The Costs of "Shock Therapy": Economic Transition in Poland

...One government official, who was until recently among those responsible for privatization told me that he would like to take a leave of absence and write a book about the impossibility of privatization in Poland...

...Trade union officials have received numerous complaints that private entrepreneurs commonly violate labor laws, do not allow union chapters to be formed in their plants, and so on...

...The need for rapid change was, and remains, one of the axioms used to justify the application of "shock therapy...

...Here I would like to refer to an instructive report entitled Precedents for Economic Change in Central Europe and the USSR, (Oxford Analytical, 1990), which is based on research conducted by more than twenty economists and economic historians...

...In the case of Spain, it took thirty years to make the change from a dirigist corporate state...

...From a number of sociological surveys, the following picture emerges: only a very small percentage of employees would choose to work in the private sector in the future (more that 60 percent would prefer to work in the state sector...

...asks one Polish sociologist...

...Thus the absence of a "middle class" and its institutions, which is bemoaned by the new establishment, is matched by the absence of a strong social democratic movement...

...But what do we have...

...Public opinion is outraged by the way in which members of the communist nomenldatura have formed their own companies...

...Of course, various social democratic discussion clubs and papers do exist, but they have few resources and little influence...

...Other proposals that have been ignored by both the media and government officials are those advocated by a new political grouping, the Labor Solidarity Alliance, whose program for the evolutionary transformation of the economy constitutes the most comprehensive alternative to the Balcerowicz program...

...Just the opposite: the most astonishing conclusion that is drawn from this "shock therapy" is that we need to speed up the pace of systemic change...

...Once this is properly FALL • 1991 • 503 Poland's Troubled Economy understood in the West, it opens up the possibility of cooperation between people from different political tendencies, particularly social democrats and liberals (of the John Stuart Mill, not the Hayek-Friedman school...

...The Polish social democrats, who are in a sense partly responsible for (and also burned by) the communist utopia, are much less inclined to view the emergence of a new social order in terms of a great socio-technical operation than are the neoliberals who are now trying to build a new utopia...

...The new government should not, however, have departed without public debate (particularly within Solidarity) from the program accepted at the Round Table...

...In many of his recent speeches in the West, President Lech Walesa has warned that Poland's program of economic reform may collapse...

...The "Great Transformation" of the postcommunist countries is going to be much more difficult and complicated and is bound to take even longer...

...An increasing number of economists, political scientists, and sociologists are referring to the recession that has been produced by "shock therapy" as stagnation, slumpflation, and depression...

...Despite this, labor discipline has barely improved, and improvement in quality of output is virtually imperceptible...

...Geremek does not even ask the question that troubles so many economists: is an excessive dose of "shock therapy" the surest way to rejoin Europe...

...This is just one of many critical analyses of the Balcerowicz program and its impact...

...Both cases involve an influx of shoddy goods and a tendency to copy slavishly...

...Even if there were reasons for the document itself (the letter of intent) to remain confidential for the time being, there is no reason why the government should not outline the general direction of economic development over the next few years and call for a public debate on the issues...

...If he had tried to tell the Polish public that real wages had increased, he might have been lynched...

...These and other factors have resulted in a situation in which people are afraid of large-scale privatization...

...At the same time, I am sure, the contents are known to international institutions and some governments...

...In 1989-90 there was such a widespread conviction that we would never overcome our economic crisis unless we had outside assistance that the Polish government would have agreed to any conditions...

...Grohman has proposed that the government engage in reprivatization by annulling the 1946 law on the nationalization of industry and by returning the maximum amount of confiscated property to former owners or their descendants...

...We have mass unemployment (more than 1.2 million), and it is expected to increase...

...Whatever its achievements, they are dwarfed by the enormous social costs...

...Americans find it difficult to understand that various development programs applied in the Third World, however rational they may appear from the economic point of view, are doomed to failure unless they take account of local customs, deep-rooted institutions, and social relations formed over centuries...

...This was just one of the many promises that could not be kept, including the promise that only the first six months of the "shock therapy" would be difficult, that unemployment would not exceed half a million in 1990, that national income and industrial output would decline by only a few percent, that reforms would mop up excess purchasing power but would not bring about a decline in living standards...

...Some people believe that our economies have already become sufficiently—or even excessively —marketized...

