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. Last Updated: 07/27/2016

Poland Touts Shock Therapy's Success

WARSAW -- Six years of economic shock therapy in Poland is finally showing results. Just ask Jozef Habrat, who runs a glass works in southern Poland that was among the first state enterprises to be privatized.

In 1990, Krosno S.A. was losing money and sinking under a mountain of debt. Three of its five plants were idle. Only one telephone line was working because there was no money to pay phone bills.

"We didn't have financial liquidity, no possibility for credit," he said. "That was a disaster."

Habrat renegotiated the debts, cut costs, improved work organization and tightened financial discipline. He also worked hard to revive sales contacts.

Exports started expanding gradually and the company, famous for its hand-blown glasses, carafes and bowls as well as industrial glass products, turned a profit in 1994. Last year the profit doubled to 8 million zlotys ($3.2 million).

It's the kind of turnaround story Poland's government likes to hear -- and brag about.

"The Polish economy is like a glittering coin," says a beaming Grzegorz Kolodko, Poland's finance minister since April 1994.

Poland is rapidly turning into a showcase for economic reforms in the former Soviet bloc -- a point not lost on Moscow, where Polish President Aleksander Kwasniewski is visiting this week to, among other things, discuss improving economic ties.

Poland's economy grew 7 percent last year, and exports soared 38 percent in dollar terms. Industrial production rose 10 percent, returning to the level of 1989, the last year of communist rule.

Annual inflation has fallen to below 22 percent, from 29.5 percent in 1994, and unemployment is under 15 percent, with 200,000 new jobs created last year.

Kolodko forecasts 5 percent annual growth until 2000, and he promises inflation to be cut to single digits by then.

As in the rest of Eastern Europe, the early post-communist period in Poland wasn't easy.

With the demise of the Soviet-led trading bloc, Comecon, factories across the region that once catered to Moscow's needs found themselves with warehouses full of useless wares.

State-controlled prices gave way to the tough rules of supply and demand, and hard currencies replaced the communist-era "transferable ruble," an accounting contrivance that existed only on paper.

"It was a complete mess," said Habrat. "All our distribution networks were closed, and the new managers had no idea about export deals."

But a year after it was privatized, the factory, named for its home city, became one of the first five companies listed on Warsaw's stock exchange, revived after half a century.

Krosno, which employs 5,000 people, has been paying dividends to its shareholders since 1994.

Sales rose 50 percent last year, to 154 million zlotys. Half of its production was exported, mainly to the United States, Germany, Britain and Australia.

"The exports really pulled us through," Habrat said.

He said market reforms have made workers strive to be more productive, "to get more money for better work.''

Leszek Balcerowicz, finance minister in 1989, liberalized all economic activity and removed limits on foreign trade, allowing many enterprising Poles to start businesses and get their first experience with a market economy.

Almost all retail trade and services were turned over to private hands. Most subsidies for inefficient state industries were eliminated, along with bailouts for indebted plants and pay increases for striking miners and steelworkers.

Despite early problems, including hyperinflation of 650 percent and a $45 billion foreign debt, shock therapy coupled with strict financial discipline seems to have done the trick, Balcerowicz said.

Nonetheless, the shock of shock therapy has not worn off completely.

Though average pay has tripled to the equivalent of about $330 a month, its purchasing power is only 75 percent of the 1989 level. Unemployment and deep social security cuts have put one in four Poles under the poverty line.

The tough measures cost the Solidarity government the 1993 parliamentary election, and dissatisfaction contributed to Solidarity hero Lech Walesa's loss of the presidency last year.

But despite seven changes of administration in six years, the government has adhered to strict budgets and refused to retreat on market reforms.

Balcerowicz said he was happy the current growth has been export-oriented, but warned more reforms were needed.

Poland is now governed by former communists, who have promised to go ahead with privatization.

Although more than 40 percent of state industries have been privatized, he noted, the process has slowed.

Meanwhile, communist-era pension and social security programs remain untouched, coal mining needs further restructuring, and more subsidies need to be cut, such as the one that kept the historic Gdansk shipyard hiring employees and paying generous benefits, while its competitors restructured.