Peggy Simpson
Peggy Simpson

Fellowship Title:

Polish Entrepreneurs after the 1989 Roundtable

Peggy Simpson
December 17, 2001

Fellowship Year

Research chemist Malgorzata Dudek had worked for two decades at the technical university in Gliwice and in 1983 decided she wanted to apply that knowledge in a startup business.

That proved too daunting. Her own knowledge was not the problem. She knew the state-owned chemical industry well and had tentative orders to make components for a nearby plant. But under state socialism, individuals could not simply open a business. They had to get permission from the local government. And the Gliwice doorkeepers said no, in a variety of ways, over the next five years.

The Polish communist politicians were skeptical if not hostile toward private business, even in the 1980s when party officials were experimenting with ways to revive the stagnating “shortage economy.” There were no clearcut rules to qualify to start a business; this was a political rather than an economic decision.

Sixteen years later, Dudek said the gist of the city disapproval was that “I was a scientist and I should go back and stick to scientific research. I shouldn’t have anything to do with business.”

She refused to listen. And in 1989, a time of enormous political and economic flux which culminated in a peaceful handover of power from the communist rulers to the Solidarity opposition, Dudek got a green light from the city and opened her first business. It lasted less than two years before falling victim to the collapse of the Russian market, which since the 1950s had absorbed production from much of Poland’s industry, from chemicals to textiles, shoes to furniture.

Failing to find other markets for the chemical product, she went far afield in her second business, opening a cut-and-stitch sewing shop for a German mail-order clothing company which she located through a Gliwice native living in Germany. She later designed her own fashion line for Polish boutiques, but by 1998 had turned to making clothes for the European-owned hypermarts which are having explosive growth in Poland.

“They can take 10,000 blouses a month,” Dudek said, “and they pay up front,” unlike the boutiques.

Today, her Modex Fashion Company is one of the top employers in Gliwice, the second largest city in Silesia, with 180 workers in the sewing factory in Gliwice and with hundreds more working on contract from 21 Polish villages and small towns.

Dudek is an example of the stubborn, innovative and educated entrepreneurs who have revolutionized the Polish economy. More than two million new businesses were created in 1989-91, providing a private-sector base that has grown rapidly in size and numbers, generating a bottom-up growth that propelled Poland to one of the strongest GDP growths in Europe by the late 1990s. The startups absorbed millions of people facing layoffs from state factories, jump-started the computer and financial services sectors and met pent-up consumer demands in both goods and services.

Poland became the first transition country to recover economically, despite the collapse of its major markets in Russia. It has made simultaneous systems-switches in both democracy and the economy. Local and regional governments now have more tax-and-spend authority and the new generation of entrepreneurs have formed business associations to represent themselves, countering the onetime monopoly “chambers” which had tried to retain their ability to speak on behalf of all economic actors (for a mandatory annual fee).

Poland is a role model for other transition countries. What is not fully understood, however, is the huge role played by rank and file Poles who proved to show far more entrepreneurial energy and expertise than either domestic or foreign analysts had predicted in 1989. Nor is their prosperity clearly seen as building on the reforms put in place by Leszek Balcerowicz in January 1990.

Balcerowicz’s “shock therapy” policies had a depth and breadth that both changed behavior and changed the economic reality, enabling Poland to make its giant U-turn from a centrally planned socialist system tied overwhelmingly to the Soviet bloc to a democratic market economy doing most business with the West.

In retrospect, Prime Minister Tadeusz Mazowiecki’s selection of Balcerowicz was a crucial element in the Solidarity government’s success. Mazowiecki had been turned down by two Polish economists and he barely knew Balcerowicz but told him he was looking for “his Ludwig Erhard,” the architect of Germany’s postwar economic recovery.

While little known internationally and not a political activist within Poland, Balcerowicz had equipped himself for the job of Poland’s Erhard.

As an international economics professor at the Central School of Planning and Statistics in Warsaw (now the Warsaw School of Economics), he had begun weekly seminars in 1978 with other young economists on economic reforms in Poland. When the communist government agreed to recognize a Solidarity independent free trade union in 1980, the “Balcerowicz group” models were on the table. But when the Solidarity movement proved to be a magnet for anti-communist fervor well beyond the union itself — half the adults had aligned themselves with Solidarity at its height in 1981 — General Wojciech Jaruzelski imposed martial law, outlawing Solidarity and jailing its leaders. Genuine economic reforms were off the table.

By 1982, Balcerowicz had resumed regular economic seminars with professors and key students, this time looking at reasons why socialism had proved unable to reform itself. On sabatticals abroad, he studied Erhard’s reforms in depth as well as economic transitions in South Korea, Taiwan, India and Latin America.

And, he boned up on the “social psychology” of change, especially Leon Festinger’s theory of cognitive dissonance which contends that people are far more likely to change their attitudes and behavior if faced with radical changes they consider irreversible, rather than with gradual changes. He concluded that socialist reforms had failed because they were not radical enough, that a critical mass of change was never reached before they were scuttled.