...This means they generally have great difficulty in understanding the role tradition plays in social life...

...For example, small factories that were taken over even though they were formally exempt from nationalization...

...Even those who are now accused of slowing down the pace of change have the most astonishing opinions...

...Gross national income declined not by 3 but by 13 percent, industrial output not by 5 but by more than 24 percent...

...Tadeusz Mazowiecki was still officially premier, although his government had already resigned...

...On the other hand, it has set in motion . . . an extremely dangerous and one-sided process in which the state is relinquishing its ownership of the means of production...

...even those who are strongly convinced of the need to privatize the state sector are inclined to argue that the enterprise in which they are working ought to remain in the state sector...

...Jeffrey Sachs strikes me as a quintessential example of "the quick and easy" American approach to success, a typical "constructivist," in Karl Popper's sense of someone who views systemic transformation simply as a sociotechnical issue...

...The Obsession with Acceleration Here, we need to consider the whole issue of "even faster," which is at the root of the vicious circle in which Poland currently finds itself...

...Sachs's virtuosity is such that recently he has begun to take account of local conditions...

...the vast majority of employees are in favor of denationalizing their own place of work through employee ownership and participation in management...

...The government, nevertheless, immediately indicated its intention to create a market economy based on private ownership...

...In fact, even when you apply "shock therapy," this is a lengthy, evolutionary process, and our economies still have a long road ahead before they can become market economies...

...There has been no public debate about it...

...This means that unit costs have increased considerably and that the economy has become even more inefficient...

...Whether this will prove possible remains to be seen...

...prices were supposed to increase by 100 percent over the year but actually went up by 200 percent...

...as a result of all the talk about impending privatization, both managers and workers in state enterprises are in a state of extreme uncertainty...

...Now a few comments about the dependence of our economic policy on the West...

...While an advocate of the market economy, Jozefiak believes that it is necessary to draw conclusions from the "shock therapy" and to proceed with privatization in such a way as not to bring about another drop in production...

...Milton Friedman has recommended that Poland adopt not the model of modern American capitalism, which has become infected with social welfare if not socialism, but the true "free market" model of a hundred years ago...

...2) Please don't write to ask whether we're interested in such and such an article—it makes for useless correspondence...

...Faced with the above, Sachs has turned out to be a propaganda virtuoso...

...Second, all this took place after Mazowiecki had been beaten by Stan Tyminski, whose election propaganda had made much use of the argument that "an international economic war" was being waged against Poland and that this was the real cause of the downturn in production, the fall in living standards, and so on...

...Generally speaking, the neoliberal euphoria, which derived from the belief that there was considerable social support for "shock therapy," is a thing of the past...

...Check all your figures, dates, names, etc...

...Less well known are two other obstacles to the formulation of a suitable program of social transformation: the culturalideological influence of the Western right and Poland's dependence on the West as a result of the "debt trap...

...they're the author's responsibility...

...These were complex circumstances which even transcended our national borders...

...The official viewpoint, repeated by many politicians, can be reduced to the assertion that the limited success in introducing market forces into the Polish FALL • 1991 • 501 Poland's Troubled Economy economy is the result of resistance on the part of the old structures, which itself can be explained largely by the fact that marketization has not been accompanied by privatization...

...He has several times stated in the Western press that living standards in Poland have not really declined...

...The draft version of this program has not been published...

...That this was so was publicly suggested by Jaroslaw Kaczynski, leader of the Center Alliance.' I am not suggesting that we are dealing with external intervention in its crudest form, but it is worth noting that on December 20, 1990, the following item appeared in the Polish press: Deputy Prime Minister Balcerowicz received Thomas W. Simons, U.S...

...There was a widespread public perception that this occurred as a result of external pressure...

...4) Notes and footnotes should also be typed double-spaced, on a separate sheet...

...We will not consider manuscripts submitted simultaneously to several publications...

...There are cases in which entrepreneurs who, in their own country, would not dare to violate labor regulations so blatantly and might even allow some employee participation in plant management, behave quite 502 • DISSENT Poland's Troubled Economy differently when they get to Poland...

...Given our traditions, level of socioeconomic development, absence of infrastructure, and so on, the promise that the new economic system would 500 • DISSENT Poland's Troubled Economy be modeled on that of the developed countries of the West was nothing but a mystification...

