Transforming Economic Systems: The Case of Poland

Contributions to Economics

Albrecht Ritschl Prices and Production - Elements of a System - Theoretic Perspective -1989. 159pp. Softcover OM 59,­ISBN 3-7908-0429-0

Arnulf GrUbler The Rise and Fall of Infrastructures - Dynamics of Evolution and Technological Change in Transport-1990. 305pp. Softcover OM 85,­ISBN 3-7908-0479-7

Peter R. Haiss Cultural Influences on Strategic Planning 1990. 188pp. Softcover OM 65,-ISBN 3-7908-0481-9

Manfred Kremer· Marion Weber (Eds.)

Transforming Economic Systems: The Case of Poland With the Cooperation of Feliks Gradalski

With 6 Figures

Springer-Verlag Berlin Heidelberg GmbH

Series Editor Werner A. Muller

Editors Dipl.-Okonom Manfred Kremer Dipl.-Okonom Marion Weber, M.B.A. Department of Economics University of Duisburg LotharstraBe 65 D-4100 Duisburg, FRG

ISBN 978-3-7908-0585-7 ISBN 978-3-642-51556-9 (eBook) DOI 10.1007/978-3-642-51556-9

CIP-Titelaufnahme der Deutschen Bibliothek Transforming Economic Systems: the case of Poland / Manfred Kremer· Marion Weber (eds.). With the cooperation ofF. Gradalski. - Heidelberg: Physica-Verl., 1992 (Contributions to economics)

NE: Kremer, Manfred [Hrsg.]

This work is subject to copyright. All rights are reserved, whether the whole or part ofthe material is concerned, specifically the rights of translation, reprinting, reuse of illustration, recitation, broadcasting, reproduction on microfilms or in other ways, and storage in data banks. Duplication of this publication or parts thereofis only permitted under the provisions ofthe German Copyright Law of September 9,1965, in its version of June 24,1985, and a copyright fee must always be paid. Violations fall under the prosecution act of the German Copyright Law. © Springer-Verlag Berlin Heidelberg 1992 Originally published by Physica-Verlag Heidelberg in 1992.

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710017130-543210

EDITORS' PREFACE

The transformation of the centrally-planned economic systems in Eastern Europe into Western-type market economies is certainly the predominant challenge facing policy makers in the East and West. A successful completion of the transformation is not only imperative in order to achieve a marked and sustained improvement in the living conditions in these countries, but will also prove crucial to the policy of detente and consequential for the future shape of the world economy.

As is illustrated by the history of economic thought, there is an intimate interrelation between ( economic) reality and ( economic) theory. Reality produces the facts that constitute the priority subject of economic theory. Theoretical insights, in turn, contribute to the shaping of economic reality by providing justifications for policy measures. It always takes time, however, for economic policy to provide well-grounded answers to questions of common concern - a time lag which is prolonged by the time it takes adopted measures to take effect.

All this holds especially true for the transformation of an economic system. The economists' guild was only partly prepared for coping with the changing reality in Eastern Europe. The theory of comparative economic systems, which is well established in Western economic thinking, was indeed able to explain the economic inferiority of centrally-planned systems as well as provide insights into the fundamental conditions necessary for a market economy to function properly. Economists were, however, largely unprepared for desigmng suitable strategies for the transition from the one system to the other, including not only the definition of the long-term goal, but also possible ways to get there. Such a strategy must not take a too narrow approach, but, in order to be workable, take into accowlt the (country-) specific initial position where the transformation begins. For it is crucial that costs and benefits of structural changes be distributed materially and temporally in such a way that the transformation is both politically enforceable and justifiable in terms of humanity.

There have been manifold efforts in the recent past to fill this conspicuous gap in economic analysis. The present volume attempts to contribute to this endeavor. This book deals with general as well as special areas of interest regarding a systemic transformation. The general theoretical reasoning, based on modern advances in economic theory, is applied to the special case of Poland. Poland is particularly suitable for such an analysis, because in this country, decisions have been made to carry out a reform program that is by far the most resolute one compared to the rest of Eastern Europe. Yet this book does not claim to cover this complex subject exhaustively. Rather, the basic intention was to offer a forum for the presentation of self-contained individual contributions. As the articles are theoretical rather than empirical-descriptive in their approach, the book does not have the character of a conventional country study, either. It is the very fact that actual country-specific facts are being analyzed in an explicitly theoretical context, that distinguishes this book from other publications.

The organizational framework for this publication has been the "German-Polish Young Economists' Workshop". This workshop is one component of the co-operation between Duisburg University and the Warsaw School of Economics (the former Central School of

VI

Planning and Statistics, SGPiS, in Warsaw) which has a long history. At conferences held periodically once or twice a year, young economists and social scientists from both universities have met to present papers and ideas on various subjects - and, last but not least, to nurse friendly relations. Our newly composed group of participants met in Warsaw in April 1990 and in Duisburg in December 1990 in order to discuss and determine subjects and contents of the projected publication. The majority of the individual articles have been written in German-Polish co-authorship. The idea behind this was to make possible for a fruitful combination of knowledge of modern economic theory on the one hand with access to data and information on special issues on the other. With regard to the formal shape of the publication, we have kept close to that of the preceding volumes (see foreword by Professor Paffenholz). In this respect, for instance, each article is supplemented with summaries in English, German, and Polish. In a departure from the practice of our forerunners, however - yet following the convention valid in academia -, we have chosen English as the publication language, in order to render the book accessible to a wider audience.

As a tangible output of scientific co-operation, a volume is of course moulded by the quality of its individual components. A good outcome presupposes not least of all a meaningful coordination and an efficient use of the input. In this respect, our "joint venture" with Poland has met with manifold obstacles. It was not only the usual technical problems of communication (languages, telecommunication, etc.) that had to be cleared by joint efforts. In our case, the particular circumstances of current affairs in Poland hampered our co­operation even more. Our Polish colleagues have not only been - as citizens and economic agents - addressees and persons concerned by the sweeping changes in the economy and society, but have in part become - as policy consultants, in one case even as a minister -their active shapers. On the other hand, of course, these circumstances have enriched our project with access to fIrst-hand information, and given it a particular relevance.

Before the completed book became a satisfying output, various tasks needed to be completed, only part of which the editors could accomplish on their own. Here, we would like to thank all persons and institutions who have been involved in the realization of this publication.

In the fIrst place, we are obliged to the individual authors, who spent much of their spare time on composing their manuscripts. The fact that the articles were to be written in English certainly did not make that task easier. Thus, in the course of the project, it was not always avoidable that the work on this "private affair" extended into working hours at the university. Therefore, we wish to express our gratitude to all the professors who gave their assistants plenty of rope as well as intellectual support. On the German side these were Professor Dr. Dieter Casse~ Professor Dr. Giinter Heiduk, Professor Dr. Dietmar Kath, Professor Dr. Hans-Joachim Paffenholz, Professor Dr. Josef Schira, and Professor Dr. Manfred Tietzel.

To be mentioned individually among the authors is our colleague and friend Dr. Feliks Gradalski. Not only did he set up the Polish project team, but he also organized our meeting in Warsaw in a danling manner. During his stay of several months in Duisburg he was also a competent, cooperative and humorous partner to all German colleagues.

VII

Furthermore, Feliks drew up part of the Polish summaries, a work he shared with Bernhard Wilczek. We are grateful to both of them.

Mrs. Dagmar Lee also had an active part in the project. She drafted several manuscripts into English prose and even made complete translations of two articles. In the process, she incurred the substantial inconvenience of working through the technical language of economics.

Thanks are, of course, due to our mentor, Professor Hans-Joachim Paffenholz. Over time, his function as Commissioner of Duisburg University Council for the Cooperation with the Warsaw School of Economics has turned him into an expert in virtually all questions concerning Poland. He always managed to motivate us for this project and to patiently give us advice on many organizational as well as technical questions. His former counterpart in Poland, Professor Dr. Stanislaw Ladyka, made possible our meeting at the SGPiS in April 1990.

Finally, we acknowledge the support of two institutions without which we would not have been able to realize our project in this form. The financial support by the Deutscher Akademischer Austauschdienst (DAAD) was indispensable just to hold the two conferences. The Physica-Verlag, at last, gave us the opportunity to present the output of our joint efforts to an interested audience in a professional form.

Duisburg, August 1991

Marion Weber Manfred Kremer

FOREWORD BY THE COMMISSIONER OF DUISBURG UNIVERSI'IY COUNCIL FOR THE COOPERATION WITH THE WARSAW SCHOOL OF ECONOMICS

The German-Polish seminar of young economists and social scientists can look back on an exceptional tradition of 15 years of fruitful cooperation. The seminar is remarkable in a number of respects:

(a) Actually, it was the young scientists who became the nucleus of the cooperation since they established thefrrst contact in 1976/77 between Duisburg University and the Warsaw School of Economics, formerly called the Central School of Planning and Statistics (SGPiS). Meanwhile, this cooperation has become the largest one between a Polish and a German university in the field of economics. The seminars and the publications of the respective teaching assistants and assistant professors are still the main foundation of this extraordinary German-Polish scientific joint venture.

(b) Since 1977, with the exception of 1981, these assistants have held one joint seminar each year. Considering the difficult political circumstances in Poland throughout the '80s this was quite extraordinary, not only from a scientific but also from an organizational point of view! The following list of the seminar topics reflects a wide range of issues, both political and in the field of comparative economics:

1977: Perspectives of Economic Cooperation Between the People's Republic of Poland and the Federal Republic of Germany (Warsaw). 1978: The EC and CMEA - Two Different European Approaches to Economic Integration (Duisburg). 1979: Problems of the Service Economy (Warsaw). 1980: Alternative Systems of Economic Planning and Resource Allocation Including Specific Issues of Foreign Trade (Duisburg). 1982: The Enterprise in a Socialist and Market Economy (Warsaw). 1983: Economic Regions and Structural Policy (Duisburg). 1984: The Phenomenon of Inflation in Systems of Centrally Planned and Market Economies (Warsaw). 1985: Problems of Monetary Policy and Public Finance in Different Economic Systems (Duisburg). 1986: Innovation, Technical Progress and Economic Development (Warsaw). 1987: Comparative Economic Systems and the Dynamics of Innovation (Duisburg). 1988: The Changing Role of State Activity (Warsaw). 1989: Regulation and Deregulation in Different Economic Systems (two conferences in Duisburg). 1990: Concepts and Problems of Economic and Societal Transformation in Poland (Warsaw and Duisburg).

(c) Since 1984, the young scientists have presented the results of their academic work to the public every other year. This series of publications already consists of four conference proceedings. The numerous articles in these volumes provide a clear picture of the broad research spectrum of the young scientists:

x

CICHY, E. U.; G. NEUMANN, eds., Probleme monetarer und fmanzwirtschaftlicher Steuerung im Systemvergleich, (Problems of Monetary Policy and Public Finance in Different Economic Systems), Duisburg 1986. WELFENS, P. J. J.; L. BALCEROWICZ, eds., Innovationsdynamik im Systemvergleich, (Comparative Economic Systems and the Dynamics of Innovations), Heidelberg 1988. APOLTE, TH.; M. KESSLER, eds., Regulierung und Deregulierung im Systemvergleich, (Regulation and Deregulation in Different Economic Systems), Heidelberg 1990. KREMER, M.; M. WEBER, eds., Transforming Economic Systems: The Case of Poland, this volume.

Last but not least, it should be mentioned that on the Polish side a number of former and current seminar members have become official advisors to the Government and in two cases they have been appointed Ministers. This clearly demonstrates the quality and the importance of the seminars. Because of the number of years the cooperation has been going on, the "young" scientists have advanced in their careers, however, more as seniors than as young professionals.

Certainly, a conference proceeding has the quality of being a collective good and naturally, each of the participants profits from it. However, the tota,! cost of this good exceeds the sum of the individual costs to each author, since a large portion of the total cost is overhead such as the organization of the seminars, the coordination of the articles, as well as the final editing of the book. This overhead is not matched by an equivalent amount of benefits. On the German side Marion Weber and Manfred Kremer have been responsible for the production of this collective good, on the Polish side, Feliks Gradalski.

Since the editurs have to deal with the publisher and those who are responsible for the cooperation without being able to profit from it as "rent-seekers" or even "free riders", I would like to express my special thanks to both Marion Weber and Manfred Kremer!

Furthermore, I would like to acknowledge the support of the Deutscher Akademischer Austauschdienst (DAAD), who - as in former years - provided the major part of the fmancial means. The two universities in Warsaw and Duisburg supported the seminar not only financially but also in other respects. I would like to express my gratitude to all of them.

Prof. Dr. Hans-Joachim Paffenholz

Council's Commissioner

CONTRIBUTING AUTHORS

Thomas Apolte (Duisburg University)

Dr. Piotr Bledowski (Warsaw School of Economics)

Otto F. Bode (Wirtschafts- und Bildungsakademie, Crimmitschau bei Zwickau)

Wilfried Boroch (Duisburg University)

Andrea Franz (Duisburg University)

Martin Gilles (Duisburg University)

Dr. Adam Glapinski (Polish Minister of Housing, Warsaw; Warsaw School of Economics)

Dr. Feliks Gradalski (Warsaw School of Economics)

Dr. Mieczyslaw Groszek (Bank Wlasnosci Pracowniczej S.A., Warsaw; Warsaw School of Economics)

Martin Kessler (Wirtschaftswoche, Dusseldorf)

Manfred Kremer (Duisburg University)

Peter Kiirble (Duisburg University)

Dr. Henryk Mozaryn (Warsaw School of Economics)

Christel Naujoks (Duisburg University)

Alfred Schipke (Duisburg University; Ministry of Finance, Warsaw)

Dr. Jacenty Siewierski (Warsaw School of ~conomics, Department of Sociology)

Marion Weber (Duisburg University)

Dr. Perdita Wingender (Duisburg University)

Dr. Jerzy Zdrzalka (Polish Vice-Minister of Housing, Warsaw; Warsaw School of Economics)

CONTENTS

Editors' Preface ...................................................................................................................... V

Foreword by the Commissioner of Duisburg University Council for the Cooperation with the Warsaw School of Economics, Prof. Dr. Hans-Joachim Paffenholz..................................................................................... IX

Contributing Authors............................................................................................................. XI

A. ECONOMICS AND POLITICS OF TRANSFORMATION

SYSTEMIC CHANGE TO A MARKET ECONOMY: GENERAL ISSUES AND FIRST EXPERIENCES IN POLAND .............................. 3

Thomas Apolte, FeIiles Gradalski

Abstracts.................................................................................................................................. 3 1. Shortcomings of Socialist Economies and Goals of the Transformation ................. 3

1.1 The End of a Societal Experiment........................................................................ 4 1.2 Goals of Systemic Change ..................................................................................... 6

2. Properties and Strategies of a Transformation ............................................................ 7 2.1 The Dilemma of Transformation.......................................................................... 7 2.2 Strategies of Transformation: Sequencing and Timing...................................... 10

3. Poland's Way to a Market Economy: Initial Situation, Conception, and Arising Problems .......................•.............................................................................. 12 3.1 Poland before the Transition................................................................................. 12 3.2 The Balcerowicz-Program ..................................................................................... 13 3.3 Successes and Setbacks .......................................................................................... 15

4. Neglect of the Restructuring Problem........................................................................... 16 4.1 State Enterprises in a Market Environment ....................................................... 16 4.2 Alternative Conception to the Bakerowicz-Program:

Novelty or Supplement? ......................................................................................... 18 5. Poland's Chances on the Way to a Market Economy ................................................. 20 References............................................................................................................................... 21

XIV

REFORMERS, RENT-SEEKERS, FREE RIDERS: SYSTEMIC TRANSFORMATION IN POLAND .......................................................... 23

Marion Weber, Adam G/apinski

Abstracts .......................................................... ....... ....... ............ ............ ....... .... ............ ........... 23 1. The Road to Freedom, Eventually? ............................................................................... 24 2. Demand for and Supply of Reforms: Some Causes and Consequences................... 24

2.1 Reforms as Public Goods ...................................................................................... 25 2.2 The "Supply-Side" of Reforms............................................................................... 26

2.2.1 The Question of the Goal......................................................................... 26 2.2.2 Scope, Speed and Sequencing: Radical or Incremental Strategy? ...... 27

3. The Property-Rights Structure: Object and Determinant of Transformation ......... 30 3.1 Friends and Enemies of Reform........................................................................... 30 3.2 On Organizability and Organization of Interests.................. .............................. 34 3.3 The "Human Factor"............................................................................................... 34

4. Are Political and Economic Reform Joint Products? ................................................. 35 4.1 Virtues and Vices of Democratic Structures in the Period of Transition ....... 36 4.2 The Role of Competition ....................................................................................... 38

5. Will They Make it this Time? ......................................................................................... 39 References............................................................................................................................... 39

THE GAME FOR POWER IN A STATE: THE CHANGES OF THE POLISH ELECTORAL LAW............................................ 42

Jacenty Siewierski, Otto F. Bode

Abstracts ............................................. ................. ............... ........... ........................ ............. ..... 42 1. The Importance of Rules ................................................................................................ 43 2. The Players........................................................................................................................ 45

2.1 The Polish United Workers' Party (PZPR) and its Parties in a Faction......... 45 2.2 The Communist Party of the Soviet U nion ......................................................... 46 2.3 Solidarity .................................................................................................................. 47

3. Changing the Players' Positions...................................................................................... 48 4. The Round-Table as a Committee for Rules ............................................................... 49 5. The Score of the Game Using the New Rules ............................................................. 51

5.1 The Election Results .............................................................................................. 51 5.2 The Political Consequences................................................................................... 51 5.3 The New Government............................................................................................ 52

6. Future Prospects............................................................................................................... 53 References............................................................................................................................... 53

xv

B. CRUCIAL AREAS OF TRANSFORMATION POLICY

PRIVATIZATION IN POlAND: A PROPERTY RIGHTS APPROACH................ 57

Andrea Franz, Alfred Schipke, Mieczyslaw Groszek

Abstracts.................................................................................................................................. 57 1. The Call for Privatization in Different Economies .................. ... ....... ................ ..... ..... 58 2. The Property Rights Approach ...................................................................................... 61

2.1 A Theoretical Outline ............................................................................................ 61 2.2 Application to the Polish Case .............................................................................. 63

3. The Current Legal Framework ...................................................................................... 67 4. Forms of Privatization ..................................................................................................... 69

4.1 Spontaneous Privatization...................................................................................... 69 4.2 Legitimate Forms of Privatization ...................... .................................................. 70

5. The Need for Rapid Privatization.................................................................................. 72 6. Conclusions ....................................................................................................................... 73 References............................................................................................................................... 74

THE STRIVE FOR A COMPETITIVE ORDER: AN EVALUATION OF THE POLISH ANTITRUST ENDEAVORS....................... 77

Martin Kessler, Henryk Mozaryn

Abstracts .................................................................................................................................. 77 1. Introduction....................................................................................................................... 77 2. The Degree of Concentration in Polish Industry ......................................................... 79 3. The Meaning of Monopoly in the Socialist Economy................................................. 80

3.1 Monopolies in the Centrally Planned Economy................................................. 80 3.2 Monopolies in the Reform Economy................................................................... 80

4. The High Degree of Monopoly in the Process of Transition ..................................... 82 4.1 The Structure-Conduct-Performance Approach ................................................ 82 4.2 The Significance of Entry Barriers ....................................................................... 83 4.3 Strategic Moves against Potential Competition.................................................. 84

5. Public Policy Instruments to Increase Competition .................................................... 85 5.1 Decartelization ........................................................................................................ 85 5.2 Promotion of Entry .................. ;.............................................................................. 86 5.3 The Liberalization of Foreign Trade.................................................................... 86

6. Conclusion ......................................................................................................................... 87 References............................................................................................................................... 87

XVI

THE ROLE OF MONETARY POLICY FOR THE POLISH ECONOMY IN TRANSITION ................................................................ 90

Manfred Kremer, Martin Gilles, Jerzy Zdrzalka

Abstracts.................................................................................................................................. 90 1. Introduction........................................................................................................... ............ 91 2. The Legacy of the Past and the Need for Monetary Reform..................................... 91

2.1 The Polish Currency Order at the Outset of the Economic Reform............... 92 2.2 The Quality of Money in Different Economic Systems ..................................... 93 2.3 Flaws of the Polish Currency and their Macroeconomic Consequences......... 95 2.4 Necessary Reforms of the Monetary Sector........................................................ 97

3. Development of a New Monetary Constitution for Poland........................................ 99 3.1 The Role of the National Bank of Poland ........................................................... 100 3.2 Creating an Efficient Commercial Banking System........................................... 105 3.3 Adoption of an Appropriate Exchange Rate Regime........................................ 110

4. A Transitional Strategy for Monetary Policy................................................................ 113 5. Conclusions ....................................................................................................................... 116 References............................................................................................................................... 117

SOCIAL POLICY IN POLAND......................................................................................... 120

Christel Naujoks, Piotr Bledowski

Abstracts.................................................................................................................................. 120 1. Introduction.................................................... ...................... .................................. ........... 121 2. Polish Social Policy: Treated as the "Cinderella" in the Economic System

until 1989? .................................... ..................................................................................... 122 2.1 Definitions of Polish Social Policy ........................................................................ 122 2.2 Different Functions of Polish and Western Social Policy.................................. 123 2.3 Some Observations on the Development of the Polish Social Security

System....................................................................................................................... 123 3. On a Theory of Social Policy .......................................................................................... 126

3.1 Formal Principles.................................................................................................... 126 3.2 The Role of the State in Social Policy .................................................................. 128

3.2.1 Necessity of a State Social Policy ............................................................. 128 3.2.2 Economic Features which Determine the Necessity of a State Social

Policy ........................................................................................................... 129 3.2.3 The Conditions of Development of a State Social Policy..................... 131

4. Prospects for a New Social Policy in Poland ................................................................ 132 5. Concluding Comments .................................................................................................... 139 References............................................................................................................................... 140

XVII

c. INTERNATIONALIZATION AS A SUPPORTIVE FACTOR

CHANCES AND LIMITS OF THE INTERNATIONALIZATION OF POLAND'S PHARMACEUTICAL INDUSTRy..................................................... 145

Wilfried Boroch

Abstracts.................................................................................................................................. 145 1. Open Door Policy of the Republic of Poland and the National Pharmaceutical

Industry ............................. ................................ ..................... ......... ................................... 146 2. Important Market Structure Data of Poland's Pharmaceutical Industry.................. 147 3. Establishment of the Industrial and Public Health Policy Framework of the

Pharmaceutical Market as Part of the Reform Process.............................................. 150 3.1 Price and Reimbursement Regulations ............................................................... 150 3.2 Patent and Approval Regulations ......................................................................... 151 3.3 Privatization and Direct Investment Regulations............................................... 151 3.4 Important Foreign Trade Regulations ................................................................. 152

4. Process of Internationalization in the Pharmaceutical Industry ................................ 153 4.1 Internationalization of Drug Competition........................................................... 153 4.2 Internationalization of Pharmaceutical Companies ........................................... 156

5. External Economic Experiences of Poland's Pharmaceutical Industry .................... 158 6. Perspectives ....................................................................................................................... 161 References............................................................................................................................... 162

THE TRANSFORMATION OF THE POLISH ECONOMY: THE ROLE OF JOINT VENTURES ............................................................................... 165

Peter Kilrble, Perdita Wingender

Abstracts ................................................................. ...................................................... ...... ..... 165 1. Introduction....................................................................................................................... 165 2. The Transformation Program of the Polish Government .......................................... 166 3. The Influence of Western Joint Ventures on the Development of the Polish

Economy ............................................................................................................................ 169 3.1 Development and Status Quo of Joint Ventures in Poland .............................. 169 3.2 The Importance of Joint Ventures for the Polish Economy in General......... 170

4. The Polish and the Western View of Motives for the Founding of Joint Ventures 171 5. Problems Arising during the Founding and Implementation of Joint Ventures

right up to the Start of Business from the Western Point of View............................ 173 6. The Importance of Joint Ventures during the Transformation Process and

afterwards.......................................................................................................................... 174 7. Resume and Prospect ....................................... ........... ........... ................ ......................... 177 References................................................................... ........ .................................................... 178

A. Economics and Politics of Transformation

SYSTEMIC CHANGE TO A MARKET ECONOMY: GENERAL ISSUES AND FIRST EXPERIENCES IN POLAND

Thomas Apolte and Feliles Gradalski

Abstract: In the fIrst part of this paper, some general issues concerning the transformation of centrally planned economies are discussed. Special attention is given to the problem that in most cases, for technical as well as political reasons, a switch from a central coordination of economic and social processes to a decentral self-regulating mechanism has to be made early, while in turn the necessary institutional foundations have yet to be set up. The consequences of this "dilemma of transformation" both for the economy and society are briefly highlighted and the options as regards their handling examined. The second part of this paper deals with Poland's choice between the two ills of this dilemma of transformation together with the issues arising from this, and examines possible alternative policy options at the beginning of the transformation process and today.

Zusammenfassung: 1m ersten Teil dieses Beitrags werden zunachst etruge generelle Probleme der Transformation sozialistischer Planwirtschaften behandelt. 1m Mittelpunkt steht dabei der Umstand, daB aus technischen und politischen Griinden meist ein sehr friiher Wechsel der okonomischen und sozialen Koordinationsmechanismen von der zentralen Planung zur dezentralen Selbststeuerung vollzogen werden muS, wofiir allerdings die institutionellen Grundlagen noch nicht bestehen konnen. Es werden kurz die Konsequenzen dieses "Dilemmas der Transformation" fiir Wirtschaft und Gesellschaft sowie Optionen zum wirtschaftspolitischen Umgang damit aufgezeigt. 1m zweiten Teil des Beitrags werden dann die polnische Wahl zwischen den zwei Dhein des Dilemmas der Transformation, die hieraus erwachsenen Probleme und schlieBlich mogliche alternative Politikoptionen zu Beginn der Transformation und heute untersucht.

Streszczenie: W pierszej czesci opracowania poruszone zostaja generalne problemy transformacji gospodarek socjalistycznych. W szczegolnosci podkresla sie koniecznosc jak najszybszego wprowadzenia mechanizmu zdecentralizowanej koordynacji, ktory jednakze natrafla na ogromne bariery w postaci istniejacych instytucji typowych dla gospodarki planowej. Ten "dylemat transformacji" ma okreslone konsekwencje dla przyszlych wariantow rozwoju gospodarczego. Z tego punktu widzenia - w drugiej czesci opracowania - analizuje sie dwie opcje polityki gospodarczej mozllwe do zastosowania w poczatkowym okresie transformacji.

1. SHORTCOMINGS OF SOCIALIST ECONOMIES AND GOALS OF THE TRANSFORMATION

The end of the eighties did not only mark the end of an eventful decade, but above all also the end of an idea. For more than 70 years the advocates of the communist idea tried to develop a new collectivistic society based on solidarity rather than selfIshness, the principle on which capitalist societies are expected to function. The fundamental failure of this attempt has been shown by a great number of theoretical analyses, one of which, the famous article by Ludwig von MISES about the impossibility of rational economic account in an environment of state ownership, was already published in the early twenties

4

(v. MISES, 1920/21). What is more, the escalation of increasing economic problems in the past decade is further empirical evidence of this failure (APOLTE/CASSEL, 1991).

1.1 THE END OF A SOCIETAL EXPERIMENT

A brief look at the annual growth rates in national income over an extended period shows, since 1951, a declining trend in most countries (Table 1). The comparatively high growth rates at the beginning of this period could only be realized through the well-known strategy of extensive growth, which since World War II has been applied all over the socialist world by means of an offensive mobilization of new resources.

TABLE 1: Annual Percentage Growth Rates of the National Income Per Capita

Year 1951-73 1974-82

East Germany 4.9 2.8

Czechoslovakia 3.1 1.1

Poland 3.5 -0.4

Romania 4.8 2.7

Hungary 3.5 1.5

Yugoslavia 4.6 4.1

Soviet Union 3.9 1.5

SOURCE: IMF, World Economic Outlook, May 1990, p. 65.

1983-88

2.2

1.1

3.3

2.5

1.5

0.2

1.9

Since the strategy of extensive growth with the help of national resources naturally had to come to an end, the reform-oriented countries especially switched over to a strategy of externally fmanced domestic growth. However, they never managed to utilize external resources for investments in such a way as to reach a sufficient return on investment for a solid fmancing. As a result, foreign debt has not helped in improving the efficiency of the domestic economy. On the contrary, economic performance has even deteriorated since that time. Evaluated in terms of world-market prices, national income per worker shows a dramatic decline in some cases, even though the official data in domestic prices look comparatively favorable (Table 2; see also VOLLMER, 1990, pp. 212f.).

5

TABLE 2: Development of the Labor Productivity in East Germany, Hungary, Poland, and the Soviet Union, 1976-85

Country East Germany Hungary Poland West Germany

2 1 2 1 2 2

1976 100.0 100.0 100.0 100.0 100.0 100.0 100.0

1977 104.5 94.9 107.4 99.7 92.1 99.4 103.0

1978 107.9 90.4 112.0 100.0 87.3 97.4 105.4

1979 111.6 85.0 113.2 94.9 87.1 89.3 108.3

1980 116.3 75.8 112.2 100.6 74.3 69.7 108.6

1981 121.6 87.8 116.4 111. 5 42.0 51.9 109.6

1982 124.4 82.7 119.6 109.9 63.3 48.7 110.7

1983 129.7 79.9 120.6 95.9 57.4 52.6 114.1

1984 136.5 ·76.2 124.3 105.1 69.3 56.7 117.2

1985 143.3 82.1 123.3 99.6 88.8 58.7 118.7

1: Index Numbers of National Income per Worker, deflated with the Price Index of the National Income.

2: Index Numbers of National Income per Worker, evaluated with the Black Market Exchange Rates to the Deutsche Mark and deflated with the Price Index of the West-German GNP.

SOURCES: Statistical Yearbooks of East Germany, Poland, and Hungary; Labor Productivity of the Soviet Union: S. REYMANN (1988), p. 44; Annual Expertise of the German "Sachverstiindigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung" 1989; Black Market Exchange Rates: P. A. WINGENDER (1989), p. 204; Authors' Calculations.

Figures below explain why for most of the socialist countries in the last 10 years the external debt has grown to become one of the largest problems. In addition to a drop in the growth rates of national income, which have nearly all become negative in the last two years (1989: Czechoslovakia -3.5%; Hungary -1.9%; Poland -2.5%), the almost unbearable burden of hard currency debt has come to be the most visible indicator for the failure of the socialist societal experiment (Table 3).

6

TABLE 3: Net Liabilities in Hard Currency Per Capita in US·$, 1977·88

country East Germany Hungary Pol and USSR Yugoslavia

1977 403 339 427

1978 515 488 530 55

1979 606 590 633 58

1980 666 626 676 56 632 1981 697 644 705 62 703

1982 617 616 682 59 725

1983 518 551 719 50 706

1984 405 478 723 37 666

1985 410 582 785 44 701

1986 520 855 892 56 735

1987 593 1055 1037 93 777

1988 575 1433 992 III 641

SOURCES: E. U. CICHY (1990), pp. 129, 158, 194; Monthly Report of the Vienna Institute for Comparative Economic Studies, No. 5/1986, 5/1988, 5/1989, 5/1990; Statistical Yearbook of the GDR; IMF, International Financial Statistics, Yearbook 1989; Authors' Calculation.

1.2 GOA~ OF SYSTEMIC CHANGE

In addition to a wide range of special properties, socialist economies are characterized by a high degree of institutional instability. The system-specific malfunctionings of the planning process as well as chronic incompatibilities of monetary and real-sector planning continuously induce potential instabilities of the economic processes. This holds particularly true for the systems of motivation and control, since the incompatibilities between monetary and real-sector planning lead to distortions in the incentive structure of the economy, which in turn fail to channel individual behavior into the direction of centrally planned economic activities.

The political leaders react to such distortions with frequent institutional reforms, which in socialist phraseology are regularly introduced to the public as "perfection" (Vervollkommnung). After a more or less short learning process, the individuals adjust to the new institutional setting with the result that new distortions in the incentive structure become relevant (HENSEL, 1970). This induces further institutional reforms, and so on. Therefore, the institutional setting of a socialist economic system is inevitably subject to frequent restructuring and is in this respect incapable of performing its original function, i.e. limiting governmental and private power and decreasing transaction costs.

These are the most important reasons why there is no inherent economic stability in socialist countries despite their comprehensive planning of the economic processes. Seemingly, economic, as well as social, stability can only be achieved through a process of "socialist crisis management", which aims at the limitation of emerging incompatibilities of economic planning via discretionary interventions into the decisions of enterprises and

7

individuals. Moreover, after doing so, it has to reset the institutions in order to cut up the respective sources of distortions, though with the result of new ones emerging later on.

Therefore there can be no protection against arbitrary governmental action and no predictability of legal decisions either. Such protection of the individuals against the state requires the functioning of the institutional setting as a framework, inside which governmental action itself takes place. But central planning requires much the opposite, i.e. that the institutional setting always is the instrument and the result of present and past governmental actions. Hence, social stability and personal freedom are only apparent phenomena, and conditions for individual economic and personal decisions are thus volatile and unreliable; they have a short-term character and are at any time subject to discretionary decisions of the political elite.

It must, therefore, be the goal of the transformation to first of all install a new institutional setting which is capable of all its original tasks, i.e. to prevent governmental and private interference with individual economic and personal decisions, thus creating the basis for social stability, personal freedom and decentral responsibility for each decision and activity. Furthermore, it has to lay the foundations for a Western-type state administration for the supply of public goods.

2. PROPERTIES AND STRATEGIES OF A TRANSFORMATION

When the socialist crisis management of the political elite fails to operate, the collapse of the conventional political and economic control mechanisms may come about quite suddenly. As a consequence of their political upheavals this is exactly what happened in 1989 in nearly all of the CMEA-countries. And although the political power of the communist parties can be destroyed through revolution, the necessary institutional setting for a self-regulated Western-type economic and political system still has to be set up, which is a task of at least as much revolutionary upheaval as the political revolution itself. But since the requirements of this task are of quite a different nature, it follows that good revolutionaries are not necessarily good system-transformers.

2.1 THE DILEMMA OF TRANSFORMATION

The way from a socialist system to a market system with inherent mechanisms of self regulation and stabilization is shown in Exhibit 1. Starting point is the above described institutional framework of a socialist economy and its potential economic and social instability, which continuously is being prevented from collapse by the socialist crisis management.

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9

The new institutions must comprise, in addition to others, a two-tier banking system, a new, or totally rearranged public administration with systems of political decision making, private ownership of the enterprises, and an adequate system of social security. Working together, these institutions induce a system of societal, political and economic mechanisms for self regulation, or at least build the basis for routinized decision procedures, e.g. via public elections. As such, they are able to provide economic and social stability, without the need for a comprehensive crisis management through a central authority.

Whatever the tensions created by the process of transforming societal and economic institutions and the switching-over from a socialist crisis management to self regulation, there arises the fundamental issue of each and every systemic change: For self regulation to function, practically all institutions have to be renewed. The institutions, however, cannot be set up in sufficient numbers without the prior collapse of the socialist crisis management.

Since setting up new institutions takes time, a considerable time of institutional vacuum is to be expected, resulting in a potential lack of control and regulation. Such an institutional vacuum is of particular risk to the success of a systemic change, corresponding in almost a classic manner to the preconstitutional situations, theoretically invented by constitutional economics (BUCHANAN/TULLOCK, 1%2; BUCHANAN, 1975; BUND, 1984).

To prevent the potential lack of control and regulation from becoming manifest, another kind of crisis management is needed during the time of institutional vacuum. Compared to the socialist crisis management, this "transitory crisis management" is a much more difficult proposition. This is because the old institutions, such as branch ministries, central bank and state enterprises were, despite their being subject to frequent institutional reforms, nevertheless functioning, i.e. in existence. During the transitory crisis management, these institutions have to be dissolved or totally restructured, and in most cases they have to be completely restaffed, without meanwhile losing control over the economy (v. DELHAES/FEHL, 1991).

Transitory crisis management with its discretionary, so-called "manual steering" of the economy through political leadership is much more similar to the old methods of central planning than the aspired market mechanisms. Therefore, if politicians hesitate too long when switching-over from transitory crisis management to self regulation, it is likely that the public will begin to suspect that the government is just maintaining the old system under a new name. This is exactly what happened to the ftrst non-communist government in Hungary, which was confronted with accusations of this kind after some months of being elected. Their communist predecessors had already begun with some success restructuring the institutions towards a market economy well before political changes took place (TARDOS, 1989). Rather than enforcing a radical change in economic policy, the young non-communist politicians all in all continued this policy of gradual change with one difference: they now publicly proclaimed a Western-type market economy as the essential aim of all institutional changes. The political consequences of this gradualism showed themselves in tendencies towards social resignation, frequent government reshuffles and a considerable amount of social unrest.

10

As a consequence of the Hungarian example, a government may decide to switchover to self regulation immediately, in which case the government has to take the risk of a manifest lack of control and regulation, since the necessary institutions for self regulation are as yet not available. Poland and the former GDR are good examples of this. Both countries decided to switch over to self regulation very early. Now they are being criticized for delaying the essential part of the transformation and, what is more, for sacrificing social security at the altar of a (yet) not functioning market mechanism.

Switching-over to self regulation only after the institutional transformation has been completed is impossible for political reasons, as the Hungarian example clearly demonstrates. It is furthermore not possible for technical reasons either. This is because restructuring the institutional framework means that the transitory crisis management loses its instruments and clearly, neither society nor the economy can be put into cold storage in the meantime. On the contrary, during that time they are particularly prone to distorting influences from pressure groups and rent seekers of all kind (see APOLTE, 1990; LEIPOLD, 1991; WEBER/GLAPINSKI in this volume).

All in all, there is nothing like an optimal point in time for switching-over, since the political and technical necessity for switching-over early to self regulation simultaneously creates a preconstitutional state of an open lack of control and regulation. This problem may well be called the "dilemma of transformation".

2.2 STRATEGIES OF TRANSFORMATION: SEQUENCING AND TIMING

In the discussion about transforming socialist systems, the question often arises of whether a systemic change should be carried out in one large step ("big-bang transformation"), or over a longer period ("gradualistic transformation"). In reality this is not the point, as the institutional frarllework cannot be rearranged over night (HERRMANN-PILLATH, 1991, pp. 179ff.). What is more, the necessary time budget is often heavily underestimated by both observers and politicians alike. What can be done, however, is to limit the time for transformation to be as short as possible, which is only logical given the unavoidable institutional vacuum in the meantime.

The question of big bang or no big bang is, therefore, not relevant for the transformation as such, but only for the switching-over from the system of central control to one of self regulation, since the liberalization of goods and factor prices, the dismantling of subsidies, and the introduction of full self-responsibility for enterprises can principally be achieved in one single act. On the other hand, it may theoretically be extended over a longer period of time, in which case a decision is made in favor of a slow "gliding-over" from one mechanism to another.

If a decision is made in favor of a big-bang solution, the right moment for such a step has, of course, to be clarified. Here, one may opt for an immediate switching-over to self regulation at the very beginning of the reform process, which would require only a short time of preparation. Or, on the other hand, one could wait with the big bang until the institutional framework for a market economy has been completed. Since this has been recognized as being impossible, a modified option could be to postpone the big bang for as

11

long as possible, in order to be able to make use of a larger number of institutions restructured to accommodate a market economy afterwards.

THE STRATEGY OF GLIDING OVER

This strategy is the basis for the radical transformation program of Stanislav Shatalin, which was adopted by the President of the Russian Parliament, Boris Yeltsin (SHATALIN, 1990). It is also the basis for a program taken on by Soviet President Gorbachev himself, who put the Shatalin plan and the propositions of his former Prime Minister Ryshkov -which in essence seek to preserve the system - together to a rather confusing mix of both (PETERHOFF, 1991). The Shatalin as well as the Gorbachev plan are both characterized by a gradual change from a central control mechanism to market self regulation, introduced step by step, in conjunction with the transformation of the institutional framework and the capitalization of enterprises. By doing this, the reformers intend to privatize state assets at the same time as liberalizing prices, which in turn should help to cut back monetary overhangs and limit otherwise unavoidable heavy leaps in market prices.

Though the idea of a simultaneous solution of all problems seems to be attractive, one may have doubts about its realism (SCHRETIL, 1990, pp. 10ff.). The emerging co-existence of different allocation mechanisms, decision-making procedures, property rights and areas of responsibility during the transformation period requires such an immense amount of cooperation between individual decision-makers - a situation which not even in the time of orthodox central planning had ever existed. What is more, this cooperation has to be more or less fully voluntary, since there is no consistent system of economic control and no institutional basis for individual and collective action any more. Finally, the required voluntary cooperation does not only call for altruistic behavior in all respects, but also for a complete knowledge of all individuals about the optimal choice for each decision from the viewpoint of the society as a whole.

The realization that such preconditions had never been available anywhere, was one of the reasons why people in East European countries decided to transform their economic systems. However, it does not seem right to expect that things that never functioned under socialism should do so now in a period of systemic change. It makes more sense to either postpone the switching-over to a system of market self regulation until a considerable range of adequate institutions have been set up, or to opt for an immediate switching-over, in order to rely as long as possible on more or less functioning markets during the time of transformation. This again points the way to the two alternative strategies of big bang.

THE STRATEGY OF A POSTPONED BIG BANG

Arising from the understandable wish for a transformation with the least possible institutional vacuum and instability, it seems desirable to postpone the big bang until a complete new institutional framework has been created out of a socialist setting. Despite the fact that in its ideal form this is politically and technically impossible to carry through, the Hungarian communists managed after all to set up some of the required institutions before the political change to a non-communist government occurred. Although these institutions were anything but sufficient for a functioning market economy, they nevertheless enabled the new government to make use of them in their economic policy.

12

However, this was the result of a unique historical situation. The traditional preferences for economic reforms into the direction of a market economy had in the past been slowed down by the Soviet Union. Since the events of 1956, Hungarian politicians never needed to refer to that point. As they had always shown a comparatively large amolint of good will and cooperation on the one hand, and could point to their external restrictions on the other hand, Hungarian communists had until the late eighties never been bothered with too much pressure from the inside to push reforms farther than a socialist politician could wish to. Only this enabled them to maintain the socialist crisis management, and, simultaneously, to set up step by step some market-oriented institutional structures (WU, 1990, pp. 98ff.).

Tragically for the newly established non-socialist government, this convenient configuration collapsed even before the new government had been elected. In the absence of Soviet pressure to maintain socialism and with increasing pressure from the Hungarian public to bring about some revolutionary changes, especially regarding the bad economic situation, there was no point in postponing the big bang any longer. It follows from this, that under certain economic conditions, postponing the big bang and maintaining some kind of "manual steering" in the meantime may be desirable from a mere economic point of view, but considering the various political options, it seems to be unrealistic in most situations. Moreover, the scope which these institutions may in effect, have, should not be overestimated. This holds especially true for Hungary.

THE BIG BANG AS A STARTING POINT FOR TRANSFORMATION

This strategy is very much the result of the realization that there is no real chance of escaping from the dilemma of transformation. There can be no switching-over of the economic processes from socialist or transitory crisis management to self regulation on the basis of a well established set of institutions in its ideal sense as illustrated in Exhibit 1.

Big bang as a point to start the transformation process from means that the transitory crisis management is given up in favor of an early introduction of market forces, even though the institutional framework is not yet able to unfold its integrative and coordinative functions. Subsequently, the institutional rearrangement as the essential part of the transformation has to be completed quickly, in order to overcome the impending institutional vacuum. There can be no doubt that this is the crucial, yet unavoidable, issue of this strategy. After the big bang the transitory crisis management is limited first and above all to some discretionary supporting measures to fight off undue social hardship, which, indeed, is one of the most important tasks during the transformation period. East Germany as well as Poland and Czechoslovakia, after all, opted for the strategy of a big bang solution as the starting point for transformation, even though in the latter case, a softer kind of transition had been intended initially.

3. POLAND'S WAY TO A MARKET ECONOMY: INITIAL SITUATION, CONCEPTION, AND ARISING PROBLEMS

3.1 POLAND BEFORE THE TRANSITION

During the eighties, the Polish government under the leadership of the United Polish Worker's Party (UPWP) undertook several reforms of the polish economy, aimed at

13

improving efficiency, but without changing the fundamentals of socialism (BALCEROWICZ, 1989b; WORLD BANK, 1987). However, the attempt at obtaining the very best from what a planned and a market economy had to offer respectively, ended with the acknowledgement of having only received the worst of both. With the escalation of the political crisis in the relationship between UPWP and the reestablished Solidarnosc, the economic crisis also deepened. The sharp drop in national income at the beginning of the eighties had barely been overcome, when the national income started to decline again.

In the aftermath of the first, failed "stage" of economic reform, a fierce struggle for income broke out in the mid eighties. The continuous administrative increases in prices led to strikes, which lasted as long as the old level of real income had been reobtained via nominal wage increases. Subsidies and the granting of practically unlimited credit to the socialist enterprises served as fmancial sources for undue wage increases. From 1985 to 1989 the state-budget deficit increased from 127 bill. to 4750 bill. Zloty, which is 4 % or 24 % of the budget revenues, respectively (GUS, 1990, p. 129). In the same period, the annual rate of escalation in retail prices increased from 14.4% to 343.6% (GUS, 1990, p. 170). After the full liberalization of food prices on August 1, 1989, their rate of escalation increased up to nearly 2000 % (MACHOWSKI, 1990, p. 33).

A shattered political and economic state together with the almost unbearable debt burden were the main properties of the Polish situation before the transformation began. What made the task even more complicated for the new government was the peculiar political constitution of the Polish parliament, the Sejm (see also SIEWIERSKIjBODE in this volume). Resulting from the round-table talks, the UPWP was guaranteed 65% ofthe seats in the Sejm, together with their earlier satellite parties. This meant that no legislative action was possible without the agreement of the communists. But since the UPWP was in a state of internal dissolution, the communists lost their ability for collective action inside the parliament. Lately, they only distorted the non-communists' policy in an unsystematic way, depending on the respective interests of individual actors. This had some serious destructive impacts, especially on the institutional rearrangement.

Regarding the economic and political background, the new non-communist government decided on a strategy of big bang as the starting point for transformation. A closer look at the Polish situation as it presented itself then, makes clear that there was no alternative, neither for political nor for economic reasons. Poland was in need of a clear and radical stabilization program for its negotiations with the International Monetary Fund. What was more, the whole socialist institutional framework had fallen into a process of rapid erosion. At the same time, the socialist crisis management had begun to break down during 1989, with consequences for the remaining central allocation of resources and for monetary and fiscal discipline. The new government quickly realized that under such conditions there was no chance of postponing the big bang for more than a few weeks without incurring the risk of total economic and political chaos.

3.2 THE BALCEROWICZ-PROGRAM

The Balcerowicz-program, named after its author, the first non-communist Minister of Finance, consists - in addition to containing some measures for a preparatory step - of two main parts. While the two parts are presented as a joint package of proposals, it would be

14

more true to say that individually, they co-exist side by side, with one part dealing with a stabilization program and the other with a program for the restructuring of the economy (BALCEROWICZ, 1989a).

It was the main goal of the stabilization program to stop hyperinflation, to bring about free and stable prices, and to stabilize the value of the Polish currency, the Zloty, both internally and externally. To achieve this, it was necessary to balance the state budget and to turn to a monetary stabilization policy (DABROWSKI, 1991):

The budget deficit was balanced through the progressive cutting back of enterprise and price subsidies. The Zloty was depreciated by more than 46%, and a uniform exchange rate of 9500 Zl. per US-dollar was introduced. This exchange rate had to be held via market interventions and served as a nominal anchor for the monetary policy (LIPTON/SACHS, 1990, pp. 113ff.). At the same time, a partial so-called internal convertibility of the Zloty was introduced.

The monetary stabilization policy was made possible by the fact that it was prohibited to fmance budget deficits through credits from the central bank. To put an end to the wage­price spiral, the government introduced special measures to harden the enterprises' budget constraints. Here, a special tax with a sharp progression has been imposed on those enterprises, which increased their wage fund for more than a currently fixed ratio of the inflation rate.

The restructuring program is based mainly on the following five parts:

1. The economic environment for enterprises is to be changed with the help of a tax reform, i.e. by simplifying the tax system in general and by lowering the marginal tax rates. Furt;lermore, a full convertibility of the Zloty and a comprehensive liberalization of foreign trade is intended. Finally, the program embodies the setting up of stock exchanges and the support of private-bank foundations, with both domestic and foreign capital.

2. An important task is the privatization of state enterprises. Here, the interests of managers and workers of the respective enterprises are taken into consideration relatively strongly. In particular, they are to be given preferential treatment through lower prices in the case of enterprise sales, or even a transfer of ownership without charge (BALCEROWICZ, 1989a, p. 5).

3. The efficiency of enterprises which, for whatever reasons, have to remain in state ownership for a while is to be improved, likewise that of those enterprises which are not to be privatized.

4. Setting up the institutional basis for the reallocation of resources through markets. Unfortunately, it is not made clear what exactly is meant by this.

5. Finally, a social security system is to be established.

The stabilization program was prepared in the fall of 1989 and launched on January 1, 1990. In contrast, the restructuring problem remained unsolved throughout the first half of 1990, and as a result it got caught in a powerful struggle involving a number of pressure groups. This applied to almost all parts of the restructuring program, but the most negative impact was produced by a delay in the capitalization and privatization of state enterprises.

15

The fIrst version of a privatization law already foundered in the fIrst months of 1990, and the drawing up of a new version was completely taken up by a fight for a just distribution of enterprise parts and shares to (former) managers, workers and - in a concealed way - to the old bureaucratic cadres. In July at last, a compromise was reached and a new law passed in parliament. However, much room for interpretation for the various groups remained. And, what is more, the share that foreign investors hold in Polish enterprises may not exceed the limit of 10% without the special permission of the President of the Foreign Investments Agency.

3.3 SUCCESSES AND SETBACKS

The first year of transformation saw some interesting results, some of which had been expected, while others produced astonishment. On the revenue side it had been foreseen, at least by the advocates of the stabilization program, that a rapid decline in market disequilibrium would occur, fIrst, through a declining excess of demand, and later, through an increase of market supply. On the cost side, a sharp decline in the production of the state sector and a sharp increase in retail and wholesale prices during the first months of the transformation had been expected by both· the advocates and the opponents of the stabilization program.

One of the most important results was a strong tendency towards market equilibrium produced by the very first weeks of the transformation. Excess demand was cut down, and the well-known socialist phenomenon of queuing for goods disappeared almost completely, without leading to the suspected erratic fluctuations of prices and quantities (PYSZ, 1991). Private trade, having been in the shadow of the large state-owned trading trusts for so long, soon began to flourish and the supply of goods of all kinds improved over night.

On the other hand, the adjustment shock turned out to be more fIerce than expected (JERMAKOWICZ, 1990, pp. 98ff.). The index of consumption-goods prices rose by a rate of 79% in January 1991, compared to December 1989. In February and March the monthly inflation rates decreased to 24% and 4.5 %, respectively, the development being rather similar to that in West Germany following the currency reform of 1948. However, after this drastic adjustment-inflation, it was not possible to decrease the rate of inflation any further. On the contrary, the rate remained high between 4% and 6% monthly and again started to increase considerably by the end of the year.

Industrial production dropped drastically. Already in February, its index had fallen by nearly 30%, compared to December 1989. Six months after launching the stabilization program, industrial production reached a level of only 72% of that in December, while in West Germany, six months after the currency reform in 1948, it had already increased by a rate of 58% (JERMAKOWICZ, 1990, p. 99). Interestingly, the decrease in employment was moderate, compared to the fall in production. Depending on the data source, the rates differ between 7% and 10%. At least, the unemployment rate reached some 6% at the end of 1990.

All in all, the strongest impact transformation had during the first year was on the demand side of the economy. On the one hand, the private sector developed dynamically, especially regarding domestic trade. On the other hand, however, the reaction ofthe state enterprises

16

to the newly created market forces was frustrating. During the whole year there was no noticeable recovery in production and the hopes that the behavior of enterprises and managers would change were sadly not fulfilled.

4. NEGLECT OF THE RESTRUCTURING PROBLEM

Although the disappointment felt by observers and initiators of the Polish transformation is understandable, its results should really not surprise, since they have essentially been the consequence of an early switching-over from a socialist crisis management to market self­regulation without the necessary institutional setting having been made available. This was obviously unavoidable for political and technical reasons, but from an economic point of view it was bad.

