Developing and comparing of two economic profiles: Poland/Hungary (for the 1990s)

Defining accounting rules for taxation purposes, organizing an Internal Revenue Service to collect taxes from the private sector.

3. Establishing rules for the new financial sector:

Defining accounting rules for reporting business results to banks and investors; setting up a system of bank regulation.

4. Determining ownership rights to existing real property:

Making laws relating to the transfer of property, and laws affecting landlord- tenant relations; resolving the annoying issue of compensation of property confiscated/damaged by former (communist in our case) governments.

5. Foreign exchange:

1. setting the rules under which private firms and individuals may sell foreign exchange and foreign goods;
2. setting the rules in the same area for the not-yet-privatized enterprises.

Next there are some tasks related to managing the:

6. Reforming prices:

Enterprises that have been privatized will supposed be largely free to set their own prices, but early on in the process, the demands of the government budget will require raising prices on many consumer goods that have been provided at prices for below cost.

7.        Creating a safety net:                  

Setting up an unemployment compensation scheme; helping to find a solution to those suffered by newly introduced reforms.

8. Stabilizing the macroeconomic:

Managing the government budget to avoid an exceeding deficit and managing the total credit provided by the banking system.    

Finally there are tasks related to privatization:

9. Small-scale privatization:

Releasing to the private sector trucks and buses, retail shops, restaurants, repair shops, warehouses, and other building space for economic activities; establishing the private right to purchase services from railroads, ports, and other enterprises which may remain in the public sector.

10.  Large-scale privatization:

Transferring medium and large-scale enterprises to the private sector; managing the enterprises that have not yet been privatized

3 POLAND: TRANSITION VIA „SHOCK THERAPY”

We begin our discussion of Poland with a brief examination of the setting. Then we discuss the Polish command system, considering the distortions this system led in the Polish economic structure. Finally, We turn to the issue of transition and examine the mechanisms taken to use and the results achieved till today.

3.1) Poland: The Setting

By European standards, Poland is a relatively large country. With a land area of just over 300,000 square kilometers, it is just over half the size of France. Moreover, with a population that approached 38 million in 1990, Poland is some 68 percent of the size of France in terms of population.

Poland is frequently viewed as having a homogeneous society, a factor that makes easier the economic reform. Although social homogeneity is difficult to measure and may well be overstated in the Polish case and in other cases (for example, there are regional differentials, urban-rural differentials, etc.), the basic statistical evidence is strong. In terms of religion, 95 percent of the Polish population is Roman Catholic. From a statistical data, 98.7 percent of the population is Polish, and only a few minority groups occur.

Urbanization and industrialization have changed the nature of Polish life and customs, but the church, family, and folk ties that have support Poland for a long time remain strong. Thus, although Poland must deal with problems of modernization, it also has valued traditions and a clear identity. These characteristics make implementing change more manageable here than in many other countries.

In terms of natural resources, Poland is a country of considerable regional diversity, though major portions of the land area are not especially fertile.

Poland's main energy resource is coal; basic minerals and some deposits of oil and natural gas also exist. With these reservations in mind, however, we note that Poland was reported to have a per capita gross national product of approximately $5400 measured in 1989 U.S. dollars. This figure places it between the high-income countries of the region (Hungary and Czechoslovakia) and the low-income countries (Bulgaria, Romania, Yugoslavia) and at one-quarter that of the United States. Prior to the onset of major economic reform, the bulk of Polish industry was state-owned and planned. Agriculture (representing roughly one-fifth of total Polish output) was a mixed system where the private sector produced about three-quarters of the total agricultural product. Foreign trade turnover — that is exports plus imports — represents roughly one-third of Polish product, again using U.S. dollar measures.

3. 2) Poland: The Command Economy

The organizational arrangements of the Polish command economy were established immediately after World War II and were very similar to those prevailing in the Soviet Union. There was widespread nationalization of property, central planning mechanisms were established, and agriculture was socialized. In addition to organizational arrangements, Polish economic policies of this time, such as those on investment, sectoral development, and etc., closely mirrored the Soviet model.

