Report on the paper

Transition in Poland
 

by Olivier Jean Blanchard
 

in Economic Journal, September 1994
 

 

 

 

Michael Nachshen


Not only is Blanchard a proponent of shock therapy, but he is also in favor of speeding up the Polish Transformation. Blanchard points to inefficient state-owned enterprises as the main stumbling blocks to a smooth transformation. These "dinosaurs" gobbled up a large percentage of GDP under Communism, either through subsidies or tax credits. Now they are being faced with what Blanchard terms a "hardening budget constraint."(1169)

Many firms are testing the new state-imposed hard budget constraints, which reduces their subsidies and places them on a fixed budget. Blanchard maintains that "So far, they have failed. But the longer they remain in their current shape, the higher the risk they will succeed."(1177)

Blanchard believes that the transformation has been moving too slowly. "Increased foreign competition, and the absence of restructuring may lead to a steady rate of bankruptcies and a steady decrease in employment."(1177)

Blanchard believes that although the shock therapy approach is painful, the alternative is worse.

I agree with Blanchard that shock therapy is the better approach. The average Pole has adjusted fairly well to capitalism. Private employment, including agriculture, comprised more than 30% of all employment in 1993.(1173) Furthermore, a shift to gradualism would seriously harm Poland. State owned enterprises would take advantage of the situation and attempt to soften the hardening budget constraint. Although that might lead to an increase in employment, it could lead to an overall decline in GDP.

 

 

 

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