A single law can free the economy. Not for long, though

16.12.2013
It will be 25 years on 23 December since the Act on Economic Activity, popularly called Wilczek’s bill, was passed. It introduced into the stubborn reality the rule that what is not prohibited is permitted. State regulation was reduced. This act is commonly considered to be the “Sevres standard” for free-market economic reforms. Is this a deserved opinion?

Polish entrepreneurship is born in the early 1990s. (Photo by PAP)


Mieczysław Wilczek, a chemist, inventor and entrepreneur. He was involved in various business activities and had already made a fortune in People’s Poland. A fortune that ranked him among one of the richest Poles. As Minister of Industry in the Mieczysław Rakowski government he wished to make it possible also for ordinary people to fulfil their business aspirations.

Although the constitution of the Polish People’s Republic clearly defined the socialist character of domestic economy, Wilczek authored a bill that introduced, at least at the very basic level, pure capitalism. According to its provisions, every citizen could undertake any economic activity. The act, later referred to “Wilczek’s bill” was passed on 23 December 1988.

The entrepreneurship of Poles, suppressed for years, was finally released. Poles put up stalls, mobile foldable tin stalls, and started to trade. They took out their cash “stashed under their pillows” and started to set up businesses. Some 2 million firms were set up and 6 million jobs were created in the period of a dozen or so months. If the bureaucrats in a free Poland had not again imposed the burden of laws, regulations and restrictions on the economy, we would be living in a completely different, richer country.

At least, this is the version of history that many advocates of pure free market would like to put into textbooks on the economy. In this version, Mieczysław Wilczek appears as a capitalist hero and the lesson we learn is this: let’s restore the bill he authored and the economy will recover.

However, some doubts arise. Can such a law really be the remedy for the economic maladies of developed capitalism?

Almost like NEP

Before we answer this question, it is worth asking a different one. Why was a capitalist law introduced into socialism at all? Isn’t it a historical curiosity?

Well, it is not. It is history repeating itself. Suffice to recall that, in the Soviet Russia of 1921 the so called New Economic Policy was launched. The dramatic economic situation of the country after World War I sparked massive social discontent. As the Bolsheviks did not want to lose power, they resorted to something completely non-communist ‒ capitalism.

Under the NEP, the state had a monopoly on big industry and banking, but permitted small businesses to operate independently and enabled them to compete. This minor but essential dose of economic freedom gave new lease of life to the economy of the country.

– As part of implementation of Wilczek’s bill in Poland, the national economy consolidation plan can be compared to the Soviet NEP ‒ says Professor Janusz Kaliński, an expert in economic history from the Warsaw School of Economics.

– The aim of the two reforms was not to implement a new economic system but to help the centrally controlled economy that plunged into a deep crisis to get second wind. Ireneusz Sekuła, who presented the draft law in the Polish Parliament in 1988 on behalf of the government, clearly said: we give the green light to private ownership, but the system will be based on socialist ownership. Indeed, Wilczek’s bill did not infringe on the socialist ownership, explains Kaliński.

It is often claimed that although Wilczek’s intentions could really have been more sublime and his plans far more reaching than the intentions of Polish United Workers’ Party (PUWP) leaders, it is certain that he did only as much as he was allowed to by the party. And the party leaders allowed him to do anything as they felt they were in hot water and were contemplating an evacuation plan. Wilczek was to help them (against his intentions and perhaps also not being aware of it) by drafting a bill that made enfranchisement of the nomenklatura possible. One of the allegations most frequently raised against Wilczek’s bill was that thanks to it the government officials were ensured “soft landing” in companies established on the basis of state-paid capital, should socialism collapse.

– These allegations defy logic. Even if the law aimed to transfer ownership rights to PUWP members, the effect would be short lived. Wilczek’s bill introduced equality before the law, and therefore, a party beneficiary of enfranchisement had to cope with the same problems in the market other people faced. The history of the nomenklatura companies that quickly went bust, like Universal, shows that PUWP activists were not top businessmen. Obviously, there were exceptions, but as a rule, natural born bureaucrats do not fare too well in the market environment, where they have to offer attractive goods and services in a situation where they cannot force others to buy them ‒ argues Andrzej Sadowski, Vice President of the Board of the Adam Smith Centre.

However, there is one ‘but’ against such a defence of Wilczek’s bill. The issue of access to capital. Where were ordinary people to take money from to start up their own business if capital was in the hands of the party and a bank credit was not easy to get? Were they to start from scratch? Not at all. It is estimated that ordinary people had a total of 2 billion dollars stashed under the mattress ‒ claims Sadowski.

One has to admit that lists of the richest Poles include more and more people who started their careers in that very period ‒ in the top ten richest Poles is e.g. Dariusz Miłek, a Lublin-based businessman, who started as an owner of a mobile foldable tin stall, and who is now one of the biggest shoe manufacturers in Poland. It is difficult to accuse him of having any ties with the nomenklatura.

