TransitionRecession  

Report on the paper

STABILIZATION & RECESSION IN A TRANSITIONAL ECONOMY: 

THE CASE OF POLAND
by
Ryszard Zukowski


MATTHEW WEINSHEL
:

In "Stabilization & Recession in a Transitional Economy:  The Case of Poland," Ryszard Zukowski analyzes the Polish transitional system of "shock therapy" and compares it to Chile's similar transitional period.  Zukowski breaks the paper into several parts or subjects to include:  hyperinflation, shock therapy, outcomes, and causes of recession.  He stresses that "shock therapy" inter-relates with hyperinflation.  Shock therapy becomes the remedy and cause of hyperinflation.

The author talks about a "hyperinflation spiral in 1989" as a result of several factors.  In March 1989, the Polish government granted legal access to foreign currency.  Individuals began an immediate retreat from domestic currency and purchased as much foreign currency as possible.  The exchange rate rose dramatically to a high of 9,514 zlotys per US dollar in September 1989.*  In April 1989, the government released an indexation of adjustment for wages, which caused the real wage to skyrocket to a high of 173 on a scale of 100 in August.*  Finally, in August, the Polish government liberalized food and some agricultural input prices.  They reduced food subsidies and restricted monetary policy overall.  For the first time in forty years, food prices experienced the pressures of the market.

 Zukowski describes the process of the Polish "leap to the market," as its shock therapy system came to be known.  The Poles designed the transition to have two primary steps:  rapid stabilization and immediate liberalization of prices and international trade.  Zukowski agrees with a quick transition when he states, "As for timing, the problem faced by every postsocialist economy is a series of viscous circles which should be broken up as efficiently and quickly as possible."  He feels that the Poles became rather over-anxious to destroy all remnants of Communism.  Among other programs, the legislature passed legislation on:  privatization, competition programs, the break up and prevention of monopolies, removal on restrictions on new corporations, banking system modernization, and tax reform.  He believes that, "All those steps could not be carried out on [a] short-term basis."  Instead, he outlines a process to include a short, medium, and long-term period, in which the Poles should have concentrated in certain areas.

One of the reasons that Zukowski suggests a three-tier period originates from his belief that "postsocialist economies face both stock and flow macroeconomic disequilibrium.  The stock disequilibrium comes from many years of rapid money creation under generalized prices and stagnant or decreasing productivity which leads to monetary overhang.  The flow equilibrium is the outcome of large and increasing fiscal deficits that have been monetized."  He argues that shock therapy becomes necessary when a country experiences high inflation, shortages, or monetary overhang.  He then moves to three reasons to justify rapid price liberalization and five policies aimed at stabilization.

 In comparing Poland to Chile, Zukowski notes the similarities between the two transitions, but he stresses the two primary differences.  First, Chile transitioned gradually because of its public deficit and its government's extensive concern about the effects of an excessive recession.  It is important to note here, that although Poland evolved as less developed than western countries, it was still more developed than Chile and the paranoia of recession reflects that.  The second difference stems from the divergent exchange rate policies.  Both countries devalued their currencies, but Chile opted for a more gradual and stable upward adjustment to keep its real exchange rate.

     Finally, he lists the outcomes of Poland's program implementation.  Although the Poles experienced a jump in inflation during the first quarter of the policy implementation, overall, the economy became disinflated and the "soft demand and budget constraints" were eliminated.  Poland experienced a deep recession, hitting the industrial output sector hardest.  Zukowski stresses that the recession is not necessarily a consequence of shock therapy, but the collapse of the COMECON system deeply hurt its industrial exports.

Although Zukowski criticizes much of Poland's shock therapy approach, he does agree with the general idea that it required an immediate and quick transition.  He also defends some of Poland's shortcomings as being out of that government's control.  However, this author does have the luxury of hindsight, which is something that no policy-maker enjoys.  Personally, I agree with Zukowski in that Poland required shock therapy.  However, I do not agree with his philosophy of a three-period transition.  If the market is allowed to operate, it will equalize and stabilize itself, with some help from the government.  The best way to end the centrally-commanded economy is to start from scratch immediately and to allow the forces of the market to work.

*  Taken from the Poland Ministry of Finance (1991)

Ryszard Zukowski: STABILIZATION & RECESSION IN A TRANSITIONAL ECONOMY:  THE CASE OF POLAND in World Development, Oxford, England, July 1993, pages 1163-78.

 

 

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