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Distinguished by History Balcerowicz Speaks on the Record of Poland's Economic Transformation
Polish News Bulletin
November 9, 2004 Tuesday
5 November issue of Rzeczpospolita p. A6-A7
The following is a summary of an interview with Leszek Balcerowicz,
central bank governor, former deputy prime minister (1989-1991,
1997-2000), co-author of Poland's economic reforms, published in
Rzeczpospolita.
Fifteen years is a round anniversary. Was it really worth starting
in 1989 to see Poland as it is today ? with a strong economy but with
an irritating, idle political scene and great unsolved social problems?
"Where would Poland be today if it was still mired in the swamp of
socialism? We don't have to look far for an example, it's just beyond
our eastern border, in Belarus," says Balcerowicz. "Whoever knows at
least a little of Polish history can have no doubts that it was worth
doing away with the socialist dictatorship. In terms of possibilities,
the post-1989 period has been better than any other during the last
300 years. The problem is now that we started the reforms, but that we
haven't finished them in several key areas. My satisfaction isn't full
because I see, for instance, how sharply lower unemployment would be if
faulty solutions weren't adopted and welfare reforms weren't blocked. I
know, however, that I had the opportunity to participate in a unique
experience. When, in the 80s, I studied the successes of countries
like Germany or South Korea, I never imagined my studies could ever
be useful otherwise than intellectually. So I feel distinguished by
history. Because I studied the history of economic reforms, I was
aware of the obscurantism and cynicism you have to be prepared for
when reforming your country. So opinion polls or personal attacks
never had any impact on my decisions. I've learned to look at politics
through the eye of a naturalist, and you find all kinds of species
in nature. Moreover, the bleak propaganda I find myself subject to
is more than offset by the words of appreciation I keep receiving
in Poland and abroad. The cynicism and obscurantism demonstrated by
some of the participants of Poland's political life are personally
not a great problem for me, but they worry me for another reason. I'm
afraid people in Poland will allow themselves to be deceived, only
to regret it later. Lukashenka's new clones keep turning up."
Poland, Czech Republic, Hungary
What has Poland achieved during the last 15 years? Where is it in
comparison with, for instance, Hungary and the Czech Republic?
"Poland's GDP grew by 30 percent between 1989 and 2002, compared
with, for instance, an increase of 21 percent in Slovenia, or just 12
percent in Hungary. So in GDP terms, Poland is clearly in the lead.
The same applies to inflation, especially that our starting position
was far more difficult than Hungary's or the then Czechoslovakia's.
We've made immense progress in healthcare, environmental protection,
tertiary education, and so on."
Unemployment, on the other hand, is nothing to boast about.
"That's true, but Poland's high unemployment is not a result of
reforms, but of their lack, or, worse still, of anti-reforms: a
rigid labour market, high labour charges, an underdeveloped housing
market, and so on. It also needs to be remembered that during the
transformation period Poland saw stronger growth in the working age
population than other countries."
Poland has also lagged behind Czech Republic and Hungary in terms of
inward foreign investment.
"What counts the most is direct foreign investment. Its cumulated
levels range from $3,700 per capita in the Czech Republic, which is
more than in Chile, through $2,100 in Hungary, to $1,100 in Poland,
which is less than in Slovakia, Estonia, and Slovenia, and roughly
in line with Lithuania."
That proportion has not been changing. Why?
"I think it's Poland's sluggish privatisation. Czech Republic,
for instance, is far more advanced than Poland in the privatisation
of its power industry, where most of the assets have been sold to
foreign investors. Actually, privatisation advanced the most in
the Czech Republic under a socialist cabinet, not when Vaclav Klaus
headed the government. Poland saw a marked slowdown in the pace of
privatisation in the last couple of years, and it's good that has
now been changing. It's also worth looking at how our privatisation
policy affects the way Poland is perceived by potential foreign
investors. Another barrier hindering the inflow of direct foreign
investment is the condition of Poland's road network. The Lithuanians
and the Slovaks made far greater progress in improving their roads than
we did because they weren't spending as much on welfare as we were."
Are these differences due to the fact that Polish politicians haven't
been bold enough?
"Reforms are made by large-format politicians who think ahead and
aren't afraid to oppose various vested interests. One such politician
was, for instance, Jose Maria Aznar in Spain who speeded up the
reforms by mobilising the public with the prospect of eurozone
accession. Today Spain stands out favourably from, say, Germany in
terms of budget discipline."
There doesn't seem to be many such large-format politicians.
