Leszek Balcerowicz: Ukraine Can Learn from Poland’s Economic History

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In 1990, GDP per capita in Poland and Ukraine was roughly the same and amounted to some $1,600. By the end of 2016, Polish GDP grew to $12,700. In 2013, GDP per capita in Ukraine equalled $4,200 but the recent recession has caused it to fall again, to some $2,000.

Leszek Balcerowicz is a former Polish deputy prime minister, and he is known for implementing the Polish economic transformation programme in the 1990s: this was a shock therapy that is commonly referred to as the Balcerowicz Plan. He is a former governor of the National Bank of Poland, and currently, he is Ukrainian President, Petro Poroshenko’s, representative in the cabinet of ministers. He spoke to Andrew Wrobel about Poland’s transformation in the 1990s and the current government’s economic growth plans, as well as his ideas for the economic development of Ukraine.

Are you happy with the so called “Balcerowicz Plan” which you introduced at the beginning of the 1990s in Poland? I mean, if you look back at the transition that has taken place in the country over the last quarter of a century?

This is a classic question. I’ve been asked this plenty of times, by different people, and that is not a criticism.

Leszek Balcerowicz (credit Adam Golec)

No, not at all. I would like to know if you would have done something differently.

Yes, but first of all, I think the word “transition” is hugely misused and rarely defined. Usually it indirectly means that you have a change from one system to another system, call it a market economy or even more precisely, capitalism together with democracy, with highly developed civil rights and a high level of the rule of law.

So if you mean that transition, then you see huge differences. I think that Central Europe, including the Baltic States, has reached this different model. They are not all the same, but quite similar. Then if you look at Russia, reforms were started [by Yeltsin] but have been reversed under Putin. In Belarus, reforms were reversed even earlier by Lukashenko who has won several elections. What you see in Central Asia is more socialism, not transition.

Now, if I come back to your question: I try not to base my judgment on emotions, but rather on what careful, empirical, economic investigation can tell you. There is a lot of investigative research, so one can draw two sorts of conclusions. The first one is that the countries that started the transition earlier, as early as possible in fact, and that did not reverse it, are in much better economic situation now than countries which, for some reason, started it later and achieved fewer institutions in the market economy.

Professor Oleh Havrylyshyn discussed that topic in his article in Emerging Europe where he compared Poland and Ukraine.

Yes, there are indicators; comparative studies of Poland and Ukraine. In 1999, these two countries were at the same level of per capita income. Now, I think Poland has a level of per capita income that is at least twice as high. Of course, there are non-economic aspects and there are some people who would wrongly imply that, “Yes, okay, radical market reforms are good, perhaps for the economy, but not so good for other aspects of life.” They cannot find examples because in Poland, and in some other countries, – if you look at social statistics such as life expectancy, child mortality, etc. – you see that they have achieved very good results. Countries which have introduced economic market reforms are better than countries which have, for some reason, not done it.

In Poland, the social record improvement, which is a social indicator, is as fast so far as the economic growth. You can point to the mechanism which links market reforms with improvement with social indicators, including health. We have seen some interesting research in Poland, which links an improvement in health with huge changes in the diet, but which were not the result of any government programme, but rather the revolution in prices, as well as the ability to learn and recognise the value of more healthy food. There are also other aspects such as the level of fear, which is much higher under non-democratic regimes than under democratic regimes. That is a very important component of the standard of living; whether you are afraid of your own government, such as happens under communism or socialism.

So, once again; by looking at the available research, there isn’t a single iota of proof that fewer market reforms are better for the economy. However there is still a lot of clamour about this which started with this nonsensical distinction between shock therapy and gradualism, or in other words — all at once or one by one.

Leszek Balcerowicz (credit Adam Golec)

Before we discuss this, would you say there is a reform that should have been introduced and wasn’t, especially in the early 1990s?

It would have been better to have tackled the social sector early. I do not mean more social spending. I mean more reforms, but I very much doubt that would have been possible given the initial situation in Poland which was catastrophic – there was hyperinflation and a very high level of foreign debt and I only had a small team, which I directed. It would’ve been better but I don’t know whether it would have been possible to do much more.

