Gradualism For Poles Won't Work

ECONOMIST Jeffrey Sachs helped draft Poland's ambitious and unprecedented transition from communism to a market economy. The controversial plan, launched Jan. 1, slashed state subsidies, setting off dramatic price increases while freezing wages. In an interview in his Harvard University office, Mr. Sachs claims that early returns are promising: Hyperinflation has been stopped cold, and, despite immense sacrifices, Poles are backing reforms they see as necessary to bring Poland into a new Europe. Excerpts follow:

On the need for drastic reform:

It is shown repeatedly throughout history that gradualism in such a deep crisis doesn't work. Hyperinflations tend to destroy tax systems; they undermine budgeting. So if you don't act decisively, it constantly gets ahead of you.

The key goal is to get the budget under control, which allows you to maintain a stable exchange rate, and the stable exchange rate is the anchor that locks the prices in place. Another [anchor] is directly intervening to stop the wage-price spiral through some sort of wage freeze.

This program imparts pain, of course, and purchasing power has been diminished. It potentially generates pressures for big wage increases. But if the wages rise through strikes or because government officials figure they have to buy social peace, then that eliminates the gain that was just accomplished by eliminating the subsidies.

On the Polish response:

It does seem that the Polish people understand very well not to go out on strike now. They understand very well that this is a crucial moment. They continue to show great support for the government, and so I'm more confident each day that this is becoming a sustainable situation.

Prices are actually falling now: The official indices don't measure the fact that there is a lot of informal selling going on at discounts. Firms are finding that they can't sell their goods, so they're having sales. There hasn't been a sale in Poland in 40 years of the magnitude that's going on right now.

On the program's social costs:

It is kind of a myth of the media, and maybe a misunderstanding of what's happening, to think that this [program] is ``cold turkey'' in a cruel, 19th-century, Dickens' sense. That is not how any modern capitalist country acts, and it's certainly not how Poland is going to choose to proceed. Poland is in the middle of Europe. Europe is more social democratic than the US, and Poland is going to be more social democratic. The welfare net will be wider than in the US, with very little doubt.

On the German role:

West Germany has a major historical responsibility to the Poles, I believe, to help them rebuild, to help them get out of the terrible debt crisis that they're in, to forgive a great deal of their debt. But Germany has not risen to the occasion yet.

Germany is Poland's main creditor. Germany should step forward right now and say they forgive Poland's debt. It's necessary. Poland can't pay this debt.

When Germany got into the same fix of gross over-indebtedness in the 1920s, the creditors didn't act, and it resulted in economic chaos and was a contributing factor to the rise of Hitler. After World War II, on the other hand, the German creditors were very generous to Germany. Even though it was the country that started World War II, we still were generous because we understood that Germany needed a fresh financial start. Now it is vital that Germany show this kind of vision and generosity to Poland.

On privatization:

The question of ownership and privatization is the thorniest issue of all. Economists know a good deal about convertibility, about getting prices right, about ending hyperinflations. [But] how to distribute in a relatively short period of time the accumulated national physical capital, which happens to be in state hands now, where it should not be, is a tremendously difficult problem. The Poles have many ideas - many of them contradictory. My own view is that part of the state property will remain in state hands for a long time.

On Europe's role:

The most important thing for Poland, bar none, is proper integration back with the economies of the European Community.