Poland - The Economy Under Communism

More about the Economy of Poland.

The economy under communism

After World War II, a centrally planned socialist system was transplanted to Poland from the Soviet Union without any consideration for the differences in the level of development of the country, or its size, resource endowment, or cultural, social, and political traditions. The inadequacies of that system left Poland in an economic crisis in the late 1980s.

System Structure

The new system was able to mobilize resources, but it could not ensure their efficient use. High but uneven rates of growth of the net material product (NMP), also called "national income" in Marxist terminology, were recorded over a rather long period. However, these gains were made at the expense of large investment outlays. Lacking support from foreign capital, these outlays could be financed only by severe restriction of consumption and a very high ratio of accumulation (forced saving) in the NMP.

During the communist period, the same cycle of errors occurred in Poland as in the other state-planned economies. The political and economic system enabled planners to select any rate of accumulation and investment; but, in the absence of direct warning signals from the system, accumulation often exceeded the optimum rate. Investment often covered an excessively broad front and had an over-extended gestation period; disappointingly low growth rates resulted from diminishing capital returns and from the lowering of worker incentives by excessive regulation of wages and constriction of consumption. Planners reacted to these conditions by further increasing the rate of accumulation and the volume of investment.

Investment funds mobilized in this wasteful way then were allocated without regard to consumer preference. Planners directed money to projects expected to speed growth in the economy. Again, considerable waste resulted from overinvestment in some branches and underinvestment in others. To achieve the required labor increases outside agriculture, planners manipulated participation ratios, especially of women, and made large-scale transfers of labor from rural areas. Shortages of capital and labor became prevalent despite government efforts to maintain equitable distribution.

An example of inefficient state planning was the unpaid exchange of technical documentation and blueprints among Comecon members on the basis of the Sofia Agreement of 1949. The countries of origin had no incentive to make improvements before making plans available to other members of Comecon, even when improved technology was known to be available. For this reason, new factories often were obsolete by the time of completion. In turn, the machines and equipment these factories produced froze industry at an obsolete technological level.

The institutional framework of the centrally planned economy was able to insulate it to some extent from the impact of world economic trends. As a result, domestic industry was not exposed to foreign competition that would force improvements in efficiency or to foreign innovations that would make such improvements possible. Above all, the isolation of the system kept domestic prices totally unrelated to world prices.

Prices were determined administratively on the basis of costs plus a fixed percentage of planned profit. Because every increase in production costs was absorbed by prices, the system provided no incentive for enterprises to reduce costs. On the contrary, higher costs resulted in a higher absolute value of profit, from which the enterprise hierarchy financed its bonuses and various amenities. When the price was fixed below the level of costs, the government provided subsidies, ensuring the enterprise its planned rate of profit. Enterprises producing the same types of goods belonged to administrative groups, called associations in the 1980s. Each of these groups was supervised by one of the industrial ministries. The ministry and the association controlled and coordinated the activities of all state enterprises and defended the interests of a given industry. The enterprises belonging to a given industrial group were not allowed to compete among themselves, and the profit gained by the most efficient was transferred to finance losses incurred by the least efficient. This practice further reduced incentives to seek profits and avoid losses.

In this artificial atmosphere, prices could not be related to market demand; and without a genuine price mechanism, resources could not be allocated efficiently. Much capital was wasted on enterprises of inappropriate size, location, and technology. Furthermore, planners could not identify which enterprises contributed to national income and which actually reduced it by using up more resources than the value added by their activities. The inability to make such distinctions was particularly harmful to the selection of products for export and decisions concerning import substitution, i.e., what should be produced within the country rather than imported.

Development Strategy

In the postwar years, all East European countries including Poland adopted a fundamentally similar inward-looking development strategy following the Soviet model of accelerated industrialization and collectivization of agriculture. Planners attempted to enforce excessively high rates of growth and to achieve a relatively high degree of self-sufficiency. Strong autarkic tendencies were modified only by the shifting import requirements of the Soviet Union and by specialization agreements within Comecon; those agreements were limited, however, by their insulation from the factors of real profitability and comparative advantage.

In 1945 the Polish economy was completely disorganized and urgently needed reestablishment of its prewar industrial base. The initial central planning organization that began work in Poland in late 1945 stressed socialist rather than communist economic goals: relative decentralization, increased consumer goods production to raise the standard of living, and moderate investment in production facilities. In 1949, however, that approach was scrapped in favor of the completely centralized Soviet planning model. During the 1950s, planners followed Stalin's requirements for a higher growth rate in heavy industry than the overall industrial rate and a higher growth rate in the steel industry than that of heavy industry as a whole. This approach neglected the other economic sectors: agriculture, infrastructure, housing, services, and consumer goods. The sectors that were emphasized were all capital-, fuel-, and material-intensive. Materials shortages had developed already in the Comecon group by the 1960s. In response, Poland was required to expand its extraction of coal, copper, and sulfur, as well as its production of steel and other basic industrial materials without considering costs.

Stalinist planning also forcibly redirected foreign economic relations. Poland's extensive interwar commercial links with Western Europe were reduced, and some important prewar markets were lost as trade with the Soviet Union expanded rapidly. For Poland this trade was based mainly on export of coal and manufactured goods primarily from the rapidly growing heavy industries. In return, Poland became dependent on the supply of Soviet oil, natural gas, iron ore, and some other raw materials. This arrangement meant that Poland's industrial structure adjusted to Soviet needs and specifications, yielding many products that could be sold only to the Soviet Union or its allies. Thus exports became heavily dependent on markets in Comecon.

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