The Heritage Foundation

Backgrounder #737 on Europe

November 9, 1989

November 9, 1989 | Backgrounder on Europe

How George Bush Can Help Lech Walesa Succeed


(Archived document, may contain errors)

737 HOW GE0RGE.BUSH CAN HELP LJXH WAIXSA SUCCEED INTRODUCTION Polish leader Lech Walesa arrives in the United States next week for what promises to be an emotional an d triumphal tour. He will address a joint session of Congress on November 15, and will meet with George Bush.

Walesas visit comes at a dramatic time in Polandshistory as that country is -1 making bold strides toward democracy.

Polands break with four dec ades of communist rule has come at dazzling speed. But Polands democratic, non-communist regime now faces enormous well-reported problems. The economy is nearing collapse; the democratic forces are weak and face a still-powerful communist party; and the S oviet Union can still intervene to halt democratization. No blueprint exists for transforming a communist country into a democracy and free enterprise economy because it has never before happened.

Consolidating Democracy.The emergence of a free and democra tic Poland would transform the strategic map of Europe by undermining Soviet inluence.Thus, the fate of democracy in Poland has enormous importance not only for that country, but also for the rest of Europe and for America. For this reason, the U.S. and i ts allies canno7 passively watch events in Poland.

Instead, they must act quickly and decisively to assist the democratic forces in consolidating their hold on power and enable them to sweep away the communists and escape from Soviet control.

Walesas visi t to the U.S. creates a compelling opportunity for the U.S government to demonstrate its commitment to assist Polands new democratic government. In his talks with Walesa, Bush should make clear Americas strong support for the emergence of democracy in Pol a nd, the recovery of its independence, and its transformation into a free market economy. Bush then should tell Walesa that, to help build such a Poland, the U.S. is prepared to democratic forces in Poland difficulties, rather than to put it on the interna t ional dole write-downs by governments and debt-equity swaps by commercial banks and does not favor those with political connections as conditions for continued assistance Warn Moscow and the Polish communists against subverting the Use economic assistance to help Poland grow out of its economic m+ pfeSg fiir WeSfefnP!de5t ,rgli$i ci~~~y t ria and Ensure that economic aid to Poland goes solely to the private sector Establish criteria for judging progress toward creating a free market Remove all restrictions on Polish exports to the U.S Establish management training and education programs to help the Poles prepare for the transition to a free market economy Encourage the broadest possible range of ties between public and private organizations in the West and t heir Polish counterparts Pursue innovative approaches to Polands problems,.such.as the creation of a U.S.-Poland Development Fund to promote privatization of Polands food distribution system. a THE STAKES FOR THE WEST The Free World has much to gain from Polands joining the community of democratic nations. Not only would this be an affirmation of the Wests fundamental values, but the expansion of democracy in the communist bloc contributes to the creation of a more peaceful world.

The West also would benef it economically from Polands transformation into a free market economy. A productive Polish economy would be a source of valuable products for the Wests consumers and a greatly expanded market Most important, the dramatic and unexpected events in Poland g i ve the for its exports U.S. and the West an unprecedented post-World War I1 opportunity to transform the strategic situation in Europe. At little cost or risk, they can help the Poles win freedom and, in so doing, undermine Soviet influence throughout the continent. Soviet influence in Europe rests upon its military power, specifically its ability to pose a military threat to Western Europe. As virtually all Soviet lines of communications to its forces run through Poland control over that country is a prer equisite for continued Soviet support of its East German satellite and the maintenance of its forces there.

Obstacle to Invasion. A stable democratic government in Poland threatens to undermine and eventually to break this connection by destroying the comm unists internal political and economic base and eventually wresting 2control of the countrys destiny from the Soviet Union. By separating the Soviet Union from its East German satellite, a democratic and independent Poland would make a Soviet invasion of Western Europe extremely difficult.

It would also make even the maintenance of its current force levels there increasingly problematic.

Encouraging Opposition. As the largest state in the region, a free and democratic.Poland also,wquld .gncourage.$hs, gqofih,of .opposition to communist regimes throughout the region, including inside the Soviet Union.

Already, the Polish model encourages the democratic forces in the Baltic republics, Byelorussia, and the Ukraine.

