Poland's 'reform' changes course

Wednesday, March 18, 1992 - 10:00

By Peter Annear in Prague

For Poland's ruling elite it's the devil or the deep blue sea. If it relaxes the recessionary "stabilisation" program of the two previous governments, hyperinflation threatens. If it doesn't, the public backlash might bring the whole project to its knees.

In a situation of economic turmoil after two years of monetarist market reforms, a perpetually large foreign debt burden, political instability following October's inconclusive election, and an exhaustion of people's tolerance for the difficulties of the reform process, the centre-right government of Jan Olszewski has set out on what many believe to be a radical new economic course. But the changes may be more apparent than real.

Last month, the minority Olszewski government finally unveiled the landmark policy shift towards greater stimulation of state enterprises and away from the monetarist program of the previous Tadeusz Mazowiecki and Jan Krzysztof Bielecki governments.

The new government has shown that it intends to enter a process of real discussion with the IMF, sponsors of the previous policy, rather than to continue to act simply as a transmission belt for IMF demands. But it would be wrong to conclude that the Olszewski government represents an alternative to the general program of capitalist market reform.

"We will try to ensure the swiftest possible establishment of free-market principles", Olszewski emphasised.

Money supply

The new policy downgrades the fight against inflation on which the past policy was based and hopes to turn around the current recession by promoting investment and exports through state enterprises as well as private. The money supply will be expanded, the budget deficit maintained at a high level and interest rates lowered.

Chief architect of the new course, economics minister Jerzy Eysymontt, claims the former government did not pay sufficient attention to the social and economic consequences of its stabilisation program. Following the adoption of the Eysymontt proposals, finance minister Karol Lutkowski, a supporter of the "Balcerowicz plan" who held his position as a sign of continuity with past policy, resigned.

Under the guidance of Leszek Balcerowicz, the former finance minister, a new class of brash, often corrupt, small entrepreneurs sprouted in Poland mainly in the retail and finance sectors. What followed was a rash of big financial and banking scandals in which some notable figures made money quickly and skipped the country.

Eighty per cent of retail trade is now in private hands. While exports grew by 18% in 1991, imports rose 72% on the back of the revaluation of the zloty. The private sector accounted for only 20% of exports but ing that the government's policy encouraged more profiteering than production.

This may have helped to fill empty shops with imported new commodities as inflation was brought under control and the currency stabilised, but while it put money into the hands of a new middle class, most people suffered.

Textile, aviation, vehicle and steel workers and teachers all joined industrial activity in January and February against the deteriorating economic situation and the government's decision to increase prices for electricity, gas and heating.

After two years under Solidarity governments that pledged they would solve Poland's economic crisis, foreign investment has utterly dried up, average incomes have fallen 40% and unemployment is heading rapidly for the 3 million mark. Some people believe the actors have changed but the theatre remains the same.

IMF failure

This failure of the IMF-backed economic program — pioneered in Poland largely with the advice of Harvard economist Jeffrey Sachs — under which state enterprises that could not perform in the market were simply allowed to fold, is behind the current policy shift.

Last year production in the state industrial sector fell to 35% below 1989 levels. Virgin private enterprises were supposed to fill the breach as more and more state enterprises went bankrupt, but this has not occurred. Total production fell by up to 10% and investment was down 8% in 1991 despite gains in the private sector.

The Olszewski government announced that economic policy would no longer be built on the rubble of state enterprises and claimed fighting the recession was its chief aim, though events may already be indicating a weakening of its resolve.

In any case, the new policy faces a tough time in parliament. After voting confidence in the Olszewski government in January, the parliament in early March voted down its economic proposals. A real test will follow later this month, when the second-quarter budget is presented.

A strong opposition in parliament centred on Mazowiecki's Democratic Union still supports the IMF-Sachs-Balcerowicz approach. This grouping, which is apparently attracting support from the Social Democracy of the Republic of Poland (the reformed Communist Party), has a more classical liberal capitalist character, while the government could be described as Catholic fundamentalist.

The Olszewski government will foster closer links between church and state and will make the position of Polish women worse, for example by cutting back on established rights to abortion.

Moreover, in the background is the threat of an escalation of the McCarthyite witch-hunting that the Christian Democratic Centre Alliance, the senior partner in the government along with the Christian National Union, campaigned for in the election under the on.

Olszewski argued that the assumption that market forces alone would remove from the economy the remains of the former administered system had not been proved correct. So, when conditions allow, some sort of purge can be expected. In the meantime, a propaganda campaign in support of anticommunist measures in Czechoslovakia, Hungary and East Germany has the backing of both sides of the parliamentary divide.

Privatisation

Nor does the new plan step back from the centrepiece of the rightist market reforms: privatisation of the state economy. The new government's support for state enterprises will buy time while a new, dramatically escalated, mass privatisation program is put in place.

Beginning mid-year, more than 200 big enterprises will be handed over to investment funds run by foreign banks and financial institutions. Two hundred other big enterprises are slated for a second round at a later date. Shares in the investment funds will be sold to the population at a nominal charge.

Former owners of nationalised property will also be compensated, and the whole scheme will be financed by a $240 million World Bank loan. By these and other means, the government hopes to place 50% of the economy in private hands by 1994. Whether this will be achieved and whether it will help is to be seen.

Central to Poland's economic problems is the debt burden it carries from the previous administration. Following a mission to Warsaw in February, the IMF expressed concern about the renewed threat of hyperinflation, but supported the plans to boost export earnings in the face of heavy debt service commitments facing the government after 1994. The new program seems to have won conditional IMF approval.

Inevitably, a big budget deficit will be one of the ingredients of the new economic recipe, threatening a new surge in inflation. While the government claims it hopes to limit the deficit to 5% of GDP, opponents say it could easily reach 10%.

Austerity

To limit inflation and aid company competitiveness, the government will tighten austerity and lower living standards, including a projected 5% cut in real income, tougher wage controls and higher taxes on consumer goods to control imports.

To get a grip on the budget deficit — caused largely by the failure to collect taxes from state enterprises — the government will dramatically increase indirect taxes, mainly through raising a sales tax on luxury items. More importantly, expenditure will be cut to the bone in areas like benefits, pensions, public sector wages, health and education while government funds will be redirected towards the judiciary, police and public administration.

Political instability has also been at the heart of Poland's special problems. "Democracy", says President Lech Walesa — by which he means the peculiar workings of parliament — is losing support. Walesa himself has shown a distinct lack of support for the elected rnment.

While he had hoped to take control of the parliament (of which he is not a member) and form a presidential cabinet in the wake of October's election, he has now adopted the role of would-be broker between competing factions. For the time being at least, Walesa seems to have been sidelined.

From GLW issue 48