Poland Reforms

Introduction

Poland's transition to the market economy after its political liberalization in 1989 is generally regarded as one of the most successful transitions of all post-Soviet economies. Today the success of this transition is evident--Poland is a middle income nation that enjoys a stable democracy and close integration into European state organizations.

The credit for Poland's success rests partly on its quick adoption of liberal free market policies in the immediate revolution termed "shock therapy", which included market liberalization and the end of Soviet-era social controls. However, this policy came at a cost. Despite its rushed introduction, shock therapy was successful because it was the right policy set at the right time for Poland.

The pre-1989 Economy

Poland's socialist economic system was fundamentally unsustainable. This structure rested on two central pillars: the dominance of state-owned industrial enterprises and the absolute centralization of economic control. State planners decided what goods and services would be produced in what quantities and set official prices for both raw materials and consumer goods. Additionally, state planners directly controlled the output of the industrial sector, preferring capital goods manufacturing over consumer goods, a preference that led to the widespread shortages that were characteristic of Polish society. Consumers responded to chronic shortages by establishing an extensive black market economy that ignored official price controls and regulation.

By the 1980s, Poland's debt was $50 billion. Inflation had reached 250 percent. national income and productivity were declining. the goods that were available became extraordinarily expensive.

By adopting the privatized market economies and multiparty democratic government of its Western European neighbors, Poland hoped that it could quickly attain social and economic success.

Shock Therapy

Shock therapy in December 1989 was intended to rapidly reform the Polish economic structure from a centrally planned economy into a privatized market-based one.

This policy held five core macroeconomic and social changes:

* Monetary contraction polices designed to restrict the supply of money and raising interest rates above the inflation level. Additionally, the government would no longer be able to finance budget deficits by printing money and raising the interest rate.

* measures to reduce the Polish government deficit, mostly through cutting subsidies and eliminating tax exemptions.

* Eliminating price controls.

* Liberalizing foreign trade by reducing barriers to international trade, encouraging foreign investment and moving to establish the Polish currency as a convertible currency whose value changed in accordance with the world market.

* Ending state control over income levels and reducing the role of state industries, which allowed the Polish private sector to grow and wages to be determined by market conditions.

In addition to these strategies, shock therapy also included recommendations to privatize state-owned industries and adopt the social and governmental standards necessary for entry into the European community.

Immediate Effects

Shock therapy's wide package of social and economic reform came at a considerable