POLAND: FAILURE TO ADJUST TO THE FINANCIAL CRISIS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85S00316R000100070004-0
• Release Decision: RIPPUB
• Original Classification: C
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• Document Creation Date: December 21, 2016
• Document Release Date: December 4, 2008
• Sequence Number: 4
• Publication Date: April 1, 1979
• Content Type: REPORT

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Directorate of Confidential
Intelligence
Poland: Failure To Adjust
to the Financial Crisis
Confidential
EUR 84-10079
April 1984
Copy 3 8 4
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Directorate of Confidential
11 Intelligence
Poland: Failure To Adjust
to the Financial Crisis
An Intelligence Assessment
This paper was prepared b~
Office of European Analysis. Comments and queries
are welcome and may be directed to the Chief, East
European Division, EURA
Confidential
EUR 84-10079
April 1984
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Poland: Failure To Ad'ust
to the Financial Crisis
Key Judgments During the last two years, the regime of Premier Wojciech Jaruzelski has
Information available made only modest attempts to adjust the economy to its financial crisis.
as of 16 April 1984 Warsaw has not yet stabilized the growth of its hard currency debt,
was used in this report.
inflationary pressures have remained strong, and there has been little
economic reform. Jaruzelski has avoided draconian measures, largely, we
believe, out of concern for maintaining control over a disgruntled populace
and a desire to have martial law considered a success. Warsaw has taken
advantage of generous debt rescheduling terms from private banks and the
de facto moratorium granted by Western governments who have refused to
conduct debt rescheduling talks.
The regime, however, was able over the last two years to stem the decline
in national income, run small trade surpluses, and cut consumption for the
first time:
? The economic fall that continued through 1982 was reversed last year
when national income grew by 5 percent.
? In 1982 the regime cut investment and hard currency imports by about
12 percent and 30 percent respectively, and, through major price
increases, reduced real wages by about 25 percent.
? In 1983, however, Warsaw allowed investment and hard currency
imports to rise while real wages were permitted to increase slightly-
together with the supply of food and consumer goods-in an effort to win
worker support.
The Poles hope to avoid rigorous adjustment measures over the next several
years. Warsaw intends to pay only 15 to 25 percent of its financial
obligations each year; it apparently calculates that Western creditors will
agree to its terms for rescheduling the balance and not declare it in default..
Warsaw hopes to maintain creditor good will by continuing to run small
trade surpluses, and to secure new Western credits through rescheduling
negotiations and membership in the International Monetary Fund. Mean-
while, the government wants to sustain the modest economic rebound,
allowing national income, industrial production, and consumption all to
grow slightly over the next two years.
Warsaw's domestic plans. are unrealistic because the economy continues to
be plagued by mismanagement, inefficient use of raw materials and labor,
and a poorly motivated work force. As long as the government balks at cut-
ting domestic consumption further and does not implement fully the
reforms needed to invigorate production, the economy is unlikely to
generate the exports needed to improve its payments position.
Confidential
EUR 84-10079
April 1984
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If the Poles continue to pay only a small portion of their financial
obligations, their debt would continue to grow. Over the next two years, for
example, the cumulation of unpaid interest-even without new lending-
will cause the debt to increase by about $6 billion to about $32 billion at
yearend 1985. This lack of decisive action to adjust to financial constraints
will delay putting the country back on a firm economic footing, provide the
Polish consumer only marginal gains, and, most importantly, will not
secure the political stability Jaruzelski is trying to buy.
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Key Judgments
iii
What Went Wrong?
1
Adjustments Under Martial Law
3
Austerity Program
8
Improvements in Foreign Trade
10
Widening Financial Gap
12
Polish Projections
12
Likely Trends in Production, Consumption, and Investment
16
Continuing Problems With Foreign Trade
16
Large Financial Gap Remains
17
Implications for Political Stability
17
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Poland: Failure To Adjust
to the Financial Crisis
By the end of 1980, a decade of expansionism-
financed mostly by Western credits-had combined
with poor management and systemic problems to
leave Poland insolvent. Net hard currency debt had
increased to $25 billion-five times as high as at the
end of 1974-and annual debt service payments of $8
billion were about equal to the value of,hard currency
exports. Sources of credit were drying up as Western
creditors realized that Warsaw was seeking new loans
primarily to service old ones and that stabilization
measures were halfhearted. Finally unable to meet its
payments, Warsaw declared a moratorium on debt
service payments in March 1981. This paper describes
the causes of Poland's debt crisis and analyzes War-
saw's efforts to deal with it, the impact on the
economy, and the adjustment policies likely over the
Figure 1
Poland: Relationship Between Investment
and Hard Currency Imports, 1970-83
next several years.
What Went Wrong?
Poland's financial problems have their roots in an
overly ambitious growth strategy, poor economic
management, the inherent shortcomings of a highly
centralized economy, and the regime's unwillingness
to implement stabilization measures promptly. While
the Jaruzelski regime has taken some steps to cure the
country's economic ills, many of the underlying prob-
lems inherited from the 1970s prolong the debt crisis.
A major reason for the rapid buildup in Poland's debt
was the overexpansionary bias of Gierek's economic
policy. With political gains in mind, Gierek sought to
modernize the country's industrial base while increas-
ing the standard of living. An investment boom was
supported by heavy reliance on imports of Western
goods and technology financed on credit (see figure 1).
The regime boosted the standard of living (see table 1)
by increasing workers' incomes sharply while allowing
only minimal increases in retail prices. Per capita
consumption of most major foodstuffs rose signifi-
cantly, but the regime had to become a net agricultur-
al importer to satisfy rising consumer demand.
Source: Official Polish data, constant prices.
Mismanagement and systemic problems compounded
Poland's economic troubles. Warsaw's planners often
failed to adequately consider the economic feasibil-
ity-particularly the export potential-of proposed
new lines of production and made decisions on politi-
cal grounds. Moreover, Western imports were not
used optimally because the unrealistic price system
understated their costs and there were few penalties
for the misuse of investment capital. Enterprises also
lacked incentives to produce quality goods for export
since their performance was judged largely on quanti-
ty. Firms also could count on government subsidies at
year's end if they encountered problems.