4.1 STATE ENTERPRISES IN A MARKET ENVIRONMENT

The surprise caused by the reaction of enterprises may be explained by the fact that the ownership transformation had been widely seen as being subsidiary to other measures. At least for a transitory period, it was hoped that the new environment would induce some sufficiently working mechanisms of positive and negative sanctions, leading enterprises to behave similarly to those in modern Western market economies with private property. However, in addition to other related problems, such a point of view disregards at least two important features:

the traditional vertical integration of enterprises into the socialist economic bureaucracy; and the consequences of changes in the internal decision-making structures leading in the direction of labor self-management during the last decade.

One of the results of a forced development of labor self-management is a synchronization of interests between workers and management. The power position of managers becomes more and more dependent on enterprise-internal workers councils, requiring managers to be heedful of their demands and requests. At the same time, the dependency of managers on branch ministries, or, more generally, state administration, erodes (HINDS, 1990, pp. 36ff.). What is more, enterprises and banks, now having objective functions determined by the workers' interests rather than by anyone else, show a tendency to completely reverse their former dependency on the state administration.

In the case of an enterprise being threatened by bankruptcy caused by poor liquidity, its supplier will simply prolong his supplier credit. This is because the highly concentrated market structures often cause suppliers to get into trouble on the demand side if just one of their customers goes bankrupt (often there is only one big customer anyhow). In this way complex networks of highly interdependent enterprises have evolved in the past, which are all threatened with bankruptcy today should only one of them face liquidation as a consequence of hard budget constraints.

This holds true also for the banking sector. Prior to the transformation, each bank was assigned to some specific branches and, thus, enterprises, so that today nearly every bank has kept its own set of branches as customers. This makes the banks actual hostages of

17

illiquid enterprises, as they often have few chances to run such enterprises into bankruptcy without becoming illiquid themselves and hence going bankrupt, too.

Should the state administration nevertheless decide to put into liquidation a part of the network's enterprises or to stop refmancing their banks, they risk creating a domino effect, in which the whole network of enterprises and banks, possibly being the mainstay of a complete industrial branch, break down simultaneously. Such a breakdown generally causes shortages in the domestic supply of goods as well as unemployment, this being reason enough for the state administration or the central bank to refrain from a policy of hard budget constraints, and to satisfy the demand of enterprises for additional fmancial resources. This had been the case all over the last decade in Poland, and led to a series of failed economic reforms.

If, as part of an economic reform, a government nevertheless starts to impose hard budget constraints for all enterprises, then the enterprises start to look for a kind of "survival strategy" (PYSZ, 1991). In case one of the respective network's enterprises decides to leave the internal solidarity in order to rearrange its internal structure and to look for emerging markets on its own, forcing other enterprises to repay their outstanding liabilities, the penalty will probably be bankruptcy caused by the other members of the network. Moreover, this enterprise will be the only one revealing its formerly concealed capacities. After stabilization has failed, which had usually been the case until recently, a recentralization occurs, with the administrative bodies referring to these higher capacities. All in all there is no incentive for the enterprises and their bodies to cooperate with the reformers. Rather, it is rational to run a strategy of survival, decrease output sharply, fire workers from the periphery of the staff and wait for "better" times with softening budget constraints.

In doing so, enterprises start a comprehensive search for short -term financial sources in order to maintain the old internal enterprise structure, instead of starting to search for profits in the emerging goods markets and to restructure the enterprise in the direction of the market demand. Such short-term fmancial sources arise especially from:

the opportunity to raise prices with the help of monopoly and differential rents, emerging from the distorted market structures, the undue plant sizes, and the liberalization of prices; the mutual supplier credits which have been granted especially since January 1, for the above-mentioned reasons; soft budget constraints towards banks, as banks are essentially dependent on "their" enterprises; credit-granting to non-solvent debtors is still the rule rather than the exception in Poland.

Such mechanisms have led to intense domestic power struggles between the Minister of Finance on the one side, whose aim is to continue the macroeconomic stabilization and, on the other side, the particular interests of managers and workers as part of the network of some enterprises and banks as well as of enterprise-internal decision-making structures. As long as such complex structures inside and outside of the various enterprises and banks remain in operation, macroeconomic stability and with it the stability of emerging markets can only be achieved through the strong arm of some courageous politicians since the

18

essential institutional basis is lacking. As these cannot be solid preconditions for a free economy, the structures are to be dissolved as soon as possible.

In order to do so, a comprehensive redefinition of property rights in its broadest sense is to be brought about (see FRANZ/SCHIPKE/GROSZEK in this volume):

The enterprises have to be reorganized from self-management to central management, in order to separate the interests of workers and managers. Enterprises and banks have to be capitalized and privatized, in order to break up the solidarity in granting mutual supplier credits between the enterprises and between enterprises and banks. Each resign of an account receivable should lead to a loss in the assets of an utmost clearly defmed person. Finally, technical solutions for the deglomeration of mutual liabilities of enterprises and banks have to be developed, in order to stop their fmancial interdependencies. For this purpose, the state could buy parts of the receivables from the enterprises and banks, and collect them from the respective debtors on its own responsibility (HINDS, 1990, pp. 74ff.).

Poland clearly neglected these tasks during the first year of the transformation process. The ensuing economic problems led to several alternative transformation programs, some of which concentrated more on the restructuring problem (BEKSIAK et al., 1990; for privatization, see FRYDMAN/RAPACZYNSKI, 1990), while others included changes to the Balcerowicz-program which - so some people thOUght - was to blame for the progress of transition moving too slowly. One of the most prominent alternative proposals to the Balcerowicz-program has been made by a working group called "Centrum-Agreement", whose authors are mainly members of an economic advisory board to the new Polish President and former Solidarnosc leader Lech Walesa.

4.2 ALTERNATIVE CONCEYfION TO THE BALCEROWlCZ-PROGRAM: NOVELTY OR SUPPLEMENT?

During the first half of 1990, the well-known Polish trade union Solidarnosc split into two, with the one side made up of supporters of the first Polish non-communist Prime Minister, Tadeusz Mazowiecki, and the economic policy pursued by his Minister of Finance, Leszek Balcerowicz. The other side was represented by Lech Walesa and the Centrum-Agreement, whose policy measures aimed at accelerating both the societal and the economic changes. Moreover, the Centrum-Agreement evaluated the policy hitherto pursued by the Mazowiecki government as having failed and proclaimed a total renewal.

The personnel policy of Mazowiecki especially - as far as it concerned members of the old communist apparatus - was seen as far too weak. Mazowiecki's moderate strategy of cooperating with a considerable part of former nomenclatura members, willing to cooperate themselves, was criticized by Walesa as the main reason for the poor economic performance and the sluggish transformation progress in 1990. As is widely known, Walesa and Mazowiecki competed for the Polish presidency in the fall of 1990 (RACHTAN, 1991).

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THE PROGRAM OF THE CENTRUM·AGREEMENT

The Centrum-Agreement created its alternative transition program as a programmatic basis for the election. It differed from the Balcerowicz-program in two points:

1. BaIcerowicz's uncompromising anti-inflationary policy was seen as harmful for the recovery of the economy. The drastic decrease in production as well as the stubborn stagnation were interpreted as a classical stabilization recession, as it typically occurs in capitalist market economies after a tight monetary and fiscal policy. Following the Keynesian tradition, an ease of the "exaggerated deflationary policy" is the proclaimed aim (see also CASELLI/ PASTRELLO, 1990). Here, the authors draw special attention to the prohibitive tax imposed on enterprises which unduly increase their wage fund. This tax is criticized as being a substantial obstacle to a rise in production, since it systematically decreases domestic demand. According to the program, the tax should be abolished in favor of a full liberalization of wages.

2. The restructuring of the economy should be accelerated. The institutional and structural reforms which have so far failed to be carried through are seen as one of the main reasons for the stabilization recession not fulfilling its "cleaning function". As the authors correctly point out, the overwhelming part of loss-making enterprises were able to survive the recession without much damage and did not vanish from the markets. A radical acceleration of the privatization process is, therefore, seen as indispensable and especially workers and ordinary citizens should gain from enterprise sales. The so-called "spontaneous privatizations", a well-known phenomenon of former socialist countries and primarily serving the welfare of the nomenclature, should cease. Special attention is to be paid to the agrarian sector. Here, the Centrum-Agreement intends to introduce a system of market interventions similar to that of the European Community, in order to stabilize prices of agrarian goods and protect farmers from seasonal fluctuations in incomes.

REVISION OR SUPPLEMENT?

In parts, the Centrum-Agreement program means a full reversal of the Balcerowicz­program. With monthly inflation rates running at 5% to 10%, one can hardly speak of insufficient demand on the goods market or a recession in the sense of Western market economies. Criticizing the "exaggerated deflationary policy" cannot therefore explain the underlying reasons for the crisis. If, on the other hand, the lack of an institutional basis is preventing a functioning market economy and if this is correctly regarded as the fundamental issue in the transformation so far, a turnabout in the stabilization policy must be rejected under all circumstances.

If a relaxed fiscal and monetary policy is decided upon, inflation would again accelerate. This would in turn rapidly lead to a new hyperinflation, bearing in mind that the inflationary basis in Poland is high anyway. The price-conducted coordination which has barely begun to clear the markets, would again be destroyed. A "switching back" to the transitory crisis management with all its consequences for economic and social stability would become unavoidable. From this point of view, this part of the Centrum-Agreement program would undoubtedly mean a total reversal of the Balcerowicz-program.

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The part of the program which deals with the acceleration of structural change may be seen as a supplement to the Balcerowicz-program insofar as it is formulated clearly. However, the measures for a rearrangement of the public administration has to be clearly distinguished from those of restructuring the enterprise sector. While the former is undoubtedly a task for state bodies, the latter is ambiguous.

To effect the deglomeration of the highly concentrated market structures, both vertically and horizontally, far-reaching governmental action is indispensable. However, the final adjustment of the market structure must certainly be brought about by market forces in an evolutionary manner. The same holds true for a possible capital reconstruction of single enterprises. Since both tasks cannot be clearly separated from each other, the question of what must and what must not be done by the state is very often subject to ideological conflicts. Unfortunately, the Centrum-Agreement program furthermore does not make clear, if the restructuring of the enterprise sector is to be seen as an objective of the government.

However, even if the respective task is not one for which the state itself takes responsibility, the basic institutional framework, especially as far as it concerns the structure of incentives, has to be set up by the state immediately. Therefore, whether or not Walesa's advisors would have done better to carry through such a task during the first period of transformation and whether or not they were correct in distinguishing between governmental and market tasks, from an economic point of view an early concentration on the restructuring problem would have brought about some considerable improvements in the transformation process. True, the proposals for a Polish agrarian sector are apt to put some serious doubts on the advisors' ability to distinguish between state and market tasks.

5. POLAND'S CHANCES ON THE WAY TO A MARKET ECONOMY

As a result of Walesa being elected President of Poland, there may be some substantial changes in economic policy. But it looks as though these changes may not be as drastic as hoped for by some and feared by others. On the one hand, Balcerowicz, both as former and present Minister of Finance, is still mainly responsible for economic policy while, on the other hand, the influence of sqme of the advisors from the Centrum-Agreement has strengthened.

In February 1991, the newly constituted government worked out a new law in order to accelerate privatization. This is an indication for a better recognition of the restructuring problem. But, up to June, 1991, the supporters of the Centrum-Agreement have not been able to do anything about the restrictive stabilization policy of Balcerowicz. Despite an offensive public policy against the prohibitive tax on undue wage increases, this tax still remained in existence.

Thus, after the new government's first month in office, it looks as if the parts of the Centrum-Agreement program serving as a supplement may really begin to make their influence felt in economic policy, while the other part aiming at revising the Balcerowicz­program has politically so far not been successful. Given that developments go in that direction, that the acceleration of institutional change succeeds, and that a minimum of social consent can be achieved, there will be a good chance of Poland getting on the right

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way to a modern Western-type market economy. To achieve this, the most important task will be to overcome the institutional vacuum as quickly as possible, so as to successfully avoid a relapse into a socialist crisis management.

REFERENCES

APOLTE, TH. (1990), Politische Systeme und Hemmnisse rationaler Regulierungs- und Deregulierungspolitik, in: TH. APOLTE; M. KESSLER, eds., Regulierung und Deregulierung im Systemvergleich, Heidelberg 1990, pp. 297-313.

APOLTE, TH.; D. CASSEL (1991), Osteuropa: Probleme und Perspektiven der Transformation sozialistischer Wirtschaftssysteme, in: List Forum, 17 (1991) 1, pp. 22-55.

BALCEROWICZ, L. (1989a), An Initial Statement. Memorandum on the Economic Reform Program in Poland and the Role of Foreign Financial Assistance, Programm presented to the International Monetary Fund on 21 September 1989 in Washington, D.C. .

BALCEROWICZ, L. (1989b), Polish Economic Reform, 1981-1988: An Overview, in: UNITED NATIONS, Economic Reforms in the European Centrally Planned Economies, Economic Studies No.1 of the United Nations Economic Commission for Europe, New York 1989, pp. 42-50.

BEKSIAK, J. et al. (1990), The Polish Transformation: Programme and Progress, London. BUCHANAN, J. M. (1975), The Limits of Liberty. Between Anarchy and Leviathan,

Chicago. BUCHANAN, J. M.; G. TULLOCK (1962), The Calculus of Consent. Logical Foundations

of Constitutional Democracy, Ann Arbor, Mich. BUND, D. (1984), Die okonomische Theorie der Verfassung. J. M. Buchanans Modell des

Verfassungsvertrages und evolutionstheoretische Kritik, Baden-Baden. CASELLI, G. P.; G. PASTRELLO (1990), Poland 1990: From Plan to Market through

Crash?, Working Papers The Vienna Institute For Comparative Economic Studies, No. 166, August 1990.

DABROWSKI, M. (1991), The Polish Stabilization Program: Accomplishments and Perspectives, in: Communist Economies, forthcoming.

DELHAES, K VON; U. FEHL (1991), Der TransformationsprozeB in der Zeit. Konsequenzen von Dauer und Reihung systemveriindernder MaBnahmen, in: K-H. HARTWIG; H. J. THIEME, eds., Transformationsprozesse in sozialistischen Wirtschaftssystemen: Ursachen, Konzepte, lnstrumente, Berlin et al. 1991, forthcoming.

FRYDMAN, R.; A. RAPACZYNSKI (1990), Privatization in Poland. A New Proposal, Mimeo, Warsaw 1990.

GUS (1990), Glowna Urzad Statystyczny (Central Statistical Office), Rocznik Statystyczny (Statistical Yearbook), Warszawa.

HENSEL, K P. (1970), Der Zwang zum wirtschaftspolitischen Experiment in zentral geleiteten Wirtschaften, in: Jahrbucher fUr Nationalokonomie und Statistik, 184 (1970), pp. 349-359.

HERRMANN-PILLATH, C. (1991), Systemtransformation als okonomisches Problem, in: Aussenpolitik, 42 (1991) 2, pp. 171-181.

HINDS, M. (1990), Issues in the Introduction of Market Forces in Eastern European Socialist Economies, Washington, D.C.

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JERMAKOWICZ, W. W. (1990), The Beginnings of Social Market Economies in Germany and in Poland, in: Forschungsstelle zum Vergleich wirtschaftlicher Lenkungssysteme der Philipps-Universitat Marburg, ed., Von der Sozialistischen Planwirtschaft zur Sozialen Marktwirtschaft: Probleme des Systemwandels, Marburg 1990 (Festschrift fiiI Hannelore Hamel; Arbeitsberichte zum Systemvergleich No. 15), pp. 71-106.

LEIPOLD, H. (1991), Politische Ordnung und wirtschaftliche Umgestaltung: Zu Restriktionen und Reformen in Politik und Verwaltung, in: K.-H. HARTWIG; H. J. THIEME, eds., Transformationsprozesse in sozialistischen Wirtschaftssystemen: Ursachen, Konzepte, Instrumente, Berlin et al. 1991, forthcoming

LIPTON, D.; J. SACHS (1990), Creating a Market Economy in Eastern Europe: The Case of Poland, in: Brookings Papers on Economic Activity (1990) 1, pp. 75-147.

MACHOWSKI, H. (1990), Polens schwieriger Weg in die Marktwirtschaft, in: Aus Politik und Zeitgeschichte, Beilage zur Wochenzeitung Das Parlament, B 12-13/90, 16 March 1990, pp. 29-38.

MISES, L. VON (1920/21), Die Wirtschaftsrechnung im sozialistischen Gemeinswesen, in: Archiv fiiI Sozialwissenschaften und Sozialpolitik, 47, pp. 86-121.

PETERHOFF, R. (1991), Wirtschaftsreformen als Krisenmanagement: Systemerhaltung durch Muddling Through?, in: K.-H. HARTWIG; H. J. THIEME, eds., Transformationsprozesse in sozialistischen Wirtschaftssystemen: Ursachen, Konzepte, Instrumente, Berlin et al. 1991, forthcoming.

PYSZ, P. (1991), Angebotskrise in der polnischen Industrie: Reaktion der Staatsbetriebe auf die Nachfragerestriktion, in: H. BAK; P. PYSZ; R. SCHARFF, eds., Das Balcerowicz Programm. Konzeption, Zwischenergebnisse und Perspektiven, Erlangen 1991, (Institut fUr Gesellschaft und Wissenschaft IGW).

RACHTAN, P. (1991), Nach den Prasidentenwahlen, in: Polens Gegenwart, 24 (1991) 1, pp.1-4.

REYMANN, S. (1988), Arbeitsproduktivitat und Beschaftigung in der Sowjetunion, Working Paper of the Department of Socialist Countries and East-West Economic Relations of the HWWA-Institute Hamburg, July 1988.

SHATALIN, S. et al. (1990), Transition to the Market, Parts I and II, Transformation of the Cultural Initiative Foundation, Moskow.

SCHRETTL, W. (1990), Transformation in Depression. Soviet Monetary Issues, Working Papers of the Eastern Europe Institute, No. 140, Munich.

TARDOS, M. (1989), The Blueprint of Economic Reforms in Hungary, in: UNITED NATIONS, Economic Reforms in the European Centrally Planned Economies, Economic Studies No.1 of the United Nations Economic Commission for Europe, New York 1989, pp. 34-41.

VOLLMER, U. (1990), Arbeitsmarktpolitik in Polen zwischen Regulierung und Deregulierung, in: TH. APOLTE; M. KESSLER, eds., Regulierung und Deregulierung im Systemvergleich, Heidelberg 1990, pp. 207-218.

WINGENDER, P. A. (1989), Westdevisen und Devisenschwarzmarkte in sozialistischen Planwirtschaften, Stuttgart.

WORLD BANK (1987), Poland. Reform, Adjustment, and Growth, Vol. I, Washington, D.C.

WU, YU-SHAN (1990), The Linkage Between Economic and Political Reform in the Socialist Countries: A Supply-Side Explanation, in: J. S. PRYBYLA, ed., Privatizing and Marketizing Socialism, The Annals, 507, January 1990, pp. 91-102.

REFORMERS, RENT· SEEKERS, FREE RIDERS: SYSTEMIC TRANSFORMATION IN POLAND!

Marion Weber and Adam G/apinski

Abstract: Based on the notion of reforms as being public goods, this article points out some basic theoretical problems with the venture of transforming an economic system. The politico-economic perspective leads to the proposition that it is the distribution of the inevitable individual welfare losses in the transition phase that largely determines the transformation dynamics. Materially, the analysis of the factors affecting the prospects of transformation success applies the theories of property rights and of rent-seeking, formally, it makes use of game theory. A main theme of the paper is the popular support of the transformation that is deemed indispensable in order to counterbalance its "natural enemies", yet which is unstable and delicate. To conclude, the question of a complementary political liberalization is addressed, again from a politico-economic point of view. Calls for an autocratic control of the transformation process are dismissed.

Zusammenfassung: Auf der Grundlage einer Interpretation von Reformen als KoUektivgiiter werden einige fundamentale Probleme bei dem Versuch einer Transformation eines Wirtschaftssystems aufgezeigt. Die polit-okonomische Analyse kommt zu dem Ergebnis, daB die Entwicklung in Reformlandern wie Polen insbesondere von der Verteilung der unvermeidlichen individuellen W ohlfahrtsverluste wahrend der Obergangsphase bestimmt wird. Urn den "natiirlichen Feinden" der Transformation ein hinreichendes Gegengewicht zu bieten, sind Vertrauen und Akzeptanz der Transformation durch die breite Masse der Bevolkerung unerlaBlich, jedoch ein instabiles Phanomen. Nach einer Analyse der die Erfolgsaussichten der Transformation beeinflussenden Faktoren, die inhaltlich auf die Theorie der Verfiigungsrechte und die Theorie des Rent -Seeking, formal auf die Spieltheorie zuriickgreift, folgt abschlieBend eine Diskussion der Frage, ob bzw. inwieweit der soziookonomische Umbruch von einer politischen Liberalisierung begleitet sein soUte. Forderungen nach einem autokratischen Management des Transformations­prozesses werden verworfen.

Streszczenie: W ponizszym opracowaniu podjeta zostaje proba interpretacji zmian systemowych przy zalozeniu, iz proces reformy sam w sobie interpretuje sie jako dobro publiczne. Polityczno-ekonomiczna analiza prowadzi do wniosku, ze rozwoj w takich krajach jak Polska bedzie w dalszym ciagu determinowany przez konflikty podzialu oraz nieuchronny spadek stopy zyciowej niektorych warstw. W celu neutralizacji tych obiektywnych hamulcow przemian niezbedne jest uzyskanie szerokiego zaufania i akceptacji przeprowadzanych reform przez szerokie rzesze spoleczne. Zjawiska "zaufania i akceptacji" maja jednak niestabilny charakter. W swietle analizy, ktora nawiazuje do wspolczesnej teorii gier oraz teorii rent-seeking pojawia sie pytanie: W jakim stopniu przelomowe zmiany w ekonomice winny isc w parze z liberalizacja zycia politycznego. Rownoczesnie pojawiajace sie tendencje do stosowania metod autokratycznych sa odrzucane.

1 We would like to thank Thomas Apolte und Manfred Tietzel for their helpful advice.

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1. THE ROAD TO FREEDOM, EVENTUALLY?

Ironically, the Poles were - beginnin2 in 1980 - among the first to initiate the process of emancipation from communist rule that would later rattle all Eastern Europe with domino-like dynamics. Yet they may well be the last to be able to enjoy the blessings of the desired free economy and society.

Poland looks back on a long record of reform attempts and subsequent failures. Numerous attempts at improving the efficiency of the command economy - all within the given institutional framework - have proven virtually ineffective.

The latest reform venture with the Balcerowicz-plan at its heart, however, differs significantly in scope and decisiveness from earlier reform attempts, as it is not system­enhancing but system-transforming in nature. Moreover, the first steps towards a virtual transformation of the centrally-planned economic system into· a market economy have already been taken. Notably, a strict stabilization program has been put into effect and fundamental institutional change has been begun.

The transition to a market economy requires comprehensive decentralization of society and economy that will inevitably impair the welfare position of some members of society. Hence, there is a critical package of individual losses th~t have no (or no immediate) compensation and that largely determine the transformation dynamics. As living prospects and vested interests of the whole population are at stake, an analysis of the forces affecting the success of the transformation whose scope is restricted to a narrow concept of economics does not seem satisfactory.

Making use of New Institutional Economics, this article attempts to contribute some general theoretical explanations for observable problems with transforming economic systems, referring back to the Polish case as empirical evidence rather than analyzing in detail factors specific to Poland that might account for certain phenomena.

2. DEMAND FOR AND SUPPLY OF REFORMS: SOME CAUSES AND CONSEQUENCES

The popular discontent with the poor supply of consumer goods and with the lack of civil liberties steadily increased with the failure of the economic system to attain basic efficiency and the ensuing continuous erosion of the socialist ideology in the people's minds3. But only the Soviet Union's liberalization of foreign and domestic policy allowed demands not only for reforms, but for a real transformation of the economic and the political system to be considered in public and with some prospect of success in Poland.

2

3

Of course, there had been remarkable incidents of revolt against communist domination, notably in Czechoslovakia, Hungary, and Yugoslavia, long before the 1980s, the "decade of revolution" that was triggered by Gorbachev's easing of the Soviet Union's grip on Eastern Europe.

If it ever was entrenched in Polish minds.

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However, the mere manifestation of a demand for reform by large sections of the population is not necessarily sufficient for reforms to be carried out.

2.1 REFORMS AS PUBLIC GOODS

In his seminal paper on Ordnungspolitik as an object of a collective-choice process, Guy KIRSCH (1981) showed that the rules set up to govern the economy (i.e., the Ordnung, the output of Ordnungspolitik) embody the characteristic features of (pure) public goods, involving the well-known problems of demand revelation and adequate provision.

As economic reforms or, to a greater extent, the transformation of one economic system into another, aim at changing the basic rules of the (economic) game, much of KIRSCH's analysis can be applied here.

The transformation of the economy is a public good because once it is provided, nobody can be excluded from enjoying its potential benefits4• For it is next to impossible (or economically unfeasible) to apply a market price mechanism in order to force "consumers" of a change in rules to bear their share of the cost of its provision. Also, there is obviously no rivalry in "consuming" economic rules. This situation involves strong incentives for free­riding, i.e., individuals seek to benefit from a reform while refraining from contributing to its "production". A necessary - yet not sufficient - condition for the provision of rules, then, according to KIRSCH (p. 260), is the presence of political entrepreneurs who expect a reward for designing and implementing those rules, a reward that the other members of society can provide at no (perceived) cost.

Moreover, a problem of crucial importance for the transformation of an economic system is the fact that the self-interest of individuals involves the desire to have everyone bound by rules except for oneself. Especially when redistributional issues are concerned, it is rational to favor a performance-related distribution of income as a general rule and a redistribution that is independent of performance or effort for oneself (i.e., a genuine privilege). To illustrate this point, imagine the concerns of a worker in Poland who desires a general improvement in the provision of consumer goods but at the same time resists the idea of stronger work incentives (payment by results) for himself, the possibility of being laid off, and price increases for many goods he consumes.

It seems highly probable that people who over decades have become used to privileges being an almost general principle of social order will not hesitate on moral grounds to strive for privileges for themselves. Given this general attitude, the distribution of pieces of the pie tends to dominate its production (and enlargement). Or, more technically, the heavy emphasis placed on distributional issues implies jockeying for positions along the utility possibility frontier that will eventually shift it inward instead of outward.

Thus, the conflict between individual and collective rationality is central to the venture of transforming economic systems. Individual rationality tends to prevent society from

4 It should be noted that overall transformation or single reforms can also constitute "public bads" - for those who experience welfare losses.

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attaining a state that most individuals prefer, because nobody is willing to give up personal privileges that were granted by the collectivist-autocratic system. First, one cannot be sure that everybody else will do so too, and second, one is uncertain about one's position in the future distribution of income under a different economic and social system.

2.2 THE "SUPPLY-SIDE" OF REFORMS

The initial impetus of Poland's - first and foremost anti-communist - Solidarity movement was boosted by the common challenge to political domination. "Solidarity was a defensive and negative alliance of middle class and skilled workers, bound together by a common antagonism" (MISZTAL, 1989, p. 24).

As had been correctly predicted, Solidarity has undergone a differentiation of goals once the unifying objectives of first, attaining legalized power and second, breaking the communist domination were achieved. The segregation into different factions and parties that can presently be observed should not, however, be considered a negative or dangerous development. Rather, it indicates the rebirth of much needed political pluralism, a first step towards democratic competition in politics (see also below 4.2).

A highly sensitive issue that has been a main object of public criticism is the perceived compromise between "reform-communists" and Solidarity .. discredited as an arrangement between elites that has been brought about in an undemocratic way (LUKS, 1990, p. 10).

Although a limited collaboration within the government has obviously been inevitable for pragmatic reasons, its public image is of critical importance, because it could hurt the vital popular trust in and support of Solidarity's reformers in their role as agents for the public.

2.2.1 THE QUESTION OF THE GOAL

Appealing to many reform-minded people in formerly socialist countries, yet stillborn, is the idea of trying to combine the most desirable features of both the socialist egalitarian ideal and the capitalist market system (see also APOLTE/GRADALSKI in this volume).

Based on empiriCal evidence from early reform efforts in the Soviet Union, BALASSA (1982, p. 308) makes an unfavorable evaluation of reform efforts of this kind, mainly due to the observation that they end up combining negative features of both systems:

"These adverse consequences, leading to subsequent abandonment of the refonns, reflected a failure to recognize the interrelationships of decentralized decision-making, the use of prices as signals for resource allocation, incentives at the production level and competition among producing units. Thus, in the absence of scarcity prices, delegating decision-making power to regional authorities and introducing profit criteria for finns a la Libennan did not bring the desired results in the Soviet Union."

There are selective incentives for political groups who understand themselves to be, and/or present themselves as, legitimate agents of the working class to promote publicly a sort of utopian welfare state with systematic and massive redistribution and regulation of

27

industries as the system to aim for (SCHULLER, 1990, p. 14). For it would obviously serve their power interests if the attained socioeconomic order were characterized by an influential representation of workers' interests (in a short-run and narrow interpretation).

In Poland, however, the recent developments in political leadership as well as in economic policy indicate that the idea of ''preserv(ing) the strengths of the old system while reducing, if not eliminating, the deficiencies of traditional central planning" (BRYSON, 1989, p. 149) has finally been abandoned.

2.2.2 SCOPE, SPEED AND SEQUENCING: RADICAL OR INCREMENTAL STRATEGY?

One, if not the, challenge that the reformers face is to minimize the human and political costs of imposing the "hard budget constraint" (KNIGHT, 1985, p. 116).

For the transformation of a communist command economy into a free enterprise economy is not a matter of degree, a gradual, modest "hardening" of the "soft budget constraint" (KORNAI, 1980), so typical of a centrally planned economy. Rather, it calls for a definite abolition of the old set of economic rules and incentives and the installation of a workable new one.

As Poland, the former East Germany, and other East European countries have painfully experienced, the interim period between the two states of more or less functioning economic systems involves transitory net welfare losses, at least for large sections of the population. The falling apart of the old system of allocation and distribution causes the consumer's surplus to shrink, mainly because of higher prices of many consumer goods due to the abolition of price controls (subsidies). Furthermore, inefficient units of production cannot sell their products, have to reduce wages or even layoff much of their work force. As a result, people experience additional welfare losses in the form of income forgone.

From a social-engineering point of view, the expected total costs of a radical approach (severe frictions, and erratic oscillations of prices and macroeconomic aggregates) are to be set off against the expected total costs of a gradual, step-by-step strategy (malfunctioning, possibly complete breakdown of the economy over a longer time period).

The welfare losses are, however, difficult to determine in the aggregate. Rather, it is their distribution that matters. For obviously, the operation of an inefficient factory (that would constantly produce red figures given real prices) means continuous losses in some aggregate that might be called "social welfare". Hence, closing it down (or rather, creating conditions under which it is forced to close down) implies an instant improvement in social welfare, although some people (workers and "managers" of that firm) do experience ill­effects.

In addition to the economic and social costs of alternative transformation strategies, their respective political costs, i.e., inherent risks of political failure, need to be taken into account. In this respect, the distribution of the transitory welfare losses among different groups in society is again the crucial factor, and should be controlled strategically as far as possible.

28

For example, it would seem advisable for reformers to dismiss openly feelings of revenge towards the former elites in order to limit the latter's expected costs of a transformation and thus curb their potential opposition. This is, of course, an extremely difficult endeavor, as the public is highly sensitive towards real or presumed cooperation between the new leaders and the hated communists.

The political enforceability of reform programs is not least determined by their corresponding vulnerability to anti-reform propaganda. On the one hand, it is fairly easy to make consumers regard erratic price fluctuations as a phenomenon typical of market processes. On the other hand, "incremental refonn may suffer the fate of being 'nibbled' into extinction by bureaucrats" (BRYSON, 1989, p. 146), who, as "quasi-natural" enemies of reform, have strong incentives not to cooperate with the reform program (see 3.1).

In direct contrast to this fear, HEWETT (1989, p. 18f.) advocates a step-by-step strategy when considering potential political costs:

"Obviously it is impractical - indeed suicidal - to make such a transition 'overnight'. ... These [centrally planned, the authors J economies are typically operating at full (albeit under-) employment of labor, with an undero.tilized and generally antiquated capital stock. Immediate decontrol of prices and quantities would certainly lead to massive unemployment which, along with what would very likely be rampant inflation, would surely mean that the govemment (and most likely the party) would fall from power. "

However, even if an evolutionary approach were able to achieve the aim of making the transition more bearable by spreading its social costs over a longer time period, this would also mean a slower set-in of the accomplishments of the reforms, i.e., the improvements in economic efficiency and well-being.

As the people's firm belief in the legitimacy of the transformation seems indispensable for it to be successfully carried out, their trust in the legitimate authority of the political leaders and the measures taken by them must be preserved.5 The numerous unsuccessful reform attempts in the past decades have already severely overtaxed the Polish people's trust in their authorities. Nonetheless, according to recent polls, the latest plan of sweeping reforms by finance minister Balcerowicz enjoys broad popular support in Poland (see, e.g., ROBINSON, 1990),6 much resembling a last desperate willingness to tolerate a temporary chaos in order to succeed eventually in making the leap to a better life?

5

6

Using HIRSCHMAN's exit-voice concept, COLEMAN (1974, p. 15) demonstrates that the acceptance of the legitimacy of a corporate body (placing trust in it) can mean giving that body free rein to act. Evidently, reasonable room to manoeuver is not only necessary to direct an enterprise, but also indispensable to carry out a transformation of a national economy.

However, the optimism implied in this statement is severely challenged by the surprisingly strong support for Mr Tyminski as a candidate for president in the November 1990 elections.

29

From this point of view, half-hearted, reluctant reform steps would be insufficient to convince the Polish population that this go is to be significantly different from the failures of the past years. A step-by-step strategy might make the transformation vulnerable to its enemies who would be able to become better organized, and to strengthen their resistance and sabotage efforts. Moreover, it is not only the people's support that is at stake, but also foreign investors' confidence in a lasting economic turnaround (SCHWARZ, 1989b).

The inevitable economic costs of transition can be minimized and largely compensated, and their distribution balanced, if and when the destruction of the efficiency of the old system is accompanied by the simultaneous implementation of a (more efficient) new economic system. There is a huge potential gain for entrepreneurs engaging in market-orientated production and services, and there is an equivalent potential gain for consumers (allowing a net increase in consumer's surplus) in access to desired goods with improved quality-price relations, supplied by either foreign suppliers or (with a time-lag) by domestic suppliers, once the appropriate institutional framework has been established.

The above analysis allows two basic propositions:

(1) On the systems level, the process of "creative destruction", leading to economic progress, as praised by Joseph SCHUMPETER (1942), can develop only if simultaneously with the old system being put out of operation, the incentive framework necessary to allow for "creation" is provided. Otherwise, the market forces' "invisible hand" will destroy yet fail to create - "destructive destruction" (WINIECKI, 1990, p. 128) being an appropriate term for the ensuing development.

(2) A piecemeal procedure for inducing social change, whilst it may be an appropriate strategy for reforms within a given socioeconomic system, is not an adequate concept to cope with the problem of transforming one system into another.

Taking economic as well as political arguments into consideration, the facts point to a "revolutionary" strategy, one that establishes an irreversible break with the old economic order, as being the most promising transformation policy, not only for Poland. The basic efficiency of the targetted system has to be established as quickly as possible in order to minimize social costs in the critical period of transition.

7 HIRSHLEIFER (1983) identifies conditions under which the voluntary provision of a public good can take on a socially-optimal amount. The conditions for applicability of the so-called "weakest-link" case of social technology are approximated, for instance, in times of disaster. As it does not seem an exaggeration to describe the situation in Poland in the late 1980s as disastrous, HIRSHLElFER's observations might serve to moderate the pessimistic evaluation of the prospects of the transformation due to the public-good problem.

30

3. THE PROPERlY·RIGHTS STRUCTURE: OBJECT AND DETERMINANT OF TRANSFORMATION

The system of property rights is one of the constitutive elements that distinguish a socialist centrally-planned economy from a capitalist market economy. Consequently, the aspiration of transforming the former Polish command economy into a market economy rightly focuses on a significant alteration of the property-rights structure, mainly via privatization (cf. FRANZjSCHIPKEjGROSZEK in this volume).

At the same time, the capacity of the system for self-transformation crucially depends on the cooperation of important groups in society and thus on the initial nature and the intended transformation of their respective property rights.8

3.1 FRIENDS AND ENEMIES OF REFORM

Transforming a centrally-planned socialist economy into a capitalist market economy must involve sweeping decentralization and de-collectivization (privatization).

In a communist system, as in "regular" authoritarian states, its main pillars - the party apparatus, the economic bureaucracy, the police, the military - receive a larger share of the national income than those groups do in democratic societies (WINIECKI, 1986). They extract rents, which represent a deadweight loss, i.e., pure waste of resources from the economy's point of view, but serving a well-defmed (power-maintaining) purpose from the regime's point of view.

The central planning, i.e., the bureaucratic micro management of resource allocation (HEWETT, 1989, p. 18), ascribes substantial property rights to the economic bureaucracy that are largely endangered by decentralization. In addition to these rights to dispose of resources, there are two important mechanisms by which party apparatchiks and economic bureaucrats draw considerable benefits from the economic arrangements in a command economy and therefore strive to maintain the centralized system: (1) The nomenklatura, i.e., the (property) right of the communist party apparatus to appoint people of their choice (including themselves) to (lucrative) managerial positions throughout the economy; (2) the system of side-payments between enterprise managers, bureaucrats and party officials (cf. WINIECKI, 1990). A system of property rights creating such a huge scope for "directly unproductive profit-seeking activities" (BHAGWATI, 1982) naturally causes large amounts of real resources to be spent in the mere distribution of rents.

In addition to these privileged groups, JERMAKOWICZ (1990, p. 91) identifies a "director's mafia" in Poland, consisting of managers of state-owned firms who - concerned about the preservation of their property rights - form a kind of anti-reform carte~ sabotaging governmental reforms by lending support to each other. This new kind of "solidarity movement" for example prevents inefficient firms from going bankrupt by

8 In a wider understanding, as used here, a property right is a socially-enforced right to dispose of resources (or, in other words, to select uses of an economic good).

31

extending them interest-free credit, thus maintammg the "softness" of their budget constraints (see also APOLTEjGRADALSKI in this volume).

Enterprise directors who obtained their rights to dispose of socially-owned resources not on account of their managerial ability but thanks to their political loyalty will naturally be far from enthusiastic about reforms leading to a free enterprise system based on the individualist-competitive principle of distribution. For according to this general rule, political loyalty as the main criterion of eligibility would be substituted by professional competence (cf. MORAWSKI, 1989, p. 77).

Resistance to reform must also be expected from farmers and craftsmen who used to enjoy particular protection (high barriers to entry into their markets) thanks to bureaucratic regulations (JERMAKOWICZ, 1990, p. 97). Their point of view is illustrated by the demands of the farmers branch of Solidarity (RI) to have prices for their produce guaranteed as well as preferential credit terms preserved during the transition phase and beyond.

Evidently, a venture towards abrogation of the command economy requires bureaucrats and enterprise managers in particular to give up large parts of their competences, virtually to the extent of losing their jobs. At the same time, the success of the whole undertaking crucially depends upon a "critical mass" of support by these people who, after all, pull the levers of the economy.9

In terms of game theory, the question with which, in the period of transition, all individuals are confronted is to cooperate (i.e., support actively or passively) or not to cooperate with (i.e., disobey, resist, or even sabotage) the transformation policy. If we divide the population into two groups, one enjoying privileges in the centrally planned system to be abandoned (P), and one - comprehensive - group of non-privileged, "ordinary" people (0), their respective restrictions and incentives to action can be depicted in matrix form, typical of game-theoretic analysis:10

For the bureaucrats and enterprise directors, to comply with decentralization and de­collectivization requirements means to give up large parts of their decision-making competence and to introduce and utilize chiefly economic criteria in decision-making which can eventually mean allowing firms to go bankrupt at the risk of wiping out one's own job. Even if everybody cooperates and the transformation is carried out successfully, most of the members of our group P will be worse off than in the status quo ante. Given this situation -which may be aggravated by risk aversion -, to defect (i.e., not to cooperate) is their dominant strategy, which is indicated by the pay-offs of 1 and 0, respectively, being superior to the pay-offs that would result from the cooperative strategy (-2 and -3, resp.), no matter which strategy the members of group 0 choose for themselves (matrix 1).

9

10

It is self-evident that also the party apparatchiks will tend to oppose the transformation, however, their influence is neglected here since the success of the transformation is not essentially contingent upon their cooperation.

This kind of approach has also been taken by APOLTE (1990).

Matrix 1

Ordinary People

cooperate

defect

32

Bureaucrats, Enterprise Directors

cooperate defect

(1,-2) (-3,1)

(-1,-3) (0,0)

If we now put aside the assumption of group 0 being an organic decision-unit and consider the incentives at work within this group, what we get is a classic prisoners' dilemma. For, as stated above, a rational individual would wish to enjoy the benefits of having everybody cooperate (i.e., the resulting improvements in overall economic efficiency) while not having to cooperate herself (i.e., to sacrifice perfect job security, accept efficiency-orientated wages, pay higher prices for goods and housing etc.). The paradox here is that it is rational for "X" to defect (e.g. by striking), which is her dominant strategy, even though she might be better off in the long run with a completed transformation. To achieve this preferable state by cooperating is only a second-best solution, as she stands to gain most if the more efficient economic system were introduced while her own conditions of life - insofar as she appreciates them - were excepted from it.

Due to the reasonable assumption of individual insignificance (i.e., a single individual's actions do not influence the choice calculus of the other members of the group), the second matrix does I!ot depict a true prisoners' dilemma (our column player, group 0, is indifferent with regard to its two strategies, both having pay-offs of 1 and -1, respectively). Presuming, however, that individual X's calculus (leading to defection) holds for each individual member of group 0, a prisoners' dilemma emerges: Individual rationality leads the group into a stable equilibrium (-1,-1) that is Pareto-inferior to another possible solution to the game (1,1).

Matrix 2

Individual X

cooperate

defect

Other Members of Group 0

cooperate defect

(1,1) (-3,1)

(3,-1) (-1,-1)

33

However, it is not only this facet of the well-known public-good problem that can make ordinary people unintentionally join the "quasi-natural" enemies of reform in obstructing the transformation.

It is undisputed that, by and large, the socialist centrally-planned economies used to provide a much higher degree of security of existence to their people than market economies can ever do if they are to function reasonably well. Consequently, people with strong preferences for security and/or relatively weak capabilities to succeed in a system based on opportunities for everybody, yet, on the other side of the coin, self-reliance of everybody, stand to lose their property rights to a secure job, free medical care and education etc. They may well value the advantages of a collectivist system higher than the potential advantages of an individualist-competitive organization. This conjecture is conflrmed for example by the following observations:

"Some people in the 'economy of shortage' prefer the rationing of goods than high free-market prices, prefer the paternalism of the state to laying out money from their own modest salaries for health services and education, tend to have understanding for the decision to impose martial law considering the fate of Czechoslovakia in 1968" (MORAWSKI, 1989, p. 81).

By the end of 1990, queues had virtually disappeared from Polish streets; street markets and peddlers dominate the townscapes instead (cf. e.g. ECONOMIST, 1991, p. 26). This indicates that the allocation mechanism of queuing, typical of the shortage economies, has been replaced by the price mechanism. One consequence of this vital part of the transformation that must not be overlooked is that people with low opportunity costs of time may be worse off than before now that they have to compete with others in order to qualify for receiving goods - not by investing time as they used to, but by actually endeavoring to earn the money necessary to buy the goods at market prices.

Thus the potential gain in autonomy that a decentralization of the state-owned sector offers may be partly offset by a loss in protection that the authoritarian, paternalistic system had afforded. Therefore, neither bureaucrats, nor enterprise managers, nor employees of state­owned fIrms, nor very risk-averse "ordinary" people are natural advocates of privatization and competition, given that they act according to a short-run calculus.

The fact that there have to be "losers" under the systemic transformation suggests that the Pareto-principle of assessing the social desirability of change cannot be called upon to justify the transformation. For once a certain social and economic order is established, any derivation from· it will cause some people to suffer welfare losses. Likewise, principles of voluntary consent/unanimity (BUCHANAN/TULLOCK, 1%2, and later works by BUCHANAN) will not be able to cover these problems adequately. In order to obtain unanimous consent to the transformation, which is the one and only legitimization of a collective action from an individualist point of view, WINIECKI (1988) furthered the rather flctive proposal to pay a compensation to those who lose privileges, that is to say to purchase the consent of the "losers" from social change (see also BRENNAN/BUCHANAN, 1985, pp. 134ff.). The desirability of such a scheme is, however, impaired not only for reasons of practicability, but flrst and foremost on moral

34

grounds, because of the questionable source of the privileges to be bought out, namely extensive exploitation of the masses.

All this does not preclude, however, that once the former elites have been deprived of power and influence, a social-contract concept a la BUCHANAN or RAWLS, operating with a "veil of uncertainty", can be applied to the defmition of rules for the "new" society.

3.2 ON ORGANIZABILI1Y AND ORGANIZATION OF INTERESTS

As demonstrated by OLSON (1965), small, well-defmed groups are significantly more able to voice their interests (i.e., the aggregate of their members' individual interests) effectively than large ones, a phenomenon also recognized by BUCHANAN (1965) as the "large­numbers dilemma". It can be predicted, therefore, that small interest groups are - ceteris paribus - more successful rent-seekers than larger parts of the population who share a particular interest.

The masses in Poland and in other reforming countries stand to gain considerably in welfare once the transformation is completed. Those who expect to lose from a transformation as a whole, in contrast, are well-defmed groups of apparatchiks, economic bureaucrats, enterprise directors.

As their interests are relatively easy to organize such that they have a considerable -hindering - influence on economic progress (consider, for example, the "directors' mafia"), a broad and fairly stable consensus of the population is required to counterbalance and outweigh the attempts of such interest groups to throw a spanner into the works of the transformation.

For this unorganized popular support to be generated and maintained, the people need to be encouraged to build up trust in the integrity of the reformers and their endeavors. The Polish population is obviously willing to endure great sacrifices; however, they expect a fairly just distribution of burdens and they need to see visible signs of change soon. Otherwise, they will soon perceive their losses now to exceed their discounted differential incomes from a transformation and therefore withdraw their cooperation.

3.3 THE "HUMAN FACTOR"

There seems to be a profound asymmetry between forcing people under authoritarian rule and relieving them from it. "To shove them in, you announce that many of the decisions which individuals used to make for themselves will now be made by the instruments of the state; you set up those instruments; you send the disobedient to prison, or to the firing squad' (ECONOMIST, 1989, p. S5). The abolition of authoritarian rule, on the other hand, requires people to assume responsibility for decision-making that had formerly been centralized, i.e., delegated to a group of people who were supposed to use their discretionary power for the good of all. Self-reliance, enterprise, and creativity do not range with the kind of personal qualities called for in a command economy. Unfortunately in a way, this kind of behavior, which becomes an essential virtue in a market system, can apparently not be enforced externally.

35

Moreover, as the (East) German novelist Stefan Heyrn said, "in the shadow of the iron curtain, there was good dreaming', i.e., the security that the paternalist system provided for many aspects of life was (at least in retrospect) a truly appreciated attribute of the socialist system.

A further inheritance of "real-existing" socialism in Poland and elsewhere is the people's deep-rooted skepticism concerning private property. This seems to be one of the reasons why even governments dedicated to sweeping reforms merely produce disappointments when it comes to privatization.

Quite naturally, people regard with deep mistrust the - sometimes huge - differential incomes gained by those who managed to seize the - sometimes dubious - business opportunities that have opened in the shady interspace between state control and emerging market forces. The unchaining of productive activity that is aspired to, by reforming property rights, however, heavily depends upon the existence of income differentials. The people's willingness to tolerate the kinds of income differentials needed to foster private enterprise appears to be an essential prerequisite of the successful implementation of a market system in Poland (BRYSON, 1989, p. 145).11

Also quite naturally, public complaining has increased. However, the fact that newspapers are full of critical comments on government performance should not be regarded as an indicator of how bad things have become. For, as Alexis de TOCQUEVILLE noted implicitely (1856/1955, p. 176), intensifying "voice" (HIRSCHMAN, 1970) is a natural effect of an oppressive regime relieving its pressure.12

4. ARE POLITICAL AND ECONOMIC REFORM JOINT PRODUCTS?

Important issues that need to be addressed when discussing a systemic transformation are

(1) which scope of reform to aim at (here: Is it possible to preserve the strengths of the old system while eliminating the deficiencies of central planning by introducing market elements?) and

(2) which speed and sequencing to choose (radical or incremental strategy?). Last but not least, we should turn to the interdependencies of the subsystems of society, i.e., discuss

(3) to what extent and from when on an economic liberalization needs to be, or should be, accompanied by a political democratization.

Walter EUCKEN's postulate of the "[nterdependenz tier Ordnungen", the necessary harmony between the economic and the political system, has not only been one of the

11

12

What makes matters worse is that the existing disequilibria create (temporary) income differentials that far exceed those inherent (and necessary) in a "regular" market economy.

For an elaboration on this idea see TIETZELjWEBER/BODE (1991, pp. 251).

36

central theorems of the (German) ordo-liberal school, but has, thanks also to the work of Friedrich August von HAYEK, prevailed in much of the theory of economic systems.

The aspirations of (former) communist countries to transform their economic and social systems raise new interest in the EUCKEN hypothesis, this time not so much from a theoretical, but more so from a teleological (technological, instrumental) viewpoint:

Is it true that a market economy and democracy (political pluralism) presuppose each other, much as linked products do? If so, is it still true that both systems, the economic and the political one, should be transformed at the same time? The critical question, in other words, is whether the introduction of democratic structures in the transition period tends to support or endanger the successful adoption of a functioning market system.

The example of Western democracies running market economies that have proved clearly superior to the "real-existing" centrally-planned economies tends to bias the observer's perception towards the idea of a fundamental interdependence between competitive structures in the economy and in politics. Empirically, however, the coexistence of these systems is not prevalent. Even today, there are market economies that apparently work well without democratic political structures (for example in Singapore, one of the "Four Little Tigers"), yet history does not supply any examples of (Western-type) democracies running command economies. It can also be observed that in history, at least the phase of implementinB a market economy has often been dominated by an authoritarian decree. This includes the beginnings of a market economy in West Germany after World War II, an achievement that was certainly not mainly based on a democratic choice process (cf. SCHWARZ 1989a).

4.1 VIRTUES AND VICES OF DEMOCRATIC STRUCTURES IN THE PERIOD OF TRANSI110N

SCHWARZ (1989a) argues that democratic structures (meaning political pluralism and majority decisions) may be insufficient to achieve the transformation of a command economy into a free competitive economy. Two reasons can be put forward in support of this conjecture: First, political pluralism may be feared to scatter a society that is inexperienced in using its freedom and thus impair the genesis of authority necessary to accomplish the "big leap". Second, the transformation of one economic system into another quite naturally entails considerable - though transitory - social costs and might therefore call for leadership that is not dependent upon unstable political coalitions.

Indeed, the dilemma between economic and political liberalization cannot be denied. Popular support of the transformation effort, conferring legitimate authority to the government, is a highly critical factor for success. With the shift from a socialist system to a free market economy, however, there occur at least three phenomena that tend to impair the required popular support: First, hidden unemployment is being converted into open unemployment; to the people that is to say: unemployment is created. Second, the allocation mechanism of a shortage economy that used to generate cash-balance inflation (CASSEL, 1990) or, as a more visible indicator, queues, has to be replaced by a price mechanism, leading to higher prices for many goods and respective losses in (pecuniary) real income for consumers. Third, inequalities begin to be expressed in terms of income-

37

and wealth-differentials instead of less tangible allocative privileges that used to limit the very access to certain goods according to political criteria.

Also, it is often argued that democratically elected governments are too vulnerable to interest-group influences to accomplish the transformation. HEWETI (1989, p. 16f.) fears that "behind the facade of ringing statements of refonn goals, political leaders allow so many exceptions to the general principles of the refonn - most notably, exceptions to the policy of no new subsidies - that in the end the application of refonn principles becomes the true exception."

From this inventory of problems some authors infer that a sufficiently strong and stable democratic government cannot be expected under such conditions, and therefore advocate economic transformation without simultaneous politicalliberalization.13 This view requires some qualification. For one thing, autocratic regimes need popular support in almost the same way as democratic governments if they are to carry out rulings at a bearable cost, since the suppression of opposition causes the regimes some expense.

What is more, the argument in favor of an autocratic management of the transformation must presuppose a benevolent dictator stepping from the spheres of wishful thinking down to earth, or something similar. For it implicitly assumes an authoritarian leader's self­interest and time-preference rate to be lower and less detrimental to the public good than those of any other group of society. Quite on the contrary, an authoritarian leader or regime will have strong incentives to exploit the society for their own short-run benefits and certainly have better opportunities to do so than interest groups and coalitions have in a democracy.