"That depends on how the people vote. Today, for instance, Slovakia
is a country to be admired. From a country that was a laggard in
reforms it has transformed into a leader thanks to prime minister
Dzurinda and deputy premier Miklos. Before that, the Slovaks had
Meciar. Their national character hasn't changed, it's their political
choices that have. Also those who carried out the reforms in the
Baltic states, first in Estonia and Latvia, and then in Lithuania,
were radical reformers. These were young people who read the right
authors: Hayek, the classic, liberal economists. A good, drastic,
but necessary work was done in Hungary by Lajos Bokros, the finance
minister in the socialist cabinet. He was vilified for that."
False Comparisons
Overall, Poland compares quite favourably with Hungary or Czech
Republic. How does it compare with the region's other countries?
"In terms of the improvement in living conditions, Poland is the
post-socialist world's absolute leader. At the same time, it's worth
noting that some of the post-Soviet countries have in the recent
years been developing more rapidly than Central Europe. Among these
is Armenia which carried out sweeping reforms thanks to which it has
a very pro-growth system."
But there's still a lot of poverty in Armenia. So in what terms is
its system superior?
"The level of poverty is a legacy; it depends on the system's quality
whether at all and how soon it is going to be curbed. Armenia's
relation of public spending to GDP is half of Poland's. As a result,
they have low taxes, and an almost balanced budget. Inflation is also
low; the scope of economic liberty has been greatly extended. I know
no country that'd be an economic tiger and have public finances as
unsound as Poland's. Lithuania is the country that probably made the
greatest progress in Central Europe in the recent years in terms of
cutting its taxes. And that happened under the ?socialist' cabinet
of Algirdas Brazauskas."
What kind of spending cuts did Lithuania make?
"They cut virtually all their expenses. If something like that were
to be done in Poland, probably nine in 10 economists would say that
it might be good in the short-term but over the long-term would cause
demand, and thus the GDP, to collapse. Yet in Lithuania, and earlier
in Estonia and Latvia, it turned out that the drastic spending cuts
had such a favourable impact on consumer and investor confidence and
expectations that private demand grew sharply, and so did the GDP.
Other non-Keynesian mechanisms worked as well, as the NBP's recent
research shows. In the populist language: the cooling proved to have
been a heating."
Has Poland made a lot of progress compared with the other countries
in the last 15 years?
"Colossal, especially if you think where we'd be if the system hadn't
been changed. The economy's external relations have undergone an
immense transformation. Poland is exporting so many new products
that even the best central planner would never invent. Hayek was
right when he said that the market was a discovery mechanism. Who
is making the discoveries? Millions of free people, entrepreneurs,
and creative employees are discovering their capabilities today. That
is the superiority of a free market economy over an enslaved one."
But there are still a lot of myths in the perception of the Polish
economy.
"Poland has undergone an immense technological transformation. But
because no government program was ever announced for the purchase of
foreign licences, many haven't noticed that. You can't look solely
at the R&D spending indicators and worry that we're spending less
than the US. Such comparisons are fundamentally flawed because they
ignore differentials in countries' development levels. The US is a
global leader which can't learn much from the others, so it has to
be spending more on R&D. The less developed countries, however, can
absorb external knowledge and that's their great opportunity. It was
used by all countries that modernised their economies ? from post-war
Japan to Ireland in the 90s."
It is often stressed that Poland's economic transformation has widened
income differentials.
"More difference isn't always worse than less difference. Are equal
incomes across the board the best solution? Besides, many differences
were kept away from the public eye in the previous system. As far as
official income differentiation is concerned, the Gini factor shows
that the post-socialist countries that grew more rapidly than others
saw less increase in differentiation. For instance, the Gini factor
rose from 0.28 in Poland in 1987-1990 to 0.33 in 1996-1998, which is
a slight increase. These are the latest available figures. In Ukraine,
for comparison, the factor rose from 0.24 to 0.47 in the same period,
with growth actually receding. So the daily propaganda that income
differentials are growing rapidly in Poland has little to do with
reality. And saying that it's better to have weaker growth in order
to have less differentiation is complete nonsense. The main factors
that hinder economic growth will also petrify poverty and morally
unjustified differentiation."
Building Capitalism without Your Own Capital
What role has foreign capital played in the modernisation of the
Polish economy?
"Every developing country, and even the most developed countries, are
striving to attract direct foreign investment. Moreover, communism
in Poland destroyed capitalism and the capitalists. In some areas,
such as banking, you need a lot of capital and some specific know-how."
