Poland's Extraordinary Transformation

WASHINGTON:  Twenty-five years ago this autumn two remarkable events took place in Washington.

On September 27^th, 1989 in the musty embassy ballroom of the Polish People’s Republic on upper 16^th Street, Leszek Balcerowicz, finance minister in the new non-communist government, outlined a plan to transform Poland’s economy from communism to capitalism. Shock therapy would be launched in three months.

Balcerowicz’s message was breathtaking.  Prices would be decontrolled, individuals allowed to start businesses, the survival of state enterprises determined by the market. There was more-- the printing press would be shut down—halting hyperinflation, the worthless Polish currency redeemed.

Financial journalists in Washington for the annual meeting of the International Monetary Fund were astonished.  Some sprang from their seats to file stories after the modest man in the ill-fitting East European suit stopped talking. For those of us remaining the room was electric. One reporter said, “there are lots of books about transforming capitalism to communism, none for going the opposite direction.”

This was six weeks before the Berlin Wall came down.

On October 19th, 34-year-old Jeffrey Sachs, the Harvard economist advising the Polish government, made an emotional plea to Washington insiders. At a Willard Hotel dinner arranged by the Institute for International Economics, Sachs said Poland required a cash injection to “leap across the chasm” from disintegrating communism to capitalism. “The next six months,” he said, “are critical in determining whether Eastern Europe’s first non-communist government since World War II succeeds.”

Sachs had made his name by helping to end hyperinflation in Bolivia. He essentially shamed his Washington audience into action, excoriating the US government, the IMF and World Bank for dragging their feet.  It was imperative, he said, that the Polish experiment succeed.

The debate over big bang and shock therapy essentially began that night.

Sachs had offered his services to Poland only weeks earlier and was just off the plane from Warsaw where there was chaos and anger over shortages of basic commodities, including food. Few outsiders thought the planned reforms-- that in the short-term would further depress living standards—had any chance of working. Sachs said later, "It was a terrifying and unpredictable period."

The rest, of course, is history. Not only did the Balcerowicz reforms stabilize and activate the economy, they won critical public and government backing. They became a model for similar plans in Czechoslovakia and the Baltics (where they worked) and in Russia (where they failed).

What could not be foreseen in the autumn of 1989 was that Poland would become the star performer of all the economies that emerged from the wreckage of the Soviet empire. Poland’s return to growth and fiscal discipline were powerful factors in the European Union agreeing to admit eight former communist countries in 2004.

Balcerowicz, now 67, served as finance minister and then central bank chief until 2007. Currently he teaches at the economics university and runs his own research institute.

While Poland has not yet joined the euro currency zone, Balcerowicz subscribes to the fiscal austerity doctrines championed by Germany. He faults Greece and other southern periphery countries for not moving fast enough or hard enough to restructure their uncompetitive economies.

The Polish miracle continues.  Alone among European Union economies it did not experience a downturn following the 2008 financial crisis. In most recent years Poland has been the fastest growing economy in the EU. Its gross domestic product has doubled since 1989 and is today Europe’s sixth largest economy.

More significantly, per capita g.d.p. has more than doubled since 1989.  This in a country of nearly 40 million, by far the largest in Eastern Europe.

Poland and Germany—with a long history of conflict—have become partners, demonstrated most recently by Chancellor Angela Merkel championing the selection of conservative Polish  Prime Minister Donald Tusk as the new president of the EU council. 

Reflecting on the 25^th anniversary of his reforms, Balcerowicz credits Sachs with playing a vital role in persuading the Solidarity-led government that shock therapy was the best way forward. For his part, Sachs says he is "thrilled that the Poles acquitted themselves so beautifully in the pages of history."