Lessons from Poland’s Reforms-25 years on

The Art of Economic Reforms

Politically, the introduction of economic reforms, is almost always very risky. So what is the best way to carry them out? The fast and the most painful method or a slower, longer and a more phased-out approach? How should politicians present ideas for far-reaching economic changes in order to gain the necessary acceptance? Prof. Leszek Balerowicz, the author of Poland's successful economic transformation, sometimes referred to as the architect of Polish "shock therapy", and Mr. Pierre Gramegna, Luxembourg's Minister of Finance tried to answer these and other questions at a Conference organised by the Embassy of Poland in Luxembourg, the Chamber of Commerce and the Luxembourg-Poland Business Club on May 23rd, at the Chamber of Commerce.

The essence of the "Balcerowicz Plan" was rapid stabilisation, liberalisation, and institutional change to rein in the state and widen the scope of individual freedom. By 1991, he had tamed hyperinflation, tightened government spending, lifted price controls, ended shortages, and removed obstacles that had inhibited the spontaneous emergence of the private sector.

In what Balcerowicz calls the "era of extraordinary politics", he was able to push through his radical reform plan. Piecemeal reform and gradualism were out of the question. The planned economy was broken and needed to be replaced by a robust open-market system based on private-not state-ownership.

He chose to promote supply-side policies rather than artificially stimulate aggregate demand by pumping up government spending and running large fiscal deficits. In early 2000, Balcerowicz was appointed governor of the National Bank of Poland. When he left the Bank in January 2007, inflation had been reduced from more than 10 percent to about 2 percent. His "relatively restrictive monetary policy" helped Poland avoid the housing bubble and the 2008 recession.

He attributes Poland's strong economic growth to the radical liberalisation and sound monetary and fiscal policies. The testimony of his success is that Poland's real GDP has more than doubled since 1989.

For this he deserves the 2014 Friedman Prize which he received on May 21st in New York.