Balcerowicz: 'Radical reforms bring about better results'
The policies were pilloried as much as they were praised in the early years by critics who said those policies had impoverished millions of Poles; today, Balcerowicz sees vindication as the radical reforms have become a model for other countries once part of the Soviet Union wanting to emulate Poland's successful transition.
Last spring, Balcerowicz took over chairmanship of Unia Wolnosci (Freedom Union), which nominated Jacek Kuron as its presidential contender in the Nov. 5 elections. In an interview with Warsaw Business Journal's John Grech and Peggy Simpson, Balcerowicz talked about the need to finish the job begun in 1989 especially in escalating privatization if Poland is to generate the rapid economic growth needed to catch up with Western Europe and create jobs for the coming baby boomers. He criticized the slowdown of privatization by the governing coalition and said the SLD's "commercialization" could lead to dangerous politicial abuses of power.
Q: Some businesses have shown a dissatisfaction with the pace of privatization in certain sectors, specifically telecommunications and oil. What impact do you see the next president having in speeding up that process?
A: First of all, I would make a bit longer this list of sectors in which the pace of privatization is too slow. There is also a question of mining, power generation and metallurgy, heavy chemicals. It's very difficult to say what impact the president will have on privatization directly as a person. So in this process what is really crucial for basic privatization is who governs. And then it brings the problem of parliamentary election in two years' time.
Q: So then what leverage does the president have, Kuron for example, if he has a hostile Parliament behind him?
A: I am sure that Jacek Kuron understands perfectly well the importance of privatization for economic development in Poland, especially for reducing this sea of poverty. And I know him from that first government when we worked together. And he is also the assurer of the pact on state enterprise, the main purpose of which was to speed up privatization. Unfortunately, it was blocked and not implemented by the present ruling coalition.
Q: You've said that Finance Minister Grzegorz Kolodko has pursued a "strategy of avoidance" and you predicted that this government may go down in history as "the government of creeping destruction." Do you still see that as a fair assessment in view of the recent successes with the bond issue and lower inflation rates?
A: You are not quoting my complete assessment. I would point out that Deputy Prime Minister Kolodko tries to keep the macroeconomy in balance and tries to maintain the cause of stability in Poland. And in this I supported him even before I became leader of the opposition party. This is essential. But I have completely different views from him on institutional reforms. I think institutional reforms in Poland have been slowed up. Some sectors are considered to be strategic. Nobody knows what is strategic, but this is a magic word to convey the idea that they should remain in the state hands, which, as we all know, is no solution, because there is no reason for such sectors as telecommunication, power generation, metallurgy or tobacco to remain in state hands. So I think instead of emphasizing the importance of privatization, two successive governments have emphasized the wrong priority of commercialization. What is commercialization? It is a reform within the state sector. It does not change the substance. It does not change the owner. The state is a political owner and, being political, is a bad owner. And I think the recent privatization law which has been accepted by the parliament is dangerous, because it introduces further possibilities of blocking privatization of large enterprises and substituting commercialization for privatization. This is one difference.
Q: The state will always remain mostly owner?
A: Commercialization does not solve the fundamental problem of ownership. A corporate enterprise remains state-owned. It is dangerous because it increases the number of posts, of lucrative seats to be subject to political patronage. This is dangerous from two points of view. First, it contributes to further blocking of privatization. Once you create a group of people who would be interested in having these seats, they would act as a barrier to further privatization. And second, it is dangerous for politics, for the quality of a democratic process. So privatization then is important not only for economic development. It is very important for democracy.
Q: You've written that Poland's situation was unique in that it had to go through major transformations both politically and economically at the same time. How would you compare Poland's transformation to other countries in the region?
A: Political and economic transformation was not unique to Poland. It was unique to all European post-Socialist countries as distinct from China, where you've got one transformation, economic, without political transformation being carried out. What is specific to Poland as distinct from other countries of Central Europe was that we had to start this transformation under very difficult economic conditions, more difficult than in the Czech Republic or Hungary. We had a huge foreign debt unlike Czech or Hungary. And we had hyperinflation, which did not exist in either of these countries. Another unique feature we inherited was that the former opposition was centered around the trade unions.
Q: How does the situation compare today?
