Poland's free market woes

Market-oriented policies are blamed for Poland's macroeconomic decline as well as growing economic insecurity.

UNTIL a few years ago, Poland was regarded by the Western press as the showpiece of the transition economies, an example of the joys and benefits that a rapid shift to privatisation, liberalised markets and incentives to capitalists could deliver. The Polish example could be cited with relief by free market enthusiasts who were confronted with economic chaos and falling rates of economic activity in other formerly socialist countries.

The period of the mid-1990s, when most other economies in transition were still struggling, was when the Polish economy supposedly took off. National income grew rapidly at around 7 per cent per annum at the peak of the boom, and the unemployment rate fell below 10 per cent. Poland became one of the most important recipients of foreign direct investment in the region. Of course, most of this was directed towards purchase of the newly privatised state assets, since Poland's privatisation programme has been one of the most comprehensive of all the transition economies. Other foreign investment was dominantly in the trading and distribution sector, which became the most dynamic in terms of employment and income generation.

But this growth was unevenly spread. The cities, especially Warsaw, thrived with the growth of medium to large private businesses. But the rural sector was badly hit, especially from 1996 onwards when the fall in international crop prices (and the continued subsidies offered by the industrial countries to their own farmers) affected the viability of Polish farmers who were being newly exposed to free trade.

The rural-urban inequality was mirrored in the growing differentiation within the urban population, as workers in the old state-run enterprises, pensioners, and other more vulnerable groups found their material position deteriorating even as some new capitalists prospered quickly.

From 2000, the Polish economy was hit by the world economic slowdown, which affected the European Union and especially Germany, Poland's main trading partner. Meanwhile, part of Poland's comprehensive neoliberal reform measures had entailed granting "independence" to the central bank. This made the central bank free of government control and democratic accountability, but increased its subservience to financial markets, making it focus on the single aim of containing inflation regardless of the state of the real economy.

Consequently, even in the face of the economic slowdown, the Polish central bank imposed a deflationary policy, with high interest rates aimed at stabilising the value of the currency, the zloty. Obviously, this had further negative effects in terms of lower exports and greater import penetration. Since then, economic growth has slackened to the point where it was only 1 per cent last year, and the growth is expected to be even less this year.

Unemployment surged as large companies shed workers and smaller companies were forced to close. The current unemployment rate is 18 per cent of the labour force, which is projected to rise to 20 per cent by the end of the year. One-quarter of the population is estimated to be below the official poverty line.

Some analysts have argued that this is simply part of a cyclical slowdown which is affecting the E.U. and the world as a whole, and that Poland has only shown that it is no exception to the international trend. But, in fact, the current downturn has revealed deep structural weaknesses in the Polish economy.

The boom in the 1990s was based on a combination of pent-up demand from consumers for "new" goods, and inflows of resources which were largely directed towards purchasing previously state-owned assets. (At this level, the story sounds very similar to that of Argentina, with the difference that the Polish government's external debt, while substantial, is less worrisome.)

But neither of these factors is likely to play much of a role in the future, as those with purchasing power have made at least first-time acquisitions of many desired durable consumer goods, and there is precious little left in terms of state assets that can be sold. Future economic expansion will have to come from other sources.

Thus far, successive Polish governments have pinned their hopes on accession into the E.U. as the engine of future dynamism. This has been delayed (along with another nine European applicants) from 2000 to 2002, and is now planned for 2004. But the enthusiasm for membership is waning among growing sections of the Polish population. Prevarication by the E.U. over membership is one reason, but there are other more significant reasons.

While the E.U. has set stringent conditions for Poland to fulfil in order to be considered for membership, it is not willing to grant Polish farmers the same level of subsidies as it provides its own farmers. Nor is it likely to make provision for as much aid as would be required to allow smaller Polish entrepreneurs to cope with the difficulties associated with import competition from more developed E.U. members. Since many of the E.U. countries, including Germany, are themselves in recession at the moment, there are also doubts about the extent to which they will act as positive stimuli for Poland's economy.

The macroeconomic decline is not the only reason for the growing unhappiness with market-oriented policies in Poland. These policies have also meant a significant increase in economic insecurity, as many of the basic goods and services that were previously guaranteed by the state have been privatised and have become more expensive and difficult to access. These services range from housing, health and education to electricity and water supply. Higher prices charged by privatised utilities and health providers as well as exorbitant charges for higher education have all reduced access not just for the absolutely poor but even for ordinary Polish citizens.

Popular dissatisfaction has expressed itself in frequent changes of government. Most recently, a centre-left coalition, led by former communists with Leszek Miller as Prime Minister, was elected to power. The current government is trying to walk the tightrope between the marketist requirements of entry into the E.U., and alleviating some of the current difficulties of the people, with not much success. A law to bring the central bank under some degree of government control is being contested.

Because of these growing insecurities, the popular mood is restive and there is a strong sense of disillusionment with and alienation from the established political parties. There is a surge in support for two extreme parties, one of which stems from the religious right-wing that had earlier formed part of the support for Solidarity. The other, called "Self Defence", is a movement led by Andrzej Lepper, a populist demagogue who expresses nationalist sentiments similar to those of the far right in western Europe, but also harks back to the greater security of the socialist regime.

While Lepper's ideology is problematic and his rhetoric tends to be confused, his movement is gathering support. This is because some of his proposals - especially those demanding greater state control over markets and private activities - are seen by many people as necessary for both growth and equity.

The Polish shipyards were the home, in the 1980s, of the Solidarity workers' movement which culminated in the collapse of the communist system in Poland. It is ironic, then, that one of the most recent moves of the government - which has been welcomed by the same workers who were closely involved in the Solidarity trade union in the past - relates to the renationalisation of a shipyard. The Szczecin shipyard was closed since March, and 6,000 workers have not been paid since. When violence loomed in May, the government stepped in to save jobs and try to rescue the shipyard.

But saving one individual shipyard, while it may have symbolic value, is not likely to be enough to bring a sustainable recovery to the Polish economy. For that, there may have to be a more consistent redirection of economic strategy, away from that of the recent past.