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Case studyEconomic history

Poland, 1990: What Happened When Prices Were Freed

On 1 January 1990 a new government freed most prices overnight. Critics called it a shock. Here is what followed.

Daniel KovačEconomics desk · 9 min read7 sources
Traders on a Warsaw street, [YEAR]. Photo: [CREDIT].
At a glance
Place
Poland
Years
1989–1992
Policy
The Balcerowicz plan: free prices, balance the budget, stop printing money
Outcome
A sharp slump, then growth from 1992
Inflation, 1990 → 1992586% → 43%−543 pointsSource 1
GDP growth, 1990 → 1992[FIGURE] → [FIGURE]Source 2
Unemployment, 1990 → 1992[FIGURE] → [FIGURE]Source 2

Before

By 1989 the state set most prices in Poland, and set them too low. Shelves were often empty and people queued for meat, sugar and petrol. To cover its deficits the government printed money, so prices it did not control rose faster every month.2

After the partly free elections of June 1989, Tadeusz Mazowiecki formed the first government led by Solidarity. He made Leszek Balcerowicz finance minister.

The Decision

Balcerowicz argued that reform done slowly would be reform undone.6 His plan did most things at once: free prices, cut subsidies, stop financing the deficit with new money, and let the złoty be exchanged at one market rate, making it convertible. The economist Jeffrey Sachs, an adviser to the government, made the case for speed too.5

3Primary source · 1989“[QUOTE FROM THE GOVERNMENT’S ECONOMIC PROGRAMME, AUTUMN 1989]”[Title of the government economic programme]Council of Ministers of Poland · [ARCHIVE]Read the source

Parliament passed the package in late December 1989. It took effect on 1 January 1990.

The strongest case for going slower
Freeing prices overnight, before new firms, banks and courts exist, invites a deep slump. Workers in state factories pay the price first. A gradual path would have protected jobs while the institutions of a market were built.
Argued by critics of “shock therapy”, including Grzegorz Kołodko in From Shock to Therapy (2000). Source 4
Is this fair to that view?

What Happened

Prices jumped in the first weeks, then queues disappeared as goods came back to the shelves. Output and jobs fell hard in 1990 and 1991.2

Annual inflation, PolandConsumer prices, % change on the year before, 1989–1992
600%400%200%0Prices freed · 1 Jan 1990[FIGURE]586%[FIGURE]43%1989199019911992
Source: [Consumer price statistics, Poland] · Dataset
  1. Sept 1989Mazowiecki government takes officeBalcerowicz becomes finance minister and deputy prime minister.
  2. Dec 1989Parliament passes the reform laws
  3. 1 Jan 1990Prices freed, złoty made convertibleMost price controls end on the same day.
  4. Apr 1991Warsaw Stock Exchange reopens
  5. 1992The economy grows againAmong the first post-communist economies to return to growth.
[YEAR]1989
Drag to compare, or use the arrow keys. Photos: [CREDIT].

Economists at the time argued over the right order of reforms, and whether a country could build markets and democracy at once.7

What Economists Still Disagree On

How much of the 1990–91 fall in output was real, and how much was bad measurement of a shrinking state sector?

Would a slower pace have cost fewer jobs, or simply spread the same losses over more years?

How much credit belongs to the plan, and how much to debt relief and trade with Western Europe?

Lessons

1Price controls hide shortages; they don’t end them.Lesson · Prices and Information2Printing money to pay bills ends in rising prices.Lesson · Why Prices Rise3Reform has real costs, and who bears them matters.Lesson · Unintended Consequences
Test yourself5 questions on Poland, 1990+10 XP each · +25 XP for all 5Counts toward Case Cracker · 2 of 5Start quiz

Sources

  1. 1[Consumer price statistics, Poland] · [PUBLISHER], [YEAR] · Dataset
  2. 2[Output and labour statistics, Poland] · [PUBLISHER], [YEAR] · Dataset
  3. 3[Title of the government economic programme] · Council of Ministers of Poland, 1989 · Primary source
  4. 4From Shock to Therapy: The Political Economy of Postsocialist Transformation · Grzegorz W. Kołodko, Oxford University Press, 2000 · Book
  5. 5Poland’s Jump to the Market Economy · Jeffrey Sachs, MIT Press, 1993 · Book
  6. 6Socialism, Capitalism, Transformation · Leszek Balcerowicz, Central European University Press, 1995 · Book
  7. 7The Process of Socialist Economic Transformation · Stanley Fischer and Alan Gelb, Journal of Economic Perspectives, 1991 · Paper
Economic historyInflationPrice controls
Daniel KovačEconomics desk · Reprogram staffDaniel writes our case studies on prices, money and reform, and checks each one against the original data.

Discussion

23 comments · Best sourced first
Jonah Okafor · Level 5 Analyst · 2 hThe open questions section is the best part. Kołodko’s book is worth reading next to Sachs’s; they draw opposite lessons from the same years.Cites: From Shock to Therapy · Book · 2000 · Well sourced 6
Join the discussion (23)
Global tradeThe New Trade OrderElena Vogt · 6 min readRethink“Price controls lead to shortages.”Holds up· 6 sourcesLessonWhy Prices RiseMoney and Prices · Lesson 3 of 8 · 6 min
Why Rent Caps Shrink SupplyThe Reprogram Daily
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