Report No. 6736-POL Poland: Reform, Adjustment and Growth Annex l: The Economic System August 17, 199/ Europe, Middle East and North Africa, Country Department IV Country Operations Division FOR OFFICIAL USE ONLY Document of the World Bank This report has a ilestricted distribution and may be used by recipients REflRN TO only in the performance of their official duties. Its contents may not otherwise!-' ~ Es~ODScrr be disclosed without World Bank authorization. ARCIE/COOM DS C-OO Box ----- LOCATION…------ --- N. U. S. LOCATION -. ' 4L FOR OMFFCIAL USE ONLY THE ECONOMIC SYSTEM TamNe ci Contents Pane No. I. Evolution of The Economic Syst. ............... 1 A. Central Planning and Attempts to Reform. ........... . 1 Achievements and Drawbacks of the System of Central Plaming . 1 Decentralization (1956) and Depolarisation (1974), and Their Reversals . . . . . . . . . . . . . . . . . . . 2 Systemic Facto-a and Implications of the Polish Crisis 1,;SO-81 . . . . . . . . . . . . . . 0 . . . . . . . . . . . 3 T. The 1981 Official Reform Project ..... ............. -. 4 The planning Process .. . . . . 999 .9. 9 4 Enterprises: Independence and Self-reliance . . . . . . . . . . 4 Labor and self-magement . . . . . . . . . . . . . . . . . 5 Transition.999999999999999 9* * * a* . * * 5 C. Reform Implementation . . . . . 6 Legislative Develop ets ................... 6 Restrictions and euptions. ................ . 6 The System in Practice ....... ............. 7 1I. The State, Private and Mixed 8ectors .............. 8 A. The Core of Central Planning ................... 8 The Scope of Planning . . . . . . . . . . . . . . 8 Centrally Allocated Inputs. . . ... .... . .. . . . 8 Operational Programs .. . . . . . . . . . 11 Ga'verment Contracts 9 .. 11 Founders' Tutelage and Informal Pressure . . . . . . 12 D. The Socialized Sector ...................... 13 Types of Enterprises .. * * * 9 * * 9 9 9 * * * . . . 13 Entry, Mergers and Assocla s ................ 13 The Enterprise Cash Flow ................... 14 Liquidation and Bankruptcy .................. 14 Rights, Obligations, Incentives . . . . . . . . . . . . . . . . 16 C. The Private and Med Sectors . ........... . 17 Private Firms and Farm ........... .................... 17 Polonia Firms. . . . ..* * * . . . . . . . . . . . . . . * . 18 Joint Ventures with Foreign Captal. . . . . . . . . . . . . 18 III. Markets and Prices: Domestic. International, Factors . . . 21 A. Domestic Product Markets . . . . . . . . . . . 21 Shortages . . . . . * # a*... * . . & . . .. * * 21 Types of Prices: Administrative, Regulated, Contractual . . . . 22 Price Elasticity of Domaestic Supply . . . . . . . . . . . . . . 22 This document has a restricted distribution and may be used by recipients only In the performanmc of their official duties. Its contents may not otherwise be disclosed without World Bank authodzation. Page No. B. International Trade . . . . . . . . . . . . . . . . . . . . . . . 24 Planning and Institutions .......a..................... 24 The CMEA Trade Regime . . . . . . . . . . . . . . . . . . 28 Intra-CMEA TrdPrades rices. * ....... ...... .....0 29 Convertible Currency Trade: Exchange Rate . . . . . . . . . 30 Allocation of Imports and Foreign Exchange . . . . . . . . . . 34 Currency Retention Quotas ........a........................... 36 Fiscal and Credit Incentives *.. a..... . oa a.a.......... .. 38 An Assessment of Export Incentives . . . . . . . . . . . . . . 40 C. Factor Prices and Mobility: Labor .. . ..... aa... *.... 40 Population and Labor Supply ....... ....... 444444.44444..... 40 Turnover .. .. . . .. . .. . .. . .. . .... . ... .. .. ... .a 42 Labor Employment and Shortages ............. . o ......... 44 Wages and Wage Structure: General Features * . . . . . . . . . 48 Piece Rates . . . . . . . . . . . . . . *. ... . . . . . . . . 48 Full Wages and Labor Costs . ................. * ..... 49 Structure of Wages by Industry ... . . . . . ............. .. 50 Wage and Price Inflation: PFAZ and PPWW . . . . . . . . . . . . 52 Wage System Reform . . . . . . .. . .. . . . . . . . . . . . 54 D. Factor Prices and Mobility: Capital . . . . . . . . . . . . . . . 55 Reform and kemonetization .. .................. . 55 The PolishBankinSst stem................... 57 Creditworthiness . . . . . . . . . . . . . . . . . . . . . . . 58 Investment Finance 4444444444444444444444 59 Financial Instruments .. ..................... 60 Foreign Exchange Deposits by Households . . . . . . . . . . . . 62 Foreign Exchange Options (RODs) and Risks 65 IV. Fiscal and Monetary Policy ........... 66 A. Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Budgetary Policy 44*4**.......... .... 66 Socialized Sector Taxation .................. 69 Private Sectr TaxationorTaxatio.......... 72 Subsidies . . . . . * . * * . . . * * 4 * * . . . 72 Current Trends . . . . . . . . . 4 4 4 4 . . . . 74 B. Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . 75 A Marginal Role . . . . . . . . . .*. . . . 4 * * . 4 * *. . .* 75 Inflation . . . . . . . . . . . . . . . . . . . . 75 The Stabilization Process 79 V. The Unfinished Reform .... .... . ... 83 Achievements . . . . . . . . . . . . . . . . . . . . . . . 83 "Parametric Centralization" 83 Obstacles to Economic Reform ................. 85 The "Second Stage" of the Economic Reform . . . . . . . . . . . 86 Pate No. APPENDICES 1. Progressi-ve Charges on the Enterprise Wage Bill: PFAZ and PPWW . 89 2. Commodities for which prices are administered by the MFT. .. . . 94 3. Tax Relief Rates According to Export Value . . . . . . . . . . . 95 4. Rates of Exemption from PPWW tax for Exports, by Area and Group . 99 5. Pay Differentials Among Industries and Wages in Manufacturing . . 100 6. Consolidated Balance Sheet of the Banking System, 1980-85 . . . . 102 TABLES 1. Percentage of Inputs Centrally Allocated, 1978-1987 . . . . . . . 9 2. Percentage of Priority Claims on Centrally Allocated Raw and Intermediate Products, 1982-1987 . . . . . . . . . .. 11 3. Polonia Firms: Permits, Employees and Output, 1982-1986 . . . . . 19 4. Distribution of Prices by Category, 1982-86 . . . . . . . . . . . 23 5. Sources of Finance of Convertible Currency Imports . . . . . . . 35 6. Population Aged 18-64 and Labor Force . . . . . . . . . . . . . . 41 7. ours Worked in Poland .9. 99 ..................... ... ..... ... 42 8. Rate of Turnover of Labor ,r*aoro ............................. . 43 9. Numbers Employed ('000) and Composition of Employment (percent) . 44 10. Alternative Measures and Composition of Labor Shortages, 1970-85 45 11. Percentage Distribution of Pay in Mining, 1986 . . . . . . . . . 49 12. Stylized Monthly Wage Cost for Polish Workforce . . . . . . . . . 50 13. Interest Rates . . ... . . . . * . . * * . . . . . . . . . .&. . 61 14. Velocity of Monetary and Financial Assets and Financial Deepening .. ............................ 63 15. Summary of Government Financial Operations, 1980-1986 . . . . . . 67 16. The Banking System's Net Domestiac Assets and Nominal Domestic Demand . . . . . . . . . . . . . . . . . . . . . . . . 68 17. State Budget Revenues, 1986 ................... 69 18. Subsidies to Enterprises .................... 73 19. Open Inflation ... . ....... ... . ......... 76 20. Income, Expenditure and Financial Position of Ho-.seholds, 1980-85 . . . . . . . . . . . . . . . . . . . . . . 78 21. Basic Indicators Illustrating the Monetary and Market Situation in 1981-85 7.99. 99....... .9. 79 FIGURES 1. The Enterprise Cash Flow ............... ..... 15 2. Pseudo Beveridge Curve, 1951-85 . . ...... . . . 47 3. Coefficient of Wage Variation .................. 51 4. Logarithmic Changes in Wages and Prices . . . . . . . . . . . 53 L EVOLUTION OF THE ECONOMIC SYSTM A. CeAtral Planning and Attempts to RMerm Achievements and Drawbacks of the System of Central Planning 1. The economic system established in Poland at the end of the 1940s was basically a traditional model of centrally planned socialism. Earlier attempts at a more decentralized pattern of industrial organization gave way to progressive centralization in 1948-49 and were abandoned with the replacement of the Central Planning Office by the Planning Commission (February 1949); in agriculture, a 1946 land reform was followed by the beginnings of compulsory collectivization. By 1950 all the attributes of the traditional model of a centrally planned economy (CPE) were present. A socialized (i.e., state and cooperative) sector embraced almost the entire economy except agriculture, in which it was beginning to make inroads. A detailed central plan, mostly in physical terms, was constructed from the aggregation of output targets and input requirements of production units, then disaggregated and transmitted back to them as a set of instructions. Foreign trade was a state monopoly, exercised through specialized enterprises. A "monobank" that combined central and commercial banking functions, monitored plan implementation and adjusted financial plans passively to real plans. The economy was partitioned into several sectoral ministries, while enterprises were one-man-managed administrative units with no more than accounting identity, executing central plans within narrow margins of discretion. The Communist Party (PZPR, the United Polish Workers' ?arty) exercised its "leading role" in economic as well as social and political life. The economic policies traditional of other CPEs were followed: fast industrialization; priority for investment, especially in heavy industry; balanced trade, directed towards the Eastern bloc; full employment of labor; and price stability after monetary stabilization. 2. The system succeeded in completing reconstruction and accelerating growth but soon manifested problems common to many systems of central planning: a tendency for investment to exceed the absorptive capacity of the economy; imbalances and shortages for both production and consumption goods; microeconomic inefficiencies in technical choice, input utilization, output quality and consumption structure; and a slowdown of productivity growth for both labor and capital. Pressure to reform the system mounted, especially as reserves of both labor and natural resources were drawn into production and exhausted. At various times, proposals were put forward to make the system more efficient and appropriate to the specific economic, cultural and political conditions and traditions of Poland. Changes in official regulations (e.g., about indicators of targets and of their implementations, price formulas, degree of direct central allocation of resources, restrictions on the non-socialized sector) have been virtually continuous over the last four decades. Three major attempts at reforming the system, towards a more decentralized, market-oriented and participatory model, can be identified: in 1956, 1974 and in the 1980s.l/ lo On the original Polish model and the 1956 reform see J.M. Montias, Central Planning in Poland, Yale University Press 1962; on the 1974 -.2 - Decentralization (1956). Depolarization (1974). and Their Reversals 3. The first attempt, in 1956, led to short-lived measures of decentralization and workers' self-management as well as the permanent reversal of collectivization in agriculture. By 1958 workers' councils had been absorbed into the broader "Conference of Workers' Self-management" including Trade Union and Party; industrial associations of enterprises recentralized many functions and restored sectoral lines of organization. In 1958-70 a large number of minor changes took place, often nominal and not amounting to a consistent program of reform. 4. The second attempt, in 1974, "depolarized" economic power away from both center and enterprises to the intermediate level of so-called "Large Economic Organizations" (WOG), i.e., amalgamations of horizontally integrated enterprises (more rarely vertically integrated as in the GDR), organized as independont corporations and designed to maintain the center's grip on the economy through the monitoring and control of a small number of large units, in spite of their greater exposure to market signals. Institutional innovations included greater flexibility of the enterprise wage fund, linked to value-added instead of being centrally fixed, and the retention of a small fraction of currency earnings by exporters. However most parameters were enterprise-specific and therefore distorted market signals, and many provisions, such as currency retentions, remained dead letters. Soon the impending crisis led the center to reassert-though ineffectively and sometimes chaotically-direct control over economic processes. By the end of the 1970s, the only surviving feature of this reform was a higher level of industrial concentration than justified by technological and economic reasons. 5. The reversals of these major attempts at reforming Polish central planning partly reflect a built-in tendency in any CPE for central control to reassert itself, and partly the vicious circle which often links crisis and major reform in any system. Economic and political crises underline the need for reform and so make it most readily accepted, but they also provide the least favorable environment for reform to succeed, and so there is a consequent danger of retreat. Polish attempts at reform are no exception; they occurred after the crises of 1956, 1970 (whose effects were compounded by the energy crisis) and they occurred again in 1980, as Poland was enduring its most serious and prolonged economic crisis. '~ (continued) reform see D.M. Nuti, "Large corporations and the Reform of Polish Industry", Jahrbuch der Wirtschaft Osteuropas, vol. 7, 1977, Munich; and D.M. Nuti, "The Polish crisis: economic factors and constraints", in Drewnowski, (ed.), Crisis in the East European Econ.mw - The Spread of the Polish Disease, Croom Helm, 1982, London. On minor policy changes and aborted reform projects see J.C. Zielinski, Economic Reform in Polish Industry, Oxford University Press, 1913. On Polish economic history since the end of the First World War, see Landau and Tomaszewski, 1985; for a concise and up to date history of Poland, see N. Davies, Heart of Europe, OUP, 1984. - 3 - Systemic Factors and Implications of the Polish Crisis of 1980-81 6. It is difficult to 3asess the relative weight of exogenous shocks, policy mistakes and systemic factors in the genesis of the Polish crisis of 1980. External shocks were caused by the unexpected contraction of international trade and lending, world inflation and the rise in interest rates and growth of trade barriers. Adverse domestic exogenous factors included an above average incidence of bad weather conditions and a succession of bad harvests. Excessive reliance on technology transfer and imported capital goods to promote exports, the over-development of sectors such as steel, shipbuilding and chemicals, and the neglect of agriculture, turned out to be policy mistakes. But systemic factors, in addition to the drawbacks reviewed above, were also connected with the adoption of mistaken policies and with the sluggishness of adjustment to adverse exogenous factors. Official recognition that the roots of the crisis lay in the political as well as the economic characteristics of the system, was given in the Government's "Report on the State of the Economy", 1981. 7. The crisis led to an unprecedented mass and range of discussions and reform proposals. In 1980-81 at least seven different programs for economic reform were put forward by academic and professional bodies, and were circulated and considered by a Party-Government Commission for Economic Reform assisted by a 500-strong body of experts and political representatives, which produced first a cautious reform proposal and then a bolder and more couprehensive project. 8. The final draft of the Commission's project -' was approved by both Parliament and the IX Congress of the PZPR (Polish United Workers' Party) in July 1981; it was also subsequently approved by the VII Congress of the ZSL (United Peasants' Party), the XII Congress of SD (Democratic Party), i.e., by all three parties forming the electoral alliance FJN (National Unity Front). The official reform project was confirmed after the introduction of Martial Law and endorsed by PRON (the Patriotic Movement of National Salvation set up to organize civilian support for General Jaruzelski's government); it has been reendorsed by the X Congress of PZPR in July 1986.!' This document did not include the more radical suggestions put forward in the discussions, such as workers' control over state ownership and entrepreneurship, but was much more radical than its first version, which had been rejected by Parliament. Until the April publication of proposals for discussion for the Second Stage of the Economic Reform, it was the most progressive blueprint for economic reform in Poland, and in some respects in Eastern Europe outside Yugoslavia, especially in view of references to the necessity for stricter limits to the Party's role in economic affairs. ~-' KPZdsRG (Party-Government Commission for Economic Reform) (1981), Kierunki reformy gospodarczei - proiekt; Projekty ustaw o przedsiebiorstwach panstwowych - o samorzadzie przedsiebiorstwa panstwowego, Nakladem Trybuny Ludu, Warsaw, July.) t' Polish United Workers' Party, Tezy Komitetu Centralnego PZPR na X Ziazd Partii, Nakladem Trybuny Ludu, March 1986, Warswaw, March. -.4 - B. The 1981 Offlola Reform Proheo4 The Planning Process 9. The project endorsed what it called "the socialization of the planning process", to be achieved primarily by changes in enterprise regime-independence, self-financing, self-management (the so-called "three S's," from their common initial in Polish), and also by clearer definition and reduction of Party influence on the economy. 10. The central plan was no longer to contain direct co&aands except in central-zed investment (budget-financed social infrastructure and large-scale projects in key sectors), defense and the fulfillment of international agreements (i,e., deliveries to CMEA countries). For the rest the plan would contain only general guidelines on macroeconomic trends and balances and be the basis of government prices and incomes policy, the budget and the general conduct of public policy; thus it would be an exercise in consistency, not a directly operational document. Parliament would discuss and choose from variants presented by government, monitor implementation at half-tern and authorize subsequent changes. Yearly plans would be linked to the state budget, also approved by Parliament; the Central Bank would assess links between credit policy and balance of payments; local authorities would take on an increased role and independently formulate their plans, to be made consistent with the national plan through informational links and fiscal policy. Planning was not to be abandoned, but its role was to change and the hierarchical links between the enterprises, Ministries and Planning Commission were to be broken. "The economy will operate on the principle of central planning with the utilization of the market mechanism (p. 21)." Enterprises: Independence and Self-Reliance 11. Branch Ministries in industry would be reduced to two or three. A first step was taken in early July 1981, with the merging of eleven industrial Ministries into five. Enterprises would be free to decide the level and structure of employment, the scale and assortment of output, investment, modernization, research; to associate or merge (i.e., without having to join compulsory associations), set up new enterprises and-a most important innovation--diversify their activity into any sector of the economy. Enterprises would "satisfy social needs at minimum cost by aiming at a profit maximization" (p. 32). Contracts between enterprises would replace orders from the center. The reconciliation between plan and markets would be achieved through policy instruments employed by Parliament on the recommendation of either government or the Central Bank. Direct instruments would include taxes and subsidies, interest and exchange rates, principles for the organization of markets and exchange, principles for the formation and liquidation of enterprise Z,s and wages and incomes policy. Indirect instruments include information flows, investment location principles, concessions, licenses, prohibitions and permissions, credit guarantees. Organizational instruments include the formation and liquidation of enterprises, their mergers, and anti-monopoly provisions. 12. A major feature of the reform project was the reorganization of banking and credit. New, specialized and "fully independent credit institutions" were envisaged, with enterprises entering contractual relations with any one bank of their choosing. Therefore the Central Bank would acquire -5- a new major role as an institution of refinancing for other Lanks, using interest and exchange rates and ultimately being responsible for the maintenance of internal and external equilibrium, in cooperation with the Ministry of Finance and the other banks. Labor and Self-Management 13. Wage policy was to change drastically. "The self-financing of enterprises makes the level and growth of wages dependent on the results of labor. If production and productivity do not grow-there will be no growth of wages" (p. 48). To avoid excessive income differentiation across enterprises, however, minimum wages would be guaranteed and indexed and wage funds would be subject to progressive taxation. The state would retain an obligation to provide full employment to all citizens "atle and reedy to work" but not "an obligation to provide work in a given place where the worker lives, in a given plant or enterprise, or in any case a right to bad work" (p.46). Massive redeployment of labor was expected as a result of the reform, from industry, building and administration to mining, transport, services, small scale industry, agriculture and forestry. The state would handle this through the creation of new jobs and the retraining of workers; a retraining fund (FZAZ, literally a fund for employment and professional activization) was envisaged. 14. "Prices will ensure the equalization of supply and demand" (p. 35). Equilibrium would be obtained through a once-and-for-all or gradual "deregulation" of prices and income; prices would be based on costs, international relative prices and, in the case of agricultural products, the formation of adequate incomes for farmers. "The government will agree with Unions and other mass organizations on decisions affecting directly the living standards of labor." (p. 33). 