Cherrypicking on the Vistula: Thoughts On the Polish Economy

James R. Thompson

In Centesimus Annus, Pope John Paul II notes:

In our time, in particular, there exists another form of ownership which is becoming no less important than land: the possession of know-how, technology and skill. The wealth of the industrialized nations is based much more on this kind of ownership than on natural resources.
The "privatization" policy advocated by Professor Jeffrey Sachs and other American experts has done much to squander the kind of wealth of which the Pope speaks. If, as a result of the "privatization" of a factory, 80% or more of the workers are terminated, then there has clearly occurred a squandering of the most valuable type of resource the nation has: the skills of its workers. A tool and dye worker may require ten years past school to become a master of his craft. What happens to the wealth of the Polish nation when such a worker is dismissed his position and reduced to the status of unemployment? The skill is lost to the nation, and the worker and his family become not contributors to the economy but a drag upon it.
Poles and friends of Poland need to demand that it is time for Poland to be admitted into NATO and the EEC. The EEC tariff borders around Poland which discourage investment should be eliminated.
Recently, I spent a brief holiday in a very pleasant small hotel in Zakopane. I noted that the flower vases in the rooms bore the name of a colliery in Silesia. It turns out that the hotel used to be a guest house for the workers of that colliery. But harsh economic conditions had required that the hotel be "privatized." The workers had lost a measurable benefit for themselves and their families. This particular colliery (Wujek) had been a center of resistance during the Solidarity revolution of the 1980s. Many of the workers had lost their lives to Zomo bullets. Was this an appropriate reward for their sacrifices?

The Ursus tractor works may well go out of business. Part of the reason was the dumping by the Russians of tractors onto the Polish market at prices well below the cost of production. So, is it in the economic interest of Poland that a potentially major agricultural producer in Europe will have no tractor factory?

At FSO a deal is in the making of General Motors Europe to use one of the lines to assemble Opel automobiles for the Polish market. Apparently, the line will provide jobs for only 250 workers. But the assembly of Opels in Poland will provide a loophole for GME to avoid certain Polish tariffs. Consequently, the result may well be that Poles who would otherwise purchase Polonaises will buy Opels. Will this result in more jobs or further layoffs for FSO workers?

France and Denmark, together with EEC partners, regularly dump agricultural products into the Polish market at prices below the cost of production. But, whenever Polish farmers try to sell their hams or cherries in the EEC, regulations are discovered which makes this difficult or impossible. Frequently, the embargoes against Polish goods are obviously based purely on the pressure of European farming groups to keep the more cost effective Polish goods out.

So, then, were the Communists right after all? Is the free market simply a device whereby the rich exploit the poor?

The collapse of the Soviet Empire caused the evaporation of many of the markets for Polish goods. There had been a purposeful effort by the Soviets to see to it that the quality of Polish goods was below that acceptable to Western markets. When the Soviet market disappeared, then nobody wanted the Polish products. Does it then follow that Polish industry should essentially be wiped out, and Poles should start from zero, as though they were so many unlettered tribesmen from Borneo? Throw away the plants. Throw away the workers. Just start from nothing. Does it make sense?

But perhaps there is nothing that could be done. Perhaps it is the case that Polish industry is worthless. Really?

Let us recall the 1970s when the Polski Fiat 125 was so well built, such a bargain, that the British and others simply banned it from their markets. What about that? How was that possible?

It was possible because Polish workers were of world class caliber. Given a replacement of party hacks by foremen trained by Italian engineers, the Poles produced, in a very short time, a car which was excellent by any standards. The low Polish wage scale was utilized by Fiat to produce a car which could compete in its market niche anywhere.

Now that communism is gone, why do we not see a plethora of such investments from the West in Poland? The workers are still excellent. The wages are still well below those in Germany or Italy or France. The plants can be renovated. Why do we not see a flood of investment from the West? A good question.

