Marek Dabrowski a b a Institute of Economic Science, ul. Nowy Swiat 72, Warsaw,

Transcription

1 This article was downloaded by: [Higher School of Economics] On: 31 January 2015, At: 08:50 Publisher: Routledge Informa Ltd Registered in England and Wales Registered Number: Registered office: Mortimer House, Mortimer Street, London W1T 3JH, UK Communist Economies and Economic Transformation Publication details, including instructions for authors and subscription information: Interventionist pressures on a policy maker during the transition to economic freedom (personal experience) Marek Dabrowski a b a Institute of Economic Science, ul. Nowy Swiat 72, Warsaw, , Poland b Polish Academy of Sciences, ul. Nowy Swiat 72, Warsaw, , Poland Published online: 13 Dec To cite this article: Marek Dabrowski (1992) Interventionist pressures on a policy maker during the transition to economic freedom (personal experience), Communist Economies and Economic Transformation, 4:1, 59-73, DOI: / To link to this article: PLEASE SCROLL DOWN FOR ARTICLE Taylor & Francis makes every effort to ensure the accuracy of all the information (the Content ) contained in the publications on our platform. However, Taylor & Francis, our agents, and our licensors make no representations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of the Content. Any opinions and views expressed in this publication are the opinions and views of the authors, and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon and should be independently verified with primary sources of information. Taylor and Francis shall not be liable for any losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoever or howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the use of the Content. This article may be used for research, teaching, and private study purposes. Any substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in any form to anyone is expressly forbidden.

2 Terms & Conditions of access and use can be found at page/terms-and-conditions

3 Communist Economies and Economic Transformation, Vol. 4, No. 1, Interventionist Pressures on a Policy Maker During the Transition to Economic Freedom (Personal Experience) MAREK DABROWSKI 1 From 15 September 1989 until 21 September 1990 I held the position of First Deputy Minister of Finance of Poland and I had an opportunity to participate in preparing and implementing the Government Economic Programme 2 (henceforth GEP), which was labelled by politicians and journalists as the Balcerowicz Programme. The goal of the GEP was to bring down hyperinflation and to carry out a radical transformation of the Polish semi-planned, semi-market economy into a real market economy. The aim of this paper is not to discuss the results of GEP. I have done this in other analyses. 3 The main purpose of this paper is to analyse the different forms of interventionist pressures met by Tadeusz Mazowiecki's government during his attempts to implement GEP. First of all, I must define what I understand as state or government interventionism. It is a kind of government activity that aims to replace the free market mechanism and enlarge government involvement in economic life. One can distinguish two areas of state interventionism: the business activity sphere (creation of national income) and the distribution sphere (distribution of national income). Maybe it is a kind of paradox, but the first type of interventionism prevailed in Poland during the period under discussion. Open pressure to increase distribution interventionism has been rather weak, excluding proposals from some socialistically oriented parties and political groups 4 and some specialists in social policy sciences. 5 In this paper I want first to describe sources of interventionist pressure in the case of Poland. Next, I am going to discuss some interventionist concepts and practical pressures. A special section will be devoted to the problem of agricultural interventionism. I want also to summarise specific advantages and disadvantages of state interventionism in a transitional economy like Poland. Sources of Interventionist Pressures From the very beginning, GEP was strongly criticised by both theoreticians and practitioners managers and politicians. The standard argument was that GEP was too liberal and monetarist oriented and that more state interventionism was necessary. Dr Marek Dabrowski, Institute of Economic Science, Polish Academy of Sciences, ul. Nowy Swiat 72, Warsaw, Poland.