15. Beside the independence and enhanced role for trade unions, employees' representation would take the form of new organs of self-management understood as an integral part cf the enterprise structure: the general assembly and the workers councils, with informational and consultative functions and also with direct participation in decisions about managerial appointments, distribution of profits, yearly plans, investments, mergers, as well as in the traditional areas of work organization and welfare. Transition 16. In view of existing imbalances, there would be still "the necessity of transitional maintenance of central allocation of selected means of production" for a period of two to three years (p. 58). However, goods in short supply would be subject to compulsory purchase by a central supply agency on the basis of contracts, and their distribution would be decided by the Council of Ministers. Such items included foreign exchange, coal, electricity and raw materials. Any surplus of centralized means of production could be resold or repurchased by enterprises. By the en,d of 1981, enterprises would be reorganized and self-management organs established. Substantial increases in retail and supply prices were to take place from January 1, 1982 (with part compensation for wage earners) and be followed by the gradual dismantling of central controls and transition to the new system under the supervision of a new Plenipotentiary Minister for Economic Reform (KPZdsRG, pp. 52-60). -.6 - C. Reform Imulemetation Le8islative Developments 17. Naturally it is important to distinguish between the reform project, enacted legislation and actual implementation. The official reform project was a comprehensive and coherent design for market socialism, i.e., decentralization of economic decisions, with moderate central intervention limited to the use of indirect policy instruments (primarily fiscal and monetary) to ensure the desired trade-offs between policy objectives. New legislation covers only part of the economy and of the reform project; it is not always coherent. Actual implementation differs from the legally possible because of frequent though temporary ad hoc suspensions and exceptions, and because legal rights are not exercised by unaware or unwilling economic agents, or because loopholes are found. 18. Already by September 1981, as scheduled, two major laws were passed on state enterprises and on workers' self-management. Shortly afterwards Martial Law suspended their pro-isions and .ndeed initially strengthened elements of central direction and compulsion, but the reform process continued. A spate of new laws, decrees and regulations have been issued to codify the reform in virtually all areas of economic activity: the planning process, price liberalization, cooperatives, Trade Unions, local government, enterprise liquidation and bankruptcy, plant bargaining, charges and taxes on wage increases and on capital; currency retentions, banking, joint ventures, etc. 19. The content of these legislative innovations will be discussed under the various headings of this Annex. It is important to stress that the wealth of legislation by itself is regarded as a necessary condition for impressing the reform principles onto all areas of the economy and making changes more difficult to reverse, given that reversals require exceptional procedures or lengthy discussions and legal processes. Fast legislative growth however has also meant over-determination and uncertainty, while the slower than anticipated pace of transition and other circumstances have led to frequent ad hoc restrictions and exemptions. Restrictions and Exemptions 20. Martial Law, which lasted from 13 December 1981 to 22 July 1983, and the administrative and logistic difficulties associated with it, led to the suspension of legislation on workers' councils and state enterprises; managers were placed under the supervision of military commissars. These and other legal and de facto restrictions were introduced and then lifted, with the exception of workers' councils involvement in managerial appointments in "enterprises of national interest" (approximately 20 percent of enterprises in the socialized sector, employing a larger proportion of the workforce). A core of direct central allocation for major products and, especially, for imported inputs, has survived. Priority supply lines were established for 14 vertically integrated groupings of essential products (the so-called operational programs, see below, para 30); these have been reduced to two in 1987. Government purchase orders, also involving supply priority for their - 7 - implementations, were widely used to reduce imbalance and steer the economy. Beside formal and informal restrictions on enterprise autonomy, exemptions from their obligations under the systems were also widely used as instruments of central control, especially under the form of tax exemptions and rebates, or subsidies, in practice negotiated with central authorities (see para. 184). The System in Practice 21. The actual Polish system today is a new hybrid. Strictly speaking it is a mixed economy, with a private sector sufficiently large to differentiate it from that of all other East European countries, a scope for markets as wide as in Hungary except for the less developed financial sector, but also a residual core of central planning, and use of direct controls and dominant state ownership which make it quite different from any Western mixed economy. With these qualifications, Janos Kornai's description of the Hungarian economy could be used for Poland: "...a symbiosis of a state sector under indirect bureaucratic control and a nonstate sector, market oriented but operating under strong bureaucratic restrictions." 1' It is a CPE economy in transition towards a model of decentralized socialism, which has reached a distinct intermediate stage, variously defined as a model of "authorizations and bargaining" (uznaniowo-przetargowy, 2/ by Otta, 1985), "parametric centralization," "manipulative system,"-' "informal command planning," 4/ but in any case a significant departure from traditional central planning. An assessment of the system and its reform experience and prospects, and the recent official suggestions for continued reform under the "Second Stage" is given in the last Part of this Annex, following the discussion of the state, private and mixed sectors (Part II), the operation of prices and markets for domestic products, imports and exports and factors (Part III), fiscal and monetary policy (Part IV). I.' Janos Kornai, "The Hungarian Reform Process," Journal of Economic Literature, December 1986. Z/ W.I. Otta, "Gospadarka przetargow" Zycie Gospodarcze, n. 35, 1985. Z.M. Fallenbuchl, "The Present State of Economic Reform in Poland," conference paper, Wilson Institute, Smithsonian Institution, Washington, November 1985. S. Gomulka and J. Rostowski, "The Polish reformed economic system, 1982-83" (mimeo), 1984. -.8 - IL THE STATE, PRIVATE AND MXD SECTOI;S A. The Core of Centr P The Scope of Planning 22. Since 1982, Central Plans in principle have been purely indicative documents, containing forecasts inatead of targets aggregated from lower levels and broken down into specific tasks and deliveries for individual enterprises through Ministries and industrial associations. Most important, the principle of traditional central planning, whereby targets should be specifically addressed to a clearly identified economic subject directly responsible for their execution, no longer applies to Polish planning. The Planning Commission remains in touch with state enterprises, cooperatives, local authorities and other agents, which still formulate plans and inform the Commission of their intentions and performance primarily through questionnaires. Over two thousand units are affected, but their plans are not aggregated and the-v can modify t;aem at their own discretion. There have been complaints that the Five Year Plan, 1986-90, is a more detailed and larger document (over 700 pages including appendices) than the 1949-55 plan (168 pages) when centralization was at a peak; and that the plan includes forecasts in physical terms for minutely defined commdity groups. 23. A more serious problem is that central control is stilt retained over the allocation of important commodity groups in short supply. These include the bulk of imports (reflecting the central financing and allocation of some imports, together with import licenses and foreign exchange) and a number of essential inputs (such as coal, liquid fuels, metallurgical products, electric cables, batteriee, plastics, rubber, tires, cement, sawn timber, hardboard, paper, cardboard and hides). Direct allocation of inputs is discussed in the next section, including references to the international trade system which is more fully treated in paras. 66-79. Centrally Allocated Inputs 24. The Ministry of Material and Fuels Management (MMFM), instituted as the Ministry of Material Economy in 1976,L' has responsibility over "questions of supply and management of raw materials, other materials, fuel and energy as well as state reserves" (art. 2.1 of the Law instituting it), in connection with the Planning Commission and its Material Supply Office. Central allocation--which in 1977 is said to have been regulated by about 1000 prescriptions 2'--nas been drat tically curtailed. Table 1 shows the X-' With Law of 27 March 1976, Dziennik Jstaw, 31 March 1976, n. 12, item 71. v' Of these 31 prescriptions regulated balances and direct allocations, about 440 the areas of production and inventories, and over 400 the management of materials; see S. Kordzik and E. Wiszowaty, Wyrkaz przepisow o gosp&darce materialowei, COBRGM (Central Research and Development Department of Material Economy), Warsaw 1977. - 9 - proportion of "Centrally Allocated Materials" (CAMs)' to have been declining since 1978. Table 1: PERCENTAGE OF INPUTS CENTRALLY ALLOCATED, 1978-1987 (value terms) 1978 1982 1984 1985 1986 1987 All Inputs 90 70 60 50 45 35 Exported Inputs 100 88 70 41 40 40 Imported Inputs 92 91 69 56 55 50 Source: Polish Authorities. 2i. In 1986 there were still 110 categories of CAMs, reduced to 64 in January 1987. By 1990, energy is to be practically the only input still centrally allocated. However, sometimes goods which are not included in the list of CAMs, and whose prices are well below market-clearing levels, are informally centrally allocated. There are still consumption norms for materials and in the yearly plans for 1984 and 1985 178 commodity categories were centrally balanced (CBMs), accounting for about 45-50 percent of fuels, energy, raw materials, components and other materials. The 63 most important balances were prepared by the Planning Commission and approved by the Council of Ministers, 113 were prepared by the MMM, and 2 by other agencies. In 1987 there were 164 CBMs. The traditional balancing approach aims at matching resources and uses, broken down into their main components through successive approximations integrated with the planning process (output targets, technical "norms" for the use of inputs, consumption and investment levels, foreign trade). In a simplified general form, the balance for a given product takes the following form: Resources Uses Beginning stocks End stocks Production Domestic consumption Imports from CMEA Exports to CMEA Imports in convertible currency Exports in convertible currency CMEA trade is planned and implemented under 5-year bilateral agreements which coincide with the 5 year planning period (see para. 68). Subsequent rounds of adjustments in each balance, with repercussions across the board, take place until the desired balance is reached. Although existing CMEA agreements tend to have a preemptive claim on exportable surpluses, new agreements take ~' Similar terms offered in discussicins, such as "centrally distributed materials", "centrally allocated inputs", goods subject to "obligatory intermediation" and "regulated goods", apparently all refer to the same classification. These are goods for which volume deliveries are assigned in response to requests (see para. 27 below). It is important to note that the number of "centrally balanced" goods includes also freely traded goods such as cement, as well as "centrally allocated materials". - 10 - account of export potential to the convertible currency (cc) area. In some cases, part of the exportable surplus is earmarked for cc trade, and the residual committed to CMEA trade. 26. The distribution of CAMs under the control of the MMFM is actually handled by 28 semi-autonomous agencies, frequently referred to as "Designated Distribution Agencies" (DDAs)./' Each of them has the distribution monopoly vis-a-vis all major producing and consuming firms for a specific range of commodities. Energy and agricultural products are not distributed by these agencies. The DDAs are not to be confused with "domestic wholesale trading organizations" which deal primarily with inputs other than CAMs, and of which more than 100 are said to operate. ' These also tend to be specialized by commodity categories, but do not have a distribution monopoly and normally trade under their own name and on their own account with producers and user firms. The reforms have not changed the distribution of retail products much. The number of product groups subject to geographical allocation, by voivodship, was reduced from 59 in 1986 to 33 in 1987, from 23 percent of retail sales to 17 percent. 27. The DDAs receive input requests from consumers, check whether these requests are reasonable in view of past experience and supporting documentation, and then assign specific deliveries. On the basis of these assignments, producer and consumer firms conclude contracts with each other. If deliveries involve imports, the DDAs issue import instructions to Foreign Trade Organizations (FTOs, see paras. 69-75) for procurement under the CAM regime or assign deliveries as the basis for contracts between FTOs and consumers. Similarly the DDAs assign deliveries for exports of commodities subject to central balancing, on the basis of which contracts are signed between FTOs and producers. However, for output under operational programs and government contracts (see below), the DDA are signatories to the contract. 28. The intimate knowledge of DDAs of the special conditions of major individual producers and consumers gives them a key role in drawing up draft material balances and in identifying supply bottlenecks. This information is fed back to the MMFM. Together with information provided by the branch ministries it provides the information basis for the final material balances, drawn up by the Planning Commission. The activities and operational plans of DDAs are monitored and controlled by a "supervisory group", usually chaired by a representative of the Ministry of Material and Fuels Management with the participation of the relevant branch ministries as "founding organs". Enterprises may appeal to the supervisory group against DDA rulings. 29. Highest priority in allocation is given to operational programs and government contracts. Reportedly these two categories absorbed around 25 percent of CAMs in 1986; this proportion has been falling (see Table 2). "/ A variety of similar English translations, such as "obligatory go-betweens," "designated marketing agencies," "licensed trading organizations" refer to the same organizations (in Polish, Jednostki obowiazkowo posredn.itwa obrocie). 2' In Polish, organizacie obrotu hurtIwego. - 11 - Table 2: PERCENTAGE OF PRIORITY CLAIMS ON CENTRALLY ALLOCATED RAW AND INTERMEDIATE PRODUCTS, 1982-1987 1982 1984 1985 1986 1987 Government Contracts and Operational Programs 50 40 30 25 n.a. Other Priorities 20 20 20 20 n.a. TOTAL 70 60 55 45 35 Source: Planning Commission Operational Programs 30. The system of "operational programs" was introduced at the onset of the Martial Law period in 14 sectors and is still in existence in 2 sectors: supplies to agriculture and health protection (mainly pharmaceuticals). These are sets of vertically linked targets cutting across the conventional partition of the economy into horizontal sectors, and involve priority access to supplies for the execution of commands. The programs were set up to cope with major imbalances and are being gradually dismantled. In principle there is no reason why central priorities should not be expressed through market procurements financed via correspondingly generous allocations out of the state budget. The survival of operational programs is a reflection both of the state of imbalance in the market for supp'1l6. to the areas covered by the programs, and of a reluctance to move from the certainty and convenience of direct commands embodying a well established ranting of sectors, to the expected uncertainty and trouble of continuous bargaining over allocations from the state budget. Government Contracts 31. The system of "government contracts"-', covers yearly or repeated purchases of both final and intermediate output, whether to fulfill trade commitments or reduce anticipated shortages or simply as an instrument for steering the course of the economy. Government contracts are extended for a list of commodities (presently 114, only a minority of which is subject to central allocation) which are judged by the Government as being both in short supply and of key importance for the economy. This list comprises mainly intermediate goods and components, such as steel alloys, ball bearings and electronic components, but it includes also some capital goods. DDAs are in cbarge of initiating government contracts. They invite bids from enterprises, and make the selection on the basis of price and foreign exchange requirements for inputs. Subsequently contracts are concluded between the selected enterprises and the DDAs, which also distribute the output. An increasing number of the contracts are multi-year, and command higher prices than annual contracts. lo/ Zamowienia rzadowe, literally government "orders" in the sense not of commands but of purchases commissioned by the government. - 12 - 32. The acceptance of such contracts is voluntary on the part of enterprises, which however could be forced by their "founding organs," (ie. branch ministry or local authority) to accept government contracts, which could therefore be construed as compulsory output targets. In practice, however, enterprises are quite keen to accept government contracts and compete among themselves to secure them, because such contracts are accompanied by guaranteed deliveries of necessary inputs and access to foreigu exchange; they are therefore an element of stability in enterprise activity and give an opportunity to redeploy internally contract-linked supplies to reduce bottlenecks elsewhere in the enterprises' production plan. Inputs for these contracts are not officially considered to be centrally allocated, but similarly reduce the amount of inputs available in the market. What is alien to a reformed system is not the principle of government contracts, which is a perfectly legitimate policy instrument, but the privileged access to scarce inputs and also the principle--whether or not actually used--of compulsion by "founding organs". Moreover, the large number and wide scope of these contracts, represents substantial and probably excessive government influence on production decisions. This system will continue for a transitional period at least until 1990 (see Law on Economic Planning, 26 February 1982). It should be progressively reduced. 33. Much R & D is centrally co-ordinated by associations, which submit a program of enterprise proposals for the 5-year plan period to government. Once approved, R & D costs are met by government grants (although a penalty of 20 percent of costs is paid by the association if production does not occur). Many new products developed in this way-70-80 percent in the case of machine tools--are covered by government contracts, which means that their prices are regulated. Founders' Tutelage and Informal Pressure 34. Greater enterprise autonomy has been accompanied, as we have seen, by the emergence of a new role for the branch Ministries which used to exercise administrative authority over them, namely their role as "founders" or "founding organs". Besides their power to compel enterprises, if necessary, to accept government contracts and their function of protecting enterprise interests in the distribution of centrally allocated commoditIes (see above), "founding organs" have a variety of similar functions of control and tutelage of enterprise activities. Most instances refer to entrepreneurial attributes, such as decisions to move into another sector, merge or split, start new ventures, draft plans for financial recovery, etc. It is arguable that national interest in the efficient uses of social capital entrusted to the enterprise would be better protected by either economy-wide supervisory bodies with functional specialization, or by representatives at the enterprise level (for instance, through a Board of Trustees), instead of intermediate sectoral bodies traditionally associated with command planning. 35. In addition to the formal powers of control and tutelage vested in the "founding organs", generally all central agencies make very extensive use of enquiries, circulars, recommendations, executive prescriptions, sectoral growth programs, appeals and campaigns, conditional tax rebates and other financial inducements, putting more pressure on individual enterprises thati compatible with their genuine autonomy. - 13 - BThe Socialzed Sector TZnes of Enterpriwes 36. The socialixed sector of CPEs is normally defined as state enterprises and cooperatives; current Polish practice requires some qualifications. In the state sector "enterprises of national interest" are singled out for reduced self-management while public utilities are more closely supervised and supported by their "founders". A new phenomenon is the development of joint enterprises set up by other state enterprises or organs; their precise legal status is somewhat ambiguous because these new entities are not directly subject to branch Ministries or other central organs, but there is no doubt that they belong to the state sector and are subject to the same regulations except for their independence from founding enterprises, being subject to the rules of "joint stock companies on the principles of commercial law".1' These joint ventures are important because they provide a channel for diversifying enterprise activities and for vertical integration; they are also important in international trade, where new trade corporations jointly set up and owned by the Ministry of Foreign Trade and major importing/exporting producers, operate on behalf of their owners, i.e., as agents, instead of trading on their own account, thereby linking more directly producers to international prices (see below, para. 73; on state and cooperative farms see Annex II on Agriculture). 