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No Shortcut Through Poland's Maze

By Maurice Ernst / November 8, 1989

IN a series of articles and influential visits to Poland, Prof. Jeffrey Sachs of Harvard University has advised the Polish government to move from a centrally planned to a market economy in one fell swoop. This prescription of adjustment through ``shock treatment'' has appeal. It promises quick results during what may be a brief period of national consensus under the Solidarity-led government of Tadeusz Mazowiecki. It has been applied successfully to other countries (e.g., Bolivia in 1985), whereas the gradualist approach to economic reform and adjustment has generally not worked because it gave time for political resistance to build.

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But Poland is different: The shock approach would be disastrous and a different approach is needed.

The big difference between Poland and the countries which successfully implemented shock-treatment adjustment is that Poland is still predominantly a Soviet-type planned economy run by a massive bureaucracy in which markets for goods and services are few and generally small. In these other countries markets existed in the larger part of the economy.

In Poland, limited free markets exist only for foods, foreign exchange, and the products of the small but rapidly growing private industrial and service sector. There is a fundamental difference between improving the operation of existing institutions and creating institutions from scratch. Turkish manufacturers and Bolivian peasants could respond quickly to price incentives.

But the Polish industrial producer typically buys materials and components from, and sells to, a monopolistic state agency. Moreover, much of production is dominated by one or two large firms. These institutional constraints make it difficult, perhaps even impossible, for producers to respond to incentives.

What would happen if Poland administered the shock treatment of letting the prices of goods, services, foreign currency (the exchange rate), and financial capital (interest rates) bring supply and demand into balance? Many firms would receive massive windfall profits while many others would suffer massive losses. And since supply adjustments would be slow or impossible, there would be little increase in production and employment to offset the production declines and layoffs.

It is not difficult to imagine unemployment reaching 20-25 percent of the labor force. And what would then happen to Poland's newborn democracy? Most likely there would be a ``populist'' reaction in which the unemployed, the many others who would fear unemployment, and the Communist Party and government bureaucrats would make common cause, throw out the Solidarity government, and impose new controls both on the economy and on political and individual freedom.

At best, Solidarity would splinter, leading to indecisive, unstable governments. At worst, a ``law-and-order'' government would eventually take over to reestablish stability.

If the shock approach will not work, what should Poland do? I believe that a multi-year (probably about four-year) program of reform and restructuring, during which market institutions and a job market for those who are laid off are created, is needed.

The program should be phased, however, to fit political realities as well as economic needs.

Having been pushed into the political leadership by a massive anticommunist popular consensus, Solidarity must now lead the nation through an extremely difficult and painful transition with a political base that spans the entire spectrum from free-market Reagan to left-wing British labor. And it must persuade a skeptical, if hopeful, public, which has had to cope with 300 percent inflation and has seen its living standards decline despite repeated government promises of improvements, to tighten its belt once again.

If the economic situation does not improve soon, Solidarity will probably begin to break up, and, although this does not mean the communists would return, a unique opportunity to put the country on the right track will have been lost. An intense debate has been under way in Poland on how to deal with this dilemma - undertaking disruptive reforms and also raising living standards. While there are many possibilities, the following scenario may suggest some feasible lines of action.

THE reform program is in four phases: