Exchange Rate Policy and Development of a Transition Economy
in Central-Eastern Europe: A Case Study of Poland1
WATANABE Hiroshi
Introduction
The purpose of this paper is to review the development of the Polish transition economy, viewed in the light of its evolution of an exchange rate policy. In
other words, we are going to investigate what the development of a transition
economy has to do with an adopted exchange rate policy, with reference mainly
to Poland.
Maybe I should answer two questions: Why Poland? Why focus on exchange rate policy?
Poland has often been referred to as a success story of transition economy.
The received wisdom is that despite initial difficult conditions, Poland took aplunge into an unprecedented radical reform, quickly achieved macroeconomic
stabilization and entered a steady economic growth path. Based on its experience,lessons have been drawn and much advice has been given to other less advanced
transition countries. Considering its performance since 1990 and its reputation,
Poland deserves being studied as a model of transition economy.
We should realize that there is a prevalent myth attributing a spectacular
economic improvement in Poland exclusively to the package of macroeconomic
stabilization policies of January 1990, the so-called Balcerowicz program or Polish“Big Bang”. It is broadly believed that the Balcerowicz program is a typical andsuccessful “shock therapy”.
In fact, monetary policy including exchange rate policy was a key component of the stability package. On January 1, 1990 the Polish zloty was devaluatedby 43%. At the same time internal convertibility was introduced for the first time
among the post-socialist countries. I think that these measures determined muchof the course and pace of the transition economy in Poland.
Observing transition economies in Central-Eastern Europe, I am inclined tothink that exchange rate policy which is assumed to adjust internal macro disequilibrium, rather than external imbalances, has been one of key policies peculiar
to the transition period. It is worth studying a specific role of an exchange rate
policy to a transition economy, the characteristic of which is a pursuit of two contradictory targets, i.e. stability and dynamism.
These are the reasons for selecting exchange rate policy as the main viewpoint of the Polish economy at transition.

I wish to express my gratitude to Prof. S. Hedlund, University of Uppsala, for reading thedraft and making a number of helpful corrections and suggestions, and Prof. M. Iwata, Chiba
University, for helpful comments.

1

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Table 1. GDP growth rates

GDP

1990
-11.6

1991
-7.0

1992
2.6

1993
3.8

1994
5.2

1995
7.0

1996
6.1

1997
6.9

real growth rate: %1998 1999 2000
4.8
4.1
4.0

Industry
Construction
Agriculture

-24.2
-10.7
-2.2

-11.9
1.6
-1.6

2.8
-0.6
-12.7

8.6
1.1
7.0

10.3
2.7
-15.1

10.4
5.6
10.7

8.3
3.0
0.7

11.5
16.5
-0.2

3.5
12.4
5.9

3.6
6.2
-5.2

7.2
1.0
-5.6

Consumption
Capital formation

-15.3
-24.9

6.3
-20.1

2.6
-13.0

5.4
12.8

4.4
9.0

3.3
16.5

8.3
19.7

6.8
21.7

4.7
14.2

5.2
6.1

2.6
2.7

Export13.7
4.1
Import-17.9
37.8
Source: GUS, Rocznik Statystyczny .

-2.6
13.9

-1.1
18.5

18.3
13.4

16.7
20.5

9.7
28.0

12.2
21.4

14.3
18.5

-2.6
1.0

na
na

1. A variety of exchange rate regimes in Central-Eastern European countries intransition
Before proceeding to investigate the exchange rate policy in Poland, it isconvenient to have a perspective on exchange rate regimes in Central- Eastern
Europe.
Over the past more than 10 years, transition economies in Central-Eastern
Europe have displayed a wide spectrum of exchange rate regimes, ranging from arigidly controlled fixed exchange rate regime to a freely floating one. In between
there have been a currency board system, a fixed peg regime, a regime with adjustable peg and band, a pre-announced crawling system and an independent
floating rate regime (see Table 2). Such diversity has its roots not only in differences in initial conditions at the beginning of transition, but has also been caused
by a good few regime changes in the course of transition. In many countries, exchange rate regime has been frequently modified and occasionally replaced due
to economic institutional evolution and changes in the economic situation.
Embarking on transition from the socialist planned economy, these countries were confronted by several pressing problems related to foreign exchange
rate policy. One problem lies in the selection of an exchange rate regime. Anotherproblem is how to set the initial exchange rate. To which extent convertibility isendowed is also a key issue. Answers to the problems were given differently, reflecting different initial conditions of each country, such as foreign currency reserves, development of inflation, macro economic imbalance, amount of monetary
overhang and so on. Already at the beginning, therefore, exchange rate policies inCentral-Eastern Europe were varied.

