Professor Leszek Balcerowicz, the former Chairman of the Polish National Bank

The socialist or communist system had three fundamental traits.  First of all, all kinds of individual rights were extremely restricted – economic and beyond economic freedoms.  If it concerns the economy, there was a ban on private enterprise – the essence of socialism – it was the most dramatic restraint on economic freedom.  There was also a ban on the legal market, because state enterprises fell under central planning.  Money was not exchanged with other money which meant if someone had wanted to import or travel abroad, he had to ask the authorities which had meant rather outside the economy.  If the authorities did not like the idea, then a person did not receive foreign currency.  There was no freedom of traveling.  The media was controlled as well as on the outside through censorship, as inside through auto-censorship.  And this is the first characteristic:  extreme restriction of freedom.  No one in the world was able to acquire fortune in the extreme restriction of freedom.  The essence of Marxism, in my opinion, was that it was acknowledged that by moving the authorities on the rung of community, the country will progress.  But it turned out otherwise.

The second characteristic can be pleasant in its own right.  Well, there was substantial social safety which on the other side of the coin, a lack of economic perspectives.  What consists in social safety?  There was not open unemployment, because unemployment was hidden.  The basic essentials were inexpensive, but there were long lines.  Whereas long-term use products were very expensive.  In socialism, there was no competition and enterprise was simultaneously centers of social help, therefore, there was no need for a special system to exist behind the social curtain in which a modern version exists in a market economy.

And finally, thirdly, what is associated with the essence of a state namely that law was lawless.  It was lawless law.  It means that actions which are the essence of development were crimes in the socialist legal light.  For development, private enterprise is essential.  But it was considered a crime as well as when the political opposition presented alternative programs. 

How much did this system cost?  There were enormous non-economic costs which I will omit.  Life in denial which now is appearing to some as an ideal is not pleasant.  But excessive economic costs are the costs of lost time.  Every socialist country lost so much.  There are no exceptions.  Let’s take Cuba and Chile, for instance.  In 1950, Cuba had 56% of Chile’s income.  But in 2003, only 23%.  That is two times less.

An especially interesting case is China.  During the times of Maoism, China withdrew from the wealthy West but from the late 70s.  China is accelerating.  Does it result from the fact that China found a better socialism?  No.  It results from the fact that China is coming into capitalism.  Though they do not officially admit this and officially, they still speak about the free market socialist economy.  But in fact, a massive privatization begins to succeed from farming allowing the creation of quasi private companies beyond farming.  China opened up to the world.  Today China has 5 - 6 times more investment from abroad than India and they export 5 – 6 times more.  Not everything is done there and what is not done is the source of problems, for example, the banking system.  Banks have gigantic losses, only people do not know about this.  In any case, China is not an exception to the rule, that socialism does not always prevail and it is necessary  to tear ourselves away from it if we want to make up for lost times.

Very briefly, I will talk now about the Central-Eastern European experience.  The general conclusion from much observation is this – in a short amount of time, substantial differences grew as well as in the economic and non-economic sense.  If for 100 we take the level of GNP in 1988, we see that Poland achieved the highest growth (though it could have achieved more), that is 47%. 

Inflation is very unpleasant for people.  It is similar to health – if there is no inflation, then no one notices a problem, but if it appears, it is noticeable. All countries lowered their inflation considerably.  Central-Eastern European countries lowered it to the lowest level, but it is  considerably lower.  Where?  In the Ukraine and Russia, countries which achieved considerably worse results in economic growth.  It shows for the following time, what nonsense it is to believe that thanks to higher inflation, we can achieve more economic well-being. 

Direct investment from abroad.  What is this?  This is the most valuable form of inflow of external capital, which constitutes in establishing enterprises as well as taking charge of them through privatization as well as buying existing private companies.  Why is it so valuable?  Because it is the holder of new knowledge:  organizational and technical – you will not read this in textbooks.  Because we know all reasonable governments try to attract this kind of investment.  Even wealthy countries:  the United States, France, and Great Britain.

If the economy releases itself from political guardianship, then certain inequalities will increase – this is inevitable when you have the possibility of a free enterprise, there will be higher income connected with this.  In socialism, it was not worth having an education – as from an economic point of view – because most educated people did not earn more than people less educated.  This changes in a market economy.  Therefore, there is no reason to deplore that inequality increases; you have to see where it is coming from and how it grows.  It is not true that in Poland inequality has grown much.  However, the truth is that inequality has grown in countries which are less reformed:  in Russia and in the Ukraine.  The less reform, the more inequality.  Why?  Because the less free competition, the more fortune associated with political connection.  Therefore, if you want to have less growth of inequality, more fair inequality, you have to reform the nation and the economy and not block it.

