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MEMORANDUM FOR THE RECC *
SUBJECT: Overview of the Polish Economy
The attached paper was nr-nt to Charleseputy Assistant Secretary, Departnent of State.
The paper reviews recent Polish economic pciionwncessesses outlook for the future.
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Um! Overview of theconomy
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Unl Charles Meicsner, Deputy AssistantSecretary, Department of State
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Reviews recent Polish economic
performance and assesses outlook for
future
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Economy Stalls9
Polish eccmomic performanceas measured by movement In keyost-World Waradir Real gross national product declined by atercent from the previous year; industrial production Increased byercent. ive-million ton decline in the grain harvest to onlyillion tons ledallercent in overall agricultural output.
These results translatedismal year for Poland's already dissatisfied population. Sales of many consuner goods including textiles, refrigerators, and automobiles fell because of production shortfalls, while the poor harvest gave rise to shortages of many fruits and vegetables. ercent rise in meat sales reflected distress slaughtering in the winter9 that will depress meat consumption in the future. Rousing completionsercent lowerainly because of shortages in construction cuterJB
Consumers were also bedeviled by accelerated inflation. The regime officially increased prices on some goodssuch as gasolineand permitted more "hidden* price increases lry such methods as repackaging old products under new names and opening ccaasercial stores that sell meat and dairy products at arach higher prices than state stores. Unsanctioned
Li*
Key Polish economic Indicator*
Percentage Rates of Growth
Production US$1
Average,
price increases havo also become more frequent. Official Polish statisticsercent increasehe actual rate probably was as much asercent. JHf
Despite the decline in overall economic activity, Poland nade littlemproving Its external financial position. Because of the need to increase grain imports, Poland only slightly reduced its total hard currency trade deficittoillion. The current accountillion) was up somewhat fromecause of rising interest payments. Poland's net hard currency debt continued to mount,illion by9 compared with aboutillion at endeasons for Downturn
Wretched weather and deliberate policy decisions contributed to last year'e unprecedented GNP decline. Agriculture was particularly hard hit by one of the worst winters on record and subsequent weather disturbancesexcess rain in spring and drought in summer. The inclement winter weather also disrupted the non-agricultural economy, primarily by causing breakdowns in transportation and electric power generation. WM^^f
Though it clearly did notrop in GNP, the regime, as parttabilization effort datingas striving to slow economic growth last year, primarily
eduction in investment that amountedercent. The objective of restraint was to restore external financial equilibrium by curtailing imports and freeing resources for production of export-..
Poland's economic performance last year cannot be explained away, hovever, as mainly the product of (a) bad luck and (b) the necessity for sharp but temporaryon output. The cumulative effect of unwise resource allocation decisions in the past and long-term, deep-seated systemic shortcomingsreater role. Agriculture, for example, eveneturn of normal weather, must still contend with chronic shortages of basic agricultural machinery and supplies, mismanagement of agricultural price policies, and the uneconomically small site of Polish farms. Furthermore, transportation and electric power will remain problem areas,ong history of inadequate maintenance, insufficient investment, and poor planning that has failed to coordinate the functioning of these sectors with the rest of the economy. To generalise. Poland's major chronic problems include:
of all levels of the economic hierarchy, especially of labor and energy resources.
poorly motivated work force, largely as aof acute shortages of consumer supplies, an
accelerating rate of inflation, and stagnation of wages.
atmosphere pervading economic planning* which places emphasis on solving Immediate problems often at the expense of longer term considerations. For instance, Poland is relying on expensive, short-term borrowing to meet Its debt repayment obligations.
consequences ol poor investment decisions in the, when Warsawumber of marginal industrial projects at the expense of the development of Important sectors such ascoal, and electric power generation.J| What the Goverrment Hopes to Do
Both0 Plan andlve-Year plan indicate that the regime (a) intends toight rein on the expansion of economic activity but (b) remains extremely reluctant to alter the system in ways that would increase efficiencyY
Belt tightening remalna the watch word The plan calls for an increase in national income (according to the Polish concept, essentially GNP minus services) ofercenthalf the rate of increase originally projected In9 plan. Investment cutbacks again lie at the heart
of the restrictive program. ercent reduction is stipulated, with temporary reductions scheduled in suchectors as agriculture and food processing. Within the pared-down total, investment is to be concentrsted on the energy and transport sectors, housing, facilities due to be commissionednd projects considered vital to modernising the economy. Even with the cut back in investment Polish consumers face further austerity, as plans to limit tho rise in real wagesercent suggest,
No changes in price policy are contemplated. Official prices on staple products will be kept down to avoid consumer discontent and to protect the real incomes of lower-paid workers. Budget policy will continue to stress stable food prices through subsidies, which will account for one-fourth of budget expendituresbout twice the share Nonetheless, no diminution in the rate of inflation is likely. First, the regime is unlikely to contain the rise in money wages that have become the rule, since efforts to do so conflict with attempts to buy domestic tranquility. Furthermore, to remove some of the excess demand in the markets for consumer goods, the regime will continue to permit hidden pricefl^
Indeed, Warsaw will continue toegree of
inflationalbeit surreptitiouslythrough expansion of
ipwlnl Mflroil emaiwririeei.
