Economic Reform in Poland and the Czech Republic

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Economic Reform in Poland and the Czech Republic
After the fall of communism, several different countries decided that it was time to reform both current economic and political policies. Two countries that have had major economic reforms are Poland and the Czech Republic. However, the process of that change is different, each country had a different idea of how to become a new economic power in the 1990’s.

In December 1989, the new government, led by members of the labor union Solidarity, launched a reform program designed to transform Poland’s economy into a free-market system. Price controls were lifted, while wage controls were imposed. State enterprises were transformed into joint-stock companies, and many were scheduled for eventual privatization or purchase by foreign investors. The restructuring of the Polish economy resulted in a massive layoff of workers and a rapid rise in unemployment. Poland’s GDP declined sharply in 1990 and 1991.

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Poland had relied heavily on agriculture and would have been easier to reform if its exhausted industrial regions could have been abandoned. Poland may have been the first to try a rapid, sweeping conversion, deemed by the press as “shock therapy.” This conversion was to a capitalism and free market. It was also the first to overcome the resultant drop in economic output. Economic growth returned as early as the first half of 1992, and voters should have begun to notice the benefits by September 1993. However, rather than reformers gaining approval, the renamed communist party captured the largest number of seats in the Polish parliament in the elections that month. This was yet another step back for the reforming process.

After its initial decline, Poland’s economy began to improve. Annual GDP increased between 1992 and 1997, when it reached $135.7 billion. Industrial production increased by about 12 percent in 1994, which, accompanied by a 2 percent drop in unemployment, represented a major increase in labor productivity. Inflation remained above government goals but steadily declined, with an annual rate of 30 percent in 1994 dropping to 18.5 percent in 1996 . Although hundreds of enterprises were transferred to private ownership during 1994 and 1995, the pace of privatization was generally slow; the private sector’s share of GDP remained at about 60 percent in 1995 and 1996. However, a new constitution adopted in May 1997 committed the country to pursuing a market economy and further privatization. In the early and mid-1990s Poland’s foreign debt was significantly alleviated by concessions from creditors, which helped to attract increasing levels of foreign investment.

The result of “shock therapy” for Poland was to emerge out after the fall of the former reigning communism, to take leaps and bounds in economic development. Another country, just south of Poland, the Czech Republic also economically reformed in the early 1990’s.

The Czech Republic has been traditionally among the most economically developed regions of Europe. When the Communists came to power in Czechoslovakia in 1948, they created a highly centralized economic system. Nearly all aspects of economic planning and management came under the control of the central government. Most of the country’s economic assets were placed in state hands; economic managers and decision-makers were cut off from their counterparts in the West; and foreign trade was conducted almost exclusively with other Communist countries. Although the economy remained strong by Eastern European standards, with one of the highest standards of living in the Communist world, the policies adopted by the Communist government led to long-term economic decline in Czechoslovakia. After the collapse of Communism in 1989, the new leaders of Czechoslovakia had to deal with this legacy.

In the early 1990’s, the post-Communist government moved quickly to convert the economy to a system based on free enterprise. A number of reform measures were adopted, including a voucher privatization plan, which gave citizens, for a low administrative fee, coupons that could later be traded for stock in companies. The voucher plan successfully transferred large parts of the economy to private ownership. By December 1994 more than 80 percent of firms in the Czech Republic were privatized or had decided on a privatization strategy. Business boomed in Prague and other cities in the mid 1990’s as entrepreneurs established new companies. The government has also succeeded in re-establishing trade with the West and obtaining substantial levels of foreign investment.

The average standard of living in the Czech Republic dropped somewhat in the early 1990s as market reforms were introduced, but in recent years, the economy has begun to recover. Inflation was about 10 percent in late 1994, less than half of what it was in 1991. Gross domestic product (GDP) increased by approximately 2 percent in 1994. Industrial production, which declined sharply in 1990 and 1991, also grew in 1994. The country’s foreign debt has remained modest. By 1997, the GDP had reached $52 billion .

Poland and the Czech Republic had the similar progress levels with the idea of having to take a step back before the progress started. In both reforms, the countries had a level of unemployment and social decline before the benefits became apparent. Also in both countries the end result for the working class was worth the suffering endured, when comparing private sector employment rates from 1989 to 1995, Poland increased from 47% to 66%, the Czech Republic had an even more drastic change from a mere 16% to an astounding 65% .

A few signs that show the progress of both Poland and the Czech Republic are that both are expected to become; full members of the European Union, World Bank, IMF, and World Trade Organization . Poland and the Czech Republic can now become a model to several other countries that need economic reform. The two aforementioned countries had overall success with minimal, temporary disruptions in the begging.


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