Poland's Transition to Market

The Head Start In Eastern Europe
by Alejandro E. Cabrera

Transition in Poland

by Phillip Hee Ung Kim

Poland’s through the eyes of the European Union
by Fabian C. Ma

up

downPoland:
The Head Start In Eastern Europe

by Alejandro E. Cabrera

 

After studying Poland’s system during the communist era, analyzing the different problems and strategies during Poland’s transformation process, it is interesting to see Poland’s current position in Eastern Europe. After a difficult start, Poland is emerging as Europe’s star performer. Economic growth, at 6.5% this year, is the most vigorous in Europe. Unemployment which peaked in 1993 is currently at 14% and it is on its way down. Inflation while high at 28%, is sharply below earlier levels (Miller 65). Privatization is moving ahead, and even foreign investment, long lagging behind that in neighboring countries, is picking up steam.

Of course, the past still lingers in Poland. The state still controls 40% of the economy, and a communist-style welfare system has created deficits that make inflation difficult to reduce. Kwasniewski, which is Poland’s new president and calls himself a social democrat, may feel obliged to listen to more extremists in his party who want to cater to farmers, pensioners, and others who feel shoved aside by the new Poland (Miller 65). Already, many people fear that too many former communists hold government posts and that such cronyism could grow, especially now that one party controls both Parliament and the presidency.

Yet even if there is a slowdown in growth rates, the direction in Poland is clear. A core of technocrats in the Finance Ministry and central bank is committed to keeping inflation down and reducing deficits. They have done so even through two years of ex-communists controlling Parliament. Last summer, they engineered Poland’s return to the markets with a $200 million Eurobond that was oversubscribed enough to raise $250 million (Miller 65). Even the former Finance Minister and architect of the shock therapy reform Leszek Balcerowicz, agrees his principles have been kept intact. "Poland has proved it can be an economic tiger," he says.

The country is poised to reach developed-nation status. Its banking system, long caught in communist-era problems, is transforming itself into a force for rebuilding industry. With a population of 40 million, low-cost labor and a central location between west and east, Poland has advantages as a market and a site for investment: It is already becoming a carmaking center.

Economies to the east now regard Poland as a model. Unlike in neighboring countries, early reformers threw open borders, canceled price controls, devalued the currency, and shackled the budget. Many said that such shock therapy would wreck the economy. Instead, the gamble paid off.

Poland is pulling ahead thanks to its thriving corporate sector. More than 2 million private companies sprang up in the free-for-all after four decades of communism ended in 1989 (Miller 65). Like their more aggressive Asian counterparts, Polish managers are increasingly measuring themselves against global competition. From mother-and-father stores to conglomerates. Thanks to healthy productivity gains of up to 15%, exports have surged 37%, to $16.6 billion, this year, despite the rising value of the zloty (Miller 66). More than 200,000 companies now export from Poland, up from just 200 five years ago (Miller 66).

Foreign direct investment, after a halting start, is picking up. Some $5 billion in direct investment went to Poland between 1990 and 1994 (Miller 66). In just the first half of 1995, however, a further $1 billion has been plowed into the country. According to the article, an economist at J. P Morgan in London, predicts that foreign direct investment will grow an additional $3.5 billion by the end of 1996. Investment is on the rise because more foreign companies see the potential of Poland’s domestic market and its attractiveness as a supply base for both West and East. PepsiCo Inc., for example, is pumping in $500 million to expand its three divisions in Poland: soft drinks and bottling, fast-food restaurants, and snack foods and chocolates. The company employs 6,600, up 90% from two years ago. A number of French and German retail chains have also been quietly positioning themselves to supply Poland’s rising middle class.

Foreign companies are not the only engines for Poland’s industrial revival, several dozen privatized companies are making a comeback. Industries such as glassmaking, heavy manufacturing, and tire making are posting huge profit gains after investing in computers and manufacturing technology to boost quality for both the domestic and export markets. Even many state companies are profitable.

