Tuesday, July 14, 2009

How Poland's Economy Adapted to the Fall of Communism

Simon Johnson and Gary W. Loveman. Starting Over in Eastern Europe. Boston, Ma.: Harvard Business School Press, 1995.

Eastern Europe’s economic status may be more aligned with new private sector investment rather than maintaining formally traditional public sector investment. Private markets sparked economic development in this region during the early 1990s.

Poland turned towards private enterprise under the Balcerowicz Plan of 1990. Its national growth afterwards (at least for the first four years during the period this book considers) was found primarily from newly created enterprises. Poland lacked adequate capital markets from its newly created commercial banks. Yet this did not hamper many businesses from forming.

The authors found data hard to find. Yet what was found strongly supports the observations that Poland’s private sector grew tremendously from 1990 to 1994. It did so by keeping public debt small and taxation low. Inflation was a problem at approximately 30% annually, although inflation was higher in the Czech Republic and Hungary. The high inflation kept interest rates high and business loans low. Unemployment was a problem at 16%.

The Balcerowicz Plan was launched after Polish economy reached stability following the fall of communism. Poland had lacked even private small businesses. These new businesses would require vast shifts in capital and labor. Its leaders feared the shift to more private enterprise faced many difficulties.

Private enterprise successfully grew in numbers. The share of agriculture production from private farms rose from under 10% in the late 1980s to over 40% in 1994. Similar growth was found in the proportion of private sector urban jobs. This growth was also similar to what was experienced in other former communist countries such as Hungary and the Czech Republic.

Poland’s private sector industrial output as a percent of its total output rose from 16% in 1989 to 35% in 1994.

In 1989, Poland had 813,500 individual proprietorships, 11, 700 commercial partnerships, and 400 joint ventures. In 1994, Poland had 1,870,000 individual proprietorships, 71,800 commercial partnerships, and 18,600 joint ventures.

Many new private sector businesses resulted from ventures that had failed under the communist government. Such businesses included food distribution operations and complicated manufacturing. In Poland, the private ventures were better able to adjust to market conditions than the public ventures. The private firms tended to pay workers more, earned more money, and were generally more successful.

After communism fell, Polish industrial output decreased in the first two years. Many state owned enterprises went bankrupt. Unemployment went from 0.3% in January 1990 to over 16% in 1994.

Poland’s government owned companies were mostly monopolies for four decades. The public sector goals were full employment and planned level of output. Profitability was not a concern. This created low quality outputs that produced lower revenues than higher quality profit oriented competition in other countries produced. When these companies shifted to a market based economy, their excess labor costs and low profitability led many to fail.

The new private sector companies that formed in the 1990s had their own profitability as goals. Prior to this, state owned companies were designed to meet centrally planned national goals. The changed economy requires managers capable of managing according to the new and different performance requirements. The author found managers provided greater work flexibility to design work needs according to firm needs. There were also competitions among companies as more successful enterprises sought to attract the better skilled managers and laborers.

Over half of the new companies began with $500 of capital and almost three fourths of all new companies began with under $5,000 of capital. Almost 60% of companies with production started with under $100 in capital.

The authors fault the Polish government for not taking more actions to control inflation. They believe abandoning their initial strong efforts against inflation reduced economic growth. Overall, the Polish economy began a strong growth in the early 1990s.

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