'cretary' s M~morandum 523 CONFIDENTIAL NOTES {;)II! POLAND BY DR. BARANSKI August 12, 1949 1. I should like to put down here some observations about economic conditions and facts in Poland based on the experiences of my recent trip to that country. General Remarks 2. The economic reconstruction and development of Poland is progressing well along the line of the three year plan, first published in the stunmer of 1946, and covering the period of 1947, 1948 and 1949. It is already clear tbat most of the i targets established by that plan w:i.11 be reached before the closing date (end. of 1949 )'. The statistical data on the industrial and ag:ricul tural production in Poland are compiled in absolute figures, and not only in percentages of the plan, so that the right assessment of the results can be easily obtained. 3. Doubts as to the reality of the plan, which seemed to prevail in the I.B.R.D. when the plan was presented a~ a collateral of the loan req_uest in the autumn of 191~6, were certainly not warranted. There was, of course, a certain amount of inconsistencies in the original plan, the elimination of which was sub- seq_uently necessary in order to keep the plan going. But these adjustments did not affect substantially the broad lines of the plan and the magnitude of the proposed results. 4. There is, however, the consensus amongst the Polish economists that the new 6-year development plan (1950~1955) aiming at the doubling of the real national income at the end of this period is more ambitious tban the first plan, and, tbat unless there is a concurrence of favorable events and circumstances, it may be more difficult to be carried out. But it is also generally agreed - (a) that even so, there is only the question of relatively minor adjustments of the time of execution of the new plan, the feasibility of which is unquestionable, (b) that new foreign credits are not indispern;iable for the new development plan, (c) that these credits, however, could be useful insofar as they could contribute to a - 2 - faster im,provement of the standard of living of the people and lessen the need of imposing grips and regulations on the economic life, necessary for the diverting of a substantial p~ of the national income for non-consi.nmition (investment) :purposes. 5. As to the feasibility of the plan, I should like to stress here one important point. The develo.pment of the native engineering industry serving as a base for providing equipment for the overall industrial development, is, according to absolutely reliable sources, a realistic pr~rposal. It is possible especially in the terms of availability of skilled labor and management. Therefore, if it is said sometimes thE;it a country like Poland is in a "desperate" need of imports of machinery from abroad, it rather seems to be an overstatement. The basis for home production of industrial equipment already exists in Poland. The idea, e.g., that the so-called East-West trade should consist of exchanging foodstuffs for industrial consumers goods is no longer applicab:Le to countries .like Poland, Czechoslovakia or Hungary. Even if we anticipated that Poland should i1l1,port textile products instead of raw cotton and wool, the implication of such a program would be that Poland will be forced to make in its own production and e~ployment a further shift from spinriing mills to engineering factories. 6. I heard tpe following comment about the six-year plan from a highly responsible person: "It will be (i.e. the plan) carried out b.ecause it ~ be done. We have now, in the next six years, a unique chance and opportunity to raise the level of our economy to the Western standards. If we miss this oppor- tunity, we may forfeit not only this hope, but perhaps we may lose what we had already gained as an outcome of the war. The Polish economy, after the six-year period, has to boom and buzz with activity and energy. 11 · 7. My feelings are that the economic po:Licy of the Government going along these lines, will be fully endorsed by all the :people ·- even by those who are opposed to the Government's political ~olicy. On the other hand, it is possible that those political circles which would like to pursue a more intransigeant and - 3 - rigid line in the domestic policy, will be induced to adopt a softer line of action should the rigid one have a direct negative effect on the above mentioned attitude of the people. National Income 8. Reliable sources estimated the national income for 1948 as representing ca 2000 billion zlotys, equal to 5 billion dollars, according to the actu.all;;r pre- vailing rate of exchange (so-called "premium rate") which, is now Zl.400 = $1.00. The national income per head is therefore slightly over $200.00; taking into consideration the changes in purchasing power, this may be somewhat more than before the war (about $100.-). Many attempts have been made to express the national income in the terms of zlotys of the purchasing power of 1938. The results are, however, unreliable because the converting factors have been chosen rather arbitrarily and have generally led to overestimates. 