Although Poland attempted modification of the command system as early as 1956 when collectivization was abandoned, big changes not occurred. Over time, private agriculture was neglected by the state, and continuing political protests, especially in the early 1970s, signaled both political and economic difficulties.

The 1970s was a difficult decade for many countries, especially those that rely on imported oil. The Polish strategy in the 1970s and later was to stimulate the domestic economy through the importation of foreign technology. This was not an unreasonable strategy in theory, but Western economies were themselves in the middle of the energy crisis and decline in economy it caused. Poland's effort to expand exports failed, hard-currency debt accumulated, and the projected influence of Western technology on the Polish economy was minimal. As the 1970s came to an end, it was clear that domestic changes will be essential — a difficult path in light of the continuing unrest among Polish workers. The 1980s began with approximately three years of military role and an attempting to achieve economic stabilization.

After weak economic reforms in the early 1980s, the rise of “Solidarity” (which had been outlawed in 1982) proved that major systemic and structural reform was necessary. Even so, and despite the fact that Polish economic performance was declining badly, serious economic reform did not begin until the late 1980s.

3. 3) The Polish "Big Bang" in Practice

The Polish transition from plan to market has been watched closely by a variety of interested observers. Although many of the policies and systemic changes introduced in Poland are common for the general reforming process, the speed of implementation in the Polish case is unique.

There had been attempts to decentralize decision making in large state-owned Polish enterprises in the 1980s, but these reforms failed to change outcomes (a possible exception is their connection to the wage explosion that took place toward the end of the decade). Moreover, before the reform in Poland (the reform program began officially on January 1, 1990), there was a big budget deficit, wage increases were out of control, and hyperinflation had resulted. Poland's hard-currency debt position was better than that of Hungary, but the debt that had been accumulated did little to stimulate the Polish economy, the zloty was overvalued, and no support in debt relief from external sources was expected.

In the fall of 1989, most price controls were lifted (on both producer and consumer goods), public spending was reduced, and the zloty was devalued. In the second stage of major reform, begun in 1990, the budget deficit was sharply cut, largely through a reduction of subsidies to state enterprises. A positive real rate of interest was implemented, and the market showed changes in the value of the zloty. This changes were a critical measure, because foreign trade and the impact of this trade on the Polish industrial structure was to be a key component of the overall reform strategy. In January of 1990, the government set the exchange rate of the zloty at 9500 to the dollar (this represented a devaluation from 1989), a rate roughly approximating its value on the black market, and it established convertibility of the zloty for international trade. Many trade restrictions were removed, and internal exchanges were set up to handle the buying and selling of hard currencies. Although these changes resulted in domestic inflation, the initial increases proved to be short-term and the exchange rate of the zloty has proved to be realistic.

Finally, wage increases were to be controlled partly through wage indexation and partly through a new tax on wage increases. Privatization is a major element of the Polish strategy of transition. In 1990 the Polish government passed a law creating a Ministry of Ownership Change, a mechanism to manage the process of privatization. Privatization has proceeded fast, though it has been achieved mainly for small enterprises in the trade and service sectors. Industrial output in the private sector grew by 8 percent in 1990 and is reported to represent roughly 17 percent of total Polish industrial output.

Though privatization has been very successful for small-scale enterprises, the picture for large state enterprises is quite different; privatization of these enterprises has proceeded very slowly. Some of the problems they faced were: price changes, wage limitations, subsidies that have been ended and protection from foreign competition that has been sharply reduced. This has encouraged enterprise managers to reduce costs by restricting unnecessary output and reducing the labor force. However, the strong commitment to rapid privatization was reinforced in June of 1991, when it was announced that a major portion of state industry would be privatized through creation of stock funds, with the population receiving vouchers.

