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Encyclopedia > Balcerowicz Plan

The Balcerowicz Plan (Polish: Plan Balcerowicza), also termed "Shock Therapy," was a method for rapidly transitioning from a communist economy, based on state ownership and central planning, to a capitalist market economy. Named for its author, the Polish minister and economist Leszek Balcerowicz, the plan was adopted in Poland in 1989. In economics, shock therapy refers to the sudden release of price and currency controls, withdrawal of state subsidies, and immediate trade liberalization within a country. ... A planned economy is an economic system in which decisions about the production, allocation and consumption of goods and services are planned ahead of time, usually in a centralized fashion, though some proposed systems favour decentralized planning. ... In economics, a capitalist is someone who owns capital, presumably within the economic system of capitalism. ... It has been suggested that Free market be merged into this article or section. ... Leszek Balcerowicz (pronounced: [lεʃεk balʦεrɔviʧ]) (born January 19, 1947) is an economist from Poland and Chairman of the National Bank of Poland. ... 1989 (MCMLXXXIX) was a common year starting on Sunday of the Gregorian calendar. ...


Such rapid transitions were difficult for the countries that used them, such as Poland. Many countries that implemented a Balcerowicz-style plan, experienced instability and crushing poverty before they could experience economic growth.

Contents

Background

After 45 years of communist rule, Poland's economy was completely unsuited for integration into a Capitalist world market. The inflation rate had reached 264.3% and was constantly rising. The majority of state-owned monopolies and holdings were largely ineffective and completely obsolete in terms of technology. Although there was practically no unemployment in Poland, wages were low and the shortage economy led to lack of even the most basic foodstuffs in the shops. After the failure of the Communist government in the elections of June 4, 1989, it became clear that the previous regime was no longer legitimate. An 1837 political cartoon about unemployment in the United States. ... Polish meat shop in the 1980s. ... June 4 is the 155th day of the year in the Gregorian calendar (156th in leap years), with 210 days remaining. ... 1989 (MCMLXXXIX) was a common year starting on Sunday of the Gregorian calendar. ...


The unofficial talks at Magdalenka and then the Polish Round Table talks of 1989 allowed for a peaceful transition of power to the democratically-elected government. Initially it was agreed that the government would be formed by Tadeusz Mazowiecki and the opposition, while the seat of the president of Poland would be given to former PUWP leader Gen. Wojciech Jaruzelski. Round-table negotiations. ... 1989 (MCMLXXXIX) was a common year starting on Sunday of the Gregorian calendar. ... Tadeusz Mazowiecki (born April 18, 1927 in PÅ‚ock) is a Polish author, journalist, social worker and politician, formerly one of the leaders of the Solidarity movement, and the first non-communist prime minister in Central and Eastern Europe after World War II. Tadeusz Mazowiecki as Prime Minister of Poland... The Polish United Workers Party (PUWP; in Polish, Polska Zjednoczona Partia Robotnicza, PZPR), was the governing political party in communist-ruled Poland from its creation (through a fusion of the communist Polish Workers Party and the left wing of the Polish Socialist Party) in December 1948 until the regimes... Wojciech Jaruzelski in 2006 Wojciech Witold Jaruzelski (pronounced: ) (born July 6, 1923) was a communist Polish political and military leader, Prime Minister from 1981 to 1985, head of the Polish Council of State from 1985 to 1989 and President from 1989 to 1990. ...


The plan

In September of 1989 a commission of experts was formed under the presidency of Leszek Balcerowicz, Poland's leading economist, Minister of Finance and deputy Premier of Poland. Among the members of the commission were George Soros-backed Jeffrey Sachs, Stanisław Gomułka, Stefan Kawalec and Wojciech Misiąg. The commission prepared a plan of extensive reforms that were to enable fast transformation of Poland's economy from obsolete and ineffective central planning to capitalism, as adopted by the states of Western Europe. The Prime Minister of the Republic of Poland represents the Council of Ministers (the Cabinet) and directs their work, supervises territorial self-government within the guidelines and in ways described in the Constitution and other legislation, and acts as the superior for all government administration workers (heading the public service... George Soros (pronounced ) [Shorosh] (born August 12, 1930, in Budapest, Hungary, as György Schwartz) is a American financial speculator, stock investor, philanthropist, and political activist. ... Jeffrey Sachs Jeffrey David Sachs (born November 5, 1954 in Detroit, Michigan) is an American economist known for his work as an economic advisor to governments in Latin America, Eastern Europe, the former Soviet Union, Asia, and Africa. ... StanisÅ‚aw GomuÅ‚ka is a Polish economist, former advisor or Polish Ministry of Finance, professor at the London School of Economics. ...


