INTELLIGENCE MEMORANDUM THE POLISH ECONOMY: PERFORMANCE AND PROSPECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600030013-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 28
• Document Creation Date: December 22, 2016
• Document Release Date: October 18, 2011
• Sequence Number: 13
• Publication Date: February 1, 1970
• Content Type: IM

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DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The Polish Economy: Per formance And Prospects
-Set,
ER IM 70-13
February 1970
Copy No. 3 K)
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
Eeclud.d bon, ouio.nottc
downRradinR and
Jedmdfim~ion
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CENTRAL INTELLIGENCE AGENCY
Directorate-of Intelligence
February 1970
The Polish Econom :
Per ormance and Prospects
in Polish sources, are slightly lower.
investment as a share of "national income," as given
Note: This memorandum was produced solely by CIA.
It was prepared by the office of Economic Rea earch.
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25X1 ~
In 1969 the Polish regime at last decided to
overhaul economic planning and management and to
push for changes in foreign economic relations,
both with Communist countries and with the West.
This memorandum considers the economic problems of
Poland and the possible economic payoff from the
new developments in policy.
Key Features of Polish Economic Policy
1. Poland's postwar economic policy has aimed
at transforming a backward and predominantly agri-
cultural country into a modern industrial state.
in pursuit of this aim the Communist regime has
maintained a high rate of investment, has rapidly
expanded the nonagricultural labor force, and has
relied on close economic relations with the USSR.
Poland today retains these basic economic policies.
2. Fixed capital investment has accounted for
a high and growing share of the gross national prod-
uct (GNP), rising from more than 20% in the early
1950s to close to 30% by the 1960s.* Total invest-
-i Gross investment estimated at factor cost.
Zgures for net
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ment, including additions to inventories, now
runs at one-third of GNP. Polish industry has
had first claim on investment resources, account-
ing for nearly 40% of total fixed capital invest-
ment and an even laxger share of additions to in-
ventories.
3. Within industry, investment outlays have
been made on a broad and ever widening front.
Year in and year out, each of the key Polish in-
dustries -- and nearly everyone of the enterprises
in them -- has received more investment funds,
without much regard to the "effectiveness" of prior
investments. A large part of fixed capital invest-
ment has gone to increasing capacity -- mainly in
heavy industry -- and little to modernization.
4. Agriculture has made a relatively small
demand on state resources, either for investment
funds or for operating subsidies. As a result of
Gomulka's decision in 1956 not to proceed with the
collectivization of agriculture, Poland has avoided
the large expenditures forced on other East European
countries by collectivization. moreover, the re-
gime is less willing to invest in modernizing
private agriculture than other regimes are to in-
vest in collectivized agriculture, although substan-
tial investments have been made in producing ferti-
lizer and machinery for agriculture. Relative'to
the increment in agricultural output since 1950,
Polish investment in agriculture is the smallest
in Eastern Europe. Although agriculture still
accounts for nearly one-quarter of GNP, the share
of agriculture in total investment has rarely ex-
ceeded 15% and on the average has run less than in
other East European countries.*
5. In contrast, investment in construction,
transportation, and other services has been rela-
tively.large, as a result of rapid industrialization
and the big increase in population -- a 30% increase
from 1950 to 1968, the greatest in Eastern Europe.
To provide minimum housing and public services for
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this expanding population, given industrialization
and rapid urbanization, Poland has had to invest
more in services than in industry. In constant
(1961) prices, the share ran close to 45% until
the mid-1960s, when it began to decline.
6. The high rate of investment in industry
is related to the rapid growth of the labor force.
Total employment grew from 12.7 million in 1950
to 16.3 million in 1968, mainly as a result of an
increase in the population of working age -- the
net change in participation rates was small. The
increase in the urban labor force was even larger,
from 5.7 million to 10.2 million, while the agri-
cultural labor force declined by about 900,000.
The regime, committed to full employment and in-
dustrialization, has tried to make available new
jobs in the urban economy for all those seeking
work. Industry has shown the most rapid increase,
nearly doubling employment from 1950 to 1968 and
increasing its share of total employment to more
than one-fourth.*
7. In the 1950s, migration from agriculture
.was the main source of new workers for industry.
Peasants in unprecedented numbers left villages
and towns in search of city jobs, especially in
Warsaw and in the new territories acquired from
Germany after World War II. Some two million
peasants migrated to urban areas, mostly before
1956 in reaction against the drive to collectivize
agriculture.
8. In the 1960s, especially since 1963, the
growth of urban employment reflected the postwar
"baby boom," which lasted for a decade and a half
and gave Poland one of the highest birth rates
in Europe. About 300,000 young Poles have entered
the labor force in each of the last six years --
more than double the average figure for the previous
ten years. Most of them have looked to the cities
for work.
