Leszek Balcerowicz’s faith in free markets and free people | The World Weekly
On June 4, 1989, Poland went to the polls in the first free elections in eastern Europe since the Soviet takeover of the region after World War II. The result was peaceful revolution: Solidarity, the opposition trade union movement, won all but one of the contested seats and went on to form the eastern bloc’s first non-communist government in almost half a century. To varying degrees, Bulgaria, Czechoslovakia, East Germany, Hungary and Romania soon followed as the Iron Curtain was rolled back across Europe.
Poland was free, but its economy was on the brink of collapse. Inflation stood at over 650%, foreign debt was crippling, food shortages were chronic, and farmers still ploughed with horses. Since then, however, its economic performance has been “not much short of a miracle”, according to Marcin Piatkowski, senior economist at the World Bank. Real GDP per capita grew almost 140% from 1990 to 2014, and since 1992 there has not been a single year of negative growth. During the global financial crisis of 2008-9, Poland was the only European economy not to slip into recession.
Wide-ranging economic reforms implemented by the new government in the early 1990s - which came to be known as ‘shock therapy’ - are often credited with ushering in Poland’s ‘second golden age’. The architect of those reforms was Leszek Balcerowicz, whom I met in an oak-paneled room in Sidney Sussex College in Cambridge, alma mater of Oliver Cromwell - an altogether different sort of revolutionary. Straight away, he tells The World Weekly that he doesn’t like the phrase ‘shock therapy’ because “people are very much afraid of emotions. I would rather call it a radical approach, which consisted of moving fast on a broad front; this was the essence of Poland’s strategy.”
At the start of 1989, Professor Balcerowicz was a little-known, 42-year-old economist who had never considered entering politics. “I had not anticipated that Poland would become free,” he explains. “Nobody in practice thought the Soviet Union was about to dissolve.” He confesses he was about to leave for Britain to take up a research position when, in September, he was invited by Tadeusz Mazowiecki, the new prime minister, to become his finance minister and deputy leader.
He accepted the offer and convened a team of economists, which put together a 10-point plan to convert Poland from a command economy to a market economy. Almost at a stroke, it made the zloty internationally convertible, stopped the government from buttressing failing state-owned businesses, left prices to be determined by the market rather than the Central Statistical Office, and slashed public spending. “The essence of the ‘Balcerowicz Plan’ was rapid stabilisation, liberalisation, and institutional change to rein in the state and widen the scope of individual freedom,” Forbes magazine commented in May 2014, when Professor Balcerowicz was awarded the Milton Friedman Prize for Advancing Liberty.
He was able to act so fast because a “hobby” had prepared him for the task. “I was interested in reforms - market reforms - and I created an informal group of economists in the second half of the ‘70s,” he says. They contemplated changes to the state-run economy - first mild, later more radical - but assumed their work would not become relevant within their lifetimes. Then the communist government was ousted and “it turned out that we were the only group which had done some homework”.
The impact of the ‘radical approach’ was immediate and painful. In 1990, over a million people lost their jobs at state-owned companies, unemployment hit 20% and the economy shrank by 7%. The slogan ‘Balcerowicz must go!’ was heard around the country.
But accompanying this slump was an explosion in entrepreneurial activity. “The entrepreneurs enjoyed unlimited demand,” Dr. Piatkowski told the Financial Times on the 25th anniversary of Polish democracy in 2014. “There were so many shortages that if you had anything to sell... you could sell it.” This nascent capitalism was messy and chaotic, leading many economists to dismiss it at the time, but by 1995 the economy was growing by almost 7% a year, and some of central Europe’s most successful businesses started life in the boots of Polish cars in 1989.
For Professor Balcerowicz, comparisons with other countries in eastern and central Europe have vindicated his approach. Hungary undertook more gradual reform and real GDP per capita has grown only 45% since 1990; in Ukraine, where oligarchs now wield huge wealth and influence, it has shrunk. If he could travel back in time, Professor Balcerowicz would do even more than he did, he says.
