Understanding Poland’s economic transformation would enable Sri Lanka to learn from Warsaw’s errors

In the spring of 2022, Sri Lanka plunged into the most significant economic crisis this island nation has ever experienced. Soon, inflation rates will skyrocket to nearly 70%, and people will continue to spend days queuing for essentials.

Public institutions, schools amongst them, closed to minimise energy usage. As the authorities will be powerless to supply fuel to the power plants, it is likely that power cuts will be imposed across the nation.

Reuters reported how Sri Lanka is ‘completely dependent on imported fuel’ with costs reaching $4.2 billion in 2022. Due to massive shortages of resources, the people of Sri Lanka will have to wait for days in kilometre-long queues to get a minuscule amount of petrol, as Colombo’s reserves go down to a mere 4,000 tons.

Sri Lanka made headlines in March 2022, only a few weeks after Russia attacked Ukraine and the global energy crisis began when the protesters occupied the entrance to president’s Gotabaya Rajapaksa office in Colombo.

In April, Sri Lanka defaulted on foreign debt and went bankrupt for the first time in its history. By July, Rajapaksa fled the country with his wife and other members of his family who held top government positions and submitted his resignation from the Maldives.

All of that, however, was only the grand finale. The Lankan economy was already crippled by years of corruption and mismanagement from Rajapaksa, his predecessors, and the devastating effects of the COVID-19 pandemic, which decimated revenue from tourism – an important sector for the country widely considered a paradise holiday destination.

The tourism industry, the third-largest source of foreign-currency income in Sri Lanka, accounts for 12% of its GDP. In 2021, however, lockdowns and travel bans wiped out most of this income and revenue from tourism plummeted from a 2018 peak of  $5.61 billion to just $615 million.

Ever since the crisis peaked, the government has been implementing policies designed to improve the nation’s economic standing. To receive a $3bn support package from the International Monetary Fund (IMF), Sri Lanka had to agree to reform its economy by raising taxes, cutting public spending, and privatising State-Owned Enterprises (SOE’s).

The Lankan government’s struggle is evident, as one of their latest initiatives – the privatisation of Sri Lanka Telecom (SLT), was recently dismissed by the Lankan Sectoral Oversight Committee on National Security due to concerns regarding national safety.

In countless analyses of this crisis, Poland’s economic transformation in the 1990s stands as an important reference point, as their past situation is much akin to what the Asian country is currently experiencing.

Watching Sri Lanka struggle with resource shortages, high inflation rates, reform of the economic system and abrupt implementation of free market mechanisms, reminds the people of Poland of their own economic battles they once had to overcome.

After the end of World War 2, which ravaged the country, the Moscow-backed Communist Party (PZPR) of Poland introduced radical agricultural and industrial reforms, making the entire Polish economy state-owned and managed by the regime.

Almost all agriculture was amassed into centrally planned State Agricultural Enterprises (PGRs), and all heavy industry – mining, shipyards, manufacturing – was controlled from Warsaw. Although the degree of private economic activity permitted was larger than in the USSR, and varied throughout the following decades, the Poles only knew the rules of free market economy from the widespread grey-zone sector.

After the Berlin Wall fell in 1989, and the Soviet empire disintegrated, the people of Poland experienced a massive crisis, with inflation rates reaching a whopping 685,8% in 1990, and the Polish Zloty (PLN) becoming a completely unusable currency. As the people of Poland decided to align with the West, changes had to be made.

In 1989, soon after the democratic and pro-Western opposition took power in Poland, Leszek Balcerowicz was appointed the Minister of Finance and implemented what went down in history as Balcerowicz’s Plan, a radical programme of reforms originating from the neoliberal economic philosophy.

The aim of the scheme was to stabilise the Polish economy and currency, introduce a free market economy, and implement multiple policies (privatisation of state-owned enterprises, debt management, changes in the law and taxation) which would be the cornerstone for long-term growth. Under the plan, Poland received monetary support from the IMF, the US and the World Bank.

30 years after Balcerowicz’s Plan was implemented, it is still a point of fierce debate in regard to its effect on Polish society.

“I think that Leszek Balcerowicz’s reforms were a great act of courage. However, now, we should be thinking about the victims of the transition period and how we could have avoided it,” Professor Adam Bodnar told Harbingers’ Magazine, hinting at how the Polish experiences during the economic transition might be of value to the government in Colombo.

Mr Bodnar is a lawyer and civil rights activist, who served as the Polish Ombudsman for Citizen Rights from 2015 until July 2021.

Marcin Zielinski is the chief economist at Civic Development Forum (FOR), a free-market oriented economic think-tank created by Prof Balcerowicz. When asked what Sri Lanka could learn from Polish experiences, he said: “Only a market system, with economic freedom and private property, is able to bring lasting results and long-term economic growth.”

“Furthermore, comparative studies show that radical reforms, focused on liberalising the economy, brought much better results than incremental reforms,” he argued further. Mr Zelinski underlined the importance of the independence of the central bank which “must work as an independent unit and not give into the pressure of politicians with regard to price stability.”

Advising on the matter, Zelinski added how “the government should strive to reduce the financial deficit in the public sector, seeking spending cuts first.”

Strict monetary policy and cutting public spending inevitably lead to a situation best depicted by Prof Bodnar, who, when asked about the negative consequences of the line adopted by Poland in the early 1990s said: “There were social groups that were forgotten by the decision makers, and this is especially true in regard to those living in rural areas and the PGRs.The economic shock therapy was not supplemented by appropriate social action and economic activating plans. This also applied to employees of large industrial plants.”

Filip Konopczyński , an expert from a left-wing think-tank Fundacja Kaleckiego, offered a much heavier-worded view on the consequences of Balcerowicz’s Washington-backed hardline approach.

According to him, privatisation was largely responsible for growing inequalities in Polish society. “We’ve reached a point in which this individualistic logic of problem-solving doesn’t work anymore. In fact, it is damaging the real-estate market, where millions of people who are not able to afford their own place de facto ‘finance’ their compatriots who came into possession of real estate by buying it or through inheritance or privatisation schemes,” he said.

It is common that during economic, social, and political difficulties decision-makers focus solely on short-term solutions to the problems of the population, while simultaneously overlooking the big picture.

While for Poland in the 1990s, this meant leaving behind a large part of the population, creating a breeding ground for Poland’s right-wing populism, in the case of Sri Lanka the greatest threat is ignoring the impact the economic reforms might have on the environment.

With the privatisation of SOE’s, the Lankan nature – one of its most precious resources – faces danger, as global corporations might abuse and privatise the access to the country’s natural riches. According to Mr Konopczynski, Sri Lanka should prioritise the protection of the environment and focus on water resources through the implementation of regulatory policies.

Damaging the Lankan environment would have a detrimental effect on Lanka’s tourism, which in turn could endanger the economic safety of the citizens, who heavily rely on tourist services.

Mr Zielinski put forward an argument how “for ten years since the economic transformation in Poland began, emissions of carbon dioxide had fallen by about a quarter, and we are talking about an economy which had a very rapid growth-rate,” suggesting that well-designed economic policies may enable the authorities to use international capital to promote not only growth but also to protect the environment.

It is crucial for Sri Lanka to keep Poland’s case in mind throughout the process of economic change to protect the wellbeing of the Lankan people by implementing conscientious public service policies and policies regarding environmental protection. This can ensure that abrupt changes don’t just provide a temporary solution to complex problems, but eliminate the issue entirely.