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The Stimulating Economic Growth Economics Essay

After the Second World War, European countries had to rebuild themselves. The governments set rules to stimulate the economy. Not all countries within Europe had the same method of smulating economic growth. The majority of Western European countries had a policy of stimulating a free market. However, the communist countries hoped to achieve growth by a strongly controlled market: a central planned market. One of the communist countries with a central planned market was Poland.

Poland’s overly ambitious Six-Year Plan’s failed to a large extend due to maladjustments, shortages, and bottlenecks in the implementation of the plans. Consumer goods received a larger share of the national product, and some quantities of grain and food were imported from the West. State control was mitigated by giving limited policy input to enterprises, and the rate of investment was reduced. Although a lively debate occurred on so called “market socialism,” actual systemic reforms were limited and short-lived. The only significant lasting change was the decollectivization of agriculture (Glenn, 1992).

Poland’s deteriorating situation in the consumer goods market resulted in a series of watershed events: a wave of strikes that led to the formation of the Solidarity union in August 1980. After 1985 the poor foreign trade situation further complicated Poland’s economic crisis for which neither the communist regime nor the economic system was prepared in the late 1980s (Glenn, 1992). Early 1990s the Polish government initiated a “Shock Therapy” enabling the country to transform its socialist-style planned economy into a market economy. As with all other post-communist countries, Poland suffered temporary slumps in social and economic standards, but it became the first post-communist country to reach its pre-1989 GDP levels, which it achieved by 1995 largely thanks to its booming economy.

This essay describes the transitional period of Poland from a central planned market to a free market economy. This transition was achieved by a “Shock Therapy”.

In the first chapter, a brief overview of the history and events leading up to the transition will be described. The second chapter will give an oversight of the events during the transition and the decisions made. In the third chapter the situation well after the “Shock therapy” will be reviewed. In the fourth chapter conclusions we be drawn and has been written with the following two questions in mind:

How has the role, participation and intervention of the Polish government changed its economy since the 1970s?

What impact has this had on their interaction with stakeholders as well as government and public servant accountability towards civil society?

The 70’s

Up to the 80’s Poland used the model of central planning. In the Central Planned economy of Poland the rates of growth depended on increases in the quantity of inputs rather than on improvements in productivity. Material production remained high as long as greater quantities of inputs were available. This pattern of growth priorities and the emerging industrial structure left no possibility of raising wages significantly. For this reason, the Polish standard of living lagged behind that of Western Europe. Already in the first postwar decade, awareness of this disparity began to cause social unrest, a situation that became a tradition during the next thirty-five years. (Glenn, 1992)

Centralized planning ranged from broad, long-range statements of fundamental future development to guidance on the operation of specific enterprises. The basic planning units for transformation of the Polish economy were the Six-Year plans, the first of which began in 1956. Within that framework, current production goals were established in an annual operational plan, called the National Economic Plan. As the years passed, these plans contained more and more specific detail. However, as requirements and supplies could not be forecast in advance, plans were inconsistent and constantly needed revision. (Glenn, 1992)

By the late 1960s, the economy was clearly stagnant, consumer goods were extremely scarce, and planners sought new approaches to avoid repetition of the social upheavals of 1956. These conditions necessitated a switch from an “extensive” growth pattern (unlimited inputs) to an “intensive” pattern of growth that would ensure high rates of growth through improvements in productivity rather than in the amount of inputs. The new emphasis helped drive another reorganization of industry in the early 1970s. State enterprises were combined into a number of huge conglomerates called Big Economic Organizations. They were expected to increase efficiency by economies of scale. Wage increases were tied to net increases in the value of outputs as an incentive to labour productivity. In practice, however, central planners could now control a smaller number of industrial units and regulate their activities more intensely. The system was never implemented fully, and no improvement in efficiency resulted. The failure of the 1973 reform demonstrated that the technological level of industrial products was still too low to permit significant increases in efficiency. (Glenn, 1992)

They had hoped to catch up with the western economies by acquiring foreign technologies, whether through licensing or industrial espionage. Because success measured in tons of steel production depended more on brute-force capital formation and the assimilation of standard technologies than on entrepreneurship and innovation, the centrally planned economy of Poland (command economy) was able, initially at least, to perform tolerably well. (Eichengreen, 2007). Bureaucrats decided how many factories to build, instructed state banks to mobilize the necessary resources, and limited consumption to what was left. They decided what to acquire.

