Discussion Papers 1993.
Spatial Research and the Social-Political Changes 37-45. p.
POLISH ECONOMY UNDER CRISIS
37
POLISH ECONOMY UNDER CRISIS
MAREK POTRYKOWSKI
Poland is the country in Eastern Europe that first commenced far reaching changes in
the social system transition from centrally planned and controlled economy of "real so-
cialism" to the system of parliamentary democracy and market economy based on private
property to an increasing degree in 1989. These changes were accompanied, however, by
a weakening of economic activity and a dramatic deterioration of the monetary and mar-
ket balance.
Polish economy has already been in the state of deep social and economic crisis for
quite a long time. This economy functions under deepening disequilibrium, on the verge
of breakdown of state finances. Ecological catastrophe is on the go together with housing
shortage, the growing burden of foreign debt and economically motivated emigration of
young generations.
Figure 1
Budgetary incomes and expenditures (at constant prices; 1980=100)
120 -
100
80-
60
40
20
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
ES3 2
1 — incomes; 2 — expenditures
Marek Potrykowski : Polish Economy Under Crisis.
In: Spatial Research and the Social-Political Changes. Pécs: Centre for Regional Studies,
1993. 37-45. p. Discussion Papers. Special
38
MAREK POTRYKOWSKI
The present crisis is not the first one in the post-war period. Still, the downs in the
mid-1950s and at the beginning of the 1980s were relatively quickly recovered by way of
limitation on over-investment and the increase of market-oriented supplies. The other
crisis, which occured in the 1970s, was also countered by massive loans and credits, re-
ceived by Poland from Western countries. These loans, consequences of which we are
carrying on our backs now, also had a negative effect as they were used mainly to increase
consumption and thereby contributed to the slow-down of modernizing investments in
Polish economy.
The first symptoms of the present crisis emerged at the end of the 1970s. The changes
in economic policies, introduced then by the authorities with the aim to decrease market
disequilibrium, did not succeed and the crisis was becoming more and more serious. On
the basis of the comparisons of fundamental economic categories such as national income,
consumption or real incomes of population, it can be concluded that Polish economy re-
gressed by some decades.
As opposed to previous crises, the present one has significant spatial aspects. Within
the set of crisis-causing factors the following can be distinguished:
(1)
A delay in the urbanization process with regard to the industrialization
process. As to spatial aspects, this phenomenon is highly differentiated
in intensity. Its direct effect is weaker than could potentially be achieved
under the given circumstances, satisfaction of social needs and incom-
plete utilization of productive assets, which lowers, to a significant de-
gree, the production scale potentially attainable.
(2)
A growing conflict between the social and economic interests in the
sphere of utilization of natural environmental resources. An over-ex-
ploitation of the environment leads, on the one hand, to the deterioration
of the conditions of social life over some areas of the country, and, on
the other hand, to the limitation of the narrowly conceived effectiveness
of economic activity.
(3)
Too high concentration of economic activity expressed through
(a) the concentration of multiple productive units, and
(b) exceeding the optimum production scale.
Particularly negative effects were caused by the simultaneous appear-
ance of both of these concentration types in certain areas.
(4)
An improper spatial organization of the productive apparatus entailing
an unduly high level of transport costs in production and a low relia-
bility of co-operative connections.
(5)
Disappearance of societal self-government on the local level. So the
local communities have become an object, and not a subject of manage-
ment, which resulted in an inadequate utilization of local growth factors
and inadequate satisfaction of social needs.
Marek Potrykowski : Polish Economy Under Crisis.
In: Spatial Research and the Social-Political Changes. Pécs: Centre for Regional Studies,
1993. 37-45. p. Discussion Papers. Special
POLISH ECONOMY UNDER CRISIS
39
The fundamental difficulty in the introduction of economic reform in Poland at present
lies in the necessity of undertaking risk-bearing decisions inevitably entailing great costs
for lack of necessary reserves. The socialist mechanism of economy existing now in Po-
land has attained the limit of its economic effectiveness, and has become the model which
loses out in the worldwide competition against other systemic solutions. Furthermore, the
model in question does not offer any adequate ideological alternatives at present. It is not
clear what the shape of reborn socialism is to be, so that it could deal with dynamically
changing social conditions.
