After Poland’s Elections: Democracy and Keynesianism?

Yves here. This post breaks with conventional narratives, that the loss of right-wing parties in Poland’s election last weekend was a victory for democracy and a pro-EU posture. Jan Toporowski instead contends, “It was the economy, stupid.” It argues that Poland had suffered under post-USSR shock-doctrine policies, which were somewhat alleviated by Polish entry into the EU (movement of workers out of Poland to higher-wage countries; new inbound investment to arbitrage labor costs). Ironically, the still top-vote-getting but diminished party PiS, despite being right wing, had an economic critique of these reforms and stood for policies that preserved incomes in poor rural areas. But it did not adequately live up to its talk.

By Jan Toporowski, Professor of Economics and Finance, SOAS; Visiting Professor of Economics, University of Bergamo; and Professor of Economics and Finance, International University College. Originally published at the Institute for New Economic Thinking website

The Polish parliamentary elections on 15 October may have confounded the hopes of all parties. The official vote counts will come out later this week, but the most important results seem clear. The governing party, Prawo i Sprawiedliwość (Right and Justice or PiS) has dominated the Polish government since 2015. It has challenged the democratic norms that were accepted when Poland joined the European Union in 2003, by suborning Polish media outlets and subjecting the judiciary to political pressure and appointment. Along with its corruption, the ruling party’s conspiratorial policymaking has alienated coalition partners in the past and will hobble its efforts to stitch together a majority.

PiS has won more votes than its rivals; but probably not enough to form a government, following a bitter three-way contest with the other parties – the centrist Koalicja Obywatelska (Citizens’ Coalition) and another arch-conservative grouping, Zjednoczona Prawica (United Right). Even before the election, the centrist Koalicja had been sounding out possible support in both Zjednoczona Prawica and Trzecia Droga (Third Way, a grouping of small centrist parties and the Polish Peasant Party), both smaller groupings with fragile cohesion that appeared ready to sacrifice principle for the sake of a place in government.

The real surprise is the failure of the opposition to capitalize on the incompetence of PiS. After all, the opposition has a natural constituency in Poland’s cities, bursting with youthful outrage at the continued oppression of women and the LGBTQ communities, the seemingly endless program of legal restrictions on abortion, the picking over of history for pretexts to quarrel with partners in the European Union, and the incontinent clericalism that combine to remind Poland of social backwardness.

Their outrage, directed at the right-wing parties, is not fully represented by the Koalicja and would find natural expression in a party of the left. That party should be the Stronnictwo Lewicy Demokratycznej (the Left Democratic Alliance or SLD), which contains the remnants of the former Communist ruling party, the Polska Zjednoczona Partia Robotniczna (Polish United Workers’ Party) and associated parties in the Nowa Lewica (New Left) alliance.

However, after dominating Polish governments in the 1990s and then from 2001 to 2005, in the 2011 election, the Left Democratic Alliance barely scraped together sufficient votes to get into parliament. In 2017, it even lost its remaining members of the lower house of the legislature, the Sejm. In the last elections in 2019, the SLD and its allies managed to secure just over 12% of the vote. On Sunday the Nowa Lewica alliance secured less than 9%.

The decline of progressive institutions (the labor movement and its allies) and socialist ideas is often attributed to the country’s experience under Communism. The Second World War devastated Poland. On its way to Berlin, the Soviet Army had installed a Communist government in Warsaw. A brief period of reconstruction was followed by Stalinist repression, which eased after 1956. But the failure to raise living standards was followed by a foreign debt crisis, starting in the 1970s, then a brief period of military rule, food rationing, and austerity. The coming of free elections in 1989 was supposed to change all this. With the dissolution of the ruling party, its leaders coalesced in social democratic parties that embraced democracy. Fatally, those parties, later absorbed into the SLD, embraced more than just democracy. In their desire to place themselves at the center of Poland’s new political consensus, the post-Communists took to their hearts the ‘shock therapy’ that transformed Poland into a market economy.

Poland’s Shock Therapy

Poland’s transition to a market economy was masterminded by the minister of finance in the first post-Communist government, Leszek Balcerowicz. He was advised by the American economist Jeffrey Sachs, who was already famous for promoting abrupt market liberalization in Latin America on behalf of the International Monetary Fund, in programs known as the ‘Washington Consensus.’ In Poland, Balcerowicz persuaded himself that a shock of this kind would convince Poland’s foreign creditors that the government was serious about abandoning state control over the economy. But institutional change was not just a negotiating gambit over Poland’s foreign debt. Balcerowicz shared the conviction of most of the economic reformers of the time that markets and free enterprise are preconditions for democracy to function.

Since the Stalinist industrialization drive at the end of the 1940s, successive economic reform projects had market forces as their common solution to the imbalances in the economy. Under Communism, and after, the followers of Oscar Lange focused on how socialist planners could mimic markets in their models. On the Right, economists like Balcerowicz embraced actual markets as the only way to get correct prices. Across the political spectrum, the opposition to one-party rule linked markets with democracy, since economic reformers also wanted political reforms.

