Hard Line on Polish Aid

POLISH Prime Minister Tadeusz Mazowiecki's recent visit to Washington provides an opportunity to review the Bush administration's economic policies toward the fledgling democracies of Eastern Europe, and toward Poland in particular. Given the current situation in Poland, Mr. Mazowiecki may have to ask President Bush for increased economic aid in the future. Mr. Bush should not initiate any further aid package - if only for Poland's good. To understand why Bush cannot supply more aid, it is necessary to understand the political and economic pressures Mazowiecki is soon to feel.

A dire economic situation. First, the Polish economy is worse off than predicted. Political analysts here say the government was shocked when industrial production plummeted 30 percent each of the last two months. Inflation has lowered but is still sky-high at 18 percent monthly for food. Real wages have fallen 5 percent - causing consumer demand to fall 28 percent in February alone. This is unheard of in an economy where the largest monthly drop in consumer demand under the communists was 10 percent.

Unfortunately, almost everyone agrees that the economic situation in Poland will get worse before it gets better. The first signs of political dissent are being heard. ``A wave of unrest is mounting in the countryside,'' says Piotr Dabrowski, a Solidarity spokesman. As dissent heats up, Mazowiecki may look for relief from the West.

Pressure from Walesa. Lech Walesa's lack of support for the government's austerity program adds to Mazowiecki's concerns.

As Mr. Walesa prepares to address the Solidarity congress next month, he has played to the backlash the economic program is causing with the workers. At a press conference in Gdansk on March 15, Walesa said, ``I cannot be held responsible for the government which you have elected. The honeymoon has ended between us and the government.''

Faced with the distancing of his political base (Mazowiecki is from Solidarity), the prime minister will find himself under pressure to ease economic burdens.

But Bush must insist the US not erase the pain Poland must endure to create a healthy economy. Now is the time the Poles must know they can't turn back.

Sending the right signals. Already there are signs that the Polish bureaucracy is shying away from free market policies and opting for more familiar central planning ones instead.

Recently, the Polish Council of Ministers constructed a list of ``Priority Sectors for Investment by Companies with Foreign Participation.'' In choosing to encourage investment in such industries as agro-processing and medical equipment, the council was imitating the centralized methods that ruined the economy in the first place.

In addition, the bureaucracy has stalled on making the currency truly convertible. In February, businesses in Poland sold $1 billion worth of zloty while private investors were unloading $300 million of the local currency. Defying all laws of supply and demand, the official government exchange rate stayed at 9,300 zloty per dollar. Not surprisingly, a black market foreign exchange rate popped up again at a rate of 12,000 zloty per dollar - robbing the government of needed foreign currency reserves.

More US aid would send the wrong signal to Poland's government bureaucracy - helping it seek relief that would postpone and increase the unemployment, lower industrial production, and further economic pain the country must go through to make its economy efficient.

Let the market decide. The market can do a better job aiding Poland than can temporary relief. American companies, and other Western firms, are investing more in the country. Poland's highly skilled, diligent work force has one of the lowest wage rates in Eastern Europe - making the country attractive for investment. Joint ventures between foreign and domestic firms have boomed.

Even in the area of Poland's $40 billion debt, the market can play an effective role. Instead of letting Poland absolve its debt, the White House should encourage the country to solve its financial difficulties in a way that will strengthen the country's credit-risk image. According to The Economist, Poland could float $500 million of bonds at a 20 percent interest rate, use the principle to buy back its original debt on the open market, and thereby lower its interest costs by $190 million, or 19 percent. Such an action - not uncommon in today's country debt markets - would help Poland receive bank financing in the future.

Improving business management. The only direct action Bush should consider is to encourage Poles to learn business management. As Andrzej Wroblewski, editor of the business newspaper Gazeta Bankowa says, ``All the economic aid in the world will be wasted until we have trained Polish managers to be effective businessmen.''

Several professors at Harvard's business school have joined professor Roman Glowacki, head of the marketing department at Warsaw University's School of Management, to establish a Western-style business program in the country. The Bush administration could consider setting up grants to pay US business professors to teach there.

The strategic importance of Poland. Other East European countries are looking closely at Poland's economic program. Any future increase in temporary aid to Poland will have significant repercussions for the administration's dealings with Romania, Bulgaria, and Czechoslovakia. Bush must be cautious that the policies he chooses for Poland do not mistakenly lead this and other East European countries to the economic dependence from which they freed themselves.

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