Vote Leaves Poland Still Without Budget : Eastern Europe: The government has operated without an economic policy for two months. Critics said its defeated proposal could have rekindled inflation.

For the two months it has been in office, Prime Minister Jan Olszewski’s government has operated without an economic policy, although it has been under mounting pressure from its international creditors to devise a credible budget before continuing negotiations on debt relief.

The government’s situation grew even more muddy Thursday when the Parliament, after a day of debate, rejected a proposed plan that had stirred expressions of worry from Western lending agencies over the direction of the country’s recovery.

Olszewski had termed his proposal a “life-saving change of course.” But critics said the plan could rekindle the inflation that two post-Communist governments here brought under control with tough austerity measures and a tight-fisted monetary policy.

The 171-138 vote, with 38 abstentions, was a solid rejection of the plan, which had seemed almost certain of passage at the beginning, despite opposition from liberal groups in the Parliament.

The defeat was also a major blow to the Olszewski government, already on uncertain ground. Polish television quoted parliamentary sources who said “a reconstruction of the government is needed to overcome the crisis, which has apparently begun.”

Critics of the government’s plan argued that it had placed too much faith in the efficiency of government agencies in parceling out cheap credit and tax breaks to selected enterprises, harkening back to the days when Communist central planners kept money-losing factories afloat at the expense of the state treasury.

In the parliamentary debate Thursday, Marek Dabrowski, voicing the criticisms of the Democratic Union party, which led the fight against the plan, pointed to the irony of a government created by stridently anti-Communist parties “now proposing solutions from the past era.”

The government argued that its plan would overcome a deep recession in Polish industry by providing financial help to “worthy” enterprises. Further measures, also highly controversial, would boost the money supply to try to increase investment, while reducing taxes and interest rates. Price supports were proposed as relief for farmers.

The plan, designed by Jerzy Eysymontt, the government’s chief economics minister, pledged to hold inflation to current levels (70% last year) and to keep the budget deficit to 5% of the gross national product.

The proposal, at minimum, was a sharp departure from the policies of former Finance Minister Leszek Balcerowicz and Harvard economist Jeffrey Sachs, whose “shock therapy” economics put Poland in the spotlight among East European countries struggling to convert to a free-market system.

Concern over the current plan came from Western governments, the World Bank and the International Monetary Fund, whose backing for the government’s economic plan is crucial in Poland’s negotiations to reduce a $46-billion foreign debt.

“The problem with all this,” said Ian Hume, the World Bank representative in Warsaw, “is that there is a major budget deficit looming, and, if the money supply has to be increased to meet it, the specter of hyper-inflation is a threat.”

The inflation rate for January was 7.5% and is likely to be higher in the next two months, spurred in part by a 12% devaluation in the zloty, the Polish currency. If those rates continue, they would quickly push the inflation rate into triple figures for the year.

Concern over the budget deficit had also been voiced by Michel Camdessus, the managing director of the IMF, who warned in a letter to President Lech Walesa: “If measures are not taken to restrict it, the deficit can reach a two-digit figure in relation to gross national product.” Economic experts say IMF backing for further debt relief for Poland would be improbable, if the deficit gets out of control.

While those attempting to assist Poland’s economy say they are sympathetic to the political pressure brought by unemployment and the continuing industrial recession, they are dubious about the new government’s ability to maintain sufficient discipline over the fine-tuning mechanisms they propose to use.

“In our purist theology,” said Hume, “such measures are not as effective over the long term as a consistent approach. A fiddle here, a fiddle there--this is not what we believe is good for Poland in the long run.”

But Olszewski, in his initial submission of his plan, said Poland could no longer afford to wait for “the invisible hand of the free market” to pull the country’s distressed state-run factories out of recession. “This type of assumption is not only a mistake,” he said, “it is madness.”

His government, based on a shaky center-right coalition in a Parliament divided by 29 parties, has worked on the economic plan for weeks. It was embarrassed two weeks ago when Karol Lutkowski, the designated finance minister, resigned, arguing that the proposal put together by economics czar Eysymontt would bring a return to spiraling budget deficits and inflation.

Olszewski, seeking credibility for the plan, turned to Deputy Foreign Trade Minister Andrzej Olechowski, a widely respected banking specialist and former employee of the World Bank, to replace Lutkowski. Olechowski has described himself as a “strict monetarist,” but has said he can work with the new government’s policies.

Olechowski’s comments Thursday to the Movement for an Independent Poland, a right-wing faction in Parliament, may actually have swung the vote against the government’s plan. According to the faction’s floor leader in Parliament, Olechowski said the government would maintain its strict monetarist policies--thereby prompting the faction’s defection from the government camp.

Clearly, the government’s major concern is over the continuing problem of what to do with huge state-run industries, which still account for two-thirds of the nation’s economy. Last year, industrial production fell by 11.9%--down an unsettling 33% from 1989. Poland’s gross domestic product fell 8%, the third successive year of decline.

Some of the decline came from forces outside the control of factory management. For example, many industrial concerns that formerly turned a profit, particularly manufacturers of heavy machinery, were devastated by the sudden collapse of the former Soviet market. But economists say the state-run enterprises have proven more resistant to change than optimists predicted in 1990, when Balcerowicz and his team of free-market exponents assumed that factory managers would either get the message or watch their enterprises go bankrupt.

Instead, many have kept afloat with loans and promises and what one economist described as a “daisy chain” of debt from one enterprise to another. With unemployment standing at 11.3%--and predicted by independent agencies, such as Vienna-based Business International, to reach 13% before the year is out--the government feels it cannot allow wholesale bankruptcies by large state enterprises.

The danger in the Olszewski economic plan, said John Reed of Business International, is that it could engender a return to the culture of the “industrial lobbies” that overpowered discipline in the economy in the 1970s (the period when Poland’s international debt soared). “The weak point in the plan, given all the things they are talking about,” Reed said, “is they don’t really explain how they are going to keep government spending under control.”

Considerable political log-rolling was involved in the vote, and it was unclear whether the strongly voiced misgivings about the plan from foreign economic experts were more decisive in the vote than the shifting political alliances in the Parliament.