02/16/2015 12:26 pm ET Updated Apr 18, 2015

Poland's Unplanned Transition

Compared to the other countries in the region, Poland's transition to democracy and a market economy seemed to involve a great deal of negotiation. The country embarked on Round Table negotiations in spring 1989 that prepared the way for semi-free parliamentary elections on June 4 of that year. The negotiations also included discussions on economic transformation, and the representatives from the government and the trade unions came to a hard-fought agreement on the indexation of wages. Actually, the fight was largely between the two trade unions. Solidarity wanted wages to rise 60 percent of any cost of living increases; the Communist trade union OPZZ pushed for 100 percent. A compromise of 80 percent was achieved.

This effort to preserve the living standards of workers was perhaps the last effort to plan Poland's economic transition, and it was almost immediately undermined. Economist Krzysztof Hagemejer participated in the indexation discussions at the Round Table. I caught up with him in Warsaw 23 years after our first meeting in 1990. He explained what happened during the summer of 1989.

"In July, the law on indexation was adopted," he told me in an interview in August 2013. "And then on the first of August, the Communists freed food prices. This was not part of the plan or the discussion. And then came all the consequences. These freed food prices, combined with indexation, led to something very close to hyperinflation. I still wonder who actually approved this decision and what were the intentions of this decision."

The resulting hyperinflation served as the threat that required the cure of "shock therapy" - a macroeconomic stabilization program that reduced inflation through the further liberalization of prices, elimination of government subsidies, and other measures. Still, as Hagemejer points out, this program that guided Poland into the market economy could have proceeded consensually. But Solidarity the trade union essentially abdicated any responsibility for the economic transition to the liberal government that it helped to form under Tadeusz Mazowiecki in fall 1989.

"The main mistake at that time was done by both government and Solidarność," Hagemejer explains. "This was the decision not to have formal negotiations on the program. The government had 99% support in opinion polls, and Solidarność decided to give the economic program the green light without any explicit agreement. It would have changed history if at that time a formal agreement had been reached to the effect that we agreed to this policy, but we would meet after a few months to monitor it. We would monitor the consequences, then discuss again the program and decide how to proceed. This was not done. There was no formal agreement. It was never negotiated. This was a political mistake because it decided the future fate of both the government and the trade union, which eventually lost confidence in the program."

The economic transition was not, of course, a neutral program that spread benefits and sacrifices evenly among the population. The workers and farmers who made up the bulk of the population had to shoulder the lion's share of the sacrifice. And a new middle class gained most of the benefits.

"There was this belief that everything should be done to be build the middle class, that this was the priority," Hagemejer points out. "When in 1992 they were introducing the personal income tax for the first time, the design was very clearly in favor of actually increasing income inequality. When you took into account all the tax breaks and things available mostly for people of higher incomes, the effect was quite flat, if not regressive, from the very beginning. It's still that way. There's no country in the EU with such a high income tax rate for low-income people."

Poland's trade unions have not disappeared, of course. They eventually refocused on more traditional labor activities. "Both Solidarność and OPZZ in Poland did quite a lot," Hagemejer says. "How successful those activities were is another question. But they did fight for trade union freedom that was in danger because new businesses and big multinational companies were coming here and practically banning trade unions, which was against the law. With the French supermarket Carrefour there was a long fight. Solidarność and OPZZ did quite a lot to overcome this, and they managed to achieve some success, at least with some of the bigger employers and also with the help of European networks. Joining the EU helped a bit. At the same time they have probably been too political. Solidarność was from day one always linked either to the ruling party or the main opposition party. I don't think that's a good idea for a trade union that wants to be seen as independent."

The Interview

Let's jump to 1989 and the debates around economic reform. Did you have an opportunity in 1989 to participate in these discussions inside the Citizens' Committee? When we talked 23 years ago, you described some of the political maneuverings inside the ministries by people with particular economic views. But I wasn't sure what your participation was at that time.

I was in the economic part of the Round Table focused on very specific tasks. There was the major discussion there on introducing the automatic indexation of wages to increasing costs of living. I was part of the subgroup that reached an agreement on indexation. Of course, I participated also in the plenary discussion of the "sub-table" on the economic model. When I think about it from today's perspective, unfortunately there was a lack of realistic visions of what could be done. But the reason for this was very obvious because nobody at that time was aware what would happen in the next stage. We still didn't know what animal we were talking about. I don't think anyone really imagined what would happen a few months later, and then in 1990, in terms of the options for economic change. We didn't know what kind of political change to expect. Things were happening so quickly.

Take the example of indexation, which was one of the things put on the Round Table by Solidarność. One of the things agreed at the Round Table was that wages would be indexed. In July 1989, I was an expert on this issue of the indexation of wages in the special commission in the new parliament working on this law on indexation that was adopted.

And there was a compromise at the level of indexation at 80%?

I don't remember now, it's so distant. In July, the law on indexation was adopted. And then on the first of August, the Communists freed food prices. This was not part of the plan or the discussion. And then came all the consequences. These freed food prices, combined with indexation, led to something very close to hyperinflation. I still wonder who actually approved this decision and what were the intentions of this decision.

What's your suspicion?

I don't know. I really have no information on this. But these two things combined were a bomb.

When people think about shock therapy they don't necessarily think about those two decisions, on indexation and on the freeing of food prices. They think more about privatization...

When Leszek Balcerowicz first stepped down as minister of finance, there were all these brutal attacks on him. He was in quite bad shape. This was at the end of 1991. I went to Washington with my colleagues as part of a project done by the World Bank at that time on labor market transition developments in Poland. Balcerowicz had left his government post and was spending a few months in Washington at the World Bank to recover. When he saw me there, he started shouting at me that it was all my and my colleagues fault because of indexation. And, of course, to a certain extent he was right. Of course, these two things combined together, indexation and freed food prices, led to what happened. So, in a certain sense, what he did was unavoidable. The problem is rather in what he didn't do.

The workers, largely the industrial workers connected with the large shipyards and coal mines, paid a pretty high price during those years. From the point of view of economists like Anders Aslund or Jeffery Sachs, that was a necessary price. Thinking back, was there anything that could have been done to either distribute the pain more evenly or to cushion the pain specifically for that sector of the population?

To read the rest of the interview, click here.