Has foreign investment helped the Polish banks?
"The system would have been much weaker without it. In some respects,
Poland's banking system is today more advanced than the US one. In
the US, for instance, they still rely a lot on cheques. There were
two models of banking sector privatisation. Due to a scarcity of
domestic capital, Central Europe was privatising its banks chiefly
with foreign capital. The alternative was to delay privatisation,
i.e. cement state ownership in an area where politicisation would be
particularly dangerous for the whole economy. The first model was
embraced not only by Poland but also by Czech Republic, Slovakia,
Hungary. The result? These countries' banks are majority owned by
foreign investors. The same is the case in Mexico, Chile, or New
Zealand."
"An opposite case is Russia where, for various reasons, the inflow of
foreign capital was blocked. As a result, Russia has a very specific
banking system dominated by a single state bank. In China, the banking
system is also dominated by the government and represents the greatest
risk factor for the whole economy."
Yet privatisation continues to arouse of a lot negative sentiment
in Poland.
"But what would have happened if privatisation hadn't been carried
out? If state domination had been retained? We're hearing a lot of
criticism and assurances that it's all about the national interests.
Yet the prosaic truth is that some politicians simply don't want to
relinquish control over the economy. Privatisation cuts the politicians
off from companies. Without privatisation, in a state-dominated
economy, there is no moving away from socialism. It's also worth
remembering that orderly privatisation replaced wild privatisation,
which often takes place under the guise of state ownership. Orderly
privatisation prevents the appropriation of public sector assets. When
we hear protests against privatisation, we should always look at
who's shouting and what they are proposing instead."
Tax Systems and Eurozone Accession
Wasn't the prospect of EU accession a crucial growth impulse for the
Polish economy?
"Simplifying things, you can say that when the reformers were in power,
that prospect played a relatively small role, because they wanted to
make reforms anyway. But because not all cabinets were reformist,
the prospect of EU accession played a very favourable role in some
periods," says Balcerowicz.
Can the prospect of eurozone accession become a pro-growth factor
again?
"Whether the road towards the eurozone is long or short depends on us,
or more precisely, on the pace at which Poland's public finances are
going to be improved. The euro is a good prospect for Poland. You can
expect its adoption to boost direct foreign investment, export, and
economic growth levels. Provided, of course, that you enter with sound
public finances and flexible markets. But you won't make the public
finances healthy by delaying the reforms. The best scenario would be
to do it in a single thrust, like they did in Slovakia or Lithuania."
How does Poland's tax system compare with those present in other
countries?
"In some respects," says Balcerowicz, "it is better than the US
one, but far worse than the world's leading tax systems. The US is
extremely complicated, but the taxes lower. In Poland, the share
of taxes in the GDP is far too high, and that's because Poland
has excessive public spending. Any sensible debate on tax cuts
has to start with spending cuts. Otherwise it's just flight from
reality. In some respects, Central and Eastern Europe's tax system
is better than those in France or Germany because it has a higher
share of indirect taxes and a lower one of direct taxes. And the
former are less harmful for growth than the latter. That's why the
pressure from some of the EU member states for us to raise our direct
taxes was completely absurd from the economic point of view. The
benefit is that today even a greatest populist will not dare to
propose raising the corporate income tax. I only wish France and
Germany also called us to raise the personal income tax, as that
might have had a mitigating effect on the politicians. Instead,
the parliament has recently passed a new, 50-percent PIT rate. What
can you say: the economic calculation is completely unconvincing,
and the motivation cited morally dubious. Let alone the intellectual
quality of the explanations why the rise was necessary. One professor
politician made me laugh recently when he wrote that the 50-percent
rate had been introduced to save capitalism. He probably doesn't even
know that he's using western socialist arguments from 50 years ago.
Anthony de Jasay ridiculed them a long time ago."
Farming: Lone Fight for More Market
Failure to reform and restructure the farming sector is one of the
main objections raised against the early Polish transformation. The
situation in the sector is starting to improve only now, following
EU accession.
"Poland's farming sector before transformation was private, but in a
sense socialistic, so it required sweeping reforms. Farming supplies
were distributed by the government, and rarely available without
bribes, and the supply of farming products was usually insufficient.
That was the starting point. Moreover, the farmers received a huge
premium in the summer of 1989 when farming produce prices were
freed, which resulted in hyperinflation, while the prices of farming
supplies remained regulated. The situation was unsustainable. For
basic equilibrium to be restored, it was necessary to cut the heavy
subsidies to farming supply products. It was also necessary to do
away with the habit of taking loans and not repaying them. All that
was perceived as injustice, and systematically publicised by parties
that purported to be representing the farmers."
