This presentation was given by Dr. Andrzej Kondratowicz, Ph.D, University of Warsaw, Lazarski University & the Forecasting Committee of the Polish Academy of Sciences in the Seminar: "Achieving economic growth in the periods of democratic transition: experience of Poland and Turkey” on Sunday, February 24, 2013 at the Faculty of Economics and Political Science, Cairo University - Egyptand the Conference: “Egyptian economy: challenges and future prospects” from February 23 to 25, 2013 at Ain Shams University - Egypt

1. CONFERENCE
The Egyptian Economy:
Challenges and Future Prospects
 CAIRO, EGYPT
 FEBRUARY 23, 2013

2. Successful Economic Reform
in the Context of Poland's Transition to Democracy
Dr. Andrew C. Kondratowicz
Lazarski & Warsaw University, Poland
Forecasting Committee of the Polish Academy of Sciences

3. MOTIVATION
& INTENDED RESULTS
I am NOT "a foreign adviser" to give you
answersto your problems
I can only humbly present a story of our
experiences in the past 25 years
Perhaps you will find it relevant for
applicable to your situation.
3

4. A possible subtitle of my presentation:
The Arab & East-European „refolutions” compared:
a refolution = reform + revolution
[after Timothy Garton Ash]
A revolution = a 1789 model
A refolution = a 1989 model

5. Hypothesis 1
revolutions are like cars: it is better to have a newer model
1989 > 1789
5

6. Hypothesis 2
the newer model is worth the price
(the price being „a rotten compromise”)
accept a [rotten] compromise
from Polish experience:
if you don’t accept a compromise
you will have to retry your revolution again and again
- It is costly!
(of course, all parties have to compromise)
6

7. Hypothesis 3
a compromise is possible, if there is some consensus about the
future shape of the economy
can you unite behind a number of common
goals even if only for a short time?
from Polish experience:
back in 1989 quite everybody hated communism
and quite everybody embraced capitalism and the market
(not necessarily now)
7

8. HISTORY
THE POLISH TRANSITION
PROCESS
8

9. The Polish background
For the record:
over twenty years ago an abrupt political regime
switchover took place in Poland [June 1989]
– and then spread to other then-communist
countries of the region [East- and Central-
Europe = ECE]
– and then even further to various parts of the
then Soviet Union.
9

10. The starting point of the Polish transition:
There was no blueprint "which way to go",
no previous experience.
It was the "sailing onto unchartered waters"
A. There was no economic transformation theory
B. There was no macroeconomic stability
(equilibrium) internally
C. There was a broadly understood stability externally
(i.e. on the global scale) – except that created by
the breakdown of the communist system itself

11. • The A + B + C above were construed in
economic terms, but they are also valid from
a political perspective

12. Now, what about Egypt
(& its neighbours) now?
How does Egyptian economy and society of
today compare with Poland in 1989?
The starting point: A+B+C =
• better knowledge of "transformation theory" +
• internal instability +
• larger external instability
__________________________________
A = existence of theory; B = no internal equilibrium; C = weak external equilibrium

13. THE DEPARTURE POINTS COMPARED
ECE & AW (ECONOMY, POLITY, BOTH?)
Poland 1989+ Egypt 2013
(East-Central Europe) (Arab World)
A (EXISTENCE OF THEORY) NO YES (?)
B (INTERNAL EQUILIBRIUM) NO NO
C (EXTERNAL EQUILIBRIUM) YES NO
13

14. GRAPH 1
EFI values ECE14 1990-2009, chained
EFI DATA
14

15. GRAPH 2
EFI values for AW11 1990-2010, chained
EFI DATA
15

16. EFI DATA
GRAPH 3. EFI values for AW11 & ECE14,1990-2009
17

17. Graph Y.
POLIT Index 1971, 1980 & 1989-2010; Min, Max & Mean
values for ECE_19 and Mean value for AW_11
10
8
6
4
2 ECE_19 mean
0 AW_11 mean
-2
-4
-6
-8
-10
10
8
6
4 ECE_19 mean
2 AW_11 mean
0
ECE_19 MAX
-2
ECE_19 MIN
-4
-6
-8
19
-10

18. Graph Y.
POLIT Index 1971, 1980 & 1989-2010; Min, Max & Mean
values for ECE_17* and Mean value for AW_11
10
8
6
4
2
ECE_17 MAX
ECE_17 MIN
0
ECE_17 average
AW_11 average
-2
-4
-6
-8
-10
*) ECE_19 without Ukraine & Russia 20

19. Successful economic transformation
called for changes in the following
areas
i. Ownership structure & the allocation mechanism
ii. Economic policies
iii. Formal economic institutions
iv. Informal economic institutions
 this is the biggest question mark!
 What could be a "role model" for Egyptians?
 What values will be accepted/adopted in the SR & LR?

20. 3 strategic points (from Polish experience)
• Reform has 3 dimensions: political, economic, social – in
1989 we "designated" 3 political leaders to deal with them
separately – seems a good idea
• When privatizing the conomy the privatization of SOEs
was less important and in Poland came later – the
endogenous growth of small and medium sized enterprises
(SMEs) was crucial in combatting transformational
recession – but this requires deregulation (PL 1988 / 1997)
• People can do it! Let them do it! Deregulate & promote
economic freedom. SMEs will not solve all problems ,but
they are vety important 22

21. Alternative scenarios of the tranformational recession paths,
depending on the SME sector dynamics
23
source: Winiecki (2004), p.51 & his Publisher 

22. Final remarks 1/6
 International economic ramifications are today not as
good for the Arab transforming economies, as they
were for Poland/ECE 20+ years ago – the world
economy was then more stable.
 Global political situation may be actually working for
the Arab countries – they are new big players on the
scene. This creates opportunities.
 Economic experience of the post-communist
transformation is around - perhaps some lessons may
be learned (technically).
24