However, it’s worth mentioning that Poland had a second period of reforms that is often forgotten, but which are equally important. This happened between 1997 and 2000, and when I was deputy prime minister and minister of finance. At that time we accelerated privatisation; we introduced a fundamental pension reform and an education reform. We also carried out a massive restructuring of mining.

You said that the Polish economy was in a catastrophic condition after the fall of communism.

Yes, there was hyperinflation, but there were still massive shortages because many prices were still controlled. There was a chaos in the pricing system. The economy declined because of this chaos. But there was one good outcome: Poland became free. There was also a feeling that since Poland had become free at the same time as the economic catastrophe then people were readier than normal to accept, say, radical changes.

I would have never accepted a government job just to be in the government. Prime Minister Mazowiecki asked me and I refused. Then, he asked me again. Eventually I accepted but I it was under the condition that I would make radical changes. Based on my previous research, which I had also done with a group of people in the late 1970s, only radical changes can succeed. The Prime Minister accepted my condition and we began.

Would you compare the freedom regained by Poles in 1989 in any way to what happened during Maidan? I remember a Ukrainian taxi driver in Kyiv who had come back from Moscow, to live in Ukraine, saying that Maidan had changed people and they wanted change now.

I thought then, and I think now, that they were similar, but remember such an atmosphere cannot last for a very long time. It can last for a year, but not longer. This is a gift and it should be used, but how? By rapid reforms. For me, this was an important non-economic reason for rapid reforms but there were also plenty of economic reasons.

I very often hear experts saying that the last three years have seen more reforms in Ukraine that the previous two decades. Do you think those 20 years were lost?

Not completely. It certainly could have been better, but there’s no point in discussing what was missed. Rather one has to try to catch up.

Leszek Balcerowicz (credit Adam Golec)

Exactly. So if we were to compare Ukraine with Poland…

I would say that perhaps the biggest similarity would be between Ukraine in 2014 and perhaps Poland in 1997, in the sense that the second reforms have already been done, but one has to speed up the other reforms. What is specific to Ukraine, and not for the Poland of 1997, is the aggression, both military and economic. As much as the military aggression is obvious to everyone, the economic one is not — Russia used to be Ukraine’s largest importer and then it introduced a ban on Ukrainian products. This alone was bound to produce a deep recession, which did happen and collectively was about 17 per cent.

However with new authorities’ policies, there could have been a worsening catastrophe but they avoided it. Why? Well, they avoided a fiscal catastrophe. The budget deficit of 2014 was in the range of ten per cent and now it’s about three per cent, with a simultaneous increase in military spending because Ukraine did have a proper army before.

Then, there is the banking sector — Governor Gontaryeva did a tremendous job by reducing employment in the Central Bank by two-thirds, and then improving the banking sector. Finally inflation was reduced from around 60 per cent to around ten per cent.

I believe privatisation should have happened faster. I think privatisation is low-hanging fruit from the economic point of view. Demonopolisation definitely needs to come, which would involve the identification and elimination of the role of oligarchs, if they are not compliant with the rules that are in order. Another aspect would be improvements in the business climate, so that there’s more investment including foreign investment.

If all the necessary measures were taken now, when do you think Ukraine could potentially catch up with countries such as Poland?

What matters is to grow faster at, say, more than three or five per cent. Unfortunately, Poland is starting to have its own problems, given the bad policies of the present government.

Yes, the new Polish government has been in power since mid-November 2015 and Mateusz Morawiecki, the deputy prime minister and the minister of economic development and finance has created a Responsible Development Plan which was approved of by the Council of Ministers in February 2017.

First of all, this is not a true plan in a technical sense. There are goals in it but they are the continued fast growth of Poland and catching up; however, the measures which are proposed are contrary to these goals.

