Returning Poland to Europe

Central Europe had been kidnapped, the Czech writer Milan Kundera once wrote in a celebrated essay from 1984. It had been dragged eastward by the Soviet Union after World War II. And like a displaced person yearning to return home, the region couldn’t wait until it could rejoin Europe after the fall of the Berlin Wall.

The economist Jeffrey Sachs first visited Poland in spring 1989, before the Wall fell. He met with both government officials and Solidarity representatives. Despite the compromise worked out at the Round Table, the economic prospects for the country were not particularly bright. “Solidarity was talking about hunger, the risk of civil war, breakdown,” Sachs told me in an interview in his Columbia University office in November 2013. “They were very pessimistic, very alarmed.”

As Solidarity prepared to enter parliament after the elections on June 4, it asked Sachs to prepare an economic reform plan. “I was given strict instructions by Jacek Kuron, who asked me to write this document, that this was about returning to Europe: period,” Sachs continued. “That was my vision then, and his vision, and my purpose, and it remained my purpose: Poland had to be part of Europe. It would be like the rest of Europe. It wouldn’t be some new hybrid or new experiment. The reality is that Poland is Central Europe and that’s where it belongs. The divide is artificial and this divide will end. And this is what will restructure the economy and make it possible for recovery.”

The advice that Sachs gave on how Poland could achieve macroeconomic stability and lay the foundation for further transformation has generated considerable praise and criticism over the years.

“All in all, I would not only stand by these ideas, but also stand by the results,” Sachs told me. “Poland actually transformed. I’m not a heartless guy. I’m not a free-market libertarian by a million miles. I wanted a cushion for Poland. That was a large part of my aims and a large part of their interest in me, in terms of what I could get for them. And I did this in a number of ways. I believe in supporting people in unemployment and old-age pensions and a public health care system. It was never the idea that people should sink or swim. It was the idea to build a real economic base from which you give support. And if you can’t get this economic base on your own, you beg for it and you plead mercy on the basis of old debts needing to be cancelled. I tried every bit of begging and pleading and tantrums and everything else I could think of to help, and fortunately some of it worked.”

Sachs dislikes the term “neoliberal” and refuses to accept the label. “I always wonder: how could I be described as a neo-liberal, which is the term of art, when I’m spending half my time berating the banks, trying to get the debts cancelled, trying to establish social funds, trying to make the public health care system work, and when I’m an admirer of Sweden?” he asked.

Sachs didn’t just provide economic advice. He was also make a key political recommendation after Solidarity won nearly every seat it contested in the June 4, 1989 elections. He told Bronislaw Geremek, who headed up Solidarity’s parliamentary caucus, that the opposition had to form a government. Geremek replied that this was impossible. “You can’t take a landslide and make a commission out of it,” Sachs said. “With the resounding victory, they’ll be looking for more than that.”

And then Sachs revealed his trump card. Solidarity figured that, given the huge debt the government had, the country was bankrupt. Sachs told Geremek to forget about the debt. “Do you know how big this is, what’s happening right now?” he told Solidarity. “Many countries in history have gotten the debt cancelled. You can do this. For Solidarity, the West will do this. But we can’t do this if you’re just a committee. You have to be the government.”

Poland, with Sachs’ help, was able to renegotiate its debt. “The most important question was: is there a way back to democracy and Europe and without civil war and without starvation,” he told me. “And Poland never came even remotely close to any of those things. It got its debt cancellation, got its help, got its foreign investment, and made its way through. To this day, after 40 years of experience in this field, I can’t imagine fine-tuning something more than that. That’s like asking the surgeon, oh, save the heart and all the organs and by the way I don’t want any stitches and no scars. But save my life.”

 

The Interview

 

When the Polish government initially approached you for advice, you said no. But then you had a chance to go to Poland in spring 1989 and talk with both the government and with Solidarity. At that point, how big a gap did you perceive between their positions on economic change and reform?

 

If I recall correctly, in April 1989, there weren’t positions. Instead people were extremely worried and were in the process of discussing what to do. The government officials I met, who were not the highest officials, talked about the need for a market economy — that was clear. Solidarity was talking about hunger, the risk of civil war, breakdown. They were very pessimistic, very alarmed. I talked with Witold Trzeciakowski, who was a senior economist, a real gentleman, an academic and a very soft-spoken and frightened individual. He was very much on the cerebral side of Solidarity. Solidarity asked him as senior academician in the country to help. A junior person in the group was Jan Krzysztof Bielecki. That was the first time I got to know him in the spring of 1989. But there was no program, there was just concern. They wanted to make a request to the West to help Poland. We called it the Brussels Project because we had a meeting in Brussels to discuss what kind of aid request Poland could make. That was basically it. There was no kind of government program at the time.