37. Cooperatives in the non-agricultural socialized sector (particularly work cooperatives, popular handicraft, artisans and construction cooperatives) which represent about 11 percent of total employment, are very much like private enterprises, in being small and little subject to central influence. Entry, Meraers and Associations 38. State enterprises can be founded by the branch or central organs of state administration, or by local authorities (subject to budgetary provisions and guarantees in case of public utilities). Joint enterprises are created by contract between the founding enterprises, subject to prior decision of the respective workers' councils. Before foundation, however, the need for setting up a new enterprise must be assessed by a preparatory committee, apparently with consultative powers only, with representatives of the Ministry of Finance, the Central Bank, national and voivodship councils, other central organs, the trades unions involved, the appropriate scientific and pr^fessional associations and organizations for environmental protection. 39. Mergers and divisions of enterprises can take place at the itnitiative of "founding organs" subject to the approval of the workers' councils involved. Divisions are rare; mergers are not. Before 1982 state industrial enterprises were grouped in sectoral amalgamations, whose establishment had been a central feature of the 1974 reform. In 1982 existing amalgamations were dissolved and replaced by voluntary associations of enterprises (regulated by civil law, while the earlier amalgamations were regulated by ^' See C. Stypulkowski, Samodti.lne i samorsadne orzedsiebiorstwo, PWN, Warsaw, 1986. - 14 - administrative law, the main difference being the enterprise's ability to withdraw and to participate in several associations). However, associations embrace about 85 percent of state enterprises; one fourth of them have been set up by Ministries in a compulsory way, often as a condition of participation in operational programs and government contracts including the fully funded central program of R & D. (On industrial concentration, see Annex III on Industry.) The Enterprise Cash Flow 40. Enterprise pre-tax gross profits are the residual obtained after deducting turnover tax (see para. 186) and the cost of current inputs (including wages) from sales revenue. Straight line amortization on periodically revalued capital is paid into the enterprise Development Fund (part of amortization may be taxed, see para. 190), leaving pre-tax net profits, called "the financial result" in Polish terminology. 41. Deducting profit tax (which is called "income tax") from the financial result we obtain net profit, also called "distributed profit" in Polish. Out of this net profit there is still a liability to be met for a tax on above norm wage payments (until 1985 an analogous charge payable into the Professional Training Fund; see paras. 141 and 192, and Appendix 1, pp 89-93). If the balance is negative the loss is funded out of the enterprise Reserve Fund or out of credit; if there is a residual profit it is partly channelled to the Reserve Fund while the rest, which is the only truly disposable profit, is paid into various other funds: the Staff Fund, the Housing and the Social Activities Fund, the Development Fund. Out of the Staff Fund bonuses to personnel are paid, after a further deduction for the charge/tax on above norm wage payments; the Development Fund is credited also with the proceeds of any sale of fixed assets and is used for the repayment of investment credits and for financing new investment. Part of the Reserve Fund is transferred to the enterprise Statutory Fund, which together with credit is used to finance inventories. A diagram illustrating these flows is given in Figure 1. 42. The implication of finanzial self-reliance, understood as the enterprise's ability to generate enough profits to finance its own activities or to persuade the banking sector to lend on the strength of profit prospects, is the exit of enterprises which fail to do so; in practice, however, subsidies or credits obtained through the intercession of "founders" still protect unprofitable enterprises. Liquidation and Bankruptcy 43. Technically the Central Bank--or any other interested party--can initiate a procedure whereby an enterprise facing financial difficulties has to subject itself to monitoring of its activities, and prepare within 3 months a recovery plan acceptable to the workers' councils and to the Bank. If the recovery plan is not presented or fails to produce results, and the enterprise has (i) shown a deficit in the previous year, (ii) exhausted its reserve fund, and (iii) been refused further credit by the bank, the enterprise passes under the control of a special administrator for two (exceptionally four) years. - 15 - Figure 1: The Enterprise Cash Flow SALES STATE BUDGET - TIJRNOVEER TTA I t SUBSIDIES SALES REVENUE WAGE BL NTEREST CURRENT COSTS - AMORTISATION CARGES AMORTISATION TAX PRE*TAX PROFITS 'FINANCIAL RESULTi K|%~ PROfT fCOME TAX NET AFTER TAX PROFIT |h ' See J. Kornai, Economics of Shortage, 2 Vols., North Holland, Amsterdam, 1980. - 22 - Types of Prices: Administrative, Regulated. Contractual 64. Since 1982, prices charged by state enterprises have been divided into three categories: administrative, regulated and contractual prices.L' The scope of administrative prices is defined by the Sejm on Council of Ministers' recommendations. The level of these prices is determined by the Ministry of Finance or other organs of State administration, usually at a uniform level for each commodity, subsidized in some cases (e.g. coal, metallurgy, meat, wheat products), and taxed in other cases (e.g. cigarettes, alcohol, benzine). They are the price counterpart of the direct allocation of materials mentioned at the end of the previous section. Regulated prices are fixed at a non-uniform level for each commodity, varying according to a cost-based formula for each producer, also in the presence of subsidies (e.g., children's shoes, agricultural machinery).-' Contractual prices are determined by free negotiations between supplier and customer, except that most contractual prices were frozen in 1984 and then price increases for this range of goods were restricted to 90-95 percent of the 'justified cost increase' (such as those due to rises in administrative prices of inputs) subject to a maximum 10 percent increase.- A strong factor inhibiting price rises is resistance by the public, managers and the central administration. The idea that it is "Just" that price increases be kept to a minimum is only gradually giving way to acceptance of market-determined price changes. Widespread shortages are evidence that contractual prices are often set below a market clearing equilibrium.4' In the last five years the trend has been towards the gradual elimination of regulated prices, now down to under 3 percent of transactions. For non-agricultural products, contract prices have increased to about two thirds, and administered prices have remained fairly stable around one third of transactions (see Table 4). Administrativ- prices-like regulated prices-are often non-market clearing but do not encourage inefficiency in the nroductiou of the affected commodities because enterprises bear the burden of cost increases and benefit from cost reductions, whereas cost-based regulated prices, and to some extent contractual prices which allow justified increases, give very little incentive to reduce costs. Price Elasticity of Domestic Supply 65. An open question for the pace of price liberalization is the price elasticity of domestic output, which can be presumed to be fairly small. -l' See Law on price, 26 February 1982; regulations in Dziennik Urzedowy Cen n. 6, 1982; and Government Decree n. 201 of December 1983. Z/ New products produced under the central program of R & D and government contracts also have regulated prices. 3' On the definition of justified costs see the decision of the Minister for Prices of 31 December 1982, Dziennik Ustaw n. 1, 1983. Withdrawal of some of the formal regulations on price increases (especially the obligatory presentation of cost calculations if demanded by the buyer) is under discussion as part of the Second Stage of the Reform. 4' See E. Maczynska, Samofinansowanie sie przedsiebiorstwa, in Dobiegala-Korona (Ed.), 1985, p 117. - 23 - Table 4: DISTRIBUTION OF PRICES BY CATEGORY, 1982-86 (in percent of the total value of sales for the relevant items covered by each category of prices) Adminis- Regu- Contract trative lated or "free" Prices Prices Prices1' Prices for consumer goods 1982 35 15 50 and services-total 1983 45 15 40 1984 47 3 50 1985 47 3 50 1986 46 2 52 of which: 1982 60 6 34 Foodstuffs 1983 59 6 35 1984 61 4 35 1985 65 2 33 1986 65 2 33 Producer prices 1982 65 - 35 Agricultural products 1983 72 -- 28 1984 72 28 1985 72 - 28 1986 72 28 Manufactured goods 1982 32 8 60 1983 32 13 55 1984 34 3 63 1985 34 3 63 1986 34 3 63 Procurement prices 1982 20 5 75 (raw and basic materials) 1983 32 13 55 1984 34 3 63 1985 35 2 63 1986 35 2 63 Source: Polish Authorities ^~' Since April 1983 there has been a freeze on all producer prices unless the increase was considered to be beyond the control of the manufacturer (e.g., increases in the prices of raw materials). In 1984 analogous restrictions were imposed on retail prices of manufactured consumer goods with the maximum price increase being limited to 10 percent. Retail prices exempted from these price controls account for approximately one half of retail expenditure. - 24 - There are no studies of this; on reflection one might conjecture that supply has some elasticity because of the private sector, the presence of contractual prices, some exposure to international trade signals, as well as the incentive structure of enterprises (the wage-value added link, profit retention, etc.; see below); but that bottlenecks (in foreign exchange and labor, if nothing else) and institutional inertia hold back output response. Out of a sample of 56 industrial enterprises investigated by the Institute of National Economy (IGN) in 1985, 70 percent perceived employment- especially of blue collar workers-as a barrier to their output, 50 percent indicated the insufficient and fluctuating supply of inputs, 20 percent capital availability (but there has been a deterioration and aging of the capital stock). In 1985 some of those 56 enterprises had changed assortment in response to the needs of buyers, the availability of inputs and relative prices; but adjustment had been made only by under half the sample, and the changes ranged from 0.4 to 11 percent of the value of their output. Some enterprises lack funds and there is a general shortage of resources for decentralized small scale investments which would induce the required flexibility in enterprise response (IGN, 1986). This low elasticity of supply justifies a certain gradualism in implementation of price liberalization at the pace allowed by sluggish quantity adjustments. Exposure to international prices through realistic exchange rates and unimpeded access to world markets are clearly important in determining the elasticity of supply with respect to prices and the overall efficiency of the domestic market; this and all the other issues related to international trade are concentrated in the next section. B. Trade Planning and Institutions 66. The operational mode, rules and regulations, and motivation and behavior of Poland's foreign trade institutions are largely shaped by the orientation to international trade of traditional CPEs. The economic trading arrangements among the CPEs in Eastern Europe-the Council for Mutual Economic Assistance (CMEA, also known as COMECON)-'-were created not only in recognition of the physical limits to national autarchy but also as a vehicle for specialization among member countries on specific lines of production in order to reap economies of scale, and to develop dynamic comparative advantages in R&D and production on the basis of medium-term inter-governmental contracts. On the other hand, CMEA is not a multilateral trading bloc. As most intra-CMEA trade is denominated in "transferable rubles" (TR), a non-convertible accounting currency, it is basically a network of interrelated bilateral agreements on exchange, which normally rests on clearing (i.e. balanced exchange) between each pair of CMEA countries over the five year cycle. 2/ 67. Trade with CMEA countries accounted for more than half of Poland's total trade in 1985. A rising trend of the recent past is expected to continue. Despite some changes in pricing rules and in the use of hard currency for settlement of some transactions, CMEA trade institutions and I~' Other more recent members are Cuba and Vietnam. 2' Trade credits became a major part of Poland's bilateral agreements with the USSR after 1980, when the USSR started to assist Poland in coping with the economic crisis. 2188G - 25- practice have remained fundamentally the same for the last 15 years'. Most important, in most instances the same organizations are involved in trade with both trade regimes, with well-established procedures and practices governing trade with the CMEA area, while those applying to trade with market economies are more complex, subject to frequent changes, and of questionable effectiveness. The institutional framework for CMEA trade is therefore likely to continue to affect the institutional arrangements for non-CMEA trade as well. 68. In a CPE, the foreign trade system is integrated into the overall system of planning and control. The planning of foreign trade is carried out in the following sequence. First, broad trade targets are defined by the national planning office for the five year planning period on the basis of material balances for major commodity categories in which trade flows are the residual items closing the balances. Second, for trade between CPEs, the national planning offices jointly determine and ratify broad targets for bilateral exchanges. For trade with other countries, supply deficits which cannot be covered by other CPEs are identified by the planning commissions, and export targets are determined which lead to a planned aggregate trade balance with the rest of the world. Third, once sanctioned by the highest authority (e.g. the Council of Ministers), the targets are broken down by the trade and/or branch ministries into more disaggregated (by commodity category) targets. Fourth, for trade between CPEs, bilateral negotiations are carried out between the ministries for foreign trade of each country, which result in binding inter-governmental agreements for the common five-year plan cycle. Fifth, as plan implementation progresses, bilateral annual trade protocols are concluded between governments for the subsequent year. These tend to be both comprehensive and detailed. For example, for the trade between Poland and Hungary 90 percent of the bilateral trade flows are established at the level of annual protocols, and in the case of the USSR the annual protocol specifies some 400 items. Annual export and import targets are similarly determined for market economies but since this trade involves a significant degree of uncertainty in an otherwise stable and predictable environment, it has traditionally received lower priority. Polish authorities stress that this has changed, and the output of some "hard" goods is earmarked for export to the convertible currency area, and in these cases only the residual of the exportable surplus is committed to CMEA trade. 69. To realize the planned balances-bilaterally with each other CPEs, and multilaterally with the rest of the world-and to ensure adherence to the inter-governmental agreements between CPEs, central Foreign Trade Enterprises (FTEs) have traditionally had a monopoly in an assigned range of products and a large degree of autonomy in setting prices with external trading partners. Having received fairly detailed targets for annual trade from the Planning Commission, the Ministry of Foreign Trade, and/or the branch ministries, their L' Since the June 1984 CMEA summit meeting in Moscow, changes in CMEA trade institutions have been discussed. Present proposals include more flexible exchange rates (which presumably would imply greater intra-bloc convertibility and an end to the present practice of broken cross-rate exchange rates, where the implicit ruble-dollar rate is very different in different CMEA countries); and releasing up to 30 percent of trade from government contracts, possibly to be arranged directly between enterprises. 21880 - 26 - main function is to identify domestic suppliers and consumers for the specified transactions, negotiate the prices, and conclude binding annual contracts on product specifications, delivery and prices with these firms and with counterpart FTEs in other CMEA countries. FTEs are also indispensable in bilateral and clearing trade operations with non-CPE countries, where they manage the agreed balances. Major trade partners in this category are China, Yugoslavia, Brazil, India and several Middle-East countries. Bilateral relations can take any form, from narrow barter trade typical of CMEA trade practices, to countertrade with sizable convertible currency swings (permissible maximum annual imbalances to be settled through monetary transfer). The FTEs tend to adopt the contracting conventions of the market economies with which they are trading (i.e., with individual firms, in irregular batches, and on a case-by-case basis). 70. The contractual relationship between FTEs and domestic producer or consumer enterprises can either take the form of intermediate purchase/sale by the FTE, or the FTE acts as an agent at a negotiated commission. Both forms are estimated to be currently of about equal importance, but with the second arrangement growing faster, at least in trade with market economies. Even in the traditional relationship, however, FTEs and domestic enterprises work very closely together. Large enterprises often employ a team within the FTE and/or vice versa; there is evidence of mobility of staff between FTEs and producers which they represent abroad. Negotiations with foreign customers and suppliers are mostly carried out jointly, with the producing enterprises covering technical aspects and the FTE the commercial/administrative ones. Kvidence of such symbiotic relationship is, for example, the prominent (often dominant) display of the FTE's name in catalogs of many Polish producers; also, at the Poznan Fair, producing firms exhibit under their own name and with their own staff providing technical information, but they are clustered by FTEs, whose staff presents all of them to potential foreign clients. Therefore at least in areas where product specification and quality are important, direct exchanges between foreign and domestic supplier/customer, do take place. Similarly, the staff of Polish firms interested in importing foreign equipment and components usually has first-hand contact with foreign supplier firms even if import contracts are concluded through a FTE. 71. Two major innovations introduced in 1982 removed the traditional monopoly of FTEs: the issuing of trading permits to producing enterprises and individual producers, and the formation of new Foreign Trade Companies. 72. From 1982, state and private enterprises and individuals could be issued with trading permits, or concessions (koncesia) allowing producers to market directly their own output and purchase their own inputs, if they meet certain requirements. Their gross output must be at least Zl 50 million ($200,000), or they must have an export volume of at least Zl 1 million ($4,000) and an export share of at least 25 percent of output, and they have to satisfy the Ministry of Foreign Trade that they have staff qualified to carry out foreign trade operations. Many exemptions to all except the last of these conditions have been granted. Subject to licensing provisions the concessions expose export-producers and import-users to the full benefits and costs of foreign trade. By the end of 1984 almost 300 permits had been issued, more than half to small producers. Only a very small fraction of producers hold permits, and not all use them fully, but continue to operate at least in part through FTEs. Reportedly, permit holders accounted for only about 3.5 percent of exports in 1984. In 1985, only 32 were issued, but - 27 - interest subsequently increased and 69 were issued in 1986 and 47 in the first 4 months of 1987, and by May 30, 1987, the total number issued was 428. In 1986 permit holders accounted for over 10 percent of all exports. This permit or concession should not be confused with the authorization to import or export a given quantity of a specific good, issued by the Ministry of Foreign Trade in accordance with central plans and trade agreements, and which automatically subjects the holder to the Ministry's supervision. 73. The new Forei8n Trade Companies are created as joint stock companies (spolki) with majority shareholding by the Ministry of Foreign Trade and minority shareholding by interested state enterprises. Most FTEs have been converted into Foreign Trade Companies (FTCs), joint stock companies. (The term Foreign Trade Organization (FTO) will be used to include both FTEs and FTCs.) The FTCs trade on behalf of their shareholders, while the FTEs trade principally on their own account. Because of their much higher profitability from comissions and trade margins and their negligible capital needs compared to manufacturers, the new foreign trade companies are subject to a 75 percent tax on profits instead of the standard rate of 65 percent. The difference is earmarked for the Small Restructuring Fund, for export-oriented investments. Shareholders are paid dividends. The FTCs, like other joint-stock companies, are regulated by the 1934 Commercial Code, which has been out of use for a long time, and standard practice has to be reestablished. 74. At the end of May 1987, 1421 industrial enterprises participated in 65 new FTCs exporting their output and/or importing their inputs. It is reported that about 65 percent of Polish foreign trade is carried out by the new FTCs, with the FTEs trading primarily in the import and export of primary goods. 