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Jayant
Bhandari casts a critical eye on India's prosperity. Liberty Around the
World The End of Soviet
Poland by Michael Christian
In the communist system, it was a miracle that
anything worked. In the capitalist system, it all became very
natural.
Dwarfing their chairs and stools in the broad hallways of
the Polish Ministry of Finance sat fat old women with moustaches. Each of them
edged into the halls from the great office doors as though escaping in slow
motion. They nibbled on little cakes, gently gossiped, and sipped sweet tea all
day long.
| | Michael
Christian is in early semi-retirement in a semi paradisiacal corner of
California. |
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They did nothing else. I mean no work at all, ever. They made no
pretense. It took me a long time to get used to them. It was best to
pretend that they simply were not there. I once begged the secretary of a
high-ranking bureaucrat to help me send a fax to the World Bank. I couldn't
operate the fax machine, and it was an important communication. The finance
minister himself cared about what I was doing. The secretary was friendly about
it, but my request was risible. She laughed at me. She simply would not
work. I wondered how, in a country with so many comely young women, these
old hallway fixtures managed to be so ugly. Polish men told me (and my
experience did not contradict them) that older Polish women were hideous and fat,
with black hairs coming out of unlikely places. Young Polish women were blonde
and beautiful. The men had a theory that these old and young women were of two
different races; the young ones never had a chance to get old, because the old
ones killed and ate them. And that's why the old ones got so fat. I suppose it
did have something to do with their diet. But I digress. When I
moved temporarily from Paris to Warsaw in 1994, it was like moving backwards and
sideways in time. Backwards because everything seemed to have been built before
1960. Sideways because all the old Polish buildings strove for a dated futurism.
Communism had frozen Poland in the past, but it was a past that worshipped
socialist progress and the socialist future. The government directed what little
bit of energy, economic growth, and foreign aid the country could muster into
futuristic projects. Its ideas about the future itself (at least as expressed in
the buildings and trams) were stuck in the first half of the last century, in the
form of socialist realism. By the way, foreign aid that came to the East
Bloc from capitalist countries, mostly the United States, helped sustain
communism. According to my Polish friends, a lot of foreign aid came to Poland in
the 1970s. The communists used it for big capital projects. How disgusting
that the Soviet rulers and their puppets, given the chance, decided what every
city and building would look like! It's such a shame, because the Poles were not
very good communists at heart. Maybe they wanted to make beautiful things that
looked nothing like socialist realism. Maybe they are making such beautiful
things now. But in 1994 they were saddled with nearly a half century of
officially constructed blight, and they were just waking up from a long
nightmare.
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| Powerful men walking
around the Ministry carried their own rolls of toilet paper. Twenty-two year olds
ran vast banking empires. High officials were unable to make simple, obvious
decisions. |
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The place was dreary and gray. Everything seemed to be covered by a fine layer
of oil. Smooth, old metal parts of heroic fabrication, lightly greased —
that was the character of Warsaw. I was shocked to learn that Warsaw was termed
the Little Paris of the East Bloc. In the communist years, wealthy Russians loved
to vacation in Warsaw. It was, according to my Polish friends, a great escape
from the gloom of Russia. I was thinking, my God, how could anyone survive in a
place gloomier than Warsaw, in a place so gloomy that Warsaw was the City
of Light? Moscow must have really been hell. The streets of the Polish
capital were absurdly wide, and sooty buildings in disrepair squatted across
whole blocks. I lived in one such building. Everything in my small, furnished
apartment was old, cheap, and worn. The water was rusty. I was paying a fortune
by Polish standards. This was Warsaw's version of upper-middle class
living. On a certain date in the late fall (practically a national
holiday), the city turned on the heat, centrally supplied in the form of steam.
That's right; they had some kind of central steam factory. When it broke or ran
out of fuel, everyone froze. The city did not turn on the heat when winter
arrived early and did not delay the heat when winter arrived late, or for warm
spells. Once the heat was on, it was on until spring. It wasn't metered. Nobody
paid for it directly. The radiators blasted their moist heat. Windows all over
the city were wide open to moderate the temperature. But often, the first day of
officially distributed heat was delayed — for financial reasons. People
liked to grouse about that. It's funny how central steam seems so absurd
to me, but I rarely think twice about central electricity. If our own state were
less socialistic, I suppose central electricity would also seem absurd. Each
house or neighborhood would make its own electricity. One might buy it from
competing companies. People get used to the absurdities of central
control. When I talk to friends about limited government, they often scoff
and cite road building as an example of how my logic goes too far. They say in
mocking tones, "I suppose you think private companies should build the
roads." They think that they have reduced my arguments ad absurdum.
Yet there is nothing absurd about private roads. They are common and are usually
of excellent quality. Near the top of a steep road that I often climb by
bicycle, I always get a laugh. There's a sign that reads, "Caution: end of
county-maintained road." The county wants to avoid any responsibility or
liability for the private road beyond the sign. Yes, should you venture beyond
this sign, you will see the horror, the abomination of a private road. In fact
the county road is rough and cracked, and the private road smooth and beautiful.
So I laugh every time. The trams were a good example of Warsaw's greasy
character. They were all of futuristic burnished metal, and oily. You could
acquire a sad affection for the trams. They ran, slowly and cheaply. I took the
tram to work at the Ministry of Finance. I reported directly to the
finance minister, who reported directly to the prime minister. All the work at
the entire ministry was performed by about 25 people, although it employed
hundreds. Communism and the command economy had led to this: out of 100 people,
100 had a job, and five worked.
| On a certain date in the
late fall, the city turned on the centrally supplied heat. When it broke,
everyone froze. Once the heat was on, it was on until spring.
