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In this three-part arc of #WooSays, we revisit some of the most consequential economic transformations of the 20th century: Poland, Russia, and China. to understand what went right, what went wrong, and what we can still learn today about the shift from central planning to market economies.
What do Trump’s trade war and his latest tariff twist have in common with Poland’s 1989 “Shock Therapy” reforms? Both mark turning points in the global economy. In this first episode of a three-part #WooSays series on historic economic transitions, Professor Emeritus Datuk Woo Wing Thye and Melisa Idris revisit the Balcerowicz Plan: Poland’s bold economic reforms from state ownership and central planning to a capitalist market economy. Why did it work? What did it cost? And what lessons does Poland’s painful but pivotal transition hold for us today?
What do Trump’s trade war and his latest tariff twist have in common with Poland’s 1989 “Shock Therapy” reforms? Both mark turning points in the global economy. In this first episode of a three-part #WooSays series on historic economic transitions, Professor Emeritus Datuk Woo Wing Thye and Melisa Idris revisit the Balcerowicz Plan: Poland’s bold economic reforms from state ownership and central planning to a capitalist market economy. Why did it work? What did it cost? And what lessons does Poland’s painful but pivotal transition hold for us today?
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NewsTranscript
00:00Hi, welcome back to another episode of Wu Says.
00:13This is where we get real about US, China, everywhere and everything in between.
00:19It's two superpowers, one global story.
00:21I'm Melissa Idris and joining me today is Professor Wu Wingtai,
00:25who has been studying US-China relations long before tariffs became headline news.
00:30So today we're going to start, Professor Wu, we're going to start with the latest news,
00:35Trump's latest trade twist, of course.
00:37The US has decided, finally has announced that they're lowering their tariffs to Malaysia,
00:44specifically from 25% to 19% starting August 1st.
00:49And I'm curious to know your read on the situation.
00:53How do you think this has played out in terms of the Malaysia-US negotiations over the tariffs?
01:01I think the Malaysia-US negotiations were pretty much predicted
01:07by what Prambovo received in his negotiations with the US.
01:14that set a metric of 19%.
01:17And then what we see is 19% for Malaysia, Philippines, Thailand, Cambodia.
01:25And for countries that are explicitly more in the China camp, they got 40%.
01:33This particular bifurcation of 19% for Malaysia, Thailand, Philippines versus 40% for Myanmar and Laos
01:54is a very clear introduction of U.S. national security concerns into the economic sphere.
02:04These are allies of China.
02:06And so when you're allies of China, you get higher tariff.
02:11This is a historic turning point for the world because it means the end of the WTO system as we know it.
02:22The WTO system of free trade among members of the organization.
02:30Now there's no undifferentiated free trade anymore.
02:34If you have China, 40%.
02:36If you are neutral or hopefully more part of the U.S., then you get 19%.
02:44And if you are like Singapore, which has been most pro-U.S. in its support, 10%.
02:50Wow.
02:51So talk to me about the significance of that.
02:54It feels like this is a significant point, like a pivotal point in the global economy,
03:00in the way the global economy has functioned over the past few decades.
03:05Why do you say it's the end of free trade?
03:08How do we navigate this turning point in the global economy?
03:15Well, I think you have to think about the time when the world took another turning point,
03:24which was towards the globalization that is ending.
03:29If you think about the globalization that really started,
03:36it started with the disintegration of communism.
03:42Basically, the disintegration of the communist economic system of central planning.
03:48That was an important turning point, which contains lessons about economic reforms
03:56that are necessary to deal with the new world.
04:00Just like Malaysia, we now face a new set of opportunities and challenges.
04:06So we will have to undertake adjustments.
04:11Adjustments in the face of different circumstances.
04:15You can call that reform.
04:17You can call that realism.
04:20But I think past adjustments by different countries in history
04:26would be a useful guide on how Malaysia should make its adjustments.
04:34And you have had a front row seat to some of the most consequential reform episodes
04:41in the past few decades, in the 90s.
04:45Talk to me a little bit about that, specifically in Russia and in Poland.
04:51Well, a reform can take place under two circumstances.
05:01One is the domestic situation is so dire that you see no choice but to make big changes.
