Polands Successful Transition - Case Study Example

Outline

Poland’s Successful Transition

After Poland had realized its transition to their market economy from socialist central planning, a lot of understanding have been gathered to enable for better understanding of how to integrate and come up with a conclusion for the future transition. Considering the numerous quotes, Poland has been used as an example of successful reforms. An Economic policy which is consistent in general and higher economic growth in the country has earned the nation an excellent reputation in the transition process (Sonin, 2013). Both political facts and statistical data such as Poland being the member of NATO and the start of holding negotiation with the European Union and its admission in the OECD depicted a positive assessment about the country on the process of transition.

By 1990s, during the beginning of a transition in Poland, there was developed regime of the fixed exchange rate with the primary purpose of fighting hyperinflation. It took 18 months for stabilization. In late 192, transition in Poland permitted the zloty to continue performing its role as a store of value and as a medium of exchange despite the increased inflation rate beyond 40 percent. At the same period, the liberalization of the trade and changes in significant geographical structure had put the domestic producers to be in a new environment of the partial globalization market (Kwiek, 2013). In 1995, stabilization of the economy possessed the rigidities of the fixed exchange rate which made it possible and adoption of necessary changes to the country’s strategy.

Being that the set instruments were aimed at disinflation, Poland’s National Bank used changing and different combination of the required tools which were dependent on their anticipated efficiency. I.e., the instance of the National Bank to attempt limiting the pressure on demand, it had to use the interest rate of the maturities that lasted from a range of seven to two hundred and seventy days. Therefore, it resulted with an influence on the significant segments of the yield curve. In regards to transparency of operational instruments and targets, Poland’s monetary policy attained some manner of openness. The system for the exchange rate aimed at the deterioration of current account in the central bank. Also, an adequate channel was exchange rate for transmitting the monetary mechanism that influenced the inflation.

During the regime of inflation targeting lite, the economy of Poland came up with severe structural changes. The changes were privatization of other financial institutions and banking sectors, deepening and building of every segment in the commercial areas. Formulation of an institutional and legal framework, and the liberalization of capital and current account. In that process, the central bank was the critical player after that; it came up with efficient banking payment system and supervision (Clark, & Cole, 2017). The Poland’s central bank again facilitated the development of money markets and financial markets. In general, the success of a series of reforms opened the significant opportunities for the utilization of monetary policy in the coming periods.

In the last years, Poland has experienced both economic and political changes that got significant support from the Polish society, such as all its opinion poll regarding the attitude of the country regarding the country’s integrating with some western countries, democracy, and its market economy. The transition in Poland possesses undisputable facts because by around 1999, the state was in a complicated social and economic situation but the transformation in the country has brought some reliefs for the nation.

Reasons for transition: The reason for Poland’s transition is that, as a country it wanted to avoid severe effects they faced during economic crisis. For Poland to be able to avoid these worst effects, it had to be fiscally conservative by ensuring their public debt was in check by not giving any room for expansion during the period of recession. Going into transition, helped Poland to successfully implement the economic rule which was market based.

Ten Years of Transition

The economic situation of Poland experienced illustrative deficiencies on inadequate inventiveness, massive misallocation of the resources, pervasive shortages and unstable prices in their central planning. Poland adopted from the time of socialism of high inflation and massive foreign debt to approach the level of hyperinflation by around 1989. The reasons why Poland entered transition was because of its destabilized state and its stagnant situation (Kwiek, 2013). However, noting that the previous system experienced unsuccessful reforms. There was a loss of the element of credibility by the economic policy which in turn demoralized the workers and the ownership of state institution. Therefore the role of financial reform became difficult.

Also, the general enthusiasm and wretched condition of economic affairs about the decline of the rule of communist brought a particular moment for the radical change. The individuals were prepared to accept and sacrifice anything their government would expect them to do (Kronenberg, & Bergier, 2012). There was no political opposition, there was a temporary silencing of the branch lobbies, the social role of the trade unions was positioned, and lastly, there was the unequivocally favorable external environment. Vision, determination, and courage got connected with the first knowledge where the fact had never been tried by anyone before.

There was the elimination of rationing of foreign exchange and goods, an immediate advocate of the prices were set free. Dramatic tightening of the monetary policy, reduction of budget expenditure, elimination of subsidies and concessions of individual taxes were tightened dramatically. An introduction of the restrictive tax to evaluate the growth of excess wages and to protect embattled enterprises away from the demand for payments from the workers. The other change that was experienced in the country was the fixing of the exchange rate which was later promised not to be changed for almost half a year. The main reason for the fixed exchange rate was to make the economic policy to have some high credibility and to impose some trust on the currency of the nation.

The primary objective for the harsh implication was to correct the disequilibrium in microeconomics which is associated with the budget deficit of the state and the one reflected in inflation. Between 1990 and 1991, marks the point where there was fall in national income and output, a higher rise which was as a result of liberalization of the prices. There was a reduction of more than 20% in real wages, and the rate of unemployment increased more than 10% about labor force. According to Kornai, the situation was termed as transformation recession.