...He has suggested that the state sector should be divided into four or five blocs to be privatized in successive phases...

...The government has demonstrated more resistance than might have been expected and has suggested reprivatization only in those cases where property was nationalized in violation of then existing law...

...In Poland only the church and perhaps the army constitute a cohesive social force...

...For example, Bronislaw Geremek, in a recent book, states that in 1989 he recognized the dangers inherent in the Balcerowicz plan...

...Jaroslaw Kaczynski, interviewed by Marek Henzler in "Przyspieszenie przyjidzie pozniej," Polityka, January 19, 1991...

...Ordinary people are paying an enormous price, not only for mistakes but also for what are viewed as successes...

...Not only has so-called hidden unemployment not dedined— and this was supposed to be one of the chief aims of the whole operation—but, relative to industrial output, it has actually increased (industrial output has fallen by 24 percent and now is 40 percent lower than at the end of 1989, employment by 11 percent...

...This is also true of many joint ventures...

...The only way to interpret this information is that the United States wants the Balcerowicz plan to be continued and considers that the presence of Balcerowicz himself in the government is the best (if not the only) guarantee of this...

...Conditionality" These issues, particularly the privileged role and conservatism of the church, are well known...

...All the forecasts of economic performance were wildly inaccurate...

...This attitude, combined with brash statements to the effect that we could expect more of the same but at a more rapid pace, was bound to give rise to widespread frustration, public mistrust of politicians, and political apathy...

...And he was chosen to be the chief economic adviser to Balcerowicz and is seen in Poland as the leading economist of the United States, a country that has one of the richest traditions in economics in the world...

...In Western Europe, and particularly in Scandinavia, the labor movement has a natural ally in left-wing, social democratic parties...

...Even with such a gap between forecasts and actual results, the government might still have come out ahead if it had properly analyzed the reasons for the gap and drawn the necessary conclusions...

...This is related to Walesa's abrupt, and hitherto unexplained, shift in attitude toward the Balcerowicz program...

...He has since come to believe, however, that changes have to proceed more quickly because they are too painful to string out over a long period...

...The subject of the meeting was the current state of economic relations between Poland and the United States and prospects for their further development...

...Journalists and social psychologists have recently begun to comment on the "Americanization" of intellectual life in Poland, expressed in a flood of trash in literature, television, and cinema...

...In such a situation, the government and the parliament must have the right to make mistakes and to experiment...

...She replies: There has been a lot of discussion about whether to transform the country rapidly or slowly, as though we were referring to an athletic contest...

...Fragmentation is also evident within Solidarity...

...We should, of course, be cautious in interpreting this statement literally, since the most forceful man in the government, Leszek Balcerowicz, does indeed want to realize "certain philosophical ideas...

...Balcerowicz assumed that such a mechanism would be provided by liberalization, combined with a radical stabilization program...

...Finally, we should add the widespread conviction that one of the goals of privatization is to bring about an increase in unemployment...

...While privatization through the sale of shares generates revenue for the state, reprivatization would simply drain the state coffers because, given the length of time that has elapsed, in most cases it would not be possible to return the property itself, and compensation would have to be paid to former owners...

...105-106...

...5) We're usually quick in giving editorial decisions...

...Or take a chance and send us your article...

...Balcerowicz has only one response when asked about future development: "More of the same but faster...

...Here I want to review the factors that still make it difficult to have a serious public discussion on alternatives to the Balcerowicz program...

...Third, the shape of the newly emerging private sector is frightening workers away from private factories...

...Interviewed by a Polish newspaper, he agreed that living standards had declined, but "at the most" by 20 percent...

...The author, Charles Feinstein, points out that even former West Germany, a country that is in many respects exceptional, took more than ten years to rid itself of the trappings of a war economy and return to a market economy (in many cases, the countries of Eastern Europe are not even returning to but are just beginning to construct a market economy...

...And please remember that we can't return articles unless they're accompanied by a stamped, self-addressed envelope...

...how much the state should intervene and how much should be left to unfettered market forces...

...In the countries of East-Central Europe, communism has publicly destroyed and discredited not only socialism but also any kind of social democracy...

