Grzegorz W. Kolodko

Transformation, Integration and Globalization Economic Research

Kozminski University, Warsaw

www.tiger.edu.plwww.tiger.edu.pl

                   

Post-Communist Post-Communist Transformation: Transformation:

Lessons for Lessons for Emerging MarketsEmerging Markets

The Poland’s Round TableThe Poland’s Round Table6th FEBRYARY – 6th FEBRYARY – 5th5th APRIL 1989APRIL 1989

POLANDPOLAND 38,5 38,5 mlnmln

$PPP GDP $PPP GDP 721721 billion billion

00..9977 % % of of

world outputworld output

per capitaper capita$1$18,8008,800

World $11,200World $11,200US $47,200 US $47,200 EU $32,700EU $32,700

TransitTransitiion x 4on x 4

1.1. To market economyTo market economy

2.2. To political democracyTo political democracy

3.3. To civic societyTo civic society

4.4. To newTo new market market culture and culture and mentalitymentality

Post-socialist (or post-communist?) Post-socialist (or post-communist?) transition (or transformation?)transition (or transformation?)

Historical gradual process Historical gradual process of a comprehensive systemic shift of a comprehensive systemic shift

FROM SOCIALIST ECONOMYFROM SOCIALIST ECONOMY > >

-- -- centrally planned;centrally planned; -- -- relatively closedrelatively closed;;

-- based on dominance of state property;-- based on dominance of state property;-- bureaucratically controlled-- bureaucratically controlled

> > TO CAPITALIST ECONOMYTO CAPITALIST ECONOMY

-- -- freefree enterprise;enterprise; -- -- open;open;

-- based on dominance of private sector-- based on dominance of private sector; ; -- deregulated-- deregulated

The components of transitionThe components of transition

1.1. Liberalization-cum-stabilizationLiberalization-cum-stabilization

2.2. Privatization Privatization

3.3. Institutional buildingInstitutional building

4.4. Microeconomic restructuringMicroeconomic restructuring

Globalization, transformation, recession, growthGlobalization, transformation, recession, growth

GDP(1989 = 100)

0100200300400500600

Poland Russia China Ukraine World

GDP (1989 =100)

0

50

100

150

200

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

CIS

CEE andBS

GDP 1990-20091989=100

0

50

100

150

200

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Ukraine

Russia

Poland

Czech Rep.

Węgry

CCatching-up atching-up in Europein Europe

20

30

40

50

60

70

80

90

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Bulgaria

Czech Republic

Estonia

Latvia

Lithuania

Hungary

Poland

Romania

Slovenia

Slovakia

GDP per capita in New Europe 1997-2010, EU-15=100, PPS

Source: Eurostat and European Comission spring 2009 projections for 2009-10.

Catching-up in the Catching-up in the WorldWorldGDP per capita in New Europe, East Asia and Latin America, 1995-2007,

PPS

Source: Estimation based on the IMF data

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From Shock without Therapy From Shock without Therapy to Therapy without Shocksto Therapy without Shocks

GDP growth (GDP growth (left left scale) and unemployment rate (scale) and unemployment rate (rightright scale) scale) in Poland, 19in Poland, 198989-2008-2008

-11,6

3,8

6,2

4,5 4,2

0,61,9

3,8 3,5

6,1 6,5

2,6

-7

5,2 7,0 7,1

5

1,1

5,34,8

Shock "therapy"

Strategy for Poland

0vercooling

Public Finance Reform Program

EU memberrship

-14

-7

0

7

14

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 I poł 2002 II poł2002

2003 2004 2005 2006 2007 2008

-15

-10

-5

0

5

10

15

20

Strategy for PolandStrategy for Poland• Comprehensive, unorthodox policy of Comprehensive, unorthodox policy of

long-term socio-economic development long-term socio-economic development trough structural reforms, institutional trough structural reforms, institutional building and equitable growthbuilding and equitable growth

• Aimed at social progress and sustainable Aimed at social progress and sustainable developmentdevelopment

• Based on four pillars:Based on four pillars:-- fast growth-- fast growth

-- fair income distribution-- fair income distribution-- opening up and partnership integration-- opening up and partnership integration

-- efficient state-- efficient state

7,5

0,2 0,4

0

1

2

3

4

5

6

7

8

%

1997QII

2001QIV

2002QI

quarter/quarter

From the "European TIGER" to stagnation (annualized GDP growth in %)

0,2 0,4 0,81,6

2,1 2,3

3,9 4,04,7

76,1

4,84

2,1 2,5

0

1

2

3

4

5

6

7

%

2001Q

IV

2002Q

I

QII

QIII

QIV

2003Q

I

QII

QIII

QIV

2004Q

I

QII

QIII

QIV

2005Q

I

QII

Annual rate of GDP growth 2001-04

From the From the ““Copenhagen Copenhagen criteriacriteria””

for the EU membership...for the EU membership...-- -- having stable institutions having stable institutions that guarantee democracy, that guarantee democracy,

the rule of law, human rights the rule of law, human rights and respect for minoritiesand respect for minorities

