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The Warsaw Voice » Other » February 18, 2009
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Reforms of the Middle Distance Runner
February 18, 2009   
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Prof. Leszek Balcerowicz spoke with Warsaw Voice editor-in-chief Andrzej Jonas and Andrzej Ratajczyk at the Warsaw School of Economics (SGH), an institution with which he has had ties for over 40 years. Balcerowicz graduated from here with honors in 1970 when it still was known as the Main School of Planning and Statistics (SGPiS). His major was foreign trade. He became a professor at the SGH in 1992 and was appointed Chair of International Comparative Studies, a position he still holds, a year later.

How did a promising academic, with no political experience, come to take up the position of deputy prime minister and minister of finance in the government of Tadeusz Mazowiecki?
I would never have taken it on had I not previously worked as part of an informal team developing a blueprint for economic reform. This team, dubbed the Balcerowicz Group, worked in the late 1970s and after August 1980 it drew up a plan that proposed the most radical version of market socialism in which the state played a limited role and enterprises were given wide-ranging autonomy. There was no privatization, however, as that would have been impossible at the time. When martial law was imposed in December 1981, we continued with our work without worrying about political restrictions. I have to say, though, that I wasn't working with a great deal of conviction as I did not believe that these ideas would ever come to anything. I met Waldemar Kuczyński, an oppositionist economist, during a presentation of our work in the fall of 1980. He was interested enough in the Balcerowicz Group's report to perhaps make a note of my name. I believe he remembered me when he was advising Prime Minister Mazowiecki on building his cabinet in 1989 and recommended me as a candidate for deputy prime minister and minister of finance. I was in the middle of packing my bags to give a series of lectures in Britain when I had my first talk with Kuczyński. I canceled my departure but turned down the proposal to become deputy prime minister for economic affairs. I suggested Kuczyński might become deputy prime minister with me as a his adviser. I refused again during my first talk with Prime Minister Mazowiecki, who said he needed someone like Ludwig Erhard in his government, someone who could take on inflation and get the economy back onto a normal, free-market track. It wasn't until after our next conversation that I finally agreed.

The decision to accept the government positions did not just stem from my previous work on reform plans, but from the existence of the team with which I had worked. This group included Marek D±browski, who later became my deputy in the finance ministry, and Tomasz Gruszecki and Jerzy Eysymontt, who went on to become ministers in a variety of governments.

In justifying my decision to award you the Chair of Two Decades, I (Andrzej Jonas) wrote that not only did you develop and carry out your reform plan, but you also set up a framework for the Polish economy that has been functioning for all those 20 years. Did you know what you were letting yourself in for when Mazowiecki offered you the posts of deputy prime minister and finance minister?
Probably not fully. But as an economist who wasn't locked away in an ivory tower, I had been observing the Polish economy as well as other economies around the world, and I was under no illusions about the state it was in. Apart from that, I took an interest in cases of radical reform. And the cases I was familiar with led me to conclude that if you start in a tough situation and carry out too little reform, you can rely on popularity for a while but this popularity wanes pretty quickly later on because the economic situation is not improving. On the other hand, if you carry out radical reforms, your popularity will take a dive initially but there's a chance that it'll pick up later owing to the healed economy. But my primary concern was to do a good job.

The cases I was familiar with suggested that you have to be prepared for there being no widespread enthusiasm when introducing radical reform and that various protests will appear after a while. Though I couldn't predict precisely how all this was going to unfold, I realized that it would be easier in the beginning and then get more difficult later. Reform was actually relatively easy to introduce during the first two years.

Was this because of the high level of public acceptance for changing the system?
That's part of the reason but there's more to it. The economic team in that government seems to have had such a strong position that no-one protested forcefully despite there being resistance from various groups. Also, we strove to act fast. Apart from that, the initial period of implementing reform was an extraordinary time in Polish history. A euphoria over regaining full freedom held sway, the forces of the previous system were discredited and the new forces were united. Because Poland was the first country in the socialist camp to embark on such radical reform, it was only natural that we marked out a certain direction, or model for such reforms. Had the reforms not worked there wouldn't be any direction to talk about outside the context of a negative example. Fortunately, they did work and many other countries could benefit from our experience as a result, and the Polish economic reform is described in textbooks around the world. The adopted direction of reform was not based on seeking out any new target system, as this had already been invented and implemented. It's called competitive capitalism.