In the desire for transition, Poland was faced with the challenge of continuing with their economic current account deficit which was large and at the moment, it was standing at 7% of the country’s GDP. Higher imports made the deficit to widen and was generally associated to a strong domestic demand. In addition, however much the growth of export in the country was growing, it could not prevent the widening of trade deficit. Being that there was no defined current account deficit level that was unsustainable, the increment of deficit could make the economy of Poland to be vulnerable and this could lead to emergence of crisis in Poland’s economy.

The policies adapted during transition

Therapy Shock Policy

During the period of transition, Poland adapted the implementation of liberalizing the prices where about 10% of the prices was regulated. The shock therapy policy resulted to a gradual drop of the inflation rate and during the period of transition, the budget deficit became substantial. At the end of 1988, Poland was experienced with increased real wage.

Economic policy

The system of the social insurance fund was uplifted due to rise in average wage. During the periods of transition, Poland came up with the sickness pensions, pension for farmers and lastly bridging pension. The policy was to take care of the old individuals who could not find for themselves but wanted better living and health.

Enterprise’s reactions

In the first instance of transition, there were three ultimate results which were regarded to bring a positive outcome. In the early stage, there was a distortion of basic prices which got eliminated after which made the market to send sensible signals to the households and firms. Crucial prices were set to be on the favorable level, and these were; prices of energy, foreign exchange, and interest rate. Coming up with the sensible decision on the allocation of resources was allowed by reasonable prices. Secondly, there was an initiation of building the confidence on the national currency whereby the US dollar which had the dominating position was undermined (Przychodzen, & Przychodzen, 2015). This is where the Polish economy goes open. Lastly, the philosophy of operating the business was changed by the reduction of the scale of subsidization which was connected to the emergence of privatization. In the first phase of transition made the economy of Poland to be manageable and the citizens began to respond to economic policy’s instrument predictably.

In the dimension of microeconomic policy on early transition showed the different view from the expected situations. For the existing companies at around January 1990, there was a massive blow of “big bang” which resulted from both sides of supply and demand. Initially, the hit included traditional exporters to Comecon and USSR markets where the trade protocol entirely collapsed. After the reformations, the registered companies recorded profits because of the inflated value of historical value of inventories and their foreign currency from the previous years.

Most of the companies made immediate reaction by raising the prices and cutting the output. To the ones who were capable, attempted repaying their bank loans is that, the interest rate level of the bank was prohibitive overnight. By the end of 1990, most of the enterprises experienced a deterioration of their financial situation. And in January of 1991, there was an increment of administrative prices and the fall of Comecon markets which could not meet the required standard of delivering (Przychodzen, & Przychodzen, 2015). A new situation was relatively adjusted earlier by the state enterprise where the signs were seen in all the aspect of their functioning. There were creation and reinforcement of sales marketing department and modification of internal organization.

The channels of domestic distribution had to be rebuilt by the enterprises at the point the network of the state wholesale had to go bankrupt because of the imposed high-interest rate. One major issue was how to work on the overdue receivables and payable which was at a potential point to outstanding for the better economy and the substantial payment jams. The assumption took the direction of justifying the microeconomic policy to help in addressing the problem and to provide some measures preventing it from escalating to unmanageable proportions. According to my view, the implementation of the microeconomic policy forces gives the most convincing piece of an idea about the Polish transition. The other evidence to the country’s development was based on the success on the reorientation of trade between the EU countries and the former Comecon.

One could raise the concern as to why without massive privatization in Poland transition happened. The feedback to such interest was about the factors which seemed to be decisive which was increment of credible and microeconomic policy and the assurance of privatizing the state companies (Kwiek, 2013). The opportunity for the survival was limited because of lack of adjustment in the new circumstances. On the second point, it addresses how the managers could mind their reputation and how they could lift their professional career. Therefore, a reliable mechanism for restructuring the industrial sectors was made to begin.

Transition in the Bank

Evolution of bank behavior was brought by the transformation of the microeconomic aspect. An essential issue on how the state banks-parallel which was in concurrent to the state enterprises was about to tackle the mission of extending the credits to other small companies. To improve the control over the bank’s loans, there was the introduction of credit ceilings to the borrowers, and at the same time, microfinance made every bank institution to put more concentration on the private sector. Indeed, there was a deterioration in the banking sector by 1990-1991 (Klonowski, 2012). There was an increment of 10% in the sharing of irregular credits in every bank in Poland. During that moment, there was a scale of the crisis. The authorities acted in time and a proper way after which, in late 1991 there was an announcement of privatization of the state bank.

The scheme of bank restructuring was conceived simultaneously, and it added the banks with an additional capital regarding bonds after which they were expected to be settled regarding portfolio. The banks got assisted in establishing the new system of dealing with those problems. The scheme has supported various manufacturing institutions to go through the worst times, even though there were differences in the ideas of the analysts compared to the actual efficiency. It was hard to deny the fact that the banks in the country were benefiting from the financial restructuring. Financial restructuring made the banks to change their attitudes towards their creditors, increment of the new expertise and increased capital base. In fact, the banks in Poland derived honor of being conservative instead of being lenient in their affiliation with other institutions (Ziemba, Papaj, & Żelazny, 2013). The outcome puts the Polish banking companies which after around ten years, the element of transition will be expected to be cost-efficient, not to be modern sufficiently, fragmented, and undercapitalized.