For America, the most important issue is P olands membership in the Warsaw Pact and Soviet control over the Polish military. At present however, Polands abrupt withdrawal from the Pact probably would be intolerable to Moscow. But a gradual withdrawal is possible, even likely. As its domestic power and stability increases, the democratic government inevitably will extend its control over Polands police and armed forces. Once such control is established, other steps can follow, including requiring the removal of all Soviet troops, forbidding Warsaw P a ct exercises on Polish territory, and an eventual withdrawal from the Pacts integrated military command. The end result would be the effective dismantling of the Pact, even if it remained formally in existence. Far from impossible, a similar series of ste p s has already been outlined for Hungary by the Speaker of its Parliament Matyas Szuros THE TRIUMPH OF DEMOCRACY While the past year has been a time of rapid change in Poland, the Polish revolution has been a long time in the making.The Soviet-imposed comm u nist regimes attempt to regiment society through decades of political repression and control of the economy never eradicated the hope of the Polish people for freedom and independence. The Catholic Church and peasants remained fiercely independent, while workers rose in revolt in 1956 1970,1976, and 1980.Then in August 1980, the Solidarity labor union was created and became increasingly powerful until the regime. declared martial law on December 13,19

81. Solidarity was outlawed and its leadership imprison ed 1970s, accelerated following the imposition of martial law. By late last year one half-hearted economic reform after another havin failed, the regime was forced to negotiate with the still-banned Solidarity. The result was the historic agreement of Apr il 5,1989, in which Solidarity was re-legalized in return for its assistance in addressing the mounting economic crisis. Most Meanwhile, the decline of the Polish economy, which had begun in the late l 1 and Prospects, September 1989, pp. 7-9.

On the economic reforms of the 1980s, see U.S. Department of State, Economic Reform in Poland. Status J 3 4 ri remarkable, however, was the regimes agreement to hold partially free elections for Polands parliament.

Despite its attempts to rig the vote, th e regime was totally defeated in the June 4th elections. Solidarity won every contested seat but one, while communists were rejected by voters even in those districts where communists ran unopposed. The communists reserved quota of seats in the parliament event,ually.we,ffled. og!yMth Soljda~!ty;s .c~opqq$o~~yhich it gave reluctantly to prevent the regime from reneging on the entire agreement.

Fragile Coalition. With the communists legitimacy destroyed and their confidence shattered, their position became untenable. As Janusz Ziolkowski, Chairman of the Foreign Affairs Committee of the Polish Senate, told a Heritage Foundation delegation visiting Warsaw last month Solidaritys moral victory was total. Despite their great successes, however Solidarity and it s allies remain weak. Even with its overwhelming victory at the polls, Solidaritys agreement with the regime limits its representation in the parliament. Solidaritys assumption of power was possible only by the defection of the tiny Peasant and Democratic parties from the communist camp.

The result is the coalition government that includes some communists. The Prime Minister, Tadeusz Mazowiecki, and most of the economic ministries came from Solidarity ranks. Other positions are parcelled out to the Peasants and Democrats in return for their support. The ministries controlling the police and the military remain in communist hands to allay .MOSCOWS suspicions of the new governments intentions toward the Warsaw Pact the Peasants and Democrats would rob the dem o cratic forces of their working majority in parliament, and the communists have little interest in aiding the governments success. Once the democratic government becomes entrenched, however, new elections could be held which would be entirely free and in w h ich every seat would be contested. This would sweep the remnants of the Communist Party out of the parliament, destroying its political power for as long as Poland remains a democracy. Only a coup or Soviet invasion could then reinstate them This coalitio n is precarious and destined to be short-lived. Defections by OVERCOMING OBSTACLES For the democratic government to accomplish its objectives, it must secure its power. In so doing, it faces enormous, some would say nearly impossible tasks. inexperienced. T heir control of parliament is limited and dependent upon the cooperation of elements of the old regime. Although greatly reduced in strength, the Polish United Workers Party (Communist Party) remains powerful, controlling the police and military. Hundreds of thousands of Communist Party members remain in key positions throughout the Only recently legalized, the democratic forces remain weak and 4 b a tl P h e F a P tl n a n d z d ii J P h J ii tc rc a SI v u tc tl e tl P b ir P d P 0 H bureaucracy and soci ety, able to sabotage government policies. Most iminously, the economic crisis that forced the communists to concede power o the democratic forces has worsened, and a free-fall into economic chaos is iossible.

Economic Ills. Polands collapsing economy come s as no surprise. It is the iarvest of decades of institutionalized economic irrationality of the Stalinist conomic systera,Econo~.c incentives Were Jggely destroyed by the states eizure of private property and the deadening hand of central planning rivat e economic activity was either extremely limited or eliminated ltogether. Much of the nations resources were squandered on ioorly-designed and ultimately uneconomic heavy industrial projects, such as he Lenin Steel Works at Nowa Huta. Agriculture and light industry neanwhile were underfunded. The responsible positions in every enterprise nd throughout the bureaucracy were staffed by the Communist Party nembers chosen for their political loyalty rather than their expertise.