9. The evaluation of the real wages of industrial workers, and especially of the income of the salaried class seems to pe in contradiction with the above estimate of the national income per head, ~s they are considered as being lOiver (sometimes substantially lower) than before the war. But there is a number of reasons why the trends of the development of what is called the national income per head must be different from the development of wage or salary rates; (a) The ratio of people actually working ("gainfully e~loyed 11 ) to those classified as "dependents" is now much higher than before the war. Thus the real national income per worker may be smaller than it was before the war. (b) The number of people engaged in jobs of very small productivity and income (primitive crafts or home industries, agriculture in the poor eastern provinces) has now decreased considerably in comparison with the :pre-war :period. Thus the major factor levelling dawn the pre-war average income has virtually disappeared. Consequently, the average income related to occupations having higher productivity (factory workers, white collar workers) must have diminished substan- tially, if the final figure representing the national income per worker is now still the same or even smaller than in 1939. .. - 4- (c) The role played in the earnings of a worker by various extras, premiums for efficiency, etc. is much greater now than before the war. Thus the evaluation of wage rates alone does not necessarily reflect the .changes c;>ccurring in the workers total income and certainly can..~ot be directly related to or compared with the development of the national income figures, even if both are considered in real, not nominal terms. Polish currency as a Standard of Value 10. Until the beginning of 1948 it was .somewhat difficult to assess properly the real value of the national income because of a specific price structure pre- vailing at that time. It was the so-called "double :price system" with a great spread .between the "controlled" prices and the "free" or 11 commercial" prices, both .( of wh:!,ch have played an important pa;l'.'t in the nation's economy. As a consequence of this syetem the whole price structure was distorted, and statistics expressed in national currency were often misleading. In 1948, however, a single pricing system was adopted - prices having been established on the f orrner ''free" level with slight adjustments. The last remnants of low "controlled. 11 prices for food articles have disappeared with the general discontinuance of the rationing system.* In the course of this refqrm wages were also adjusted to the new priee level. So the purchasing power of the Polish currency can be easily defined now, and figures expressed in Polish zloty give a fairly accurate picture of economic matters com- parable with the pre..:war statistics, or statistical data of other countries. The most substantial distortion which still remains is the artificial structure of housing rents, being generally very law or only nominal. 11. The formation 9f prices under this system is not yet al.together "natural" because there are still subsidies (or measures equivalent to subsidies) for certain * There still is a quasi-ratfoning system for meat, the pricas of which are now held on the level of those previously prevai].ing on the free market, but in my opinion they are too low for the present time. - 5 - ___./ goods and services, both in internal and foreign trade. But these subsidies {cover- ing the internal trade such items as certain building materials, iron and steel products, meat and lard, and to some extent costs of transportation) represent, in comparison with the whole national product, a ratio certainly not higher than that which exists today in Great Britain. Subsidies of this kind are covered by higher prices asked for certain consumers goods (e.g. pure woolen materials),, a system which works like a purchase tax. 12. There are also certain subsidies applied in export trade (mainly for food articles). The ratio of these subsidies to the entire value of exports is higher than the respective ratio in internal trade, but it is considerably smaller than it was in :Poland before the war. Export subsidies are offset and covered by extra profits resulting from certain highly :priced and remunerative exports (e.g. coal). 13, With these qualifications it can be said that the "premium" exchange rate of 400 Zl. for $1.00, now applied to ~l but few of the current export and import transactions, gives a proper evaluation of the external value of the zloty, and may be considered (;l.s more realistic than several par values agreed upon with the Monetary Fund. There is, however, a strong feeling in Poland.. against fixing any par value or legal rate of exchange before the contemplated monetary reform. Such a monetary reform would aim at the est~blishrnent of a monetfi.ry unit of higher value, as the present zloty is now worth practically one pre-war grosz (1/100 Zl.). But no such reform is intended before ,it can be m&de sure that the danger of inflation- ary pressures is entirely eliminated · from the Polish economy. In this respect the government seems to be very cautious. Experiences from the monetary reform of 1924 are still remembered and these experiences may be one of the elements jusifying this cautiousness. Agricultm:e 14. Pros~pects for the Jiarvest were very good in June ·· b1.