 

I interviewed Marcin Swiecicki at the time. He was in the Party, tasked with figuring out a program for economic reform. He told me that they started out by looking at Hungary, and that lasted for a couple months. Things were shifting so quickly, so then they looked at Sweden. But then things changed even faster. It seemed as I was talking to him that at that point they didn’t really have a concrete model in mind. They were casting around for various options – that as the case both for Solidarity and the government. If anything, I thought that Solidarity had more ideas.

 

For the economic reforms I thought very important — supply and demand, currency, trade, budget, debt, finance — there were no ideas to speak of. What they were interested in was ownership, an area I knew the least. The areas I knew best and where I could add some value was how a market system actually functioned in its financial, monetary, and trade relations. Instead, they were quite interested in how to transform ownership.

If you look at our proposal, we didn’t have any specific ideas on privatization, which was different from the normal discourse of reform at the end of the 1980s. One thing that both surprised and interested them was that I was talking about things like the exchange rate, where there was no ideological view, just a practical view of what should be done. They didn’t know how the exchange rate worked, or how to run the central bank. That’s where I put a lot of emphasis. For privatization, all we wrote was: “seek technical assistance from the World Bank, invite foreign investment banks to suggest schemes and prepare valuations, prepare in one year a program for extensive privatization.” Those were the three things that I could think of that night. I was not proposing a privatization plan. This, by the way is completely contrary to most of the nonsense said about me or what I was doing or what I was recommending.

 

That you came in with a preconceived notion.

 

Not just that. That radical privatization was the essence of it. It wasn’t the essence of it. I knew from the beginning that privatization was hard and complicated, and I didn’t have clear ideas about it.

 

One of the interesting parts of that paper was the discussion of the challenge of preserving the standard of living at a time when obviously there was going to be more unemployment. One of the hard-fought issues in the Round Table negotiations was indexation. Finally, if I remember correctly, it was fixed at 80 percent. I talked with Krzysztof Hagemejer, who worked on the Solidarity side. We worked so hard on it, he said, but then the government over the summer removed price controls. To this day, he still doesn’t know why the government did that. It threw a monkey wrench into the whole discussion of preserving standard of living. It obviously aggravated the inflation. Do you have any insights into this?

 

The main thing that was happening was a tremendous financial crisis, which often accompanies a political revolution. If you look at political revolutions in history, often there are hyperinflations associated with them. The government doesn’t collect revenues. The normal means of finance breaks down. The government prints money to pay the bills. In Poland in 1988 and 1989, whatever structures were there were clearly going to pieces. A tremendous pent-up monetary shock was hitting the system, but it was showing up under price controls in the form of soaring black market prices. The black market exchange rate was four or five times the official rate. There were shortages of everything except under the counter at black market prices. Everybody felt that tremendous hoarding was going on. A lot of the Solidarity people felt that there was going to be hunger very soon because the farmers would sit on their grain and not release it to the cities or the government trading firms.

So, they had to raise the prices. There was flight from the currency – people were getting out of the zloty in any way they could. There were intensifying shortages, rising black market prices, and lots of complicated financial and monetary processes that nobody could decipher ex post facto. I think the government was just reacting to this. It knew that it had to raise prices. The budget indicators probably meant that public sector tariffs were low and enterprises were squeezed. I don’t know what went through their minds, but those are all good reasons why you can’t really control things. The idea that these official prices are the real prices of transactions is wrong. If you remember, in the summer and fall of 1989, you couldn’t buy most things in the shops. In that context, the official prices were only vague indicators of what was going on at the time.

 

I interviewed Jacek Zakowski, the spokesman for the parliamentary caucus of Solidarity’s Citizens’ Committee, who is a journalist now. He said that they all paid a price for the economic reform. Mazowiecki lost his job; Geremek would eventually lose his position. You made an interesting comment in this document that governments never fall because of unemployment but instead because of hyperinflation, which can be very destabilizing. The Mazowiecki government did, with the help of Balcerowicz, reduce the level of inflation quite dramatically. But the issue of unemployment remained, and that did prove politically destabilizing — not for the system as a whole but certainly for that government. Was that a surprise for you? In that document, there was a more optimistic vision that private enterprise would absorb the unemployed. There wasn’t much discussion of the unemployment that would happen in the countryside, which was dramatic.

