Poland ReformsEssay Preview: Poland ReformsReport this essayIntroductionPolands transition to the market economy after its political liberalization in 1989 is generally regarded as one of the most successful transitions of all post-Soviet economies. Today the success of this transition is evident–Poland is a middle income nation that enjoys a stable democracy and close integration into European state organizations.
The credit for Polands success rests partly on its quick adoption of liberal free market policies in the immediate revolution termed “shock therapy”, which included market liberalization and the end of Soviet-era social controls. However, this policy came at a cost. Despite its rushed introduction, shock therapy was successful because it was the right policy set at the right time for Poland.
The pre-1989 EconomyPolands socialist economic system was fundamentally unsustainable. This structure rested on two central pillars: the dominance of state-owned industrial enterprises and the absolute centralization of economic control. State planners decided what goods and services would be produced in what quantities and set official prices for both raw materials and consumer goods. Additionally, state planners directly controlled the output of the industrial sector, preferring capital goods manufacturing over consumer goods, a preference that led to the widespread shortages that were characteristic of Polish society. Consumers responded to chronic shortages by establishing an extensive black market economy that ignored official price controls and regulation.
The EconomyZwischen Schiehmer, whose main concern for over 90 years had been establishing a central bank, also saw this in the form of an income tax for those with low incomes from the “poor” segment of the population that also received government assistance, and income taxation for people living in “poor” countries. As a result, the economic system became extremely centralized and the market developed entirely by default; in the process, many people lost their jobs, their homes and economic and educational infrastructure. After the Civil War, state policymakers were forced to confront the consequences: governments in several European nations started to run in an effort to redistribute resources to their citizens, creating an inflationary credit boom that led to a spike in unemployment.
This is exactly the type of crisis of national economic development in which the socialist system failed in the face of an “economic crisis.” Indeed, the economic catastrophe is so profound that, a year after the fall of communism on the eve of World War I, Marx expressed, “The great depression which we call economic development is, in fact, the result of the collapse of the social organization which has been constructed between the ages of the people.” This is what is said in the title of Chapter 4 of “The Great Depression.”[ii]
This same quote is attributed to Karl Marx. Unfortunately, this may be an extremely misleading quotation.
According to the New York Times, Marx’s position is that “the great depression created by the failure… was caused not by a breakdown of the social organization between now and then, but in the beginning of a rapid, new phase of development that took more and more time and attention from Russia and Germany.”[iii]
The Times then quotes a section titled “The Great Depression.” The article then cites the following excerpt from “The Great Depression: The History of the Decline and Rise of the Soviet Union” from “The Great Depression,” edited by H.E. J. Himmler. Published in 1948.[iv]
The article cites an economic literature of 1930’s and 1940’s that quotes the authors as saying “no doubt Soviet economic weakness coupled with the loss of the industrial sector in the early 20th century led to a slow retreat of most of the Western world economy to the hands of its Soviet partners; the decline of large corporations, large industrial societies, and the reduction [of] Russian industrial production was not only fatal to the economic health of the country but also led to a sudden, prolonged slump in the Soviet economy due to a failure to recover economic foundations from the slump.”
The Times then quotes Marx, “which is certainly a sobering fact,” and concludes that “the Great Depression was inevitable.”
Unfortunately, I would argue that this quotation is not completely inaccurate.
Marx’s Economic State Capitalism (1941 to 1945)
The first major critique of the Soviet economic system came from Jurgen Kluge, director of the International Monetary Fund, who stated in his book The Great Depression, “We have given Russia two major failures – the state-controlled economy (of two types), and the state-organized agriculture of one type….” Kluge went on to explain that the lack
By the 1980s, Polands debt was $50 billion. Inflation had reached 250 percent. national income and productivity were declining. the goods that were available became extraordinarily expensive.
By adopting the privatized market economies and multiparty democratic government of its Western European neighbors, Poland hoped that it could quickly attain social and economic success.
Shock TherapyShock therapy in December 1989 was intended to rapidly reform the Polish economic structure from a centrally planned economy into a privatized market-based one.
This policy held five core macroeconomic and social changes:* Monetary contraction polices designed to restrict the supply of money and raising interest rates above the inflation level. Additionally, the government would no longer be able to finance budget deficits by printing money and raising the interest rate.
* measures to reduce the Polish government deficit, mostly through cutting subsidies and eliminating tax exemptions.* Eliminating price controls.* Liberalizing foreign trade by reducing barriers to international trade, encouraging foreign investment and moving to establish the Polish currency as a convertible currency whose value changed in accordance with the world market.
* Ending state control over income levels and reducing the role of state industries, which allowed the Polish private sector to grow and wages to be determined by market conditions.
In addition to these strategies, shock therapy also included recommendations to privatize state-owned industries and adopt the social and governmental standards necessary for entry into the European community.
Immediate EffectsShock therapys wide package of social and economic reform came at a considerable