In 1991 and 1992 two of my Rice colleagues (Marek Kimmel and Martin Lawera) and I engaged ourselves in the activity of assisting in the organization of a group of Polish consultants in Statistical Process Control. This is the industrial management paradigm of the late W. Edwards Deming, and has been proven both in Japan and in the United States.

The major portion of our expenses were defrayed by a Polish corporation (the International Team for Company Assistance) run by Kevin McDonald, an MBA from the Kellogg School of Management at Northwestern University. ITCA itself ran on grants from various American and United Nations agencies. As such, it was somewhat in the nature of a nonprofit foundation. The American members of the ITCA essentially did all their business in English.

We formed a Quality Control Task Force, consisting of a dozen Polish statisticians and presided over by Jacek Koronacki, a Polish colleague who had visited Rice as a visiting professor. The members of the team all held doctorates and continued in their academic pursuits while attending to their SPC activities on a consulting basis. The salaries paid for 80 hours consulting per month were extremely modest-around $3 per hour as opposed to customary American rates of $150 per hour. (The three of us from Rice worked for nothing beyond living expenses.) Inasmuch as the QCTF members were all professional statisticians, explication of the Deming method was something they picked up very quickly. Of course, all members of the QCTF were Polish speaking with around half having proficiency in English. All consultation in SPC was, therefore, done in Polish.

The training manual for the QCTF members was a set of notes which I had used for some years in consultation in the USA, translated into Polish by Dr. Koronacki. Within twelve months after we began our activities, Jacek and I wrote a book in English for Chapman & Hall; and that book replaced the lecture notes as a basis for instruction for the QCTF members. The book (Statistical Process Control for Quality Improvement) will shortly appear in Polish.

By the terms of our agreement with the ITCA, the QCTF members consulted on a regular basis with a dozen Polish corporations in various stages of "privatization." My general impression of Polish engineers, foremen, and workers was that they were highly motivated and well trained and were generally at least the equal of their counterparts in the United States.

The management of the firms was of widely varying quality. Some would have been an asset to any company anywhere, but these were unusual. Most of the managers were from the junior league of the old People's Republic managerial nomenklatura. They all spoke English and they generally had experienced something like an accelerated American MBA training program. They tended not to spend much time on the work floor and generally would have had the same kind of difficulty an American MBA would have if he were asked to perform the tasks of any of the industrial workers in his company. Like American MBAs, they knew a fair amount about marketing, finance and accounting, and very little about industrial production.

The measure of productivity used by MBAs is something called "labor productivity" and it consists in dividing the profit of a firm by its number of employees. So, for example, if a firm employs 1,000 workers and produces a profit of $10,000,000, the labor productivity measure is $10,000/worker. Let us suppose that one part of the firm employing 100 workers produces $5,500,000 profit. Then that part of the firm has a labor productivity of $55,000/worker. The remaining 900 workers produce $4,500,000 profit; and have a labor productivity of $5,000/worker.

A person who used the labor productivity measure argument might decide to shut down all the firm except for that where the 100 highly productive workers were employed. Such a move would appear to increase the overall productivity of the firm more than five fold. By firing 90% of the work force, the firm would have become "more productive." And, if it were a Polish firm being considered, the act of putting 900 people on the street without a job would have "increased the productivity of Poland."

The labor productivity argument becomes more compelling when we change the figures to reflect that the company is currently experiencing a loss of $1,000,000, even though the productive group of 100 workers is generating a profit of $5,500,000. In other words, the 900 less productive workers are generating a loss of $6,500,000, giving them a productivity measure of -$7,222/worker.

In this latter case, it would appear clear that a decision to fire the 900 workers with the heavy loss is appropriate. In a long standing free market, that would indeed tend to be appropriate, although one must ask about the quality of management which would ever permit such a situation to develop. (The coming of the automobile definitely negatively impacted saddle making, but it did not happen overnight, and a number of saddle companies handily converted themselves into shoe companies, for example.) But in the Polish situation, the market had not been free prior to 1989 and most of the market loss happened due to poison pills put into the old communist system to spike any attempt at a free market.

