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Social costs of the transition to capitalism : Poland, 1990-91

Listed author(s):
  • Milanovic, Branko

The Polish stabilization program implemented in 1990 as part of the transition to capitalism entailed unexpectedly high social costs. The often unstated assumptions had been that since central planning was intrinsically inefficient, stabilization in Poland might be less costly in terms of lost output than it would have been in a market economy. The idea was that recession stemming from an overall decline in demand could be moderated by removing the administrative barriers that in a planned economy hindered the best deployment of resources. The results were the reverse of expectations. Unemployment reached 12 percent of the labor force by the end of 1991, and real incomes plummeted (by about 40 percent). An estimated 17 percent of the population lived in poverty in 1989. By 1991, that figure reached 34 percent. The poverty rate more than doubled for all social groups except pensioners, for which it remained stable. Large households, and children in particular, were especially affected. The poverty gap rose from an estimated 1.4 percent of GDP to 4.8 pecent. Existing evidence on income distribution shows that it did not change. There was a slight compression of income among farmers, which has also occurred in the past when real incomes declined, and possibly some wage-stretching among workers. What happened to the general welfare? Conclusive results are elusive. Personal consumption, overall decreased. Queuing also decreased, but utility gains from shorter lines were offset as real wages, and thus the opportunity cost of waiting declined. Real appreciation of the exchange rate raised dollar wages substantially and led to an upsurge in consumer imports, thus decreasing the utlility derived from the ownership of consumer durable.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1165.

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Date of creation: 31 Aug 1993
Handle: RePEc:wbk:wbrwps:1165
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