Economic Shock Therapy vs. Gradualism : The "Big Bang" Approach Has Worked Well in Poland, While Other East Europeans Have Adopted a More Gradual Method in Moving toward Capitalism

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By 1989, the communist economic system of central planning and state- owned industry was nearing its end. In Poland, the Solidarity movement had probably dealt it a mortal blow already in 1980 by virtually paralyzing the party state on which the functioning of the whole system crucially depended. In the Soviet Union, Gorbachev unwittingly kept dismantling it bit by bit through ceaseless reforms and reorganizations. Largely because of Gorbachev's renunciation of the Brezhnev Doctrine, the communist system was disintegrating in other Soviet bloc countries as well. Relieved of the threat of Soviet intervention,they saw once more the rise of the spirit of 1956 Budapest and 1968 Prague, this time safe and self-confident.

Poland was the trailblazer. An (almost) freely elected parliament, with a large noncommunist majority, approved the so-called Balcerowicz program in December 1989. Consisting of a host of coordinated liberalization measures ultimately aiming at the restoration of capitalism, the program--often described as "shock therapy" (or alternately, "big bang")--became the first of the postcommunist reform schemes.

Its example certainly inspired the measures later introduced in post- Soviet Russia by Egor Gaydar. And its results were closely watched by everybody. Some paid lip service to the principle of moving away from the centrally planned, state-owned economy rapidly, on a broad front, just as the Poles did. Others expressed doubts and reservations. Except for Russia, few equaled the Polish pace of reforms. The seemingly high cost--falling output, declining living standards, increasing unemployment--was judged excessive. Instead, a purportedly less painful exit route from communism was generally advocated--a gradual transition.

From the record so far--barely a decade--it would be difficult to draw conclusions about the relative merits of the two approaches. Shock therapy seems to have succeeded quite well in Poland but apparently not in Russia. More gradual changes added up to creditable progress in Hungary and in the special case of the Czech Republic (although short of expectations) but nowhere else. Obviously the course and outcome of the reforms (even if motivated by the same goal of restoring capitalism) were strongly influenced by local circumstances. Nonetheless, a few observations may be helpful in putting the shock therapy vs. gradualism issue into a more general perspective.

First, we must recognize the extraordinary complexity of a systemic overhaul. Economics was of relatively little use in choosing between the two strategies. Although a prescription for an adequate working system could be culled from any decent economics textbook, neither theory nor practical experience offered any guidance regarding the transition from the realities of communism to capitalism. Necessarily, the great project of overhauling an entire economic system was a matter of learning by doing, with all the attendant uncertainties and risks. It was, in effect, guesswork and improvisation. No amount of advice from academics, international agencies, or Western governments could change this.

The choice between the two strategies was further complicated because many relevant considerations involved psychological, sociological, and cultural dimensions that do not lend themselves easily to analysis--in particular, to quantifiable analysis--and prediction. This added an elusive quality to an already baffling economic problem.

Moreover, apart from any intrinsic complications, the choice of strategy and its implementation was to a great extent a matter of politics. It depended on the configuration of political forces in each country. This had several consequences. It would be difficult to exaggerate the weight of politics in adopting shock therapy. In Poland and Russia, the only two unambiguous cases of such a choice, the goal was to remove once and for all the organizational and economic basis of the Communist Party state. …