"What were we supposed to do? Continue subsidising the sector or
fight for more market? I fought for the latter, but I didn't have
too many allies. Besides, there is little appreciation of the massive
change that has occurred in the farming sector since 1989. Many farms
have modernised themselves, a process that has been stimulated by the
modernisation of the food industry, which is one of the most important
industries in Poland today. Just look at how many good dairy or meat
plants we have, and how sharply have Poland's food exports to the EU
been growing since accession. It'd be worth holding a serious debate
on the former state farms, or PGRs, whose reforms have been one of
the most vilified areas of the Polish transformation. And yet the
PGRs have been successfully privatised, and that amid a constant
populist cannonade. It also needs to be remembered that as far as
the countryside as a whole is concerned, we're talking about decades,
if not centuries, of neglect and underdevelopment."
The cannonade may have resulted from the fact that the PGRs employees
hadn't received the kind of social cover that, for instance, the laid
off miners were getting.
"Would you like to have even higher taxes in Poland? Even higher
unemployment? The social cover program for the mining industry was
a result of a tough compromise. I wasn't on the side of those who
wanted to increase these benefits."
Which is perhaps why the problem remains unsolved to this day.
"That's a half-truth. Employment in the mining industry was very
sharply reduced, from 400,000 in 1989 to some 136,000 today."
Moods and Arguments
Let's return to the sense of disilusionment and frustration that is
present not only in the countryside. Where does it come from?
"To see the problem of discontent in a proper context it's necessary
to look at how things are in countries where there's been no reforms:
Belarus, Uzbekistan, Turkmenistan? There people are discontent,
or confused, or frightened. The lack of free market reforms usually
goes hand in hand with a dictatorship."
"Is it really so surprising that reforms cause frustration? When the
system changes, so does the ranking of wages and the most prestigious
professions. Those that enjoyed the highest prestige in the former
system may not necessarily do so in the new one. That applies to,
for instance, the miners. The former system needed a lot of energy, so
the labour of those extracting coal was in high demand. And how were
the accountants or IT engineers treated in the former system? With
contempt. As were white collar workers in general. Since that
time, the miners have gone down in the prestige ranking, and the
accountants or IT specialists have gone up, though the miners are
still in a batter situation than their peers in Ukraine or Romania.
People whose relative situation worsens don't have to be enthusiastic
about reforms. Does that mean we shouldn't be reforming?"
Can these arguments convince the unemployed?
"Above all it's necessary to remove the causes of unemployment. Where
did unemployment come from? From the free market? No. The free market
has been blocked by excessive labour regulation and a pathological
welfare system. It's not only unemployment benefits but also spending
on early retirement, on disability benefits, the KRUS, and so on.
These expenses keep taxes high, and high taxes destroy jobs."
"Poland also experienced various external shocks that reduced demand
for unskilled labour; some 70 percent of the increment in unemployed
numbers in 1999-2001 were unskilled workers. Such people are the
first to be affected by labour market rigidity, i.e. an excessive
minimum wage."
Perhaps the reformers spent too little time explaining the reforms to
the people? Perhaps there wasn't enough social dialogue, especially
in the beginning?
"You can always say that more could have been done. The initial
Polish reforms were successful because they were implemented swiftly.
If we had gotten stuck in long discussions, the reforms would have
been cast into doubt."
But is it really obvious that the Poles wanted to have the kind of
a free market that they have gotten?
"Our market is in many areas distorted by state interventionism, but
the interventionists blame the free market for everything. Besides,
most people aren't aware of the choices we're facing. There isn't
enough economic education in the media. Instead, people are shown
the politicians, usually arguing ones."
No one promotes reforms better than those who have benefited from
them. Why didn't a middle class, that all over the world is the
greatest supporter of reforms, emerge in Poland?
"But it did! Only it's very busy, making money, building capitalism.
And who's protesting? People who for various reasons have more time
or are strongly organised. At the same time, it'd be an illusion to
believe that every entrepreneur is a liberal who loves competition.
What is good for the individual entrepreneur doesn't have to be good
for the economy, and vice versa."
Is it so that the Polish politicians don't understand the reforms,
or that they don't want to understand them?
"There are different politicians, just as there are different
journalists, but it's true that many participants of political life
are motivated by cynical or opportunistic calculations, or false
knowledge that is worse than ignorance. If someone wants to learn to
swim the crawl, it's better they don't swim at all than if they swim
doggie style."
