Poles Get Ready For Another `Shock'

Poland's Balcerowicz unleashes another dose of reform

When Leszek Balcerowicz, the fabled father of Poland's economic "shock treatment," reclaimed the Finance Ministry after national elections last September, the burning question was: Can he work his magic again? Many Poles and foreign observers agreed that Central Europe's most vibrant economy desperately needed Balcerowicz and his tiny Freedom Union party to reignite reform, which had slowed during four years of Communist rule. But many also feared he would wield little power in a government led by the Solidarity trade union--with which Balcerowicz enjoys an uneasy political peace.

Now, the 51-year-old Balcerowicz looks set to finish the job he began in 1989. As Deputy Prime Minister and Finance Minister, the former professor wants to keep Poland from degenerating into a once promising also-ran--and secure its place among Europe's first-tier economies. He has already begun a major deregulation drive and has raised taxes on such things as liquor and cigarettes to get the budget deficit down. He also plans to trim social spending. In the still huge state sector, Balcerowitz is sweeping enterprises clean of political appointees. At the center of his program--call it Shock Treatment II--is a privatization plan the previous government had all but forgotten. Privatization is crucial if Balcerowicz is to pay for his other reforms--especially a plan to tame Poland's out-of-control pension system.

Problems are inevitable for an agenda this ambitious, as Balcerowicz knows. Some moves could push the 10.5% jobless rate higher. But Balcerowicz is unfazed--although he recognizes that Shock Treatment II will require steady growth if it is to shake the nation free of the remnants of a planned economy. Poland has been expanding at 7% annually over the last two years. That has made it Europe's star--and encouraged many Poles in their cherished goal of joining the European Union, perhaps as early as 2003. Growth should slow to 5% in 1998, but that still gives Balcerowicz plenty of room to push further reform. "It is a crucial mistake to say that reform is going to cause a lot of pain," says the feisty Balcerowicz. "Avoiding reform is what gets very painful."

GREAT EXPECTATIONS. Although foreign investors hung back after last fall's elections, a "Balcerowicz effect" has begun to buoy the markets--and help Poland avoid the Asia jitters hitting other emerging economies. Over the past month the Warsaw stock market is up 25%, to 16,600. A sale of $285 million worth of treasury bills on Feb. 9 was nearly four times oversubscribed. The surge of foreign capital also has held the zloty firm--even forcing the central bank to intervene to keep the currency from appreciating. Says Barbara Lundberg, executive vice-president at Enterprise Investors, a Warsaw-based venture capital firm: "There are huge expectations with Balcerowicz coming back."

Investors are looking closely at Balcerowicz' much-hyped privatization policy, which is aimed at the 35% of Polish output state companies still account for. In March, Balcerowicz will unveil plans to sell up to 100 large state enterprises, worth some $40 billion. Those sales could begin later this year.

The new minister has already hastened--and enlarged--several large privatizations. In the biggest, 20% of phone company Telekomunikacja Polska, worth $3 billion, will be sold via a stock offering this year. The remainder will go to foreign strategic investors by 2000. By contrast, the previous government had planned to sell just 15% this year and to prohibit foreign ownership. In addition, half of retail banking group Pekao will go on the block this year, up from an earlier planned 15%. And Polish Airlines-LOT recently signed an agreement with British Airways PLC that is probably a prelude to a partial sale. The previous government had blocked foreign investors in this deal, as well.

PENSION PIT. At Balcerowicz' insistence, the new coalition has also been cleaning up executive suites. Nine phone company directors who were political appointees have been replaced so far this year. Jan Monkiewicz, who mismanaged insurance giant Powszechny Zaklad Ubezpieczen so badly that the company's loss reserves slipped $257 million below legal requirements, left the company and was replaced by Wladyslaw Jamrozy, a respected industry veteran. Warsaw is also holding down wages of government workers, which are budgeted to rise only 1.5% this year, vs. 4.5% last year.

The toughest part of Balcerowicz' second act will be social security. The state pension system sucks up 17% of all spending; millions of Poles collect pensions and work in the underground economy. While plans to partially privatize the system have been agreed upon, the reform will require a budget-busting $2 billion annually for the next decade. Meanwhile, the cash-strapped health system is also unraveling. It is wracked by strikes and, although care is officially free of charge, patients must often bribe doctors to get the medical attention they want.

Amid such challenges, there's still a danger that the political peace Balcerowicz helped forge will fall apart. The Solidarity Election Action party, as the coalition is called, is cobbled together out of about 40 different factions, from religious radicals to socialists. What unites them is a deep conviction that the former Communists can never again be entrusted with Poland's future. And so, with a gulp, they're all resigned to another bout of shock treatment.

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