Structural Adjustment and International Trade in Eastern Europe: The Case of Poland

Abstract

Poland Andrew Berg and Jeffrey Sachs The Polish economic programme is important not only in its own right, hut as a key example of the benefits and possible costs of a rapid movement to convertibility. This paper proposes an analytical framework and new estimates of the costs and benefits. The framework shows that convertibility revolves around the relationship of two nominal variables, the money supply and the nominal exchange rate. Return to convertibility is achieved not mainly through a real depreciation, but through a nominal depreciation which helps to bring the overall price level back into line with nominal aggregate demand and particularly with the money supply. The new estimates show that the costs, a drop in living standards and output, are less than commonly believed. Given the extreme inflationary conditions in 1989 and the shock following the disintegration of CMEA trade, the loss of output was not caused in any important way by the rapid move to free trade.

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