Beyond these changes in the state sector, new guidelines have been introduced to monitor enterprise performance. Furthermore, a new Industrial Restructuring Agency will consider how remaining state enterprises should be handled, to what extent privatization is possible, and what restructuring should take place for those enterprises that are not having the ability to survive in the new setting. These new arrangements are designed to ensure a rapid transformation of the Polish industrial structure, to make it similar to and competitive with market economic systems, and to achieve this result as quickly as possible.

3. 4) The Polish Economy in the 1990s

It is clear that economic reform in Poland has been radical and has moved sharply and quickly away from the plan toward the market. In addition to the expanded influence of market mechanisms, decision making has been decentralized and private property introduced. The initial results have been definitely encouraging.

First, stabilization measures cut the rate of inflation sharply from a reported 40-50 percent per month at the end of 1989 to roughly 4-5 percent per month in 1990. At the same time output fell, though supplies of consumer goods in stores increased. Employment in industry declined by 20 percent during 1989 and 1990, although it is reported that only a relatively small portion of this reduction in the labor force was caused by forced layoffs. The unemployment rate was reported to be 6.5 percent at the end of 1990.

Another major positive aspect of the Polish reform experience has been the foreign trade sector. There has been an important increase in export, especially to hard-currency markets. This expansion resulted in part from the devaluation of the zloty to market-clearing levels and in part from the reorientation of trade away from the Soviet Union and other East European trading partners. At the same time, as a result of restrictive policy measures and the higher domestic cost of these imports, import demand declined.

A third qualified success has been privatization. This early privatization was mainly of small-scale (privet sector) enterprises in the area of trade and services. Though Polish reformers took seriously the need to continue privatization of major state enterprises, carrying trough it was a critical task for the next several years.

4.HUNGARY: THE NEW ECONOMIC MECHANISM AND PRIVATIZATION

Prior to 1968, Hungary applied the Soviet model of centrally planned socialism in a typical fashion. But then, in 1968, Hungary began to introduce by far the most radical economic reform attempted in Eastern Europe (with the exception of Yugoslavia). In the words of one early observer of this reform, it clearly represents the most radical postwar change, in the economic system of any Comecon  country, which has been maintained over a period of years and gives promise of continuity.

Although the reform program in Hungary met with only partial success, the problems that have arisen (conflicts of objectives, for example, and difficulty in persuading participants to change their ways) are fundamental to the reform experience of planned socialist systems.

The Hungarian experience with reforming foreign trade, and in particular its efforts to become integrated into the world economy both East and West, is prototypical. The difficulties of reforming the foreign trade mechanism are crucial to the Hungarian economy as well as to the economies of many other systems of Eastern Europe.

4. 1) Hungary: The Setting

Hungary is located in central Europe. Its land area of approximately 36,000 square miles makes it roughly the same size as the state of Indiana. Its population of about 11 million is comparable to that of the population of Illinois. Although Hungary is not self-sufficient in energy, it docs have supplies of coat, oil, and a number of minerals, including important bauxite deposits.

Although it has some rolling hills and low mountains, Hungary is basically a flat country with good agricultural land and a favorable climate. As in other East European countries, the period since World War II has seen the population flow from rural to urban areas and a changing balance of industrial and agricultural activity. Today, approximately half the population lives in urban areas.

Hungary is not particularly prosperous. Most estimates of its gross national product or per capita gross national product place Hungary in the middle of the East European countries. It is generally wealthier than Bulgaria and Yugoslavia and certainly wealthier than Albania; it ranks behind East Germany and Czechoslovakia. Hungary's per capita income appears to be close to that of Greece. In this sense, economic development remains a key issue in Hungary. By the standards of Western Europe, Hungary remains relatively poor; by the standards of the Third World, Hungary ranks among the more affluent countries.

4. 2) The Hungarian Economy: Prereform

The postwar reconstruction of the Hungarian economy began quite modestly in 1945. Before the implementation of a three-year plan in 1947 (1947-1949), the main policies included stabilization of the currency, changes in the nature of rural landholdings, and the beginnings of nationalization. The first three-year plan was designed primarily to bring the economy up to prewar levels of economic activity.                                        During this time, a planning mechanism was created and the share of national income going to investment increased sharply. The changes were not radical, however, and balanced development was envisioned.

