Front Matter Page

Research Department

Table of Contents

• Summary

• I. Introduction

• II. The Background

  • 1. Previous reform efforts

  • 2. The crisis of 1989

  • 3. Sequencing

  • 4. Stabilization in a socialist economy

• III. The Program

  • 1. Policies

  • 2. Early results

  • 3. Mid-year shift

• IV. Monetarist Arithmetic

  • 1. Monetary institutions

  • 2. The government budget constraint

    • a. Revenues

    • b. Expenditures

  • 3. Monetary and fiscal adjustment

    • a. Seignorage

    • b. Wages and tax revenues

    • c. Expenditures and subsidies

    • d. The implicit interest subsidy

    • e. External debt

  • 4. Summing up

• V. Wages and Employment

  • 1. The rationale for wage controls

  • 2. Wage indexation and the accumulation of margin

  • 3. Employment incentives

  • 4. Unemployment in Poland

• VI. Money and Exchange Rates

  • 1. A liquidity overhang?

  • 2. The exchange rate anchor

• VII. Structural Reforms

• VIII. Accounting for the Output Collapse

  • 1. Measurement problems

  • 2. Demand-side contraction

  • 3. A credit crunch

  • 4. Monopoly power unbound

  • 5. Credibility and structural change

• IX. Conclusion

• Note on Data Sources

• References

• Figures

• Figure 1. Retail Price Inflation

• Figure 2. Refinance Rate

• Figure 3. Government Budget Balance

• Figure 4. Balance of Payments

• Figure 5. Real Wages

• Figure 6. Real Money Stock

• Figure 7. Real Credit to Non-Government

• Figure 8. Domestic Monopoly

Summary

This paper reviews developments in Poland in 1990, the first year of the stabilization and reform program. It sketches the background to the 1990 program, including the reforms of the 1980s that gave rise to a situation of “neither plan nor market,” which in turn set the scene for the crisis of 1989: a widening fiscal deficit, more acute shortages, and accelerating inflation. The new government chose a “Big Bang” over a sequential approach, introducing a broad package of measures that were designed to be mutually reinforcing.

The paper describes the program, which involved monetary and fiscal stringency, the use of the exchange rate as a nominal anchor, a tax-based incomes policy, administered price increases, and various liberalization and reform measures. It also outlines the early results of the program: sharply falling inflation, a steep drop in measured output, and a remarkable strengthing of the budget and the balance of payments.

The paper examines the links between inflation, wage policy and the budget; it addresses the issue of a liquidity overhang; and it discusses the appropriate choice of exchange rate. It also describes the progress of structural reforms, including steps toward demonopolization, financial sector reform, and privatization. The paper then adduces alternative explanations of the sharp decline in measured output that occurred early in 1990. These include some potentially serious measurement problems, the possibility of a demand-side contraction; the “credit crunch” hypothesis, which turns on the effects of credit contraction on aggregate supply, the possibility that price liberalization acted to unfetter monopoly power, and other considerations related to credibility and restructuring.