With inflation running at 2,000 percent in late 1989, shortages causing hours-long lines for daily food staples, the currency plummeting in value — and with a political uncertainty about the Soviet response to the peaceful takeover by Solidarity— the stage was set for the radical blueprint for change Balcerowicz introduced in January 1990.

“Shock therapy” policies liberalized foreign trade, stabilized the currency, ended most subsidies, retained wage-increase controls and privatized everything small immediately. Privatizing the print and radio media also was a first-year priority. There also was close cooperation with the central bank coupled with moves to make the bank independent from political pressure by 1991, along with introduction that year of a Securities and Exchange Commission (modeled 100% after the U.S. version with its strict “transparency” rules on all deals to keep investors informed) and the Warsaw Stock Exchange, with began with the listing of five former state-owned enterprises.

These might have been radical but they drew little opposition, even when people did not know what exactly was happening. That was largely because of the intense feeling that Poland had won a rare opportunity to re-unite with the West — and to end the era that began at Yalta when the Western leaders implicitly signed off on Stalin’s postwar ambition of absorbing Poland and other eastern-central European countries into the Soviet orbit.

In addition, entrepreneurs such as Dudek moved to seize the moment. They no longer needed to ask permission to start a business. They could count on a stable currency, unlike in the previous decade where it lost value steadily, making planning impossible and fueling the attitude that it was better to stand in line for hours to buy what the stores had today — because the zloty would be worth less tomorrow. Businesses could export what they wanted without having to go through government foreign trade agencies. They could import technology to help them build cutting-edge factories or high-tech service businesses. And they could draw on a skilled workforce where many people were being made redundant from state bureaucracies and factories, where the state was eager to rent or sell warehouses or parts of factories which could be re-tooled for marketable products by startup private companies.

A key political topic, revived last spring with the 10th anniversary of the Round-table negotiations that led to the peaceful transfer of power in Poland, remains whether the Solidarity opposition won freedom but the communist technocrats and “connected” nomenklatura managers won the economic power.

At a University of Michigan seminar on the Roundtable talks, this paranoia surfaced repeatedly. Former U.S. Ambassador John Davis says that the nomenklatura managers and the OPZZ union created by the communist party when Jaruzelski banned Solidarity in 1981 were aligned against reforms being contemplated at the talks. They wanted to keep what they had; reforms would give them more competition.

It was undoubtedly true that the bulk of Solidarity activists had been kept far from any managerial posts — and that the nomenklatura managers had gained much experience in the 1980s from their positions. They also had an inside track when factories were split into component parts for privatization or leasing. And some sweetheart deals had been forged between the political elites, when state companies could buy raw materials at cheap, subsidized prices but could sell at “market” rates for huge profits.

The Balcerowicz plan ended many of those subsidies, nipping some connected-company abuses in the bud. And many entrepreneurs had no significant political connections; they started companies that took private the skills they had used in the state sector. A Poznan engineers who worked for a giant state ship-engine company quit to make bathroom heaters; a Bialystok engineer quit her state job to make automatic garage doors, something she had never seen except in pictures. A dozen architects of sewage systems left the 300-person state bureaucracy that designed waste-water treatment facilities for all cities — and started not just their own design firm but also employed people to build the systems.

Even with connections, there were plenty of forks in the road that challenged the entrepreneurs. This was especially true after the Russian market collapsed. But even before that, the business infrastructure was remarkably ill-developed, especially in such essentials as distribution. Connections from the past didn’t help. Only hard work, ingenuity and trial-and-error experiments provided solutions to forging nationwide sales and marketing outlets.

The Gliwice entrepreneur, Dudek, did not have a straight-line success with her second business. Once her emigre friend told her about the German mail-order clothing market, she still had to get up to speed on the sewing business. A neighbor worked at a state garment enterprise which also was reeling from the Russian crisis. No, the neighbor said, the German blouse patterns were not particularly complicated and, yes, she could bring some other women from the Gliwice garment factory to stitch up the first 100 blouses after work.

When the trial run brought major reorders, Dudek then found an abandoned state industrial building for her startup sewing-assembly operations and staffed it with women from the state sewing enterprise.

With some forward financing from the Germans and from a regional economic development fund, Dudek’s husband went to Berlin to buy six new industrial sewing machines. They were in business. She subsequently switched German companies several times. And her goal of a high-fashion line for boutiques proved less than fruitful when she realized the boutiques only paid her after they made sales (and sometimes not then.)

By the time the hypermarts were in high gear, and desperately searching for Polish suppliers for almost everything, she was ready for that next big step forward. That step-by-step combination of risk-taking and lessons learned is what is propelling not just Dudek forward, but Poland, as well.

©2000 Peggy Simpson

Peggy Simpson, an economics writer in Warsaw, is researching Polish entrepreneurs in the country’s new economy.

Peggy Simpson
Peggy Simpson