9. In the race to increase output per capita
for a rapidly expanding population, Poland has re-
lied heavily on the USSR to provide a market for
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its manufactures, especially machinery,. and to
furnish essential materials. Poland has a sub-
stantial resource base, including abundant coal
reserves, but imports grain, iron ore and ferrous
alloys, and most of its crude oil, mainly from the
USSR. Before World War II the bulk of Poland's
trade was with Western Europe, only 1% with the
USSR. Now the USSR is.Poland's chief trading
partner, accounting for at least-one-third of
total foreign trade turnover, a share greater than
that of the entire Free World.
10. Like the other East European regimes,.the
Polish regime. originally sought close economic
relations with the USSR as a basis for planning
economic growth, a basis that would permit Poland
to expand output with little regard to demand on
the world market. As a result, after two decades
of insulation from the Western market, Poland has
developed major lines of manufactures that are
readily saleable in large amounts only to Communist
trading partners and, on occasion, less developed
countries. Machinery and other finished goods make
up about two-thirds of total sales to these markets.
On the other hand, foodstuffs, raw materials, and
intermediate manufactures make up two-thirds of
sales to the industrial West.
Economic Trends*
11.? Under these policies Polish economic growth
has been fairly rapid, averaging about 4.7% per
year since 1950 (see Table 1). On a per capita
basis, however, the average annual rate of increase
in GNP has been only 3.2%, the lowest in Eastern
Europe. This low rate reflects the 30% increase in
population and the high costs of urbanization.
Mistakes made in the early 1950s, stemming largely
from an overconcentration of resources in heavy
industry, also contributed to a low rate of growth.
12. During the 1960s the growth of population
slowed down and the per capita rate of annual
* The estimates used here to measure growth do not
reflect the Polish growth indexes; they reflect in-
dexes calculated for comparability with Western
data.
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Average Annual Rates of Growth of GNP, by Sector of Origin a/
1951-60
1956-60 1961-65
1966
1967
1968 b/
1969 c/
Industry and handicrafts
8.7
7.7 6.9
5.4
6.6
8
7-1/2
Agriculture and forestry
1.9
2.7 1.7
8.9
-0.7
4
-4.7
-Construction
8.2
5.4 3.6
5.8
8.5
6
N.A.
Transportation and
communications
6.7
5.1 6.7
16.9
7.7
7
N.A.
Trade
5.3
7.6 5.3
7.0
7.5
6
N.A.
Housing
2.3
3.0 2.5
3.8
2.9
3
N.A.
Other services
3.8
3-1/2
N.A.
4.6
4.6 4.5
7.1
3.6
6
3-1/2
GNP per capita
6.5
3.3
5
2-1/2
a. Estimates through 1967
b. Estimated.
C. Preliminary.
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growth rose, from 2.8% the average for the
19 50s -- to 3.8%.. But the regime takes little
comfort in that, for the growth of output ' '?pe
worker was slower in the 1960s. Employment,,which
rose more slowly than population through 1959 at only 1% per year -- has since been growing
faster. The divergence has been especially marked
since 1963, when the postwar "baby boom" mentioned
above brought the annual increase in employment to
nearly 2%, for the more rapid growth of employment
has not brought much rise in the rate of growth of
output. Thus the annual increase in labor productiv-
ity, which averaged almost 4% in 1956-60,'ran in the
1960s at only about 3%.
13. The overall growth of efficiency is also
discouraging. To be sure, the capital/output ratio
has declined very slightly, instead of rising, as
it did in most other European countries in the
1960s. The value of all fixed capital, according
to official figures (at constant prices) has been
increasing at about 4% per year. But even so the
combined productivity of capital and labor has been
going up at only about 2% per year, not an impres-
sive figure for a??relatively backward country.
14. Economic growth in the 19,60s reflected a
slowdown in industry and a rise in growth rates in
construction and transport and communications. The
growth rate in industry and handicrafts is!down
from the late 1950s -- though it. has. tended to rise
in recent years -- because of a drop in rates for
light and food industries and some slowdown in the
growth industries, notably electrical and electronic
equipment. The main cause was a leveling off of
demand for the available product mix -- and, lags
in adapting the product mix to demand. In agrieul-
tur3 the growth rate declined in the early 1960s
and has fluctuated sharply since then. In construc-
tion a slowdown in the early 1960s has been followed
by an`?upswing since 1965. In transport and communi-
cations, growth in the 1960s was actually faster
than from 1956 to.11960. In:'all these sectors, in
contrast to industry, investment has been up sharply.
In agriculture, the regime has been investing,
heavily in grain production since 1964 to reduce
dependence on imports, especially from the West --
the combined result of a drop in Soviet deliveries
in 1964 and the end of US deliveries under PL 480.
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As a result, production has increased substan-
tially, subject to variations in the weather,
but industrial inputs have risen even faster, and
the average rate of growth of value added in
agriculture is still low, as it is generally in
Eastern Europe. The upswing in construction and
the sharp rise in the output of transport and
communications reflect attempts to break bottle-
necks in the economy. Trends in other services
have been mixed, with a slight decline in the
growth rate for housing and trade and a rise in
the growth rates for public services, including
defense.