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Of the 25 who did anything in the Ministry of Finance, only two were over 25
years old. One of them was the minister himself. The post-communist government
drew him from academia. He was like the professor, and all the 20-somethings were
like his students. The other older person who did any work was a crusty
apparatchik who was ready for anything. I liked him. I think he liked me too,
because he introduced me to his beautiful 16-year-old daughter. With a wink, he
sent me off on lunch dates with her. She was formal and shy. But she certainly
was eager to improve her English. "It is just for English," she would defensively
say. We became friends once she realized that I was not going to court her at the
behest of her father. I asked some of the young workers about all the
worthless employees, particularly the old ladies in the halls. They told me that
most people, after working under the communist regime for more than seven or
eight years, could not be reformed. They were hopeless and would have to be
carried along for the duration. You couldn't fire them. That might be unfair and
would certainly cause riots and strikes. Inflation would chip away at their
incomes. They would become bitter and remain lazy. From all I saw in
Poland, I conclude that, after the great Solidarity movement and the fall of the
Wall, there was a revolution affecting the people at the very top of major
governmental and government-controlled institutions. They were largely replaced
with newly minted college graduates. The rest of the hierarchy was a series of
sinecures. So these young men and women, fresh out of college, some of
them just 19 years old, were remaking Poland. (I met the president of the biggest
Polish bank. He looked to be about 22 years old.) I was supposed to help them by
giving little courses on financial markets and by hanging about and lending a
hand. By happy coincidence, they were gearing up to offer open-market government
bonds for the first time since before World War II. I knew about bonds.
But the Poles were burdened not just by the legacy of their communist governments
but by their new government too. The director of the international department,
for whom I worked, was smart and hard-working. He was also paralyzed by political
fear. In one of the first, big, post-communist privatizations, the government set
the initial public offering price of a bank at a level that turned out to be less
than one-tenth of what the market would have paid. It was a scandal causing some
very highly placed heads to roll. I believe that the director was terrified. He
did not want to make any decisions that might expose him to an accusation of
corruption.
| They wanted to know who
really set the prices. I would explain the market mechanism. They would nod and
agree. They understood all about it. But who really set the prices?
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The bond issue that I was helping with illustrated the point. Nobody wanted to
choose the investment bank to underwrite the offering; the power to choose
implied the power to accept bribes. So, unable to reject unlikely candidates, the
ministry received and reviewed an excessive number of detailed proposals from
investment banks to act as investment advisor and lead manager of the issue. Then
the whole decision-making process rotted in a large selection committee with
members from several areas of government, business, and academia. Nobody could
decide anything, and nobody could be blamed for the eventual decision.
Even the simple, obvious, necessary decision to hire bond counsel to represent
Poland proved almost impossible to make. I wrote memos strongly recommending this
step. The U.S. Treasury Department, also assisting Poland, wrote extensive
letters supporting my recommendation. The director just asked for more memoranda.
He passed them up the chain of command (and it didn't go much higher).
Consequently, when I left Poland, this essential but petty decision was sitting
on the desk of the minister of finance, who objected that it was not a
sufficiently important decision for him to make. The bond issue made my
lessons especially relevant to the bright young bureaucrats. They were used to
thinking about capitalism and markets in abstract, academic terms. When they
thought about financial markets in the real world, in Poland, it was too much
even for their supple young minds. In particular, they could not believe that
some concept called "the market" would set the prices for the bonds. They wanted
to know who really set the prices. I would explain the market mechanism again and
again. They would nod and agree. Yes, they told me. They understood all about it
– supply and demand, market information incorporated in the price,
allocation of resources efficiently made through the free choices of millions of
people. But who really set the prices? Was it the SEC or the World Bank or maybe
the European Community? Or would the Polish government have to set the prices?
And who were the secret beneficiaries of the rigged bond issuances? I
feared for the Ministry of Finance. I feared for Poland. My little report
on what I did in the fall of 1994 is pretty dreary. Command economies make
for odd behavior: Old women paid to drink tea. Windows wide open, the heat on
full blast. Powerful men in business suits walking around the Ministry carrying
their own private rolls of toilet paper for the bathrooms. Twenty-two year olds
running vast banking empires. High officials unable to make obvious, simple
decisions. Yet recent history has obviated my pessimism. I was wrong. The
bond issue was a big hit. And now for years, Poland has been the darling of the
post-communist economies. It has experienced rapid, though sporadic, economic
growth despite its government's failure to privatize very large state-owned
companies. The growth, of course, has been in sectors where smaller companies
were privatized, and in new sectors of activity. Poland's total exports
increased more than 30% in the first nine months of
2004.1 From 1991 to 2005, its GDP grew an average 4%
annually. Its rapid growth has been persistent. In 2005, for example, its
industrial product grew 9.2%.2 In 1999, Poland joined
NATO. From the CIA's fact book on Poland:3 Life
expectancy at birth is now above 74 years. The literacy rate is 99.8%. Exports to
the EU are surging. GDP, adjusted for inflation, grew 3.3% in 2005. Unemployment
is now high — which I consider to be a great achievement of liberalization
and an ingredient of rapid economic growth. And I believe that someday, mature
Polish women will be beautiful. The obvious lessons from Poland are that
some freedom and capitalism are better than none. The less obvious lesson is that
very incomplete and corrupt liberalization can still make huge differences in
lives and economies. The forces of freedom and capitalism are not hothouse
flowers. They will grow in a little dirt between the cracks. They will flourish
in a vacant lot. They will set up great forests in a land that demolishes most of
its state structure. The Poles, like most humans, seem to be natural capitalists.
God bless them.
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ENDNOTES 1. The Economist,
June 6, 2005.
2. The Economist, Jan. 28, 2006
3.
http://www.cia.gov/cia/publications/factbook/geos/pl.html
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