Figure 2
Prices and population income dynamics, 1980-1989
(1980=100)
Tho us.
4-
Incomes
3 -
Prices
2-
0
1981
1982
1983
1984
1985
1986
1987
1988
1989
The comparison with other countries indicates that the capacity to make sacrificies,
which is absolutely necessary to overcome current difficulties, is much smaller in Poland
than elsewhere. The degree to which members of the society identify themselves with the
goals and strategies formulated by the authorities is very low, which leads to the lack of
faith in the probability of success and to social apathy. The composition of the new gov-
ernment made up of people who had previously been active in the opposition brought new
hopes for the improvement of the country's social and economic situation. It is strange
indeed that, although real incomes for the majority of the society decline, industrial pro-
duction decreases and inflation climbs upwards, and there are no obvious signs indicating
that there may be economic improvement in sight, still there is strong approval of the
activities of the government.
There are no economic reserves, resulting primarily from a significant decrease in
national income accompanied by a strong social pressure on the consumption sphere, cre-
ating definite limitations on the magnitude of investments. Yet, the structure of the econ-
omy requires radical reconstruction, necessary also for undertaking production on a
higher technological level, for which it is expedient to bear significant investment outlays.
Marek Potrykowski : Polish Economy Under Crisis.
In: Spatial Research and the Social-Political Changes. Pécs: Centre for Regional Studies,
1993. 37-45. p. Discussion Papers. Special
40
MAREK POTRYKOWSKI
Figure 3
Changes of the share of shavings in financial resources of the population
(1980=100)
250 -
200-
150-
100-
50 -
0
'
1980 1981
1982 1983 1984 1985 1986 1987 1988 1989
On the other hand, the burden of the foreign debt on Polish economy has very serious
consequences in the form of inflation, and it shuts off the possibility to use foreign reser-
ves for financing the reconstruction of economy.
In principle, the only source of reserves is human capital. Adaptation of economic
conditions to natural tendencies towards the improvement of material situation and social
Figure 4
Investment* outlays dynamics and the dynamics of gross material product divided (GMPD)
* In the socialized economy (at constant prices; 1980=100)
110
GMPD
100
.0
Investments
•••
90
.0*
.00
.0*
80
70
•••
\
ss•
60
1981
1982
1983
1984
1985
1986
1987
1988
1989
Marek Potrykowski : Polish Economy Under Crisis.
In: Spatial Research and the Social-Political Changes. Pécs: Centre for Regional Studies,
1993. 37-45. p. Discussion Papers. Special
POLISH ECONOMY UNDER CRISIS
41
status of individuals may set great free reserves of creative energy and thereby contribute
to the dynamization of the country's development. The transition in the political setting of
government in Poland may become the main element triggering the functioning and de-
velopment of other elements of the country's socio-economic setting. Such a statement is
based upon the conviction that the political regime which was in power until quite recent-
ly significantly braked development, and that once the brake is no longer obstructive,
there should be advantageous social and economic transformations. It should be supposed
that the causes of failures of previously attempted reforms lied in the fact that these at-
tempts did not try to change the political system in any way. The necessity of the reform
of the political system in this context is the result of the necessity of passing from the
bureaucratic control mechanisms towards the market control mechanisms, the latter re-
quiring qualitatively different political conditioning than the one proper for bureaucratic
mechanism.
The present transformation of the political power setting in Poland creates new possi-
bilities for economic, social and political activities. As of now, this transformation meets
with broad social approval and enhances the credibility of the proposed development
strategies. There is hope that thereby also the perspectives for foreign capital shall im-
prove, in terms of the perceived stability of the situation in Poland, increasing the inflow
of this capital.
The government program prepared recently is meant to forge the way out of the crisis.
The main economic goal of this program consists of creating in Poland a market economy
hdving features similar to the economic systems of highly developed countries. Carrying
out such a task requires ownership transformations in the economy, together with the in-
troduction of market mechanisms and the reform of the financial system.