4 60 Marek Dçtbrowski As far as academic discussion was concerned, even some former enthusiastic supporters of radical economic reform now became advocates of state involvement in economic life. 6 1 think there were three general reasons for this situation. First, in the past, some people were very deeply engaged, intellectually and emotionally, in different 'market socialism', 'democratic planning' and 'Third Way' concepts. When faced with the prospects of a real market reform these people found themselves in strong opposition to GEP. Secondly, personal ambitions should also be taken into account (I have in mind the deep disappointment of some people who were not appointed to the government). Thirdly, the lack of sufficient professional knowledge on the part of many Polish economists. The second and third factors moved even some of those economists with a formerly 'liberal' reputation toward the etatistic and interventionist camp. I do not want to describe this academic discussion in more detail or present specific positions of individual participants. I do not think such a presentation would be fruitful from a professional point of view. Rather than make a new contribution to the discussion on the theory and transformation from planned to market economy, it could only give a picture of professional and political frustration among Polish economists. Moreover, the academic discussion was not the main source of interventionist pressure on policy makers; however, it created a difficult intellectual atmosphere around the market oriented reform and from time to time it supplied 'theoretical' arguments for government opponents. The main pressure on policy makers was and still is created in the process of political and administrative bargaining. It is generally acknowledged that the specific economic interests of different social groups play a predominant role in this process. However, this is not always true. My observation is that some autonomous institutional interests of individual organisations (social organisations, political parties, trade unions, etc.) and administrative structures also have an important impact. Let me give some examples. The process of pluralisation of social and political life results in the creation of many new political parties and organisations competing with one another. Each of them wants to be a credible representative either of the whole of society or of a concrete social group. 7 This creates an atmosphere of populistic competition. Sometimes it also creates the illusion that this is the real state of feelings of society. For example, the protest of a farmer's organisation does not automatically mean the protest of all farmers. This kind of mystification is very dangerous for government, which must have sufficient determination to break up demagogic pressure and to find a direct contact with society over the head of political representation. Some organs of government administration also create specific bureaucratic interests. The more of these organs, the narrower the departmental interests. This is especially important in the transition period when many of the sectoral/branch organs still represent the mentality inherited from the centrally planned economic system. Several times I experienced the pressure of departmental interests. One example was a one-year battle against extra-budgetary funds. The attempt, finally successsful, to introduce new legislation eliminating these funds met very strong resistance from the majority of government departments. Each minister tried to protect 'his' fund, arguing that this fund

5 Pressures on a Policy Maker 61 was necessary for fulfilling his statutory obligations and that important social interests needed to be met in this way. Another example concerns the tax reform. As in the case of extra-budgetary funds, individual ministries wanted to keep specific tax privileges. The argumentation was very similar. What should government do to avoid or at least to restrain interventionist pressure? My first conclusions concern the internal organisation of the government. The merger of economic ministries not only facilitates the coordination of economic policy, but also eliminates the institutional source of interventionist pressure inside government. Preserving the previous structure of branch ministries was a weak point of Mazowiecki's cabinet, originating from a political compromise (the coalitional character of the government). Bielecki's cabinet too was designed in the same way, with one exception concerning the planned abolition of the Ministry of the Domestic Market. Secondly, one should not create financial possibilities for an interventionist policy. If the state budget has big reserves, disclosed or hidden, it is very difficult to fend off interventionist demands. The best anti-interventionist argument is the lack of money. A relevant example is the story of the money for restructuring. Some 3 trillion zloty (ca. US$300m) were provided in the 1990 central budget to finance so-called restructuring purposes. It was a personal idea of Deputy Prime Minister Leszek Balcerowicz to create this budgetary reserve to deal with the expected massive bankruptcies of state-owned firms. In fact, there was never a clear idea how to use this money. Advocates of hard budget constraints for state enterprises, including the author of this paper, tried to push the idea of a special bank which would lend money on commercial conditions to enterprises with some current troubles, but with chances of being viable after restructuring. After long intra-governmental discussion the idea of the Polish Development Bank was finally accepted by the Council of Ministers at the beginning of July However, in the meantime, a major part of the restructuring money had been spent as direct subsidies for non-viable state food-processing enterprises and milk co-operatives and as grants for some extra-budgetary funds (which were to be abolished very soon). Moreover, this money also became a pretext for a big and demagogic discussion, especially in the Sejm, 8 raising the question of the necessity of government branch restructuring programmes. We still have to deal with the consequences of this discussion. The demand for a kind of government industrial policy is still emphasised, even by economists who called themselves liberals. 9 The 1991 state budget again planned restructuring money for branch ministries. The third conclusion is very close to the second one. Legislators should give neither the Council of Ministers nor the Minister of Finance or other government agencies the possibility of discretionary power, especially in the fiscal policy area. I think that the best chance for the Minister of Finance to reject demands for new tax exemptions or additional subsidies is to have no legal possibility to grant them. Lastly, the fourth remark concerns the consequences of government policy. As long as government can resist all fiscal or wage demands, for example, it is in a relatively comfortable, although still not easy position. However, each,