\t cold and rainy weather prevailing in July could have affected adversely the ultimate results, especially in the Southern regioµ. Reserves of ~-ye left over from the crops of 1948 are still high. - 6 - ~ · 15· A speciai program for promoting cattle and pig breeding is under way (the so-called Action Hit). 11 Meat production is still insufficient, and demand is rising steadily, There is an increase of meat consumption by the farniers themselves as their income is going up in line with increasing farm yields. The demand for meat in the urban areas is growing at a faster rate than demands for other food articles as a resuit of an increase in real vra.ges, although this increase is justified by and kept in line with the grO'Wing overall production of consumers goods. And lastly, ~here are new requirements for export trade (bacon for Great BTitain under the new trade agreement, etc.). 16. The cattle and pig population, however, is still far below the pre-war figures, and will not be fully replenished before 1955, i.e. at ·the end of the si~-year plan. The meat scarcity will probably still last a lO?i$ time U!L4ess substantial price increases are allowed in order to check the rise in demand. So far, meat (and. lard) is the orily food. item the prices Of which are now subsidized. 17. The program for the establishment of cooperatives for agricultural pro- duction (what is sometimes call~d "co;nectivisation" and was frequently regarded as a full scale political attack on the peasantry), did not :materialize in a su9,stantial way. The orily major effect seems to be that the acreage still held by the State, as a result of the agrarian re:form, (over lCf/q of the entire acreage), will not be distributed individually, but, either managed as State-owned farms, or given to the peasants in the form Of collective property; the latter may also be applied to the acreage foJ;'merlY owned by Ukrainians who -t-;ere repatriated to USSR :f'rom the Eastern borderland. of Poland. 18. The new six-year plan proviaes for a reduction of about 3% of the number of people working in agriculture. On the other hand, the mechanical traction applied on farms will be ra~sed from the present 5% to 15% of the total traction power (including horses) calculated in the s~e units. This means only that the proposed changes in agriculture are rather conservative, and if realized on this scale certainly cam;i.ot involve any r~volutionary change in production methods and organization. - 7- Mining and Industry 19. Coal mines ;ha.ve slightly exceeded the target of production foreseen for 1948 in the plan established ip 1946. The further increase of coal output has been, however, deliberately slowed down (target for 1949 - 75 million tons instead of 80 million) in order to keep in line with home nee~s and expo;t:'t pos~ibilities. During the six-year plan the coal output sh~.J.l go µp, b:ut at a s;J.owing rate. Expo:;-:ts are supposed to be continued at the present level; no increase is conte~plated. 20. Steel production shall oe raised considerably .so as to double it in 1955. There e.lready is a shortage of rolled p~oducts in ~oland. A new steel mill, ordered in u.s.S,R. on credit terms, is to be const:ructed in Cracow (not in Gliwice, Silesia as originallY intended; it will have the capacity of producing 1,500,000 tons. a year. '!'he combined l?olish.-Czechos;Lovak crude steel output will represent in 1955 the figure of about 8 million tons {at present it is about 5 million). Cracow has been chosen as the location of the new steel mill due to the fact that the huge rai).road, marshalling yard built there du+ing the W!3-r by the Germans, and not being at present fully utilized, may provide e~oellent t+a;nsport services for this purpose. From the economic point of view, this represents a major economy, ~s the transport facilities in Silesia are already overburdened and ought to be sub- stantially en;I.arged if new steel mills were to 'Qe constructeQ. there. Thus Cracow will become an industrial city and will in some respect change is present character of an intellectual and tourist center. 21. There are extensive plans as to the development of engineering industries (including motor car production), as well as many chemical branches, based on home produced basic materials (coal and coal deri.vatives, salt, sulphuric acid as a by-produet of zinc smelting, etc.). 22. In spj_te of the fact that the development cf the ":.leavy indust:~y has be- come a shibboleth in economic discussions and propagand~, the most substantial gains in production during the year occlll.~red in quite a different field, i.e. in the consumers goods industries which formerly lagged behind in comparison to the -8 - pre-war level and to the actual needs. With the possible exception of ~urniture and leather goods, the production now covers the demand for most of the industrial articles. Capital Formation, Investments, Reconstruction . 