THE SCOPE OF POLAND'S ECONOMIC DILEMMA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80T00702A000100020005-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 19
• Document Creation Date: December 12, 2016
• Document Release Date: June 1, 2001
• Sequence Number: 5
• Publication Date: June 1, 1978
• Content Type: REPORT

1 National Secret
d F1*r&pIease 2001/08/02 : CIA-RDP80T00702A000100020005-a'opcoRN
Center
cret
--"-78 034D
' ne 1478
Approved F=or Release 2001/0 IA-RDP80T00702AO O t 0 0005 p'
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
NATIONAL SECURITY INFORMATION
Unauthorized Disclosure Subject to Criminal Sanctions
DISSEMINATION CONTROL ABBREVIATIONS
NOFORN- Not Releasable to Foreign Nationals
NOCONTRACT- Not Releasable to Contractors or
Contractor /Consultants
PROPIN- Caution-Proprietary Information Involved
NFIBONLY- NFIB Departments Only
ORCON- Dissemination and Extraction of Information
Controlled by Originator
REL ...- This Information has been Authorized for
Release ?7o ...
clauuled by 015319
Exempt from General Decloulfkatlon Schedule
of E.O. 11652, exemption category,
Sec. 5B(1), d2)k(3)
Automkaly e id on,
dote Impoufble to detamine
NFAC publications are available on microfiche. To get a
microfiche copy of this publication call:OCR/DSB); for future
issuances in addition to or in lieu of hard copies, call _PPG/RD).
Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
SECRET
NOFORN
The Scope of Poland's Economic Dilemma
Central Intelligence Agency
National Foreign Assessment Center
June 1978
Key Judgments
Poland's leadership is confronted with growing consumer unrest over
chronic shortages of meat and quality consumer goods and with balance-of-
payments stringencies that have created conflicting, perhaps irreconcilable,
demands. In an effort to deal with these problems, the current five-year
development plan has been revised to increase the availability of consumer
goods and services and to reduce capital goods imports. The shift will reduce
economic and industrial growth and, over the next year or two, probably cut
the growth of imports from the West. Although such actions will not solve
either problem, it is probably the most Poland can do in the short term, given
its severe political and economic constraints.
Poland's difficulties stem from economic policies initiated in 1970 which
simultaneously pushed rapid industrialization and sharply rising living
standards. To help achieve these goals, Poland imported massive amounts of
Western technology and equipment with attractive credits made available by
eager Western exporters. To boost consumption, the regime permitted
incomes to grow rapidly, increased the supply of housing and quality
consumer goods, and kept retail prices stable.
By 1974, these policies began to founder:
? The growth of exports to the West could not keep pace with sharply
rising import growth and mounting hard currency debts.
? Despite a declining growth of exports, imports were maintained at
peak rates.
? Worker income continued to grow rapidly while the availability of
consumer goods increased slowly.
? To avoid worker dissatisfaction, prices were kept at 1967 levels while
costs rose and food subsidies soared.
SECRET
Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
SECRET
NOFORN
Several years of bad weather pushed up agricultural imports and cut
the growth of consumption, particularly of meat.
Despite the growing economic difficulties, the regime continued to
pursue policies designed to boost meat consumption-the symbol of improve-
ment in living standards for the Poles. The regime instituted long-range
policies to strengthen the private farm sector-the source of 80 percent of
Poland's agricultural output-to encourage increased livestock production.
Grain imports were boosted sharply to increase the domestic fodder base.
Nevertheless, meat output fell and growth of per capita meat consumption has
leveled off, despite sharp cuts in exports in 1976 and increased imports in
order to bolster domestic meat supplies. Meanwhile, these trade measures have
contributed substantially to the trade deficits with the West, now running
about $2.5 billion a year, and to a hard currency debt which by the end of
1977 totaled $12.8 billion.
The outlook over the next few years is for increasing economic con-
straints. Exports to the West are growing at a substantially lower rate as they
encounter trade barriers, Western economic sluggishness, and competition in
Western markets. Meanwhile, the revised development plan and continued
hard currency deficits which have forced cuts in imports from the West will
impinge on long-run economic growth. If Poland is to maintain a level of
imports sufficient to prevent any further cutbacks in planned growth, it must
either receive substantial assistance or arrange a large-scale debt rescheduling.
To be effective, aid must come soon. Further cutbacks in growth will reduce
growth in real wages and other worker benefits. The result is likely to be more
worker unrest.
Approved For Release 2001/08/02: CIA0T00702A000100020005-3
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
SECRET
NOFORN
The Scope of Poland's Economic Dilemma
Introduction
Poland's leadership currently is confronted
with growing consumer unrest over chronic
shortages of meat and quality consumer goods
and with balance-of-payments stringencies that
impinge on economic growth. These problems
stem largely from (a) accumulating hard curren-
cy debts that are placing constraints on imports,
(b) bad weather, which contributed to stagnating
agricultural output, (c) economic recession and
slow recovery in the West, which has reduced the
growth'ot Polish exports, and (d) critical errors in
economic ' policy (made largely out of domestic
political, considerations) to deal with these
problem. s.*
The burgeoning balance-of-payments problems
which have sharply boosted Poland's hard cur-
rency debt result in large part from an inability
to rapidly increase exports to the West while
imports remain high. Imports have not only risen
faster than Poland's export capability but its
traditional exports also have encountered trade
barriers and reduced demand in Western mar-
kets. Moreover, new export-oriented industries
developed with large hard currency borrowings
have run into marketing problems because of
quality shortfalls and obsolescence.
