Within a few years, Poland was on the road to recovery. By 1992, just two years into the Balcerowicz plan, inflation had been largely tamed. Shortly thereafter, the economy began to grow again. Foreign investment has poured into the country, with some 6,000 foreign firms opening operations since 1990. In the years since Balcerowicz implemented his reforms, Poland’s real GDP has doubled, and today the average Polish income is roughly equivalent to that of Portugal.
Balcerowicz’s second stint as deputy prime minister, from 1997 to 2000, was not as successful, as political opponents were able to block a number of his proposed reforms, such as the introduction of a flat tax. However, in 2000 he was appointed governor of Poland’s central bank, where he became known for his refusal to pursue monetary stimulus. By the time he left, seven years later, inflation had been reduced to less than 2 percent. More important, Poland was one of the few European countries able to avoid both the housing bubble and the subsequent recession.
Unfortunately, few countries have been willing to follow such a program. Even subsequent Polish regimes have backtracked on many of Balcerowicz’s reforms. But those nations that have adopted some form of shock therapy have generally fared much better than those that have muddled through.
Balcerowicz himself has contrasted the experiences of what he refers to as the BELLs (Bulgaria, Estonia, Latvia, and Lithuania) with that of the troubled PIIGS (Portugal, Ireland, Italy, Greece, and Spain). The BELLs took immediate steps in response to the recession, significantly cutting spending in an attempt to get debt and deficits under control. The PIIGS muddled through with tax increases, some spending cuts spread over a number of years, and stimulus in some cases. While the BELLs all saw an initial contraction, they recovered quickly, and their economies have emerged stronger than those of most other countries in the region.
Balcerowicz’s experience proves two things. First, market economics outpaces state interventionism at almost every turn. But even more important, Balcerowicz shows that a leader willing to stick to principles can effect serious change. True, he worked within the system, achieving the possible and compromising when necessary. But he was also willing to make difficult and even unpopular decisions when necessary.
If a few more of our politicians learned that lesson, there would be more light at the end of our economic tunnel.
This article appeared in the National Review (Online) on May 21, 2014.
Michael D. Tanner is a senior fellow at the Cato Institute, heading research into a variety of domestic policies with particular emphasis on health care reform, welfare policy, and Social Security. His most recent white paper, "Bad Medicine: A Guide to the Real Costs and Consequences of the New Health Care Law," provides a detailed examination of the Patient Protection and Affordable Care Act (Obamacare) and what it means to taxpayers, workers, physicians, and patients.