Special clothing stores will be opened0 and will operate on an experimental basis with greater freedom with respect to sources of supply, employment, and wages. Inetwork of private stores selling meat at high free market prices has beer, put into operation on anental basis. With the associated objective of attracting citizens' holdings of foreign exchange, the government will expand sales through the foreign currency shopsespite resentment by citizens who do not have access to hnrd currency.
lan implies some relaxation of austerity, with national Income (Polish definition) scheduled to growear. However, this is well belowercent rate the Poles had projected at the start of the current Five-Year Plan The emphasis on continued reallocation of resources from domestic use to bolster exports is implicit in the apparent intent to farther reduce the proportion of investment in national Income. Investment will continue to be shifted to sectors largely responsible for shortages and.bottlenecksenergy, raw materials, and transportation. Energy conservation is
toatrcAsed, and new less energy intensive technology la to be developed.
Although morehan past plane,oals still depend on enhanced efficiencyas the leadership Itself has stressed. This, In turn, would require substantial systemic reform. Although pressure from provincial leaders, party moderates, economists, and Western creditors will keep the reform issue alive, the regime's words and actions at the recent Party congress suggest strongly that sweeping changes over the next few years have, at least for now, been ruled out. The- personnel changes announced at the Congress did not install champions of reform in key posts. o-slow approach, Gierctk indicated that if .tabilization efforts and the gradual introduction of improvements in managing the economy succeed in alleviating some of the most pressing economic problems, it stay be possible to consider wider reforms Another party leader, Mladyslaw Krocxek, echoed this theme after the Congress. He explained that on the basis of an evalration0 of tbe present system of planning andomprehensive program for improving the performance of the econcaty should be worked out and implemented The leadership appears reluctant to repest Its experience with the reforms introducedhen the economy was already ovetheating and waa
suffering from the pressure of excess demand. At that time, the regime had impleroentec" several measuresew management systemhe "system of large economic organisations"ew method for determining wages, several new success indicators, and other meatjurea to improve efficiency and the role of prices. When the reforms did not accomplish the goals set by the authoritiesIn part because they were implemented only partiallythe regime abandoned suiny of the reform measures and reimposed tight centralutlook
Th* hard times recently experienced by the Polish economy are likely to grow even harsherevenecurrenceisfortune such asinter. The prospects for Poland's righting its balance of payments without prolonged, and probably politically unacceptrble, stagnation in economic growth and living standards are not bright. roup of Polish economists, in aand unofficial forecast, recently predicted zero economic growth throughnd declining real personal income in Poland for the next five yo/iro.
ery slow rat* of economic growth is the
best the Poles can hope for. With investment still declining
and likely to level off or rise only slowly, the
-9-
stock will increase st sMrplyates.lowdown in the growth of the working age population is under way. with percentage increments to fixed capital and the labor force declining to little more than half the levels of, Poland must rely heavily on incrr-nsccl efficiency to support -conomic
The gloomy outlook in part reflects economicbeyond Poland's control. Althoughet exporter of energy (thanks to its large coaloland must import oil and natural gas, and the energy terms of trade are turning against Poland. Oil end gas prices aze rising faster than coal prices. Furthermore, the USSR, which now provides aboutercent of Poland's oil on mora favorable terms than those offered bysuppliers, is unlikely to increase oil deliveries0 and is likely to stiffen the terms on the oil it continues to sell. J
Poland's efforts to cut or eliminate its trade deficitis the Nest will be further complicated if, as seems likely, Nestern economic activityand thus import demandremalnc sluggish, Western trade restrictions are noteased, and Polish goods (other than raw anditems such as coal, copper, sulfur, and silver) remain only marginally competitive In Nesternf
Compounding the problem created by an increasingly uninviting oxternal environment la Poland's evidentdiscussed in preceding sections, to overhaul its economic system. Warsaw's unwlllingners to do sounction partly of the conservative nature of the leaderahip and partly of its fearolatile population that has in the past violently protested against measures that adversely affected its livinc standards. The riots triggered by price rises06 are theotable cases in point and doxplain the furtive, timid, piecemeal approach the regime has adopted in raisingjf
Finally, the austerity measures themselves can conflict with efforts to improve the balance of payments. Cutting Imports is likely to make production for export more difficult. Reducing investment in turn hampers the expansion andof productive capacity required to meet both domestic and export demand and to make Polish goods competitive. At the same time, slower growth in consumption runs tha danger of demoralising workers and thus defeating efforts to raise labor productivity. aftEjM
Original document.
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