Capitalism in Poland and Its Transitional Stage Research Paper

Introduction

At the edge of the 1980s and the 1990s, European countries with transition economies commenced on a way to democracy and a market economy. Consequently, sets of reforms were initiated, including such crucial processes as macroeconomic stabilization, liberalization, and the building of institutional grounds for a market economy. It resulted in the necessity to create the financial systems almost from scratch because those systems in conditions of central planning were reflecting decisions of the authorities. All the countries had a similar purpose to create a stable and healthy financial system (Romaniuk & Sznajderska, 2013). Still, the achievements of every state were unique due to the impact of initial economic conditions, institutional diversity, and the models of capitalism that the countries selected to follow. Countries of Eastern Europe are of particular interest because they had to develop new economies on the post-communist background. One of the states that accomplished a successful transition from the post-communist economy to capitalism in Poland. This paper investigates the type of capitalism developing in Poland and the factors that led to the current economic situation in the country including institutional changes in the financial system.

Capitalism and its Diversity

Before analyzing the development of capitalism in a specific country, it is necessary to discover its types. One of the broadly accepted classifications of capitalism is the one suggested by Bruno Amable (as cited in Mykhnenko, 2005, p. 2). The researcher distinguished five diverse models of capitalism that are grounded on a variety of institutional complementarities. Thus, Amable suggests such models as the market-based economies (also known as the Anglo-Saxon model or liberal market economies); social-democratic economies (also called Scandinavian); Asian capitalism; Continental European capitalism, and South European or Mediterranean capitalism. Every type has its peculiarities in the functioning of product markets, labor market, financial system, social protection, and education system. Consequently, to comprehend a type of capitalism, it is necessary to analyze each of this institutional complementariness.

Institutional Changes in the Financial System

The decades of socialism had a significant impact on the transition countries and resulted in the lack of institutions involved in the provision of the functioning of a market economy. The system that suffered most of all was the financial one (Romaniuk & Sznajderska, 2013). In the broad sense, institutions are critically important for the successful transition of countries with a centrally planned economy to a market economy. Institutions determine “the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction. In consequence, they structure incentives in human exchange, whether political, social, or economic” (North, as cited in Romaniuk & Sznajderska, 2013, p. 126). The major institutions related to economic development comprise formal ones such as financial markets, banking supervision institutions, as well as informal institutions such as laws, accepted rules of behavior on the market, the relationship between agents, and others.

Poland came to transition with a high level of inflation that involved a fiscal deficit. Also, the country lacked the capital market and had to apply debt monetization to cover the fiscal deficit (Romaniuk & Sznajderska, 2013). One of the reforms employed by the country was in the bank sphere and included the separation of the central bank and the commercial ones. At the initial stage, it resulted in banking crises. Finally, Poland successfully stabilized its banking system. As for the financial sphere, it is less safe in Poland compared to other European countries. The development of the capital market was guided by an independent Securities Commission and implied the restricted regime of investor protection (Romaniuk & Sznajderska, 2013). The development of the financial market, on the whole, is also assessed by its response to the financial crisis. In Poland, the central banks were able to restore the balance due to specialized programs, which is the evidence of a developing financial system and productive functioning of the related institutions.

Current Type of Capitalism in Poland

Currently, Poland’s emerging capitalism cannot be characterized by well-developed integral institutional complementarities. Mykhnenko (2005) describes it as a ‘post-communist’ model of capitalism, a distinguishing feature of which is institutional ambiguity. The researcher defines post-communist capitalism as “an economic system in which heavily regulated product markets are combined with a small and inactive, bank-based financial system to originate comparative advantage in low technology- and resource-based manufacturing industries” (Mykhnenko, 2005, p. p. 31). On the whole, to define the type of modern capitalism in Poland, it is necessary to analyze the components of Amable’s theoretical model. It comprises the development and peculiarities of product markets and their regulation; labor market, its institutions, and wage-labor correlation; the financial system as well as corporate governance; the sector of social protection; and the education sector.

