Market Reforms In PostCommunist Eastern Europe Essay
Market Reforms In Post-communist Eastern Europe Essay, Research Paper
A Study Of The Market Reforms In Post-Communist Eastern Europe With A Specific
Case Study of Poland
Poland, every bit good as it & # 8217 ; s fellow post-communist states, face an backbreaking
undertaking in re-inventing their economic systems to fit the dominant Western manner
presently ruling the universe. The troubles lie in the countries of political orientation,
structural demands ( monolithic alterations required ) , universe recession ( current ) and debt
Why did the economic sciences of the communist axis fail so miserably? Why has
every individual socialist, fascist, Communist and other non-democratic state had
to implement economic alteration in order to last? This is due to some inherent
jobs in the bid economic system thought.
Monopolies ( in a bid economic system ) tend to bring forth inefficiency, low
quality goods, deficiency of invention and technological betterment.
Command economic systems tend to concentrate on growing instead than strength taking
to larger production and an evan. worse usage of available resources.
The 1980 & # 8217 ; s marked a alteration in universe markets meant that the Communist
economic systems were faced with four challenges that would, if met, have meant the
continuance of the USSR.
Resource salvaging miniaturisation necessitating high engineering and accomplishment were
demanded ( bid economic systems have neither ) , Flexible production to run into a assortment
of demands ( bid economic systems have big mills to maintain production high & # 8211 ; they,
therefore, did non hold the financess or ability to impact the necessary alterations to their
agencies of production ) , the & # 8220 ; information age & # 8221 ; meant that the communist axis had to
deny the new prevailing types of engineering, which would distribute Western thoughts,
and therefore they fell behind ) , and & # 8220 ; package & # 8221 ; became indispensable to the growing of
industry ( the & # 8220 ; hardware & # 8221 ; focal point of the East could non absorb this new attack.
As good, the alterations are being attempted in a deep period of economic
crisis that make an already hard procedure even more hard.
Changing the Economy
Systematic transmutation requires institutional inventions, the
internal liberalisation of the economic system, the external liberalisation and the
accommodation of the existent economic system every bit good as the pecuniary system.
Not merely does at that place necessitate to be a different institutional model for a
market economic system but one has to take most of the familial constructions and to
alteration the typical behavioral forms in industry, province and private families.
Denationalization is a hard undertaking because of four chief factors. Firm
sizes in post-communist states tend to be big. This means that their
division or shrinking airss troubles for foreign investors, they are nevertheless,
non worthwhile at current sizes and must be reshaped. Expectations are running
high but attitudes ingrained in the work force will necessitate clip to alter. None of
the construction exists to cover with private houses and must be created along with
the labour needed to run it. There is really small cognition and certainty about
the belongings rights issue and until resolved investors will be wary of the
state of affairs.
However, non all states have addressed the needed alterations in the same
manner. Poland has been a leader in foreign investing and engagement when
compared to it & # 8217 ; s post-comminist opposite numbers.
Poland: Brief History
The name Poland is derived from that of the Polanie, a Slavonic people
that settled in the country, likely in the fifth century AD. Poland is a state in
east-central Europe. In the eighteenth century it was divided up by its neighbours and
ceased to be until resurrected in 1918. Again partitioned by Germany and the
Soviet union at the beginning of World War II, it was reestablished as a Soviet
orbiter province in 1945, and remained a Communist-dominated & # 8220 ; people & # 8217 ; s republic & # 8221 ;
Mikhail Gorbachev & # 8217 ; s assignment as Kremlin leader in March 1985 was the
signal that the Polish resistance had been waiting for. Exploiting the new
liberalisation in the part, Lech Walesa and Solidarity, Pope John Paul II and
the church hierarchy, and ordinary citizens stung by the intensifying economic
recession combined to coerce the Communists to sit down at roundtable negotiations in
1989. They secured far-reaching political grants and exploited the
ensuing chances for political competition to drive the Communists from
The new non-Communist authorities sought to convey about economic reform
through & # 8220 ; daze therapy & # 8221 ; in a strategy devised by Finance Minister Leszek
Balcerowicz. Introduction to Polish economic state of affairs
Poland & # 8217 ; s cardinal economic job is that production and life
criterions for it & # 8217 ; s 38 million people is considered to be unequal. With a GDP
about a 3rd of the United States ( on a per capita footing ) , Poland is considered
to be a in-between income state.
