Poland and the International Monetary Fund Policies

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The debt crisis of the 1980’s brought to the limelight the central role of the International Monetary Fund in the exchange rate policies of nations. Third world states had to devalue their currencies to an estimated 50% (Elekdağ, S., p 630). This condition was precondition for any nation to access any loan from the Institution. Unfortunately, this move led to the increases in prices and compressions in the real earnings of nationals.

The move seemed to ravage most states particularly those inAsia.ThailandandKoreafor example underwent a serious financial crisis resulting from the condition by the International Monetary Fund.   The crisis was further precipitated by the institutional speculators who deliberately manipulated the currency market to be tilted in their favour. These set precedence for the IMF bailout. The bailout was done in consultation with the Breton woods institutions (World Bank).

WhenPolandbroke away from the soviet dominated bloc, it transformed its mainly planned economy to a market economy. At the very onset, in 1990, the polish government developed the Economic Transformation Programme. The plan was meant to stabilize the economy through the transformation of the structures that would see the economy become a market economy parse.

The polish economy was the first in the region to become a capitalist state. This was resultant from the policies that were developed to effectively transform the economy to a market economy.Polandwas able to successfully transform without much recession and succeeded in getting a high GDP than had been experienced in the communist regime. The initial years were not characterised by positive development trends. However, years that succeeded the period soPolandtransform into one of the first developing economies in centralEurope. The growth was further precipitated by an expansion in the private sector, translating into a GDP growth of 20% in 1999 relative to that in 1989 (Beeson, M., Broome, A., p 399).

The policies introduced put the Polish economy on one that was ever-expanding. The polish economy was expanding with exceptional resilience and replete to the external environment with particular reference to the international financial crisis. Unlike countries such as theCzech RepublicandRussiawhich were ravaged by the crisis,Poland’s economic resilience was attributed to the consistent and balanced macroeconomic policies that had been initiated by the IMF.

While the economy exhibited the much resiliency mentioned above, the crisis affected the country’s demand for its exports. Nevertheless, the economy had strengthened enough to withstand the economic tide that was ravaging the neighbouring countries and was able to survive replete of the slowing GDP growth to 1.7% from the initial growth of 4%. The growth, however, rebounded in the third quarter of the year to 6% of GDP (Woods, N., p 380).

The intervention by the International Monetary Fund in the financial operation of states comes with mixed blessings. From the very psychological perception, it is argued that given that the IMF comes in, in the event of a crisis, tends to make the crisis more likely to occur. It is apparent credit institutions would otherwise offer crisis-prone states loans at a rate lower had it been that the IMF was not available. Within the precincts of the assertion of the critics of the loaning policies of the IMF, the knowledge of the presence of a salvaging institution makes governments fail to put in place sound policies for the regulation and supervision of financial management that would otherwise reduce the likelihood of a crisis.

InMexico, for example, the intervention of the IMF in the 1995 crisis prompted a massive bailout era. This bailout was characterized by high level risk taking ventures that set precedence for crises in the wider Eastern Asia andRussia.Brazilwas hit hard years later as a result of the crisis that was dogging the neighbouring countries. Given, the aspect of the IMF funding being hazardous should not be wished away so lightly.

In a way, the interventions by the IMF have mixed fortunes (Woods, N., 393). In some cases it is appreciable that the financing assists the country to pull away from the brink of collapse, assisting the countries mitigate the adverse effects of any down turn thereof. In some other cases, the interventions streamline the financial institutions and stabilises them altogether. Whole, with the intervention of the IMF, the moral hazard resultant is an unavoidable consequence.

Zambiawas largely devastated in 1975. The country had its per capita income drop to a quarter of the initial figure. In the same year the terms of trade for copper dropped by an estimated 50% (Beeson, M., Broome, A., p 407). Merchandise imports similarly dropped by 25%. The drop affected the production level plunging the country into a crisis. The external situation equally complicated the state that the country was under going especially given that it was beyond the control of the government.

The foreign debt forZambiastood at $4500 million. This debt was due to private companies, banks and foreign governments. The intervention of the International Monetary Fund through loaning and the conditional ties that saw the country restructure its financial institutions brought the country back on track after 13 years. This presents a success story for the intervention of the International Monetary Fund.

Vividly, one can attest to the fact that the interventions of the IMF significantly affect the incentives of any state putting into effect mitigating measures for any financial crisis. Most importantly, during liquidity crisis, the international monetary fund is able come in to compensate for the market failures (Woods, N., p 393). Where the effect could have been multifaceted, the victims of the crisis would definitely be cushioned. The victims would include creditors and trade partners that would have otherwise been distressed by the contagion.

In addition, the intervention, or rather the impending intervention by the International Monetary Fund tends to provide basic catalyst and certainty in international trade (Elekdağ, S., p 641). Creditors in international transaction are made certain of their payment where it appears definite that failure by the creditor to service the debt would have the International Monetary Fund come in to intervene. Overall this promotes international financial stability.

The aforementioned notwithstanding, one can easily observe that making extreme hypothesis on the hazardous or the beneficial nature of International Monetary Fund intervention is protracted. Hypothesizing that investors will obviously be bailed out in case of a crisis is equally extraverted. By any feasible standards, if this was a basis for evaluation and action, most countries would borrow at the very risk-free rates.

In conclusion, the overall intervention of the international monetary fund has been characterised by mixed blessings. These mixed blessings provide basis for the development of a global system that would be equipped in dealing with crises. Of particular essence will be the widened parameter within which regulations would be provided for the inclusion of all financial institutions. Besides, there is a dire need for incentives that would encourage all players to willingly take risks.

In as much as the players will be encouraged to take risks, similar efforts will be put in place to ensure the very risks are mitigated. It should be noted that extroverted regulation may equally hurt the market. This extraversion will be noted through stifled innovations. Subsequently, the benefits of integrating the global financial system will be limited to a large extend. Within the mandate of the aforementioned assertion, it will be tidal to develop a broad yet consistent framework that would consistent across the divide.

Fervently, the founding principles of the International Monetary Fund were quite articulate and were in line with the development agenda of the time, however, the developmental prospects world over have moved through stages and the need for restructuring and reorientation of the IMF is timely and inevitable.