6 62 Marek Dçbrowski even very limited, concession to one firm or social group dramatically worsens the bargaining position of government against other groups and enterprises. The attempt to give such concessions secretly can only additionally undermine the credibility of government. In the democratic state with an open information system and a free press, the belief in the possibility to make secret concessions is very naive. The consistency of programme declarations and practical decisions also plays a very important role in the creation of confidence in government policy. All the experience of GEP implementation supports the importance of the above remarks. Interventionism versus Stabilisation Programme The Mazowiecki government inherited an economy in a state of hyperinflation combined with acute market shortages. The most urgent task of GEP was therefore to bring inflation down and restore an elementary market equilibrium. The very comprehensive stabilisation programme was designed in cooperation with an IMF mission in the autumn of 1989 and implemented from 1 January This programme could be classified as heterodox, since it included wage control. 11 This point was strongly criticised from both trade union and liberal positions. 12 Because the income policy is a separate and very controversial issue, I do not want to discuss it in this paper. 13 Apart from wage control, the stabilisation programme was strongly marketoriented. It contained not only typical fiscal and monetary adjustment, partial tax reform (decreasing the highest marginal tax rates of direct taxes, equal treatment of all ownership sectors, increasing the rates of depreciation, elimination of the majority of tax exemptions), introduction of current account convertibility together with some elements of capital account convertibility and a unified exchange rate, and radical tariff reform (the elimination of the socalled non-commercial customs tariff and gradual reduction of tariffs during 1990). Several important market-oriented institutional reforms were adopted, mainly in the first half of 1990, as an integral supplement to the stabilisation effort. I have in mind, for example, new anti-monopoly legislation, a liberalisation of the building rental law, of the Civil Code and of land law, new legislation governing the commercial insurance sector, and finally privatisation legislation. 14 As I mentioned earlier, GEP was strongly criticised from interventionist positions. The same applies to its stabilisation component. The price liberalisation problem and the proposal for a supply-stimulating policy were two main points of controversy. With respect to price liberalisation, this problem already arose at the beginning of the Mazowiecki government as a consequence of the earlier decision taken by the Rakowski government. I have in mind here the so-called 'marketisation of the food economy', where food price deregulation was combined with elimination of food rationing, central allocation of food, etc. This set of decisions went into effect on 1 August Several macroeconomic policy mistakes made both at this moment and earlier resulted in hyperinflation. However, food price liberalisation was absolutely necessary (in fact it was undertaken at least half a year too late) and could not be postponed much longer.

7 Pressures on a Policy Maker 63 However, some expectations were that the new, non-communist government would abandon unpopular decisions of the previous communist government. This kind of 'magic' thinking also applied to food price deregulation. 15 The issue of how to withdraw Rakowski's price decisions and what to do then became an open question. The proposal to reintroduce administrative control of price margins in wholesale and retail trade was the less radical variant of this idea. 16 To accept such control meant to postpone the prospect of a food market equilibrium and domestic trade demonopolisation and privatisation. It seems that the main resistance to price deregulation derived from the lack of confidence in the possibility of real functioning of market forces in the Polish economy. The cost theory of prices and the cost-push inflation theory are other examples of this way of thinking. In fact, the cost-push inflation mentality was widespread not only among left-oriented opposition to GEP, but also among members of government and government experts. It resulted in permanent resistance to price liberalisation, the elimination of subsidies and the necessary adjustment of government prices of coal, energy, etc. Postponing coal price liberalisation and the decision to keep further informal control over petrol prices was also a product of this mentality. The conflict with the farmers' lobby at the end of September 1989 (just after the government started work) on the question of a petrol price increase immediately made government price decisions very sensitive to political signals. Moreover, the reaction of farmers' organisations (the successful attempt to link procurement prices of milk and sugar-beet with the retail price of petrol 17 ), supported the relevance of cost-push inflation theory in several people's minds. Only the first signs of the appearance of the demand barrier on the food market (in the beginning of November 1989) began to change the atmosphere of the price debate. Later, after the stabilisation operation, demands for price control disappeared in practice. The autumn of 1989 was still a time of relatively big shortages, both on consumer and producer markets. Hence the government responded to the demands to stimulate the supply of deficit goods. 18 Rather traditional ideas representing instruments of the previous economic system were put forward. So-called government orders were one such instrument. Earlier, in the mid- 1980s, this policy tool contained both some positive stimuli for enterprises (like a preferential allocation of deficit resources, labour and foreign exchange, preferential wage treatment, some tax reliefs) and some informal administrative and political pressures on enterprise directors. However, government orders could never really contribute to the elimination of shortages because the reason for these shortages was completely different the fundamental disequilibrium of a non-market economy. Now, owing to the wide-ranging systemic changes, only one stimulus was effective very moderate corporate income tax relief. On the other hand, the belief that this instrument could play any role in terms of a very radical cut in total demand was very naive. However, some branch ministries, especially the Minister of the Domestic Market (who tried to find institutional arguments to survive) and the Minister of Agriculture and Food Economy 19 successfully put pressure on the Council of Ministers to continue government orders in 1990 as a 'transitional solution'. Fortunately, they very quickly became completely irrelevant to the new market situation created by the stabilisation policy (the appearance of a demand

