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Poland Table of Contents


Causes of Decline

No single factor was responsible for Poland's large-scale decline in production and incomes in 1990 and 1991. The very restrictive stabilization policy caused some of the decline in economic indicators as well as increased unemployment. But when some fiscal and monetary restrictions were eased and real incomes increased late in 1990, inflation again increased. A similar succession of events in 1991 indicated that under prevailing conditions any increase in aggregate demand would lead to an increase in prices (hence inflation) rather than to an increase in output that would match the demand generated by higher wages.

An important reason for the unresponsiveness of supply was the inherited industrial structure, especially the poor condition of capital stock and shortages of various components and materials only available on the import market. But other factors also played a role. In many cases, enterprise managers failed to make responses and decisions appropriate to reform goals. The reform of 1981 had called for election of most managers by the workers' councils of their enterprises. Under the communist system, the political leverage of this relationship meant that managers sought to satisfy the councils by raising wages and avoiding layoffs through whatever strategy was available. Beginning in January 1990, however, the enterprises suddenly found themselves in a buyer's market instead of the traditional seller's market. Substantial and rapid adjustments within the enterprises were needed to cope with a decline in the domestic demand caused by a drastic reduction in personal incomes, cuts in government expenditures, and rapidly increasing imports. At the same time, the sudden elimination of the formerly secure Comecon markets, especially those in the Soviet Union and East Germany, made establishment of new markets in the West a condition of survival for many enterprises.

Few managers were prepared by training or experience to deal with this new requirement. No consulting or foreign trade brokerage firms were available to provide assistance, and the banking system that succeeded the old structure under the National Bank of Poland (Narodowy Bank Polski--NBP) had no experience in this respect. Although the elimination of price distortions and the introduction of an economically meaningful rate of exchange finally made profit and loss projections meaningful, the system of internal accounting within the enterprises still required considerable adjustment in 1992. At that point, however, major changes in the product mix and improvements in quality were unlikely because anti-inflationary macroeconomic policy had caused a scarcity of investment funds for modernization and restructuring.

Another inhibiting factor was the persistent concentration of the postcommunist Polish industrial structure, which in 1992 was still dominated by huge state-owned enterprises. In many cases, one enterprise monopolized an entire group of products. Antimonopoly legislation and an antimonopoly office established in 1990 had limited effect in the early postcommunist years. Some large enterprises were split, and some monopolistic practices were stopped. Rapidly increasing imports provided new competition, but imports also reduced the market for domestic products and created an adverse trade balance despite a surprisingly strong performance by Polish hard-currency exports.

Closing bankrupt or unprofitable state- or municipally owned enterprises proved especially difficult when the livelihood of entire communities or regions was based on one or two such plants. Powerful workers' councils lobbied for continuation of the status quo. In 1992 thousands of bankrupt state enterprises survived on loans from other enterprises or from banks, which were not capable of enforcing repayment under the financial conditions of the time.

Data as of October 1992