Let’s Not Stop Halfway
December 19, 2013
This is the latest in our series of extended interviews with key figures in Poland’s transition from communism to a free-market economy, which began in 1988/1989, the period when The Warsaw Voice itself appeared: the first issue of this magazine hit the newsstands Oct. 23, 1988.
As part of the series, we have also talked to Lech Wałęsa, Bogdan Borusewicz, Tadeusz Mazowiecki, Leszek Balcerowicz and Aleksander Kwaśniewski. The interviews with Wałęsa, Borusewicz and Mazowiecki have already been published.
Leszek Balcerowicz, the architect of Poland’s transition to a free-market economy, former central bank governor and ex-finance minister, talks to Andrzej Jonas.
How did you come to be a minister in a government that undertook to transform the country’s political and economic system in 1989—an unprecedented project in this part of the world at the time?
I was not one of those heroic members of the Polish [democratic] opposition who spent time in prison in the communist era and whose life was made miserable by the regime for their attitude and views. Like many other people, I did not believe that the system in Poland would change or that the Soviet Union would disappear within my lifetime. The best I could think of to do in my life was to try to improve things—if only at the outer edges of the economy. In my research work I specialized in international economics, a field that was probably the least deformed by the [communist] system when it comes to economics. So I was less burdened with all those absurdities that had been taught for decades to students at all university business courses in communist Poland as part of their curricula in majors such as the infamous “socialist political economics.”
In late 1977 and early 1978, I organized a group of then-young economists from different universities, thus creating an informal group of people who could today be called naive enthusiasts. In the Poland of the time, the Stalinist version of communism had long ended, so there was no risk involved in forming such a circle of hobbyists who were free to meet regularly without any state project in the background that they were supposed to pursue. Our goal was to try to develop—as part of the existing system—a slightly better framework for the functioning of the economy.
When the Solidarity phenomenon exploded for the first time in 1980, it turned out that we were the only group of economists in the country who were doing such work. At the time reform proposals from independent experts and groups were in great demand, and we were the only ones to come up with such a proposal. From today’s perspective, of course, our ideas seem naive, but in those days they were regarded as very radical. The idea was to introduce as much [free] market as possible under the existing political constraints. We came to the conclusion that the Yugoslav model, in which worker councils guaranteed greater independence of enterprises, would be a good model to follow. That was as far as we could go because we thought that taking the path of privatization would be tantamount to inviting Red Army units into Poland.
In 1980, many feared that Solidarity did not have an economic program. I spent many months at the time meeting with Solidarity activists and presenting the ideas my group developed. The first Solidarity period ended with martial law [imposed by the communist authorities Dec. 13, 1981]. My group continued to meet, but we rejected the idea that the reforms we urged could be hammered out in consultation with the communist government. In the years that followed we worked as hobbyists, which gave us a lot of pleasure, but was in fact useless in those days. However, I believe that without all that work done by the team of economists I created, it would’ve been impossible to launch the reforms that came 10 years later. Nor would I have found myself in the first noncommunist government without that.
When the government of Tadeusz Mazowiecki was formed in 1989, you were appointed finance minister and deputy prime minister responsible for the economy...
In 1989, my wife and I were preparing to go to Britain for some time, where I had planned a series of lectures, and my wife had been granted a research scholarship. Shortly before our scheduled departure, I got a phone call from Waldemar Kuczyński [an economist who was responsible for privatization in the Mazowiecki government], who had taken part in one of my team’s meetings back in 1980. He invited me for a talk during which he said that Mazowiecki was “looking for his Ludwig Erhard” [a German politician and economist, the architect of that country’s “economic miracle” of the 1950s]. We met, and Prime Minister Mazowiecki, whom I had never met before, briefed me on his proposal—and I refused. But Mazowiecki asked me to give it some more thought. So I called a brainstorming session at home; my wife and most other members of my family were against the idea, but what prevailed was an argument used by a distant relative, who said, “If you say ‘No’ now, you will sorry for the rest of your life.” He argued that this was a big, once-in-a-lifetime opportunity.