 

It’s really important to put this in some temporal and comparative perspective. By any standard, Poland did extremely well in the transformation. It ended up growing rapidly. The economy expanded, foreign investment came in. Compared to the other countries in the region, it soared in terms of new business, exports, and investment. Especially compared to the dire forecasts of 1989, you don’t get better than that. Looking back I’m not only very satisfied but very grateful at how favorable the outcomes were.

Unemployment is the hard question for which I don’t have a nitty-gritty and full answer. After 40 years of a system that ended up collapsing — and with the collapse of its partner institutions all over the Soviet Union and Eastern Europe as well as the end of the cheap energy on which it was built — there was a lot of decrepit uncompetitive companies that had no place, given late 20th century technology. Those companies that couldn’t make it employed a lot of people, especially older people who had grown up in a given context, which included living in places with a factory that wasn’t going to survive. In the end, they got transfers of some sort. But a lot of unemployment for these older people persisted for 10-15 years. That was a generational thing, to a very large extent.

My sense is, though I can’t prove it, that it was very different for young people. First of all there was a lot of dynamism. An incredible number of enterprises were created. No doubt there were places in the countryside that were more remote, or in the east where things were broken down and jobs were not created. The east was toward Russia, and now life was going to be in the west. Wroclaw and places in the west became magnets for foreign investment, and places in the east ended up being sunset places to an important extent. That’s real economics. I don’t know any answer to that. That’s probably a lot of what’s in the data. I also never am sure about some of the data concerning unemployment benefits, which I don’t begrudge by any means. But especially in Poland, everybody I knew had a gig doing things off the record, under the counter, and around the side. A lot of this data therefore has to be taken with a significant grain of salt.

A whole system had been built up that collapsed. These factories don’t just come to life. You have to build again. No one wants to be in the situation Poland was in in 1989. I said there was a way out of this. There was a lot of pessimism at the time, so this was a debated point. But I didn’t say that there was an answer to every moribund factory and every broken-down piece of heavy industry. There never is. Economics, to the extent that it is something beyond a village, is about change. And change is not simple. Poland had bottled up a lot of change for 40 years, and later came what is called “creative destruction.” It took place over a very short space of time.

 

Looking back, was there anything you would have changed in terms of the question of unemployment? For instance, you spoke of sunset and sunrise regions. One example of industrial policy is for the government to direct funds to a sunset region to cushion the blow or to redirect investment. Or was it really just not possible for a government at that time to play that kind of role during a difficult economic transition?

 

There’s a great deal of improvisation. A political, economic, and social revolution was taking place. This kind of transformation was unprecedented and hopefully never has to happen again. I didn’t want to become a specialist in this kind of work. I was hoping this would be the one time in history, and we would do the best one could. I was given strict instructions by Jacek Kuron, who asked me to write this document, that this was about returning to Europe: period. That was my vision then, and his vision, and my purpose, and it remained my purpose: Poland had to be part of Europe. It would be like the rest of Europe. It wouldn’t be some new hybrid or new experiment. The reality is that Poland is Central Europe and that’s where it belongs. The divide is artificial and this divide will end. And this is what will restructure the economy and make it possible for recovery.

I believed in basic economic forces — that you couldn’t have a catastrophic drop in living standards between the east of Germany and the west of Poland without forces occurring such as a German plant being established in western Poland to take advantage of that gap and thereby boosting living standards. I’m not so keen for such a process to be hugely complicated by powerful anti-market moves because there’s no money. The day-to-day problems are overwhelming in terms of actually accomplishing something other than avoiding chaos. It’s so much better to have wind in the sails than not, and the wind in the sails was coming from Western Europe. I believed that the Polish economy would be heavily reshaped through deeper linkages with Western technology and economy. And that’s basically what happened. From the earliest moments, even before January 1, 1990, major western companies were investing.

ABB was the first one that came to me and said that they were thinking of investing in Poland and what did I think about it. I said I thought it was a splendid idea because Poland was going to reform and be open for business. “Are you sure?” they asked. “I am sure,” I said. “This is the way to go.” They ended up making a major investment, the first big investment in Poland, and they modernized the sector. It was very successful from Poland’s point of view and ABB’s point of view. And it was the first of hundreds of restructuring events, not by the government and not by the blind market but by the reality of Western Europe being the economic neighbor and power. To my mind, that was the right way for Poland to go.