23. ' - Figures available for 1947 indicate that the gross investments amounted to 16% of the gross national product; the actual ratio may be higher because not all repairs and renewals are treated as gross investments. The respective data included in the E.C.E. Report for 1948 (Table 32) are obviously erronneous. It is impossible that in 1947 the gross investments should have been only lCP/o and in 1948 - r;f/o of the G.N.P. The error way consist in tne wrong assumption that the "national investment plan" covers all investments, although ... (a) neither does it include the bulk of agricultural investments (in private farms), nor a substantial pa.rt of housing construction, and (b) it does not ip.clude any increase of stocks, neither publicly owned or private. The allowance for depreciation referred to in the above E.Q.E. report is certa,inly too low. It must be calculated at least at 6% of the G.N.P. or more. According to tbe six-year plan the gross capital forma- tion planned for 1950 will represent 18% of G.N.P., and for 1955 - 23%. 24. Of all the investment expenditures which ha.ve to be done in 1950, 3g;/a will go to mining and industry, 11% to agriculture, 21% to transportation and communications, 2Z1/o to housing and public building construction. In this connec- tion may I be allowed to mention that in an article :presenting a tentative post-war investment and development plan for Poland (p11blished in the quarterly •::he Polish11 Economist 11 , London, .January•March, 1943, No. 5), I proposed the following scheme: 3Cfl/q for industry, 10% for agriculture, 20)0 for transportation and communi cations, and 40% for construction work, including dwelling houses as well as public and commercial buEdings. The actual :plan differs substantial 1y fro'.n tha·c s <;he;~e:. insofar as 'building of houses is concerned. In fact, the shifting of t::,0 P ol :~ sh frontiers and actual losses in population have considerably attenuated t he urgency of a big housing program, considered ~t that time as a necessary collateral to an - 9 - industrialization and urbanizatidh program :for ·P oland in her ·p re-war shape. The building of' new houses has now lower :Priority in f'avor of the reconstruction of the daroaged one·s , which can be done. at a smaller cost. In the meantime, the official allocation system of existing dwelling space is a temporary measure, allevl atj.ng actual shortages. 25. The destroyed or substi;i,ntially ,dam:aged urban buildings (dwelling houses and other buildings) represented at the end of the war 18.6 billion cubic feet. In this amount the part of the incorporated western {formerly German) provinces represented 57 .5°/o, that Of Warsaw - 17-5°/o (3-~ billion cubic feet)' and the rest, i.e. the bulk of the Polish territory - 25%. The value of destroyed or damaged farm houses or other rural buildings is estimated as one-fourt4 of the damages in cities. The reconstruction of Warsaw has now a high priority in comparison with repairing the destruction sUff ered in other parts of the country. But even at this privileged rate, the reconstruction bf Warsaw cannot be co;m,pleted before the period of 15-20 years, according to reliable information and estimates. Foreign Trade 26. Poland's foreign trade is an item, the development of :whiCh has gone along a somewhat different line than it was believed in 1946 according to the f:irst I version of the three-year reconstruction plan. 27. The total foreign trade (import-ex.p ort) f o;r the year 1949 was :planned originally (in 1946) at i260 million dollars, Since Pola~d's foreign tra1e amounted to 278 million in the first quarter of 1949j it was lesser than the ple1:~13d tri;.. mestrial rate by a margin of' 12%. From experience in previous years, w<--. can assum,e that the trade in the first ~uarter was smaller than the corresponding annual rate, so that the f 0reign trade of 1949, as pl::i.r..:.'1ed tix.~ee years 2.go, and the actually expected trade may show even lesser divergen_-.:.es, i.f:' any . , 28. The plan of 1946, however, has foreE?een the import~ substantially higher than expected now (775 mi+lion dollars, as aga:l,'.nst ca 600); and exports considerably - 10 - lower (485 million dollars as against ca 600), thus having allowed for a deficit of 290 million dollars, as against the balanced position expected now. This reflects, of course, the changed pattern of the foreign trade, being the result of' the lack of foreign credits. On the other lw.nd, it is also likely that the needs ;fo;r imports have been somewhat exaggerated in the plan of 1946; it seems to appear especially clear in the case of raw materials. 