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Table 2. Exchange Rate Regimes in Central-Eastern Europe1in 1990-1997
Country
Albania

Bulgaria

Croatia

Czech RepublicHungary

Macedonia
PolandRomania

Slovak Republic
Slovenia

RegimeCurrency convertibility

Managed Float since July 1992 Current account: mostly free
Capital account: inflows
mostly free, outflows restricted
Managed Float, Feb. 1991-July Current account: mostly free1997
Capital account: inflows
Currency Board Since Julymostly free, outflows re1997
stricted
Current account: mostly free
Fixed: Dec.1991-March 1992
Capital account: mostly free
Expected PPP Crawl: March
1992-Oct. 1993
inflows and outflows
Managed float since Oct. 1993
Fixed: Dec. 1990-May 1997
Current account: mostly freeManaged float since May 1997 Capital account: inflow
mostly free, outflows restricted
Adjustable peg since before
Current account: mostly free
1989
Capital account: inflow
Preannounced crawling band mostly free, outflows resince March 1995
strictedManaged Float since April
Current account: mostly free
1992
Capital account: restricted
Fixed, Jan. 1990-Oct. 1991
Current account: mostly free
Capital account: restricted (inCrawling peg since thenflows and outflows)
Managed Float since Aug. 1992 Current account: mostly free
Unified rate since July 1997
Capital account: mostly free
(inflows and outflows)
Fixed since Dec. 1990
Current account: mostly freewith frequent depreciation
Capital account: restricted
Managed Float since Oct.1991 Current account: mostly free
Capital account: mostly free

Source: Wyplosz 1999.
Regarding the choice of foreign exchange rate regime, I would like to pointout that only two countries, Poland and Czechoslovakia, applied a fixed exchange
rate regime in the early stage of transition, following the suggestion of IMF. The
others did not, despite IMF recommendation and its strong influence.2
2“Poland, Hungary [sic] and Czechoslovakia accepted the suggestion of IMF that a fixed rate-54-

2. Reforms before the Balcerowicz program and its introduction
In Poland, under the socialist regime, economic reforms had been attempted
several times. The latest was attempted at the beginning of 1989. Being faced with
political and economic hardships, the last government of the socialist regime introduced a radical economic reform program. Undoubtedly this program made it
possible for the team led by Leszek Balcerowicz to start their reform not fromscratch.
For the most part, however, reform attempts by the socialist government
have been ignored after 1990. It is very rare to mention effects of preceding reforms in the literature on the transition economy of Poland, although it is so oftenthat the negative legacies of the socialist regime are referred to.
The time of socialism seems to be treated as an ancien regime to which positive aspect is no attributable. It is like saying that you could jump well and win
without a good runway. As a matter of fact, when it comes to foreign exchange
rate policy, the former socialist government got down to reforms of the systemand paved the way for a key instrument of the Balcerowicz program.
2.1 The pre-history of the “Big Bang”
Taking a longer view than the ten-year transition period, we may get a better perspective of the transition economy in Poland. We recognize easily that theroots of the Balcerowicz reform date back to the reforms in the 1980s.
In 1982, under martial law, reform of the economic system was started. A
modification of the planning system was intended in order to make the best of amarket mechanism. Many prices were set free and state owned enterprises (SOEs)
were given greater autonomy. In theory, a stage was set, and actors prepared forthe working of a market mechanism. It is worth noticing that the law of SOEs of1981 provides the groundwork for autonomy of SOEs and article 19, describing aprocedure of liquidation of SOEs, is put to practical use as one of main privatization measures at the present time.
In the late 1980s reforms were continued. The monopolistic banking system
was loosened and more or less equal conditions for SOEs, cooperatives and private firms were created. A price-income adjustment was introduced. Some transfer of public assets to private interests was permitted and a so-called “spontaneous privatization” was begun.
Towards the end of 1980s prices increased and wages were raised accordingly. Consequently, general shortages of consumer goods occurred. The black
market thrived and strike waves broke out.

regime should be applied as “a nominal anchor” for an internal stability. Other countries selected different floating system, not because they were not convinced of its superiority, but
because they realized that a fixed rate regime could not be sustained on account of limited
foreign reserves and less confidence in stabilization policies.”(Rosati 1998, pp.225-226, tr. by
H.W.)

