Poland’s Awesome Opportunity

Poland, the first Eastern Bloc nation to break away from Soviet-style communism’s monolithic approach during the 1980s, is embarked on an ambitious move to a more market-oriented economy. Having recently returned from a presidential economic mission to that nation, I would like to share some initial--and personal--observations.

In their initial burst of enthusiasm, the Poles envision a movement to a mainly private enterprise economy--such as that which characterizes the United States and the United Kingdom. The required changes will be extremely wrenching, and nobody knows now how far they can go.

The task that faces the Polish government and the Polish people is awesome. The current rate of inflation is 55%. That is just for the month of October! Estimates of the aggregate increase for the calendar year are in hyperinflational ranges--900% to 1,000%.

Inflation has been fueled by a monetary policy so loose that it results in negative interest rates being paid by the nationalized enterprises. Easy money has been accommodating a budget deficit of 10% of the nation’s gross national product, and generating a rapidly depreciating currency. The zloty was devalued from 1,000 to a dollar in September to 3,000 to a dollar in mid-November. That is still above the “unofficial” rate of about 7,000 to a dollar.

While trying to end runaway inflation, Poland will be dismantling four decades of the communist bureaucracy’s restrictions on its economy, privatizing an array of inefficient nationalized enterprises, introducing a modicum of competition, and closing down or restructuring an archaic industrial base. One steel complex employs 30,000 workers to make the same amount of steel that an American company can make with 7,000 people.

Moreover, Poland has to do all this while maintaining the support of its people--who start off with one of the lowest living standards in Europe.

What are the prospects for success? Let us start with the positives. The ability and dedication of the senior Polish officials encountered by the members of our combined public sector-private sector mission were in the main of a very high order. At the top level, a large proportion are Solidarity stalwarts from academia, although a liberal sprinkling of the former nomenklatura (bureaucracy) remains.

The basic priorities that they have set seem to be sound. Bringing down hyperinflation is the sensible top priority. Monetary and fiscal policy are the appropriate tools for that difficult task. The Solidarity-dominated government starts off with a broad base of popular support.

Longer-run positive elements in the Polish economic scene include a young and relatively well-educated work force, with one of the lowest wage levels of any industrialized nation. Wages average about $70 a month at the official exchange rate--and much lower in real terms.

One positive aspect (or absence of an expected problem) is the availability of food in Poland. Spot shortages do occur, in large part due to poor transportation. But, the average diet in Poland reportedly provides at least as many calories as in the United States. The per-capita consumption of meat is above the average for Western Europe. Since the partial decontrol of retail prices in August, meat is visible in Warsaw’s open air markets. The prevailing forecast is that Poland should be self-sufficient in food this winter.

The negative factors facing the country are numerous: ancient capital equipment, overstaffed factories and workers used to an environment with little incentive to produce. A popular saying among Polish workers is, “They pretend to pay us, and we pretend to work.”

The combination of balancing the budget, shifting to a tight monetary policy and a privatization policy that requires downsizing or closing many ancient enterprises will be very disruptive. Unemployment is likely to rise rapidly (the official estimate is an increase of 400,000 jobless). Bankruptcies will be frequent, and uncertainty (that barrier to investment) will inevitably increase.

Budget details are difficult to come by. The Poles have copied some of our budget gimmickry. Many nationalized industries are off-budget. The definition of revenues is very broad. Like us, they include the proceeds of asset sales--in their case, from selling off nationalized companies.

A more blatant subterfuge is the likelihood that, to show a balanced budget, they will include as receipts the proceeds of short-term borrowing (the equivalent of our Treasury bills). Such “revenues” are not really income to the government. Under any logical accounting system they should be treated as a way of financing--not reducing--the budget deficit.

A necessary complication of reducing the deficit (now running at 30% of the budget) is the need for what Poles call a “social shield” to deal with the hardship of mounting unemployment, or what we term a “social safety net.”

Initial planning calls for rather liberal benefits, such as paying 100% of the prior wage for six months to workers who lose their jobs by group dismissals or bankruptcies. After the first six months, the benefit would decline to one-half of the average wage in the nation.

Taking account of the off-budget outlays and the on-budget revenue items that do not belong there, it will be too easy for the Polish Finance Ministry to achieve “nominal” balance in the national budget, while still contributing substantially to the real fiscal deficits that are at the heart of the inflationary pressures.

Of course, the fate of the current Polish experiment will be determined by the Poles themselves. And the ultimate success of privatization can only occur in the private sector. On that score, the entrepreneurial spirit among the Polish people is greatly underrated. About 70% of agriculture is privately owned. Secondly, an array of private entrepreneurs is evident in trade, services and a variety of small crafts.

Where do the citizens of a poor and hitherto communized society generate the capital to finance a rebirth of its private sector? The sensible answer is from foreign private sectors.

But Poland’s large foreign debt exceeds the combined indebtedness of the other Eastern European nations. The inflow of equity capital on a large scale will occur only after the creation of an attractive business environment. Much of that would be a byproduct of Poland’s new economic goals, notably low inflation, privatization and elimination of regulatory obstacles to enterprise.

There is a bright side to the waste and featherbedding in Polish enterprises. They are gold mines of potential cost reduction, productivity improvement and profit enhancement. This should attract foreign investors who seek combinations of high risk and high profits.

Modern history provides many examples of nations moving from capitalism to communism. However, there is little precedent for reversing that movement. That is what makes the travails of the Polish nation so riveting to people in free nations. If the current liberalization effort works, the Poles will have demonstrated that the movement to Marxism is truly reversible. Communism will clearly be seen, not as the wave of the future, but as a dismal reminder of the past.