To continue modernizing the economy, Poland must rebuild its banking system (Miller 70). While state-owned banks have been cleansed of millions of bad loans, they still are alert when lending to Poland’s cash-hungry private companies. Instead, they use the bulk of their cash to buy government debt-a safer bet, and critical to help fund social spending. Now the banks seem poised to take a more aggressive role in financing the economy. Competition from foreign banks is prompting them into action. Citibank and several Dutch and Austrian banks, which have long been active in the market, have expanded from serving multinationals to attracting Polish exporters as clients. In recent months, several German banks were granted licenses or bought stakes in troubled Polish banks. The banks are starting to put together foreign debt offerings for fast-growing companies, and the mortgage business is on the rise.

Few would have guessed back in 1990, when prices soared and living standards plunged, that Poland would have come so far. If growth continues and the new regime stays on course, it is likely that Polish corporations will soon be making their mark throughout Eastern and Western Europe.

Work Cited

Miller, Karen Lowry, Frank J. Comes and Peggy Simpson. "Business Week: Poland: Rising Star Of Europe," December 4, 1995.

 

updownTransition in Poland

by Phillip Hee Ung Kim

 

1989, the year that the ruling communist party in Poland was standing at the end of falling cliff and by the will of Polish public, they did fall and gave rise of a Solidarity. In 1980 to 1981, the communist party once experienced almost near death but was saved by tanks and army which were controlled by them. Before and since then, the Solidarity was powered by Polish public and the communist party was supported by army. Finally in 1989, Polish public ended the Central Planned Economy and take the first step into the free market system. At that time the question was the reaction of USSR demolishing communism. Even though USSR proclaimed that they would not interfere, nobody had any certainty. As a matter fact, USSR did not interfere. The main task for the Solidarity was stabilizing economy such as cutting the inflation rate, raising the real wage, and adjusting the unemployment rate into reasonable rate.

In 1990, once the Communist party headquarters in Warsaw became Polands stock exchange. The symbol of Communism became the symbol of Capitalism. Polands first non-communist government began its transformation by selling the first seven state companies to public. Also they were willing to accept foreign investment by allowing foreign investor to purchase up to 10% of the companies. Yet, by that time, Pole did not open the stock market to other nations because they wanted more stable stock market before they do. Polands stock market system followed Frances second exchange in Lyon. The trading regulation was adopted from EC regulation because they expected EC to be their main trading partner. Understandably, the regulations and the economic methods were mostly adopted from other developed capitalist nations.

Since 1989, Poland has had fully free elections at the local, presidential, and parliamentary levels. In December 1990, Lech Walesa became the first popularly elected president of Poland. In 1991, Poland held the election for the two houses which were 460 seats for Sejm and 100 seats for Senate. In Poland, the lower house holds more authority than upper house. The legislature system intentionally prevents from assembling governing majorities. On the opposite side, in order to prevent too much diversification of the parities, in 1993, the Sejm passed a electoral law setting minimal popularity percentage for each parties entering parliament. By President Walesa signing Small Constitution, which defines relations among the presidency, government, and Parliament. The first step to establish stable and reliable government was finished at that point. Implementing shock therapy, the economic transition from CPE to free market system has begun. The immediate result was very approval to the public. The manufactured products were traded with efficiency without shortage and the hyperinflation was held at stable level. However, inflexible anti-inflation policy brought a severe recession. The major problem was the unemployment rate. In a whole sense, Polands transition toward to the free market system was very successful compare to any other Eastern Europe nations. Stabilizing the currency, freeing most prices, removing barriers to trade, and establishing the legal structure for a market economy, these were achievements for the Poland going toward free market system.

