THE BLOG
04/04/2010 05:12 am ET Updated May 25, 2011

Poland as Number One

Poland is the Cinderella of the world economy. A ruin of decayed communism 20 years ago, Poland by the late 90s was among Europe's fastest growing economies. In 2009 it was the only European economy to register growth.

What accounts for this miracle is inspired leadership, bold action, and persistence in implementing rigorous market based reforms.

It's easy to forget how bad things were in Poland in 1989. In the months before the Berlin Wall came down, Poland's chaotic command economy imploded. Shortages were rampant. There was hyperinflation. Led by the Solidarity trade union, people were in revolt. Forced to agree to Poland's first free elections in 40 years, the Communists lost and an elected non-Communist government took over. It was a tense and dangerous time where wild optimism was balanced by fear of Soviet intervention.

In the midst of turmoil, in September 1989, Leszek Balcerowicz, a slender 42-year-old economist with an MBA from St. John's University, came to Washington seeking help. In a memorable press conference in the musty, seldom-used ballroom of the Polish embassy, Balcerowicz outlined an astonishing plan for quickly converting Poland's communist system into a western style market economy.

Jointly developed with Jeffrey Sachs, then a top economist at Harvard, the Balcerowicz Plan had two components, stabilization and institutional reform. The immediate need was food aid, debt relief and emergency loans. Then, hyperinflation would be halted by monetary restraint. Prices, for decades set by government bureaucrats, would be freed and determined by market forces. Protected state enterprises would have to compete with imported goods. Polish citizens would gain access to credit and be allowed to start businesses.

Poland's big bang drive to build a market economy was launched January 1, 1990. Aware that the reforms would be painful, Balcerowicz believed that given enough time shock therapy would succeed. "We are starting," he said, "in extremely difficult conditions...(but) we are determined to go ahead." Sachs said, "It was a terrifying and unpredictable period."

As expected, the first months were hard. Unemployment soared as industrial subsidies were cut. Living standards fell and poverty jumped as prices rose faster than wages. But fresh fruit and goods of all kinds began to fill empty shelves, boosting confidence that the plan might be working. Curbs on government spending and monetary discipline brought down inflation. The new government stuck with the program.

Two years later, the transition recession ended and an entrepreneurial Poland was registering rapid growth. By the mid-90s, growth reached 5% and Poland became the first post-communist economy to match the living standards that prevailed ten years earlier. Democracy became entrenched as elected governments came and went, but the reforms persisted. Poland joined NATO, and in 2004 the European Union. Annual growth rates well above those of Western Europe began to narrow the income gap with the west. Today, Poland is Europe's 6th and the world's 18th largest economy.

Proud of his country's achievements, conservative prime minister Donald Tusk told the Financial Times (January 27th) that Poland's success is based "on the fundamental values of freedom, private property, competitiveness, and a limited role of the state." Tusk's government is raising the retirement age and pushing down the budget deficit so that Poland will qualify for membership in the Euro currency zone.

Balcerowicz, too, is proud of what's been accomplished. He credits monetary discipline with helping Poland avoid the housing bubbles that swept through the three neighboring Baltic States, resulting in their economies registering 15% declines while Poland grew by over 1.5% in 2009. Looking back, Sachs says he is "thrilled that the Poles acquitted themselves so beautifully in the pages of history."