8 64 Marek Dçbrowski barrier). Some revenue losses for the state budget and some administrative complications in tax collection were the only effects of government orders in Similar pressure contributed to the survival of the central material balances system in Some quantitative export restrictions still existing in 1990 seem to be the only practical implication of this regulation. The Prime Minister's personal appeal to miners to increase the coal output and to work on Saturdays, made on 1 November 1989 (Polish Independence Day), can serve as another example of old-fashioned supply stimuli inherited from the time of the communist regime. This step had a rather doubtful output effect, but it seriously undermined the government bargaining position vis-à-vis the coal lobby in the coming months. Interventionism versus Recession The deep recession, which seems to be the unavoidable product of the stabilisation programme, became the main issue of economic controversies in A kind of hysteria dominated the majority of discussions concerning economic policy. As I mentioned above, this paper is not devoted to discussing the details of the stabilisation programme and the possible mistakes made by the government in this area. However, I think that even taking into account possible mistakes it would be unrealistic to expect any other outcome of a stabilisation and liberalisation policy in a country like Poland. The experience of the former GDR, Hungary and Czechoslovakia supports this point of view. Even countries like the USSR, Romania or Bulgaria, which did not change economic system and did not implement a restrictive macroeconomic policy, also suffered a big output decline. I do think, however, the government made some important mistakes in the public relations area. First, forecasts presented by government experts before the introduction of the stabilisation programme were too optimistic. They then served as a basis for strong political criticism of government policy, especially in the parliamentary forum. The main argument was that the government had not fulfilled the 'planned' targets. Secondly, the government was not able to reform the system of statistical reports. The statistical data did not give a fully relevant picture concerning the GDP level, for at least two reasons: they still used the MPS method, and in addition data on private business activity were incomplete and delayed. Thirdly, government experts did not explain publicly the economic nature of the statistical decline in output. 20 In fact, the government implicitly accepted the hysterical interpretation of the recession (that it was a complete collapse of the Polish economy). Fourthly, the government did not have sufficient political determination to tell society openly that it had been mistaken in its forecasts, that the recession had a long-term character and that the main task should be the continuation of the systemic transformation, not the stimulation of economic growth at any price. I have concentrated on discussing some tactical and propaganda mistakes because to a significant extent they impaired the ability of the government to

9 Pressures on a Policy Maker 65 resist the interventionist pressures. In fact, the government felt itself 'guilty' and, despite hard anti-interventionist and anti-expansionary rhetoric, tried from time to time to do 'something' to stimulate output recovery. This 'something', in practice, amounted to significant interventionist concessions. The first direction of interventionist thinking proposed the idea of general manipulation of aggregate demand. Because the stabilisation programme seemed to be too restrictive for some people, they proposed to correct it with macroeconomic policy relaxation. They assumed that such action would ease the recession by raising total demand. On the one hand it was a kind of 'fine tuning' idea, on the other, a kind of very primitive pseudo-keynesian approach. I think that both concepts are false. The 'fine tuning' idea is not realistic for practical implementation, especially in a country like Poland. With respect to the second one, there are many signs which indicate that Polish enterprises have a very limited supply flexibility in relation to income and price stimuli. It seems that this situation results from a number of factors, such as the dominance of state ownership, monopolistic and oligopolistic markets, habits resulting from years of the command system and a shortage economy, durability of inflationary expectations, etc. In this situation the relaxation of monetary, fiscal and income policies are bound to lead to a return of inflation rather than to an increase in output. The second direction focused attention on selective state intervention in economic life. Some representatives of this approach do not define where this type of interventionism should be applied and what specific policy tools should be used. I think they represent rather a general hope that interventionism is a kind of ' Wunderwaffe' which can deal with any economic problem. This is 'magic' thinking, not real professional argumentation. The idea of branch restructuring designed, implemented and financed by the government is another variant of selective interventionism. As I mentioned earlier, this concept was still viable. The restructuring money planned in the 1990 state budget was one pretext to raise this question, but not the only one. The former Minister of Industry, Tadeusz Syryjczyk, was still attacked (even by people with a liberal reputation) because he would not design and implement an 'industrial policy'. 21 Generally, the word 'restructuring', frequently used by Western economists in the broader sense (including demonopolisation, privatisation, opening up the economy, enterprise rehabilitation, etc.), 22 is understood by many Polish economists and politicians as meaning only state influence on the branch structure of an economy. This kind of misunderstanding is very often seen, for example, during negotiations with IMF and IBRD missions concerning restructuring programmes for the whole Polish economy or for some sectors. Several advocates of branch programmes have in mind the concrete branch or sector which should receive priority in government policy. They demand different financial privileges like direct subsidies, tax exemptions, cheap credit and others. Sometimes the proposal is also to protect an individual sector or branch from the influence of market forces (like in the case of agriculture or housing). In 1990 the strongest sectoral pressure came from the farmers' lobby (see below). Other sources I should mention are the housing sector, the coal industry, the railways and city transport.

