Market Reforms In Post Communist Eastern Europe Case Study of Poland

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Poland, every bit good as it ’ 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 burden.

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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 ’ 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 – they, therefore, did non hold the financess or ability to impact the necessary alterations to their agencies of production ) , the “ information age ” 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 “ package ” became indispensable to the growing of industry ( the “ hardware ” 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 ’ 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 “ people ’ s republic ” until 1989.

Mikhail Gorbachev ’ 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 power

The new non-Communist authorities sought to convey about economic reform through “ daze therapy ” in a strategy devised by Finance Minister Leszek Balcerowicz. Introduction to Polish economic state of affairs Poland ’ s cardinal economic job is that production and life criterions for it ’ 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 ’ 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 ’ 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 twelvemonth.

During the 1980 ’ 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 ’ 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 production. 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 ’ 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 – 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 – 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 ’ 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 ’ 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 universe.

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 restructuring.


A figure of policy steps were directed chiefly to stabilization aims.

  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 ) – 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.

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