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At the beginning of 1989, the Rakowski government introduced a reform
program containing following actions,- liberalization of foreign exchange operations: through a new foreign exchange law in force in April private foreign exchange transactions
among residents were legalized and licensed exchange offices opened,- arrangement of legal equal conditions for economic activities regardlessof a property form: a new law on entrepreneurship provided a common
juridical base for all enterprises and opened ways for the privatization of
SOEs,- reduction of subsidies on a large number of consumer products, especially on food,- closure of inefficient plants and those particularly harmful to the environment,- introduction of incentives for foreign investors.
Obviously, these changes of the economic system were the antecedent to thereforms in 1990s. But, on the other hand, a series of measures adopted in the late1980s prepared the stage for an inflationary spiral. In fact the flame of three-digit
hyperinflation in the second part of 1989 was ignited by the decision to liberalize
the prices of food products in August.
2.2 Policy measures of the Balcerowicz program
What is commonly called the Balcerowicz program is not a single document
but consists rather of three different documents: The Government’s Program of
the Reconstruction of the Economy,3 which was published in October 1989, andtwo Letters of Intent to the IMF.4
Immediately after being appointed as Vice Prime Minister and Minister ofFinance, Leszek Balcerowicz attended an annual assembly of IMF in September
and submitted a Letter of Intent making commitments to an economic reform.
Second one was the approved economic policy by the Sejm in December which
was put forward as basis for stand-by credit negotiations.5
The reform program consists of two major pillars:- a stabilization policy package to deal with a hyperinflation,- a structural reform through liberalization and institutional change.
The stabilization package comprises four main policy measures: fiscal,monetary, foreign exchange rate and tax-based incomes policy. Concerning fiscal
In this document the initial conditions of the “Big Bang” were described as follows; “We areembarking on the reshaping effort under extremely adverse conditions. The economy is inever more tenuous disequilibrium, on the verge of financial collapse of the state. …. In recent
months additional crisis symptoms surfaced or mounted in force: rapid price climb linked
with wage explosion, the flight from the zloty, growing deficit of the state budget and also adrop in output….”
4 M.Dabrowski 1995, pp. 10-11.
5 L.Balcerowicz 1992, pp. 37-39.
3-56-

