THE AMERICAN OUT TO SAVE POLAND Harvard's young Jeffrey Sachs is pushing Solidarity to take the pain now for a big gain later. The future of market capitalism in the East rides on whether he is right.
By Robert E. Norton REPORTER ASSOCIATE Jennifer Reese

(FORTUNE Magazine) – IT'S A BLEAK winter evening in a drab Warsaw suburb. Some four dozen Polish workers in leather jackets have crowded into the parish house of a Catholic church. They used to meet there secretly after the government outlawed their Solidarity union. Now Solidarity is the government, and they have come for , reassurance that the drastic new economic reforms will be worth the pain. The liturgical setting suits the moment. Harvard professor Jeffrey Sachs, 35, who played a major role in shaping the new policies, sounds less like an economist than an evangelist. Salvation will come quickly -- if the government sticks to the plan. ''It won't take a year or two years or three years,'' he says in a tone of incandescent optimism. The first result, he goes on, should be an end to Poland's raging inflation by spring. A lot rides on whether Sachs is right. Solidarity is trying to go from Stalinist central planning to free markets in a few years, with the most wrenching changes in the first weeks of 1990. The initial effects are sharply rising consumer prices, falling real wages, and a new phenomenon in postwar Poland: unemployment. If the economy blossoms after weathering a short intense storm, other countries in the East will want to follow. Failure could delay market capitalism in the old Soviet bloc for years. Brash, bright, sure-of-himself Jeff Sachs has delivered economic sermons from Washington to La Paz to Budapest. His peers in academe consider him one of the very smartest economists of his generation, just on the basis of his theoretical writings. His position at the front lines of economic reform in the Third World and Eastern Europe puts him in a special category. His unique talent is not only to size up quickly and accurately what it will take to fix a broken economy but also to persuade people to follow his advice. Says Paul Krugman, 36, the Wunderkind of the Massachusetts Institute of Technology's economics department: ''What sets Jeff apart is that he is a first-rate theorist who is also a major political force. It's a pretty amazing combination.'' In 1989 alone he visited Poland a dozen times as an adviser to Solidarity. He went to Bolivia five times to advise the President and also touched down to counsel officials in Argentina, Brazil, Ecuador, Mexico, Peru, Czechoslovakia, Hungary, and Yugoslavia, among others. His work in Poland is paid for by a foundation started by George Soros, the Wall Street wizard and a native Hungarian. The United Nations pays for many of his trips to Latin America. His arrival in Warsaw this year was a homecoming of sorts. Though he grew up in suburban Detroit, his family's roots are in Grodno, now in the Soviet Union and once part of Poland. His wife of ten years fled with her parents to the U.S. from Czechoslovakia in 1966, when she was 12. A trip to East Germany the summer before his freshman year at Harvard triggered his interest in economics. He spent a week with a high school pen pal who harangued him on the virtues of socialism and the sins of capitalism. Sachs knew little about either, so he picked up an English translation of the works of Karl Marx. After puzzling over Marx's murky theories, he began reading other economists. By the time he showed up for classes, Sachs was hooked: ''I started out trying to understand what makes for a good economic system, and I spent four years trying to find the right answers to my pen pal's questions.'' Sachs took to Harvard and Harvard to Sachs. His second economics course, as a sophomore, was in macroeconomics at the Ph.D. level, and he got the highest grade. He graduated third of 1,650 in 1976, having completed all requirements as an undergraduate for a doctorate in economics, save a thesis. He also had an answer for his East German friend: Socialism was a dead end. As a graduate student, Sachs was elected a junior member of Harvard's Society of Fellows, a super-elite group that includes economists Paul Samuelson and James Tobin, both Nobel laureates. In 1983, at 29, he was made a full, tenured professor. Had that been the only story, Sachs today might be spending more time in Cambridge and less on airplanes. But while a freshman he discovered John Maynard Keynes as a role model. An academic who worked in the British Treasury at various crucial moments between 1915 and 1946, Keynes became the most influential economic thinker of the 20th century. Says Sachs, reverently: ''Keynes showed what it was to be both a theoretical economist and a man of practice, and how there is no clear distinction between economics and politics -- something I believe very much.'' Sachs began leavening his Harvard studies in mathematical economics with summer internships in Washington. He later came to appreciate an economist he had