Polish News Bulletin
November 9, 2004 Tuesday
5 November issue of Rzeczpospolita p. A6-A7
The following is a summary of an interview with Leszek Balcerowicz,
central bank governor, former deputy prime minister (1989-1991,
1997-2000), co-author of Poland's economic reforms, published in
Rzeczpospolita.
Fifteen years is a round anniversary. Was it really worth starting
in 1989 to see Poland as it is today ? with a strong economy but with
an irritating, idle political scene and great unsolved social problems?
"Where would Poland be today if it was still mired in the swamp of
socialism? We don't have to look far for an example, it's just beyond
our eastern border, in Belarus," says Balcerowicz. "Whoever knows at
least a little of Polish history can have no doubts that it was worth
doing away with the socialist dictatorship. In terms of possibilities,
the post-1989 period has been better than any other during the last
300 years. The problem is now that we started the reforms, but that we
haven't finished them in several key areas. My satisfaction isn't full
because I see, for instance, how sharply lower unemployment would be if
faulty solutions weren't adopted and welfare reforms weren't blocked. I
know, however, that I had the opportunity to participate in a unique
experience. When, in the 80s, I studied the successes of countries
like Germany or South Korea, I never imagined my studies could ever
be useful otherwise than intellectually. So I feel distinguished by
history. Because I studied the history of economic reforms, I was
aware of the obscurantism and cynicism you have to be prepared for
when reforming your country. So opinion polls or personal attacks
never had any impact on my decisions. I've learned to look at politics
through the eye of a naturalist, and you find all kinds of species
in nature. Moreover, the bleak propaganda I find myself subject to
is more than offset by the words of appreciation I keep receiving
in Poland and abroad. The cynicism and obscurantism demonstrated by
some of the participants of Poland's political life are personally
not a great problem for me, but they worry me for another reason. I'm
afraid people in Poland will allow themselves to be deceived, only
to regret it later. Lukashenka's new clones keep turning up."
Poland, Czech Republic, Hungary
What has Poland achieved during the last 15 years? Where is it in
comparison with, for instance, Hungary and the Czech Republic?
"Poland's GDP grew by 30 percent between 1989 and 2002, compared
with, for instance, an increase of 21 percent in Slovenia, or just 12
percent in Hungary. So in GDP terms, Poland is clearly in the lead.
The same applies to inflation, especially that our starting position
was far more difficult than Hungary's or the then Czechoslovakia's.
We've made immense progress in healthcare, environmental protection,
tertiary education, and so on."
Unemployment, on the other hand, is nothing to boast about.
"That's true, but Poland's high unemployment is not a result of
reforms, but of their lack, or, worse still, of anti-reforms: a
rigid labour market, high labour charges, an underdeveloped housing
market, and so on. It also needs to be remembered that during the
transformation period Poland saw stronger growth in the working age
population than other countries."
Poland has also lagged behind Czech Republic and Hungary in terms of
inward foreign investment.
"What counts the most is direct foreign investment. Its cumulated
levels range from $3,700 per capita in the Czech Republic, which is
more than in Chile, through $2,100 in Hungary, to $1,100 in Poland,
which is less than in Slovakia, Estonia, and Slovenia, and roughly
in line with Lithuania."
That proportion has not been changing. Why?
"I think it's Poland's sluggish privatisation. Czech Republic,
for instance, is far more advanced than Poland in the privatisation
of its power industry, where most of the assets have been sold to
foreign investors. Actually, privatisation advanced the most in
the Czech Republic under a socialist cabinet, not when Vaclav Klaus
headed the government. Poland saw a marked slowdown in the pace of
privatisation in the last couple of years, and it's good that has
now been changing. It's also worth looking at how our privatisation
policy affects the way Poland is perceived by potential foreign
investors. Another barrier hindering the inflow of direct foreign
investment is the condition of Poland's road network. The Lithuanians
and the Slovaks made far greater progress in improving their roads than
we did because they weren't spending as much on welfare as we were."
Are these differences due to the fact that Polish politicians haven't
been bold enough?
"Reforms are made by large-format politicians who think ahead and
aren't afraid to oppose various vested interests. One such politician
was, for instance, Jose Maria Aznar in Spain who speeded up the
reforms by mobilising the public with the prospect of eurozone
accession. Today Spain stands out favourably from, say, Germany in
terms of budget discipline."
There doesn't seem to be many such large-format politicians.