 

 

 

 

 

 

 

 

 

Chapter Two

2.0 Literature Review

The international monetary fund has had pivotal roles in the 1970s, 1980s and the 1990s. The role the fund was play in the development of nations across the globe gave the institution much attention and much was written on the institution. The beginning of the 21st century has seen much being written on the need for the restructuring of the institution and much criticism on its performance.

Polandon its part, however, attracted much attention due to its prospects as one of the fastest growing economies inEurope. After breaking from the communistRussiathe country did away with communist policies and developed capitalists policies that so the economy transform very fast.

This chapter seeks to review any literature that would be incidental in establishing the role is any that the International Monetary Fund has played in the world economies and narrows to look at the polish economy. The literature reviewed also looks at the conditional ties that the institution puts on its funds before giving the funds to beneficiaries. Formative, it is hypothesized that the funding by the International Monetary Fund has mixed effects on any economy.

The great depression that ravaged the world in 1930s saw country seek to develop stringent barriers to international trade and subsequent devaluation of their currencies (Best, J., p 688). Citizens were curtailed fro holding any foreign exchange. The policies were self-defeating and could not alleviate the challenges that were seemingly becoming insurmountable by the day. During the period world trade plummeted considerably, coupled by increase in the levels of unemployment. Subsequently living standards in most states went low.

The devastated international monetary system necessitated the development of an institution that would oversee the international payment and transactions alike (Beeson, M., Broome, A., p 396). The developed outfit was to ensure that the there was stability in the exchange rate of the countries that were members. Besides, the outfit was to facilitate the purchase of goods and services from amongst citizens.

This breakdown in international monetary cooperation led the IMF’s founders to plan an institution charged with overseeing the international monetary system—the system of exchange rates and international payments that enables countries and their citizens to buy goods and services from each other. The new global entity would ensure exchange rate stability and encourage its member countries to eliminate exchange restrictions that hindered trade (Best, J., p 649).

The IMF has over the years been termed as the lender of last resort for countries that have had financial difficulties (Woods, N., p 380). The institution has over the years used its powers in the imposition of strict conditions that would make the countries access loans from the institution. The policies have been commonly referred to as structural adjustment programmes (SAPs). The institution has been very instrumental in the stabilization of countries that have had financial constraints, particularly in Latin America, Africa andAsia.

The World Bank did not prior to peg its lending on the structural adjustment programmes. However, the International Monetary Fund did set precedence. Today, most of the lending institutions require that country seeking for the loan put in place strategic structural adjustment programmes to access any loans. All loans have to be attached to some conditional ties.

The structural programmes require that labour laws are made less stringent. More often the policies for the adjustment of the structures tend to make the workers less unionisable. Besides, while the policies will see the country come back to the requisite track, the policies tend to do away with labour laws. In most cases countries that are loaned by the IMF have massive layoffs in the short run.

WhenMexico(Elekdağ, S., p 631) was bailed out in 1995 by the International Monetary Fund, it had to lay off most of its workers. An estimated 2million Mexicans lost their jobs in the wake of the bailout and the structural adjustment programmes. This layoff appeared to be in utter tandem with the policies of free trade that would liberalise the market and make possible the ease of access of labour (Archer, D., p 17). Subsequently, the loaned states have to embrace international trade policies that would allow for the free flow of resources across its borders. Overall, the International Monetary Fund policies are those that seem to be anti-workers. It is perhaps for this reason that most of the unions across the globe will be against funding by the International Monetary Fund.

The inception of the Bretton woods institutions was meant to not only revive capitalism but to also encourage international cooperation. This move was prompted by the currency competition that was prevalent in the 1930’s (Woods, N., p 390). The move was to tame the Soviet wave and shift to the market based alternative of economic development. By the time the IMF was coming into full force, theUnited Stateswas developing into the sole major economy.

The International Monetary Fund found itself functioning in a new economic order by the 1970’s with the sudden collapse of the Bretton woods institutions at the time (Dieter, H., p 346). The International Monetary Fund had t reinvent itself and become an institution that would provide economic surveillance and provision of policies that would assist nations that were tending to the doldrums to regain economic strength.

The challenge the IMF was facing in the 1990’s was resultant from the relationship the institution was having with theUnited States of America. It can to be argued that the IMF was in fact a tool for theUSto pursue its foreign economic policy. In deed, the policies of the IMF seemed to simply perpetuate the policies of theUSin the countries that were beneficiaries to the IMF funding (Seonjou K., p 705). However, many scholars are in agreement that theUnited Stateshas played a major role in the activities and the policy development and implementation prospects of the International Monetary Fund. One of the major examples cited is the use of the US dollar as the major transacting currency for the IMF.

The IMF also relies so much on theUSas the major shareholder. This has on many occasions made theUSto overlook the board and go ahead in lobbying for the adoption of the policies that theUSfavours. Most scholars argue that theUStreasury has some sort of special relationship with the International Monetary Fund. This intimated relationship was evident particularly with the handling of the crisis inAsia. Besides, theUStreasury played a pivotal role in the negotiations for the loan packages for bothThailandandKorea.

While the IMF is supposed to focus on individual economies as the singular and basic unit of analysis, the institution appears inclined to some political bloc (Archer, D., p 16). Through the IMF, the adoptions of international unified monetary policies have been largely advocated for. The move has been furthered through the sponsoring of the retraining of officials from the member economies. TheUnited Stateshas played a central role in the training of these officials.

The interest byChinain the IMF policies seemed to make theUnited Statesto develop some cold feet. This was sufficient show that theUnited Stateshad some hidden agenda for pursued through the IMF. The intervention of china through the use of exchange rate control witnessed high opposition from theUnited States(Elekdağ, S., p 629). TheUnited Statesput much pressure in 2007 to review or clarify its surveillance of the exchange rates. This made the IMF to adopt external stability policies that would seek to have countries have their economy stabilised through external forces.

Despite the restructuring by the IMF, critics argue that the IMF has not executed satisfactorily its mandate as an economic surveillance institution. The fund has been struggling to redefine and reposition itself towards measuring to this responsibility. The invention of the Financial Stability Forum in 1999 by the G-7 seemed to further devastate the institution. The aftermath was characterised by the reduced popularity of the IMF amongst countries such as theUnited States of America(Microfinance Network). By any standards the usefulness of the institution seems to be dwindling by the day.

