Balcerowicz Plan

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The Balcerowicz Plan (Polish: Plan Balcerowicza), also termed "Shock Therapy," was a method for rapidly transitioning from a communist economy, based on state ownership and central planning, to a capitalist market economy. Named for its author, the Polish minister and economist Leszek Balcerowicz, the plan was adopted in Poland in 1989.

Such rapid transitions were difficult for the countries that used them, such as Poland. Many countries that implemented a Balcerowicz-style plan, experienced instability and crushing poverty before they could experience economic growth.

1 Background
2 The plan
3 The effects
- 3.1 Positive
- 3.2 Criticism
4 External link

[edit] Background

After 45 years of communist rule, Poland's economy was completely unsuited for integration into a Capitalist world market. The inflation rate had reached 264.3% and was constantly rising. The majority of state-owned monopolies and holdings were largely ineffective and completely obsolete in terms of technology. Although there was practically no unemployment in Poland, wages were low and the shortage economy led to lack of even the most basic foodstuffs in the shops. After the failure of the Communist government in the elections of June 4, 1989, it became clear that the previous regime was no longer legitimate.

The unofficial talks at Magdalenka and then the Polish Round Table talks of 1989 allowed for a peaceful transition of power to the democratically-elected government. Initially it was agreed that the government would be formed by Tadeusz Mazowiecki and the opposition, while the seat of the president of Poland would be given to former PUWP leader Gen. Wojciech Jaruzelski.

[edit] The plan

In September of 1989 a commission of experts was formed under the presidency of Leszek Balcerowicz, Poland's leading economist, Minister of Finance and deputy Premier of Poland. Among the members of the commission were George Soros-backed Jeffrey Sachs, Stanisław Gomułka, Stefan Kawalec and Wojciech Misiąg. The commission prepared a plan of extensive reforms that were to enable fast transformation of Poland's economy from obsolete and ineffective central planning to capitalism, as adopted by the states of Western Europe.

On October 6 the program was presented on public television and in December the Sejm passed a packet of 10 acts, all of which were signed by the president on December 31, 1989. These were:

Act on Financial Economy Within State-owned Companies, which allowed for state-owned businesses to declare bankruptcy and ended the fiction by which companies were able to exist even if their effectiveness and accountability was close to none.
Act on Banking Law, which forbade financing the state budget deficit by the national central bank and forbade the issue of new currency.
Act on Credits, which abolished the preferrential laws on credits for state-owned companies and tied interest rates to inflation.
Act on Taxation of Excessive Wage Rise, introducing the so-called popiwek tax limiting the wage increase in state-owned companies in order to limit hyperinflation.
Act on New Rules of Taxation, introducing common taxation for all companies and abolishing special taxes that could previously have been applied to private companies through means of administrative decision.
Act on Economic Activity of Foreign Investors, allowing foreign companies and private people to invest in Poland and export their profits abroad.
Act on Foreign Currencies, introducing internal exchangeability of the złoty and abolishing the state monopoly in international trade.
Act on Customs Law, creating a uniform customs rate for all companies.
Act on Employment, regulating the duties of unemployment agencies.
Act on Special Circumstances Under Which a Worker Could be Laid Off, protecting the workers of state firms from being fired in large numbers and guaranteeing unemployment grants and severance pay.
Act of Monetary Return, to freeze exchange of Polish currency while maintaining a high level of inflation.

In late December the plan was approved by the International Monetary Fund. The IMF's support was especially important because the national debt in various foreign banks and governments reached an amount of US$38.5 billion during the last 25 years of Communist rule in Poland. The IMF granted Poland with a stabilization fund of US$1 billion and an additional stand-by credit of US$720 million. Following this the World Bank granted Poland additional credits for modernization of exports of Polish goods and food products. Many governments followed and paid off some of the former Communist debt. Many foreigners benefitted from a fixed currency exchange rate, making billions of dollars per year (See ART-B).

[edit] The effects

[edit] Positive

The packet of reforms passed by the parliament drastically limited the state's influence over the economy. The plan released price-fixing for many products, allowing them to be dictated by the market instead of the Central Statistical Office. Also the internal debt was drastically limited, by circa 3% of GNP, by cutting down on state subsidies to coal, electricity and petroleum. Initially the social costs of the reforms were seen as extremely high, and roughly 1.1 million workers at state-owned firms lost their jobs. Although inflation seemed to be out of control, the Polish economy gradually started to get back on track. By 1992, more than 600,000 private companies had been set up, providing jobs for approximately 1.5 million people.

Most economists agree that without this shock therapy, which sacrificed short-term gains for long-term growth, modern Poland would be a much poorer country. For example, Poland's annual growth rate between 1989 and 2000 was one of the highest of all post-Communist economies.^{[citation needed]}

[edit] Criticism

The reforms were very controversial and made Balcerowicz a target for many political attacks. The hardship caused by the Balcerowicz plan prompted Andrzej Lepper, the leader of a party called Self-Defense (Samoobrona), to create the slogan: "Balcerowicz has to leave" (Balcerowicz musi odejść).

The wave of bankruptcies of inefficient state-owned industrial giants left approximately 20% of Poles unemployed. The change was especially drastic in rural areas of the country, which had previously been collectivized by the Communists into state-owned farms. However, critics often point out that the reforms of 1990 only showed the unemployment that had existed in a hidden form during Communist times.

Critics of Balcerowicz's Plan point to Russia as a country that privatized its industry in a similar manner and quickly became crony capitalistic. Russia had the same economic advisor Jeffrey Sachs as Balcerowicz, and their reform plans were analogous to Poland's. Recently Jeffrey Sachs has criticized his own advice as incorrect (The End of Poverty: Economic Possibilities for Our Time), which has subsequently renewed discussion over Balcerowicz's reforms. Many economists (for example Nobel Price winner Joseph Stiglitz) argue that stopping the reform allowed Poland to avoid the same fate as Russia. However, some reports state Russia did not carry out shock reform in the same manner as Poland (Russia is not Poland, and That's Too Bad', Michael M. Weinstein, New York Times, p. 5, Aug. 30, 1998) Additionally, the reforms undertaken in countries such as Hungary and the Czech Republic, are considered to be better models for economic transition. Prominent Polish critics of Balcerowicz include Grzegorz Kolodko, prof. Zdzisław Sadowski and Ryszard Bugaj. However, some people point to countries that failed to reform quickly, such as Ukraine, Slovakia, Romania and Bulgaria, whose respective economies are in far worse condition than that of Poland. The transitional problems that Poland faces are blamed on high taxes, restrictive labor laws and a lack of economic freedom that characterized the period between 1990-1993.^{[citation needed]}

Years later, Balcerowicz admitted that he neglected to consider the element of human motivation in his calculations.^{[citation needed]}

Change in %	1990	1991
GDP	-10,5	-7,5
prices	585,8	70,3
real wages	-24,4	-0,3
export	24,7	-18,5
import	-2,5	24,3
Food production	-2,2	-2,0
industrial production	-24,2	-11,9
unemployment	6,1	11,5
deficit (% of GDP)	3,1	3,8