"That depends on how the people vote. Today, for instance, Slovakia
is a country to be admired. From a country that was a laggard in
reforms it has transformed into a leader thanks to prime minister
Dzurinda and deputy premier Miklos. Before that, the Slovaks had
Meciar. Their national character hasn't changed, it's their political
choices that have. Also those who carried out the reforms in the
Baltic states, first in Estonia and Latvia, and then in Lithuania,
were radical reformers. These were young people who read the right
authors: Hayek, the classic, liberal economists. A good, drastic,
but necessary work was done in Hungary by Lajos Bokros, the finance
minister in the socialist cabinet. He was vilified for that."
False Comparisons
Overall, Poland compares quite favourably with Hungary or Czech
Republic. How does it compare with the region's other countries?
"In terms of the improvement in living conditions, Poland is the
post-socialist world's absolute leader. At the same time, it's worth
noting that some of the post-Soviet countries have in the recent
years been developing more rapidly than Central Europe. Among these
is Armenia which carried out sweeping reforms thanks to which it has
a very pro-growth system."
But there's still a lot of poverty in Armenia. So in what terms is
its system superior?
"The level of poverty is a legacy; it depends on the system's quality
whether at all and how soon it is going to be curbed. Armenia's
relation of public spending to GDP is half of Poland's. As a result,
they have low taxes, and an almost balanced budget. Inflation is also
low; the scope of economic liberty has been greatly extended. I know
no country that'd be an economic tiger and have public finances as
unsound as Poland's. Lithuania is the country that probably made the
greatest progress in Central Europe in the recent years in terms of
cutting its taxes. And that happened under the ?socialist' cabinet
of Algirdas Brazauskas."
What kind of spending cuts did Lithuania make?
"They cut virtually all their expenses. If something like that were
to be done in Poland, probably nine in 10 economists would say that
it might be good in the short-term but over the long-term would cause
demand, and thus the GDP, to collapse. Yet in Lithuania, and earlier
in Estonia and Latvia, it turned out that the drastic spending cuts
had such a favourable impact on consumer and investor confidence and
expectations that private demand grew sharply, and so did the GDP.
Other non-Keynesian mechanisms worked as well, as the NBP's recent
research shows. In the populist language: the cooling proved to have
been a heating."
Has Poland made a lot of progress compared with the other countries
in the last 15 years?
"Colossal, especially if you think where we'd be if the system hadn't
been changed. The economy's external relations have undergone an
immense transformation. Poland is exporting so many new products
that even the best central planner would never invent. Hayek was
right when he said that the market was a discovery mechanism. Who
is making the discoveries? Millions of free people, entrepreneurs,
and creative employees are discovering their capabilities today. That
is the superiority of a free market economy over an enslaved one."
But there are still a lot of myths in the perception of the Polish
economy.
"Poland has undergone an immense technological transformation. But
because no government program was ever announced for the purchase of
foreign licences, many haven't noticed that. You can't look solely
at the R&D spending indicators and worry that we're spending less
than the US. Such comparisons are fundamentally flawed because they
ignore differentials in countries' development levels. The US is a
global leader which can't learn much from the others, so it has to
be spending more on R&D. The less developed countries, however, can
absorb external knowledge and that's their great opportunity. It was
used by all countries that modernised their economies ? from post-war
Japan to Ireland in the 90s."
It is often stressed that Poland's economic transformation has widened
income differentials.
"More difference isn't always worse than less difference. Are equal
incomes across the board the best solution? Besides, many differences
were kept away from the public eye in the previous system. As far as
official income differentiation is concerned, the Gini factor shows
that the post-socialist countries that grew more rapidly than others
saw less increase in differentiation. For instance, the Gini factor
rose from 0.28 in Poland in 1987-1990 to 0.33 in 1996-1998, which is
a slight increase. These are the latest available figures. In Ukraine,
for comparison, the factor rose from 0.24 to 0.47 in the same period,
with growth actually receding. So the daily propaganda that income
differentials are growing rapidly in Poland has little to do with
reality. And saying that it's better to have weaker growth in order
to have less differentiation is complete nonsense. The main factors
that hinder economic growth will also petrify poverty and morally
unjustified differentiation."
Building Capitalism without Your Own Capital
What role has foreign capital played in the modernisation of the
Polish economy?
"Every developing country, and even the most developed countries, are
striving to attract direct foreign investment. Moreover, communism
in Poland destroyed capitalism and the capitalists. In some areas,
such as banking, you need a lot of capital and some specific know-how."
Has foreign investment helped the Polish banks?