Just to be more specific, Poland has an excessive budget deficit. In a booming economy there should be a surplus, or at least a balance, but not a three-per-cent deficit. Then, the forces that are responsible for longer-term growth are weakening in the country. Because of the ageing population, fewer people will be going to work, unless certain measures are taken, such as raising the retirement age. Then, the investment ratio, especially private investment, is low and, most importantly, the rate of growth of overall productivity has slowed down a great deal in the last few years and this is the main driver.

Two years ago, my younger colleagues and I presented three scenarios for Poland’s development. The first one assumed that all challenges had been neutralised by proper reforms. The second one assumed no reforms were introduced and the third one assumed counter-reforms were introduced which would result in a slowdown. What has, and is, being done and is also listed in the so called Morawiecki Plan which is the worst-case scenario: for example, not only nothing is being done to heal the public finances but additional expenditures are being introduced.

The government has also lowered the retirement age.

Yes, so this is not a plan, unless the goal is to slow down the growth of Poland’s economy.

What, then, should be done in Poland to benefit from the growth of the last quarter of the century and even to further improve the situation?

If we look at ageing, which is a good thing in itself because it’s better to live a longer than a shorter time, but we need to remember that it has certain demographic consequences. You have to increase retirement age, which was done by the previous government but has been reversed by the present one. As a result, if no further action is taken, we will have even more people who are not working and who are drawing pensions in a pay-as-you-go pensions’ system that is financed by younger people. It’s difficult to imagine a greater sabotage to economic growth than that.

It was not very difficult to diagnose the challenges and to propose reforms. The main problem, as always, is it’s a political economy. We have now a bad government. They should be democratically removed and this is a test for the Polish society.

Now the government is after the VAT mafia. Tax offenders can be imprisoned for 25 years.

I can refer to the economics of crime literature. From that, one learns that there has to be a certain gradation of crimes ascribed to different offences, because otherwise, it’s chaos. Let me give you an example: imagine there is a VAT offender who committed a crime and there are witnesses who can prove that. What should this offender do if the penalty for murder is the same as for his VAT crime? Secondly, the very possibility of being wrongly accused and sentenced adds to uncertainty.

Leszek Balcerowicz (credit Adam Golec)

So if no proper reforms are introduced to address the key challenges we discussed earlier, how do you see Poland’s economy in two or three years?

Poland is vulnerable, especially its public finances. If there’s a strong external shock who would be hit the hardest? Countries with weak public finances. What is practically certain is that with these policies, which are intensifying and making challenges harder not easier, Poland cannot maintain its previous rate of growth, so there will be a serious slowdown. Whether it is dramatic or gradual depends on the external factors.

But speaking practically, what Poland has achieved so far was beyond the expectations of most people. Who would have had expected, in 1999, that Poland would be the best-performing country in Europe?

Why do people emigrate from poorer countries? I’m not speaking about refugees, because they are poorer and they have an economic direction. This is an old story. If there is a substantial or big gap, between what you can earn in your country and what you can earn elsewhere, and the standard of living is better, some people make a decision to leave.

The Polish governments want Poles to come back, for example, from the UK.

Yes, but the only effective way of halting this feeling of pre-emigration is to grow faster in a poorer country. The threat is that if Poland stops catching up, emigration will continue. These are usually the most entrepreneurial people. So policies which are bad for growth are very good for emigration.

Now, if again, we look at Ukraine and Poland, what lessons, perhaps, should Ukraine learn from what is happening in Poland today?

The lesson is first work to increase the pressure for reforms; be ready with a package, and finally move with the maximum possible speed.

I believe, you shouldn’t introduce counter-reforms because they result in a slowdown. In your recent book you call yourself a fighter, don’t you?

Actually, somebody else suggested the title but I thought it matched me because, yes, I have had to fight. I am not speaking about my childhood fights, but fighting for reforms because they are not going to just drop down out of the sky.

There are many resistance forces and interest groups defending that system so one has to overcome them by mobilising other people. You have to be faster and more energetic and better at communicating your ideas.

(main photo: courtesy of President.gov.ua)

This piece is part of the EBRD 2017 Annual Meeting and Business Forum special report, prepared together with the European Bank for Reconstruction and Development. To register for the event, click on the banner below.

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