THE SCOPE OF POLAND S ECONOMIC DILEMMA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80T00702A000100030017-9
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 19
• Document Creation Date: December 14, 2016
• Document Release Date: March 11, 2003
• Sequence Number: 17
• Publication Date: August 11, 1978
• Content Type: PAPER

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cL~ is Central Intelligence Agency
Herbert E. Hetu
Director of Public Affairs
11 August 1978
Enclosed for your use is a new research
paper, "The Scope of Poland's Economic Dilemma,"
prepared by the National Foreign Assessments
Center of the Central Intelligence Agency.
Among the conclusions in the report are
that Poland must receive substantial assistance
or arrange a large-scale debt rescheduling in
the near future if it is to maintain a level
of imports sufficient to prevent cutbacks in
planned growth.
Deputy Director of Public fairs
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 Nation
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Assessment
Center
The Scope of
Poland's Economic Dilemma
ER 78-10340U
July 1978
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The Scope of Poland's Economic Dilemma
Central Intelligence Agency
National Foreign Assessment Center
Key Judgments
Poland's leadership is confronted with a high level of 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 stand-
ards. 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, Warsaw 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.
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Several years of bad weather pushed up agricultural imports and cut
the growth of consumption, particularly of meat. .
Despite the growing economic difficulties, the government continued to
pursue policies designed to boost meat consumption-- the symbol of improve-
ment in living standards for the Poles. Warsaw 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. Neverthe-
less, 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 Westare 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 reschedul-
ing in the near future.
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The Scope of Poland's Economic Dilemma
Introduction
Poland's leadership currently is confronted
with a high level of 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 cur-
rency debts that are placing constraints on im-
ports, (b) bad weather, which contributed to
stagnating agricultural output, (c) economic re-
cession and slow recovery in the West, which has
reduced the growth of Polish exports, and (d)
economic policy decisions (made largely out of
domestic political considerations) to deal with
these problems.
The burgeoning balance-of-payments prob-
lems which have sharply boosted Poland's hard
currency debt result in large part from an in-
ability 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
markets. Moreover, new export-oriented indus-
tries developed with large hard currency borrow-
ings have run into marketing problems because
of quality shortfalls and obsolescence.
So far, the Gierek government has not made
substantial inroads on its problems. It has made
some cuts in capital goods imports, but has made
only a modest retreat from its high-growth poli-
cies. At the same time, fearing adverse consumer
reactions, Warsaw continues to freeze retail
prices of basic foods and has let wages rise, thus
exacerbating chronic consumer goods shortages.
Impact of Poland's Development Strategy
Since coming to power in 1970, the Gierek
administration 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
falling behind that of the less developed East
European countries which had begun moderniza-
tion programs in the 1960s.
To help achieve modernization, Poland im-
ported massive amounts of Western technology
and equipment with attractive credits made
available by eager Western exporters. Although
the Poles expected these credits to sharply in-
crease 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 productivity, the government boosted in-
comes 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 contrib-
uted to stagnating agricultural output in 1974-77
and the Western recession and subsequent slug-
gish recovery, which reduced the growth of Po-
lish exports.
Warsaw, moreover, compounded its trade
problems with key policy decisions. With the
onset of the Western recession, most East Euro-
pean 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
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for rapid industrialization and the belief that
domestic political stability was linked to further
improvement in living standards, continued to
push their ambitious development program. As a
result Polish imports of Western industrial goods
continued to increase.
Meanwhile, Warsaw permitted consumer in-
comes to grow rapidly, primarily by allowing
unplanned increases in workers' bonuses. The I I -
percent average annual growth in aggregate real
incomes in 1971-76 far outstripped available
supplies of consumer goods and services. The
resulting market disequilibrium and steadily ris-
ing consumer demands, especially for meat,
generated considerable consumer unrest, necessi-
tating grain and meat imports to at least main-
tain the level of meat consumption.
Meat-the Persistent Problem
Meat 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,
Wladyslaw Gomulka, boosted meat (and other
food) prices sharply to stem rapidly rising de-
mand. Polish workers, already chafing over gov-
ernment efforts to clamp down on wage growth,
found the increase too much to accept, particu-
larly during the Christmas season, when meat
purchases are increased. They reacted violently.