Also, we can see no convincing reason to expect confidently that over time, the free enterprise system will prove instructive and contagious to the political system and hence clear the way for democracy to ride on its coat-tails.14 Rather, we would expect a lack of competition in the political market to induce inefficient monopoly structures and other restraints on competition in the economic sphere as well.

At any rate, the risk inherent in entrusting monopoly power to any person or group in society must not be underestimated. For who guarantees that no abuse of power will occur and, moreover, that that power will be relinquished after the predefined goal has been accomplished? The mechanisms that serve an authoritarian regime to stay in power are far more complex than is assumed in the above conjectures calling for an autocratic introduction of the market economy (for a pioneering analysis of autocratic rule see TULLOCK, 1987; for an application to the revolution in East Germany see TIETZELjWEBER/BODE, 1991).

13

14

SCHULLER (1990), for example, explicitly considers this line of reasoning.

SCHWARZ (1989a, p. 9) assures that economic liberalism, once established, will start to nibble at and eventually "corrode" political authoritarianism.

38

A drawback of political liberalization in the transition phase - one that would, by the way, not exist in a world without transaction costs - is that the implicit freedom of organization involves opportunities for interest groups and political parties to exploit informational asymmetries existing between them and the masses. Such organizations could, for example, take advantage of the lack of information about the functioning of a market economy among the population by promising utopian economic systems that would improve the welfare of their respective clientele. In the former communist parts of united Germany, trade-unions promise east German workers to press for the approximation of their wages to West German standards. Although a speedy equalization of wages is obviously most detrimental to the workers' long-run interests, as it destroys the one and so far only attractive locational factor of this region ( cheap labor), it serves the interests of the unions by strengthening their degree of organization and influence. IS

The conclusion to be drawn from these prospects is not, however, to reject democratization and stick to autocratic government instead, but to create those conditions in the political market that tend to prevent such opportunism.

4.2 THE ROLE OF COMPETITION

The main difference between a democratic political system and an authoritarian one does not lie in the rulers' vulnerability to the influence of interest groups, but in their relative freedom to utilize their discretionary margin. In a pluralist system, the need to compete for votes in order to further their own utility binds politicians more or less strictly to pursuing the interests of (sections of) the population. By the threat of being voted out of office, the government is restricted in its discretionary margin in that it has to secure a majority (coalition) to support it. Authoritarian governments, i.e., monopolies in the political market, that do not gain their legitimacy via popular elections enjoy a much larger scope for exploiting the population for the sake of personal enrichment. Their only constraint to action is the need to secure their power. In contrast to political pluralism, however, this does not mean that they need to comply with the people's revealed preferences. Authoritarian governments will generally rather rely on applying force in order to further their interests.

Thus, a high degree of competition in the political sphere, much the same as in the market for economic goods and services, guarantees protection of the "consumers" from exploitation by self-interested "suppliers" trying to maximize their "producer's surplus".16

15

16

I am indebted to Manfred Tietzel for pointing this out to me, M. W.

This emphasis on the "exit" option (HIRSCHMAN, 1970) for consumers in the political as well as in the economic market has been well established by Karl R. POPPER's (1945/1980, p. 174) insightful definition of democracy as a form of government that allows its citizens to get rid of a particular government simply by voting them out of office, i.e., at low cost.

39

Under conditions of (nearly) perfect competition in the political market, there is no room for opportunists to mislead the uninformed public, because competitors have strong incentives to expose and pillory such behavior.

Thus, the way to overcome the existing flaws in simultaneous economic and political liberalization is not to resort to autocratic control, hoping for a benevolent, disinterested leader, but to establish the conditions under which genuine political competition can evolve.

5. WILL THEY MAKE IT THIS TIME?

Economic theories of individual and interest-group behavior do not evoke much optimism as regards the attempt to diametrically transform a command economy. The necessity that the privileged, those who control economy and society, give up their rights and ranks while there is neither the means nor the willingness to compensate them for these sacrifices seems to prevent an effective break with the past from happening.

There are, however, certain conditions that moderate this pessimistic evaluation. In times of disaster, when life cannot be much worse, and given the presence of "political entrepreneurs" who are willing and able to manage social change, and given sufficient stocks of the population's trust, i.e., authority transferred to these leaders, then the "big leap" seems achievable.

The current development in Poland is ambiguous as to the prospects of success. While on the one hand, the current government's credible commitment to a strict reform program gives reason for some optimism, there is, on the other hand, a growing social unrest to be observed that fmds its manifestation in the political sphere in severe tensions within Solidarity and within the government. An influential group within Solidarity either does not see the long-run consequences of its postulates or, more likely, has discovered the political opportunity in proclaiming a "softer", more socially-orientated course of reform.

Irreversible as the break with communist rule may be in the political sphere, it is certainly not yet so in the economic sphere. It becomes a matter of the political clout of political entrepreneurs and of political opportunists respectively, whether Poland will "make it" on its own account within the next few years or else continue to struggle with a malfunctioning economy lacking any coherent system.

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BRYSON, PH. J. (1990), Soviet Economic and Social Reform (Perestroika and Glasnost): Claim and Reality, in: D. CASSEL, ed., Wirtschaftssysteme im Umbruch, Miinchen 1990, pp. 123-152.

BUCHANAN, J. M. (1965), Ethical Rules, Expected Values, and Large Numbers, in: Ethics,76 (1965), pp. 1-13.

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BRENNAN, G.; J. M. BUCHANAN (1985), The Reason of Rules. Constitutional Political Economy, Cambridge, Mass.

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Public Goods, in: Public Choice, 41 (1983), pp. 371-~. JERMAKOWICZ, W. W. (1990), The Beginnings of Social Market Economies in

Germany and in Poland, in: Forschungsstelle zum Vergleich wirtschaftlicher Lenkungssysteme der Philipps-Universitat Marburg, ed., Von der Sozialistischen Planwirtschaft rur Sozialen Marktwirtschaft: Probleme des Systemwandels, Marburg 1990 (Festschrift flir Hannelore Hamel; Arbeitsberichte rum Systemvergleich No. 15), pp. 71-106.

KIRSCH, G. (1981), Ordnungspolitik als Gegenstand der politischen Auseinandersetzung, in: O. Issing (ed.), Zukunftsprobleme der sozialen Marktwirtschaft, Berlin 1981, pp. 255-275.

KNIGHT, P. T. (1983), Economic Reform in Socialist Countries. The Experiences of China, Hungary, Romania, and Yugoslavia, Washington, D. C. (World Bank Staff Working Papers, No. 579).

KORNAI, J. (1980), Economics of Shortage, Amsterdam. LUKS, L. (1990), Geordneter Riickzug - dank der "Solidaritat", in: Frankfurter Allgemeine

Zeitung, No. 20, 24 January 1990, p. 10. MISZTAL, B. A. (1989), Political Transformation of Authoritarian Regimes, in: The Polish

Sociological Bulletin, 2 (1989), pp. 17-33. MORAWSKI, W. (1989), "Politics" in Three Types of Economic Reforms in Poland, in:

The Polish Sociological Bulletin, 1 (1989), pp. 65-81. OLSON, M. (1965), The Logic of Collective Action, Cambridge, Mass. POPPER, K R. (1945), The Open Society and Its Enemies, I, The Spell of Plato, London,

German translation: Die offene Gesellschaft und ihre Feinde, I, Der Zauber Platons, 6th ed., Miinchen 1980.

ROBINSON, A. (1990), Walesa calls for haste, in: Financial Times, Survey Poland, 20 November 1990, Section ill, p. 1.

SCHULLER, A. (1990), Probleme des Ubergangs von der Staatswirtschaft zur Marktwirtschaft, m: Forschungsstelle rum Vergleich wirtschaftlicher

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Lenkungssysteme der Philipps-U niversitiit Marburg, ed., Von der Sozialistischen Planwirtschaft zur Sozialen Marktwirtschaft: Probleme des Systemwandels, Marburg 1990, (Festschrift fur Hannelore Hamel; Arbeitsberichte zum Systemvergleich No. 15) pp. 1-24.

SCHUMPETER, J. A. (1942), Capitalism, Socialism and Democracy, New York. SCHWARZ, G. (1989a), Marktwirtschaft und Demokratie: Eine Art von Hassliebe, in:

Neue Ziircher Zeitung, No. 11, 15/16 January 1989, p. 9. SCHWARZ, G. (1989b), MUhsame Metamorphose von Marx zum Markt, in: Neue

Ziircher Zeitung, No. 269, 19/W November 1989, p. 13. TIETZEL, M.; M. WEBER; O. F. BODE (1991), Die Logik der sanften Revolution. Eine

okonomische Analyse, Tubingen (Walter Eucken Institut/Vortriige und Aufsiitze 133).

TOCQUEVILLE, A. DE (1955), The Old Regime and the French Revolution, New York (L'Ancien Regime et la Revolution, Paris 1856).

TULLOCK, G. (1987), Autocracy, Dordrecht. WINIECKI, J. (1986), Distorted Macroeconomics of Central Planning, in: Banca

Nazionale del Lavoro Quarterly Review, 157 (1986). WINIECKI, J. (1988), The Distorted World of Soviet-Type Economies, London­

Pittsburgh. WINIECKI, J. (1990), Why Economic Reforms Fail in the Soviet System: A Property

Rights-Based Approach, in: Economic Inquiry, 28 (1990) 2, pp. 195-221.

THE GAME FOR POWER IN A STATE: THE CHANGES OF THE POLISH ELECTORAL LAW

Jacenty Siewierski and Otto F. Bode

Abstract: According to Property Rights Theory, the rules for competition have an effect on the competition results, the distribution of possible power positions, and also value the competitors' respective skills differently. This means that certain groups prefer the current rules whereas, at the same time, other groups refuse to accept these rules; thus redistribution struggles become possible. First, this article will try to explain the transformation of the Polish electoral law using economic premises. Second, the starting position for the "game for power in Poland" at the beginning of the eighties will be described. Thus the particular interests of the groups involved - Solidarity, the PZPR, and its bloc parties, and the Communist Party of the Soviet Union - will become evident. This political system was developed and transformed due to these particular interests. The change of the goals of the political leaders in the Soviet Union and their change of action are regarded as the most important change of the "players' positions". Perestroika's impact on the balance of power between the PZPR and Solidarity will be described and analyzed. The round-table accords will also be considered from the economic point of view. According to this, both the negotiations and their results were consequences of the clash of interests between Solidarity and the PZPR. The fmal part of this article deals with the election result of Sejm and Senate, which was also the reason for differing interests between the alliance's suborganizations (the bloc parties and the PZPR) on one side, and Solidarity as a conglomeration of different groups of society (Christians, conservatives, and left dissidents) on the other side.

Zusammenfassung: Der vorliegende Beitrag versucht die Transformation des polnischen Wahlrechts unter Verwendung okonomischer Pramissen zu erkHiren. Ausgehend von der Annahme der Property Rights Theorie, daB die Gestaltung der Wettbewerbsregeln das Wettbewerbsergebnis beeinfluBt, potentielle Machtpositionen verteilt und relative Eigenschaften der Wettbewerber unterschiedlich gewichtet, wird zunachst versucht zu zeigen, daB jede tatsachliche Rechtsetzung von bestimmten Gruppen praferiert, von anderen Gruppen aber abgelehnt wird. Damit birgt jede Rechtsordnung Anreize ffir Umverteilungskampfe. AnschlieBend wird die Ausgangssituation im "Spiel urn die Macht im polnischen Staat" zu Beginn der BOer Jahre dargestellt. Dabei sollen die partikularen Interessen der beteiligten Gruppen, der Solidaritat, der PVAP mit den Blockparteien und der KPdSU herausgearbeitet werden, denn diese Interessen waren die Grundlage fUr die bestehende politische Ordnung Polens zu Beginn der 80er Jahre und die Triebfeder fUr die Wandlungen dieser Ordnung. Die .Anderung des politischen Zielsystems und der daraus resultierenden Handlungen der politischen Fiihrung in der UdSSR wird als wichtigste Anderung der "Spielaufstellung" angesehen. Die Auswirkung der Perestroika auf das KrafteverhaItnis zwischen PV AP und Solidaritat wird beschrieben und analysiert. Auch die Verhandlungen am "Runden Tisch" werden mit Hilfe der okonomischen Annahmen untersucht. Sowohl die Verhandlungen selbst als auch die Ergebnisse sind danach das Resultat der Interessenkonflikte zwischen Solidaritat und der PVAP. Der abschlieBende Teil befaBt sich mit den Auswirkungen des Wahlergebnisses der Wahlen zum Sejm und zum Senat, welches u. a. dazu beitrug, daB die Interessen der Suborganisationen der

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Biindnisse, die Blockparteien und die PV AP auf der einen, die Solidaritat als Konglomerat verschiedener gesellschaftlicher Gruppen (christliche, konservative, linke Oissidenten) auf der anderen Seite, nicht mehr deckungsgleich waren, was zum Bruch der langjahrigen Biindnisse (PVAP, SO, ZSL) bzw. zur Spaltung der Organisation in verschiedene politische Gruppierungen (ROAD und Zentrum) ftihrte.

Streszczenie: Ponizszy tekst podejmuje probe wyjasmema zmian w polskim prawie wyborczym za pomoca ekonomicznych przeslanek. Biorac za punkt wyjscia zalozenia property rights, mowiace 0 tym, iz reguly i zasady konkurencji okreslaja jej ostateczny wynik, wyjasnia sie najpierw, ze kazdy warjant ordynacji wyborczej preferowany jest przez okreslone grupy, podczas gdy inne grupy daza do jej zmiany. Tym samym powstaja naciski na rewizje proporcji podzialu dochodow. Dla ilustracji "gry 0 wladze" w Polsce w latach 80-tych przedstawiona zostaje struktura interesow roznych grup i organizacji. Szczegolny nacisk polozony zostaje na punkt wyjscia do transformacji, w ktorym na poczatku lat 80-tych wyraznie wyartykulowaly sie interesy tych grup, ktore bronily starego porzadku oraz tych, ktore stanowily sile napedowa przemian. Zmiana politycznych celow systemu i wynikajaca stad rewizja stanowiska wladzy w ZSRR stanowily najwazniejszy element inicjujacy proces transformacji. Spowodowalo· to zmiane ukladu sil pomiedzy PZPR a Solidarnoscia. Analiza sytuacji "Okraglego Stolu" przeprowadzona jest takze przy wykorzystaniu ekonomicznych przeslanek. Zarowno same rozmowy jak i ich ostateczny wynik sa rezultatem konfliktu interesow PZPR oraz Solidarnosci. Koncowa czesc opracowania pokazuje jak w trakcie i po wyborach do sejmu i senatu w czerwcu 1989 dywersyfikowaly interesy poszczegolnych grup w ramach dwoch glownych blokow: PZPR, ZSL i SO z jednej strony oraz Solidarnosci z drugiej. Spowodowalo to rozpad koalicji postkomunistycznej oraz podzial w lonie Solidarnosci (ROAD Centrum).

1. THE IMPORTANCE OF RULES

As every athlete knows, the decisive factors which lead to either victory or defeat, championship or relegation, include not only understanding the game, tactics, the physical fitness of the players, and teamwork but, above all, the rules of the game. The player with the most points does not necessarily win the tennis match but rather the one whose points are distributed so as to win the most sets. The same principle is true for ski-jumping - the length of a jump is important but does not by itself determine victory or defeat - other factors such as style also playa significant role.

The rules governing political competition are similar to those in sports. The importance of a political party depends on the distribution of seats. Under certain circumstances, it is possible that parties which have achieved the majority of the votes in parliament are in the opposition. This is possible due to the majority vote system.1 The decision to 'allow only democratic, only socialist or otherwise defined parties to participate in an election can sharply reduce the selection of the candidates for the citizens. The question as to whether

1 In Iceland in 1931, the party which gained 35 percent of the votes attained 54 percent of the seats; the party which had 45 percent of the votes only attained 35 percent of the seats (see NOLEN, 1989, p. 71).

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the general population (or a part of the population) should have the right to vote turns out to be a question of how the rules for the "political game for power" are defined.

The rules of a game have an effect on the comparative characteristics of the players, as certain skills are regarded to be more important than other ones.2 Therefore, they also influence the players' chances for success. In politics, this means that rules affect the politicians' ability to achieve their goals. A parliamentary democracy can be distinguished from a socialist democracy or monarchy by the costs - and, therefore, the possibility - of a change of power; the costs to vote out a politician are lower than those of a revolution.

This also means that transforming the rules can lead to a change in influence and thus also a change in the relative costs which a politician must raise in comparison to other politicians in order to come to power and/or to remain in power. In other words, changing the rules involves a redistribution of profits and losses and consequently (almost always) leads to redistribution struggles. Those who believe they are being treated preferentially by the existing system will try to preserve this framework as much as possible, while others who do not feel they are represented by the status quo will try to change the rules.

The framework containing the "rules" for politics is usually called the "constitution". The constitution lays down (basic) rights and obligations as well as the allocation of power among competing politicians (e.g. electoral procedures). The latter is especially important for the following arguments. Attempts to change the constitution are thus struggles for potential power positions on the basis of currently realized power positions.

This article will try to explain the process of political reorganization in Poland using typical economic premises. The participants belong to the genus "Homo economicus". This kind of person needs politics in order to increase his individual benefits. Power is the capability of imposing one's will on other individuals (MANDT, 1986) and therefore a possible instrument to use other peoples' achievements for one's own interests.

The framework of rules determines the scope in which politicians are able to take advantage of their positions of power against the citizens' will, as the degree to which power can be restricted depends on the way the political system is organized (procedure for obtaining power positions, duration of period of office, number and contents of different opinions permitted).

As it is not possible (or only at an extremely high cost) to force politicians to resign from power positions (APOLTE, 1990, p. 3), the politicians are an elite group which makes decisions which do not correspond to the interests of the general population. According to SCHAPER, the political supply would be monopolized; and this inevitably causes "monopolistic scopes" (SCHAPER, 1984).

2 In decathlon, the player is awarded a certain number of points in the· respective disciplines. The importance of the respective disciplines for the result is determined by the way in which the points are distributed.

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Pluralistic systems, however, offer the population many choices analogous to competitive market systems (OBERREUTER, 1980). Democratic rules create institutional conditions for a change of government at a reasonable price and thus limit the amount of damage that bad or incompetent rulers may cause (POPPER, 1980, p. 170).

2. THE PLAYERS

2.1 THE POLISH UNITED WORKERS' PAR'IY (PZPR) AND ITS PARTIES IN A FACTION

The PZPR was the Marxist-Leninist workers' party in Poland. It saw itself - as did the other communist parties of the Eastern bloc - as a representative of the working people.3

Under the leadership of the PZPR, as was laid down in the constitution, the proletariat ruled in Poland.

The Marxist-Leninist ideology was the legitimacy for the power of the PZPR and its allied bloc parties: the ZSL (Polish-United Peasant Party) and the SD (Democratic Party). According to this ideology, it was not absolutely necessary for the proletariat to free himself from the chains of oppression. Under unfavorable conditions, a capitalist society would be able to survive for quite some time. Therefore, the organization of the work force was necessary to overcome the bourgeois system; the respective Marxist-Leninist party was responsible for this task. The party was granted the monopoly of leadership in order to ensure it would fulflll its obligations. Besides the PZPR no other independent party was allowed. Only the so-called bloc parties had their place within the state. The bloc parties originated from non-socialist parties, which had existed before the Polish state was crushed in World War II.

As it seems impossible for any society to involve all individuals in everyday political decision making,4 the "collective of dictators of the proletariat" also had to accept mechanisms and selection procedures which were used to choose representatives.

3

4

The logic of the Marxist theory leads to a situation, in which a very small minority of capitalists rules over the overwhelming majority of the population, the proletariat. The extreme case would be a state, in which one single capitalist owns all means of production and thus forces all members of the society into dependence. In such a situation the establishment of a "dictatorship of the proletariat" would not be a dictatorship in which a minority exploits and governs the majority by force. This dictatorship would rather be the last step towards the realization of a classless society, free of rulers and ruled.

BUCHANAN and TULLOCK (1962) show how the costs of decision making develop in a collective, which depends on the number of individuals who have to agree to a decision in order to make the decision binding. We can conclude from this argumentation that extremely high costs would be necessary to make a decision in large collectives if all (or almost all) the collective members were involved in this process. Representation is much more effective and thus reduces the costs considerably.

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Representatives were selected in the communist state in a procedure based on the electoral system which was organized according to the principle of democratic centralism. According to this principle, the lower levels of the respective organizations chose the delegates, who then acted as representatives on the upper levels. The upper levels and their organs had the authority to issue directives to the subordinated (hierarchy) levels.

The potential candidates for representative positions of a state all came from a select group: they belonged to the Marxist-Leninist party or a bloc party. The point of having elections was to appoint the best representatives of the proletariat for important tasks. The best were among the good, and the good ones were - by defmition - members of the Marxist-Leninist party (or the allied bloc parties) (TIETZELjWEBER/BODE, 1991, p. 13).

Elections were carried out in the following way: the PZPR and its bloc parties united their candidates for seats in the Sejm. All candidates shared the "standard opinion" and the voters were only allowed to decide who would represent this opinion in Parliament. If there was a ballot paper without any marks on it, the vote was then given to the first candidate on the list. It was therefore impossible to abstain from voting by not choosing a candidate on the ballot paper.

This kind of selection largely prevented the citizens form having any direct influence on politics. Only those who had proven to be loyal to the party line could acquire a seat in Parliament. This was the guarantee for the regime's power; it ruled out any participation by the citizens, while, at the same time, the political system had the outward appearance of "democratic participation".

2.2 THE COMMUNIST PAR'IY OF THE SOVIET UNION

The Communist Party of the Soviet Union played the role of an "eminence grise" in the game for power in Poland. It was the central power in the Eastern bloc and as a "central enforcer" dictated the line for the Eastern bloc.

The costs of revolution in the satellite states - and therefore in Poland, too - increased considerably due to the Warsaw Pact structures. The respective democracy movements faced the threat of intervention by other Eastern bloc nations - especially the Soviet Union - if a member state tried to leave the official line and introduce independent politics. This attitude of Moscow has become known as the "Brezhnev doctrine" and prevented the opposition groups from openly committing themselves.

Maintaining the Eastern bloc was one important aim of the Communist Party, because the credibility of the Soviet Union as a world power depended on the stability of this confederation. During the Cold War, when deterrence played a significant role, the military potential of the Soviet Union and the satellite states was an important factor.

The Eastern bloc states also formed a kind of producer cooperative and the Iron Curtain became their most famous product. Every state sealed off its respective borders to capitalist states; thus the costs to cut off the whole communist area were decreased considerably. Sealing off borders also prevented citizens from breaking out of the sphere of

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influence of the Marxist-Leninist party, because the Iron Curtain greatly increased migration costs.5

If one single state had succeeded in breaking out, this would have meant the end for the entire system, just as, for example, one single stone, which breaks out of a dam, could mean the destruction of the whole dam. The Soviet Union was forced to refuse the single states any political freedom in order to use this system for its own interests. This also meant that the Soviet Union as the "central enforcer" had to bear the costs which guaranteed its power position and therefore resources had to be withdrawn from private consumption in the country. As long as the advantages outweighed the disadvantages for those in power in the Soviet Union, the system was able to survive.

2.3 SOLIDARI1Y

The continuing bad economic situation and chronic supply shortages in Poland led to the emergence of Solidarity Trade Union in August 1980 which represented the interests of the opposition. As a socialist society was characterized by the omnipotence and omnipresence of state authorities, the government was entirely responsible for economic mismanagement. When the attempt was made to change the conditions for production and introduce a free economic system, the need for reformed socialist forms of organization became evident: it was necessary to organize independently from the communist power (TOURAINE/STRZELECKI, 1983).

The philosophy of the Solidarity movement was deeply rooted in political ideas, which the following organizations had originated in the fifties: first, the workers' councils or discussion associations of revisionist intellectuals, the communist dissidents, who formed the "Democratic Left" (MICRNIK, 1980) and, second, the catholic intelligence associations (KIK), which had gradually developed into a broad social movement and were influenced by the integration of Christian, national, and liberalist-conservative movements. Solidarity recruited its members and ideals from these sources (ASCH, 1983). They had one political interest in common: they both wanted to overcome the Marxist-Leninist system. This goal united the two groups, who had differing opinions regarding other matters; Solidarity thus became a powerful mass movement in which all the different sections of society were involved. Officially this movement had the status of a trade union but at the same time it represented political interests. Solidarity, which formed the political opposition, was not allowed in Parliament, and was only able to exist in the economic subsystem; Solidarity was also a labor movement, whose economic activities inevitably had political consequences.

A dilemma arose from Solidarity's conflicting interests: as a political power, it had to deal with the issues concerning the society as a whole (such as, for example, Poland's financial situation), as a labor organization, however, it had to represent the interests of its members. It was almost impossible to reach both goals as the two following examples will show.

5 The East German border is one example for migration costs: here people risked their lives - this is the highest price that could be paid (see also TIETZELjWEBER/BODE, 1991).

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First, from the economic point of view, it was impossible for Poland to satisfy both the demand for an extensive health service and higher wages; what the labor organization regarded as necessary, a rational politician could not take into consideration.

Second, the strike was Solidarity's main instrument in the struggle for political power, but this weakened the economy and, consequently, the chance to improve the laborers' income as well. The strike was highly efficient as a political form of pressure, but side-effects were disastrous for the economy.

At the beginning of the eighties, Solidarity (which then had about 10 million members) was able to force the PZPR to make concessions.

H Solidarity and the PZPR had been the only ones involved in the struggle for power, Solidarity might have been able to force a change in the political situation using the political power and support among the population it then possessed. However, the Communist Party of the Soviet Union was behind all the communist parties as a "protecting power" and issued directives.

When Solidarity called for a big strike in 1980/81, the government gave in to some of the trade union's demands and thus the special "situation of the game" soon became very clear.

Under pressure from the Soviet Communist Party the Polish communists declared martial law and banned Solidarity.

3. CHANGING THE PLAYERS' POSITIONS

Even when Solidarity was underground, it never lost its organizational structure entirely: Solidarity continued publishing during the period of martial law and afterwards as well. It also organized demonstrations on anniversaries. As it was impossible for Solidarity to work as a trade union, it concentrated increasingly on political goals. The whole organization was now committed to overcoming the communist system: the trade union had become a political party which refused to collaborate with the communists. But Solidarity did not voluntarily take on the role of a counterbalance and sign of hope for the overwhelming majority in Poland, but rather was forced into this role by the circumstances.

Looking back at this period from today's perspective, it is apparent that Solidarity did not have a long-range concept. There was no political program for the time after the communist rule. One explanation is that not even Solidarity reckoned with a change of government - until the beginning of the Perestroika a Perestroika was unlikely, but without Perestroika a transition of government was absolutely impossible.

The ban on Solidarity was lifted as a consequence of Soviet leadership's thinking. The transition from the "Brezhnev doctrine" to the "Sinatra doctrine" changed the distribution of political power in Poland.

The cost for a coup d'etat, which had been terribly high for Solidarity during the period of the Brezhnev doctrine, was now considerably lower; the rest of the Eastern bloc was no longer a threat to Poland. A rebellion was no longer inconceivable.

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The PZPR's situation was absolutely contrary. Before the transItion in the SOVIET UNION, the central power position of the Soviet communists had protected the PZPR. In economic words: the SOVIET UNION bore one part of the PZPR's costs. After the transformation in the SOVIET UNION, the PZPR itself had to bear the costs in order to remain in power. Now they had to find a new way to minimize their loss of power. The PZPR could no longer survive politically without making concessions to Solidarity. It is not surprising that the Polish communists asked Solidarity to cooperate. They wanted to achieve two goals with this offer:

First, the PZPR offered Solidarity leadership as an alternative to (open) resistance. Second, they also wanted it to share the political responsibility and thus direct a part of the citizens' discontent arising from the political and economic situation to Solidarity (HOLZER, 1990, p.22).

The members of Solidarity had differing OpInIOns regarding this offer. One group absolutely refused to accept the offer as they did not want any collaboration with the PZPR whatsoever. Another group, however, recognized that if Solidarity was involved in the political process, there might be a way to abolish the Marxist-Leninist system peacefully. The alternative to an open revolution or to boycotting and ruining the Polish society was one way of transforming the system at a reasonable price. Moreover, this was the guarantee for a special position in the political structure for Solidarity after the communist rule was over. Solidarity was able to take an active part in organizing the framework which would be laid down by the new "rules of politics" that still had to be worked out. In this way they would be able to have a hand in creating this new framework. The Solidarity leadership decided in favor of negotiations with the government.6

Their main criticism was that this kind of "top to bottom management" only allowed the Solidarity leadership to decide over reforms at the round-table. Solidarity's proposals were not being developed and debated at the local level but were determined by the Solidarity leadership and then presented to the population. Thus neither the population nor the ordinary members of Solidarity were able to influence the reforms at all.

4. THE ROUND-TABLE AS A COMMI'ITEE FOR RULES

Representatives from the PZPR, the bloc parties, and the Christian groups of the Sejm participated on the part of the government organizations in the negotiations to organize the Polish institutions. The Solidarity delegation consisted mainly of members of the citizens' committees with Lech Walesa which had been founded in December 1988 (ZIEMER, 1989b, p. 960). The claim of democracy of this citizens' committee was controversial because its members were not elected but coopted by Lech Walesa and his select circle of advisors (ZIEMER, 1989b, p. 960).

6 As a result, the members of Solidarity who were against these negotiations founded the "Solidarity 80". They chose this name in order to show that Solidarity 80 tried to achieve Solidarity's original goals at the beginning of the eighties. It also implied that the negotiations with the government did not correspond to these aims.

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One of the key problems during the negotiations was how to organize the next elections so that the population would accept them as authentic and democratic while at the same time preventing the party from immediately losing its power. The solution to this problem was of great importance for both the government and Solidarity. Power and influence - as well as the money and privileges that went along with this - were at stake for the one group while the other group was fighting for its reputation among the population and for its right to be the representative of the people.

The provisions for the first free elections united elements of the old system with those of Western democracies.

A second chamber, the Senate, was created. The Sejm, up to that point, had been the only chamber. Free elections were to determine the composition of the Senate. The electoral pr()t;ess for the Senate was a variant of the majority vote system; two mandates each were given from the respective voivodships (except Kattowitz and Warsaw which were granted three mandates each). The Senate had less political influence than the Sejm. Its tasks were primarily concerned with human rights, law and order, and to watch over the social and economic sector. The Sejm was still responsible for the legislation, but the Senate was given a suspending right of veto which meant that they could demand a second vote in the Senate before a bill could become a law. The delegates at the round-table were not able to reach an agreement regarding the number of votes needed to overcome a veto in the Sejm until the last day of negotiations. The government delegation was in favor of a 60 percent majority, the opposition wanted a two-thirds majority. On the last day of conference, the government [mally agreed to Solidarity's demand.

The elections to the Sejm were not entirely free and equal, unlike the Senate elections. In the Sejm, 60 percent of the seats were apportioned to the PZPR and the bloc parties, 5 percent were allotted to the Christian groups, and only 35 percent were freely contested (NAGORSKI, 1990). Solidarity's candidates and other candidates supported by Solidarity were among those in the last category.

These provisions were to ensure from the very beginning that the previous government parties (the communists and their allies) maintained a majority in the Sejm after the elections. The distribution of seats under these provisions also explains why the government delegation insisted on having the 60 percent majority to override the suspending veto in the Senate: it appeared that the government parties were assured of a 60 percent majority and would thus be able to override every veto. If a two-thirds majority was necessary, the government parties would then need the support of the independent members of Parliament as well as the representatives of the Christian groups to override a veto.

The common task of both houses was to elect the president of Poland. The agreements reached at the round-table granted the president a very important position. The president had a six-year term of office which was 2 years longer than that of the members of Parliament. Like the Senate, the president had a suspending veto, which also could only be overridden by a two-thirds majority. He was the commander-in-chlef of the armed forces and was authorized to dissolve Parliament in certain situations. The dissolution of the Sejm (either by the President or the Parliament) would mean the dissolution of the Senate as

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well. The president also had the right to declare martial law and states of emergency (ZIEMER, 1989b).

The agreements reached at the round-table contained provisions regarding electoral law as well as elections campaigns and broadcasting times. The opposition thus had the right to broadcast 45 minutes per week and Solidarity's weekly paper was once again allowed to be printed.

5. THE SCORE OF THE GAME USING THE NEW RULES

5.1 THE ELECTION RESULTS

Solidarity's victory (in the first ballot Solidarity got 160 out of 161 mandates available in Sejm and 92 out of 100 seats in the Senate) was so overwhelming that this was regarded as not just an election but a plebiscite on more than 45 years of communist rule (ZIEMER, 1989b, p. 967). Not even the provision in the electoral law, which stipulated that the respective candidates were not allowed to indicate their party membership on the list, was able to stop Solidarity's victory. If Poland had had the proportional vote system, Solidarity would only have received 64 percent and 71 seats in the Senate; the Government parties would have got 19 seats that is 16 percent of the votes, and, fmally, independent opposition 9 percent or 10 seats.

5.2 THE POLmCAL CONSEQUENCES

The overwhelming victory of Solidarity over the communist parties gave the elections a new status. Originally, the electoral procedure was described as "half democratic, but honest"; now the proportional representation of 65 to 35 was being questioned considerably. Solidarity owned a "moral victory," whereas the communists were the clear losers. The coalition of the PZPR and the bloc parties fell apart due to the changed circumstances. The common interests of the respective parties were now drifting apart. The PZPR had apparently overlooked this fact at the round-table accords.

Due to the election results, the old coalition lost the PZPR and thus any claim to authority: the communists had dispensed with the monopoly of leadership and they had experienced a crushing defeat in the elections. The bloc parties now had a new option, which could not have been considered before and which the bloc parties themselves had not recognized: they were in a position to carry out the population's will that had been expressed in the election by dissolving the alliance, which had lasted many years, and joining Solidarity.

It was Lech Walesa who first understood the ramifications of the new situation. He surprisingly made the bloc parties an offer to join the coalition. The two parties, who had been partners of the PZPR for decades, agreed two days later. Altogether the coalition of Solidarity, ZSL, and SD had 57 percent of the seats; this was sufficient to oust the PZPR from its power position. The dynamism released by the election results made it possible for the voters' will to have an impact on the composition of the government sooner than any one just a few weeks earlier would have thought possible (ZIEMER, 1989b, p. 970).

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5.3 THE NEW GOVERNMENT

After the PZPR's defeat it had no choice but to join the Mazowiecki government. This government consisted of representatives from all parliamentary parties, and thus attained great support from the Polish population; the proof of this was the fact that there were no more strikes in Poland until May 1990, although living conditions continued to deteriorate.

The government's main problems were not to justify and carry through their own politics; difficulties arose from other problems.

First, the government did not have any support from the apparatus of state, the army, or the police (HOLZER, 1990, p. 24). For many members of the old guards, the passive resistance to the directives issued by the new political leadership was more important than putting these directives into effect.

Many parties opposed Solidarity, because the leading political power in the state and in Parliament did not have the status of a party. The fact that Solidarity was not officially a political party also meant that it was not subject to the "party law", which prohibited political parties from accepting money from foreign countries for election campaigns. Solidarity as a trade union was able to make use of such resources and thus became a rich party although it was not really a party at all. In this way, Solidarity had certain advantages over its rivals.

There was another important problem which had an effect on Solidarity. Solidarity had hoped to be successful in the elections, but did not reckon with taking over the government and having the leading position in Parliament. There was no concept regarding the government leadership, the structural organization for this task was not adequate, and, fxnally, differences of opinion among the respective groups of the trade union caused tensions within Solidarity. Differences of opinion arose after the main goal had been reached: overcoming the communist rule.

As the economic conditions in Poland continued to worsen, the conflicts increased to such an extent that the political scene once again changed fundamentally. New conservative parties were founded, which had not yet been represented in Parliament. Many activists of those movements originally came from Christian groups within Solidarity, whereas smaller groups tried to prevent the party from splitting up by founding the "U nillcation Center" (PC). The creation of the PC, however, meant the end of Solidarity. Solidarity lost those who could identify more with the CP and, at the same time, a group of other Solidarity members formed a new left-wing party called ROAD (the Polish acronym for Civic Movement for Democratic Action).

The presidential elections very clearly showed the hard competition between the respective groups of Solidarity. Tadeusz Mazowiecki and Lech Walesa, comrades for many years, both ran for president. They had differing opinions regarding the amount of power the Polish president should have (compared to other political institutions). Mazowiecki was in favor of

53

a relatively weak presidency, whereas Walesa believed that a powerful president would be able to lead Poland out of its crisis?

Both politicians were competing from relatively unequal positions. Mazowiecki was the political pragmatist, the prime minister, who was made responsible, whether justified or not, for Poland's economic problems. Walesa, however, had the aura of a working-class leader, of a strong man in Solidarity. Therefore, it is not surprising that Walesa successfully competed in the race for the presidency whereas Mazowiecki was not able to gain enough votes to reach the decisive runoff election. This was the end of the Mazowiecki government, because he had announced that he would resign from office if being defeated byWalesa.

6. FUTURE PROSPECTS

The process of creating new "rules of the game" for Poland's political system has not ended with the election of the president. It seems strange that the Polish citizens elected their president without knowing how much power the president would eventually have. At the time when the elections were held there was no "job description" for the presidency. This 'job description" and the fmal version will be decided upon and passed by the Parliament and then laid down in Poland's new constitution by the Sejm and the Senate. Who will fmally have the "leading position" under the new rules is still an open question. It is to be expected that the respective political parties will attempt to form the rules of the game so that the particular interests of their organizations will have priority.

REFERENCES

APOLTE, TH. (1990), Die Transformation des Wirtschafts- und Gesellschaftssystems der DDR, Diskussionsbeitriige des FB 5 -Wirtschaftswissenschaft- der Universitat Duisburg, No. 129, Duisburg.

ASCH, T. G. (1983), The Polish Revolution, Solidarity 1980 - 1982, London. ASCHERSON, N. (1981), The Polish August, The Self-Limiting Revolution, New York. BUCHANAN, J. M., G. TULLOCK (1962), The Calculus of Consent, Logical Foundations

of Constitutional Democracy, Ann Arbor, Mich. BUSCHER, B. et al. (1983), eds., Solidarnosc, Die polnische Gewerkschaft "Solidaritat" in

Dokumenten, Diskussionen und Beitriigen, Koln. FENCHEL, R., A-J. PIETSCH (1982), Polen 1980 - 1982, Gesellschaft gegen den Staat,

Hannover. GROFMAN, B., A LUPHART (1986), eds., Electoral Laws and Their Political

Consequences, New York. HOLZER, J. (1990), Polens Weg aus dem Kommunismus, in: Aus Politik und

Zeitgeschichte, Beilage zur Wochenzeitung Das Parlament, B 12-13/90, 16 March 1990, pp. 17-28.

KAISER, K., H.-P. SCHWARZ (1987), eds., Weltpolitik, Strukturen - Akteure -Perspektiven, Bonn.

7 Mazowiecki was supported by ROAD, Walesa by Center Alliance (see NAGORSKI, 1990).

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MACHOWSKI, H. (1990), Polens schwieriger Weg in die Marktwirtschaft, in: Aus Politik und Zeitgeschichte, Beilage zur Wochenzeitung Das Parlament, B 12-13/90, 16 March 1990, pp. 29-38.

MICHNIK, A (1980), Die Kirche und die polnische Linke, Von der Konfrontation zum Dialog, Mtinchen.

NAGORSKI, A (1990), No Solidarity, As the election nears, Poland's anti-communists are bitterly divided, in: Newsweek, 19 November 1990, pp. 16-24.

NOLEN, D. (1989), Wahlrecht und Parteiensysteme, Opladen. NORTH, D. C. (1988), Theorie des institutionellen Wandels, Tiibingen. OBERREUTER, H. (1980), ed., Pluralismus, Opladen. POPPER, K R. (1980), Die offene Gesellschaft und ihre Feinde, Vol. 1, Tiibingen. SASlAWSKAJA, N. (1990), Soziale Aspekte der Perestroika in der UdSSR, in: Aus Politik

und Zeitgeschichte, Beilage zur Wochenzeitung Das Parlament, B 19-20/90, 4 May 1990, pp. 16-21.

SCHMEUOW, N. (1990), Wirtschafts- und Finanzreform im Zeichen der Perestroika, in: Aus Politik und Zeitgeschichte, Beilage zur Wochenzeitung Das Parlament, B 19-20/90,4 May 1990, pp. 22-29.

SEIDEL, B., S. JENKNER (1974), ed., Wege der Totalitarismus-Forschung, Darmstadt. SIMON, G. (1990), Der Umbruch des politischen Systems in der Sowjetunion, in: Aus

Politik und Zeitgeschichte, Beilage zur Wochenzeitung Das Parlament, B 19-20/90, 4 May 1990, pp. 3-15.

STANISZKIS, J. (1984), Poland's Self-Limiting Revolution, New Jersey. STROBEL, G. W. (1990), Politisches System und Pluralismus in Polen, in: Aus Politik und

Zeitgeschichte, Beilage zur Wochenzeitung Das Parlament, B 12-13/90, 16 March 1990, pp. 3-16.

THADDEN, J. VON (1986), Krisen in Polen: 1956, 1970 und 1980, Eine vergleichende Analyse ihrer Ursachen und Folgen mit Hilfe der okonomischen Theorie der Politik, Frankfurt a. M., Bern, New York.

TIETZEL, M.; M. WEBER; O. F. BODE (1991), Die Logik der sanften Revolution. Eine okonomische Analyse, Tiibingen (Walter Eucken Institut/Vortdige und Aufsatze 133).

TISCHNER, J. (1982), Ethik der "Solidaritat" - Prinzipien einer Hoffnung, Graz. TOURAINE, A, STRZELECKI, J., Solidarity, The Analysis of a Social Movement:

Poland 1980 - 1981, Cambridge. TULLOCK, G. (1987), Autocracy, Dordrecht. ZAGAJEWSKI, A (1981), Polen, Staat im Schatten der Sowjetunion, Reinbek. ZIEMER, K (1989a), Auf dem Weg zum Systemwandel in Polen, I. Politische Reformen

und Reformversuche 1980 - 1988, in: Osteuropa, (1989), pp. 791-805. ZIEMER, K (1989b), Auf dem Weg zum Systemwandel in Polen, II. Yom "Runden Tisch"

zur "IV. Republik"?, in: Osteuropa, (1989), pp. 957-980.

B. Crucial Areas of Transformation Policy

PRIVATIZATION IN POLAND: A PROPERTY RIGHTS APPROACH!

Andrea Franz, Alfred Schipke and Mieczyslaw Groszek

Abstract: Privatization has become a frequently used instrument of public policy in numerous countries. However, depending on the main objective of privatization, different privatization strategies should be applied. Since Socialist Economies in Transition (SET), such as Poland, are currently trying to increase the efficiency of the entire economy through the implementation of Western-type market economies, private ownership becomes a constitutional element. On the one hand, the existence of national ownership, which shows some characteristics of non-ownership, is closely related to the failure of socialism. On the other hand, the absence of clearly specified property rights is detrimental to the privatization process as such since individual claimants of property rights are entering into a bargaining process. This can possibly paralyze the actual transfer of national ownership to the private sector. Hence, it is necessary to clearly specify the property rights both to increase overall efficiency and as a prerequisite for rapid ownership changes.

Zusammenfassung: Die Privatisierung ist in zahlreichen Uindern zu einem haufig ange­wendeten Instrument staatlicher Wirtschaftspolitik geworden. Es soUten jedoch in Abhan­gigkeit von den Oberzielen der Privatisierung unterschiedliche Privatisierungsstrategien angewendet werden. Da die ehemals sozialistischen Lander, wie eben auch Polen, zur Zeit versuchen, die Effizienz der gesamten Wirtschaft durch die Einfiihrung der Marktwirt­schaft westlichen Stils zu erhOhen, wird Privateigentum fUr diese Lander zu einem konsti­tuierenden Element. Einerseits namlich ist das Scheitern des Sozialismus auf die Existenz Offentlichen Eigentums mit unzureichend spezifizierten Verfiigungsrechten zuriickzufiihren und andererseits gefahrdet das Fehlen von eindeutig defmierten Verfiigungsrechten die Ei­gentumsiibertragung an sich. Die von einzelnen Wirtschaftssubjekten und Interessengrup­pen angemeldeten Anspriiche heziiglich der Verfiigungsrechte fiihren zu einem Verhand­lungsprozeB, der den gesamten PrivatisierungsprozeB lahmen kann. Daher ist es notwen­dig, die Verfugungsrechte eindeutig zu speziftzieren, um sowohl die Efftzienz der staat­lichen Unternehmen zu erhOhen, als auch die Grundlage fUr die eigentliche Eigentums­iibertragung an den privaten Sektor zu schaffen.

Streszczenie: Prywatyzacja jest najszerzej stosowanym instrumentem polityki panstw w procesie transformacji. W polityce tej stosuje sie rozne strategie prywatyzacji w zaleznosci od celow, ktore zamierza sie osiagnac. Prywatyzacja jest procedura, ktora rna zapewnic wzrost efektywnosci gospodarczej oraz stanowic konstytujacy fundament rodzacej sie gospodarki rynkowej. Z jednej strony upadek socjalizmu spowodowany zostal brakiem jednoznacznych praw wlasnosci oraz niesprawnoscia tzw. wlasnosci spolecznej, z drugiej zas brak szybkiej rekonstrukcji tych praw stac sie moze hamulcem zmian systemowych. Wysuwane przez rozne podmioty i grupy interesow zadania praw wlasnosci w stosunku do roznych elementow majatku moga proces prywatyzacji zdezorganizowac. Z tego tez wzgledu kapitalnego znaczenia nabiera jasne okreslenie regul i ram prywatyzacji. Daje to

1 We would like to thank Dietmar Kath and Manfred Tietzel from whose comments we have profited in the course of our work.

58

szanse poprawy efektywnosci przedsiebiostw panstwowych oraz stanowi podstawe przeniesienia praw wlasnosci na sektor prywatny.

1. THE CALL FOR PRIVATIZATION IN DIFFERENT ECONOMIES

After waves of nationalization, privatization or denationalization2 has become one of the major issues for economic analysis and public policy throughout the last couple of years.3

This holds for industrialized and developing countries alike and most recently has become one of the key components of economic reform in Eastern Europe. Earlier reform efforts in Eastern Europe aimed exclusively at improving economic performance without bold systemic changes such as massive privatization. Hence, the current objectives and measures differ qualitatively from the ones applied in the past.

In the case of Poland, the objective of transforming the economy into a market economy is stated in the Polish Economic Reform Program mentioning that "(p)arallel with efforts to counteract inflation and stabilize the economy, the Govemment shall take steps ( .. ) to fundamentally alter ( ... ) the economic system. This will consist of introducing the market economy institutions which have proven themselves in developed Westem countries". Since private ownership constitutes one of the principal elements of any Western-type market economy,4 the program explicitly mentions that this objective can only be reached by means of ownership changes ''resulting in an ownership structu.re akin to that of industrially developed countries" (COUNCIL OF MINISTERS, 1989, p. 6).

Although the ultimate goal of privatization is to transfer the ownership of most of the national assets5 to the private sector6, the design of a privatization strategy should depend on criteria such as: 7

2

3

4

5

Privatization can accordingly be defmed as an "(u)gly antonym of another ugly-ation: nationalization" (PENNANT-REA/EMMOTT, 1987, p~ 182).

Another issue of privatization in Socialist Economies in Transition, usually referred to as reprivatization, concerns the claims of private citizens which were expropriated illegally throughout the period of socialism. Albeit an issue of utmost importance, as the difficulties arising from it demonstrate in the case of the former GDR, it will not be the subject of analysis in this article.

For a detailed analysis of the principal elements of a market economy see EUCKEN (1952, pp. 254-291).

Western concepts of ownership cannot easily be applied to socialist economies. Although private ownership existed in almost all socialist economies in some form or another, it was the exception and rather limited by state regulation. The remaining part can be called socialized ownership comprising of cooperatives and national ownership. Note that, whereas in Western-type market economies cooperatives are treated as private entities, it is more appropriate to classify them as socialized entities. At the present time, however, state interference is being eliminated and cooperatives will eventually be able to operate freely. Hence, the following analysis

59

(i) The main objective of privatization: In spite of the fact that more than one goal shall be reached, the main objective should determine the privatization strategy. The most prominent objectives for privatization are reducing the budget deficit, increasing the efficiency of the productive sector, creating or expanding capital markets, getting access to foreign capital, technology and management know how, and reducing the foreign debt burden.8

(ii) The institutional setting: Non-Western economies might be lacking key institutions such as a stock exchange and even if these institutions were established rather quickly their functioning depends on a time consuming and evolutionary process of learning-by-doing.9

Hence, the kind of instruments which can actually be used in Socialist Economies in Transition (SET) might be extremely limited.

(iii) The scope of enterprises to be privatized: The scope of enterprises on the agenda is another important factor to be taken into consideration when dealing with SET. WINIECKI (l990b, p. 786) points out that the time aspect of privatization is closely connected with the aspect of scope. In the case of Britain it took the government almost ten years to privatize 5 percent of industrial assets. Since the Polish national sector represents 90 percent of industrial output, it would take decades to complete the process of privatization. Particularly, politico-economic arguments, however, prohibit the application of tedious privatization strategies.

In market economies such as the United Kingdom, the objective of privatization has been to maximize fiscal revenues from the sale of the state assets and, although to a lesser extent, to spread ownership more equally (peoples' capitalism). Since the UK has

6

7

8

9

focuses on national ownership which is the central heading for municipal, state, and all other assets which somehow belong to "society" as a whole.

There might be sound economic arguments not to privatize all national enterprises due to the existence of natural monopolies, external effects, or public goods, which also exist in Western-type market economies. Since these cases would only be the exception to the rule, they are not treated in this article.

An instructive article on privatization in the West and the East has been written by WINIECKI (l990a).

WINIECKI (l990b, p. 785) correctly emphasizes that it is best to formulate the goals of privatization before talking about its means. In the case of Poland, however, there seems to be more discussion about the forms of privatization, especially with respect to the (egalitarian) distribution of national assets to different groups of the population, than about the objectives of privatization.

With respect to the Polish stock exchange which opened in April 1991, the ECONOMIST (1991a) observed that "the idea is that Polish brokers should go through the evolution from a less sophisticated exchange to a more complex one, just as brokers did in the West, in order to learn the basics."

60

developed capital markets and the number of enterprises at stake IS rather limited, traditional privatization methods are being applied.Io

In the case of developing countries such as Argentina and Brazil with less developed capital markets and more political uncertainty, the number of enterprises to be privatized is relatively small, and the driving force for privatization has been to reduce foreign debt and to gain access to foreign capital and technology. But even here traditional case-by-case privatization strategies are feasible.

The issue of privatization in SET, however, is fundamentally different since conditions in those economies were so, that systemic shortages of quality goods and services actually led to the collapse of socialism. Since the main reason for this has been an inefficiently operating national sector, it should be the primary goal of any privatization strategy to increase overall efficiency and to assure that scarce resources are allocated optimally. Nevertheless, the absence of adequate market institutions, the number of enterprises to be up for privatization, and the political pressure for rapid solutions and economic improvements prohibit the application of standard privatization procedures.

Certainly, privatization is not a panacea for all the ills in SET and other issues such as monetary stabilization and institutional reforms have to be tackled simultaneously. II Directly related to privatization is demonopolization (see KESSLERjMOZARYN in this volume). There are numerous monopolies in SET due to the functioning of socialist economies where specialized monopolies were established intentionally. Although the question of demonopolization shall not be analyzed in this article it should be mentioned that demonopo1ization of the tradable goods and service industry might not be quite as urgent in the short and medium run since the issue can be tackled through trade liberalization (see SCHMIEDING, 1991). This, however, does not discard the need for an adequate set of regulations concerning market competition.

Although the utmost goal of any privatization strategy in SET should be to drastically increase the efficiency of the economy, certain secondary objectives cannot be neglected. Since in SET the transfer of huge amounts of national property is at stake, distribution aspects appear on the scene. Usually, a conflict between the goals of equality and efficiency is assumed. As stated above, the transition program is aimed at increasing overall efficiency in Poland. Nevertheless, WINIECKI (1990b, p. 785) suspects that the Polish government is in favor of "the widest possible dispersion of ownership". From an efficiency standpoint, however, assets should be allocated to those individuals who value them highest. However, in most SET there seems to be considerable fear of economic power arising from a

10

11

For an overview of standard privatization methods see VUYLSTEKE (1988).