Symptomatic Problems
15. The symptoms of the slower growth of effi-
ciency in the 1960s are those common to the Soviet
and East European economies in this period -- a
large rise in money incomes and chronic shortages
of consumer goods; bottlenecks in construction and
transportation; and a lag in modernizing plant,
equipment, processes, and products, as reflected
especially in exports.
16. One important symptom of Poland's economir,
difficulties is that managers persist, counter to
plan, in increasing employment so as to meet produc-
tion quotas. A slight relaxation of central controls
in the 1960s has doubtless aggravated the problem.
Because many plant managers hire labor indiscrim-
inately as a cheap substitute for capital, any Pole
who wants to work can usually find a job, almost
without regard to experience or work record. The
ease of getting work has contributed to lax labor
discipline. Absenteeism is high; Polish industrial
workers in 1968 stayed away from the job an average
of fifteen working days.
17. An indication of the strong demand for
labor is the ease with which Polish women, eager to
augment low family incomes, have been able to find
work, not only in light industry and the services
but also in heavy industry, even in construction.
During 1966-68, 58% of all new workers were women --
a percentage much higher than the 43% ceiling
written into the plan. The proportion was already
high -- 54% -- in the years 1961-65, a sharp jump
over the 1950s, when it was only 38%. The regime's
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hope of reducing the share in 1966-68 obviously
came to nought.
18. All in all, about 200,000 more workers
entered the work force in 1966-68 than the plan
allowed for, and there were also wage increases
above plan, so that total wage payments were much
more than planned. In each of the years 1965-68,
total wages rose by more than 7%, placing a grow-
ing strain on the consumer market, aggravating
existing shortages of some goods and resulting,
finally, in price hikes for a number of important
commodities. The price of meat, the single most
important item in the Polish food budget, was in-
creased by 17% in late 1967. The growing imbalance
between purchasing power and supplies of food and
desirable consumer goods could have brought even
more serious consequences had not the regime suc-
ceeded in encouraging the people to save for an
apartment or a car. Savings deposits have grown
at an average yearly rate of 20% during the last
five years, although total savings are still rela-
tively low for Eastern Europe, about one-third of
the annual wage bill.
19. Equally serious difficulties appeared on
the. investment front, as the cumulative effect of
starting too ::zany projects for the available re-
sources. riy the end of 1968, 25X1
200 billion zlotys -- some $5 25X1
billion* -- were tied up as "frozen assets" in in-
complete investment projects -- a sum greater than
one year's investment and a large jump over the
previous year's total. Gomulka hardly overstated
the case in characterizing the investment process
as "planned disorganization in advance." Large
resources are tied up in some projects, such as the
Polish FIAT plant at Zeran on the outskirts of War-
saw and the Olsztyn tire factory, which represent
important additions to the country's capacity for
producing automotive equipment and farm tractors.
The investment cycle, according to another account,
has grown from four to six years in the Warsaw
* It ah-,uZ be noted that $5 billion, although
equal to more than one year's investment, is Less
than 15% of the estimated dollar value of GNP. The
zloty/dollar ratio for investment of about 40 to 1
is much higher than for GNP as a whole.
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industrial region as a whole -- the third most
important industrial region in Poland -- and
stretches out to eight to ten years for some un-
dertakings. There are serious delays, moreover,
in bringing finished plants to full capacity opera-
tion.
20. The long investment cycle results partly
from the practice of industrial planners of under-
stating enormously the probable costs of projects
so as to improve chances for acceptance. 0
actual investment costs dur-
bottlenecks in the country's primitive transporta-
tion system, especially the railroads -- have not
been helped by chronic shortages of gravel, struc-
tural steel, and cement. The cement shortage
assumed critical proportions by the early spring
of 1969, and the cement plants changed over to a
four-shift work day. Cement exports have also been
cut back, from 45,000 tons per month on the average
during 1966-68 to only 5,000 tons per month during
the first nine months of 1969.
22. The technical obsolescence of many or most
Polish exports is another major problem of concern
to the leadership, especially in regard to machinery,
which in 1970. will contribute nearly 40% of total
exports. Many of the machinery industries are
oriented to the export market. For example, 40% to
50% of the output of metalworking machine tools,
diesel.engines, excavators, and freight cars has
been exported in recent years, and 70% of the output
of the shipyards. These products alone accounted
in 1968 for nearly one-fourth of machinery exports,
the other main categories being complete industrial
plants (12%), power installations and electrical
equipment (8%), and motor vehicles (5%). The rest
is scattered among the other branches of machine
building. Most of these exports are still sold
readily enough in Communist countries -- in exchange
for other machinery -- but not on the world market.
23. Poland's difficulty in marketing machinery
in the West is suggested by the low prices obtained
ing 1966-68 ran 65% above plan for the country as
a whole. In contrast, the unallocated investment
reserve is 5% of the total planned amount.
21. Lags in construction -- aggravated by
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for it and by the relatively small amounts sold.
According to data for 1964, the average per kilo-
gram price brought by Polish machinery is substan-
tially lower than the average for Eastern Europe
as a whole -- though 15% to 20% above the average
price of Bulgarian and Romanian machinery -- and
less than one-half the average per kilogram price
in transactions between West European countries.
