From Plan to Action

Poland's "big bang," or shock therapy as it came to be called, began on the first day of the new year. Virtually all price controls were eliminated. The currency was steeply devalued and then pegged at the new rate of 9,500 zlotys per dollar. The currency was backed by the Zloty Stabilization Fund, and the Central Bank of Poland announced that it was prepared to intervene in the foreign exchange market to keep the rate at 9,500 per dollar. A raft of new economic legislation went into effect, especially laws allowing private companies to open for business. Trade barriers with Western Europe were eliminated, and private traders were free to travel to and from Western European neighbors to buy and sell goods.

The first days were frightening. With the end of price controls, the pent-up excess demand of the socialist era caused a massive jump in prices, on the order of a fivefold increase. The price of a particular cut of meat, for example, might rise within days from 1,000 zlotys per kilo to 5,000 zlotys per kilo. In the prereform days, however, the 1,000-zloty price was mostly a fiction. Only those people who queued up early in the morning and were lucky to pick the right shops could get meat at that price, but most shoppers would find only empty store counters. If they really wanted to get meat, they would have to pay black market prices, which could be even higher than 5,000 zlotys per kilo. Thus what looked like a shocking fivefold jump in prices was, in many cases, an actual decline in prices if one compared the black market prices before January 1, 1990, with the free-market prices afterward. After the reforms, the goods were available in the shop counters, not the alleys of the black market. This change, too, lowered the cost of goods by lowering the time and effort that went into buying them.

Theory is one thing, and practice is quite another. Even though I was confident that the end of price controls on January 1, 1990, would put goods back into the shops, at affordable prices, the early days of 1990 were nerve-racking. I called Poland regularly from the United States. Larry Lindenberg was getting more and more nervous. "It's been a week, and we don't see any goods in the shops yet." And then, suddenly, the breakthrough came. "Jeff, there are goods in the stores! In fact, the department store down the block is having a sale, cutting the price that it was charging for some appliances. This is the first time in my adult life I've seen a sale. Something is starting to happen."

Indeed, within a few weeks the markets filled again. On our visits to Poland at the time, Lipton and I kept a reconnaissance on the availability of kielbasa in a shop around the corner from the Ministry of Finance. Throughout late 1989 there were no sausages available at all. By the middle of January, the sausages lasted until about eleven in the morning. A few weeks later, the sausages were amply available the entire day. An amazing shuttle trade also began between Germany and Poland. Poles would take their little cars and drive across the border to Germany to buy goods to sell in Poland. They would sell the goods out of the trunk of the car, convert the zlotys into deutsche marks (a conversion legal after the start of the year), and then use the deutsche marks for the next round of purchases. Others were selling Polish goods—such as processed meats—or Polish labor on construction sites in Western Europe, bolstering the flow of deutsche marks and other Western European currencies on the Polish market.

None of this trade made Poland rich overnight. The newly available goods were expensive, and incomes were low. Still, Poles stopped spending their daily lives searching for goods in the black market or queuing up for goods in front of empty shops. The freedom to trade would become an underpinning of economic growth during the coming years. There were, of course, some very sharp changes in consumption patterns, some highly desirable, others quite painful. One change for the better was in the composition of the Polish diet. Until 1990, the Polish diet had been overstuffed with fatty dairy products, the result of heavy subsidies for dairy farmers. At the start of 1990, the subsidies were eliminated, and the diet shifted toward fruit and vegetables and away from cholesterol-laden dairy products. Fruit that had simply been unavailable in Poland, such as bananas, was now available through the shuttle trade. The new diet led to a significant drop in heart disease within a few years.

The biggest dislocation, by far, came in Poland's large state-owned industrial enterprises. Many enterprises had survived only because of central planning. They were not manufacturing products that were marketable, especially when Western goods became readily available. Many were making products that had been sold to the Soviet Union, which was not much of a customer any longer. Most of heavy industry had relied for decades on the delivery of very cheap and plentiful Soviet energy to Poland. In the beginning of 1990, with the end of communist rule in Poland, the Soviet Union began selling oil and gas to Eastern Europe on a strictly market basis, leading to a huge drop in supplies. Poland's large heavy industrial firms were forced to scale back their workforce, and some closed their doors permanently. The greatest pain was endured by middle-aged workers in their forties and fifties who had been trained for a Soviet economy that no longer existed. Most of these laid-off workers ended up on the unemployment dole for a while, then on pensions after early retirement. History had cheated them of the training and knowledge for a full lifetime of productive employment.

Fortunately, foreign investment from Germany and other Western European countries began to pick up relatively early. In late 1989, I was asked to meet with a senior executive of Asea Brown Boveri in the Zurich airport as I was traveling back to Boston. She told me that the company was considering an investment in Poland: taking over a state-owned power turbine factory. She asked if I would meet with the board, and when I did, they were very surprised when I told them how optimistic I was about Poland. Fortunately, enough of the ABB leadership shared that optimism, and the proposed investment went ahead. It became very successful, and the company ended up selling power turbines all over the world through ABB's global production network. Its success was a clear example of how Poland's integration into the world economy could create jobs in Poland, raise the productivity of local industry, help integrate Poland into the European economy, and begin the long process of raising productivity and living standards.

In general, Western European firms began to invest in Eastern Europe after 1989, often setting up production facilities in order to export manufactured goods to Western European markets, taking advantage of the lower wages in the east. This same pattern fueled Spain's rapid economic progress once it had become integrated with the European Community in the 1970s and 1980s. Geography, as usual, showed its power to shape economic events in the east. The farther a postcommunist country was from Western European markets, the lower the foreign direct investment (FDI) per person that flowed into the country. This is illustrated in figure 2. The distance of each postcommunist country's capital city from Stuttgart, in the heart of the European economy, is plotted on the horizontal axis, and the amount of foreign direct investment per person as of 1996 on the vertical axis. Though not a rigorous analysis, the downward sloping line shows a strong relationship: the closer to Western Europe, the higher the FDI.

Within two years, it was beginning to dawn on many people that Poland was out of disaster and, in fact, beginning to grow. That resurgence was the first case of postsocialist growth in all of the countries of Eastern Europe. A degree of optimism began to creep in, even in a milieu that was historically so riddled with pessimism. The real revival of optimism, however, awaited a solution to the foreign debt, which hung over Poland's future like a persistent storm cloud.

Figure 2: FDI and Location in Eastern Europe and former Soviet Union

Figure 2: FDI and Location in Eastern Europe and former Soviet Union

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