Privatization And Economic Restructuring in Poland: An Assessment of Transition Policies

I Introduction After the fall of the Communist regime in 1989, Poland's new government faced the difficult task of restructuring an economy suffering from four decades of socialist central planning. Although its stabilization became the immediate objective, privatization of Poland's more than 8,400 state-owned enterprises (SOEs) was seen by many reformers as a key to the country's transition to a market economy. While Poland's macroeconomic reforms have generally been successful, they have not been implemented without social and political obstacles. The transformation to a market economy has been slowed by political ambivalence about the accompanying economic hardships. Public dissatisfaction resulted in frequent changes in government from 1989 to 1994. The Solidarity government's defeat in the September 1993 elections that followed a no-confidence vote in Parliament the previous May, came after continuing bickering among factions of the ruling party over the pace and scope of economic reform and privatization. The Solidarity government was succeeded by a coalition of leftist parties dominated by former communist leaders and functionaries who were elected on promises of slowing the privatization process. Since Poland was among the first of the post-communist countries to embark on economic and political reforms, its experiences during the early 1990s illustrate the variety of factors that affect the implementation of privatization policies. This article reviews Poland's experiments with privatization during its early economic transition period from 1989 to 1994. Experience indicates that Poland's economic transformation owes far more to the creation and expansion of small- and medium-sized enterprises than to the rapid privatization of large SOEs. This article identifies the problems and challenges Poland faced in implementing privatization, and examines the implications for economic transformation. II "Shock Therapy" Economic Reforms as a Context for Privatization The role of the private sector in the economy was extremely limited in 1989 when the Communist regime in Poland collapsed. Nongovernment enterprises contributed only about 15 percent to gross domestic product.(1) Old, large, state-owned companies produced about 80 percent of national output and accounted for nearly 88 percent of employment in the nonagricultural sectors. Only 300 of the largest SOEs accounted for 59 percent of the net income of Poland's 3,177 state industrial firms. Most economic reformers in Poland understood from the outset that both developing the private sector and privatizing state enterprises were essential for creating a market economy. But for a variety of reasons, government policies focused more heavily on the latter. Privatization was considered essential to reallocate the public resources used to subsidize money-losing SOEs. Financial resources were needed to extend infrastructure and "social safety net" programs, to increase the size and dynamism of the small existing private sector, to achieve broader property ownership, and to promote foreign and domestic private investment.(2) The International Monetary Fund (IMF) and other financial organizations insisted that privatization could generate revenues needed by the state to create new jobs for workers displaced by industrial restructuring. Privatization could reduce the state's administrative responsibilities and the burdens of government intervention in enterprise management. Also, after SOEs were privatized, they could provide consumers with more efficiently produced and lower-cost goods. At the same time, SOEs could benefit from private ownership, which was expected to make them more productive and profitable. After 40 years of economically debilitating socialist rule, however, the success of privatization in Poland depended initially on restoring efficiently operating markets. Poland's approach to economic reform in 1989 and 1990 was drastic and far-reaching, but even the Communist government during the 1980s had been under economic and political pressures to make some reforms. …