The Centrally Planned Economy

The Centrally Planned Economy

This development strategy brought about a specific pattern of economic growth in Poland. As in the other centrally planned economies, rates of growth depended on increases in the quantity of inputs rather than on improvements in productivity. Material production remained high as long as greater quantities of inputs were available. This pattern of growth priorities and the emerging industrial structure left no possibility of raising wages significantly. Wages had been reduced during the first industrialization drive of the early 1950s. For this reason, the Polish standard of living lagged behind that of Western Europe as the continent recovered from World War II. Already in the first postwar decade, awareness of this disparity began to cause social unrest, a situation that became a tradition during the next thirty-five years.

Establishing the Planning Formula

Centralized planning ranged from broad, long-range statements of fundamental future development to guidance on the operation of specific enterprises. The basic planning unit for transformation of the Polish economy was the five-year plan, the first of which began in 1956. Within that framework, current production goals were established in an annual operational plan, called the National Economic Plan. As the years passed, these plans contained more and more specific detail; because requirements and supplies could not be forecast in advance, plans were inconsistent and constantly needed revision.

The Soviet system had already encountered difficulties, however, in the overly ambitious Six-Year Plan of 1950-55. Maladjustments, shortages, and bottlenecks appeared in the implementation of that plan, which was intended to create the infrastructure for the industrial future: heavy industry, mining, and power generation. In 1956, after workers' riots in Poznan, a general uprising was averted only by a change in the leadership of the communist party, the Polish United Workers' Party (Polska Zjednoczona Partia Robotnicza--PZPR). The new government of Wladyslaw Gomulka promised modification of the system and changes in the development strategy. Consumer goods received a larger share of the national product, and some quantities of grain and food were imported from the West. State control was mitigated by giving limited policy input to enterprises, and the rate of investment was reduced. Although a lively debate occurred on socalled "market socialism," actual systemic reforms were limited and short-lived. Among the reform measures of 1956, the only significant lasting change was the decollectivization of agriculture.

Retrenchment and Adjustment in the 1960s

By the early 1960s, economic directives again came only from the center, and heavy industry once more received disproportionate investment. At that point, the government began a new industrialization drive, which was again far too ambitious. Rates of investment were excessive, the number of unfinished industrial projects increased, and the time required for project completion was considerably extended. Structural distortions increased, and the rates of growth in high-priority sectors were adversely affected by the slower than expected growth in lowpriority sectors. Bottlenecks and shortages increased inefficiency. By the late 1960s, the economy was clearly stagnant, consumer goods were extremely scarce, and planners sought new approaches to avoid repetition of the social upheavals of 1956. At this point, suppression of consumption to its previous levels had become politically dangerous, making a high rate of accumulation problematic at a time when demand for investment funds was growing rapidly. Because of these factors, additional investment funds were allocated to the neglected infrastructure and to the production of consumer goods.

Modernization efforts stressed technological restructuring rather than fundamental systemic reforms. However, a policy of "selective development," introduced in 1968, required another acceleration of investments at the expense of consumption. Selective development and a new system of selectively applied financial incentives ended in the worker riots of December 1970 and a second forced change in the communist leadership in Poland. Meanwhile, no funds were invested in remedying the environmental crisis already being caused by excessive reliance on "dirty" lignite in the drive for heavy industrialization.

These conditions necessitated a switch from an "extensive" growth pattern (unlimited inputs) to an "intensive" pattern of growth that would ensure high rates of growth through improvements in productivity rather than in the amount of inputs. The new emphasis helped drive another reorganization of industry in the early 1970s. State enterprises were combined into a number of huge conglomerates called Big Economic Organizations. They were expected to increase efficiency by economies of scale. Wage increases were tied to net increases in the value of outputs as an incentive to labor productivity. In practice, however, central planners could now control a smaller number of industrial units and regulate their activities more intensely. The system was never implemented fully, and no improvement in efficiency resulted. The failure of the 1973 reform demonstrated that the technological level of industrial products was still too low to permit significant increases in efficiency.