A: I would say Poland has so far been very successful economically, despite this special difficulty initially and thanks to the comprehensive and radical nature of the reforms carried out after 1989. If you were slow in launching the comprehensive program and implementing it in the first years, you would be in a much worse situation. First, because there would be a less improved economy and, second, because you would have to implement those reforms under a more difficult political situation. So we are profiting now from the reforms of the first years. This is for me the main lesson, and this is not only the Polish lesson. If you compare across post-Socialist economies you can see that radical reformers fare better than the less radical reformers. This is true for the former Soviet Union and for the post-Socialist countries outside the Soviet Union.
Q: Do you see the economic weaknesses of the East as any kind of a threat to Poland?
A: We are interested economically and politically in the dynamic economies to the east. Russia is a massive mutual benefit. The same goes for Ukraine. This is why I hope economic reforms in Russia and Ukraine will be successful. We see lots of dynamism already in each case.
Q: Are you more encouraged than a year ago?
A: Oh yes. I think that, generally speaking, we've got one lesson. Radical reforms bring about better results than non-radical. And this lesson has been spread. Remember that these countries which had slower reforms are now joining the ranks of radical reformers, because they don't have other ways to continue to be strong. I can say this is the power of the Polish model. When I am traveling to the east and meeting authorities and journalists there, they are familiar with the Polish transformation of 1989, and for them it's a positive model. Some of my colleagues who used to work with me in privatization are now consultants there. So there is a transfer of know-how from Poland. I only regret they can't do the same in Poland and speed up privatization.
Q: What do you fear in terms of reversals here? If Kwasniewski wins, you talk about the danger of the economy being based on political decisions. What does that really mean?
A: At stake is the pace of federal reforms like privatization and local government reforms and constitution. It matters because Poland has different future scenarios. We can be a very dynamic country and I think we have a real chance to develop at the rate of 6% or 7% not only for one or two years, for more than 10 years, and then there would be a rapid catching up with Western Europe, not with Germany, but, say, with Spain. This scenario is possible. We have already shown that we are capable of doing it. This year the rate of growth will be around 6% or 7%. If you include the informal sector, exports will increase by almost 40%. So this shows the potential of the Polish economy, mostly due to the private sector. But to realize this positive scenario, we have to complete reforms. We have to diminish the scope of the public sector for the two reasons I mentioned, impact on the economy and impact on the political process. If this is not done, it would be a less favorable scenario. We will grow at a rate substantially below our potential. We need very much rapid economic development for several reasons. First, because we have so much to catch up. Second, because of demography. There will be a record number of young people who enter the labor market in the coming years. Third, because we have to grow out of the debt. And fourth, because a fast growing economy is the key solving other problems.
Q: You've talked about the dangers of political decision making in the economy. What does that mean?
A: Depending on who is in charge, you've got rapid reforms or non-rapid reforms. Referring to your question of what could be reversed, this mostly depends on the policies of the expenditure sides. This needs to be streamlined, including the pension system. This is why we've suggested in the Freedom Union to adopt a different formula for pensions.
Q: Isn't the SLD (Democratic Left Alliance) moving to do that too?
A: So far they're not. What is suggested is a solution for one year. Look at the future. We are against one-year solutions. So we'll open a further debate next year. It's much better to introduce a lasting change this year, because next year the situation won't be better. So this is a matter of further economic stabilization, dependent on the pace of budgetary reforms and, in part, on the pace of privatization. Remember, state enterprises tend to have losses. Restructuring mining is the best example. There are huge losses and huge debt. The slow pace of restructuring certain sectors may undermine further stabilization. The second point is, I don't think there is a reversal of privatization. There is not nationalization, but what is at stake is further privatization, and we've got much more to privatize. The third point is liberalization. But here, fortunately, there are some external constraints: the association agreements with the EU and GATT. We need more constraints. Very much will depend on the behavior of the European Union. If they behave in a protectionist way, as they sometimes tend to do, engaging in petty protectionism, switching around some technical constraints, then they set a very bad example to anti-reformist forces in Poland. And this political damage sometimes is more important than economic damage. So the West should show a good example. Sometimes the western politicians are encouraging us to be more radical in words on reforms. The best encouragement is the power of good examples, and there are some very bad examples in the West, especially the EU.
Q: With this huge glut of state-owned companies that are moving into that pool and not moving out of it, what is Kuron's position?
A: The draft for Unia Wolnosci's plan on privatization is on my desk, but I can't discuss it yet because we have to have some further debates. That is one of our priorities.