...whether we want a welfare state which will subsidize housing, education, health care, and so on, but levy higher taxes, or whether we want lower taxes and a system closer to that preferred by the liberals in which everyone has to look out for him- or herself...

...But as a procedure intended to change the economic system, "shock therapy" has proved a disaster...

...Western and Polish experts agree that, if privatization were carried out on a commercial basis, there would be only enough savings to allow the purchase of a mere 2 percent of the state sector...

...If there's a delay, it's because a few editors are reading your article...

...It seems that a situation has emerged in which it might be possible to choose a path that would be less painful over a longer period...

...The Polish government and the IMF are currently finalizing a three-year stabilization program that is supposed to determine the general direction of our economic policy...

...Revolution from Above It should be remembered that the policies of the previous, the current, and almost certainly the next few Polish governments have not been and will not be concerned with creating the basis for a new social order...

...One example is Cezary Jozefiak, chairman of the Senate Economic Committee, a well-known economist who was offered the post of deputy premier before Balcerowicz...

...The church hierarchy is even keeping its distance from the numerous Christian-democratic and nationalist parties that have recently emerged, perhaps because it does not want to risk its prestige by accepting direct responsibility for social issues at a time when it seems certain that the aspirations of most of the population are not going to be realized...

...Obliged to negotiate with ever new groups of workers, members of the government complain that they cannot work normally...

...One-sided—because to date the reforms have not succeeded in creating a new group of owners (Rzeczpospolita, March 18, 1991...

...The possibility of further cooperation within the forum of international institutions was also reviewed, including U.S...

...The Polish government has appointed Professor Jeffrey Sachs as its adviser...

...The date of the ambassador's visit is extremely important...

...The government is likely to get its way on this only if its proposal gains the support of the trade unions...

...He complains about the tyranny of statistics and boldly questions the validity of statistical data...

...Political Fragmentation The most serious obstacle is political fragmentation...

...No dot matrix submissions, please...

...Walesa has recently started to think along these lines too, although he has an alternative suggestion as to how to get rid of the ball and chain: he has become a staunch advocate of Reprivatization in its most sweeping version...

...The fact that they do not have even the minimal feeling of stability necessary for economic activity means that the efficiency of their plants is constantly declining...

...Part of the "concrete reality" that currently confronts the government are numerous open conflicts over wages and living standards...

...Our decision," said Bielecki, "was taken in light of concrete reality, not the desire to realize a dream or certain philosophical ideas...

...In all likelihood, Solidarity's decision to take part in the forthcoming parliamentary elections will increase the political divisions within the union...

...This becomes even more apparent when we compare these groups with the Catholic Church, traditionally conservative and, since the election of a Polish pope, outright triumphal...

...The new prime minister, Jan Krzysztof Bielecki, says that he wants to be another Milton Friedman but that he has to recognize reality and must often take steps that conflict with his beliefs...

...Such a move would undermine the entire legal order of the past forty-five years and would burden the State Treasury—in other words, the population—with enormous expenditures...

...It is impossible to provide here a complete answer to the question of why privatization has yielded such miserable results to date and why the prospects for the immediate future do not inspire advocates of rapid privatization with optimism...

...THE EDITORS 504 • DISSENT...

...The most impatient neoliberals react to this situation by proclaiming that the state sector constitutes a ball and chain that has to be abandoned at any price, even if this means selling it off as scrap metal or giving it away free...

...In the year of the great breakthrough1989 —Poland found itself in the role of pioneer...

...This distrust has received additional impetus from the fact that some politicians make no secret of the fact that rapid privatization will probably lead to a temporary deepening of the recession...

...So far, only the church has succeeded in maintaining its unity, or at least the appearance of unity...

...The most important factors are the following: First, the painful results of "shock therapy," which has yielded far fewer benefits than anticipated, have aroused in many people a distrust of all government programs...

...It has not set in motion sufficiently strong processes of systemic change...

...By now, however, there are increasing signs of disarray, crisis, and pessimism among those recently triumphal...

...However, all governments like to receive revenue, particularly those that, like the Polish, are dominated by the minister of finance (Balcerowicz holds this position as well as that of deputy premier...

...Summing up our experience of this procedure, one journalist recently noted: It is not, after all, much of an achievement to enter Europe quickly simply because the political atmosphere is favorable...

...unemployment is twice the level forecast...