05:11Because reforms, by their nature, are a revolution against yourself.
05:19Why?
05:21Think of the following.
05:24If a leader says,
05:26from now onwards, we are going to turn 180 degrees from what I was doing in the past.
05:34If the world outside has changed, you've got a very good excuse.
05:40Because the world has changed and so I'm turning 180 degrees because this is the new thing.
05:46But what if the world has not changed?
05:50For if the world has not changed and you say,
05:53let us turn 180 degrees,
05:56you are admitting that you have made mistakes in the past.
06:00In the past, you recognize your mistake and so now they're turning.
06:04And if you were responsible for the screw-up in the first place,
06:08why are you still in charge?
06:11So, most reforms are hard to undertake by existing governments
06:17in a world that has not changed
06:20because that is a confession of
06:23I really messed up big in the past
06:26and now I'm trying to dig myself out of the hole
06:29that I created for myself.
06:32So, reforms in general are hard to take
06:36except for when there are changes in government.
06:40Then you can blame everything on the previous person
06:43and you say,
06:45that's why you voted him out, didn't you?
06:47You all voted him out and so I'm here.
06:50This is exactly what happened in Poland.
06:53In the case of Poland,
06:56there have been stagnation for 20 years before 1989.
07:04Which stagnation?
07:07Accompanied by growing food shortages.
07:09Okay.
07:11And at the same time,
07:13they could see the growing prosperity in Western Europe.
07:18So, when Gorbachev came to power in 1985,
07:24the Russian economy has been contracting for the last two years.
07:29So, that's why Gorbachev's back was...
07:33He had no choice.
07:34He knows that more of the same could not go.
07:36So, he has to undertake reform
07:39under the name of Berastrika and then Glasnost.
07:48But the important thing is,
07:50reforms are usually made
07:53when it's a new group of people who comes in.
07:56In the case of Gorbachev,
07:58he had just succeeded Antropov, who died.
08:02And so, he was a new figure.
08:05But the problem was,
08:07he was picked by the figure who died.
08:11So, because he was a successor,
08:13he was part of the team.
08:15He had all this legacy and the baggage they had to carry.
08:18Exactly.
08:19So, here are two types of reforms.
08:24The reforms by people who were chosen by their predecessors
08:30and reforms in countries where they got into power
08:36because election threw up the previous guy.
08:39So, the previous guy did not choose you.
08:41And the third type of reform was
08:45that was just a social revolution
08:47such that it was not the reforms that brought you in.
08:50You came riding on the back of a tank,
08:53on the top of a tank.
08:55So, there are three types of situations
08:57in which reforms have taken place.
08:59Well, in the case of Malaysia,
09:01clearly, we had elections and we had new people.
09:04But let's look back at Poland
09:07where the reforms that came in
09:10and they came in by election.
09:15But the kind of reforms,
09:18really, the right reforms
09:20has to do with speed and direction.
09:26In other words,
09:28do I just speed up whatever the previous guy was doing
09:31or do I take a different direction?
09:34And taking a different direction,
09:36what speed should I go at?
09:37All of this depends on
09:40what are the circumstances you find yourself in.
09:44Let's talk about Poland.
09:46In this case,
09:48a new government got elected,
09:51a non-communist government.
09:54And they inherited a bureaucracy
09:56that was 100% selected
10:00to serve the communist power structure.
10:04That is the domestic situation.
10:07They are unable to know the loyalty
10:10of the instruments
10:12in which they inherit.
10:15As opposed to Gorbachev.
10:17Gorbachev inherited,
10:20but it was left behind
10:22by the person who chose him.
10:23So he's got the loyalty
10:25of the bureaucracy.
10:27He came from the insider.
10:29He was a new face
10:30of the old gang.
10:32You see,
10:33that's the new face of the old gang
10:34versus new faces of a new gang.
10:37That's a good position to be in,
10:39Gorbachev.
10:40So,
10:41what you could do
10:43was very different
10:45because Gorbachev
10:48could still command
10:49the bureaucracy
10:50to do things
10:51because
10:53they have used
10:54to following
10:55the orders
10:57of his group.
10:58They were all promoted
10:59by his group.