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
'The Poles' sensitivity to the supply of meat reflects their rapidly
rising incomes and the lack 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
consumption, which is equated with social status, lead to chronic
excess demand and consumer unrest.
farmers (who account for almost 80 percent of
Poland's agricultural output) to boost produc-
tion, 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 ex-
panded 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 profit-
ability of private farming contributed signifi-
cantly to a 27-percent jump in livestock produc-
tion and a 25-percent rise in per capita meat
consumption (see table 3). Moreover, enough
meat was produced to also permit a large boost in
exports.
Problems Emerge
In 1975 the livestock expansion program be-
gan to falter under the weight of rapidly rising
costs, falling profits, and bad weather which
reduced grain and fodder crops. A shortfall in
the 1974 fall potato crop-a major source of feed
for hogs-and other fodder crops forced many
private farmers to purchase a larger than usual
amount of livestock feed from the state. More-
over, farmers were reluctant to sell grain to the
state, preferring to keep it for their own use.
Both factors pushed up Polish grain imports in a
tight world grain market. The higher cost of
these imports to the farmer was not matched by
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 (see table 4). This trend
was further exacerbated in 1975 by drought-
induced shortfalls in grain and potato produc-
tion. The government imported massive amounts
of feed supplies, but they remained expensive. By
mid-1976, hog numbers on private farms had
declined an additional 17 percent. More impor-
tant, sow numbers dropped almost 20 percent,
hampering future efforts to rebuild herds.
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1970
1971
1972
1973
1974
1975
1976
1977
Grair ......................................
16.3
19.9
20.4
21.9
23.0
19.6
20.8
19.4
Of which:
Wheat ............................
4.6
5.5
5.1
5.8
6.4
5.2
5.7
5.3
Rye ..................................
5.4
7.8
8.1
8.3
7.9
6.3
6.9
6.3
Barley ..............................
2.1
2.4
2.8
3.2
3.9
3.6
3.6
3.4
Potatoes ..................................
50.3
39.8
48.7
51.9
48.5
46.4
50.0
41.3
Sugar beets ............................
12.7
12.6
14.3
13.7
13.0
15.7
15.1
15.9
Fodder (root) crops ..............
8.2
6.8
8.0
8.5
8.0
7.8
8.4
8.3
Vegetables ..............................
4.2
3.5
3.6
4.0
3.5
4.1
3.8
3.8
--Poland: Grain Production, Consumption, and Trade'
Million Metric Tons
1970/71 71/72 72/73 73/74 74/75 75/76
Marketing Year ending 30 June
1. Grains include wheat, rye, barley, oats, mixed grains, corn and sorghum.
77/78
Estimate
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Poland: Government Purchase
Prices for Livestock and Cost of Feed to Farmers
Cattle prices .......................... 109 143 154 178 183
flog prices
Slaughter ............................ 126 134 134 135 141
Bacon ............................... 114 122 123 124 130
Feed concentrates .................. 96 100 103 t08 123
Index 1970=100
1976 1977
165 198
1.51 179
172 NA'
Of which
Pork .._ ............................ 32.8 37.3 38.8 394 409 34.8
Beef ................................ 12.5 10.8 11.5 131 15.5 188
Potatoes ....... .......................... 189.0 1870 18.3.0 1770 1710 171 0
Sugar ..................................... :39.6 409 42.0 43 9 43.2 43.9
Vegetables ............................. 95.8 83.8 93.0 84.3 94.0 88.2
Fruits ..................................... 20.3 18.7 20.3 19.4 21.4 28.5
Poland: Inventory of Livestock Herds and Production
of Selected Livestock Products
cgs` .................................. 15.2 17.3 19.8 21.5
State farms .................... 1.9 2.3 2.8 35
Private farms ................ 13.3 15.0 17.0 18.0
title' ............. ............... ... 11.1 11.5 12.2 13.0
State farms 2.U 2.2 2A 2.7
Private farms ................ 9.1 9.3 9 8 10.3
alltrv ............................... 88.9 92.9 94.2 96.b
213
43
170
13.3
2.9
10.4
99.8
18.8 20.1
4.7 5.1
14.1 15.0
12.9 13.0
3.l 3.3
9.8 9.7
79.2 94.6
livestock products
Meat' ............... ................. . 2.215 2085 2,735 3,072 3,067 2,902 2,867
01 which:
Beef ............................ 456 439 478 6313 695 751 692
Pork ........................... 1.313 1.590 1,771 1,888 1.793 1,543 1,542
milk .................................... 15.148 15,766 16,245 16,668 16,377 16,521 17,100
Butter .................................. 128 162 181 198 193 217 244
Preliminary.