During the 1970 & # 8217 ; s, the Gierek authorities attempts to undertake the job ( of
economic hurt ) through a policy of quickly spread outing ingestion coupled
with investing financed by foreign adoption. For several old ages this economic
policy generated growing of approximately 10 per centum per twelvemonth ( The USA & # 8217 ; s current growing
( In GDP ) is between 2-3 % with 4 % being the end ) .
However, the policy was to finally neglect due to mismanagement,
recession in Western export markets ( i.e a deficiency of foreign investing ) , a prejudice
towards merchandises in weak demand but dearly-won to bring forth ( in footings of energy input
and natural resources ) . These three factors produced an economic crisis that
resulted in negative growing rates in 1979,80,81 and 82. It besides produced the
Solidarity motion in 1980 and the execution of soldierly jurisprudence the following
During the 1980 & # 8217 ; s, Poland managed to recover earlier production degrees,
at the terminal of this period of economic development there was some restructuring
of production, off from heavy industry towards lighter industry, nutrient
processing and services. Equally good there was little motion towards the motion
of concern from province to private custodies ( with the end of believed market
mechanisms for efficiency ) . The private sector, in Poland, now accounts for one-
tierce of the labour force ( 2/3 of that in agribusiness ) .
However, former policies ( as mentioned above ) have created a basic
economic state of affairs in Poland that is marked by inefficiency, foreign debt and
Agribusiness histories for 13 % of national income, 28 % of employment and
12 % of export net incomes. It is preponderantly a private industry sector ( about
75 % ) but productiveness is low and development is dead. In this country Poland
has fallen increasingly behind it & # 8217 ; s east European neighbours.
This deficiency of advancement is due chiefly to an inefficiently little size of
farms ( 10 hectares or less ) , inefficient production methods, deficiency of investing
inducements and limited entree to inputs such as fertilisers and pesticides
( which would increase productiveness and cut down loss due to plagues ) .
Industry ( including energy and fabrication ) produces about half of GDP
and employs 29 % of the labour force. The sector is mostly colored towards heavy
industry and big province endeavors ( authoritative attack of communist ethic ) . Over
90 % of industrial end product is produced by the 6000 ( or so ) province owned endeavors.
This outmoded productive base needs to be restructured. Industry is mostly
over-manned and energy intensive. Energy ingestion is 2-3 times higher per
unit of production in Poland than in the mean Western Industrialized state.
There are important energy militias in Poland, in the signifier of coal, oil and
gas ( in eastern Poland ) , but these militias need modern engineering to be tapped.
Poland is no longer a net energy manufacturer and must import energy to keep
Incentives for direction and workers have been distorted ( includes
unrealistic prices-low energy and pollution costs, soft budget restraints and
Largely created during the 1970 & # 8217 ; s, this totaled more than 48 billion
dollars ( US ) before the more than 50 % decrease of official debt in March of
1991. The staying 30 billion dollars is still a heavy load on the economic system.
The debt service due ( involvement & # 8211 ; simple maintaining of debt at present degree ) in
1991 amounted to 4 billion ( 40 % of 1989 exports ) .
The authorities fell into arrears with many creditors ( 2/3 owed to
foreign authoritiess, 1/3 to foreign Bankss ) . The debt was being traded on the
markets at 15 cents on the dollar down from 40 cents at the terminal of 1988 ( intending
that the creditors were non secure in the belief that Poland was a good debitor
and that their debts were improbable to be paid in full & # 8211 ; hence the bead in value
of keeping portion of their debt ) .
Deficits and extra demand for consumer goods and factors of production
were profoundly ingrained in the system until the reform of January 1990. Subsidies
accounted for 14 % of GDP ( down from 17 % in 1983 ) , and the budget was running a
shortage of 8 % of GDP in 1989.
Poland & # 8217 ; s economic system was structured, in the same manner systematic of Communist
states, in an inefficient mode. Production was big, province owned and in
usual monopoly, This meant that the economic system was without the benefits of private
market mechanisms for economic efficiency. In trying to vie in an
progressively globalized universe market Poland & # 8217 ; s economic state of affairs became desperate.