29. The structure of exports has undergone substantial changes in comparison with the plan of 1946. The share of coal in total exports now amounts to 1ess than 5Cf/o, instead of 7'21/o, fo~eseen 'Qy the above mentioned plan, It is t;rue that in th:is respect the as·s umptions of the plan were criticized already, three years ago. 30. Terms of trade are still extremely favorable fot Poland due to high p~ices of coal. It is believed in Poland t~t this good ~ituati.on will still prevail during 1949 and even through ;1.950. It is agreed, h0wever, that obtaining "hard" currencies (i.e. dollars) for coal is now much more diffic\ll.t in~uropea.n trade. Rumors which :persisted last spring "t;hat Poland is tinal>le to sell several million tons of avaiiable coai to Western Eu;r'ope were denied with the qualification that it may be true wj,.th regard to a quantity (less than 1 million tops) of coal. · dust - a low standard wb,icp is no more ~ted. 31. There was a general consensus tha,t Po:l,and has no diffi,c ulties in obtaining in trade with the Western European countries goods and commodities (inclu4ihg equipment) which she actually needs and wants. I:r+ fact, I was to~ci ma1zy; times that, generally speaking, dif:ficu1tiea ·1,:n the so-called East-West trade, as far as Poland is concerned, do not exist. The real limitations ~re mostly technical; sometimes it takes much time to organize new exports or imports. Or, they lay in the sphere of general economic conditions. It is unlikely to deveiop trade reaching fantastic amounts if this is not commensurate wj,th the magnitude or the potentiali- ties of the economy of one partner. Of course, the Ea$tern European countries (without Russia) cannot e:ntirely replaoe the "dollar area" as a trade partner of Western Europe. - 11 - 32. . ~o economic expert seemed to pay · attention t6 the problem of the "export ban" connected with the E.R.P.• agreepients; but the argument of discrimination was used rather widely (and in an able way) in the political field in relation to the foreign trade policy of the U.S.A, themselves. 33. I · have the impression that · the · "East-West tta!e'i; can develop in a natural ·. way; if the :principle "essentials for ,essentials" is obse:rved. Talking too much about it in international organizations . may lead to the making of tb1s economic matter a :political :problem with all the dangers resulting from such an a:p:proach. 34. The Western European and overseas countries account · now for 55% of the Polish foreign t:rade; the remaining 451}(, is being done with countries o:f tpe Eastern a~here, including the Soviet zone of Germany. The pattern of trade agree- ments is often the same with the Eastern as well as with the Western countries; it is based on bilateralism. If there are critical colJJillents that the Polisn trade with the Eastern coun,tries has risen considerably in comparison with the pre-war figures, at the expense of tra.de with the West, the answer is that the situation prevailing in this respect after the first World Wa,r w1;:1,s considered 'by every'body in Poland as an anomaly, and by some industrial branches (e.g. cotton industry) almost as a disaster. 35. When the Eastern countries finall.y refused to :participate in the "Marshall Plan", rumor13 arose immediately in tb.e Western press that a "Molotov Plan" was being prepared for them as a substitution. What this term might mean nobody lmew exactly. It was . coined first, ; if I ;remember well~ by a newspaper correspondent residing in Viepna. Thus the system of bilateral trade agreements linking the Eastern countries with each other was called sometimes t!1e "Molotov Plan" or at leas_ t cons;td,ered ~s its main feature. When t)J.e so-called "Coinecon" was established in January, 1949, it wa6 considered. by some peop:)..e as a materialization of the "Molotov Plan". There were persisting rumors at that time to the effect that this might be a starting p9int for "multilateral trade" within the Eastern sphere and the creation of a "rouble areat1. RecentlyJ whe;n two tr;i.?,ngular trade - 12 - con;-pensation agr$ements were concluded between u.s.s.R., Finland and Poland, and between U,.S.S.R., Finland and Czechoslovakia, (from the text of the news it follows . that there are twQ triangular transactions, and not one quad;ripartite agreement) - Western commentators tried to find here the beginning of the new multilateralism based on the rouble. Here it seems necessary to clear up a major r.aisundersti;i.nding. The concept of multilateral trade is that proceeds from e:lt_Porta held by resident~ of the exporting country in a country to which they have e4J)orted, can be used or paying; for any im,ports from any other country participating in the multilateral system. That is being a~stll'ed normally by the convertibility of currencies, free or even limited to a certain extent. But the principle of choice, being an essential of the multilateral trade, is lack.ing entirely in the a9ove mentioned cases. Both operations provide for deliveries of specific goods in specific quantities, thus involving a specifically arranged barter, leavin$ no place for any choice or change. The rigidity may eve~ be stronger here than in some bilateral clearing agreements, in which an element of free choice regarding imports from t .he partner-country still may e~ist, even if on a limited scale~ The rouble is playing in these agreements only the role of a currency in which accounting should be done. Exactly the same as e.g. the dollar has played so far in some trade agreements •S.R. with the U.S . It has no other signific;;i.nce t:)J.an the 11 unitas" would have had for the purpose of bookkeeping in the International Monetary Fund, if the first version of its c~rter had been .,accepted.