75. Despite the end of the FTE trade monopoly, producing enterprises tend to concede to FTOs a dominating role, because of their accumulated experience in international operations, their established connections with foreign customers and suppliers, and because of their knowledge and leverage in dealing with the domestic trade authorities. Since most producing enterprises in Poland lack the world-wide contacts, the export marketing infrastructure and the commercial and administrative know-how necessary for successful autonomous foreign export and import marketing, they appear to shy away from the high investment and risk involved in replicating the established commercial basis of FTOs. FTOs seem to have responded to the loss of monopoly over foreign transactions of firms by expanding the range of services they offer, for example by extending investment credits to firms they represent, and by providing other services, such as general contracting and organizing export financing. In market economies, direct foreign trade operations are preferred by most producers, and are presumably in the long run the more efficient pattern, provided that producers have sufficient profit incentive to seek foreign markets aggressively. Cloter direct market contact should influence the product quality. World Bank research on the causes and consequences of Korea's success in increasing its share of exports of manufactured goods strongly indicates that direct contact between the producer and purchaser can also have beneficial effects on technological transfer - in the Korean caae this was more important than licensing agreements.1' ~' Y.W. Rhee, B. Ross-Larsen and G. Pursell, Korea's Competitive Ed8e: Managing the Entry into World Markets, World Bank and Johns Hopkins Press, 1984, Chapter 4. - 28 - The more that can be done to increase the interest of enterprises in exporting, the better. Permits to export directly should be automatic, or, better still, abolished. An active entrepreneurial trading house system along a Japanese model can also be effective in promoting trade, and this approach is being tried in Hungary. FTOs might, if they become sufficiently profit-minded, move in that direction. The CMEA Trade Regime 76. The inter-governmental nature of CMEA trading agreements means that they are given high political importance. In Poland "external obligations" are-apart from defense, emergencies and government contracts-formally the only valid cause for the Government to override the autonomy granted to enterprises under the legislation of economic reform. While the formal inter-country (within CMEA) sanctions for deviating from the agreements are unknown, they are at least to some extent also supported by the economic self- interests of countries. In particular, countries try to avoid unplanned trade surpluses, since, in the absence of multilateral financial convertibility and bilateral "commodity convertibility", the resulting involuntary credits are of no economic use to the credited country. Realization therefore tends to be close to planned targets. In addition, FTOs have some flexibility to negotiate with foreign counterparts changes in prices or product mix if imbalances emerge during the year. If government intervention leads to losses, producing enterprises are entitled to compensation through the Price Equalization Scheme (see paras. 82 and 83). Although the procedures for establishing trade flows appear cumbersome, they are made manageable by the practice of largely relying on the past delivery and price patterns, and concentrating negotiations on incremental changes. This practice, in addition to the long-term nature of some of the underlying government-to-government agreements, is a major reason for the relative stability over time of intra-CMEA trade volume, composition and prices. 77. The bilateral natur^: if CMEA transactions makes the elected currency of account of minor relevance. Most transactions are denominated in TR, but convertible currencies are somet4mes used for greater flexibility in price setting; only in exceptional cases does this result in actual transfers of currencies. Such exceptional cases could be emergencies or if a large share of imported inputs originate from convertible currency countries, such as electronic control and navigation equipment in ships. Actual transfers of convertible currency from trade transactions are estimated by the Ministry for Foreign Trade to be in the order of 4 percent of total trade volume with the USSR and 2 percent of trade with the rest of CMEA, i.e., on average about 3 percent. 78. One of the more confusing features of intra-CMEA trade is the distinction between "hard" and "soft" goods. Two criteria for defining this particular quality are sometimes used. Under the first, "hard" goods are those which find a ready market in convertible currency trade; all raw materials tend to fall into this category, some food products, and an unknown, but probably limited fraction of manufactures. "Soft" goods do not meet the test of universal marketability, except at discounts which are considered unacceptable in terms of domestic resourre costs. A second criterion is that "hard" goods are in short supply, whereas the supply of "soft" goods can be increased relatively easy. As a consequence, under the ruling bilateralism of intra-CMEA trade the same good could be soft between one pair of countries and hard between another. It is in the interest of each country to "harden" its - 29 - imports and to "sof ten" its exports. This is potentially a major source of conflict in negotiations between national FTOs. One of the methods to deal with this problem is to break down total bilateral trade balances into sub-balances for commodity categories with a comparable average degree of hardness. This explains why bilateral agreements tend to break down commodity categories into more detail than is necessary for planning external balances. These sub-balances lead to some degree of "commodity inconvertibility" of CMEA trade, i.e., surpluses in bilateral trade in some categories cannot be used for additional purchases in other categories without consent of the deficit country. Since such involuntary trade credits are undesirable from the point of view of surplus country, this compartmentalization adds to the inflexibility of intra-CMEA trade. 79. Poland's trade with the five smaller CMEA countries of East Europe was reportedly rather well balanced in the aggregate and also in sub-balances by commodity category and degree of hardness, but such balances were absent from trade with the USSR. Not only has Poland been receiving considerable planned credits, but for structural reasons Poland imports mostly raw materials from the USSR and exports mainly manufactures. The former are by definition hard goods and most of the latter are considered soft. In its relations with the USSR, Poland faces now considerable pressure to harden its export mix. Moreover Polish interlocutors stress almost unanimously that the quality margin between hard and soft goods is now narrowing, including those in trade with the USSR, as "world market standard" is increasingly turned from a slogan into a practical norm for CMEA trade as well. Rejection by Soviet buyers, on technological and engineering grounds, of some of the Polish machinery on offer in 1986, contributed to a shortfall of planned CMEA exports in this category in 1986. This increases the potential competition between exports for convertible and non-convertible markets. While this had reportedly not yet led to severe preemption of hard goods in short supply, it is likely to do so by 1990, when repayments of debt start to come due to the tune of $300-500 million per year. Intra-CMEA Trade Prices 80. Prices in CMEA trade are in principle determined according to the "Bucharest formula" of using the (moving) average world market price over the last five years.-' While this rule commonly seems to be the starting point for price negotiations for most unambiguously definable products (mainly raw materials and minerals) it is of little use for most manufactures. This can cause considerable problems for contract negotiations, in particular if agreed monetary balances have to be met. It seems that a number of rough-and-ready methods are employed by the FTOs to solve the price setting problem: (a) relying heavily on past prices and concentrating negotiations on substantive changes; (b) using price and quality tnfermation on comparable goods in western markets and in violation of the narrow definition of the Bucharest formula (this is reportedly one of the reasons for denominating some bilateral transactions in convertible currency rather than in TR); and (c) counter- balancing price adjustments. ^' There is some doubt how universally the rules are applied in practice. See Jozef M. van Brabant, "The Relationship between World and Socialist Trade Prices - Some Empirical Evidence", Journal of Comparative Economics, vol 9, 1985, pp 233-251. - 30 - 81. Given such disparate influences on price formation and the discrepancies between actual factor prices and their opportunity costs within each country, it is all but impossible to arrive at a realistic valuation of the economic resource costs of any particular transaction. Nevertheless under the principles of the reform, transactions between producing or consuming firms and FTOs, and transactions with foreign customers or suppliers should be carried out at "transactions prices", i.e., prices determined in the world market (c.i.f. for imports and f.o.b. for exports) converted through official (now uniform) exchange rates. The number of goods to which these prices apply has been increasing. Appendix 2 lists the fairly small number of products whose foreign trade prices are still administered by the Ministry of Foreign Trade. Export transaction prices are treated as a ceiling which in theory should not be exceeded in domestic transactions. 82. In principle, it is clearly desirable to expose Polish firms to the direct influence of international prices. In practice, there is a reluctance to go further in introducing these, while so many other elements of the Polish economy remain distorted. In particular, in recent years the exchange rate has been overvalued although, as noted in the following section, this policy is changing. Moreover there are countless deviations of domestic relative prices from international relative prices which do not reflect comparative advantage but distributional considerations or merely historic price levels, frozen into "administered" or "controlled" prices (see para. 64). In such circumstances, the universal use of transactions prices could generate very large windfall gains for some firms, while preventing economically advantageous transactions from occurring voluntarily because of the associated windfall losses to involved firms. The "Equalization Payment System" (EPS), the successor of the Price Equalization Fund, is to prevent either of these from happening and to bridge the gap between the two price systems. It collects the windfall gains from positive differences between controlled domestic and international prices and compensates for windfall losses. The Equalization Payment system covers a substantial portion of foreign trade (in 1984, 15 percent of exports to and 45 percent of imports from CMEA countries were subject to price equalization, and 40 percent of exports to, and 30 percent of imports from, the convertible currency area.1') It is, however, intended to eliminate differences between domestic and international (convertible currency) prices during 1987-8, except for energy. (The coal price would be raised 60 percent, but not set on the basis of international prices). 83. The EPS is managed by the Ministry of Foreign Trade. It is supposed to operate as a self-supporting fund with only small balances submitted to or received from the budget. However, in 1985 the EPS ran up a substantial deficit of Zl 79 billion ($536 million at average 1985 exchange rate), equivalent to 3.3 percent of total trade volume. This decreased to Zl 44 billion in 1986, and is expected to be zero in 1987. The EPS is not intended to have any fiscal functions, or to be an instrument of trade policy in its own right. Convertible Currency Trade: Exchange Rate 84. Enterprise targets and direct government intervention to induce exports have been formally abolished for convertible currency trade. Polish $' Coverage increased to 32 percent of exports to CMEA countries in 1986, and decreased slightly to 38 percent of convertible currency exports. - 31 - producing firms export--directly or through FTOs-if the incentives to do so are sufficiently strong, given the larger marketing effort required in highly competitive markets. For raw material and semi-finished goods which are still subject to central balancing, foreign trade flows are balancing items and automatically receive lower preference than domestic consumption. Similarly, since CMEA trade is part of government-to-government agreements, exports to CMEA receive an automatic preference in case of a supply shortfall. The traditional relegation cf trade with market economies to a last resort supply of imports, to be matched by the exports necessary to maintain external balance, has precluded convertible currency exports being seen as an independent source of growth and has weakened motivation to develop them through long-run investment in an international marketing infrastructure. It seems difficult to alter this traditional bias simply through export promotion campaigns newly adopted under the pressure of debt service requirements and import dependence. 85. Under the reform, the major export incentive should be relative profit. In principle, therefore, the most importaqt incentive should be a correctly functioning exchange rate. In practice, the many elements in the Polish economic system that reduce the effectiveness of relative prices as instruments for resource allocation also reduce the effectiveness of the exchange rate. In addition, however, there is a major question as to whether the present level is appropriate. Most observers, including the Mission, believe that the zloty has been substantially overvalued, at least until very recently. The rapid inflation of 1982-3 was not matched by a comparable devaluation of the zloty, so that compared with its value in the late 1970s and early 19808, the zloty has appreciated in real terms in relation to foreign currencies. One FTO, which deals with more than 100 medium-sized and large firms, estimated that in October 1986 domestic prices exceeded export prices in convertible currency markets in the range of 15-60 percent. On the other hand, it has been objected that exports already have high average profitability relative to domestic sales, so that devaluation would not introduce any new incentive to export.1' 86. At present, the rate of exchange is set with the aim of making the value in foreign prices of the most profitable 80 percent of exports higher than their value in domestic prices. The reverse is true for the remaining exports, on which export "losses" are borne. Although the World Bank has not seen the underlying calculations, it is known that a high proportion of the "unprofitable" exports are agricultural. The export "losses" are regarded as temporary, dictated by the payments crisis. The Polish authorities argue that a very much lower rate-Zl 350 or more per US dollar-would be required to make all exports profitable. This, and the inadequacy of the present trade ~' At a May 1986 meeting of the PZPR Central Committee the Minister of Finance stated that "in 1984 the profitability (rentownosc, defined as the ratio between profits and costs) of hard currency exports was 11 percent while that of domestic sales was 4.5 percent; in 1985 the corresponding indicators were 12 and 5 percent" (Rynki Zagraniczne, no. 62, 1986). The MFT does not accept these estimates, which include EPS Fund payments. A strong association between profitability so defined and the share of exports is suggested by recent official data on the top 500 industrial enterprises (Zarzadzanie, June 1984, 1985 and 1986) and on the top 100 exporters (Handle Zaaraniczny, April 1986). - 32 - balance, achieved only by massive import restrictions, all suggest that the exchange rate is overvalued. However, a real devaluation on its own is insufficient to achieve the desired realignments of domestic relative prices and increase in exports. Five aspects of the present economic system dampen the impact of real devaluations: (a) central allocation of inputs, which makes some of the key relative prices of production irrelevant for resource allocation, (b) rationing of foreign exchange to free foreign currency to pay for the centrally allocated imports, the demand for which is inelastic to the real exchange rate, (c) cross-subsidization mechanisms, such as the Price Equalization Scheme and other subsidies, which isolate domestic from international prices and ensure profits for firms that make losses at the current domestic relative prices, (d) pervasive domestic price controls, and (e) the still strong rate of expansion of the banking system's net domestic assets, that maintains an upward pressure on the prices of non-tradeables and on tradeables that are free of competition because of the rationing of foreign exchange. Under these circumstances, a phased series of devaluations, as part of a set of policies to continue to reduce central allocation, foreign exchange rationing, subsidies, price controls, and monetary expansion, is the optimal way to proceed. 87. There has been a reluctance to devalue sufficiently to make marginal exports profitable, because some exporters--especially those in sectors where supply is particularly constrained--might obtain an ill-deserved windfall. But such a rule of thumb may prevent relative profitability from overcoming the many relative disincentives to convertible currency exports, and also provide a proper incentive to appropriate import substitution in other activities. The effects of currency overvaluation are aggravated by shortages in the domestic markets which can usually absorb an enterprise's entire output without requiring the trouble and expense of seeking and penetrating foreign markets. Opposition to a devaluation comes from those who worry about its inflationary impact and believe that the response in terms of switching production from domestic markets to exports, or in substituting domestic production for imports would, in the short run at least, be very limited. Other concerns are the effects of the ensuing revaluation of the domestic currency value of foreign debt, and the need for additional zloty funds to buy from exporters the trade surplus used for debt service (this provision however is being built up now with the newly introduced FOZZ charge, see para 192). 88. But while a devaluation in itself cannot work miracles, it is impossible for the reform to be successful in raising economic efficiency in response to relative prices, unless the most important price of all, the exchange rate, is set at a level that will make the necessary volume of exports and import substitutes profitable. To a considerable degree the reluctance to devalue is being overcome. In February 1987, the exchange rate was devalued from Zl 200 to the US$ to 240, and in April 1987 the President of NBP began a series of small devaluations (of up to 3 percent), which he is newly able to do without consulting the Ministers of Finance and Foreign Trade who, jointly with him, decide larger devaluations. Although this is an important step forward from the previous situation, it should be stressed that the average profitability of domestic and foreign sales on existing imports is not a satisfactory way to set exchange rates in the long run. The most important argument for devaluation is that stronger marginal incentives to export are needed to overcome the attractiveness of a domestic market widely characterized by shortage. However, even if profit/cost ratios could be regarded as a reliable indicator of profitability in the use of capital and - 33 - other resources, the existence of a gap between average profitability in foreign and domestic sales is not necessarily an argument against devaluation, which can still be required to improve the marginal profitability of export promotion and import substitution, in a situation in which the Polish balance of payments clearly signals a need for substantial new exports or import substitutes. 89. Devaluation is going to require major price adjustments not only of the goods and services actually traded, but also of prices of goods which require significant amounts of tradables for their production. It has been shown, for instance, that in many cases the value of energy inputs (at international prices expressed in zlotys at the official exchange rates) is greater than the value of output at domestic prices. Obviously in these cases-which include a number of producers of steel, nitrogen, cement, aluminum and a few other primary products-a devaluation would widen further the gap between current price and opportunity cost, making overdue price adjustments inevitable. 90. Like all soft currencies the zloty can be converted into hard currency in black markets locally and abroad (for instance in Vienna). Poland, however, in practice encourages the activation of such markets by allowing Polish citizen to hold hard currency accounts without disclosing the source (although slightly better terms are offered for hard currency which can be shown to have been legally acquired); by exchanging hard currency for Polish vouchers denominated in US dollars and which can be traded legally in the domestic market; by selling imported and domestic scarce goods at particularly favorable prices against hard currency and dollar vouchers. Special state shops (Pewex being the largest chain with total retail sales of $370 million in 1986) retail large amounts of such goods and run a large yearly turnover (US$503 million in 1986); and by granting priority access at low price (i.e., at an exchange rate which vastly overvalues hard currency) for houses, cars and major durables against total or part payments in hard currency or dollar vouchers. Dollar prices for luxury goods are extremely low, even by standards of duty-free shops elsewhere. For example, well-known brands of Scotch whisky were selling for $5.60 in May 1987. 91. The unofficial valuation of dollar vouchers is published weekly in the Polish Consumer Association weekly (Veto) together with that of gold scrap, under the heading "Gold and dollar vouchers in the black market" (which is inappropriate since vouchers can be traded legally). Until 1981 the black market rate of hard currency was about three times the official rate, following fairly closely the floating of currencies with a liquidity premium on US dollars; in early 1982 it rose dramatically and ther., after the price rises, it settled to about four times the official rate and has retained this relative level. In May 1987 the price of dollar vouchers was around 950 zlotys (Veto gives both a buying and a selling rate, with a fairly constant margin of 20 zlotys, which suggests widespread and efficient intermediation). The black market rate for banknotes (which is illegal) is about 20 zlotys higher than that of vouchers, presumably because of their greater liquidity. 