This coupled with debt ( and the demands of serving it ) meant that the economic system
was in demand of alteration on a expansive graduated table if Poland was to emerge as an economic
force with sensible success in comparing to her neighbours in Europe and the
The Reform Procedure
Against the background, the Mazowiecki authorities adopted a rapid and
extremist reform plan for 1990. The purpose, of this plan, was to consequence a
transmutation of the Polish economic system from a bid to market economic system based on
proved establishments with market finding of monetary values and exchangeable currency.
The plan included steps for stabilisation, liberalisation and
A figure of policy steps were directed chiefly to stabilization
1 ) Budgetary balance: increasing revenue enhancements by 50 % , cut downing authorities investings,
and cut downing subsidies from 14 % of GNP to 6 % in 1990. ( These steps were
designed to increase gross while diminishing outgos doing for a balanced
budget and the ability to refund the national debt )
2 ) Tight pecuniary policy with positive existent involvement rates ( involvement subtraction
rising prices = existent involvement rate ) to extinguish concealed subsidies from family
rescuers to province endeavors via low involvement rates in the banking sector that
were estimated to entire 10-15 % of GNP in 1988 and 1989.
3 ) Eliminating controls on more than 90 % of monetary values in the economic system, with
exclusions in energy, public conveyance and lodging. ( This was designed to
extinguish province pricing that did non reflect accurate market images of cost
and demand )
4 ) Wage restraint, supplying merely mild pay indexation ( indexation = alteration of
rewards based on cost of life additions ( i.e. rising prices ) & # 8211 ; limited means that
rewards would stay mostly unindexed and therefore workers would non ( unless given a
rise ) earn the same comparative wage as old ages past and would see a loss
in purchasing power ) . Excess pay payments were taxed at a punitory 500 % endeavor
revenue enhancement rate.
5 ) Foreign debt was rescheduled by an understanding with the Paris Club ( Holder of
2/3 of national debt ) in
March 1990 and reduced by at least 50 % in March 1991. A
structural accommodation loan of 394 million was obtained by the World Bank in 1990,
every bit good as an IMF ( International Monetary Fund ) stand-by of 569 million and
committednesss from the G-24 stabilisation fund ( of 1 billion ) and EC ( economic
community ) of fiscal assistance.
Liberalization of Foreign Trade
This implies the lifting of most of the quantitative and licensing
limitations coupled with the lowering of duties to between 15 and 50 % for most
goods. Since 1982 an increasing figure of endeavors have been granted
mandates to carry on foreign trade activities, in add-on to the 60 ( odd )
specialised province endeavors ( with the same privilege ) .
Export inducements include export related income revenue enhancement alleviation, a foreign-
exchange keeping system introduced in 1982 ( this granted export endeavors
precedence rights to purchase foreign exchange for production related imports ) .
Restructuring of the Economic system
This was to average steps of a more extremist nature to be introduced in a
1 ) Deregulation of province endeavors and enforcement of rigorous payment
processs ; new bankruptcy and anti-monopoly statute law intended to indurate
budget restraints and to cut down monopoly power. The system of ad hoc, ex station
revenue enhancement distinction with regard to sectors, houses and factors of production
will be replaced by a unvarying system of revenue enhancement ( enterprise revenue enhancement, personal
income revenue enhancement ) . Abolition of industrial associations, in order to, prevent
informal co-ordination of their activities.
2 ) Well defined belongings rights. The new authorities inherited a system under
which workers & # 8217 ; councils were straight involved in endeavor determination devising and
the assignment of directors ( the obvious deficiency of industry strength under this
system is obvious ) . A Major trouble is the rapprochement of workers & # 8217 ; rights
and the denationalization jurisprudence of adopted in July, 1990 ( this jurisprudence envisages far-
making denationalization ) .
State companies are being transformed into companies with portions owned by the
province to be sold subsequently to the populace. At most, 20 % can be sold to worker on
discriminatory footings and 10 % to foreign investors without enfranchisement. However,
larger graduated table gross revenues to foreign investors are possible capable to authorities
blessing ( the procedure is expected to be mere formality ) . The obvious addition of
this is to increase authorities gross ( in the short term ) and to make,
through foreign investing, a vivacious economic system supplying occupations and gross n the
3 ) A new pecuniary system based on a two-tier banking system. The monopoly bank
was split in February 1989. Interest rates are to reflect market forces,
authorities bond gross revenues can be used to pull off possible budgetary shortages, and
commercial paper will be issued ( which can get by with the job of inter-
endeavor arrears by turning them into tradeable securities to be discounted at
commercial Bankss ) .