So I agreed—also because I had “done my homework” and had prepared the ground. If I had not created my group more than a decade earlier, if we had not been discussing strategy for years, and finally, if I did not have the people with whom I eventually entered the government (one of my conditions was that I wanted to have a tangible impact on staffing decisions at institutions responsible for the economy), I would never have accepted Tadeusz Mazowiecki’s offer. My mission would’ve been doomed to complete failure.
We did not have to set off on a learning curve—the direction had been determined, it was only necessary to fine-tune a whole lot of details. I realized that a strategy of slow, partial change would be futile and offered no chance of success. That was because it ruled out the unleashing of new economic energy needed for success in the private sector. I knew that [under a strategy of gradual change] the old would crowd out the new. For years I had studied and described attempts to reform socialism—all ended in failure because the reformers were unable to go outside the system, beyond state ownership, central planning and so on.
When embarking on your economic reforms, were you aiming to build a classical model of capitalism in Poland, or were you thinking of some modified version of it, adapted to the socioeconomic realities of the time?
I did not have any textbook definitions in my mind—these are usually imprecise and confusing anyway. I rather tried to determine a set of key features of the system and the conditions for fast and robust economic growth. Both for me and my colleagues, it was evident what Poland needed after 300 years of falling behind the Western world. I tried to define a system that would allow us to catch up [with the West]. This was a system predominately based on the private sector, the fastest possible demonopolization, and competition—a system open to the world. It was also clear that what was needed was stability, and that high inflation was bad for growth. We also wanted taxes to be as low as possible, an approach that is quite problematic today.
Privatization meant taking politics out of the economy. In privatized companies, politicians can no longer appoint the CEOs, and the government cannot control the economy. Unfortunately, in recent years in Poland, a number of privatizations have been incomplete, with some of the stock in specific companies still remaining in the hands of the state, which means that these companies are still subject to political influence.
All this work on the future economic model was by no means difficult; it was enough to take a good look at the experience of Latin America, where that kind of bad capitalism subject to political control had emerged. Of course, it was better than socialism, but it did not guarantee stable development. If, on the other hand, someone was looking for the best model for the central bank, it was enough to look at Germany’s Bundesbank.
So we had clear roadsigns based on previous analyses and the experience of many countries in different regions of the world. All these roadsigns warned that a policy of slow change would be doomed to failure. We had to go wide and fast. Some called these reforms “shock therapy;” I preferred to use the term “radical therapy” so as not to unnecessarily frighten people.
What was the biggest challenge for you in applying this kind of therapy, which later became known as the Balcerowicz Plan?
Radical therapy is very risky because it may fail. But non-radical therapy is sure to fail. I knew at the time that, if I took the path of minimal change, then I as well as the whole country would lose out. This would have been passing up a historic opportunity and failing to take advantage of conditions conducive to a radical change for the better. In those days I introduced the concept of “a period of extraordinary politics” that has spread throughout the world since then. At that time of breakthrough, political euphoria and economic crisis, people were less inclined to protest over various radical changes, the previous system had been discredited, while the new forces were not yet divided; they were sticking and working together—those were the components of that concept. As someone interested in history I knew, however, that such conditions would not last long, let alone forever—you had to decisively take advantage of them.
A certain advantage in terms of the challenges I faced was that I was once a middle-distance runner—800 meters and 1,500 meters. These events require a combination of speed and endurance at the same time.
I started getting the first written protests from trade unions two weeks after the Balcerowicz Plan was launched. That was long enough for the unions to be convinced that the reforms would not work. If someone less persistent and convinced that the adopted strategy was the right strategy had been in my place, they could have well backpedaled on the reforms, refocusing on slow change instead and consequently squandering a historic opportunity for the development of the country.