I will now present what looks like the main conclusions as I think of other countries whose conditions in the beginning can be similar.  I think that Cuba having a socialist economy, central planning is similar enough.  Therefore, firstly, a very important conclusion – the more pro-market reform, the better economic results and beyond economic results.  Those who block reform hurt people, weaken growth, and causing greater unemployment, though they simply show themselves as benefactors.  The biggest hurters rant and rave the most that they love people.  Secondly, it happens that some country is late with reform.  But if we start with a later reform and rush it very much so after some time, the economy will be accelerated.  The best example is probably Armenia.  A country which is in a very difficult place geographically, cut off from the sea, and has two neighboring enemies:  Turkey and Azerbaijan.  It is a country which achieved over the last few years from 1999 fantastic economic results.  In Armenia, this was accomplished which was not achieved in none of the Central-Eastern European countries – with the exception of Lithuania – the state’s fiscal presence in society was drastically reduced.  The relation of public expenditure to GNP fell from 30% to 17.7%.  In Poland, how much is it?  44%.  In Armenia, you could have reduced taxes up to 14% of the GNP.  It is somewhat of a fiscal burden as with the Asian tigers.  This came along with the fall of inflation.

If in a decisive manner, the reform accelerates and it maintains itself, so after a certain time, there will be an accelerated growth.  What do these reforms consist in?  There are 3 fundamental areas.  First of all, liberalization, that is removing political restraints.  First of all, the removal of barriers and creating private enterprise.  Secondly, the rebuilding of institutions ie. creating new institutions which could not exist in socialism or transform the existing institutions.  What could not exist in socialism?  For example, the stock exchange.  What needs to be transformed?  Privatize enterprises.  Take back power from politicians over them.  We also need to rebuild public institutions.  It is extremely important to have independent and professional courts – the measure of justice.  The institutions have to also learn the new law.  In the past, speculators were hunted down, but now we need to protect private owners.  Thirdly, prices have to be stabile, ie. low inflation in order to avoid a crisis. 

It is worth remembering:  Liberalization can be done quickly.  Macroeconomic stabilization also can be achieved rapidly.  What is more, you also have to do it fast as usual especially if there is high inflation.  Therefore, institutional rebuilding, though it has to be done in a quick manner, cannot be done as quickly as liberalization. 

Liberalization is not a technocratic change, but it is also deeply moral and social in order for people to be free and in order to achieve their life plans.  How many people were hurt in socialism – they wanted to be entrepreneurs, but they could not be.  They could only do it in the gray zone, but this is not any enterprise.  Besides this, liberalization is extremely important to support development.  Now I would like to say a few words about privatization.  With privatization, it is easy to make it seem as though it is a boogeyman, but the one who blocks privatization hurts people.  Why does it hurt?  If you introduce competition, but you do not privatize a given enterprise, it is like as if the enterprise was a boxer who you tie one arm in the back, but he has to fight with the other boxers who have two free hands.  Simply because private competition is more efficient and better managed than state. 

You have to remember that conditions to reform do not ripen as fruit in the garden.  You have to take advantage of every occasion.  But in order to take advantage of every occasion, you have to be ready for the program and the group of people in order to go in and reform quickly.  And to implant reforms in such as a way that you can not reverse them.  For example, the exchange of money is very important because it signals danger for us.  It is worth engaging in international treaties which has been instilling reform, for example, participating in the World Trade organization.  The role of media is very important.  In communism, the media was controlled.  They did not show real problems and to a lot of people, it seemed as though they do not have these problems - that there are no hardships, that there is no crime.  When you free media, the good thing alone is what they are concentrating on - on bad characteristics of the new reality.  And then for many people, it can seem as though crime or poverty came about only after the fall of socialism - this is a blurred picture.  It is not a solution for the behavior of censorship, therefore, it is vastly important – training journalists – in terms of journalist ethics and professionalism.    

Reforms bring out dissatisfaction.  And this is true.  Because if there would not have been any dissatisfaction, then reforms would have been accomplished a long time ago.  Where does dissatisfaction come from?  If economic reforms are satisfactorily done – that is accelerate development, then the relative position is in comparison with other people; certain groups fall and other groups rise. 

For example, let’s take miners.  They were highly paid and had a lot of prestige in the former system and were compared with other people in the past.  Why?  Among other things, because the socialist economy needed a lot of coal.  Accountants were ignored, because in socialism, expenses were not counted.  What happens when you successfully enter into a market economy?  The relative position of miners lowers which does not mean that it worsens in comparison to accountants, engineers, or enterprises.  We need to remember that in these groups there can not be enthusiastic support for reform.  The relative position of accountants or engineers has improved.

In socialism, there was a lot of unemployment – it was hidden.  When we cross over to a market economy, then open unemployment appears.  From the point of view of an individual person, it is better to be unemployed in work than publicly.  But are these arguments in order not to make reform?  Of course not, because first of all, without reform, the country can only tumble.  Secondly, if it tumbles, then everyone will be unhappy after a certain time.  So it is better to reform and definitely, counting on some kind of proportional dissatisfaction than not doing anything and leading towards something where everyone will be dissatisfied.