Poland: Fish Soup or an Aquarium
By Natalie Laing '91
Independent Study (Political Science) "Economic Reforms in Poland"
Writing Objective: Write a detailed paper of approximately 20 pages, reporting on the results and conclusions of your independent research.
The crumbling of the Berlin Wall signified not only the crumbling of a communist-oriented government in one country, but also the crumbling or defeat of communism in an entire group of countries, formerly known as the Eastern Bloc. The disintegration of these governments is in turn giving birth to brand new democracies. While the past two years have proved to be the “birthing period” of democracy for most of the former Eastern European or Eastern Bloc countries, there is an Eastern European country whose political reforms began ten years ago-Poland.
Poland is the largest country in Eastern Europe, with a population (as of 1988) of thirty-eight million.1 During the last few years of World War II, the Soviet Union invaded and occupied Poland and established the Polish United Workers’ Party (PUWP) as the exclusive ruling party. This government was recognized by other established nations at the Yalta Conference in 1945, and a Communist dictatorship was thus founded in Poland.
The Communist government consisted of four parts: a Party Congress, a Central Committee (elected by the Party Congress), a Politburo, and a Secretariat (both elected by the Central Committee). The government was run by the PUWP elite, or the nomenklatura. The nomenklatura was a body of local officials and managers who held their positions due to their party membership (in the PUWP), rather than attaining the positions by merit or technical expertise.2 The tedious structure of the Communist rule was shown in its need to rely on military power in order to maintain its level of influence, and In it’s extensive use of front organizations (organizations that are noncommunist, but act as auxiliary communist forces) to reinforce party influence in areas where the Workers’ Party had low ratings.3
Under the strain and oppression of communist rule, opposition groups of intellectuals and militant working class citizens developed and Increased in size and influence. It was in this atmosphere that the Solidarity movement (an organization of free trade unions) came Into being. A number of factors in addition to the Solidarity movement, including an underground press, other organized opposition groups, and massive defiance, contributed to the demise of the Communist regime.4 The gradual buildup of power in the Solidarity movement garnered its successes by chiseling away at the communist government and it’s Institutions.5 Between 1950 and 1970, defiance of the government run by the communist PUWP took the form of anti-government riots, strikes by workers, and protests from intellectuals. No substantial successes were achieved until 1980, when thousands of workers from Gdansk and several other cities went on strike and demanded economic and political reforms. As a result of such large scale opposition, the government conceded to recognize the Solidarity movement. This was a significant development, due to the fact that the Solidarity movement was an organization that was independent of the Communist Party and it’s front organizations .6
The “last hurrah” or initiative of communism In Poland was the imposition of martial law In 1981, which lasted for several years. The intention of the PUWP leaders that were enforcing martial law was to impose stability in Poland. This was successful to an extent in political and economic terms, but true progress and development were blocked, because the government did not have the popular support of the people it ruled. For the rest of the 1980’s, party membership (in the PUWP) declined while the opposition to the party grew until, finally, in August 1989, a parliamentary agreement was reached to implement a Solidarity-led coalition government. The coalition government consisted of the Peasant Party, the Democratic Party, the Solidarity movement, and (reluctantly) the PUWP. The installment of this government marked the first time in over forty years that the political role in Poland was not dominated and monopolized by communist rule.
Prewar Poland has been equated to an aquarium full of diverse fish which were subsequently turned into fish soup by the communist regime.8 Poland is now faced with turning the fish soup (the broken parts or the oppressed Independence of the Poles) back into an aquarium. The rebuilding of the aquarium, or the free Polish state, will obviously be more difficult and time consuming than the subversion of Poland was.