On October 6 the program was presented on public television and in December the Sejm passed a packet of 10 acts, all of which were signed by the president on December 31, 1989. These were: October 6 is the 279th day of the year (280th in leap years). ... The Sejm building in Warsaw. ... December 31 is the 365th day of the year (366th in leap years) in the Gregorian Calendar. ... 1989 (MCMLXXXIX) was a common year starting on Sunday of the Gregorian calendar. ...

  1. Act on Financial Economy Within State-owned Companies, which allowed for state-owned businesses to declare bankruptcy and ended the fiction by which companies were able to exist even if their effectiveness and accountability was close to none.
  2. Act on Banking Law, which forbade financing the state budget deficit by the national central bank and forbade the issue of new currency.
  3. Act on Credits, which abolished the preferrential laws on credits for state-owned companies and tied interest rates to inflation.
  4. Act on Taxation of Excessive Wage Rise, introducing the so-called popiwek tax limiting the wage increase in state-owned companies in order to limit hyperinflation.
  5. Act on New Rules of Taxation, introducing common taxation for all companies and abolishing special taxes that could previously have been applied to private companies through means of administrative decision.
  6. Act on Economic Activity of Foreign Investors, allowing foreign companies and private people to invest in Poland and export their profits abroad.
  7. Act on Foreign Currencies, introducing internal exchangeability of the złoty and abolishing the state monopoly in international trade.
  8. Act on Customs Law, creating a uniform customs rate for all companies.
  9. Act on Employment, regulating the duties of unemployment agencies.
  10. Act on Special Circumstances Under Which a Worker Could be Laid Off, protecting the workers of state firms from being fired in large numbers and guaranteeing unemployment grants and severance pay.
  11. Act of Monetary Return, to freeze exchange of Polish currency while maintaining a high level of inflation.

In late December the plan was approved by the International Monetary Fund. The IMF's support was especially important because the national debt in various foreign banks and governments reached an amount of US$38.5 billion during the last 25 years of Communist rule in Poland. The IMF granted Poland with a stabilization fund of US$1 billion and an additional stand-by credit of US$720 million. Following this the World Bank granted Poland additional credits for modernization of exports of Polish goods and food products. Many governments followed and paid off some of the former Communist debt. Many foreigners benefitted from a fixed currency exchange rate, making billions of dollars per year (See ART-B). A budget deficit occurs when an entity (often a government) spends more money than it takes in. ... An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. ... Popiwek (an acronym of PPWW, short for Podatek of ponadnormatywnych wypłat wynagrodzeń, Polish: ) was an extraordinary tax introduced in Poland in 1984. ... Certain figures in this article use scientific notation for readability. ... Złoty (literally meaning golden, plural: złote or złotych, depending on the number) is the Polish currency unit. ... [[Image:Example. ... The United States dollar is the official currency of the United States. ... The United States dollar is the official currency of the United States. ... Logo of the World Bank The International Bank for Reconstruction and Development (IBRD, in Romance languages: BIRD), better known as the World Bank, is an international organization whose original mission was to finance the reconstruction of nations devastated by WWII. Now, its mission has expanded to fight poverty by means...


The effects

Positive

The packet of reforms passed by the parliament drastically limited the state's influence over the economy. The plan released price-fixing for many products, allowing them to be dictated by the market instead of the Central Statistical Office. Also the internal debt was drastically limited, by circa 3% of GNP, by cutting down on state subsidies to coal, electricity and petroleum. Initially the social costs of the reforms were seen as extremely high, and roughly 1.1 million workers at state-owned firms lost their jobs. Although inflation seemed to be out of control, the Polish economy gradually started to get back on track. By 1992, more than 600,000 private companies had been set up, providing jobs for approximately 1.5 million people. internal debt is the part of countries debts owed to creditors inside the country. ...