This was designed to make better seting & # 8220 ; natural & # 8221 ; market forces and to
enable industry to better header with the economic alterations.
The Results of Reform
The reform plan led to initial consequences that were no less than
remarkable. However these consequences have in most instances non been sustained over
Inflation, after an initial leap, fell to a much lower rate ; but it did
non fall every bit far as was hoped and the job is non yet beaten ( low rising prices
has become a dominant economic policy in the last two decennaries ) . In 1990
rising prices was at 585 % , in 1991 it was supposed to drop to 36 % ( harmonizing to IMF
prognosis ) but merely fell to 80 % . ( For position the & # 8220 ; normal & # 8221 ; rising prices rate in
the Western universe stands at between 1-3 % ) .
Relative monetary values responded quickly to the 1990 monetary value liberalisation and
deficits mostly disappeared. Strong positive existent involvement rates were
established. The budget was ab initio in excess ( unheard of ) but has since gone
back into shortage.
The economic system remains in a deep recession. GDP fell by 8-12 % and end product by
12-18 % in 1991. The deepest end product lessenings have been in fabrics, coal, metal
and conveyance. Investing in 1991 was 15 % below degrees of 1990.
However, end product in the private sector increased in 1990 by 17 % ( might be
due to the simple addition in the size of the private sector ) . Agricultural
end product has non decreased, so far, despite a bead in fresh fish and fertiliser gross revenues
to tierce of former degrees.
As good, bankruptcies have been rare, new houses have been established
( net addition in houses in 1990 of 362,000 ) . Enterprises have been cushioned, so
far, by diminishing investing outgo, sale of capital assets and stocks,
and have used their resources to procure short-run endurance and avoid lay-offs.
Unemployment is besides low compared to the bead in production degrees ( May
1991 & # 8211 ; 8 % of labour force jobless ) .Real rewards have fallen aggressively ( 25 %
instantly after reforms in 1990 ) and go on a downward tendency.
Problems of Reform
The ultimate purpose of the reform procedure is to inculcate a dynamic component
into the economic system by agencies of marketization ( doing economic agents responsive to
existent monetary values ) of production and denationalization of the agencies of production. The
full scope of the necessary conditions for growing is non clear ( economic experts
seldom agree ) but it is clear that there exists a minimal demand for
successful reform. This includes political, cultural and economic sustainability.
Initially, both the authorities and the population were to the full committed
to the reform procedure. In the first months of 1990, the authorities could claim
an unprecedented grade of legitimacy and support from the population. In the
public sentiment polls the proportion of people who felt that their economic
state of affairs was at least & # 8220 ; non bad & # 8221 ; rose from 13 % in fall in 1989 to 20 % in
January 1990 and up to a high of 27 % in March of that same twelvemonth.
Since so, nevertheless, this spirit of success has become tarnished. Pollss
in mid 1991 showed that most people expected tensenesss to increase. In 1991 the
CBOS polling house recorded ( in March ) a 48 % difference between optimist and
pessimist ( 54 % pessimist versus 6 % optimist ) .
The likely ground for this is that outlooks rose faster than the
possible economic additions and the populations outlooks were non ( nor could non
be met ) .
A immense sum of new economic statute law is required to set up a
general regulation of jurisprudence and establishments appropriate to a market economic system.
A important purpose of reform is to better inducements for private and state-
owned endeavors. Property rights are to be clearly defined and contracts and
payment processs purely enforced. Denationalization has a high precedence, nevertheless,
there are still issues of timing, graduated table and foreign investing that need to be
The Polish people are eager for speedy reforms and a fast rise in life
criterions. There are, nevertheless, hazards to enterprises such as speedy denationalization.
This type of undertaking ( aggregate denationalization ) is dearly-won in footings of advisers,
disposal ( to supervise the new proprietors rights ) and is unsafe in footings of
Denationalization policies are besides hard in an environment where the
place public is unable to afford a interest in the new houses. During the initial
stage of reform single Polish fiscal strength has diminished. This has
meant that foreign investing was needed to purchase the one time province owned houses. This
might make jobs in the hereafter with small or no control exercised by the
Polish themselves in their ain state.