23. Final remarks 2/6
1. Polish/ECE most important lesson:
Gradualism in reforming has its beauty, but ...
„political time" for reforms is short."
Use it while you can.
2. The deeper the crisis, the longer the political window
of oportunity for reforms (i.e. of social acceptance of
dramatic changes).
3. Later, the Olsonian [re: Mancur Olson] redistributive
coalitions re-emerge and they block reforms (since
their vested interests are hurt).
25

24. Final remarks 3/6
 A comprehensive change in formal institutions
and policies is a necessary condition for
economic success (and it shows in the EFI
scores), but
 Informal institutions are crucial for solidifying
the early changes / successes – if they do not
change we get "unfinished transformation"
(like some former USSR Republics) or regime
reversals.
26

25. Final remarks 4/6
The ROW – especially the EU – has been helpful (in Poland & the
ECE):
1. It provided some funding when it was especially needed
2. It provided some technical assistance when it was especially
needed
3. It provided a "role model" for many Poles and ECE citizens
4. It provided common institutions for the entire region, thus
decreasing the transactions costs
Could it work the same/similar way for Egypt?
27

26. Final remarks 5/6
1. "The money from the EU" has been important but not
crucial for Polish/ECE reforms – these funds came much later.
2. Nevertheless, the early debt cancellation (by 50%) by the
Clubs of Paris and London were crucial for stabilizing the
economies in crisis.
3. So was the technical assistance (in building modern economic
institutions) in the early phases of transformation
4. Therefore, foreign aid cannot and should not be
underestimated
28

27. Final remarks 6/6
 Informal institutions must change in order to solidify the early
reforms (i.e. the changes in policies and formal institutions)
 It has been believed until recently, that informal institutions
generally are very slow to change
 Fortunately, recent research shows that some of them may
change relatively quickly – this is a chance for the Arab
countries
 It remains to be seen
if their societies be willing and able to do it.
29

28. 30
Ras al Jinz, Sur, Sultanate of Oman

29. Or like this? 31
Will it be like this?

30. 32
haps like this – 1956, 1968/70, 1976, 1981 & 1989 – the Polish way?

31. THE END
33

32. 36

33. Closing remarks 1
Q: Have the roads to prosperity passed through the
Land of Economic Freedom?
A: For most core EE14 – yes.
- Ukraine is a notable negative exception.
- Russia another one, although with some improvement
in 2008.
- China's EFI is improving >Russia!
- non-EU Balkan economies (5) are doing worse than
EE14 (except for Montenegro & Macedonia)
- ex-Soviet republics from Asia are doing well (6,99)
except non-measured
Turkmenistan, Tadjikistan, Uzbekistan which are
considered transformational fiascos (as is Belarus)
37

34. Closing remarks 2
 Those considered transformatonal failure have
also failed in improving EFI.
 Oleh Havrylyshyn in Divergent Paths in Post-
Communist Transformations (2006) classified the
above as countries of either limited / reversed
reforms or as gradual but delayed reforms.
 In both groups the likelihood of rent-seeking
activities of new olygarchs was very high; in
some cases it ended up in what he called "the
state capture" by those olygarchs colluding with
one another. 38

35. Closing remarks 3
 The positive scenarios present in the EE14 were to a
large extent (and may still continue to be) made possible
and amplified by beneficial institutional changes caused
by accession to the EU.
 What counts is not only "goodness" of some EU
institutions but also their spread over a sufficiently large
economic area. As Douglass North was stressing (1986)
not only good, but common institutions decrease
transactions costs, thus positively influencing economic
growth of a given region.
 Those beneficial institutional changes have been
reflected by increasing levels of EFI.
39

36. A final question
 In EE14 we have witnessed quite dramatic economic changes
over the past 20+ years. They resulted in enormous increase in
the standards of living within just one generation.
 The forces at work may be characterized as a push-pull
process: an initial push toward a liberal free market-based
economy and a subsequent pull toward the institutions of EU
(read: WE) that generally mean higher levels of EFI (except
for Area I).
 Can the Arab countries find and implement some similar
ways to boost their EFI and economic prosperity?
 This remains to be seen, but examples of some Arab
economies – like Oman, its economic policies and institutional
changes – are encouraging. 40

37. THE END
41

38. 42

39. Emerging economies of ECE:
economic freedom vs economic performance:
 Economic freedom has increased, but what about
economic performance?
 In most of ECE there has been a dramatic change in
economic prosperity: 25 years ago average monthly
salary in Poland was below $20 now is well above
$1000
 Those post communist countries that are considered
transformatonal failure have also failed in improving
EFI
44

40. Some examples of weak performers
among post-communist economies
(in terms of EFI)
 Ukraine is a notable negative exception
 Russia another one, although with some improvement in
EFI over recent years
 China's EFI is improving >Russia!
 non-EU Balkan economies (5) are doing worse than EE14
(except for Montenegro & Macedonia)
 ex-Soviet republics from Asia are doing well ( 7.0) except
non-measured Turkmenistan, Tadjikistan, Uzbekistan
which are considered transformational fiascos (as is
Belarus)
45

41. A threat of unfinished and reversed reforms
 Oleh Havrylyshyn in Divergent Paths in Post-
Communist Transformations (2006) classified the
above as countries of either limited / reversed
reforms or as gradual but delayed reforms.
 In both groups the likelihood of rent-seeking
activities of new olygarchs was very high; in
some cases it ended up in what he called "the
state capture" by those olygarchs colluding with
one another (a menace to the Arab Spring?).
46