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Returning Poland to Europe

Central Europe had been kidnapped, the Czech writer Milan Kundera once wrote in a celebrated essay from 1984. It had been dragged eastward by the Soviet Union after World War II. And like a displaced person yearning to return home, the region couldn’t wait until it could rejoin Europe after the fall of the Berlin Wall.

The economist Jeffrey Sachs first visited Poland in spring 1989, before the Wall fell. He met with both government officials and Solidarity representatives. Despite the compromise worked out at the Round Table, the economic prospects for the country were not particularly bright. “Solidarity was talking about hunger, the risk of civil war, breakdown,” Sachs told me in an interview in his Columbia University office in November 2013. “They were very pessimistic, very alarmed.”

As Solidarity prepared to enter parliament after the elections on June 4, it asked Sachs to prepare an economic reform plan. “I was given strict instructions by Jacek Kuron, who asked me to write this document, that this was about returning to Europe: period,” Sachs continued. “That was my vision then, and his vision, and my purpose, and it remained my purpose: Poland had to be part of Europe. It would be like the rest of Europe. It wouldn’t be some new hybrid or new experiment. The reality is that Poland is Central Europe and that’s where it belongs. The divide is artificial and this divide will end. And this is what will restructure the economy and make it possible for recovery.”

The advice that Sachs gave on how Poland could achieve macroeconomic stability and lay the foundation for further transformation has generated considerable praise and criticism over the years.

“All in all, I would not only stand by these ideas, but also stand by the results,” Sachs told me. “Poland actually transformed. I’m not a heartless guy. I’m not a free-market libertarian by a million miles. I wanted a cushion for Poland. That was a large part of my aims and a large part of their interest in me, in terms of what I could get for them. And I did this in a number of ways. I believe in supporting people in unemployment and old-age pensions and a public health care system. It was never the idea that people should sink or swim. It was the idea to build a real economic base from which you give support. And if you can’t get this economic base on your own, you beg for it and you plead mercy on the basis of old debts needing to be cancelled. I tried every bit of begging and pleading and tantrums and everything else I could think of to help, and fortunately some of it worked.”

Sachs dislikes the term “neoliberal” and refuses to accept the label. “I always wonder: how could I be described as a neo-liberal, which is the term of art, when I’m spending half my time berating the banks, trying to get the debts cancelled, trying to establish social funds, trying to make the public health care system work, and when I’m an admirer of Sweden?” he asked.

Sachs didn’t just provide economic advice. He was also make a key political recommendation after Solidarity won nearly every seat it contested in the June 4, 1989 elections. He told Bronislaw Geremek, who headed up Solidarity’s parliamentary caucus, that the opposition had to form a government. Geremek replied that this was impossible. “You can’t take a landslide and make a commission out of it,” Sachs said. “With the resounding victory, they’ll be looking for more than that.”

And then Sachs revealed his trump card. Solidarity figured that, given the huge debt the government had, the country was bankrupt. Sachs told Geremek to forget about the debt. “Do you know how big this is, what’s happening right now?” he told Solidarity. “Many countries in history have gotten the debt cancelled. You can do this. For Solidarity, the West will do this. But we can’t do this if you’re just a committee. You have to be the government.”

Poland, with Sachs’ help, was able to renegotiate its debt. “The most important question was: is there a way back to democracy and Europe and without civil war and without starvation,” he told me. “And Poland never came even remotely close to any of those things. It got its debt cancellation, got its help, got its foreign investment, and made its way through. To this day, after 40 years of experience in this field, I can’t imagine fine-tuning something more than that. That’s like asking the surgeon, oh, save the heart and all the organs and by the way I don’t want any stitches and no scars. But save my life.”

The Interview

When the Polish government initially approached you for advice, you said no. But then you had a chance to go to Poland in spring 1989 and talk with both the government and with Solidarity. At that point, how big a gap did you perceive between their positions on economic change and reform?

If I recall correctly, in April 1989, there weren’t positions. Instead people were extremely worried and were in the process of discussing what to do. The government officials I met, who were not the highest officials, talked about the need for a market economy — that was clear. Solidarity was talking about hunger, the risk of civil war, breakdown. They were very pessimistic, very alarmed. I talked with Witold Trzeciakowski, who was a senior economist, a real gentleman, an academic and a very soft-spoken and frightened individual. He was very much on the cerebral side of Solidarity. Solidarity asked him as senior academician in the country to help. A junior person in the group was Jan Krzysztof Bielecki. That was the first time I got to know him in the spring of 1989. But there was no program, there was just concern. They wanted to make a request to the West to help Poland. We called it the Brussels Project because we had a meeting in Brussels to discuss what kind of aid request Poland could make. That was basically it. There was no kind of government program at the time.

I interviewed Marcin Swiecicki at the time. He was in the Party, tasked with figuring out a program for economic reform. He told me that they started out by looking at Hungary, and that lasted for a couple months. Things were shifting so quickly, so then they looked at Sweden. But then things changed even faster. It seemed as I was talking to him that at that point they didn’t really have a concrete model in mind. They were casting around for various options – that as the case both for Solidarity and the government. If anything, I thought that Solidarity had more ideas.

For the economic reforms I thought very important — supply and demand, currency, trade, budget, debt, finance — there were no ideas to speak of. What they were interested in was ownership, an area I knew the least. The areas I knew best and where I could add some value was how a market system actually functioned in its financial, monetary, and trade relations. Instead, they were quite interested in how to transform ownership.