92. The high valuation of the dollar in the black market exacerbates lack of confidence in the zloty and lowers domestic demand for it; undermines monetary and exchange rate policy; and contributes to excess demand for goods and inflationary pressures, both through wealth effects on dollar holdings and - 34 - through portfolio substitution between financial and real assets. There is little the authorities can do to affect the external supply of foreign exchange, which depends on employment opportunities for Polish workers in Western countries and in socialist countries where payment is partly in dollar-denominated vouchers, transfers from friends and relatives abroad, and illegal sales by tourists. Th2re is more scope for affecting the demand for foreign currency. (i) Large interest rate differentials between zloty and foreign currency deposits need to be reduced, preferably by increasing the zloty rates, which have been substantially negative in real terms. Although the diversion of foreign exchange from the black market into the banking system (see paras. 172-176) increases official control over foreign exchange, the very high relative interest rates offered have increased the demand for dollars and widened the divergence between the official and black market rates. (ii) Domestic market shortages which lead to retrading and private importing for resale in foreign currency can be reduced by increases in supply and domestic prices which improve market balance. (iii) An important component of foreign currency demand is for purchases in the 18 Pewex-type chains and for domestic transactions in miixed (dollar and zloty) prices. Ending mixed prices and switching some of the Pewex-type sales into zloty sales at market-clearing prices conflict with the balance of payments requirements of obtaining hard currency, but are a necessary part of a comprehensive set of actions to strengthen the zloty and reestablish sustainable internal and external balance. The very small margin between Pewex vouchers and actual currency indicates the importance of Pewex-type demand on the black market rate. Although there are no close domestic substitutes for many of the goods sold, vodka makes up about a quarter of Pewex sales, and it is likely that the purchasing power parity of the zloty with respect to the Pewex price of vodka sets a limit on the black market exchange rate. Raising the dollar price of vodka should nudge the black market rate down. The impact of this on total Pewex dollar receipts will depend on the price elasticity of demand for vodka and the margin people are willing to pay for convenience, longer purchase hours and higher quality vodka. (iv) Foreign currency is also required for travel, but in 1986 only about 2.5 percent of the population travelled to non-socialist countries, and it seems undesirable to place additional limits on foreign travel opportunities. (v) A strong demand factor for foreign currency is the attempt by highly-liquid and high-income households to hold dollars in addition to other stores of value such as real estate, land and art, as a hedge against domestic inflation. This underlines the need for a wider range of zloty-denominated financial assets offering positive real rates of return or interest rates. Allocation of Im2orts and Foreign Exchange 93. Imports are subdivided in two principal categories: (i) "centrally financed imports" and (ii) imports financed from the own resources of the importers. From Table 5 a pattern of change is clearly discernible: the share of centrally financed imports is declining and the reduction is taken up by an increase of the share financed from enterprises own resources. This pattern of change is consistent with the general principles of the reform. - 35 - Table 5: SOURCES OF FINANCE OF CONVERTIBLE CURRENCY IMPORTS (in percent) 1984 1985 1986 From centrally allocated sources 70.1 67.8 64.2 of which: - Centrally financed goods (41.9) (40.3) (33.3) - Operational programs ( 7.3) ( 7.3) ( 6.9) - Government contracts ( 2.1) ( 2.3) ( 1.8) - Other ^' (18.8) (17.9) (22.2) From enterprise resources b/ 19.5 23.3 27.2 PEWEX 2.0 2.0 2.0 Other 8.4 6.9 6.6 100.0 100.0 100.0 US$ bn 4.8 5.1 3.8 ^' Including central investment decided by Ministries. k" From retention quotas and auctions. Source: The Planning Commission. 94. For raw materials, intermediate goods and spare parts, imports are rationed through access to imported CAMs or through retention quotas. An exception to import rationing through foreign exchange availability is the import of major capital goods, which require a specific import license, while the corresponding foreign exchange is included in the CFMs. From September 1987, it is planned to make international tender for equipment a condition of all import licenses. 95. The determination of resources for centrally financed imports is subject to a stepwise planning procedure. First, the Planning Commission prepares proposals for a relative breakdown of available foreign exchange resources into categories such as those presented in Table 5 above. The estimate of the total amount available for imports is linked with import planning, export projections and debt servicing targets. Second, the Council of Ministers decides on the planning totals and the breakdown into the categories. Third, the Ministry for Foreign Trade and the Ministry for Material and Fuels Management determine jointly the allocation of foreign exchange for particular commodity categories; this is done on the basis of the balances for DDAs and the planned volume and composition of operational programs and government contracts. In principle, these allocations are made as part of the annual planning process. Recently, because of the acute shortage of convertible currency, the allocation has had to be made on a quarterly basis by an Inter-Ministerial Committee, chaired by a Vice-Minister of Foreign Trade. - 36 - 96. To sum up, the procedures for import and foreign exchange allocations are closely linked to the centrally-planned core of the economy. First, the material balances comprise both domestic and foreign sources and use of a large number of key inputs. Second, the procedures of planning of supply and of foreign exchange distribution are very similar, are often based on the same information sources, and are carried out by the same organizations. Third, on the basis of these balances, import and export contracts are concluded by the FTOs in trade with CMEA countries. Fourth, in the case of government contracts, access to imported inputs to meet domestic shortages is still an important element of production planning. 97. The unrestricted use of retention quotas and of output in excess of central balances introduce an element of flexibility into what would otherwise be an overly rigid framework. One might add that these elements of flexibility provide scope for gradual reduction of central allocation and their replacement by autonomous enterprise actions. For example, this could take the form of reducing gradually for each CAM the portion which is centrally allocated through contracts prescribed by the DDAs, leaving a growing share to firm-to-firm transactions, until the CAM system becomes redundant. Currency Retention Quotas 98. Poland introduced in 1982 a "currency retention quota" (known as ROD) scheme as a major new export incentive, in lieu of devaluation. Under this scheme, exporters have had the option of buying back at the official exchange rate a share of their export earnings, and sometimes also a higher share of increases in their export earnings, thus freeing themselves of dependence from centrally allocated imports. This facility is an important.element of flexibility because any bottleneck can usually be removed by importing necessary goods or services and because the ability to use foreign exchange fairly freely introduces a strong degree of actual decentralization. The retention quotas range from 1.5 to 95 percent of export earnings; in theory these quotas should reflect import-intensity of output but in practice they are negotiated on a case-by-case basis with the Ministry of Foreign Trade (in at least one case a large firm received a much higher quota than justified by imported inputs on the grounds that it needed foreign exchange for the completion of its investment program). It is now proposed to grant a quota of 10 percent automatically to enterprises that began to export in 1986, and only if a higher rate is claimed will an application have to be submitted to the Ministry of Foreign Trade. Trade under bilateral agreements can also qualify for ROD, but until January 1987 this was at lower rates, (generally half the rate applicable to convertible currency exports), and with a restriction on the currency which can be drawn. Now equal ROD rates apply but there are restrictions on using currency earned in bilateral trade for importing from hard currency areas. 99. Enterprises have been able to transfer their currency entitlements to cover the import requirement of their suppliers, but not to make currency transfers to firms other than them. Since ROD accounts have been merely rights to purchase foreign exchange, held for enterprises in the books of Bank Handlowy, circumvention of this rule seems to have been difficult and rare. Foreign exchange received through the exchange of accumulated earned quotas in principle could only be used for imports of raw materials, intermediate - 37 - goods and spare parts before January 1987, although in practice, equipment purchases were permitted. Under the new rules firms may freely allocate ROD foreign exchange for any productive input, and spend up to 1 percent on non-productive items for their workers or the local population. 100. During 1982, 452 accounts were opened (377 of which were still operating in 1985) for 1,372 industrial enterprises; at the end of 1984 their number had increased to 724 (643 still operating) owned by 2,250 enterprises (i.e., almost all exporting firms in Poland). Another 120 accounts were opened for retention quotas of transport enterprises and cooperatives. At the end of 1986 there were 783 accounts owned by 2,937 enterprises. The shortage of foreign exchange in 1985 and 1986 caused many firms to encounter delays in permission to use their ROD entitlements, which endangered the credibility of the scheme. Despite this, Table 5 shows the proportion of imports financed out of enterprise resources, most from retention quotas, to have increased steadily from less than 20 percent in 1984, to 27 percent in 1986. For 1987, it has been decided that the proportion of imports to be financed in this way will again be about one-quarter. This means that fewer imports will be available through central allocation. 101. A resolution of the Council of Ministers -' changed the whole concept of ROD accounts on January 1987. They are no longer treated as entitlements to repurchase foreign exchange, but confer actual ownership of hard currency which can be held in "M" accounts at any Polish foreign exchange bank in $, DM, French and Swiss Francs, pound sterling and Austrian schilling, and are part of the assets of an enterprise. The M accounts may be held as non-interest bearing current accounts, or as term accounts with a minimum balance of US$5,000 (or its equivalent) earning interest at 3, 4 or 5 percent for 1, 2 or 3 year deposits respectively. ROD rates were reduced by one fifth, on average. Enterprises could transfer up to 5 percent of existing entitlements accumulated before 1987 to their M accounts. The balance is to be replaced by certificates which will entitle the owners to purchase currency equal to their entitlements, on a ru*sed basis from 1987 to 1995. In May 1987, foreign exchange held in M accounts became tradable at market-clearing rates through fortnightly auctions orZ?nized by the Export Development Bank.-' It is proposed that the certificates also be marketable. Marketability defuses some of the major general criticisms of retention schemes, such as: that the limitation of the use of accumulated credits to direct and indirect import needs creates a ceiling beyond which they have no further incentive effect on exports; that firms endowed with a net balance of undervalued foreign currency entitlement might indulge in greater import intensity than technically and economically necessary; and that this system penalizes import substitution relatively to export promotion. i-' Dated December 8, 1986 t' The amount of foreign currency offered increased from US$ 80,000 at the first auction, to $300,000 at the second, and $546,000 at the third. These small amounts have been well below the offers to buy. The effective prices paid (the official exchange rate, plus the "right to buy" premium auction bid) have been within the range of the black market exchange rate. - 38 - 102. Marketability removes the case for the present discretionary rates of retention; these should be replaced by a flat rate unconnected to import currency transactions which differs significantly from the official exchange rate. While this does provide an effective incentive for exports, there is clearly a danger that such a situation will generate its own pattern of unwelcome side-effects and distortions, with no obvious advantage over a unified exchange rate with some degree of currency convertibility. Although marketable RODs are a substantial improvement on unmarketable ones, steps should be taken to reduce and eventually eliminate imports that are brought in at the lower offical rate, so that the marketable ROD rate becomes itself the official rate. Fiscal and Credit Export Incentives 103. There are presently three fiscal incentives to export. First, tax rebates which depend upon export value and increases, country of destivation, type of product, domestic value added, and domestic cost relative to export value. Up to 18 percent of export value in convertible currency, 12 percent of export value under clearing trade or to the USSR, 6 percent of export value to other socialist countries, and up to 22.5 percent of export increases, can be deducted from the enterprise income tax due. Exports of a small number of CBMs qualify for much smaller rebates. (These are the maximum rebates, and apply to highly processed goods. See Appendix 3) The rebate is reduced if the production cost (C) of the export exceeds the zloty value of the sales revenue (W) by more than 50 percent, and increased if C is less than W. In 1986 these reliefs accounted for Zl 113 billion, or 9 percent of total exports and about 40 percent of total tax reliefs. They are supposed to be used to augment the enterprise Development Fund, and it is hoped they will help finance investment in additional export capacity. Second, exporters are automatically eligible for reimbursement of turnover taxes on intermediate products and of import duties on inputs used in exported production. Third, the Ministry of Foreign Trade has at its disposal a special bonus fund from which it can reward firms for exports in convertible currency according to two rules: (a) 0.6 Zl/$ for exports of finished goods and 0.4 Zl/$ for exports of semi-finished goods, and (b) 2.5 Zl/$ for increments of exports of finished goods. The bonus fund is very small--atout Zl 3-4 billion per year--so cannot be very significant as an export incentive. 104. The Ministry for Foreign Trade has a modest fund at its disposal to provide credits for financing of working capital for export production. There are several schemes for financing the zloty component of export-oriented investments. One is the Ministry of Foreign Trade's so-called "Small Restructuring Fund", jointly created by the Ministry of Foreign Trade, the Ministry of Finance, and the National Bank in 1985. The fund stood at Zl 20 billion at the end of 1986. Since it began operating in early 1986, about 50 projects have been approved, amounting to Zl 18 billion. It extends quick-yielding, zero interest credits in zlotys, leading to increased export. Second, the National Bank charges 3 percent lower interest on credits for export oriented projects (9 percent instead of the normal 12 percent). Third, enterprises undertaking export-oriented investment are automatically granted an income (profit) tax (see para. 196) rebate equal to 20 percent of the project value. In addition, projects - 39 - valued at less than ZI 500 million with implementation periods of less than 3 years make the enterprise eligible for an additional 10 percent rebate, and a reduction in depreciation tax by 20 percent of the project valve. These rebates can amount to budgetary finance for 50 percent of the investment outlays. 105. A new Bank, the Export Development Bank (EDB) began operations on January 1, 1987.x' It is a joint-stock bank, with the following partners: (a) MFT with 41 percent of the shares; (b) Ministry of Finance and NBP each 10 percent, Bank Handlowy, Bank PKO and the Bank for Food Economy together 10 percent, and (c) the rest sold in public subscription to over 400 socialized enterprises and cooperatives. The equity capital is Zl 5 billion and the reserve capital a further Zl 2 billion (US$ 28 million at the current official exchange rate). Apart from equity, the domestic sources of funds for EDB include: (a) the Fund for Export Development, funded with the dividends of exporting firms owned by MFT, which is already lending to exporters at zero interest rate (this Fund has Zl 13 billion and will grow by Zl 10 billion per year); (b) NBP rediscounts; (c) deposits from enterprises; and (d) probably bonds in the medium term. All these domestic sources provide funds denominated in zlotys. Foreign exchange resources will be obtained through foreign borrowing and from the enterprise M accounts held with EDB. EDB is also entitled to receive foreign exchange from the balance of payments at the official rate. US$10 million has already been obtained, and US$15 million more is expected to be obtained in the second half of 1987. 106. EDB finances socialized sector exporting firms exclusively, including mixed limited liability companies, leaving the financing of Polonia firms to Bank PKO. EDB specializes in investment financing, but also finances working capital and bridging operations. Loans are in foreign exchange for imported goods and in zlotys for domestic expenditures, natching the currency of the loan with that of the source of funds. It was stated that no special preference will be given to shareholders, but the evident interest in EDB shares suggests that this may not be believed and that potential buyers are expecting easier access to foreign exchange. 107. A further provision for financing the foreign exchange requirements of export-oriented investments was made in the Council of Ministers Decision 36 of September 1986. This allows the 4 export banks to lend foreign exchange beyond the limits of the official lending plan provided borrowing enterprises present full financial feasibility studies which show the investment to be economically viable and self financing. The investor is allowed to use 100 percent of export earnings generated by the investment for repaying the loan during the repayment period. Some 4 or 5 loans have been made under this scheme, most for 2-3 years, at an interest rate of LIBOR plus up to 1.5 percent commission. Repayment is in the same currency as the loan, so that the final borrower bears the foreign exchange risk. 108. Other measures intended to promote exports are: the new Law on Joint Ventures which came into operation on July 1, 1986, discussed above (paras. 55-61); regulations ensuring the supply of CBMs for export-oriented production of selected highly manufactured goods (Group I of Appendix 3) through long-term agreements between enterprises and distribution agencies; 1' Under resolution No. 99 of the Council of Ministers of June 20, 1986. - 40 - and increases in the wage bill exempt from PPWW taxation on above-norm increases (see para. 141) which depend on type of export and export market (see Appendix 4). The last is reported to be a strong motivator (although exemptions from this tax are widely granted on other grounds as well). An Assessment of Export Incentives 109. The new M accounts, and the progressive real devaluation of the exchange rate, are potentially major changes in a system of export incentives to convertible currency markets that hitherto have been inadequate. The incentives have been too differentiated, and changed too frequently. The system of incentives should be simple and stable, and there should be fewer administrative bodies involved than at present. The Planning Commission recently carried out a survey on export performance and motivation for the period 1983-85 of some 2000 enterprises which had exported in 1983. 300 of these had stopped exporting altogether by 1985, and another 800 had significantly reduced exports. This was partly offset by other firms which began exporting, and there was a rise in the total number of exporting firms from 2,363 in 1985, to 2,680 in 1986. However, even if markets remain, the output of firms is often limited by bottlenecks; shortage of imported spare parts, materials and components, and shortages of skilled labor are frequently mentioned. Morewver as inevitably market demand changes, 'buy-back' arrangements expire, technology advances, and sales of current export production decline, they are not replaced by new export items. With an overvalued zloty1, a domestic sellers' market with lower quality requirements, and a tradition under which most exports have been arranged on a long-term basis through FTEs, other incentives have not been enough to encourage enterprises to exercise much initiative in conquering new markets, especially given the recent imperfect access to their ROD accounts. It must also be observed that in addition to export promotion, there may be untapped sources of foreign exchange saving, both through energy and material saving opportunities on the factory floor and also in the replacement of domestic for imported inputs and final output, which are also discouraged by currency over-valuation and an inadequate incentive structure. C. Factor Prices and Mobflity: Labor Population and Labor Supply 110. Generalized labor shortage is a standard feature of CPEs, where over-full employment is a by-product of the planning mechanism rather than a specific target. In Poland labor shortage is widely perceived as a major factor constraining output; it is mainly attributed to demographic slowdown and is held responsible for high turnover and wage inflation. These propositions are reviewed critically here. Ill. Demographic slowdown in itself cannot be regarded as responsible for shortages, since it was correctly predicted by Polish demographers and therefore anticipated all along. In any case the sluggish labor force growth experienced by Poland in the 1980s, unlike that of other East European countries, was more the result of social policy than demographic factors, with the labor force growing less rapidly than the population. -41 - 112. Table 6 documents this claim. It records the rate of growth in the population 18-64 and in the labor force (which includes some people outside that age bracket) from 196t; to 1985 and gives the prospective growth through 2000. The table shows a marked deceleration of the rate of growth in the labor force/working age population ratios. The fall in participation rate is due to various factors: increases in old-age pensions; changes in retirement policies (a reduction in 1978 in the retirement age by 5 years to 55 for women who had worked for 30 years, and the 1981 provisions encouraging retirement in that year);" and the growth of unrecorded accivities in the grey/black markets. Table 6: POPULATION AGED 18-64 AND LABOR FORCE ('000 and ratios) Males Females 18-64 Total LF Ratio 18-64 Total LF Ratio 1960 8,072 8,828 1.09 1970 9,295 8,734 .94 9,852 7,672 .7i 1980 10,763 9,547 .89 11,088 8,222 .74 1985 11,942 9,645 .81 12,478 8,270 .66 Percentage Change: 1960-70 15.2 -0.1 11.6 1970-80 15.8 9.3 12.5 7.2 1980-85 11.0 1.0 12.5 0.6 Source: Rocznik Statystyczny 1986 (RS), Table 4 (67), p. 40-41, and Table 1 (95), p. 61. 