Since the collapse of communism in Central and Eastern Europe, Poland has undertaken some of the most dramatic economic reforms in the region. Donors have actively encouraged Poland in its efforts to make the transition from a communist-led, centrally planned economy to a free-market economy and a democratic political system. The United States has supported Poland’s transition both financially and diplomatically. The major industrial countries and the international financial institutions had committed about $36 billion in assistance to Poland from 1990 through December 1994. These commitments consisted of emergency, humanitarian, infrastructure, and economic transformation assistance; debt forgiveness; private sector investment; export credits; and investment guaranties. The Group of 24 (G-24) countries committed approximately $26.8 billion in bilateral assistance to Poland and the International Monetary Fund (IMF), the World Bank, and the European Bank for Reconstruction and Development (EBRD) committed about $8.9 billion. (See tables 1.1 and 1.2.) The G-24 countries designated the European Commission, the executive arm of the European Union (EU), as the coordinator of these assistance activities. However, the European Commission acts primarily as a clearinghouse for information on G-24 bilateral assistance to the region rather than as a coordinator. One of the Commission’s functions is generating the G-24 Scoreboard of Assistance Commitments to the Central and Eastern European Countries, a listing of donor assistance pledged to the region by G-24 countries. According to an EU official, the main function of the Commission’s delegation in Poland has been to arrange donor meetings. Donor coordination is generally handled by the Polish government’s Council of Ministers’ Foreign Aid Office. However, donors often bypass this office and deal directly with the relevant ministries, or rely on organizations outside the government of Poland to implement their programs. For example, most U.S. assistance programs have been implemented either directly with the private sector recipients or through contractors and nongovernmental organizations with little direct involvement on the part of the government of Poland. The Support for Eastern European Democracy (SEED) Act of 1989 (P.L. 101-179) authorized funding for Poland and other countries in Central and Eastern Europe for fiscal years 1990 through 1992. Since 1993, obligations for programs in the region have been funded under both the SEED Act and the Foreign Assistance Act of 1961, as amended (P.L. 87-195). The United States had obligated about $719 million in assistance as of September 1994 to help Poland’s transformation to a democracy and a market-oriented economy; the United States has also provided about $700 million in Overseas Private Investment Corporation financing and insurance for U.S. businesses to facilitate their investment in Poland, $355 million in Eximbank loan guarantees and investment credits, and about $2.4 billion in official debt forgiveness. Poland was one of the first countries of Central and Eastern Europe to receive U.S. assistance because it took the lead in the transformation from communism to democracy and a market-oriented economy. Poland has received the largest share of U.S. assistance in the region. This assistance was initially expected to be necessary only for a transition period of about 5 years starting in 1990; however, the U.S. Agency for International Development (USAID) representative in Warsaw now believes that Poland will probably need assistance for at least the next 5 years or until the country is closer to economic integration with the EU. Pursuant to the SEED Act, the Deputy Secretary of State was designated as the Coordinator of U.S. Assistance to Central and Eastern Europe in 1990. The Coordinator was assisted by special advisors from the Department of the Treasury, the Council of Economic Advisors, and USAID. In 1993, the Coordinator’s office was placed within State’s Bureau for European Affairs. The U.S. assistance program in Central and Eastern Europe was initially designed with a regional rather than country-specific approach and was centrally managed in Washington, D.C., with limited authority delegated to U.S. personnel in-country. However, this approach changed in 1993 as USAID devolved many of the management responsibilities to the field at the direction of Congress. The USAID/Poland representative said that he now has an understanding with USAID/Washington that no projects will be initiated in Washington without the field office’s concurrence. The USAID representative also said that he has requested control over all contracts and work orders, indicating that this oversight and control was necessary to coordinate and develop strategic plans for future work in Poland. As shown in figure 1.1, the majority of U.S. assistance to Poland has been devoted to economic restructuring and assisting in Poland’s transformation to a market-based economy. The remainder of the funds have been obligated to support democratic initiatives and quality of life issues. Democratic initiatives projects included training for parliamentary and local government officials and grants to support the small and independent press media. Quality of life projects included technical assistance for the