It’s also important to understand, even though we might forget it now, that Poland was completely bankrupt. It had no idea what it was going to do. I was giving them advice on how to get out of bankruptcy not only in the literal financial sense or the economic development sense but in the sense of negotiating the debt. Was there room to maneuver where the economic situation could improve and the government could take care of all these problems? No, that was not the case.

 

Zakowski also emphasized that given the situation at the time — the debt, the economic situation – there was only one path to Europe. The only question was pace. Is that also something you perceived at the time?

 

Yes. There were a thousand analogies to nobody’s liking. One of them was: if you’re getting your tooth pulled, you don’t do it over four weeks. You pull it out. That’s not a perfect analogy. Another famous reformer said: you don’t jump a chasm in two hops. And a third was: if you cut off a dog’s tail, you don’t do it in little bits. These were the things that were discussed: what is the point of trying to keep a moribund company alive and with what and how? If you have scarce resources, do you build for the future or not?

All in all, I would not only stand by these ideas, but also stand by the results. Poland actually transformed. I’m not a heartless guy. I’m not a free-market libertarian by a million miles. I wanted a cushion for Poland. That was a large part of my aims and a large part of their interest in me, in terms of what I could get for them. And I did this in a number of ways. I believe in supporting people in unemployment and old-age pensions and a public health care system. It was never the idea that people should sink or swim. It was the idea to build a real economic base from which you give support. And if you can’t get this economic base on your own, you beg for it and you plead mercy on the basis of old debts needing to be cancelled. I tried every bit of begging and pleading and tantrums and everything else I could think of to help, and fortunately some of it worked.

 

In a long article Lawrence Weschler wrote in The New Yorker back in 1989, you were up front: you said you were a social democrat by disposition. So there is consistency. Going back five or six years why have there been articles about you saying that you had a conversion experience at some point in your intellectual life? Why is there an attempt to explain that you were Saul back then and you have since become Paul?

 

Because people who have written about this don’t understand these issues, don’t understand the context. I’ve become absolutely inured to silliness. I always said, and in fact it’s one of the favorite lines I ever wrote — which I put in Poland’s Jump to the Market Economy — whether you want to be social democratic Sweden or Thatcher free-market UK, you would do the same things right now: you want to avoid hyperinflation, you want open trade, you want your currency to work, and so forth. Other people disagree with me but I will state my strong convictions based on a lot of experience on how to work in the context. I found so much of the discussion and debate irrelevant because it was completely outside of any real context. It’s like two doctors arguing about what to do with a hypothetical patient rather than a real live patient. A good doctor treats a real patient, not a hypothetical. A good economist treats a specific historical context, not a hypothetical. Most of my peers don’t do that kind of work. Most journalists are used to talking to politicians or ideologues who try to flog a particular point of view. I’m trying to solve a problem.

I’ve been on many sides of many issues because they’re different in different contexts. For three years I said constantly that the key to reform is stabilization, liberalization, and privatization. That was a kind of mantra for three years in Eastern Europe, which I stand by. Then I went to Africa a few years later and I heard the IMF say: stabilization, liberalization, and privatization. And I said, “Are you kidding? They have AIDS and malaria, why don’t you talk about those things?”

“But Professor Sachs, we’re just quoting you!”

And I honestly did a double take. I said, “But in Warsaw, they had streets, electricity. They didn’t have malaria or an AIDS epidemic. They had fresh water, sanitation. Here it’s different. It’s about poverty, development, disease, hunger. They’re different issues.”

Professionals should know better because it’s in front of their eyes. But with journalists, I’m sorry to say, it’s much worse. It’s utter confusion with them. Of course many journalists like a narrative. They want an arc to the story. I find it quite silly. I know what I believed in at different times and why I recommended certain things. I’ve written down most of what I was doing at the moment: writing op-eds, articles, and books is part of my job. But nobody reads that stuff. So, there’s a lot of confusion.

I always wonder: how could I be described as a neo-liberal, which is the term of art, when I’m spending half my time berating the banks, trying to get the debts cancelled, trying to establish social funds, trying to make the public health care system work, and when I’m an admirer of Sweden?

 

As you say, there’s a narrative: at a certain point in the early 1990s neoliberalism was the reigning ideology and it has eclipsed. So, they have to find a figure who represents that.

