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Czech Republic/Poland: Early Reforms Bring Successful Transitions

  • Kitty McKinsey

Warsaw, 28 February 1997 (RFE/RL) -- While Albanians are rioting over failed get-rich-quick schemes and Bulgarians are watching their currency lose value by the hour, further north in the region, Poles and Czechs take pride in economies that are among the best performing in Europe -- East or West.

Almost eight years after Communism began to collapse, the former Soviet Bloc countries have divided sharply between those -- like Poland and the Czech Republic -- that bit the bullet of reform early and have now largely made the transition to market economies, and desperate cases like Bulgaria, Belarus and Tajikistan that are paying a steep price for putting off changes.

As "Business Central Europe" magazine observed recently, "it is clear that there is no alternative to the market economy if living standards are to rise to Western levels." And the examples of Poland and the Czech Republic clearly demonstrate that a short sharp transition is preferable to delaying reforms and becoming mired in an economy that offers neither the stability of the old Soviet model nor the improving living standards and vast opportunities of the market system.

Both Poland and the Czech Republic last year were invited to join the rich-nations' club known as the Organization for Economic Cooperation and Development (OECD). As former Polish Finance Minister Grzegorz Kolodko put it, this "gives us the stamp of approval as an open, advanced market economy."


Poland, a country of empty food stores, long queues and hyperinflation at the end of the 1980s, was the first post-Communist country to embark on serious economic reform. In January, 1990, under the guidance of then finance minister Leszek Balcerowicz, Poland launched its radical "economic shock therapy." The price was severe hardship -- but it is easing now.

Poland is now the "tiger economy" of Europe, with five straight years of economic growth, at levels that are among the best in the world. Its Gross Domestic Product (GDP) is now above pre-1989 levels.

Private enterprise has flourished, and the private sector now accounts for about 60 percent of GDP in the region's most dynamic economy. Increasingly attractive to foreign investors, Poland pulled in $5 billion in direct foreign investment last year alone. Governments have changed frequently in Poland since the fall of Communism, but all Polish cabinets, including the current one composed of ex-Communists, have kept firmly to the line of economic reform first laid down by Balcerowicz.

Paul Knotter, World Bank representative for Poland, told an RFE/RL correspondent in Warsaw that the country holds important lessons for unreformed economies in Eastern Europe and the former Soviet Union.

"The first thing (the Polish government) did right was to take very difficult and very comprehensive measures very early and these measures set the economy on the right track," he said.

Czech Republic

The Czech Republic started from a better position than Poland, with no foreign debt thanks to the cautiousness of the former hardline Communist government, and a market that was -- by Soviet Bloc standards -- well-supplied with both food and consumer goods.

Building on those advantages, Vaclav Klaus, first as finance minister and more recently as prime minister, embarked on a Thatcherite drive to throw off Communism and embrace free-wheeling capitalism as quickly as possible.

Under the stifling hand of Czechoslovakia's Communist regime, private enterprise was almost unknown before 1989, accounting for only four percent of Gross Domestic Product. The new government embarked on a program of mass privatization through distribution of vouchers giving the public a stake in the economy. It also actively encouraged entrepreneurs to open new businesses. Now more than two-thirds of GDP is produced by the private sector. Unemployment is -- especially by regional standards -- extremely low at about three percent.

Of course, all is not perfect in either the Czech Republic or Poland, and both countries have a long way to go to get their economies in shape for hoped-for entry into the European Union.

Particularly troubling in Poland are the inflation rate of 18 percent -- sinking but still high -- and unemployment rate of more than 13 percent. Farming suffers from low productivity.

The Polish government gets high marks from economists for the progress it has made in restructuring the formerly state-directed economy. Many loss-making factories have been closed or sold to new owners who streamlined them. But much remains to be done in privatizing whole sectors of the economy, such as telecommunications.

The Czech Republic lags behind in restructuring, which will be painful because it will likely throw many out of work. A huge trade deficit is also a worry.

And both countries -- even with improving living standards -- remain far below Western levels. Poland's income level today is only one-third of average income in the European Union (EU).

Harvard economist Jeffrey Sachs -- a key adviser on Poland's and Russia's economic reforms -- estimates that even with year after year of impressive five percent annual increases in GDP, it will take another 23 years for Poles to reach 90 percent of the average income of EU citizens. For countries like Bulgaria, Belarus or Tajikistan, where economic reform has barely begun, Sach's analysis shows, Western living standards may be out of reach for a much longer time.

This is part one in a four-part series about the transition of the Czech Republic and Poland to market economies.