Poland suffered from the ills common to all communist economies leclining rates of growth, technological stagnation, poor quality of products rasted resources, lack of consumer goods, and distortion of incentives.

Jnable to correct these problems, the government borrowed billions of lollars from Western banks and governments in the 1970s. Instead of being nvested productively, this money was wasted on projects of little merit.

Deadly Circle. The result is a foreign debt of approximately $41 billion early payments on the interest alone wou ld consume approximately 90 lercent of Polands export earnings. A far smaller percentage actually is paid owever, as the remainder is rolled over into the ever-increasing principal et, even these limited interest payments have crippled Polands ability to m port machinery to modernize its antiquated industry and consumer goods 3 satisfy basic needs, including food. A deadly circle thus has been created here Polands interest payments prevent it from importing what it needs to evive its export capacity, which in turn reduces its foreign exchange earnings nd its ability to pay its debt.

Poland is also beset by hyperinflation. This years inflation rate is expected 3 exceed 1000 percent, but could soar higher.The cause is as old as history he regime has been print ing reams of money to subsidize inefficient state nterprises, to boost wages artificially to keep peace with labor, and to cover he government deficit.

The burden of these and other problems falls squarely on the population heady low, living standards are falling further. Basic consumer goods are ecoming more scarce. The percentage of Poles below the subsistence-level fficial poverty line, already 40 percent of the population, is growing, sucking I ever larger segments of the professional classes, a bitte r irony of Marxs rediction of capitalisms impoverishment of these same groups. In iscussions with Heritage visitors in Warsaw last month, one Polish official rent further, asserting that the economic situation of 80 percent of the opulation could be charac terized as bad and getting worse 5 Most worrisome is growing malnutrition. Food shortages already are a problem, and are sure to get worse in the traditionally difficult winter season.

Prices on basic commodities have exploded. The price of meat has risen 1000 percent in two months; that of still subsidized bread and milk, 500 percent.

In brief, life may be becoming intolerable for a brave population which has suffered increasing economic misery for years. Polish officials and others with whom.He.ritage\\ r epresentatives met igrJYarsaw lgit.month, including even the communists, agreed that the population supports the new government and is willing to endure significant hardships. Many expressed a fear, however, that food shortages and a general economic coll a pse could send people out into the streets and bring down the government. Minister of Construction Aleksander Paszynski told Heritage that the government had three or four months maximum to produce results THE GOVERNMENTS PLANS a To deal with this crisis, the new government led by Prime Minister Mazowiecki has unveiled a very ambitious plan designed to reverse the economic decline and also prepare the transition to a free market economy.

The first priority of the government is to reduce inflation. By the b eginning of next year, the government plans to slash the budget deficit, now 55 percent of total revenues or as much as 25 percent of gross national product in nominal terms, by cutting subsidies to unprofitable state enterprises and closing those which a re hopelessly inefficient and unprofitable; limiting wage increases tightening monetary policy and credit; and reducing government expenditures, especially for the police and military.

Then the government plans an enormously complex and difficult series of structural changes to build the foundations for a market economy? This involves not only dismantling the old system through privatization of state enterprises and reduction of the eno rmous bureaucracy, but also creating the elements of a capitalist system largely from scratch. Among such elements tax and commercial codes, a banking system, capital and labor markets property rights guarantees, and corporate and business law.

Dwarfing Th atchers Task. A private sector is to be created by removing restrictions on private economic activity and by selling or transferring state enterprises into private hands. Such privatization is an enormous task, as the state sector accounts for approximate l y 94 percent of industry. Currently, a variety of plans are being considered regarding how best to dispose of these assets, including employee buyouts, outright sale of enterprises to Poles and foreign investors, and even auctions.The emphasis is on dispo s ing of them as rapidly as possible. I The scale and unfamiliarity of the planned changes are forbidding. The Polish task dwarfs, for example, Margaret Thatchers privatization of only a 2 Poland makes a Dash for Economic Liberalisation, Finunciul Zmw, Sept ember 28,1989, p. 3 6small part of the British economy, which has taken a decade to accomplish.

And this was in a relatively prosperous and politically very stable country with a long heritage of free enterprise.