10 66 Marek Dçbrowski Until May 1990 the government successfully resisted the pressure, both on aggregate demand management (relaxation of macroeconomic policy) and on selective interventionist policy. However, starting from June 1990, a significant reorientation of macroeconomic policy was decided. The government still declared its determination to keep to the previous policy line, but, in fact, a set of important relaxation decisions were made. I have in mind the following steps. 1. The significant decrease in the interest rate combined with quantitative monetary expansion in the second half of The decision to spend the budget surplus in the second half of 1990, mainly on interventionist purposes. 3. The postponement of a revaluation of fixed assets, which meant a relative decrease in the dividend tax burden for state enterprises. 4. The relaxation of the excess wage taxation. At the same time, the government's engagement in specific interventionist policies significantly increased. It raised subsidies for preferential agriculture 23 and housing credits, which contributed further to the monetary policy softening. I already described the spending of the restructuring budget reserve as direct subsidies for some non-viable firms (especially in the milk industry). Railwaymen and other employees of the public utility sphere received wage concessions. All these concessions did not guarantee any long-term political benefits. On the contrary, they only increased interventionist expectations and interventionist pressure. Even the groups which received evident benefits, like farmers, still continued to show their dissatisfaction with government policy. It is a typical situation of the escalation of demands when a government displays a lack of consistency and determination. The reorientation of macroeconomic policy in the middle of 1990 did not stop the recession. It only contributed to the new wave of inflation starting in September Despite its liberal declarations, the new government of J. K. Bielecki continued the tactics of gradual and hidden interventionist concessions, especially in agriculture and wages policy. This was probably the result of the weak political base of this government. There is only one question: where is the final limit to this policy? Interventionism and the 'Acceleration' Idea Starting from the spring of 1990, political decomposition began to occur inside the 'Solidarity' camp. Advocates of Lech Walesa, and especially leaders of the Centre Agreement, raised the slogan of 'acceleration'. Like every political slogan, this one too was very unclear. One might think that the main sense of the acceleration idea was the rapid promotion of Waîesa for the presidency and a massive purge of members of the former communist establishment (so-called nomenklatura people). However, the Centre Agreement also published its economic programme, which generally supported the Balcerowicz Programme, but at the same time suggested that this programme could be implemented more quickly. 24 The basic condition for this kind of acceleration was supposed to be greater government involvement in the creation of new market structures. Spontaneous

11 Pressures on a Policy Maker 67 creation of competitive market structures, a competitive banking network and also a new allocation of resources would take too long. The active intervention of government was absolutely necessary to speed up these processes. The demand for an industrial policy was also repeated in this context. I have already discussed the problem of an industrial policy and interbranch restructuring decided and financed by government, but the question of government involvement in creating market forces and market structures should be assessed separately. I think that in the terms of a transition period, government can implement to some extent a policy of positive interventionism which would be aimed to promote a market system. What have I in mind? First of all, the government should, as quickly as possible, remove all existing relics of the command system and state paternalism vis-à-vis enterprises. This means, defacto, active anti-interventionist interventionism. Such a policy was pursued by the Mazowiecki government in the first nine months of its period in office. Secondly, the government can use the administrative method to break up big state-owned enterprises, cooperatives, trusts and other types of compulsory or voluntary associations of state enterprises, cooperatives and private firms. The government can also introduce anti-monopoly legislation. However, it would be a mistake to overestimate the practical importance of the above steps in creating a competitive market. I also have doubts about the frequently presented idea that government should actively found new economic units, e.g. in the banking sector, for the purposes of making the market structure more competitive. I think that the main possibilities for government policy in this area are, on the one hand, to eliminate all existing administrative barriers to new entrants and, on the other, to open the economy to the rest of the world. However, this is typical liberalisation policy and it would be very difficult to classify it as a kind of interventionism. In the case of Poland, the first type of liberalisation policy (removing domestic barriers to entrepreneurship) was implemented by Rakowski's cabinet at the beginning of 1989, the second type (opening up the economy) by Mazowiecki's cabinet at the beginning of The results of such policy steps cannot come immediately. Thirdly, the government or another state agency (like the Fund of National Property) must take a very active role in the privatisation process because they represent the owner of these assets. Another question is how strongly this process should be centrally controlled and decided in all details and to what extent any decentralisation (in the sense of giving some decisions in this field to enterprise directors or to employees) is possible. There is a choice between the danger of bureacratic lethargy, possible corruption and etatistic constructivism in the case of overcentralisation and the danger of unfair practices in spontaneous, decentralised privatisation. In Poland, this dilemma has not been solved yet. Fourthly, the government should keep hard budget constraints for stateowned enterprises and should execute compulsory liquidation (in the case of non-profitability) and bankruptcy procedures very consistently. In some cases, the enforcement of environmental standards will also be an additional tool for identifying non-viable enterprises. These proposals seem to be, in fact, the absence of state interventionism and paternalism, rather than any special kind of market-oriented interventionism.