 

One person wrote that story in the early 1990s about my being a neoliberal: John Donnelly. I knew him. He didn’t know the work in Eastern Europe. I brought him to the White House in the early 2000s. People picked up on what he wrote. That’s another habit, which is just laziness. Something gets repeated enough times that it becomes a fact.

The interesting and hard part about being good at this activity is context. Of course, the first time you don’t have full context, so you learn. Then you do more. And you learn more. And so on. It dawned on me after a few experiences that differential diagnosis was really at the core of being good at this — understanding what’s driving a particular crisis. I had the wonderful good luck to watch my wife probably a thousand times as she was talking to the mother of a febrile child and asking questions in order to diagnose the fever. Watching this amazing process of trying to sort out what is going on — separating the emergency from the non-emergency, the superficial from the very grave conditions. That’s a lot of what this is about.

 

When people talk about unintended consequences, they usually are referring to negatives. But were there any positive unintended consequences you observed in Poland after 1990? Virtuous circles, for instance.

 

In general, the wonderful thing to watch was the amount of energy and drive that Poles had. When I went to Germany in the fall of 1989, I met with very senior officials. The head at the Bundesbank was very negative about Poland. Every stereotype came spilling out of his mouth: they’ll never accomplish anything, what a mess of a country, everything they touch will be ruined. It was a terrible attitude, and I was scandalized, of course. But the fact is that Poland did very well in terms of how many new businesses started, how many people had relatives in Cleveland helping them to get something started, how many people had been running the underground shuttle trade with Berlin, how many people knew how to get a small construction firm going, how many people could aggregate their friends in the neighborhood to buy a machine to start a company. So there was a tremendous amount of activity. That was a thrill.

And that was completely unlike Russia. You couldn’t do shuttle trade between Moscow and Berlin much less between Omsk and Berlin, although a few people did it by train. Geography made a huge difference. Poland also had a lot of civil society activists: first-rate, original, independent-minded intellects all over the country who were strong voices. The Church was no particular friend of the market reforms, but it was a fundamental bulwark of these reforms. It created very stern oversight of government: don’t go running off with the property, don’t misbehave, you have to live up to this great historical opportunity, the Pope is watching you. Poland was obviously very tough. People say, “Look at all this hardship!” But they don’t know the mood a year earlier when people thought that it was going to be a complete catastrophe. It was nothing like that. From the very beginning, people were up and about, moving and doing things. That was an incredible thing to watch. We scoured the monthly statistical bulletins as they came out, watching the soaring numbers of self-proprietorship being registered. Hundreds of thousands of these businesses were starting.

 

Did you engage with this argument about “red capitalists”? On the one hand, red capitalism represented a certain amount of stability; on the other hand, people were outraged that people who had benefitted under Communism were benefitting under the new dispensation as well.

 

I’m inevitably more of a moralist than an economist, some people say. But I don’t like people running away with property. Maybe that’s how actually tooth-and-claw capitalism has worked over time. But I don’t like it. People accuse me of actually fomenting that kind of process, but if they would just take the care to read what I said or wrote…

I met many red capitalists and former nomenklatura in Eastern Europe and the former Soviet Union. In the spring and summer of 1989, I met a lot of government officials who were already on the boards of enterprises that were privatizing. “Isn’t this exciting, Professor Sachs?” they asked me. And they actively wanted my blessing. I remember walking out of a meeting with David Lipton saying to him, “Can you believe that guy said those things to us?”

I was trying to think through privatization for the first time, since I hadn’t thought about it before 1989. I knew about industrial organization, which is a different topic of state-private relations, but not about privatization per se. I knew a little about what was happening elsewhere. A huge part of my concern was preventing the theft of state assets or the spontaneous privatization of these assets. That’s why I wrote a lot about what we called corporatization. The idea was at least to create a legal structure with a board and the government as a shareholder — and not to allow this to dissipate into private hands with people walking away with the enterprise or the machinery or whatever else. If you look at the articles I wrote, I was trying to find formulas and ways of doing this with thousands of enterprises, corporatizing everything in the space of a couple years. Should every manager get three percent of the shares as an incentive, or five percent? Should the workers automatically get 10 percent? We always talked about finding core investors, either foreign investors coming in or domestic banks.