...Following his election as president, Walesa's sharp criticism of the plan suddenly gave way to statements regarding the need for the plan to be maintained and for Balcerowicz to retain his place in the government...

...The neoliberals' hasty search for a "middle class," or rather the attempt to create one artificially, says Mozrkycki, simply indicates their naivete regarding the possibility of bypassing what, in the West, proved to be a lengthy process of socioeconomic development...

...Following Walesa's electoral victory, a couple of neoliberals were appointed to the government...

...In Poland there are no real left-wing parties other than the so-called social democratic party, which emerged out of the old Communist party...

...Established by former apparatchiks, these companies have frequently made huge profits because they had access to machinery and equipment in state factories, have been able to use state workers for private purposes, and have been able to acquire state assets at artificially low prices...

...Instead, it pretended that the goals of the Balcerowicz plan had been essentially achieved and that the country was making the best of its pioneering role...

...The only ones who know nothing about it are ordinary Poles...

...The possibility of such a collapse has also been referred to by the new head of Solidarity, Marian Krzaklewski...

...2 Lena Kolarska Bobinska, interviewed by Agnieszka Wroblewska, Zvcie Warszaw y, November 22, 1990...

...No lessons have been learned from this...

...He has appointed as his plenipotentiary the scion of a great industrial family, Jerzy Grohman...

...A recent opinion survey yielded such statements as: "It may have been only on paper, but in the old days they used to praise working people and extol the value of labor rather than entrepreneurship at any cost," and "Workers don't count any more, only the middle class counts these days...

...This decision was more or less forced on Solidarity, because its leaders suddenly realized that workers' interests were not adequately represented in parliament...

...It took place several days before the formation of the new cabinet was completed...

...As we're not an academic journal, we prefer that they, wherever possible, be dropped altogether or worked into the text...

...Government officials are aware that largescale privatization is unpopular, but are also convinced that it is impossible to improve efficiency in the state sector...

...Listening to Sachs address the Solidarity members of parliament in 1989, I was reminded of the Soviet emissaries of the 1940s 498 • DISSENT Poland's Troubled Economy and 1950s who used to call on us to implement the most radical and rapid "revolution...

...2 The obsession with acceleration has come to dominate most political discussion...

...3 Tomasz Jezioranski, Transformacja polskiej gospodarki, Warsaw-Krakow, 1990, pp...

...Few people have anything to say about where we are hurrying to...

...This is the reason for the difference of opinion regarding reprivatization that has emerged between the president's office and the government...

...officials had convinced him that it was necessary to move slowly...

...Only when the first group of plants to be privatized had begun to show an increase in output, productivity, and employment would the second group be privatized, and so on...

...Official propaganda has actually led workers to believe that marketization and privatization are leading to a system that is ill-disposed to working people...

...Superficially, there would seem to be some basis for their opinion...

...To Our Contributors: A few suggestions: (1) Be sure to keep a copy of your ms—the mails aren't always reliable...

...In an interview under the title "The Vicious Circle of Post-Communism," a well-known sociologist, Edmund Mokrzycki, made the following comments on the pride and joy of the neoliberals, the program of Finance Minister Balcerowicz: Is the only way out of this vicious circle via a dramatic revolution—in other words, a breakdown of the entire system—or will we manage to set in motion a self-generating development...

...The price is a decline in the standard of living, the loss of guaranteed employment, and the sudden unavailability of some services...

...An interesting development can already be seen in Poland...

...This fragmentation is evident in the fact that more than sixty political parties have been officially registered, while there are over a hundred other groupings of a semipolitical nature...

...The only issue that is now publicly debated is how to accelerate the pace of change...

...consumption fell by more than 28 percent (although food consumption declined very little...

...Moreover, it was Balcerowicz who was asked, at one point, to form the new government...

...In the same spirit, although in the opposite direction, Sachs called on us to implement "shock therapy," which, by reducing inflation, would stabilize the economy and simultaneously create a market system...

...But this has not yet happened, FALL • 1991 • 497 Poland's Troubled Economy and we have to be cautious in formulating even slightly optimistic forecasts—although some grounds for optimism are emerging...

...During his recent visit to Washington, Walesa stated that during his previous visit (in 1989), U.S...

...Faster," but "where to...