Clearly the institution has over the years undergone a cycle since the exit of the Bretton Woods. The fund has been the central salvage institution during crisis for ravaged countries. However, this popularity notwithstanding the fund has rare and unpopular reputation because of sovereignty costs which it was imposing on the various governments. This can be traced clearly in its actions during and after the Asian financial downturn of the 1997-98 (Dieter, H., p 349).

While the Asian economies were state-led the IMF policies were geared towards having the economies towards market led economies. The IMF termed the unprecedented development in the Asian economies as the real essence of globalisation. The director argued that the development was merely neoliberal (New African p 16). However, when the crisis in Asia took toll, the IMF and theUnited Statesso it as a loophole for the introduction of market economy into the crisis-hit nations.

The IMF roles appear to be divided into two models, one that embraces dialogue and the other that is interested in the auditing. However, if the fund is insulated from any political pressure its surveillance role would be adequately delivered to the member countries. According to Gordon Brown, theUKChancellor in the exchequer, with sound management of the international monetary fund, the fund would live above partisan ideologies and become independent and credible in its mandate.

The IMF has had countries rejecting its advice on monetary issues outright. This rejection has made the institution lose its credibility.Malaysiafor example rejected the IMF’s and chose to reintroduce control on the inflow of capital (Archer, D., p 10). Ultimately, this move seemed to show that the IMF was not credible enough. Perhaps it is for this reason that the critics blame the IMF for the pre-crisis and post-crisis challenges that faced the ravaged states.

Clearly, the politics of accepting the policies of the international monetary fund seems to put most states off their feet.  Within any earnest assertions, the autocracy of nations seems largely impeded by the intervention of the international monetary fund (Seonjou K., p 700).

When focus is put on the democratic ideals of IMF funded nations there is evidence that the countries make efforts to democratise, however the efforts seem to last for as long as the International Monetary Fund lasts.

Though it is universally acceptable that the IMF intervention comes in handy when states have economic difficulties, the conditional ties attached to the fund cause much political upheaval. Similarly, the fund is seen a cause of stagflation within nations that receive the fund. Unless structures within the recipient countries are restructured prior to the receipt of the funds, the corruption and inefficiency within the public services impedes the objective of the fund.

Camdessus (Camdessus, M., 363) argues that though the adjustment programmes mentioned earlier would be a good step towards the attainment of the objectives of the fund, the success of the implementation depends on the electoral cycle. In regimes where there are impending elections, the regimes tend to work very well. However, in regimes undergoing a post election era, structural adjustment programmes of the International Monetary Fund are flawed in their implementation.

Camdessus (Camdessus, M., p 363) agrees with the argument by Kaufman and Haggard who assert that the implementations of the SAPs are a success particularly in countries that are in a state of democratic transition. In these countries, they argue, the political class are conscious of the need integrity and sobriety in the management of the affairs of the public offices which they have interest or the ones they are holding.

While it is regrettable that most of the authors on this topic tend to examine at length the polity type regarding the failure or success of the IMF programmes. A thorough examination of countries such asMexico,ArgentinaandBrazil, tends to imply that only countries that have authoritarian rule would successfully implement the strategies and programmes of the International Monetary fund. Kaufman argues that the ideologies postulated and pursued by the IMF would not be implemented by technocrats. Overall, the impact under technocratic implementation would be less felt than would be the case in authoritarian states.

In her examination, Önis (Önis, Z., p 251) finds a lot of fault in the implementation of the policies by the International Monetary Fund both in democracies and in autocracies. She does this with particular reference toLatin America. Her central concern was to ascertain whether the programmes by the IMF posed any risk to the autocratic governments and if autocracy was a sufficient condition for the successful implementation of the IMF programmes. According to her, democracies had an edge in the implementation process.

 

 

 

 

 

 

 

 

CHAPTER TWO

2.0  Theoretical Framework: Neoliberalism

The polish government had to undertake a thorough restructuring process to have a smooth transition process from a communist economy to a capitalist economy. Theorists and policymakers had to go back to the drawing board to have a thorough review of the prior market state relation that existed across the board over the communism period.

The privatisation process had to be put under a thorough scrutiny (Grzegorz W. K., p 48), deregulate certain economic arrangements and perhaps sturdily deal with the challenges that appeared abound with the onset of globalisation. The postWashingtonconsensus also needed to be reviewed with renewed gait to ensure the effects of the charter would not eat into the transitioning economy.

The aspect of public utility privatisation became very palpable prompting the development of a draft legislation that would make the transfer effective. While the council activists were opposed to the transfer and commercialisation of the utilities, the government went ahead to privatise the firms (Camdessus M., p 363). The basis of the rejection was based on the fact that the privatisation implied recentralisation power, particularly those related to the economy.

In 1990, the legislation on the privatisation and commercialisation of the public utility firms was passed by government. This gave the process a green light to go ahead and have the utilities transferred to private ownership without much ado. However, the council which had been opposed to this arrangement was given powers by the government to vet the plans for privatisation. Stocks were used as the central medium of transfer. Further, with the review of the provision, the council was given the leeway to have their firms dissolved and leased off or its assets sold to new corporations. Besides, the new corporation developed were allowed to have its employees own its shares. This however, seemed to give loopholes related to employee ownership.

The year 1991 saw the transfer of most of the firms to the private sector. However, this transfer witnessed a shift from public transfer to mass transfer of the utilities. The transfer was done in phases with the ministry first identifying 500 utilities that it deemed a priority in the privatisation process. The government also developed a mutual fund whose shares were to be given to the public.

The ministry did not have the going that smooth. Most firms were not willing to be privatised that easily. However, an estimated 250 (Önis, Z., p 240) firms were made joint-stock companies by the end of 1991. The ministry’s central objective of having the firms privatised was to have the firms’ performance improved. Contrary to these expectations, this was not to be; the firms’ performance is said to have actually deteriorated.

The firm managers on their part had expected better treatment from the government. This never came to be the case and hence they seemed to develop some resentment. They argued that the move was a probable scare for customers (V Calomiris, C. W., p 347). They argued that until the owners were identified the restructuring was inconsequential. The directors of the boards that were put in charge seemed to lack the moral and legal mandate to have the managers change this behaviour.