Adequate labour market establishments are absent, worker still appeal ( in
general ) to the province governments instead than to enterprise direction when
claiming higher rewards and other betterments. A system of corporate bargaining
is needed, and the private endeavor demands representative organisations.
Institutions that can convey market signals to manufacturers are missing.
Should the signals pass there is frequently structural rigidnesss that prevent the
necessary alterations needed to capitalise on consumer demand.
This is important to the success of reform in speed uping economic growing.
Poland has had the bad luck of four recent blows to the economic system. The decrease
of the former GDR market after the German reunion ( this has meant the loss
of occupation for 35,000 Polish migratory workers ) , terrible cuts in exports to other parts
of the former CMEA ( particularly Russia ) ( Poland & # 8217 ; s exports for grounds of quality
and monetary value can non vie with Western exports ) , increases in universe oil monetary values
( Poland imports energy ) and eventually the universe recession of the past 4 old ages
which has forced Western economic concentration on itself and therefore universe assistance has
Poland has been the luckless receiver of economic and political freedom
in footings of timing. The Western universe is in a debt crisis and can no longer assist
every bit much as they one time would. Equally good, the terminal of the Cold War has meant that
Poland is no longer every bit of import as it might hold been as a lever for the
democratic states of the West. It & # 8217 ; s chase of democracy does non hold the
same impact as it would hold had under Cold War fortunes.
From an economic point of position Poland, and every other East European
state in this state of affairs, is faced with a pounding giant of an economic system
littered with inefficiency, waste, bad direction and engineering decennaries behind
the states they are now in competition with. This means that Poland will necessitate
to consequence a complete Reconstruction of it & # 8217 ; s economic system in order to be able to, in
the hereafter, vie on an even degree.
Poland has the ability to emerge from this economic recession and emerge
as an solid economic power capable of supplying good life criterions for her
-Blanchard, O. and Layard, R. & # 8220 ; Economic Change in Poland & # 8221 ; Discussion paper No 3,
London School of Economics, 1990.
-Chilosi, A. , & # 8220 ; Poland & # 8217 ; s Program of Economic Transformation & # 8221 ; , Paper presented at
NATO-Colloquium, Brussels, 1990.
-Dziewanowski, M.K. & # 8220 ; A History of Soviet Russia & # 8221 ; , Prentice Hall, New Jersey,
-Gomulka, S. And Rostowski, J. , & # 8220 ; An International Comparison of Material
Intensity & # 8221 ; , Journal of Comparitive Economics, No4:475-501 Dec 1988.
-Kremer, M and Weber M. Eds. & # 8220 ; Transforming Economic Systems: The Case of
Poland & # 8221 ; Physica-Verlag Heidelberg, 1992.
-Macesich, G. and Dimitrijevic, D. & # 8220 ; Monetary Reform in former Socialist
Economies & # 8221 ; , Praeger, London 1994.
-Mihalyi, P and Smolik, J.E. , & # 8221 ; Leading is non plenty: an Assessment for Western
Support for Reforms & # 8230 ; . & # 8221 ; Paper presented at 1st conferance of EACES, Verona,
1 ) & # 8221 ; Internal and International Aspects & # 8230 ; & # 8230 ; in Poland & # 8221 ; , Paper presented at 5th
Congress of EEA, Lisboa, 1990.
2 ) & # 8221 ; Privatization of Socialist Economies & # 8221 ; , Paper presented at 1st Conference of
EACES, Verona 1990.
-Poznanski, K. Ed & # 8220 ; Stabilization and Privatization in Poland & # 8221 ; , Kluwer Academic
Publishers, Boston, 1993.
-Sachs, J. & # 8220 ; Poland & # 8217 ; s Jump to the Market Economy & # 8221 ; , MIT imperativeness, Massachusetts,1993.
-Shen, R. & # 8220 ; The Polish Economy & # 8221 ; Praeger, New York, 1992.
-Slay, B. & # 8220 ; The Polish Economy & # 8221 ; Princeton University Press, New Jersey, 1994.
-Summers, R. and Heston, A. & # 8220 ; A New Set of International Comparisons & # 8230 ; & # 8221 ; , Review
of Income and Wealth 34, No1:1-25.
-Zabkowicz, A. & # 8220 ; Stabilization, Adjustment and Economic Activity & # 8211 ; the Polish and
Magyar Experience & # 8221 ; Discussion Paper 328, Institute of Developement