After the oil crisis in 1973 the growth was slower than before. It culminated in a crisis of central planning that brought down not just the command economy but its authoritarian political superstructure as well (Eichengreen, 2007). Strikes were now more often observed. Particular the strikes of “Solidarność” (“Solidarity”), in the shipyards of Gdansk was intense and on a wide scale. The government could not ignore the grievances of the workers. This initiated the collapse of the central planned economy.

The transition (80’s and 90’s)

When state socialism collapsed in the USSR and thus also in Poland in 1989, the Polish society nurtured great hopes to rapidly establish well functioning democracy and efficient markets. The labour law reforms have been welcomed by the fact that the public opinion in Poland was favourable to deregulation; partially due to the perception that such changes would be advantageous to the society, and partially because no credible alternative existed. Polish mass media did overwhelmingly support labour law reforms and there were no voices calling for an alternative approach to try to reduce unemployment. With the collapse of the socialist system the Polish also hoped to create favourable conditions for joining the EU in the future. (Surdej, 2004).

Labour turmoil in 1980 led to the formation of the independent trade union Solidarność, which over time became a political force. Despite persecution and imposition of martial law in 1981, it eroded the dominance of the Communist Party and by 1989 had triumphed in Poland’s first free and democratic parliamentary elections since the end of the Second World War. Lech Wałęsa, a Solidarity candidate, eventually won the presidency in 1990.

The transformation of its socialist-style planned economy into a market economy was accomplished by a dramatic “Shock therapy” programme of the Polish government. This shock therapy was set up by Leszek Balcerowicz, Poland’s leading economist and Minister of Finance and deputy Premier of Poland.

The main points of this package of 11 acts were:

Act on Financial Economy within State-owned Companies, which allowed for state-owned businesses to declare bankruptcy and ended the fiction by which companies were able to exist even if their effectiveness and accountability was close to none.

Act on Banking Law, which forbade financing the state budget deficit by the national central bank and forbade the issue of new currency.

Act on Economic Activity of Foreign Investors, allowing foreign companies and private people to invest in Poland and export their profits abroad.

Typical for Poland was that the privatization of companies was left until a later date, not upsetting the whole system at once.

As with all other post-communist countries, Poland suffered temporary slumps in social and economic standards (wiki 2011).

The economic situation in the beginning 90’s was that inflation was high, peaking at around 600%, and the majority of state-owned monopolies and holdings were largely ineffective and completely obsolete in terms of technology. Although there was practically no unemployment in Poland, wages were low and the shortage economy led to lack of even the most basic foodstuffs in the shops. Unlike the other post-Soviet countries, however, Poland did have some experience with a capitalist economy, as there was still private property in agriculture and food was still sold in farmers’ markets.

Advocates of shock therapy view Poland as the success story of shock therapy and as a vindication of its failures by its critics. Poland’s reforms were the most gradualist of all the post-communist countries. It became the first post-communist country to reach its pre-1989 GDP levels, which it achieved by 1995 largely thanks to its booming economy (wiki 2011).

The last ten years and counting

A social dialogue between the government and the unions was set up. Even in the Polish People’s Republic, there had been sporadic episodes of dialogue between the authoritarian government and society (Eurofound, 2006). There are some controversial descriptions of the social dialogue: according to a sociological research piece, Polish social dialogue can be described as a “talk show”, because it does not seek solutions to negotiation problems, but instead focuses on playing blame games and in essence does not involve conflicts of interests, but conflicts of values. The notion of “empty social dialogue” appears.

The weaknesses of the Polish social dialogue are the following (Kurtyka, 2005):

Often the government is asking questions, but it is not listening to the social partners’ answers;

There is a lack of implementation of the agreed solutions; this observation especially concerns the voievodship level, i.e. Wojewódzkie Komisje Dialogu Spolecznego, WKDS (regional social dialogue commissions) are not operational as they could be.

Recently, the “civic dialogue”, which is a wider term, has replaced the notion of “social dialogue” and it weakens the importance of the social dialogue as a forum of exchanging positions and opinions by officially recognized social partners;

The quality of the social dialogue is still to be improved; the government, seeking to push forward its solutions, sometimes uses the weakness of the process.