Almost overnight Balcerowicz pushed through legislation to liberalize the economy, remove price controls, make the Polish currency convertible, and eliminate the fiscal deficit by reducing substantially government subsidies to state enterprises. In order to deal with inflation, partial indexation of wages and incomes was introduced. Faced with the reduction in subsidies, state enterprises reduced production and raised their prices. Hyperinflation took hold and, along with it, mass unemployment. In the government, economists advised that this inflation was necessary to bring down real wages and eliminate the money balances built up during the last decade of Communist rule, as shortages of consumer goods left households with incomes but little on which to spend.

The sharp decline in economic activity lasted far longer than Balcerowicz and his advisers had planned. Real wages did indeed fall. But the excess money balances had long ago been converted into foreign currency. The result was a major redistribution of incomes from workers to the better-off middle classes, who were the main beneficiaries of the reforms. For the next two decades, unemployment did not fall below 13% and over two million Poles (one in ten of the workforce) emigrated. The situation was especially bad during the 1990s when public infrastructure rotted. But its worst effects were in smaller towns most dependent on state subsidies and state industrial policy. In the north and west of the country where state farms were concentrated, two generations of workers in rural isolation were socialized into idleness and its symptoms of violence and alcoholism.

The situation was only effectively reversed with Poland’s entry into the European Union, as foreign companies started to take over Polish businesses to assemble products with cheap Polish labor and Polish cities spruced up with EU regional aid.

When it governed (between 1993 and 2005) the SLD turned a blind eye to the depression that hit the Polish economy or, in its telling, took a long-term view of these economic difficulties. Fearful of scrutiny of its Communist origins, the party avoided active government policy that might compromise adherence to the Stability and Growth Pact of the European Union. Even today the party considers its greatest achievements to be Poland’s membership of NATO and the EU.

By contrast, PiS emerged in the early years of this century with a devastating critique of the betrayal of Polish aspirations at the time of the fall of Communism. In their first free elections, in 1989, Polish people had voted for full employment and fair wages, rather than to lose their jobs and become impoverished. PiS criticized the neoliberalism of Balcerowicz and the giveaway of Polish jobs and enterprises that came with privatization. Its economic program was simple: child benefits, higher pensions, and keeping ownership of Polish enterprises in Polish hands. If that meant holding onto state enterprises and extending the party’s control over Polish media to the point of excluding critical voices, then so much the better for embedding its control of the state in the hands of patriots.

Democracy and Full Employment

Once it achieved power, PiS did little to reverse the decline of the Polish economy. EU subsidies and foreign direct investment did that. But, in its embrace of social welfare and Big Government, PiS has made life very difficult for its opponents. The Koalicja Obywatelska, under Donald Tusk, has difficulty in putting aside its early criticism that raising pensions and paying złoty 500 (US$120) per month for each child is fiscally imprudent. The welfare spending of PiS has poured money into the Polish regions depressed by the Balcerowicz reforms. Opponents may argue that this and higher pensions continue the socialization into idleness. But it is not possible to overlook the uplift that it has given to many poor households in the country. The return to democratic norms may delight the thinking urban electorate in Poland, and observers in European capitals. But the big question is whether such a democracy is sustainable.

The narrative that emerges from Poland’s politics is that democracy in that country has been subverted by PiS, an authoritarian and intolerant conspiracy that is corrupting the institutions of the state and buying support from a docile electorate. This overlooks the consequences of Poland’s bungled dismantling of state controls over the economy and the willingness of liberals and the left when it held power to tolerate mass unemployment.

It also overlooks historic precedent in the experience of Polish democracy in the inter-war period of the last century, when the country succumbed to military dictatorship. In the 1930s, an earlier generation of political economists, Oskar Lange and Michał Kalecki concluded that, far from strengthening workers’ resolve to create a better, more democratic world, the immiseration of the working class directs that resolve to intolerance, violence, xenophobia, and fascism, and business values order over politics. This element of their political economy was omitted from the post-war discussion of economic reforms in Poland since Poland had full employment under Communism and the West had near-full employment. Virtually all right-thinking people deprecated the lack of democracy under Communism, and the Left understood that full employment was necessary for social democracy. When democracy was achieved, anniversaries of that achievement were celebrated. But the need to sustain that democracy with full employment was ignored. Full employment was supposed to be the outcome of markets working properly, rather than government action.

Thirty years ago, post-communist governments abandoned the full employment that had been agreed with the Solidarity trade union by Poland’s last Communist rulers in their Round Table talks in Gdańsk. In accepting mass unemployment, those governments and the democratic parties that constituted them removed the economic foundation for Poland’s democracy. It is full employment, rather than free markets, that is the precondition for democracy. As the largest party, PiS will have first shot at assembling a coalition. But it is hardly the only danger for Poland’s democracy.