How America Can Help Poland Make History

NO ONE CAN watch what is happening in Poland today without a sense of wonder. During a mere seven months, Solidarity's brave leaders have fought for legal recognition; then for democratic elections; then, after an overwhelming victory, for the right to lead Eastern Europe's first non-communist government; and now for a dramatic program of economic and political reform.

Since April, I have taken eight trips to Poland as an economic adviser to Solidarity. During that time, I have watched in awe as the Poles have seized the opportunity to forge a normal life for themselves and their children. Poland can make it-with prompt and measured help from us. A couple of weeks of hard work by the Bush administration and our Western allies could put together a package of aid that can make the difference.

"History does not wait," warns Jacques Delors, president of the European Community. But some in the West seem to wish that it would, fretting that the changes in Eastern Europe and the Soviet Union are moving too fast, that the West needs more time to develop a policy.

Some Poles also counseled caution: They feared that Solidarity was not ready, that it did not have a program, that it was a trade-union movement, not a political movement, and so on. And one could have understood if Solidarity had said "no thanks" to the Herculean task of cleaning up the mess left by the collapse of Poland's centrally planned economy. But overwhelmingly, the Solidarity leadership and the Polish people knew better. Prime Minister Tadeusz Mazowiecki knew that history could not wait.

Poland's economic program can succeed, despite the miserable economic hardships that Poland now faces. Poland can transform itself into a parliamentary democracy with a market economy closely linked to the European Community. It can lead the way out of the old post-1945 alignment in Eastern Europe into the new order of the 1990s. But the transition will be very risky, and the West has a vital role to play in reducing those risks.

The new government clearly recognizes the staggering task before it. The state-owned, state-run economy of the former communist regime has totally collapsed, leaving in its wake an inflation raging at 40 percent per month, a deepening recession and an unpayable foreign debt of $40 billion. The depth of the crisis is the main spur to the attempt under the leadership of Finance Minister Leszek Balcerowicz to create a market economy in one big jump. As a leading Polish economist has put it, "You don't try to cross a chasm in two leaps."

The government's economic program charts a remarkable course of legal, institutional and economic reforms aimed at creating a stable market economy by the end of 1990. The plans include: balancing the budget by draconian cuts in budget subsidies; devaluing the exchange rate and creating a stable convertible currency; breaking up the state-run monopolies that now dominate much of Poland's industry; privatizing large parts of the state sector; creating a tax and regulatory environment that will foster the formation and growth of new private firms; and opening the doors wide for an expansion of trade and foreign investment.

The gravest risks will come in the next few months. Solidarity inherited a bankrupt government, hemorrhaging from a huge debt burden and paying its bills by printing money. The result of the financial collapse is a galloping inflation. While there are many aspects to the reforms planned for the next year, the first steps must be to regain financial control over the budget, and thereby to stabilize the currency.

But here is the nub of the problem. The budget deficit must be cut so that the government can stop printing money. Only with budget balance will Poland be able to create a stable and convertible currency, which is in turn the key to expanding international trade, attracting foreign investment, reforming the tax code and privatizing industry. But cutting the deficit requires a deep cut in subsidies on consumer goods (for example, coal and gasoline). As subsidies are cut, workers' real wages are eroded, while prices of consumer goods jump ahead. If workers insist on wage increases to recoup their lost ground, not only does the wage-price spiral intensify but the deficit widens again, as higher labor costs counteract the subsidy cuts. So if the budget is to be balanced, as it must be, wages cannot be allowed to keep up with the higher prices that result from the subsidy cuts.

The prospect for workers is not, in fact, as bad as it may seem. What workers now gain from subsidies, they lose through the insidious "inflation tax" that relentlessly eats away at the value of their money holdings. Thus, while real wages will have to fall when the subsidies are cut, workers will recoup some or all of those losses very quickly simply by having a stable value of money.

Nonetheless, cutting subsidies is frightening to the government and to the public-especially since the size of the cuts as a proportion of GNP will exceed, in the next six months, all the deficit-cutting that the United States hopes to accomplish under Gramm-Rudman during a five-year period! Not surprisingly, a sense of panic now pervades Poland, especially as the public stares at higher coal prices as winter approaches.

A rock thrown through a bakery window by a disgruntled worker could set off a chain of violence that could stall or reverse the reform process. Or populist politicians could paralyze reform efforts by holding before the public the illusion of an easier way to end inflation (such as a price freeze, which would gravely worsen shortages, and so be short-lived). In earlier years, subsidy cuts in Poland have prompted riots and violence, as they have this year in Argentina and Venezuela. The risks in Poland are special, for the police and internal security forces remain outside of Solidarity's control.