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Table 1
Poland: Consumption Indicators
Nominal income
3.7
9.8
8.8
13.5
27.4
50.7
25.0
Retail prices
1.3
2.4
6.8
9.1
24.4
101.5
23.0
Real wages
2.1
7.2
1.9
4.0
2.4
-24.7
1.6
Sales of goods in the socialized market (constant prices)
Food
5.7
9.4
3.4
-0.2
-9.4
-13.1
-1.0
Consumer goods
6.5
10.9
3.7
2.0
6.8
-24.3
14.0
Meat (kilograms)
49.2
53.0
70.3
74.0
65.0
58.5
56.0
Milk (liters)
233
262
264
262
257
255
250
Eggs (units)
162
186
209
223
227
200
190
Cereals (kilograms)
141
131
120
127
121
124
126
Warsaw was slow to remedy its growing debt burden
largely because the Gierek regime was reluctant to
admit that there were serious flaws in its economic
policies and feared that an austerity program would
cause serious unrest. Warsaw put off painful mea-
sures by continuing to borrow heavily in the West.
Between 1976 and 1980, Warsaw merely tried to slow
the rise in the external deficit by reducing the rate of
growth in investment and cutting imports modestly
without restraining consumer demand. As a result,
inflationary pressures intensified and annual trade
deficits stayed at well over $1 billion throughout the
last half of the decade (see table 2).
By 1980-when Western creditors began to cut back
after Warsaw had missed some debt repayments-the
Gierek regime decided to raise food prices moderate-
ly. The resulting strikes and demonstrations led to the
rise of the independent trade union Solidarity and
Gierek's downfall. His successor, Stanislaw Kania,
introduced a limited, hastily conceived stabilization
program in 1981, but, partly because of opposition
from Solidarity, he continued to avoid consumer
austerity measures. Kania slashed investments by
about 23 percent and cut hard currency imports by 35
percent. Some progress also was made in substituting
CEMA and domestic inputs for hard currency im-
ports.' The impact of these measures, however, was
undermined by others aimed at placating angry work-
ers, including cutting working hours, holding the line
on price rises while caving in to workers' demands for
higher wages, and boosting imports of agricultural
goods. Although Kania's policies produced a $1 billion
improvement in Poland's hard currency trade position
'According to recent unpublished CIA analysis, Western imports
would have had to be 7 percent greater in 1980 and 14 percent
more in 1981 to achieve the same output without these substitution
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i..onnaenual
Table 2
Poland: Hard Currency Trade
1978
1979
1980
1981
1982
Estimated
1983
Hard currency trade e
(billion US $)
0.15
-2.94
-2.19
-1.91
-1.69
-0.98
0.02
1.45
1.56
1.28
4.44
4.88
5.48
6.35
7.51
5.45
5.21
5.67
1.13
7.38
7.07
7.39
8.04
8.49
5.43
3.76
4.11
in 1981, they also contributed to a 13-percent decline
in industrial production and a 5-percent fall in GNP.
Since hard currency exports declined over 25 percent,
Poland achieved only a small hard currency surplus,
not nearly enough to cover its debt service obligations.
steps necessary to cover all of its external financial
obligations. Warsaw presumably calculated that it
could take advantage of favorable rescheduling terms
granted by private banks and the de facto moratorium
extended by Western governments to divert resources
to the domestic economy from debt repayments.
Adjustments Under Martial Law
After martial law was imposed in December 1981, the
regime's major economic priority was to stop the slide
in output. Warsaw quickly imposed tight controls on
labor and resource allocation and passed some reform
measures to encourage efficiency (see box). At the
same time, the Jaruzelski regime, taking advantage of
martial law controls, imposed austerity measures to
show it was not neglecting its debt obligations and to
boost creditor good will. (See table 3 for a summary of
economic adjustment measures and their impact.) As
a result of these measures, the regime was able to stop
the decline in GNP, to make some progress-at least
in 1982-in bringing consumer demand into better
balance with available goods, and to run small hard
currency trade surpluses.
But by 1983, Jaruzelski-worried about the political
consequences of continued austerity-sought to ease
the burden of adjustment. Warsaw allowed increases
in investment and real incomes and was unable to
make significant gains in foreign trade. As a result of
Jaruzelski's political concerns and waffling on auster-
ity measures, Poland stopped far short of taking the
Stabilization of Production. To cope with the prob- 25X1
lem of reduced inputs, in December 1981 the martial
law regime imposed tight controls on labor and on 25X1
physical flows of resources to check the decline in
industrial production, labor productivity, and exports.
The government militarized coal mining and other
important industries and appointed military commis-
sars to run more than 200 large factories. The central
authorities established 14 "operational programs"-
and subsequently a government contract system-
that eventually controlled over half of industrial out-
put. Central planners were given new powers to set
most factory production targets on a quarterly or even
monthly basis. The regime also reinstituted the tradi-
tional longer workweek, established harsh penalties
for absenteeism and strikes, and restricted worker
transfers. The mining industry was given priority,
largely out of a calculation that its performance would
be a key to reviving industrial production and increas-
ing exports and that its output could be increased
without reliance on Western imports.
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While imposing new central controls over the econo-
my, the martial law regime also adopted an economic
reform program designed to encourage enterprise
initiative and to expand the use of financial instru-
ments-such as interest rates and bank credits-in
place of administrative controls. Firms were given
increased authority to set wages and prices, to make
decisions on investments and product lines, and to
retain hard currency earned from exports. The gov-
ernment consolidated several ministries, reduced cen-
tral staffs, and allowed enterprises a larger role in
setting their own plans. Banks received increased
power to extend credits and to declare enterprises in
default.
Other measures were taken to ensure more efficient
use of available domestic resources. A conservation
program initiated in early 1982 sought to cut waste of
raw materials, energy, and agricultural products. The
central planners counted on the savings from this
program to provide as much as 50 percent of industri-
al growth by 1983. When labor shortages became a
problem-because of a surge of retirements under an
early retirement program adopted in late 1981-the
regime began trying to lure retired workers back into
the factories with financial inducements.
