market rates) to various commercial banks to help them avoid bankruptcy by keeping their old 1970s loans on their books. Into the early 1990s, this overhang of old bad loans continued to hinder the full liberalization of the Korean banking system.

Pace refers to the speed at which the move towards market‐based interest rates in the public sector and other liberalizing reforms takes place. It could be swift or phase over a longer period of time. The “shock therapy” corresponds to the situation where market forces are allowed to fully play their role almost overnight in most parts of the economy. It carries the risk of large short‐term economic and social costs. The gradual approach corresponds to the opposite situation, where the old economy and new economy continue to cohabit for a longer period of time. It minimizes the short‐term costs but carries the risks of reform ineffectiveness, reversal and fatigue leading to an inferior longer‐term outcome. In the many transitions experienced in Central and Eastern European following the fall of the Berlin wall in 1989, Poland (see Box 5) and the Baltic states are often cited as examples of successful rapid transitions from communism in the early 1990s,<sup>86</sup> while many other countries’ gradual approach has been less successful.

# **Box 5. The Polish Shock Therapy of the early 1990s**<sup>**87**</sup>

Poland’s transition to a market economy is generally regarded as one of the most successful experiences among all former socialist countries in Central and Eastern Europe. The success is generally attributed to the initial “shock therapy” administered by then Polish Finance Minister Leszek Balcerowicz to radically and rapidly transition Poland from an economy based on state ownership and central planning to a market‐oriented economy. The reforms were implemented at an unprecedented rapid pace. A package of 10 acts (proclamations) aimed at stabilizing and liberalizing the economy was passed by the Polish Parliament and came into force at once on January 1, 1990, barely four months after the establishment of the first post‐communist government:

1. Act on Financial Economy Within State‐owned Companies, which allowed for SOEs to declare bankruptcy and be sold or liquidated.

2. Act on Banking Law, which forbade financing the state budget deficit by the national central bank and forbade the issue of new currency.

3. Act on Credits, which abolished the preferential laws on credits for SOEs and tied interest rates to inflation.

4. Act on Taxation of Excessive Wage Rise, which aimed at limiting the wage increase in the public sector.

5. Act on New Rules of Taxation, introducing common taxation for all companies and abolishing special taxes that could previously have been applied to private companies through means of administrative decision.

6. Act on Economic Activity of Foreign Investors, allowing foreign companies and private people to invest in Poland and export their profits abroad.

7. Act on Foreign Currencies, introducing internal exchangeability of the złoty and abolishing the state monopoly in international trade.

8. Act on Customs Law, creating a uniform customs rate for all companies.

> 86 Piatkowski, Marcin (2018). Europe’s Growth Champion: Insights from the Economic Rise of Poland. Oxford University Press.

> 87 This box draws on Piatkowski (2018).

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