Per ton, Poland pays up to five times as much for
machinery imports from the West as it receives
for its exports -- the difference being twice as
great as in trade with other Communist countries.
These contrasts reflect differences in product
composition (Poland exports chiefly industrial
machinery, which has a relatively low value per
pound), the heavier weight of machinery of Polish
design, other less desirable features of the prod-
ucts themselves, and poor marketing and service.
As a result of these problems, Poland has not suc-
ceeded in selling much machinery in the industrial
West, barely 3% of its total machinery exports,
and only some 3% of its total exports to the in-
dustrial West.
24. The realization of how backward Polish
technology is led the regime in 1966-68 to step up
imports of investment goods, especially from the
West. Imports of machinery, in 1956-60 only 24%
to 33% of total imports, rose to 29% to 37% of
imports in the 1960s, and the share is rising.
The share of the industrial West in imports has
been rising and now represents more than 20%. Since
the mid-1960s Poland has bought more machinery from
the West on credit than ever before -- at least
$215 million in long-term credits during 1966-68 --
although its policies on credit purchases remain
quite conservative. As a result especially of the
step-up in purchases from the West, machinery im-
ports now account for nearly one-third of the total
investment in machinery and equipment.
Targets for Economic Growth in 1971-75
25. The constraints imposed on Polish economic
policy in the 1960s will remain effective in the
1970s -- a large number of new entrants to the
labor force, the difficulty of controlling employ-
ment and investment, and technical backwardness.
Therefore, the present Polish leadership intands to
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aim for about the same rates of growth as in the
late 1960s, using the same basic policies --
maintaining a high rate of investment, allowing
a large increase in nonagricultural employment,
and relying heavily on trade with the USSR.
26. The rates of growth of output, employment,
and investment planned for 1971-75 are only a
little higher than those projected in the current
five-year plan. The main features of the plan
that differ sharply from those in 1966-70 are a
higher rate of growth in foreign trade, especially
in imports, and a much smaller increase in agri-
cultural investment. A comparison of the prelimi-
nary 1971-75 targets with those for 1966-70 is
given in Table 2. Actual economic development in
1966-69 was quite close to the planned growth,
except for the unplanned increases in employment
and foreign trade and some underfulfillment of agri-
cultural plans. Probably, therefore, the 1971-75
plan involves little projected change from actual
rates in the present period -- except for reducing
the growth of employment.
27. From what is known of the gross structure
of output, investment, and trade, the general
trends of the recent past are to be continued.
Priority will still be given to increasing output
of machinery, electronic equipment, building
materials, and chemicals -- as in every other Com-
munist country. Investment will be concentrated
on the development of output in these areas of
industry, and investment in services (except for
transportation) will continue to lag, as it has
since 1965. As in the last few years, export
strategy will be (1) to push development of sales
of machinery and, to a lesser extect, of consumer
goods, (2) to hold down exports of agricultural
commodities and foodstuffs, and (3) to develop
exports of selected raw materials and intermediate
products. Machinery and industrial materials are
due to provide an increasing share of imports;
foodstuffs and consumer goods, a declining share.
The preliminary goals for increasing foreign trade
by 1975 are shown in Table 3.
28. The main targets for economic growth prob-
ably can be met even if the regime is not success-
ful in introducing new technology as planned. The
introduction of new technology is in the nature of
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Table 2
P:celiminary Plan Targets for 1971-75
Compared with Plans for 1966-70
Annual Average Percentage Increase
1971-75
Plan
1966-70
Plan
National income J
6.3
6.0
Industrial production J
7.7-8.0
7.6
Agricultural production /
Foreign trade
2-3
2.6
Exports
8.2
5.9
Imports
8.7
5.1
Investment
7.0
6.6
at Differences in coverage and computation from
GNP.
b. Official gross industrial production, not
calculated value added in industry and handicrafts.
C. Gross output of crops and livestock (not value
added in agriculture as in Table 1). The rate of
growth of agriculture projected for 1971-75 is in-
ferred from published discussions; no explicit
statement has yet been made.
an investment in the economic future of Poland,
which is not likely to be reflected in higher
growth rates in the short run. Indeed, the
attempt to upgrade products and stimulate effi-
ciency -- and to improve the infrastructure in
transport and trade -- could well lead to a slow-
down in growth, for success in achieving these
objectives is not immediate and depends on making
planners and managers -- and the leadership -- less
concerned with meeting plan targets for output.
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Increases Projected in Polish Imports and Exports
1975
Imports Exports
Index Index Commodity . Index Index Commodity
i (1968 = (1970 = Compositica (1968 = (1970 = Composition
100) 100) (Percent. 102) 100) (Percent)
LZJ
'--3 ment 211 168 42 225 179 49
Fuels and industrial
materials 168 144
Foodstuffs and agri-
cultural products 142 131
Industrial consumer
goods 150 123
44 131 100
9 100 100
5 18; 163
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Recent Changes in Planning and management
29. The Polish regime -- it hardly need be
said -- has no intention of experimenting with
untried economic reforms, involving widespread lay-
offs of workers, sharp price rises, or balance-
of-payments difficulties. Throughout the reform
movement of the 1960s Poland hung back. Gomulka
has no sympathy with the "revisionist" economic
ideas that he faced on coming to power in 1956.