11:00Whereas the new people
11:02that came in in Poland
11:03is not sure
11:06of internal sabotage
11:07by the bureaucracy
11:08for one thing.
11:10The more important thing
11:12that the Poles realized
11:14is they want to change it
11:16in a direction
11:17that is different
11:18from before.
11:19And the last time
11:20when someone tried
11:22to do that
11:23in Hungary
11:23in 1956,
11:26the Russians invaded
11:27and restored the old way.
11:29Right.
11:30And in 1968,
11:31when Czechoslovakia
11:33tried to change things,
11:36the Russians invaded
11:37and restored it.
11:39So these people
11:40see themselves
11:41as possibly
11:43having a short lifespan.
11:45And if you think
11:47you have a short lifespan,
11:49then you want to make changes
11:51that are so big
11:52so that whoever
11:53comes back
11:54will find it
11:55really hard
11:56to reverse.
11:57So you've got to
11:58move quickly.
11:59Speed.
12:00Speed
12:00and comprehensive.
12:03You want large-scale changes
12:04in as speedy
12:07a manner as possible.
12:08And it is also justified
12:11by that the situation
12:13is dire
12:14in that there's food shortage.
12:16Right.
12:16So what did they do?
12:19They were very lucky
12:21that they had someone
12:23called
12:24Lexik Bolserovich,
12:27a professor
12:27at Warsaw School of Economics
12:29who had spent
12:31most of his professional career
12:33dreaming about
12:35if I could end
12:37central planning,
12:38how would I do it?
12:40So here he was
12:41operating the middle
12:43of a centrally planned economy
12:45and he has this dream
12:47thinking about
12:48how would I change it
12:50if given the chance?
12:51Wow.
12:52So he was the man
12:52with the plan.
12:54So even though
12:55he was not
12:56a card-carrying member
12:59of the party
13:01that came in,
13:02but he's the guy
13:03who actually
13:04has a coherent
13:06plan
13:07of what to do.
13:08Wow.
13:09So they selected him
13:10and said,
13:11go and
13:12make us
13:13like
13:14West Germany.
13:15Because you must understand
13:17for reforms
13:18you've got to have
13:20a vision of the end goal.
13:22It cannot be
13:23let's try this
13:23and let's try that.
13:25The end goal is
13:26we want to be
13:27at this point
13:27and we are going to
13:28work backwards
13:29from the end goal
13:31to where we are.
13:32Okay.
13:33So from the end goal
13:34to where we are,
13:35what do we need?
13:36Okay, so the end goal,
13:37the vision for Poland
13:38was to move away
13:40from central planning.
13:41Whatever they were,
13:42from
13:42to West Germany.
13:45Which is?
13:46Which was a
13:47capitalist society.
13:49Capitalist market economy
13:50that everybody
13:52who had visited
13:53East Berlin
13:54and West Berlin
13:56could tell
13:56the big difference.
13:58Understood.
13:58That was just a,
14:00you could call that
14:01a blinding insight.
14:03When you saw it
14:04was such a blind thing
14:05that you understood,
14:06that is where
14:07the direction is.
14:09So,
14:09how do you move
14:10from one to the other?
14:12The first thing is
14:13under central planning,
14:14you had got
14:16the prices
14:17set by the bureaucracy,
14:19the prices of the output,
14:20the prices of the input.
14:21So the firms
14:22were nothing like,
14:24they don't need
14:25to be entrepreneurial
14:26because they were told
14:27how many to produce
14:28at what price
14:29and then what inputs
14:30to buy at what price.
14:32So their profits
14:32were already
14:33pre-set for them.
14:35So the,
14:36there was no entrepreneurship.
14:39And so what they did,
14:41so that was the first thing.
14:42The second thing was
14:44the country
14:45was,
14:47doesn't believe
14:48in free trade.
14:49It believes that
14:50we should try to produce
14:51everything domestically
14:53if we can.
14:54If we cannot
14:55make it,
14:57then we will have
14:58to import it.
14:59So report,
14:59import was the last result.
15:01It was not normal trading.
15:03So that's the second part.
15:04And the third part
15:05had to do with
15:07everything was government-owned,
15:08including the restaurants.
15:09It was incredible.
15:11Small restaurants
15:12are state-owned
15:13and all the stores
15:16are state-owned.