So far, the Gierek regime has failed to deal
effectively with its problems. It has made some
cuts in capital goods imports, but has made only a
modest retreat from its high-growth policies. At
the same time, fearing adverse consumer re-
actions, Warsaw continues to freeze retail prices
of basic foods and has failed to contain wage
growth, thus exacerbating chronic consumer
goods shortages.
Impact of Poland's Development Strategy
Since coming to power in 1970, the Gierek
regime adopted development policies that have
placed emphasis on modernizing Poland's
economy and boosting living standards. Gierek
believed that a "new" approach was impera-
tive-Poland's economic growth was steadily fall-
ing behind that of the less developed East Euro-
pean countries which had begun modernization
programs in the 1960s.
To help achieve modernization, Poland import-
ed massive amounts of Western technology and
equipment with attractive credits made available
by eager Western exporters. Although the Poles
expected these credits to sharply increase their
hard currency debt, they believed repayment
could be made with expanded exports to the
West of goods produced in the newly constructed
plants. To raise living standards and labor pro-
ductivity, the regime boosted incomes and
supplies of housing and quality consumer goods
and kept food prices stable-especially for meat.
Poland's development strategy was highly suc-
cessful in 1971-73 as real GNP grew 7.3 percent
annually. The rapid rise in real incomes enabled
consumer spending to surge. Large trade deficits
caused the hard currency debt to grow, but it was
manageable. By 1974, however, the economic
picture began to darken. Constraints were devel-
oping as the trade deficits jumped and the hard
currency debt rose sharply. Adding to the diffi-
culties were problems beyond Warsaw's control,
particularly unfavorable weather, which con-
tributed to stagnating agricultural output in
1974-77 and the Western recession and subse-
quent sluggish recovery, which reduced the
growth of Polish exports.
The regime, moreover, compounded its trade
problems with critical policy errors. With the
onset of the Western recession, most East Europe-
an countries cut back on plans for imports from
the West, and, in some cases, on economic growth
plans. But the Poles, driven by the desire for
rapid industrialization and the belief that domes-
Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
SECRET
tic political stability was linked to further im-
provement in living standards, continued to push
their ambitious development program. As a result
Polish imports of Western industrial goods con-
tinued to increase.
Meanwhile, the regime permitted consumer
incomes to grow rapidly, primarily by not bring-
ing under control unplanned increases in work-
ers' bonuses. The 11-percent average annual
growth in aggregate real incomes in 1971-76 far
outstripped available supplies of consumer goods
and services. This inability to satisfy rising con-
sumer demands, especially for meat, generated
considerable consumer unrest, necessitating grain
and meat imports to at least maintain the level of
meat consumption.
Meat-the Persistent Problem
"Mat consumption is a critical element in
Polish economic policy. Not only does it impact
heavily on the trade deficit but its growth has
significance for domestic tranquility. ' It was one
of the chief issues that brought Gierek to power.
In December 1970 Gierek's predecessor, Wlady-
sla% Gomulka, boosted meat (and other food)
' The Poles' sensitivity to the supply of meat reflects their rapidly
rising incomes and the tack of alternative consumer goods on which
to spend that income. The only effective outlet for the consumer is
to improve the quality of the diet. Thus, much of the Poles'
spending centers on meat and meat products, especially pork. The
low relative prices of meat intensifies the problem by shifting an
even larger share of spending to these products. Government pricing
policy and the consumer attitude toward increased meat consump-
tion, which is equated with social status, lead to chronic excess
demand and consumer unrest
prices sharply to stem rapidly rising demand.
Polish workers, already chafing over government
efforts to clamp down on wage growth, found the
increase too much to accept, particularly during
the Christmas season, when meat purchases are
increased. They reacted violently.
Gierek's Initial Success
Gierek moved quickly to calm the populace by
importing meat and raising wages for the lowest
paid workers. In March 1971 he rescinded the
food price hikes and froze them at 1967 levels
(the last time prices had been raised signifi-
cantly). In order to provide incentives for private
farmers (who account for almost 80 percent of
Poland's agricultural output) to boost production,
the government abolished compulsory grain
deliveries to the state, raised purchase prices for
grain and livestock, and increased grain imports.
Private farmers also were given legal title to their
land and were brought under the national health
service.
Gierek's policy met with early success. Four
consecutive record grain crops in 1971-74 and a
sharp increase in grain imports significantly
expanded the fodder base (see table 1 and figure
1). Meanwhile, government purchase prices for
cattle and hogs were set well above the cost of
feedstuffs (see table 2). This improved profitabil-
ity of private farming contributed significantly to
a 27-percent jump in livestock production and a
25-percent rise in per capita meat consumption
(see table 3). Moreover, enough meat was pro-
duced to also permit a large boost in exports.
of which:
Wheat ............................ 4.6 5.5
five .................................. 5.4 7.8
Barley .............................. 2.1 24
Potatoes .................................. 50.3 39.8
Sugar beets ............................ 12.7 12.6
Fodder (root) crops .............. 8.2 6.8
vegetables .............................. 4.2 35
5.1 5.8 6.4 5.2 5.7 5.4
8.1 8-3 7.9 6.3 6.9 6.2
2.8 3.2 3.9 3.6 3.6 3.4
48.7 51.9 48.5 46.4 50.0 41.3
1-1.3 13.7 13.0 15.7 15.1 15.9
8.0 8.5 8.0 7.8 8.4 8.4
3.5 4.1 3:8 4.3
3,6 4.0
Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
Poland: Grain Production, Consumption, and Trade'
1970/71 71/72 72/73 73/74 74/75 75/76 76/77 77/78
Marketing Year ending 30 June Estimate
1. Grains include wheat, rye, barley, oats, mixed grains, corn and sorghum.
5]5260 2]8
Poland: Government Purchase
Prices for Livestock and Cost of Feed to Farmers
Cattle prices ..........................