The era of balanced development came to an end with the introduction of a five-year plan in 1950. The share of national income devoted to investment was increased substantially, and the bulk of new investment was directed toward heavy industry. This policy was partially reversed toward the end of the plan period, but it was reaffirmed in 1955-1956.

A number of economic trouble spots cried out for attention. There was an observed need to improve industrial labor productivity, especially through the development of a better incentive system to offset the declining supply of labor from rural areas. Supply-demand imbalances were growing increasingly severe. Waste and imbalance in the material-technical supply system created the need for a substantially modified coordinating mechanism among enterprises.

In addition, excess demand for investment led to substantial amounts of unfinished new construction and to the neglect of old facilities. Some mechanisms for the more rational allocation of capital investment had to be found. The adoption and diffusion of technological advances were seen as inadequate. Technological improvement was considered crucial for continued development of the economy.

This background seems familiar: a small country, the Soviet (Stalinist) model of industrialization, overcentralization, emphasis on extensive growth, rigidities of the plan mechanism, incentive problems, and the resulting difficulties. Against this background, the New Economic Mechanism first promulgated in a party resolution in 1966 was put into, practice in 1968. Over twenty years later, it remains one of the most important reform programs of planned socialist systems.

4. 3) Intent of the New Economic Mechanism

There is disagreement about the importance and effect of the Hungarian reform program. The New Economic Mechanism (NEM) has generally been interpreted as leaving the power to control the main lines of economic activity (volume and direction of investment, consumption shares) with the central authorities, while relying on the market to execute the routine activities of the system. The NEM called for substantial decentralization of decision-making authority and responsibility from upper-level administrative agencies to the enterprise level. In a general way, NEM bears a close resemblance to the Lange model. Let us consider the original blueprint of NEM.

The objective of NEM was to combine the central manipulation of key variables with local responsibility for the remaining decisions. The first change was a significant reduction in the number and complexity of the directives firms; for large state-owned firms, the traditional problems remain. Valuation is difficult, especially in loss-making enterprises. Moreover, it is hard to find buyers for these types of enterprises, let alone to arbitrate the potential rights of past owners. And just as elsewhere, privatization in Hungary is likely to become slower and more difficult as the focus shifts to the less attractive, large enterprises.

In addition to privatization itself, Hungary has addressed the creation of infrastructure (for example, a stock market) and new rules designed to change the guidance of enterprises. Accounting procedures have been refined and bankruptcy laws strengthened so that state subsidies can be curtailed and hard budgets introduced into large state-owned enterprises.

Hungary has also pursued a variety of stabilization measures and has liberalized policies in the sphere of foreign trade, though to a lesser degree and certainly more gradually than Poland. Domestic price controls have been substantially removed, and enterprises are permitted to enter into and benefit from foreign trade transactions. Although there are limits on the holding of foreign exchange, the Hungarian forint is substantially convertible for business purposes. However, the Bank of Hungary has maintained controls such that it has access to foreign exchange earnings to serve as repayment of the Hungarian hard-currency debt. (Hungary has a per capita hard-currency debt roughly twice that of Poland). Hungary has followed a tight monetary policy designed to create a balanced budget and also to exert financial pressure on enterprises.

Hungary has very liberal laws regarding foreign investment, including the possibility of full foreign ownership with permission. Moreover, repatriation laws are liberal. Not surprisingly, Hungary has been considered a leader in the quest to attract foreign investment, though the magnitude of this investment and its overall impact on the Hungarian economy probably remain modest.

The initial results of the transition process in Hungary have generally been positive when judged against the sorts of expectations that we discussed earlier. At the same time, it is proving difficult to sustain popular support as the inevitable costs of the transition process take their toll.

4.4) The Hungarian Economy in the 1990s, similarities or differences?