Poland has, however, diligentiy begun the restructuring process. The restructuring is occurring on two basic planes: economic and political. As mentioned previously, the political reforms have occurred very gradually over the past ten years. The economic reforms have occurred very suddenly, however. The present transition from a centrally planned economy to a market oriented economy has been a shock to the Polish system. This shock to the system has been appropriately termed “shock therapy”. The shock therapy theory was created by Jeffrey Sachs, a Harvard professor. The “shock” method is designed to create a market rapidly, through simultaneous reforms, in order to create an environment that encourages rapid economic development. Sachs advocates the simultaneous implementation of ten basic components of his program in order to create an “instant market”:
- eliminate restrictions on private economic activity
- break up industrial giants
- sell government owned enterprises
- open economy to international trade
- balance government budget
- eliminate subsidies and guaranteed loans
- tighten monetary and fiscal policies
- make currency convertible
- end price controls
- freeze wages at present levels
The idea behind the shock therapy method of economic reform is to introduce reforms rapidly in order to minimize hyperinflation and public resistance, both of which are commonly associated with a market readjustment process, and to introduce private ownership and competition to the Polish economy.9 Shock therapy was officially Implemented in Poland as of January 1, 1990, and it brought several positive changes to Poland almost immediately. The state monopolies of foreign trade were broken up, the balance of payments with countries using hard currency made a marked improvement, and the shortage of consumer goods was eliminated. These changes brought stabilization to Poland, but at a cost.*0
Salaries In Poland froze while prices rose and many government subsidies were eliminated or drastically reduced. Polish citizens were faced with “first world prices at third world wages.” This prevented them from taking advantage of the now well-stocked stores. An unemployment percentile of Polish citizens was established (at just under 10%), which was a relatively new experience for many Poles, as there was virtually no unemployment under the communist regime. That is not to say that everyone was actually working, but merely that everyone had a job and received wages, sometimes for doing no work at all.
The negative effects of shock therapy (such as soaring prices and unemployment) have caused some Poles to experience disillusion and frustration with the market oriented system. These reactions are entirely understandable, as there is no blueprint in the Polish historical archives for Poland to consult concerning how to run the government in a democratic fashion. Not only are the Polish citizens not prepared psychologically for a transition of such major proportions, but they have no previous precedents of democracy in Polish government to fall back on. The communist regime has stamped out all knowledge in Poland of how to function in a normal market system or to effectively use entrepreneurial tactics.ll In general, however, the Poles have tolerated their economic hardships with relatively little protest and opposition.13
Additional negative effects of the shock therapy on the government include the lack of a bridging policy (between the two economic systems) to offer long-term protection by the government to Industries. Again, this is due to a justified lack of preparation on the part of the government for this transition, as well as a somewhat laissez-faire attitude.14 The government is also being plagued with side effects of the economic and political transition such as high inflation, increasing drug use, tax evasion, bootlegging, and the spread of pornography.15 The appearance or strengthening of such problems combined with the uncertainties of managing a new system of government have forged quite a large discrepancy between the predicted and actual results of the reforms Implemented in accordance with the shock therapy method. These discrepancies (as of December 1990) are listed below.
The above statistics are the actual outcomes of the reforms thus far. These circumstances or discrepancies are what the new government is going to
1. 100% inflation will occur.
2. Industrial productivity will decrease 5% per year.
3. National income will decrease a little over 3%.
4. There will be 400,000 unemployed.
5. Consumption will decrease 1%.
6. 100 prtviUzations will be completed by the end of 1990.
1. Inflation rose 200%.
2. It decreased close to 25%.
3. It decreased close to 20%.
4. 1,300,000 are unemployed.
5. It decreased close to 20%.
6. Only 7 were.16
have to take into consideration as it forms policies In an attempt to rebuild the economic structure in Poland. Prtvitization efforts in a newly formed pluralist government are going to be strenuous. The government not only has to organize the capital market, but must also decide how to get the basic industries and the production of consumer goods Into operation. The government must also find and establish partners for Joint ventures and obtain loans from Western countries in order to stimulate the Polish economy and keep it afloat.17 The present government therefore faces the huge task of shaping an entirely new democratic system.
The government is caught In a “Catch 22” (or Kecz-22, as they say in Poland) situation. On the one hand, they are in the midst of implementing major economic reforms. This economic transition leads to political frustration, which in turn leads to instability and unrest among the Polish citizens. On the other hand, the transition that Poland is facing politically leads to economic frustration.18 The problems are therefore cyclical-the processes of economic and political liberalization are two distinctly separate processes, yet they are also unavoidably Intertwined. The Polish government is therefore dealing with two simultaneous liberalization processes.