The transformation of the ownership structures in the economy should be carried
out on such a scale that they could determine the overall effectiveness of the economy and
also become the source of sector and branch restructuring. The law has to be changed, not
only to make it clear that private ownership of the means of production is now respected
but also, and it is even more important, to make sure that private businessmen can get
access to labour, capital, machinery and raw materials. This includes raising the hitherto
rigid limit on the number of workers they are allowed to employ and, if possible, remov-
ing the limit altogether. It also means a legal promise that private companies will be equal
to state ones when it comes to getting hold of whatever else they need to do the job.
Poland is doing its best in this area. The law promising equal treatment to private com-
panies is in the statute book, so these companies have full legal equality with state enter-
prises and can, in principle, employ as many people as they like.
Opening up the public sector. Even the most reform-minded people recon that the
public sector will continue to dominate in Polish economy for years to come. For any
economic revival, it is, therefore, essential to break up the huge inefficient public sector
into smaller units and to make them compete. The fundamental rule to be followed is the
public sale of state property, and facilitation in purchases by employees of shares of enter-
prises put out for sale. Alas, smaller units are no solution by themselves. There are too
many loss-making state companies, whatever their size is, still kept artificially alive by
subsidies because the government is afraid of closing them down.
Marek Potrykowski : Polish Economy Under Crisis.
In: Spatial Research and the Social-Political Changes. Pécs: Centre for Regional Studies,
1993. 37-45. p. Discussion Papers. Special
42
MAREK POTRYKOWSKI
The reform of the financial system is orientated towards attaining the convertibility
of Polish currency, which would make it possible to open up the Polish economy to the
world. No real competition is possible between companies, private or state-owned, until
most of the prices at which they buy and sell are set by the market. While they wrestle
with prices, subsidies and inflation, the government has to create a more flexible banking
system which lends money to firms not on a planner's whim but on the sensible objective
judgement of whether it is a good investment.
Commercial banks are needed in Poland. At present there are not any. The Poles need
help to establish a network of banks. One way is to encourage Western banks to open
branches in Poland. They would quickly attract the hard currency Poles have saved and
turn this 'unemployed' capital into working capital.
These things are the skeleton on which the flesh of an efficient economy might take
shape one day. They do not include the "normal" issues of economic management, least
of all inflation. Inflation is abnormal in Poland in the sense that the system has allowed an
extraordinary amount of inflationary pressure to build up; but it will have to be brought
under control by the methods so painfully familiar elsewhere.
Suppose Poland carried through what it has now started to do—dismantling much of
the apparatus of planning and supervision; breaking up the old state monopolies; and tell-
ing the managers of the smaller firms thus created to take it from there.
The managers of all the firms producing, say, women's shoes would then decide what
sort of shoes to produce, how many and at what price, on their estimate of what the market
wanted. Those managers who got it right could double their workers' pay, raise a large
loan for expanding their operations from a beaming fellow at one of the new commercial
banks. Those who got it wrong... This is the point at which the idea starts to wobble, and
the question of ownership becomes inescapable.
Three different things can happen to a company that gets it wrong. One is to go bust,
and put its workers on to the street. Another is to transform itself from inside, changing
over to a new line of shoes, or maybe doing something entirely different. The third is to
get taken over by somebody from outside, who will make necessary changes. All the three
seem harder with socialist companies than with capitalist ones.
The course for steering out of the crisis is conditioned by the satisfaction of definite
economic, social and political conditions. The economic condition is to curb and then
sharply decrease inflation. The social condition is the wide approval of the government
programs. The political condition is the conclusion of agreements with the IMF and the
World Bank to determine together with particular groups of creditors what the new condi-
tions of debt and interest repayment will be in accordance with the financial capacities of
Poland. Simultaneously, steps must be taken to facilitate the inflow of foreign capital to
Poland and to ensure more stable and advantageous conditions for investments than the
ones in place today. Implementation of the economic program shall, first of all, require
new credits to be obtained still this year from highly developed countries to import raw
materials and semiproducts as well as consumption goods of special social importance.
