The Communist state-planned economy shelters the national currency, the zloty, from free-exchange markets. The currency is traded at an official rate unrelated to economic reality. Prices are regimented, and vast amounts of capital are diverted to heavy industries such as coal and steel. The artificial manipulation creates chronic consumer shortages.
Reeling from economic decline and public unrest, the Polish government borrows millions from Western governments. It intends to use this foreign capital to hold down ballooning food prices while it modernizes industry. But Poland's outdated system and a global recession thwart the plan. The country is left with an enormous foreign debt that it cannot service or repay.
As economic conditions worsen, the zloty's unofficial and official rates diverge wildly. After the Round Table agreements and Solidarity's victory, inexperienced Solidarity leaders turn to Harvard professor Jeffrey Sachs, the movement's economic advisor, for help in charting a new economic course.
Using Jeffrey Sachs's plan as a blueprint, new Minister of Finance Leszek Balcerowicz launches his daring economic "shock therapy" program on January 1. He devalues the Polish zloty and makes it convertible, freezes wages, reforms taxes, deregulates prices, and creates a stock market overnight. Prices leap 78 percent in the first few days but eventually stabilize.
With the 1990 reform behind them as an example, Polish governments follow sound fiscal policies. The Warsaw Stock Exchange and the Polish zloty weather financial crises in Russian and Asian markets. The National Bank of Poland regulates domestic demand by keeping interest rates high. In 1998 Polish exports outpace imports, in part as a result of the zloty's depreciation against the dollar.
Inflation is at a historic low, but unemployment is on the rise. As the economy slows, the new coalition government asks the Central Bank to lower interest rates. Prime Minister Leszek Miller commences spending cuts to bring the budget under control. Poland is slated to join the European Union in 2004, which will bring adoption of the euro and the retirement of the zloty.
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