Poland - Macroeconomic Indicators for 1990 91

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.

Impact on Productivity and Wages

Experts predicted that the highly restrictive stabilization policy would suppress production, but the extent of the decline exceeded all projections. Industrial output declined by 24 percent in 1990 and by another 12 percent in 1991. In 1990 all branches of industry registered a substantial decline. In 1991 only the food industry showed a modest increase in output. In agriculture the situation was somewhat better. Gross agricultural production declined by 2.2 percent in 1990 and by 2.4 percent in 1991. In both years, however, the grain harvest was a very robust 28 million tons.

Gross domestic product (GDP) declined by 12 percent in 1990 and by 8 percent in 1991. Gross fixed investment, after declining by 2.4 percent in 1989, decreased by 10.6 percent in 1990 and by 7.5 percent in 1991. Consumption declined by 11.7 percent in 1990 but increased by 3.7 percent in 1991. The decline in investment meant that no significant modernization and restructuring could take place, which in turn jeopardized future growth. The number of unemployed people reached 1.1 million or 6.1 percent of the labor force, at the end of 1990 and 2.2 million people, or 11.4 percent, at the end of 1991.

Real personal incomes decreased by 22.3 percent in 1990, but they increased by 12.7 percent in January-September 1991. Real wages, excluding agriculture and jobs financed directly from the state budget, declined by 29.2 percent in 1990 and increased by 2.0 percent in 1991. The average real value of pensions decreased by 14 percent in 1990, then increased by 15 percent in 1991.

Macroeconomic indicators for 1990-91

Postcommunist economic reform initially brought both positive and negative results in the key areas of prices, productivity, inflation, and wages. In general, early indicators showed that the adjustment to a market economy would require more time and greater social discomfort than was anticipated in 1989.

Price Increases

Sudden liberalization of prices brought an average price increase of 79.6 percent in the program's first month. The high prices were intended to eliminate some major distortions in pricing and begin to adjust demand to the existing limited supply. Price liberalization stopped hyperinflation but, unexpectedly, inflation remained high.

Annual price increases were 250 percent in 1990 and 70.3 percent in 1991. Except for the first quarter, however, average quarterly price increases in 1990 were considerably smaller than the equivalent increases in 1989, when the administrative system of price determination and controls still dominated. The average quarterly price increases were lower in 1991 than in 1990.

Agricultural Imbalances

A serious political problem developed in the agricultural sector during this period. Reduced domestic demand for food, the loss of Comecon markets, a rapid increase in imports, and relatively good harvests led to oversupply of agricultural products. Agricultural prices lagged behind the prices of goods and services purchased by Polish farmers. As a result, incomes fell farther than incomes in other sectors in 1990 and 1991. This situation made farmers one of the most dissatisfied groups in Poland; although traditionally not politically active, farmers demonstrated en masse to improve their situation. In 1992 they demanded that government policy include higher tariffs, guaranteed minimum prices, and cheap credits to protect them from economic hardship.

More about the Economy of Poland.

Statistical Distortions

Comparative statistics for this period, which generally caused overstatement of the 1990 decline, must be understood in their context. Two factors contributed to this faulty estimate. First, 1989 figures provided the basis for evaluating the economy's 1990 performance. Traditionally, output statistics in centrally planned economies were inflated to show success in every case. Also, the 1989 figures did not reflect the lowquality , unprofitable goods produced by subsidized state enterprises. Unprofitable production was shown as a statistical increase in NMP even as it reduced national income in the real world. Furthermore, until 1989 personal income and real wage calculations used the artificial official price index, so they were not a true measure of consumer purchasing power.

On the other hand, official statistics for 1990 and 1991 reflected a downward bias. Revenues and incomes deliberately were underestimated in order to avoid higher taxes. Because of these distortions, decentralized economic activity in the state sector and rapid growth in the private sector clearly required new methods of collecting and presenting statistics. In 1992, however, the Central Statistical Office in Poland had not yet removed the distortions of the previous system from its statistical formats. Unemployment statistics also failed to keep pace with the actual economic situation. The rapid expansion of private enterprise in 1990 provided jobs for many people who had registered for benefits established at the beginning of the reform period. Meanwhile, legislation was slow to reform the accounting system. Even after statistical adjustment, however, the first three years of economic reform brought Poland genuine, deep decline in industrial production, in GDP, and in real personal incomes and wages.

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