So what was so special about the Polish transformation?
The intellectual revolution consisted in moving from the previous bad system, a tragic economic situation, to the mentioned target system. And where we were headed was a lot clearer than how we were going to get there. That was a huge intellectual and practical challenge. We had to become global trailblazers in some areas, for example how to privatize in short order with no investment banks, no stock exchange and no way of applying Western privatization methods on a wide scale. Or how to curb enormous inflation in the still socialist economy we had inherited.

There were also practical challenges in addition to the intellectual ones, for example how to quickly contain the ongoing economic chaos, prepare a state budget, obtain foreign currency to import medicines and so on. And at the same time, this program of massive reforms was due to kick off at the start of 1990. We also had to negotiate with the International Monetary Fund and the World Bank during this time.

How did the West react to what was going on in Poland?
Overall, very favorably, although waiting for hard facts. Poland was the first country to walk away from the communist system. There was also a great degree of curiosity as to how we were going to cope. Perhaps nobody was under any major doubt that dictatorship had gone for good and that democracy was here to stay in Poland. Reforming the economy, however, did raise a few questions. During my first visit to the IMF in Washington, when I unveiled the first draft of the reform plan, I got the impression that it aroused a degree of skepticism but, at the same time, a great deal of respect. When it turned out that we were putting to life what we had announced, our demands that the West meet our expectations on matters like reducing Poland's debt were all the more effective. I tried to explain to our Western partners that it would be very difficult to win public approval for such radical reforms if the fruits of these positive changes were denied people in Poland.

The sympathetic attitude of the United States has to be stressed. The United States came through once again as a tried and true partner of Poland during what was a breakthrough period. The sympathy and support of the Americans was evident, for instance, in reducing Poland's debt.

Do you think the guidelines for radical economic reform adopted in 1989 were right?
No better model has ever appeared in the economic books I know. An economic model grounded on competition has proved effective and breaking up state monopolies has brought positive results. The importance of fast reduction of high inflation, opening up to the West, privatization, building new institutions, and introducing stability of currency, has been confirmed.

Some politicians and economists claim that the social cost of your radical reforms was too high.

Costs aren't the problem, but how they are spread out is. Studies show that a radical reform, compared to options involving slow or fragmentary changes, is the least costly socially. Society bears the greatest costs when reforms are not carried out or don't go far enough. It's easy to demonstrate how much countries like Ukraine and Belarus have lost compared to Poland by delaying reform.

In hindsight, do you think better results would have been achieved had some component of the plan been changed?
The experience of Poland and other countries offers no grounds for thinking that more could have been achieved by introducing a less radical strategy. Some of the details might be debatable, though. For example, it might not have been a bad idea to introduce a flat-rate tax already in the first reform package. Then again, we could have paid closer attention to social policy, as this turned out to be wrong at times. An example of this was being able to be registered as unemployed without ever having worked. This caused unemployment to skyrocket. I could come up with more examples like this.

The initial period of implementing the Balcerowicz plan was visited on President Lech Wałęsa and Prime Minister Tadeusz Mazowiecki. How would you rate your working relationship with these politicians? Did you receive any kind of political protection while carrying out your reforms?
Making decisions concerning matters on which you have no specialist knowledge takes trust. And here, Kuczyński, as head of the prime minister's advisory team, played a vital role in mediating between Prime Minister Mazowiecki and the government's economic team. As for President Wałęsa, he never concerned himself with details. I never felt any opposition to the program from him though. If anything, I had the impression that he was expressing his support for the reforms in that special way of his, even when he was publicly criticizing certain ideas. I still did my best, though, to explain the government's plans to him before important decisions were taken.

During the periods in which you did not hold any government positions, you advised governments in many other countries on reforming their economies.

To be accurate, I was never an official government advisor, but presidents and prime ministers from various countries did invite me to share my views on economic strategy matters.

To what extent is your model of ends and means universal?
To the same extent that capitalism is universal. It has worked in a variety of cultures while socialism hasn't worked in any. The experience in transition from socialism will be useful-and quite soon, I hope-in such countries, as Cuba, North Korea, and even Iran.

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