Poland

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Poland
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Background

• dates back to mid-tenth century
• http//www.countryreports.org/poland.htm
• http//www.kasprzyk.demon.co.uk/www/HistoryPolska.
  html
• Once very powerful country in Europe with
  territory stretching from the Baltic to the Black
  Sea
• Occupied between late 18th century until
  independence in 1918
• About the size of New Mexico

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• Overrun by Germany and Soviet Union in WWII
• Became Soviet satellite after war and adopted
  planned socialism
• System never took hold as strong as in Soviet
  Union
• Resentment of Soviet Unions influence
• Catholic Church remained a powerful influence in
  opposition to the system
• Strong information flows from outside
• Agriculture remained primarily private

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Problems with Polish Socialist Economy

• Prior to socialism, Poland was a major food
  exporter
• By 1970s, Poland has to import food
• low priority
• farms too small and under-equipped
• processing facilities run by inefficient state
  enterprises
• distribution inefficient leading to waste

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• Priority on heavy industry
• Poland is small and resource-poor
• no comparative advantage
• result was shortages that led to food riots and
  shakeup of Party
• had to subsidize enterprises heavily
• resorted to heavy borrowing from US but funds
  wasted

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• Usual problems associated with socialist economy
• shortages
• irrational prices
• irrational resource allocation
• stunted banking system
• soft budget constraints
• lack of incentives
• high absenteeism and alcoholism

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1980s

• Period of economic and political instability
• Per capita GDP declined almost the whole period
• Galloping inflation develops into hyperinflation
  in 1989
• External debt mushroomed
• boom in industrial and consumer spending financed
  by borrowing
• Massive shortages and rationing

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• Labor unrest
• birth of the Solidarity movement
• led to wage explosion
• Martial law off and on during early 1980s
• Attempted reform in 1982 a failure
• limited SOE autonomy and worker management
• abolished central planning for certain final
  product
• replaced by government orders
• partial price liberalization

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Price Regimes in Poland, 1982 and 1987
(percentage of total) 1982
1987 Consumer Industrial
Consumer Industrial
Goods Inputs Goods
Inputs Type of Control Administered
35 45 20
29 Regulated 15 2 5
3 Free 50 53
75 68
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• partial demonopolization of foreign trade
• limited openings for domestic and foreign
  private-sector investment
• some liberalization of SOE financing and wage
  setting
• Government collapses late 1989
• Big Bang or Shock Therapy transition begins
  January 1, 1990

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Better Initial Conditions

• It had a higher share of its economic activity
  coordinated by the market.
• Its agricultural sector was predominantly
  private, and though in need of rationalization,
  no major land reform was required.
• It had an existing system of commercial
  regulations and legalized private property.

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• Its state enterprises already achieved a high
  degree of independence from the ministries.
• Reforms had already encouraged the expansion of
  private entrepreneurial activity.
• It had developed strong trade links with the
  West, facilitating information and investment
  flows.

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Shock Therapy

• Fast transition, everything at once
• price liberalization
• most subsidies eliminated
• fiscal reform
• currency reform
• SOEs privatized

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Price Liberalization

• Immediate increase in prices
• consumers purchasing power reduced by the
  inflation
• incentives to produce increased
• shortages eliminated as supply increased

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Fiscal Reform

• Central government balanced its budget to achieve
  maximum macroeconomic stability
• an important prerequisite for success in
  transition
• Had engaged in inflationary deficit spending
  during 1980s

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Currency Reform

• Zloty devalued
• Then made convertible
• Then allowed to float according to dictates of
  supply and demand
• Devalued currency made Polands exports cheaper
  and foreign investment more attractive

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Privatization

• There was already a considerable private sector
  to start with
• private sector share almost 29
• restaurants and service enterprises
• hotels built and run by foreign chains

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• Like other socialist countries, the Polish
  economy was dominated by large state-owned
  enterprises
• An example is the Lenin steel works
• 36,000 workers in 1990
• 11,000 six years later and still losing money
• too politically important to shut down
• too obsolete and inefficient to be an attractive
  buy for investors

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• Initial stages of privatization included
• sale of entire enterprises to foreign investors
• very unlike Russia
• liquidation of assets and sale to private
  investors
• free distribution of shares
• Nearly 80 of retail and wholesale outlets
  privatized by October, 1991
• Half of trucking industry privatized within 16
  months
• 1.2 million private firms created in first 16
  months

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• Large SOEs were much harder to privatize but
  process continues
• politicians loath to risk losing the votes of the
  hundreds of thousands of workers who would be
  laid off
• Process changed many times
• public offerings
• sealed bids
• leasing
• vouchers
• investment certificates

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Mass Privatization

• Mass privatization was instituted on in 1995.
• Unique method to create 15 government-sponsored
  national investment funds (NIFs)
• They will hold the equity of large SOEs,
  restructure the companies by changing management,
  improving marketing, etc.
• Avoid the problem of insider control prevailing
  in Russia

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Structure of Equity of Large Privatized
Enterprises Lead shareholding fund
33 Other 14 funds (1.93 each)
27 Employees
15 State
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Banking

• Prior to 1988, the National Bank of Poland
  existed has a typical socialist state monopoly
• Nine state-owned commercial banks created in 1988
• National Bank conducts monetary policy and
  regulates banks

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• New private banks have been charted since 1989
• Most of the original state-owned banks have been
  privatized
• Over 1,500 cooperative banks
• main purpose to make housing loans

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Public Finance

• During socialist period, the most important tax
  was the turnover tax
• The most important expenditure was SOE subsidies
• 16 of GNP

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• Replaced by capitalist pattern of taxation and
  expenditure
• Most important taxes at national level are
  Value-added tax (VAT) and personal income tax
• At local level, the property tax is the major
  source of revenue

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Performance

• Overall, one of the most successful transitions
• much more successful than Russias
• Initial collapse relatively short and recovery
  strong
• Inflation and unemployment has declined
• although recent performance has not been so good

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• Capital inflows exceed outflows
• investor confidence in economy
• credit rating good
• Corruption not a major problem
• Unemployment high
• Inflation high but generally declining
• Entering European Union in 2004

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   1998 1999 2000 2001  GDP per head ( at
PPP) 7,970 8,450 8,990 9,280 GDP ( real change
pa) 4.8 4.1 4 1 Government consumption ( of
GDP) 16.37 16.5 16.53 16.59 Budget balance ( of
GDP) -1.01 -0.93 -0.1 -4.6 Consumer prices
(average change) 11.73 7.31 10.14 5.5 Public
debt ( of GDP) 42.89 42.98 39.3 39.9 Labor
costs per hour (USD) 2.01 2.39 2.46 2.8 Recorded
unemployment () 9.98 11.98 14.01 16.22 Current-a
ccount balance/GDP -4.31 -7.45 -6.31 -4.05 Foreig
n-exchange reserves (m) 27,325 26,354 26,562 25
,648 Source The Economist