Transformation in Poland Libor Žídek Contents 1.Development during the communist regime •Insight to long-run political development •Economic situation 2.Political Development 3.Transformation period •Economic reforms after 1990 •Privatisation •Development in banking sector •4. Economic results •Economic growth •Structure of the economy •Unemployment •Inflation •External relationships • • •The first part Insight to long-run political development •Poland – Russia relations before WWII •Member of the communist block after WWII • –prickly relations with Russia -> effect on attitude towards socialism –problems with the regime + bad economic situation -> protests (1956, 1970) –attempts for reforms -> Gomulka (1956), Gierek (1970) –Jan Pavel II (1978)-> symbol of Polish opposition against the communist regime –lack of freedoms + economic situation –> emmigration – – – – – – Chart 1: Emigration, Immigration and net migration in Poland in 1966-2008 • Source: Central Statistical Pffice (GUS), http://www.stat.gov.pl/gus/5840_8408_ENG_HTML.htm, (29.12. 2010) Economic situation I. •Centrally planned system • •Backward economy with large portion of agriculture • •Measures in 1960´s and 1970´s –Membership in GATT since 1967 –Legal framework for FDI – •Economic problems –FDI -> overheating, inflationary pressures –Borrowings from abroad -> foreign debt –Impacts of global debt crisis (1980) -> GDP, government deficit, deficit of BoP, shortage of basic products, monetary excess – • •Riots, destabilization ... • • ... martial law and reforms as solutions? Table 1: Chronology of reform measures before 1990 Source: Kornai (1996) Economic situation II. • No impovement ... •Another crisis (1987) - > shortage of consumer goods •Partial price liberalization -> hyperinflation •Chaotic economic policy and economic distortions • • Problems with ... •Polish self-managed socialism •Overal ownership structure •Structure of the economy •Development of main indicators • • • Self-management socialism •Companies controlled by workers – better functioning, motivated employees, improved overall efficiency – self-governing (powerful) councils established in almost all companies – • In reality negative impact on companies – increasing wages -> inflation – no rationalisation of production processes – no improvement in motivation of employees – – Structure of the economy • Public sector • large portion of GDP • f.e. state companies and cooperatives created 81.9% of GDP in 1988 • Private sector • smaller portion of GDP, mainly in agriculture • growing share since the end of 1970s • BUT larger than in Czechoslovakia •Large share of agriculture – – sign of underdevelopment •Armament production –obstacle to transformation –relatively high portion of industrial production –one of the biggest producer –for Warsaw Pact countries and Soviet Union • • Table 2: Exchange rates to American dollar (averages in units of national currency) Source: Winiecki, Regional survey, (1993). Table 3: The share of nationalized and private sector in industrial production in Poland Source: Wang, Zhen (1991) Chart 2: Economic growth and long run trend (by HP filter) in Poland 1950–1989 (in %) Source: Maddison, Historical Statistics, Retrieved October 11, 2010 from http://www.ggdc.net/MADDISON/oriindex.htm Chart 3: Current account balance % of GDP Source: International Monetary Fund, World Economic Outlook Database, October 2010, http://www.imf.org/external/pubs/ft/weo/2010/02/weodata/index.aspx (1.12.2010) Contents 1.Development during the communist regime •Insight to long-run political development •Economic situation 2.Political Development 3.Transformation period •Economic reforms after 1990 •Privatisation •Development in banking sector •4. Economic results •Economic growth •Structure of the economy •Unemployment •Inflation •External relationships • • •The second part Political development I. •Pseudo-democratic system –Consequence of negotiations with Solidarity –First non-communist government in 1989 -> Solidarity (high support) –Walesa – president (1989) – •First free elections in 1991 –> 29 parties in the Parliament – fragile political situation – weak and changing coalition governments –associate agreement with EC in 1991 –new constitution -> stronger position of president –protests -> early elections – Political development II. •Elections in 1993 –> post-communist party (DLA) as winner –slowdown of the transformation process –emphasisi on social aspects –leader of the party -> next president – •Elections in 1997 -> right wing parties (SEA) –40 political groups without uniform position –membership in NATO (1999) –unpopular steps -> collapse in 2000 – •Elections in 2001 -> left wing parties (DLA) –coalition with the Polish People’s Party –collapse in 2003 – •Membership in EU (2004) • Unstable political situation regardless of +/- economic situation Contents 1.Development during the communist regime •Insight to long-run political development •Economic situation 2.Political Development 3.Transformation period •Economic reforms after 1990 •Privatisation •Development in banking sector •4. Economic results •Economic growth •Structure of the economy •Unemployment •Inflation •External relationships • • TRANSFORMATION PERIOD •The third part Economic reforms after 1990 I. •„Big Bang“ reform (shock therapy) –Consequence of catastrophic economic situation – •Public opinion –In favour of reforms –No sense about the function of market economies – •Balcerowicz plan (1990) –Liberalization of markets and prices –Inner convertibility of the zloty –Restrictive monetary policy –Devaluation + fixing of the zloty to the dollar –Wage regulation –Fiscal restrictions (limiting subvensions) – •Jeffrey Sachs –key economic adviser of the Polish government – Economic reforms after 1990 II. Table 4:Development of the main economic indicators in Poland 1990-1993 Source: Holman (2000) •Transformation recession • •Development in foreign sector –Decline in trade with COMECOM –Support from the West •PHARE •Remitting polish debts •IMF (stabilization program and loans) •Devaluations of the zloty + fixed to a basket of 5 currencies + crawling pegg •Poor economic conditions still in 1993 -> Strategy for Poland • Chart 4: Nominal and real exchange rate in Central Europe Source: Frait, Kotlán (2000) Table 5: Development of Gini coefficient 1994-2004 Source: United nations university - UNU Wider - world institute for Development Economics Research, http://www.wider.unu.edu/research/Database/en_GB/wiid, 22. 