"The system would have been much weaker without it. In some respects,
Poland's banking system is today more advanced than the US one. In
the US, for instance, they still rely a lot on cheques. There were
two models of banking sector privatisation. Due to a scarcity of
domestic capital, Central Europe was privatising its banks chiefly
with foreign capital. The alternative was to delay privatisation,
i.e. cement state ownership in an area where politicisation would be
particularly dangerous for the whole economy. The first model was
embraced not only by Poland but also by Czech Republic, Slovakia,
Hungary. The result? These countries' banks are majority owned by
foreign investors. The same is the case in Mexico, Chile, or New
Zealand."
"An opposite case is Russia where, for various reasons, the inflow of
foreign capital was blocked. As a result, Russia has a very specific
banking system dominated by a single state bank. In China, the banking
system is also dominated by the government and represents the greatest
risk factor for the whole economy."
Yet privatisation continues to arouse of a lot negative sentiment
in Poland.
"But what would have happened if privatisation hadn't been carried
out? If state domination had been retained? We're hearing a lot of
criticism and assurances that it's all about the national interests.
Yet the prosaic truth is that some politicians simply don't want to
relinquish control over the economy. Privatisation cuts the politicians
off from companies. Without privatisation, in a state-dominated
economy, there is no moving away from socialism. It's also worth
remembering that orderly privatisation replaced wild privatisation,
which often takes place under the guise of state ownership. Orderly
privatisation prevents the appropriation of public sector assets. When
we hear protests against privatisation, we should always look at
who's shouting and what they are proposing instead."
Tax Systems and Eurozone Accession
Wasn't the prospect of EU accession a crucial growth impulse for the
Polish economy?
"Simplifying things, you can say that when the reformers were in power,
that prospect played a relatively small role, because they wanted to
make reforms anyway. But because not all cabinets were reformist,
the prospect of EU accession played a very favourable role in some
periods," says Balcerowicz.
Can the prospect of eurozone accession become a pro-growth factor
again?
"Whether the road towards the eurozone is long or short depends on us,
or more precisely, on the pace at which Poland's public finances are
going to be improved. The euro is a good prospect for Poland. You can
expect its adoption to boost direct foreign investment, export, and
economic growth levels. Provided, of course, that you enter with sound
public finances and flexible markets. But you won't make the public
finances healthy by delaying the reforms. The best scenario would be
to do it in a single thrust, like they did in Slovakia or Lithuania."
How does Poland's tax system compare with those present in other
countries?
"In some respects," says Balcerowicz, "it is better than the US
one, but far worse than the world's leading tax systems. The US is
extremely complicated, but the taxes lower. In Poland, the share
of taxes in the GDP is far too high, and that's because Poland
has excessive public spending. Any sensible debate on tax cuts
has to start with spending cuts. Otherwise it's just flight from
reality. In some respects, Central and Eastern Europe's tax system
is better than those in France or Germany because it has a higher
share of indirect taxes and a lower one of direct taxes. And the
former are less harmful for growth than the latter. That's why the
pressure from some of the EU member states for us to raise our direct
taxes was completely absurd from the economic point of view. The
benefit is that today even a greatest populist will not dare to
propose raising the corporate income tax. I only wish France and
Germany also called us to raise the personal income tax, as that
might have had a mitigating effect on the politicians. Instead,
the parliament has recently passed a new, 50-percent PIT rate. What
can you say: the economic calculation is completely unconvincing,
and the motivation cited morally dubious. Let alone the intellectual
quality of the explanations why the rise was necessary. One professor
politician made me laugh recently when he wrote that the 50-percent
rate had been introduced to save capitalism. He probably doesn't even
know that he's using western socialist arguments from 50 years ago.
Anthony de Jasay ridiculed them a long time ago."
Farming: Lone Fight for More Market
Failure to reform and restructure the farming sector is one of the
main objections raised against the early Polish transformation. The
situation in the sector is starting to improve only now, following
EU accession.
"Poland's farming sector before transformation was private, but in a
sense socialistic, so it required sweeping reforms. Farming supplies
were distributed by the government, and rarely available without
bribes, and the supply of farming products was usually insufficient.
That was the starting point. Moreover, the farmers received a huge
premium in the summer of 1989 when farming produce prices were
freed, which resulted in hyperinflation, while the prices of farming
supplies remained regulated. The situation was unsustainable. For
basic equilibrium to be restored, it was necessary to cut the heavy
subsidies to farming supply products. It was also necessary to do
away with the habit of taking loans and not repaying them. All that
was perceived as injustice, and systematically publicised by parties
that purported to be representing the farmers."
