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June 3, 2014 3:02 pm
Elections on June 4 1989 won by Solidarity paved the way to a radical economic and political transition in Poland. Other central and eastern European (CEE) countries followed suit and the Soviet Union was dissolved in December 1991.
It appeared that every country was heading in the same direction: towards democracy, rule of law and capitalism. But, after a couple of years, the trajectories started to diverge: those that joined the EU achieved democracy and capitalism, Belarus reverted to dictatorship and quasi-socialism, while, in Russia, President Vladimir Putin eliminated democracy, politicised its capitalism and recently attacked a democratic but mismanaged Ukraine.
Economic performance differed widely across countries, sometimes in surprising way. Poland’s GDP per capita between 1989-2013 more than doubled, while that of Hungary increased by 22 per cent. Slovakia’s GDP per capita increased by 83 per cent while that of the Czech Republic by 48 per cent (less than in Bulgaria). Estonia grew by 90 per cent and Russia by 18 per cent.
How does one explain these and other differences in economic performance after socialism, including the relative success of Poland? First, the quicker and more radical the improvement in the economic system – if sustained – the faster the long-term economic growth.
An early “Big Bang”, pioneered by Poland in 1990, and implemented even more radically by Estonia, has proved much better than delayed, slow or inconsistent reforms. For example, Poland introduced the convertibility of the currency as part of a large package of liberalisation and stabilisation measures less than four months from the start of its new government, while in Ukraine it took almost four years.
What kind of capitalism emerges is vital. In Poland (and most other CEE countries) the success of private groups does not depend, as a rule, on their political and bureaucratic connections, while in Russia or Ukraine this has been crucial.
Politicised or crony capitalism is not only unfair but inefficient, as it stifles economic competition and generates huge rent-seeking activity. Equal treatment is not only a matter of ethics but of efficiency.
Second, fiscal stance matters for growth. One reason for Hungary’s poor record has been the size of its government, coupled with persistent deficits, occasional fiscal crises and huge public debt. Poland’s fiscal situation has been far from ideal, but not as bad as Hungary’s.
Third, longer-term economic growth slows down when countries suffer deep recessions – a result of external shocks, boom-bust policies (Baltics, Bulgaria, Ukraine) or of the misallocation of credit by the dominant state banks (Slovenia).
Uniquely among post-socialist economies, Poland had no recession after 1989. A boom-bust pattern was avoided by relatively prudent monetary and supervisory policies while politicised misallocation of credit was avoided due to a surge in bank privatisation during 1998-2000.
However, past success can be a poor predictor of performances, and Poland is not immune to this rule. Indeed, without additional reforms, Poland’s economic growth will slow considerably.
There are three reasons for this. First, the ageing population would reduce employment and increase the share of older, non-employed people. Second, Poland’s private investment ratio is the lowest in the region, along with that of Hungary. Third, the growth of overall efficiency (as measured by total factor productivity – TFP) which has been a main driver of Poland’s economic success, has slowed considerably in recent years.
These negative tendencies could be neutralised by further reforms. For example, Poland could considerably increase employment of younger and older people.
The gradual increase in the retirement age to 67 was a step in the right direction. But more has to be done – for example stopping and reversing the rise in the mandatory minimum wage.
Private investment could be raised by the elimination of various regulatory or bureaucratic barriers to investment and by increasing the savings ratio. Unfortunately, the de facto confiscation of the mandatory retirement savings enacted in 2013 was a step in the wrong direction.
Finally, to prevent a decline in the growth of the TFP, Poland must complete privatisation, reform its public universities, eliminate the social traps that block the movement of people to more productive occupations, and strengthen competition, especially in social services and in network industries.
Competing politicians rarely come up with proper solutions on time. (Political monopolies are usually even worse).
One reason for that is that politicians in democracies are constantly pressed by various statist groups, which demand even more state intervention and resist reform – for pecuniary or ideological reasons.
Poland is no exception. Therefore, we need more and stronger civic pressures from those who monitor the politicians in the belief that it is free markets, rule of law and civil society that provide the best solution to various social problems.
I am personally very much engaged in this effort in the hope that Poland will surprise again.
The writer was the finance minster who launched Poland’s shock therapy economic reform plan in 1990
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