12. 2010 GDP per person 1990=100 Source: Economic reforms after 1990 III. •Relatively high economic growth -> budget deficit under control • •Monetary policy -> targeting money in circulation • •Agreements with London and Paris creditors clubs (1994) • •Re-denomination of the zloty (1995) -> 10 000 PLZ for 1 PLN • •Liberalization of transactions on the financial account –Massive inflow of foreign capital –Appreciation and increase of foreign reserves to keep the exchange rate –Periodic devaluation, wider fluctuation zone, basket of 2 currencies – •Membership in OECD (1996) • •Government vs. Public debt • •Direct inflation targeting (1999) • •Free floating since 2000 • • Table 9: General government balance as % of GDP (1990-2000) • Table 9: General government balance as % of GDP (1990-2000) Source: IMF: Republic of Poland: 2003; IMF: Republic of Poland: 2006 Source: EBRD: Selected economic indicators data, 26. 11. 2007. Chart 5: Public debt, % GDP Source: EBRD: Selected economic indicators data, 26. 11. 2007. Chart 6: Inflation and inflation targeting in Poland 1998-2003 Source: NEWTON: Makroekonomický vývoj Polska, 2003 Privatisation •Lack of domestic savings but stronger position of employees and trade unions • •„Spontaneous privatisation“ at the beggining • • New forms of ownership change – commercialisation and liquidation • •Voucher privatisation – specific features • •Slow and postponed process • • • Table 12:Private sector share in employment (in %) Table 11: Employee Ownership Resulting from Privatisation in 1994 Source: Earle, Estrin (1996) Source: EBRD: Selected economic indicators data, 26. 11. 2007. Development in banking sector •The firt attempt for change in 1988 (creation of 9 state banks) • •Impacts of transformation recession –weak position of banks, share of classified credits • •Enterprise and Bank Restructuring Program (1993) –recapitalization, positive effect on banking sector –relatively low cost on recovery – •Privatisation of banks –Slower than excepted, but share of foreign banks – •Importance of state banks vs. limited role of commercial banks and exchange stock Table 13: Financial sectors in European countries in 2002 • Table14: Number of IPOs in Central Europe Source: Gabrisch, Hölscher (2006) Source: Kovanda (2005) Contents 1.Development during the communist regime •Insight to long-run political development •Economic situation 2.Political Development 3.Transformation period •Economic reforms after 1990 •Privatisation •Development in banking sector •4. Economic results •Economic growth •Structure of the economy •Unemployment •Inflation •External relationships • • ECONOMIC RESULTS •The fourth part Chart 8: Economic growth and long run trend (by HP filter) in Poland 1990-2008 (in %) Source: EBRD: Maddison, Historical Statistics, Retrieved October 11, 2010 from http://www.ggdc.net/MADDISON/oriindex.htm . Chart 7: Cumulated GDP (1989=100) EBRD: Selected economic indicators data, 26.11. 2007. Table 15: Real wages in Eastern Europe, the bottom and situation in 2005 in comparison to the pre-transformation year • Source: UNDP: International human development indicators Retrieved December 22, 2010 from http://hdrstats.undp.org/en/indicators/49806.html Source: Klaus, Tomsik (2007) Table 16: Development of HDI in central Europe 1975-2010 Table 18: Employment by sectors (% of total employment) Source: World Databank - World Development Indicators (WDI) & Global Development Finance (GDF); Retrieved December 10, 2010 from http://databank.worldbank.org/ddp/home.do?Step=12&id=4&CNO=2 Chart 9: Development of unemployment in Poland, Hungary and the Czech Republic between 1990 and 2006 (in %) Source: EBRD: Selected economic indicators data, 26. 11. 2007. Chart 10: Labour participation rate, total (% of total population ages 15+) Source: World Databank - World Development Indicators (WDI) & Global Development Finance (GDF); Retrieved December 10, 2010 from http://databank.worldbank.org/ddp/home.do?Step=12&id=4&CNO=2 Table 19: Development of consumers prices annual average (%) Source: EBRD: Selected economic indicators data, 26. 11. 2007. Comparison of inflation in the CR, selected transition economies (1989 = 100) Table 21: The main Polish trading partners 1929-2004 and their share in Polish trade (in %) Source: Central Statistical Office, Yearbook of Foreign Trade Statistics 2007, 2007. Chart 11: Trade openness (exports plus imports to GDP in %) in Poland, Hungary and the Czech Republic Source: EBRD: Selected economic indicators data, 26. 11. 2007. Table 23: The share of the current account balance to GDP between 1990 and 2004 (in %) Source: IMF: World Economic Outlook Database, Retrieved October 9, 2010 from http://www.imf.org/external/pubs/ft/weo/2010/02/weodata/index.aspx Table 24: Cumulative inflows of FDI in absolute terms and per capita in Eastern Europe 1989-2004 • Table 25: The share of foreign companies in industry at the end of the 1990s Source: Berend (2009) Source: Berend (2009) Conclusions •Dramatic changes in economic conditions through the analysed period –Economic catastroph before the fall of communist regime – Transformation recession and hyperinflation due to „shock therapy“ –Improvement of economic situation in medium-term – •Outcomes –Establishment of growing trend –Catching up with developed countries – – ... the main goal of transformation was fulfilled ! – • Thank you for attention !