As a result of these measures, and because output of
the mining sector was unaffected by the drastic drop
in Western imports, the decline in GNP was halted
and industrial production was stabilized in 1982-83,
albeit at low levels (see figures 2 and 3). Production of
traditional hard currency exports from the extractive
industries-such as coal, copper, and silver-in-
creased in 1982 by up to 16 percent over 1981, and
then leveled off in 1983. Manufacturing output fell 3
percent in 1982, mainly as a result of shortages of
labor and Western inputs, and then grew 7 percent
last year, largely, we believe, because of increased
hard currency imports and increased working time.
After a 14-percent decline in 1981, labor productivi-
ty-measured by net industrial output per person
employed-grew slightly in 1982-83 because total
product prices.
The regime's halfhearted implementation of reform,
however, often did little more than cause new disrup-
tions. Enterprises that took advantage of some re-
form provisions frequently raised prices, wages, and
investment much more than planners had projected.
Under the reform plan, competition and profitability
criteria would have limited such increases. Although
the regime subsequently put some restrictions on
price increases, it did not tighten wage and investment
regulations. Reform measures also did not induce
enterprises to use labor and other inputs more effi-
ciently. According to the Polish press, many enter-
prises failed to reduce excessive manpower and mate-
rial use because these costs continued to be added to
industrial employment dropped 6 percent because of
the early retirement program and increased maternity
leave.
The industrial rebound was hindered, however, by the
government's investment cuts of over 40 percent
during 1978-82. The cutbacks particularly hampered
natural resource exploration and further weakened
the long-neglected transportation system. Polish econ-
omists, for example, attributed the leveling off of coal
production in 1983 and the sharp declines in natural
gas output in 1982-83 to insufficient exploration
funds. A railroad official admitted in late 1982 that
one-fourth of the country's railroad tracks and one-
sixth of its rolling stock needed repairs for which there
was a serious shortage of parts. State truck transpor-
tation also suffered from shortages of repair parts and
poorly maintained roads. Because of these deficien-
cies, some plants were forced to sell their products at
the factory gate or to curb output, according to Polish
As for agriculture, Warsaw used both threats and
incentives to encourage private farmers-who pro-
duce 75 percent of output-to grow more crops,
particularly grain, and to increase sales to the state.
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Table 3
Poland: Economic Adjustment Measures and Their Impact,
1982-83
Industry Increase or stabi-
lize production of Major sectors of the economy were "militarized" for example,
selected indus- workers faced harsh penalties for failing to work or being
tries, especially uncooperative. Tight central controls over 50 percent of industry
raw materials in 1982 despite the decentralizing reforms.
and consumer
goods.
Number of operational programs reduced (from 14 to six), but
new "voluntary" government contract system maintained cen-
tral controls; for example, enterprises were assured of inputs
and hard currency if they committed their production to
government hands.
Workweek extended to 46 hours in 1,800 enterprises specified
by the Council of Ministers.
Workers in some plants required to give up to six months' notice
of resignation; restrictions on pay increases imposed on workers
who change jobs.
Job placement only through authorized employment agencies in
industrialized areas; factories are practically obliged to hire
those sent by the government.
Campaigns initiated to eliminate waste of raw materials, ener-
gy, and excess employment.
Tax incentives for industries producing quality goods.
Financial benefits for retired workers who return to the job,
intended to lure back 550,000 workers who retired early.
Agriculture Decrease agricul- Encouraged private farmers to sell to the state by increasing
tural imports procurement prices and reaffirming support for private farming
from the West. through a new provision in the Constitution. The regime also
increased pressure on private farmers to sell to the state by
linking the sale of farm inputs to their sales and threatening
compulsory deliveries.
Investment Decrease govern- Decreased investment outlays in 1982 with some increases in
ment spending 1983 largely as part of economic reform.
and imports.
Decrease indus- In 1983, 30 percent of total outlays was directed to the food
trial investments sector, another 30 percent to the housing industry.
in favor of the
consumer.
Industrial production fell only 4
percent in 1982, compared with
almost 13 percent in 1981.
Industrial production increased
4 percent in 1983 compared
with 1982.
Undermined economic reform
provisions.
Farmers did not respond imme-
diately; the regime had to im-
port 3.5 million tons of grain in
1983. By December 1983 grain
sales to the state were sufficient
to satisfy demand. Livestock
numbers, however, fell in 1982-
83.
Much Polish industrial equip-
ment will become outdated in
the next several years, decreas-.
ing competitiveness in Western
markets. (The 1983 investment
increase was spent primarily on
maintenance, not replacement.)
Effective for only a short time
because the regime allowed en-
terprises to increase wages.
Effective in distributing goods
in short supply, but created a
system of illegal coupon trade.
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Table 3
Poland: Economic Adjustment Measures and Their Impact,
1982-83 (continued)
Restrictions on consumer credits for newly married couples and
farmers.
Progressive taxation of incomes above 25,000 zloty monthly. Measures reduced incentive to
increase earnings and
productivity.
Uniform taxation of private craft, trade, and service industries
which earn above 160,000 zloty annually.
Uniform taxation of all types of farms according to the quality
of each hectare.
Increased taxation of summer homes, foreign travel, and car Discouraged people from work-
fees. ing harder and saving more.
Increases of consumer prices restricted to 15 percent.
Increased gift and inheritance taxes.
Sales tax on some high-quality goods implemented, sales on
other goods increased.
Sale of many consumer goods regulated by province.
Increase consum- Attempts to increase food and consumer good production by Ineffective; food sales fell 13
er supplies. means cited in the industry and agricultural sections. percent in 1982; consumer
goods, 24 percent from 1981
levels.
Crackdown on black-market sales. Effective in reducing the size of
the black market in 1982; activ-
ity up again in 1983.
Enterprises banned from selling to their own workers goods Disincentive to increased
which are in great market demand. productivity.
Control excessive Strict control over consumer price increases implemented by Restricted many enterprises
price increases. enterprises. from passing on increased costs
as specified under the reform.
Contract prices for supply and investment goods frozen.
