Poland is simultaneously trying to restructure its economy and to control the inflationary pressure stemming from political liberalization. Inflation fell from 30% per month during August- December 1989 to 5% per month in February-March 1990, but at a cost of about one-quarter of measured output compared with the previous year. The two key issues now are the the size of the output loss and unemployment required to keep inflation in check during restructuring and the process to move as rapidly as possible to the establishment of people's capitalism.

In Discussion Paper No. 432, Olivier Blanchard and CEPR Governor Richard Layard argue that the restructuring of production to raise productivity and reap the fruits of comparative advantage will inevitably lead to the bankruptcy of many firms following the removal of subsidies and raising of interest rates. Further, the dollarization of intra-Comecon trade will reduce Soviet demand for Polish manufactures, although a compensating increase in exports to the West is feasible, since real wages in Poland are now very low and much of this labour is relatively highly skilled. Substantial retooling will also be important, but foreign direct investment will be initially sluggish, although it could be stimulated by the abolition of the existing constraints on the repatriation of profits. The major redeployment of labour required in the mean time will inevitably involve substantial transitional unemployment.

Blanchard and Layard argue that the proportion of the labour force employed in manufacturing as a whole is too high, and that numbers employed in improving the infrastructure and in services will need to rise. Whether workers will take these new jobs when they are offered will depend on the system of unemployment benefits adopted. If benefits are available indefinitely, as in many EC member countries, long-term unemployment may easily develop and take root after an economic shock. If benefits run out after a year but major resources are devoted to training and creating work for the unemployed, however, as in Sweden, unemployment remains much lower after a shock. The continued threat of inflation emphasizes the importance of the government's wages policy, whereby wages are not allowed to grow by more than a proportion of the rise in prices. Increasing the interval of such indexation from one month to three might ensure a period of wage stability in which price growth could be finally reduced to West European levels.

Blanchard and Layard maintain that the most important change needed is the introduction of private ownership of Polish industry. Proposals have become somewhat stalled, however, owing partly to the shortage of buyers able to pay an `appropriate' price and partly to resistance from workers. Their proposed solution is to give the nation's capital to the people. Firms should be grouped into about five conglomerate holding companies and all citizens given 100 shares over five years. The holding companies would pay `dividend tax' to the government and also a dividend to their owners. After the initial distribution, foreigners could buy shares from individual Poles, which would avoid the objection as if the shares were sold by government `over the heads of the workers'.

Within ten years the holding companies should have reorganized the individual enterprises (some would have closed, others been given a change of managers), whose shares they could then sell to citizens, banks and foreigners. Private individuals could then buy these shares on the basis of better information and sufficient private wealth to enter the market.

Economic Change in Poland
Olivier J Blanchard and Richard Layard