At the very point and period of transition; the trade unionism was on the verge of collapse. This collapse was precipitated by the ascension across the globe of economic Neoliberalism. This policy became a common tenet of the Polish economic policies and dominated the economic orthodoxy ofPoland.

During the transitional period financial institutions from the west played a pivotal role inPoland. The success of Neoliberalism (Woller, G. M, Hart, D. K., p 20) was largely pecked on the western economies. The institutions are largely credited for the shaping and reforming the economy ofPoland.  The efforts by persons particularly those in the labour unions played a central role in the establishment of a market economy inPoland. In retrospect, the role of the international institutions had a major influence on white collar jobs.

The increase in the role played by the international financial institutions from the west had much influence on the role of trade unions inPoland. Common during the transitional period was the transfer of the ownership of state owned premises to private proprietors from the west (Önis, Z., p 251). Most of these unfolding were precipitated by the collapse of theSoviet Unionand the subsequent dissolving of the Council for Mutual Economic Assistance.

The very period within whichPolandwas undergoing a transition saw the development cultural trends such as pop culture and consumerism. Apparently, this largely affected the solidarity culture which had relied largely on patriotism, social solidarity and sacrifice. While solidarity had during communism existed as a trade union, it had turned into a social outfit. However, the inception of globalisation saw concept of solidarity decline to its very knees.

Though the nomenklatura capitalism would have played a gigantic role in the development of the present dayPoland, it is argued that it did the last blow on the solidarity. The capitalism introduced looked at solidarity as a central support for socialism which was largely discredited. The aftermath of the incessant struggle saw the full embrasure of capitalism by workers and trade unionists alike.

The rejection witnessed during the neoliberal period seemed to be an aspect of neoliberal reform. The strategy was adopted by the polish post communist reform proponents. Privatisation was not only perceived as a sine non quo for the systematic reformation of the economy but was also viewed as a way through which the influence of workers was to be trimmed (Calomiris, C. W., p 347). On addition, devoid of any surprises, the government did not develop any framework within which the workers would be appreciated at their place of work and how they would participate in any emergent issues.

Nevertheless, the neoliberal strategy inPolandencountered massive challenges and hostility (United Nations Development Program). The hostility was particularly witnessed in the plant based representation of workers. Clearly, the only strategy that worked successfully during the neoliberal time was largely dependent on proactive participation of the councils of employees and their support. Though the councils stood changes of losing support after the privatisation process, most of them were named to head the formed corporations.

The Polish government later realised that the pronounced industrial relations was after all a liability towards industrial reform. Overall (Bullard, N.,Bello, W., Mallhotra, K. p 514) the government ofPolandin the neoliberal period had the least option but to have some regulations on the negotiation of workers at the plant level.Polandwas ideally at the risk to replace the then inherent institutions for any such incidental negotiations. The prevailing structure of industrial association seemed to have lost its competitive advantage for the negotiation of the affairs of the workers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter Three

3.0  Methodology

To evaluate the success of any programmes, considerations have to be given to variables that are qualitative and those that are quantitative in nature. Qualitative evaluation will address the issues of how well the programmes may have served the set goals and objectives. Within this context, in checking the success of the programmes, one has to consider the predetermined objectives and evaluate the success of the policies based on the extent of the success of the policies.

The evaluation can also be done on the basis of how much has been achieved through the review of the figures vis-à-vis the target figures (Trudel, R., p 936). This quantitative analysis is capable of indication the effectiveness of the implementation process. In quantitatively evaluating the success of the international monetary fund this paper will look at the gradual increase in the disbursement and the effect of the loans on the GDP of the recipient countries.

The relationship betweenPolandand the international monetary fund have all the relevance to transitional economies, particularly those undergoing restructuring and stabilisation programmes (Cooper, R N., p 138). Equally, the case ofPolandrepresents the benefits that recipient country of IMF funds would enjoy. The IMF was more receptive givenPoland’s economic state.Poland’s outstanding success in its relation with the IMF was evidenced in the successful negotiation of debt forgiveness and subsequent acquisition of the $1billion loan.

The polish government equally reduced the debt consistently. The London Club and Paris Club had reduced the Polish debt from 30% and 50% respectively (Microfinance Network). This was largely influenced by the successes the government was reaping from its investment resultant from the IMF. The debts did in no way threaten the viability of any recessionary policies. However the Polish case seems relatively exceptional assisting the economy to move from recession to a sustained reduction in the rates of inflation and an inflow of foreign investment.

It is appreciable thatPolandmost of the time triumphed over the IMF during negotiations, in the long run the Polish government was able to access much loan without stringent criteria. The Polish (Bullard, N.,Bello, W., Mallhotra, K. p 525) government had, through Balcerowicz, developed a stabilisation model reminiscent to that of the International Monetary fund. This eased the IMF-Polish negotiation strains.Polandhas enjoyed much leverage from western debt relief measures, hence providing further financing for the polish government for transitional purposes.

In appreciating the milestones in the Polish economy, it needs to be appreciated that not all beneficiaries of bilateral aid should expect to be relieved off the external debts. In this way, the merits the Polish economy accrues from the bilateral agreements should be treated as exclusive. While it is also notable that the Polish economy could have also reaped much from the euphoria of the collapse of theSoviet Union, the symbolic position held by the Polish economy then was so novel.

The impact of any policy has to catapult the efforts of any state towards prosperity. The evaluation of the success of the policies would be established through a quantitative process or a quantitative process. Equally, the successes of the international monetary fund inPolandwill be ascertained through the qualitative and quantitative review of the impact of the fund on the Polish economy.

The polish economy with a population of an estimated 38 million people has had a stable growth over the years. Since its joining of the European Union, the polish economy has remained very healthy.Polandjoined the European Union in 2004. Thereafter, the polish economy has witnessed a steady growth trend, 6.7% in 2007 and 4.8% in 2008. The projected economic growth for the country over the coming years has been projected at an increase of between 0.3 to 1.9% (Bird, G., Rowland, D., p 864).

To a reasonable extend the IMF has been able to meet its stipulated objectives. Though it can be attested that it has been an institution with mixed fortunes, it qualitative and quantitative evaluation of performance over time proves that its performance has relatively served the objectives, particularly in the 1980s and the 1990s.

