FREE ESSAY ON ECONOMIC REFORM IN POLAND AND THE CZECH REPUBLIC

ECONOMIC REFORM IN POLAND AND THE CZECH REPUBLIC

Mark S. Hopler
Prof. Lindeke
December 6, 1999
Economic Reform in Poland and the Czech Republic
After the fall of communism, several different countries decided that it was time to
reform both current economic and political policies. Two countries that have had major
economic reforms are Poland and the Czech Republic. However, the process of that change
is different, each country had a different idea of how to become a new economic power in
the 1990's. 
In December 1989, the new government, led by members of the labor union Solidarity,
launched a reform program designed to transform Poland's economy into a free-market
system. Price controls were lifted, while wage controls were imposed. State enterprises
were transformed into joint-stock companies, and many were scheduled for eventual
privatization or purchase by foreign investors. The restructuring of the Polish economy
resulted in a massive layoff of workers and a rapid rise in unemployment. Poland's GDP
declined sharply in 1990 and 1991.
Poland had relied heavily on agriculture and would have been easier to reform if its
exhausted industrial regions could have been abandoned. Poland may have been the first to
try a rapid, sweeping conversion, deemed by the press as "shock therapy." This conversion
was to a capitalism and free market. It was also the first to overcome the resultant drop
in economic output. Economic growth returned as early as the first half of 1992, and
voters should have begun to notice the benefits by September 1993. However, rather than
reformers gaining approval, the renamed communist party captured the largest number of
seats in the Polish parliament in the elections that month. This was yet another step
back for the reforming process. 
After its initial decline, Poland's economy began to improve. Annual GDP increased
between 1992 and 1997, when it reached $135.7 billion. Industrial production increased by
about 12 percent in 1994, which, accompanied by a 2 percent drop in unemployment,
represented a major increase in labor productivity. Inflation remained above government
goals but steadily declined, with an annual rate of 30 percent in 1994 dropping to 18.5
percent in 1996 . Although hundreds of enterprises were transferred to private ownership
during 1994 and 1995, the pace of privatization was generally slow; the private sector's
share of GDP remained at about 60 percent in 1995 and 1996. However, a new constitution
adopted in May 1997 committed the country to pursuing a market economy and further
privatization. In the early and mid-1990s Poland's foreign debt was significantly
alleviated by concessions from creditors, which helped to attract increasing levels of
foreign investment.
The result of "shock therapy" for Poland was to emerge out after the fall of the former
reigning communism, to take leaps and bounds in economic development. Another country,
just south of Poland, the Czech Republic also economically reformed in the early 1990's.

The Czech Republic has been traditionally among the most economically developed regions
of Europe. When the Communists came to power in Czechoslovakia in 1948, they created a
highly centralized economic system. Nearly all aspects of economic planning and
management came under the control of the central government. Most of the country's
economic assets were placed in state hands; economic managers and decision-makers were
cut off from their counterparts in the West; and foreign trade was conducted almost
exclusively with other Communist countries. Although the economy remained strong by
Eastern European standards, with one of the highest standards of living in the Communist
world, the policies adopted by the Communist government led to long-term economic decline
in Czechoslovakia. After the collapse of Communism in 1989, the new leaders of
Czechoslovakia had to deal with this legacy.
In the early 1990's, the post-Communist government moved quickly to convert the economy
to a system based on free enterprise. A number of reform measures were adopted, including
a voucher privatization plan, which gave citizens, for a low administrative fee, coupons
that could later be traded for stock in companies. The voucher plan successfully
transferred large parts of the economy to private ownership. By December 1994 more than
80 percent of firms in the Czech Republic were privatized or had decided on a
privatization strategy. Business boomed in Prague and other cities in the mid 1990's as
entrepreneurs established new companies. The government has also succeeded in
re-establishing trade with the West and obtaining substantial levels of foreign
investment. 
The average standard of living in the Czech Republic dropped somewhat in the early 1990s
as market reforms were introduced, but in recent years, the economy has begun to recover.
Inflation was about 10 percent in late 1994, less than half of what it was in 1991. Gross
domestic product (GDP) increased by approximately 2 percent in 1994. Industrial
production, which declined sharply in 1990 and 1991, also grew in 1994. The country's
foreign debt has remained modest. By 1997, the GDP had reached $52 billion .
Poland and the Czech Republic had the similar progress levels with the idea of having to
take a step back before the progress started. In both reforms, the countries had a level
of unemployment and social decline before the benefits became apparent. Also in both
countries the end result for the working class was worth the suffering endured, when
comparing private sector employment rates from 1989 to 1995, Poland increased from 47% to
66%, the Czech Republic had an even more drastic change from a mere 16% to an astounding
65% . 
A few signs that show the progress of both Poland and the Czech Republic are that both
are expected to become; full members of the European Union, World Bank, IMF, and World
Trade Organization . Poland and the Czech Republic can now become a model to several
other countries that need economic reform. The two aforementioned countries had overall
success with minimal, temporary disruptions in the begging.