12 68 Marek Dg.browski I would like also to comment briefly on another proposal of this type. It was suggested that government should a priori select some non-viable enterprises, choosing those with the highest material and energy intensiveness, because the highly imperfect 'socialist' market with false prices will not be able to do it. This idea was also included in GEP. Fortunately, there was no time at the end of 1989 to try to implement it. Later, after the price liberalisation and opening up of the economy this proposal became less relevant. I am convinced that such a measure can only start a big political bargaining process without any guarantee of reaching adequate decisions. Using a sporting analogy, it would be an attempt to select winners and losers before allowing a fair competition. It seems that the experience with the Gdansk Shipyard 25 made this concept less attractive for politicians. Fifthly, there are also suggestions that government should organise an information and educational network for new businessmen. I do not see any special arguments against this idea; however, I believe that private initiatives in this field are probably more effective and flexible. Interventionism and Economic Freedom Polish experience of the past two years does not give too many examples of pressure aimed at restricting freedom of economic activity. However, some cases, of rather marginal character, should be mentioned because in the future these kinds of demands may become more dangerous for the transformation process. The first source of such pressure is the attempt to protect or to rebuild the monopolistic position of some professional groups. A permanent conflict with taxi-drivers wanting to reintroduce the system of licensing and thus block competition from newcomers is one example. The attempt by the solicitors' lobby in the Senate to stop the possibility of creating legal advisers' firms is a second. A second group of cases has been connected with attempts to keep a state monopoly in some activities. I think the almost year-long campaign to break the Polish Post, Telegraph and Telephone Company monopoly in the telecommunications industry was the most prominent example in this area. The problem of a state monopoly in alcohol production and trade seems to be another issue causing conflict. In this last case, some moral arguments are also used from time to time. 26 The Special Problem Agricultural Interventionism The farmers' lobby is probably the most anti-market oriented political group in Poland. Conflicts with farmers were the main social conflicts during the time of the Mazowiecki government. Some populistic demands in agriculture during the transformation process were predictable, but this danger was generally underestimated in comparison with the expected resistance of industrial workers to market reform. Some liberal politicians even expected that farmers, as private entrepreneurs, would be an important social base of market transformation. I believe the agricultural problem is likely to be the most dangerous challenge to the young and still weak market system, and to the equally young and weak democracy in Poland in the coming years. Why am I so alarmed?

13 Pressures on a Policy Maker 69 I think that the seriousness of the agricultural problem stems from at least two factors. The socio-economic structure of Polish agriculture is the first; the second is connected with the very specific political atmosphere surrounding farmers' problems. The land structure of Polish farms is similar to structures in developing countries, rather than to those in West European countries. The majority of Polish farms do not exceed five to seven hectares of land. However, Polish farmers want a living standard close to the level enjoyed by other European farmers or at least higher than other Polish citizens living in towns. The former communist regime was not interested, for ideological and political reasons, in economic concentration of private farms (the Agrarian Reform even worsened the structure of farms). On the contrary, after unsuccessful attempts at collectivisation in the first half of the 1950s and some administrative restrictions during the second half of the 1950s and during the 1960s, starting from the 1970s the communist governments implemented the income parity policy. This policy gave Polish farmers relatively comfortable incomes in comparison with other social groups and effectively protected the existing farm structure. Beside these long-term factors some other economic events of a rather temporary character have played an important role, especially in The operation of 'marketisation of the food economy' introduced by the Rakowski government on 1 August 1989 gave farmers the opportunity to sell their products at high free market prices, while their main input prices were still administratively controlled and subsidised. This situation dramatically improved the profitability of agricultural production and the incomes of farmers in comparison with other social groups. When the stabilisation and liberalisation part of Balcerowicz's programme was introduced (e.g. deregulation of factor prices, removal of a significant part of subsidies) the price discrepancy began very quickly to diminish. The market and income boom for agricultural production was over and the social atmosphere in this sector significantly worsened. As far as the intellectual attitude to the agricultural problem is concerned, the authors of the Balcerowicz programme had to contend with a very soft approach by the majority of Polish politicians and economists. Either they are under the influence of the farmers' lobby propaganda (farmers are victims of many years of communist repression, farmers are the essence of the Polish economy, there is a danger of a complete collapse of agricultural production and thus of undermining Polish economic and political independence, the whole world subsidises agriculture, etc.), or they are afraid of the political protests of this lobby. The outcome is that even the Polish 'liberals' try to find rational, 'scientific' arguments for agricultural interventionism. From the farmers' lobby side, there is no political unity (which can have both positive and negative implications for government policy) and no serious leaders. This makes it hard to find any reasonable compromise. Every compromise is very short-lived. Every concession from the government side only increases expectations on the farmers' side of future concessions. The point of political equilibrium does not exist. I think also that some economic factors prevent a political compromise being reached. There is a big difference between the capacity to subsidise agriculture from the budget in the West European countries and in Poland