Alien System. Among the many problems is t hat few Poles have sufficient understanding of, or experience with, what is still the largely alien system of capitalism.There is a serious shortage of those with proficiency in accounting business .management, I.aW,-and. finance p,,p.zqe .q

y*.g,&y of th e most basic skills needed in business. In addition, there are few guidelines for transforming a communist economy into a free enterprise system. Never before has it been attempted for an entire economy changes pushed by the Mazowiecki government would be expected to produce more economic hardship. The Minister of Social Policy, Jacek Kuron, told The Heritage Foundation that unemployment could reach 30 percent of the labor force as the reforms take effect. And Poland has only the rudiments of a social safe ty net to care for the unemployed and the poor.

Noticeable improvements in the economy will not occur until 1991 and probably only years later. It is an open.question whether any government could survive such conditions, especially one that remains very we ak and beset by powerful enemies who will work for its failure Even in the best of circumstances, the deflationary policies and structural U.S. INTERESTS IN A FREE AND DEMOCRATIC POUND Because Polands transition to democracy is clearly in the interests of the West and the U.S they should move quickly to reinforce the many trends toward democracy already underway. Although assistance, to some extent should be a collective responsibility of the West as a whole, effective action requires America to lead, both by example and by taking the initiative in establishing a coordinated Western approach.

According to President Wojciech Jaruzelskis spokesman, Wladzimierz Lozinski, Polands priorities for outside assistance are: 1) food and medical supplies to get through the winter; 2) credits for new materials and spare parts for industrial equipment purchased abroad; 3) fertilizers, pesticides and herbicides to boost next years agricultural harvest; and 4) foreign investment from the International Monetary Fund (IMF Wo rld Bank, and other financial institutions, plus joint ventures with foreign firms, particularly in agriculture and food processing for the production of food exports.

The West already has taken some action to help Poland. At the behest of George Bush, who visited Poland last June, the European Community has devised an emergency aid package totaling $325 million. This money is intended for emergency food aid, to stabilize the Polish economy, and for 7e management training. Several West European countries i n dividually have promised additional assistance, as has the European Investment Bank. The U.S. House of Representatives last month voted $837 million of aid over three years, but the Senate has yet to vote on its own measure. The Polish government is talki n g with the IMF and the World Bank about loans for stabilizing Polands economic situation and assisting the transition to a free market. The IMF is considering a $1 billion loan, of which the U.S. share Political Assistance psychological. America can ensur e that the government and people of Poland do not feel isolated as they struggle with the enormous prob1ems.confronting them. In the past, the Wests seeming abandonment of Eastern Europe to Soviet domination was an important factor in demoralizing potentia l opponents of the communist regimes.This was true during the imposition of Soviet control after World War II and also for the Soviet invasions of Hungary in 1956 and Czechoslovakia in 1968.

America and its West European allies publicly should embrace the Mazowiecki government and welcome a democratic Poland into the West.

During their Warsaw visit, Heritage Foundation representatives were told repeatedly by individuals from across the non-communist political spectrum such as the leader of the Solidarity p arliamentary group, Bronislaw Geremek that one of the most effective ways for the U.S: to help Poland is continued high-level interest by American officials. This includes regular visits to Poland, public statements of support in Washington, and encouragi ng similar actions by the West European governments.

Genuine Polish political parties are emerging and in need of assistance ranging from simple office equipment to instruction in the techniques of political polling. Ties between all levels of Western publ ic and private institutions should be encouraged with their democratic counterparts in Poland to provide material assistance, expertise, and moral support.

Example: the National Endowment for Democracy, the organization established by the Reagan Administr ation to promote democracy around the world, should increase its funding for Poland in general and provide technical assistance to these new parties in particular.

Warning Moscow. The West should make clear to Moscow that an attempt by it to suppress or t urn back the gains made by Polands democratic forces will impair seriously the Wests relations with the Soviet Union. While the West cannot prevent the Soviets from trying to reimpose control either through invasion or through a communist-led imposition o f martial law should Moscow decide to do so, it can raise the potential costs to the Soviet Union of such action.This may deter it 200 .miuio.n A A 8.k b One of the Wests most important, though least costly, influences is 3 cooperation in these areas. The U.S. has provided $600,000 for this program.

The U.S. and Poland signed a scientific and technical exchange agreement in September 1987 to improve 8 Several Poles, including officials and others in the democratic movement expressed to The Heritage Foundation in Warsaw last month their belief that Mo s cows willingness to tolerate the changes taking place in Poland and Eastern Europe is connected with its desire for expanded economic contact with the West. Given this leverage, a coordinated Westem position that made clear the negative consequences for e c onomic relations in the event of a crackdown could provide extra protection for the democratic forces in Poland The same message should be sent to those in the Polish Communist Party who may attempt to seize power. Perhaps the most powerful message of thi s kind would be a declaration that all Western assistance to Poland would halt in the event of a coup. Faced with the prospect of having to address a deteriorating economic situation, which they already have demonstrated an inability to resolve, Polands co mmunists may be deterred by a firm Western stand. Effective pressure would require a united Western stance which only U.S. leadership can provide.