Most economists agree that without this shock therapy, which sacrificed short-term gains for long-term growth, modern Poland would be a much poorer country. For example, Poland's annual growth rate between 1989 and 2000 was one of the highest of all post-Communist economies.[citation needed]


Criticism

The reforms were very controversial and made Balcerowicz a target for many political attacks. The hardship caused by the Balcerowicz plan prompted Andrzej Lepper, the leader of a party called Self-Defense (Samoobrona), to create the slogan: "Balcerowicz has to leave" (Balcerowicz musi odejść). Andrzej Zbigniew Lepper (born June 13, 1954 in StowiÄ™cino / Stojentin, Poland) is a Polish politician, leader of Samoobrona RP (Self-Defense of the Republic of Poland) political party, and since May 5, 2006 Deputy Prime Minister of Poland and Minister of Agriculture. ... Self-Defense of the Polish Republic ( Polish: Samoobrona Rzeczypospolitiej Polskiej, SRP) is a political party and trade union in Poland. ...


The wave of bankruptcies of inefficient state-owned industrial giants left approximately 20% of Poles unemployed. The change was especially drastic in rural areas of the country, which had previously been collectivized by the Communists into state-owned farms. However, critics often point out that the reforms of 1990 only showed the unemployment that had existed in a hidden form during Communist times.


Critics of Balcerowicz's Plan point to Russia as a country that privatized its industry in a similar manner and quickly became crony capitalistic. Russia had the same economic advisor Jeffrey Sachs as Balcerowicz, and their reform plans were analogous to Poland's. Recently Jeffrey Sachs has criticized his own advice as incorrect (The End of Poverty: Economic Possibilities for Our Time), which has subsequently renewed discussion over Balcerowicz's reforms. Many economists (for example Nobel Price winner Joseph Stiglitz) argue that stopping the reform allowed Poland to avoid the same fate as Russia. However, some reports state Russia did not carry out shock reform in the same manner as Poland (Russia is not Poland, and That's Too Bad', Michael M. Weinstein, New York Times, p. 5, Aug. 30, 1998) Additionally, the reforms undertaken in countries such as Hungary and the Czech Republic, are considered to be better models for economic transition. Prominent Polish critics of Balcerowicz include Grzegorz Kolodko, prof. Zdzisław Sadowski and Ryszard Bugaj. However, some people point to countries that failed to reform quickly, such as Ukraine, Slovakia, Romania and Bulgaria, whose respective economies are in far worse condition than that of Poland. The transitional problems that Poland faces are blamed on high taxes, restrictive labor laws and a lack of economic freedom that characterized the period between 1990-1993.[citation needed] Jeffrey Sachs Jeffrey David Sachs (born November 5, 1954 in Detroit, Michigan) is an American economist known for his work as an economic advisor to governments in Latin America, Eastern Europe, the former Soviet Union, Asia, and Africa. ... Joseph Stiglitz (born February 9, 1943) is an American economist, author and winner of Nobel Prize for economics ( 2001). ... Grzegorz W. KoÅ‚odko (born January 28, 1949 in Tczew, Poland) - professor of economics, renowned polish economist specializing in development economy, system reforms and public finances. ...


Years later, Balcerowicz admitted that he neglected to consider the element of human motivation in his calculations.[citation needed]

Change in % 1990 1991
GDP -10,5 -7,5
prices 585,8 70,3
real wages -24,4 -0,3
export 24,7 -18,5
import -2,5 24,3
Food production -2,2 -2,0
industrial production -24,2 -11,9
unemployment 6,1 11,5
deficit (% of GDP) 3,1 3,8

External link

(Polish) Plan Balcerowicza i sytuacja makroekonomiczna Polski w okresie przejściowym w latach 1989-1991 by Monika Gola


  Results from FactBites:
 
Leszek Balcerowicz - Wikipedia, the free encyclopedia (350 words)
Balcerowicz received his doctorate from the Warsaw School of Economics in 1975 and an MBA from St.
On November 11, 2005, President of Poland, Aleksander Kwaśniewski, awarded L. Balcerowicz with the country's highest decoration, the Order of the White Eagle, for his contribution to the transformation of the system.
The Balcerowicz Plan was a series of reforms, which sought to end hyperinflation and balance the national budget.
  More results at FactBites »

 
 

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