109
143
154
178
183
202
234
Hog prices
Slaughter ............................
126
134
134
135
141
165
198
Bacon ..................................
114
122
123
124
130
151
179
Feed concentrates ..................
96
100
103
108
123
172
NA'
I Not available.
The Policy Falters fall potato crop-a major source of feed for
hogs-and other fodder crops forced many pri-
In 1975 the livestock expansion policy began to vate farmers to purchase a larger than usual
falter under the weight of rapidly rising costs, amount of livestock feed from the state. More-
falling profits, and bad weather which reduced over, farmers were reluctant to sell grain to the
grain and fodder crops. A shortfall in the 1974 state, preferring to keep it for their own use. Both
SECRET
Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
Poland: Per Capita Consumption of Selected Foodstuffs
Of which:
Pork ................................ 32.8 373
Beef ................................ 12.5 10.8
Potatoes .................................. 189.0 187.0
Sugar ...................................... 39.6 40.9
Vegetables ............................. 85.8 83.8
Fruits ...................................... 20.3 18.7
1973 1974 1975 1976
611 65.6 70.3 70.0
38-8 39.4 40.9 34.8
11.5 13.1 15.5 18.8
183.0 177.0 173.0 171.0
42.0 4419 43.2 43.9
93.0 84.3 94.0 88.2
20.3 19.4 21.4 28.5
Poland: Inventory of Livestock Herds and Production
of Selected Livestock Products
1972 1973 1974 1975 1976 1977
Livestock
Hogs' .................................. 15.2 17.3
State farms ................... 1.9 2.3
Private farms 13.3 15.0
Cattle . ................................ 111 11.5 State farms ................... 2.0 21
Private farms ................ 9.1 9.3
Poultry ................................ 88.9 92.9
Livestock products
Meat ' .................................. 2.215 2.485
Of which:
Beef ............................ 456 439
Pork ............................ 1,313 1.590
Milk .................................... 15,148 15.766
Butter .................................. 128 162
Preliminary.
As of 30 June
Not available.
(:areas weight.
factors pushed up Polish grain imports in a tight
world grain market. The higher cost of these
imports was passed on to the farmer, but the
regime failed to compensate the farmer with
higher purchase prices for his livestock.
The resultant profit squeeze forced many
farmers out of hog raising. By mid-1975, hog
numbers on private farms had fallen 6 percent
from their 1974 peak (sec table 4). This trend was
further exacerbated in 1975 by drought-induced
19.8 21 5 21.3 18.8 20.1
2.8 3.5 4.3 4.7 5.1
17.0 18.0 17.0 14.1 15.0
12.2 13.0 13.3 12.9 13.0
2.4 17 2.9 3.1 3.3
9.8 10.3 10.4 9.8 9.7
94.2 96.6 99.8 79.2 NA '
478 636 695 749 NA
1,771 1,888 1.793 1,537 NA
16,245 16,668 16,377 16,521 17,100
181 198 193 217 244
shortfalls in grain and potato production. Even
with massive imports, feed supplies remained
expensive. By mid-1976, hog numbers on private
farms had declined an additional 17 percent.
More important, sow numbers dropped almost 20
percent, hampering future efforts to rebuild
herds.
As livestock population declined, meat short-
ages emerged in late 1975. The government was
forced to resort to what it hoped would be
-1 SECRET
Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
SECRET
stopgap. measures to boost domestic supplies;
meat exports were sharply curtailed and imports
were increased. Nevertheless, store queues
lengthened and consumer tensions worsened.
Critical Errors in Pricing Policy
The meat problem would have been less severe
if the regime had let meat prices, frozen at
unrealistically low levels since 1967, rise grad-
ually over the years. But the regime procrastinat-
ed for fear of adverse consumer reaction. By
early 1976, however, the Polish leadership real-
ized that domestic meat supplies could not be
increased significantly in a short time and decid-
ed to curb demand for meat and other quality
foods by raising retail prices. Moreover, the con-
tinuing price freeze in the face of steadily rising
costs had sent government subsidies soaring. In
1975, food subsidies consumed 14 percent of the
national budget compared with 6 percent in
1970.2
Gierek's advisers decided that any price in-
crease would have to be substantial to have much
effect on meat consumption, because Polish de-
mand for meat is highly price inelastic. 3 In a
major miscalculation, the regime decided on a
steep, one-shot price boost. On 24 June, Prime
Minister Jaroszewicz announced that meat prices
would go up 69 percent; total food prices, 40
percent; and the cost of living, 15 percent. The
government hoped to ease the impact by raising
wages of low-income workers by 20 percent and
those of middle- and high-income groups by at
least 10 percent. It also expected to stimulate
meat deliveries to the market by increasing pur-
chase prices for livestock by about 20 percent.
Although expecting higher prices, the populace
was stunned by the magnitude of the increases.
Worker reaction was swift and often violent.