In spite of a tendency to compare the processes of economic reform in Poland and Hungary, there are important differences between the two systems, and especially in the degree to which prior reform had taken place. Although some would argue that the New Economic Mechanism was quite limited compared to contemporary reforms, nevertheless the reform process has a significant history in Hungary. The differences between the Hungarian and Polish cases are important.

Inflation has been much less serious in Hungary than in Poland. The annual rate of inflation for 1989 has been estimated at roughly 17 percent. Although the inflation rate increased to about 29 percent in 1990, this performance has been viewed as positive. In addition, wage increases have generally been controlled. Largely because of a shift away from trade with former CMEA trading partners, the volume of Hungarian trade has declined. At the same time, the Hungarians have experienced growth in exports to Western markets and a generally weak domestic demand for imports — both important developments for the overall trade balance.

The good news on the exports side, however, tends to be sector-specific. Hard-currency debt remains a serious problem, and the movement toward a convertible currency has been much slower than in the Polish case. Finally, the Hungarian budget deficit has increased.

The Hungarian economy was projected to shrink by approximately 3 percent in 1991, and associated declines in consumption and investment were anticipated. The state property agency is moving ahead with privatization. The overall relatively slow pace of reform in Hungary may well dictate less sharp downturns and less severe fluctuations during the periods of downturn but, at the same time, rather slower recoveries and a longer time in which to achieve normalization. As with Poland, the effectiveness of the macroeconomic policies being implemented, world market conditions (such as the price of oil), and domestic structural change through privatization will all affect both short-term and longer-term outcomes.

Conclusion

The different conditions under which transition have taken place in both countries played one of the major roles in formation of the market economies in them. Though Hungary, as it was described above, showed its willingness  to create some fundamental features of market economy even during the Soviet period , the systemic constraints of the huge “machine “ called communism didn’t  allow this country to overcome collectivistic as well as command principles of the economy of that period.

After the collapse of the Marxists- Leninists principles of the development of the economy, both countries had mostly the same problems and tasks of transitional period, but the process which had taken place in each of them differed in many dimensions.        Poland took as an example of transition more rapid, as well as more revolutionary, means of economic transformations as a result of that much losses in employment as well as in welfare of the population at all took place at the beginning of the process of transformation. But the terms of the achievement of the final goal decreased proportionally to the measures implemented.

Hungary instead of so called “shock therapy” chose softer way of achievement market economy, though both countries practiced the involvement of the government during the first steps of transformation,and both of them had the same problem of the unattractiveness of the large enterprises, the involvement of the authorities in regulation of currency exchange for example was more strict in Hungary than in Poland , i.e. currency exchange market served only the interest of the big  business and not the other sub- structures of the economy.

So, the empirical research of these two different approaches toward the transformation of the planned economy to market one, shows that the range of the methods applied can, in practice, vary depending upon the inner as well as outside influence of the political, economic an social system at all, but the long term interest of the state, or the core idea should always remain the same, hence no matter how but if it works it should be applied further as well.  

Each of the methods, as soon as it gives positive results , should be taken into account as a possible example or a model for other countries which face the same stage of transition to market economy , with only one exception that all the models can serve only and only as a strategic example of development , more profound than inquisitive one. States must themselves model their transitional process as soon as the cultural diversities still play a great role in creating Max Weber’s “spirit of capitalism”.

BIBLIOGRAPHY

• Danks, Stephen (ed) : "Business studies". 3rd ed. London 1996 BA 7738
• Jeffery Sachs : "Shock Therapy in Poland: Perspectives of Five Years"  (THE TANNER LECTURES ON HUMAN VALUES) Delivered at University of Utah April 6 and 7, 1994
• Mankiw. G. N. :"Principles of economics" 3rd ed.  
• Peter Calvocoressi: "World Politics since 1945" Addison Wesley Longman; 7th edition (October 1, 1996)
•    Самонис В. ,Сани Г. "Рыночные Реформы в Полъше и к востоку от нее"  МЭ и МО // 1992  (Samonis V., Sani G., : "Market reforms in Poland and to the east of it ")  

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