The Balcerowicz Plan catapulted Poland into new territory...
The beginnings were tough. The economic forecasts on the basis of which the first state budget was drawn up turned out to be wrong, which should come as no surprise in hindsight—too much had changed in the economy and these changes happened too fast to be able to accurately predict everything. The news about the mistaken forecasts reached the media and caused a big stir; we had to weather this period. Years later we see many things in a slightly different light. For example, the Central Statistical Office (GUS) released a GDP growth projection that was significantly different from what we had in our target; but later it turned out that the GUS figure was predominately based on the declining figures of the state sector, while disregarding private companies, which were rapidly growing in number and increasingly contributed to GDP growth. Actually, this was largely because the Central Statistical Office did not have sufficient possibilities for [monitoring the situation] in those days.
All these new forms of doing business that we enabled by removing obstacles and restrictions on business freedom were what I was particularly happy to see in the first few months of the transition. It all started with street vendors, a natural form of small business.
We introduced competition and transferred some state enterprise assets to the private sector. This involved the sale of trucks, warehouses, machinery, etc. In state-owned companies these assets were often simply wasted, while private companies could use them to crank up their business. In this way, we carried out what was in fact privatization, even though it was not called that—state-owned enterprises continued to exist, but kept shrinking.
The reforms also impacted Poland’s foreign trade...
What was extremely important was that in 1990 we had a clear surplus in trade in dollar terms. From 1991 onward, we had to pay in dollars for oil and gas supplied from Russia; if we hadn’t had the cash to pay, we would’ve found ourselves in a situation as uncomfortable as is the case in Belarus and Ukraine today. We all know that these countries’ dependence on Russian supplies of strategic raw materials are an obstacle to the development of these economies, that Minsk and Kiev must constantly seek discounts and better terms of payment. We never had that kind of problem thanks to dollars obtained from foreign trade at the start of the reforms.
Let’s fast-forward to the present day. Do you think radical programs are easier to implement in extraordinary periods of history or would you say that they can also be carried out at a time of stability?
Of course, periods of euphoria should be taken advantage of, because unless you carry out the necessary changes when the situation is opportune, you will find yourself forced to do that when the economic and political conditions get worse. Looking at the former socialist countries in Central Europe, it is easy to see that those countries that have gone through radical reforms, such as Estonia or Latvia, are in the best position today. On the other hand, those countries which abandoned such reforms for political reasons are in the worst situation today—this is particularly well exemplified by Ukraine.
Unpopular reforms can also be carried out under normal, stable conditions, but this requires good political leadership. Also needed is a precise diagnosis of the state of the economy. If this [diagnosis] shows that serious risks have appeared, any reasonable political leader will introduce profound changes immediately after they win the election, in the interests of his country as well as his own—to make sure that the positive effects of these changes are felt before the next elections. Outstanding politicians do just that.
Unfortunately, in Poland today I do not see that happening. The current ruling coalition [of the economically liberal Civic Platform and the rural-based Polish People’s Party] did not have, in my opinion, any strategy ready for reforms once that coalition started its first term in 2007. It is paying a political price for this, and we can see that today in the polls—when it comes to the level of support for the governing coalition after its six years in power.
Would you agree that it was easier to make radical changes in the early 1990s than in the Poland of today?
Yes, but that does not mean—contrary to what some Civic Platform politicians argue—that radical changes simply cannot be carried out today. In the coming years, the Polish economy will decelerate, and GDP growth will be much slower than it was in the previous 20 years, which brought Poland huge success in terms of development. We are running the risk that the catch-up process will grind to a halt and that we will be making much slower progress bridging the gap that separates us from wealthy European countries.