In terms of the future development of industrial relations in Poland, there are two major pressures. On the one hand, labour relations are becoming more decentralized and deregulated, especially in the private sector. On the other hand, there is a tendency to retain a certain degree of centralization, especially in establishing permanent rules and procedures for consultation with the unions. Social dialogue in Poland has increasingly become a political issue (Kurtyka, 2005).

The specific Polish reasons behind this state of affairs are related to:

The existence of two influential and ideologically divided trade union

organisations (OPZZ and NSZZ Solidarność) with a roughly equal number of members;

Direct involvement of the trade unions in politics;

Institutionalisation of divided and competing trade union organisations and

their confinement to specific companies, where their leaders hold a regular post

and the unions have their base and “clientele”;

“Unfriendly” legal regulations concerning establishing trade unions in the

enterprises.

Since 2000, the GDP per capita has been catching up quickly. The shortfall relative to the upper half of the OECD countries remains primarily due to a labour productivity gap. The government attracted foreign investments so that it could modernise the economy. A number of other reforms were implemented, particularly in the following areas:

Reduce public ownership

Lower barriers to entrepreneurship

Stimulation to start a business

Improve the efficiency of the education system

Cut the personal income tax rates

However the State has kept controlling stakes in strategic energy producers.

An action the Polish government undertook is a privatisation programme; encompassing 800 firms, generating receipts of about 2% of GDP. The government has announced further privatisation projects like: barriers to entrepreneurship have recently been lowered with the creation of one-stop shops. This was done to reduce state interference in privatised companies, and shorten the time needed for setting up a new firm (OECD, 2011).

Another reform which is being implemented is to increase the number of places in pre-school childcare facilities. Also, they wish to increase the quality of Public higher-education institutions, giving them greater financial autonomy. Reinforce quality assessment, and strengthen transparent promotion criteria for professors in tertiary education. The early-retirement schemes are luxurious and cover a considerable number of employees of the police and armed forces and those who lost their jobs prior to retirement.

The quality of Poland’s transport infrastructure and fixed broadband penetration are still among the lowest in the OECD. Electricity generation relies heavily on outdated coal-fired plants. Transport infrastructure is being upgraded with the help of EU funds.

The housing market suffers from the absence of zoning plans, labour shortages in construction and a large informal rental market due to strict rent controls. A reform of housing policies is proposed by the government. (OECD, 2011)

Many large, socially sensitive or politically powerful state-owned enterprises (in coal, steel or chemicals sectors) or financial firms (the rural bank, the housing and savings bank and the national insurance company) have avoided major restructuring. As a consequence their losses continue to be a drag on the growth potential of the economy. Privatization, while persistent, has been slow, particularly in the industrial sector and the financial sector. Without increasing the pace of privatization, state-owned firms and banks may find it increasingly difficult to compete in European markets; therefore this situation can potentially create future fiscal and unemployment setbacks.

It is worth noting that in September 2005 the European Economic and Social Committee adopted an opinion on “Social dialogue and employee participation, essential for anticipating and managing industrial change (own-initiative opinion). NSZZ “Solidarność” was a initiator of an amendment to this opinion on the need to conclude social pacts in the new Member States.

Conclusion

During the central planned economy, the accountability of the Polish government was mainly towards the leaders of the USSR. In this system, the people and the unions in Poland had very little influence on this process (in this system). The government was not accountable to the unions or towards the people for its actions.

In the period during the Shock Therapy, the government was held accountable for its actions towards the just elected free parliament and the unions like ‘Solidarnos’. Not any longer to the rulers of the USSR.

There after the companies received more freedom of operation and entrepreneurial new businesses were given room to operate. Change of the political system and introducing free market economy put entrepreneurs in a very difficult position. In order to face the challenges of the free market economy, enterprises had to adapt to the new rules of operation. The accountability after the Shock Therapy has been described as the notion of “empty social dialogue”.

The free market economy had changed the Polish economy tremendously however, the accountability towards its people and the unions was still a long way to go to emulate similar standards of its fellow Western European countries. The government was/is still authoritarian and hardly listen(ed) to its stakeholders.



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