Fearing a nationwide strike, the regime withdrew
the increases the next day "for further
consideration. "
E By the end of 1977 the share had risen to more than 15 percent.
' Polish studies indicate the demand for meat is highly income
elastic-ranging from 0.6 to more than 1-with the highest elastic-
ity in the lowest income brackets. Given the lack of adequate
substitutes, a high income elasticity would indicate a highly price
inelastic demand for meat at prevailing, low state-set prices.
Despite subsequent efforts to mollify consum-
ers, unrest remained high during 1976. The Poles,
anticipating price hikes later in the year, began
hoarding many consumer items,.only intensifying
existing shortages. The situation became so seri-
ous that the regime was forced to introduce sugar
rationing in August. De facto rationing of meat,
coal, and other commodities occurred in many
localities through limits on purchases imposed by
store personnel and local officials.
The government eventually announced post-
ponement of a decision on food prices for at least
a year, until Poland's economic problems could
be studied. Meanwhile, to bolster domestic meat
supplies, the government, acceding to the year-
long pressure to reduce meat exports, cut exports
by 60 percent in the second half of 1976 and
imported 42,000 metric tons of meat. Some
100,000 tons of meat reportedly were imported in
1977. These measures, however, merely enabled
per capita consumption of meat to remain at the
1975 level.
Although a good harvest in 1976 enabled the
regime to begin rebuilding herds and grain
stocks, poor weather in 1977 again cut grain and
fodder output. We estimate the harvest at about
19.4 million tons-some 7 percent below the 1976
level and about 16 percent below the record 1974
crop. In addition, the potato crop was 17 percent
below 1976. In order to maintain its livestock
expansion program, the regime was forced to
continue its costly imports; otherwise it would
have to initiate distress slaughtering.
The disastrous 1977 harvest so far has had little
impact on livestock production. In contrast to
1975, when policy blunders aggravated the situa-
tion, the government intervened effectively. The
regime raised purchase prices and introduced
other measures that established a favorable price-
cost structure, encouraging farmers to carry over
livestock inventories through the winter. In addi-
tion, Warsaw publicized its planned large expen-
ditures on grain imports to assure private farmers
of adequate feed supplies. Consequently, hog
numbers at the end of 1977 were 23 percent
higher than at yearend 1976. Perhaps even more
significant, the number of sows on private farms
increased 16 percent.
Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
Despite the increase in hog numbers, reduced
meat exports, and substantial meat imports, meat
supplies in 1977 still were lower than in 1976
because the larger numbers of livestock were not
yet ready for slaughter. Hogs require a leadtime
of 12 to 18 months before they are ready for the
market. As a result, consumer unrest over meat
shortages remained high throughout the year.
Occasional scuffles requiring police intervention
broke out at state-controlled meat stores, where
consumers had to stand in line for many hours.
Silesian miners, the elite of Polish workers, also
staged strikes to protest the shortages. Reports of
flood-induced crop losses also generated panic
buying of flour, rice, and groats.
The Growing Trade Gap
Poland's meat policies have contributed signifi-
cantly to the country's trade deficits with the
Poland: Trade Balance With the Developed West ---
West, which have burgeoned since 1972 (see
figure 2). Imports surged, reaching $6.6 billion in
1976-more than seven times the 1970 level. A
substantial part of the rise represented machinery
and equipment, which totaled more than $9
billion in 1971-76. The increase in imports of
high-priced Western grains and feedstuffs also
contributed to the sharp rise, particularly in the
latter part of the period. In 1976, imports of
agricultural products and foodstuffs totaled $1.3
billion, more than six times the 1970 level. Sharp
price rises in 1973-74 for imported oil, chemicals,
steel, cotton, grain, and soybean meal also con-
tributed to the deficit. In 1971-76, import prices
rose nearly 60 percent. Although export prices
rose faster, the impact was offset by a faster rise
in the volume of imports than of exports.
While imports from the West grew almost 40
percent annually in 1971-76, exports rose only 23
Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
percent a year. About 40 percent of the total rise
in export value represented higher export prices.
Real exports actually declined in 1974-75 as 'the
economic recession in the West took its toll. By
1976' Poland's trade deficit with the West totaled
$3.3 'billion-with imports twice the level of
exports-in spite of some recovery in exports and
attempts to curb import growth. Exports also
were affected by the cut in meat exports to
counteract consumer unrest, an import ban im-
posed in 1974 on beef and cattle by the European
Community, and the United Kingdom's entry
into the EC (which cut Poland's bacon exports by
one-half).
Efforts to bring the hard currency trade deficit
under control in 1977 by boosting exports were
thwarted by sluggish Western economic recovery
and soft world prices for Poland's major exports.
Warsaw, however, succeeded in reducing im-
ports. Imports of machinery and equipment and
of some industrial materials were cut substan-
tially and some hard currency raw material
purchases were shifted to the USSR. As a result,
Poland cut its trade deficit with the West by an
estimated $800 million.
Financing, the Deficit
sources. Invisibles have contributed little. By
1975, mushrooming interest payments more than
offset net earnings from .services and transfer
payments. By the end of 1.977. Poland's net debt
to the West totaled about $12.8 billion, compared
with $800 million in 1970 (see table 5). Poland's
major Western creditors are the United Kingdom,
West Germany, and France, each of which holds
roughly 20 percent of Poland's hard currency
debt. The United States accounts for only 4
percent of the debt. 4
Poland's early borrowing was largely in the
form of government and government-backed
credits. In recent years, however, Poland has
become heavily dependent on private credit from
Western commercial banks (see table 6). The
borrowings soared in large part because of War-
saw's need to cover immediate financial needs
arising from its large trade deficits and growing
debt service payments. By yearend 1977, almost
60 percent of Poland's net debt consisted, of such
borrowings. As a result of the sharp rise and the
rapid change of the structure of the debt, the
share of merchandise exports. required to service .