From a theoretical point of view the problem of sequencing economic reform measures has not been solved yet. However, first experiences from SET and the study of economic reform programs in Latin America seem to reveal that stabilization, privatization, and institutional reforms cannot be treated sequentially. Any initial stabilization program will ultimately fail if the underlying imbalances such as endogenity of money and fIScal deficits are not solved simultaneously.

61

concentration of private property. But even an initial wide distribution of assets does not prevent ownership concentration in the presence of a functioning secondary market and tradable shares.

The following analysis focuses on the current transformation of the Polish economy. A property rights approach is chosen because it provides the necessary framework for analyzing institutional reforms, or better, institutional developments in times of systemic change. Through the application of the property rights theory, the incentives arising from different property rights structures and the resulting economic outcome in Poland can be explained. This is due to the fact that the assumptions concerning human behavior are applicable to the analysis of Western market economies and SET alike. Therefore, the property rights approach is not system-specific.

2. THE PROPER1Y RIGHTS APPROACH

2.1 A THEORETICAL OUTLINE

The property rights theory does not take the institutional setting of an economy, comprising a particular structure of property rights, as a given datum. Rather, it tries to explain the distribution of these rights in a society at a certain point in time and its change over the course of time as well.

According to PEJOVICH (1976, pp. 2f.), property rights are dermed as economic relations among the individuals of a community which arise from the existence of scarce resources.

The right of ownership to an asset is then seen as a bundle of the following rights12 (cf. TIETZEL, 1981, p. 210; FURUBOTN/PEJOVICH, 1974, p. 4):

(i) "the right to use an asset" (ius usus);

(ii) "the right to appropriate returns from the asset" (ius usus fructus);

(iii) "the right to change the asset's fonn and/or substance" (ius abusus), and;

(iv) the right to transfer rights (i) to (iii) (e.g. to sell an asset), or some rights (e.g. to lease or to rent an asset, which means a temporary transfer of property rights), to a third party. This right to dispose of an asset depends on all other rights.

If an owner of an asset does not possess all four rights, the property rights are attenuated (FURUBOTN/PEJOVICH, 1974, p. 4). There are two forms of restrictions to the owner's rights that prevent a full specification of property rights. First, there are transaction costs which are realistically assumed to be positive. "In the broadest sense transaction costs encompass all those costs that cannot be conceived to exist in a Robinson Crusoe economy where neither property rights, nor transactions, nor any kind of economic organization can be

12 ''It is not the resource itself which is owned; it is a bundle ( ... ) of rights to use a resource that is owned" (ALCHIAN/DEMSETZ, 1973, p.l7).

62

found" (CHEUNG, 1987, p. 56). One can distinguish different types of these costs, "including those of infonnation, of negotiation, of drawing up and enforcing contracts, of delineating and policing property rights, of monitoring perfonnance, and of changing institutional arrangements" (CHEUNG, 1987, p. 56). The second form. of restrictions are legal ones (TIETZEL, 1981, p. 211).

One can imagine situations in which an individual de jure or nominally, owns all the possible property rights to an asset, but de facto, cannot practice his or her ownership because of high enforcement costs. On the other hand, an economic actor may be de facto owner of an asset, but de jure, he or she is not because of differing legal regulations (see also SCHENK, 1988, p. 227). In the course of time the legal framework may be adjusted to the de-facto situation. In the long run, institutional innovations, e.g., new legislation in former socialist states, may occur that can change a given property rights structure (cf. TIETZEL, 1981, p. 214).13

Summing up the aforementioned ideas and applying them to the subject of this article one might agree with CHEUNG (1987, p. 57), who comes to the conclusion "that the poor economic perfonnance of a communist state is attributable to the high transaction costs of operating that organization. Under the postulate of constrained maximization, the communist state survives for the same reason that any 'inefficient' organization survives: namely, that transaction costs of changing an organizational (institutional) a"angement are prohibitive. Such costs include those of obtaining infonnation about the workings of altemative institutions and of using persuasive or coercive power to alter the status of the privileged groups whose incomes might be adversely affected by the institution of a different fonn of economic organization" (see also WEBER/GLAPINSKI in this volume).

With respect to the owner( s) of an asset the theory assumes that a certain structure of property rights implies a certain incentive structure. The "transmission" of these incentives occurs through the behavior of individual decision-makers (TIETZEL, 1981, p. 218). This means that the property rights approach is based on methodological individualism (FURUBOTN/PEJOVICH, 1974, p. 1).14 The individual is characterized as ''REMM­Resourcefu4 Evaluative, Maximizing Man" (MECKLING, 1979, p. 549). REMM in his or her role as, for example, economic bureaucrat, party apparatchik, party-appointed enterprise director, or worker differs from the well known (Western-type) homo economicus in that he or she maximizes a so-called "open utility function" comprising many

13

14

For a public-choice approach to the transformation of former socialist economies see WEBER/GLAPINSKI in this volume.

See also v. MISES (1949, p. 42) who points out "that all actions are perfonned by individuals". He further states: "(A) social collective has no existence and reality outside of the individual members' actions. The life of a collective is lived in the actions of the individuals constituting its body. "

63

different arguments (TIETZEL, 1981, p. 219). That REMM also differs from the type of man characterized by socialist theorists needs no further explanation. IS

Nevertheless, one must state that the behavior of man in different economic systems in practice did not show any differences: ''Yet agents in STEs (Soviet-type economies) pursue their own self-interest and act to exploit the opportunities they face" (ICKES, 1990, p. 56). Accordingly, one has to point out that the property rights approach is not just applicable to the analysis of Western-type market economies. Rather, it can be used for the purposes of this article as well since its assumptions are independent of the respective economic system (cf. also PICOT/MICHAELIS, 1984, p. 256).

The theory states that the more specified the rights to an asset are, the smaller the difference between private and social costs or benefits will be (negative or positive externalities) (cf. PEJOVICH, 1976, p. 4). Since the individual is assumed to act in response to economic incentives arising from a given property rights structure, the motivation to use a resource efficiently becomes greater as the degree of the specification of property rights in the respective resource increases. Throughout the economy the allocation of resources is then improved.16

In market economies, private ownership rights are exchanged via contracts. Therefore, the creation of specified property rights is not only a precondition for introducing private ownership rights in SET, such as Poland, but also for granting the freedom of contract to all economic actors (see EUCKEN, 1952).

2.2 APPLICATION TO THE POLISH CASE

The suboptimal allocation of scarce resources in Poland is closely related to the unspecified property rights structure in centrally planned economies. According to socialist ideology, all means of production are owned by one entity: "society" as a whole. From a property rights perspective, this is similar to non-ownership, since certain property rights cannot be

IS

16

"The new man of socialist economies is endowed with a high level of cognitive competence (hence the presumed efficacy of planning) and displays a lesser degree of self-interestedness (a greater predisposition to cooperation) than his capitalist counterpart. The 'cooperation and solidarity' on which socialism is based are 'introduced by social planning', which 'not only improves macroeconomic efficiency but (also adds these new qualities) to the economic process.'" (HORVAT, 1982, p. 335, quoted in WILLIAMSON, 1985, p. 52). Nine years after the publication of this characterization, the idea of the so-called new socialist man has already been dead and buried. Finally, it became obvious that there does not exist a system-specific type of man.

See PEJOVICH (1976, p. 4): "[t follows that non attenuated private property rights are a powerful, and possibly necessary, condition for the efficient allocation and use of scarce resources. "

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assigned to single identifiable individuals (see Exhibit 1).17 What, by ideology and by law, was not allowed to exist in the ideal world of socialist economies was the fourth right, namely the right to transfer all or some of the other property rights to a third party. In contrast to this, rights (i) to (iii) existed before. However, they were not explicitly defined.

What deserves mentioning in this context is the fact that the right to receive the residual18

was de facto exercised by the central state in Poland, which was not restricted by any budgetary constraints. This right comprises not only the right to keep the profit, but also, and perhaps more importantly, to bear eventually occurring losses. As a result there was a lack of incentives for nomenklatura-appointed enterprise directors to avoid losses since they had the possibility of taking loans from the central bank.19 Therefore, in socialist reality, bankruptcies of enterprises were literally unknown.20 Even after the introduction of (new) bankruptcy regulations in 1983, only 11 national enterprises were liquidated in Poland (LIPTON/SACHS, 1990a, p.108).

It could be argued that the institutional setting of classical central planning did not reflect the ideal of socialism, since in reality the central state (instead of "society" as a whole l maintained all ownership rights. There were a number of principal-agent relationships.2 To avoid confusion, the following characterization is chosen in this article. Society was the principal of several agents. The leading Communist Party, although not legitimized by democratic elections, took the role of an agent in the socialist transition period on the way to communism. One may also call the Party the "chief agent". On a lower level several "sub agents" can be found. One can differentiate between the central state or economic bureaucracy which was the principal of the branch ministries. On the lowest level of this hierarchy of principal-agent relationships, there is a link between the so-called "founding organs", i.e. the branch ministries and "voivodships" (the regional branches of the central administration),22 as principals and the enterprise directors or "managers" as agents.23

They were bouad to fulfill the targets as set in the central plan and were supervised by a founding organ.

17

18

19

20

21

22

23

Unfortunately an exact definition of "society" is missing. This is one of the main reasons for the confusion about ownership rights in SET.

This right corresponds to ius usus fructus on a more general level.

They were even forced to by the central state.

There is no doubt that the exit option is a constituent element of a market economy, just as the opportunity for entrance is.

For an outline of the principal-agent theory see, e.g., ARROW (1985).

Poland is divided into 49 voivodships.

The workers of the enterprises may be regarded as sub agents of "society" as well.

EX

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66

In the course of time, a continuous attenuation of state property rights has taken place. However, the fundamental (socialist) rules of the game were not changed. Through the implementation of more drastic economic reforms (which started in September 1981 in Poland with the Law of State Enterprises and the Law on Self-Management of the State Enterprises' Employees), it was intended to increase overall efficiency and output by granting more autonomy to the enterprises (LIPTON/SACHS, 1990b, p. 303). This was operationalized by dividing the book value of the firm's capital between the so-called "founder's" and the "enterprise fund", both belonging to the state as the nominal owner of national enterprises. Since the enterprise fund represents the book value of retained earnings, as opposed to the founder's fund which stands for the initial capitalization of the firm, it is the basis for financial autonomy and hence a requirement for independent investment decisions (see LIPTON/SACHS, 1990b, p. 303 and p. 308). The attenuation of state property rights became even more pronounced through the collapse of socialism and the termination of central planning. It could be argued that, currently, neither the state nor any other group of society possesses de facto the constituent element of a market economy property rights structure, i.e. the right to dispose of an asset, because a clear legal assignment of this right is missing. LIPTON/SACHS (l990b, p. 298) accordingly describe the status quo as follows: "While the state enterprises are presumably owned by the state, the various components of ownership ( ... ) are in fact jointly held, in a shifting and imprecise way, among managers, workers, and the state. "

Because of a resulting paradoxical incentive structure, socialist non-ownership, by inducing a misallocation of resources, has lead to economic inefficiencies.24 Any privatization strategy with the objective of assuring the allocation of scarce resources to most highly valued uses should therefore focus on the specification of property rights.25 In other words: the most important task will be the definition of the new rules of the game. Non-existing ownership rights also become a critical issue in the privatization process in determining to whom the right to transfer ownership should be nominally assigned by law. In the case of Poland, a number of groups and institutions, including the central state, the founding organs of enterprises, directors of enterprises, workers and workers' councils, claim ownership rights. They act as pressure groups in the political bargaining process trying to influence the future distribution of property rights. But since none of the groups can be positive about the outcome of the negotiation process, some of them, notably the workers and managers, try to appropriate non-owned property spontaneously.26 Also, the role of the workers' councils in Poland, at least in the transition period under discussion, should not be underestimated, since the workers' councils can be regarded as a powerful interest

24

25

26

The well-known incentive structures in socialist enterprises are not to be described in the following. For a detailed description of the traditional command model used by centrally planned socialist economies see, e.g., GREGORY (1990).

The term "redefinition" of property rights, which is commonly used, is not applied in this article since it should be pointed out that a comprehensive property rights structure did not exist in the past.

This is what is generally called "spontaneous privatization". See section 4.1 of this article.

67

group and appear to be an obstacle to implementing a market-economy type ownership structure since they fight for worker management (cf. LIPTON/SACHS, 1990b, p. 295).

In order to transfer the ownership of national assets to the private sector, the questions of 'who has the right to make such a decision' and 'who has the right to receive the privatization returns' have to be clarified. It can be argued that the process of privatization takes the more time the less specific the current property rights structure is. All claimants of property rights will engage in bargaining for the rights to national assets and even try to prevent privatization if they expect to lose in the negotiating process.27 However, the longer it actually takes to transfer ownership rights to the private entities, the higher the social cost imposed on society as a whole, due to a continuous misallocation of scarce resources. Hence, time is a crucial issue, especially in SET such as Poland.

The questions of 'who privatizes' and 'who receives the privatization returns' have to be posed in all SET. As stated above, it can be assumed that all economic agents will maximize their individual utility. This means that the ones who decide about, for example, the offer of national enterprises to potential buyers, act as individual maximizers as well. From an efficiency point of view, one should vote for independent privatizers who do not belong to one of the interest groups mentioned above. In all other cases, it is highly probable that different sub agents will make use of already existing connections to the parties involved,28 leading to suboptimal solutions for society as a whole. By appointing independent experts the important problem of who monitors the privatizers becomes less relevant. If the constraint of the Polish political environment is taken into account, an applicable first-best solution would have to require at least the transfer of all national enterprises to the central state. Although this would not have solved the question discussed above, it would have facilitated the privatization process by answering the question of who is the de jure owner of national assets.

In the following, the most important legal regulations with respect to the subject of this article are mentioned.

3. THECURRENTLEGALF~EWORK

At the end of 1989, the proposal of a Law on Transformation of State Enterprises was turned down by Sejm (Polish Parliament). According to this law, all national enterprises would have been transformed into legal entities in the form of joint-stock companies of the State Treasury. This process is frequently called "commercialization" or "corporatization",

27

28

Note that losers can only be (groups of) persons who exercised some de facto ownership rights before and are expecting to lose their "privileged" position in the future after a market economy type property rights structure has been established. The idea of compensating the losers of the transformation process is analyzed in great detail by WINIECKI (1991, pp. 76-95).

In the case of the former GDR this phenomenon is called "Seilschaften".

68

as opposed to the transfer of ownership rights to the private sector.29 The main reason for such a procedure would have been to transfer all property rights to the central state. If the parliament had passed such a proposal, questions concerning the right to privatize national enterprises and to retain possible returns from privatization would not have remained open. This, however, would have meant that other claimants of ownership rights would have lost their chance of entering into the bargaining process. In the aforementioned case the influence of the workers was responsible for the withdrawal of the proposal (LIPTON/SACHS, 1990b, p. 312).

In contrast, corporatization was applied in the case of East Germany. By law, about 8,000 national enterprises were converted into joint-stock or limited-liability companies of the central state, and trusteeship was given to the so-called Treuhandanstalt, a state holding company supervised by the Ministry of Finance which is in charge of initiating and supervising the restructuring and privatization of the now state-owned companies.30

The final legal framework in Poland (Privatization Statute) which was passed by Sejm on July 13, 1990, remains rather vague both with respect to the specification of property rights and how the transfer of national ownership should take place. It is a compromise which accommodates all potential claimants?1 Unfortunately, the price for reaching a broad political compromise has been to initiate a bargaining process about ownership rights instead of limiting it. At the same time, the Ministry of Ownership Changes, responsible for privatization, has been established.

The current legal framework, which in addition to the Privatization Statute includes other pieces of legislation such as the Law on State Enterprises and the Bankruptcy Law,32 allows different methods of transferring ownership to third parties. The lack of a consistent legal framework leads to intended as well as unintended forms of privatization such as the so­called spontaneous privatization.

The following chapter describes different forms of privatization and identifies the respective decision-makers and recipients of privatization returns.

29

30

31

32

In this article, both procedures are regarded as two sequential parts of the privatization process as such.

For a brief description of the German privatization law and the function of the state holding company responsible for privatization, see WEIMAR (1991).

The Statute was approved with only two votes against it (see BLASZCZYK, 1990).

In Poland, the bankruptcy procedure is regulated through the President's decree dated October 24, 1934. The latest amendment took place on February 24, 1990.

69

4. FORMSOFPRWATIZATION

4.1 SPONTANEOUS PRWATIZATION

In the past, socialist economic reform was aimed at improving the performance of the economy by granting more financial and· decision making independence to national enterprises. At the same time, some of the restrictions imposed on the private sector were removed to encourage private initiative and entrepreneurship.33 Due to this process, the enterprises received some autonomy to transfer state ownership rights to the private sector without the prior consent of the central administration. This can be seen as a first attempt of the central state to assign property rights to certain groups of society but without granting private ownership rights. According to the latest amendments to the Act on State­Owned Enterprises of September 25, 1981, managers, with the consent of the workers' council, can dispose of enterprise assets at discretion.34

Nevertheless, there are certain restrictions imposed on the enterprises, since they are neither allowed to transfer the ownership in real estate (Act on Land Economy and Expropriation of Real Estate of April 29, 1985) nor can they dispose of equipment and machinery, if this were to endanger the operation of the enterprise (Act on State-Owned Enterprises). Hence, from a legal point of view, it would be impossible to change the type of operation or to restructure the enterprise. From a property rights perspective, this refers to ius abusus. On the basis of this legislation, e.g., more than half of all automobiles of national enterprises has been transferred to the private sector (see MICHALSKI, 1990).

What has been described up to this point is the establishment of a principal-agent relationship between the central state as the principal and the enterprise directors as agents. The right to sell parts of the enterprises has previously only been delegated to its agents by the central state. The sales revenues were supposed to remain within the enterprise. Hence, there has been an incentive for the managers and the workers to press for higher wages. The government has tried to cope with this by imposing wage controls. This in turn has shifted the problem to non-pecuniary earnings. On the one hand, enterprise employees might be inclined to work less, and on the other hand, there are incentives for the managers to acquire prestigious goods such as furniture for their offices, etc.

As stated above, the managers are mere agents of the owners. But what usually seems to happen in times of economic transition is that enterprise directors behave as if they themselves were the owners of the assets and, e.g., sell parts of the enterprises at their own

33

34

This is what WINIECKI (l990b, p. 784) calls "privatization from below", which aims at the establishment of new private firms, as opposed to "privatization from above", which is the subject of this article and deals with the transfer of national assets to the private sector.

The specific procedures for such a sale, which is to be done by public auction, are set out in the Ordinance of the Council of Ministers of June 25, 1990.

70

discretion although they do not have the right to appropriate the sales revenues.35 They cannot be sure about their future position in society, but they can easily predict that they will lose their former privileges. Should they expect private principals to appear on the economic stage, the managers are motivated to maximize their personal income by "illegal" transactions. Since their income is not directly connected with the success of the sale, there is no incentive for the directors of the enterprises to sell the assets at highest possible prices. Instead, they are motivated to sell at low "official" prices or even to simply give assets away for nothing when they can receive non-pecuniary earnings or a bribe instead. It is evident that such a phenomenon, which is called "spontaneous privatization" or "asset stripping" is a socially undesirable form of privatization.36 This instance clearly demonstrates that a loosely defmed property rights structure leads to "privatization by chaos" and is an undesired outcome due to ill-defmed rules of the game.

4.2 LEGITIMATE FORMS OF PRIVATIZATION

The legitimate forms of privatization can take place (i) on the municipalleve~ (ii) through liquidation, (iii) through asset conversion, or, (iv) through corporatization. Although there is no specific legislation concerning (v) employee buyouts, it will be treated separately, since it might become an important form of privatization.

(i) Municipal privatization: From a property rights perspective, a less problematic kind of privatization is frequently called municipal privatization. This form of privatization has become possible in early 1990 through the creation of self-governed municipalities (gmina) and a legal provision according to which ownership of retail outlets and small industrial enterprises was transferred to the municipalities. Hence, the municipalities are entitled to privatize their assets without the consent of any central administration. At the same time, they obtained the right to claim the returns from either leasing or selling the property to the private sector which has become their main source of revenue. Since in the case of municipal assets the ownership rights are clearly defined, it can be assumed that privatization will take place quickly. The latest fifFes available indicate that more than 17,000 local shops and stores have been privatized.

(il) Uquidation: The attenuation of national property rights, or more explicitly, the missing of a clearly defmed ownership structure, also becomes apparent concerning the right to liquidate a national enterprise. Although the state, through its founding organs, has the

3S

36

37

"(C)ommunist managers in many firms simply assumed the right to trade, lease, merge or even sell the enterprise assets, often for their own enrichment and to the fury of the public" (LIPTON/SACHS, 1990a, p.l28).

For a more detailed description of this spontaneous process m Poland, see LIPTON/SACHS (l990b, pp. 307f.).

This form of privatization is also called "small-scale privatization." In most of the cases municipalities leased the retail outlets to the private sector. In only a few cases was ownership actually transferred. The latest figure released by the Ministry of Domestic Markets concerning privatized retail outlets refers to October 1990.

71

right to establish an enterprise, its right to shutdown an enterprise is limited under the current legal regulation (ZAKRZEWSKI, 1990, p. 4). This means that, whereas the state can exercise the entry option, it cannot decide about the exit of enterprises. Liquidation is basically limited to cases of bankruptcies.38 In case privatization occurs on the basis of bankruptcy legislation, the assets are to be sold by public auction.

The Privatization Statute of July 13, 1990 provides the basis for the forms (iii) and (iv). On the one hand, an enterprise can be converted into a joint-stock or limited-liability company of the State Treasury, and on the other hand, the enterprise can be wound-up. The latter form is basically intended for smaller and medium-sized enterprises. It is, however, not limited to them and will in the following be referred to as (iii) asset conversion.

(iii) Asset conversion: The Privatization Statute uses the term "asset liquidation". This term is, however, misleading since it differs from the above mentioned liquidation of an enterprise on the basis of bankruptcy and applies to enterprises in sound economic conditions as well.39

Although the Privatization Statute is specific in determining who has the right to cancel the operation of a state enterprise, it basically invites all potential claimants of property rights to participate in a bargaining process. If, e.g., a founding organ such as the Ministry of Industry initiates privatization via asset conversion, both the workers' council and the directors of an enterprise have the right to challenge such a move. In general, the party that initiates the process of ownership changes, needs the consent of the others involved. Furthermore, the central administration retains the right to veto any decision since the Statute requires the consent of the Minister of Ownership Changes as well. It can be expected that, unless all parties are somehow compensated for the loss of their respective property rights, they will not be willing to agree with privatization but rather adhere to the status quo.

(iv) Corporatization: The same procedure is applicable if a national enterprise is to be converted into a legal entity of the state, i.e. a joint-stock or limited-liability company. All parties involved, i.e. founding organs, workers' councils, directors, and the central state represented by the Ministry of Ownership Changes need to agree to such a procedure leading to the same type of bargaining process. Nevertheless, it can be assumed that once a national enterprise has been converted into a legal entity of the state, the actual disposition of shares in that company should not cause any obstacles. Chapters II and III of the Privatization Statute, which deal with corporatization, are generally referred to when discussing a strategy for privatization.

38

39

"The declaration of bankruptcy may be demanded by an insolvent debtor, every creditor, and other persons mentioned in the Bankruptcy Law (e.g. founding organs of national enterprises)" (SNIECINSKI, 1990, p. 1).

Asset conversion, according to Article 37 of the Privatization Statute, means that an enterprise can be wound-up in order to (a) sell its assets, (b) use the enterprise's assets as a contribution to a company, and (c) allow the enterprise's assets to be let against payment for a predetermined time period.

72

(v) Employee buyouts: The fact that employee buyouts are actually being discussed in Poland shows that remains of socialist ideas are still alive. Employee buyout means that the workers, who were agents before, become principals. Employee buyouts are possible on the basis of the Privatization Statute.

The idea of selling assets to the workers can be evaluated from different angles. A portfolio-theoretical argument against it says the following: "(I)t makes little sense for workers to hold most of their equity wealth in their own enterprise, since on diversification grounds they should hold their financial capital and human capital in separate investments" (LIPTON/SACHS, 1990b, p. 311). In contrast, the advocates of employee shares in Western-type market economies refer to the incentive of work that is supposed to arise from this instrument of distributional policy (KATH, 1981, p. 451).

In the case of employee buyouts, the interests of managers and workers, both sub agents of the central state, seem to go hand in hand. Both groups of the enterprise know each other; i.e., there is better information on both sides about their respective future behavior. Therefore, the workers may be more reluctant to dismiss the managers who are to become agents of the workers than anonymous private owners from outside the enterprise might be.4O

5. THE NEED FOR RAPID PRIVATIZATION

A privatization strategy which were to solve the problems of not clearly specified property rights would also have to deal with the questions of 'who is going to receive the shares in commercialized enterprises', 'how the sale, or more generally speaking, distribution of the assets is to be arranged' and 'which price should be paid for them'. These questions cannot be answered without considering the constraint that the privatization process should not be too time consuming.41

Because of the aforementioned problems arising from a prolongation of the status quo one might favor rapid privatization. Since the Privatization Statute is not precise in providing a framework for one single privatization strategy, there is still discussion about a suitable one in Poland.

In contrast to the privatization strategy used in Western market economies, i.e. "the sale of shares in an initial public offering (IPO) PI, the free distribution of assets to different groups should be preferred in Poland (LIPTON/SACHS, 1990b, p. 322). The advantage of such a strategy is obvious: one would not have to rely on the newly established stock market and the problem of correctly valuating national enterprises would be less relevant. Since the fmancial infrastructure is not yet sufficiently set up and is not yet been proven to work efficiently, the free distribution of shares, at least from a property rights perspective, is tailored to the specific conditions of Poland.

40

41

This behavior could be observed in the case of a privatized Soviet enterprise which is described by the ECONOMIST (1991b).

The following proposals are based on LIPTON/SACHS (1990b).

73

The small fmancial savings of private households constitute a related problem. LIPTON/SACHS (1990b, p. 325) estimate that "(e)ven for the lowest price-earnings ratio ( ... ) the value of the largest enterprises is roughly 2.5 times the cu"ent stock of savings." To combat this problem, a voucher scheme was under discussion in Poland.42 This means that the government was to issue so called "Privatization Coupons" which were to be distributed free of charge to the population for the sole purpose of purchasing the shares of commercialized enterprises. Article 25 of the Privatization Statute, which deals with the issue of vouchers, provides a rule of distribution. It states that the coupons should be distributed "in equal amounts to all citizens of the Republic of Poland, resident in the country." The problem of small domestic financial savings could also be solved by allowing foreign investors to buy assets of Polish enterprises. Although the Privatization Statute is quite restrictive concerning the sale of shares to foreigners, it is currently being discussed whether the coming privatization strategy should explicitly promote investment from abroad.43 To prevent free shares from becoming money substitutes impeding monetary policy, their liquidity should be limited by issuing them as registered nontradable slips.

Last, but not least, every IPO-type solution would probably lead to the privatization of profitable enterprises only. Profitless enterprises would remain owned by the State Treasury which would have to decide whether to rescue or liquidate them. Since privatization should take place as soon as possible, all enterprises should be dealt with equally, i.e. the application of a firm-by-firm sale is not recommended. All, or at least the 500 largest national enterprises in Poland, should be rapidly converted into state-owned joint-stock companies.44 Corporatization should take place by decree and not at the request of certain groups of claimants, i.e. not voluntarily as still provided for by the Privatization Statute. The distribution or sale of shares to the population should then take place.

6. CONCLUSIONS

As mentioned earlier, the current legal framework has not yet solved the issue of loosely specified property rights. It is only in the case of municipal property that the local state possesses the right to transfer ownership to a third party. In all other cases, it is to be expected that rapid privatization will not be very likely, due to a tedious bargaining process. This, in turn, means that the misallocation of scarce resources, caused by a misleading

42

43

44

According to latest news, privatization by the issue of vouchers is no longer favored by the Polish government. Instead, a privatization-funds solution is likely to be realized (FRANKFURTER ALLGEMEINE ZEITUNG, 1991).

One must state that, whereas from a patriotic viewpoint the fear of foreign investment is quite understandable, from an efficiency standpoint it cannot be supported.

The Top 484 national Polish enterprises represent only 6 percent of the total number of national enterprises. However, this group accounts for approximately 47 percent of the sales and 60 percent of the net income of the whole national sector. These ftgures were taken from the first quarter of 1990 and annualized (MINISTRY OF OWNERSHIP CHANGES, 1990, p. 7).

74

incentive structure, will proceed. The longer the bargaining process takes, the more likely it is that privatization as such might be at stake. This could then endanger the entire economic transformation program.

However, in Article 6.1., the Privatization Statute provides that the Prime Minister may, at the request of the Minister of Ownership Changes, order the transformation of a national enterprise into a corporation. Since this procedure does not need the consent of either the founding organs, the enterprise directors, or the workers' councils, it should be applied in order to clearly specify property rights.45 This could take place through the transformation of the major 500 companies into joint-stock or limited-liability companies of the state for the first step. In order to get public support from potential claimants of property rights, a certain percentage of the shares should be issued either for free, or at a discount to the workers and the directors of the national enterprises. This process would circumvent the long lasting bargaining process. In the second step, the remaining shares should then be transferred to the private sector as a whole. Although different rapid privatization strategies are applicable (even in combination) such as the mutual fund concept, the free distribution of vouchers, etc., traditional privatization concepts such as IPOs are not an alternative since - among other things - they would be too time consuming.

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Problems, in: Economic Affairs, 10 (1990) April/May, pp. 36-42. WINIECKI, J. (l990b), Post-Soviet-Type Economies in Transition: What Have We

Learned from the Polish Transition Programme in Its First Year?, in: Weltwirtschaftliches Archiv, 126 (1990), pp. 765-790.

WINIECKI, J. (1991), Resistance to Change in the Soviet Economic System. A Property Rights Approach, London-New York.

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ZAKREZEWSKI, K. (1990), Act on the Privatization of State-Owned Enterprises. An Introduction. Paper presented at the Seminar of Privatization, Ministry of Ownership Changes, October 22-23,1990, Warsaw.

ZNIECINSKI, D. (1990), Bankruptcy Procedure under Polish Law. Paper presented at the Seminar of Privatization, Ministry of Ownership Changes, October 22-23, 1990, Warsaw.

THE STRIVE FOR A COMPETITIVE ORDER: AN EVALUATION OF THE POLISH ANTITRUST ENDEAVORS

Martin Kessler and Henryk Mozaryn

Abstract: Concentration rates in Polish industry are far above comparable rates in Western market economies. The high degree of monopolization results from the former system of central planning in which monopoly was made the principle of production and trade. The decision of the present government to transform Poland into a market economy is closely connected to the objective of breaking the monopolistic structure and of creating a competitive order. This contribution analyzes how decartelization, easier market access, and free trade and investment increase competition in Polish industry. We come to the conclusion that internationally open markets have the strongest impact on domestic competition. Promotion of entry is a temporarily viable strategy. No case is found for comprehensive decartelization as this instrument cannot be sufficiently controlled in its effects on the economy.

Zusammenfassung: Die Konzentration in der polnischen Industrie liegt weit iiber den vergleichbaren Werten der marktwirtschaftlich verfaBten Lander des Westens. Der Grund dafiir ist in der friiheren Zentralverwaltungswirtschaft zu suchen, die das Monopol in der Giiterherstellung und im Handel zum Prinzip erhob. Der marktwirtschaftliche Kurs, den die polnische Regierung gegenwartig steuert, solI die monopolistischen Strukturen aufbrechen. Der vorliegende Beitrag vergleicht, wie Entflechtung, erleichterter Marktzutritt und internationale Konkurrenz den Wettbewerb in der polnischen Industrie stimulieren konnen. 1m Ergebnis kommt der scharfste Wettbewerbsdruck von einer liberalisierten AuBenwirtschaft. Eine staatliche Forderung des Marktzutritts konnte voriibergehend hilfreich sein, wahrend eine groBangelegte Entflechtung zu stark und zu undifferenziert in wirtschaftliche Ablaufe eingreift.

Streszczenie: Koncentracja w przemysle polskim przekracza wielokrotnie odpowiednie dane w krajach zachodnich. Powodem tego fenomenu jest dawny system centralnego planowania, ktory dazyl do monopolu w handlu i w produkcji. Kurs rynkowy, ktorym kierunkuje sie terazniejszy rzad, ma zlamac powyzsze struktury monopolistyczne. Ponizsze opracowanie zajmuje sie pytaniem, w jakim stopniu odplatanie, ulatwienie dojscia do rynku i miedzynarodowa konkurencja moga zastymulowac rozwoj polskiego przemyslu. Najostrzejsza presja konkurencyjna wywodzi sie z zliberalizowanej ekonomii miedzynarodowej. Panstwowe pomoce w dojsciu do rynku moga tymczasowo najlepiej pomoc, odplatanie systemu monopolistycznego na duzej stopie moze nieodpowiednio wkraczac w system ekonomiczny.

1. INTRODUCTION

The economic policy-makers of the fIrst non-communist government in Poland have inherited a highly monopolized structure of economic activities. Monopoly was the principle of Poland's centrally-planned economy, particularly in industry, but it also formed the basis of wholesale and retail trade, the banking and insurance system, the construction and transport sector, and of foreign trade. The process of decentralization, as intended by

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the communist government in the economic reforms of 1982-1989, has altered the intensity of monopolization somewhat, but has not changed it fundamentally.

The transition to a full-fledged market economy with private property, which is the declared goal of the recent post-communist government of BIELECKI/BALCEROWICZ, has posed the problem of demonopolization anew. After the liberalization of prices in 1990 and the start of the privatization process, possible consequences of monopoly power in a decentralized market economy is a matter of serious concern. Monopoly power, so it is argued, injures consumer interests and prevents the necessary adaptation of enterprises to the new economic environment. Even before July 13, 1990, when the Law on Privatization was passed by the Sejm (the Polish parliament) the Antimonopoly Law was set in force on April 13, 1990. This new antitrust legislation replaced the old Antimonopoly Law of 1987 and is considerably stricter.

Privatization and antitrust are closely connected. At the time of writing this article (June 1991) just seven companies with more than 1,000 employees were privatized. At the moment, the state-owned enterprises only face the competition of newly-founded private (share of the industrial production 1989: 7 percent, GUS, 1990) and foreign companies (import share of industrial production 1989: 13.6 percent, GUS, 1990). The low degree of competition in the Polish economy raises the question of how to achieve more competition during and after the process of privatization.

The following contribution covers the problem of competition in Polish industry, since energy, telecommunication and traffic systems, trade, banking, and insurance face different antitrust problems. We first give an overview of the degree of concentration in the industrial sector before we discuss the role of monopoly in the former centrally-planned economy and the various stages of reform between 1982 and 1989. Since the recent government has, publicly, decided to transform the economy into a market-based system with private property, the high degree of concentration is analyzed in the context of the transition process.

We discuss the influence of market structure and conduct on Polish industry within the framework of the modern structure-conduct-performance approach (BAIN, 1968; SCHERER/ROSS, 1990). The theory of industrial organization has enriched this approach with the consideration of strategic behavior (TIROLE, 1988), contestability conditions (BAUMOL, 1982), and the analysis of entry barriers (BAIN, 1956; v. WEIZSACKER, 1980; GILBERT, 1989). These techniques will help to evaluate the present and likely future state of competition in Polish industry.

The last section deals with proposals to improve the current restraints on competition. Three issues will be considered: First, measures to deconcentrate the monopolized industry which are provided by Article 12 of the new Antimonopoly Act and are widely discussed in Poland (SCHULZE, 1991; BIELA WNY, 1990; JAKOBIK, 1990; MODZELEWSKI, 1990); second, the promotion of market entry; and third, the consequences for competition as foreign competitors gain access to internal markets.

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2. THE DEGREE OF CONCENTRATION IN POLISH INDUSTRY

It is quite difficult to measure exactly the extent of concentration in the Polish industry. Typically, Polish firms are producers of a few standard commodities and, in the past, had a legal monopoly in these goods - either for a specific region or for the whole country. Products with a similar production process or with similar good characteristics were often made by different firms. For administrative reasons, firms were integrated horizontally in associations (WORLD BANK, 1987, p. 28). The old structure was changed only partially by the reforms between 1982 and 1989. So the system has lived on to the present day since only a few firms have so far been privatized.

TABLE 1: Gini Coefficients for Industrial Sectors in Polanda,b

Industrial Sectors 1980 1985 1988

1 Industry 0.602 0.695 0.685

2 Energy and Fuels 0.602 0.449 0.322 3 Mechanical and Metal Industry 0.495 0.381 0.214 4 Electrotechnical Industry 0.679 0.679 0.687 5 Chemical Industry 0.682 0.675 0.608 6 Minerals 0.473 0.523 0.569 7 Wood and Paper Industry 0.630 0.641 0.645 8 Light Industry 0.593 0.609 0.619 9 Food Industry 0.522 0.624 0.613 10 Residual Industries 0.630 0.554 0.590

a: Concentration Coefficients are equivalent with Lorentz curve values. b: Gross production (1980), value of shipments (1985, 1988).

SOURCE: GUS, Statistical Yearbooks of Industry (several years).

On a very high aggregate level the Statistical Office of Poland, GUS, has published Gini coefficients for the concentration of different sectors (Table 1). Despite the reforms from 1982 to 1989 this measure of inequality in production shares showed an overall increase in concentration at least up to 1985 with some decline thereafter. Going into detail, it can be seen that concentration rose in five out of nine industrial branches in the eighties.

In comparison to international standards, the degree of concentration is extremely high (WORLD BANK, 1987, Annex III). The Polish Antitrust Agency has also investigated the degree of monopolization and found that dominant firms manufacture about 70 percent of the product lines. A dominant finn, by definition, controls 30 percent of the overall production of a specific product line (FORNALCZYK, 1990). In summary, the Polish industry is characterized by a high degree of monopolization in formal terms.

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3. THE MEANING OF MONOPOLY IN THE SOCIALIST ECONOMY

The theory of property rights gives a formal framework for defining differences between a centrally-planned and a decentralized economy, both featuring collective property (see FRANZjSCHIPKEjGROSZEK in this volume). Since firms are in both forms, with some small exceptions, state-owned, we speak of a socialist economy. This means, the right to draw benefits from property (usus fructus) and to dispose of the property remains with the central state authority (FURUBOTNjPEJOVICH, 1974). On the other hand, the right to use the property for the production of specific goods (usus) varies. In a centrally-planned economy this right is exercised by the central authority. If company directors or workers' councils can decide on what is to be produced we speak of self-management or, in the case workers decide, of worker management. A socialist economy with self-management or worker management is labelled a reform economy. Let us now consider the meaning of monopoly in centrally-planned and reform economies.

3.1 MONOPOLIES IN THE CENTRALLY PLANNED ECONOMY

Monopoly is the principle of production and distribution in the centrally-planned economy. This principle applied, with some qualification, also to Poland before 1982. Accordingly, the monopoly firm is the executive economic agent in a system in which the central authority determines

the foundation, liquidation and merger of production and distribution entities (firms), the degree of concentration of producers and distributors (wholesale and retail trade), the degree of product differentiation, i.e. the specifics of certain product lines and assortments, the process of production, the region to be supplied by a certain producer, and the allocation of goods which are designated for export and the amount of goods to be imported (monopoly of foreign trade).

Every firm founded by the central authority (normally a branch ministry) has the exclusive right or duty to supply the economy or a part of the economy with a certain product or service. In contrast to capitalist monopolies, the socialist firm has no opportunity of fixing prices, of reducing production or investment, or of foreclosing the entry of other producers. Prices and production are determined by the planning authority. Some authors call such a construction an administrative monopoly (FORNALCZYKjKASPERKIEWICZ, 1985).

3.2 MONOPOLIES IN THE REFORM ECONOMY

The first stage of reform which became law in 1982 was intended to decentralize the economic decision-making. The levels of authority in the administrative system were reduced. The reformers abolished the associations, intermediate administrative bodies, which were obligatory for the firms. Instead, the single enterprises received the right to determine products, product lines, assortment, and production processes. Even price­setting and choice of customers, at least to some extent, were in the hands of the firms. According to the new economic legislation, the enterprises were allowed to cooperate and to form voluntary groups. The branch ministries only retained the right to approve

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foundations, mergers, and the liquidations of firms. The principle of state ownership was never questioned, and private firms were limited. Table 2 gives an overview of the basic differences in areas of authority between the planned and the reformed economy in Poland.

TABLE 2: Authority in Centrally Planned and Reformed Economies in Poland

Activity

Foundation, Divestment, Merger, Liquidation

Assortment, Scope of production, Investment

Centralized

Exclusively by founding institution

Exclusively by founding institution

Reformed

On initiative of firms, but approval of founding institution

a, On initiative of firms, approval of founding institution in important cases b, Obligatory investment in central operation programs

Cooperation Arranged by associations On initiative of firms

Founding institutions Branch ministry

Indirect hierarchy stage Central Planning Authority, Association

Form of industrial Horizontal integration integration

SOURCE: JAKOBIK (1988, p. 84)

Branch or functional ministry

Voluntary or obligatory unions, Sales and purchase centers, Government repre­sentative of operation pro­grams

Horizontal integration

In practice, the reform did not succeed for various reasons which are not discussed here in detail (see PYSZ/QUAISSER, 1988; APOLTE/KESSLER, 1990; MOZARYN, 1990). Generally speaking, the central authorities gradually made the decisions of the self­managed firms dependent on their approvals. They allocated fmancial resources, and initiated operational programs which were first voluntary, supported by fmancial incentives, and then obligatory (MOZARYN, 1990, pp. 176-180). Even a second stage of reform, implemented in 1988, brought about no fundamental change.

The monopolistic structure remained although it was possible to enter another firm's field of activity. Actually, this seldom occurred because company directors preferred to stay in their traditional fields of activity and new firms were scarcely allowed. The authorities prevented monopolistic price-setting by fixing prices when they considered them too high.

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Thus prices were controlled at two levels. First, the authorities fxxed prices to reduce the effects of wage inflation fueled by fxnancial assistance to fxrms. Second, anti-monopolistic measures reduced the prices of certain producers who were believed to be abusing their market power.

4. THE HIGH DEGREE OF MONOPOLY IN THE PROCESS OF TRANSITION

The intended transition of the Polish economy to a full-fledged market economy with private property sheds new light on the present market structure in industry. Before we discuss the legal actions to correct the monopolistic structure we shall fxrst examine the effects of the high degree of concentration which is observed in Polish industry. We make use of the well-known structure-conduct-performance-approach of BAIN (1%8), but enlarge this approach by modem strategic and contestable-markets considerations (BAUMOL, 1982; DIXIT, 1982).

4.1 THE STRUCTURE-CONDUCT-PERFORMANCE APPROACH

A formal framework for assessing the degree of competition is provided by dividing the market process into the elements of structure, conduct, and performance. It is a formal framework and says nothing about theoretical or empirical relationships. Traditional industrial economics tries to frod out how the industrial market structure influences the conduct of firms which then results in a certain economic performance. Some economists, like BAIN (1968), focus on the causality which runs from structure to performance, others, like SCHERER (1980), give priority to the effects of market conduct on performance. A third group, in the tradition of KA YSEN and TURNER (1959), stress a combination of the two impacts on performance (see also SCHMIDT, 1990). Actually, competition is more complex. If one considers a dynamic process, a certain market structure influences conduct and performance which in turn brings about a different structure with consequences for market performance in the second stage and so on. Modem industrial economics focus more on strategic decision-making in a multi-stage competition process.

We shall first examine the economic performance of Polish industry by making a market structure test. Then we consider the conduct of Polish industrial fxrms adding the experiences of periods of central planning and of socialist reform. By putting these elements together we shall be able to make some statements on the current and future situation of the Polish industry as far as industrial organization is concerned. Of course, the difficulties the Polish economy suffers from are only to a minor extent due to the present monopolistic structure. Problems of property rights and macroeconomic adjustment programs playa major role. But, if the privatization process succeeds and anti-inflationary measures lead to the reduction of interest rates and to more investment, the problem of monopolistic market structure will come to the fore.

Market structure contains several variables:

number and market shares of firms (degree of concentration), degree of product differentiation, information and adjustment speed, barriers to entry (technical and legal restraints), internal firm organization and fxnance structure,

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conditions of demand.

The prominent elements in our context are the degree of concentration and barriers to entry. Thus, we consider the extent of actual and potential competition in the Polish transformation process. A crucial point in this conception is the cost of entry and exit (BAUMOL, 1982). Firms enter markets if profits after entry exceed the costs incurred. Entry barriers have technological and institutional reasons.

Firm conduct means the choice of parameters like prices, quantities, terms of sale, quality, service, and advertising. In a static context the technological and institutional conditions of entry, such as economies of scale, product differentiation, and absolute cost advantage (BAIN, 1956) always determine firm conduct. If a market process is seen in a dynamic sense, firms which have entered earlier or even have created the market are in a different position than late-comers. They can behave so as to deter entry by means of reputation gathered in the past. Thus, the degree of competition is dependent on strategic behavior, i.e. on the conduct of firms in the past (KREPSjWILSON, 1982).

Market performance is the result of conduct and underlying market structure. It is measured in terms of welfare. Again, a certain market performance brought about by events in the past, for example by an improvement in production techniques, leads to a different market structure and a different degree of actual and potential competition.

4.2 THE SIGNIFICANCE OF ENTRY BARRIERS

The principle of monopoly in centrally-planned economies means the absence of actual and potential competition. It implied vast static and dynamic efficiency losses in the past. Now, entry to the market of state-owned and cooperative firms is free. Nevertheless, new competitors very rarely enter the monopolized industrial sector. Firms remain horizontally­integrated with concentration rates above international standards, as a World Bank study has shown (WORLD BANK, 1987, p. 28). Actually, firms control markets for specific products, even though they are not integrated vertically with customers or suppliers. The World Bank study conveys that firm size often exceeds minimum efficient scale. Therefore, the extraordinary concentration rates in Poland cannot be explained by technological barriers to entry. Since brand names do not play a vital role either, the degree of monopolization is not the result of product differentiation. Moreover, former socialist enterprises normally incur higher costs in comparison to capitalist firms of an equal branch. Hence there is little ground for absolute cost advantage.

Barriers to entry are higher for a different reason: the difficulty of raising funds. In Poland, a market for equity will come into being but is not likely to have much importance (LIPTON/SACHS, 1990). The same applies to the market for industrial bonds. In the credit sector there are now commercial and even private banks, but the banking system still is closely attached to the established firms (see KREMER/GILLES/ZDRZALKA in this volume). Therefore, the fmancial system raises entry barriers for newcomers.

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4.3 STRATEGIC MOVES AGAINST POTENTIAL COMPETITION

So far, we have explained why newcomers in the industrial sector have difficulties in competing with established fIrms. Since former socialist fIrms supplied only specifIc goods, there is room for competition in products with high substitution elasticities. Moreover, similar production schemes for different goods provide a source for potential competition. Established fIrms also have good prospects of receiving credits from the banks to build up production in adjacent or even more remote sectors in order to remove inefficient monopolists from these markets. Therefore, we should expect harder competition between established fIrms at least in markets with lower barriers to entry.

Generally, it is doubted that this will happen in the present state of affairs. Only a very small fraction of industrial enterprises has been privatized, so far. State-owned enterprises with decentralized management and powerful workers' councils are not very interested in external or internal growth of their fIrms but instead decapitalize state property (LIPTON/SACHS, 1990, p. 306). As far as takeovers or fIrm growth are associated with improved competition the property rights structure prevents harder rivalry (see also FRANZ/SCHIPKE/GROSZEK in this volume). This situation will probably change if the government's plans to privatize 400 state-owned fIrms, which represent 25 percent of industrial sales and 12 percent of total employment, succeed (FINANCIAL TIMES, June 28,1991).

Competition is impeded by a second source of defIciency. Established fIrms, even if they are less efficient than newcomers, can successfully prevent competitors from entering. The necessary conditions are some barriers to entry. In markets with technological entry restraints firms act interdependently (oligopolistic behavior). They expect rivals to change conduct as a consequence of their own action. Interdependence of fIrm behavior gives scope for strategic entry deterrence (DIXIT, 1982).

Suppose entry occurs in a monopolistic market and the incumbent must decide between a price war against the entrant or accommodation (peaceful coexistence). Then, threatening the newcomer is credible if the incumbent is better off with the price war (GILBERT, 1986, p. 90). At the same time, entry deterrence is profItable if any cost of making the threat credible is smaller than the difference between monopoly and accommodation profIts. The commitment to pay a certain sum in case of accommodation (the waiver of recovering sunk costs for example), increases the credibility of a threat. Even if the incumbent has no opportunity to commit himself, he can build up a reputation of being tough in order to deter entry if, among others, the condition of incomplete information is met (KREPSjWILSON, 1982).

Commitment and reputation influence competitive processes. If we want to fInd out their impact we have to model them as sequential games. Established Polish fIrms, even if they are not very efficient by international standards, have the advantage of the first move against possible newcomers, regardless whether they are new enterprises or fIrms from other branches. Heavy sunk costs in terms of established distribution channels, connections to customers and suppliers or in production plants commit former socialist firms. Barriers, such as scarce factory space and a defIcient infrastructure, even increase the potential for established fIrms to deter entry against competitors who are only slightly better.

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Another feature is the close network between the members of the old "nomenklatura". They have had long periods of cooperation in the old system of central planning and are not likely to stick to competition even if they work for private firms. The close cooperation which was necessary for even a weak functioning of the old system is now the basis for collusive behavior in a capitalist environment. Altogether, traditional cooperation and the possibility of entry deterrence can multiply the problem of monopoly. On the other hand, in a rapid process of privatization new owners are likely to change management staff and to increase efficiency in relation to backward state-owned firms. If productivity between factories diverges the incentive to enter markets of inefficient firms increases while at the same time strategic entry deterrence loses its importance.

5. PUBLIC POLICY INSTRUMENTS TO INCREASE COMPETITION

The new Antimonopoly Act of February 24, 1990, which tightened the rules of its predecessor in 1987, envisages three principle instruments to foster competition: the prohibition of monopoly practises such as cartel agreements, predation, and restraint of competitors (Art. 4,5); the control of mergers and firm acquisitions (Art. 4, 11); and the chance to deconcentrate dominant firms (Art. 12). In addition to antitrust legislation policy-makers may ease entry conditions, promote new firms, or liberalize internal and foreign trade. The necessary basis for a competitive order is a fast process of privatization and efficient capital markets.

We have already touched on the importance of privatization and the financial system. In this section, we shall analyze three topics which are believed to improve competition. First, the legal chance fo divest dominant firms is investigated. Then, we shall assess public assistance to new firms in order to promote entry. Third, the impact on competition of free trade and foreign investment is analyzed.

The issues of cartel agreements, predation and other monopolist practices will not be dealt with. Since state-owned monopolies dominate Polish industrial markets, the rigorous enforcement of antitrust instruments at the present state would imply vast government intervention. During the transition process competition can only be improved by decartelization, the entry of new firms, and the liberalization of foreign trade.

5.1 DECARTELIZATION

The rules for divesting dominant firms have been tightened in the amendment to the old Antimonopoly Act. The Antitrust Agency is allowed to deconcentrate a dominant firm with a market share of more than 30 percent if this firm continues to abuse its market power. This means that firms which violate competition rules twice are subject to decartelization. According to the old law, ministries and courts had to approve the divestment after the firm had violated competition rules four times. This, actually, never happened (MODZELEWSKI, 1989, 115).

Although the instrument of decartelization is regarded as a very crucial one (BIELA WNY, 1990, p. 4), even the stricter rule has, so far, never been applied, at least in an important case. Apart from open violation of competition rules, it is very difficult to detect monopolistic practices. On the other hand, technical and organizational economies of scale

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and economies of scope makes it necessary to have large firms and plants. Since minimum efficient scale, which is a measure both for necessary plant size and the number of plants in a firm, changes over time with technical and organizational progress, the instrument of decartelization intervenes in rather complicated firm and market processes.

Therefore, decartelization is a severe weapon and should be used only as a fmal instrument if all others have failed. Polish antitrust economists favor a narrow application of the rules, in order not to disadvantage the competitiveness of firms (JAKOBIK, 1990; MODZELEWSKI, 1990).

5.2 PROMOTION OF ENTRY

Generally speaking, new firms often lack equity capital and have only limited access to banking credit. In Poland, the situation is more aggravated still. Capital markets do not exist and banks are closely related to established firms. Banks have no incentive to give credit to new firms because payoffs of these investments come late, while the state-owned bank has to carry part of the risk burden. Moreover, the current structure of the banking system makes lenders very short-sighted for the same reasons that apply to industrial firms (see section 43 above).

Therefore, privatization of the banking system is a necessary precondition for improved lending. But this process takes time even if it is accelerated. Meanwhile, the incentive to give credit to new firms can be increased by reducing the risk burden of banks. If public authorities guarantee bank credits, perhaps with reduced guarantee rates, barriers to entry are lowered. The Polish government can also subsidize interest rates payments of newly founded firms. But subsidies distort competition whereas state guarantees without reduced payments do not. In giving credit guarantees, the state must take some insurance function.