These are big questions of capitalism in general. There is no consensus about how the corporate sector should be owned and operated. The United States has dispersed ownership, and that gives a lot of power to the CEOs, and in their way they do a lot of things like red capitalists. Other places have core investors or a family, which in the Polish context could not be reconstructed in most cases. But my feeling was the opposite of how I am often portrayed, that I wanted to give everything away and create the oligarchs. I was always arguing the opposite. There’s no ambiguity in my writing on this point.

By the way, this was in contrast to Andrei Shleifer at Harvard who to my mind was unacceptably cynical and believed that it didn’t really matter who owned what because then there would be private property and a market economy that could work. I never felt that way. I believe that an economy must have a moral framework, which is not necessarily a mainstream view. I was always trying to start from creating a corporate legal form, from which privatization could proceed. I was also a fan from my youth of John Kenneth Galbraith and the concept of countervailing power. I always saw some fraction of the shares going to workers as one way of keeping discipline on the management.

 

I used to meet with Stefan Kawalec in 1989 to talk about privatization — this was before anyone was talking about privatization, before the Round Table had even finished.

 

With Stefan, I had probably one of the most interesting discussions that produced one of my most novel ideas — that the currency could be convertible right away. For a lot of reasons I would take that as one of the defining elements of Poland’s success and of my recommendations. A convertible currency basically allows international trade to take place on a market basis, and I wanted that to start very early on — for all the back-to-Europe reasons and all the transformative reasons that come with international market-based trade. Stefan, who is a wonderful person and very knowledgeable, said, “But Jeff, it took Western Europe 13 years to reestablish the convertibility of the currencies from the European Payments Union all the way through the 1950s.”

“Yes,” I said, “but Poland does not have to do that. It can skip the EPU stage and go straight to convertibility.”

I hate the term, as you know, and I hate the mistaken ideas about its results, but making the currency convertible quickly was a real shock. And I would defend that as the key to getting things to move fast and in the right direction.

 

If you were given the opportunity to go back to that time with the hindsight of knowing what has gone on in Poland or elsewhere in the world, would you change anything in your recommendations, whether major or minor?

 

I don’t know. I want to describe one more part because it is for me the most intense two weeks of my professional life — the period just before the reforms started. I took a very active role in trying to convince the leaders that they could do this. This was so interesting for me. I regard it as one of my most proud moments.

 

Who needed the most convincing?

 

Everybody. The basic idea was that this was a hopeless situation and that maybe only after a few years something could be done. At the moment, however, it was a disaster and they’d be lucky to avoid starvation and civil war. This may sound melodramatic, but these were the prevailing ideas.

 

I remember when Mazowiecki fainted on his first day as prime minister. And that was seen as a metaphor for Poland as a whole.

 

Exactly. These were deeply felt ideas. Larry Lindenberg, who is a close friend, took me to see the four giants – Bronislaw Geremek, then Jacek Kuron, then Adam Michnik, and then Lech Walesa. It was very systematic. With Geremek, I had one of the most interesting and passionate conversations of my life. It was just after June 4, 1989, and Solidarity had won this spectacular victory in the elections. Geremek and I sat down and he said, “What do you think we should do?”

I said, “You should try to form a government.”

He said, “No, no, no. While we have the Senate we only have one-third of the Sejm, and anyway it’s hopeless. Let me describe to you what we want to do. We’ll form a committee, a Senate commission, and call in the finance minister all the time and keep a really tight eye on things. But they’ll run the ship. We’ll watch it, and use the Senate for all its worth.”

I said, “This was a revolution. I don’t think you can do that. You can’t take a landslide and make a commission out of it. You have to form the government.” This was June 1989. It was all a little premature. “With the resounding victory, they’ll be looking for more than that.”

And he said, “That’s not possible.”

And that was the first evening that I ever described what I thought could be done. I had a trump card as it were. They thought that Poland was bankrupt. “The debt is crushing us,” Geremek said, “We can’t do anything.”

“Forget the debt.”

“What do you mean, forget the debt?”

“It’s gone, it’s not your business.”

“What do you mean?” he said. “We owe that money!”

“Do you know how big this is, what’s happening right now?” I said. “Many countries in history have gotten the debt cancelled. You can do this. For Solidarity, the West will do this. But we can’t do this if you’re just a committee. You have to be the government.”

“But we’ll have hyperinflations and shortages.”

And I said, “No, you can do this! Do you know what happened in 1947 when Ludwig Erhard took off price controls in West Germany? The goods came back to the stores. That can happen here.”

“But the currency is worthless.”