One of the possibilities for the Western holders of Poland's debt to help Polish econ-
omy is to offer some of it for sale to Western companies, fairly cheap. These companies
then could tell the Polish government that they were ready to cancel a bit of the debt in
Marek Potrykowski : Polish Economy Under Crisis.
In: Spatial Research and the Social-Political Changes. Pécs: Centre for Regional Studies,
1993. 37-45. p. Discussion Papers. Special
POLISH ECONOMY UNDER CRISIS
43
return for a share in the equity a Polish state firm. The price would have to be right, and
the Western investor would have to know that he could get a grip on the running of the
firm; but, under those conditions, this could be a way of starting to resume the state sector
of the economy, still by far the biggest part.
Short of that, the only practical form of Western assistance is the help in the building
up of the infant private sector. The main way of doing this is the joint venture. Attracting
Western partners into joint ventures requires a mixture of generous terms and bold mar-
keting. But the West argues too much over the quantity of aids, and pays too little attention
to their quality. Even small amounts of money, carefully directed, could make a big dif-
ference to Poland's attempted leap to capitalism.
The seven-nation summit in Paris in July gave the European Commission the task of
co-ordinating Western relief efforts. The first meeting concentrated on emergency food
aid for Poland, the second one focussed on help with economic restructuring, and the
Commission presented an "action plan".
The action plan by the European Commission has five priorities. For agriculture the
Commission proposes giving farm machinery and pesticides. To promote access to West-
ern countries the Commission wants to lift export quotas, reduce tariffs and let in more
farm products. To encourage foreign investment it suggests that the Poles become
eligible for loans from the European Investment Bank (guaranted by the EC budget).
Many schemes to help professional training are planned. The fifth priority is environ-
mental protection. The Commission presented its detailed ideas in private. Efforts would
be concentrated on the basin of the River Vistula.
It is hard to tell how many countries will contribute individually to the aid effort. For
example, the Paris Club of creditor governments is also waiting for the IMF agreement
before its members attempt any formal rescheduling or debt conversion.
Figure 5
Polish export volume dynamics, 1980-1989
.
(1980=100)
150
Rouble area
140
130
120
„,•••--- —*Convertible
currency area
110
ele
0
100
.m0 •
90
80
70
1981
1982
1983
1984
1985
1986
1987
1988
19 89
Marek Potrykowski : Polish Economy Under Crisis.
In: Spatial Research and the Social-Political Changes. Pécs: Centre for Regional Studies,
1993. 37-45. p. Discussion Papers. Special
44
MAREK POTRYKOWSKI
Figure 6
Polish import volume dynamics, 1980-1989
(1980=100)
120
110
Rouble area
Convertible
100
„...•
currency area
90
80
70
s
00'
60
•
1
50
1981
1982
1983
1984
1985
1986
1987
1988
1989
The economic reform in Poland has no chances of success without an opening of the
Polish economy to the outside world. Profound changes are necessary in the relations with
CMEA (COMECON). In its present form this organization is outdated. The rules of trade
Figure 7
Intermediate imports dynamics and output dynamics, 1985-1989
• Output sold of the socialized industry (at constant prices; 1984=100)
140
Imports from
the convertible
130
currency area
120
110
100
90
1985
1986
1987
1988
1989
Marek Potrykowski : Polish Economy Under Crisis.
In: Spatial Research and the Social-Political Changes. Pécs: Centre for Regional Studies,
1993. 37-45. p. Discussion Papers. Special
POLISH ECONOMY UNDER CRISIS
45
between the socialist countries must be changed, accounts must be settled in convertible
currencies, while contracts should not be signed by the representatives of governments but
by producers and intermediares. Multiannual international economic agreements should
be annulled. Currently, large firms having long-term contracts within CMEA have no in-
centive in terms of competition, and the profitability of production has been ensured by
governmental subsidies. Essential changes in that respect shall take place, however, only
starting in 1991, since until then Poland is bound by previously signed multiannual inter-
national contracts.