As of 30 June.
(area_ss weight.
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As livestock population declined, meat short-
ages emerged in late 1975. The government was
forced to resort to what it hoped would be
stopgap measures to boost domestic supplies;
meat exports were sharply curtailed and imports
were increased. Nevertheless, store queues
lengthened and consumer tensions worsened.
Pricing Policy
The meat problem would have been less severe
if Warsaw had let meat prices, frozen at unreal-
istically low levels since 1967, rise gradually over
the years. But the government was deterred by
the possibility 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 de-
cided to curb demand for meat and other quality
foods by raising retail prices. Moreover, the
continuing price freeze in the face of steadily
rising costs had sent government subsidies soar-
ing. In 1975, food subsidies consumed 14 percent
of the national budget compared with 6 percent
in 1970. 2
Gierek's advisers apparenty believed that any
price increase would have to be substantial to
have much effect on meat consumption, because
Polish demand for meat is highly price inelastic.
The government thus 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 govern-
ment 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 deliv-
eries to the market by increasing purchase prices
for livestock by about 20 percent.
Although expecting higher prices, the popu-
lace was stunned by the magnitude of the in-
creases. Worker reaction was swift and often
violent. Fearing a nationwide strike, the govern-
2 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
elasticity 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.
ment withdrew the increases the next day "for
further consideration."
Despite subsequent efforts to mollify con-
sumers, unrest remained high during 1976. The
Poles, anticipating price hikes later in the year,
began hoarding many consumer items, only in-
tensifying existing shortages. The situation be-
came so serious that the leadership 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, only allowed 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. The harvest-about 19.4 million
tons-was 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, Warsaw continued its costly
imports to support the fodder base; 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 decisions aggravated the
situation, the government intervened effectively.
Warsaw raised purchase prices and introduced
other measures that established a favorable
price-cost structure, encouraging farmers to
carry over livestock inventories through the win-
ter. In addition, Warsaw publicized its planned
large expenditures on grain imports to assure
private farmers of adequate feed supplies. Conse-
quently, hog numbers at the end of 1977 were 23
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percent higher than at yearend 1976. Perhaps
even more significant, the number of sows on
private farms increased 16 percent.
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.
The Growing Trade Gap
Poland's meat shortages have contributed sig-
nificantly to the country's trade deficits with the
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 ma-
chinery 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
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
2368
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$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
To cover the trade deficits, Warsaw has had to
borrow heavily from foreign official and private
sources. Invisibles have contributed little. By
1975, mushrooming interest payments more than
offset net earnings from services and transfer
payments. By the end of 1977 Poland's net debt
to the West totaled about $12.8 billion, com-
pared 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
the debt jumped from an estimated 27 percent in
1974 to 60 percent in 1977. 5
Excluding Polish liabilities to foreign branches of US banks.
' 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.
Table 5
Poland: Estimated Hard Currency Balance of Payments
Merchandise exports, f.o.b.. .................. 962 1,099
Merchandise imports, f.o.b.. .................. 901 1,075
Services, net ............................................ Negl Negl
Interest income ........................................ -40 -40
Transfer payments, net .......................... 110 140
Current account balance .................... 131 124
Financed by medium- and long-term
credits, net' ........................................ -10 30
Errors and omissions' ............................ . -121 -154
Outstanding net debt .............................. 770 800
1972
1973 1974
Million US $
1975
1976
1977
1,397
2,063
2,865
3,026
3,373
3,660
1,772
3,431
5,233
6,076
6,636
6,120
5
-10
-5
-15
-25
-25
- 45
- 80
-240
-400
-640
-860
220
300
320
375
560
570
-195
-1,158
-2,293
-3,090
-3,368
-2,775
250
700
1,400
2,000
2,200
2,000
-55
458
893
1,090
1,168
775
1,100
1,900
3,950
6,930
10,200
12,800
Percent
' 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 and perhaps 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.