Economic Assistance Western economic assistance will play a critical role in Polands recovery.

Without such help, the chances of the Mazowiecki government successfully addressing Polands economic problems are minimal..

Potential Western assistance falls into two categories. The first, and most important, is immediate support to enable the.new..government.simply :to survive. Second, and less pressing though very critical, are longer-term programs aimed at easing the transition to a free market economy. For if the democratic government survives, Polands long-term economic future is bright; if it fails, longer-term assistance will be irrelevant. As Jerzy Nowak Director of Planning at the Foreign Ministry put it to visiting Heritage Foundation representatives, If this government can survive one year everything else becomes possible dthrbug~outE~tern.:E~rope I H .ia.y . i 2 A I The case for Western assistance to Poland is obscured by a confusion of these two types of assistance. Mindful of Polands squandering of billions in Western loans in the 1970s, many in the West understandably either oppose substantial aid outright or demand a series of stringent 1itmus.tests relating to economic reform, specifically a restructuring and privatization of the economy, before any substantial new aid is granted Inappropriate Pressure. While the concerns raised are valid, they may be les s relevant in the rapidly changing conditions of Poland.The assumption that pressure is needed to induce the Polish government to adopt necessary reforms was correct when the communists were in power. Pressure may be inappropriate now, with a democratic go vernment that already% planning a rapid restructuring of the economy and its transformation into a free market.

A wide range of Polish officials responsible for the economy, such as Minister of ForeignTrade Marcin Swiecicki, acknowledged to The Heritage Fo undation that the growth of the private sector and the attraction of 9much-needed foreign investment would depend largely on the governments effectiveness in implementing these reforms.

Urgent Needs. Immediate assistance from the U.S. should be directed a t relieving the enormous pressures on the government. Food assistance is a high priority. So are medical supplies. It would be a mistake, however, for Western nations to dump surplus food into Poland. As has happened in sc.or,es~XTbird Morld:.co_smt~i.ies , this sigp!ydwyldipg&$g .the food crisis by depressing food prices and thus incentives for farmers to produce more. Even more important than food supplies are farm machinery and agricultural chemicals such as insecticides, herbicides, and fertilizers. The communist Deputy Minister of Agriculture, Wieslaw Mlynarczyk, emphasized to Heritage visitors last month that the need for such products exceeded even that for food this winter materials, new machinery, spare parts, and other industrial goods to revive th e economy. Hard currency is also required to stabilize Polands monetary system and to import many basic consumer goods. Poland already earns hard currency through such exports as coal and other raw materials such as copper as well as textiles and semi-proc essed industrial goods. This year, Polish exports are expected to total $8 billion.

Debt Re/ief Approximately 25 percent of Polands. export. earnings .areaabsorbed. by interest payments on Polands $41 billion hardlcurrency debt. Even this payment, however, represents only one-quarter of the actual interest due with little or no payment on the principal. Rather than provide new loans which add to the debt, America should devise a policy of debt relief to allow Poland to use the hard currency it earns to tac kle its own priorities;.

A debt relief package could include: 1) a moratorium on payments of interest and principal; 2) debt writedowns; and 3) debt-equity swaps.

While deferring interest payments through a moratorium would help in the short-term, it increases the long-term burden by adding debt to the principal.

Debt writedowns, by contrast, provide immediate and long-term assistance.

The actual new costs to Western governments and financial institutions in writing down. the Polish debt, in fact, would be considerably less than the size of the debt suggests. Because the international financial market already has concluded that much of Polands debt is unlikely ever to be repaid, Polish notes are trading in Western financial markets at around 33 percent o f book value. West Europeans loaned great sums to Poland during the 1970s, despite strong U.S. warnings. Washington should urge these governments to admit their mistake and help Poland by writing down the outstanding debt.