5.3 THE LIBERALIZATION OF FOREIGN TRADE

Free trade and free direct investment of foreign firms are the most important safeguards of effective competition. LIPTON and SACHS (1990, p. 301) even argue that "monopoly is not an urgent problem, since most Polish industry is now subjected to strong international competition". They cite a study of the Polish Ministry of Finance which reviewed the market power of the 500 largest industrial firms and hardly found a case for antitrust.

Indeed, import tariffs in Poland have been lowered to an average of 4 percent which is among the lowest in Europe (HANDELSBLATI, June 11, 1991). The Customs Law of 1989 standardized tariffs at a moderate level. Customs preferences are expressed by way of extra duties on certain import goods. On the other hand, the Polish currency, the zloty, is not convertible for foreigners and has recently been devalued from 9,500 to 11,100 zloty to the dollar (see KREMER/GILLES/ZDRZALKA in this volume). The undervalued zloty protects, to some extent, the Polish economy from foreign competition. But this is welcome, as it helps to smooth the rapid transition from a protected, inefficient socialist economy to an open market system.

The degree of openness controls the degree of competition in Poland. An undervalued zloty can only temporarily protect the Polish economy from foreign competition. Since

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import duties have already been lowered, Polish industry will have to face fierce rivalry in the future. Foreign finns need not overcome entry barriers, such as deficient funding facilities. They can hit and run the Polish markets with only small entry and exit costs even if entry barriers consist of large economies of scale and scope. This means, in the face of foreign competition, many Polish markets are contestable.

Only if costs of transport to customers or suppliers playa major role - for example in the cement and sugar industry - Polish firms are protected. But even in this case, foreign investors will probably buy Polish factories and at least increase efficiency. An example illustrates the impact on competition (HARTEL et al., 1991, p. 20). A Japanese firm wants to acquire a Polish cement plant near the German-Polish border. In the cement industry unit production costs are lowered at large plant sizes (economies of scale), and the transport to customers is costly. So, the Japanese firm will probably increase efficiency, but also exercise monopoly power. In this case, the Antimonopoly Agency has to check the degree of competition.

6. CONCLUSION

The high degree of concentration in the Polish industry can only partly be explained by technological and organizational barriers to entry. Actual and potential competition is also restricted because established firms are able to deter entry. New competitors lack equity capital and banking credit to build up production. Moreover, former socialist firms have sunk costs in plant, building, industrial connections to customers and suppliers, and are used to collude rather than to compete.

A source of fierce competition is provided by foreign trade and investment. Poland has only low tariffs, but is at least temporarily protected by an undervalued currency. Competition will also be improved when the privatization process of banks and industrial producers accelerates. Foreign investors can probably playa major role in this process by increasing the efficiency of acquired firms. Private banks and investment groups, the foundation of which is intended by recent privatization plans, will lower barriers to entry for new firms. Probably the state can also help newcomers and guarantee company credits.

Large programs of decartelization as advocated by worried economists and politicians may fail their objective. In a rapidly changing environment, minimum efficient scale which is a measure for plant and finn size will vary over time. Apart from political problems, decartelization implies heavy interventionist activity by antitrust authorities. It should only be a fmal instrument in case fmer tools fail.

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LIPTON, D.; J. SACHS (1990): The Privatization in Eastern Europe: The Case of Poland, in: Brookings Papers of Economic Activity, (1990)2, pp. 293-341.

MODZELEWSKI (1989), W sprawie kierunk6w nowelizacji ustawy 0 przeciwdzial aniu praktykom monopolistycznym (Directions of an Amendment of the Antimonopoly Act), Przeglad Ustawodawstwa Gospodarczego.

MODZELEWSKI (1990), Parasol dla konkurencji (An Umbrella for Competition), in: Rzeczpospolita, 21 May 1990.

MOZARYN, H. (1990), Die polnische Industriepolitik der achtziger Jahre, in: TH. APOLTE; M. KESSLER, eds., Regulierung und Deregulierung im Systemvergleich, Heidelberg 1990, pp. 172-181.

PYSZ, P.; W. QUAISSER (1988), Polens Wirtschaft zwischen Krise und Reform, in: Aus Politik und Zeitgeschichte, Beilage zur Wochenzeitschrift Das Parlament, 11 March 1988.

SCHERER, F. M.; D. ROSS (1990), Industrial Market Structure and Economic Performance, 3rd ed. (2nd ed. by F. M. Scherer, 1980), Boston.

SCHMIDT, I. (1990), Wettbewerbspolitik und Kartellrecht, 3rd ed., Stuttgart-New York.

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SCHULZE, U. W. (1991), Der rechtliche Rahmen der Wettbewerbspolitik und Privatisierung in Polen, in: Wirtschaft und Wettbewerb, 41 (1991), pp. 23-27.

TIROLE, J. (1988), The Theory of Industrial Organization, Cambridge, Mass. WEIZSACKER, C. C. VON (1980), Barriers to Entry, Berlin-Heidelberg-New York. WORLD BANK (1987), Poland. Reform, Adjustment, and Growth, Volumes I and II,

Washington, D.C.

THE ROLE OF MONETARY POLICY FOR THE POLISH ECONOMY IN TRANSITION

Manfred Kremer, Martin Gilles and Jerzy Zdrzalka

Abstract: The role of monetary policy for the systemic transformation of the Polish economy is derived from the initial conditions of the monetary sector, which will be analyzed by using the "elementary currency order" and the "quality of money" as theoretical framework. The quality of money, newly defined, depends on its specific property rights which determine the material and intertemporal "usability" of money, and is to be evaluated in a system-specific context. The improvement in the quality of the zloty necessary in order to meet the needs of a market economy requires both success in the fight against inflation and comprehensive monetary reform, which entails the creation of a two-tier banking system with an independent central bank at the top of the credit pyramid. The banking reform of 1989 is basically apt to provide the formal prerequisites for the development of an efficient and stable banking system. Since the use of foreign currency as money is extraordinarily wide-spread in Poland, foreign exchange policy is particularly significant in Polish monetary policy. The choice of the exchange rate as the central variable of the transitional strategy for monetary policy reflects this peculiarity.

Zusammenfassung: Die Rolle der Geldpolitik ffir die Transformation des polnischen Wirtschaftssystems leitet sich aus den monetaren Ausgangsbedingungen abo Diese werden mit Hilfe der "elementaren Wiihrungsordnung" und des hier entwickelten Begriffs der "Geldqualitat" als theoretischer Bezugsrahmen analysiert. Die Qualitat des Geldes hiingt ab von seinen spezifischen Property Rights, die die sachliche und zeitliche "Verwendungsfahigkeit" des Geldes bestimmen, und ist systemspezifisch zu beurteilen. Die notwendige Verbesserung der an marktwirtschaftlichen Kriterien gemessenen Geldqualitat des Zloty bedingt sowohl Erfolge in der Inflationsbekiimpfung als auch umfassende monetare ReformmaBnahmen, zu denen die Schaffung eines zweistufigen Bankensystems mit einer unabhangigen Zentralbank an der Spitze der Kreditpyramide ziihlt. Mit der Bankenreform von 1989 wurden die formalen Voraussetzungen fUr die Entwicklung eines effizienten und stabilen Bankensystems weitgehend geschaffen. Da in Polen Westdevisen in auBergewohnlich hohem MaBe Geldfunktionen iibernehmen, ist die Wechselkurspolitik von spezifischer Bedeutung fUr die Geldpolitik Polens. Diese Bedeutung spiegelt sich in der Wahl des Wechselkurses als zentrale Variable der geldpolitischen Dbergangsstrategie wider.

StJ.eszczenie: Rola politiki pienieznej w transformacji polskiego systemu ekonomicznego wywodzi sie z monetarnego punktu wyjscia. Punkt ten zostaje tutaj analizowany za pomoca "podstawowego porzadku walutowego" i przy tym wypracowanym znaczeniu "jakosci pienieznej". Jakosc pieniadza jest zalezna od jego specyficznej struktury property rights, ktora decyduje 0 jego rzeczowej i czasowej przydatnosci, i ktora nalezy systematycznie zbadac. W ostatecznosci polepszenie jakosci zlotowki - a jakosc ta nalezy mierzyc miara jakosciowa wolnego rynku - jest zalezne od wynikow zwalczania inflacji i wdrazania reform systemu finansowego, jak na przyklad wprowadzenie dwustopniowego systemu bankowego z wolnym bankiem centralnym na czele. Z reforma bankowa roku 1989 zostaly zalozone formalne podstawy rozwoju stabilnego systemu bankowego. Jak wiadomo dewizy zachodnie

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w duzym stopniu posiadaja w Polsce funkcje pieniezne, tak ze polityka wyniany dewizowej posiada szczegolne znaczenie w polityce pienieznej Polski. Znaczenie to odzwierciedla sie w wyborze kursu wymiany dewizowej jako centralnej wielkosci zmiennej w przejsciowej strategii polityki pienieznej.

1. INTRODUCTION

Monetary policy is generally assigned an essential role in the process of transforming Eastern European economies into market economies. This role implies not only stabilizing efforts of monetary policy aimed at fighting open and/or repressed inflation, but also and above all, a restrucuring of the monetary order. The reform of the monetary sector in order to build a framework for lasting monetary stability is itself a necessary part of the systemic transformation.

In German literature one can fmd the notions "institutionalizing" and "functional" monetary policy ("institutionierende und funktionale Wiihrungspolitik') to seperate the two dimensions of monetary policy. The institutionalizing monetary policy designs the monetary order and is oriented toward the achievement of long-term goals. It creates the framework for current measures of the functional monetary policy based on short-term objectives (LIPPERT, 1974, p. 4-5).

This article deals with the general and specific role of both branches of monetary policy for the formerly socialist economy of Poland undergoing radical systemic transformation. It will mainly focus on the reform of the Polish monetary order. The concept of the "quality of money" shall be developed and applied as a uniform theoretical framework for the analysis.

2. mE LEGACY OF mE PAST AND THE NEED FOR MONETARY REFORM

The socialist economy of post-war Poland was from the very outset constructed as a monetary economy. In a monetary economy "money" is generally used as a quid pro quo in economic transactions. Accordingly, we want to define "money" simply and "in the old narrow sense" (YEAGER, 1968, p. 45) as the ''universally acceptable media of exchange" of an economy (MENGER, 1892, p. 239). In modern economies these exchange media usually coincide with the legal tender or monies therein redeemable, yet it is possible that certain circumstances may bring about a separation of the media of exchange and the lawful means of payment; a phenomenon that could also be observed in socialist Poland.

In addition to the exchange function, hence regarded as primary or "constitutive" for the phenomenon money, a so defmed money generally fulfills the "consecutive" functions as a unit of account and a store of value (RICHTER, 1990, p. 122). These are the three classical and system-indifferent functions of money (HICKS, 1967, pp. 1£.) upon which our analysis will essentially be based.

Furthermore, we suggest that money can be considered an abstract asset with a specific property-rights structure inducing the incentives to acquire, hold or sell money. This, however, means that we can assign an independent and individual utility to money (KA TH, 1983, pp. 249, 252f.). If money has the above-mentioned properties, it is principally a substitute both for other fmancial assets as well as all other goods.

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The whole set of actual forms and characteristics of money in a particular currency area determines its currency order. Their elements need not necessarily be the result of state intervention, but can likewise develop spontaneously in the form of informal conventions (RICHTER, 1990, p. 104). The rules set by the state will be superceded by such sponta­neous developments, especially when the official monetary system functions badly in the eyes of rational economic agents.

2.1 THE POLISH CURRENCY ORDER AT THE OUTSET OF THE ECONOMIC REFORM

Nevertheless, we can realistically start from the principle that the state provides the basic elements of the currency orderl : It sets the official currency unit (money-of-account), establishes the concrete means of payment (money proper), determines the price target for the currency and regulates the money supply, i.e. the mechanisms of creation and destruc­tion of money, according to that price target. The price target represents the desired value of the currency unit by linking it to units of either one single commodity (e.g. gold) or a bundle of commodities (RICHTER, 1990, pp. 103-109). Today central banks usually use a specifically dermed basket of commodities via its price index (e.g. the consumer price index) as a reference to formulate their objectives and targets for monetary policy.

Polands' socialist currency order showed, in light of this approach, the following basic characteristics also typical of other centrally planned economies: The zloty as the national currency unit was designed as pure "paper money". That means that the sole issuer of zloty­denominated money, the Polish state represented by the central bank, was not obliged to redeem its currency into any backing commodity. Hence, the price target was principally undetermined - as is also the case in Western economies. It depended entirely on the (discretionary) behavior of the monetary authorities concerning the money supply. The money supply was actually managed by the banking system. For the sake of simplicity we may just as well talk of a single-tier banking system, since the process of creating money worked much like a "monobank" due to the far-reaching authority of the central bank as to its dominating influence on the behavior of the remaining subordinated banking institu­tions. The central bank, on the other hand, was bound in its activities by the centrally­determined plans for credit and cash circulation (LUTKOWSKI, 1989, pp. 129f.). As the official means of payment, that is cash and demand deposits, were entirely liabilities of the state banking system and as spontaneous developments were only possible through the destruction (although highly restricted, money demand was not entirely determined), but not through the creation of money (except certain effects on the money supply of foreign trade, see BOTHjWELFENS, 1989, pp. 153-158), the state was theoretically able to determine the money supply exactly.

1 We follow herein RICHTER (1990), who dermes the minimum regulations of a monetary constitution as the "elementary currency order". It consists, firstly, of a bookkeeping order, which determines the accounting unit and the means of payment, and secondly, of a value-safeguarding order determining the price target and the quantity of the circulating means of payment.

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The flaws of the state monetary order, to be explained later on, led in the course of the '80s to the development of a real currency order which differed substantially from the currency order intended and controlled by the state. Western currency in the form of notes, coins and foreign exchange accounts, mostly denominated on the US-dollar, increasingly substi­tuted the zloty as an exchange medium, a means of payment, a store of value, and even as a unit of account (KOSTRZEWA, 1989, pp. 456-459; WINGENDER, 1989). Due to its informal character, the missing or strongly limited convertibility of the traded currencies and the indeterminacy of the manifold legal and illegal sources of supply in the private circulation of foreign currency, there existed neither a domestic price target for the circula­ting foreign currencies nor reliable indicators for their quantitative development and hence the "dollar-prices" of certain goods. Therefore, the Polish currency order lacked entirely a true "nominal anchor" to channel and stabilize the price expectations of the public.

2.2 THE QUALI1Y OF MONEY IN DIFFERENT ECONOMIC SYSTEMS

The use of money calls for a particular justification in socialist planned economies insofar as both the marxist doctrine and the theory of centrally planned economies postulate that money and monetary categories (money prices, interest rates, money wages, dotations, etc.) should or could, in principle, be done away with. Yet, the central planners soon learned by the experience of central planning that the use of money within its classical functions could be useful. The main advantages were to be seen in overcoming certain problems with the preparation, execution and enforcement of the central plan and in the rationalization and enhanced central control of the real exchange processes. This can also be interpreted as a means of saving transaction costs (HAFFNER, 1987, pp. 195, 198; HARTWIG, 1987a, pp. 22-24), similar to the rationale for money in market economies relying on the transaction cost-saving and productivity-increasing effects of the use of money (KATH, 1990, p. 179).

There are, however, substantial dissimilarities in the very concept of a monetary system in socialist and market economies. This will have to play an important role when evaluating the working of the monetary sector or the quality of money in different economic systems. In ideal centrally planned economies, money is assigned a mere "passive" character as the monetary dispositions should principally be a mirror image of the real sphere which is planned materially in nature (HAFFNER, 1987, p. 201; HARTWIG, 1987a, p. 3). This is due to the assumption that central planning authorities possess sufficient information concerning relevant economic facts (production possibilities, consumer needs and prefe­rences etc.) to guarantee a maximum of economic welfare by means of overall physical and respective monetary planning. The passivity of money in this sense may be interpreted as a intensification of the concept of the neutrality of money developed in Western literature on monetary theory. Money in ideal centrally planned economies not only leaves real variables untouched, but also has no influence even on the absolute price level (THIEME, 1990, p. 2). Under ideal conditions, the causality runs unilaterally from the real to the monetary sector.

We now want to add to this symptomatic definition of the passivity of money one which is based on its causes: Hence, the passivity of money is perfect if money is entirely restricted in its material and intertemporal usability ("sachliche und zeitliche Verwendungsfahigkeit") by complete central planning.

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The concept of "usability" is meant to reflect the intra- and intertemporal exchange capaci­ties of money. The material usability is - on the one hand - determined by the current purchasing power of money and - on the other hand - by the whole set and availability of possible exchange objects (goods, factors of production, assets), as well as the transaction costs involved in exchange activities.

The intertemporal usability refers to different points in time at which the exchange transactions are carried out. The ability of money to transfer its material exchange capacity into future periods correspondingly serves as an appropriate quality measure. Both the uncertainty about future developments (risk) as well as specific transaction costs (e.g. inventory costs) have to be considered. Regarding the money functions, we can already assert that the quality of money as an exchange medium and as a temporary store of value refers in the first case to the material and in the latter to the intertemporal usability of money.

According to this concept, money becomes an active category as soon as the behavior of economic units is based upon the total amount and the structure of money stocks (HARTWIG, 1987a, p. 3). This, indeed, presupposes the existence of alternative exchange objects for money, combined with certain margins for decentralized decision-making. As soon as money assumes an active character we can thus apply choice- and utility-theoretic models to explain the money demand behavior even in different economic systems (HARTWIG, 1987b, p. 252).

The esentially passive role of money in socialist planned economies is revealed in that it is characteristically a mere means of accounting and control in the planning process. The quality of money in this context can be measured as to what extent it reduces transaction costs (caused by the drawing up and execution of the central plan) and, at the same time, interferes with the process of central planning. Hence, planning efficiency is the appro­priate macroeconomic criterion for the quality of money. Under ideal conditions money does not have any independent effect on the utility function of an individual and therefore remains "quality-less" on the microeconomic level.

In market economies, in contrast, money is assigned a fundamentally different role, i.e., that of being as active as possible. Money serves as a means for rationalizing decentral exchange processes guided by market signals in an imperfect and uncertain world. Hence, market efficiency, characterized by optimal intra- and intertemporal factor allocation, has to be the criterion for evaluating the macroeconomic quality of money.

From the microeconomic perspective it is assumed that the quality and the resulting utility of money are positively correlated with its usability. Perfect money, therefore, offers to each individual a maximum of material and intertemporal usability (freedom of exchange). Ideal money is the perfect means of payment (KA TH, 1983, p. 255), which additionally produces the lowest possible costs and risk of storage, including value losses caused by inflation (but excluding opportunity costs!).

It is now of crucial significance that this approach implies a fundamentally different rela­tionship between the macro- and microeconomic quality of money according to different economic systems. In centrally planned economies, on the one hand, we may presume a

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trade-off between the micro and macro quality of money. The greater, for example, the active role of money and hence the individual freedom of choice, the less efficient the planning of the system will be (i.e. the higher the probability of deviations of the actual from the planned and "optimal" economic processes). In market economies, on the other hand, it is reasonable to suppose that the macroeconomic factor allocation will be more or less efficient, the higher or lower the individual utility of any unit of money, since the perceived value of money has certain effects on the incentive system. The higher the utility of money, the higher the readiness will be to acquire money by means of higher labor supply or by increased production, which lead to higher productivity and supply of labor and capital and, hence, to an improvement of economic welfare. To this have to be added the positive welfare effects caused by reduced transaction costs due to an increase in the degree of monetization of the economy, which comes along with increases in the individual utility of money.

2.3 FLAWS OF THE POLISH CURRENCY AND THEIR MACROECONOMIC CONSEQUENCES

Applying this theoretical framework, we are now able to analyse the malfunctioning of the Polish monetary order from the perspective of different economic systems. This approach, combined with a causal analysis of the recognized monetary defects, turns out to be conve­nient in order to understand certain goals and to derive adequate measures of monetary reform in an economy pursuing systemic transformation.

The Polish banking system and its relationships to other economic units had been organized so as to guarantee the intended passive role of money in a socialist economy. The state enterprises and cooperatives had to carry out their financial transactions through a single bank account ("basic account", see HINDS, 1990, pp. 132f.) held with only one bank. All payments, except wages to workers which were paid out in cash, had to be settled using bank deposit money. Credit forms other than bank credits (granted, with few excep­tions, only by the enterprise's single bank) were not allowed, the purchase of working and investment capital had to be fmanced proportionally with bank credits and the enterprise's money stock was largely earmarked. Thus the banking system was theoretically able to control the fmancial dispositions and hence the plan conformity of the socialized sector extensively (HAFFNER, 1987, p. 204; HARTWIG/THIEME, 1987, p. 220; APOLTE, 1991l There remained only a largely restricted freedom of choice to the socialized sector concerning the use of money.

The population, on the other hand, was principally excluded from cashless money transfer in order to maintain two institutionally separate "monetary circuits". By restricting the socialist enterprise sector to the use of bank deposit money and the private sector to the use of cash, the central government hoped to more closely control the financial and real transactions of both sectors. Both monetary circuits were interrelated only via certain

2 However, this formal dominance of the banks over the enterprises in effect turned out to reverse to a factual dominance of the enterprises over the banks, which supports the "endogenity" of money supply and hence the inflationary pressure in the Polish economy (LUTKOWSKI, 1989, p. 144).

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special-purpose banks. Yet, only the supply of circulating cash could be centrally managed via planning targets for wage payments of the socialized sector and for bank credits granted to the private sector. In the use of money, on the contrary, the private sector, which in Poland had always enjoyed important economic power (KALICKI, 1989, p. 74), was not subordinated to central planning and was therefore basically "free" (NUTI, 1989, p. 86).

Under such institutional circumstances money in Poland, as in other socialist economies, was never a totally passive entity. The activity degree of money was high especially in the private sector, above all in markets having a private supply with flexible prices. As the model of authoritarian central planning was increasingly weakened with the aim of allevia­ting the inherent defects of the economic incentive system, the active role of money also started to grow in the state sector. This was due, on the one hand, to the successive expan­sion of manoeuvring ability at the lower levels of the hierarchy with regard to borrowing as well as the use of money stocks and, on the other hand, to the application of monetary categories to the management of the economy in a parametric, i.e. indirect, manner (HAFFNER, 1987, p. 202).

These developments led - according to the criterion of planning efficiency - to a decrease in the macroeconomic quality of money. This, however, the political decision-making authori­ties did not mind as they hoped that by "activating" or, indeed, by raising the individual utility of money they could offer on the microeconomic level an incentive to improved economic performance (which in itself implies an increasing rejection of the centrally planned economic model).

Despite these conditions and partial reforms, the microeconomic quality of money remained low and has probably even decreased, for which there are a number of reasons:

On the one hand, there are institutional restrictions as regards the material and intertem­poral usability of money:

despite successive softening "at the margins", there still remained an institutional separation between the bank deposit money and cash circuits (HAFFNER, 1987, p. 204) which means a restriction on the exchange possiblities of money and implies higher transaction costs; the way that categories, quantities and prices of the supply of goods have been regula­ted by the state and not by free market principles has restricted the material usability of money through general, or at least, partial rationing; the undifferentiated supply by the state banking system of financial assets, rather illiquid and partly tied-up to certain purposes, which, furthermore, because of low nominal interest rates often yielded a negative real interest rate has restricted money's function as a temporary and permanent store of value, thus limiting the material and, mainly, the intertemporal usability of money. (The store-of-value ability of a given stock of money is measured here not in the traditional sense by the relationship between the own interest - negative in inflationary times - and opportunity costs of money in the form of forsaken interest on alternative financial assets, but by the availability and profitability of fmancial assets into which money can be exchanged for the purpose of an intertemporal transfer of purchasing power corresponding to a particular time preference; this means that, for instance, a substitution of money by

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interest-earning bank liabilities, brought about by a rise in interest rates, reflects not a decreased, but on the contrary an increased quality of money, which in this case leads to voluntary money destruction!); because of the lacking convertibility of the zloty, money holders were excluded from foreign goods and factor markets.

On the other hand, open and repressed inflation caused by the system's inherent tendency to monetary overissue (HARTWIG/THIEME, 1987, pp. 235f.), lead to real losses in the value of money and further strengthened the negative effects of the institutional causes for the low quality of money mentioned above. Because of the excessive money supply, even a risk of capital loss on money balances through an imminent currency reform to reduce the monetary overhang could be accepted, particularly since Poland's economy was in 1989 on the verge of a hyper-inflationary situation.

In view of this it can be understood that a money of such "bad" microeconomic quality will in reality lose its properties as a generally accepted quid pro quo in economic transactions. The following are effects of and alternative reactions to this situation particularly on the part of the population:

growing legal and illegal activities in the shadow economy where the real value of the state money was reduced according to its perceived relative scarcity (CASSEL, 1989, pp.57ff.); deterioration of the quality of products and services as well as a reduction in quantities of supply in those areas where an exchange could only be effected through the use of legal tender, e.g. on the official goods and labour markets (CASSEL, 1989, pp. 57ff.); emergence of a parallel currency system of Western currencies outside state control (BOTHjWELFENS, 1989, p. 160; WINGENDER, 1989); reduction in the macroeconomic degree of monetization, i.e. an increase in barter trade.

Such developments involve important macroeconommic welfare losses. For example, losses in production in the official sector of the economy caused by a decrease in productivity and lower input quantities, are generally not compensated by an increase in domestic private production. Furthermore, higher transaction costs caused by the use of media of exchange which are uncertain and highly restricted in their usability (Western currency, commodity money) lead to a waste of economic resources and to a reduction in utility-enhancing exchange processes.

These arguments illustrate that at the start of the economic transformation process Poland's currency from a market-economic point of view was of a very low macroeconomic as well as microeconomic quality.

2.4 NECESSARY REFORMS OF THE MONETARY SECTOR

In order for money to be most productive in a market economy, i.e. for it to contribute to an efficient factor allo~tion, it must have high microeconomic quality. Through improving the quality of the zloty, and herewith its utility, a "remonetization" of Poland's economy can be achieved and with it, a rise in economic welfare. It must, therefore, be in the interest of

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Poland's monetary authorities to free the zloty from a variety of institutional and proce­dural impediments. In completion of the historical trend, the active role of money should be made to reach as wide an extent as is practically feasible.

The following are necessary reform measures which are to be implemented at least in the long term:

complete abolition of the institutional separation between the distinct money circuits; price liberalization on the goods markets, in order to get market equilibrium and to avoid rationing ; interest rate liberalization and the authorization of fmancial innovations; full convertibility of the zloty.

Furthermore, a certain degree of monetary stability (price stability) must be achieved. In view of the impending hyperinflation at the end of 1989, this may be seen, indeed, as the most pressing task lying ahead, as a conditio sine qua non for the beginning of systemic reform (FISCHER, 1990, p. 134). A special problem of the interim phase is the absence of a system of relative prices based on economic principles. This can only emerge due to incomplete and costly information in a long adjustment process on the supply as well as on the demand side. To assess, however, the ability of Poland's enterprises to survive market pressure, it is very necessary to get closer to undistorted relative prices. A process of high and variable inflation is bound to delay unduly such adjustments of the price structure.

On the other hand, a reform of the banking system is absolutely necessary in order to improve, above all, the intertemporal factor allocation. A single-tier, state-run and centra­lized banking system is, within a centrally planned economy, the optimum form of organi­zation. In contrast, in a market economy the banking sector as actually the crucial part of the financial system assumes the responsibility for important allocative functions which it can only fulfill efficiently within a competitive context. Banks as financial intermediaries arrange indirect credit relationships between regular surplus units (savers, traditionally private households) and deficit units (investors, traditionally the enterprise sector and the state) by transforming maturities, amounts and risks. Their activities (providing certain payment systems, offering through the deposit business differentiated products for investment and taking on the responsibility of selective functions in the credit market) are of major importance for the accumulation of monetary and real capital and with it also for the longer-term growth of the economy.

Implementation of a two-tier banking system is generally called for because this form of organizing the money supply, being a mixture of market and hierarchy (RICHTER, 1990, p. 130), promises a satisfactory solution to the supposed dilemma between maintaining the efficiency of a monetary system stimulated by competition and the stability thereof (price stability and stability of the financial system). The central bank at the upper stage has as part of its function to guarantee the stability of the fmancial system and to provide for - by using its monetary policy instruments - a stability-based macroeconomic money supply (according to the price target). The task of the competitive private banks at the lower stage is to effect an efficient allocation of scarce fmancial means through their profit -oriented credit and money creation activities taking into consideration the constraints set by the central bank.

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Simply from the viewpoint of price stability it is by no means necessary to effect such a restructuring of the banking system. (It may even be less effective at ftrst glance.) It would have been quite sufficient to make it binding on the central bank to safeguard the value of money and to have freed it from having to fmance budget deftcits and deftcits of enterprises so as to enable it to gain control over the money supply; or, as FISCHER (1990, p. 135) put it: "All it takes is a tough government." The necessity of other measures, with which to impose harsher ftnancial discipline (hard budget constraints) on the various economic units, is independent of the structure of the banking system.

3. DEVEWPMENT OF A NEW MONETARY CONSTITUTION FOR POLAND

As already stressed, Poland's monetary policy in the transformation period must not only be functional, i.e. with the goal of ftghting inflation, but above all, it has to include the building-up of monetary institutions, in order, on the one hand, to create a framework for long-term monetary stability and to maintain an efftcient fmancial system, on the other. We are indeed talking about the creation of a monetary constitution or currency order corresponding in the best possible way to a competitive market economy, in order to achieve the basic aim of the systemic transformation, i.e. an increase in economic welfare through efftcient factor allocation and appropriate economic growth (FRIEDMAN, 1953, p. 134; BRAINARD, 1990, pp. 1£.).

The major points of difference between the intended new currency order and the one that existed at the start of the systemic transformation are that the supply of means of payment is to be effected through a truly two-tier banking system and that the central bank is to guarantee the maintenance of a price target for Poland's currency. For this it will be essential to free the money supply from its factual endogenity, for a decision about the price target and money supply permits only one degree of freedom (RICHTER, 1990, p. 105). Furthermore, other supporting reform measures will be indispensable in the real (price liberalization) and monetary sectors (interest rate liberalization, fmancial innova­tion), which make possible a decentrally induced adjustment of the nominal and also real money demand to given market conditions. In addition, the zloty is to be integrated into the international monetary community as a convertible currency. It can be assumed that all of these measures will serve directly or indirectly to improve the macro- as well as microeco­nomic quality of the zloty.

It is frequently pointed out that the functioning of a monetary system is based on the fact that money users have sufftciently high conftdence in a currency thus used and for which the monetary authorities are responsible (BAKA, 1990, p. 60; CORRIGAN, 1990, p. 24, 26; CROW, 1990, p. 10). The conftdence in monetary stability can easily be integrated, in the form of a risk component, into our concept of money quality. The higher the conftdence, the lower the money's income and capital risks are - which means higher money quality or utility. Economic agents, however, have to gain conftdence in a longer process of expe­rience with the use of money. Government authorities can, nevertheless, prepare the ground for building up such conftdence by expressing credibly their absolute will to stabilize the value of money in the form of appropriate regulations regarding the monetary constitution. Such regulations should include the setting up of an institution which, on the one hand, is bound by law to provide and maintain monetary stability as well as the stability of the ftnancial system and which, on the other hand, must be equipped with the ability to

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fulfill its legal task thus set. And it is indeed this requirement which the Polish legislative powers and government tried to comply with when passing the ACf ON THE POLISH NATIONAL BANK on 31 January 1989 (NBP, 1989b).

While hiving off a Western-type central bank from a hierarchically structured monopolist banking system of the Eastern European-type is hardly a particularly difficult organiza­tional problem, the creation of a system of competing, profit-seeking and efficiently working commercial banks is, the more so since history does not offer any precedence in this respect. It is rather the case that Western central banks - to stabilize financial systems and/or to fmance government deficits (GOODHART, 1988, pp. 4-6; VOLCKER, 1990, p. 2) - were often superimposed on a system of already existing private competitive commer­cial banks. The commercial banking systems in Western countries have after all developed in a long adjustment process under specific prevailing circumstances, as is customary for "inside institutions" ("innere Institutionen'~ as creatures of a market economy. In contrast to such inside institutions, "outside institutions" ("iiuj3ere Institutionen'~ which form the necessary framework for a market economy and to which a central bank also belongs, are much more easily created by government decree (LACHMANN, 1963, pp. 66-68, 72). Experience, however, has shown that the development of appropriate market structures under the leadership of government institutions and under a certain policy setting can indeed be accelerated.

As a rule, an optimal coordination of intertemporal consumption planning by households and production planning by enterprises is in decentral market economies carried out not only by interposing banks and other fmancial intermediaries, but also via capital markets (BERNHOLZ, 1990, p. 297). In some of these markets, fmancial assets (bonds, shares) between ultimate debtors and creditors are exchanged directly (primary markets). The secondary markets give a higher liquidity at a higher degree of income risk to the titles thus traded (NUTI, 1989, pp. 91-93) - provided the market is broad and deep enough - as compared with other forms of assets (e.g. time deposits at banks), which render possible a much more flexible portfolio management to asset holders (banks and nonbanks). This, too, improves the quality of money, since it makes available another profitable and liquid alternative to holding money. But since the development of capital markets in Poland is still in the planning or elementary stage, the whole burden of supplying and channeling the much-needed fmancial means to be used for a variety of purposes (private and public investment, including housing, restructuring and privatizing the state-owned enterprise sector) will fall to the banks. And it is for this reason that the banking system deserves our special attention.

3.1 THE ROLE OF THE NATIONAL BANK OF POLAND

In contrast to its passive and more technical function as a completely dependent issuing and controlling authority, the Polish central bank (Narodowy Bank Polski, NBP) now has an important active role to play within the context of systemic transformation. As a decision­making authority, NBP will have to guarantee credibly a permanent maintenance of what the zloty's price target is to be, i.e., safeguarding the state's promise of a real anchoring of the unit of account. During the transition phase it will have the additional task of laying the foundation for stable monetary conditions by halting Poland's open and repressed inflation.

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THE CENTRAL BANK GOAL

The central bank's general task is legally embodied in Art. 5.1 of the ACT ON THE NBP of 31 January 1989: "The activity of the NBP is aimed especially at strengthening the Polish currency." According to a number of government and NBP publications, this very vague formalization is to be interpreted as a goal toward establishing stability in the value of money.

The fact that this area of responsibility has been given to the NBP, together with the comprehensive reorganization of Poland's central bank system in 1989, is a clear indication of the government's will to attain monetary stability, as is also manifested by the Balcerowicz-program and the stabilization aims planned therein (see APOLTE/GRADALSKI in this volume). By establishing a monetary authority in the form of a Western-type central bank, the Polish government hopes to strengthen the popula­tions' confidence in the Polish currency as well as the credibility of its stabilization policy. If the factual will to price· stability on the part of the monetary authorities, including the legislative powers, is a necessary condition for a success in monetary policy, then these measures are to be viewed as an important step by Poland toward monetary stability.

INDEPENDENCE OF THE NATIONAL BANK OF POLAND

The instrumental and legal ability of those bodies entrusted with the conduct of monetary policy to enforce this will to monetary stability would then be sufficient. But these condi­tions are, in Poland's case, only in part credibly fulfilled. Due to its specific position in the process of money supply, and because of the instruments it has available as well as the formal absence of an obligation to unlimited base money creation, the NBP is now basically able to autonomously control the growth of monetary aggregates and at the same time to abolish the endogenity of money supply, which is generally thought of as the major cause for inflation in socialist countries. To accomplish this task, however, the NBP will have to have a certain degree of functional and personal independence, especially as regards its relationships to parliament and government.

The independence of a central bank can be established within a principal-agent framework. This approach is suitable to analyze the relationships between money users, legislative powers, government, and the central bank in democratic systems (see, for example, RICHTER, 1991, pp. 50-55; TOMA/TOMA, 1986, pp. 243-249). The money user (or tax payer) as principal is much interested in the stability (or high quality) of the currency he uses. A change in currency causes him to have high specific transaction costs (sunk costs) which the use of money for certain purposes (notably as an accounting unit for valuation purposes and as a quid pro quo agreed upon in economic contracts) requires (RICHTER, 1991, pp. 5Of.). This is particularly true when dealing with a government currency monopoly, where the role of the agent is principally taken on by the legislative powers. The agent settles all currency problems for the principal, including the money supply. Owing to high transaction costs caused by a change in currency, there is for the supplier of money in principle an incentive for ex-post opportunism. He can reduce the real wealth of the money user by increasing the money supply above certain limits and thus imposing an inflationary tax on the stock of financial assets as the tax base. Securing the value of fiat money by esta­blishing a price target fixed at constitutional level (for example, by employing

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FRIEDMAN's money supply rule) is usually rejected on various (political, theoretical and technical) grounds. In addition, it is thought that the tendency of governments to ex-post opportunism is a real threat as there are always strong influences at work stemming from various interest groups and because of the possibility of inducing politically-motivated business cycles (exploiting the short-run Phillips curves in connection with political electio­neering). For these reasons some countries prefer to transfer the role of the agent by law to a relatively independent central bank. This presents one of the forms of "division of powers" in economic policy to reduce overall information and monitoring costs and to avoid net welfare losses caused by short-sighted monetary policy. The central bank in this case acts as a democratically legitimized ex-ante protective body (regulated by the legislative powers) so as to ensure that money is not abused by "weak" governments (LAGA YETTE, 1990, p. 136).

Whether or not such protection is in reality effective depends very much on the degree of indepence the central bank enjoys as regards government and parliament. The then President of the NBP, BAKA, had this to say regarding the functional dependence of the NBP, as laid down in the ACT ON THE NBP (BAKA, 1990, pp. 62f.):

"We have chosen the model of very great autonomy for the central bank because our experience so far - with monetary policy, inflationary pressure, and the attitude of government officials regarding their preeminent role - convinced us of the need to fundamentally alter the relation between the government and the central bank. ( ... ) The National Bank of Poland is expressly prohibited from financing the budget deficit. Also, the central bank may not finance state enterprises. Finally, the program of monetary and credit policy is directly presented by the central bank to parliament. Of course, the government presents its opinion, but parliament has to decide in the case of differences of opinion what should be the choice. "

The general obligation the NBP has toward the "state", i.e. of cooperating "in the realization of the economic policy of the State" (Art. 5.2; see also Arts. 6.2 and 16.1) is made a more concrete fact by Art. 17 which requires the NBP to prepare "projects of State monetary policy assumptions determining in particular shaping of money supply, interest on credits and deposits, exchange rate as well as foreign exchange policy, and the policy of foreign credit relations" (sic). The Council of Ministers still has to add its comments to this envisaged monetary policy program after which the Sejm (Polish parliament) will have to vote on it (Art. 19). The President of the NBP will then "watches over the implementation of the voted through by the Sejm assumptions of the monetary policy of the State and consequently detennines banks' obligatory reserve ratio as well as the rate of commission" (sic; Art. 20.1).

This way of proceeding implies that the objectives of monetary policy the NBP is to follow will periodically be dictated by the Polish parliament. The NBP can then freely decide which monetary policy instruments to employ to attain the given objectives. The indepen­dence of the NBP from parliamentary interference is thus to a great extent limited to the use of instruments.

In contrast, there does actually exist a high degree of functional independence toward the government. The government has neither direct influence on the decisions of the NBP nor

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does it have unlimited access to central bank credits. In fact, there is absolutely no provision for giving book credits to the state (see ACT ON THE NBP, Chapter 4: Credit Activity, Arts. 22-28). Loans to the state are merely allowed on the basis of buying treasury bills of limited amount by the NBP: "In the budgetary year the NBP may purchase bills issued by the State Treasury for the total amount not higher than 2 % of planned central budget expenditure" (Art. 34).

Nevertheless, it can be assumed that there is actually a still dominant influence of the government on the NBP's monetary policy because of the highly restricted independence of NBP as regards personnel. Although the NBP is directed by a board of management, formally consisting of a number of persons, the decision-making structure within this body can in no way be called democratic, since decisions are solely taken by the President of NBP, as laid down in Art. 48: ''The NBP is managed by the President of the NBP." The President, however, "is appointed and recalled by the Sejm" (Art. 49.1) without any mention of his term of office or personal requirements.

The President of the Polish central bank must therefore be prepared to expect being dismissed from his job at short notice and in an arbitrary manner if he pursues a monetary policy that is contrary to the preferences of the government. The former President BAKA, who resigned at the beginning of 1991, was aware of this being a weak point in the central bank act, when he reckoned: "( ... ) the president of the National Bank of Poland is appointed by parliament ( ... ). At the moment, this system is very efficient; but I think that it depends very deeply on how much weight the government places on restraining inflation" (BAKA, 1990, p. 63).

CENTRAL BANK FUNCTIONS

The role of the NBP, as the central bank of Poland, is not limited to that of a decision­making and executive body with the sole objective of safeguarding the money value. The general aim of achieving "stability and efficiency of the monetary sector", traditionally pursued by central banks, can also be derived from the ACT ON THE NBP. According to specific tasks therein assigned to the NBP, these can be classified as the following catalog of central bank functions:

1. Monetary policy (narrowly defmed as stabilization policy; Chapter 3: Participation in Shaping Economic Policy and Monetary-and-Credit Policy of the State);

2. Issuing bank (Chapter 2: Issue of Legal Tender); 3. The bank of banks (Chapter 4: Credit Activity, and Chapter 5: Keeping Bank

Accounts); 4. The bank of the state (passim); 5. Exchange rate policy (Chapter 8: Foreign Exchange Activities and Cooperation with

Abroad); 6. Supervision and regulation of banks (Chapter 9: Supervising Activities of Banks).

All these functions which the central bank is to fulfIll cannot be carried out totally indepen­dent of each other, as they are all closely interrelated as regards their effects. Being the issuing bank, the central bank has the possibility, as the bank of banks in a two-tier banking system, of influencing on the activities of the commercial banks to a large extent through its

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refinancing and minimum reserve policy and thus of fulfilling in this way its ''macro junction" of establishing monetary stability (GOODHART, 1988, p. 5). It must then, however, be able to control the volume of its assets and with it also the base money supply.

This could come into conflict with the central bank's tasks as the bank of the state and as the executive body of exchange rate policy, holding national foreign-currency reserves. We have already pointed out that the NBP cannot by law give unlimited credit to the state, which gives more autonomy to the NBP's monetary policy. The obligation to intervene in foreign exchange markets could also undermine the central bank's independence. Art. 39.1 of the ACT ON THE NBP stipulates that it is the Council of Ministers "at the motion of the President of the NBP in agreement with the Minister of Finance and the Minister of Foreign Economic Relations" that determines the ''principles of fixing of the exchange rate", in other words, the exchange rate regime toward particular foreign currencies. According to Art 39.2 the actual exchange rate is, however, independently fIXed by the NBP's President, which again grants to the central bank comparatively wide scope for exercising its autonomy.

On the other hand, the role as the bank of banks could come into conflict with its monetary policy function. The ''micro function" as the bank of banks implies that the central bank also plays the role of lender of last resort (GOODHART, 1988, p. 7). In this function it has to make available to the commercial banks unlimited bas~ money if temporary liquidity problems arise, in order to avoid overall financial crises ("lend freely" according to BAGEHOT's rule, cf. RICHTER, 1991, p. 53). The resulting creation of base money could lead to the overall money supply overstepping the mark of what is regarded as conforming to monetary stability.

It is just this classical dilemma facing all central banks that may well prove, for various reasons, a pal ticular problem of monetary policy in the transition period: the strict maintenance of a set target in base money supply is, on the one hand, not advisable in the case of strong fluctuations and unpredictable trends in money demand behavior of the nonbank sector. On the other hand, quite erratic developments can also be expected to occur regarding the reserve demand of banks, if there is no properly functioning interbank money market. In addition, the asset side of most of the banks currently in existence offers little in the way of flexibility in adjustment because a major part of their assets inherited from the old system consists of non-performing and low-interest bearing loans to state­owned enterprises and government budgets which are unprofitable and non-marketable. The reorganization of the industrial sector, hence, will most probably cause liquidity problems with a lot of these banks owing to loan losses. All this will force the NBP to deal with the difficult task of deciding in each individual case whether the required base money demand is just a temporary phenomenon or whether it is, indeed, a structural problem of liquidity and solvency of banks. If it is a problem of the latter kind, the question of how far the banks can be blamed for these shortcomings will have to be considered (KING, 1990, p. 131).

The problem of interpreting the function of lender of last resort already points to the need to entrust the Polish central bank with the task of regulating and supervising the banks as well. Furthermore, because of the NBP's role as lender of last resort, a moral hazard is sure to tempt the commercial banks particularly during the transformation period. This

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refmancing function of the central bank can be seen as an "insurance policy" encouraging risky lending practises since the commercial banks can, in the case of loan losses, always count on the central bank bridging their liquidity problems. Indeed, if the level of competi­tion within the banking system is low and if the (state) banks are not having to fear for their existence through bankruptcf, the threat of granting unprofitable loans is a real one with consequent inefficiencies in factor allocation and excessive money supply. The high risk of a moral hazard is another (traditional) argument for supporting the view that the NBP should take on extensive supervising and regulating functions (cf. GOODHART, 1988, p.7).

Limiting the functions of the NBP to conform to what Western-type central banks do, would require an abolition of its lending and deposit-taking business with state enterprises and the private nonbank sector. Beginning with the re-establishment of the State Savings Bank's (Powszechna Kasa Oszczednosci-bank panstwowy, PKO-BP) independence in 1987 and above all with the banking reform in 1989 the NBP lost these commercial banking functions with certain asset and liability items being transferred from NBP to the commer­cial banking sector.

3.2 CREATING AN EFFICIENT COMMERCIAL BANKING SYSTEM

The creation of an efficient banking system working according to market-economic criteria is of particular importance to Poland for two reasons: On the one hand, a banking system has to provide for an allocation of scarce fmancial means to its most profitable uses by means of its role as intermediary between savers and borrowers - and this applies most particularly to cases where there is no properly functioning capital market (BRAINARD, 1990, pp. 1-4). There must be a minimum of profitability for real investment fmanced by loans in order to produce positive real rates of interest and economic growth. Positive real interest rates are in the long-run not only dependent on a successful interest rate and inflationary policy, but are in the end the result of "increased profitability" ("Mehrergiebigkeit'1 of the production means employed (BERNHOLZ, 1990, p. 298) and of increased efforts in economic performance by the various economic units.

On the other hand, the banking system, being the third link in the credit and money supply chain, beside the nonbank sector and the central bank, assures that the effects of monetary policy are channeled in a predictable way (cf. BRAINARD, 1990, p. 298). Reforming the central bank and decentralizing the lending and deposit -taking business by creating independent commercial banks will not be a sufficient measure to plug the money-creating gaps and to make the money supply controllable (cf. APOLTE, 1991).

Therefore, it will be necessary to first make sure that the banks behave in a profit-oriented way, i.e. to install an adequate system of economic incentives, while at the same time conforming to monetary stability. In ideal market economies profit-seeking is assured through private ownership of and competition among banks which implies the possibility of bankruptcy. In order to support the stability of the financial system, a prudential banking

3 Without doubt, both points are relevant for Poland's banking system as it is still in a rather rudimentary stage of development (see section 3.2 below).

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regulation should be established. Under such circumstances the monetary authorities can try to achieve their monetary policy goals by indirectly controlling the commercial banks' behavior. This they can do by using monetary policy instruments which have an effect on the profitability of the commercial banks, thus inducing shifts in the bank portfolios which produce the desired changes in interest rates and monetary aggregates.

Secondly, supporting reforms of the public and private enterprise sector (ownership legislation and bankruptcy procedures) are indispensable in order to force above all the still state-owned enterprises to use economic resources efficiently and to maintain financial discipline so as to protect the banks from a "pull of credit demand" ("Kreditnachfragesog") (THIEME/MICHLER, 1991, pp.13f.; BRAINARD, 1990, pp. 2f.). For as long as the state enterprises are not subject to profitablity and cannot go bankrupt and, moreover, the private sector remains underdeveloped, it may well be a rational decision on the part of the banks to give "secure" loans to the state sector in large quantities if they are the only ones which are bound to make profits (cf. KESSLER/MOZARYN in this volume).

Furthermore, the efficiency of the commercial banking system influences the concrete terms (property rights) with which the bank liabilities, offered to the nonbanks for invest­ment, can be provided, thus being also of crucial importance for the money quality of the national currency: On the one band, the more efficient the payments system SUPplie9 by banks (demand deposits, giro system), the higher the matedal usability of money will be. It is also true, on the other hand, that risk and profitability of the banks' asset business has strong impacts on the degree of liquidity as well as the level and variability of the real interest rates granted on various bank liabilities (e.g. term and savings deposits). The terms of these potential substitutes to money determine essentially the material, but also and above all the intertemporal usability of money.

mE CURRENT BANKING STRUCTURE AND mE BANKING LAW

Through the banking reform of 1989 Poland created a two-tier banking system. The task of limiting the NBP's functions to those typical for Western-type. central banks was reached by transferring the entire commercial banking portfolio of the NBP - mainly loans to state enterprises comprising 42 % of the central bank's total assets4 as of 31 December 1989 - to nine newly created "state banks" which for now constitute the core of the Polish banking system. According to THE BANKING LAW of 31 December 1989 all banks may princi­pally act as universal banks. Banks' actual activities, however, have to be carried out in accordance with particular statutes and/or government ordinances and within the range of different laws according to the legal form a bank has taken on. The provisions of THE BANKING LAW are, of course, the legal basis for all banks.

Briefly, the following is the structure of the Polish banking system as of 31 December 1990 (NBP 1991b; BREZINSKI, 1991, pp. 314-316):

1. Cooperative and state-cooperative banks: The 1577 cooperative banks, being indepen­dent cooperatives and acting as unit banks, traditionally meet the financial needs of the

4 Source: NBP 199Ob, p. 55 and authors' calculations.

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private agricultural, trade and enterprise sectors in their trading area. In addition, they grant consumer credits and deal with the accounts of municipal budgets. The Bank for Food Economy (Bank Gospodarki Zywnosciowej) "is a state-cooperative bank because it functions as an administrative and financing centre for the cooperative banks associa­ted with it at voluntary basis" (NBP 1991b, p. 33). Hence, beside a wide range of other activities, this single state-cooperative bank (with 97 establishments in Poland) grants refmancing credits to the cooperative banks and acts as their representative. State­cooperative banks are under direct influence of government bodies. All of these cooperative and state-cooperative banks are subject also to the Cooperative Law - Act.

2. State banks: State banks will be created and liquidated by the Council of Ministers that also provides for the statutes. The Bank's President will take over the manage­ment. He in turn will be appointed and recalled by the Prime Minister. At present there are eleven of these state banks. The nine state commercial banks established with the banking reform in 1989, which keep a regionally separated network of 363 branches altogether, are to a large extent involved in lending and deposit business with the socialist sector. Yet, the range of activities may in general be called quite wide with respect to the offered products and served customers. The PKO State Savings Bank is the biggest bank in Poland. It has 365 branches and 218 sub-branches and other agencies. It is a universal bank offering the widest range of services and holds in particular about 70 % of the total savings of Polish economic units.

3. Joint stock company banks: Until the end of 1990, 37 joint stock company banks already existed and 18 of such banks were in organization. They are subject to the provisions of the Commercial Code referring to joint stock companies. Three of these banks, being in state ownership, have been entrusted with activities in foreign currencies and promoting exports even in the socialist past of Poland5. Most of the remaining banks are newly created, still special-purpose banks without an extensive network of branches.

The development of the banking system is, however, still in its initial phase. Judging from the structure outlined above it looks as though the joint stock company banks (with private capital from domestic and foreign sources) will gain greater importance. The number of licences granted to the founding of banks has since 1989 increased to 75 (POENISCH, 1991, p. 13). The beginning of 1990 saw the start of the partial privatization of some Polish banks tJrrough shares issues and the granting of licences to purely private banks (BREZINSKI, 1991, p. 316). It has, however, to be taken into account that the newly founded private banks are rather small entities. The development toward a Western-style banking system will most probably take a great deal of time due to a multitude of obstacles and the long time required to create efficient institutions.

The legal prerequisites for developing a competitive, profit-seeking banking system can be considered satisfactory, due to a "liberal" licencing policy (MONTAGNON, 1990) and the provisions of THE BANKING LAW (NBP, 1989a), which gives to banks quite a broad range of activities and responsibilities. The banks are "autonomous" and "self-financing"

5 Bank Handlowy w Warszawie SA, Bank Pekao SA, and Export Development Bank (Bank Rozwoju Eksportu SA). The books of Bank Handlowy contain, among other things, a record of Poland's foreign indebtness (BRAINARD, 1990, p. 15).

