Poland Proves Model for Market Reforms in Former Soviet Bloc

Six years of economic shock therapy in Poland is finally showing results. Ask Jozef Habrat, who runs a glass works in southern Poland that was among the first state enterprises to be privatized.

In 1990, Krosno SA was losing money and sinking under a mountain of debt. Three of its five plants were idle and only one telephone line was working because there was no money to pay the bills.

“We didn’t have financial liquidity, no possibility for credit,” he said. “That was a disaster.”

Habrat renegotiated the debt, cut costs, improved work organization and introduced stricter financial discipline. He also worked hard to revive sales contacts.

Exports started expanding gradually and the company, famous for its handblown glasses, carafes and bowls as well as industrial glass products, turned a profit in 1994. Last year earnings doubled to 8 million zlotys, the equivalent of $3.2 million.

Government officials say Krosno isn’t unique among Poland’s businesses.

“The Polish economy is like a glittering coin,” said a beaming Grzegorz Kolodko, Poland’s finance minister since April 1994.

Poland’s overnight move from communism to a market economy in early 1990 has turned the country into a showcase for monetary and business reform in the former Soviet bloc. And Kolodko promises more growth and a higher standard of living for Poles tired of six years of belt-tightening.

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Poland has the fastest growing economy in Europe with a 7% expansion in 1995. Exports soared by 38% last year in dollar terms. Industrial production was up by 10% and back to the level of 1989, the last year of communist rule.

Annual inflation is below 22%, down from 29.5% in 1994, and unemployment is under 15%, with 200,000 new jobs created last year. Kolodko forecasts 5% annual growth until 2000 and promises inflation will be cut to single digits by then.

As in the rest of eastern Europe, the early post-communist period in Poland was anything but easy.

The former East bloc’s trading pact, the Comecon, was dissolved and factories across the region that used to cater to Soviet needs saw their warehouses filled with useless products. State-controlled prices had to give way to market calculations and hard currencies replaced the communist invention, the “transferable ruble,” that existed only on paper.

“It was a complete mess,” said Habrat. “All our distribution networks were closed and the new managers had no idea about export deals.”

Change came overnight on Jan. 1, 1990, when then-Finance Minister Leszek Balcerowicz liberalized all economic activity and removed limits on foreign trade, allowing many enterprising Poles to start businesses and get their first experience with a market economy.

Almost all retail trade and services were turned over to private hands. Most subsidies for inefficient state industries were eliminated, along with bailouts for indebted plants and pay increases for striking miners and steelworkers.

Despite early problems, including hyperinflation of 650%, a $45-billion foreign debt, acute shortages of basic goods and high unemployment, the shock therapy, coupled with strict financial discipline, seems to have done the trick, Balcerowicz said.

The tough measures cost the Solidarity government the 1993 parliament election, however, and dissatisfaction with belt-tightening contributed to Solidarity hero Lech Walesa’s loss of the presidency last year.

Poland is now governed by former communists, who have promised to go ahead with privatization and other reforms.

Other countries in eastern Europe have taken a different approach, gradual changes instead of overnight capitalism, and retreats on tough economic policies in the face of strikes or protests.

The Czech Republic has enjoyed political stability despite rapid reforms, for instance, but has paid the economic price of shoring up inefficient factories instead of letting them go bankrupt.

Poland seems to have succeeded even in an area where it lags behind its neighbors--privatization of state-owned industry. Czechs and Slovaks, as well as millions of Russians, became stockholders overnight through voucher privatization schemes.

Poles spent a long time discussing their plans and were selling factories to local or foreign investors one by one.

“Our main goal is to find an owner,” Privatization Minister Wieslaw Kaczmarek said in a recent interview. He noted that overnight privatization leaves managements with no clue about how to improve the operation or where to find money for modernization.

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Balcerowicz said he was happy the current growth has been export-oriented, but warned more reforms were needed. Although more than 40% of state industries have been privatized, he noted, the process has slowed down.

Meanwhile, coal mining needs further restructuring, and more government subsidies need to be cut, such as the one that kept the historic Gdansk shipyard hiring employees and paying generous benefits while its competitors restructured.

There are other problems: While average pay now has tripled to about $330 a month, purchasing power is only 75% of the 1989 level. Residual unemployment and deep cuts in Social Security have put one in four Poles under the poverty line.

But Krosno’s Habrat said market reforms have made workers strive to be more productive, “to get more money for better work.”

Last year, sales at the 5,000-worker firm rose by 50%, reaching 154 million zlotys, or $61 million. Half its production was exported, mainly to the United States, Germany, Britain and Australia.

In 1991, a year after it was privatized, Krosno, named after the city where it is located, became one of the first five companies listed on Warsaw’s stock exchange, revived after half a century. The company has been paying dividends to shareholders since 1994.

Habrat is aware it will be hard to maintain Krosno’s big growth rate. He plans to further cut production costs and perhaps employ more people to launch a four-shift, seven-day-a-week production system.

Asked about how he learned so fast to prosper under the new economic rules, Habrat says: “I was a capitalist even in communist Poland, but I was not allowed to spread my wings.”