“No, I actually converted it. It’s convertible. I gave a dollar and I got 9,000 zlotys from the taxi cab driver. On the black market.”

So we had a conversation like this for three hours. Geremek was just a gem of a man, an amazing saint, and he seemed to have the weight of the world on his shoulders. “I am very unhappy with this conversation,” he said finally, “because I think you’re right. I think we need to do something.”

Then we went to see Kuron. And he finally said, “Tak rozumiem.” [Yes, I understand]

“We’ll go home and write this thing up and send it to you,” we said.

“No, tomorrow morning we need this.”

Then we went to see Michnik, who is a phenomenon. He didn’t argue. He just said, “Do you really think we can do this?” After about an hour, at his kitchen table, he said, “Okay you’ve filled in the final piece for me. I knew the political strategy. Now we have the economic strategy and we’ll move forward.” And a few days later came his article, “Our Prime Minister, Your President.”

 

That was a very controversial article.

 

Yes, of course. I knew that from just that conversation. To hear those words – “now you have filled in the economics piece” — was for me the real question, not the fine-tuning. Life is hard; economic policy is imperfect; revolutions are tough. In the scheme of things, Poland did very well. There were fights, but the West helped amazingly. So, I can’t get into the mindset of this little thing or that little thing. Life is not perfection. It’s about finding a way forward. The most important question was: is there a way back to democracy and Europe and without civil war and without starvation. And Poland never came even remotely close to any of those things. It got its debt cancellation, got its help, got its foreign investment, and made its way through. To this day, after 40 years of experience in this field, I can’t imagine fine-tuning something more than that. That’s like asking the surgeon, oh, save the heart and all the organs and by the way I don’t want any stitches and no scars. But save my life. In this case, the patient was moribund on the table.

 

Many people in the region asked me why didn’t they get the same deal on the debt that Poland got. So, why didn’t other countries get the same deal?

 

Because Poland asked and they didn’t. Honestly! I went to Poland and I went to Hungary a few days later. I said to Poland, “Go for debt cancellation.” I went to Hungary and said the same thing. Mazowiecki got a call from Washington: get that guy out of Poland because this is dangerous. Mazowiecki told me that, and he said, “But we want you to stay.”

Hungary said, “We’re not going to ask for that. We’re going to show that we can pay the debt back, and in the end it will be better for us.” I didn’t think so. So, they didn’t ask. And then Poland got its cancellations and within two years had a better credit rating than Hungary. The Hungarians were furious. “We’re paying the debt,” they said. “And Poland has a better credit rating?”

“Yes,” I said, “because Poland has less debt. Grow up! This is life.” They chose. There’s no more to it than that. Nothing deeper than that.

 

I talked with former Slovenian finance minister Joze Mencinger. He told me that he resigned in part because he felt that the government was taking your advice not his advice. He explained that it had something to do with a) privatization and b) the exchange rate (he supported a flexible rather than a fixed exchange rate). But maybe it just came down to a question of pace. What’s your interpretation?

 

I don’t remember any of the details. The main thing I did in Slovenia was to introduce the national currency. I worked with the group of Slovenes who were doing more. But my main focus was the monetary side because they had come out of Yugoslavia and needed a national currency. I was a monetary economist. But frankly I don’t remember the details.

 

It’s often presented as two paths back to Europe: the faster Polish and the slower Slovenian paths. With the caveat that Slovenia started out in a much better position: a richer country and more strategically located. Have you spent any time thinking about that?

 

To me, those are really fine points for academic debate, not reality. The Slovene path is through Austria, and the Polish path is through Germany: that’s the main difference. They’re both on the front line, they both did quite well, and everything else is no doubt important if you’re a local politician. But from my point of view, it mostly comes out in the wash. I don’t mean to be flip about it, but I don’t think there are these grand ideological differences.

 

Geography is destiny in some sense.

 

Yes, and the good geography for both of them is that they are neighbors to Western Europe and obviously benefited from that. Both did quite well. Slovenia was already a very sophisticated economy before 1990, and it remained so afterwards. Its links to Austria and to Europe are quite important. Geography matters so much. I have a perennial argument with people who have only looked at tables and haven’t experienced the region. The farther east you go, the weaker are the connections. You don’t get the foreign investments. The transport costs go up. The family ties all fall off. The historical traditions are also important. It makes a difference who was Roman Catholic and who was Orthodox. That’s an important divide, not because of doctrine but because of who is rooting for you and giving you assistance.