The economy ofPoland(Dreher, A., p 286) was experienced deterioration for a period of time. This was a result of recession that had been precipitated by the economy’s transformation from a controlled economy to a free market economy. The government had concentrated its efforts towards the curbing of social security expenses that had earlier required increase in the subsidy from the general revenues. The trimming of the expenditure was achieved within a short period of time; thanks to the conditions by the International Monetary Fund

The cutting of the expenditure had been a condition of the International Monetary Fund and had been put on the Polish government in the wake of a loan it had received from the IMF. Within the same period the International Monetary Fund had demanded that most of the public utilities be privatised.

In its reform process, the polish government set ceiling for the earning levels. This criterion was to be equally used in the determination of the pension of the workers. Besides, the same period witnessed a stream of retrenchments (Best, J., p 267). This retrenchment was faced by stiff competition from the Trade Unionists. The unionists went to court over the issues. Subsequent, pensioners were awarded shares in the privatised companied by the government rather that the payment in cash of their pension.

The IMF has shortly suspended funding to the polish government and the government was forced have the social security fund cut down so that the IMF would revert to the lending (Chaudhry, P K., Kelkar, V L., Yadav, V., p 67). To have the trust of the International Monetary Fund the government was expected to have the social security cut down. The internationals monetary fund was to in turn reassure the investors of the feasibility of their investment inPoland.

The polish government instituted a few measures towards the attainment of the objectives. Most importantly, it introduced cutbacks on the unemployment benefits, expenditure on cash benefits. Earlier, these costs had seen the expenditure increase from 11.17% of the Gross Domestic Product to 15.3% of the Gross Domestic Product (Microfinance Network). This was attributed to the increased pension benefits relative to the average wages. This seemed to reverse the trend experienced in the 1980’w in total.

The programmes of the IMF have been very particularly relevant to the Polish government. The structural adjustment programmes saw the government ofPolandreview its management policies that saw the economy pick up. Through the structural adjustment programmes, the adjustment programmes saw the government improve the delivery of services to its citizens through the firms that were privatised (Trudel, R., p 930). Though layoffs were a common scenario, the overall delivery of services to the public was catapulted through the adjustment programmes.

The conditionality placed on the on the aid and loans saw the improvement in the overall governance ofPoland.  The fund also increased international cooperation and financial surveillance through the monitoring of the central bank functioning and the linking of the banks. Overall this seemed to enhance international integration that is incidental in political, social and cultural development.

Because of the sound macroeconomic policies that were initiated by the International Monetary Fund, the Polish economy has remained robust and is among the only countries in Europe that were not hard hit by the global economic crisis. The Polish government has been able to avoid recession because of the well developed institutions that were founded in the 1980’s.

Most important to be noted is thatPolandis the only economy inEuropethat managed to have some economic growth in 2009. This has been attributed to the good policies and sound management of its institutions. The international monetary fund’s credit has been seen as playing a central role in the stability ofPoland.Polandhad been awarded a grant of $20.8 billions which was very instrumentals in its maintenance of the zloty’s stability (Bird, G., Rowland, D., p 846). The sound relationship betweenPolandand the Bretton Woods institution has been able to putPolandon the right economic track over the years.

In attaining the central objective of cushioning the country against any shocks, the economy ofPolandsought to get a loan from the IMF (Heritage Foundation 2005, p 76). The loan was to increase the polish central bank’s reserve by an estimated one third. This was done through Free Credit Line from the International Monetary Fund. This was intended towards cushioning the Polish government against any attacks from speculators and the probable virus from the crisis.

Relatively, the Polish economy was doing very well compared to the other ex-communist state. The ex-communist states such asLatvia,HungaryandRomaniawere getting economically devastated over the time.  Though this economies had received funding from either both IMF and/or the World Bank. WhilePolandhas over the years been reluctant seeking extra funding because it suffered from capital evaporation that had been precipitated by the credit crunch.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter Five

5.0 Analysis: Economic Background of Poland

After the Second World War, the Polish government adopted a centrally planned system of economic planning (International Labour Organization).  The adoption was undertaken with the least consideration of the differences in the levels of economic development between the two countries. Similarly, there was the least regard for the resources endowment among the countries (Trudel, R., p 935). Ideally, consideration for the social, political and cultural levels of the countries ought to have been given due considerations.

The thieving of the Polish economy was largely catapulted by the rich natural resources endowment. Polandwas the largest producer of food in the eastern part of Europe. The industrial sector of Polandwas based on the richness in the endowment of coal. Food production industries and equipment manufacturing firms were founded on the availability of coals for energy production. Then, in the 1990’s, Polandwas the 4th largest producer of coal (Khan, S. R., p 1092).

After the Second World War the Polish leadership established socialist model of economic development. The result of the reorganisation was the establishment of large enterprises, heavy industry and a heavily centralised bureaucracy. The centralised bureaucracy controlled the production process, ignoring the capitalist practises of employee job satisfaction and the demands of the consumers.

Polandhad abundance of agricultural resources that remained mainly in the hands of the private sector. At the same time of communist dominance, the states influence on the sector was mainly through taxation. The state also controlled the use of the materials. Besides, the state tried to limit the amount of the private plot any individual would own. Nevertheless, most of the industries and craft firms remained in the ownership of private ownership with minimal state control.

Poland’s economy was equally delineated from the rest of the world mainly because of the nationalised foreign trade. However, (Ministry of Finance,RepublicofPoland Basic Information) there were numerous reforms undertaken in the 1970’s and the ‘80’s that saw individual trade activities, including foreign trade activities. The trade with the international community was further curtailed by the obligations that were laid down by the Council for Mutual and Economic Assistance.

Further, given that the association was largely controlled by theSoviet Union, as a break away states the Polish economy remained disadvantaged (New African p 14). The Polish economy nonetheless gained to some extend some advantage in its balance of payment. On the other hand,Polandexperienced increased inefficiencies in its production process, besides the low quality of production that did hamper increased international trade with other countries.

The years between 1970 and 1980 saw the upsurge of social unrest (Heritage Foundation 2005, p 36). This was resultant from the failure by the state to inspire incidental economic growth from its lopsided economic plans. The installation of the non-communist government in the 1989 saw a paradigm shift in the economic trend ofPoland.  Inherently, the government was mainly inspired by the popular support it was enjoying. Consequently, the populist government introduced the western economy system of the market economy.  The government policy was dominated by the privatisation of most of the state corporations.

