Photo: Wikimedia Commons
The high level of economic development in Poland today is often accredited to the rapid implementation of liberal free market policies, or “shock therapy”, in the immediate aftermath of the collapse of Communism in Poland.
The architect behind economic shock therapy was the former Minister of Finance and Deputy Premier of Poland Leszek Balcerowicz, who earlier this year was invited by Ukraine’s President Poroshenko to design a similar economic reform policy for Ukraine, implying that Ukraine could emulate the success story of Poland.
However, Poland’s positive transition does not provide a comprehensive blueprint for Ukraine, as other social and institutional factors were imperative in ensuring the economic growth of Poland.
The Balcerowicz Plan drew on neoclassical mainstream economic theory and included prudent macroeconomic policies, privatization, price liberalization and free-market capitalism. While there can be no doubt that the transition to a market economy benefited Poland’s economy in the long run, it came at considerable short term cost. The Balcerowicz Plan led directly to a deep recession in the aftermath of its implementation in Poland in 1989. The rapid turnover fostered instability and uncertainty, ultimately leading to high inflation, decreasing economic output and increasing unemployment.
Shock therapy has already been applied several times in Ukraine, beginning right after the country gained its independence in 1991, when prices were liberalized. Under Leonid Kravchuk, independent Ukraine’s first president, the dialog revolved more around nation-building and national symbols. Ukraine’s second president Leonid Kuchma also initiated shock therapy reforms, but these once again came to a halt.
Due to the inconsistent market reforms in Ukraine, rent-seekers were able to benefit from the arbitrage between regulated and free prices in the face of partial liberalization, enabling former state enterprise managers and government officials to make fortunes, with the wealthiest of them eventually becoming oligarchs. Advocates of shock therapy argue that a more rapid implementation of price liberalization could have mitigated the price distortions which led to arbitrage.
Akin to the Polish experience, immediate price liberalization generated hyperinflation in Ukraine. The Ukrainian administration sought to combat the hyperinflation using over-restrictive fiscal and monetary policies, resulting in a deep and extensive recession which seemingly won’t come to an end. Ukraine is today a market economy, notwithstanding its dysfunctional institutions and pervasive corruption. Due to rent-seeking state officials and the inconsistency of reforms in Ukraine, shock therapy treatment has been unsuccessful in laying the groundwork for sustainable economic growth and clear improvement of living standards.
The Ukrainian experience implies that other variables than market reforms were imperative to the success of Poland’s transition. It is therefore inaccurate to assume that Poland’s economic development can be ascribed solely to economic shock therapy which in turn can then be applied as a blueprint for other transitioning countries.
Shock therapy in Poland was accompanied by comprehensive reforms on legal and constitutional issues. Poland had already been a democratic nation with free markets prior to the Communist rule and still possessed many of the features of a democracy, such as a vibrant civil society backed by the non-violent Solidarność movement which had developed years prior to the collapse of the regime. Most of the representatives of the Communist regime in Poland agreed to a market-oriented policy line immediately after the transition, including most state-owned enterprises and organizations, which prevented the proliferation of oligarchs in Poland by keeping business owners independent of the government.
In Ukraine such social conditions were non-existent. The country had little experience with a non-violent civil society when Ukraine became an independent state in 1991. The representatives of the Soviet nomenklatura kept their positions and recognized the new possibilities for personal profit stemming from market liberalization. The Ukrainian government became entrapped by oligarchic interests, and thus has failed to institute comprehensive reform of the state to create conditions for actual democratic development and economic growth.
Considering the lessons of the Polish transition and taking into account the likely prospect of prolonged internal conflict in Ukraine, it is crucial that new reforms aiming to foster sustainable economic growth are engendered by a broad spectrum of civil society from all of Ukraine to create local ownership rather than imposing reforms externally.
Western states should support the formation of civil society, independent media, local businesses, and NGOs. While it is crucial that Ukraine deal with a range of fiscal issues, both on the spending and revenue sides, budget austerity alone is unlikely to solve the challenges the country faces. Instead, greater attention should be paid to institutional and governance issues, such as legal reforms, improving the business climate, and combating corruption, to help ensure that Western financial assistance achieves its desired effects.
Ann Sander Nielsen is a Eurasia Intern at CIPE.