The satisfactory progress in the sector of institutional and structural reforms and the manner in which there was the development of microeconomic indicated the transition in the Poland’s economy. The establishment of the first independence of Poland’s National Bank in the areas of both the instruments and goals was an additional emphasis for the requirement of transition. In the turn of 1997, electronic access to the country’s monetary policy achieved its limit.

Poland’s health system had been experiencing various issues that were generated from corruption, inefficiency, and waste, inadequate funding from the public sources, cost explosion, services of low quality and acute diseases. From the fiscal point of consideration, management of public resources was dangerous by all medical units. Taking into account on the financial point of view, coming up with reforms in the health parts entailed two main elements (Ziemba, Papaj, & Żelazny, 2013). To begin with, there was the transfer of medical units under the leadership of local government which took over the responsibility and authority for their upcoming duties. Also, there were establishments of regional health administration organizations.

Still, in the sources of relative success, Poland was always regarded as an impoverished nation in the European Union. In the west of Europe, Poland’s GDP per capita could not exceed the level of 40%. The firms that were in Poland showed a low international competitiveness even if it was gradually growing. The export potential of the country was limited, the infrastructure was developing, but in many aspects, the country was still underdeveloped (Zecchini, 2013). According to the related statistics, over a quarter of the country’s population got employed in the agricultural sectors.

The prospects of attaining a formal EU membership and adopting the resolute reforms made the country to be one of the promising nations with the promising markets, better place for the attraction of the investors and the regional player. Without any doubts, Poland is one of the nations that went a successful transition. Five factors contributed to the success of Poland’s transition. The first element was based the shock therapy which happened in 1990. This was the primary source of success in the economy of Poland because, in the first instance, it was an indicator of a massive cleaning operation. The distortion in most prices got eliminated, and an abrupt change in the economic game was experienced.

Also, the first factor had a pursuit of starting to improve the credibility of economic policy. It is important to recall that Poland entered the race of transition as a more destabilized country in their industrial branch. This had numerous outcomes of failed trials of reforming their socialist system. Due to all the difficulties, the administrators of the state enterprises developed the techniques to survive during the periods of the shock. The third-factor bases on the package of 1990 which had a comprehensive agenda of bringing the reforms in the Poland’s market. Therefore, from the start of Poland’s transition, the reformers of Poland became patient in establishing the third means and thereby brought the measures and the clarifications which had been put in place in the developed nations.

Pension system reform in Poland revolved in substituting an ancient way of which the state was being run, the way system of monopoly where you could not negotiate or take credit any further. In 1999, is when such reform was launched, and therefore the whole system got conceived. During this time, the set of requirements described and required the operation of pension to be adopted. Both for the public finance and the insured, this kind of reform brought the hope bringing several consequences in Poland’s economy. With such an expectation, the type of labor market was anticipated to bring some changes. The reform contained essential fiscal cost where the employees switched to pension funds from state system of funding (Zecchini, 2013). The aftermath deficit in the sector of Social Insurance Fund was revolving around 1 to 1.5 % of the country’s GDP in the entire ten to twelve years which was to be obtained from the state budget.

The result

The result of Poland’s transition made the state sector to quickly shrink due to decline of production companies and employment. The manner of transformation destroyed the industries in Poland. The success in the economic policies led to avoidance of the issues of crisis in the sectors of finance such as the stock exchanges, insurance companies, pension and investment funds and banks. The introduction of institutional reforms made Poland to join European Union. In summary, the element of transition made Poland to experience great achievements. An extraordinary success was enjoyed by the few, the majority’s hopes were justified but all in all, the process brought disappointment to the less fortunate. It is indisputable to expect for the end of a transition. The agricultural sector experienced several reconstructions, the reconstruction of the industries and the introduction of reforms of the judiciary and the labor market depicts some harsh challenges which faced Poland in their trial to seek for the European membership. In great consideration, successful transition of Poland was facilitated by the aspect broad consensus pertaining the strategic aims revolving on the political elites and in the whole society.

The intermediary step of monetary policy evolution was one of the factors which had increased the inconsistency of various purpose and the instruments of monetary policy. After the achievement of the successful transition, Poland showed the different picture which was, an active and polarized society which grasped the negotiation from the use of the confrontational model. With all the success from the obstacles, Poland became incomputable by creating several mature markets in its economy. The country’s progress in their consistency and its diminishing efficiency consequently made the nation to implement FFIT in 1998.

According to my own opinion towards Poland’s national interest, the country requires to look for more recipes to reduce incase European Union collapses and as a recommendation, Poland should be in a position of cooperating with other countries and involve in the activities that will result to further transition.