policy, the target was set to reduce the state budget deficit to less than one percent of GDP in 1990, from 8 per cent in 1989. A substantial cut in subsidies was
the main means to achieve this goal. As for monetary policy, the excessive demand was to be contained through restrictions on money supply. The interest rate
was to be used as the main monetary policy instrument. By raising the interest
rate to positive real levels, a shift from foreign currency deposits to zloty financial
assets was induced.
On January 1, 1990, the unified rate for foreign exchange was set at 9,500
zloty against the dollar, and internal convertibility was introduced. International
supports such as a stabilization fund (1 bn US$) raised by some G-24 countries
and a bridging loan from the Bank of International Settlements (215 mil US$) werearranged to strengthen confidence in the sustainability of the rate. In the field of
tax-based incomes policy, a 200 to 500% tax, known popularly as “POPIWEK”,
was introduced on wage increases exceeding the predetermined indexation coefficients linked to inflation.6
3. The exchange rate policy and the development of the transition economy in
PolandNow that we have seen the runway and the introduction of the Balcerowicz program, we move to the transition period. First we take a quick lookat the evolution of an exchange rate regime in the transition period. Then, in
the light of the evolution, we review the economic development in Poland after1990.
3.1 The evolution of exchange rate policies in Poland
Table 3 shows the evolution of exchange rate policies in Poland. We observethat the exchange regime has been changed several times and frequently been adjusted. Yet, we can recognize four different types of exchange rate regimes applied since 1990. Those are a fixed rate regime, a crawling peg regime, a crawlingband regime and a direct inflation target regime.
Their characteristics are as follows:
The fixed rate regime (Jan. 1990-Oct. 1991)
As already mentioned, on January 1 1990 zloty was devaluated by 43%. This
deep devaluation raised exports and reduced imports, which led to a surplus in1990. At the same time it, undoubtedly, became a great inflationary factor. In 1990
CPI increased by 250% and GDP fell by 12%. As inflation increased under a fixednominal rate, the real rate of the zloty appreciated quickly. Imports surpassed exports toward the end of 1990.
The crawling peg regime (Oct. 1991-May 1995)
From the 4th quarter of 1990, the current account deficit grew rapidly. In
May 1991 the monetary authorities were forced to devaluate by 17%, and in OctoThe permitted wage increase in SOEs was 30 per cent of the inflation rate in January, 20 per
cent in February to April and 60 per cent from May on.
6-57-ber they took the decision to abandon the fixed rate regime and to introduce acrawling peg with a narrow band. This decision was aimed both at curbing inflation and at dealing with current account imbalance. The “exit policy” from thefixed rate regime was implemented without big turbulence due to administrative
limitations on capital flow.
Table 3. Polish Exchange Rate Regimes since January 1990
Date
RegimeJan-90Devaluation by 42% and Fixed rate to US$
May-91
Devaluation by 17% and Basket of 5 currencies introduced
Oct-91
Crawling of 1.8% per monthFeb-92
Devaluation by 12%
Oct-92
Crawling band introduced +-1% per monthAug-93
Devaluation by 8% and Crawling of 1.6% per month
Sep-94
Crawling of 1.5% per month
Nov-94
Crawling of 1.4% per monthFeb-95
Crawling of 1.2% per monthMar-95
Band widened +-2%
May-95
Band widened +-7%
Dec-95
Revaluation by 6%
Jan-96
Crawling of 1.0% per monthFeb-98Crawling of 0.8% per month and Band widened +-10%
Jul-98Crawling of 0.65% per month
Sep-98Crawling of 0.5% per monthOct-98Band widened +-12.5%
Jan-99Basket changed to 2 currencies
Mar-99Crawling of 0.3% per month
Source: NBP, Raport Roczny.
The crawling band regime (May 1995- the beginning of 1999)
In May 1995 the crawling peg was replaced by a crawling band regime. Theband crawled with a pre-announced monthly devaluation, which was graduallydiminishing. In terms of capital inflows, the situation changed dramatically in thefirst part of 1995. Following agreements with the Paris Club and the London Club
creditors in 1994, Poland could normalize relations with international financial
communities, after 15 years of break. The investment risk in Poland was reduced
and restrictions on capital flow relaxed. Foreign capital flew rapidly into Poland.
The National Bank of Poland (NBP) was obliged to deal with a sudden massive
inflow of foreign capital. Pressure for appreciation of the zloty was intense. The
Central Bank tried to buy large amounts of foreign currencies. After using up its
resources, the NBP resolved to widen the fluctuation band from (+/-) 2% to (+/-)
7% in May 1995 and further revalued zloty by 6% in December 1995. In this year-58-the official foreign reserves increased from 5.8 bn $ to 15 bn $, supposedly due tothe defense of the exchange rate against upward pressure.7
The direct inflation target regime (1999In 1998 the NBP gradually refrained from intervening the foreign exchange
market. It widened the band to (+/-) 10% in February 1998 and again to (+/-)
12.5% in October 1998. At the beginning of 1999 the direct inflation target regime
was adopted and the Bank expressed an intention to halt the crawling system andmove to free float regime. This policy continued in the Medium Term Monetary
Policy Strategy for the years 1999-2003, accordingly in the Monetary Policy Guideline for the year 2000. In April 2000 the council of ministers took the decision to
float the zloty.8
3.2 Development of the transition economy
From the perspective of a decade, we can distinguish several phases of development of the Polish transition economy. I think it is uncontroversial to divide
it into four phases in terms of GDP growth trend as follows;
Phase 1: cave-in9(1990-1991)
Phase 2: recovery(1992-1994)
Phase 3: acceleration(1995-1998)
Phase 4: slow down
(1999It is worth paying attention to the fact that these phases almost overlap theI think that the year 1995 as well as 1990 was a critical turning point of the exchange rate
policy in Poland. As the ratings of Poland picked up, foreign investors sought profitable objects in Poland. In the 3rd quarter of 1994 yields on 3-month Treasury Bill hovered around 2728%. Due to a steady devaluation (1.4% per month), annual devaluation was expected to beabout 18%. Foreign capital rushed into the Treasury bond market. Being faced with a newsituation, monetary policy got confused. First the NBP, which considered that an increase offoreign reserve was potentially an inflationary factor, reduced the rate of crawl in February
1995 to 1.2% and two weeks later raised interest rates by 2-3%. Consequently the inflow offoreign capital was accelerated because of the widened interest disparity. For the first fourmonths of 1995 official foreign exchange reserves increased by 5 bn $ and only in April net
inflow amounted to 1.5 bn $. Under the upward pressure, continuing sterilization operation
at the rate would make the central bank suffer large losses shortly. In May the NBP took adecision to widen the band to (+/-) 7% in order to let the exchange rate adjust more freely. In
addition, in June interest rate was lowered by 4%. However, after a slowdown of capital inflow, foreign investors continued to buy the bills more intensively. In December 1995 thebank finally resolved to revalue zloty by 6%. Furthermore, the Bank reportedly lost around 1
bn $ through sterilization operation in 1995. The fiasco of the NBP in 1995 was because it tried
to control at the same time three variables, exchange rate, interest rates and inflation target.
(Rosati 1998, pp. 174-189)
8 NBP, Raport Roczny 2000, pp. 38-40.
9 In the Polish literature on the transition economy, the term “recession” has been widelyused to describe the sharp shrink of the economy at the beginning of 1990s. However it is not
a proper term to indicate a big fall equal to the great Depression. Taking into consideration the
discontinuity and vacuum of system, I propose to use a new term “cave-in”.
7-59-