Imports Decrease depend- . Domestic and CEMA substitutes sought for hard currency Some limited success in 1982-
ence on the West. imports. 83 in finding substitutes.
Exports Increase exports Devaluation of the zloty rate from 35 zloty per dollar in 1981 to Polish goods still overpriced in
to West. 85 in 1982. light of poor quality.
Attempt made to regain lost export markets by charging below-
world-market prices.
Export-producing firms given priority claim on imports.
In 1983, some firms allowed to retain some of their hard
currency earnings.
Government Reduce govern- In 1983, tight control imposed over expenditures. Supported by most consumers
ment spending. because the measures have little
effect on the average worker.
Number of government employees reduced and line held on
their wages.
Attempts made to reduce subsidies for enterprise production Subsidies were decreased in
and consumer goods. 1982 but increased in 1983,
contributing to a rise in the
inflation rate.
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Figure 2
Poland: Average Annual Rates of Growth
of GNP by Sector of Origin, 1971-83
-10 -10
-15 -15
1971 75 80 83 1971 75 80 83
-10 -10
X 1 1 1 1 1 1 I 1 1 V I I I I I I I I
-15 1971 75 80 83 15 1971 75 80 83
-10 -10
V I I I I I I I ~ 11 I I 1 I I I
75 80 83 -15 1971
Source: L. W. International Financial Research Inc., Research Porject on
National Income in East Central Europe, Occassional Papers, No. 75-79.
New York, New York, 1983.
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Figure 3
Poland: Monthly Industrial
Production Index
I I I I I I I I I I I
75 I
J F M A M J J A S 0 N D
The regime threatened farmers that it would compel
them to deliver products to the state, deployed mili-
tary teams to the countryside to inspect farms, and
linked the sale of inputs to government procurement.
On the positive side, Warsaw liberalized inheritance
and pension laws, increased the maximum permissible
farm size and continued to grant credits and subsidies.
In 1983 the regime encouraged grain sales to the state
by raising grain procurement prices significantly.
Warsaw also took steps to decrease the size of live-
stock herds to reduce the need for imported grain and
protein meal.
The regime succeeded in increasing grain production
in 1982 and 1983, enabling Poland to reduce its hard
currency imports of agricultural products. We esti-
mate that total farm output dropped more than 4
percent in 1982 and then rebounded slightly in 1983,
although it remained about 2.5 percent lower than in
1981. Warsaw had above average harvests of most
crops mainly because of good weather in both years.
The regime was able to buy 4.6 million tons of grain
from farmers during the last six months of 1983,
compared with only 3.1 million tons in the 12 months
ending in June 1983. Livestock numbers decreased
both years as a result of the reduced imports of grain
and protein feed and regime efforts to reduce herd
sizes.
Austerity Program. These measures to boost produc-
tion were complemented by the implementation of an
austerity program to control the growth of demand.
The goals of the 1982 austerity program were to cut
investment by 10 percent and reduce the standard of
living in order to shift resources toward the foreign
sector. The government hiked prices of many foods
and consumer goods an average of some 100 percent.
Rationing was expanded to comprise 70 percent of
food and 30 percent of nonfood items. Despite short-
ages in the domestic market, the regime continued to
export food items such as meat and sugar for hard
In 1983 the government sought to allow a 2-percent
increase in investment-the first scheduled increase
since 1978-and moderated its consumer austerity
programs. The authorities delayed and reduced sched-
uled retail price increases and maintained meat ra-
tions despite falling supplies. They also gave the
production of consumer goods priority in the govern-
ment contract system, permitted the operation of
foreign-owned (Polonia) firms that produce primarily
consumer goods, and reduced taxes on manufacturers
of consumer goods. Despite considerable pressure
from some economic planners, Jaruzelski refused to
link future wage increases to productivity gains. The
regime also liberalized benefits for pensioners and
large families, reduced taxes on enterprise wage
funds, and exempted overtime pay from income taxes.
Although the martial law regime's austerity measures
were limited-and, in some cases, fell short of what
was intended-declines took place in consumption
that were significant by Polish standards (see table 1).
In 1982 consumer prices rose by 100 percent-with
food prices rising 160 percent and consumer goods, 85
percent. Since the average nominal income increased
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Figure 4
Poland: Growth of Money Wages, Prices,
and Real Wages, 1970-83
50 percent, real incomes declined by about 25 percent
(see figure 4). Supplies of consumer goods in state
markets fell 17 percent, with the sale of food dropping
13 percent and nonfood items, 24 percent (see figure
5). Despite shortages, queues for food and consumer
goods eased because higher prices meant fewer people
could pay. In addition, rationing and reduced hoard-
ing assured a more equitable distribution. Although
economic subsidies declined in 1982, the regime still
ran a large budget deficit because consumer prices
were still, highly subsidized, low-income families were
given increased benefits, and inefficient industrial
enterprises continued to receive government financial
support.
Warsaw's easing of its austerity program in 1983-
primarily out of fear of worker protests-produced a
small increase in the standard of living.' Real income
2 Regime officials readily admit, however, that workers continue to
believe that their standard of living is being eroded. They argue
that workers' perceptions are governed more by price than wage
increases.
Figure 5
Poland: Sales of Consumer Goods
in the Socialized Market, 1970-83
increased by almost 2 percent, according to Polish
statistics. The amount of food and consumer goods for
sale in state markets increased 6 percent, and goods
such as candy, liquor, cigarettes, soap, and detergent
were no longer rationed. Meat supplies improved 25X1
considerably in early 1983 because of increased
slaughtering, although they then deteriorated rapidly.
The regime diverted meat from export markets and
imported additional quantities, bought on credit from
China, to maintain the meat ration. Though still
illegal, black-market operators increased their activity
and filled the gaps for many affluent consumers as the
regime increasingly ignored their activity.
Polish officials admitted in late 1983 that retail price
increases during the previous two years had not
reduced the size of private holdings of cash and
ConfdentiO
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savings.' According to the Polish press, these holdings
were 10 percent higher in 1983 than the year before.
These holdings reduced the incentives for workers to
be more productive and have kept price hikes from
balancing supply and demand. Warsaw has seemed
reluctant, however, to introduce either a currency
reform or a steeply progressive income tax to reduce
the overhang.