Reliance on Technology in the 1970s

In the early 1970s, East-West detente, the accumulation of petrodollars in Western banks, and a recession in the West created an opportunity for Eastern Europe to import technology and capital from the West to restructure and modernize its industrial base. Poland was relatively late in introducing this so-called "new development strategy," but it eventually went further in this direction than its Comecon allies. The share of trade with Comecon declined, and trade with other countries increased quite dramatically during the first half of the 1970s.

The technology import strategy was based on the assumption that, with the help of Western loans, a large-scale influx of advanced equipment, licenses, and other forms of technology transfer would automatically result in efficient production of modern, high- quality manufactured goods suitable for export to the West. Under those conditions, repayment of debts would not be difficult. Expansion of exports encountered considerable difficulties, however, partly because of the oil crisis and stagflation in the West, but mainly because the central planners remained unable to effect the required changes in the structure of production. The investment drive, financed by foreign borrowing, exceeded the possibilities of the economy. Removed from direct contact with the foreign markets, centralized selection of exportables was ineffective in expanding the markets for Polish goods. At the same time, the dependence of the economy on imported Western materials, components, and machines inevitably increased. By the middle of the 1970s, large trade deficits had been incurred with the Western countries. The negative balance of payments in convertible currencies increased from US$100 million in 1970 to US$3 billion in 1975. During the same period, the gross convertible currency debt increased from US$1.2 billion to US$8.4 billion. Unable to expand exports to the West at the necessary pace, Polish planners began centralized restriction of imports. This policy in turn had an adverse effect on domestic production, including the production of exportables.

Reform Failure in the 1980s

By 1980 it had become clear that the large-scale import of capital and technology from the West could not substitute for economic reform. On the contrary, systemic reforms were needed to ensure satisfactory absorption and diffusion of imported technology. Significant expansion of profitable exports to the world markets was impossible for an inflexible and overly centralized economic system. On the other hand, without an increase in exports, reducing or even servicing Poland's rapidly increasing international debt was extremely difficult.

Meanwhile, the enormous investment drive of the early 1970s had destabilized the economy and developed strong inflationary pressure. Rates of NMP growth dropped throughout the second half of the decade, and the first absolute decline took place in 1979. Although planners should have been adjusting the level of aggregate demand to the declining aggregate supply, they found this task politically and administratively difficult. The authorities also feared major price revisions, especially after workers' riots forced withdrawal of a revision introduced in 1976. In the late 1970s, some prices were increased gradually whereas other increases were concealed by designating them for new, higher quality, or luxury items. The rest of the inflationary gap was suppressed by fixing prices administratively.

By the late 1970s, the shortage of consumer goods was acute. Nominal income increases continued as a "money illusion" to minimize social discontent and provide a work incentive. This strategy increased the "inflationary overhang," the accumulated and unusable purchasing power in the hands of the population. At the same time, suppressed inflation spurred maladjustments and inequities in the production processes, further reducing the supply of goods. The deteriorating situation in the consumer goods market resulted in a series of watershed events: a wave of strikes that led to the formation of the Solidarity union in August 1980, a third enforced change in the communist leadership in September 1980, and the imposition of martial law in December 1981.

Between 1978 and 1982, the NMP of Poland declined by 24 percent, and industrial production declined by 13.4 percent. The decline in production was followed by prolonged stagnation. Recognizing a strong grass-roots resistance to the existing system, the new government of Stanislaw Kania, who had replaced Edward Gierek, established the Commission for Economic Reform in late 1980. This body presented a weakened version of drastic reforms recommended by the independent Polish Economic Society, an advisory board of economists formed earlier in 1980. Implemented hastily in mid-1981, the reforms nominally removed the PZPR from day-to-day economic management and gave the enterprises responsibility for their own financial condition and for planning. These decentralizing reforms were distorted by the constraints of martial law that had been imposed nationally in December 1981, however, and they failed to improve the economic situation. Internally inconsistent and insufficiently far-reaching, the reforms reduced central administrative control without establishing any of the fundamentals of an alternative market system. Thus, in effect, the economy operated from 1981 to 1989 in a systemic vacuum.

After 1985 the foreign trade situation further complicated Poland's economic crisis. The relative importance of Comecon trade declined yearly, necessitating expanded trade with the West, particularly the European Community (EC). This shift was a policy change for which neither the communist regime nor the economic system was prepared in the late 1980s.

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