For example, the Ursus Tractor Works used over 200 subcontracting factories all over the Soviet Bloc. The failure of any of these simply meant that finished goods could not be turned out until other sources of parts were obtained. And, after the collapse of the Communist government, a number of these subcontractors did cease operation. What was the solution of Ursus? Do the best they could. Try to find alternate subcontractors (using a pool from an economy formed by the Communists so that there would be none) and juryrig internally the rest. What was the short term result? A decrease of reliability in Ursus tractors. It should also be noted that Russia dumped its backlog of tractors onto the Polish market at costs well below those of production. The Polish product was now quality inferior to a rather wretched Russian product sold at half the price of the Ursus tractor. And in Poland, short term losses generally translate into company failure. There is no cash reserve to effect the steps for restructuring suppliers, subcontractors, markets, etc.

According to the "shock therapy" paradigm of Sachs, the solution for Poland is simply to let the market work its will. Plant closings may indeed be justified in situations where the commodities being produced are simply impractical. For example, many of the old heavy industries in Poland cannot be competitive without complete (and prohibitively expensive) retooling. Steel production, for example, which employs many tens of thousands of employees, is not an economically feasible option for continuation. Regrettably, there must be some jobs which will be lost-permanently.

But there are other industries which will die simply because of the absence of capital for the training and restructuring necessary to bring Polish products up to good quality levels. I recall one valve company which had a limited number of contracts with engine manufacturers in Italy and in the United States. The workers in the company are well trained and highly motivated. But they are out of work. No one is coming forward with the rather small amount of capital required for a modest amount of retooling. The best that any worker can hope for is that some international speculator, a "cherrypicker," will come forward with 5% of the actual value of the plant. Then perhaps that part of the plant which shows a profit will be retained. This will typically involve termination of 90% of the work force.

Again in Centesimus Annus, Pope John Paul II writes

It would appear that, on the level of individual nations and of international relations, the free market is the most efficient instrument for utilizing resources and effectively responding to needs.
I could not agree more. But Poland has passed from 50 years of destructive occupation. The good Samaritan was not good because he refrained from robbing the already robbed Israelite. Indeed, those who passed on the other side of the road were doing no apparent damage to the assaulted man. The good Samaritan actually helped his injured brother. He did not simply bend over and whisper in the Israelite's ear, "Well, be of good cheer. The robber is gone away. You have nothing to fear from him further. If you will be patient, I am sure that some speculator will come along very shortly and pay you five percent of the value of your goods which have not been stolen."

What did the workers of Poland fight for? Freedom, independence, certainly. But they also assumed that without the Russian bear and the UB hyena to feed, their material lives would be better too. They never dreamed that the West would do naught for them, save give the international cherrypickers their address.

Poor, naive Poles. Did they really believe the Americans would remember that Kosciuszko saved their Revolution by building the West Point defenses which split Burgoyne's army from the British coastal forces? Did they really think the Austrians would remember Sobieski's delivering them from the Turks? Did they really think the British would remember the 303 Squadron during the blitz or Anders' Second Corps' storming of Monte Cassino?

Apparently, it is unrealistic to expect the Americans, say, to contribute significant financial resources to help Poland. But it is not unreasonable for Poland to demand admittance to the European community which it has defended for 400 years. And the Americans can help in that direction. (Had President Bush demanded Polish admission to the EEC as a condition to America's agreeing to German reunification, it could have been achieved in a twinkling.) The tariff borders around Poland which discourage investment should be eliminated.

Poles apparently, are disposed to suffer in silence. But that is not appropriate. Poles and friends of Poland need to demand, yes demand, in every forum from the United Nations to wardheeling in Chicago that it is time for Poland to be admitted into NATO and the EEC forthwith.

James R. Thompson is Professor and Chairman of the Department of Statistics at Rice University. His books include Empirical Model Building (John Wiley 1989) and Statistical Process Control for Quality Improvement, co-authored with Jacek Koronacki (Chapman & Hall 1993).

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