTRY (II) Now that the Poles are free to be capitalists, their government must play the leading role in creating conditions that will allow business and trade to flourish on a Western scale...

...American telephone experts have estimated that an investment of $15 billion would be required to bring Polish communications up to European standards...

...An American economist we spoke to recently reported that a long conversation with NBP officials convinced him that they simply did not understand the economic concept of "money...

...As every economist knows, it is almost impossible to make pricing and investment decisions in the Alice-in-Wonderland world of command economies, and there is a serious risk that bad decisions within the monopolies could cause serious distortions in other sectors...

...Yet these scars on the urban landscape are only superficial signs of a more dramatic under-investment in public infrastructure by these Communist regimes over the past forty years...

...in Poland, "socialist" ones must first be dismantled before new ones can be built...

...Americans, perhaps convinced that economies are governed best when governed least, seem prepared to invest and to give economic advice when needed, but with the exception of the impressive work done by the National Forum Foundation and, on a smaller scale, the USIA and the Congressional Quarterly, we are unaware of any similar intergovernmental or interbureaucratic contacts with Poland...

...But at the local level there exist mafia-like connections between ex-party officials, monopoly managers, the police, and nomenklatura businessmen, and this knot will only be untied by legal force...

...Each demonstrates how heavily Poland's long-term economic health will also depend on public initiative...

...This lack of publicly trained personnel has already hamstrung the government in its efforts to attract private investors...

...Prices of natural gas and electricity, always kept artificially low and now only partially decontrolled, have quadrupled in a month...

...In underdeveloped nations the tax and regulatory systems are never stable...

...The French government, for example, always eager to export Gallic dirigisme around the globe, has just initiated a series of internships for local Polish politicians, who will spend time in French towns this year learning how government ought to work...

...This is made up of publicly trained men and women working in services on which business also depends...

...Theirs was, after all, a bloodless revolution meant to restore national unity...

...What they really mean is that the necessary public institutions that support economic activity are nonexistent, dysfunctional, or hopelessly corrupt...

...Neither in Warsaw nor in foreign embassies are there truly professional business liaisons...

...However serious this threat may be, it is a short-term one: in the next twelve months we will know whether the "shock" was too large to be handled...

...But in reality the government will be forced to continue planning because the system of monopolies it has inherited cannot be sold off or dissolved overnight...

...Reforming this large non-workforce will be an extremely long and delicate procedure...

...In underdeveloped countries public agencies must be constructed from scratch...

...Wild stories of profiteering and illegal "privatization" are already circulating throughout Poland...

...lines for previously rationed items have shrunken drastically since few can afford what they once waited hours to buy...

...Poland is in desperate need of educated professionals—accountants, statisticians, engineers—that the recently liberated universities will not be capable of providing for many years to come...

...But when agricultural prices were decontrolled by the Mazowiecki government last year, the "cooperatives" proclaimed their legal independence and continued their work, acting as the dominant agricultural wholesaler in the Polish economy...

...But before the civil service can be completely rebuilt, a new legal and constitutional framework must be put into place...

...And from a perfectly practical viewpoint Solidarity knows that it still needs people to man the governmental machinery...

...Public Administration As the example of banking indicates, the heavy centralization of the economy inherited by the Mazowiecki government means that many management problems eventually to be inherited by private business must first be confronted by governmental agencies that will dominate the scene in the medium term...

...As a consequence, water is nonpotable in most cities and must be boiled before use, and electrical currents fluctuate so wildly that one hears of high-tech computers bought with precious foreign currency now lying unused in government offices because they keep short-circuiting...

...The "soft" infrastructure needed to allow for a free flow of economic information simply does not exist...

...Domestic service is not much better, and callers must dial and redial repeatedly just to reach the other side of town...

...A law must be passed on returning Communist party property to the state (as is already under way in Hungary) and strict rules must be established to regulate the privatization of public enterprises to ensure that these mafiosi do not end up running the local economies...

...In fact, at this writing the widow Johnson has evidently changed her mind about saving the former Lenin Shipyard...

...Solidarity and the new government decided quite soon after coming to power that there would be no purges, no "decommification" that might hand the ex-Communist party a natural class of resentful, disinherited public workers...

...As we noted briefly in our previous article, the medium term will be dominated less by purely economic and political reforms than by institutional ones...

...Yet despite these unsettling changes to a once predictably deteriorating way of life, the Poles seem to have found new reserves of "solidarity" to manage them...

...Eventually Poland will need to train its civil servants in the skills and ethos of administration, and some funds for bureaucrats' "retooling" have already been set aside...

...gasoline and insurance are now so expensive that more than 10,000 automobile owners have turned in their license plates...

...A special parliamentary committee is already at work drawing up possible blueprints...

...There is already talk of American-style price support and subsidy programs, all of which would have to be run by the government...

...In underdeveloped nations there are no public works...

...There is no way of predicting whether this willingness can persist, especially since the inevitable layoffsand plant-closings will not begin for a few months...

...Until a truly competitive system of wholesaling or cooperatives grows up, the government will be forced to help manage the agricultural economy...

...Below this leadership level the problem is somewhat different...

...That economy will never "take off" without the provision of public infrastructure, the founding of an independent public administration, and sound management of the remaining public monopolies so as to minimize market distortions...

...Another sector where this "training gap" could prove decisive is banking...

...The government's nightmare is that, as the layoffs begin, disgruntled unemployed workers will join with frightened small farmers to form a parliamentary coalition to block the necessary "shock" reforms...