Improvements in Foreign Trade. Warsaw's foreign
trade strategy was based on unrealistic assumptions
about export prospects. The government counted on
boosting exports 10 percent in 1982 and 12 percent in
1983, while keeping hard currency imports at 1981
levels. To achieve these goals Warsaw:
? Devalued the zloty by 60 percent against the dollar.
? Charged below world market prices.
? Gave export-producing firms priority claim on
imports.
? Allowed some firms to retain part of their hard
currency earnings.
Poland also aggressively tried to acquire substitutes
for Western imported goods from domestic sources
and its CEMA allies. The regime commanded fac-
tories deprived of Western imports to develop their.
own spare parts and sources of supply. Polish press
articles indicate that Warsaw asked CEMA countries
to deliver additional commodities and help'with unfin-
ished projects. The regime also tried to negotiate
favorable trade agreements with its East European
neighbors, primarily asking for the right to run trade
deficits and to increase exports of machinery unsal-
able in the West.
The hard currency trade surpluses of over $1 billion in
1982 and in 1983, however, were the result of sharp
import cuts forced by the severe drop in Western
credits (see figure 6). During these two years, Poland
obtained only $2.3 billion of an anticipated $3.5
Polish economists do not agree how best to estimate the inflation-
ary overhang. One group, which calculated the overhang as 500
billion zloty at the end of 1982, derives this figure by taking the
difference between the total amount of the population's money
resources and an estimate of the transaction demand for money and
target-oriented savings. Another group claims the overhang was
360 billion zloty at yearend 1982. Their estimate considers the
cumulative compulsory savings in successive years, which is derived
by taking the difference between the actual increase in money stock
and the increase stemming from a natural propensity to save.
Figure 6
Poland: Hard Currency Exports
and Imports, 1970-83
Surplus
0 1 1 1 1 1 1 1 1 1 1 1 1 1 1
billion in Western credits. The result was a decline in
hard currency imports on a customs basis by 30
percent in 1982. Lacking credits, the regime had to
arrange barter deals for most of its imports or pay
cash, thereby reducing the amount of hard currency
available for debt service.
Although raw material shortages became more com-
mon, Polish statistics show that the regime apparently
had some success, especially in 1983, in shielding key
industrial sectors from the import cutbacks. Polish
economists estimate that imports of industrial materi-
als from the West as a share of all hard currency
imports -increased from 53 percent in 1980 to 66
percent in 1982. Imports of Western machinery and
equipment dropped by more than one-third in 1982
compared with 1981 and remained at that level in
1983, contributing to an increase in the average age of
the industrial capital stock. Imports of agricultural
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Warsaw continued to receive soft currency trade
credits from the USSR in 1982-83, but was com-
pelled to balance trade with most other CEMA
countries. Polish trade deficits with the USSR
amounted to the equivalent of $850 million in 1982
and $530 million in 1983-far lower than the $2.3
billion deficit in 1981. The USSR helped Poland by
supplying 650,000 metric. tons of grain in 1983 and
delivering above plan amounts of raw and semifin-
ished materials such as cotton and various metals.
The latter were paid for by Polish shipments to the
USSR of 50 percent of the resulting output.
Warsaw had limited success in convincing CEMA to
help complete unfinished investment projects. Ac-
cording to the Polish press:
? The USSR is helpingfinish fertilizer, ball bearing,
and textile plants, coke ovens at the Huta Katowice
steelworks, metallurgical plants, and a rolled steel
plant.
goods and foodstuffs were cut in half during 1982-83,
and, as a result, food supplies in state markets
decreased by 14 percent in 1982 and another 1
percent in 1983
The high levels of exports anticipated by government
planners failed to materialize. Hard currency export
receipts on a customs basis rose less than 10 percent in
1982-83 compared with 1981 levels-far short of the
projected 22-percent increase and not nearly enough
to cover originally planned imports and debt repay-
ment obligations. Although the slide in industrial
production was checked and the zloty was devalued,
export performance in the West did not improve
because of the poor quality of many Polish goods and
unfavorable price changes in Western markets. The
government also failed to give enterprises any signifi-
cant financial incentives to produce for Western
markets. Furthermore, although exports of coal and
other raw materials to the West increased in 1983,
growth in receipts was held back by slack world
demand and Polish price cutting.
? The Soviets also are cooperating with Poland in
building an atomic power station and the Kobryn-
Brest- Warsaw gas pipeline.
? The Hungarians are helping Poland produce Jelcz
buses.
? The Czechoslovaks have invested in light bulb and
mining machinery factories and copper mines
Past CEMA investment projects indicate that the
Poles probably will have to pay for the aid by sending
a certain percentage of output to the country that
provided the help. The Poles apparently failed to
enlist help from their CEMA allies for the 55 other
investment projects for which it had sought assist-
ance.
Poland had only limited success in finding domestic
substitutes for Western imported goods or reorienting
trade to CEMA (see box). The share of CEMA trade
in total exports and imports increased but mainly
because trade with the West declined. According to
the Polish press, a group of Polish economists conclud-
ed that domestic or CEMA goods could substitute
adequately for no more than 8 to 15 percent of
Poland's imports from the West in. 1982. Although
the regime found some substitutes for food and
agricultural imports and managed to obtain some
supplies from CEMA and domestic sources for the
machinery and chemical industries, the substitutes
were often of lesser quality and sometimes hindered
production. Some factories, for example, produced
makeshift spare parts, but the machinery frequently
worked less effectively. Most firms dependent on
Western inputs produced at a lower level or simply
closed. For example, the broiler industry, completely
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Figure 7
Poland: Debt and Debt Service
Due, 1970-83
1970
a Including arrearages.
to declare a moratorium on debt repayments, proba-
bly because-according to the Polish press-it real-
ized that such an action would cut off new credits for
a long time.' Warsaw sought to honor its payments to
private banks both to increase the chance of acquiring
new credits and to keep the banks from declaring
Poland in default.