The strategy for reform was led by the Deputy Prime Minister and the Minister for Finance Leszek Balcerowicz. They took the notion of complete transition of economy even though partial reform was considerable idea. Since they took the shock therapy, the policies as well had to be very quick and effective. The government first fixed the rate of exchange of a zloty to the dollar at 9500 zloty per dollar, close to the black market rate but much above the preexisting official rate. This policy provided a stable currency value of zloty in the international market. Also, it decreased the pressure for the Polish firms. The government also implemented a policy a wage controls in state enterprises which brought inflexibility of real wage. Following above two polices, the government eliminated all subsidies to state-owned enterprises and decontrolled prices. The outcome of this package reforms was acceptable. The rate of inflation went down to a five percent per month. However, in order to maintain fixed rate of exchange, the inflation rate should be dragged down even further. Moreover, to perform even permanent reform it was necessary. In spite of severe contraction, the Treasury has been able to maintain a budgetary surplus due to microeconomic stabilization policy. Somewhat, the microeconomic stabilization policy was considered as successful. However, the Polish economy still had the structural weaknesses to adjust.

After the implementation of the macroeconomic stabilization policy, the next round of reforms had to focus on building a market oriented, profit motivated, and modern industrial sector. In a way, this was a much more complicated task than macroeconomic stabilization. Poland simply did not have a modern market economy. No stock market, no private commercial banks, and no bond market, Poland had. Before to have financial market, there had to be a private firms that needed the financial market. Ministry of Property Transformation(MPT) was core of privatization process. They would select enterprises for privatization after consultation with the management and workers councils. Only ten percent of each companys stock was limited to foreigner. Remain was offered to the public but the public just did not have a capital to absorb those stocks. In order to break this cycle, the government came out with the mutual bond distributed to the public equitably. Most of privatization were done through this way in Poland. It was strongly recommended that foreign capital was necessary in order to achieve fast and stable economy transition, however Polish government did not feel comfortable foreign investors involving deeply with Poland economy.

With focused policies toward economy transition, Poland is growing faster than that of any other ex-communist country in Europe. Now, Poland is preparing to be member of the European Union. This is Polands economys third task and it is a daunting task. It is really admirable that how Poland went through economy transition period so well. There are still a lot to be changed in Poland and I believe they will do just fine.

Polands Hour The Economist 08/19/89 v312:n7616. p9(1)

Fact sheet: Poland US Department of State Dispatch 05/03/93 v4:n18. p317(2)

Unfinished business: Poland prepares for Europe The Economist 09/20/97 v344:n8035. p23(3)

Poland: economy in transition Ordover, Janusz A.. Business economics 01/91 v26:n1. p25(6)

 

updownPoland’s through the eyes of theEuropean Union

by Fabian C. Ma

 

Present day Poland is what the world would see as an economic miracle. But yet if you ask any Pole, he or she would say that they did not belong in what was known as the “Soviet Block.” Poland is a country that happens to lie in a very politically unstable part of the world. Most of the countries around it have just been created almost a decade ago. Relatively recent if that is what the entire area is composed of, newly formed countries following the fall of the former socialist regimes.

Currently Poland’s economic well being is seen as on an upswing. Thought it was briefly sidetracked due to the massive flooding that took place in July 96. Its GDP is way above what it once was back in 1989, representing a benchmark for the other countries in the region. It is predicted that the other countries would not be even close Poland’s GDP growth rate for another 10 years. But yet Poland in the eyes of the west is still a poor country that is trying to grow up. Compared to the other countries in the European Union (EU) it’s living standards are far to low.  In some texts Poland is placed as having one of the poorest populations. Though this should be rectified very soon because of the continuing rise in the level of real wages.

Poland’s economy, even today, can still be seen as a hybrid mix of the once dominating socialist industries. Which means a large majority of Poland’s heavy industry (i.e. coal and steel mines) is still “influenced” by the government. It is said that the ruling party would put their own people into certain lucrative positions within the industry. And that attempt to privatize these industries in 1989 was almost impossible because of the political weight that these industries pull.

Approximately 2 million out of Poland’s 38 million total population are registered in the state to be independent entrepreneurs. This contributed to the 150,000+ independent new companies that were created since 1989. Not bad, but it is reported that not all of these businesses are exactly legal; Poles proved to be remarkably adept in dodging taxes and custom duties. Non the less, this has created a booming “Black Market or Grey Sphere.” This area is so lucrative that it is estimated to be about one fifth of the total GDP of the entire country.          