Nor would it suit him to announce a sweeping pro-
gram such as that launched by Walter Ulbricht in
1963, although his ideas on reform are not far
from Ulbricht's. The reforms Gomulka introduced in
1969 in fact came only after a serious challenge
to his leadership mounted the previous year and
led in part by Politburo-member Edward Gierek,
the industrial czar of Katowice province and the
spiritual leader of Poland's "young technocrats."
Gierek and his followers especially criticized the
cumbersome administrative apparatus in Warsaw
that hamstrung efficiency in production units and,
by implication, the aging bureaucrats that made
the apparatus go round.
30. To this, Gomulka responded by introducing
reforms intended chiefly to make the central
authorities more effective through the replacement
of key personnel and emphasis on economic decision
making and deemphasis of monitoring production.
The enterprise managers, although freed of obliga-
tory quotas for production in physical terms, do
not have much room for maneuver. In regard to
employment, wages, and investment, their freedom
has been reduced rather than increased. These
changes have been introduced with a well-publicized
campaign of familiarizatic;n but Gomulka does not
claim and presumably doex not expect any dramatic
economic results. However, he did succeed in
blunting the arguments of his most powerful critics
at least temporarily and gained a period of grace
that should carry him at least through the early
years of the 1971-75 plan.
31. Changes in planning and management were
preceded by widespread changes in the economic
hierarchy beginning in December 1968. Since then
the entire top echelon of the State Planning Com-
mission -- the organ most responsible for overseeing
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the economy -- has been replaced, beginning with thn
removal of Stefan Jedrychowski, whose heavy-handed
administration dominated the economy for well over
a decade. Both the new minister (Jozef Kiilesza)
and his leading deputy (Jozef Pajestka) have been
selected more for their professional abilities than
,for their standing in the Party; they are not even
known as Gomulka men. Each has emphasized the
urgency of industrial specialization.
32. Wholesale prrsonr,el changes also have boen
made since early 1969 within the Ministries of
Foreign Trade, Shipping, i'inance, Communications,
and Building and Building Materials -- beginning
at the top. In almost every instance, new
appointees are younger, display better professional
credentials, and have more management experience
than their predecessors.
33. At the operating level, in the associations
and enterprises, there has also been a considerable
turnover in management. Since the Fifth Party
Congress in November 1958, new heads have been
appointed in about one-third of the operating
organizations for which information is available
(65 out of 200). Turnover has been greatest in
the central cooperatives and in transportation and
foreign trade. In industry, only one of six
managers has been replaced (see the accompanying
chart). Appoints to management jobs in industry
Personnel Changes Made at the Director and Deputy Director Level
in Associations, Enterprises, and Central Cooperatives
September 1969
ECONOMIC SECTOR
- 1996 n has and aaaclatlont In aampie - 17 with known parwnnoI chan t
0013130 000130 00000 00000 06.9
00000 00000 00000 00000 1181
?D00000 0 0000000 0000000 0000000 00 01
- Transportation
11 Mterpr/at and aaoclarlont In ample - 6 with known personnel changer
00000 ai000i 8
? Foram Trade
86 antarpfa l and aaeoclatlona In ample - 28 with known pusonnW d es
Sao 00800 C30000
000000 00000 usfil II
? Cantrai
Cooparatiws 28 cooparathaa in ample - 14 with known paraon1w changes
00013 000000000:::::....
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or'yj
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are influenced by the powerful Party leaders in
the provincial capitals, and the central authori-
ties must move slowly in this area.
34. The reforms introduced thin year do not
give a groat deal of additional leeway for deci-
sions by management. Physical production targets
are no longer binding, and enterprises will be
somewhat more free to produce according to demand.
But their freedom to change the product mix will
still be limited by many factors. These include
dependence on central allocation of key materials
and central approval of investment in new machin-
ery. They also include obligatory quotas for the
value of output and exports. Enterprises must
meet targets for the value not only of total out-
put but also output in key commodity groups. The
value of exports also remains an obligatory quota --
presumably in terms of foreign exchange earned by
sales of various groups of commodities.*
35. Profits do not play an important role as
indicators in the Polish reform. Prices are still
set by the central authorities. Enterprises may
retain for investment a substantial share (461) of
profit, but ceilings are placed on investment out-
lays, however large the profit available for in-
vestment.
36. Finally, there are two now controls --
(1) on the level of employment and wages and (2) on
the initiation of investment expenditure. These
controls, which are discussed at some further
length below, complete the task of hemming in the
enterprise and/or association managers. Enterprises
are expected, says the Party, to take a more active
role in planning, cooperating with the central
authorities. But the tightly restricted field of
action of the enterprise should give the manager
few illusions about his job, let alone his influence.