To cover the trade deficits, Warsaw has had to
borrow heavily from foreign official and private Excluding Polish liabilities to foreign branches of US banks.
Table 5
Poland: Estimated Hard Currency Balance of Payments
1970 1971 1972 1973 1974
Million US $
1975, 1976 19771
Merchandise exports, f.o.b. s .................. 962 1,099 1,397 2,063 2,865 3,026 3,373 ' 3,660
Merchandise imports, f.o.b.. .................. 901 1,075 1,772 3,431 5,233 6,076 6,636 6,120
Services, net ............................................ Negi Negl 5 -10 -5 -15 - 25 -25
Interest income ........................................ - 40 - 40 - 45 - 80 -240 -400 -640 - 860
Transfer payments, net .......................... 110 140 220 300 . 320 .375 560 . 570
Current account balance .................... 131 124 -195 -1,158 -2,293 -3,090 -3,368 -2,775
Financed by medium- and long-term
credits, net' ........................................ -10 30 250 700 1,400 2,000 2,200 2,000
Errors and omissions 4 ............................ -121 -154 -55 458 893 1,090 1,168 775
Outstanding net debt .............................. 770 800 1,100 1,900 3,950 6,930 10,200 12,800
Percent
Debt service ratios " ................................ 20 19 20 21 27 43 49
' Preliminary.
' Trade with the developed West.
' For the purposes of'this paper, medium- and long-term credits are those with repayment periods of more than one year.
* Including short-term borrowing as well as some credits of up to five years. Also included are hard currency trade balances with'
the less developed countries and changes in foreign exchange reserves.
s-Repayments of principal on medium- and long-term debt and interest on all debt as a percentage of merchandise exports to the
developed West:
Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
Poland: Estimated Structure of the Net Hard
Currency Debt '
Total .......................... 770 6,930 10,200 12,800
Western govern-
ment-backr-,l ...... 320 2,130 2,600 3,200
Western govern-
ment' .................. 370 506 760 1,000
Private credits from
Western com-
mercial banks ....
Other ......................
4.010
284
5.800
1,040
7,400
1.200
Assistance From Moscow
In 1976, Poland appealed to Moscow for assis- B
tance to case its hard currency trade and financ-
ing difficulties. Moscow responded with a sub-
stantial aid package, including a 1-billion-ruble
loan, above-plan shipments of raw materials,
consumer goods, and a resumption of grain deliv-
eries-suspended in 1975-76 as a result of the
disastrous 1975 Soviet grain harvest. The Soviets
agreed to boost annual crude oil shipments from
I I million tons to 13 million tons in 1977-80 and
may have agreed to increase deliveries of raw
materials, such as iron ore, that Poland buys from
the West for hard currency. Moreover, the Sovi-
ets reportedly will pay for Polish equipment for
joint projects of the Council for Mutual Economic
Assistance in the Soviet Union on delivery. Pre-
vious payments have been made only after a
venture was in operation.
There are no indications of any new assistance
from Moscow since its loan and other promises of
help given in 1976. Clearly, any program of
economic assistance large enough to defuse the
Polish situation would imply painful sacrifices for
the Soviet economy and would be difficult for the
Soviet leadership to undertake unless there were
clear threats to Poland's political stability.
End of year.
Including amounts outstanding on US Export-Import Bank,
Commodity Credit Corporation, and PL-450 credits and on a West
German official financial credit.
the debt jumped from an estimated 27 percent in
1974 to 60 percent in 1975. s
Despite the reduction in Poland's trade deficit
last year, rising debt service obligations required
Poland to borrow more than $4 billion for the
second year in a row. Warsaw drew about $1.5
billion in government and government-backed
credits. Poland was able to raise the balance from
commercial banks, but probably had to pay
stiffer front-end fees.
3 The 1977 ratio drops to 45 percent if gross earnings from
invisibles are added. But of invisibles earnings of roughly $1.2
billion (excluding interest), less than one-half was available to
finance merchandise imports; the remainder covered expenditures
on services.
Revising the Economic Plan
More for the Consumer
The continuing threat of consumer unrest
forced the Polish leadership to revise the 1976-80
plan to increase the consumers' share of the pie
and lower the foreign trade targets (see the
appendix). In December 1976 the regime an-
nounced that agriculture, housing, communal
Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
services, and the food industries will receive 45
percent of total investment during the period,
compared with a 35-percent target in the original
plan. Production for the domestic market is to
increase 60 percent, instead of 42 to 45 percent,
and consumer services are to grow by 70 percent
versus the original 49 percent. Not all the
changes, however, were good news to the con-
sumer. Because of the intensity of the livestock
problems, livestock production and meat con-
sumption targets were cut.
Poland's efforts to meet the revised plan have
had mixed results. National income last year
failed to grow at the planned rate of 5.7 percent,
largely because of the stagnation in agricultural
production. The increase in industrial production,
on the other hand, hit 8.6 percent, exceeding the
1977 plan rate of 6.3 to 7.3 percent. Meanwhile,
the regime attempted to freeze total investments
in 1977. Even so, the revised investment plan was
not met because there was a greater shift of funds
from heavy industry to what Warsaw perceived
as more urgent areas of housing, consumer indus-
tries, and the food program.
