Foreign debt, crisis management, systemic transformation : Poland 1989-1994

Abstract

This thesis examines the role of foreign debt in the origin, progress and completion of an economic reform in Poland lasting from 1989 until 1994. The correlations between foreign debt and radical economic reform are analyzed from the perspective of the International Monetary Fund, which, since 1989, played an ever increasing role in the shaping of economic policy in Poland. This was possible thanks to a remarkable progress in the democratization process in Poland, and the role of the IMF increased proportionally with the diminishing role of the Communist Party. However, even before the formation of the democratic government of Tadeusz Mazowiecki the Fund recognized the close connection between radical solutions to both problems: the economic crisis and the debt crisis. Regardless of the nature of this correlation (political or economic one), it turned out that the Polish foreign debt problem could be resolved permanently only by introducing a historically unique economic reform. From then on, the correlation between debt reduction and systemic transformation formed the consensus on economic policies across party-lines. I try to prove that what made this consensus possible was the inherently political nature of the debt crisis in Poland, and a resulting very strong dependency of Poland’s economic development on ‘political will’ of Western governments. Since 1982, foreign debt was being used as a very effective instrument of Western governments’ pressure on Poland. Consequently, foreign debt should be considered either a constraint to or an opportunity for a radical economic reform, depending on the period: before, during or after 1989. ‘Before’ - when geopolitical factors both prevented the Communists from carrying out their program of economic reconstruction, and, simultaneously, contributed to a substantial deterioration of Poland’s payment capacity throughout the 1980s; ‘during’ – when the IMF was the first to acknowledge the great importance foreign debt could possibly have in forcing through a radical reform; and ‘after’ - when it became clear for the major Polish decision-makers that the very same Western governments could be persuaded to reduce Polish foreign debt only in return for initiating, pursuing and completing such a reform, which would be of exceptional importance to those governments, i.e. rapid transition to a free market system modeled on Western countries.