Holding Down Employment and Wages
37. After years of bewailing the readiness of
managers to hire unauthorized workers and to pay
Ao prove ed in a reform of 1966. It io not clear
whether targets are oat for different types of foreign
exchange (clearing rub Lee; accounting dollars,
achillingo, and the like; and free hard currency).
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wages in excess of quota, the regime in 1969
finally began to take administrative action.
Reports over the last year mention severe repri-
mands, financial penalties, and "changes in the
staff" as the means used to enforce "wage and
employment discipline." in the fall of 1969 the
Polish press announced that these penalties had
begun to take affect -- or in "Party Chinese":
The introduction of certain finan-
cial and administrative restrictions as
regards employment has given positive
results after the unfavorable outcome
of the first six months of this year.
The results are not especially impressive -- the
increase in employment in the nationalized economy
over 1968 in the first three quarters came to
3.3%; in the first half, it had been 3.5%.
38. Little more effective was the setting of
employment limits for the end of 1969, as reported
in the Party journal Zycic partii in October. In
some cases enterprises apparently laid off em-
ployees to meet these quotas, but the total in-
crease in employment in the nationalized economy
for the year was still 3.4%. The goal for 1970
is an increase of only 2.5%, which, with a con-
tinued slight decline in private employment (chiefly
in agriculture) and little change in cooperative
employment (in handicrafts and the building trades),
would represent an overall increase of about 1-1/2%,
a substantial reduction below rates in recent years.
39. To back up these efforts, the regime has
slated 55,000 students for an extra year's school-
ing; recommended the employment of women only on
a part-time basis, especially in trade and the
service industries; and added to educational and
monetary incentives to keep young people in
private agriculture.
40. Although these -neasures should be effective
in he short run, persistent effort will be neces-
sary to control employment over several years. The
regime has a good reason for trying to do so -- to
ease the inflationary pressures that developed in
the 1960s. But there is an obvious conflict be-
tween the commitment to leave more to managers and
increased administrative pressures to hold down
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employment and wages. Pressure will doubtless
be reduced or increased according to the growth
of food supplies, improvements in the quality and
mix of consumer goods, especially durables, and
the availability of new housing and other services.
Regulation of Investment
41. The regime has also introduced several
changes in the regulation of investment, in order
to restrict the proliferation of new projects
and to channel more resources into the industries
selected for modernization.
42. First, the regime will impose at the out-
set a ceiling on the amount of investment funds
available from the state budget for lower priority
industries through the entire period 1971-75.
These industries will have to stay within the
initial investment allocations. At the same time,
the unallocated reserve in the state budget has
been increased from 5% to 10% of total investment
outlays. This change -- long favored by many Polish
economists, including the late Oskar Lange -- seems
to be intended to cover unforeseen needs of the
high-priority industries.
43. An important check has now been placed on
investment by enterprises from their own profits
or from bank credits by requiring the approval of
the State Bank before undertaking any project.
Since a large share of investment comes from these
sources -- the share was 65% in 1966 and is
expected to grow to 84% this year -- this control,
if exercised, could help to reduce '-he prolifera-
tion of investment projects and to encourage
priority investment. Whether the State Bank is
up to dealing with the job, which has proved too
much for the ministries and the State Planning
Commission, remains to be seen. But the banks at
least have wide latitude in applying sanctions
and incentives. They can scale the size and terms
of annual repayments, postpone repayments, waive
regular interest charges (now set at 3% for in-
vestment projects) and make refunds for projects
completed ahead of 'chedule.
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Foreign Trade Policy and Technology
44. Finally, the Poles are try4lg to use the
revamped administrative structure to modeinize
the economy through foreign trade. In particular,
they are hoping (1) to increase economies of scale
by eo'perative agreements with Communist trading
partners; (2) to expand output of highly saleable
exports, especially for Western markets; and
(3) to upgrade processes and products in selected
industries by greatly increasing imports of machin-
ery from the industrial West on medium- to long-
term credit.
45. The Polish regime has long hoped to
arrange for product specialization among the mem-
bers of the Council for Mutual Economic Assistance
(CEMA) on some more effective basis than in the
past. The "specialization agreements" negotiated
since the late 1950s cover relatively few commod-
ities -- in 1966, only some 6% of machinery prod-
ucts, for example -- and many cover existing pat-
terns of specialization rather than the results of
negotiation.
46. Polish hopes of a new initiative in this
field were dashed in April 1969 by the failure
of CEMA, after discouraging months of deliberation
in committee, to come up with any agreement on
"closer cooperation" save a decision to continue
studying the problems.
47. The Poles have continued to press for
agreements on product specialization industry by
industry, through ad hoc agreements and through
the development of new institutions such as the
CEMA organizations for trade in metals (Intermetall)
and in chemicals (Interchim), which serve as clear-
inghouses for orders. Other products suggested
for such treatment include electronic and automo-
tive components. But the Poles now realize that
progress in this field will come too slowly to
mean much in the next five-year plan.