Washington should take the lead b y doing so itself. Poland now owes the U.S goverqment $2.2 billion and West European governments more than $25 One of Polands greatest needs is the hard currency to buy the raw billion, at face value 10 e The U.S. government, meanwhile, should urge Americ a n and other Western commercial lenders to consider debt-equity swaps with Poland. In a debt-equity swap, the lender (such as a West German bank) sells its hard currency debt at a discount to a middleman. The middleman then redeems the debt from the debtor countrys government for local currency or some state-owned asset, such as shares in a factory. The lender thereby recovers part of a loan that likely never would be repaid in full, the middleman becomerankwestor in the localeconomy;landthe*debtor governme nts external debt is reduced. A number of indebted Third World countries, like Chile, are using debt-equity swaps in this way.

In Polands case, the state owns a wide range of enterprises, from tourist resorts to steel factories, that could be transferred t o Western investors in return for an agreed-upon reduction in Polands debt. Polish Minister of ForeignTrade Swiecicki told visiting members of The Heritage Foundation last month that The Polish government is ready to have debt-equity swaps.

The fire-sale prices of Polish assets, moreover, are an attractive alternative to near-worthless loans.

Earning Hard Currency The West can also help Poland grow out of its dismal economic situation by opening markets to Polish exports. Export-led growth w ould stimulate Polish industry as well as provide needed hard currency. The U.S. already has taken important steps to reduce its restrictions on imports from Poland, such as restoring Most-Favored-Nation status, suspended after martial law, and allowing P o lish exports to enter the U.S. under the Generalized System of Preferences, normally given only to developing countries. Jan Padlewski Director of the Department of Economics at the Foreign Ministry, identified quotas on textiles and steel as the most imp ortant remaining restrictions for the U.S. market. Padlewski told Heritage Foundation visitors thG Poland is capable of exporting more wool products to the U.S. than allowed by U.S quotas. These restrictions on Polish exports should be removed entirely.

An additional way of boosting Polands hard currency earnings would be to create a guest worker program in which Poles would work in the West and be allowed to send home portions of their hard currency wages. A single worker in the West can often support an extended family in Poland on a relatively small salary. At the current free market exchange rate in Poland, $1 buys the equivalent in zlotys of an average daily wage.

Poland to provide needed expertise in the workings of a free market economy. Minister for Foreign Trade Swiecicki told The Heritage Foundation that the problem of a lack of expertise extended into every area of the economy and was a major impediment to reform. Training centers could be established in Poland and staffed by Western economic and business 4 The U.S. then should increase its management training assistance to 4 See also Melanie S. Tammen, Reducing Third World Debt: Private vs. Public Strategies, Heritage Foundation Backgrounder No. 699, April 10,1989 11 experts teaching entry-level, mid-career, and senior-level courses in business management and free market economics.These should be established in cooperation with Western universities and management training businesses with the U.S. government helping to subsidize the hard currency e x penses involved. This program also should help create and expand the economics and business faculties at Polish universities, and offer scholarships for Polish students and faculty to study in the U.S. in these disciplines and to serve as interns atbanks .and..stock.exchanges~~~e~U~S~~alsorshould insist that a small portion of the cancelled Polish debt be used to fund these training enterprises and to translate business and management textbooks into Polish.

The West also should challenge Moscow to assist P oland.The present economic mess is a direct result, in great part, of Soviet plundering of the country after World War 11, such as its dismantling and transpoiting entire factories to the Soviet Union, and the imposition of the Stalinist economic system, t he ruinous effects of which have been admitted even in the Soviet Union. At a minimum, the Soviets could begin with forgiving Polands $3 billion hard currency debt to them CRITERIA FOR LONGER TERM ASSISTANCE The U.S. assistance program for Poland unveiled by George Bush during his June visit to Warsaw, as well as the plans proposed by Congress, center around the creation of a so-called enterprise fund.. With this fund, the U.S would lend capital to private businesses in Poland..To administer this fund; a b oard of directors, composed of Americans and Poles, would be established.

This enterprisefund is a good idea. It will fail, however, unless the Polish government enacts reforms to enable a free market to function effectively.

Although the Polish governmen t is committed to creating a free enterprise economy, its efforts may be undermined by the scale and complexity of the task and the unfamiliarity with the workings of the capitalist system.There may also be a strong incentive to delay necessary changes be c ause of their painful short-term effects. To help prevent this, the U.S. should establish criteria to serve as benchmarks by which both Warsaw and Washington could judge the Polish governments progress toward establishing a free market economy. The criter ia also would allow the U.S. to determine if its aid to Poland is being used wisely. Such criteria should include 1) Guaranteeing Security of Property and Contract.

Polish citizens should have the right to acquire and dispose of private property in all its forms, including secure legal title. Property rights can be protected only by an independent judicial system with the power to enforce contracts for individuals against the government 2) Eliminating Obstacles to Entrepreneurial Activity.

