Echoes: After Revolution, the Hard Part

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By John B. Taylor

This week's discussion on the economic impact of democratic change in the Middle East reminds me of the upheaval that transformed Poland from a centrally planned economy to a capitalist one two decades ago.

After Lech Walesa and the Solidarity trade-union movement triumphed politically over the communists, the new Polish government quickly developed economic-renewal plans that were ready to go by December 1989.

These changes were sometimes called "shock therapy" because they were enacted so rapidly, or the Balcerowicz Plan, because Finance Minister Leszek Balcerowicz supported them more than anyone else in the Polish government.

They quickly transformed the economy by removing many price controls and halting subsidies to state enterprises.

The U.S. was a strong advocate of the plan. I was then a member of President George H.W. Bush's Council of Economic Advisers, and I worked with Condoleezza Rice, who was then the National Security Council's director of Soviet and Eastern European affairs, to put together a $1 billion stabilization plan to help the transition and demonstrate American support.

The economic shift turned out to be very difficult. The unprofitability of state enterprises, which were suddenly left to compete in the free market without price supports and subsidies, became vividly apparent. Many had to close or shrink. Measured unemployment rose, but as the economic team stressed, it was simply unemployment in a different form.

The same types of adjustment pains are likely during the transition to a less interventionist economic policy in the Middle East and North Africa.

I traveled to Warsaw in December 1989, and again in April 1990, to provide advice. The second visit was with a team that included former Federal Reserve Chairman Paul Volcker, and I recall the distressed prime minister of Poland, Tadeusz Mazowiecki, asking us in a small meeting if we could see "light at the end of the tunnel" for the Polish people. Volcker, who had experience with the U.S.'s painful disinflation in the early 1980s, offered strong support and said Poland should stick to the plan. Almost everyone in the group of advisers agreed.

Fortunately, Poland emerged successfully from the transition. Its new free-market economy was soon growing rapidly, and it remains relatively strong today. Poland was the only nation in Europe to avoid a recession after the 2008 financial turmoil.

In political transitions, such as the ones occurring in the Middle East now, the importance of the economy is too often forgotten. The historical lesson is that if free-market strategies are to succeed, they need committed leaders, such as Leszek Balcerowicz, to implement them in difficult circumstances, and in the face of heavy criticism. They also need support from other free-market economies, such as the U.S., and their leaders.

(John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at the Hoover Institution. The opinions expressed are his own.)

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-0- May/26/2011 20:10 GMT