The present government in Poland is led by Lech Walesa, the recently elected president of Poland, and the leader of the Center Alliance (a separate branch of the Solidarity movement formed by supporters of Walesa). The recent presidential elections in Poland marked the first time in more than sixty years that democratic presidential elections were held there. He was elected on December 9, 1990 in Gdansk over his opponent Tadeusz Mazowlecki, the previous Prime Minister, whose supporters formed the group known as the Civic Movement for Democratic Action.
Lech Walesa has justifiably been hailed as the hero of the Solidarity movement (he won a Nobel Prize In 1983 for his leadership) and of the liberalization process, but he is not necessarily hailed as a post revolutionary hero. He has been accused of possessing dictatorial tendencies, of being unpredictable, and inconsistent in stating his intentions of beliefs. His personality was one of the reasons that another party was created.
The two existing parties (the Center Alliance and the Civic Movement) are practically two rival political parties, even though they both stem from the Solidarity movement They both nominated candidates for the election as well as represented different constituents, and they thus closely resemble democratic political parties In Western countries. While the parties agree on the need for reforms, they have differing opinions concerning the style of the reforms and the rate at which they should be implemented.20 It has become clear to countries such as Poland that it is easier to overthrow a repressive communist regime than it is to create a functional and thriving democracy.21
The government is, however, definitely on the road toward democracy. Their first partially free elections for the legislature were held in 1989, and the first free national elections were to be held In the spring of 1991, but have been postponed to October 1991. Communist ministers In the government are being replaced by Solidarity activists. The Center Alliance is pushing for rapid political reforms, the adoption of a brand new constitution, and the removal of the rest of the members of the Communist party (specifically the nomenklatura) from the government.22 Replacements for posts that were previously held by communists are being filled by Solidarity activists such as Jan Krzysztof Bieleckl, the new Prime Minister in Poland.
The cabinet that Beilecki leads was approved by the Polish Parliament on January 12, 1991.23 Bieleckl plans to risk making unpopular decisions in order to achieve the “higher good” of a market economy as soon as possible. One of his major concerns is to create a middle class (by privatizing small businesses and shops) and to involve the public in privatizing large companies by selling stocks and attracting institutional investors.24 Bielecki hopes that such economic changes will expedite the transition process to a market-oriented economy.
Lech Walesa is also interested in expediting the transition process. Walesa recently asked Parliament to approve holding elections for the legislature on May 26, 1991. His request was denied, however, when the chamber voted (on March 9, 1991) to delay the ballot. They decided instead to dissolve the chamber later in the year- in the fall of 1991, and to hold 1 0 elections by October 31, 1991, five months later than Walesa had suggested.25 Despite discrepancies such as this one, however, the Polish government is indeed unified.
The government policies are unanimously based on sovereignty in foreign affairs and independence from the Communist Party in domestic affairs. The length of the required military service in Poland has been shortened to eighteen months and soldiers are now educated as patriots of Poland instead of being Inundated with one only party’s doctrine during their military training. The defense budget has been cut back to 10.8 trillion zlotys,26 and the Polish Senate had passed a resolution calling for the quickest possible removal of Soviet troops from Poland.27 These are just a few examples of the policies that are being implemented by the new government in Poland. As of yet, however, politics in Poland do not represent to Polish citizens the “self-interest grabfest” that they often associate with U.S. politics.
Although the government is dealing with many issues within Poland itself as it develops, there are also many outside issues that affect Poland and its formation of a democratic government. What will Poland’s political position in Europe be? What will it’s position on the international market be? How will Poland be treated by countries who are already recognized as established democracies? The reactions of outside countries and institutions (such as the European Community, the World Bank and the International Monetary Fund) will play a large role in Poland’s future.
Poland’s fate and their future global position will truly serve as a prototype or precedent for the other countries in Eastern Europe The development of Poland according to the shock therapy method is an experimental process and is being observed with great interest not only by other Eastern European countries but by the Soviet Union as well. The success of this “experiment” in Poland depends, however, on a number of external factors, one of the most important being the investment of capital In Eastern European, and specifically Polish, companies and industries.