If you look at our proposal, we didn’t have any specific ideas on privatization, which was different from the normal discourse of reform at the end of the 1980s. One thing that both surprised and interested them was that I was talking about things like the exchange rate, where there was no ideological view, just a practical view of what should be done. They didn’t know how the exchange rate worked, or how to run the central bank. That’s where I put a lot of emphasis. For privatization, all we wrote was: “seek technical assistance from the World Bank, invite foreign investment banks to suggest schemes and prepare valuations, prepare in one year a program for extensive privatization.” Those were the three things that I could think of that night. I was not proposing a privatization plan. This, by the way is completely contrary to most of the nonsense said about me or what I was doing or what I was recommending.

That you came in with a preconceived notion.

Not just that. That radical privatization was the essence of it. It wasn’t the essence of it. I knew from the beginning that privatization was hard and complicated, and I didn’t have clear ideas about it.

One of the interesting parts of that paper was the discussion of the challenge of preserving the standard of living at a time when obviously there was going to be more unemployment. One of the hard-fought issues in the Round Table negotiations was indexation. Finally, if I remember correctly, it was fixed at 80 percent. I talked with Krzysztof Hagemejer, who worked on the Solidarity side. We worked so hard on it, he said, but then the government over the summer removed price controls. To this day, he still doesn’t know why the government did that. It threw a monkey wrench into the whole discussion of preserving standard of living. It obviously aggravated the inflation. Do you have any insights into this?

The main thing that was happening was a tremendous financial crisis, which often accompanies a political revolution. If you look at political revolutions in history, often there are hyperinflations associated with them. The government doesn’t collect revenues. The normal means of finance breaks down. The government prints money to pay the bills. In Poland in 1988 and 1989, whatever structures were there were clearly going to pieces. A tremendous pent-up monetary shock was hitting the system, but it was showing up under price controls in the form of soaring black market prices. The black market exchange rate was four or five times the official rate. There were shortages of everything except under the counter at black market prices. Everybody felt that tremendous hoarding was going on. A lot of the Solidarity people felt that there was going to be hunger very soon because the farmers would sit on their grain and not release it to the cities or the government trading firms.

So, they had to raise the prices. There was flight from the currency – people were getting out of the zloty in any way they could. There were intensifying shortages, rising black market prices, and lots of complicated financial and monetary processes that nobody could decipher ex post facto. I think the government was just reacting to this. It knew that it had to raise prices. The budget indicators probably meant that public sector tariffs were low and enterprises were squeezed. I don’t know what went through their minds, but those are all good reasons why you can’t really control things. The idea that these official prices are the real prices of transactions is wrong. If you remember, in the summer and fall of 1989, you couldn’t buy most things in the shops. In that context, the official prices were only vague indicators of what was going on at the time.

I interviewed Jacek Zakowski, the spokesman for the parliamentary caucus of Solidarity’s Citizens’ Committee, who is a journalist now. He said that they all paid a price for the economic reform. Mazowiecki lost his job; Geremek would eventually lose his position. You made an interesting comment in this document that governments never fall because of unemployment but instead because of hyperinflation, which can be very destabilizing. The Mazowiecki government did, with the help of Balcerowicz, reduce the level of inflation quite dramatically. But the issue of unemployment remained, and that did prove politically destabilizing — not for the system as a whole but certainly for that government. Was that a surprise for you? In that document, there was a more optimistic vision that private enterprise would absorb the unemployed. There wasn’t much discussion of the unemployment that would happen in the countryside, which was dramatic.

It’s really important to put this in some temporal and comparative perspective. By any standard, Poland did extremely well in the transformation. It ended up growing rapidly. The economy expanded, foreign investment came in. Compared to the other countries in the region, it soared in terms of new business, exports, and investment. Especially compared to the dire forecasts of 1989, you don’t get better than that. Looking back I’m not only very satisfied but very grateful at how favorable the outcomes were.

Unemployment is the hard question for which I don’t have a nitty-gritty and full answer. After 40 years of a system that ended up collapsing — and with the collapse of its partner institutions all over the Soviet Union and Eastern Europe as well as the end of the cheap energy on which it was built — there was a lot of decrepit uncompetitive companies that had no place, given late 20th century technology. Those companies that couldn’t make it employed a lot of people, especially older people who had grown up in a given context, which included living in places with a factory that wasn’t going to survive. In the end, they got transfers of some sort. But a lot of unemployment for these older people persisted for 10-15 years. That was a generational thing, to a very large extent.

My sense is, though I can’t prove it, that it was very different for young people. First of all there was a lot of dynamism. An incredible number of enterprises were created. No doubt there were places in the countryside that were more remote, or in the east where things were broken down and jobs were not created. The east was toward Russia, and now life was going to be in the west. Wroclaw and places in the west became magnets for foreign investment, and places in the east ended up being sunset places to an important extent. That’s real economics. I don’t know any answer to that. That’s probably a lot of what’s in the data. I also never am sure about some of the data concerning unemployment benefits, which I don’t begrudge by any means. But especially in Poland, everybody I knew had a gig doing things off the record, under the counter, and around the side. A lot of this data therefore has to be taken with a significant grain of salt.

A whole system had been built up that collapsed. These factories don’t just come to life. You have to build again. No one wants to be in the situation Poland was in in 1989. I said there was a way out of this. There was a lot of pessimism at the time, so this was a debated point. But I didn’t say that there was an answer to every moribund factory and every broken-down piece of heavy industry. There never is. Economics, to the extent that it is something beyond a village, is about change. And change is not simple. Poland had bottled up a lot of change for 40 years, and later came what is called “creative destruction.” It took place over a very short space of time.

Looking back, was there anything you would have changed in terms of the question of unemployment? For instance, you spoke of sunset and sunrise regions. One example of industrial policy is for the government to direct funds to a sunset region to cushion the blow or to redirect investment. Or was it really just not possible for a government at that time to play that kind of role during a difficult economic transition?

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