-It was a landmark bill. For example, Wilczek’s bill lifted the employment caps. Before its entry into force, it was not allowed to employ more than 15 persons, as this posed a threat to the socialist economy… As soon as Wilczek’s bill became law it was possible to start thinking of rumping up more serious business and, to tell the truth, in any sector of the economy. The Polish economy was so ravenous that even the blind and the lame could make a fortune. Zbigniew Jakubas, a stock exchange investor and one of the richest Poles, has fond memories of the early 1990s. However, he points out that Wilczek did not solve all the problems.

Flight from freedom

One has to admit that the people who claim that Wilczek’s bill did not introduce an ideal free market system, at least because it did not liquidate state-run enterprises or facilitate foreign direct investment in Poland are right. However, a few years were enough for the Polish legislation to fill the gap. This was done by the liberals who formed the new democratic governments, including that led by Leszek Balcerowicz.

However, when they were in power an unbelievable thing happened. On the one hand, state-owned enterprises began to disappear due to privatisation, and foreign holdings, encouraged by new institutional conditions, started their first investment projects. On the other hand, basic freedom to start a business introduced by Wilczek’s bill was consistently restricted. The bill was ‘diluted’ month in, month out by subsequent regulations that restricted access to carry out professions, introducing licenses and imposing new bureaucratic obligations on businessmen.

This process went practically uninterrupted for over 20 years, irrespective of who was in power, until the critical moment when it turned out that the regulations limit access to 380 professions. Only a year ago, politicians (more specifically, the then Minister of Justice Jarosław Gowin) did respond, passing the so called deregulation law. Regrettably, its provisions again encountered resistance from different groups of interest. The present level of economic freedom in Poland is best reflected in the fact that Wilczek’s bill had half the number of articles compared to the act on economic freedom currently in force.

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Why were the achievements of Wilczek cancelled out by the liberals?

– The truth is that it is not the liberals who are to blame but the pressure of a bureaucratic caste and lawyers who wrote too complicated laws. Every subsequent provision translated into jobs for bureaucrats and the lawyers themselves, claims Professor Janusz Kaliński. In an interview for the Rzeczpospolita daily, Mieczysław Wilczek confirms this observation: This is the revenge of the officials. They remain the biggest losers as a result of liberalisation of the economy. Officials love to control people. They do not like people to be free and independent. That is why they limit freedom.

– The system in which officials and politicians cannot derive direct benefits from the fact that GDP is growing was unacceptable for those who had been used to sponge off the labour of others, adds Andrzej Sadowski.

Is it at all possible for a law similar to Wilczek’s bill to be passed now? It seems that given the fact that we are members of the European Union that imposes on us complex directives and regulations, economic freedom in such a broad meaning is not possible any more. However,…

European Commission experts claim that Wilczek’s bill is 100% compliant with European law and there are no contraindications to implement it, claims Sadowski. If such a legislative revolution is then merely the question of political will, what would happen if it were actually implemented?

Cannot we do without regulation?

It depends on who you ask. Wilczek’s supporters say that in the first place, firms freed from the bureaucratic burden by this law would have more time to carry out their core business. It is worth noting that currently an average entrepreneur spends as many as 37 days per year to satisfy the needs of the public administration apparatus.

Analysts from Grant Thornton, the auditor and advisory services provider, and the Polish Chamber of Commerce have calculated that if this burden was taken off the Polish companies their revenue would grow even by 200 billion zlotys per year, which represents 12% of Poland’s GDP. Another benefit arising from the law would be to curb corruption as the room for bribery increases along with the growing number of unclear regulations and situations that depend on officials’ discretionary decisions. Last but not least, increased competition would lead to the decline in unemployment and prices.

Unlike the advocates of the bill, economist and politician Ryszard Bugaj is not of a good opinion about it.

– Firstly, the bill did not liberalise the market so much as it is sometimes claimed. Secondly, swift economic growth observed after its implementation resulted from the structure of our economy rather than from the bill itself. Its largest drawback was that it replaced a comprehensive reform, was its substitute not becoming with the requirements of the legal system under which a present-day complex capitalism can operate. Implementing such a law today would lead to a chaos, argues Bugaj.

Piotr Kuczyński, an economic commentator and Investment House Xelion analyst, is also skeptical. He claims that dreams about restoring the economy of the free-for-all type, like in the times of Wilczek, may even be dangerous.

– The economy has to be subject to certain regulations and provisions relating to the financial sector, for example, which is responsible for a crisis in 2008. As is clear, leaving things to themselves may be dangerous. I am not sure whether a total deregulation of the market, let’s say of real property brokerage, would in fact not be risky. In my opinion, it would pave the way for fraud.

Obviously, these two views will always clash: more regulation and less regulation, and the current legal status will reflect which of the two will prevail in the debate.

– I think there will be more rather than fewer regulations with time and it is good, says the analyst.

The question is whether Kuczyński and other critics of Wilczek are aware of the consequences the reasoning may have, namely that it is the right solution to strengthen regulation, for example the regulations relating to the protection of professional groups.

If the lobby of economists has forced a restriction of the definition of economic analysts only to people with higher economic education degree, many of those who practise it today, including Piotr Kuczyński, would have to retrain for another profession or undertake studies again. Otherwise, they would not be able to earn their living.

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