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A Study Of The Market Reforms In Post-Communist Eastern Europe With A Specific Case Study of Poland

Poland, as well as it’s fellow post-communist countries, face an arduous task in re-inventing their economies to match the dominant Western style currently dominating the world. The difficulties lie in the areas of ideology, structural needs (massive changes required), world recession(current) and debt load. Communist Economics Why did the economics of the communist bloc fail so miserably? Why has every single socialist, fascist, communist and other non-democratic country had to implement economic change in order to survive?

This is due to some inherent roblems in the command economy idea. Monopolies (in a command economy) tend to produce inefficiency, low quality goods, lack of innovation and technological improvement. Command economies tend to focus on growth rather than strength leading to larger production and an evan. worse use of available resources. The 1980’s marked a change in world markets meant that the communist economies were faced with four challenges that would, if met, have meant the continuation of the USSR.

Resource saving miniaturization requiring high technology and skill were emanded (command economies have neither), Flexible production to meet a variety of needs (command economies have large factories to keep production high – they, thus, did not have the funds or ability to affect the necessary changes to their means of production), the “information age” meant that the communist bloc had to deny the new prevalent types of technology, which would spread Western ideas, and thus they fell behind), and “software” became essential to the growth of industry (the “hardware” focus of the East could not absorb this new approach.

As well, the changes are being attempted in a deep period of economic crisis that make an already difficult process even more difficult. Changing the Economy Systematic transformation requires institutional innovations, the internal liberalization of the economy, the external liberalization and the adjustment of the real economy as well as the monetary system. Not only does there need to be a different institutional framework for a market economy but one has to remove most of the inherited structures and to change the typical behavioral patterns in industry, state and private households.

Privatization Privatization is a difficult task because of four main factors. Firm sizes in post-communist countries tend to be large. This means that their division or shrinkage poses difficulties for foreign investors, they are however, not worthwhile at current sizes and must be reshaped. Expectations are running high but attitudes ingrained in the workforce will need time to change. None of the structure exists to deal with private firms and must be created along with the labor needed to run it.

There is very little knowledge and certainty about he property rights issue and until resolved investors will be wary of the situation. However, not all countries have addressed the needed changes in the same fashion. Poland has been a leader in foreign investment and involvement when compared to it’s post-comminist counterparts. Poland:Brief History The name Poland is derived from that of the Polanie, a Slavic people that settled in the area, probably in the 5th century AD. Poland is a nation in east-central Europe. In the 18th century it was divided up by its neighbors and ceased to exist until resurrected in 1918.

Again partitioned by Germany and the USSR at the beginning of World War II, it was reestablished as a Soviet satellite state in 1945, and remained a Communist-dominated “people’s republic” until 1989. Mikhail Gorbachev’s appointment as Kremlin leader in March 1985 was the signal that the Polish opposition had been waiting for. Exploiting the new liberalization in the region, Lech Walesa and Solidarity, Pope John Paul II and the church hierarchy, and ordinary citizens stung by the deepening economic recession combined to force the Communists to sit down at roundtable talks in 1989.

They secured far-reaching political concessions and exploited the resulting opportunities for political competition to drive the Communists from power The new non-Communist government sought to bring about economic reform through “shock therapy” in a scheme devised by Finance Minister Leszek Balcerowicz. Introduction to Polish economic situation Poland’s fundamental economic problem is that production and living standards for it’s 38 million people is considered to be inadequate. With a GDP about a third of the United States (on a per capita basis), Poland is considered to be a middle income country.

During the 1970’s, the Gierek government tries to tackle the problem (of economic distress) through a policy of rapidly expanding consumption coupled with investment financed by foreign borrowing. For several years this economic policy generated growth of about ten percent per year (The USA’s current growth (In GDP) is between 2-3% with 4% being the goal). However, the policy was to eventually fail due to mismanagement, recession in Western export markets (i. e a lack of foreign investment), a bias towards products in weak demand but costly to produce (in terms of energy input and raw resources).

These three factors produced an economic crisis that resulted in negative growth rates in 1979,80,81 and 82. It also produced the Solidarity movement in 1980 and the implementation of martial law the following year. During the 1980’s, Poland managed to regain earlier production levels, at the end of this period of economic development there was some restructuring of production, away from heavy industry towards lighter industry, food processing and services. As well there was slight movement towards the movement of business from state to private hands (with the goal of believed market echanisms for efficiency).

The private sector, in Poland, now accounts for one- third of the labor force (2/3 of that in agriculture). However, former policies (as mentioned above) have created a basic economic situation in Poland that is marked by inefficiency, foreign debt and market imbalances. Inefficiency Agriculture Agriculture accounts for 13% of national income, 28% of employment and 12% of export earnings. It is predominantly a private industry sector (about 75%) but productivity is low and development is stagnant. In this area Poland as fallen progressively behind it’s east European neighbors.

This lack of progress is due mainly to an inefficiently small size of farms (10 hectares or less), inefficient production methods, lack of investment incentives and limited access to inputs such as fertilizers and pesticides (which would increase productivity and reduce loss due to pests). Industry Industry (including energy and manufacturing) produces about half of GDP and employs 29% of the labor force. The sector is largely biased towards heavy industry and large state enterprises (classic approach of communist ethic).

Over 90% of industrial output is produced by the 6000 (or so) state owned enterprises. This outmoded productive base needs to be restructured. Industry is largely over-manned and energy intensive. Energy consumption is 2-3 times higher per unit of production in Poland than in the average Western Industrialized country. There are significant energy reserves in Poland, in the form of coal, oil and gas (in eastern Poland), but these reserves need modern technology to be tapped. Poland is no longer a net energy producer and must import energy to maintain roduction.

Incentives for management and workers have been distorted (includes unrealistic prices-low energy and pollution costs, soft budget constraints and employment guarantees. Foreign Debt Largely created during the 1970’s, this totaled more than 48 billion dollars (US) before the more than 50% reduction of official debt in March of 1991. The remaining 30 billion dollars is still a heavy burden on the economy. The debt service due (interest – simple maintaining of debt at present level) in 1991 amounted to 4 billion (40% of 1989 exports).

The government fell into arrears with many creditors (2/3 owed to foreign governments, 1/3 to foreign banks). The debt was being traded on the markets at 15 cents on the dollar down from 40 cents at the end of 1988 (meaning that the creditors were not secure in the belief that Poland was a good debtor and that their debts were unlikely to be paid in full – hence the drop in value of holding part of their debt). Market imbalances Shortages and excess demand for consumer goods and factors of production were deeply ingrained in the system until the reform of January 1990.

Subsidies ccounted for 14% of GDP (down from 17% in 1983), and the budget was running a deficit of 8% of GDP in 1989. Summary Poland’s economy was structured, in the same way systematic of communist countries, in an inefficient manner. Production was large, state owned and in usual monopoly, This meant that the economy was without the benefits of private market mechanisms for economic efficiency. In attempting to compete in an increasingly globalized world market Poland’s economic situation became dire.

This coupled with debt (and the needs of servicing it) meant that the economy as in need of change on a grand scale if Poland was to emerge as an economic force with reasonable success in comparison to her neighbors in Europe and the world . The Reform Process Against the background , the Mazowiecki government adopted a rapid and radical reform program for 1990. The aim, of this program, was to effect a transformation of the Polish economy from a command to market economy based on proven institutions with market determination of prices and convertible currency. The program included measures for stabilization, liberalization and restructuring.

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