Adjustment measures and debt relief from banks were
swamped by the enormity of Poland's debt service
obligations and failure to raise sufficient credits. Lack
of rescheduling agreements with Western and other
governments put even greater amounts in arrears,
while sources of financing decreased because of the
drop in Western credits (table 5). Because $7 billion in
principal and interest owed to official creditors was
carried over from 1981 and 1982, Warsaw's financial
requirement totaled over $14 billion in 1983. The
regime covered only about $2 billion leaving arrears
of over $12 billion.
Polish Projections
Official Polish plans for 1984-85 indicate that War-
saw does not intend to pursue greater austerity over
the next several years (see box for Polish statements
on the country's financial and trade situation). Al-
though the plans project increased trade surpluses
during 1984-85, they state that Warsaw will allocate
dependent on Western imports of feed, was almost
totally wiped out when such imports plummeted in
1983 to 17 percent of the 1981 level.
Widening Financial Gap. Jaruzelski's adjustment
policies only allowed Warsaw to cover a small part of
its debt service obligations in 1982 and 1983. Warsaw
enjoyed debt, relief from the banks (see figure 7) in
these two years on more favorable terms than in 1981
(see table 4) since the banks returned more than 50
percent of Poland's interest repayments in the form of
short-term credits to finance Western imports for
Polish export industries. In addition, the regime also
slipped into a de facto moratorium to Western govern-
ments simply by not paying its obligations to official
creditors after they had protested against martial law
by refusing to reschedule.' At the same time, the
regime rejected the advice of some economic officials
` Because there were no negotiations among governments in 1982-
83, virtually all debt payments in those two years were to Western
bank creditors. Many bankers stopped calling for Western govern-
ment rescheduling when they realized that any payments to
governments probably would reduce the payments to bank credi-
only $2-3 billion per year for debt repayments even 25X1
though its financing requirement will be over $16
billion each year. National income is slated to reach
the level of 1980 by 1986, and consumption and
investment are expected to increase to 1981 levels.
Large increases in exports are expected; imports are
slated to grow almost as fast as exports and will be
directed mainly to export sectors. Warsaw intends to
seek further debt rescheduling agreements and new
Western credits and will continue to seek assistance
from its CEMA partners.
Domestic Economic Policies. The plans assert that
the economy will grow by 3 to 4 percent annually over
the next two years. Industrial production is slated to
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Table 4
Rescheduling Agreements
Repayment
Period
Comments
January 1986- Bilateral accord with the
July 1989 United States not signed
because of $28 million
arrears on unresche-
duled payments due in
1981.
1981 Paris March 1981 27 April 90 percent of $2.2 billion Varies with creditor;
Club 1981 principal and in- generally 1 percent
Agreement terest on medi- above domestic gov-
um- and long- ernment borrowing
term loans in rate.
arrears of 1
May-December
1981.
1981 Bank August 1981 6 April 95 percent of $2.3 billion LIBOR plus.1.75
Agreement 1982 payments on me- percent
dium- and long-
term debt due 26
March-31 De-
cember 1981.
1982 Bank August 1982 7 November 95 percent of $2.2 billion LIBOR plus 1.75
Agreement 1982 principal on me- percent
dium- and long-
term debt due
in 1982.
1983 Bank August 1983 November 95 percent of $1.2 billion LIBOR plus
Agreement 1983 principal on me- 1.875 percent
planned dium- and long-
term debt due
in 1983. .
December 1985- 1981 interest payments
December 1988 completed in March
1982.
September 1986- Interest paid in three in-
September 1989 stallments, November
1982, December 1982,
and March 1983. Sepa-
rate agreement provided
that 50 percent of inter-
est payments be re-lent
in the form of six-month
trade credits rolled over
for three years at an in-
terest rate of 1.5 per-
centage points over
LIBOR.
January 1988- Principal repayment
July 1992 schedule is graduated 10
percent due in 1988 in-
creasing 5 percent annu-
ally to reach 30 percent
in 1992. Separate agree-
ment provides for 65
percent of interest pay-
ments to be re-lent in the
form of six-month trade
credits, rolled over for
five years at an interest
rate of 1.75 percentage
points over LIBOR.
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Table 5
Poland: Financing Requirement
and Sources, 1982-84
-3,039
-1,787
-660
358
1,085
1,400
Exports
4,974
5,402
6,4'00
Interest c
-3,799
-3,279
-2,560
Other invisibles, net (excluding
interest)
402
407
500
Short-term debt repayments, net
-110
264
0
Medium- and long-term debt
repayment due:
-7,061
-5,482
-4,045
Paris Club creditors
2,573
1,825
1,808
Banks
2,442 d
1,371 d
619
Other creditors
2,046
2,286
1,618
Arrearages from previous year
-573
-6,963
-12,151
Net credit extended
3,815
2,345
NA
Credits
1,670
903
700
Debt relief
2,050-
1,200
Other
95
242
Arrears/gap
6,963
12,151
NA
a Preliminary.
b CIA projection.
e Amounts are for interest due rather than interest paid. Because
Poland has not paid all interest due, the figures for interest and the
current account deficits overstate the hard currency outflows.
d Includes principal payments deferred until the following year
under the bank rescheduling agreements for 1981 and 1982.
e Includes interest deferred until 1983 under the 1982 bank
agreement.
rise by 4 to 5 percent each year, largely because of
more efficient use of energy and raw materials,
further implementation of reforms adopted in 1982,
and large increases in worker productivity (beginning
with a 10-percent gain in 1984). The regime hopes to
boost productivity by providing increased incentives,
such as more consumer.goods. To increase agricultur-
al output by a projected 3 percent annually, the
government plans to raise farm procurement prices
and give private farmers access to more supplies. It
says it tends to increase sales of consumer supplies by
about 7.5 percent annually, largely by boosting sup-
plies of manufactured goods; per capita consumption
of most quality foods such as meat, milk, and eggs is
to grow only 1 to 1.5 percent annually. Nominal
wages are slated to increase by 17 percent a' year and
prices by about 15 percent. Investment outlays will
increase slightly, with emphasis on agriculture and on
resuming work on one-third of the industrial invest-
ment projects frozen in 1981-82
Trade and Financial Policies. Warsaw projects hard
currency trade surpluses of about $1.4 billion in 1984
and $1.8 billion in 1985, with exports rising over 11
percent annually and imports increasing more than 9
percent each year. Although coal exports are expected
to remain at 1983 levels
'exports of food products, primari-
ly meat, are scheduled to increase 25 percent and
exports of machinery, about 10 percent annually. At
the same time, Warsaw is hoping that the USSR will
continue to allow it to run a soft currency trade deficit
and will agree to a rescheduling of debt due in 1986.