Q: Some forecasts?
A: There is to be a massive privatization, not case-by-case. That's my personal view. This has to be based not only on NIFs (National Investment Funds) but should go beyond and involve certain strategic sectors. It should be truly massive. Another assumption would be that large companies should be privatized by a combination of methods so that a large company with strategic investors will have shares distributed to smaller investors via mass privatization. Then the smaller investors would be free and clear. They would profit from having very good strategic investors, and then they would be interested in good foreign investors if they understand it's in their interest that the value of the enterprises and the value of their shares would tend to increase depending on the quality of strategic investors. And another assumption would be that one should use privatization to finance, at least partially, the very needed reform of the pension system.
Q: Are these tenets that Unia Wolnosci is going to unify behind? UW has had some division, some dissent.
A: Not on that. In every party there are some divisions, especially in an electoral campaign. In UW there are no fundamental differences with respect to the economy. There are some differences of views on the current tactics, but they should not be misunderstood for fundamental differences as far as the economy is concerned. Everybody agrees that faster privatization is needed. Everybody agrees on further fundamental reform for the local government. Everybody agrees that Poland needs more macro-economic stability, a good constitution, so there is no problem really in the party as far as economic stability is concerned.
Q: Some Solidarity era people are saying that if SLD controlled all three branches of government, then it would forget about the market. There would be a return to cadres, to political manipulation of economic decisions. Do you share that fear?
A: I think there would be a very biased distribution of political power, because a minority which gained about 20% in the last elections would occupy the most important positions, institutions in Poland. This would be a very skewed representation and potentially dangerous. The system of checks and balances could not then work very efficiently.
Q: But they're talking about something beyond that. They're talking about a real manipulation.
A: There are signals of some nominations of the state administration or in the state enterprises which are not necessarily based on criteria of competence but more on political favoritism, political patronage. But the key to solving this problem is first to have an apolitical civil service, which we suggested in 1993. It was not adopted. Second, to privatize, because if you privatize, then you narrow down the scope of political manipulation.
Q: How about the Church?
A: On the constitutional level, one needs a clear division between the church and state. This is necessary, because otherwise none of these institutions can function properly. Second, in the everyday relationships between the successive governments and the churches, there should be good cooperation to solve certain social problems, like business ethics.
Last spring, Balcerowicz took over chairmanship of Unia Wolnosci (Freedom Union), which nominated Jacek Kuron as its presidential contender in the Nov. 5 elections. In an interview with Warsaw Business Journal's John Grech and Peggy Simpson, Balcerowicz talked about the need to finish the job begun in 1989 especially in escalating privatization if Poland is to generate the rapid economic growth needed to catch up with Western Europe and create jobs for the coming baby boomers. He criticized the slowdown of privatization by the governing coalition and said the SLD's "commercialization" could lead to dangerous politicial abuses of power.
Q: Some businesses have shown a dissatisfaction with the pace of privatization in certain sectors, specifically telecommunications and oil. What impact do you see the next president having in speeding up that process?
A: First of all, I would make a bit longer this list of sectors in which the pace of privatization is too slow. There is also a question of mining, power generation and metallurgy, heavy chemicals. It's very difficult to say what impact the president will have on privatization directly as a person. So in this process what is really crucial for basic privatization is who governs. And then it brings the problem of parliamentary election in two years' time.
Q: So then what leverage does the president have, Kuron for example, if he has a hostile Parliament behind him?
A: I am sure that Jacek Kuron understands perfectly well the importance of privatization for economic development in Poland, especially for reducing this sea of poverty. And I know him from that first government when we worked together. And he is also the assurer of the pact on state enterprise, the main purpose of which was to speed up privatization. Unfortunately, it was blocked and not implemented by the present ruling coalition.
Q: You've said that Finance Minister Grzegorz Kolodko has pursued a "strategy of avoidance" and you predicted that this government may go down in history as "the government of creeping destruction." Do you still see that as a fair assessment in view of the recent successes with the bond issue and lower inflation rates?
