Theory of economic reform and the case of Poland

Abstract

This article examines the theory of economic reform in light of the actual experience Poland.Its main themes are liberalisation and stabilisation.Liberalisation in the case of transition economies implies decontrol of domestic prices and foreign trade. Liberalization may be gradual (gradualism), or immediate (shock therapy).Here, we compare the effects of these strategies using Swedar van Wijnbergen's intertemporal speculation model, taking into account the question of currency convertibility. According to monetarist theory, budget deficits are the main cause of inflation in closed economies.Thus, stabilisation programs usually start with budget balancing.Implementation of nominal anchors for economic reform is also an important issue, because nominal anchors can help eliminate demand pressure and build credibility.Three nominal anchors, i.e. wage tax, fixed exchange rate and high interest rate are closely examined.In addition, the non-trivial task of sequencing the phases of reform is discussed. Obviously, an unsuccessful stabilisation has a strong influence on, e.g. real exchange rates and export opportunities, so how does one time the phases of reform for successful results? Poland's "Big Bang" reform is an example of a monetarist economic reform.This analysis covers the main features of the reform, applying the credit market model of Guillermo Calvo and Fabrizio Coricelli.Calvo and Coricelli have studied the influence of tight credit on output from their empirical results, which is of particular interest in discussion of the Polish case.The paper ends with a summary of the reform outcomes to date. Keywords: Poland, liberalisation, stabilisation, credit market