Information available on the 1978 plan suggests
that Warsaw already is retreating somewhat from
the goals set for 1980. National income and
industrial production, for example, are slated to
grow at rates of 5.4 and 6.8 percent, respec-
tively-well below the average annual rates of
the five-year plan. The 1978 plan restates the
freeze in total investment and its restructuring
with emphasis on housing construction, food pro-
duction, and other consumer oriented areas. As
the leadership continues to stress consumer wel-
fare, increased expenditures in this area will have
to be at the expense of economic growth. The
revised 1980 goals for livestock production still
stand though their achievement is recognized to
be "a very difficult task."
Bigger Role for the Private Sector
Perhaps the most striking feature of the revised
1978-80 plan-representing a reversal of past
government policy-is the expansion of private
activity in the consumer services sector. The
leadership hopes that the private sector will
SECRET
provide the bulk of the growth in the supply of
services during the remainder of the plan period.
To stimulate this expansion, the government:
Raised the tax-free limit on private service
income by 500 percent.
Reduced taxes on private business.
Increased the availability of credit to private
business.
Included private craftsmen in the social in-
surance system.
Established local government offices to assist
private craftsmen in locating commercial
premises and obtaining materials and
equipment.
Created a new government entity to" import
small tools and equipment to help expand
private services.
More Realistic Trade Goals
The original five-year plan called for total
exports to the West to grow more than 20 percent
annually, pushing trade into balance in 1979 and
into a $1 billion surplus in 1980. By the end of the
1976, however, trade targets were revised as
Poland was confronted with a decline in some
goods available for export and continued weak
Western demand for Polish goods. Overall export
targets were cut from an annual rate of 15.6
percent to about 12 percent and import growth
from 9.4 percent to less than 5 percent. Though
undefined, trade targets with the West were
accordingly reduced.
Despite these cuts, the revisions still allowed for
balanced trade with the developed West by 1980.
But this goal required exports to grow 15 percent
each year and imports not to grow at all. In 1976,
exports grew only 11 percent while imports grew
9 percent, yielding a record hard currency trade
deficit of $3.3 billion. In 1977, exports to the
developed West grew almost 9 percent but im-
ports fell about 8 percent. The obvious inability
to achieve the revised export goal forced its
abandonment. The 1978 plan, for example, calls
for exports to grow only 9.2 percent and imports
1.4 percent. Now, however, Minister of Foreign
Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
SECRET
Trade Olszewski is pushing even harder to reduce
the deficit and has called for Poland to cut
imports by more than 3 percent in 1978 while
striving for an increase of 10 to 12 percent in
exports for the balance of the plan period.
Even with zero import growth in 1978-80,
however, Poland still might achieve its economic
growth plans for the remainder of the decade.
Because domestic investment is to increase slowly
(3 percent annually, compared with 18 percent
annually in 1971-75), imports of Western
machinery and equipment-almost 40 percent of
Poland's hard currency imports--will be cur-
tailed. But this cut should have little adverse
short-run impact on economic growth during this
period because of a large supply of equipment in
the pipeline and some excess plan capacity.
Agriculture-a Key Problem Area
Even with increased investment, agriculture
will remain a major problem over the next few
years. Good, or even normal, weather could bring
grain and fodder production to record levels, but
sizable imports of animal feeds still would be
required. Without these imports, Warsaw will be
unable to achieve sufficient growth in livestock
production to reach the consumption target for
1980. Moreover, the leadtime required to rebuild
livestock herds means that meat production prob-
ably will not increase before mid-1979. Thus,
large imports will have to continue if the regime
is to satisfy even the 2-percent increase in meat
supplies planned for 1978.
Achievement of the 1980 target for agricultural
output would require growth rates of 5 to 6
percent compared with the average rate of 2
percent during 1966-70 and 4 percent during
1971-75. Crop production, for example, would
have to grow by 6.3 to 7.5 percent annually in
1978-80 compared with a long-term average of
less than 3 percent. Poland would have to expe-
rience an unlikely three years of better-than-
average weather to come even close to these
targets.
Even if meat supplies increase, frequent retail
shortages will continue if the government does
not raise prices and/or cut income growth-two
steps the regime has been either unwilling or
unable to take. Gierek has refused to raise official
meat prices. In January 1978 he said that such
prices would rise gradually and would be linked
to increased agricultural output. Meanwhile, to
help soak up some excess purchasing power, the
regime opened a number of "commercial" shops
offering a better selection of higher quality meat,
but at prices nearly double the "frozen" prices.
The reported popularity of the new shops, espe-
cially in urban areas, has established a de facto
two-tier meat pricing system in the socialized
sector. Even so, larger supplies of other consumer
goods still will have to be made available to sop
up a large part of the workers' excess income.
Potential for Increasing Exports
To help deal with its economic problems, Po-
land must increase its export earnings substantial-
ly. Recent export trends highlight the difficulties
facing Poland in diversifying its exports while
increasing such traditional exports as coal, cop-
per, and foodstuffs. We project a growth of
export volume over the next few years of 10 to 12
percent at best, a growth rate well below that
originally planned but consistent with what
Polish officials believe feasible.
Foreign Trade Minister Olszewski recently
directed that export policy concentrate on coal,
copper, and traditional exports which could yield
faster results than the broad diversified approach
previously promoted by Polish planners. Coal
exports, now valued at $1 billion, thus will contin-
ue to be Poland's largest hard currency earner.
