Market Reforms In PostCommunist Eastern Europe Essay

Market Reforms In Post-communist Eastern Europe Essay, Research Paper

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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


Communist Economicss

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 ;

until 1989.

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

market instabilities.



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

employment warrants.

Foreign Debt

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 ) .

Market instabilities

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

gradual nature.

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.

Popular Attitudes

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 ) .

Institutional Reform

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

worked out.

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

insider acquisitions.

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.

Supply Response

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.

World Environment

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

been reduced.


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


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London School of Economics, 1990.

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NATO-Colloquium, Brussels, 1990.

-Dziewanowski, M.K. & # 8220 ; A History of Soviet Russia & # 8221 ; , Prentice Hall, New Jersey,


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Intensity & # 8221 ; , Journal of Comparitive Economics, No4:475-501 Dec 1988.

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Poland & # 8221 ; Physica-Verlag Heidelberg, 1992.

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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,


-Nuti, D.M.

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

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-Poznanski, K. Ed & # 8220 ; Stabilization and Privatization in Poland & # 8221 ; , Kluwer Academic

Publishers, Boston, 1993.

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-Shen, R. & # 8220 ; The Polish Economy & # 8221 ; Praeger, New York, 1992.

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of Income and Wealth 34, No1:1-25.

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Magyar Experience & # 8221 ; Discussion Paper 328, Institute of Developement

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