One risk is demography. We have the lowest fertility rate in the European Union, and in addition the working-age population in Poland includes a smaller percentage of both young and older people than in Germany, for example. So a decline in employment can be prevented even when the demographics are very unfavorable, provided reforms are carried out. This has not been done. I remember how during the period of the baby boom at the start of the previous decade I tried to push through parliament legislation designed to liberalize the labor law. This was blocked for political reasons and as a result young people have joined the ranks of the unemployed instead of entering the job market immediately after completing their education, as they may otherwise have done.
Nor is the current governing coalition working effectively enough to improve the investment climate in Poland, despite announcements to this effect. Investment is closely related to saving; meanwhile, the government intends to nationalize the country’s open pension funds, which means more than half of the assets collected by citizens as part of their pension savings.
Poland’s economic growth in the last two decades has predominately resulted from improved productivity. Technology transfer has taken place, privatization has done away with the wastage characteristic of the public sector, people have decided to give up work in the fragmented farming sector, for example, and looked for new opportunities in urban areas instead. But over the past several years, labor productivity in Poland has been growing slower and slower. This is probably due to excessive regulation and a lack of competition. State-owned universities do not want to educate students for the needs of the market because they are financed by the Ministry of Science and Higher Education and they do not need to seek funds on the market. Briefly put, we are running the risk of a serious slowdown in terms of GDP growth.
And how do you assess the state of the EU economy? What kind of reforms does it need, if any, and how could that affect Poland as a member state?
Speaking of the EU as a whole is in a way masking the problem. With such an approach, we erroneously assume that the situation in all the member countries is similar. Or that similar, unified solutions are needed wherever there are negative trends. Meanwhile, the situation in different member states is very diverse, and only some of them have gotten into trouble. In simple terms, those are the countries that have followed bad, populist economic policies. At one end of the spectrum in the euro zone in 2008-2013 is Slovakia with 5-percent economic growth, and on the other end is Greece with a 24-percent contraction. The determining factor was policy at the national level, while—what needs to be emphasized—the monitoring mechanism at the EU level failed completely. When the euro zone was being created, the need for financial discipline was being taken into account; it was specified in the Stability and Growth Pact but then the enforcement of its provisions was completely disregarded. Today, in the wake of this unpleasant experience, the fiscal surveillance powers of the European Commission have been strengthened. I’m seriously worried that there will be another embarrassment. So far the European Commission cannot see the difference between Latvia, which is restoring contributions to open pension funds, and Hungary, which has practically disbanded such pension funds, or Poland, for that matter, which is taking the same path [as Hungary] and intends to nationalize its open pension funds.
Do you see any political force today capable of carrying out economic reforms needed by the country with the same kind of determination as you and your colleagues displayed in the early 1990s?
Political forces in a democracy depend on the extent of pressure applied by the public. Let’s look at the United States: there are two parties there, the same two for some 200 years. But they too have changed their platforms under pressure from the public. To use a drastic example, once the Democrats were in favor of slavery, while the Republicans were against it. That’s why I’m against making any easy diagnoses of what happens in politics—also because such diagnoses yield rather hopeless conclusions, nothing but complaints.
In any democracy, various groups put constant pressure on politicians. Populists, trade unionists, statists, environmentalists... they all want the government to increase spending on areas that they consider appropriate for reasons of ideology or because of their own interests. They also demand an increase in state regulation, which results in a lack of competition. If there are weak politicians on the other side, they start to bend to such demands or themselves become members of the pressure groups.
What can stop a mismanaged state from drifting along? Two things—stagnation or disaster. An example of the first scenario is Italy, the slowest developing country of the Western world for several decades, or France. Such a stagnation is particularly dangerous when accompanied by a process of population aging, as is the case across Europe. The second scenario is, of course, exemplified by Greece.
In short, the only reasonable thing to do today, in my opinion, is to create a civil society and exert civic pressure—on the one hand on politicians and on the other on pressure groups that put forward various demands. So instead of complaining in private—a practice typical of a large number of people in Poland—much greater mobilization for reform is needed, especially as many projects have succeeded in Poland. So maybe it’s not worth stopping halfway.