periods of the exchange regime type.
Phase 1
Roughly speaking, the cave-in at the beginning of 1990s was caused by the
introduction of the reform program, the stability package and the collapse of
COMECON. During two years GDP decreased by 18% and real wages fell sharply
by 30%.
The team of Balcerowicz supposedly expected that decision makers at theenterprise level would react quickly and adjust to the new situation. They musthave thought that clear economic signals would start to work and actors of the
new economic play would perform their roles. However, in spite of their playbook the main actors, managers of SOEs took a “wait and see” attitude. I thinkthat it was quite a natural attitude. As well as being uncertain about the futureand lacking know-how to deal with a new situation, they were not urged to perform their roles on account of good economic conditions.
Unexpectedly the SOE sector recorded fairly good profit in the first of 1990.
They found themselves in favorable financial situation through:- unexpected increase of accumulated asset values as a result of hyperinflation,10- a surge of the value of foreign currency deposits due to the deep devaluation,- lowering labor cost thanks to “POPIWEK”,- manipulation of cutting output and raising price,- increasing values of assets because of continued inflation.11
Contrary to the declared intention of the Balcerowicz program, the SOEs
were “not shocked”. If anything, the SOEs were afforded quite some time to beprepared.
In 1991, however, the financial situation of many SOEs deteriorated rapidly.
The collapse of COMECON severely hit the Polish industry. It led to a crisis in all
the former COMECON countries and Finland. The change of financial situation
forced a number of SOE managers to change their attitudes and become businessmen rather than insatiable negotiators of a socialist economy.
Phase 2At the middle of 1992 output of the manufacturing industry sector showedsigns of recovery. Other industry such as transportation and construction followed. However, the force of the recovery appeared rather fragile. As it was, investment still stagnated.
With uncertainty about the future, in particular concern about privatization
being weakened, the trade between SOEs in excess of assets such as machinery,buildings, lands, labors, know-how, financial means and so on became thriving.
Due to hyperinflation in 1989, booking prices of inventories turned out tremendously low.
Net turnover profitability rates of the industry sector as a whole fluctuated from 43.5%(1989), 30.9% (1990), -3.7% (1991) to 1.6% (1992). GUS, Rocznik Statystyczny.
10
11

