Poland has received much attention recently as economic activity finally rebounded following a sharp collapse in output ushered in by the implementation in 1990 of a comprehensive program of economic transformation. The rebound has been widely viewed as indicating that the reform efforts of the past three years are at last bearing fruit. Since Poland embarked on its transformation program earlier than the other countries in Eastern and Central Europe, as well as before the countries of the former Soviet Union, this evidence of success, and Poland’s experience more generally, are believed to contain valuable lessons for the countries that are following on the road to a market economy. The focus of this Occasional Paper is on describing the salient features of Poland’s economic transformation with a view to highlighting the general characteristics of that process.
In the 1980s, Poland experienced large changes in the financial position of the general government as the economy underwent upheavals that led to its 1990 economic transformation program.1 During 1979–81, the country had already experienced an economic crisis that had been accompanied by a sharp deterioration in its fiscal accounts. Following a series of partial fiscal reforms that modified the system of taxes and streamlined subsidies with a view to imposing greater discipline on enterprises, the financial position of the general government improved significantly during 1982–83 and remained broadly in balance during 1984–88. However, the improvement was temporary and, in 1989, general government finances deteriorated dramatically, reaching a deficit of 8 percent of GDP that was attributable more to a decline in tax revenues than to an increase in general government expenditures. The radical changes associated with the introduction of the transformation program in 1990 implied equally drastic changes for the country’s fiscal policy framework.
There are close linkages between financial sector reforms, the conduct of monetary policy, and macroeconomic and financial stabilization. Indeed, the success of the transformation programs in previously centrally planned economies depends crucially on the development of efficient financial intermediaries and of credit and capital markets. The mammoth restructuring of the productive sectors needed for a sustained improvement in productivity and growth requires developing efficient financial markets to mobilize savings and channel them efficiently. Against this background, this section reviews the developments in the area of monetary policy and financial sector reform, concentrating on the period 1991–93.
This paper discusses the first phase, to be constructed from 2015 to mid-2019, comprises a 41-kilometer section that is to provide an efficient and safe transport link between Podgorica and the poorest northern region in Montenegro. It runs through the mountainous terrain in the center of the country that is economically undeveloped. Due to its large cost (25 percent of 2017 GDP), the first phase of the highway has used up most of Montenegro’s fiscal space and will crowd out other productive spending. For the foreseeable future, the second and third parts of the highway could only be financed with concessional funds, because loans would destabilize the debt sustainability of Montenegro. The government’s main motivation for this large project is the need to improve connectivity, particularly to Europe through Serbia, boost tourism and trade, improve road safety, and strengthen national security. The highway is a part of Montenegro’s plans to integrate the Montenegrin transport network with those of neighboring countries.
This 2010 Article IV Consultation highlights that the authorities’ adjustment program has contributed to limiting the fallout of the global crisis on Serbia. Although the output slump has been limited relative to regional peers, the decline in domestic demand has been significant, resulting in a strong external adjustment. The outlook for 2010 points to a slow but balanced recovery. The pickup in growth will likely be moderate, reflecting slow trading-partner recovery, protracted corporate deleveraging, nominal freezes in public wages and pensions, and lagging labor market adjustment.
One of the choices facing countries in transition to a market economy concerns which exchange rate regime to adopt. In general, the selection made has reflected, among other things, the individual country’s particular economic objectives, as well as its initial conditions and the source of shocks to the economy.
Mr. Charalambos Christofides, Mr. Paul Mylonas, Ms. Inci Ötker, Mr. Liam P. Ebrill, Mr. Gerd Schwartz, and Mr. Ajai Chopra
Poland's economy rebounded dramatically in 1992-93, several years after the nation embarded on a comprehensive program of economic transformation. This paper describes Polan's steps in the areas of public finance, monetary policy and financial sector reform, trade and exchange rate policy, and microeconomic liberalization, as well as the social impact of transition.
KEY ISSUESContext: Moderate growth is continuing; however credit and wage growth are weak.The level of nonperforming loans (NPLs) remains high and public debt has risen sharplyin recent years.Fiscal policy: Medium-term funding needs to roll over existing debt and to fund budgetdeficits are large. A new highway, budgeted to cost about one quarter of GDP, will cause deficits to widen and add to public debt. The draft 2015 budget shows appropriate restraint on other spending, but a long period of strong fiscal discipline will be needed to manage fiscal risks. Laying out clear long-term plans for managing the public finances would boost credibility and reduce risks to market access. Fundamental expenditure reform, especially of the pension system and the public sector wage bill, would be an essential part of such plans.Financial sector: The banking system’s liquidity appears comfortable; however, profitability is low and lending spreads are high. Regulatory provisioning is set higher than that reported under international accounting standards, but a wide range of provisioning levels across banks and weak incentives to take losses remain concerns. A more transparent and comprehensive reporting environment would be beneficial.Reforms to ensure better enforcement of contracts and collateral would help bring down structural lending risk premia.Structural reform: Higher levels of labor participation and employment are needed to boost potential growth and safeguard the public finances. Ensuring that wages adjust in line with productivity alongside reforms to achieve better employment outcomes and boost productivity would enhance the economy’s ability to respond to macroeconomic shocks, and are even more important in a country that lacks its own currency and with decreasing fiscal buffers.
When Poland began its economic transformation from a centrally planned economy in 1990,1 few observers expected the sharp declines in output that would accompany the reform (see Chart 5–1 and Appendix Table A10). Traditional economic reasoning, while recognizing the importance of adjustment costs, assigned greater weight to the positive benefits of abandoning inefficient modes of production and liberalizing trade transactions. Sharply negative rates of GDP growth in Poland and in other reforming economies, however, soon shifted opinion from guarded optimism to deep pessimism. Academic papers that investigated various explanations of the “output collapse” proliferated. Macroeconomic factors such as the disbanding of the Council of Mutual Economic Assistance (CMEA) and the concomitant terms–of–trade deterioration, a policy–induced “credit crunch,” and fiscal disinflation were investigated and assigned varying amounts of blame.2 Economists and other social scientists belonging to the “institutional” school of thought felt vindicated by developments that seemed to indicate that the profound tearing down and rebuilding of institutions necessitated by the transformation process was time–consuming and expensive, a fact undervalued by more mainstream economists and policymakers.