Shock Therapy
Poland was looking to change its failing economy with something similar to a western economy, but first needed to establish what the main issues were with its economy. These main issues can be split up into two main ones, as Balcerowicz puts it: extreme macroeconomic imbalance and a faulty economic system. These two were considered the main issues according to the creator of the plan and needed to be addressed first and urgently. There were also two other subordinate issues described by Balcerowicz as a distorted economic structure and huge foreign debt.
The economic strategy to eliminate these issues starting with the main two issues and followed shortly after with the subordinate issues. This idea seemed to be the guiding light for the future for,
“the key assumption was that Poland had become free to choose, among other things, its economic order and that it should choose the system which creates the best chances for rapid, long-run economic development.” (Balcerowicz, p. 76) With the focus being on the main issues, the Poles described their new economic system to be capitalist, western-like, competitive on the world stage, furnished with flexible labor markets with the long-run in mind. When took the main issues out individually, they began to fit solutions to them. This was a delicate process, layered with lots of research and careful examination. Poland’s imbalance on the macroeconomic level, “called for macroeconomic stabilization (S policy), i.e. reducing the budget deficit, controlling the money supply, and moving towards positive real interest rates.” (Balcerowicz, p. 76) Balcerowicz goes on to also say that, “a fixed rate of exchange was another ‘nominal’ anchor.” Establishing this fixed rate was the subject of much debate before the 1990 implementation of the plan. Hyperinflation and massive production shortages were another reason for the use of a stabilization policy. With this S-policy, Poland would reign in the hyperinflation and bring it down to normal levels. As for the shortages, Poland would introduce a microeconomic liberalization policy known as the L-policy. The L-policy would bring about, “enlarging the scope of economic freedom by eliminating a massive and detailed state intervention so as to increase the flexibility of supply and prices.” To fix the second main problem, faulty economic system, Poland had to bring about a change in the economic institutions that had governed the economics for so long. Deemed as fundamental institutional change, it would need the help of the L-policy and fundamental restructuring also known as
I-policy. The L-policies used for this fundamental transformation included the, “removal of the remaining restrictions with respect to private activity, liquidation of the remnants of the central allocation of inputs, price liberalization, removal of the bulk of quantitative restrictions on exports and imports, unification of the exchange rate and the introduction of convertibility of the Polish Zloty of current