Western and industrialized countries have been understandably hesitant to Invest capital in Eastern European industries, because the future of those industries is really indefinite, and in some cases, insecure. On the other hand, the Poles are also hesitant to accept foreign capital, for fear that foreign countries will dominate or gain control of them by making them dependent on that foreign capital in order to survive or function effectively. This fear is especially today in Poland, as the prices have fallen quite low and Poland could easily be “bought” by someone who had the money to do so.’ The matter of foreign investment is therefore a touchy one, for the Poles wish to develop and strengthen their firms and companies with the capital attained from foreign investment, yet they also want to protect them and prevent foreign takeovers.
Most foreign financial institutions view the Poland “experiment” as the most ambitious of any attempted thus far in Eastern Europe, despite Poland’s large debt and the serious side effects of the program (such as a lowered standard of living, a serious recession, and increasing unemployment). Jeffrey Sachs, the Harvard professor who created the shock therapy program, blames the communist regime for Poland’s debt, because in order to remedy damages done under the communist rule, the Solidarity-led government had to reduce a large number of government subsidies. This in turn eliminated some of the government’s budget deficit but also stunted the growth of their money supply.30
Bieleckl (the Prime Minister) is attempting to lessen Poland’s debt by urging that eighty percent of Poland’s debt to Western countries be forgiven. This would be Justified, according to Bieleckl, due to the fact that Poland is a pioneer of the instant economic transformation experiment and therefore deserves favorable treatment (i.e. the forgiving of a very large percent of their debt). This request was made by Bieleckl at a meeting in Switzerland on February 3, 1991, of government and corporate officials form over fifty countries. Bieleckl declared that he Intends to remove the existing obstacles to foreign Investment, but that the country’s huge deht slows the growth and investment processes.31
The decisions of other countries concerning their involvement with Poland therefore have the potential to have a drastic impact on Poland. If Poland’s debts are not forgiven by Western countries, they will experience further sethacks in development. If the reunified Germany develop into a strong economic power, it will pose a threat, or at least a challenge, to the Polish economy. If the Soviet government and economy collapses, Poland will suffer along with the Soviets, as the USSR is a major trading partner for Poland.32 Poland has no choice, however, but to rely on aid from foreign countries, because such aid is essential to their survival as a democracy.
One source of such aid is the World Bank, who provided Poland with $300 million dollars to support the overall economic changes in Poland, and to help restructure Polish enterprises. The money will also support efforts on the Polish government’s part to mitigate the growth of unemployment and to help all that are suffering or in need due to the switch to capitalism.
The United States Department of Labor agencies are also Involved In providing aid to Poland- In the form of technical assistance. They are mostly programs that will “help Polish workers and their families adjust to the new free-market environment, not only from a humanitarian standpoint, but also to ensure that both political and economic reforms have sufficient opportunities to take hold. It Is hoped that these programs will assist the Poles not only technically, but socially as well. It remains to be seen (hopefully In the near future) whether Poland can successfully implement such assistance.
The future of Poland truly depends on whether or not they receive and effectively administer programs that take advantage of the technical assistance availahle from outside sources (such as the U.S. Department of Labor programs mentioned above). This type of aid-employment services, entrepreneurial skills, unemployment compensation, lahor statistics and crafts training33-Is the true need of the Polish government. Granted, aid in the form of capital and investments are important, but capital is useless if the possessor of it does not have the knowledge needed to deal with the capital.
The reforms that are presently of primary importance are therefore those that deal with educating and training the people In Poland who are responsible for rebuilding and developing the economic and political infrastructures there. In other words, it is important to properly train those in Poland whose job it is to train others, because Poland has a lot of untapped potential. They have land and labor enough to develop a large and successful labor market, hut they need more capital and, more Importantly, they need more trained personnel In order to organize the market.34
A contemporary reconstruction plan is therefore necessary to repair the infrastructure in Poland as well as the environmental damage that occurred under the communist regime. It is hoped that such repairs will cause Western countries to feel comfortable enough to begin or continue investing capital in Polish companies. Unfortunately, the capital that has been generated thus far has not been overwhelming. However, funds do exist for the Bank of Reconstruction and Development (BERD) in Europe, of which all European Community (EC) members are shareholders, as is the World Bank. The EC has already donated 10 billion European Community Units (ecu’s) in order to found the bank, which was constructed in order to assist countries such as Poland, and will start lending to Eastern Europe this year.
