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The Warsaw Voice » Politics » December 16, 2009
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Balcerowicz Plan: 20 Years On
December 16, 2009 By W.¯.    
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Twenty years ago, on Dec. 31, 1989, then-President Wojciech Jaruzelski rubber-stamped a package of 10 bills ushering in a set of economic and social reforms that came to be widely known as the Balcerowicz Plan or "shock therapy." The package, previously approved by parliament, was the first attempt by an Eastern European country struggling to break free from Soviet domination to move away from central planning and toward a free market.

The Balcerowicz Plan, named after the finance minister and deputy prime minister Leszek Balcerowicz, was preceded by Round Table talks between the country's communist government and the democratic opposition, which produced an agreement that divided power between the two camps in a deal that had no precedent in the Soviet bloc.

The Round Table talks led to the first partially free elections on June 4, 1989, which the democratic opposition won hands down. After the communists failed to form a government, the opposition's Tadeusz Mazowiecki Aug. 24 became the country's first non-communist prime minister after World War II. The lower house of parliament and the president approved the new government Sept. 12, 1989.

Balcerowicz was an economist from what is now the Warsaw School of Economics (SGH) and his set of social and economic reforms was a flagship project of Mazowiecki's government. Balcerowicz unveiled his plan in September 1989 after teaming up with a group of Polish and international experts.

The Balcerowicz Plan comprised 10 bills designed to help the country make the market transition. They were approved by parliament in December and signed by the president into law Dec. 31, 1989.

The State-Owned Enterprise Financial Management Act abolished a principle under which state-owned companies could continue in business regardless of their efficiency and financial performance. The law also introduced bankruptcy proceedings for unprofitable enterprises.

The Banking Act prohibited the central bank from financing the budget deficit and also banned unlimited issues of empty money.

The Credit Act abolished preferential lending terms for state-owned companies and tied interest rates to inflation. It also altered the terms and conditions of previously signed loan agreements based on fixed interest rates.

The Excessive Wage Growth Tax Act was enacted to radically curb pay raises in state-owned companies whenever these increases were out of step with price growth.

The New Principles of Taxation Act introduced uniform tax rules for all sectors of the economy.

The Foreign Investors' Business Activity Act obligated foreign enterprises to sell foreign currency to the state according to exchange rates set by the central bank. It also exempted foreign-owned companies from excessive wage growth tax and allowed them to repatriate their profits.

The Foreign Exchange Act introduced what was referred to as internal convertibility of the zloty, abolished state monopoly in international trade, and obligated companies to sell all foreign currency they earned to the state.

The Customs Act introduced a uniform customs rate on imported goods for all businesses.

The Employment Act regulated the responsibilities of employment agencies.

The Layoffs Act guaranteed severance pay and temporary unemployment benefits for all those who lost their jobs, especially as a result of group layoffs.

When the Balcerowicz Plan got under way, Poland was struggling with hyperinflation, which stood at 639.6 percent, with foreign debt running at a staggering $42.3 billion, or 64.8% of the country's GDP. Store shelves were empty and people formed long lines to buy staple goods.

Before long the Balcerowicz Plan made it possible to curb inflation and the budget deficit. In 1990, the country recorded a budget surplus and eliminated shortages and central distribution of commodities. As a result, international creditors agreed to reduce Poland's foreign debt, currency reserves grew sharply, and the country reported the fastest economic growth in the former Eastern bloc. The economy began to make up for its technological delay, especially in sectors such as telecommunications and digital data processing. Other developments included a radical improvement of the environment, greater energy efficiency in the economy and the establishment of 600,000 new private companies which created 1.5 million new jobs over two years.

Despite these successes, the Balcerowicz Plan was heavily criticized for causing a radical decline in living standards for large groups of people, mainly workers of unprofitable state-owned enterprises and state-run farms (PGRs) which were dissolved after 1989. The result were many poverty-stricken regions and structural unemployment that persists in some areas to this day.

In the two decades that followed, "Balcerowicz Must Go!" was a staple slogan of many leftist and populist demonstrations.

Economists say that while the Balcerowicz Plan was a godsend for Poland, it failed to protect the country from a recession that was mostly fueled by external factors such as the decline of the Soviet economy, the disappearance of the East German market after German reunification, and the Persian Gulf conflict, which cost Poland many trade contracts and elevated oil prices. According to some experts, Poland's GDP shrank by anywhere from 3.5 to 5 percent as a result of a major drop in exports to the Soviet market.

In a poll taken in early January 1990, around 50 percent of respondents supported the Balcerowicz Plan, while almost 15 percent opposed. Later support for the reforms fell consistently. After the most painful period of economic and social changes in 1990-1993, public support for the plan largely depended on how the economy performed at a given time.

Balcerowicz was deputy prime minister and finance minister until Dec. 23, 1991. He retained his post after Mazowiecki's Cabinet was replaced by that of Jan Krzysztof Bielecki.

Balcerowicz became finance minister again Oct. 31, 1997 under Prime Minister Jerzy Buzek. This time he took the job as leader of the Freedom Union party (UW) , which governed the country together with Solidarity Election Action (AWS). He kept the job until June 8, 2000, when his party left government.

From Jan. 10, 2001 to Jan. 10, 2007, Balcerowicz was the governor of the central bank.
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