48. Poland is still hopeful of expanding its
trade with the industrial West. The Poles expect
to increase exports to the area by at least 5-1/2%
per year, a rate that appears quite feasible.
Agricultural exports, mainly animal products, which
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once were the mainstay of Polish exports to the
West, will increase little if any. As a result
partly of rest European protectionist policies
and reduced demand, the Poles have decided to try
to eliminate imports of grain for hard currency
rather than try to expand exports of animal prod-
ucts; a similar goal. set in the 1966-70 plan was
unattainable. But Poland can count on continued
expansion of sales of coal, sulfur, copper, and
iron and steel.
49. About one-half of the probable increase
in exports to the industrial West -- which are due
to increase from $0.78 billion in 1968 to about
$1.1 billion in 1975 -- is likely to come just
from the expansion of copper and sulfur exports,
which are sold mainly (75%) to the industrial West.
The rise in these exports represents a payoff on
investment projects started not long after the dis-
covery of rich mineral deposits in southwestern
Poland in the 1950s. Exports of coal, now the
largest earner of hard currency, and of iron and
steel products, which come second, will doubtless
grow more slowly, but should provide uF to one-
fourth of the total planned growth. Although over-
all demand for coal in Western Europe is not likely
to grow much, Poland may be able to increase sales
to some coal-poor markets (Norway, Italy, and Japan).
Sales of iron and steel products, mainly pig iron,
ingots, and basic shapes, seem to hold up well,
and further increases in Polish exports are possible.
50. The rest of the growth of exports must
come from sales of chemicals and of light industry
and machinery products. The Poles are especially
interested in expanding such "val:~,e added intensive"
exports. Consumer goods probably have the best
prospects, if Poland does not run into serious quota
limitations. Textiles, shoes, furniture, ceramics,
and ;lads all offer possibilities of expanding sales,
if Poland can judge the market right. Western help
in designing and marketing would make a big difference.
Chemical exports can undoubtedly be expanded substan-
tially. Exportation of machinery, however, which
interests the Poles the most, offers no very promis-
ing prospects, for reasons explained earlier. Even
with Western help it is doubtful whether Poland will
increase significantly the share of machinery in
exports to the West.
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51. Poland has been trying to muster help in
exporting high-grade manufactures in the 1960s in
several ways -- by joining the General Agreement
on Tariffs and Trade (GATT), by investigating
possibilities for now agreements with Western
governments, and by upping expenditures on research
and development.
52. Poland was able to join GATT in 1967 by
offering, in lieu of the tariff liberalization
offered by Western countries, the assurance of a
minimum 7% increase in imports collectively from
GATT members. In return, Poland was hoping for
easing or removal of quota restrictions on sales
to member countries, especially its most important
customers in the Common Market. During the first
two years as a member, however, Poland appears to
have failed tc meet its obligation to increase im-
ports, and the Corrunon Market has failed to offer
many concessions to Poland.
53. More promising appears Poland's chances of
negotiating substantial help from West European
countries in five-year trade agreements, especially
guarantees of long-term credits on favorable terms.
Poland is proposing in 1971-75 to buy a good deal
more machinery in the West. Until now the Poles
have followed a rather conservative policy in buy-
ing on credit. Hard currency indebtedness probably
stands at more than $600 million, but represents only
three-fourths of the value of hard currency exports
in 1969.* The amount probably will be reduced some-
what in 1970. With the assurance of a steady in-
crease in exports, the Poles can easily raise their
indebtedness by several times. But they will prob-
ably remain careful; even by 1975, total hard cur-
rency indebtedness at most probably will be only
about $1.3 billion, not much greater than hard cur-
rency earnings. In contrast, both Bulgaria and
Romania, the most adventurous East European regimes
in the Western market, owed nearly twice the amount
of their hard currency earnings in 1968.
* This estimate excludes very-long-term interest-
free indebtedness to the US for deliveries under
PL 480, which amounts to little more than $400 mil-
lion, payable in dollars or, as agreed, in domes-
tic zlotys.
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54. Poland has already negotiated a credit
line of $125 million with Prance for imports
of equipment through 1972, repayable in goods,
chiefly copper. But the largest share of Polish
purchases on credit probably will be supplied (and
financed) by West Germany. In the trade negotia-
tions begun in October 1969, the Poles repeated
earlier proposals that the West German government
guarantee credits running over $100 million a year
for the period of the agreement. At present it
looks as if the West German government will hold
out the prospect of credit guarantees on this
scale, but will make commitments only for a year
at a time. Even on this basis, Poland would be
in a position to do some planning, and -- what is
more -- to ask other countries to raise the ante
to match the West Germans.
55. If the' agreement with West Germany follows
these lines, then the Poles probably will be able,
as they would like, to buy up to $1.5 billion
worth of machinery on credit in the West in 1971-75
and a total of as much as $2.5 billion of machinery
to upgrade existing plant and equipment. These
purchases would amount to about 30% of total planned
machinery imports during the period, a sharp rise
above the present share (somewhat more than 20%).