been taught to hate at Harvard: Milton Friedman. ''His very clear message -- his faith in markets, his constant insistence on proper monetary management -- is far more accurate than fuzzy structuralist or pseudo-Keynesian arguments one hears a lot in the developing world,'' says Sachs. In 1985 he got the chance to put his ideas into practice in Bolivia, invited by politically active Bolivian Harvard graduates. Barren, desperately poor, and up to the Andes in debt, the country's chaotic economy was gripped by hyperinflation, defined as a rate of more than 50% per month. Through the sorcery of compounding, a 50% rate produces annual inflation of more than 10,000%. Bolivia's reached 24,000%. His prescription was shock treatment that included immediate deep cuts in wages and state spending. The government adopted his ideas, and Sachs headed back to Harvard. A few months later the plan faltered and inflation began rising again. This time the government summoned him. He persuaded the Bolivians to persevere. Says Dwight Perkins, director of Harvard's Institute for International Development, which also worked with the Bolivians: ''He built a relationship with the senior leaders there. He impressed them as someone who really knew what he was talking about and that he had no separate agenda, that he was genuinely interested.'' The harsh cure worked: Inflation by 1987 fell below 15% per year and has stayed there. Bolivia had suspended payments on its international debt, and Sachs advised the government not to resume. Four years later, Sachs bristles when he recalls Bolivia's situation: ''Here was a country whose debts were 140% of GNP, where the debt service would have been well over 100% of all government tax revenues, where real per capita GNP had fallen by 25% in the preceding years, where there was hyperinflation, and the International Monetary Fund and the U.S. government marched down there and said, okay boys, you'd better start paying. This was stunning, ahistorical, financially nonsensical, and it got me rather upset.'' Eventually, most of Bolivia's debt was written off. AFTER BOLIVIA, Sachs's phone began ringing from unlikely places, ultimately from Warsaw. A succession of Communist governments had succeeded only in creating Third World living standards in the heart of industrialized Europe. They tried to borrow their way to prosperity in the 1970s, then squeezed the population to repay the loans in the 1980s. Last year the economy finally spun out of control (see charts). Facing mounting unrest, the Communists in early 1989 negotiated with Solidarity to devise reforms. One reason for the change of heart was that with Mikhail Gorbachev pursuing his own revolution, the Polish regime could no longer count on Soviet troops to keep it in power. After being legalized, Solidarity trounced the Communists in an election, and by August, Poland had a coalition government. The economic crisis, however, was deepening. Sachs had rejected overtures from the Communists. He works only for democratic governments or ones that are moving in that direction. Once Solidarity was recognized, he packed his bags. While he is just one of many experts and economists helping to shape the new government's thinking, his role has been crucial. Early in the debate last summer he argued forcefully that Poland needed the same kind of shock therapy that had worked in Bolivia -- not a smooth transition but an abrupt break with the failures of the past. By speaking before parliament and to groups of workers and economists, appearing on television, and giving interviews to newspapers and magazines, Sachs galvanized public opinion. Says Jan Mujzel, 66, an economist at the Polish Academy of Science and a gray eminence in Polish economics: ''His main idea, that the reform can succeed only if it is implemented as quickly and decisively as possible, was well understood by Polish economists. But his persuasive articulation of this idea played a significant role in preparing the program. He's a talented man, and has a talent to influence the people.'' PARLIAMENT rushed through the reform measures in December, and they went into effect with the new year. To balance the budget, the government eliminated most subsidies of consumer goods and services. The price of coal, Poland's chief fuel, jumped 600% for households; gasoline doubled to 98 cents a gallon. Subsidies to money-losing state businesses were cut too, a move that will shortly lead to widespread bankruptcies and unemployment. The zloty, Poland's currency, was sharply devalued to bring the official rate in line with that of the black market, which presumably is close to the zloty's real value. As a result, prices of imports will rise. Wages are to be held below the inflation rate. If all this works, inflation -- after one last surge as the price increases bite -- will drop to single digits within a few months. Then the second phase of reform should gain speed: a massive privatization of the state-owned enterprises, which account for more than 80% of