Polish officials have said in press interviews that the
regime will try to defer the bulk of its debt repayment
obligations into the next decade, while securing new
credits to finance imports. Furthermore, Warsaw will
ask-its private creditors for a multiyear rescheduling
package on more favorable terms than the 1983 bank
agreement, including more generous credit provisions.
As in the past, Polish negotiators, we believe, will
argue that new credits are necessary to finance im-
ports of intermediate goods vital to Poland's export-
producing industries. To boost its standing with West-
ern creditors and obtain new sources of financing, the
Poles will undoubtedly press again for readmission to
the International Monetary Fund.
Evaluation
Not only do these plans make no provision for cover-
ing all of Poland's debt obligation, they are based on
an assumption-which we consider very shaky-that
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a.uuiiucualal
We want a long-term settlement of Poland's financial
problems, but we cannot accept a solution that weak-
ens our production potential or leads to a deteriora-
tion of the country's standard of living.
Deputy Premier Manfred Gorywoda at
the 14th PZPR Central Committee
Plenum, 19 November 1983
In the capitalist countries, the overcoming of a crisis
begins with drastic budget cuts on social expendi-
tures. We in Poland do not wish to follow this road
nor can we do so.
General Wojciech Jaruzelski at the
14th PZPR Central Committee
Plenum, 19 November 1983
Just as the "umbrella" theory proved futile so it is
now commonly known that no one-be it a bank or
government-will ever risk putting a major debtor in
a state of default.
For various reasons, most Poles have resented the
export of Polish goods in the postwar period. While
the average Englishman, German, or Japanese wel-
comes the presence of his country's goods on foreign
markets, a Pole reconciles himself of exports only
when this proves absolutely inevitable.
Henryk Chadzynski, economic
journalist, Zycie Warszawy,
3 November 1983
When at the end of the 1990s a half of the industrial
plants in the world will be turning out products
involving electronic components, Poland only will be
able to sell some unprocessed raw materials, proba-
bly at a loss, some building services, which will face
stiff competition from underdeveloped countries, and
primitive products of the engineering industry, which
no one else will find profitable to make any longer.
Stanislaw Stepien, Polish businessman,
13 November 1983
Aleksander Jung, Polish economic
official, 20 November 1983
Let us remember that the sanctions imposed on
Poland caused considerable economic losses, which
must be taken into consideration when resolving the
problem of debts.
Stanislaw Dlugosz, deputy chairman
of the Planning Commission,
30 October 1983
Western creditors will provide generous debt relief. If
the creditors fail to come through, Warsaw seems
ready to risk default or continuation of the present
situation vis-a-vis Western governments
Even if they do maintain the good will of their
creditors, the Poles will still have trouble meeting
their own goals. Many of the problems that plagued
The technological gap is growing. We are at present
seriously behind the average world level of technol-
ogy so the competiveness of our products in world
markets, incuding CEMA, is deteriorating. Reducing
the gap requires an increase in investment outlays in
the next few years.
General Wojciech Jaruzelski at the
14th PZPR CC Plenum, 19 November
1983
the Polish economy in the 1970s have worsened in the
1980s. Economic planning has not become any more
realistic, judging by such moves as the decision to
complete the Katowice steel plant. Major systemic 25X1
problems persist, despite the regime's verbal commit-
ment to economic reforms. Most importantly, the
authorities fear that severe consumer austerity meas-
ures would provoke political unrest.
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Likely Trends in Production, Consumption, and
Investment. We believe the regime will have problems
fulfilling the plan for industry. Output of the mining
industries, according to some Polish economists, has
reached its upper limit because of the lack of invest-
ment in new mines. Increased output in manufactur-
ing industries will continue to depend heavily on more
imports of raw materials and intermediate goods from
the West. Moreover, the main factors that helped
boost industrial production in 1982-83-a longer
workweek and the return of many retirees to manu-
facturing enterprises-are one-time sources of im-
provement that could even disappear if many pension-
ers retire again because of limited incentives. Lack of
adequate incentives also could hold down gains in
labor productivity.
Warsaw's hopes for improved efficiencies from its
reforms and conservation programs seem badly mis-
placed. Economic reforms have been steadily eroding
since 1982, partly because the regime feels a need to
maintain tight central controls, and
few besides Jaruzelski and some of his
close advisers favor reform. Many government offi-
cials resent the potential erosion of their power.
Enterprise managers are not prepared to take respon-
sibility for their actions, and most workers equate
reform with higher prices and lower pay. The regime's
conservation program also gives little promise of
easing scarcities because enterprises still have no
incentives to conserve and only limited funds have
been allocated to the program. Much of the existing
industrial structure uses excessive energy and raw
materials and would require substantial capital out-
lays to revamp.
Judging by past broken promises, the regime probably
will not increase investment in the agricultural sector
enough to achieve higher levels of farm output.
Investment in the sector last year was only slightly
higher than in 1982, despite a government pledge to
provide farmers a much larger percentage of the state
investment budget. Crop output was helped signifi-
cantly in 1982-83 by generally good weather-some-
thing the government cannot count on. Finally, in-
creasing the size of livestock herds may prove difficult
in the wake of the increased slaughtering in 1982-83.
Despite the need to hold the line on or reduce.
consumption, the regime shows no sign of changing its
policy of allowing nominal incomes to grow more
rapidly than consumer supplies. Continuation of this
policy will only intensify inflationary pressures and
make price hikes a less effective means of reducing
demand. Moreover, the regime, to curry favor with
the populace, could easily give in to pressures to lift
further the lid on incomes. This could aggravate the
imbalance between demand and supply in the con-
sumer market.
