Academic journal article International Advances in Economic Research

Marketization and Poland's Transfer Payments

Academic journal article International Advances in Economic Research

Marketization and Poland's Transfer Payments

Article excerpt

BOZENA LEVEN [*]

This study will examine the effects of Poland's transition on structural and policy changes in the primary categories of central government transfer payments, family assistance programs, pensions, and unemployment benefits. In this paper, changes in the structure of transfer payments for 1990 through 1997 will be quantified, and the relevant programs are described. This paper also examines the regulatory and policy framework of transfer payments. The welfare effects of transfer payment changes on Poland's different societal groups will be calculated, and certain policy recommendations are presented. (JEL H1, H3, HS, H7, PS)

Introduction

Only eight years ago, Poland's centrally planned economy afforded its citizens a cradle-to-grave embrace of health care, housing, education, and employment. The price exacted for these benefits was high and, in many respects, all encompassing. In the political arena, that price included almost complete political disenfranchisement and a system in which no elected institutions held the state responsible for its economic and other policies.

Fittingly, in 1990, Polish socialism was toppled from the bottom up by the very popular consensus that it had worked so hard to repress since the end of World War II. Faced with a crumbling state-owned economy, the newly elected government moved quickly toward privatization, implementing the now well-known "shock therapy" program of economic reform.

Besides a new economy, however, Poles also awoke to a new relationship between popular consensus and government policies. The purpose here is to discuss that relationship as it affects privatization through the prism of central government spending and, more specifically, by quantifying and assessing the restructuring of government spending during 1991-96.

The hypothesis considered is that privatization and decentralization should lead to a diminishing role for the central budget in financing economic activities in Poland. The privatization of some sectors, such as pensions, health services, and education, should diminish the need for financial support from the central budget and, consequently, total government spending. The reason is quite straightforward: prior to the 1990s, the great majority of firms were owned by the state, which maintained a monopoly in almost all areas of social spending. Privatization means the loss of state ownership rights in many enterprises, simultaneous with the formation of private substitutes. In other words, as the state monopoly is being eliminated, social spending from the central budget on the newly privatized sectors should decline. This paper does not attempt to analyze Poland's privatization process in detail. Instead, the focus is on changes in government spending during the 1990s as a proxy to measure the progress of pr ivatization in some sectors. The notion underlying this approach is that the such a marketization process should diminish government spending as privatization progresses, consistent with a growing private sector. In addition, decentralization, necessary for successful transition, should further diminish the need for central funds.

However, the opposite process is occurring in Poland. That is, despite fundamental changes in the mechanisms of that country's economy, government spending has actually increased as a percentage of total gross domestic product (GDP) during the examined period. This paper provides empirical evidence that despite the popular expectations, Poland's transformation to a market economy led to an increase in government spending as a percentage of GDP. Because that increase appears to have been driven largely by popular resistance to deeper social welfare cuts, it is concluded that the "honeymoon' phase of Polish reform may be over, and a new, much more sporadic phase of transition may have already begun.

Analysis of Changes in Government Spending in the 1990s

Government spending has two components: transfers and purchases of goods and services. …

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