1960 population from RS 1980, Table 7 (57), p. 34. 1960 labor force, estimated from employment figures in RS 1986, by applying ratio of 1960 to 1970 in that series to the 1970 figure in our table. 113. To raise labor supply in a situation of perceived labor shortage the government has taken several measures-for instance, raising the earnings ceiling at which pension reductions take effect has encouraged 500,000 pensioners to work, but without much effect on the overall level of shortages. The government has also introduced laws against "work evasion" or parasitism, requiring persons without jobs to register at employment exchanges, with apparently little success in reducing the number of persons in this group. 2/ See Jan Adam, "Regulation of Labor Supply in Poland, Czechoslovakia and Hungary", Soviet Studies, vol. XXXVI no: 1, January 1984, pp 69-86; and Employment and Wage Policies in Poland, Czechoslovakia and Hungary since 1950, St. Martin Press, New York 1984). JPRS, Translations of Polish news stories: "Comments on Work Evasion Law", January 10, 1986; "'Parasite' Law Proves Ineffective, Says PZPR Ideological Weekly," October 19, 1985. - 42 - 114. In addition to showing declines in labor participation over time, Table 6 shows high female participation in the work force in 1970, which has, however, been falling. One contributing reason was the prolongation from 1980 of the period of leave that women may take .a' addition to the statutory 16 weeks of fully-paid maternity leave. 115. Table 7 turns from numbers of workers to hours worked. Column 1 records monthly hours worked in manufacturing from ILO data; it shows a substantial decline in hours in the 1970s through 1980 of 10 percent and a 6 percent drop in the 1980s, with however a rise in hours after the imposition of martial law. Column 2, which gives the number of hours per year in industry as reported in the Statistical Yearbook, reveals the same pattern. These changes reflect in large part the reduction in working time gained by workers via nationally legislated reductions in working on Saturdays. In addition, however, they also reflect increased sick time and worker injuries, particularly among women. Absenteeism is extremely high-an annual average of 222 hours per worker. Reducing absenteeism by 25 percent would be equivalent to increasing employment by 875,000."' Table 7: HOURS WORKED IN POLAND Monthly Hours Annual Hours in Manufacturing in Soc. Industry (1) (2) 1970 172 1978 161 1979 161 1,949 1980 159 1,916 1981 147 1,763 1982 149 1,809 1983 152 1,849 1984 152 1,840 1985 1,852 1986 1,858 Sources: Column (1): ILO, Column (2): RS 1985 Table 17 (313), p. 225. RS 1986 Table 19 (322), p. 234, MRS 1987 Table 11 (135) p. 150. Turnover 116. A major complaint about labor supply in Poland is that workers exhibit too much turnover and quit without notice, reducing industrial efficiency. Indeed, even Western experts have labelled labor turnover as Zycie Warsawy, August 25, 1986, p.1 reported director Szumak of the Ministry of Labor, as saying that about 1.5 million socialized sector workers were absent each day. - 43 - excessive.L' While it is not unreasonable to expect high turnover in a labor market faced with labor shortages, the available evidence suggests that this complaint has little validity. 117. First, on an international comparative basis, the turnover rates in Poland are not particularly high. The 20 percent for the economy shown in Table 8, for example, compares to an average turnover of 28 percent for Sweden and 42 percent for the US manufacturing in the 1970s (European Trade Union Institute). Table 8: RATE OF TURNOVER OF LABOR 1970 1980 1985 New Hires/Total Employment 24.2 19.0 19.0 By Industry: High: Building Trade 27.5 27.2 Cultural 29.4 29.0 Low: Finance 16.2 14.7 Science 14.7 15.0 Administration 11.4 16.3 Source: RS 1986, Table 21 (115), p. 78. RS 1981, Table 19 (113), p. 78. 118. Second, the available data shows no increase in the turnover rate in the 1980s when labor shortages grew immensely. If the official data are to be believed, the enormous reported vacancies in the 1980s were not accompanied by higher than innrmal turnover. 119. Th4"d, more detailed data on the cause of turnover provided by the Ministry of Labor show the vast bulk of the actual turnover was for noneconomic personal reasons. Of 2.3 million job changes in 1985, 1.5 million were due to maternity leave, retirement, military service, and the like, rather than to quits for job reasons. An additional 0.1 million workers were mobile because of dismissal. Of the remaining 0.8 million job changes (the totals do not add up exactly due to rounding) only 0.3 were made without the legally required notice to employers, although it is likely that some employers backdate the notices,.so as not to force a worker with a better job lined up to remain at the workplace, disgruntled and aching to leave. 120. If, as argueA, turnover was far from excessive in the 1980s, the real question about the Polish labor market is not why turnover is so high but rather why it is so low in a shortage situation. One possible explanation is See Morris Bernstein, "Overview: Assessing Economic Performance" in Joint Economic Committee, Congress of the US. East European Economies: Slow Growth in the 1980s, Washington, D.C., October 28, 1985. - 44 - that the incentive for changing jobs is small due to relatively modest wage differentiation, save for certain favored sectors. Another likely factor is the housing shortage (see Annex VI) which can be expected to limit mobility. Labor Employment and Shortages 121. Turning from supply to employment, Table 9 shows the number of workers by sector and type of employment from 1970-1986. It documents three aspects of the composition of jobs in Poland: (a) the continued importance of agriculture; (b) the slow growth of employment in industry, indicating that in Poland as elsewhere the period of rapid industrialization of the work force has ended; and (c) the differential pattern of growth of the private part of the economy between industry and agriculture, with the private share rising in industry but falling in agriculture. Table 9: NUMBERS EMPLOYED ('000) AND COMPOSITION OF EMPLOYMENT (percent) 1960 1970 1980 1985 A. Total Numbers Total 12,401 15,175 17,325 17,137 Agriculture 5,367 5,210 5,143 4,958 Industry 3,158 4,453 5,245 5,000 Socialized Economy 7,194 10,325 12,718 12,259 B. Percentages Of Total: Industry 25 29 30 29 Agriculture 43 34 30 29 Socialized Econ. 58 68 73 72 Of Industry: Private 5 5 5 10 Of Agriculture: Private 91 85 75 80 Source: RS 1986, Table 2 (96), p. 61. 122. The proposition of the labor force employed in the provision of services is at the low end of the range of 30-50 percent typical of countries of similar income level, and well below the 50-60 rercent typical of higher- income industrial market economies. There is a widespread sense of the inadequacy of repair and other services, reflected in long waiting times for many services, including those in the Polityka COL consumption basket-shoe repairs, laundry and tailoring. This prompted a Council of Ministers' resolutiun early in 1987 on promoting the development of services over the next few years. An important part of services to households are provided by - 45 - private establishments, but the majority of some activities, especially housepainting, electrical services and plumbing, are provided in the second economy. 123. As in other East European countries and in the product market, shortages are recognized to characterize the Polish labor market and to severely constrain output. The usual difficulties arise in the measurement of labor shortage and its trend; relevant information is contained in Table 10. Table 10: ALTERNATIVE MEASURES AND COMPOSTITION OF LABOR SHORTAGES, 1970-1985 1970 1980 1981 1982 1983 1984 1985 1986 Vacancies at year end (thousands) 40 98 119 248 234 262 266 288 Registered Job Seekers at year end (thousands) 79 10 26 9 5 5 4 5 Vacancies/Job seekers 0.5 9.8 4.6 27.6 46.8 52.4 66.5 57.6 Vacancies at year end in Socialized Sector/Employment .39 .77 .94 2.0 1.9 2.1 2.2 2.3 Total annual Job Placements&' (thousands) 1,555 1,706 1,449 1,726 1,803 1,909 1,990 1,969 Composition (percentages) Vacancies Female 22 30 33 26 26 25 24 23 Blue Collar 88 90 87 88 88 86 85 85 Placements Female 35 35 33 35 35 34 34 33 Job Seekers Female 90 78 46 56 60 60 75 80 Blue Collar 82 50 58 67 60 50 50 60 Notes: A/ Includes new labor force entrants. Sources: RS 1986, Table 23 (117) p. 79, Table 2 (96) p. 61, and MRS 1987, Table 11 (55) p. 57. - 46 - Line 1 records the year-end number of job openings (vacancies) reported by firm to the official employment exchanges, which are the major intermediaries in the labor market. Under current law, every establishment must report vacancies to the exchange. Line 2 presents figures on the other side of the job market-the number of job seekers at the end of the year. Line 3 shows the ratio of year-end vacancies to job seekers, and line 4 records the vacancy rate (a openings/employment in the socialized sector) at the year end. These are large, at least by standards of Western countries;.' they may be inadequate as an absolute measure of shortage but are still likely to provide a reasonable index of shortages over time, with "higher values ... show(ing) more intensive shortage, while lower values show less intensive shortage", as required of a valid index..' 124. Line 5 of the table turns from shortages to the actual number of placements made during each year through the employment exchanges. The large number shows that the exchanges are extensively used, suggesting that the data provide a comprehensive picture of the labor market. 125. The corposition of vacancies and placements by sex and type (blue/white coliar) and its variation over time is interesting (Table 10). In 1970 nine times more women were seeking jobs than men. This gap narrowed until men outnumbered women in 1981, but has again reversed to a ratio of 3 to 1 in 1985. Consistently two thirds of job offers concern men. In 1970 blue collar workers seeking jobs were more than four times the number of white collar workers; since 1980 the two categories are approximately equal. Over the period 1970-85 white collar vacancies have been between one eighth to one sixth of the total, a slightly higher proportion concerning blue versus white collar workers. 126. In western macroeconomics, much is made of the inverse relation between vacancies and unemployment (the "Beveridge Curve"), which shifted outward in the 1970. and 1980s, which produced higher unemployment per vacancy. Figure 1 graphs the closest analogue for Poland, the relation between openings per employee and job seekers per employee. It shows the standard inverse relation between the vacancies and job seekers without any worsening in the position of the curve over time. 127. Finally, to understand the operation of the Polish labor market it is most important to notice that the rate of job openings rose and the rate of job-seeking fell in the 1980. when output contracted as well as in the 1970s when output expanded. Standard economic analysis would lead one to expect a very different pattern in the 1980s: decreases in vacancies/increases in job seeking with contraction. Five factors have probably contributed to increased demand for labor during the 1980s: (i) labor hoarding by firme in the face of disruption of established allocation patterns due to the crisis and the ensuing uncertainty; (ii) rapid growth of a non-labor-constrained and labor-intensive private sector; (iii) the shorter working week caused by free Saturdays; (iv) attempts to substitute labor for capital in the face of capital goods supply difficulties; and (v) a fall in labor productivity L' See S. Roper, "The economics of job vacancies", LSE Center for Labor Economics Discussion Paper, n. 252. 2' See J. Kornai, Economics of Shortaxe, cited, p.13. 2ISeo Fq2 VPawwmm!w 8.sdd . Cune 195'*1915 aO34 - tam ao'4 ~~~~~~OO2 ~ ~ ~ ~ ~ ~ ~ o LOVRt WeV** Vt vwti ~Is 195t. tn tam fiS oar&y* bocm tolt $We 4940a w obtains swwodabeffa.W faLm bx Ihe d *dtew* nt M ~fiowhen Pobad bea eoxxming b~orn # wodd wr VVuId Bar* -30*~1 - 48 - because of input supply problems and reduced output, resulting in a fall in the output/labor ratio that has tended to be difficult to reverse as output has recovered. Econometric analysis suggests that changes in output have a primary influence on openings (except for the periods of large decline in output) and job-seeking; that job openings affect the labor market but not consumer prices while the growth of output affects consumer prices but not wages; that in spite of goods shortages the household sector is more responsive to real wages than are firms; and that the effect of open price inflation on wages is markedly below the unity found in many analyses for the USA and UK and other OECD countries, probably because of parallel unrecorded repressed inflation. Wages and Wage Structure: General Features 128. Wage setting in socialist economies tends to be characterized by: (i) piece rate pay systems; (ii) sizeable divergencies between take-home pay and cost of labor, despite low personal tax rates; (iii) inequality in access to goods, which creates divergencies between measured pay and real earnings; (iv) relatively modest wage differentials among industries and enterprises, with enterprise scope for independent wage negotiations severely limited and no collective bargaining over wages; (v) national wage setting establishing wage rates below those that wonld prevail in a free market (of course for a similar full employment policy pursued by the government); and (vi) moderate wage increases, generally exceeding price increases so that real wages (or shorta*es of goods) tend to rise gradually. 129. Until the 1980s the Polish labor market exhibited all of these features. Since then there have been substantial changes, and both workers and their unions and the Polish government have asked for further changes as part of an economic reform. Hence the composition, determination, structure, and rate of change of wages merits considerable attention. Piece Rates 130. In 1985 approximately half (47 percent according to Ministry of Labor figures) of Polish workers in the socialized sector were paid according to a formula including some kind of piece ra e; a quarter of workers were paid on a salaried basis. w,hile another quarter were monthly-paid employees. In western economies piece rate systems are relatively uncommon, as most firms find them to be an inefficient way to organize work groups, particularly in automated and mechanized settings. 131. One aspect of the piece rate pay system that has achieved considerable attention is the tendency for firms to set lax norms as one way to attract or keep labor in a shortage market-what in the West is known as demoralization of the piece system. Prior to recent efforts to reform the wage system workers in Poland were reported to over-fulfill norms by 48-74 percent in different surveys; recent reforms of norms and of wages have lowered over-fulfillment to 14-24 percent."' JPRS 12 September, 1985 reports the figures 74 percent and 14 percent from a Ministry of Labor Study of 105 enterprises; JPRS 21 April 1986 reports 25 percent and 48 percent. - 49 - 132. To deal with the problems of norms the Polish government is considering development of a new national wage evaluation scheme, with enterprises evaluating their jobs according to a point system set by the Ministry of Labor. Under this scheme, one p6rcent of the national wages fund is supposed to be used to provide enterprises which pay wages below job evaluation scores, with money to increase wages to the level of comparable workers elsewhere. Full Wages and Labor Costs 133. In addition to payment by piece many Polish industries contain many payments supplementary to wages that make the base rate a remarkably small component of overall pay. In 1986 in coal mining, the highest paid industry (using a broad, "one-digit" classification), base pay constituted a bare quarter of total monthly remuneration, with export and other bonuses contributing as much in pay as an average worker's income in some other sectors (see Table 11). The significance of supplementary payments in compensation is one of the widely criticized aspects of the Polish wage system and an obvious area for significant reform. Table 11: PERCENTAGE DISTRIBUTION OF PAY IN MINING, 1986 Total Pay 100.00 Basic Wage 28.10 Piece-work surplus 1.96 Bonuses 9.66 Overtime Pay 0.10 Remuneration for Work on Sundays and Holidays 4.83 End-of-year bonus (13th pay) 5.01 Supplementary end-of-year bonus (14th pay, payable out of profits) 3.02 Miners Day award 5.01 Other 7.62 Paid leave 5.83 Sick leave 3.10 Miners Charter pay (seniority benefit) 7.24 Productivity fund pay 5.61 Concessions in kind 2.51 Other (e.g. export bonus) 10.40 Source: Polish Ministry of Labor. 134. In Poland, as elsewhere, the wages paid workers and the cost of labor diverge considerably due to payroll taxes and contributions to benefit plans. Table 12 presents a stylized picture of this divergence in 1986, showing that the cost of labor in Poland exceeded base wages by roughly 2:1. - 50 - Table 12: STYLIZED MONTHLY WAGE COST FOR POLISH WORKFORCE (Zlotys) Basic Wage 20,000 Social Security and Payroll Tax 12,600 Social Fund 2,700 Housing Fund 1,350 Share of Profit (6-7 percent) 1.500 Total 38,150 Source: Interviews. 135. Neither Table fully reflects total earnings in Poland because they fail to allow for differential access to goods associated with jobs. For example, an employee whose job provides him with a certificate to purchase a car gets a one-time "bonus" with a value of about two or three times average annual pay. The existence of shortages of coumodities ties the labor and product markets together in ways that make wages only a partial indicator of rewards to labor and understate inequalities asmong workers. Goods shortages adversely affect labor productivity because of wasted time in queueing and searching for goods, but it remains to be proven that labor supply is unresponsive to money payments; money can still command goods at a price higher than the official price in secondary markets and in the private sector. Structure of Wages bE Industry 136. Despite the fact that wages do not measure full returns to work, it is still useful to analyze the structure of pay across sectors of the economy, to compare it to the structure in Western countries and to consider how differentials have changed over time. Appendix 5 presents ILO data on industry pay for the broad economic sectors and for manufacturing. Figure 3 compares the dispersion of wages (measured by the coefficient of variation) in Poland with dispersion in various developed market economies. Taking the broad sectors first, the data reveal a level of wage dispersion across sectors that is higher in Poland than in Western countries (see panels A and B of Figure 3). 137. The reason for this is the exceptional position of mining in the wage structure. As a result of government wage policies, mining has enjoyed an extraordinarily high and rising advantage over other industries, with an advantage over manufacturing of the order of 2 to 1 in the mid 1980s. By contrast, ratios of mining to manufacturing pay for market economies are: US, 1.27; Sweden, 1.14; Norway, 1.09; Portugal, 1.22; UK, 1.07; Netherlands, 1.24. The pay advantage enjoyed by mining explains the different reports of labor shortages received by members of the World Bank team from various parts of Poland. In areas without mining, enterprises did not in general regard labor as a key constraint on output; in coal mining areas, firms did express such concerns. - 51 - Fizure 3: COMFFICIENT OF WAGE VARIATION A. OR aAM UnDUsI _ . S. AM IDWUS8 ltCXCIPT FOR AOIISCULTUIU A& 4'I a. .0 _o"IL W WOU C. FOR MANUPCTRIN XNDU8T1M a.. a . eL AD 1 W UKu . AL WIUYISECP O GIUTR - 52 - 138. The picture of wage dispersion within manufacturing is quit. different. Here one finds the expected lower inequality of wages in a socialized economy than in capitalist economies, though the Polish manufacturing wage structure is not the lowest in the groups under comparison (see panel C of Figure 3). Sweden, which has centralized wage-setting and free collective bargaining, has the lowest dispersion of wages across manufacturing industries. 139. The rank order correlation of pay by industries provides another useful indicator of the divergences/similarities between the Polish wage structure and those in market economies. The correlations for the ranking of Polish industries in Table 14 with Sweden, Portugal, the UK and the US are 0.62, 0.57, 0.52, 0.70 respectively. While the ranking of industries in Poland thus approximate the rankings in market economies, the rank correlations between Poland and the other economies are somewhat smaller than those among those economies (for example, the rank correlation between Poland and the US is 0.70, while the correlation between the US and other countries are: 0.91 (Sweden); 0.78 (Portugal); 0.91 (UK). By this measure it appears that Polish centralized wage determination has produced a moderately different order of industries from that in a competitive market. Examining particular industries, one sector which deviates markedly in its rank in pay from its position in the other countries is the paper and pulp industry, an area in which Poland has had significant goods shortages. Wage and Price Inflation: PFAZ and PPWW 140. Turning to rates of change of pay over time, Figure 4 records indices of (logarithmic) changes in nominal pay, consumer prices, and real pay in Poland from 1950 to 1985. Until the 1980s money wages and prices rose moderately, with wages rising slightly faster so that living standards (and repressed inflation) rose. In the 19809 the situation changed dramatically: wages and prices grew at much more rapid rates, in part reflecting the transformation of earlier repressed inflation into open inflation, but also indicative of an economy out of control. Real earnings and living standards deteriorated dramatically. Given that the price index does not allow for deteriorated quality of goods nor for shortages in shops, the decline in the period is undoubtedly larger than indicated in the figures for money wages and prices. 