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organizational units (THE BANKING LAW, Art. 2.1) and are relatively free regarding the way in which they can run their asset and liabilities business and use their profits (Art. 98.2), even when applying Western standards6. They are obliged to maintain "financial liquidity" (Art. 9) and are subject to liquidation and bankruptcy procedures in case of insolvency (Chapter 10: Rehabilitation Proceedings, Liquidation and Bankruptcy of a Bank). Nonbanks are authorized to do business with banks of their choice which is one of the indispensable prerequisites for competition to exist in the banking system (Art. 10).

The licencing requirements applied to foreign banks, which because of their investment potential and know-how could be of major importance for intensifying competition within, as well as for spuring the technological progress of the Polish banking system, may also be considered satisfactory. There is a general intention to bring the conditions governing foreign financial institutions into line with those existing for domestic ones (HANDELSBLATT, 1990).

TRANSFORMATION PROBLEMS OF THE COMMERCIAL BANKING SYSTEM

In order to reach the goals of banking reform it is necessary for the monetary authorities and the commercial banks to follow certain behavior patterns. Provided the monetary authorities have the will to achieve monetary stability, reaching the goals depends on the ability and incentives to banks to conduct business in a way corresponding to stability.

The Polish banking system is at present dominated by state-owned banks, above all by those state banks which were created by the banking reform (BAKA, 1990, p. 61). Being in state ownership and the fact of having little factual competition within the banking system -since the state banks are operating mainly in different regional areas - means that there are few incentives for bank managers to show a strict profit -orientation. And although there is discussion about finding interim solutions to stimulate bank managers (HINDS, 1990, pp. 13Of.), it is nevertheless even for the medium-term an absolute must to privatize a large part of the state bank sector. Government directives and administrative controls are not the right way to determine banking behavior. On the contrary, it should be the long-term interest in profit which directs the behavior of banks, limited only by prudential banking regulation.

The privatization of these banks, however, will cause considerable problems, as their asset portfolios consist mainly of loans to the socialist enterprise sector, which are in part non­performing and/or often yield only very low nominal interest7. This implies, on the one

6

7

Art. 5 of THE BANKING lAW, however, states: "In their activity banks follow assumptions of the monetary policy which have been voted through by the Sejm (Parliament)", which may come into conflict with banks' independence.

Nominal interest rate in some cases amounts to only 3 to 7.5 % (HINDS, 1990, pp. 141,149). An evaluation by the World Bank reached the conclusion that the level of interest rate subsidies (through negative real interest rates), which were granted to the state enterprises through the banking system, was about 10 % of GDP in the year 1988 (BRAINARD, 1990, p. 6).

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hand, difficulties in making a reliable valuation of banks' net worth and profitability. On the other hand, it is probable that an assessment of the balance sheets will result in some banks having a negative present value which is a countercheck to privatization (BRAINARD, 1990, p. 14).

Prior to privatizing the banks it is, therefore, advisable to clear the banks' balance sheets of non-performing loans in order to improve their profitability and, in this way, to increase their ability to survive in a market-economic context (cf. BRAINARD, 1990, pp. 18-22; HINDS, 1990, pp. 125-150). One of the discussed approaches "is to recapitalize the banks by first lifting the bad loans out of their portfolios and then to provide a mechanism for injecting new capital" (BRAINARD 1990, p. 20). This can be done by government purchase of "the banks' bad loans with long-term bonds paying a positive interest spread over the banks' cost of funds" which provides for a continous improvement of the capital position of the banks by "elimination of the problem loans and the positive income flow from the govemment bonds" (BRAINARD, 1990, p. 21).

The ability of banks to show a profit -oriented behavior does not solely depend on a one­time recapitalization, but also on their independence toward current borrowers. Banks must not be forced to fmance the deficits of state enterprises and public authorities through the granting of loans. Hence, the success of reforming Poland's financial system greatly depends on the restructuring and privatization of the enterprise sector. Only when those unprofitable enterprises, which are not entrusted with the production of public goods, are either forced to start rehabilitation proceedings or go bankrupt, can it be assured that the banks will not have to cover losses of the enterprise sector either through direct loans granted to those enterprises or indirectly via the fmancing of budget deficits.

Relevant in this context are also aspects concerning management and technical capacities. On the one hand, it has to be avoided that the close personal relations between bank management and state enterprises, having their origins in the old system, interfere with an efficient credit allocation. Particularly during the transitional period the question of corruption may be a real threat (HINDS, 1990, p. 131).

On the other hand, managerial skills of the banks' staff, developed by professional training and on-the-job experience - together with available technological know-how also plays a major role in determining the banks' efficiency (BRAINARD, 1990, p. 27; WORLD BANK 1990, p. 27). It is asserted that the human capital of banks - including the central bank - is an important bottleneck in the development of the Polish banking system (MONTAGNON, 1990). Especially accounting and credit appraisal techniques seem to be lacking, the development, standardization and application of which the central bank is to take care of (CROCKETT, 1990, p. 126f.). With the international aid of private banks and foreign central banks, attempts are being made to alleviate this defect by training personnel and by transferring technological know-how (BAKA, 1990, pp. 6lf.; ECONOMIST, 1991). Help can, of course, be particularly expected from those foreign banks which participate in Polish banking - either through maintaining branches, subsidiaries or representative offices or simply through stockholdings on Polish banks -, since it is then in their own best interest to be equipped with highly qualified staff and advanced machinery. This is another reason for limiting the engagement of foreign banks as little as possible despite nationalist doubts.

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3.3 ADOYfION OF AN APPROPRIATE EXCHANGE RATE REGIME

The type of exchange rate regime to be chosen, dermed as the entire set of regulations governing the foreign exchange markets, is of crucial importance in Poland's transitional period. Arranging the exchange ~ate regime does not only influence the Polish national economy through impacts on foreign trade and capital transactions, but also via effects on the domestic monetary conditions, including monetary policy. Changes in currency conver­tibility and the exchange rate have, for instance, an influence on the phenomenon of currency substitution, which reflects the money demand behavior of economic units. Because of the extraordinarily high amount of Western currencies used in all of the classical money functions for domestic purposes ("dollarization" of the Polish economy), currency substitution in Poland is, compared with other Eastern European countries, of unique importance (KOSTRZEWA, 1989, p. 455; WINGENDER, 1989).

FOREIGN EXCHANGE POLICY AND MONEY FUNCTIONS OF FOREIGN CURRENCY

Starting from a strict governmental foreign currency monopoly so typical of socialist economies (foreign exchange control, inconvertibility of the domestic currency), Poland's foreign exchange policy has up to this day been characterized by a gradual and comprehen­sive, though rather erratic process of liberalization8• Both legal liberalization measures as well as the de facto toleration of spontaneous developments in the black foreign exchange markets were designed to alleviate the chronic shortage of foreign currency in the official sector by attracting private foreign currency stocks.

Although the private holding of foreign exchange was in principle forbidden for a long time, the authorities began with its partial liberalization quite early. In the course of time, the use of Weslern currencies in the private sector as means of payment increased substan­tially. Foreign exchange, for example, was also used officially for purchasing purposes since the introduction of "domestic exports,,9 (THIEME/WINGENDER, 1990, pp. 48-50). The emergence of the process of accelerated open inflation at the beginning of the '80s, together with further liberalizations of foreign exchange regulations and the resulting reduction of the dollar's transaction costs, led to an increase of payments in foreign exchange both in big-ticket transactions (for example, real-estate transactions) as well as in smaller ones (KOSTRZEWA, 1989, pp. 457f.). Foreign currencies began to assume the function of a store of value, notably in the form of foreign exchange accounts which were kept with the banking system and made increasingly attractive through suitable regulations on interest rates, proof of origin and usability (THIEMEfWINGENDER, 1990, pp. 51£.). However, even the holding of noninterest-bearing cash in Western currencies was an

8

9

For example, when introducing martial law on 13 December 1981, restrictions on foreign currencies were tightened (e.g. blocking of foreign exchange accounts), which shocked the population and still influences its demand patterns regarding foreign exchange (cf. THIEMEfWINGENDER, 1990, p. 59).

Since the '50s consumer goods imported mainly from the West can be bought with foreign currency in certain state-owned shops (Pewex-shops).

111

attractive store of value, for it yields a rate of return in the form of the (expected) percentage change in the nominal exchange rate (CALVO/FRENKEL, 1991, p. 272).

The state-owned enterprise sector was subject to stricter regulations regarding the use of foreign currencies. The complete foreign exchange control within the state sector has been relaxed by degrees since the end of 1986. In order to encourage export production and to improve foreign currency allocation, export enterprises were allowed, on the one hand, to use parts of their hard-currency earnings as they wished and certain other enterprises were enabled, on the other hand, to meet their excess demand in foreign exchange - the amount above that directly allocated to them by the authorities - by means of periodic auctions (THIEMEjWINGENDER, 1990, pp. 52f.). It was made possible in this way that even within the state sector, payments were settled in foreign exchange, which discriminated against those enterprises that did not have their own sources of foreign currencies (KOSTRZEWA, 1989, p. 458).

Table 1 shows clearly the extent of currency substitution in Poland at the beginning of systemic transformation, although not even the circulating foreign cash, which eludes estimation, is included. Such were the conditions that had to be taken into consideration when reforming the exchange rate regime. Although the full convertibility of the zloty is set as the long-term goal (KOSTRZEWA, 1989, p. 475; APOLTE/GRADALSKI in this volume), Poland decided on a radical, but nevertheless incomplete liberalization of the exchange rate regime. As part of the implemented transformation program, on 1 January 1990, the FOREIGN EXCHANGE LAW was passed as a preliminary highlight of Poland's foreign exchange policy. The existing system of multiple exchange rates was replaced with a single, uniform and ftxed exchange rate for current account transactions (limited internal convertibility). By legalizing the black foreign exchange markets and providing them sufficiently with foreign currency, there is now only a slight spread between the offtcial and the parallel exchange rate. Liberalization, however, affects mainly private households, as enterprises are still prohibited from making foreign exchange transactions on the parallel "kantor" markets - nor are they permitted to expand their holdings of foreign currency (LIPTON/SACHS, 1990, p. 113).

HOW TO DEAL WITH CURRENCY SUBSTITUTION?

What effects can now be expected from this liberalization of foreign exchange policy regarding the money quality of the zloty, the money demand behavior and Poland's monetary policy in general? Changes in foreign currency regulation also mean changes in the property rights structure of domestic and foreign currencies. The changed property rights produce in the eyes of economic agents a change also in relative money qualities, which in turn induces adjustments of the demand for domestic and foreign currency. Shifts in money demand are, however, of particular importance to a stability-oriented control of the money supply.

In order to determine the monetary aggregates which are regarded as most closely linked to nominal spending and, hence, to inflation (usually narrowly deftned money plus certain near-monies), it is necessary to add to the holdings of domestic money certain stocks of foreign currencies, if the latter circulate within the economy as parallel currencies, i.e., as means of payment and/or as a temporary store of value. The phenomenon of currency

112

substitution can cause particular problems to domestic monetary policy if the supply sources of foreign currency are beyond state control (BOTHjWELFENS, 1989, p. 160).

TABLE 1: Total Amount and Structure of Broad Money in Poland, 1989/12 - 1991/4, Billions of Zlotys

Year: I Broad Mone/

Month 1 Domestic Currency Foreign Exchange Acc. Doll.

Bank Deposits::! den.

as " Cash 2 as " Bank of Ci re. of Pekao

Broad Indivi- Enter- Broad Indivi- Enter- Cou-Total Money duals prises Money duals prises pons

1989: 12 95839 27.5

1

9879 8628 7841

1

71. 6

1

45926

1

22683

1

880 1990:01 98041 38.0 11105 10975 15199 61.2 45904 14105 749 1990:02 103751 43.7 14751 13583 17012 55.6 46509 11194 698 1990:03 112878 48.9 18914 16514 19719 50.6 47232 9846 649 1990:04 120367 52.4

1

22093 18315 22689

1

47.1 48058

1

8600 608 1990:05 127577 55.2 22527 20294 27608 44.4 49000 7612 532 1990:06 136676 58.6 25996 22678 31420 41.1 49444 6688 448 1990:07 149053 61.4 28344 25236 37865 38.4 50976 6221 410 1990:08 1615081 63.7

1

30966

1

27577

1

44323

1

36.1 52388

1

5878 373 1990:09 169622 65.1 33315 29870 47282 34.7 53192 5582 378 1990:10 177426 66.4 35450 32659 49717 33.4 54044 5208 346 1990: 11 186005 67.9 38343 35712 52306 31.9 54599 4717 326 1990:12 188836 68.3 1 39335 40536 49125131.6 55505 1 4074 258 1991 :01 192083 69.1 39328 45344 48009 30.8 55622 3628 149 1991:02 198242 71.9 43459 52442 46571 28.1 52293 3439 35 1991:03 207869 74.4 47477 61683 45529 25.5 49884 3211 84 1991:04 216203 76.9 j 48359 70234 47668 I 23.1 47140 i 2704 92

1: Broad money = domestic currency + foreign exchange accounts (zloty values) + dollar-denominated Bank Pekao SA coupons (zloty values).

2: Cash circulation: issue of cash - cash in banks' vaults. 3: Bank deposits: "individuals demand and savings deposits"; "enterprises funds".

SOURCE: NARODOWY BANK POLSKI, Monthly Information Bulletin, various issues; authors' calculations.

With the introduction of the limited internal convertibility in 1990 the substitutability among the domestic and foreign components of money supply will have been strengthened. Legalizing the black foreign exchange markets and establishing a uniformed exchange rate has deprived Western currencies to some extent of their beneficial "exclusivity" and, furthermore, has lowered the transaction costs of both foreign currency purchases (for example, by abolishing the illegality of private foreign currency trade and holdings) and sales (as there is now internal convertibility, the zloty is in part freed of its character as a "mousetrap" currency). It can be expected that the portfolio behavior of Polish asset holders will in future react more strongly to changes in the level and risk of (pecuniary) yields of different fmancial assets, since a large part of the institutional restrictions on the usability of both the zloty and Western currencies have been abolished or at least eased. This tends to improve the monetary authorities' ability to control the money supply, as its foreign currency component will probably be more calculable concerning the supply side and more easily influenced through monetary policy instruments (such as interest rates, obligatory reserve ratios, exchange rate adjustments, foreign exchange interventions etc.) as regards the demand side.

113

If Poland intends to "remonetize" its economy, i.e., to increase both the absolute and the relative amount of transactions settled in domestic currency, it has to improve the money quality of the zloty relative to the quality of parallel foreign currencies in order to activate "Anti-Gresham's-Law". Flexible exchange rates assumed, "good" money drives out "bad" money (KOSTRZEWA, 1989, p. 184). In order to make the zloty more attractive than foreign currencies and thus drive the dollar out, Polish monetary authorities abolished, as mentioned above, some of the institutional restrictions in the use of the zloty, which still has the important comparative advantage of being Poland's legal tender. However, it is also necessary to stabilize the purchasing power of the zloty so as to make sure that zloty­denominated deposits bear a interest rate higher than the rate of return on foreign exchange accounts, which consists of their nominal interest and the expected rate of appreciation of foreign currency.

But this last requirement highlights the importance of the inflation problem. On the one hand, high and variable rates of inflation require a high nominal interest rate, which includes a risk premium so that the asset holder can expect a positive real rate of interest. The level of the risk premium, however, depends on both the degree of uncertainty about the asset yield and the risk aversion of individuals. On the other hand, high nominal interest rates on bank deposits interfere with the profitability of banks, as their asset side earns low profits. This problem may be aggravated by the fact that continued high inflation will force devaluations of the zloty against Western currencies, which increase the value of foreign exchange accounts measured in domestic currency and, hence, the value of banks' liabilities without creating any profitable items on the asset side 10. Furthermore, from a macroeco­nomic perspective devaluation leads to an increase in the zloty-value of the overall quantity of money (domestic plus foreign components). This monetary expansion creates an additional inflation potential which could result in a "vicious circle" in the form of a self­sustaining inflationary spiral unfavorable not only to banks. It is also for this reason that monetary policy should - as a priority task in the initial stages of systemic transformation -focus on curbing inflation and breaking the inflationary mentality of the Polish population as quickly as possible.

4. A TRANSITIONAL STRATEGY FOR MONETARY POLICY

The stabilization and liberalization program of the new government which came into office in September 1989 started with the implementation of a reform policy package on 1 January 1990. The program was aimed at creating the foundation for a successful "leap to the market" via reducing aggregate demand and adjusting and stabilizing the price level11•

The threat of fmancial collapse due to the impending hyperinflation could have been averted at the end of 1989 (the monthly inflation rate in October 1989 was 55 %, which

10

11

The revaluation of foreign exchange accounts held with commercial banks effects an extension of banks' balance sheet. On the asset side the devaluation of the domestic currency will be reflected in an increase of a valuation adjustment item which tends to reduce the balance-sheet profit of banks.

For a detailed description and discussion of the stabilization and liberalization program see LIPTON/SACHS, 1990, pp. 112-119.

114

amounts to a rate of about 20,000 % on a yearly basis! See exhibit 1). To secure this tendency toward monetary stability the authorities then had to create the monetary condi­tions for a lasting improvement of economic development in Poland.

EXHIBIT 1: Monthly Rates of InDation for Poland, 1989/1 -1991/4 (Growth Rates of Consumer Price Index, Previous Month = 100, 1 = 100 %)

0.8lr-~--~--~----~~~~~~~ .~~~~--~~~~~~~.-,

0.71·············_ 0.61········ .. ··· __ _ 0.:5 r ........ .

---#-........................ ---

0.4._ ..... _. __ _ -{-I---+ ........................ _--

0.3 ............ __ _ -r--tl+-........................ _--

0.2 ..... _ .. ___ . -~+ ........................ ---

--··················1 ~ --- ...............•.. ~ I ~

--_······ .. ··········i ~ ! ! ................. ~

-~~~I i

0.11, ......... ·················l

~ ~

o~............. . ................. ~

1 I -0.1~. ......... I .......................... . ........................ -...---......................... . ................ ~ ! ! ! :, -0. 2 r~w~ .. ....,...~,~,~...,. ....... w"m.~~ .. ~~~-.-, ...... w ••••• wN.".,.m' .. .w'N.",~, .. , .... -w-w ... l~ ..... ~=.:" .... =~ .. ~...,............V=': • .wh .. W~~

1989 1990 1991

SOURCE: IMF, International Financial Statistics, various issues; authors' calculations.

To achieve this goal it was necessary to reduce the presumed monetary overhang and to continue fighting against open inflation. From the various possible methods of absorbing the monetary overhang (see FUCHS, 1989, pp. 340-343) the Polish government chose price reform, with which the zloty-denominated real balances should have been reduced to equilibrium level through a one-time price adjustment (''one-time corrective inflation", LIPTON/SACHS, 1990, p. 113). Price liberalization and an increase of the remaining administered prices at the beginning of 1990 caused a significant "price jump" which, due to its one-time character, must not be considered as inflation according to the prevailing Western inflation theory (CASSEL, 1990, p. 2)12. Furthermore, money demand (broadly defined) should have been increased, which would have absorbed some of the monetary overhang due to decline in the velocity of money circulation. This, again, is to be achieved through an improvement of the money quality of the zloty - e.g. by granting positive real

12 The enormous price increase in January 1990, with a rate of almost 80 %, already dropped in the immediately following month. See exhibit 1.

115

interest rates on bank deposits, reducing open inflation and introduction of partial conver­tibility - thus giving incentives to either hold money or to transform it into near-monies, but not to sell it on the commodity markets. Notably shifts from money into near-monies would tend to mitigate inflationary pressure, since only actual media of exchange can ''bum holes in pockets" (YEAGER, 1968, p. 47).

At the same time the monetary authorities had to design a strategy for monetary policy that is credible in the eyes of the public and capable of effectively fighting against current and future inflation. A monetary policy strategy can be defined as a system of consistent relations among monetary policy instruments, indicators, target variables and goal variables (KATH, 1990, p. 212). Due to the high uncertainty about the monetary transmission mechanism caused by economic reform, the Polish government preferred a strategy in which the dollar exchange rate would serve as both the target variable and the nominal anchor of the Polish currency13.

Together with the introduction of internal convertibility on 1 January 1990, the official dollar exchange rate was sharply devalued and fixed at the level of Z1 9,500 per dollar (from Z16,SOO per dollar). This measure was prepared by successive devaluations of the official exchange rate so as to come nearer to levels prevailing on the parallel exchange rate markets (LIPTON/SACHS, 1990, pp. 110, 113). There is reason to believe that the level at which the official exchange rate was fixed was chosen appropriately, as there have been only slight differences between the official and the parallel exchange rate since then and as these did not cause foreign reserve losses to the NBP. On the contrary, foreign reserves of the NBP increased from $ 2,537 mill. in December 1989 up to $ 8,061 mill. in December 1990. The exchange rate of ZI9,500 could have been maintained until May 1991, i.e., for almost 16 months. Because inflation in Poland is still high compared with Western economies, a further devaluation of the zloty to Zl 11,100 was regarded as necessary (FRANKFURTER ALLGEMEINE ZEITUNG, 1991) in order to avoid a real overvalua­tion of the zlo~ and a further decline of foreign reserves (which had fallen by April 1991 to $ 6,576 mill.)14.

The choice of the exchange rate as target variable (in "agreement" with the IMF) can. be judged a positive measure of Poland's monetary authorities since it endowed monetary policy with a particularly high degree of credibility in the eyes of the public. The theoretical literature defmes "credibility" as "( ... ) the extent to which the public believes that a shift in policy has taken place when, indeed, such a shift has actually occured" (CUKIERMAN, 1986, p. 6). The "Credibility Hypothesis" says that "( ... ) the less credible disinfiationary policies are, the longer and the more severe their interim adverse economic effects will be"

13

14

Hence, the exchange rate is used to formulate the price target according to the elementary currency order (see section 2 above). It promises, at least for the transitional period, to provide the domestic currency units for a much more reliable relationship to domestic as well as foreign bundles of commodities compared with, for example, goals for the consumer price index combined with monetary growth targets.

Figures of foreign reserves are from: NBP (l990c; 1991), Statistical Annex.

116

(CUKIERMAN, 1986, p. 5). This is so because inflationary expectations - which have a decisive influence on the development of wages and interest rates and hence on employment and real economic growth - decrease only to the extent of the credibility with which monetary policy intentions are perceived by the public. It can be assumed that under the conditions of systemic transformation the credibility of an exchange rate target is higher than, for example, the credibility of monetary growth targets, since it is easier to understand, more highly appreciated and better controllable by the money users. Polish economic units got accustomed to using the "market" exchange rate (at present the official as well as the parallel exchange rate, formerly only the black market exchange rate) as a reliable indicator of the real scarcity of domestic currency (cf. WINGENDER, 1989). Additionally, stabilizing the exchange rate improves the capability of the monetary authorities to control the overall money supply in zloty values and, moreover, increases the relative money quality of domestic currency by probably reducing the expected rate of depreciation of the zloty.

The Polish government intends to support this monetary policy strategy by cutting and restricting state budget deficits, by measures of incomes policy (e.g. imposition of taxes on nominal wage growth above certain limits to be paid by enterprises) and, of course, by controlling money and credit supply.

No doubt, stabilizing monthly inflation on mostly one-digit rates since the beginning of 1990 is to be judged a partial success of stabilization policy (see Exhibit 1). Nevertheless, inflationary momentum within the Polish economy is still strong on a yearly basis and, hence, prevents opportunities for expansionary monetary-policy experiments (even the inflation goal for 1991, already corrected from 35 % to 90 %, can hardly be achieved if the current trend of inflation remains unchanged). However, figures in Table 1 suggest that the Polish monetary authorities have obviously succeeded in improving the relativ money quality of the zloty, since the ratio of domestic currency to broad money has increased from an initial 27.5 % in December 1989 to 76.9 % in April 1991.

5. CONCLUSIONS

It should be understood that monetary policy has to play an important role for a successful transformation of the Polish economic system. Due to the simultaneous and inconsistent use of money as both a passive instrument of accounting and control and as an active means so as to stimulate individuals to increased economic efforts, the socialist economic policy left a disastrous monetary disorder. The malfunctioning of the monetary sector judged from the perspective of both a centrally planned economy and a market economy increased, on the one hand, the reform pressure but, on the other hand, represented at the same time an important obstacle to a successful systemic transformation because of the low quality of the zloty and lacking monetary institutions.

To improve the money quality of the zloty as expeditiously as possible is imperative in order to spur decentrally-planned exchange transactions which are responsible for increases in economic growth and economic welfare. Therefore, monetary authorities have to extend the usability of the zloty, which requires monetary reforms and liberalization as well as disinflationary measures.

117

Above all a restructuring of the banking system being the source of money supply is necessary. It has to discard its former character as a "self-service store" for the state and enterprises and has, moreover, to be enabled and induced to impose "hard budget constraints" on the real sector.

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SOCIAL POLICY IN POLAND!

Christel Naujoks and Piotr Bledowski

Abstract: The dramatic change of Poland's general economic and social setting is calling for the need for a new definition of the position of its social policy still fixed in ancient structures. This article, therefore, concentrates on some of the approaches possible to solve the new social problems resulting from this change of system. First, some of the deflnitions and functions of social policy are pointed out and are then extended by the description of some pillars of the social security system in socialism. By comparing the old system still in existence with the new social problems, affecting certain groups of the population differently, the goals of social policy to be based on the fundamental principles of insurance, provision and care have to be dermed in a new way. In view of the changing socioeconomic framework, the role of the state in social policy and the resulting consequences are considered and analysed. Furthermore, fIrst steps which Poland has already taken to alleviate unemployment, the problems of pensions, poverty and other crucial problems to improve the social policy umbrella are described.

Zusammenfassung: Der dramatische Wandel in den wirtschaftlichen und gesellschaftlichen Rahmenbedingungen Polens macht eine neue Standortbestimmung der noch iiberwiegend in den alten Systemstrukturen verhafteten Sozialpolitik dringend notwendig. In diesem Beitrag sollen daher Ansatze zur LOsung der neuen sozialen Probleme, die aus dem Systemumbruch resultieren, formuliert werden. Zuerst werden einige Deflnitionen und Funktionen der Sozialpolitik im Sozialismus, ergiinzt durch die Darstellung einiger "Saulen" des Sozialsicherungssystems, skizziert. Aus der Gegeniiberstellung dieses (noch) alten Systems mit den neuen sozialen Problemen, die verschiedene Bevolkerungsgruppen unterschiedlich stark treffen, miissen die Ziele der Sozialpolitik auf der Basis des Versicherungs-, Versorgungs- und Fiirsorgeprinzips neu definiert werden. Angesichts der geanderten sozio-okonomischen Rahmenbedingungen werden in diesem Beitrag auch Konsequenzen hinsichtlich der Rolle des Staates als Trager der Sozialpolitik gezogen. Erste Schritte Polens zur Beseitigung der Arbeitslosigkeit, des Rentenproblems, der Armut und anderen auBerst wichtigen Problemen dienen dazu, den sozialpolitischen "Schirm" zu verbessem.

Streszczenie: Dramatyczne przeksztalcenia systemu ekonomicznego i spolecznego w Polsce wymagaja nowego zdefiniowania polityki socjalnej, ktora jest nadal zakorzeniona w starym systemie. Opracowanie to probuje wyjasnic pierwsze kroki na drodze rozwiazania nowych socjalnych problemow, wywodzacych sie z przeksztalcen systemowych. Wpierw zostaja zarysowane niektore definicje i funkcje polityki socjalnej w socjalizmie, nastepnie zostaja ukazane "podpory" systemu zabezpieczenia spolecznego. Na podstawie tego przeciwstawienia Geszcze) starego systemu i nowego systemu socjalnego, ktory rozne grupy spoleczne roznie traktuje, nalezy wypracowac cele polityki socjalnej na podstawie zasady ubezpieczenia, zabezpieczenia i opieki. Biorac pod uwage zmiany systemu socjo-

1 We would like to thank Hans-Joachim Paffenholz und Vera Apel for their helpful advice.

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ekonomicznego zostaje w tym opracowaniu uwzgleniona rola panstwa, jako nosiciela polityki socjalnej. Pierwsze polskie kroki w kierunku zmniejszenia stopy bezrobocia, poprawy sytuacji rentowej i innych bardzo waznych problemow sluza poprawie socjalno­polityczenj sieci zabezpieczenia.

1. INTRODUCTION

'The Old does not work and the New does not work either." This term excellently summarizes the experience of socialist economic reforms. Take e.g. the picture of a pendulum: The pendulum in stationary condition signifies the traditional centrally-planned economy. The pendulum regularly moves between two points without any change. As a result no more efficient and forward-looking alternative is considered. Sooner or later the pendulum swings in the other direction without falling back to the starting point and trying to fmd a new way. Reformers formerly restricted themselves to careful changes to the basic model. The current economic program, the first of such importance, is set to become the economic and social cornerstone of Poland's revival after years of stagnation.

The need for a social policy arises, firstly, from considerations of social justice, such as the protection of the employment and living conditions of the dependent labor force and, secondly, from a just distribution of social products between social classes. A further need for a social policy derives from the economic interests of the state. The development of unfair competition between different branches as a result of different socioeconomic and fmancial-economic policies must be avoided.

A description of Polish social policy in the beginning of the nineties completed by an additional illustration of new ideas and laws might become obsolete when this paper starts to be printed. As the Polish system is on the way to market economy a lot of social . problems become obvious now and turn to focal points of interest such as (SCHWEITZER, 1990, p. 6):

How can individuals be motivated to leave their low paid, unproductive jobs which guarantee an employment for life in order to change to more productive potentially better paid but uncertain jobs in a market economy? How can weak social groups such as pensioners, unemployed, single parents and children be offered protection against the social costs of change of system? How can health service and education be improved when budget deficits and inflation threaten the poor financial resources which are available for the social sector?

As a result many painful and slow adaptations are still to come. This is true with regard to the establishment of social institutions which offer benefits and services, as well as to the mentality of the government. The timing is, no doubt, unfortunate because the effects of the present economic crisis are being most sharply felt. During the current process of transition, a lot of shortcomings of Polish social policy have come to light which impede the achievement of reforms. However, we should not discuss problems of current social policy without having broached the subject of social policy as it was seen before the political change in 1989.

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2. POLISH SOCIAL POLICY: TREATED AS THE "CINDERELLA" IN THE ECONOMIC SYSTEM UNTIL 19891

2.1 DEFINITIONS OF POLISH SOCIAL POLICY

The term social policy is not clearly defined in Polish literature, although a social policy for its own sake came about more clearly in the early seventies.

It becomes apparent that the discussion about an adequate definition of social policy seems to be dependent on changing political situations so that the term was permanently adapted to the cbanging social conditions. In Polish literature the term of social policy is ambiguous because there the authors make a difference between a restricted and an extended definition (HASL, 1985, pp. 59f. and PETERHOFF, 1991, p. 355):

Regarding the restricted definition the term social policy means ''polityka socjalna" which sets forth the politics of social security and health services covering all causes of want: unemployment, sickness, disability, maternity, old age and death.

The sense of the extended definition is ''polityka spoleczna" (society policy) which signifies the whole field of social development so that the frame of social policy is extended: With regard to the system of values of Marxist ideology "social justice" becomes an objective of the economic system. It is the economic system which is an instrument for the conscious development of ''social progress" as it was formulated by the Polish United Workers' Party (Polslca Zjednoczona Partia Robotnicza/PZPR). The PZPR was the only institution that determined and controlled socio-political objectives and instruments. With reference to the extended definition social policy becomes an ideological problem as the empty terms ''social justice" and "social progress" indicate.

The most common definition in Polish literature has been introduced by SZUBERT (RAJKIEWICZ, 1979, p. 30) who defines social policy as the "effective influence of government, the trade unions and other organizations that provide the necessary social conditions, in order to strive for the improvement of living and working conditions and the elimination of social inequalities." Other authors additionally stress that the needs being fulfilled by social policy are derived from the so-called "social fundamental rights of the Polish constitution". Examples are the right to health care, the right to education and labor, etc. (HASL, 1985, pp. 73ff.)

Referring to functional aspects, social policy becomes part of the general economic politics, which means that efficient social policy increases economic productivity and as a result leads to higher efficiency of the economy. This signifies too, that economic objectives become part of the definition of social policy which was initially demanded to be overcome (HASL, 1985, p. 61). The fact seems to remain however, that the ways and means by which the economic objectives were expected to be achieved were clearly specified, while those related to social goals were loosely defined. Indeed, no guidance was given on a precise understanding of the vague definition concerning the question how the living and working conditions could be harmonized in the reality of life.

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2.2 DIFFERENT FUNCTIONS OF POLISH AND WESTERN SOCIAL POLICY

In socialist economies the function of social policy is completely different from that of western economies. It intends to be an instrument to bring the socialist way of life into reality. It puts high emphasis on the realization of social justice and the reduction of social differences between classes and nationalities so that ex-post "redistribution" becomes superfluous. Socialist government is obliged to provide the maintenance of welfare, which means that self-responsibility is neither expected nor wished because this would reduce the initiative of the overall responsible government to make arrangements.

In western economies social policy outlines a "contrast program" to the market sector: While markets only consider economic indicators as profits and performance, social policy aims to serve benefits if necessary. Social policy wants to create security when market processes lead to undesirable or even unbearable oscillations of the economic situation (HELBERGER, 1988, p. 382 and KATH, 1981, p. 405). As a result, socialist social policy is considered as ex-ante policy because of the ex-ante character of the model of socialist systems. The result of markets is ex-post and as a consequence social policy is ex-post, too (HASL, 1985, pp. 2f.).

2.3 SOME OBSERVATIONS ON THE DEVEWPMENT OF THE POLISH SOCIAL SECURI1Y SYSTEM

After World War II the Polish government started with the reestablishment of social security in which it followed the German-Austrian example (MUSZALSKI, 1984, p. 42). This development stopped after Poland became a socialist republic. The social security system implemented during the fifties has existed unchanged until today .

. The use of a restricted and an extended definition as well as the blurred differentiation between social and economic policy produce the question of the dimension of social policy, e.g. which fields of activities are of socio-political nature? As to the notion of social policy, this may be said to cover a wide range of areas such as labor, social security, health and environment.

Social security stands for the "classical" tasks of social policy and can be brought into line with the restricted definition: polityka socjalna. More specifically (RAJKIEWICZ, 1979, p. 433) this means that social security is characterized as the totality of measures which the government makes use of to protect individuals from getting into trouble, although they do not deserve to be blamed. It is the guarantee of lawful right for all individuals (employees and their family members) to receive benefits. This also means that the state as the chief supporter, monopolizes the socio-political tasks.

The total system of Polish social security comprises six elements (RAJKIEWICZ, 1979, pp. 434f. and HASL, 1985, pp. 99ff.):

1. Social insurance: The social insurance system for its own sake distinguishes between three elements: First, the "classical" social security system which provides most individuals with benefits because of illness, disability and labor accidents, maternity, old age and death. Social

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insurance is said to be the heart of the social security system. It describes the system of benefits bound to the characteristic of "labor" which are guaranteed by law. That means that only the working part of the population (most employees and their family members) is provided with benefits. With the end of the employment-relation, insurance also stops (HASL, 1985, p. 170). Second, since 1978 private farmers have been eligible for benefits. Third, an alimentation fund was established. All these benefits out of this fund are administered by the Social Security Institution (Zaklad Ubezpieczen Spolecznych -ZUS) which is subordinated to the Minister of Labor, Wages and Social Affairs.

2. Voluntary accident and property insurance is part social security, too. It is administered by the State Insurance Institution (Panstwowe Zaklad Ubezpieczen - PZU). This kind of implication is due to the approach of RAJKIEWICZ (HASL, 1985, p. 1(0).

3. Additional social benefits are granted to special groups of the population such as e.g. scholarships for persons who serve an apprenticeship; all benefits for such people are paid by the trade unions.

4. Health care involves medical and hospital care, rescue service and medical prevention and is completely fmanced by the national budget.

5. Rehabilitation comprises the reintegration of disabled persons into society by measures of medical and professional rehabilitation. Pensions are not integrated here.

6. Public care provides for services and benefits when individuals are not entitled to get other benefits or when the subsistence level is not guaranteed. It is additionally supported by the church and non- or half-state organizations.

The last three subjects are administered by the Minister of Health and Public Care.

The centralized social security system has been administered by the Social Security Institution (ZUS) and its regional offices which are subordinated to the Minister of Labor, Wages and Social Affairs (PETERHOFF, 1991, p. 356). The ZUS does not have any financial autonomy; its budget is part of the national budget. Since 1945 insurance premiums have been paid exclusively by the employers as part of the wages fund. This is valid for state and private enterprises as well as for the members of the RSP. Concerning the remaining groups (farmers, manual workers, self-employed persons, artists etc.) the insured person is partly burdened with insurance contributions (HASL, 1985, p. 216).

The total financial volume of benefits as well as the expenditures for "social consumption" (polityka spoleczna) are paid from the "social consumption fund" (spoleczny fundusz spozycia) (HASL, 1985, pp. 338ff. and PETERHOFF, 1991, p. 357) which is part of the national budget. The government's contributions as well as the premiums that come from the insured individuals are collected in different social security funds: During the sixties a first special pension fund was established for private manual workers. In 1968 (IA W 1, 1968 and IA W 2, 1968) the general pension fund was implemented which exists until today. Ten years later in 1978 a pension fund for private farmers was called forth. The level of pensions depended on the personal income. As the basis of calculation of pensions changed in time and no valorization schemes were implemented, significant differences in levels of pensions occurred. As a result pensions of the "old porte!euille" and pensions of the "new portefeuille" developed (HASL, 1985, pp. 232f. and IA W 3, 1982). The enumeration of different funds may show that equal treatment of individuals was not possible on this basis because some funds could realize surpluses, others were more deeply integrated into the

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national budget etc. The contributions imposed as a flXed percentage on the total wage fund that came from the state enterprises and social organizations were different (LAW 4, 1983): in state industry 15%, in private trade and private middle classes industry 16-23%, in private middle class trade 30% (PETERHOFF, 1991, p. 357). These differences make the significance of equality questionable. Possibilities for individual additional provisions were not integrated in the state insurance system.

TABLE 1: List of benefits which the main groups of insured persons are entitled to receive

Benefits Social Insurance of

empl. RSP man farm

sickness benefit + + after thirty days

attendance allowance + + + +

educational benefit + +

compensatory benefit +

rehabilitation + + +

child allowance + + + +

. maternity + + + +

funeral benefit + + + +

pensions + + + +

early retirement +

disability pensions + + limited

widows' pension + + + +

orphan pension + + + +

SOURCE: MUSZALSKI, 1987, p. 44 and own supplements.

The above-mentioned 1968 reform of the pensions gave the impulse to establish the social security system in its current form and content. Since then, more and more individuals have been eligible for benefits. In 1985 approximately 99.7% of the total population had access

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to benefits (ZUS, 1987, Table III The reason for this development is that step by step the members of cooperative associations for agricultural production (in Polish RSP), manual workers, self-employed persons as well as private farmers were integrated into the social security system. This integration of large parts of the population into social insurance can be explained by political and economic reasons such as granting privileges to some socially­important groups (HASL, 1985, p. 213 and pp. 247ff.). The integration of private farmers into the system of social security was based on economic reasons because the government wanted to increase the efficiency in agricultural production (HASL, 1985, p. 23 and LAW 7, 1991). These developments make understandable why only 0.1% of the total population is not given a right to social security benefits. Table 1 gives a survey of all benefits which employees (empl.), RSP-members, manual workers (man) and farmers (farm) are entitled to receive.

The sequence of the preceding ideas shows that social policy has been, until recently, very limited. With regard to international comparisons most industrialized and economically efficient economies are able to support functioning social security systems. There is a positive correlation between the economic performance level and its part in the gross national product. The economic superiority of market economy systems in contrast to socialist economic systems has already been proved empirically (LAMPERT, 1990, pp.29 and 49).

3. ON A THEORY OF SOCIAL POLICY

3.1 FORMAL PRINCIPLES

As illness, disability, old age, maternity, unemployment could cause major problems in the living conditions of the individual it is vital to make provisions against such risks ever occurring. Soc;ety can organize such provision in two ways: First, by making individual provisions, in theory also known as the "individual principle" or second, by making collective provisions, known as the "social principle". With regard to the "individual principle" each person should be free to create his own living and working conditions, i.e. being responsible himself for the kind of life he wishes to provide for. He can do this by saving or, better still, by taking out insurance(s) because savings do not fully operate on the basis of covering risks (insurance principle). Regarding large scale unemployment, however, the insurance principle does not work which means that making individual provisions does not work either. If the "individual principle" fails, the state becomes responsible for taking care of the individual. This is the case when risks cannot be insured or when the individual shows only little willingness and interest in taking individual precautions (KATH, 1981, pp. 428ff.).

The formal principles of a system of a state social security such as insurance, provision and care (KATH, 1981, pp. 43lf. and WINTERSTEIN, 1980, pp. 9ff.) will be shortly illustrated here:

2 Thinking of 1945 only 25.4 % of the whole population (employees and their family members) received benefits.

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Insurance principle is created as a "do-ut-des"-principle which means that the insured persons form insurance communities which are threatened by similar risks. In case of the loss the insurance community covers the effects by granting fmancial benefits. Each individual that belongs to this community has to pay insurance premiums. The amount of these contributions is dependent on the risk that is connected with every member that joins this community. Provision principle entitles individuals to receive benefits from the state without having paid any contributions before. Supported persons are passive recipients of state benefits which are fmanced by the national budget. This means that every member of society is burdened with taxes to finance these benefits. Care principle is concerned with the individual needs of persons. The extent of helping is only concentrated on the individual. The recipient of public assistance receives benefits because of his individual emergency without having paid any contributions or taxes in the past.

These principles, which usually occur as a combination, are expected to minimize the suffering of individuals from various misfortunes in life that are caused by material and non-material needs. The principles are based on different ideological concepts. Until the beginning of this century, care was a conservative Christian principle which was connected with the liberal insurance principle. Both principles have to be regarded in contrast to the provision principle, which was initially developed by socialist theorists (v. BEYME, 1977, pp. 45f.). With regard to socialist theory, the liberal insurance principle as well as the conservative care principle might be considered as alien elements because of their theoretical sources in the German socio-political activities. Nevertheless, the insurance and care principles were adapted to the socialist order, though in a different way: As to the insurance principle, benefits are guaranteed by the state in case of the loss. This means that the insurance principle in its traditional meaning was frozen because it now comes nearer to the provision principle which is quite dominant in a centrally-planned economy. As a result, membership rates and calculation basis have been kept constant for years. The care principle was strongly neglected. Often individuals were not entitled to receive benefits which means that the level and the duration of public assistance was dependent on the good will of the appropriate authorities. Thus little importance was attached to individual emergencies. The reasons were of an ideological nature because individual emergency and poverty were taken as non-existent in socialist economy (v. BEYME, 1977, pp. 52ff.).

All the three principles prove that persons are only entitled to receive benefits when they have been employed for a certain time. This opens a wide field for arbitrary decisions whom should be granted benefits or not. As a consequence, Polish social policy is not based on the "Finalitatsprinzip" (the decisive factor for receiving benefits is the special situation of the person but not the cause of emergency) but on the principle of causation (HASL, 1985, p. 157). In this context it should be added that the predominant theoretical approach of Polish social policy is known as the "need orientated approach" (bediifnisorientierter Ansatz) which was first developed by SZUBERT (HASL, 1985, p. 62). It becomes obvious that theory contrasts sharply with reality.

The principles that are concerned with the interior structure of society are "Solidaritat" (solidarity) and "Subsidiaritat" (WINTERSTEIN, 1980, pp. 16ff.). In future the "Solidaritatsprinzip" will gain in importance because of urgent problems of the social

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security system. The term of "solidarity" symbolizes the principle "all for one and one for all" and is reflected in the principle of insurance and provision. In contrast to private insurance, contributions and benefits of social insurance need not to be the same for each person insured, but have to be sufficiently high for financing the totality of benefits (Solidarausgleich). According to the "Subsidiaritatsprinzip" an individual is only entitled to receive benefits (public assistance) from the community in case of individual need which means that he is not able to make provisions on his own. Establishing a new concept of social policy for Poland means to defme its principles anew.

3.2 THE ROLE OF THE STATE IN SOCIAL POLICY

3.2.1 NECESSI1Y OF A STATE SOCIAL POLICY

In the real world, markets usually fail to achieve social efficiency. Part of the problem is the lack of perfect competition, part is the existence of externalities and the fact that markets may take a long time to adjust to any disequilibrium because of immobility of factors. Markets may also not work because they fail to achieve objectives such as greater income equality, full employment and stable prices.

State regulations aim to alleviate and abolish the uncertainty of special life risks which the members of a society have to suffer from in the course of their lives (ROLF/SPAHNjWAGNER, 1988, p. 14). This necessity of a state social policy can be justified by the different needs of the population (LAMPERT, 1990, pp. 22ff.):

At first a penn anent basic need of parts of the society can be pointed out which is independent of time, environment and economic system because every social community includes a number of people that are unable to satisfy their basic needs on their own on account of mental, physical or psychological weakness (SCHONFELDER, 1987, p. 21). Secondly a need is worth mentioning that is caused by development. Economic development and the restructuring of industry give the reason for individual and social impairment of living conditions. The possibilities to make a life for oneself to protect against potential risks are reduced thinking of the consequences of unprepared unemployment or the sudden necessity of social and regional mobility. Third one may reflect on a need caused by distribution. Socia-political need could arise from inequality of income and wealth distribution as well as from spatial distribution of economic resources and infrastructures (transportation facilities, communication possibilities, equipment with kindergarten, schools, hospitals, advice centers etc.). Fourth Poland is confronted with a "created" need because it tries to take the socio­political aims and systems of western economies as an example.

The necessity of state social policy is not only deduced from those needs or the existence of risks which individuals are not able to cope with on the basis of their own economic and mental force. It can be shown by an additional argument that non-state or private measures often tum out not to be successful (LAMPERT, 1990, p. 26). 'Trouver une fonne d'association qui defende et protege de toute la force commune la personne et les biens de chaque associe, e par laquel/e chacun, s'unissant a tous, n'obeisse poUTtant qu'a lui-meme, et reste aussi libre qu'auparant. Tel est Ie probleme fondamental dont Ie Contrat social donne la

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solution." (Jean-Jacques ROUSSEAU, Du Contrat Social, Chap. VI.) This means that a state develops because of a state contract which is accepted by individuals as the contract guarantees a higher level of satisfaction of one's needs than a stateless alternative (ROLF/SPAHNjWAGNER, 1988, p. 16). However, it is of great importance that the details of the contract are newly determined from time to time because the social, economic and demographic frame, as well as preferences are changing.

The general equilibrium model of W ALRAS puts the accent on the individual, too. Flexibility of the price system leads to equilibrium on goods and factor markets. Under the conditions of perfect markets the so-called "Pareto-criterion" says that general welfare can be increased if changes in production or consumption can make at least one person better off without making anyone worse off. If any additional changes in the economy benefit some people only by making others worse off - the economy is said to be socially efficient, or Pareto optimal. Pareto optimality, however, is a weak test of social welfare, since it ignores the question of the possible fairest distribution of income or e.g. supposes standardized utility functions, etc. However, it is a necessary condition for an ideal allocation of resources, but it is not so sufficient that one would consider state intervention desirable when Pareto optimality is not achieved by other measures (SCHONFELDER, 1987, p. 18).

3.2.2 ECONOMIC FEATURES WHICH DETERMINE THE NECESSI1Y OF A STATE SOCIAL POLICY

A modern economical approach for a reasonable state interference in market paradigm lies in the analysis of market failure by holding to the Pareto-criterion. As to social policy the following facts are of special interest:

(i) Public goods: This is a category of goods that the free market will underproduce or may not produce at all. These are goods which when consumed by one person can still be consumed by other people .. Once public goods are provided, it is not possible to exclude people from using them. This feature of non-excludability is known as the free-rider­problem. Indeed, social security offers a considerable part of benefits which cannot be individually attributed to, although they offer advantages to all persons. A comprehensive theory of social policy should take this aspect into consideration in spite of the fact that it would become difficult to determine the exact part of public goods in the system of social security (ROLF/SPAHNjWAGNER, 1988, p. 22).

(ii) Merit goods: When the state feels that it knows better than individuals about what items are good for them and even though they underconsume them, such goods are named "merit goods" which the state could either provide freely or subsidize their production. This entails the question whether "security against risks of life" could be submitted to merit goods. Thinking of developed industrialized economies with a strong insurance branch the social optimum of provision seems to be fulfilled. However, it is uncertain whether for all life risks private insurances could be established. This is the case when a one-sided concentration of negative risks is to be expected which means that the price for insurance would excessively, and for this reason deterrently, increase. Damages which ought to be prevented cannot be calculated in their probability. The most important example is economic depression which could entail long-term unemployment for individuals which

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they are not able to cope with for a longer time: state intervention is desirable here. Positive external benefits which are connected with the abolition of risk exceed the costs of intervention. Today Polish private insurance companies may hesitate to establish themselves because of high risks which are strongly connected with high and still increasing unemployment rates. A second reason for state interference might be the correction of inappropriate individual preferences in order to shelter society from preventable burden. This means that individuals neglect to take precautions and to make provisions because the weight of future need is underestimated or it is expected that in case of need, society will help with financial benefits. All production of merit goods involves the danger of a reduction of the personal freedom of decision making (MOLITOR, 1987, pp. 6ff.).

(iii) Externalities: Production and utility functions are not independent of each other so that externalities can be defined as additional costs or benefits of production or consumption experienced by society but not fully accounted by the producers or consumers themselves. The Pareto-optimum is not achieved when social and private welfare are dividing up when the production of insurance benefits leads to external benefits of non­insured persons. Private insurance institutions could not charge for these benefits. By means of collective arrangements, advantages could be realized which would not be available without state interference (ROLF/SPAHNjWAGNER, 1988, p. 22).

(iv) Inefficiencies caused by imposing taxes and premiums: If the state is forced to raise taxes and premiums in order to finance social security this affects the marginal conditions whose fulftllment is demanded for the existence of the Pareto-optimum. The result are welfare losses, first for individuals who suffer from the loss of purchasing power, second because of substitution effects in the form of additional and excess burden. As a result the volume of taxes and contributions should be imposed in a way that the excess burden is as low as possible (ROLF/SPAHNjWAGNER, 1988, p. 30).

(v) The treatment of risk and uncertainty in case of imperfect information: Modem economic approaches concerning insurance presuppose that we live in an insecure world caused by ignorance. The Pareto-criterion could be realized by a competitive price system in an uncertain world if conditions of special requirements were taken into account. These "contingency markets" are seldom to be found in reality which is caused by high information and transaction costs. Further, information is distributed asymmetrically which means that the consumer of insurance performance has a higher information level about probabilities connected with special conditions than insurance companies and vice versa. The market could fail then because of moral hazard (overtaxing) and because of a concentration of too high risks. Following the choice theory there are strong arguments for the establishment of institutions which supply goods and services estimated at a flat rate because of an insecure environment with positive information and transaction costs. The provision of these goods and services is mostly fmanced by compulsory state levies. In this way disadvantages are corrected by compulsory institutions which arise because of unequal income and wealth distribution as well as imperfect markets. Otherwise there is the possibility to prosecute a risk-management because compulsory insurances with their services estimated at a flat rate save information and transaction costs. This could mean that a compulsory insurance is of great advantage. However, the standard insurance completely organized by the state with its compulsory membership (as in socialism) is excluded. Risk-management means that there are no eternal regulations for details but that

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it is necessary to adapt them to new developments. If the feature of risk-management as a basis for social security is chosen it must be stressed that in a world of great insecurity - and as a result high information costs - permanent analyses and discussions about instruments and their use are necessary (ROLFjSPAHNjWAGNER, 1988, pp. 23ff.).