' Repayments of principal on medium- and long-term debt and interest on all debt as a percentage of merchandise exports to the
developed West.
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Poland: Estimated Structure of the Net Hard
Currency Debt '
51illioo US -S
1970
1975
1976
1977
Total
770
6,930
10.200
12.800
Western government-
backed
320
2,130
2,600
3,200
Western government=
370
506
760
1,000
Private credits from
Western commer-
cial banks
80
4,010
5.800
7
End of rear-
Including amounts outstanding on US Extort-Import Bank. Com-
mrxlity Credit Corporation, and PL-480 credits and on a West
German official financial credit-
* Including errors and omissions.
Not available: included in private credits from Western banks
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. To help ease the growing
pressure on its payments position, Poland has
been seeking easier credit terms in the West. So
far it has succeeded in stretching out payments
for some industrial goods with credits from West
European governments. Poland also is seeking
easier credit terms for US Commodity Credit
Corporation credits--used primarily to finance
grain imports from the United States---and in
May 1978 reportedly approached Austria for a
large, balance-of-payments credit.
Assistance From Moscow
In 1976, Poland appealed to Moscow for assis-
tance to-ease its hard currency trade and financ-
ing difficulties. Mosow responded with a
substantial aid package, including a 1-billion-
ruble loan, above-plan shipments of raw ma-
terials, consumer goods, and a resumption of
grain deliveries-suspended in 1975-76 as a re-
sult of the disastrous 1975 Soviet grain harvest.
The Soviets agreed to boost annual crude oil
shipments from I 1 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 Soviets reportedly will pay for
Polish equipment for joint projects of the Council
for Mutual Economic Assistance in the Soviet
Union on delivery. Previous payments have been
made only after a venture was in operation.
There are, however, no indications of any new
assistance from Moscow since its loan and other
promises of help given in 1976.
Revising the Economic Plan
The Polish leadership responded to the mount-
ing consumer unrest by revising the 1976-80 plan
to increase the consumers' share of the pie and
lower the foreign trade targets (see the appen-
dix). In December 1976 the government an-
nounced that agriculture, housing, communal
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
grew less than the planned rate of 5.7 percent,
largely because of the stagnation in agricultural
production. The increase in industrial produc-
tion, on the other hand, hit 8.6 percent, exceed-
ing the 1977 plan rate of 6.3 to 7.3 percent.
Meanwhile, the government attempted to freeze
total investments in 1977 and shifted even more
funds than planned from heavy industry to what
it perceived as more urgent areas--housing, con-
sumer industries, and the food program.
Information available on the 1978 plan sug-
gests that Warsaw already is retreating some-
what 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,
respectively--well below the average annual
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rates of the five-year plan. The 1978 plan re=
states the freeze in total investment and its
restructuring with emphasis on housing construc-
tion, food production, and other consumer ori-
ented areas. As the leadership continues to stress
consumer welfare, 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 re-
vised 1976-80 plan-representing a reversal of
past government policy-is the expansion of pri-
vate activity in the consumer services sector. The
leadership hopes that the private sector will
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 equip-
ment.
? Created a new government entity to import
small tools and equipment to help expand
private services.
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 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 imports 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.
Even if imports do not grow at all 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 (1.2 percent annually, compared with 18
percent annually in 1971-75), imports of West-
ern machinery and equipment-almost 40 per-
cent of Poland's hard currency imports-will be
curtailed. But this cut should have little adverse
impact on economic growth through 1980 be-
cause of a large supply of equipment in the
pipeline and some excess plant 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 Poland is to
satisfy even the 2-percent increase in meat sup-
plies planned for 1978.
Achievement of the 1980 target for agricul-
tural 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
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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 exper-
ience an unlikely three years of better-than-
average weather to come even close to these
targets.
copper potential also requires a long period of
development. 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 con-
straints on growth in this sector, and by Western
trade barriers.
Even if meat supplies increase, frequent retail
shortages will continue if the government does
not raise prices and/or cut income growth--two
steps Warsaw has been either unwilling or un-
able to take. Cierek 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
government 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,
especially in urban areas, has established a do
facto two-tier meat pricing system in the social-
ized sector. Even so, larger supplies of other
consumer goods still will have to be made avail-
able to sop up a large part of the workers' excess
income.
