Creating Market Economy in Eastern Europe

Until Solidarity won the parliamentary elections in Poland in the summer of 1989, the Polish economy had been, since the end of World War II, a rather typical planned socialist economic system. State ownership predominated, and though economic reform was attempted in varying degrees at different times, little real systemic change had taken place. Moreover, as Table 1 shows, the rate of economic growth continued to decline, and the period saw recurring shortages, increasing inflation, and an understandably declining work ethic.
Beginning in 1990, Poland took decisive steps toward a market economy. This "shock therapy" approach was to be sudden, and in this it differed signifi­cantly from the gradualist approach being discussed in other socialist systems. In addition to treeing prices, Poland implemented monetary controls, the zloty was made convertible into hard currencies, and steps were taken to control wage increases.
As we shall see, the "shock therapy" approach has not been without critics. Moreover, although the Polish case quickly attracted the interest of those who study the problems of socialist transition, it was viewed as unique. Thus it was argued that. for a variety of reasons that were discussed earlier, reform was much more likely to succeed in Poland than in a case like the Soviet Union. But before we examine the Polish reform experience in greater detail, we must review what brought the Polish economy to the reform phase and how, at that point, it might be different from other socialist countries.
I begin our discussion of Poland with a brief examination of the setting. Then I discuss the Polish command system, considering the extent to which this system led to distortions in the Polish economic structure. Finally, I turn to the issue of transition and examine the mechanisms utilized and the results achieved thus far.
1) Poland: The Setting
By European standards, Poland is a relatively large country. With a land area of just over 300,000 square kilometers, it is just over half the size of France. Moreover, with a population that approached 38 million in 1990, Poland is some 68 percent of the size of France in terms of population.
Poland is frequently viewed as having a homo­geneous society, a factor that facilitates economic reform. Although social homogeneity is difficult to measure and may well be overstated in the Polish case and in other cases (for example, there are regional differentials, urban-rural differentials, and the like), the basic statistical evidence is strong. In terms of religion, 95 percent of the Polish population is Roman Catholic. From a stannic standpoint, 98.7 percent of the population is Polish, and only a few minority groups occur.…