Product Markets and Their Regulation

Usually, public regulation determines the nature, form, and intensity of competition among the companies involved in the markets of goods and services. Thus, particular institutional settings are needed to regulate markets. The regulatory environment of the product markets comprises such regulatory domains as state control over business enterprises, barriers to entrepreneurship, and explicit barriers to international trade and investment (Mykhnenko, 2005). Speaking about Poland, it has a highly restricted product-market regulation. Because regulatory domains can be evaluated according to a scale range from 0 to 6 points where o is for the least restricted regulation while 6 is for the most restrictive ones, Poland has the following indicators. Thus, the overall indicator for product market regulation is 2.8, which is calculated based on state control (3.6), barriers to entrepreneurship (2.3), and barriers to trade and investment (2.4) indicators. It means that Polish capitalism involves heavy regulation of product markets, expanded government participation in the economy, the significant role of the public sector, the high rate of coordination of economic agents, medium level of administrative strains for entrepreneurs, and active trade protectionism (Mykhnenko, 2005). The scope of these indicators approximates Poland to the model defined by Amable as the Mediterranean, which is characterized by a high level of state control, intensive administrative and economic regulation, as well as many formal barriers to foreign investment and trade.

Labor Market

To receive a comprehensive picture of the labor market, the analysis should include both the aspects of wage-labor correlation and the functioning of labor market institutions. Thus, the focus of this analysis is the industrial and employment relations and their regulation provided by capital, labor, and state institutions. One of the significant aspects here is employment protection legislation, which can be assessed with the use of OECD-developed comprehensive technique (Mykhnenko, 2005). The existing indicators are summed up in two major domains, employment protection legislation regular contracts, and temporary contracts. According to a similar scale range from 0 to 6, regular contracts in Poland are evaluated as 2.3 and temporary ones as 1.4, which makes an overall indicator of employment protection legislation at the rate of 1.9. Consequently, the political economy in Poland proves to have a moderate level of employment protection. This fact puts the country’s capitalist model between the liberal-market-based and social-democratic ones.

As for the wage-labor correlation, it also depends on the nature of industrial relations. To analyze this aspect, it is necessary to consider such variables as “wage-bargaining co-ordination, centralization and corporatism, the role of governments in bargaining, trade union density, industrial disputes, and practices of national social dialogue and relations between managers and employees evaluated through the collective agreement coverage” (Mykhnenko, 2005, p. 8). Thus, industrial relations in Poland are characterized by decentralized wage bargaining, the low level of coordination, highly sporadic labor unionization, as well as poor coverage of the collective agreement. Manager-employee relationships are generally non-confrontational. Also, strikes are not typical of the Polish labor market. Despite a certain degree of state involvement in industrial relations, which is evident from a moderate level of collective bargaining in the country, such indicators of wage bargaining as limited coordination and centralization are similar to the characteristics of decentralized flexible labor markets that are typical of liberal market-based economies (Mykhnenko, 2005).

The aspect of employment policy is another one to consider in the analysis of wage-labor correlation. In Poland, the wage differentiation within the manufacturing sector and economy, on the whole, is dramatically high in conditions of post-communism. One of the possible reasons for high wage flexibility in Poland is the deregulation of labor markets. As for the average net replacement rates which indicate the level of state intervention into labor markets, Poland approaches the market-based model, because this rate is rather low. On the whole, it can be concluded that in the aspect of wage-labor correlation and labor market institutions, Poland is gradually shifting from its post-communist political economy to the market-based model.

The Financial System and Corporate Governance

The domain that involves the financial system and corporate governance is one of the decisive ones for defining the type of modern capitalism. Thus, the financial intermediation sector can be assessed through several indicators such as the general size of the capital market, the sum of domestic assets of commercial banks, as well as capitalization of the stock market to GDP (Mykhnenko, 2005). The analysis of the mentioned aspects indicates that the financial system of Poland is underdeveloped and does not meet the characteristics of any of the modern capitalism models identified by Amable. First of all, the financial sector of the country is small. Moreover, it is majority bank-based, which does not correspond to the market-based model of capitalism. On the whole, such a post-communist capital market can be characterized as inactive, rudimentary, and with a low sophistication rate. Also, there are a few institutional investors. Generally speaking, the financial system is elementary and underdeveloped.

The underdevelopment of the financial market in Poland is closely connected with undistinguished standards for corporate governance and generally poor business environment provision (Mykhnenko, 2005). According to the evaluation of representatives of the business community including entrepreneurs and company managers, the major barriers to making business in Poland are taxation, finance, corruption, and judiciary (Mykhnenko, 2005). At the same time, infrastructure was considered the least significant obstacle to entrepreneurship. As for the corporate control in Poland, it is underdeveloped as well. It is characterized by extensive protectionism against foreign businesses.