But Warsaw will find it difficult to boost coal
exports rapidly because of capacity constraints
and rising domestic demand. Substantial in-
creases are not likely until the mid-1980s, when
production in the Lublin mines is to be well
under way. Most of Poland's sizable copper
potential also requires a long period of develop-
ment. Meanwhile, the industry faces low world
prices. Boosting of Poland's traditional food and
live animal exports is hampered by rapidly rising
domestic demand, by physical constraints on
growth in this sector, and by Western trade
barriers.
10 SECRET
Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
Polish planners originally anticipated that a
good deal of the targeted growth and diversifica-
tion in exports to the West in 1976-80 would
come from the plants built with the machinery
and equipment imported from the West. Such
industries, never before significant in Poland's
hard currency export structure, included heavy
machinery, chemicals, automobiles, construction
equipment, and aircraft. Poland also invested
heavily in the production of household appliances
and electronics and in such import substitution
industries as steel, cement, and pulp and paper.
With the sharp cut in the growth rate of
exports to the West, some Polish economists now
question whether Poland has created an indus-
trial structure that, while not generating large
exports to the West, will still remain dependent
on increased inputs of Western raw materials.
The lackluster performance of the automotive
industry undoubtedly supports their pessimism.
The expansion and modernization of the indus-
try, begun in the late 1960s, is based almost
wholly on West European equipment, technol-
ogy, and licenses. Despite its early start, the
industry continues to run deficits in its trade with
the West. Exports of passenger cars have leveled
off at about 21,000 units despite 30-percent
annual increases in production. At the same time,
imports of auto parts are now about five times
those of exports. Trade in buses, trucks, and
trailers also has been in deficit. The payoff in
exports from some of the projects was not envis-
aged until much later, however. A 1972 agree-
ment with the Austrians, for example, did not
provide for Polish exports of trucks until 1980.
Similarly, the payoff in exports from other
projects was not envisaged until at least 1978.
Many of the chemical plants built with Western
equipment will only come onstream this year.
Also, production of Ursus tractors using UK
licenses was not to enter series production until
1978. Substantial increases in aircraft sales were
not envisaged until the 1980s. The production of
components for tracked vehicles, begun in 1972
under a US license, only recently has expanded
into the manufacture of complete vehicles-
including bulldozers, tractors, earth dumpers, and
pipelaying tractors-and has become a net earner
of foreign exchange.
On balance, Poland's prospects are mixed for
realizing its plan to broadly diversify its export
structure. Olszewski's recent directive to concen-
trate on more traditional goods deemphasizes the
policy at least for the short run. Meanwhile, when
most of the "new" production is available for
export, it will represent technology that is five to
10 years old. Moreover, it will have to penetrate
markets that are saturated. A recent survey of
technology transfers to CEMA countries, includ-
ing Poland, from West German firms shows that
50 percent of the coproduction deals involved
goods that already face saturated Western
markets and another 44 percent involved goods
that are moving in that direction.
Other problems the Poles face that may restrict
the expansion of exports to the West, particularly
of machinery and chemicals, include:
Tariff and nontariff barriers to Western
markets.
The inability of Polish production to adjust
rapidly to change in foreign demand.
A lack of marketing, servicing, and advertis-
ing expertise as well as problems in supply-
ing replacement parts.
Competition for petrochemical markets from
newly developed industries in other East
European countries and members of the
Organization of Petroleum Exporting
Countries.
Balance-of-Payments Outlook
With exports likely to grow at most 12 percent
annually and with debt payments mushrooming,
Poland will have to cut imports further. Warsaw
will find it difficult to raise large financial (un-
tied) credits on a continuing basis even if Western
banks remain highly liquid. In fact, some banks
now are even reluctant to provide project-related
loans to Poland. Moreover, the Poles themselves
are anxious about the size of their debts and are
reluctant to see their obligations continue to rise
rapidly. If, for example, imports are held at the
Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
SECRET
1977 level and exports grow 10 to 12 percent a
year, service payments could consume more than
80 percent of export earnings by 1980. Thus,
unless Warsaw obtains large-scale financial cred-
its--either from Western governments or private
banks-it will have to resort to rescheduling or
t-ut its imports sharply.
to looking at long-term prospects for Poland's
balance of payments, we have developed scenar-
ios that show Poland's import capacity under
different export assumptions. One scenario as-
sutnes no debt rescheduling (see table 7). Another
scenario assumes that one-half of repayments due
in 1978-80 are postponed for three years and then
repaid over eight years (see table 8). In both
cases, upper limits have been placed on the ratio
of debt service to exports. It is assumed that this
ratio can go no higher by 1980 than the 60
percent incurred in 1977 and must drop to 40
percent by 1985. Historically, few countries have
run a 50-percent debt service to export ratio for
any length of time.
Assuming no rescheduling and a 12-percent
average annual increase in exports, imports
would have to fall about 40 percent by 1980 in
order for the debt service ratio not to exceed 60
percent. Only if exports grew more than 18
percent a year through 1980 could Poland hope
Poland: Import Capacity in Trade with the Developed West
Without Debt Rescheduling
Million 1977 US $
10- Percent 12- Percent 15-Percent
Average Annual. Average Annual Average Annual
Export Growth Export Growth Export Growth
Imports ............. 6.120 3.160 14,120 3,690 14,710 4,660 16,360
Exports .................................... 3.660 4,870 7,850 5,140 9,060 5,570 11,200
Net hard currency
Assuming a ratio of debt service to exports of 60 percent in 1980 and 40 percent in 1985.