"What were we supposed to do? Continue subsidising the sector or
fight for more market? I fought for the latter, but I didn't have
too many allies. Besides, there is little appreciation of the massive
change that has occurred in the farming sector since 1989. Many farms
have modernised themselves, a process that has been stimulated by the
modernisation of the food industry, which is one of the most important
industries in Poland today. Just look at how many good dairy or meat
plants we have, and how sharply have Poland's food exports to the EU
been growing since accession. It'd be worth holding a serious debate
on the former state farms, or PGRs, whose reforms have been one of
the most vilified areas of the Polish transformation. And yet the
PGRs have been successfully privatised, and that amid a constant
populist cannonade. It also needs to be remembered that as far as
the countryside as a whole is concerned, we're talking about decades,
if not centuries, of neglect and underdevelopment."
The cannonade may have resulted from the fact that the PGRs employees
hadn't received the kind of social cover that, for instance, the laid
off miners were getting.
"Would you like to have even higher taxes in Poland? Even higher
unemployment? The social cover program for the mining industry was
a result of a tough compromise. I wasn't on the side of those who
wanted to increase these benefits."
Which is perhaps why the problem remains unsolved to this day.
"That's a half-truth. Employment in the mining industry was very
sharply reduced, from 400,000 in 1989 to some 136,000 today."
Moods and Arguments
Let's return to the sense of disilusionment and frustration that is
present not only in the countryside. Where does it come from?
"To see the problem of discontent in a proper context it's necessary
to look at how things are in countries where there's been no reforms:
Belarus, Uzbekistan, Turkmenistan? There people are discontent,
or confused, or frightened. The lack of free market reforms usually
goes hand in hand with a dictatorship."
"Is it really so surprising that reforms cause frustration? When the
system changes, so does the ranking of wages and the most prestigious
professions. Those that enjoyed the highest prestige in the former
system may not necessarily do so in the new one. That applies to,
for instance, the miners. The former system needed a lot of energy, so
the labour of those extracting coal was in high demand. And how were
the accountants or IT engineers treated in the former system? With
contempt. As were white collar workers in general. Since that
time, the miners have gone down in the prestige ranking, and the
accountants or IT specialists have gone up, though the miners are
still in a batter situation than their peers in Ukraine or Romania.
People whose relative situation worsens don't have to be enthusiastic
about reforms. Does that mean we shouldn't be reforming?"
Can these arguments convince the unemployed?
"Above all it's necessary to remove the causes of unemployment. Where
did unemployment come from? From the free market? No. The free market
has been blocked by excessive labour regulation and a pathological
welfare system. It's not only unemployment benefits but also spending
on early retirement, on disability benefits, the KRUS, and so on.
These expenses keep taxes high, and high taxes destroy jobs."
"Poland also experienced various external shocks that reduced demand
for unskilled labour; some 70 percent of the increment in unemployed
numbers in 1999-2001 were unskilled workers. Such people are the
first to be affected by labour market rigidity, i.e. an excessive
minimum wage."
Perhaps the reformers spent too little time explaining the reforms to
the people? Perhaps there wasn't enough social dialogue, especially
in the beginning?
"You can always say that more could have been done. The initial
Polish reforms were successful because they were implemented swiftly.
If we had gotten stuck in long discussions, the reforms would have
been cast into doubt."
But is it really obvious that the Poles wanted to have the kind of
a free market that they have gotten?
"Our market is in many areas distorted by state interventionism, but
the interventionists blame the free market for everything. Besides,
most people aren't aware of the choices we're facing. There isn't
enough economic education in the media. Instead, people are shown
the politicians, usually arguing ones."
No one promotes reforms better than those who have benefited from
them. Why didn't a middle class, that all over the world is the
greatest supporter of reforms, emerge in Poland?
"But it did! Only it's very busy, making money, building capitalism.
And who's protesting? People who for various reasons have more time
or are strongly organised. At the same time, it'd be an illusion to
believe that every entrepreneur is a liberal who loves competition.
What is good for the individual entrepreneur doesn't have to be good
for the economy, and vice versa."
Is it so that the Polish politicians don't understand the reforms,
or that they don't want to understand them?
"There are different politicians, just as there are different
journalists, but it's true that many participants of political life
are motivated by cynical or opportunistic calculations, or false
knowledge that is worse than ignorance. If someone wants to learn to
swim the crawl, it's better they don't swim at all than if they swim
doggie style."