Polish public and private housing sector, a model unemployment benefit payment office, and technical assistance to help improve public sector environmental services. The Polish Stabilization Fund and the Polish-American Enterprise Fund account for the majority of funds obligated under the Economic Restructuring Program for Poland. (See fig. 1.2.) Under the SEED Act, the United States provided a $199-million contribution to the multi-donor $1 billion Polish Stabilization Fund. The fund was established to (1) support a relatively fixed exchange rate for the zloty (Poland’s currency) after a sharp devaluation and (2) help ensure that the zloty would be convertible for current account transactions; that is, to allow residents to freely purchase currency through authorized foreign exchange banks. These objectives have been accomplished, and the United States has authorized Poland to use the $199 million held in reserves to recapitalize and privatize the Polish state-owned banks. The SEED Act also authorized the Polish-American Enterprise Fund as a private corporation with maximum flexibility in implementing the fund’s investment policies. As of September 1994, about $250 million had been obligated and the fund had disbursed about $227 million. The fund primarily makes loans to, or invests in, small- and medium-sized businesses in which other financial institutions are reluctant to invest. The objectives of this review were to (1) assess the status and progress of Poland’s economic restructuring in the key areas of macroeconomic stabilization, foreign trade and investment, privatization, and banking, (2) describe impediments to these restructuring efforts, (3) discuss the role donors have played in the transformation process, and (4) identify lessons learned that could be useful to other transition countries. To address these issues, we interviewed officials of the Departments of State and the Treasury and USAID in Washington, the Economic Commission for Europe (ECE) in Geneva, the EU in Brussels, the Organization for Economic Cooperation and Development (OECD) in Paris, and the EBRD in London. We also met with officials at the British Know How Fund as well as Central and Eastern European experts at the London School of Economics and other organizations. In Warsaw, we met with U.S. embassy officials, USAID representatives, U.N. officials, IMF and World Bank officials, EU officials, and officials of the British and Japanese embassies. We also met with officials from the Polish government, representatives of the Polish-American Enterprise Fund, representatives of private sector promotional organizations, and managers from U.S. and German companies doing business in Poland. We reviewed pertinent U.S., host, and donor-government documents, as well as reports and studies by international organizations, academia, and private sector groups. We also used information from PlanEcon, Inc., an economic consulting group specializing in Central and Eastern Europe and the former Soviet Union, and information from the Warsaw Economic Research Institute, a policy institute at the Warsaw School of Economics. To describe factors hindering Polish exports, we relied heavily on the reports and studies of international organizations as well as the opinions of Polish and international organization officials. The data presented in the tables and figures of this report were obtained from a number of different sources. These data should be interpreted and used with caution since the quality of the data could not be verified in some cases. We performed our review from January 1994 through May 1995 in accordance with generally accepted government auditing standards. The foundation for Poland’s current economic recovery and continued restructuring was the major stabilization and macroeconomic reform efforts, referred to by some as “shock therapy” or “the big bang approach,” which began in late 1989 and early 1990. The Polish government took a wide range of actions to encourage stabilization, including tightening fiscal and monetary policy, liberalizing prices, devaluing the currency, and controlling the growth of debt. Western donors provided important support for such reforms and the United States played a key role in initiating these forms of assistance. Poland’s economy is now experiencing healthy growth. In October 1989, the Polish government began implementing macroeconomic stabilization and liberalization measures, and accelerated the reform movement in January 1990. Subsidies to industry and households, for example, food subsidies, were sharply cut. Public investment spending was substantially reduced. Money growth was tightly controlled; the zloty was sharply devalued and made convertible. Wage growth was controlled with an excess wage tax designed to limit the rate of increase in the wage bills of state enterprises. Prices were liberalized, bringing about a one-time jump in the price level corresponding to the reduction in the real value of the zloty. Additional liberalization measures included the establishment of a free-trade regime and liberalization of legal requirements for setting up private enterprises. Together, these efforts gave Poland the basic operating features of a market economy and were widely considered to be essential first steps toward overall economic restructuring.