Preliminary-
End of year.
Poland: Import Capacity in Trade With the Developed West
With Debt Rescheduling
10-Percent 12-Percent 15-Percent
Average Annual Average Annual Average Annual
Export Growth Export Growth Export Growth
1977' 1980 1985 1980 1985 1980 1985
Imports ........................ 6,120 6,410 5,940 7,180 6,960 8,560 8,780
Exports .......................... 3,660 4,870 7,850 5,140 9,060 5,570 11,200
Net hard currency
debt' ........................ 12,800 20,000 14,100 21,200 16,100 23,300 19,800
' Assuming that one-half of debt repayments failing due in 1978-80 was rescheduled. Repayments begin
after a three-year grace period and run for eight years. The debt service to export ratio was held at 50
percent in 1980 and 40 percent in 1985
Preliminary.
End of year
Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
to keep imports from falling below the 1977
level. After 1980 (assuming exports continue to
grow 12 percent a year), a rapidly growing trade
surplus, together with a probable increase in
credit because of the improved balance-of-pay-
ments position, could be sufficient to allow a
significant rise in imports.
A rescheduling of one-half of repayments fall-
ing due in 1978-80 would considerably improve
Poland's import capacity through 1980. Thus, if
real exports grew 12 percent a year, import
capacity would rise 17 percent over the 1977
level. But rescheduling on this order of magni-
tude would increase repayment obligations after
1980, reducing import capacity temporarily. By
1985, import capacity would still be 3 percent
below the 1980 level.
The Economic Dilemma-Insoluble in the Short
Run
If the Poles cannot arrange sufficient aid or
debt rescheduling they will have to make further
cutbacks in imports and economic growth. War-
saw probably will have to accept a combination
of some financial assistance and import cuts.
Although cuts in machinery and equipment im-
ports may not have much immediate adverse
impact on output, the Poles also may have to
reduce imports of industrial materials. With re-
scheduling or large rollover credits, higher import
levels can be maintained and the ultimate impact
on growth could be reduced and/or postponed.
The main impact on the consumer of a cutback
in economic growth would be reduced growth of
wages and other worker benefits. The regime is
committed to increasing the availability of con-
sumer goods and services. It cannot appreciably
cut imports of Western consumer goods because
of the low level of such purchases. A high level of
grain imports will have to be maintained, even
with normal production, to raise the amount and
quality of meat consumed. Poor harvests would
make it extremely difficult for the government to
exercise its import options.
Import and growth problems are likely to
become more severe after 1980 as expected diffi-
culties in Soviet oil production become consider-
ations. If, as we believe, Soviet oil exports to
Poland either level off or fall after 1980, the Poles
will have to import large amounts of expensive
Western oil. By 1985, such imports could range
between $1.5 billion and $3 billion, depending on
the amount and price of Western oil imported.
Some of this might be offset by higher coal
prices, but overall Poland would be squeezed for
funds to import goods other than oil.
For political reasons, the Polish leadership is
reluctant to abandon its rapid growth policies.
Gierek's tenure as party leader has been marked
by rapid economic growth with a concomitant
rapid rise in the standard of living. To abandon
this strategy now would mean a discrediting of
his past policies and would enhance the chances
for his ouster.
The authors o this paper are
and office of Economic eseQ' .1A
Comments an ueries are welcome and should
be directed to
telephone
25X1A
SECRET 13
Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
 Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
Revised Plan a
National income ............................
Percent average annual increase
7.0- 7.3
7.0- 7.3
Industrial production ....................
Percent average annual increase
8.2- 8.4
8.2- 8.4
Machinery and equipment ......
Percent average annual increase
10.5-10.8
10.5-10.8
Chemicals ..................................
Percent average annual increase
10.9-11.2
10.5
Wood and paper ......................
Percent average annual increase
8.2
9.2
Consumer goods ........................
Percent average annual increase
6.2
6.5
Foodstuffs ..............................
Percent average annual increase
6.2- 6.5
7.1
Agricultural production ................
Percent average annual increase
2.8- 3.0
3.0- 3.5
Crops ..........................................
Percent average annual increase
2.3- 2.8
3.4- 3.9
Livestock ....................................
Percent average annual increase
3.0- 3.4
2.7
Hogs ........................................
Million head
231
21-22 3
Cattle ......................................
Million head
14.7-15.0
14.0-14.3'
Capital investment
Total economy ..........................
Percent average annual increase
6.5- 7.9
7.4
Industry ..................................
Percent average annual increase
7.4
8.9
Agriculture ............................
Percent average annual increase
5.5
7.9
Housing ......................................
Million units
1.5251
1.5754
Real wages ....................................
Percent average annual increase
3.0- 3.4
3.0- 3.4
Social benefits ................................
Percent average annual increase
8.3
11.2
Per capita meat consumption ......
Kilograms
79-811
75?
Total trade
Exports ........................................
Percent average annual increase
15.6
11.8
Imports ......................................
Percent average annual increase
9.4
4.7
' As announced at the Seventh Party Congress in December 1975.
$ As announced at the Fifth Plenary Assembly in December 1976.
' Target for 1980.
Target for 1976-80.
Approved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3
 Secret
pproved For Release 2001/08/02 : CIA-RDP80T00702A000100020005-3