The ones that got away
Despite Poland’s huge overall gains, many people in the countryside and the east of the country feel left behind. “Research studies and statistics show the cleavage between rural and urban areas with regard to many dimensions: poverty, unemployment and education levels,” noted an EU-sponsored research paper in 2008.
Professor Balcerowicz defends Poland’s record, pointing out that there is a similar divide between the north and south of England, and that poverty was already entrenched in areas of Poland in 1989. “It’s impossible to get rid of in 20 or 30 years,” he says, adding that “these people in the poorer parts of Poland are much better off than those in Belarus, where there have been no reforms”.
For some, that is scant consolation. When asked what eastern Poland’s lacks by The Economist last year, a trade union activist in the city of Lublin replied: “Everything. This is the backwater of Europe. If it could, Warsaw would fill it with forest.” This sense of exclusion and neglect has contributed to a debilitating brain drain and catapulted the Law and Justice Party, which combines a deeply conservative social agenda with populist economics, into government in last October’s general election.
Since taking office, the party has clamped down on judicial and journalistic freedom by neutering the Constitutional Tribunal that serves as a check on government power and reining in the public media. The new government argues that it is undoing years of bias and corruption in these institutions.
Professor Balcerowicz has inveighed against the measures and joined mass demonstrations against them. “Poles are not passive,” he says. “And of course it’s up to us, those people in Poland who believe in the limit of government and individual freedoms, to defend them.” But he also dismisses the idea that the European Union is splitting between a liberal west and illiberal east. “What about Denmark?” he asks, referring to its policy of confiscating refugees’ valuables. “Is this in the east?”
Optimistic about Europe, pessimistic about Brexit
Until recently, Poland’s transformation into a liberal democracy and successful market economy made it Europe’s poster child. Now its illiberal bent and increasingly hostile relationship with Brussels are yet another headache for EU officials.
I ask Professor Balcerowicz about the euro crisis, a topic he has followed closely through his work at the Group of Thirty (a Washington DC-based body of leading economists), Bruegel (an economics think-tank in Brussels) and the Civic Development Platform (his own think-tank in Poland).
He interjects, countering: “There is no euro crisis. The euro as a currency is not in crisis, and not every member of the eurozone is in crisis. Certain countries are in crisis - those which should not have been admitted into the eurozone in the first place.” Had Greece, Portugal and Italy not been admitted, he contends, “you would not have a crisis in the eurozone, because there are many countries that have performed well”. The threat of malaise spreading from one country to another through financial contagion is, he thinks, overblown: “Healthy people don’t get ill”.
Throughout the crisis, Professor Balcerowicz has argued the bailouts offered to Greece, Portugal, Spain and others were counterproductive, because they reduced the incentives for these countries to consolidate their public finances and implement structural reforms - a mantra he has chanted since 1989. Speaking at an event organised by Cambridge Polish Studies a few hours after the interview, he bemoaned that fiscal discipline has come to be labelled as ‘austerity’ and that “if you are for austerity, you are a bad person”.
Professor Balcerowicz also rejects the idea that the refugee crisis poses an existential threat to the EU, as a number of European leaders, including French Prime Minister Manuel Valls, warned in January. “People should not be so dramatic,” he says, laughing. Again he stresses that “European policies are not a mandate from heaven”, and that the onus lies with national governments and civil society to find a solution.
About the UK’s possible breakaway from the EU in an upcoming referendum, however, he is less upbeat. The debate has been riddled with “misinformation about the bad consequences of the UK remaining in the EU and the good consequences of its leaving”, he says. Some of the arguments that senior politicians have made in favour of a ‘Brexit’ have been “comical”.
And if the UK does quit? Professor Balcerowicz reiterates a point he made the day before at a roundtable discussion organised by the Open Europe think-tank: “There would be a lot of bad blood, because people in other countries would say ‘we went very far to accommodate it, and they rejected us’”.
“And beyond emotion, there is also a strategic consideration. If Britain leaves and gets good terms, it would boost the popularity of Marine Le Pen’s National Front in France… And we in Poland think it is in our vital interests to keep the European Union together.” He leans forward and chuckles. “It’s not revenge. It’s game theory.”