15:17So compare that to Germany,
15:19you straight away know
15:20you have to have
15:22free moving prices
15:24to restore
15:25entrepreneurship.
15:27That means you got to
15:29legalize
15:30the private sector.
15:32Wow.
15:33Because under communism,
15:35the private sector
15:36was illegal.
15:36Yes.
15:37So the direction was
15:38to become like Germany,
15:40we got to free up prices,
15:42we got to have
15:42private enterprises,
15:44and we got to
15:45greatly reduce
15:47the state enterprises.
15:49And the third one is
15:50we got to integrate
15:51into the world.
15:53This is really
15:55major reforms.
15:56This is the dismantling
15:57of the entire
15:59power structure
16:00to something new.
16:01You weren't kidding
16:02when you talked about
16:03how big the scale
16:06of the reforms were.
16:07Yes,
16:08and I think
16:09some of the reforms
16:10that we could do
16:12in Malaysia,
16:13some of the reforms
16:14were big scale
16:15and ambitious,
16:17and some
16:18we can tweet
16:19on the margin
16:21because we are doing
16:22pretty well.
16:23We are just trying
16:24to do better.
16:24That's how.
16:25So in this case,
16:27now,
16:28Poland
16:28knows what the end goal is.
16:32Similarly,
16:33so did China
16:33in 1978.
16:35China also,
16:36when Deng Xiaoping
16:37visited Japan
16:38and Singapore,
16:40he was just
16:41astounded.
16:42You know,
16:43how could they now
16:44be so far ahead of us?
16:46So he knows
16:47the four changes
16:48that I talked about.
16:49Price liberalization,
16:52you need to have
16:53internationalization,
16:56you've got to have
16:57macroeconomic stability,
17:00and you've got to reduce
17:01the state sector.
17:02All of this is known.
17:04But the question is,
17:06how quickly
17:07should we do it?
17:09And how quickly
17:10you should do it
17:11depends on
17:12the capacity
17:14of the civil service
17:15where they will
17:16listen to you
17:17and
17:18what you think
17:22is likely
17:23to be the world trend.
17:24Like,
17:25for example,
17:25if you think Russia
17:26might invade you,
17:27then you definitely
17:28want to move quickly.
17:30But if Russia
17:31is not going to invade you,
17:33and if you are able
17:34to get the bureaucracy
17:35to do what you want
17:36to do,
17:37then you can have
17:38a more,
17:40or what you call,
17:41planned out process
17:42of what to do.
17:44But if you are not,
17:45you know the bureaucracy
17:46cannot be trusted,
17:47and Russia
17:48could be invaded,
17:49then let's do it
17:50very quickly.
17:51Even though we haven't
17:52finished drawing up
17:53the 100% plan.
17:55So,
17:56Poland.
17:57Shock therapy
17:59for Poland.
18:00That was what
18:01it was described as.
18:02Big bang,
18:03shock therapy.
18:04Basically,
18:05it is
18:06quick changes
18:08on a broad front.
18:10That is what it was.
18:11And there are some,
18:14looking back at China,
18:16what it really shows is
18:17there are some reforms
18:20that must be done
18:20very quickly,
18:21and some reforms
18:23that can be done
18:23very slowly.
18:25I think this is fascinating
18:26because
18:27the relevance
18:28of kind of
18:29historical events
18:31we can take lessons from
18:32because we are seeing
18:33similar pivotal points
18:35happening today
18:37in the global economy.
18:38so I want to come back
18:39to this conversation
18:40and talk a little bit
18:41about Poland's success story
18:43and what happened
18:44with Russia
18:44and also looking at China.
18:46So let's come back
18:47and talk a little bit more
18:48about how these
18:49really momentous
18:53reform episodes
18:54have shaped
18:55the world today.
18:57We'll be back
18:57with another episode
18:59of Wu Says
19:00shortly
19:00in the next week.
19:02So make sure you come back
19:03for more on this topic.
19:04I'm Melissa Idris.
19:05With me,
19:06Prof Wu Wingtai,
19:07talking about everything
19:08and everywhere
19:09between China
19:10and the US.
19:11We'll be back soon.
19:12See you.
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