Potential for Increasing Exports
To help deal with its economic problems,
Poland must increase its export earnings substan-
tially. Recent export trends highlight the diffi-
culties facing Poland in diversifying its exports,
while increasing such traditional exports as coal,
copper, 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.
Western demand is likely to be stronger in the
short run for Poland's traditional exports than
for the new products Poland is trying to market
in the West. Coal exports, now valued at $1
billion, thus will continue 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 increases are not likely until the mid-
1980s, when production in the Lublin mines is to
be well under way. Most of Poland's sizable
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
envisaged until much later, however. A 1972
agreement 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
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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. 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 coun-
tries, including Poland, from West German firms
shows that 50 percent of the coproduction deals
involved goods that already face saturated West-
ern markets and another 44 percent involved
goods that are moving in that direction.
Other problems the Poles face that may re-
strict the expansion of exports to the West,
particularly of machinery and chemicals, in-
clude:
? 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 Coun-
tries.
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
(untied) credits on a continuing basis even if
Western banks remain highly liquid. 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 ex-
ample, imports are held at the 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 credits-either from
Western governments or private banks-it will
have to resort to rescheduling or cut its imports
sharply.
In looking at long-term prospects for Poland's
balance of payments, we have developed sce-
narios that show Poland's import capacity under
different export assumptions. One scenario as-
sumes no debt rescheduling (see table 7).
Another scenario assumes that one-half of repay-
ments 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
Poland: Import Capacity in Trade with the Developed West
Without Debt Rescheduling '
10-Percent 12-Percent 15-Percent
Average Annual, Average Annual Average Annual
Export Growth Export Growth Export Growth
Imports .................................. 6,120 3,160
Exports .................................... 3,660 4,870
Net hard currency
14,120 3,690 14,710 4,660 16,360
7,850 5,140 9,060 5,570 11,200
Assuming a ratio of debt service to exports of 60 percent in 1980 and 40 percent in 1985.
z Preliminary.
s End of year.
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Poland: Import Capacity in Trade With the Developed West
With Debt Rescheduling '
Million 1977 US S
I (I-1'erc unt 12-Percent 15-Percent
\verage Annual Average Annual Average Annual
Export Growth Export Growth Export Growth
Imports ........................ 6.120 6.410 5 940 7.180 6.960 8.560 8.780
b:xp rts .......................... 3.660 4.870 78.50 5.140 9.060 5.570 11.200
Not hard currenev
debt . ........................ 12.800 20.00( 14 100 21.20(1 16.100 23.300 19.800
Assuming that one-half of debt repavrnents falling due in 1978-80 was rescheduled. Repayments begin
.filter a three rear grace period and run for eight years. The debt service to export ratio was held at 50
J rcent in 1980 and 40 percent in 198.5.
Preliniinarv.
baud of year.
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
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-
nnents 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 opt for a combination of some
financial assistance and import cuts. Although
cuts in machinery and equipment imports may
not have much immediate adverse impact on
output, the Poles also may have to reduce im-
ports of industrial materials. With rescheduling
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 cut-
back in economic growth would be reduced
growth of wages and other worker benefits. The
government is committed to increasing the avail-
ability of consumer 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
difficulties in Soviet oil production become con-
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siderations. If, as we believe, Soviet oil exports to depending on the amount and price of Western
Poland either level off or fall after 1980, the oil imported. Some of this might be offset by
Poles will have to import large amounts of higher coal prices, but overall Poland would be
expensive Western oil. By 1985, such imports squeezed for funds to import goods other than
could range between $1.5 billion and $3 billion, oil.
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Original Plan
Revised Plan
National incrme .... _ ......................
Percentaverage 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
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
IT 2.8
3.4. 3.9
Livestock ...................................
Percent average annual increase
3.0- 3.4
2.7
(logs for slaughter .................
Million head
23'
21-22
Cattle for slaughter ..............
Million head
14.7-15.0'
14.0-14.3'
Capital investment
l'otal economy ..........................
Percent average annual increase
0- 0.5
1.2
industry ..................................
Percent average annual increase
0.2
2.5
Agriculture ..... .......................
Percent average annual increase
0
3.0
Ilousing - _..................................
Million units
1525 '
1.575,
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
79-81 '
75'
Total trade
t?: s port s .......................................
Percent average annual increase
15-6
11-8
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.
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