141. To deal with the problem of wage inflation the central authorities in Poland placed first a levy, then a straight tax on above norm wage payments (the full history and details of this tax are given in Appendix 1). The wage bill of enterprises in 1980-85 was subject to payments made out of after-tax profits into a "state fund for professional activization" (i.e., training fund, or PFAZ), progressively graded as a percentage of wage increases over and above a permissible tax-free rate of increase. This was effectively a tax, though it appeared in the state budget not as tax revenue but as an increase in the gross balance of the PFAZ fund, out of which very little training expenditure was being financed. In 1984 PFAZ raised an amount equivalent to 7 percent of tax revenue on the socialized sector. From January 1, 1986 the PFAZ fund has been fed out of a state budgetary allocation and enterprise payments to PFAZ have been abolished and replaced by a "tax on above-norm payments of remuneration" (PPWW) intended to deter large wage increases, and not to raise revenue. Both PFAZ and PPWW establish a link between wages and productivity, inducing enterprises to compress zhe share of wages in value added. Wage increases above a fraction of labor productivity percentage increases are subject to PPWW at pre-fixed, progressive rates. - 53 - FIgue 4 Loga*IthmlChanges In Wages and Pem no, 0Q2 - A~~~~~~~~ OLI~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~S -n3 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~ s 0.L2 - -0-312 51 55 60 65 70 75 so 86 Yea's 142. While in principle regulating wage inflation through a tax un rates of increase above some norm is a fruitful idea which has attracted considerable attention in the west as well as in Poland, ' the cur ent Polish scheme has definite drawbacks. First, one should not make wage increases depend excessively on enterprise level performance, which is often out of the hands of workers and managers. Incomes policy should rather seek to make wages grow with productivity (output) in the economy as a whole rather than in a particular firm. It is better that profitable enterprises expand at the expense of unprofitable ones, rather than distribute the profits in the form of wage increases. If performance-related bonuses are introduced, it would be better to leave them at the discretion of enterprises but subject them to a steeply progressive tax on personal incomes. Second, the system appears to be open to all sorts of bargaining and political maneuvering to gain exemptions through the soft budget constraint. Firms with "pull" or "need" are able to get exemptions, as are those in sectors that happen to be favored at a particular time by planners. In 1985 it was estimated that over half of all enterprises, employing nearly two-thirds of workers in the socialized sector benefited from concessions on the PFAZ tax. This suggests that a tax on wage fund increa,jes has not been a viable substitute for profit maximization by-firms facing a hard budget constraint. By taxing wage increases, the state is focussing on a symptom rather than on the "disease" of soft budget constraints itself. lo' See R. Layard, R. Jackman and C. Pissarides, "Policies for reducing the natural rate of unemployment", LSE Center for Labor Economics Discussion Paper 199. - 54 - 143. Additional difficulties are associated with the particular formulations of tax regulations; namely: (i) the application of five different tax formulas at the discretion of the Ministry of Labor on the opinion of the relevant branch Ministry, alternatively linking the tax-free wage fund to the growth of net sales recalculated at "comparable" prices, the planned tax-free growth of earnings fixed in the yearly central plan, the share of earnings in the value of sales (reducing such share at a fixed rate over time), the growth of profits, the increase in the difference between earnings of individual workers over and above tax thresholds from one year to the next; the elasticity of the tax-free wage fund with respect to these alternative variables is less than unity; (ii) the cumbersome nature of some of the calculations involved (especially the first one requiring the recalculation of all sales of the enterprise), and the large compounding effects which these formulas would have over time if they were to be left unchanged; (iii) the diversification of relevant parameters linking the tax-free wage fund to some of the variables by sector of operation of enterprises. Obviously the draftsman has tried to grade the tax burden according to the expected productivity increase in various sectors, but has not succeeded in producing a uniform, clear cut and effective tax. 144. In 1987 a ceiling of 12 percent was imposed on all wage increases (although it is too early to assess how effective this has been). The number of PPWW formulae is to be reduced in future. Wage System Reform 145. Attempts at reforming the wage system, (beside the enterprise discretion to determine its own rates of pay subject to taxes on excessive wage increases), include plant level agreements, national job evaluation and subcontracting experiments. 146. The effects of plant level agreements have been primarily (i) some consolidation into basic pay of severel eomponents of earnings related to individual conditions of workers instead of performance, making additional earnings depend on individual or collective performance; and (ii) a considerably wider spread of earnings differentials in the same enterprise and across enterprises. They have also been strongly criticized as leading to wage rises, rather than reallocation and improved productivity. 147. Job evaluation procedures attach points to :ach specific aspect of work on each job; the range of pay must be no less than 1:1.6 for blue collar and 1:2.2 for white collar workers. In the IGN industrial enterprise sample, these ranges in 1985 were much wider reflecting some autonomy on the part of enterprises (the most frequent in 1985 was 1:4 for blue collar and 1:4.44 for white collar workers). Other aspects nf pay policy instead are centralized: function-related payments, seniority scales, and overtime payments are now related to the minimum national wage. Tlhe director's salary, fixed by the enterprise's "founders", is not related to enterprise performance and is often too low in relation to the earnings of other employees. 148. In 1984 as a limited experiment a number of industrial enterprises introduced subcontracting of production tasks to independent groups of enterprise workers, similar to the Hungarian practice. In October 1985 the - 55 - Council of Ministers issued a detailed regulation; the experiment is said to be successful and is now being extended.- 149. On balance, wage structure and the persistence of shortages suggest that the reform has not been successful in creating a well-functioning labor market. There has been a tendency to attempt too many changes of regulations, often contradictory (as witnessed by the simultaneous moves towards plant-level and nation-wide principles of wage-fixing), with enterprises trying to obtain exemptions and special allowances. There has been inertia in both branch Ministries and plant managers to operate "as usual", while Trades Unions necessarily have an ambivalent attitude to economic reform, at the same time supporting reform and protecting their members from its adverse effects. Ultimately the basic premise of wage policy, i.e., that of labor shortage, may have to be reconsidered: labor shortage is a symptom of the persistence of systemic problems rather than a problem to be tackled directly in itself. D. Factor Pries and MobLit. Capital Reform and Remonetization 150. In the traditional CPE, capital investment is centrally decided and allocated in real terms. Finance is provided automatically from the state budget free of charge to investing firms, which are subject to straight line amortization charges on the historical cost of their investments and transfer their surpluses back to the state budget. Credit is mostly short-term and is also automatically available to enterprises to finance working capital needed to fulfill their planned tasks; it is granted by the Central Bank at an almost symbolic interest charge designed to cover aduilsatrati-vc costs; trade crd:t is forbidden. Enterprises must hold their accounts with the Central Bank, which has a credit monopoly and monitors plan fulfilment by checking whether the enterprise financial flows correspond to plans. The cost of capital goods, or of credit, is immaterial to enterprises whose prices are fixed on a cost-basis and whose profits and losses are imputed to the state budget. Money is primarily an accounting instrument of aggregation and control. In this system, project selection is made on the basis of cost-effectiveness only, with an obligation to avoid more capital-intensive projects unless their additional capital expenditure is recouped within a given number of years; the shadow capital charge implicit in this procedure, however, is not actually paid and often is neglected. The liquid resources left at the disposal of enterprises are kept in special purpose funds and earn a low return, if any; there is therefore an incentive for enterprises, within the scope of their discretion, to hoard invet:tories of materials and products. Once acquired, the real resources of each enterprise are virtually immobile; rare transfers depend on administrative decisions; there is no mechanism for the valuation of the current opportunity cost of existing capital and for its mobility towards more productive uses. The banking system cannot intermediate between enterprises and households. The population can accumulate a small range of liquid assets; interest rates are low (often negative in real terms) to avoid the rise of rentiers; often liquid assets are accumulated involuntarily I' Reforma Gospodarcza, 30 January 1986. - 56 - because of goods shortages, or state bond purchases are made obligatory as a form of taxation; thus households, with virtually no access to productive assets, prefer to invest in housing, durables and higher stocks of real goods. Foreign capital, when tapped, is borrowed centrally, distributed to licensed importers and serviced out of central purchases of foreign exchange from exporters, with domestic producers being insulated from both interest costs and foreign exchange risk. 151. In any planned economy that has ever attempted reform, sooner or later a process of remonetization has taken place. Ideally, in a reformed model, financial flows are fully connected; commercial banking is separated from central banking and exercised by competing banks; investment grants are replaced by bank credits, inter-enterprise loans and self-finance. Credit is provided not automatically but at the discretion of banks on a contractual basis, at an interest rate which is supposed to balance demand with the money supply; enterprises which are not deemed creditworthy can be forced into liquidation and bankruptcy. Investment decisions, except for infrastructure, are taken by enterprises on the basis of prospective profitability relative to the actual or opportunity cost of finance. When foreign capital is borrowed the foreign exchange risk is fully reflected in the rate at which it is resold for domestic currency or in the interest rate at which it is relent. There is a wide range of financial instruments available to households and enterprises; the way is paved for active monetary policy, using standard instruments such as reserve and liquidity ratios, the scale and rates of rediscounting, open market operations, etcetera. Real resources are made more mobile by greater retrading opportunities between independent enterprises, both directly and through secondary trading of the equity stakes they are allowed to hold in each nther. Tideo1nieal constraints are bound to limit households' ownership of equities, the size of holdings of securities and the style of trading them, but recent experiments in countries such as Hungary and China have been breaking new ground. 152. Until the latest wave of reform, the Polish system corresponded fairly closely to the traditional model, with the following exceptions: some decentralized investment by enterprises was permitted out of retained profits and bank loans; interest rates were more than symbolic, though sti1l mostly negative in real terms; instead of mere cost-effectiveness checks, discounted cash flow methods were applied, at least in theory; households who had obtained foreign exchange officially could deposit it at attractive interest rates. In practice, however, the Polish system worked along very traditional lines. The reform project also conformed to standard trends, though it did not contain any provisions for the possible development of a financial market or for enhanced mobility of physical assets. Implementation has fallen short of the reform proposal, however, more here than in any other area. There have been only a few innovations, though they are potentially significant. Contractual relations between enterprises and banks now depend in principle on creditworthiness, but this provision has been much weakened by the continued credit monopoly of the Central Bank. Provisions for liquidation and bankruptcy of unprofitable enterprises have been wade, but, in practice, they are little applied. Enterprises have discretion ill using their cash flows for wages and other current costs, reinvestment or redistribution, although some uses are still subject to penalties and disincentives. - 57 - The Polish Banking System 153. The overhaul and development of the banking system was a major feature of the reform project, which envisaged "new, independent credit institutions" competing for funds and for the extension of commercial credit, with enterprises choosing freely among them and entertaining contractual relations with any one bank in the context of a banking system which was to be far more autonomous than the old system. The plurality of banking institutions would give a new major role to the Central Bank, ultimately responsible for the maintenance of internal and external equilibrium in cooperation with the Ministry of Finance, under the coordination of a Council of Banks. 154. The 1982 Banking Law made banks autonomous organizations, whose fundamental tasks are to collect monetary resources, develop credit activities and organize financial settlements, including foreign payment operations. Banks are autonomous regarding not only other branches of the government but also the Central Bank. To promote autonomy of the banking system the President of the National Bank, who had previously been a Deputy Minister of Finance, is now appointed by Parliament. The possibility of new banks taking the form of joint-stock companies with local or mixed local and foreign capital is specifically allowed. 155. The plurality of commercial banking institutions has not been implemented. The banking system consists of the Central Bank (NBP); the Bank of Food Economy (BGZ, which is the financial center for 1650 cooperative banks that operate in the countryside, lending mostly to the agricultural sector); the Bank Handlowvy (handling and financing foreign trade transactions); Bank PXO (Bank Polska Kasa Opieki, specializing in foreign exehange Rerviees to the population and some foreign trade transactions); and from April 1987, the new Bank for Export Development (BRE) for the socialized sector. 156. The banks coordinate their operations through the Council of Banks, chaired by the President of NBP and formed by representatives from other banks, the Ministry of Finance and the Planning Commission. The Council of Banks determines, within the limitations established by the President of the Central Bank, maximum interest rates and commissions on both deposits and credits, and coordinates wage policy in the banks. 157. Despite the legal autonomy of banks from NBP, NBP dominates the financial system. The only other sizable credit institution is BGZ, which gets 61 percent of its resources from NBP. NBP accounts for 75 percent of non-Government and 100 percent of Government deposits. There is no competition: banks are specialized in specific activities and there are very few and unimportant overlaps. Firms can only open one basic account through which they have to carry out their normal transactions, and can get credit only from the bank where they have their basic account. A firm can open other accounts in other banks but only for restricted use, in special circumstances and, in most cases, with the permission of either NBP or the bank managing the basic account. The banking system is not subject to competition from other financial institutions. - 58 - Creditwortbiness 158. The truly revolutionary change in the reform project was the replacement of automatic credit-granting to enterprises for the fulfillment of planned tasks, with discretionary contractual relations based on the Bank's assessment of enterprises' "creditworthiness". This new principle was enshrined in the Banking Law of February 1982, in no uncertain terms: "Art. 26.1: A bank may grant a credit to a socialized economy unit . . . 26.2: Entering credit agreements the bank takes into account the creditworthiness of the borrower. 26.3: A credit to a state enterprise suffering losses or not giving adequate guarantee of repayment may be granted by a bank only in the framework of a readiustment procedure . . ." (emphasis added). The notion that credits may or may not be granted according to the Bank's discretionary assessment of creditworthiness, on terms fixed in a contract, and subject to provisions for the financial recovery of loss-making enterprises, is a true legislative innovation. It is necessary to guarantee the principle of "self-financing" of enterprises (which together with self- management and enterprise autonomy was the keynote of the reform), meaning the avoidance of losses requiring subsidies and the ability to finance investment partly out of reinvestment of profits, and partly from comercial credit, instead of relying on state grants. 159. A further development of the banking system took place on January 1, 1984, when firms were endowed with the credit required for their current operations (either on a year-to-year basis or as longer-term loans repayable in 12 years); development credit especially for financing inventories (up to five years' credit repayable out of firms' development funds); discounting facilities on a short-term basis; investment credits for centrally planned projects, (for up to 15 years); and emergency assistance in case Us 6hort tGer cash flow difficulties of otherwise sound enterprises. The reforms have not yet had much impact on the structure of credit. The reform principles do not apply to centrally planned investments, cooperative residential construction and the financing needs of government (which jointly claim about one third of domestic credit), or to investment projects begun before 1982. In addition, working capital credits--accounting for more than 40 percent of domestic credit--existed before the reform, and have been extended on a continuing basis with little regard to the profitability criteria. 160. "Creditworthiness" might be defined, in principle, with reference to current and expected cash flow or to the underlying economic position of enterprises, i.e., the net worth of their current assets. In Polish regulations "creditworthiness" is not defined, but Central Bank papers define it as if enterprises had to satisfy both criteria: "Enterprises are considered as possessing credit capacity when their current and prospective effectiveness as well as financial standing assure their soundness, ensuring reimbursement of credit and interest as they become due," (NBP Information Bulletin 1985, p. 20, footnote). In practice, the ratio of profits to prime costs is used most, of course taking into account the diverse minimum requirements in different sectors according to the capital-intensity of their output. 161. The principle of creditworthiness is very much strengthened by the new provisions for the liquidation and bankruptcy of enterprises which do not make enough profits to service their loans (see paras. 43-44). The intentions of the reform in seeking to establish a competitive banking system should - 59 - increase the degree of competition in the economy in general, and the development of institutions whose sole concern is financial profit could do much to force financially unprofitable firms into liquidation or increased efficiency. This may be a somewhat long-run objective, however; the first and more urgent step is to separate NBP's central banking and commercial banking functions. At present the responsibilities of the Bank include the implementation of the financial aspects of the Plan, and in the frequent cases of conflict between the profitability of ventures and their contribution to plan implementation, the Bank is bound to be subject to intolerable pressure from branch Ministries and local bodies. It would be much easier to resist this pressure if the NBP had only central banking functions, while commercial banking was subject to general rules of financial viability and to general constraints (reserve and deposit ratios, etc.) Investment finance 162. In 1985 bank credits accounted for 16 percent of finance for enterprise investments (roughly half of total investments); other sources of investment finance were enterprises' development funds (62 percent) and other own funds such as the social and housing funds. Low reliance on investment credit reflects the excessive share of central investments and high enterprise liquidity. Official procedures for the assessment of investment projects, which remain the responsibility of the Planning Commission-have been based since 1974 on standard versions of discounted cash flow methods, which compare well with international practice. Unfortunately these have frequently been neglected, especially in recent years. These procedures, currently under revision, embody a target rate of return of 8 percent, which is unacceptably low in money terms but a great deal higher in real terms than most investments have aCUirnt *" + u P14sh gituatioi. 