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Unintentionally they reallocated existing resources. A large number of SOEs improved their production facilities and began adjusting to real demands.
In 1993, the socialist government, which was more flexible in terms of privatization, was established. Not in earnest being urged to privatize, able SOE managers began making up restructuring plans, which situation brought about asteady increase of investment. A growing tendency of economy became morethan visible.
Phase 3In the middle of the 1990s the economic growth was accelerated. GDP grewin the range of 6-7% annually during 1995-1998. Investment dramatically expanded at rates surpassing 10%. After resuming relations with the international
financial community, FDI started advancing in Poland. Inflation slowed down
and unemployment decreased. Consumers’ expectation was enhanced and consumption grew.
However, these favorable trends were overshadowed by a growing trade
deficit. Although the current account was mitigated by a large inflow of foreign
currency from cross border trades, the deficit on the current account amounted toabout 4% of GDP in 1996.
Phase 4In the second part of 1998 the economic growth began to decelerate. The
GDP growth rate fell from 4.8% in 1998 to 4.0% in 1999. Undoubtedly, monetary
upheaval in Russia affected the Polish economy largely on account of the fall of its
export markets in the former Soviet Union. However the shock from Russia wasapparently absorbed in 1999.
The deceleration trend ought to be attributed to the lack of consistency inthe policy mix – fiscal, monetary and exchange rate policy. It is rather an inherent
dilemma in this stage of transformation. If it is necessary to cool down an overheat and prevent from widening a current account deficit, theoretically, raisinginterests is an effective measure. But it would cause pressure of appreciation of
the currency through the increased inflow of portfolio investment, following
which there would be a growth deficit of trade balance. In this stage, trade balance could not be improved by exchange rate policy. Fiscal policy should be conducted more cautiously.12
In order to keep up the competitiveness of the Polish economy, another economic policies such as FDI attracting policy, export policy, S&M enterprises policy ought to be utilized more than before. Above all, it is needed that SOEs shouldbe transformed into more competitive ones. It is time that the economy should be

Inflation tendency continues in this stage of transition because of budget deficit and differences of productivity growth. Demand for public investment is far from being satisfied andexpenditure is under strong pressure of expanding. Differences in productivity of FDI advanced industries and others cause inflation, which is known as Balassa-Samuelson effect.
(Gotz-Kozierkiewicz 2001, pp. 41-57)
12

-61-

“przekuwanie”(reforged). Privatization needs to be thought of as a policy instrument to restructure the economy.
Table 4. Selected economic indicators1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
GDP/capital (US$ at exchange rate)
1547 1999 2198 2232 2402 3086 3484 3725 4098 4011 4082
Consumer prices, %p.a.
585.8 70.3 43.0 35.3 32.2 27.8 19.9 14.9 11.8
7.3 10.1
Producer prices, %p.a.
622.4 48.1 28.5 31.9 25.3 25.4 12.4 12.2
7.3
5.7
7.8
Real growth wages rates, %p.a.
-24.4 -0.3 -2.7 -3.9
0.5
3.0
5.7
6.8
4.5
4.7
2.6
Retail trade growth rates, %p.a.
-17.4
3.8
7.9
6.9
3.0
2.3
4.5
6.8
2.6
4.0
1.4
Money supply (M2), tri. zloty
19.1 26.1 41.1 55.9 77.3 104.3 136.7 176.4 220.8 263.8 294.4
Discount rate, %p.a., end of year
48.0 36.0 32.0 29.0 28.0 25.0 22.0 24.5 18.3 19.0 21.5
Deficit of central gov. budget, % of GDP
0.4 -3.8 -6.0 -2.8 -2.9 -2.6 -2.5 -1.4 -2.4
-2.0 -2.2
Unemployment rate, %, end of year
6.3 11.8 13.6 16.4 16.0 14.9 13.2 10.5 10.4 13.0 15.0
Exchange rate per US$, average (1)9500 10582 13631 18145 2.27 2.42 2.70 3.28 3.49 3.97 4.35
Current account, mil. US$
716 -1359 -269 -2329 -944 5455 -1352 -4268 -6858 -11660 -9946
Foreign debt, mil. US$
48500 48400 47000 47200 42174 43957 47354 49648 59163 64890 68193
Foreign reserve, mil. US$
4680 3814 4287 4281 6029 14963 18033 20670 27210 26107 26321(1) In 1994 downward redenomination by four figures.

Source: GUS, Rocznik Statystyczny .