The private sect or should be deregulated broadly and competition promoted. Monopolies in the state and private sectors can be countered best by permitting unhindered entry to, and exit from, the market by new 12 enterprises. Currently, a cumbersome system of registration and approvals is necessary to create or expand a private business. Government red tape can delay the start-up of a new business by months. State enterprises are given privileged access to credit and scarce supplies. And the state distribution and retail n e twork has not yet been replaced by the private sector 3) Ending Wage and Price Controls II e;~v~i~~nt~c.ont:~o~s-~~er wag& in.&pde&vs.bcld #be ;abolished and market forces allowed to operate freely. Inflation can only be controlled through a balanced budg et 4) Reforming the Tax System.

The Polish government should restructure its tax system to-promote incentives in the private sector and the formation of private capital. The present 50 percent tax on profits discourages private businesses. This tax already is too high, yet the government plans to raise taxes on the'private sector to balance the state budget. While reducing the deficit is of critical importance, raising t&es threatens to hobble the fledgling private sector on which Poland's future depends. A much better alternative to raising taxes would be reductions in spending and the sale of state-owned enterprises.

Specifically, the profit tax rate should be reduced to no more than 30 percent.

The government also should avoid attempting to attract fore ign capital through a preferential rate of taxation. Such an approach discriminates against domestic capital and cannot compensate.for% the.absence of.attractive business opportunities. There will be no need to bribe foreign investors if the proper econom ic climate is established 5) Removing Barriers to Foreign Trade.

Polish individuals and private enterprises should be allowed to operate directly in the international market; they should be able to import and export without the current government intermedi aries. The government should eliminate restrictions on the availability of foreign exchange, and remove market-distorting export incentives such as subsidies. Foreign exchange rates should be determined by the market, rather than by government edict Forei gn investment should be encouraged and allowed to operate in Poland on equal terms with Polish businesses 6) Ending Restrictions on Investment and Capital Flows.

Polish and foreign citizens should be able to invest freely and on an equal basis in the Polish economy and to dispose of financial and other assets without government interference.The entry and export of capital to and from Poland should be unrestricted. The state banking system should be replaced with a number of private commercial banks empowered to operate in all areas of the economy.These should include Polish and foreign banks, and competition among them should be encouraged as well 13 1 7) Privatizi ng the State Sector.

Over 90 percent of Polish industry is state owned. All state enterprises should be candidates for privatization, from the state fishing fleet to coal mines. They can be privatized through outright sale or leasing of enterprises whole o r in part; by auctioning them; or through employee buyouts. Care should be taken to ensure that the transfer of state assets to the private sector not-bs influwed. by o~t~cal..co~ider~a~io o~-b~~~d fay or of individuals or groups with privileged connectio n s to the government or the previous regime. Foreigners should be allowed to purchase or lease these assets on equal terms with Poles DARING A BOLD STRATEGY: U.S.-POWD DEVELOPMENT FUND The U.S. governments plan to provide Poland with substantial amounts of aid, including shipments of surplus food stocks, offers a unique opportunity to encourage Poland to make some of the necessary market reforms in its system. Using the needed food shipments as a lever, a bold, comprehensive plan could be developed that off e red the beginning of a solution to Polands problem of immediate food shortages as well as the problems of foreign debt inefficient state-owned enterprises, a moribund farm sector, limited financial institutions, and inflation caused by too many zlotys in c irculation. The focal point of the program would be the requirement that all U.S. food aid must be distributed and utilized by private sector entities in Poland. The purpose is to encourage the Poles to swiftly privatize their inefficient and costly food distribution system, and to provide the needed price incentives to the farmers.

To facilitate the transfer, a joint U.S.-Poland Development Fund could be established in Warsaw, funded by debt-equity swaps, which may include the 2.2 billion that Poland owes the U.S. government. As an example, the U.S could convert some of this debt into an equity stake, measured in zlotys, in a newly-created Development Fund jointly owned by the U.S. and Poland. The Fund would then acquire, at a concessional price from the Polish government, all state-owned food distributors, wholesalers, storage facilities bakeries, mills, food retail outlets, and the other parts of the food processing and distribution system.