14 70 Marek Dgbrowski (GDP per capita is many times higher and the proportion of the population in agriculture is significantly smaller than in Poland). Moderate subsidies like 10-12% of state budget expenditure do not satisfy farmers' expectations. Higher subsidies must inevitably lead to hyperinflation. During the past year and a half we have observed several forms of interventionist expectations in agriculture. Traditional concepts concentrate on the demand for guaranteed minimum procurement prices for agricultural products. This concept seems to be very dangerous for both budget equilibrium and the possibility of introducing a real food market. Another, also traditional idea concerns subsidised credits at a stable low interest rate (in Polish circumstances this means a deeply negative interest rate in real terms). This not only softens monetary and fiscal (budget) policy, but also harms the market-oriented reform of the banking system. Moreover, in the Polish institutional environment such an instrument de facto helps a monopolised food processing industry and 'socialised' domestic trade to protect their position. At the beginning of 1990, in an attempt to stop the pressure for the reintroduction of guaranteed minimum prices, the government offered the farmers' lobby the idea of a State Agriculture Agency, which would counteract short-term price fluctuations on the food market. After several months of legislatory and organisational difficulties, the Agency started work in the summer of It became evident very quickly that earlier government expectations were very naive. 27 The first spectacular intervention action in March 1990 (before the formal establishment of the Agency) on the meat market only contributed to a new inflationary impulse on the retail food market in March and April 1990 and to improving the financial situation of the meat processing industry. The next 'advantage' of this institution was the massive sugar export with big subsidies in the autumn of I am afraid that in the coming months the 'old' ideas of guaranteeing minimum prices and of income parity 28 will be combined with the Agency's activity. In the second half of 1990 a new conflict area with the farmers' lobby appeared: tariff policy. The rising complaints about 'unfair' competition from the West (arguments about heavy subsidisation of food exports in the West are advanced all the time) and loss of economic sovereignty became a kind of political hysteria in recent months. The Bielecki government tried to neutralise this pressure by introducing anti-dumping customs protection and increasng effective import tariffs for agricultural products in the spring of However, once again political concession by the government has only stimulated the farmers' lobby to escalate their demands. I cannot analyse all the specific pressures for agricultural interventionism here (like permament pressures for agricultural tax reliefs, the idea of a 'grain credit' in the autumn of 1989, demands to subsidise agricultural exports, etc.). However, the picture I have presented is sufficient to cause political concern. Special Disadvantages of State Interventionism in the Economy in Transition In place of the conventional conclusions I would like to end by stressing some special disadvantages of state interventionism in the economy during fundamental transformation.

15 Pressures on a Policy Maker 71 First, there is a general danger of continuing the planning mentality inherited from the previous system. In fact, in the case of many people who argue for interventionism, this word is only a new label for the old idea. Second, in the first stages of the transformation process no market price basis, neither ex post nor ex ante, is available for policy makers. This means that government interventionism can only be based on political preconditions. There is a danger of initiating a large-scale bargaining process which in the main can benefit only 'old' sectors of the economy. 'Old' sectors usually have strong social and political foundations, while future sectors, non-existent now, cannot fight for their interests. Third, almost every kind of state interventionism undermines the possibility of enforcing a hard budget constraint for firms, especially state-owned ones. As a result, it impedes progress in creating the microeconomic environment necessary to increase economic efficiency and supply elasticity. Fourth, state intervention must almost always have negative fiscal implications (tax concessions, subsidies, additional budget expenditure, etc.). Taking into account the fact that the fiscal base of East European economies is extremely weak and fragile, such a policy is bound to create permanent inflationary or even hyperinflationary pressure. Fifth, interventionism needs a good civil service, which is a major political and organisational problem during the transition process. To offer a final conclusion, in practice in the transformation process largescale interventionism can only be a modified version of the old command system. The possibility to accelerate the transformation process by using specific interventionist tools is very limited. The attempt to use interventionism as a substitute for the market mechanism in the transition period can only delay the end point of the reform process without giving any significant benefits. This is my main message for policy makers in my country and in other Central and East European countries. Notes and References 1. This is a slightly revised version of a paper originally presented under the same title at the Symposium on 'Liberty after Communism: Post-Soviet-Type Economies in Transition to Economic Freedom', organised by Liberty Fund, Indianapolis and Adam Smith Research Centre, Warsaw, 5-6 June 1991 at Madralin, near Warsaw, Poland. 2. The GEP was published in Rzeczpospolita, 12 October It was a document of rather general character. The stabilisation part was developed in the Letter of Intent, addressed to the IMF and adopted by the government on 22 December The institutional aspects of reform were summarised and developed in the Memorandum of Development Policy agreed with the IBRD in the framework of the Structural Adjustment Loan negotiations and accepted by the government on 2 July The Government Programme of Privatisation of the Polish Economy was finally announced in November All three documents have been extensively presented in Reczpospolita. 3. See e.g. M. Dabrowski, 'The Polish Stabilisation Programme: Accomplishments and Perspectives', Communist Economies and Economic Transformation, Vol. 3, No. 1, 1991; M. Dabrowski, 'Stracone połrocze' (The lost half-year), Polityka, no. 2, 1991; M. Dabrowski, 'Privatisation in Poland', Communist Economies and Economic Transformation, Vol. 3, No. 3, 1991.

