Economic Reform in Poland
The Aftermath of Martial Law, 1981-1988

Edited by David M. Kemme. Russian and East European Studies, Vol. 1. Greenwich, CT. JAI Press. 1991. Hardcover. $63.50.

Peter Mieszkowski

The book consists of twelve conference papers originally presented in October 1987. A few of them were updated to incorporate the momentous events of 1988-1990, and one paper, by David Mason, discusses Soviet economic reforms in the 1980s and the events leading to the formation of the first Solidarity government in Poland in August 1989.

Although the papers are uneven in scope and quality, the book is a valuable guide to the operation of the Polish economy during the 1971-1988 period, and it provides excellent information about the mechanics of a planned economy. The authors report on a rapidly changing situation in Poland's economic and political institutions, Poland's relations with the Soviet Union and the West, and on economic reforms in other east European countries. They provide a historical narrative which brings out the evolutionary nature of the changes in Poland culminating in the abolition of the Communist government and restructuring the economic system into a free market economy. However, none of the essays anticipates the actual radical reforms introduced in 1989 and 1990.

Poland's most promising export sectors have been light industry, forestry, food industry and agricultural products.
Z. Fallenbuchl, J. Svejner and R. Chaykowski provide quantitative information on the constraints faced by Polish planners during the 1970s and 1980s, and explain the failures of the 1970s. When Edward Gierek assumed power in Poland in 1971, he borrowed heavily to increase living standards and to modernize the Polish economy by importing Western technology. The foreign debt was to be serviced by expanding exports. Imports increased rapidly and real incomes did rise temporarily, but the anticipated increase in exports did not materialize. In 1977, imports were curtailed. Between 1978-82, Polish industrial production fell by 25%, largely because of the shortage of hard currency necessary to import essential intermediate inputs, spare parts and capital goods.

The "growth through exports" strategy failed because decisions on export specialization were made by central authorities with little information about export markets. Rather than establish priority sectors, the investments were spread over a wide range of industries. Svejner and Chaykowski present quantitative evidence that Poland's most promising export sectors were light industry, forestry, the food industry and agricultural products but the planners gave high priority to the development of the engineering industry and chemicals, two industries with high import content and low domestic value added. The economic reform of 1982 followed the introduction of martial law in 1981 and the imposition of economic sanctions against Poland. It was designed to weaken the control of the central planning authorities and promote self-management and self-financing of public enterprises. The failure of these reforms is outlined in the two essays by B. Kaminski and K. Crane, and these are the best essays in the book. They offer detailed documentation of the limitations of reforms, and they also provide an excellent discussion of the shortcomings of central planning.

Kaminski's paper demonstrates how the politization of resource allocation undercut the objectives of efficiency and innovation. Political considerations were given precedent over the economic ones. The state protected the large inefficient state enterprises, and the results of bargaining, which was substituted for market processes, were not subject to market evaluation and were not known to the public. The Communist Party and the bureaucracy gained power and privilege through their control over the economy and wealth creation. Attempts to reform and to decentralize the planning process were resisted by these entrenched interests.

The 1982 attempt to partially substitute the rule of law for the ad hoc rules of central authorities was diluted by exemption of various sectors from the reforms and by distortion, by means of loopholes and diverse interpretation of the laws, of the intention of the legislation. Unprofitable industries continued to get centrally allocated investment funds, and favored workers' groups with political clout got large real wage increases at the expense of the general public.

Crane's essay provides additional details of the planning process during the reform period in the 1980s. Crane notes that decentralization of investment and material balances was partial at best. Also, monetary policy continued to accommodate the enterprises that ran over their budgets. The combination of price controls, imposed to limit the reported rate of inflation, government subsidies and the financing of government deficits through the printing of money resulted in the excess demand of labor and commodities, and the galloping inflation of the late 1980s.

What does the experience of the 1981-88 period teach us about the present situation in Poland or elsewhere in the post-communist world, and about the success of the recent reforms in Poland?

The situation in Poland today is quite different from what it was three years ago. First, the material shortages and queues have been eliminated through currency convertibility and imports. Second, much of the retail and services sectors have been privatized, and a large number of new firms have been created in these industries. Third, the structure of Polish industry has changed with large declines in steel, electronics and non-ferrous metals, and increases in construction, wood, apparel and food processing. Fourth, unemployment has increased to 14% and industrial production that fell by 40% in 1990-1991 is growing slowly. Fifth, the inflation rate remains high at 40% a year; the government budget is well in excess of 5% of the GNP and there are strong political pressures to increase social spending on behalf of old-age pensioners and the unemployed.

Since 1990, Polish reforms introduced legal and administrative changes which allowed for strengthening of private property laws and for genuine competition. There are no entrenched bureaucratic interests to sabotage the rule of law, and the price system is in operation. Success in achieving controls over aggregate spending is more limited as social safety net expenditures, related to unemployment and early retirement, have grown rapidly.

The most serious shortcoming of the reforms to-date is the limited privatization of large public sector enterprises. The public governance of these firms has been eliminated and managers now operate them, sharing control with workers' councils. Without stockholders or government control there is the danger that the managers will strip the assets of their firms or pay out profits or reserves as wages; many managers have too much power, not too little. Numerous privatization schemes have been suggested but none have been adopted by Parliament. In part, political pressure from workers' councils has prevented agreement on this critical issue. Workers oppose privatization because they fear that layoffs and wage decreases would follow.

The slow pace of privatization, the growing macro-instability related to budget deficits and the uneven distribution of burdens of employment restrictions among different groups represent serious problems. Nevertheless, since 1988 Poland has made enormous advances toward the liberalization of its economic and political institutions. Comparison with other countries and Poland's own experience will show whether the economic restructuring could have been carried out more gradually, with less concentrated pain. History is of little help in answering this question; I do however believe that the course chosen was right.

Peter Mieszkowski is Allyn R. and Gladys M. Cline Professor of Economics and Finance at Rice University.

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