3.2.3 THE CONDmONS OF DEVEWPMENT OF A STATE SOCIAL POLICY

An economic principle says that objectives have to be achieved by scarce resources which is also valid for the representatives of social policy. There are three features which determine the necessity and possibilities of a state social policy (LAMPERT, 1990, pp. 30ff.):

The urgency to solve problems: On the one hand this means the urgency to meet the socio-political need in comparison to other social and individual needs. On the other hand it signifies the urgency of various socio-political needs. Thinking of the fundamental economic problem of scarcity the rule for rational behavior is to use resources in a way in which they can provide highest utility which is known as the equi­marginal principle. This states that society will get the highest utility from a given level of financial resources when the utility from the last Zl. spent on each socio-political measure is the same. If a special urgency to solve problems is recognized it corresponds to rational behavior to use a part of available instruments for socio­political measures which exist for all political purposes when social marginal utility of socio-political measures is higher than that of other use. The ability to solve problems expresses the ability to make use of efficient economic inc;truments as e.g. institutions to meet socio-political purposes. This ability is dependent on the level of economic productivity. There is a positive correlation between the "Sozialleistungsquote" which is an instrument to measure the extent of state social policy and the amount of the per capita gross national product of a population. Of course, this does not say anything concerning the quality of social policy. However, social policy has a high impact on the GNP and on economic growth when it improves labor force and its qualitative structure, when it prevents social risks and when it repairs recurring injuries by means of rehabilitation instead of compensating them by monetary measures. The readiness to solve problems: This readiness is original because political representatives discover a wide range of responsibilities as to which way and to what extent social policy is established. Readiness is dependent on the extent of scarcity of goods in the economy. It is more difficult to arrange redistributions the lower the level of economic productivity and growth is. In relatively poor societies the privileged groups suffer deeper from the redistribution of rights, chances, income and wealth than in richer societies. The resistance of the privileged groups manifest the level of the above mentioned readiness. The more intense the identification between the privileged groups and the political leadership is, the lower is the readiness to solve socio-political problems.

Poland is an economy with a low degree of economic efficiency, which means its ability to solve socia-political problems is low, but today it is nevertheless willing to solve them in an attempt to create social peace and economic stability. In socialist Poland the declared superior objective of state social policy was the maximum fulfillment of people's needs. As

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a result the state played the role of the organizer of activities necessary to satisfy needs: All measures were taken to strive for protection against misfortunes such as illness, disability, etc. as well as to provide possibilities for full and rational employment of people able to work. The state centralized local administration and social organizations so that all fields of social life should and could be regulated. The state wanted to prove the justness of its position by giving evidence of the fact that only the state is able to satisfy society's needs.

The above-mentioned ideas put the main emphasis on the role of the state in social policy because western economies' understanding of the state is different, i.e. it is based on democratic principles. The guarantee of adequate insurance contributions, the avoidance of undesirable risk-selection as well as the avoidance of exclusion from receiving generally accepted benefits are tasks of the state, and it is possible to take them as a basis for the establishment of a social security system. The necessity of state intervention in social policy could thus be justified. The limits of a state social policy become important when considering its effects. Even Bismarck asked how far it was possible to go when establishing a system of social security and protection of the employees ''without killing the worker's goose that lays him the golden eggs." (lAMPERT, 1990, p. 58)

4. PROSPECTS FOR A NEW SOCIAL POLICY IN POLAND

Without a real social dimension, Poland's process of transition will lose all its attractiveness for the great majority of the population. However, the politico-economic system of Poland needs the full support of the population. If there is reluctance or even hostility to its activities, it will become impossible to achieve further progress. The economy of the country will return to the stagnation and crisis of the years before. As a result, social policy is less a matter of charity but first of all a political need, which is not an easy subject but requires urgent and continuing discussion.

With respect to the situation of the nineties it might be helpful to think pragmatically: Social policy can only succeed if it meets real needs which currently become apparent as unemployment, redundancy, early retirement and poverty. Socio-political challenges such as the search for answers to decisive questions, e.g. "What are the social problems workers will be confronted with during the next years?" or "Is there sufficient protection in Polish socia-political law to face all possible difficulties?" (see also para 1.) are based on the necessity to adjust administration and management mentality to the conditions of a decentralized market-orientated area (SCHWEITZER, 1990, p. 6).

The economic program of October 1989 (program gospodarczy), enlarged by the stabilization and liberalization program, launched on January 1, 1990, which aims at a contribution to the economic and social progress also comprises a concept of a new social policy which at first view produces little evidence of a well-defmed perspective on social aspects.

The economic program indicates a tendency to a system as illustrated in the restricted definition (see para 2.1). Two levels have to be distinguished:

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1. Short-term stabilization measures should minimize the loss of real income of socially weak groups which is caused by the politics of anti-inflation (COUNCIL OF MINISTERS, 1989, para V. and PETERHOFF, 1991, p. 361):

the Employment Secretary founded an "SOS-Fund" which is sponsored by voluntary aid. Some results become obvious in the organization of "public kitchens" where soups and stews are served free of charge or served at low prices (November 1989: 1.200 Zl.). Beside this, shops that sell cheap clothes were opened; food ration-cards for basic food such as bread and milk were planned to be distributed (this measure was not implemented because of too high costs of printing and distributing) ; benefits for the costs of heating in flats were permitted; pensioners received additional benefits (goal: to bear some relation to average pensions and average wages as in 1988); reorganization of the system of public assistance.

2. Such selected measures to cope with social problems are not enough, but long-term measures (COUNCIL OF MINISTERS, 1989, para V. and PETERHOFF, 1991, p. 362) aim at modernizing and improving the social policy umbrella of Poland:

(i) Reference to unemployment and labor market: The problems to be tackled include the establishment and extension of institutions of the future labor market as a result of a new phenomenon: increased regional and sectorial unemployment in the short and medium term. During the process of transition there will be a restructuring of some branches of industry which means that some of the producers will probably disappear. Restructuring with loss of working places is expected in heavy industry, whereas in the banking and the insurance sectors (generally the service producing sector) where the freedom of delivering services will be implemented, an increase of working places is anticipated. Further, the transition of property forms in industry (see FRANZjSCIDPKEjGROSZEK in this volume) is the reason why a lot of employees will lose or change their jobs much more often than in the period of socialism. More specifically, this means promotion of employment opportunities especially for young people and women (unskilled employees), alleviation of regional disparities, job skills and mobility, protection of new and unusual kinds of work, reorganization of working patterns and working hours to technological adjustment, change and improvement of competitiveness in enterprises of all sorts. To further labor mobility and free access to work a minimum of coordination will be needed.

In the course of the last year the unemployment rate rose consistently. In November 1990 the number of unemployed was 1.2 million people which means an increase of the unemployment rate to 7.7% which is modest in comparison with unemployment rates in western economies (e.g. 19% in Spain in 1988) (SCHWEITZER, 1990, p. 6). As unemployment was regarded as a social crime, measures and institutions to support reallocation of employees and motivation to become more flexible were only developed in a very rudimentary way. Reflections of such kind must lead to some activity because Poland cannot afford to risk deep conflicts with its working classes. First steps are being taken to compensate for unemployment by retraining programs (PETERHOFF, 1991, p. 362).

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One element of a labor market policy is the formation of an unemployment insurance which is new for the previous socialist country. It was in 1947 that several insurance funds were eliminated, so unemployment insurance was cancelled, too, with view to a centrally planned economy which guaranteed employment and supported economic development. Until 1989 financial benefits were paid out of a "retraining-fund" (fundusz aktywizacji zawadowy). The economic program proposed the foundation of a "labor fund" (fundusz pracy) in which all companies are obliged to pay 2-3% of their wage bill. The resources of this fund are used for retraining programs, for implementing unemployment agencies as well as social security measures in the case of mass-redundancy (COUNCIL OF MINISTERS, 1989, para V. and PETERHOFF, 1991, p. 362).

The emergence of unemployment is not the only factor which causes the necessity to reform the labor market. The ancient system of centrally fIXed wages which favoured heavy industry in contrast to light industry and blue-collar workers in contrast to white-collar workers, led to insignificant wage differences and a low degree of productivity. In addition, innovations, increase of productivity as well as scarce qualifications were rewarded quite poorly. Otherwise the danger grows that a fast decentralization is running to wage inflation because there are still many enterprises holding a monopolistic position whereas a slow decentralization could discourage efficient use of labor. As a consequence wage increases were limited to prevent a wage-price spiral by the introduction of punitive taxes on high wage increases (SCHWEITZER, 1990, p. 6).

(ii) Reference to the reform of pensions: Regarding the reform of pensions little has been done until now. During the first six months of the stabilization program in 1990 wages dropped drastically (about 40%), and although wages rose intolerably during the late eighties, the consequence of the economic program has been a decrease of the standard of living, estimated at 30% (SCHWEITZER, 1990, p. 7). The rate is assessed even higher for approximately 6,860,000 persons who received pensions in 1990.

During the last eight years the Polish pension system has been modified at least. twelve times (POLSKA AGENCJA INTERPRESS No. 5/1991). Inflationary monetary policy was the reason for the 50% increase in the cost of living (according to official statements they increased by 25%) from 1981 to 1982. Wage increases counterbalanced price augmentations, whereas pensions were not risen. As a counter measure the pensioners received compensation payments ("rekompensaty') of about 200 Zl. per month. After a further price increase in the beginning of 1982 an additional one-off (payment) "rekompensaty" was granted: 3,000 Zl. to pensions up to 4,500 Zl., 2,000 Zl. were added to pensions between 4,500 and 5,500 Zl. (PETERHOFF, 1991, p. 359). As a consequence an important goal for the future must be the implementation of regular valorization schemes of pensions in relation to the growth of wages. It is being discussed that the lowest pension should not fall below 35% of the per capita income. The method of indexing pensions was first realized in 1987. Since 1988 Poland has succeeded in preserving average pensions on a level of 52% of the average per capita income (GUS, 1989, Tab. 3 (251) and 2 (244)). This is quite a low level because pensions were not adapted to inflation caused by price and wage increases as seen before.

To judge reform measures it is necessary to consider the whole range of economic aspects because connections between the pension system and the economy become evident. Taking

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into account the above description of the situation m the early eighties, the Polish government does not yet seem to have realized the significance of the economic development for the pension system. The development of the labor market is one of the most important determining factors with view to the fmancing of pensions. The demand and supply of labor follows economic laws. The situation in the labor market is reflected by the access to pensions. Thus the economic development has a direct influence on the drawing of one's pensions (KOLB, 1989, p. 32). Moreover, measures have to be taken to regulate the access to pensions because of premature retirement which could be caused e.g. by inability to work. Independent of the way of organizing retirement, this change will also have consequences for the labor market. It is possible to use this instrument consciously to control the labor market (KLANBERG/PRINZ, 1988, p. 421) as it has been practiced in Germany, too. So it is currently proposed to reduce the retirement age of employees in the new "Bundeslander" of Germany.

The fixing of a retirement age-limit influences the labor market as well as the costs of the pension system when retirement pensions are fmanced e.g. by insurance contributions of employers and employees. Moral hazard behavior has become obvious in western pension systems because the actual average retirement age-limit has been unofficially decreased from sixty-five to fifty-eight years when access to early retirement is relatively easy. This could be prevented by making the pension system more flexible. HASL (1985, pp. 252ff.) has already compiled some facts to illustrate that the old pension system is too inflexible. HASL criticizes that the determination of the retirement age is too rigid. As a consequence employees should decide on their own when they want to draw their pensions. HELBERGER (1988, p. 391) presents this fact referring to the different individual preference systems as well as to the different individual living conditions, e.g. marital status, level of training, education of children, health status, unemployment etc., which produce the need of adaptation in a pension system.

Granting individual choice to determine the retirement age creates the problem of undesirable privileges. The increased chance for individuals to determine their retirement age on their own makes a concrete organization of access to pensions necessary which produces cost-neutrality for the pension system regarding alternative dates of access. With regard to a pension system which is financed by insurance contributions this can be achieved by the realization of exact actuarial sound deductions of the pension in case of early retirement. Correspondingly, additional labor should be repaid by surcharges. On condition that correct actuarial sound deductions are made it could be further possible to sell one's labor force on the labor market (HELBERGER, 1988, p. 400). With regard to increasing unemployment in Poland gainful employment of pensioners should be prevented by medium-term limitation. With flexibilisation of the retirement age-limit the attractiveness to get access to early retirement pensions because of e.g. inability to work has of course to be reduced. Further, employees could be given the chance to get only parts of the pension to become pensioners step by step.

Until now employees lose their right to labor when they reach the retirement age. So a new consciousness towards work and retirement must be developed. As a result there are plans to introduce a private pension system to replace the current "pay-as-you-eam-government­fmanced system. The latest outline of a new pension system was worked out with view to western pension systems (POLSKA AGENCJA INTERPRESS No. 5/1991). A transitory

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regulation is the determination of the size of pensions which should be orientated on the personal income of ten years of an employee which means in practice that each pensioner can choose his best ten professional years in which he earned most money. The aim is that in the long term the size of pensions should be dependent on the indexed wages of all years of one's employment in which contributions for the ZUS were paid. The retirement age for male and female individuals is fixed by sixty-five years which seems to be warranted with view to future demographic burdens of the pension system which is also true for Poland. The new calculation of pensions is based on two stages: First, the basis of calculation for all pensioners is ftxed at 24% of the current average monthly income. The second part of the pension reflects the labor performance of each individual and is dependent on the number of working years and the height of income. The distinction between an old and a new portefeuille is then abolished. The current additional payments for special branches of industry (blue-collar work) will be cancelled, too. On the contrary, a special law is planned for special groups such as soldiers, police and prison officers which obviously means preferential treatment to special social groups. A critical remark should be made here: It has been emphasized that workers of e.g. heavy industry have earned much more money than employees in other branches of industry. The transitory regulation could lead to the continuation of granted privileges to special social groups.

It is planned to reform seven million pensions; as a result 70% of the pensions will be increased, 30% of the pensions are planned to be decreaseQ because 5% of the pensioners receive pensions of 250% of the average wages (POLSKA AGENCJA INTERPRESS No. 5/1991). The organization of the pension fund has not changed since 1968. Thus, LIPTON/SACHS (1990, pp. 328f.) propose the capitalizing of a new private pension system by creating several new pension funds which are to be distributed to enterprises and individuals to back retirement payments.

(iii) Reference to a social security contributions system: Furthermore, changes must be pushed forward in the field of social security in general. Especially the introduction of a social security contributions system must make rapid progress. First steps are taken by the abolition of the state insurance monopoly which has existed since 1951. New laws governing insurance institutions (LAW 5, 1990) were introduced which permit private domestic and foreign insurance enterprises to operate in Poland. This is true for the unemployment, health, pension and disability insurances. The implementation of a contributions system opens the chance that benefits are granted on the basis of individual need and not on the fact whether the feature "labor" is fulftlled or not. Moreover, social security contributions should commonly be paid by employees and employers, which of course means a new ftnancial burden for employees and their family members. But the new insurance fund might be a guarantee for the reception of benefits which are based on the contents and the extent of the insurance.

In socialist Poland no calculations of expenditure of monetary benefits which were ftnanced by the national budget were worked out. The lack of control of the Polish ftnancial system of social insurance led to an inefficient use of benefits so that fmancial resources were not only used for social security measures but in other fields which had nothing to do with social security. The existence of such a new insurance contributions system might avoid the fact that the impact of provision with benefits is dependent on the annual

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negotiations about the national budget which has always pushed social security activities to the end of the queue. As a consequence the level of performance could be increased.

(iv) Reference to health care (see also BOROCH in this volume): Universal medical care provided by the state was to have been a great achievement of socialism. For many years now, the health service has been increasingly suffering from a shortage of doctors, particularly specialist, and hospital staff. A further alarming trend is the deterioration of the health status which is caused by an inadequate management and the fmancing of the public health service. Health expenditures have a 5% share in the gross domestic product in contrast to OECD-countries which have more than 8% interest in the GOP (SCHWEITZER, 1990, p. 7). In 1990 the health budget did not increase at the same rate as inflation which led to a serious lack of medical equipment, small medical apparatus, drugs etc. Medicines were cheap in Poland; the insured paid 30% of the price and the pensioners received them free of charge. But persistent shortages of even the most rudimentary drugs undermined the advantages of this nationalised distribution. The low degree of the quality of health services is now criticized publicly. Until now it has not been decided whether health services will be organized by the state or by means of health insurances. Several concepts propose the introduction of insurance contributions for standard benefits; additional benefits will be afforded when individuals are ready to pay voluntarily additional insurance premiums. The last thought should not be mistaken with the former practice to pay additionally for doctor services although patients were guaranteed free access to extensive medical services. In the summer of 1991 the introduction of a comprehensive health-reform is planned. Its main goal is - despite changes to the structure of the health system - the reduction of expenses of the national budget in order to implement a health insurance fund. The planned reform is expected to strengthen the relation between health service, sources of financing (insurance premiums) and objectives to reestablish the character of insurance.

The influence of the process of adaptation (such as unprepared lL."1employment, short term decrease of the real wages, transfer of employees etc.) will lead to further tensions in the health sector (SCHWEITZER, 1990, p. 7). Points of discussion are the enlargement of privatization as doctors become entitled to open their own private offices; creation of payments commensurate with the efforts in the health service; forming of financial incentives to improve the use of resources, improvement of the budget system to support a reasonable allocation of resources and efficiency. The absence of a well-developed insurance system makes the diversification of fmancing sources by social and private insurers difficult for the short term.

(v) Reference to poverty and the system of public assistance: The ideological refusal to accept the existence of poverty led to institutional and political weakness with regard to the ability to cope with this problem. Polish public assistance is over-bureaucratized and suffers from a lack of qualified staff as well as of fmancial resources. This shortcoming has to be removed as fast as possible in order to provide the weakest social groups with a safety net because additional burdens will soon come to prove the efficiency of the social welfare system.

Until January 1990 about 50% of all prices were administratively fixed by central planners. As subsidies were reduced or completely eliminated, today over 90% of the prices are

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market prices. Examples of the elimination of subsidies are food, fue~ electrical energy, dwelling, communication and transport services. The introduction of subsidies is aimed at an improvement of the budget balance and an encouragement of efficient allocation of resources in production and consumption which has not yet been attained. The resulting increase of prices has a high negative impact on a decrease of the standard of living of all individuals. But the poor social groups which are dependent on the reception of social benefits are affected even more deeply with regard to e.g. the price of coal which was raised by 500%, the price of electricity which was raised by 300% and the price of transport services which increased by 200%. Consequently social institutions have to be implemented which provide help to those poor and impoverished individuals. Indeed some social organizations such as the Red Cross already exist, but because they were subsidized by the state they have lost any influence since the abolition of the subsidies.

With regard to the organization of public assistance state centralism has been cancelled and communal and now regional representatives are held responsible for socio-political tasks (LAW 6, 1990). Momentarily public assistance as an element of the social security system has to remove the disfunctioning of the social insurance system. People who are deeply affected by the decrease of the standard of living expect material benefits. Providing these benefits can only be part of the tasks of public assistance because it is necessary not to search for temporary solutions but finally to search for a stable system solution. The opening of public cateries, distribution of food ration cards,etc. will prove to be insufficient solutions in times of rapid economic change. It seems that Polish reformers think of material benefits as more efficient than financial help. The reason behind this idea is the deep deficit of the national budget. But material benefits have to be fmanced too, which leads to the fact that money is a veil. The modification of public assistance should be aimed at an offer of a variety of care services as well as at the provision of needy individuals with financial benefits. As a result Polish social policy needs a new concept of public assistance.

In western social security systems public assistance corresponds to a basic social security system, which is applied when benefits of prior security systems which are orientated towards the insurance principle fail (KLANBERG jPRINZ, 1988, p. 403). This means that salary alone is not enough to live on. In the long term, Poland's new social security system has to guarantee a standard of living which stands in relation to the average social standard of living. A crucial question asks for the amount of the minimum living wage which RA WL generally answers with the "maximin-principle" which allows for a ''graded income supplement" (KLANBERGjPRINZ, 1988, p. 411). As the number of assisted persons will rise the system of public assistance must develop a system of categories which distinguishes individuals that are in need of benefits from those who are not needy. Thus the potential receivers are divided into persons who are expected to work, and into individuals who are unable to work such as old age people, mothers with children, etc. This means that a set of construction features must be established to prevent an overburdening of the social property right to public assistance. Public assistance must not be regarded on the same level as the prior principles (KLANBERGjPRINZ, 1988, p. 419). Consequently the responsibility of the family for the fmancial situation and supply of family members should be strengthened, too.

Furthermore, the introduction of a permanent "social pension" is discussed instead of providing short term material benefits. It has to be pointed out that the principles of

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effectiveness (the level of attaining an aim of instruments) as well as of efficiency (the relative opportunity costs of instruments and its alternatives) should be proved here because the grant of a permanent minimum pension affects the supply of labor. The higher the benefits of public assistance the lower the incentives to be gainfully employed (KLANBERG/PRINZ, 1988, p. 410). Decisions concerning labor or leisure time which are controlled by the price system are disturbed. Consequently, the economy suffers from economic costs resulting from the wastage of resources. These ideas show the urgent need for a continuing discussion about the extent and scope of minimum pensions which cannot be finished here.

(vi) Reference to personnel in the social security system: Another unsolved problem is the number of people who are employed in the social sector. The low level of wages is the reason why only about 8,000 persons are employed as social welfare workers, although there are approximately ten million people who need help because of low income, old age, illness or disability. Momentarily about one million individuals receive insufficient care and benefits. The shortage of personnel in the health service results from inefficient work organization and the overburdening of doctors with bureaucratic procedures as well as from low pay. Doctors earn less than workmen. Insufficient personnel and the difference between the above-mentioned numbers show the necessity for acting in this area.

5. CONCLUDING COMMENTS

The discussion about reforms of social security is not yet finished. Until now the stabilization and liberalization program on the whole, has caused economic hardship to the population. The improvement of social security happens at an unfavorable moment of deep economic crisis in which the improvement could only be financed by reflation. Free competition may intensify a two-tier society which means those living in poverty and those who do not. What is needed is a new response to a new problem. So far the limits of peoples' patience have not yet been reached and the readiness to establish a market­orientated economy which might make it easier for individuals to identify with, still persists. This readiness will be tested in the near future unless the costs are matched with further acceptable improvements.

The final structure of the new social policy will only become apparent after a certain amount of time: An expected better social performance level could only be achieved when the economic reform is consequently carried out. The dramatic social situation of large parts of the population, the deficit of experience as well as insufficient theoretical preparatory work of reform politicians make matters worse (PETERHOFF, 1991, p. 362). However, in future, social policy should not be considered as an appendage to the rest of economic policy, but in the first place it should be "economic order policy" ("Wirtschaftsordnungpolitik"). Social policy measures have to be considered as important as economic and monetary policy measures. There is nothing which is not of social importance. Nearly every politico-economic measure has, directly or indirectly, social effects and social significance (EUCKEN, 1952, p. 313) which predicts a revival of social policy-making. It is now the responsibility of the lawyers to formulate concrete provisions to enlarge the national constitution. They must guarantee the genuine implementation of these social rights and ensure that they do not remain an unfulfilled promise. This would make it easier for workers to identify with the national constitution. This means that

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Poland will not be relieved of its responsibility to establish a social policy and to guarantee certain fundamental social rights. Whatever the type of social rights Poland is planning to establish, it will always feel the need to elaborate and specify basic social rights, in line with the need to elaborate and specify basic developments in the economy and its labor market. Those who are not connected with the labor side of employment must receive much attention, too. The rights of e.g. the poor, children, women who were, are and will not be employed, ethnic minorities etc. are unlikely to receive any priority. The argument is to put far more emphasis than is presently the case on social rights, in order to create a future social policy for those categories of persons that do not seem to have received due attention up to now.

However, security is not all. So it is formulated by MOLITOR (1980, p. 285) who puts the accent on other crucial points of welfare and social maturity such as entrepreneurship, competitiveness and especially the ability to adapt oneself to the changing structure of economy. For this reason, social policy must be established in a way that on the one side individual performance is not punished and that it does not prevent professional and regional mobility of persons that will become important for Poland on the other side. Otherwise it will not cope with the restructuring of its economy. Although it might seem to be a paradox: Social stability is only possible on the basis of individual flexibility.

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(Statistical Yearbook), Warszawa. HASL, R. (1~85), Normative und instrumentelle Aspekte polnischer Sozialpolitik,

Frankfurt a. M. HELBERGER, C. (1988), Starre Sozialversicherungssysteme fur flexibilisierte

Arbeitsmarkte?, in: G. ROLF, P. B. SPAHN, G. WAGNER, eds., Sozialvertrag und Soziale Sicherung, Frankfurt a. M., New York 1988, pp. 381-402.

KATH, D. (1981), Sozialpolitik, in: D. BENDER et aI., eds., Vahlens Kompendium der Wirtschaftstheorie und Wirtschaftspolitik, Vol. 2, 4th ed., Miinchen 1991, pp. 405-454.

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KOLB, R. (1989), Bevolkerungsentwicklung und Auswirkungen auf die Renten­versicherung, in: Aus Politik und Zeitgeschichte, Beilage zur Wochenzeitung Das Parlament, B 18, 28 April 1989, pp. 32-39.

LAMPERT, H. (1990), Notwendigkeit, Aufgaben und Grundziige einer Theorie der Sozialpolitik, in: T. THIEMEYER, ed., Theoretische Grundlagen der Sozialpolitik, Berlin 1990, pp. 9-71.

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c. Internationalization as a Supportive Factor

CHANCES AND LIMITS OF THE INTERNATIONALIZATION OF POLAND'S PHARMACEUTICAL INDUSTRY

Wilfried Borach

Abstract: The transformation of Poland's economic system is proceding with a further opening up of the domestic economy. Hence domestic companies will be exposed to a strenghtening of external competition pressure. The following article is aimed at discussing the chances of, and limits to, integrating Poland's pharmaceutical industry into the world market. This will be done by using a market structure, market behavior, market performance test. Hence, in the first instance, we examine the specific supply and demand side characteristics of Poland's pharmaceutical market by using the relevant market structure data. In this way we also have to describe the establishment of the industrial and public health policy framework of the pharmaceutical market as part of reform process. The internationalization process of the pharmaceutical industry is discussed within the framework of the market behavior test. This is done without taking into account the specrnc structural market conditions prevalent in Poland. One has to show that, on the one hand, the workability of tbis market is determined by the dynamic innovation competition both on a national and an international level. On the other hand, it is important to recognize that the national legal and institutional framework influences the movements of capital across borders in this industry decisively. Therefore, this last point has an extraordinary relevance for the internationalization of Poland's pharmaceutical industry. The article concludes with some remarks on first experiences in foreign trade in this industry and gives also some perspectives for future development.

Zusammenfassung: Die mit der Transformation des polnischen Wirtschaftssystems einhergehende zunehmende Offnung der Binnenwirtschaft fiihrt dazu, daB die einheimischen Unternehmen einem versUirkten externen Wettbewerbsdruck ausgesetzt werden. Dieser Beitrag beschaftigt sich mit den spezifIschen Moglichkeiten und Grenzen der Einbindung der polnischen Arzneimittelindustrie in die Weltwirtschaft. Dies geschieht mittels eines Marktstruktur-, Marktverhalten- und Marktergebnisansatzes. Foiglich werden zunachst anhand einiger relevanter marktstruktureller Daten die angebots- und nachfrageseitigen Gegebenheiten des polnischen Arzneimittelmarktes erlautert. Hierzu gehort ebenfalls die Darstellung der Gestaltung der industrie- und gesundheitspolitischen Rahmenbedingungen dieses Marktes im ReformprozeB. Der InternationalisierungsprozeB der Arzneimittelindustrie wird im Rahmen der Untersuchung des Marktverhaltens behandelt. Dies geschieht zunachst unabhangig von den polnischen Gegebenheiten. Einerseits solI bier dargelegt werden, daB die Funktionsfahigkeit dieses Marktes sowohl auf der nationalen als auch auf der internationalen Ebene durch den dynamischen Innovationswettbewerb bestimmt wird. Andererseits gilt es zu zeigen, daB die national geltenden rechtlichen und institutionellen Rahmenbedingungen maBgeblich den grenziiberschreitenden Kapitaltransfer in dieser Branche beeinflussen. Gerade dieser letzte Punkt scheint beziiglich einer Internationalisierung der polnischen Arneimittelindustrie von auBerordentlicher Bedeutung zu sein. Mit der Darstellung einiger auBenwirtschaftlicher Erfahrungen dieses polnischen Industriezweiges sowie einem perspektivischen Ausblick schlieBt dieser Beitrag.

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Streszczenie: Otwarcie rynku polskiego, ktore jest polaczone z transformacja systemu ekonomicznego, prowadzi do powiekszenia konkurencji z zewnatrz dla polskich przedsiebiorstw. Ponizsze opracowanie zajmuje sie stopniem wprowadzenia polskiego przemyslu farmaceutycznego na rynek swiatowy. Wprowadzenie to zostaje wykonane przy pomocy ukladu struktury rynku, zachowania na rynku i wyniku rynkowego. A wiec zostaja wpierw przedstawione niektore daty rynkowo-strukturalne popytu i podazy na polskim rynku farmaceutycznym. Nalezy tutaj uwzglednic tez przedstawienie przeksztalcenia tego rynku pod wzgledem polityki przemyslowej i polityki zdrowia. Przedstawienie to zostalo dokonane ogolnie, bez szczegolnego uwzglednienia sytuacji polskiej. Po pierwsze ma zostac ukazane, ze funkcjonowanie tegoz rynku zwiazane jest z krajowa i miedzynarodowa konkurencja na rynku. Po drugie nalezy ukazac, ze krajowe warunki prawne i instytucjonalne maja ogromny wplyw na miedzynarodowe transferownie kapitalu w tej branzy. Ostani punkt posiada ogromne znaczenie w ramach internacjonalizacji polskiego przemyslu farmaceutycznego. Opracowanie konczy sie na przedstawieniu niektorych miedzynarodowych doswiadczen polskiego przemyslu farmaceutycznego i wykazaniu perspektyw na drodze rozwoju.

1. OPEN DOOR POLICY OF THE REPUBLIC OF POLAND AND THE NATIONAL PHARMACEUTICAL INDUSTRY

The transformation of Poland's economic system means at the same time a turning away from the inward-oriented policy that dominated for so many years political, social and economic life. The external competitive pressure generated by the opening up of Poland's economy is generally regarded as an appropriate instrument for effectively removing inherent structural problems as well as difficulties in domestic resource allocation (MINISTRY OF FINANCE, 1990). The necessity of opening up Poland's domestic economy is made more urgent by the fact that its government is willing to become a member of the EC as soon as possible. Consequently, Poland's legal and institutional structures will urgently and extensively need to be brought into line with those existing in the countries of Western Europe.

However, irrespective of what is generally required in terms of domestic and foreign economic alignment within the process of transforming a formerly socialist economic system (see APOLTEjCASSEL, 1991, pp. 22-55; WINGENDER, 1991, pp. 56-70), this article is aimed at discussing the possibilities of, and limits to, integrating Poland's pharmaceutical industry into world markets.

In genera~ the value added generated by the pharmaceutical industry as part of a country's gross national product is on the whole rather small. Despite this fact, however, this industry is often seen as a key industry to a country for the following, well-founded reasons:

The manufacture of pharmaceutical products is intensive both in research as well as human capital and does not, on the whole, require the employment of a great deal of raw material. It is these favorable production conditions that make this industry economically and strategically very important for a country in terms of its international competitiveness in the technology sector since it opens up the possibility of realizing positive economic welfare effects in the long term (CASSEL, 1990).

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As pharmaceutical products perform an indispensable service to society, i.e. fighting disease, it can be assumed that they are needed in any country's economy. Consequently, a country having no, or indeed, an insufficiently large pharmaceutical industry, is dependent on those countries which can in fact pride themselves of possessing high capacities in this particular industry. Therefore it faces a permanent sectoral deficit in its foreign trade balance.

It is especially this last point and its consequences which will be of major interest to Poland's economy. It is, of course, possible to consolidate high foreign indebtedness by, for example, creating a sufficiently large export potential. But because the product structure of Poland's foreign trade is rather antiquated, this would be very difficult to achieve (PYSZjQUAISSER, 1991, pp. 347-353). However, the chemical industry, including the pharmaceutical industry, is one of the very few high-tech sectors in Poland's economy which is an exception in this respect. Nevertheless, the question arises of whether, after the dissolution of Comecon, on the one hand, and the opening up to Western countries on the other, Poland's pharmaceutical industry will be able to reach an important position as part of its industrial policy as well as of its foreign trade policy.

A point in favor of regarding the pharmaceutical industry as playing an important role in Poland's future economic development is the fact that pharmaceutical products are health care goods whose deployment, besides leading a healthy life, provides after all the most economical form of prophylaxis and therapy (CASSEL, 1990, pp. 44f.). A number of empirical studies has shown that through the use of pharmaceutical products it is possible to effect major savings in public health and employment costs (RISLER, 1988; LINDGREN, 1989; and others).

In the following, we examine Poland's pharmaceutical market by using the relevant market structure data and by describing the legal and institutional conditions. The analysis thereafter concentrates on the international drug competition in general without taking into account the specific structural market conditions prevalent in Poland. This is done in order to illustrate the limits to, and possibilities of, internationalizing Poland's pharmaceutical industry. The article concludes with a discussion of some of the experiences in foreign trade and an illustration of the economic policy requirements for internationalizing this particular branch of Poland's industry.

2. IMPORTANT MARKET STRUCTURE DATA OF POLAND'S PHARMACEUTICAL INDUSTRY

As data for health and pharmaceutical products are rather limited, it is not possible to provide a comprehensive picture of the market structure of Poland's pharmaceutical industry. In the past, for example, the necessary medicaments for Poland's population were produced by 15 state-owned pharmaceutical enterprises (Table 1). The number of people employed in these enterprises is estimated to be 17,500 in the year of 1989 (SCRIP, 1990d, p.4).

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It is estimated that about 80 % of domestic demand for pharmaceutical products was satisfied by local production (approximately US-$ 800 Mill., 1990).1 Accordingly, about 20 % of the products sold on the Polish market had to be imported (SCRIP, 199Od, p. 4; AMZ, 1991a, p. 4). The products most urgently in demand were drugs for stomach ailments and cardiovascular diseases and antidiabetics. Three- quarters of all imports came from Western industrial countries of which the most important where: The Federal Republic of Germany, Switzerland, Great Britain and Italy (SCRIP, 1989, p. 4).

The export of pharmaceutical products is not insignificant considering the Polish economic circumstances. In 1986, for example, chemical products of which a not insignificant part were pharmaceutical products, accounted for the second highest trade surplus in Poland's foreign trade balance (PYSZjOUAISSER, 1991, p. 351). The most important importer of these Polish products was the USSR. In fact, 30 % of all drug imports of the Soviet Union came from Poland. Additionally, Poland supplied pharmaceutical products to the value of 600 Mill. Ruble (1989) to all the other former Comecon countries. The export to countries with convertible currencies is estimated to have amounted to approximately US-$ 20 Mill. (1989). In 1990, however, Poland's pharmaceutical products are expected to have achieved a deficit in the trade balance with Western industrial countries (CENTRAL STATISTIC OFFICE (GUS), 1990, pp. 91£.; AMZ, 1991a, p. 4). Up to 1982, all export and import transactions were controlled by the state-owned trade organization CIECH.

TABLE 1: Pharma Sales and Export Quota of Major Pharmaceutical Companies, 1989

Companies Sales (Bi 11. Zl.)

Export Quota as X of Sales

Polfa Tarchomi n 70.0 42.9

Polfa Pabi ani ci 40.6 51.7

Polfa Krakow 39.0 24.9

Polfa Grodzi sk 47.3 56.9

Polfa Starograd 98.0 72.5

Polfa Jelenia 50.8 77 .4

Polfa Warsaw 40.0 65.0

Polfa Kutno 63.0 20.3

Polfa Poznan 50.5 43.4

Polfa Rzeszow 34.9 78.8

Polfa Lodz 17.1 ----Polfa Lyszkowice 18.8 ----Polfa Lubin 13.2 ----

SOURCE: Modified table of SCRIP (199Od), p. 4; author's calculations.

There are a number of discrepancies in the data available. This may be due to definition of terms and methodic procedures having been applied in a different manner, especially as the system of calculating and subsidizing pharmaceutical products was changed in 1990. Mistakes could also have been made when calculating the exchange rate of Zloty into other hard currencies.

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In 1988 there were altogether 2,500 different pharmaceutical products officially launched in Poland (SCRIP, 1989, p. 5). The distribution of drugs was handled by approximately 3,000 pharmacies. Half the businesses are in private hands, while the others are still state-owned. All pharmacies are supplied by the state-owned wholesalers of CEFARM (SCRIP, 1990d, p. 4; AMZ, 1991a, p. 4).

It was not possible to ascertain the exact data concerning the expenditure of drugs as a share of total health expenditure. However, in the official Polish statistical yearbook a figure of 4,016 Bill. Zl. is quoted as having been spent on health by the State in the year 1989 (GUS, 1990, p. 144). However, the actual expenditure is thOUght to have been much higher, since additional health care services are provided by organizations which work either at a regional or at the state-owned enterprise level (SMOLEN et aI., 1988, p. 275). Furthermore, a not insignificant amount of health care services is carried out by unofficial activities (SZABLEWSKI, 1989, pp. 484-486).

EXHIBIT 1: International Comparison of Relative Frequency of Causes of Deaths

U88R

CSFR

GlDR (former)

Hungary

Poland

w...rn Europa

21,. 10ft DHthoau ...

1- ..... '-.·­EBB Otll.r .... _ ~ Cano.r

SOURCE: Modified exhibit of AMZ (1991b), p. 6.

71,. 100ft

I

For an analysis of the pharmaceutical market it is essential to be able to check the demand­determined data regarding the average life expectancy as well as the age distribution of a population. Accordingly, Polish men had an average life expectancy of 66.8 years in 1987 and Polish women a life expectancy of 75.2 years. Age distribution in Poland was as follows: the share of people up to the age of 14 was 25 % of the total population, between the ages

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of 16 - 59 it was 60 % and over the age of 60 it was 15 % (1987). The share of people under the age of 15 being 25 % of the total population is rather high, for in Western industrial countries that share has been generally around 20 % and less (AMZ, 1991b, p. 6). These figures are of relevance to the effects this will have on the demand for the various types of pharmaceutical products. This also applies to the relative frequency of causes of deaths in anyone country. As can be seen in Exhibit 1, cardiovascular diseases play a much more important role in Poland and the other former Comecon countries than they do in Western European countries.2

3. ESTABLISHMENT OF THE INDUSTRIAL AND PUBLIC HEALTH POLICY FRAMEWORK OF THE PHARMACEUTICAL MARKET AS PART OF THE REFORM PROCESS

The opening up of the pharmaceutical market has led, on the one hand, to this domestic industry becoming exposed to international competition, while, on the other, foreign capital and know-how is at the same time having to be "lured" into the country. Since the market behavior of pharmaceutical suppliers can be extensively influenced by both industrial as well as public health policy, a relevant legal structure of the two policies is one of the prerequisites for Poland's pharmaceutical industry to participate in the international division of labor. Describing the important regulations one can distinguish four levels.

3.1 PRICE AND REIMBURSEMENT REGULATIONS

The information which is currently available about the future structure of price and reimburseDlent regulations for pharmaceutical products indicates that for 1991 a "budget­pricing" is intended, i.e. the Ministry of Public Health and Welfare, being responsible for the pharmaceutical market, will receive a certain budget for drug reimbursement from the government. This budget can be administered by the Ministry without interference: it is to be used for settling those bills incurred for reimbursable pharmaceutical products. The quantity necessary for fixing a price will most probably be determined by a comparison with the quantity used during the previous year. Once this has been done, a price can then be determined within the given budget for each particular specialist pharmaceutical product. When fixing the price for specialist pharmaceutical products whose field of application has a similar therapeutic value, generic products are used as the baseline (SCRIP, 199Oe, p. 10). Given this fact one wonders, of course, what value is put on innovative products and what importance is attached to the particular field of indication. No information has so far been made available on these points.

Restructuring the reimbursement system will involve dividing the pharmaceutical market into three categories: Drugs of the first category being prescribed by a doctor will be

2 BLEDOWSKI (1990) analyzed chosen indicators of Poland's public health system for the period 1970 - 1987. He found that in the said period there was a major worsening regarding the frequency of certain pathological symptoms, such as cardiovascular diseases and, above all, tumours. There was furthermore in Poland no noticeable increase in life-expectancy levels as compared to many other countries (BLEDOWSKI, 1990, pp.109-111).

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reimbursed to the patient in full or he may have to pay a small amount towards the costs (something in the region of 1,000 - 5,000 Z1.). Regarding this last point, it has so far not been clarified whether this category will only involve "essential drugs" or whether it will involve all those drugs that are regarded by the authorities as "usual" therapy. All other drugs will fall into the second and third market category. For drugs of the second category it is planned to reimburse 70 % of their price, while for drugs of the third category the patient will have to pay in full, i.e. 100 %. Likewise, some expensive drugs from Western countries will not be reimbursed if they are regarded as a surplus to Polish requirements (SCRIP, 1990e, p. 10). As this last regulation can be interpreted in a very broad way, only the future will show to what extent foreign pharmaceutical products will be excluded from the public reimbursement system. If, however, the Polish government wishes to participate in the international division of labor, such a regulation should not be used to build up artificial market entry barriers.

3.2 PATENT AND APPROVAL REGULATIONS

As far as known in 1990, Poland and the USA signed a bilateral treaty which was a first step towards guaranteeing reasonable product protection for pharmaceutics in the Polish home market. According to this treaty, all American chemical and pharmaceutical products being launched on the Polish market will be subject to 20 years of patent protection as from December 31, 1991. Foreign products which entered the Polish market before this regulation coming into force will only enjoy limited protection. Furthermore, the treaty contains a clause limiting any possibility of the Polish authorities introducing compulsory licensing. Very importantly, the regulations worked out in the treaty for US-products now will equally be applied to other countries and their pharmaceutical products (SCRIP, 1990a, p. 3; SCRIP, 1990b, p. 6).

Other reform regulations concerning market registration worth mentioning are those that envisage shortening the approval time as well as those that make it easier for foreign products to gain access to the market. This is to be achieved by authorizing a pharmaceutical product merely on the ground of its safety and efficacy. Accordingly, the applicant does not have thus to prove that his product has advantages over products already available on the Polish market. Furthermore, by accepting sufficiently documented foreign registrations, a process of intermediate governmental "double checking" is therefore avoided, with the result that the domestic licensing authority has less work to do preventing both a tiresome backlog of applications and lengthy waiting periods for foreign suppliers who can now look forward to the Polish market being opened further. Therefore one of the most effective institutional barriers to entry to international trade in pharmaceutical products has been abolished. If the registration authority refuses to allow a foreign pharmaceutical product entry to the market, the applicant in question can raise his objections with the Polish authorities within three months (SCRIP, 1990e, p. 10).

3.3 PRIVATIZATION AND DIRECT INVESTMENT REGULATIONS

According to the Polish privatization statute of July 13, 1990, two different ways of privatization can be pursued: on the one hand, privatization can take place through the transformation of state-owned enterprises into joint-stock companies of the state treasury or, on the other hand, through a process which is called liquidation. Referring to the

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current political discussion, it can be assumed that privatization through liquidation is applied in the case of small or medium enterprises. The ownership transformation of "large" state-owned enterprises to the private sector will most likely occur via the establishment of joint-stock companies. The question of whether an enterprise is classified as small or large will depend on the book-value of the firm. The rules concerning the distribution and the sale of a state-owned enterprise stipulate that 20 % of the nominal capital can be offered to the employees at preferential prices. The remaining 80 % of the stocks can either be sold in the market, transferred to investment funds, possibly be given away free of charge to the Polish population, or be used for the capitalization of public institutions such as pension funds. The acquisition of stocks by foreign investors is, however, limited to 10 %. Foreign investments exceeding 10 % need the prior consent of the President of the Foreign Investment Agency. Nevertheless, if privatization takes place via liquidation3, up to 100 % of the assets can either be transferred to the employees of the state-owned enterprise or to third parties. This regulation applies also to foreign investors (FRANZ/SCHIPKE/GROSZEK in this volume; MINISTRY OF FINANCE, 1990; v. DELHAES/JERMAKOWICZ, 1990, pp. 20-25).

Apart from the criterion "size", other variables also have an impact on how privatization will actually come about, for example, the strategic-economic importance of an enterprise or an industry. In this respect, the pharmaceutical industry might be given exceptional status as it offers the possibility of activating technology-int~nsive know-how. Consequently, it can be assumed that Polish pharmaceutical enterprises - regardless of their size - can be sold up to 100 % to foreign investors. In order to establish an open economy, joint-ventures between Polish and foreign companies are encouraged, and Western partners can in this case determine the share of their capital participation themselves. At the same time, the transfer of profits is also allowed in full. A final point worth mentioning is that foreign investors are now legally entitled to buy land and building plant without having to acquire the formerly obligatory local capital participation (SCRIP; 1990e, p. 10; WINGENDER, 1991, p. 69).

3.4 IMPORTANT FOREIGN TRADE REGULATIONS

In foreign trade, the extensive liberalization measures introduced in 1990 are already taking effect. On the import side, the quantitative restrictions for imported goods having to be paid for in convertible currency have been abolished and so has the non-commercial trade turnover. There has likewise been a massive reduction in governmental foreign trade organizations and import licences. The export side, too, has been the subject of major deregulation with the exception of important raw materials and agricultural produce which are still regulated by the state. With the liberalization of foreign trade major bureaucratic obstacles have been abolished which formerly made it difficult for enterprises in Poland to initiate foreign trade relations or actually barred them from doing so altogether. There is,

3 In Art. 37.1. of the State Enterprise Privatization Act the ways of liquidation are discribed as follows: "The parent body may, ... , liquidate a state enterprise in order to (1) sell its assets or integrated portions thereof; (2) contribute enterprise assets or an integrated portion thereof to a corporation; (3) lease out its assets or an integrated portion thereof, against a fee, for a specified period. "

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however, one limitation in this respect, i.e. enterprises can only buy foreign currency at their banks after they have deposited their foreign currency earnings with the State Bank (SCRIP, 1990d, p. 4; WINGENDER, 1991, pp. 68f.).

The privatization of the foreign trade organization CIECH responsible for the pharmaceutical market had started as early as 1982. The Ministry of Finance holds 51 % of that organization, while the other 49 % is in the hands of Poland's chemical and pharmaceutical enterprises. As privatization has gained pace and the opening up of the Polish market is progressing further, the Ministry of Finance is endeavoring to sell its share in CIECH to the entrepreneurs already possessing shares in enterprises or to foreign investors (SCRIP, 1990d, p. 4).

4. PROCESS OF INTERNATIONALIZATION IN THE PHARMACEUTICAL INDUSTRY

In the following we shall distinguish between two description levels of internationalizing the pharmaceutical industry: For one thing, the internationalization of competition at the good level is discussed. Innovation will in this respect be one of the major parameters of competition. For another, concepts will have to be found as to how the movement of capital across borders regarding the pharmaceutical product markets is to be explained. Since in the case of Poland the capital transfer by foreign companies into the country is more important than from Poland to countries abroad, the prerequisites required for only the first case will largely be examined.

4.1 INTERNATIONALIZATION OF DRUG COMPETITION

According to HOPPMANN (1983), the workability of the pharmaceutical market is to be explained by competition through innovation. The starting point for this model is that the structure of enterprises is to be divided into two categories (HOPPMANN, 1983, pp. 36-38):

manufacturing enterprises, which largely concentrate on production and whose activities are limited to the domestic market; and

research enterprises, which involve themselves in manufacturing, research and service tasks and whose competitive direction generally has an international dimension.

While the manufacturing enterprises specialize in the production of pharmaceutical products, with their implemented pharmaceutical knowledge freely available, research enterprises create new products or new pharmaceutical knowledge, respectively. And it is at this last enterprise level where the dynamic competition takes place via the parameter of innovation. In spite of being in competition with each other, these high-tech enterprises will, nevertheless, have to take into account some features characteristic of the pharmaceutical market, the most important of which are:

generally a long-term commitment to high risk capital as well as to highly qualified and specialized staff and material resources (CASSEL, 1988, pp. l09f.);

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in close context with the above, conditions exogenous to scientific explanation as regards the good "drug" (need of explanation to consumers, degree of empiricism, cost structure etc.);

the integration of this industry into the public health market, which in turn, influences the legal and institutional framework relevant to this industry because of safety and cost containment regulations motivated by public health policy.

Theories of competition usually distinguish between product and price competItIon. HOPPMANN (1983) overcomes this dichotomy by changing over to the inventor performance (''Erfinderleistung'~. Accordingly, the new knowledge incorporated into the product, i.e. the new or modified therapy, will be in competition to the therapy already available on the market. What follows is a "competition of new against old". In order for the workability of competition to function, however, it is not necessary that the new therapies have to drive out the old ones, but it is quite sufficient for the new products just to be able to enter the market without hindrance (HOPPMANN, 1983, pp. 46-48; SCHELLHAAB, 1985, pp. 276f.).

The price behavior of R&D-intensive companies is based on "the competitive nature of the price with respect to the invention". This means that, in additon to the mark-up reflecting the degree of advance the invention effects (relative to products of the same therapeutic category already on the market), a further price component will have to come into play, one that represents the course and duration of the product life cycle. Consequently, at the end of a product life cycle the realized marginal income will have to correspond to the costs incurred plus a usual return on investment of enterprise (HOPPMANN, 1983, p. 59). Here it is important to bear in mind that the usual return on investment of enterprise is higher in the growth and expansion stage of a industry than it is during the stagnation and maturing stage. This is b~cause at the beginning of a cycle stage the powerful R&D resources are relatively scarce and the product life cycles are shorter than during the end stage when the technology potential has been largely exhausted (SCHELLHAAB, 1985, p. 277). The reward for an innovator is therefore realized at the end of the product life cycle. Should in the dynamic competition process the market share of a well-established product decline because of another product being introduced into the market, the first innovator's total profits will decrease, even if the initial price is left as it is. Thus, innovative competition also leads to an implicit competition in prices (HOPPMANN, 1983, pp. 67-71; CASSEL, 1988, pp.111-113).

Another characteristic of drug research is its high degree of empiricism. Under this exogenous condition the innovation-oriented enterprise creates a pharmaceutical product whose new therapeutic value it cannot exactly assess: On the one hand, the time period, needed for a new product to be launched into the market cannot be determined (HOPPMANN, 1983, pp. 4Of.). On the other hand, products which because of their high degree of empiricism have in principle to be invented, cannot be safeguarded sufficiently by legal patents, thus enabling other enterprises to introduce similar therapies into the market by molecule manipulation and variation. Innovative enterprises are thus continuously forced - at least in the expansion phase - to put their profits into the research and development of new products in order to have high earning-capacity standard in the future (SCHELLHAA6, 1985, pp. 268f.). In addition, research enterprises will take advantage of

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other competitive factors, such as product differentiation, quality, scientific information, reputation etc., in order to ensure their market position.

This is very typical of the competition taking place on the pharmaceutical products market, both on a national and on an international level. Especially from an international point of view, a second exogenous factor is of great importance: the cost structure. As can be seen in Exhibit 2, the typical cost structure of a pharmaceutical products enterprise engaged in research shows a high level of fIxed overheads. These flxed overheads become ex post sunk costs if research has not been successful, or they become in part sunk costs, if a success in research has not brought in sufficient marginal income.4 Faced with such high fIxed overheads a pharmaceutical enterprise will naturally look for opportunities to internationalize its business operations. Large markets make possible the use of scale effects because average costs decline. In the spirit of HOPPMANN, this situation could well be described as an accumulation of national product life cycles. National innovative competition thus gets shifted to an international level. An international presence is all the more important for large pharmaceutical enterprises since national safety requirements become ever more rigid, increasing, on the one hand, the costs for having drugs authorized for markets, and shortening the effective patent terms on the other. One single market can therefore not suffice to cover the high fIXed overheads, thus making it necessary for pharmaceutical enterprises to seek a product-related internationalization at the goods leve1.

International innovative competition between pharmaceutical enterprises is influenced greatly by a variety of national regulations and trade obstacles: administrative price interference, market entry barriers for the protection of domestic industry, compulsory capital transfer etc. Accordingly, enterprises operating internationally will develop suitable behavior patterns in order to avoid the transfer of national administered prices and in order to decrease international market entry costs. Certain company strategies will come into play, such as, for example, segmentation of the competitive markets with the help of patent and trade mark laws. In this way the re-importing as well as the parallel importing of drugs can be avoided (KIRCHNER, 1975). At the same time, establishing an international reputation is extremely important, since by using this competitive instrument market entry costs can be lowered and barriers to entry circumvented.

This article will not describe the use and effect of these competitive factors. What is important, however, is to explain international capital movements in the pharmaceutical industry, above all because activating foreign capital imports may decisively contribute towards increasing the competitiveness of Poland's pharmaceutical industry.

4 This can occur particularly in circumstances when rare diseases call for the production of orphan drugs. It may also be the case, however, that an inventor's temporary monopoly comes to an end within the process of dynamic competition.

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EXHIBIT 2: * Cost Structure of Research Intensive Companies (in Percent of the Total Turnover, 1988)

RID expendltura 19.1

Licence expenditure 1.3

Solen. Information 11.1

Marketl ng ooeta 2.9 Dlatrlb. ooata

8.8

Atter-tax-Profl t 2.4

~""",., Other expenditure 4.8

Imputed Interaet 1.8

*) German companies (the annual turnover is more than 150 Mill. DM).