16 72 Marek Dg.browski 4. I have in mind two post-communist parties: The Social Democracy of the Republic of Poland and The Polish Social Democratic Union, as well two parties of 'Solidarity' origin: The Polish Socialist Party and 'The Labour Solidarity'. 5. Like Professor Andrzej Tymowski. 6. Professor Józef Kaleta can be an example of such a position. 7. The best example of such behaviour is the strong competition between parties and other organisations which want to represent farmers' interests. 8. The lower chamber of the Polish parliament. 9. I have in mind, e.g. Professor Stefan Kurowski or Dr Adam Glapiński. 10. See note See F. Coricelli & R. R. Rocha, 'Stabilisation Programs in Eastern Europe: A Comparative Analysis of the Polish and Yugoslav Programs of 1990', paper presented at OECD and World Bank Conference on 'The Transition to a Market Economy in Central and Eastern Europe', Paris, November The comprehensive draft of an economic programme, prepared in August-October 1989 by a team headed by Professor Janusz Beksiak (the stabilisation component was designed mainly by Professor Jan Winiecki) had in fact only one important difference in comparison with GEP the lack of wage control. See J. Beksiak, T. Gruszecki, A. Jedraszczyk, J. Winiecki, The Polish Transformation: Programme and Progress (London, Centre for Research into Communist Economies, 1990). 13. I have explained my position vis-á-vis wage control in two articles published in Życie Warszawy: M. Dabrowski, 'Nadregulacja' (Overregulation), Życie Warszawy, 20 December 1990; M. Dabrowski, 'Liberalizacja plac i twardy pieniadz' (Wage Liberalisation and Hard Money), Życie Warszawy, 21 December More extensive analysis of institutional reforms is presented in Dabrowski, 'The Polish Stabilisation Programme...'. 15. Dr. Ryszard Bugaj was an example of such thinking. 16. Senator Karol Modzelewski several times publicly pressed this proposal. 17. It was possible because of a big demand surplus (an inflationary gap) on the consumer market at this time. 18. I put aside very primitive and naive ideas that a supply-stimulating policy would be a substitute for a stabilisation programme in fighting hyperinflation and shortages. Such ideas were very frequently presented at this time. 19. The Minister of Agriculture and Food Economy was especially interested in the government order for steel for the construction of agricultural machinery(!). 20. An analysis of this programme was made by Professor Jan Winiecki. See J. Winiecki, 'Post-Soviet-Type Economies in Transition: What Have We Learned from the Polish Transition Programme in Its First Year?', Weltwirtschaftliches Archiv, Vol. 126, No. 4, 1990, pp Professor Leszek Zienkowski has proposed a specific concept of an industrial policy: state support for the best enterprises to make them better. See L. Zienkowski, 'Czas korekt' (The time of corrections), Polityka, No. 51, Very often this word has a similar sense as the term 'adjustment'. See, for example, I. Lieberman, Industrial Restructuring Policy and Practice (Washington, DC, The World Bank, Policy and Research Series No. 9, 1990). 23. In practice the category of 'agricultural credit' was interpreted very broadly: the majority of the food-processing industry and a significant part of the pseudocooperative trade network became beneficiaries of this policy. 24. Later, in 1991, the Centre Agreement shifted towards rightist-populistic positions and started direct opposition to the Balcerowicz programme. 25. The decision to close down the Gdańsk Shipyard was taken at the beginning of November 1988 by the then Prime Minister, Mieczysław Rakowski, and his Minister of Industry, Mieczysław Wilczek. The official argumentation tried to use the philosophy of selection of non-viable enterprises in heavy industry and