industrial production. Many Poles are worried that all these changes may be too sudden. Although Mujzel supports the government's goals, he says, ''There is perhaps some limit, some border of endurance for the people, and if that line is crossed and the people massively protest, this unique chance to democratize the society and marketize the economy would be lost.'' Sachs's main worry is that the Poles might ease up too soon. Speaking at a meeting of Polish economists in Warsaw, he said, ''Governments try to muddle through, or they get scared, or they do halfway measures. I've seen in Latin America that the gradual way is doomed to fail. This is the moment to act, and I really pray that the government sees this and takes the chance.'' Back home in Cambridge, Sachs explains his longer-term fears. ''One could imagine that if the reforms get bogged down, and the process becomes paralyzed, that the country ends up getting stuck in a nether world that is a half-planned and half-market economy, where very strong particular interests act as blocking coalitions to real reform. That's been the situation in Argentina for a long time.'' Sachs also advised the Poles to suspend most of their debt payments, and they negotiated temporary reductions with commercial banks. He tells anyone in Warsaw who will listen that Poland should make no payments at all, at least during the next few years. His reasoning: The Poles can't afford to repay the debt and have little moral obligation to do so since it was unwisely incurred by the hated Communist government. He argues that three-quarters of the debt is owed to Western governments, whose interests are better served by seeing Poland succeed than by collecting on the loans. Commercial bankers, who hold the balance, may grumble, he says, but in the end they will settle for far less than 100% on the dollar, just as they would in a commercial bankruptcy. FOR POLAND, such economic glasnost will be crucial over the next few years. Instead of paying out $1.5 billion a year in debt repayments, the Poles will be receiving more than that in aid and loans from the IMF, the World Bank, and Western governments. The U.S. and 14 other nations are extending a $1 billion loan to help the Poles stabilize the zloty. But Sachs thinks the West should do far more, including canceling most Polish debts and promising explicitly that Poland will be welcomed as a full partner in the European Community. ''These are the kinds of things that give a society the capacity to continue,'' he says. ''And instead of vision in the West, there's coyness and there's confusion.'' Sachs's family life is that of two-paycheck yuppiedom writ large. Even when he's not jetting around, he maintains a supercharged schedule fielding frequent phone calls from abroad, writing scholarly articles, attending ^ conferences, and making near-weekly trips to Washington to push his ideas among legislators and officials of international financial institutions. He gets by with little sleep, often working until 3 a.m. His wife, Sonia Ehrlich, runs the household and looks after their children, Lisa, 7, and Adam, 4. But this is no June Cleaver. Ehrlich, a grandniece of German scientist Paul Ehrlich, who won the Nobel Prize for medicine in 1908, is a pediatrician at the Harvard Health Service. Says she: ''The reason I put up with it is that I like what he's doing. It makes a huge difference to me that he's putting his education and training into helping people lead better lives.'' SACHS AND EHRLICH met as Harvard undergraduates in 1972 at a screening of The Sorrow and the Pity, Marcel Ophuls's four-hour documentary about the Nazi occupation of France. To keep the family in touch, Ehrlich and the children join Sachs abroad during her vacations. They spent three weeks en famille last fall in Czechoslovakia, Hungary, and Yugoslavia, with Sachs working most of the time. The kids are well traveled even by Cambridge standards. Lisa has been in 23 countries; Adam, 17. Can Sachs keep it up? He returned to Poland in early January to help the government with the technical details of the stabilization. He will also travel to Yugoslavia, which suffers from many of the same problems and is attempting some of the same cures. Though he has been on leave from Harvard for the past year, he still sees himself primarily as an academic. He plans to try to teach part time this year. Wistfully, he says, ''I'm looking forward very much to a period of calm to do some more extensive writing. But I don't see it for the next few years.'' That should be good news for beleaguered Third World finance ministers in both hemispheres. The Latin debt crisis, after seven hard years, is far from over, and the march of capitalism in the East is just beginning.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: POLAND'S PLUNGING ECONOMY Socialism's shortcomings became plain last year. With output plummeting, the Polish regime tried to buy its way out of bankruptcy by printing money. Instead, all it got was ruinous hyperinflation.