Within the fist two years of its installation the government had put the economic prospects ofPolandon the right track. While the prospects appeared quite uncertain in 1992, economic indicators were rife that the economy would pick up after all. Consumer goods were made readily available (Payne, A., p 311). The positive economic indicators were backtracked by the inefficiencies in the state enterprises. This inefficiency led to the decreased productivity increase in unemployment and transitory stagflation. This was relatively treacherous as the inflation had earlier been reduced to almost zero.

The Polish government had to get means of gaining international support particularly from financial institutions. While the Polish economy would have been boosted by the writing of its hard-currency debt, the communist management system remained a partial hindrance to the economy prospects of the Polish economy. The communist policies largely affected the prospective foreign investment that would have been incidental in the country’s prospects. In 1992 what had been planned as a period of economic adjustment turned out to become a longer nightmare with very mixed returns (Bird, G., Rowland, D., p 879).

Polandmade much effort in trying to make its economy western (Microfinance Network). This forced the Polish to largely depend n international financial support and expertise. However, the adoption of the western policies that were capitalist in orientation assisted the polish economy towards gaining economic stability. The economic growth and development ofPolandhas remained on course over the years, succumbing to the least international economic pressure.

The economic freedom of Polandas at the beginning of 2010 was put at 63.2, being ranked the 71st in the ranking for free economies. These score represents an increase of 2.9 points from that of 2009 (Ministry of Finance, Republic of Poland Basic Information). According to the ranking Poland is the 33rd of the 43Europe countries. This ranking represents an above average global ranking.

Notably, the Polish government has had a continued enhancement of an entrepreneurial environment. This has made the Polish economy gain an estimated 15 score in the 2010 index.

The economy has over the last 5 years recorded a sustainable growth of 5%. The monetary policy of the Polish government has remained very stable. Besides, the finance sector has been able to withstand the tide in the international crisis relatively well (International Labour Organization). The rates of tax have become quite competitive coupled with sound implementation corporate taxes policies that are relatively flat. Individual taxes have equally been reduced.

The Polish government has also reduced the levels of corruption and strengthened its legal framework. This has improved the domestic environment that has been incidental in the encouragement of foreign investment (Grzegorz W. K., p 48). The high expenditure by the government has been able to hold down the economic freedom ofPolandabove board. In addition the Polish economy has been able to maintain a sound pension scheme for its workers.

This scheme has remained a central target for further reforms. Relatively high government spending holds down overall economic freedom inPoland. The government ofPolandhas also made relentless efforts towards limiting its expenditure and check the ever-rising fiscal deficit. Consequently, the Polish government has seen the property right as another central target for meaningful reforms. While the judicial system has been fairly reliable, it is inefficient and needs partial overhaul.

The business freedom in the economy ofPolandhas been limited under the regulatory policies developed by Polish government. The application for business operation permits have been reduced to 32 days. This is relatively commendable relative to the world’s average which is estimated at 35 days.

Polandshares similar trade policies as those embraced by the European Union. The country has an average tariff rate of 1.3% as at end of the year 2008 (Chaudhry, P K., Kelkar, V L., Yadav, V., p 60). The hindrance has been that the EU member states have had very high tariffs on agricultural and manufactured products. Besides the MFN code for most of the EU states has been relatively complex. These restrictions notwithstanding, there have been manufacturing and agricultural subsidies and quotas. Overall, this has limited the economic operations of the Polish government.

The European Union has a lot of restriction on biotechnology and pharmaceutical products. Intellectual property rights have also been key challenges in the EU and subsequently to the Polish government. Subsequent, the ranking had to deduct ten points to carter for these restrictions. This was meant to account for the non-tariff barriers. The polish government has had a relatively high income rate of about 40%. Commendably, the rate has been reduced to 32% (Chaudhry, P K., Kelkar, V L., Yadav, V., p 71). This has been a relief on the part of corporate prospective.  The Polish economy has a rate of 19% of corporate tax rate which is comparatively low with the European League. Other notable taxes are inclusive of inheritance tax, transfer tax and value added taxes. The few past years have had an average of 33.5% of Gross Domestic Product as the overall tax revenue (Payne, A., p 318).

The privatisation that had been a common feature of the inception of the capitalist policies has been stalled. Besides, the expenditure of the government, inclusive of the consumption and the transfer payments has been relatively high. This high government expenditure, estimated at 42.1% has been able to stimulate the economy growth (Bird, G., Rowland, D., p 238).

In the period between 2006 and 2008, the Polish economy has had an average inflation of 3.5% (Griesgraber, J M., p 354). Being a member of the European Union, this has led to the distortion of the prices of goods from the agricultural sector. The government has been monitoring the prices of pharmaceutical products and medical products. The government has deemed this a necessary and almost sufficient condition for the effective functioning of the economy (Ryder, P M., p 419). In view of the foregoing, the Polish ranking had to have reduction in its monetary freedom scores by ten points to carter for the adjustment in the distortion in the measure of the domestic prices.

The Polish government has treated domestic and foreign capital investment as of equal significance in its prospects. The government has refrained from screening investment and does allow for 100% private foreign ownership of businesses and firms (Dreher, A., p 238). Nevertheless, all the investments and business need a valid permit and concession from the government.

Businesses engagements may be deterred by regulatory unpredictability and administrative red tapes. The Polish court systems are equally low in their pursuit for legal redress; this hampers the prospects of business engagements. Both the non-residents and residents can open foreign exchange accounts with minimal government restrictions.

The effecting of payments and transfers and transactions has to be conducted through a domestic bank (Trudel, R., p 928).  However, transaction of capital orient particularly with the European Union member states are subjected to a number of restrictions and has to get government approval. The ownership of land by foreigner is subjected to a number of controls and restrictions.

The financial system ofPolandhas been growing over the years. The availability of credit has been made a success at the market terms. Foreigners are also able to access domestic financials markets. This has been affected to make possible foreign investments. The banking sector inPolandhas experienced tremendous competition. The banking sector controls most of the assets (particularly commercial banks), estimated at about 90% of the assets (Payne, A., p 321).  Foreign owned banks account for approximately two-thirds of the banking sector inPoland.