A: You are not quoting my complete assessment. I would point out that Deputy Prime Minister Kolodko tries to keep the macroeconomy in balance and tries to maintain the cause of stability in Poland. And in this I supported him even before I became leader of the opposition party. This is essential. But I have completely different views from him on institutional reforms. I think institutional reforms in Poland have been slowed up. Some sectors are considered to be strategic. Nobody knows what is strategic, but this is a magic word to convey the idea that they should remain in the state hands, which, as we all know, is no solution, because there is no reason for such sectors as telecommunication, power generation, metallurgy or tobacco to remain in state hands. So I think instead of emphasizing the importance of privatization, two successive governments have emphasized the wrong priority of commercialization. What is commercialization? It is a reform within the state sector. It does not change the substance. It does not change the owner. The state is a political owner and, being political, is a bad owner. And I think the recent privatization law which has been accepted by the parliament is dangerous, because it introduces further possibilities of blocking privatization of large enterprises and substituting commercialization for privatization. This is one difference.
Q: The state will always remain mostly owner?
A: Commercialization does not solve the fundamental problem of ownership. A corporate enterprise remains state-owned. It is dangerous because it increases the number of posts, of lucrative seats to be subject to political patronage. This is dangerous from two points of view. First, it contributes to further blocking of privatization. Once you create a group of people who would be interested in having these seats, they would act as a barrier to further privatization. And second, it is dangerous for politics, for the quality of a democratic process. So privatization then is important not only for economic development. It is very important for democracy.
Q: You've written that Poland's situation was unique in that it had to go through major transformations both politically and economically at the same time. How would you compare Poland's transformation to other countries in the region?
A: Political and economic transformation was not unique to Poland. It was unique to all European post-Socialist countries as distinct from China, where you've got one transformation, economic, without political transformation being carried out. What is specific to Poland as distinct from other countries of Central Europe was that we had to start this transformation under very difficult economic conditions, more difficult than in the Czech Republic or Hungary. We had a huge foreign debt unlike Czech or Hungary. And we had hyperinflation, which did not exist in either of these countries. Another unique feature we inherited was that the former opposition was centered around the trade unions.
Q: How does the situation compare today?
A: I would say Poland has so far been very successful economically, despite this special difficulty initially and thanks to the comprehensive and radical nature of the reforms carried out after 1989. If you were slow in launching the comprehensive program and implementing it in the first years, you would be in a much worse situation. First, because there would be a less improved economy and, second, because you would have to implement those reforms under a more difficult political situation. So we are profiting now from the reforms of the first years. This is for me the main lesson, and this is not only the Polish lesson. If you compare across post-Socialist economies you can see that radical reformers fare better than the less radical reformers. This is true for the former Soviet Union and for the post-Socialist countries outside the Soviet Union.
Q: Do you see the economic weaknesses of the East as any kind of a threat to Poland?
A: We are interested economically and politically in the dynamic economies to the east. Russia is a massive mutual benefit. The same goes for Ukraine. This is why I hope economic reforms in Russia and Ukraine will be successful. We see lots of dynamism already in each case.
Q: Are you more encouraged than a year ago?
A: Oh yes. I think that, generally speaking, we've got one lesson. Radical reforms bring about better results than non-radical. And this lesson has been spread. Remember that these countries which had slower reforms are now joining the ranks of radical reformers, because they don't have other ways to continue to be strong. I can say this is the power of the Polish model. When I am traveling to the east and meeting authorities and journalists there, they are familiar with the Polish transformation of 1989, and for them it's a positive model. Some of my colleagues who used to work with me in privatization are now consultants there. So there is a transfer of know-how from Poland. I only regret they can't do the same in Poland and speed up privatization.
Q: What do you fear in terms of reversals here? If Kwasniewski wins, you talk about the danger of the economy being based on political decisions. What does that really mean?
A: At stake is the pace of federal reforms like privatization and local government reforms and constitution. It matters because Poland has different future scenarios. We can be a very dynamic country and I think we have a real chance to develop at the rate of 6% or 7% not only for one or two years, for more than 10 years, and then there would be a rapid catching up with Western Europe, not with Germany, but, say, with Spain. This scenario is possible. We have already shown that we are capable of doing it. This year the rate of growth will be around 6% or 7%. If you include the informal sector, exports will increase by almost 40%. So this shows the potential of the Polish economy, mostly due to the private sector. But to realize this positive scenario, we have to complete reforms. We have to diminish the scope of the public sector for the two reasons I mentioned, impact on the economy and impact on the political process. If this is not done, it would be a less favorable scenario. We will grow at a rate substantially below our potential. We need very much rapid economic development for several reasons. First, because we have so much to catch up. Second, because of demography. There will be a record number of young people who enter the labor market in the coming years. Third, because we have to grow out of the debt. And fourth, because a fast growing economy is the key solving other problems.