Table 5. Balance of payments (mil. US$)
1990 1991
Current account716
Trade balance
2214
Export10863
Import8649
Services, net-150
Income, net-3329
Current transfer, net
1981
Capital and financial accountDirect investment
10
Portfolio investment
Other investment-6664
Source: GUS, Rocznik Statystyczny .

1994

1995

1996

-1359 -269 -2329 -944
51
512 -2293 -836
12760 13997 13585 16950
12709 13485 15878 17786
236
344
369
57
-2863 -4054 -3424 -2081
1217 2929 3019 1916

-2299
-1827
22878
24705
150
-628
6

-1352 -4268 -6858 -11660 -9946-8154 -11269 -13720 -14462 -13168
24420 27229 28229 26386 28256
32574 38498 47054 40848 41424-209
305-508 -1623 -1684
-366
-465
-568
-800
-761
224
1100
1942
1589
1680

1134
1171
454

2741
241
1715

117

1992

284

-5427 -1723

1993

580
0
175

542
-624
1958

1997

3041
2098
2355

1998

4966
1330
4431

1999

6348
866
404

2000

6967
2587
-3386

Conclusion: Once again ‘shock therapy’ or gradualism?
Let us summarize the main points that have been made until now.
1. In contrast to common perceptions of the initial conditions we can pointout another aspect. As for SOEs, the hyperinflation brought about a tremendous
increase of value of assets and gave relief at the starting of transition.
2. The fixed rate of 9,500 zloty was extremely undervalued.13 It could not be
13

The setting of an initial rate at 9,500 zl against US$ at the beginning of 1990 is still under-62-

a nominal anchor. If anything, it was a strong inflationary factor.
3. Some measures of the Balcerowicz program improved financial conditions of SOEs to absorb shocks of the economic system changes. Against the goalsof the program, surviving SOEs lost momentum of privatization. Sweeping collapse and liquidation of production units, which occurred in the name of privatization in many other transition countries, was avoided. This situation made possible an earlier recovery of the Polish economy.
4. Moving adjustable peg regime from a fixed exchange rate in 1991 is aunique and successful “exit policy” among the transition economies.
5. Crawling in the direction of devaluation proved to be effective in theearly part of transition.
6. The role of exchange rate policy has changed in accordance with the development of the transition economy in Poland.
7. Nearing an accession to the EU and applying a free float rate regime,other economic policies should be more utilized than before. It is time that privatization should be considered in earnest.
I close this paper putting forward a working hypothesis, a little bit different
from the received wisdom or myth.
Hypothesis:- The Balcerowicz program was not “shock therapy” from the economic
point of view. The reform had started earlier, and SOEs were afforded some time
to adjust to the new situation.
- The exchange rate policy at the beginning of 1990 encouraged characteristics of the Polish transition economy, i.e., favorable economic performance andpersistent dominant existence of gigantic state owned enterprises.14
debate. Rosati points out that the rate was ‘overshot’. “All measures of the stabilization package caused bigger decrease of the aggregated demand than assumed. In addition, the supply
contracted largely through raising interest rates and limiting credits,… Excessive devaluationof zloty did severe damage to the recession. It is difficult to understand why did the rate at
9500 zl/dol. was applied, not the black market rate at around 8,000 zl/dol…”(Rosati 1998, pp.
50, tr. by H.W.). Kolodko acutely claims that the rate was “grossly undervalued”. “The instantconvertibility decreed in January 1990 could only be achieved a grossly undervalued exchange rate – with respect to Purchasing Power Parity (with the US dollar at almost twenty
times the PPP rate at the beginning of January 1990)…”(Kolodko, Nuti 1997, pp. 12-13). It is afact that the rate was set extremely low and caused unexpected effects. In addition to it, I
think, there is still another question to be explained. Why such a sharp devaluation was possible? Why did the team of Balcerowicz settle that low rate? Why could it be accepted in the
Polish society?
14 A usual argument is that a delay of privatization in Poland could be attributed to the political influence of strong trade union and unpopularity of the society caused by devious“spontaneous privatization” of nomenklatura in the second part of 1980s. It can explain retained SOEs, but not their economic revival. In the industry sector 1,458 SOEs operate, employ 673,300 workers and produce 21% of its total output as of 2000. GUS, Rocznik-63-

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Statystyczny Przemyslu 2001.

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