The Polish government retains majority control in particularly two banks with relatively low-interest rate loans for the Polish homeowners and farmers. The process of privatising government owned firms has been relatively low, particularly in the insurance industry. Apparently, the Polish capita market has become relatively intricate, with the Warsaw Stock Exchange experiencing tremendous expansion (Bird, G., Rowland, D., p 849). With this stability and as has been already mentioned, the economic turmoil has had the least effect on the polish economy, or at most the effects has been quite mild.

The rights for the ownership of property have been well protected. The legal framework provides for the acquiring and disposal of property at will with minimal restrictions. Piracy of the intellectual property is still perpetuated in the Polish despite government efforts in improving their protection. Corruption is a significant indicator in any economy. The regulations relating to labour inPolandare fairly rigid, the cost, non-salary, of employing workers is high, and the dismissal is very stringent making the employment prospects lower

Polandis ranks 58th of the 179 (Griesgraber, J M., p 286) countries ranked in the Transparency International’s Corruption Perceptions Index of 2008.  In evading the fears related to this menace, the government has established an office to combat the scourge. The rate of corruption has reportedly declined as a consequent, particularly in public service and goods procurement.

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter Six

6.0 Empirical Studies of the Impact of IMF Conditionality Program on Poland.

The international monetary fund undertakes very elaborate negotiation process before accepting to advance loans and aid to beneficiary countries. Countries with extended balance of payment yet incapable of accessing loans from commercial banks from foreign countries normally opt for the IMF as their lender of last resort (Ryder, P M., p 410). During the prequalification discussions, the IMF may come up with conditions that are to be met before the loan is advanced.

In return to financing its balance of payment the country will always be compelled to agree on the implementation of certain adjustment programmes that may not be readily adaptable by the recipient nation. These programmes are meant to assist the nation in question to undertake stabilisation. Inevitably, the programmes may involve stringent measures that may be full of austerity (Ministry of Finance,RepublicofPoland Basic Information). Overall the negotiation may be termed as such yet they tend to be largely ultimatums. However, the option for the applying country may be either limited or not available at all. The country seeking the loan/grant has to embrace the programmes to salvage its dwindling economic prospects.

When the Polish government sought a loan for stabilisation from the International Monetary Fund, the condition was to embrace structural adjustment programmes. InherentlyPolandto privatize all the state owned corporations (Khan, S. R., p 1079). While the world over the prospects of privatisation is largely positive, the adjustment comes with numerous challenges such as mass worker lay-off and restructuring of the overall management of the various firms. This tends to increase the rates of unemployment. Besides, the government may loss its popularity among the electorates (Khan, S. R., p 1080). This may bring about mass action and in the long run some sought of anarchy

The Polish relationship with the International Monetary Fund was a clear indication of the diktat theory where there is the existence of the superior and the subject. The IMF programmes adopted by the IMF were mainly of economic imperative or most importantly had much to do with the economic imperative and with Polish political inclination. This principle orientation demonstrates the cardinal and manipulative role that the Western countries have on the policies and decisions of the International Monetary Fund.

The ultimate relationship between IMF and the Polish government has been best depicted not as an opposing relation but as a trans-national pact that has effectively and efficiently lobbied other incidental actors towards attaining economic stability inPoland(Kirkpatrick, C., Önis, Z., p 347). The actors are inclusive of the Western creditors and its domestic constituencies geared towards achieving common incidental policy goals. The Polish government has accepted albeit passively, the IMF prescriptions.Polandhas used its political strength and domestic vulnerability to push the western states to support its financial prospects.

Though the IMF stresses that its role is a politically neutral one, concerned particularly with the regulation of the international monetary system, it takes into consideration issues of political nature; these are captured in the conditions for the advancement of the requested loans (Trudel, R., p 929).  In deed, during the negotiations, the IMF does this strictly with the governments which are expected to be politically impartial. Nevertheless, politics and the economy can not be treated in isolation.

The negotiations of the IMF are ordinarily centred on the economic policy of the country in question. However, unlike in the cases of bilateral aid, the financing by the International Monetary Fund is not pecked on the fulfilment of the specific political conditions. This assertion notwithstanding, it should not be construed that the IMF financial aid of loans is devoid of conditions. The financing has much of political input from the receiving country.

To begin with each of the criteria used by the IMF used in the scrutiny of the legibility of any nation is normally attached to the country’s budget deficit or its exchange rate. These two aspects have a very close correlation with the country’s political debate. It is argued that the policies that are at the core of any country’s economic transformation are always at the core the country’s political epicentres and life.

Secondly, approval of the agreement with the International Monetary Fund is always prone to influences from the national governments which are always subjected to political evaluation and reproach.  Countries with large contribution to the IMF such as theUnited StatesandGermanyhave to have their votes cleared by their governments. Ultimately, this makes the fund very political (Payne, A., p 317). Countries such as theUnited Statesnormally require that its executive director does take stock of the recipient country’s human rights records. Where government to be advanced the aid/loan have records of human rights violation, theUnited Statesmay not approve of the loan advancement. This makes the fund full of non-economic curtailments.

The Polish relationship with the IMF and the World Bank can be traced back to the cold war period.Polandis one of the first members of both institutions. However the increasing intensity of the Cold War saw the relationship of the World Bank andPolanddeteriorates (Khan, S. R., p 1093). Not only did the relationship with the World Bank go awash but also the Polish relation with other International Financial Institution, the IMF inclusive.

Conditionalities (Moore, W., Scarritt, J R.,  p 49) imposed by the International Monetary Fund do not necessarily auger well with all the states.  The structural adjustment programmes introduced by the IMF inPolandhad mixed returns. Workers (International Labour Organization) were against the policies as there was massive employee layoff. While the policies were well intentioned, anarchy was not one of the central objectives of the policies. The devaluation of the currency, a common policy tool used by the international monetary fund, may also, unless effectively and efficiently managed present mixed blessings. Most commonly, the floating of the exchange rate is also largely speculative and may not present the desired results.

