Grzegorz W. Kolodko Transformation, Integration and Globalization Economic Research Kozminski University, Warsawwww.tiger.edu.pl

Post-Communist Transformation: Lessons for Emerging Markets

The Poland’s Round Table 6th FEBRYARY – 5th APRIL 1989

POLAND POLAND 38,5 mln 38,5 mln $PPP GDP 721 billion 0.97 % of world output per capita $18,800 World $11,200 US $47,200 EU $32,700

Transition x 4 1. To market economy 2. To political democracy 3. To civic society 4. To new market culture and mentality

Post-socialist (or post-communist?) transition (or transformation?) Historical gradual process of a comprehensive systemic shift FROM SOCIALIST ECONOMY > -- centrally planned; -- relatively closed; -- based on dominance of state property; -- bureaucratically controlled > TO CAPITALIST ECONOMY -- free enterprise; -- open; -- based on dominance of private sector; -- deregulated

The components of transition 1.Liberalization-cum-stabilization 2.Privatization 3.Institutional building 4.Microeconomic restructuring

Globalization, transformation, recession, growth

Catching-up in Europe GDP per capita in New Europe , EU-15=100, PPS Source: Eurostat and European Comission spring 2009 projections for

Catching-up in the World GDP per capita in New Europe, East Asia and Latin America, , PPS Source: Estimation based on the IMF data

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From Shock without Therapy to Therapy without Shocks GDP growth ( left scale) and unemployment rate ( right scale) in Poland,

Strategy for Poland Comprehensive, unorthodox policy of long-term socio-economic development trough structural reforms, institutional building and equitable growth Comprehensive, unorthodox policy of long-term socio-economic development trough structural reforms, institutional building and equitable growth Aimed at social progress and sustainable development Aimed at social progress and sustainable development Based on four pillars: Based on four pillars: -- fast growth -- fair income distribution -- opening up and partnership integration -- efficient state

From the “ Copenhagen criteria ” for the EU membership having stable institutions that guarantee democracy, the rule of law, human rights and respect for minorities -- a functioning market economy -- the capacity to cope with competition within the EU -- the ability to take on the obligations of membership

…to historical Copenhagen EU Summit December 2002…

…and the EU Athens Summit in 2003

20 = 5 x 4

5 x ca. 4: The Polish Transition and Growth since the 1989 Round Table Pre-transition reforms of the 1970s & 1980s Shock without therapy (1989/90-93) Shock without therapy (1989/90-93) Strategy for Poland ( ) Strategy for Poland ( ) Overcooling Overcooling Public Finance Reform ( ) Public Finance Reform ( ) EU early membership 2004/ EU early membership 2004/ – crisis and its aftermath… 2009 – crisis and its aftermath…

Shock Failure versus Gradual Therapy

What if... Real and hypothetical rate of growth, What if... Real and hypothetical rate of growth,

SevenPolishLessons

1 The early market-oriented reforms, introduced under socialism – yet incomprehensive and not going far enough – have helped later, during the transition to a full-fledged market economy. The more an economy had been reformed before the transition took of, the better for the successful transformation to a market economy, democracy and civil society.

2 Only a proper mix of two policies – a system change policy and a development policy, oriented to the accumulation and efficient allocation of capital – offers a chance of rapid economic growth. Neglect of either of these components precludes good results. This is amply demonstrated in a negative sense by the Russian case and in a positive sense by China.

3 Confusing means and ends in economic policy backfires, increasing the social costs of development and decreasing its attainable scale. As the means become glorified, they sometimes come to be perceived as ultimate goals. That effect had occurred despite the progress in institution building, privatization efforts and the ongoing process of opening up the economy.

4 Yet the improving institutions do not by themselves entail an ever improving policy, the institution building is of fundamental importance. However, the soundness of policy also depends on other factors, such as the economic doctrine, the dominant political set-up and the skills of those who run the economic policy. Hence, the institutions matter, but so does policy

5 The main source of development financing in „emerging markets” – including the postsocialist ones – is the domestic capital accumulation. Its formation should be given the priority in macroeconomic policy and in the system of microeconomic incentives. The foreign capital can play only a supportive role and cannot substitute for the national savings.

6 Globalization creates additional development opportunities and threats at the same time. The art of economic policy-making consists in the apt handling of the dilemmas that crop up under the new circumstances. Hence, the mini-max rule should be followed: minimize threats, maximize opportunities.

7 Economic policy is at the same time a technocratic and social endeavor. The neglect of either of these aspects does decrease the effectiveness of the policy. The best results in economic policy are provided by an appropriate mix of financial and social engineering, technocratic macroeconomic governance and genuine social dialog, professional pragmatism and social sensitivity.

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