...Mazowiecki's government was frequently reproached for its failure to follow such a course when the Balcerowicz program was being drawn up...

...Ambassador to Poland...

...3) Type your ms double-spaced, with wide margins...

...Look at our last few issues to see if your idea fits in...

...I do not deny that Balcerowicz and Sachs have had some success in stabilizing the economy, particularly market relations, in moving from a situation of acute shortages to one in which a startling array of consumer goods is available, and in reducing the rate of inflation (although it remains so high that the premier himself has referred to it as insane...

...Second, the privatization that has taken place since 1987 provides numerous examples of what has come to be known as a "pathological privatization" based on corruption...

...In addition to the already open conflict between the elite groups that have emerged from Solidarity and the workers' part of the movement, the trade union itself has become an arena in which the most varied political tendencies are vying for power and influence...

...However, he says, he knew that "we had to set out along this road with all due speed, because Europe had no intention of waiting for us...

...support for an extension of the stabilization fund for 1991 (Zycie Warszawy, December 20, 1990...

...Recently the mass media have begun to raise FALL • 1991 • 499 Poland's Troubled Economy the issue of Polish sovereignty in relation to Western governments...

...It is unfortunate that the "Great Transformation" in Poland, which began in 1980-81, coincided with the height of Reaganism and Thatcherism, which have come to constitute the most popular stereotype of Anglo-Saxon culture...

...It would, however, be a real achievement to become an equal partner, not an agricultural relic or a dumping ground for heavy industry, in other words, a state belonging to a lower category of civilization, a state whose role and place in Europe would once again be decided by forces outside its borders.' Toward Reckless (Re)privatization The opinion quoted above does not, unfortunately, represent the main trend in political thinking in Poland...

...only a small percentage intends to buy shares issued as part of privatization...

...He has said he wants to move gradually by reorganizing and modernizing rather than forcing widespread factory closings, even in the case of the industrial giants recently threatened with immediate bankruptcy...

...It's high time we thought about the long term and stopped assessing change simply in terms of how far we have managed to distance ourselves from communism...

...Generally speaking, this program was consistent with the "Program for a Self-Governing Republic" passed by the First Solidarity Congress in October 1981...

...In addition, inflation, followed by a sharp deflation, has decimated people's savings...

...what kind of capitalism is going to emerge...

...Sovietization" has been replaced by "Americanization...

...The meeting took place at the request of the ambassador...

...There is a widespread perception that national assets have, in this way, been stolen, and that successive Solidarity governments have done little to stop it...

...6) Please bear with us—we have accumulated quite a backlog of material, and you may have to wait for a few issues before you see your article in print...

...There are people who disagree, but they are ignored...

...He arrived at this astonishing result by simply multiplying wages in zlotys by the current dollar exchange rate—even though everyone knows that until 1990, exchange rates varied widely and were highly artificial...

...The most important thing for the immediate future is to abandon not only post-Marxist but also Hayekian constructivism...

...Professor Jozefiak is a resident of Lodz, a city particularly hard hit by the recession because it is a center of light industry (largely textiles, production of which has declined by nearly half...

...Such a system will remain well beyond our horizon of possibility for many years to come...

...Americans are fortunate in that they have never experienced feudalism...

...I shall ignore the issue of the notorious "conditionality" imposed in the case of loans from the World Bank and the IMF (International Monetary Fund), not just because the matter is well known but also because there was very little difference of opinion between the leadership of these two institutions and Polish government officials...

...But neither of them provides a basis from which to formulate a program for the transformation of the country...

...After fourteen months, we have reason to doubt its effectiveness...

...The process was supposed to be something like Schumpeter's "creative destruction": shortlived crisis and recession were supposed to create the conditions for modernization, increased innovation, and so on...

...This is particularly true in the area of property relations, which must be transformed through the most rapid possible denationalization of the state sector...

...Here is another example...

...The process of "creative destruction" has turned out to be lopsided: plenty of destruction but so far little creativity...

...In economics, this is expressed in the popularity of Milton and Rose Friedman's book Free to Choose and the works of George Gilder, Michael Novak, and so on...

...Translated by JANE CAVE q Notes ' "Because of circumstances which it would be difficult to make public at the moment, it was not possible to form the government that would have been able to carry out this acceleration...