The SAPs (Moore, W., Scarritt, J R., p 52) may be also characterised by the abolition of monopolies and state owned enterprises in both the production and the market sectors. Inherently, the state may opt to reform the banking policies, including the rates of interest, reduction in the government budget and money supply which hurts to a reasonable extend the injection by the government into the economy. Where such injections are low, the investment becomes restricted and hence hurts the civilians (Dreher, A., p 230). Besides, the removal of consumer subsidy which also characterises the SAPS may dwell a blow on the standards of living the large populace.

It should not perturb therefore that some of the impacts of the structural adjustment programmes have lead to much criticism of the World Bank and the IMF (Bird, G., Rowland, D., p 243). However, it is remarkable that at the time the Polish government needed the intervention of the both the IMF and the World Bank and the IMF, the policies were followed to the letter and largely put the Polish economy on tracks as it still stands out to this day.

By all standards conditions that are applied by the International Monetary Fund are inevitable. The fund has to ensure that the resources that it receives from the member states are safeguarded (Bird, G., Rowland, D., p 872). The only sure avenue of reaching this end is through the attachment of stringent conditions on the loans and aid that is advanced. Besides, these conditions assist the recipient states to attain the objectives for which they sought the loan or the aid.

The polish government utilised the fund in the development of infrastructure that was a central incentive for the foreign investment that saw the Polish economy back on the track. The road infrastructure opened up the rural area ofPolandto both the foreign and domestic investment hence reducing the level of unemployment and increasing the country’s GDP (Ministry of Finance,RepublicofPoland Basic Information).

The education sector has also been a major beneficiary of the International Monetary Fund. The Polish government has been able, over the years to reduce the level of illiteracy considerably. This has been a key ingredient in the prospects ofPoland’s development. The introduction of the universal basic free education inPolandsaw the literacy level increase from an estimated 69% to 89% in 1994 (Payne, A., p 320).

The agricultural sector was also a major beneficiary from the fund as the development of infrastructure opened the productive area and made the transportation of agricultural proceeds relatively fast (Dieter, H., p 345). Besides, the industries were able to reach the areas easily to access the raw materials for the products. Besides, the developed infrastructure, electricity and road network made it possible for the development of industries in the rural area and created jobs for the residents. In addition, this led to the decrease in the rates of rural urban migration.

6.1 Utility of the Ordinary Least Squares

To find the efficacy of the loan and the aid advance by the International Monetary Fund to any country, we find the best line that fits the data that is derived from the two variables that are provided. In the context of the IMF funding the Polish government two variables can be picked to see the efficiency effects of the fund. Given that employment is a key variable in any state we consider varied levels on the IMF funding with the respective levels of employment.

Letting the funding function be

Y=bo + b1E

Where the

Y- Funding by the IMF

bo – Autonomous employment level

b1 – Employment propensity

E – Employment

Once the data has been plotted and the best line of fit is derived, it is possible to project future employment prospects given a certain level of funding.

 

The graph shows a clear correlation between the amount that the Polish government and the rates of employment at varying periods from the year 1995 to the years 2010. Clearly the increase n the level of employment depends on the amount that the government does injects into the economy (Trudel, R., p 921). An increase in the government injection leads to an increase in the level of employment.

From the data we can determine the responsiveness of employment to the level of the employment. This can be done by determining the change in the amount of funding and the respective change in the levels of employment.

Responsiveness of employment to external funding = δY

δE

Once the Responsiveness of employment to external funding has been established, a singular point can be used to establish the autonomous employment rate in the absence of any funding. The two constants can then be used in projecting the levels of employment given any funding level.

The Ordinary least squares assist any statistician to establish the true levels of unemployment given any government injection (Griesgraber, J M., p 354). The injection within this context is resultant from the funding from the International Monetary fund.  The funding from the International monetary fund in this case is treated as the independent variable, while the level of employment is seen as dependent on the level investment which are treated as the amount of money that is funded by the international monetary fund.

6.2 Results of the test

The test clearly shows that the funding by the International Monetary Fund will have a positive correlation with the levels of employment (Dreher, A., p 234). If the conditions are followed to the letter by the recipient country, the result would produce positive returns. However, the initial stages may experience some teething problems. The teething problems would take the form of mass action from workers resisting the lay-offs and the restructuring process.

Lying off workers may also mean a reduction in the levels of employment. The level of employment may therefore seem to drop tentatively but then will pick up in the long run. This will be if the policies are effectively implemented. Overall, the efficiency of the programmes introduced depends on their feasibility; political, social, economic, cultural and social.

 

 

 

 

 

Chapter Seven

7.0 Conclusions and Recommendations

7.1 Conclusions

It can be adduced from the foregoing discussion that the IMF funding of the Polish government produced the requisite results (Heritage Foundation 2005). This is because since the implementation of the SAPs by the polish government, the economy ofPoland has remained on track through the years. The economy was even able to withstand the economic downturn that hit the world in the years of 2008/09 (United Nations Development Program).

The institutions that were restructured at the same time have remained incidental in the economic prospects of the Polish economy to date. One can therefore comfortably argue that the success of the Structural Adjustment Programmes largely depends on the suitability of their formulation and the efficiency and the effectiveness of their subsequent implementation.
7. 2 Recommendations

Subject to the foregoing discussion the recommendations can be made for not only the government ofPolandand the International Monetary Fund, but also any state or government that wishes to access IMF funding (Microfinance Network). This recommendation would see the general public see the essence of IMF intervention and change the presence perception on the institution.

First, the IMF should supervise and lobby for the accumulation requisite foreign exchange reserves by the member states. This will reduce the vulnerability of states to economic slowdown. Besides, the development of the policies for pecking on the conditions should be done with due consideration of the country’s political and economic environment.

The International monetary fund should also advice states like it was in the case forPolandon the best level of interest rates that would be appropriate for the domestic market. This will reduce the chances of excess money supply or money demand (Bird, G., Rowland, D., p 860). The interest rates should be held lower than is appropriate in the domestic market to sustain and stabilise the demand for the local currency.

The IMF should devise ways through which it can encourage countries to increase its export levels and reduce the amount of goods and services being imported. This will go a long way in ensuring that the amount of foreign reserves remains with the requisite limits (Ministry of Finance,RepublicofPoland Basic Information). Beside, the intensity of controls on the amount of capital imports should be increased. This can also be done through artificial promotion of capital exports. Overall this will assist in the stabilisation of economies,Polandinclusive.

WE ACCEPT