The Fund would immediately privatize these business establishmen ts by selling them, in well-defined units, to the workers in these enterpikes, or other interested domestic investors and entrepreneurs, accepting zlotys which are overabundant, as a down payment or partial payment for the businesses. Debt could be taken b ack by the Fund to pay for the remainder of the cost of the enterprises. Some portion of the zlotys paid the Polish government by the Fund for the food enterprises, as well as those paid the fund by the worker/owners, could be taken out of circulation of p ulling some of the abundant supply of zlotys out of the system, thereby diminishing the severe inflationary pressures which now confront Poland Reducing Inflation. Such a series of transactions have the added advantage 14 Most people have plenty of zlotys but nothing to buy with them. By taking zlotys out of circulation inflation would be eased. As part of the return for their down payment, the new privately-owned food enterprises would be entitled to purchase from the fund, for zlotys, wheat or flour from the U.S.

This would get the food supplies to those who can use or distribute them the best and create an efficient and competitive food distribution network that will ease food shortages by the next harvest. Some portion of the zlotys earne~-by.the-fundth Tough.sales .ofgrain*.and-other food stocks could also be retired while others could be used by the Fund to make loans to facilitate further privatization and small business development. There is plenty of precedent for such an arrangement. In many cases i n other developing countries, under the so-called P.L. 480 program, the United States Agency for International Development (AID) sells surplus food stocks to domestic suppliers for local currency. In turn, the AID mission in that country uses the local cu rrency to help fund privatization and business development programs.

The emergency food sales would be a one-time event for the purchasing enterprises.The food aid would be sold over the next three or four months to help the Poles through the winter but as sure that prices for farmers would not be depressed into the next growing and harvesting season. Beyond serving as an efficient distribution system for the U.S. aid, these newly-created food enterprises, now in the hands of private owners and owner/worker s , would have the incentive to seek new supplies of wheat or flour from the Polish farmers at competitive prices that encourage the farmers to produce at much higher levels. If necessary, the Fund could lend the zlotys back to the enterprises for capital i mprovements or even for down payments on contracts for future wheat.deliveries.

Encouraging Rapid Movement.The owners of the new enterprises would gain experience in the essential aspects of business in a market system, create the beginnings of a commercia l finance system, and spur entrepreneurial initiative throughout the system. This approach could take place very quickly.

Some delays could be expected as workers secure zlotys for the down payments on their enterprises and as bureaucratic obstacles delay the transfer of titles to workers. However, a U.S. policy of no privatization, no food should encourage the government to move rapidly Needed zlotys could come from the workers own savings and by borrowing from friends and family. The two governments cou l d be required to divest themselves of their shares in the Development Fund byselling them to domestic or foreign investors once a stock market emerges, thereby extracting the governments from the market and leaving Poland with a major commercial venture t hat is privately owned.

When presented with this plan last month by Heritage representatives Minister of ForeignTrade Marcin Swiecicki said that it was fantastic and urged that the U.S. government present it as an official proposal to the Polish finance mi nistry 15 CONCLUSION Through great danger and sacrifice, bpired by the values of the West, the Polish people are breaking free from over four decades of Soviet rule and are reestablishing their connections to the Free World. In so doing, they have present e d the U.S. and its Western allies with an opportunity to undermine the foundations of Soviet control over Eastern Europe and its ability to l.ewest; I I 1 L I i I i In its efforts to aid Polands struggle, the U.S. must be careful not to promise more than i t can deliver.The victory of the democratic forces in Poland and the revival of the Polish economy can only be secured through the efforts of the Poles themselves. At best, the U.S. and the West can ease some of the pressures and remove some of the obstac les.

Bolstering Poles Spirit. The U.S however, can play an important role in restraining Soviet intervention or a communist coup by warning of the consequences on their relations with the West. And it can bolster the Poles spirit to face the tasks before t hem by proclaiming strong and continuing U.S support for their struggle.

U.S. and Western assistance should be aimed at helping Poland grow out of its economic difficulties through the use of its own res0urces.The.U.S. and the West can help to free these resources through debt relief and other programs aimed at increasing Polands ability to earnhard currency.

Creative Approaches. The admirable determination to help Poland overcome its economic problems should not blind the U.S. and the West to the long-te rm damage that is done by traditional approaches to providing assistance. U.S. and Western aid must be carefully designed to avoid exacerbating Polands problems, as providing surplus food is likely to do.

Creative approaches are needed because Polands eme rgence from communism presents unique problems. One such approach would be the proposal to use Polands debt to the US. government to restructure Polands food supply system and provide a lasting benefit to the Polish people beyond short-term charity commit m ent to Poland, to outline the goals of U.S. assistance, and to press upon him the need for rapid action on the economic reforms. His message must be that the U.S. and the West stand with Poland during the hopeful and difficult time of its democratic and e conomic rebirth George Bush should use Lech Walesas visit to reaffirm the US Douglas Seay Policy Analyst 16

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