-- -- a functioning market economya functioning market economy -- -- the capacity to cope withthe capacity to cope withcompetition within the EUcompetition within the EU-- -- the ability to take on the ability to take on

the obligationsthe obligations of membership of membership

……to historical Copenhagen EUto historical Copenhagen EU SummitSummit DecemberDecember 20 2002…02…

……and tand the EU Athens Summit in 2003he EU Athens Summit in 2003

20 = 5 x 420 = 5 x 4

5 x 5 x ca.ca. 4: 4: The Polish TransitThe Polish Transitiion and Growthon and Growth

since the 1989 Round Tablesince the 1989 Round Table

PPre-transition reformsre-transition reforms of the 1970s & 1980s of the 1970s & 1980s

• Shock without therapy (1989/90-93)Shock without therapy (1989/90-93)• Strategy for Poland (1994-97)Strategy for Poland (1994-97)• Overcooling 1998-2001Overcooling 1998-2001• Public Finance Reform (2002-04)Public Finance Reform (2002-04)• EU early membership 2004/05-2008EU early membership 2004/05-2008• 2009 2009 – – crisis and its aftermath… crisis and its aftermath…

ShockShock FailureFailure

versusversus

GradualGradual TherapyTherapy

What if...What if... Real and hypothetical rate of growth, 1989-2008Real and hypothetical rate of growth, 1989-2008

0

50

100

150

200

250

300

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Rzeczywisty średni roczny wzrost PKB = 3,0 Gdyby średni roczny wzrost PKB = 5,5%

175

277

SevenSeven

PolishPolish

LessonsLessons

11The early market-orientedThe early market-oriented reformreforms, s,

introduced under socialism – yet introduced under socialism – yet incomprehensive and not going far enough – incomprehensive and not going far enough –

have helped later, during the transition to a have helped later, during the transition to a full-fledged market economy. The more an full-fledged market economy. The more an

economy had been reformed before the economy had been reformed before the transition took of, the better for the transition took of, the better for the

successful transformation to a market successful transformation to a market economy, democracy and civil society.economy, democracy and civil society.

22Only a proper mix of Only a proper mix of two policiestwo policies

– – a system change policy and a development a system change policy and a development policypolicy,, oriented to oriented to the accumulation and the accumulation and

efficient allocation of capital – offers a efficient allocation of capital – offers a chance of rapid economic growth. Neglect of chance of rapid economic growth. Neglect of

either of these components precludes good either of these components precludes good results. results. TThis is amply demonstrated in a his is amply demonstrated in a

negative sense by the Russian case and in a negative sense by the Russian case and in a positive sense by China.positive sense by China.

33Confusing Confusing means and ends in means and ends in

economic policyeconomic policy backfires, increasing the backfires, increasing the social costs of development and decreasing social costs of development and decreasing

its attainable scale. As the means become its attainable scale. As the means become glorified, they sometimes come to be glorified, they sometimes come to be

perceived as ultimate goalsperceived as ultimate goals. . That effect had That effect had occurred despite the progress in institution occurred despite the progress in institution

building, privatization efforts and the building, privatization efforts and the ongoingongoing process ofprocess of opening up the economy.opening up the economy.

44Yet the improving institutions do not by Yet the improving institutions do not by

themselves entail an ever improving policy, themselves entail an ever improving policy, the institution building is of fundamental the institution building is of fundamental

importance. However, the soundness of importance. However, the soundness of policy also depends on other factors, such as policy also depends on other factors, such as

the economic doctrine, the dominant political the economic doctrine, the dominant political set-up and the skills of those who run the set-up and the skills of those who run the

economic policy. economic policy. Hence, Hence, the institutions matter, but so does policythe institutions matter, but so does policy

55The main source of development The main source of development

financing in „emerging markets” – financing in „emerging markets” – including the postsocialist ones including the postsocialist ones – – is the is the

domestic capital accumulationdomestic capital accumulation. Its . Its formation should be given the priority information should be given the priority in

macroeconomic policy and in the system of macroeconomic policy and in the system of microeconomic incentives. The foreign microeconomic incentives. The foreign

capital can play only a supportive role and capital can play only a supportive role and cannot substitute for the national savings. cannot substitute for the national savings.

66Globalization creates additional development Globalization creates additional development

opportunities and threats at the same time. opportunities and threats at the same time. TThe art of economic policy-making consists he art of economic policy-making consists

in the apt handling of the dilemmas that crop in the apt handling of the dilemmas that crop up under the new circumstances.up under the new circumstances. Hence, Hence, tthe he

mini-max rule should be followed: mini-max rule should be followed:

minimize threats, maximize opportunitiesminimize threats, maximize opportunities. .

77Economic policy is at the same time a Economic policy is at the same time a technocratic and social endeavortechnocratic and social endeavor. The . The neglect of either of these aspects does neglect of either of these aspects does

decrease the effectiveness of the policy. decrease the effectiveness of the policy. TThe he best results in economic policy are provided best results in economic policy are provided

by an appropriate mix of financial and by an appropriate mix of financial and social engineering, technocratic social engineering, technocratic

macroeconomic governance and genuine macroeconomic governance and genuine social dialog, professionalsocial dialog, professional

pragmatism and social sensitivity.pragmatism and social sensitivity.

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