In terms of total investment in machinery, however,
even imports of $2.5 billion would amount to a
small fraction (perhaps 15%) of total machinery
invested.
56. it
appears that Poland will be interested especially
in machinery that would improve the competitiveness
of key exports, especially those that have a good
chance of acceptance in the West. This policy
should lead to greatly increased interest in equip-
ment for light industry. The Poles probably will
also want to add data processing equipment, plant
and equipment for the growth industries (chemicals
and electronics), transport equipment, and perhaps
equipment for rolling high-grade steel.
57. Besides credits and easing of quota restric-
tions, the Poles are renewing their interest in
"joint ventures" for producing and marketing new
goods. They were among the first to show some
interest in this field, when Krupp's Berthold Beitz
was promoting joint ventures in 1965. Since then
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they have not made much progress. This year, how-
ever, in negotiating a five-year trade agreement
with Franca, the Poles did get a promise of help
in producing some manufactures, which will be
marketed in France outside of existing import
quotas.' In approaching the West Germans in the
summer of 1969 on the subject of a long-term exten-
sion of their trade agreement, the Poles likewise
included production assistance as one of their
interests. Western know-how in technology, manage-
ment, and marketing could eventually make a sig-
nificant contribution, especially in labor-inten-
sive industries, such as the consumer goods indus-
tries.
58. Nevertheless, even with good fortune -- the
extension of $1.5 billion in Western credits, some
cooperation on quota restrictions, and new activity
in joint ventures -- the visible effects on pro-
duction and efficiency would be slight. With
better investment control and a high priority for
putting Western machinery to work, construction,
installation, and the learning process will last
well into the period, even for the first imports
made in 1970 or 1971. The main addition to Polish
capacity will come from projects already begun in
the 1960s.
59. The same is surely true of the expansion
of research and development. Poland already spends
relatively more on research and development than
other-East European countries -- 2% of the "national
income" in 1969. Further increases are to bring
the share to 2.5% in 1975. The research effort,
as has already happened in other East European
countries, is to be tied more directly to produc-
tion. It is far from clear what a country in
Poland's position can best do in research and
development. Lack of scientific and even of
engineering background, however, is not the key
weakness of Polish industry, but rather the know-
how that can be acquired only through operating
the newest plant and equipment. That is likely to
remain one of the bottlenecks in the Polish economy
for a long, long time.
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Conclusions
60. In 1971-75 Poland will try to modernize
selected industries through improved planning and
management, closer cooperation with other Commu-
nist countries in trade and investment, and large-
scale purchases of machinery on credit from the
West. The Poles do not expect to have a lot to
show for these efforts by 1975. The leadership
apparently will, be satisfied to maintain economic
growth at recent rates, which for GNP averaged
4-1/2% to 5%. This rate implies a somewhat faster
rise in overall efficiency in the event -- rather
unlikely -- that the growth of employment can be
held to planned rates. Living conditions will
improve only slowly. A 2% annual rise in personal
consumption per capita is projected, mainly in the
form of increased use of very high priced items
(quality foods, better grade clothing, and con-
sumer durables). Little improvement is to be
expected in the per capita availability of housing
and other services.
61. The Polish reforms in planning and manage-
ment affect mainly the State Planning Commission,
the economic ministries, and the foreign trade and
transport organizations. The leadership has moved
in younger, better qualified people, has cut back
the effort that the central authorities spend mon-
itoring production, and has reinforced their power
to deal with inflationary pressures and to guide
investment. Industrial enterprises and associations
remain largely under the same managers, and their
freedom of action is carefully restricted, even
more than before in respect to employment, wages,
and investment, although they no longer have to
meet obligatory quotas for output in physical units.
The reforms, in short, are intended mainly to im-
prove administrative controls. They may well have
some effect, especially in reducing inflationary
pressures.
62. The prospect of closer economic cooperation
with other Communist countries keeps receding. At
the 23d General Council of CEMA in April 1969, the
Poles pleaded for closer cooperation, through any
and all means acceptable to the members. The Poles
are convinced that the CEMA countries cannot go on
producing more and more machinery and trying to sell
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it to one another, without arranging for specia-
lization, cooperative investment projects, and
joint research and development. That will come
very slowly, as they doubtless realize.
63. The Poles should not find it hard to in-
crease machinery imports from the West. Their
exports should continue to rise by at least the
planned rate of 5-1/2% per year, largely through
'expanding sales of raw materials and metals, and
their credit is good. West Germany, Poland's
second largest trading part:.er in the West, doubt-
less will go beyond France's lead in extending
credits to Poland if the negotiations begun last
fall are concluded successfully. But machinery
imports from the West suggested by the foreign trade
plan, though fairly sizable, as much as $2.5 billion
in 1971-75, will still represent a small share of all
Polish investment in machinery and equipment -- an
estimated 15% -- and the payoff would come only after
several years. Thus it is quite unlikely that the
expansion of Polish imports from the West will have
much effect on the efficiency of Polish industry and
on the competitiveness of Polish exports at least
through 1975.
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