Poland’s association with the EC in the future is of vital importance. The actions and decisions of the EC concerning Poland will greatly affect the direction and substance of reforms in Poland. Will the EC grant full membership status to Poland? Or will they only grant them associate membership? Or maybe Poland will be denied membership? How successful will EC development and aid programs In Eastern Europe be for Poland specifically? The cruciality of the acceptance or denial of a membership offer for the EC may sound fairly trivial, but it will truly effect Poland as a part of Europe-elther positively or negatively.
The EC exports comprise just under twenty percent of world trade and the organization continues to grow in strength as they work toward their December 31, 1992 goal of the complete removal of non-tariff barriers on goods and services.36 A strong EC economy could shut out economies in countries that are on the European continent, yet not considered to be a part of Europe, or at least of the EC. Therefore Poland is striving (as are other Eastern European countries) to become a part of this stable and successful organization known as the EC- both for the economic benefits associated with membership and for the protection of such a large and multinational organization.
The EC has actually already begun the Implementation of some development programs in Eastern Europe, Poland Included. The programs can be categorized into three areas: financial, educational, and managerial programs. The main project in the financial sector is called Phare, (the French word for lighthouse), or G-24. Tills program evolved originally as the coordination of the aid of twenty-four “rich countries” to go to Poland and Hungary. It has since been expanded to other Eastern European countries, but Poland and Hungary still receive a substantial amount of money. In 1990, the two countries received 300 million ecu’s through the Phare program.
Projects in the managerial sector are for the most part based on the theory that “association agreements” should be extended to East European countries. Association agreements are agreements that do not mention the prospect of East European countries obtaining membership in the EC (at least not In the near future), but instead call for political and economic association with Eastern Europe, through various agreements and affiliations.
The agreements are designed to lead to free trade with the EC and offer protection to tile economies of the Eastern European countries. This would be accomplished hy implementing joint projects In Eastern Europe, which are projects that cffer services such as management training through Joint projects in banking, research and development, the environment, and telecommunications. These agreements are being advocated in the place of membership because the EC claims that the governments of the East European countries are not prepared to handle the responsibility of membership in the EC yet and also that the economies would not be ahle to stand up under the Influence of such a strong free trade market.38
The association agreements are not meant to be negative or “cop-out” programs on the part of the EC. The EC has offered money and loans to Eastern Europe through the European Investment Bank and is attempting to facilitate political cooperation between the EC and Eastern Europe. The EC is actually very interested in seeing a regional association (independent of the EC? formed in Eastern Europe, which would offer the protection of a community or organization to the countries in Eastern Europe and would alleviate the pressure on the EC to accept new (and somewhat immature) members. Such a regional association combined with the EC development programs in Eastern Europe would be beneficial in that the East European countries would be in good condition to enter the EC market when the opportunity arises.
EC development programs are therefore of vital importance to countries like Poland, especially those programs in the educational sector, which is the third, and perhaps most important, area in which EC development programs have begun to be implemented. Such programs would involve administering some really strong education programs in Eastern Europe in order to utilize the untapped intellectual resources in Poland (and other Eastern European countries) to their full academic potential. There are three main avenues through which these untapped resources can be cultivated: the ERASMUS, TEMPUS, and COIIETT programs. The term ERASMUS is an acronym for the European Action Scheme for the Mobility of University Students. TEMPUS, the second program, is an acronym for a Trans-European Mobility Plan for University Students. Both programs attempt to improve the university departments in Eastern Europe by encouraging Western firms and universities to get involved in the updating process, primarily through educational programs and exchanges. For example, 650 Polish students traveled to the West during the fall of 1990 in order to receive training on how to better teach husiness studies, languages, and applied sciences.40
COMETT, the third program, focuses more on technical exchanges and Joint training projects in an attempt to better relations and cooperation hetween universities and industries. COMETT is also concerned with giving university students international exposure-through internships, study abroad programs, and other related activities. This is actually a concern of all three programs. In the future, the Easter European countries want to better educate students that attend the universities (students who are the future of their countries), but they also want to avoid “brain drain” by encouraging the students that they educate to remain In their respective countries in order to develop a strong base of technical training.41
Even with a strong training program in technical affairs, however, Poland’s entry into the EC as a member is still questionable, at least for the next ten to fifteen years as Poland establishes it’s government and economy. Poland faces a long wait not only due to a number of countries already in line for membership, but also due to the debate being currently waged within the EC as to whether the EC structure should be widened or deepened.