 With all this success the average Pole discarded their ideals taught to them in the communist era and adopted the western criteria of measuring success. Though adopting the west’s living standards to their own, they were consider poor. What drove this into them was that upon transition in 1989 some immediately achieved wealth on a western scale; now a Pole’s measure of material success is when a neighbor is driving a BMW, which is becoming more and more a reality to date. With all this financial and economic growth Poland in July 1997 was invited to join the European Union, along with the Czech Republic, Estonia, Hungary and Slovenia.

The European Union is an acknowledgement from the west that Poland and a few of its neighbors are proving themselves to the rest of the world. Poland with its membership application to the EU is a representation of what problem the rest of the countries in Eastern Europe would be facing in the near or even far future. The Pole’s in general should be excited, they are returning “back to Europe,” where they though that they did belong to begin with.

Membership in to the EU is or will be very important to Poland and it’s fellow applicants. It will give them direction and a focus that will lead them into the new millenium. It is speculated to be painful for both members and applicants because of the possible restructuring and chaos that it could poise inside their respective countries. I have a excerpt from a statement that was used in what I believe is a “scorecard” for entrance into the EU; which states “Poland’s preparedness for membership of the EU, issued in July 1997, sets a formidable agenda. Poland scores well in terms of its political readiness and is credited with having a “functioning market economy”. But its prospects for coping competitive pressures and a market forces within the EU as well as its ability to take on the acquis communautaire are both seen as highly dependent rapid progress in restructuring agriculture and heavy industry and on sweeping legislative changes.

Perhaps more important, Poland must demonstrate that it has the manpower to implement and enforce EU-compatible regulations.” This statement proposes that Poland does have what is needed to become an EU member but may have some trouble and obstacles to overcome before it can get there. I truly believe that Poland does have what it takes to achieve what it originally wanted before Socialism took over in the late 40’s, which was to be part of the west, financially, politically and economically.

One of Poland’s problems is that a large majority is in the agriculture market. And this was one of the potential problems stated. With so much independent farmers around, the Polish farmer may not have a job or even home by the end of the millenium. Competition from other larger farms and even factories coming into existence will destroy this way of life. This would be the one of the many prices the Pole’s would have to pay for membership. Also with so many people working in such areas of low pay, GDP per head is about $3,500, about one-sixth of the EU average. Only Portugal is higher, by about slightly over double with $10,500. Poland’s low-income levels, large population, and “economic stature” would be most challenging to the Polish politicians. This though would not really concern the already EU members, they are more interested average figures of GDP and percentage of economic growth.

Investment from other countries has been slowly coming in.  Investors of note are the Asians particularly the Japanese and South Koreans.  Asian investment is ever so increasing with the contribution of Japan and South Korea. The Japanese Keiretsu has pledged to invest $1.32 billion into the country. And the South Koreans seem to be using Poland as a central platform to invest and spread out into the rest of Europe. But with Asia in it’s current state all these plans might probably be on hold or in early preliminary stages and not moving until the situation back home gets better.

Along with all this EU membership talk Poland also seeks membership with another European necessity, NATO, North Atlantic Treaty Organization. With the membership of NATO it would bring security which Poland seeks and hopefully foreign investment. The security that Poland seeks is that it feels it is in an unstable  “Grey zone” in-between united Germany and Russia. This feeling could seems to stem from its past history which involves invasion, takeover and even “supply depot” status it once had in it’s distant past.

 Poland in its present situation has all to gain with this venture. Everything it wants now and going to need will be address by these future adjustments it will make with the help of its new allies. These transitions that it will have now with the current government in place will effect all it’s citizens. It has proven to everyone that everything in its past could be put away and used to learn form to be better than they once were.

Poland to 2005 By Ben Slay and Louisa Vinton Copyright 1997, The Economist Intelligence Unit Limited

 

 

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