The West can play a crucial role in cushioning the burden during the stabilization phase of Poland's reform process. The Polish government has outlined a request for aid from the West that conforms with the country's needs and is realistic in terms of the amounts of support that can be expected. Both directly and indirectly, the U.S. share of the aid would come to about 20 percent of the total, with the rest coming from Europe and Japan.

The aid will play several vital roles: to help sustain Poland's import levels during the cold winter ahead, and thereby cushion any fall in living standards; to give the Polish government the financial reserves to stabilize the currency; and to give confidence to the people to bear with the reform measures, and to accept the reduction in real wages as a short-run necessity that will prepare the way for long-term growth.

The centerpiece of the aid request is a $700-million loan from the International Monetary Fund. The Polish authorities do not shirk from an IMF "austerity package," including budget cuts. The IMF has, fortunately, moved with alacrity, and an IMF mission is now in Warsaw. Still, the urgency of Poland's problems require that the IMF negotiating process be expedited so that money starts flowing by January.

Poland has also requested aid from the World Bank, in the form of a $500-million structural-adjustment loan to help pay unemployment insurance to the large portion of the labor force that may lose their jobs in the coming months. But World Bank officials have been unaccountably glum in their public utterances to date. The only concrete measures so far endorsed publicly by the bank have been some loans for projects negotiated with the previous regime.

The third element of Poland's aid request is for a $1-billion stabilization grant from the industrial governments, of which the U.S. share would be $200 million. The money would be placed in Poland's international reserves to give confidence to the Polish public that their currency will have a stable value against the Western currencies. The remaining $800 million is to come from the other advanced industrialized countries that make up the Group of 7, but commitments have not yet been made.

The fourth component of Poland's request is for emergency support for food and other imports in the last two months of 1989 if, as looks possible, supply problems in Polish industries lead to a serious fall in export earnings needed to finance necessary imports. Several European countries are now considering such aid.

The fifth and crucial component of Poland's request is for deep debt relief. For the next 12 months, Poland will be able to pay little if anything on its crippling foreign debt. After that, the long-term burden of the debt will have to be reduced down to manageable levels. Poland must be acknowledged as a clear and worthy participant in the Bush administration's Brady Plan, so that commercial bank loans, squandered by the previous regime, can be cut by more than half.

There is nothing complicated in Poland's requests, nor are the sums particularly large. Congress has recognized the urgency of the situation, and has helped to prod the administration into action. The House of Representatives recently passed an $840-million aid package for Hungary and Poland, including, with administration endorsement, the U.S. contribution for the stabilization fund, and the Senate will soon vote on a similar measure. And yet, the overall package of aid has still not been assembled.

Part of the foot-dragging seems to arise from fears that Poland will prove to be an endless sinkhole for Western aid. Such fears are thoroughly misplaced. While Poland's crisis is indeed acute, Poland is far from being a long-term economic basket case.

It is the perversities of Poland's defunct planned economy, rather than any deficiencies in the Polish people or Poland's economic resources, that have led to the current economic disaster. The outgoing economic system has systematically punished economic initiative: Marginal tax rates have been punitive; the exchange-rate system has punished exporters by forcing them to remit foreign exchange earnings for local currency at a highly overvalued exchange rate; price controls have led to extensive shortages, so that production sometimes ceases because of a shortage of a key input.

After a few years of economic reform, coupled with relief from the crushing debt burden, real wages will almost surely be several times the current pitiful levels of $30-$50 per month. In fact, Poland has many advantages over other countries now attempting free-market reforms. Poland has a highly skilled labor force and a developed industrial infrastructure in the very heart of Europe. With good rail and air connections to Western Europe, and port facilities in the Baltic, Poland enjoys low transport costs to the major European markets. Poland does not suffer from large income inequalities of the sort that undermine stability in Latin America, and Poland has no divisions among competing nationalities that greatly complicate the reform efforts in the Soviet Union and Yugoslavia. Poland has simply lacked a rational economic system, and that it will soon have.

Undersecretary of State Lawrence Eagleburger has reportedly been given the responsibility in the Bush administration for coordinating aid to Poland. Eagleburger should now move immediately to assemble the leaders of the IMF, the World Bank, the European Community and the G-7 governments so that together they can tell the Polish people that their aid requests have been heard. Poland now faces the risk that fears provoked by the deep crisis could derail the brilliant course that the new government has charted. Every day that we delay needlessly gives fear another chance to get the upper hand.

Jeffrey Sachs is professor of international economics at Harvard University and an economic adviser to Solidarity.