I gave some lectures in 1993 at LSE that came out from MIT Press. It’s a complete and accurate record of my thinking from then. I can’t live it down, but I can also point to it. There is one quote I wanted to show you. Whether you want to be Sweden or Poland, you have to go in the same direction. This is the diagram that I always thought about. On this end you have state socialism. On the other end, you have free market. Sweden is somewhere in the middle with the United States a little further toward free market. Poland started over here at state socialism. My point was, whether you want to end up here with the United States or with Sweden, you’re going in the same direction and making the same changes. That’s literally how I thought about it. The United States and Sweden both have convertible currencies, central banks, financial policy. Poland had none of those things in 1989. You want to debate the fine points? I don’t think so. I think you want to make these changes.

New York, November 13, 2013

 


4 Comments

  1. The so-called redemption in the “arc” of history has something to do with overall self preservation. Expedience is not competence. Shock doctrine economics is a perverse form of stealth and wealth creation over unjustifiable viability. In the end Sachs did not save Poland and frankly fails to critically analyze the shock theory in situ and in the full spectrum description it deserves.

  2. More than substantially inter-related International political correlates: The Center for Social and Economic Research (CASE): Warsaw Think Tank under Western finance and advisers:
    “Jonathan Hay ran the day-to-day operations of the Russia Project. He was found guilty of violating three counts of the False Claims Act and was debarred from serving in USAID. But he’s managed to resurface in Ukraine, working in the local operations of a Polish think tank.”
    [full article]
    http://www.nakedcapitalism.com/2015/02/convicted-fraudster-jonathan-hay-harvards-man-who-wrecked-russia-resurfaces-in-ukraine.html
    [excerpted quotes]:
    “The Centre for Social and Economic Research (CASE) has been based in Warsaw since 1991. It claims on its website to be “an independent non-profit economic and public policy research institution founded on the idea that evidence-based policy making is vital to the economic welfare of societies.” In its 2013 annual report, declares: “we seek to maintain a strict sense of non-partisanship in all of our research, advisory and educational activities.” Three-quarters of CASE’s annual revenues come from the European Commission; another 9% from American and other international organizations. According to CASE, that’s “an indication of progressive diversification of CASE revenue sources.”

    “CASE Ukraine is a branch of this Polish think-tank, and at the same time a descendant, it claims, of a Harvard University-funded group which was active between 1996 and 1999. Registered since 1999 as CASE Ukraine, this calls itself “an independent Ukrainian NGO specializing in economic research, macroeconomic policy analysis and forecasting.” According to parent CASE in Warsaw, one of the group’s goals is “promoting cooperation and integration with the neighboring partners of Europe”. This means, not only CASE Ukraine, but CASE Kyrgyzstan, CASE Moldova, CASE Georgia, and in Russia, the Gaidar Institute for Economic Policy.
    Independent is what CASE swears; independent isn’t what CASE represents. Investigate the names, the associations, the sources of money, the secret service engagements, and what you have is a family, a front, a cover, a closed shop, a mafia.
    Founders of CASE Ukraine like the American Jonathan Hay and operators of CASE Poland like the Balcerowiz family reveal a well-known anti-Russian alliance

    “One of the ideas which CASE Ukraine and its partner, Vox Ukraine, have been lobbying in Kiev is direct-line financing from the US and European governments for the civil war in the east.”

    “Unbeknownst to those who researched Hay’s misconduct in Russia at the time is that Hay moved on to a similar line of business in Ukrainian privatization. CASE was one of the instruments – and USAID was paying again. At present, CASE doesn’t list Hay on its current Supervisory Board. Dmitro Boyarchuk, the executive director of CASE in Kiev, explained today that there are two empty seats on the board, and that Hay has gone. Added Boyarchuk, this was two years ago. For seven years following his conviction in the US, Hay helped run CASE Ukraine.

    • The Neoconservative turn in Poland is largely a correlate to the privatizing liberalization schemes largely put into play by Sachs and his collaborative version of political economic creative destruction. Unfortunately the creation seems to be an increasingly political society compromised by containment politics and Western finances that buy the support. Meanwhile, the destruction seems to have been the solidarity movement and traditional movements that brought Democracy out from tyranny of another sort.

  3. Collision and Collusion:
    The Strange Case of Western Aid to Eastern Europe
    Jan 13, 2001
    by Janine R. Wedel

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