Social Protection

To discuss the issues of social protection and welfare, it is necessary to analyze the existing types of welfare states typical of contemporary capitalism. Thus, there are such welfare models as ‘residual welfare,’ ‘minimal universal,’ and ‘conservative corporatist’ with the ‘Latin paternalist’ subtype (Mykhnenko, 2005). The welfare system of Poland has a level of social expenditure of 22.3 percent of GDP, which makes it one of the most generous European social protection systems. Also, the level of public spending on pensions is nearly the highest in Europe with 15.8 percent of GDP (Mykhnenko, 2005). Such division approaches Poland to the ‘Latin paternalist’ subtype of the conservative welfare model. On the whole, the state’s involvement in the economy is high in Poland, which results in extensive government sector expenditure.

Education Sector

The education sector, although not directly related to the economy, is the final institutional foundation that has to be considered during the identification of the capitalist model. The educational system of Poland was influenced by the Continental European model of France (Mykhnenko, 2005). One of the peculiarities adopted from the European model that distinguishes it from the post-communist ones is the low level of differentiation between general and vocational programs. The assessment of the education sector is grounded ion such indicators as the duration of compulsory education, enrolment ratios (gross primary, secondary, and tertiary), public expenditure on education, private expenditure on tertiary education, gross domestic expenditure, and researchers (Mykhnenko, 2005). The analysis reveals that the educational system of Poland preserves a high level of publicly-funded institutions, which is the impact of post-communism. Also, polish schools are characterized by relatively short mandatory education. Moreover, weak private funding of research is typical of the Polish education sector. As for life-long learning and lasting professional training, they are not significant in the system of the country’s education. On the whole, Poland’s education sector resembles that typical of the Mediterranean model (Mykhnenko, 2005).

The education budget priorities of Poland have the following characteristics. The greatest part of Poland’s education expenditure is distributed between primary and secondary education. Thus, the system focuses on general, transferable skills. This approach to budget division is typical of market-based and Mediterranean educational systems found in modern capitalism. The share of post-secondary education is also high. As for the division of graduates, Poland produces significantly fewer science graduates compared to the number of technology and engineering ones. On the whole, Poland has adopted some major institutional features of capitalistic European education systems still preserving its traditional post-communist characteristics. At present, the Polish education sector is relatively weak and focused on elementary education that provides basic general skills. Generally, some aspects of the education sector in Poland are close to the Mediterranean model of education.

Conclusion

Summarizing, it is necessary to mention that the countries of post-communist Eastern Europe developed diverse forms of capitalism. The institutional changes that influenced this process resulted in certain similarities between countries. Still, every state with a transition economy developed its specific model of capitalism which resembles the models adopted in other countries but still has many peculiarities. Speaking about Poland, its emerging capitalism cannot be characterized by fully developed institutional complementarities that are crucial for defining the type of capitalism. It can be concluded that Poland currently does not have a definite capitalism model bit is in the transitional stage preserving its post-communist type. It has a strong impact on the development of the institutional forms of the national production model as well as those of consumption and distribution. This ‘post-communist’ model of capitalism is characterized by the so-called institutional ambiguity. Its typical features include heavily regulated product markets, small and bank-based financial system that demonstrates low activity.

Wage-labor correlation is also specific in post-communist capitalism and is usually opposed. Moreover, social protection systems in post-communism are diverse and can vary from the conservative Continental European welfare model to limited Liberal minimal social protection one. Finally, the education sector is not homogenous in post-communist capitalism due to the blending of the country’s original education system and the adopted aspects of more developed countries. On the whole, the interconnection among the institutional structure, comparative advantage as well as macroeconomic performance of Poland as a post-communist country can be characterized as ambiguous. Despite evident progress, it is difficult to make conclusions if the existing post-communist model can develop into a new model of modern capitalism. Generally speaking, Poland has some typical features of the Mediterranean model in the finance sector due to a high level of state control, intensive administrative and economic regulation, as well as many formal barriers to foreign investment and trade. Still, it resembles both liberal-market based and social-democratic models in labor regulations and market-based model in the issue of wages. Consequently, the country is still on the way to developing modern capitalism and needs reforms if its institutions to approach to capitalism in its contemporary meaning.

References

Romaniuk, J., & Sznajderska, A. (2013). Institutional changes in the financial systems of Poland and the Czech Republic. Comparative Economic Research, 16(1), 123-142.Web.

Mykhnenko, V. (2005). What types of capitalism is Eastern Europe? Institutional structures, revealed comparative advantages, and performance of Poland and Ukraine. Proceedings of the conference on Varieties of capitalism in post-communist countries. Paisley, Scotland.