SOURCE: own presentation, data quoted: BPI (1971), 20th ed. 1990.

4.2 INTERNATIONALIZATION OF PHARMACEUTICAL COMPANIES

Concerning the internationalization at enterprise level, we mean above all the international activities which are effected by making strategic use of direct investment.s The questions of whether one should pursue the strategy of direct investment and how to execute it are

5 Internationalization in this sense is nothing less than a further step towards the multinationalization of enterprises that is increasingly happening worldwide. According to recent advances in foreign trade theory, the strategy of enterprises in their various phases of internationalization is generally characterized by a succession of three activities, i.e. export of goods, direct investment and the granting of licences. As far as the internationalization of the pharmaceutical sector is concernced, the order of priority for the last two stages does not necessarily have to follow a certain pattern, i.e. since this particular market is rather special, it could well be that during the early phase of internationalization, the buying and selling of licences is thought to be preferable to international investment activity. (CASSEL, 1987, pp. 94-102; 1991, Tab. 19).

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manifold and comprise a series of assessments based above all on hypotheses about internationalization set forth quoted in connection with the theory of the multinatio­nalization of enterprises (see HEIDUK, 1980, pp. 63-73; WELFENS, 1990a, pp. 185-192). In this regard the 'availability hypotheses' are of particular interest. It is assumed that domestic suppliers have a natural advantage of location, i.e. nearness of and to customers, easy access to local authorities, or even availability of raw materials etc. These natural locational advantages will be used by them to build up barriers to market entry. In addition, foreign suppliers are - because of not being near a particular market - confronted with higher costs for market information and communication, resulting in having to serve the foreign market by means of direct investments as an alternative strategy to exporting goods and services.6

Applying this general concept to a particular industry, it is necessary to take account of the characteristics of market structure as well as of the legal and institutional framework. It is this last point which is of major importance for the international capital transfer in the pharmaceutical market, especially when research-intensive foreign investments are involved. According to a company survey conducted by BURSTALLjDUNNING (1986, pp. 7f.) R&D-intensive investments abroad are dominated - besides general considerations on profitability - above all by the following two motives:

access to scientific personnel in the country concerned; and

regulation pressure from government interference.

It is mentioned in a study by HElD UK (1982) that national regulations force internationally operating companies to multinationalize. This is especially true with respect to the transfer of international capital. Actually it means an involuntary or rather compulsory multinationalization which is, according to HEIDUK (1982, p. 203), a 'quasi­second-best solution', since it is a more efficient strategy than completely ignoring country specific international competitive advantages.

At the same time, national governmental regulations can also effect an international capital transfer in the opposite direction. Extensive safety requirements, uncertain legal frameworks and a lack of social acceptance etc. may increase the domestic locational risks for the enterprises concerned. Therefore, one expects a rise in costs or a worsening in the possibilities of R&D activities. This can lead to a dislocation of production capacities, and, what is even more important, to the dislocation of research as well. This applies particularly to a great number of countries doing research in the field of bio and gene technology which may yet prove to be the last great technological revolution of this century. BAYER, HOECHST and BASF, all very important German companies, have, for example, moved their research capacities in gene technology abroad, mainly influenced by uncertain legal

6 Direct investment only makes sense if an enterprise has certain company specific advantages which make up for the natural disadvantages of taking up production in a foreign country. In this connection the market deficiencies for know-how in the international markets are of major relevance since an insufficient protection against imitation benefits foreign investment (WELFENS, 1990a, pp. 185f.).

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and institutional home conditions (CASSEL, 1990, pp. 53-57; WELFENS, 1990b, p. 32; WEISS, 1991, pp. 89-92).

In conclusion it can be said that the internationalization of the pharmaceutical industry at company level is forced upon it by national governmental regulations. The different attitudes governments take with regard to regulations concerning technological, industrial as well as public health policy are reflected in the rather artificial segmentation of world markets (BOROCH, 1990). Given the different preferences national governments attach to these policies, an international ex-ante coordination of the relevant industry-related conditions is only possible to a limited extent? Like many other former member states of the Comecon, Poland has a lot of catching up to do as regards internationalization. In this context the question arises which strategy it should adopt in order to activate foreign investments in the pharmaceutical field within the framework of international regulatory competition. In order to answer this question it is necessary to give details on the market performance of Poland's pharmaceutical industry as compared to an international level. This will give a better indication as to how to view Poland's pharmaceutical industry in relation to a potential internationalization process.

s. EXTERNAL ECONOMIC EXPERIENCES OF POLAND'S PHARMACEUTICAL INDUSTRY

Since innovative ability is the most important competitIVe factor in the international pharmaceutical business, the fmal part of the article will mainly attempt to examine this point. As regards the domestic and the foreign experiences with international capital transfer to Poland, little can so far be said since Poland's open door policy has not been conducted sufficiently long enough. However, it is known that by the end of 1989 contracts for a total of 7 joint-venture projects with Western industrial countries had been drawn up in Poland (SCRIP, 1990d, p. 4). Finally, the export and import trade will not be analyzed further (see chapter 2).

The most important indicator for quantifying the output of innovative activity is the amount of new chemical entities invented. In order to assess international competitive ability a comparison is usually made between the figures for each individual country. As individual data for Poland are not available from official sources, Table 2 refers to the "Eastern

7 For example, the attempt at harmonizing the framework for this particular industry in the course of creating a single European market by December 1992 will be less than perfect for the reason mentioned, though there will be an ex-ante harmonization of all the legal and institutional structures motivated by an industrial policy point of view. This includes, for example, a harmonization of the time for the validity of patents as well as of the way in which high-tech pharmaceutical products are handled. Although approval regulations for market entry that have in part been used in order to discriminate foreign competitors can be reduced or harmonized in the course of this process. However, the EC-Commission still considers it impossible to interfere with present interventionist pricing systems if the EC country concerned justifies its behavior on grounds of public health policy and cost containment measures (BOROCH,I990).

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Block" as a whole. Although, unfortunately, it is not possible to evaluate clearly the innovative activities of Poland's pharmaceutical industry between the years 1971 - 1985, one important tendency can be established: for the five-year-periods illustrated an above average decline in the invention of new chemical entities can be observed in Eastern European countries, in comparison with the OECD-countries. Having only invented eight such entities during the period 1981 - 1985, the international competitive ability of the Eastern European pharmaceutical industry can be said to be rather on the low side. One may assume that this evaluation can also be applied to Poland's pharmaceutical industry. Furthermore, the research potential of Hungary and Czechoslovakia is estimated to be higher than that of Poland (see Exhibit 3; SCRIP, 1990c, p. 6).

TABLE 2: New Chemical Entities (NCEs) by Countries of Origin (Five-Year Periods, 1971-1985)

I Five- USA F FRG J GB CH Eastern\ Year Periods Europe

1971-75 82 67 44 43 33 16 31 43

1976-80 70 30 46 32 39 13 14 13

I 1981-85 69 19 45 61 20 12 23 8

Total 221 116 135 136 92 41 68 64

SOURCE: REIS-ARNDT (1987), p. 8.

Another indicator for comparing Poland's international competitive potential with that of other countries is the size of the individual enterprise as measured in terms of its turnover. Since ALFA WASSERMANN, being placed number 150 in the world ranking list of pharmaceutical companies, achieved a turnover seven times higher than Poland's largest pharmaceutical enterprise STAROGRAD, this is an indication that Poland's industry, in an international context, is of little significance. Besides innovative ability, it is also important to look at the willingness and preparedness to innovate, even though a clear distinction between these terms is difficult to achieve. It is possible to do this by using as a scale the R&D-share in the turnover figures (see Table 3).

With an R&D expenditure of only 2 % of turnover, the low level of research intensity of Poland's pharmaceutical industry as compared internationally is sufficiently documented. Even the former GDR managed a higher R&D input, with a research share of 4 % of turnover. A lack of willingness to innovate is also reflected in another economic ratio: the level of R&D personnel in relation to Poland's population is particularly high (WELFENS, 1988, p. 15). One may conclude from this that, on the one hand, there is an inefficient system of research in Poland, but that there is, on the other hand, a substantial basis of human capital in Poland (see Exhibit 3). This last point is of major importance since the pharmaceutical industry is highly knowledge-intensive. Therefore the availability of sufficiently qualified domestic personnel is one of the foremost prerequisites for activating foreign investment (BURSTALL/DUNNING/LAKE, 1981, pp. 83-94). In order to improve the willingness of Polish enterprises to innovate, the R&D input in financial as well as personnel resources will have to be increased. This means that besides abolishing

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system-based allocation obstacles, the protection of intellectual property will have to be guaranteed by the passing of wide-ranging patent legislation.

EXHIBIT 3: Evaluation of Investment Locations in Eastern Europe8

ICriteria * ICSFR Hungary Poland USSR Bulgaria Romania

Total Economy B+ B C+ 0+ 0 0

Economic Potential B+ C C O- F 0-

Reform Progress A- A- B+ C- C B

Indebtedness A- D 0 C+ F A

Inflation B C+ C- D D- C

Access to the EC-Market B B B C C+ C+

Labor Market A- B C+ C- C- D

Educational Level A A B- C C- D

Employee Moral B B- C 0 C- D

Market Size C 0 B A F B-

Raw Material Supply 0 F B A F C

!Infrastructure B B- C 0 C 0

Transport B B- C+ 0 C- C-

COJ11l1unication B B 0+ 0- C+ 0-

Interest in Foreign Investments A- A B+ C C+ B

Prospects to Repatriate Profits B A A C- 0+ B

Prospects for Foreign Aid C+ D- B 0+ C C-

Political Prospects A- B+ B- 0 0+ 0-

Significance of Non-CoJ11l1unist Party B+ A A C- C- D

Political Stability A- B+ C+ D- C- 0-

Democratic Tradition A B- C F D 0-

Total Evaluation B B- C+ 0+ D 0

*) A - excellent; B - good; C - satisfying; D - poor; E - bad; F - very bad.

SOURCE: quoted from AMZ (1991c), p. 5.

8 In its general survey on possible investment locations in Eastern Europe the economic research institute PlanEcon comes to the conclusion that of the countries eager and willing to reform, the Eastern Block States of Hungary, Czechoslovakia and Poland offer the most favorable conditions to Western investors.

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TABLE 3: R&D Expenditure as % of Pharma Sales in some Selected European Countries (1985)

Iselected Pharma cost R&D European Countries as % of Sales

West Germany 14.6

I France I 12.5

Great Britain 15.0

Spain 6.5

Poland 2.0*

GOR (former) 4.0 **

*) 1987; **) 1989.

SOURCE: own presentation, data quoted: SCRIP (1984), 5th ed. 1989, p. 63; BPI (1971), 20th ed. 1990, p. 29; AMZ (1990), p. 4; SCRIP (l990d), p. 4.

6. PERSPECTIVES

In one of its country surveys on Poland, the World Bank comes to the conclusion that "the phannaceutical industry is internationally competitive because of the availability of domestic inputs, the size of its operations, and the use of modem equipment" (WORLD BANK, 1987, p. 105). In the author's mind this evaluation is not valid. Presently, the role of Poland's pharmaceutical industry is rather insignificant in the international context. The lack of competitive ability at the commodity level requires foreign investment, the activation of which could lead to major competitive and innovative impulses being transferred to the domestic industry. The size of its market - Poland's population now stands at approximately 38 Mill. -, an expanding domestic demand for pharmaceutical products (SCRIP, 1989, pp. 4-5) and the good trade relations with former Comecon states, especially the USSR, are among the most important given prerequisites that could make foreign pharmaceutics­oriented investors wish to establish themselves in Poland. Opposed to this, there exists a multiplicity of legal uncertainties and deficiencies, which may seriously impede the opening of Poland's foreign trade. As far as the opening of the pharmaceutical sector is concerned, this will require, besides general legal and institutional reforms, the additional formation of conditions specifically tailored to the pharmaceutical market. By establishing the price and reimbursement regulations as well as the regulations governing patents and market authorization the Polish government has done a great deal to reduce legal uncertainties for foreign investors. It would help further if, in order to activate foreign investment, Poland were to create a favorable framework for research and a suitable infrastructure to go with it. Since many Western countries are faced with a hostile climate towards research, with industries, such as bio and gene technology, being subjected to massive interference, scientific progress is at times made impossible, preventing any research spill-overs from actually taking place. In these circumstances, the motives for enterprises operating internationally to transfer research capacities from countries with rigid regulations to countries that have more tolerant research-oriented laws, are indeed very strong: in international regulation competition the industry-specific norms and frameworks will

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increasingly determine R&D locations (WELFENS, 1990). This will be a great opportunity for the Republic of Poland.

REFERENCES

AMZ (ARZNEIMITTELZEITUNG) (1990), DDR-Industrie mit Samthandschuhen anfassen, 3 (1990) 9, p. 4.

AMZ (ARZNEIMITTELZEITUNG) (1991a), Marktchancen in den ehemaligen Ostblock-Staaten differieren stark, 4 (1991) 10, p. 4.

AMZ (ARZNEIMITTELZEITUNG) (1991a), Tod durch Herz-Kreislauf-Erkrankungen im "Osten" haufIg, 4 (1991) 1, p. 6.

AMZ (ARZNEIMITTELZEITUNG) (1991c), Wie PlanEcon die Investitionsstandorte in Osteuropa bewertet, 4 (1991) 10, p. 5.

APOLTE, TH.; D. CASSEL (1991), Osteuropa: Probleme und Perspektiven der Transformation sozialistischer Wirtschaftssysteme, in: List Forum, 17 (1991) 1, pp. 22-55.

BLEDOWSKI, P. (1990), Deregulierungstendenzen im Gesundheitssystem der VR Polen, in: TH. APOLTE; M. KESSLER, eds., Regulierung und Deregulierung im Systemvergleich, Heidelberg 1990, pp. 107-118.

BOROCH, W. (1990), Nationale Gesundheitssysteme in der EG zwischen wettbewerblicher Anpassung und btirokratiseher Harmonisierung, Diskussionsbeitrage des Fachbereichs Wirtschaftswissenschaft der Universitat Duisburg - Gesamthochschule, No. 130, Duisburg.

BPI (BUNDESVERBAND DER PHARMAZEUTISCHEN INDUSTRIE) (1971), pharma daten 1990, 20th ed., Frankfurt a.M. 1990.

BURSTALL, M. L.; J. H. DUNNING (1986), Investition und Innovation. MittelfluB in der intemationalen pharmazeutisehen Industrie, Basel.

BURSTALL, M. L.; J. H. DUNNING; A. lAKE (1981), Multinational Enterprises, Governments and Technology. Pharmaceutical Industry, Paris.

CASSEL, D. (1987), Japan: Pharma-Weltmacht der Zukunft? Entwicklungsperspektiven der japanischen Pharma-Industrie und ihrer nationalen Konkurrenz im Spannungsfeld zwischen staatlicher Marktregulierung und Innovationsf6rderung, Baden-Baden.

CASSEL, D. (1988), Intemationaler Innovationswettbewerb: Die Rahmenbedingungen in den USA und Japan, in: D. CASSEL, ed., Forsehung im Dienste der Gesundheit. Medizinische Notwendigkeit und wirtschaftliche Bedingungen von Arzneimittelinnovationen, Baden-Baden 1988, pp. 107-130.

CASSEL, D. (1990), Rahmenbedingungen fUr die Arzneimittelentwicklung der Zukunft aus sozial6konomischer Sieht, in: G. M. FULGRAFF et aI., eds., Klinisch­Pharmakologisches Kolloquium IV. Titisee 1989, Freiburg im Breisgau 1990, pp. 38-68; 207-212.

CASSEL, D. (1991), Die japanische Arzneimittelindustrie auf dem Weg naeh Europa, Forum-Seminar, Deutsch-japanische Wirtschaftsbeziehungen in der pharmazeutischen Industrie, Mimeo, Bonn 16 May 1991.

CENTRAL STATISTIC OFFICE (GUS) (1990), Statistical Information on the Economic Situation in Poland, Warszawa.

DELHAES, K. VON; W. JERMAKOWICZ (1990), Privatization of Poland's Economy. Options and Choices, Mimeo, Marburg.

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GUS (GLOWNY URZAD STATYSTYCZNY) (1990), Rocznik Statystyczny 1990, Warszawa.

HEIDUK, G. (1980), Theorie internationaler Gtiter- und Faktorbewegungen. Eine nicht­monetare Analyse internationaler Wirtschaftsbeziehungen, Berlin.

HEIDUK, G. (1982), Multinationalization in the Pharmaceutical Industry as a Response to National Health Policies, in: Managerial Decision Economics - the International Journal of Research and Progress in Management and Economics, 3 (1982), pp. 194-203.

HOPPMANN, E. (1983), Marktbeherrschung und PreismiBbrauch. Moglichkeiten und Grenzen kartellrechtlicher Preiskontrollen dargestellt am Beispiel der pharmazeutischen Industrie, Baden-Baden.

KIRCHNER, C. (1975), Internationale Marktaufteilungen. Moglichkeiten ihrer Beseitigung mit einer Fallstudie tiber den internationalen Arzneimittelmarkt, Frankfurt a.M.

LINDGREN, B. (1990), The Cost of 'Non-treatment', in: G. TEELING-SMITH, ed., Measuring the Benefits of Medicines; The Future Agenda, Papers from an International Symposium held in London 23/24 October 1990, pp. 15-19.

MINISTRY OF FINANCE (1990), Poland's Economic Transformation - Objectives and Progress of the Government's Program, Mimeo, Warszawa, 22 October 1990.

PYSZ, P.; W. QUAISSER (1991), AuBenhandel, in: W. WDHLKE, ed., Landerbericht Polen, Bonn 1991, pp. 342-354.

REIS-ARNDT, E. (1987), 25 Jahre Arzneimittelforschung. Neue pharmazeutische Wirkstoffe 1961-1985, pharma dialog, No. 95, Frankfurt a.M.

RISLER, T. (1988), Mehr Wirtschaftlichkeit durch Behandlungsfortschritte?, in: D. CASSEL, ed., Forschung im Dienste der Gesundheit. Medizinische Notwendigkeit und wirtschaftliche Bedingungen von Arzneimittelinnovationen, Baden-Baden 1988, pp.83-94.

SCHELLHAASS, H.-M. (1985), Dynamische Marktschranken und Funktionsfahigkeit des Wettbewerbs, in: G. BOMBACH; B. GAHLEN; A. E. OTT, eds., Industrieokonomik: Theorie und Empirie, Tiibingen 1985.

SCRIP (1984), Scrip Yearbook 1989, 5th ed., Richmond, Surrey 1989. SCRIP (1989), Opportunities in Eastern Europe, in: World Pharmaceutical News, No. 1457

(1989), pp. 4f. SCRIP (l990a), Polish Patent Protection for US Products, in: World Pharmaceutical News,

No. 1503 (1990), p. 3. SCRIP (1990b) , Polish Patents for all Pharmaceuticals, in: World Pharmaceutical News,

No. 1510 (1990), p. 6. SCRIP (1990c), Prospects in Eastern Europe Assessed, in: World Pharmaceutical News,

No. 1528 (1990), p. 6. SCRIP (l990d) , Pharma Reforms in Poland, in: World Pharmaceutical News, No.

1544/1545 (1990), p. 4. SCRIP (1990e) , Polish Moves on Pricing/Reimbursement, in: World Pharmaceutical

News, No. 1575 (1990), p. 10. SMOLEN, M.; M. BRYLA; I. RYDLEWSKA (1988), Sources and Principles of Financing

Industrial Health Service in Poland, in: G. DURU et aI., eds., La Science des Systemes dans Ie Domaine de la Sante. 2. Systeme de sante et acteurs, Lyon 1988, pp.275-278.

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SZABLEWSKI, A. (1989), InoffIZielle Wirtschaftsreformen im Handwerk und im Dienstleistungssektor, in: D. CASSEL et al., eds., Inflation und Schattenwirtschaft im Sozialismus. Bestandsaufnahme, ErkHirungsansatze und ReformvorschHige fiir die Volksrepublik Polen, Hamburg 1989, pp. 477-494.

WEISS, P. (1991), Arzneimittelinnovationen in der Bundesrepublik Deutschland als unternehmerische Aufgabe und ordnungspolitisches Gestaltungsfeld, Duisburg.

WELFENS, P. J. J. (1988), Innovationstheorie, -politik und -dynamik im Systemvergleich, in: WELFENS, P. J. J.; L. BALCEROWICZ, eds., Innovationsdynamik im Systemvergleich. Theorie und Praxis unternehmerischer, gesamtwirtschaftlicher und politischer Neuerung, Heidelberg 1988.

WELFENS, P. J. J. (1990a), Internationalisierungsprozesse auf Unternehmensebene und Politiksystem: eine Analyse der Interdependenz von Wirtschaft und Politik, in: Zeitschrift fur Wirtschaftspolitik, 39 (1990) 2, pp. 183-203.

WELFENS, P. J. J. (1990b), Internationalisierung von Guterproduktion und Ressourceneinsatz: wirtschaftspolitische Herausforderung durch Standortwettbewerb offener Volkswirtschaften?, in: D. CASSEL, ed., Wirtschaftssysteme· im Umbruch. Sowjetunion, China und industrialisierte Marktwirtschaften zwischen internationalem Anpassungszwang und nationalem Reformbedarf, MUnchen 1990, pp. 17-46.

WINGENDER, P. (1991), AuBenwirtschaftsreformen in Polen, in: List Forum, 17 (1991) 1, pp.56-70.

WORLD BANK (1987), Poland. Reform, Adjustment, and Growth, Volume II, Washington D.C.

THE TRANSFORMATION OF THE POLISH ECONOMY: THE ROLE OF JOINT VENTURES

Peter KUrb/e and Perdita Wingender

Abstract: Joint venture (foreign capital participation) has become a kind of slogan in the forming of the transformation process of former centrally planned economies into Western-type market economies. This paper will show what importance joint ventures do in fact have in the Polish transformation process. For this reason, empirical sources and the results of an enterprise inquiry were used as a basis, thereby proving that joint ventures cannot in fact fulfill the requirements of a transformation and privatization instrument. J oint ventures have no capacity to shape the economic order. In order for joint ventures to work and for the transformation of the economic system to come about, substantial reforms of the property structure and the price system are necessary. It could, however, be proved instead that joint ventures are used as strategic instruments for companies to internationalize, especially for small and medium-sized companies.

Zusammenfassung: Joint Venture (Gemeinschaftsunternehmen) ist zu einem Schlagwort der Gestaltung des Transformationsprozesses ehemals sozialistischer Planwirtschaften in kapitalistische Marktwirtschaften geworden. Dieser Artikel zeigt, welche Bedeutung Joint Ventures im polnischen TransformationsprozeB tatsachlich haben. Dazu werden empirische Quellen und die Ergebnisse einer Unternehmensbefragung herangezogen. Es laBt sich nachweisen, daB Joint Ventures die Anforderungen an ein Transformations- und Privatisierungsinstrument nicht erfullen. Joint Ventures konnen keine ordnungspolitische Funktion ubernehmen. Fur die Funktionsfahigkeit von Joint Ventures und die Transformation des Wirtschaftssystems sind tiefgreifende Reformen der Eigentumss!ruktur und des Preissystems notwendig. Stattdessen hat sich bestatigt, daB Joint Ventures als strategisches Instrument der Internationalisierung von - hauptsachlich Klein- und mittelstandischen - Unternehmen genutzt werden.

Streszczenie: Joint Venture - stalo sie pojeciem scisle zwiazanym z procesem transformacji gospodarek planowych w gospodarki rynkowe. Opracowanie ponizsze pokazuje role, jaka faktycznie joint venture spelniaja w transformacji polskiej gospodarki. W tym celu zaprezetowane zostaja wyniki badan empirycznych oraz odpowiedzi udzielone przez joint ventures na przeprowadzona ankiete. Empiryczne badania prowadza do wniosku, ze joint ventures nie staly sie dostatecznie skuteczna forma przyspieszajaca proces transformacji i prywatyzacji. Ich organizacyjne i wlasnosciowe formy nie staly sie takze podstawa rozwiazan bardziej generalnych. Dla samego funkcjonowania joint-ventures oraz powodzenia przelomowej reformy w Polsce konieczne sa zdecydowane dzialania prywatyzujace sektor panstwowy oraz tworzace podstawy rynkowego systemu cen. Joint ventures okazaly sie natomiast owocna forma internacjonalizujaca stosunki ekonomiczne, szczegolnie na poziomie malych i srednich przedsiebiorstw.

1. INTRODUCTION

Most of the former socialist countries have liberalized their centralist foreign trade mono­polies and no longer have export and import planning. As a consequence of this, enterpri-

166

ses are now able to trade without interference. The currencies of these countries are as yet not fully convertible as most of the countries fear an extremely high devaluation and rising competition from abroad. Nevertheless, full convertibility is the main aim at the end of the reform process in foreign trade. There is discussion now in the transition period about the most suitable form of foreign trade and, among other things, about joint ventures. This paper will show first, the functions of joint ventures in the Polish economy in the past and second, the tasks that joint ventures could fulfill in the future. The paper concludes with the view that joint ventures cannot support the transformation process in a direct way. In order to make wide-ranging use of this particular form of industrial cooperation, a substantial reform of the enterprise structure is necessary and a workable pricing system will have to be established in the Republic of Poland. Foreign capital participation just supports the transformation process in an indirect way, because it competes with Polish companies and increases the pressure of competition on the firms which are state-owned. Joint ventures are, in addition to being sefOnd-best solutions, also a strategic mstrumenC for internationalizing small and m;dium-sized finns: .

Chapter 2 deals with the transformation program of the Polish government and its influ­ence on the establishment of foreign investments. Chapter 3 shows the influences joint ventures have had on the Polish economy. Chapter 4 deals with the motives of the Western and Polish firms and the Polish government. Then, these motives are compared with the requirements of the transformation program. Chapter 5 shows the problems of establishing a joint venture in Poland. This chapter and the foregoing ones contain the results of an actual enterprise inquiry, conducted with Western firms as regards Polish joint ventures (HEIDUK/WINGENDER, 1990). Finally, we discuss in chapter 6 the importance of joint ventures in and after the transformation process. Chapter 7 concludes with the results of the paper.

2. THE TRANSFORMATION PROGRAM OF THE POLISH GOVERNMENT

The Polish liberalization and stabilization program, introduced on January 1, 1990, and de­veloped with the help of the International Monetary Fund, is based on two major points: the stabilization of the Polish economy and second, the restructuring of the economy into a market economy similar to that found in Western countries. The stabilization of the economy is to be reached by balancing the government budget, and by a reform of the exchange rate system enabling households and firms to freely exchange Zloty into Western currencies. In addition, the most regulated prices are to be liberalized and subsidies and tax reliefs are to be reduced or eliminated (MACHOWSKI, 1990, p. 63). Restructuring the economy means the privatization of 8,000 state enterprises, which produce over 90 percent of industrial goods (MINISTRY OF FINANCE, 1991, p. 4) as fast as possible (BALCEROWICZ, 1990). Privatization is to go ahead with the selling of small-size firms by means of auctions and of the big state enterprises by means of initial public offerings, the free distribution of shares, the transfer of shares to banks and private pension funds, a limited sale of large blocks of shares to interested domestic and foreign parties (MINISTRY OF FINANCE, 1991, p.4, see also FRANZ/SCHIPKE/GROSZEK in this volume). The aims of restructuring are first, to get the best possible conditions for sponsoring domestic enterprises and second, to increase the flow of foreign capital into the Polish economy to form a compound in different organizational and legal kinds

167

(BANASINSKI/CZECHOWSKI, 1990, p. 277). There are three possibilities for foreigners to invest in Poland:

The Act on Economic Activity with the Participation of Foreign Parties passed on July 13, 1990, allows the government to sell the shares of the former state enterprises to workers and others as explained above. If these buyers are foreigners and they want to buy more than 10 percent of the shares authorized, the president of the Foreign Invest­ment Agency (FIA, called into being 1989) has to come into action. Already since 1976 the Regulation of the Council of Ministers has permitted foreign individuals to run certain types of economic activities (SADOWSKA­CIESLAK/PAC/KOZYRA, 1990, p. 12). But there used to be a difference between the needs of foreign investors and the possibilities to invest. Now the government wants to close the gap with legal reforms (see table 1). First of all, there is no restriction on the scope of activity. Foreign participation can now be in Zloty and non­cash contribution. The possibility of bringing in the participation in Zloty induces a change of the currency into Zloty and therefore forces the inner convertibility of the Zloty. Until 1989 export earnings of joint ventures had to be sold to a Polish bank before being transferred abroad. Now they could be transferred in full, but the transfer of Zloty earnings is still limited. Limitations exist also for the transfer of liquidation earnings in Zloty. At the earliest, they can be transferred ten years after the re­gistration of the joint venture. This ignores the agreement of investment promotion and protection of November 10, 1989, which allows to transfer a higher percentage of liquidation earnings. The income tax rate has often been changed and now it is the same as for private enterprises. Also, tax incentives have been the object of numerous changes. Now, joint ventures are free of income tax for three years and this can be prolonged to six years. At first, a prerequisite for allowing foreign participation was for the owners of enterprises with foreign participation to be country nationals resident abroad. Then, only the chairman of the Board had to be a resident and now no such regulation exists any more. Also, the duration of joint ventures no longer has to be specified. To set up a bank is now also possible to foreigners. The conditions are regulated in the Law of Banking. The president of the FIA as the issuing authority permits the setting up of a foreign bank. So far, 55 licences have been granted but none of these is foreign.

If we want to know something about the hopes Polish government has put into joint ventu­res, we have to look at the conditions, combined with the permits for joint ventures given by the FIA (ACT ON THE ECONOMIC ACTIVITY WITH THE PARTICIPATION OF FOREIGN PARTIES FROM 23 Dec. 1988). A permit to set up such a company may be refused only if its activity would

help to introduce modern technical and organizational elements into the Polish eco­nomy, deliver goods and services for the export to Western countries, improve the supply of modern and high-quality goods and services in the home mar­kets, improve environmental protection.

TABLE 1:

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Joint-Venture Legislation in Poland from 1976 to 1989

10, 20 or 40 Years

Each IX of production export~ ; O,~X r~uc- ~xport~ = O,4X re- rat~ as the pri­ticn in tax rate. rein- duction in tax ~ate. vate enterprises v~sted profits are tax re;nvest~ profits f r~e ar-e tax f re:e fl r ll " 2 year" tax fr.... Fl rst ', 3 years' tax ".,:''''~1 rst !I to 6

J.;g~~t:..;~ .. . :t free ;.:;}:; . " "-:. ..~ YlI!ars tax free Hanage r or C"a; nnan of None Manag,""",nt Board

llftlt :.:", .

a: 14.05.1976 Decree regarding the granting of permission for the practice of certaht economic activities to foreign legal and physical entities. 07.02.1979 Guidelines concerning the principles of establishing and organizing limited liability companies with foreign capital participation in Poland. 06.07.1982 Law referring to the principles of practising an economic activity on the territory of the People's Republic of Poland in the small scale industry sector by for­eign legal and physical entities.

b: 23.04.1986 The Law concerning companies with foreign capital participation. c: 23.12.1988 The Law on economic activity with the participation of foreign parties. d: 28.12.1989 The Law about the changing of the law referring to the principles of

practising an economic activity in small scale production by foreign legal and physical entities and the Law concerning economic activity with the participation of foreign parties.

SOURCE: SZNAJDER (1988); FOREIGN TRADE RESEARCH INSTITUTE (1990).

169

Finally, permission will not be given if it runs counter to national economic interests, state security and defenses, or the protection of state secrets. So far, there have been only a few cases for which permission has not been given.

3. THE INFLUENCE OF WESTERN JOINT VENTURES ON THE DEVELOPMENT OF THE POLISH ECONOMY

3.1 DEVEWPMENT AND STATUS QUO OF JOINT VENTURES IN POLAND

In comparison with the other members of the CMEA, Poland ranged third with regard to all industrial cooperation agreements (including licensing, supply of plant or equipment with payment in resultant products, coproduction, specialization, sub-contracting, joint tendering or joint projects involving third parties, general cooperation contracts and management contracts (UNECE, 1989a, p. 3) with Western countries. For many years Hungary occupied the first place in founding industrial cooperations and its share has increased since 1976 from 30 to 35 percent in 1989. The USSR occupies place two in this list and its share has increased from 13.5 percent in 1976 to 32 percent in 1989. By comparison, the Polish share decreased during that period about 23 percentage points (see table 2), from 26 to 3 percent.

Poland and Romania, which in 1976 occupied position two and three, have dropped to posi­tion six and seven. One of the reasons for the decrease in founding industrial cooperations has been that both countries underwent economic crises in the seventies, a situation which is still continuing (LAMBRECHT et al., 1990, p. 33). West German firms clearly predo­minate among joint ventures partners, not only in Poland, but also in the whole of CMEA (see table 3). In 1986, West Germany took part in 25 percent of all cooperations.

TABLE 2: East-West-Cooperation in CMEA (in Percent against the Previous Year)

Year Country

Hungary USSR Poland CSFR Bulgaria Romania GDR

1976

30.0 13.5 26.0 4.5 4.5

19.5 2.5

1986

38.5 29.5 11.0 8.0 5.0 4.0 4.0

1989a } I

35.0 I 32.0 3.0

I 6.0

11.8 0.0 5.0 I

a: Industrial cooperation without joint ventures.

SOURCE: UNITED NATIONS, EUROPEAN COMMISSION OF EUROPE (UNECE) (1989a), p. 14.

Also, the share of joint ventures in the different kinds of industrial cooperations has in­creased, not only in Poland but also in the whole of CMEA. In 1989, the ECE counted 3,700 agreements (including Yugoslavia), of which 1,900 were joint ventures. Because of the high increase in the number of joint ventures since 1989, the ECE now distinguishes between joint ventures and other kinds of industrial cooperation (UNECE, 1989, p. 1).

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Table 4 shows that in Poland the licensing of joint ventures has strongly increased. Poland now takes place two after the USSR and before Hungary. The high number of joint ventu­res may be the reason for why other kinds of industrial cooperation, regarded as a preliminary stage to joint ventures, have lost in importance (see table 2).

As seen in table 5, the share of former West German and West Berlin agreements with Po­lish enterprises amounts to 35 percent of all Polish joint ventures. As regards the share and paid-Up capital to the value of US-$ 75 billions, former West Germany occupies place one. As regards the aggregate capital of all joint ventures, West Germany's share is, however, only 21.2 percent, which means that the capital share per joint ventures averages out at US­$ 187,700, which is less than the average of all joint ventures (US-$ 312,000).

TABLE 3: East-West-Cooperation orWestem Countries in Percent,

Year 1986 Country

West Germany 25.0 United States 11.0 Italy 11.0 France 9.5 Austria 8.0 Great 8ritain 8.0 Sweden 5.5 Japan 5.0

SOURCE: UNECE (1986).

3.2 THE IMPORTANCE OF JOINT VENTURES FOR THE POLISH ECONOMY IN GENERAL

As shown in table 6, the contribution of joint ventures to the Polish economy is small. Joint ventures and the so-called Polonia firms (firms whose owners are country nationals living abroad, see table 1, 1976/1982/1986, existed until 1989) make up 1.9 percent of all revenues in goods and services in the Republic of Poland. They hold 3.7 percent of all exports of Western countries, 1.6 percent of all employees working in joint ventures or Polonia firms; they generate 1.8 percent of profit and pay 0.6 percent in income tax. The low tax burden is due to the tax advantages enjoyed by joint ventures.

Joint ventures are much more export-oriented than the whole of the Polish economy and the Polonia firms (see table 7). While joint ventures export more than one third of their re­venues, Polonia firms export only 17 percent and the Polish economy as a whole only 14 percent. The exports of joint ventures are evidently oriented towards the West: 81 percent of joint venture exports are delivered to Western countries, i.e. non~CMEA countries. The Polish economy as a whole only exports 66 percent to Western countries. Labor producti­vity is, with 1.8 index points, twice as high as in the Polish economy as a whole. The general rate of profits per employee is 2.8 points in joint ventures. Nevertheless, the domestic mar­ket is preferred.

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Table 4: Joint Ventures between Western and Eastern Partners in the USSR, Poland, CSFR and Hungary (Numbers, 1987-1989)

Country USSR Year

1987 23 1988 168 1989 738a )

Total 929

a: Until October 1st, 1989. b: January to May 1989. c: Until October 1st, 1989. d: Until April 1st, 1989.

SOURCE: UNECE (1989b), pp. 1-45.

Poland CSFR Hungary

13 5 102 40 11 74d )

129b) 22c ) 2

182 38 178

The question arises, why joint ventures have not been able to fulfill the expectations of the Polish government. In the following, we want to use the results of an actual poll of enterpri­ses (HEIDUKjWINGENDER, 1990) to answer this question.

4. THE POLISH AND THE WESTERN VIEW OF MOTIVES FOR THE FOUNDING OF JOINT VENTURES

At th~ beginning of this chapter, we want to look again briefly at the main motives for the Polish government to license joint ventures: First, joint ventures are supposed to improve the transfer of know-how and modern managerial methods. Second, joint ventures are to improve the capital transfer to Poland. Third, joint ventures should improve exports and the supply to the domestic markets. The main reasons for these motives are first, the shortage of foreign currencies in Poland, forcing it to look for indirect possibilities to get Western goods and services. And second, the Polish government hopes for economic growth, higher economic efftciency and an improvement in the balance of payments.

The main motives for German companies to establish joint ventures in Poland are to utilize lower wages and lower production costs, followed by the motive to open up the Polish mar­ket and by the motive to utilize the Polish partner's knowledge of the country and its market (HEIDUKjWINGENDER, 1990). If the size of the enterprise is taken into account, it can be seen that the main motive for large enterprises is to open up the Polish market with the view to finally opening up the whole of Eastern Europe. While small and medium-sized enterprises are more interested in the advantages of wages and production costs (BOLZjPISULLA, 1982, p. 11), 85.4 percent of all enterprises questioned in the above-mentioned survey expressed no interest in using joint ventures in order to by-pass Polish import restrictions.

In conclusion, the motives of the Western partners in joint ventures are not contrary to the motives named by the Polish government for legalizing joint ventures. Differences result rather from the motives of the Polish government being macroeconomic, while those na­med by the Polish enterprises are of a microeconomic nature. For example, while the Po­lish government welcomes the know-how transfer to the Polish market, the Polish state

172

enterprises, which have worked according to a plan up to now, do not (HEWETT, 1975). First, the efficient input of modem technology will strengthen the plan target. Second, the utilization of new technology will raise the requirement on the labor force. But the incentives are not suitable (THIEME, 1985, p. 304). Third, enterprises are now forced to take into account competition in the world economy. Instead, it is easier for them to sell to the domestic market (MACHOWSKI, 1988, p. 63). Apart from the negative attitude of the Polish enterprises towards the transfer of modem technology, Western partners are also not interested in building up potential competitors. That is why the technology p~t at the Polish partner's disposal by Western enterprises is not modern, but rather of a standard nature (ENGELHARDT jSEIBERT, 1981, p. 432; BARISITZ, 1990, pp. 184f.).

TABLES: Geographical Structure of Joint Ventures in Poland (in Numbers and Capital, March 1990)

Number of Value of initial Value of initial capital/

Country jOint capital in mio. number of joint ventures

ventures US-dollar in thousand US-dollar

Total Foreign Total Foreign

share share

West Germany 404 75773.7 42612.3 186.7 105.5

Sweden 101 35245.3 19740.3 349.0 195.5

Austria 74 18342.1 8913.6 247.9 120.5

USA 73 18942.8 10618.0 259.5 145.5

West Berlin 65 19052.7 13026.9 293.1 200.4

Great Britain 49 9135.3 5669.2 186.4 115.7

France 49 7104.7 3487.6 145.0 71.2

Nethe r 1 ands 48 29202.5 16762.7 608.4 349.2

Italy 47 33462.2 10459.2 712.0 222.5

Multinational 46 32080.9 15445.6 697.4 335.7

Switzerland 29 6316.2 4199.2 217.8 144.8

Belgium 27 11708.1 4713.2 433.6 174.5

Canada 24 3984.0 2259.3 166.0 94.1

Denmark 22 4517.8 1726.1 205.4 78.5

Others 87 52394.7 26967.8 602.2 310.0

Total 1145 57244.9 186601.0 312.0 162.0

SOURCE: FOREIGN TRADE RESEARCH INSTITUTE (1990), p. 37.

Capital transfer has also been on a rather small scale (see table 5), thus dashing all hopes the Polish government might have had. One reason for this is the size structure of Polish enterprises. The large enterprises are state-owned and the possibility of building up joint ventures with Western firms is a recent phenomenon. The other reason is the modest investment behavior of Western ftrms (see also table 5).

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TABLE 6: Importance of Joint Ventures (in bl. Zloty and in Percent against the Previous Year, March 1990)

Turnover

in %

Export

in %

of this exports in

non-CMEA countries

in %

Employed persons

in T.

in %

Profit

in %

Income tax

in %

Poland

total

140975

19028

12912

6901

48406

18522

Joint

venture

736

0.60

259

1.40

236

1.90

20

0.30

341

.0.70

2

0.01

SOURCE: FOREIGN TRADE RESEARCH INSTITUTE (1990), p. 69.

Polonia

fi rms

1869

1.30

322

1. 70

228

1.80

87

1.30

501

1.00

99

0.50

The improvement in the balance of payments has not been achieved yet. Although the survey shows in fact an export-orientation of the joint ventures, the export share with regard to Polish exports as a whole is very small (see table 6).

Therefore - in spite of the far-reaching stabilization and liberalization program - it can be concluded that joint ventures have not fulfIlled the hopes of the Polish government so far. This is due to the policy of the state-owned enterprises and the cautious approach of We­stern companies.

5. PROBLEMS ARISING DURING THE FOUNDING AND IMPLEMENTATION OF JOINT VENTURES RIGHT UP TO THE START OF BUSINESS FROM THE WESTERN POINT OF VIEW

From the moment of deciding to establish a joint venture with a Polish partner right up to the start of business and afterwards, problems can arise. During the founding phase the main problem is to get a suitable partner. The study (HEIDUKfWINGENDER, 1990) shows that more than 60 percent of German enterprises had already had contacts with Po­lish firms before founding a joint venture, making the search for a partner rather easier. As a preliminary stage to joint ventures, the existence of industrial cooperations proved to be of greater importance than relations based on exports and imports. This could be explained by the necessity of the partners having to work together rather more closely in industrial cooperations. However, the nature of the former relationship did not reduce the period of time necessary to start a joint venture. The time for founding a partner fitting the need is on average 2.3 months; for the first contacts 2.5 months; for the bargaining process 3.1 months; for the licensing process 3.9 months; for registering at the Chamber of Commerce

174

2.2 months and for starting economic activity 3.0 months. Besides such "prenatal" problems, there could arise difficulties also after the "birth" of a joint venture. It is interesting to see that the main difficulties are a non-existent infrastructure and a lack in telecommunication. 86.5 percent of the enterprises questioned named these problems rather than an unstable political, legal and economic framework. The range of the problems is independent of the size of the Western firm involved. Only 34 percent cited the last issue as a problem. AGARWAL (1990) takes a quite different view. He mentions that a new analysis shows that political instability has a very important, though negative, influence on the engagements of foreign firms in developing countries and most particularly in centrally­planned economies (AGARWAL, 1990, p. 134). Also, having to deal with the Polish authorities represents a major problem to West German companies (63.2 percent). Some of the Western employers are of the opinion that corruption has increased since the start of the Polish reform process. Because of that, West German enterprises still prefer to have Polish citizens occupy the higher management positions, since they also have knowledge of the country and language.

TABLE 7: Economic Indicators for Joint Ventures in Comparison with the Whole Polish Economy and Polonia Finns

Poland Joint Polonia

total venture fi rms

Export/turnover in X 14 35 17

Export no.,-CMEA/

total export in X 66 81 71

Material cost/ turnover in X 45 40 45

Turnover/employment

in Bl. Zloty 20431 35987 21448

Index 1.0 1.8 1.1

Profit/employment

in Bl. Zloty 7016 16682 5750

Index 1.0 2.8 2.4

SOURCE: FOREIGN TRADE RESEARCH INSTITUTE (1990), p. 68.

6. THE IMPORTANCE OF JOINT VENTURES DURING THE TRANSFORMATION PROCESS AND AFTERWARDS

The question here is if and to what extent joint ventures fulfill a dynamic function or are an instrument for internationalizing small and medium-sized companies. Theories which explain the dynamic function of joint ventures see these as a second-best solutions as compared to wholly-owned companies. When trade or the founding of foreign subsidiary companies is restricted, foreign companies look for alternative strategies. They take the defensive view of the take-it-or-leave-it strategy (CONTRACTOR, 1981, pp. 79ff.; OMAN, 1984, p. 78; BORNER 1984, p. 23; KOJIMA/OZAWA, 1985, p. 41).

175

The international business view is that the reasons for establishing joint ventures do not lie in the pressures exerted by restrictive legislation, but that it is a strategic decision of em­ployers (for an overview see RATH, 1990, p. 220). Empirical studies show that although since the beginning of this decade legislation on foreign investment has been liberalized, there has been no drop in the establishment of joint ventures. The advantages of joint ven­tures against other forms of international cooperations mentioned are:

Securing existing and opening up of foreign markets with a minimum of financial and material investments. Access to the market is quicker than by foreign subsidiary com­panies or new foundations (PAUSENBERGER, 1980, p. 210). Utilizing local resources and knowledge together with subsequent learning effects (JAHRREISS, 1984, pp. 36 ff.). Risk reduction over limited property loss (economic and political risks). The higher risk involved (because of the smaller capital share reducing control possibilities) is thought to be smal~ since there are other possibilities for control, i.e. by utilizing mo­dern technology (OMAN, 1989, p. 26).

If one takes the view that joint ventures are only an instrument for avoiding trade restric­tions, it is to be expected that joint ventures will, with further liberalization of the Polish

foreign investment laws, be of less importance. This process is explained by KOGUT (1988) who shows in his study on the life cycle of joint ventures, that a joint venture will in all probability be finished if the reasons for the liquidation of the joint venture are the same as the reasons for founding it in the first place. Joint ventures are therefore not generally to be viewed negatively, because during their existence joint ventures bring a lot of advantages to all partners concerned. _Kogut integrates the view of joint ventures as a secona-best­strategy option of going it alone with the thesis that joint ventures are founded voluntarily (WEDER, 1989, pp. 231ff.) because they have advantages as opposed to other trade and cooperation forms (HAUSER, 1981, p. 178). The abstract of the HeidukjWingender study shows that the majority of enterprises founded joint ventures for sale and production motives. The abolition of restrictive trade regulations is not an important motive. This points to the fact that joint ventures are not liquidated because of changing legal frameworks, but because joint ventures are not the right way to fulfill the microeconomic targets of the partners. Or just as KOBRIN (1988, p. 82) formulates " ... finns do not automatically revert to wholly owned subsidiaries where the choice is theirs. The decision appears to be a function of the costs of a joint venture ... and the benefits. II

OMAN analyzes the development of new forms of investments Goint ventures in which for­eign equity does not exceed 50 percent, licensing agreements, franchising, turnkey and pro­duct-in-hand contracts) and traditional forms of trade which include a hundred-percent participation for developing countries. Until the seventies a strong aversion against wholly­owned firms could be observed, because the governments in developing countries feared a loss of control over the business of such firms. In the seventies the low interest rate on the international fmancial markets and the high amount of US-dollars outside the United States gave the developing countries the possibility of lending at relative favorable conditions. During that period, those countries were not interested in allowing wholly­owned firms. They favored new forms of industrialization, including minority-equity joint ventures. Since the debt crisis in 1982 the situation has fundamentally changed: to fmance the deVeloping process with the help of the international financial markets has become

176

limited. The governments of the developing countries are now ready to allow wholly-owned enterprises. OMAN (1989, pp. 14f.) comes to the conclusion:

"Insofar as the growth of NFl (new fonns of investment, the authors) during the 1970s was the result of government regulations that restricted foreign ownerships of investment and generally favoured NFl over traditional FDI (traditional foreign direct investment), the fact that host governments are now seeking to attract new flows of traditional FDI suggest a reversal of the previous trend. But other factors, notably including a change in multinational corporate views on the advantages and disadvantages of NFl relative to traditional FDI, point to continued growth of NFL Moreover, the latter trends give the impression of being somewhat stronger than the fonner. But on balance, the two trends appear to be more complimentary than contradictory."

These developments can be transferred to the Polish situation. The fIrst law about the activity of foreigners was introduced in 1976. First, with a time lag of six years in 1982, there was a forward liberalization of foreign trade in Poland. Far-reaching liberalization after that was fIrst introduced in connection with the economic crisis in 1988, after which it was recognized that Poland could not get further fInancial means on the international fmancial markets. Since the economic situation has worsened, the Polish government peqnits wholly-owned enterprises. OMAN (1989, p. 26) expects for the developing countries: "Many internationally active cooperations have found that just as ownerships of equity does not necessarily imply effective control of an investment operation, so minority or even zero equity does not necessarily imply inadequate control." Taking into consideration these arguments, it can be expected that with the further liberalization of trade in Poland, Polish joint ventures will continue to be part of the economic scene. Joint ventures as a strategic form of interna­tionalization will be more extensive, although their share in the economic results will be unimportant.

The importance of joint ventures in general, and in Poland in particular depends also on the propensity for joint ventures. The propensity depends on regional and sectoral conditions and differs from industry to industry. Studies show that Japan, Europe and the developing countries have a higher propensity for new forms of industrialization than, for example, the enterprises in the United States. But that applies only to the quantity. Value comparison can show another perspective (CONTRACTOR/LORANGE, 1988, p. 6). KOBRIN analyzes the propensity for joint ventures in different branches in the US­economy. Branches with high technology intensity have a low propensity to found joint ventures. The empirical results show that instruments, electronics and computers have a very low propensity for joint ventures. They are virtually wholly-owned, as fewer than 15 percent of subsidiaries are joint ventures in each case. The pharmaceutics industry is in 78 percent of cases wholly-owned. At the other end of the scale are textiles, chemicals and the paper product industry (KOBRIN, 1988, pp. 77f.). Our data about the branches of joint ventures in Poland show a similar structure: food processing, textile, building and vehicle construction participate in most of the joint ventures, while there were, for example, no joint ventures in pharmaceutics and only a small share of joint ventures in instruments, electronics and computers.

177

7. RESUME AND PROSPECT

Joint ventures in the Republic of Poland have had a negligible influence on the Polish eco­nomy. Joint ventures can only play an important role in the transformation process if the microeconomic motives of the Polish state enterprises are harmonized with the macroeco­nomic goals of the Polish government and the motives of Western companies. Therefore, and this is the dilemma, the state enterprises must be privatized or the state enterprises have to be made to conform to the market-oriented profit principle. But that would mean that the reform of the property structure and the price system would be a prerequisite for an efficient engagement in joint ventures. Hence it follows that joint ventures are no appro­priate instruments for privatizing a former centrally planned-economy (INOTAI, 1990).

Nevertheless, the Polish government should liberalize the legal and economic framework for foreign investments as fast as possible, because the data show that joint ventures work more efficiently than state enterprises. In addition, the firms questioned were of the opinion that their joint ventures with the Polish partners were more than satisfactory (HEIDUKjWINGENDER, 1990). That does not, however, mean that joint ventures need special legislation (ENDRES, 1987, pp. 378f.), because exceptional laws in the past have often led to improper use, i.e. fictitious joint ventures. Also, the experience with developing countries shows that tax privileges are no substitute for liberal frameworks (AGARWAL, 1990, p. 137). It makes more sense if joint ventures are emancipated from the domestic and state enterprises. The expected legislation will provide for the following:

transfer of all profits, dividends and capital gains, unsuccessful ventures can be liquidated immediately, instead of after 10 years, instead of a three-year tax holiday that had been allowed so far, it will now be possible to carry forward losses in the initial years of a project and set these against subsequent profits to reduce tax, current requirements for foreign partners to contribute at least 50 thousand US-dollars to a joint venture and to hold at least 20 percent will be abolished, except in strategic sectors, such as energy and defense, foreign companies will be allowed to found joint ventures with private Polish firms without seeking prior permission from the Foreign Investment Agency (HERALD TRIBUNE, 1991).

What chance then has the development of joint ventures in Poland? The future importance of joint ventures in Poland depends on the role of the joint ventures as a mainly dynamic instrument to abolish trade restrictions or as a permanent instrument for the internationalization of frrms. The data for the Republic of Poland show that joint ventures in that country mainly perform the second task. Further developments in Poland will show, if joint ventures in Poland will only be a dynamic and temporary phenomenon in the transformation process, or if they will be a permanent feature in the internationalization of enterprises.

178

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