Q: You've talked about the dangers of political decision making in the economy. What does that mean?
A: Depending on who is in charge, you've got rapid reforms or non-rapid reforms. Referring to your question of what could be reversed, this mostly depends on the policies of the expenditure sides. This needs to be streamlined, including the pension system. This is why we've suggested in the Freedom Union to adopt a different formula for pensions.
Q: Isn't the SLD (Democratic Left Alliance) moving to do that too?
A: So far they're not. What is suggested is a solution for one year. Look at the future. We are against one-year solutions. So we'll open a further debate next year. It's much better to introduce a lasting change this year, because next year the situation won't be better. So this is a matter of further economic stabilization, dependent on the pace of budgetary reforms and, in part, on the pace of privatization. Remember, state enterprises tend to have losses. Restructuring mining is the best example. There are huge losses and huge debt. The slow pace of restructuring certain sectors may undermine further stabilization. The second point is, I don't think there is a reversal of privatization. There is not nationalization, but what is at stake is further privatization, and we've got much more to privatize. The third point is liberalization. But here, fortunately, there are some external constraints: the association agreements with the EU and GATT. We need more constraints. Very much will depend on the behavior of the European Union. If they behave in a protectionist way, as they sometimes tend to do, engaging in petty protectionism, switching around some technical constraints, then they set a very bad example to anti-reformist forces in Poland. And this political damage sometimes is more important than economic damage. So the West should show a good example. Sometimes the western politicians are encouraging us to be more radical in words on reforms. The best encouragement is the power of good examples, and there are some very bad examples in the West, especially the EU.
Q: With this huge glut of state-owned companies that are moving into that pool and not moving out of it, what is Kuron's position?
A: The draft for Unia Wolnosci's plan on privatization is on my desk, but I can't discuss it yet because we have to have some further debates. That is one of our priorities.
Q: Some forecasts?
A: There is to be a massive privatization, not case-by-case. That's my personal view. This has to be based not only on NIFs (National Investment Funds) but should go beyond and involve certain strategic sectors. It should be truly massive. Another assumption would be that large companies should be privatized by a combination of methods so that a large company with strategic investors will have shares distributed to smaller investors via mass privatization. Then the smaller investors would be free and clear. They would profit from having very good strategic investors, and then they would be interested in good foreign investors if they understand it's in their interest that the value of the enterprises and the value of their shares would tend to increase depending on the quality of strategic investors. And another assumption would be that one should use privatization to finance, at least partially, the very needed reform of the pension system.
Q: Are these tenets that Unia Wolnosci is going to unify behind? UW has had some division, some dissent.
A: Not on that. In every party there are some divisions, especially in an electoral campaign. In UW there are no fundamental differences with respect to the economy. There are some differences of views on the current tactics, but they should not be misunderstood for fundamental differences as far as the economy is concerned. Everybody agrees that faster privatization is needed. Everybody agrees on further fundamental reform for the local government. Everybody agrees that Poland needs more macro-economic stability, a good constitution, so there is no problem really in the party as far as economic stability is concerned.
Q: Some Solidarity era people are saying that if SLD controlled all three branches of government, then it would forget about the market. There would be a return to cadres, to political manipulation of economic decisions. Do you share that fear?
A: I think there would be a very biased distribution of political power, because a minority which gained about 20% in the last elections would occupy the most important positions, institutions in Poland. This would be a very skewed representation and potentially dangerous. The system of checks and balances could not then work very efficiently.
Q: But they're talking about something beyond that. They're talking about a real manipulation.
A: There are signals of some nominations of the state administration or in the state enterprises which are not necessarily based on criteria of competence but more on political favoritism, political patronage. But the key to solving this problem is first to have an apolitical civil service, which we suggested in 1993. It was not adopted. Second, to privatize, because if you privatize, then you narrow down the scope of political manipulation.
Q: How about the Church?
A: On the constitutional level, one needs a clear division between the church and state. This is necessary, because otherwise none of these institutions can function properly. Second, in the everyday relationships between the successive governments and the churches, there should be good cooperation to solve certain social problems, like business ethics.