Industrial investment also could increase more rapidly
than projected in the next several years. Even though
investment rose 4 percent more than planned in
1983-largely because under the economic reform
industrial enterprises were given greater control over
investment funds-the regime has not tightened con-
trols. Moreover, the government's decision to resume
work on some large, partially completed investment
projects could, as in the past, boost investment more
than anticipated. A large increase in unplanned indus-
trial investment may cause central planners to divert
funds from agriculture.
Continuing Problems With Foreign Trade. The gov-
ernment, in our view, will be hard pressed to achieve
its ambitious targets for foreign trade, particularly
because of obstacles to improvements in export
performance:
? Meat exports could easily be held down by domestic
production problems and constant pressure to divert
planned meat exports to Polish consumers.
? Efforts to increase machinery exports will have to
overcome the poor quality of Polish products and a
widening technological gap between Poland and the
West.'
? Exports of building services, which earned $673
million in 1982, also are likely to remain low in the
next few years because many of Poland's traditional
customers in the Middle East are restricting
investments.
6 Polish economists have said, for example, that 65 percent of
machine tools currently in use in the country will be at least 10 to
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? The coal industry probably will be able to meet its
export goals but is unlikely to rise much above 1983
levels because of stagnating production.
Aside from financing problems, the Poles will also
have difficulty, we believe, keeping down the rate of
growth of Western imports because of their need to
increase imports to fuel economic growth.' Resuming
investment projects frozen in 1981 could easily lead to
higher imports without commensurate export gains.
Consumer pressure for improvements in the standard
of living could prompt the regime to increase imports.
Poland will not gain much in terms of real resources
or financial aid in its trade with CEMA over the next
several years. Indeed the USSR, according to Polish
press reports, probably will reduce the soft currency
trade deficit that Poland will be allowed to run. Other
CEMA countries are likely to demand that Poland
run trade surpluses to pay back aid given in 1980 and
1981. They also are likely to extend only minimal
assistance to the Poles in completing investment proj-
ects, and most will be reluctant to make substantial
investment without guarantees of significant econom-
ic returns. Moreover, we believe that Poland has
already exploited the available CEMA and domestic
substitutes for imports from the West.'
Large Financial Gap Remains. Even if Warsaw
achieves its projected trade surpluses, it will not have
come very far toward covering its financial obliga-
tions. We estimate that this year Warsaw will be able
to pay most of the interest due Western bankers only
' We think the growth of Poland's GNP is closely associated with
the growth rate of hard currency imports. Greater GNP growth
requires progressively greater growth in hard currency imports. We
estimate an average elasticity of imports to GNP of over 1.25 in the
1983-85 plan. If political pressures cause an increase in imports of
consumption goods without compensating reductions elsewhere, an
even more rapid increase in hard currency imports will result. A
rebound in consumption levels to 1977-78 highs by 1985 without
compensating cutbacks elsewhere would result in a hard currency
imports/GNP elasticity of 2.
'According to unpublished CIA analysis, metals, machinery, light
industry products, food, and agricultural goods, for which it is
difficult to find substitutes in CEMA or in the domestic economy,
now account for the bulk of hard currency imports. Continued
successful substitution away from hard currency imports in other
commodity categories cannot have much impact on overall hard
currency imports, since even a 10-percent reduction in these other
by leaving completely uncovered the more than $16
billion in arrears owed Western governments and
other creditors. To cover debt maturing this year as 25X1
well as arrears, Poland needs highly concessionary
rescheduling agreements with Western governments,
favorable rescheduling terms from banks, and sub-
stantial new credits. The Poles, in our view, will try to
convince their creditors that the alternative to such
Western concessions is a Polish default!
Poland's policy of minimizing debt repayments-as
long as its creditors continue to go along with this
strategy-will take some pressure off the economy, 25X1
but will create even greater problems in the long term.
As long as some interest is unpaid, both the debt and
the interest payments required to service the debt will
grow. For example, if Warsaw can pay only $1 billion
in interest annually, the debt will increase to $32
billion by yearend 1985 and $40 billion by 1990. To
prevent an increase in debt, the regime would have to
generate trade surpluses equivalent to annual interest
payments. This would require a significant boost in
exports-which the Poles have not yet been able to do
and which they claim depends heavily on increased
imports-and a tough austerity program that the
regime is especially reluctant to impose. Until War-
saw changes its economic priorities, Polish leaders will
continue to view the servicing of its foreign debt as
only one-and not the most important-of its many
economic problems. Moreover, a sustained improve-
ment in Polish economic performance is not possible
without measures and reforms to deal with some of
the'systemic and other factors that were the roots of
the crisis.
Implications for Political Stability
The government's continued refusal to implement
draconian measures that could help resolve the
balance-of-payments crisis is based on the justified
.fear that such actions would seriously endanger the
' Debates are continuing within the Polish regime on ways to handle
the debt policy, especially with government creditors. In recent
articles in the Polish press, the chairman of Bank Handlowy argued
for continuing with the negotiation, while a deputy chairman of the
Planning Commission advocated postponement of Polish payments
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country's fragile stability. The. authorities clearly. are
seeking to buy time. They hope to deflate consumer
expectations-through constant propaganda about
the country's perilous economic situation-so that
small increases in consumption will be enough to help
preserve political tranquility and. stimulate worker
productivity.
Although the regime's use of force and intimidation
can maintain a superficial calm over the near term, its
economic policies will not produce a more enduring
political stability over the longer term. Most Poles do
not believe regime statements, attribute economic
shortcomings to government ineptitude and/or Soviet
"exploitation," and are unwilling to make sacrifices as
long as there are wide disparities in incomes and
access to goods. Moreover, government success in
maintaining a modicum of social peace could make
the authorities overconfident and reduce their interest.
in solving systemic and management problems neces-
sary to put the country on a sounder economic footing.
Postponement of austerity measures may also make it
more risky to implement them later in the decade. In
the coming years the authorities will be confronted by
a new generation of Polish workers, who are more
alienated because their expectations were inflated
during the Solidarity period and crushed by martial
law. This generation might believe that it has less to
lose by reacting violently to additional austerity
measures
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