Widening the structure of the EC would mean adding to the EC the East European countries or the countries that presently belong to the European Free Trade Association (EFTA). Deepening the structure of the EC would mean concentrating on strengthening the existinq structure of the EC (with only the twelve present members). The strengthening would occur by focusing on and increasing the current efforts being expended on three issues: building an open market, developing a single currency, and establishing a common security council.
If the present EC structure was widened, it is possible that the strength of the EC would be diluted. It is also feared that consensus would be more difficult to achieve due to a large increase in members, and that the neutrality of countries like Switzerland, Sweden, Finland, and Austria might be threatened. This is a problem because neutrality is something that those countries would most likely fight to retain, and such a conflict could hinder the development of a common security policy in Europe.42
If the present EC structure was deepened, on the other hand, there would be a certain loss of political and economic autonomy for the individual country members, which would be painful for a country like Great Britain. However, there would be the gain of an entity that is economically and politically very powerful. The existence of this union would eliminate the possibility of any single nation becoming dominant and would offer protection and security to the countries involved. If the EC had to concentrate on processing a whole list of new countries into the EC, there would be less energy available for the deepening, or strengthening, process. It Is likely that for now the EC will focus on just deepening it’s structure-at least until 1993, which is the earliest date that they will start discussing accepting any new members.43
Although Poland has not been accepted as a member of the EC, they do receive favorable treatment from the EC. Poland has signed trade and cooperation agreements with the EC that grant them the same trade preference that the EC offers to developing countries. The EC has also relaxed quotas where Poland is concerned and encourages coop-rative work concerning issues like energy and the environment. Political cooperation also takes place, through an organization called the European Political Cooperation (EPC).44
This cooperation with the EC is an important part of Poland’s development process. It is actually to Poland’s benefit that the membership process for the EC is delayed until at least 1993, because Poland has a lot of things (politically and economically) to work through in it’s own country without the added worry and pressure of conforming or being able to live up to EC standards.
For example, Poland is still in the process of deciding how much power to grant to the president and to the Parliament. A strong president might be helpful to push reforms through quickly, but it might also prove dangerous to place too much power into the hands of just one individual. The coalition form of government that is in power right now also runs the risk of being too weak to handle the difficult economic decisions that lie ahead. Despite these uncertainties and the many questions (that are as of yet unanswered) that were mentioned previously, Poland’s outlook is positive-they have gotten a good start on turning the “fish soup” back into an aquarium.
Meanwhile, other Eastern European countries continue to observe Poland and it’s progress, which thus far has been relatively positive. The problems that have ocrurred up to this point, such as unemployment or disillusion, were expected and are understandable, as the transition to a free enterprise system unavoidably encounters uncertainties and insecurities, especially coming out of a communist regime where the mindset was that socialism provided security, protection, and shelter to Polish citizens. Poles that are used to this mindset could feel threatened by the uncertainties associated with a market economy.
It is possible that the doubts that Polish citizens voice concerning the economic transition will deter the other countries in Eastern Europe from following Poland’s example and implementing the shock therapy method of economic reform. The question remains, then, as to whether or not Poland should really be hailed as a role model for the other countries in Eastern Europe. If the term “role model” implies that other countries should follow in the exact footprints left behind thus far by Poland, then no, Poland should net be hailed as a prime role model, because the “experiment” is not finished yet. The world is waiting now to see if the end results of the experiment will be positive. However, if the term “role model” refers to the courageous and confident actions taken by the Poles, then the term is appropriate, because it was due to the persistent efforts of the Poles that the communist regime was toppled.45
Only the future will disclose the ultimate results of the shock therapy experiment in Poland .Whatever the results are, however, the people will be governed by a government of their choice. Poles will be represented by elected officials of their choosing. Political problems will be tackled by a democratic government and economic problems will be addressed by a market economy. The Poles are above all hopeful that Poland will be integrated into Western Europe and become a member of the EC, and that it will once again become the “aquarium” it once was-a large tank full of independent fish instead of a tank dominated by scavenger fish and sharks!
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