163. The system introduced in 1982 divided socialized sector investment into the following three principal categories: (a) centrally planned investments in very large physical infrastructure projects or in productive sectors with a major impact on the structure of the economy and in certain social sector projects (which on approval automatically receive foreign exchange, credit and fiscal allocations); (b) local authority (voivodship) investments, almost entirely by budgetary units, mainly in localized physical and social infrastructure (which have received about 70 percent of their financing from the state budget but generally do not require much foreign exchange)'; and (c) enterprise investments which were to be decentralized and were to account for the largest part of investment, especially in productive sectors. .L' The plan for 1986-90 aims to reduce the extent of central funding for such investment and to subject them to greater central control by requiring all such investments in excess of zloty 500 million to be subjected to central approval. - 60 - 164. Enterprise investments have in recent years accounted for about one-half of total investment, and almost two-thirds of socialized sector investment. The 1986-90 plan proposes roughly to maintain these shares. This, though, would be a misleading indicator of the degree of effective decentralization of investment decisions, and, even more so, of the extent to which they are made solely on the basis of relative profitability. Central influence over enterprise investment decisions is expressed partly through fiscal incentives, partly through credit policy, and partly through a variety of direct and indirect measures. Income tax rebates, preferential rates of tax on depreciation allowances and wage payments and direct budgetary allocations constitute the principal fiscal influences on the allocation of investment. Enterprise investments are also subject to scrutiny by the banks. The main criteria for allocating credit to a proposed project at present are: implementation period of less than two years, repayment period of less than five years and limitation of credit to initially no more than 80 percent of the costs of an investment project (this was previously 30 percent, and has just been raised to 90 percent for certain types of investment). 165. There are other sources of central influence over enterprise investment. Probably the most important is the central allocation of imports and some domesFically produced inputs. In addition, investments are also influenced ind_rectly by the system of Government contracts for the supply of certain items, and by a host of other central interventions such as those on prices. Financial instruments 166. The NBP is the largest deposit-taking institution in the country, -^ -J for a!mn-e th-vee rwu-arters of all non-government deposits. It has agencies in all 49 voivodships, and 300 branches; it also operates a network of 300 savings banks, obtained in the 1970s through a merger that gave NBP the monopoly of savings accounts in zlotys. In addition to savings and term deposits, NBP issues savings instruments targeted for the purchase of houses and cars. Housing deposits are indexed to the average cost of construction if the saver uses the funds to buy a house or a flat; if the saver is not able to buy, the indexation is removed and these deposits pay a nominal interest of 6 percent. The funds for the indexation are called the "guarantee premium" and are provided by the Ministry of Finance; under a system that is being phased out and will disappear in 1987, indexation was complete; unbar the new system deposits pay 15 percent and the Ministry of Finance provides the guarantee premium only to cover rises in construction costs in excess of 15 percent. 167. The NBP issues two kinds of bonds: (i) deposit bonds, which pay 15 percent compounded interest rates at maturity; and (ii) rental bonds, which pay the same interest rate but yearly. Holders of rental bonds can choose not to collect their interest yearly, in which case NBP compounds interest payments, making the rental bond e4uivalent to the deposit one. Both deposits and rental bonds are negotiable and have 5-year maturities. Holders can redeem their deposit bonds after 3 years without interest penalties; before then they receive only 6 percent. Rental bonds pay 6 percent if redeemed at any time before maturity. It is reported that an incipient secondary market for bonds recently started to develop on NBP's premises, but that it has been discouraged by NBP, lest it reduce demand for primary issues. The increased liquidity provided by a secondary market might, however, have the opposite effect. - 61 - .168. The weighted averags interest rates paid on deposits and charged on credit are given in Table 13. Table 13: INTEREST RATES 1981 1982 1983 1984 1985 1986 Nominal Rates Weighted Average Deposit Rates: Households and Non-Socialized Sector 5.2 8.1 8.1 8.3 7.6 8.2 Socialized Sector 1.8 2.7 2.4 2.8 2.1 2.4 Overall Weighted Average 3.4 5.3 5.2 5.4 5.0 5.5 Weighted Average Credit Rates: Households and Non-Socialized Sector 3.2 3.0 3.1 3.5 4.1 4.5 Socialized Sector 5.0 5.4 6.0 5.9 6.4 6.4 Overall Weighted Average 4.9 5.3 5.8 5.8 6.2 6.3 Real Rates&' Weighted Average Deposit Rates: Households and Non-Socialized Sector -13.2 -46.2 -11.5 -5.8 -6.5 -8.1 Socialized Sector -16.0 -48.9 -16 1 -10.6 -11.3 -13.1 Overall,Weighted Average -14.7 -47.6 -13.8 -8.3 -8.8 -10.4 Weighted Average Credit Rates. Households and Non-Socialized Sector -14.9 -48.7 -15.6 -10.0 -9.6 -11.3 Socialized Sector -13.4 -47.5 -13.2 -7.9 -7.6 -9.7 Overall Weighted Average -13.4 -47.6 -13.3 -8.0 -7.7 -9.8 Notes: a/ Calculated as 1 + rr.1 - 1 + r.ominal 1 + Pp Source: National Bank of PolarA- For households and the non-socialized sector, the lower rate charged on credit than received on deposits reflects the high weight of subsidized housing credits at 3 percent; other rates are 12 percent for furniture and appliances (9 percent for couples where the wife is younger than 35), and 18 percent on cash advances. Table 14 also gives real interest rates; in 1982 - 62 - following the drastic price increase interest rates wcre automatically raised, and savings deposits rose by 20 percent; nevertheless real irterest rates have been negative throughout the 1980s. The interest rate has not been adjusted to reflect the high though falling rates of inflation, and the basic rate of 12 percent is still negative in real terms (inflation rates having fallen from over 100 percent in 1982 to 15 percent in 1985, rising slightly to 18 percent in 1986). 169. Persistently negative real interest rates, usually largely so, must be an important factor encouraging the demand for credit and supports the argument that there is some involuntary holding of liquid assets by households. It is true that investment depends more on the relationship between the rate of return and the interest rate (whether nominal or real, as long as both are expressed in the same units) than on the negative or positive level of the real rate. However, persistently negative real interest rates are not conducive to a return to "normal" conditions, i.e., an economy capable of producing a surplus and not investing so much that at the margin the sacrifice of current consumption ceases to be rewarded. 170. Appendix 6 presents the consolidated balance sheet of the banking system, 1980-86; i.e., it shows the level and composition of the liabilities (= banking assets) and assets (= banking liabilities) of the socialized sector, households (as well as financial institutions, central and local government). 171. The socialized sector holds less than 10 percent of total cash but nevertheless is very liquid by any standard: almost 90 percent of its assets are available on demand. There has a been a tendency towards an increase in socialized sector liquidity. Credit directly granted by one enterprise to another, either as a result of payment delays or as a result of an agreement, does not appear in the table; however although enterprises have been able to issue bonds to each other, they do not appear to have availed themselves of this opportunity. The non-socialized sector holds over 90 percent of the cash in circulation, corresponding to about a third of its monetary assets. These include also time and saving deposits, but these less liquid holdings are no more than three times the rate of yearly savings and therefore could be run down fairly fast if need be; thus the overall position of households can be regarded as liquid. There can be no doubt that there is a wide gap in the range of longer term, less liquid and riskier assets. If these were made available they could absorb excess liquid resources in the hands of households, and speed up the current slow recovery in the expenditure velocity of money from the low rate to which it had fallen in the 1970s until the considerable price rises of 1981 and 1982 (see Table 14). Foreign exchange deposits by households 172. One of the peculiarities of the Polish system, visible from Table 14, is the ability of enterprises and households to hold foreign exchange deposits. Bank PKO, a joint-stock bank owned by the Ministry of Finance (97 percent) and NBP (3 percent), specializes in mobilising individuals' domestically held foreign exchange resources; it does not have a monopoly, but the share of Bank Handlowy and the NBP in this kind of transaction is much smaller. Bank PKO, established in 1929, began in 1948 to facilitate transfers from Poles living abroad, and in 1970 started to accept dollar-denominated - 63 - deposits from local residents. Now it has 2.5 million accounts denominated in foreign exchange, about 80 percent in US dollars. It also receives zloty-denominated deposits from 700 foreign companies operating in Poland, which are obliged to sell a substantial share of their hard currency earnings to Bank PK0 at the official rate (see para. 52). Bank Handlowy holds 13,000 individuals' foreign exchange accounts, and NBP holds 0.9 million; together these account for less than 30 percent of total foreign exchange deposits in individuals' accounts. Table 14: VELOCITY OF MONETARY AND FINANCIAL ASSETS AND FINANCIAL DEEPENING 1981 1982 1983 1984 1985 Expenditure-Velocity of Money: Money 3.2 4.6 4.5 4.8 4.9 Quasi-Money 3.6 5.2 5.2 5.5 5.6 M2 1.7 2.4 2.4 2.6 2.6 GDP-Velocity of Money: Money 3.1 4.7 4.6 4.9 5.0 Quasi-Money 3.5 5.3 5.3 5.6 5.? M2 1.6 2.5 2.5 2.6 2.7 Ratios to GDP: Foreign Assets 3.9 3.3 3.6 4.4 5.0 Foreign Liabilities 45.2 33.5 34.4 32.8 34.9 Net Foreign Assets 41.2 -30.2 -30.8 -28.4 -29.9 Domestic Credit 101.4 63.3 59.1 53.5 50.3 Socialized Sector 113.6 65.3 58.3 51.7 48.1 Non-Socialized Sector 5.7 3.6 3.8 4.0 4.1 Government -17.9 -5.5 -3.0 -2.1 -1.9 Budget -14.0 -3.1 -0.7 0.7 1.6 Extra-Budget -3.9 -2.5 -2.3 -2.8 -3.5 Other Net Domestic Assets -0.8 7.9 13.0 13.7 17.7 Government Debt 2.9 10.1 16.5 18.0 22.3 Foreign Exchange Loss 0.0 7.4 13.3 15.0 18.6 Other 2.9 2.7 3.1 3.0 3.7 Other -3.6 -2.2 -3.4 -4.3 -4.6 Net Domestic Assete 100.6 71.3 72.1 67.2 67.9 Money 3;.. 22.0 22.1 20.6 20.3 Quasi-Money 27.7 19.1 19.2 18.1 17.7 M2 59.4 41.1 41.3 38.7 38.0 Sources: 1. IMF for fiscal and banking system's accounts. 2. IBRD, "Poland: A First Report," October 10, 1986 for National Accounts. - 64 - 173. Bank PK0 offers two main accounts to its individual Polish clients: (i) "A" accounts, which pay interest, are freely disposable and can be opened only when the origin of the foreign exchange can be shown to be legal (banking transfer abroad or border declaration); (ii) 'N" accounts which pay no interest and do not allow withdrawals for remittance abroad for the first year but are opened with no questions asked. After one year, deposits in "N" accounts can be transferred to "A" accounts. Bank PKO also offers "C" accounts for foreign individuals. It also receives interest-free zloty deposits from Polonia firms. 174. Since 1981 interest rates on "A" accounts have been 5 percent for demand deposits, 9 percent for 1 year, 10 percent for 2 years, and 11 percent for 3 years, irrespective of currency. All banks pay the same interest rates. Depositors are allowed to shift currency as frequently as they please. To discourage cross-currency speculation Bank PK0 charges a 4 percent commission on changing one hard currency into another. 175. Holders of "A" accounts can withdraw their deposits in either foreign currency or in vouchers denominated in foreign exchange that can be used for purchases in PEWEX stores or for other transactions denominated in foreign currency, but are not reconvertible to foreign currency. Their use has been extended for all kinds of domestic transactions because they do not lose their value with local inflation. Depositors readily take vouchers instead of foreign currency because they receive a 10 percent premium on vouchers and also because Bank PK0 allows them to withdraw before maturity from term deposits without an interest penalty only in voucher form. If they decide to withdraw foreign currency the interest on the whole amount uf their deposit (whether withdrawn or not) falls to only 3 percent. This does not apply to withdrawals for travel abroad, which may be redeposited without penalty if the trip is cancelled. In general, foreign currency withdrawn from bank accounts cannot be redeposited in "A" accounts, but only in "N" accounts. Since most withdrawals are made for domestic transactions, depositors do not attach much of a premium to the external liquidity of actual currencies; the discount of PK0 vouchers in the black market is usually no more than 50 zlotys below that of dollar bills (i.e., a maximum discount of about 6 percent). At present vouchers represent about 11 percent of PK0 liabilities. 176. The public's confidence in foreign currency accounts suffered a blow when, with the introduction of Martial Law, all banking accounts (except C accounts held by foreigners) were subject to restrictions and all foreign accounts were almost completely frozen.1' In 1984 liberalization started and in April 1985 the current system was introduced. In order to induce a renewed flow of deposits the government created the "N" accounts, and granted a special amnesty for three months before April under which money without proven legal origin could be deposited in "A" accounts. Depositors queued willingly to take advantage of this provision; in January-March 1985 banks received US$300 million of net deposits of which US$230 million went to Bank PKO (about 20 percent of Bank PY.0's current stock of deposits). ' The exceptions were: (i) interest could be withdrawn without restriction; (ii) non-interest withdrawals could be made in vouchers; (iii) up to US $400 could be withdrawn for trips abroad. - 65 - Foreign exchange options (RODs) and risks 177. Rules on holding foreign currency deposits have been much more restrictive for enterprises than for individuals, and enterprise holdings are much smaller than the US$2 billion held by individuals. Until the recent introduction of M accounts, exporting enterprises in the socialized sector were not allowed to retain directly a share of their actual earnings but had only an entitlement-i.e., an option-to repurchase part of their currency earnings from Bank Handlowy at the official rate. 178. Bank Handlowy, owned by the Ministry of Finance, specializes in foreign trade and handles about 95 percent of the country's foreign trade transactions. BR finances foreign trade enterprises, grants foreign currency credit to producers (only US$33 million in 1985 and US$26 million in 1986), carries the country's external debt (foreign currency losses however being automatically covered by the Government, in 1986 out of the FOZZ fund--para. 192) and has the obligation to honor the ROD entitlements of exporters (see paras. 98-100). 179. A treatment of the changes necessary to activate financial markets in Poland must include a brief mention of foreign exchange risk, especially in view of the large external debt and the burden of servicing it. In the 1970s Bank Handlowy borrowed abroad in foreign exchange, not of its own initiative but simply materlally executing government instructions. Bank Handlowy financed some imports through credit to FTEs, with repayment in zlotys, and made loans in zlotys to enterprises and trade organizations. Bank Handlowy holds most of its assets as zloty deposits with NBP, but most of Poland's external debt is carried as liabilities of Bank Handlowy, denominated in foreign exchange. With the sequence of zloty devaluations, Bank Handlowy made severe losses which have been covered by the government. These transfers were not included in the budget (though they will be in future) but are shown in the banking system accounts as "settlements with the state budget on account of foreign currency valuation" (see Appendix 6). 180. In practice it is immaterial whether the foreign exchange risk is born by the government or by Bank Handlowy, since BH is entirely government-owned. What is important is that whoever bears the foreign exchange risk should be able to make an allowance for it, either in the rate at which foreign currency is sold or in the rate of interest at which it is lent. The establishment of a general fund (FOZZ, see para. 192) into which all enterprises are asked to make payments out of their Development Funds, to cover the needs of debt service and in particular the foreign exchange risk, does not meet this requirement. Moreover, compulsory payments of this kind cannot be singled out and earmarked for this specific purpose any more than any other tax can; it is a matter of indifference how the general pool of government resources, out of which devaluation losses are paid, have actually been assembled, seeing that there is no relation between FOZZ payments and past exposure to foreign exchange risk. It is understood that lowering or eliminating the FOZZ payments and Passing foreign exchange risk to the ultimate direct benefi^iaries of borrowed foreign exchange is presently under discussion. - 66 - PART IV. FISCAL AND MONETARY POLICY A. F . Budzetarv Policy 181. Traditional CPE budgetary policy is balance or modest surplus; Poland had abandoned this canon but is trying to implement it again. In the last seven years the Polish budget (including extrabudgetary funds) has recorded continuous deficits, except for a negligible surplus in 1985, but as a result of real expenditure cuts the deficit of the general government was reduced from 10.7 percent of GDP in 1981 to about 1 percent in 1986 (see Table 15). These fiscal figures ignore foreign exchange losses caused by devaluations in the zloty equivalent of the external debt, which are ultimately borne by the government (see para. 179) and which are not included in the budget but are shown instead in the accounts of NBP as a liability of the government to NBP (these losses are not shown in the government's current account but in "other domestic assets"). The MF justifies this exclusion because, in contrast to other parts of the fiscal deficit, no current government expenditure or use of domestic resources is involved. In the future these losses will be partially covered by the new Debt Servicing Fund (see para. 192). The current comprehensive fiscal deficit is equivalent to 9.1 percent of GDP, down from 19.4 percent in 1982. The reduction of this fiscal deficit, together with restrictive credit policies, resulted in a reduction in the growth rate of the banking system's net domestic assets from 46 percent in 1981 to 28 percent in 1985 (see table 15). 182. The share of national income going through the state budget is usually a good indication of the degree of centralization of a planned economy and has been observed to fall and rise in other socialist countries with the alternate bouts of reform and reversals. In Poland this peaked in the late seventies and fell again between 1980 and 1983. In the last two years it has increased again to about 48 percent of national income (see the 1986 Report of the Consultative Economic Council); this is probably due to the resumption of investment, rather than adverse institutional change, but the trend ought to be monitored. Taxation 183. The Polish taxation system is more articulated and complex than is usually the case in CPEs. There are separate taxation systems for the socialized and the non-socialized sectors (a distinction which is mostly due to the different size and branches of operation of the two types of economic agents). Taxation of the socialized sector yields about 80 percent of state revenue (Table 17); taxes on households (excluding tax on personal incomes of employees, which is collected and paid by firms) and private firms (including Polonia firms) provide less than 5 percent of state revenue. The rest is accounted for by charges for services to the population and to socialized enterprises, including social insurance, as well as penal fines. - 67 - Table 15: SUMMARY OF GOVERNMENT FINANCIAL OPERATIONS 1980-1986 (as percent of GDP) 1980 1981 1982 1983 1984 1985 1986 State Budget Revenue 48.3 41.7 43.4 39.1 39.7 40.7 38.3 Expenditure 49.5 53.1 46.3 41.2 41.9 41.9 38.8 Surplus/Deficit(-) -1.2 -11.5 -2.9 -2.1 -2.2 -1.2 -0.5 Extrabudgetary Funds Revenue 6.9 9.7 9.3 11.7 12.7 13.1 12.3 Expenditure 7.6 8.8 8.9 10.5 10.9 11.9 11.9 Surplus/Deficit(-) -0.7 0.8 0.4 1.2 1.7 1.2 0.4 Total Fiscal Position as percent of GDP Revenues 54.2 49.9 50.2 48.2 49.6 50.7 40.6 Expenditures 56.1 60.5 52.8 49.0 50.1 50.7 50.7 Balance -1.9 -10.6 -2.5 -0.8 -0.5 0.0 -0.1 Change in Debt to NBP n.a. 0.0 16.9 2.9 6.8 9.1 Total Deficit n.a. -10.6 -19.4 -3.7 -7.3 -9.1 Source: Polish authorities - 68 - Table 16: THE BANKING SYSTEM'S NET DOMESTIC ASSETS AND NOMINAL DOMESTIC DEMAND 1980 1981 1982 1983 1984 1985 Annual Rate of Growth of the Banking System's Net Domestic Assets: Domestic Cr3dit n.a. 19.7 21.6 13.1 10.7 17.5 Socialized Sector n.a. 7.3 14.6 9.4 9.5 16.6 Non-Socialized n.a. 5.4 35.8 31.8 26.3 24.0 Government n.a. -43.1 -34.9 -26.9 74 7.7 Budget n.a. -54.8 -64.2 -89.5 -1453.3 61.8 Extra-Budget n.a. 20.0 25.0 9.7 88.9 29.4 Other NDA n.a. -144.3 2348.2 14.2 43.2 66.5 Government Debt n.a. 0.4 1157.2 19.6 47.9 52.3 FX Loss n.a. -100.0 100.0 24.6 50.8 50.0 Other Debt n.a. 0.4 161.5 0.6 34.2 64.8 Other NDA n.a. -69.9 306.1 42.9 63.8 9.8 Total NDA n.a. 24.6 46.6 13.3 16.6 28.4 Annual Rate of Growth of Nominal Domestic Demand (Nominal Absorption): Absorption n.a. 8.7 93.2 25.3 23.6 21.6 Consumption n.a. 20.5 70.8 29.6 22.2 19.1 Government n.a. 12.8 74.6 34.1 31.4 n.a. Private n.a. 21.5 70.3 29.1 21.0 n.a. Investment n.a. -23.2 205.2 11.8 30.2 28.0 Fixed n.a. -17.3 117.4 24.8 27.7 24.1 Stocks ne -114.3 -7569.0 -21.7 40.3 42.3 Unallocated n.a. -89.8 -4053.8 44.2 176.0 12.1 Exports n.a. -9.7 68.8 10.6 27.1 25.4 Total Demand n.a. 4.8 88.7 22.8 24.1 22.2 Supply n.a. 4.8 88.7 22.8 24.1 22.1 GDP n.a. 9.6 101.5 24.8 23.9 20.9 Imports n.a. -10.7 38.1 11.3 25.8 30.2 Sources: 1. IMF for Fiscal and Banking System's Accounts 2. IBRD, "Poland: A First Report," October 10, 1986 for National Accounts - 69 - Table 17: STATE BUDGET REVENUES, 1985 AND 1986 1985 Budget 1986 Zl.b. X total 2 tax Zl.b. X total 2 tax _ _ _ _ _ _venue revenue Total revenue 4224.2 100.0 4765.9 100.0 Tax revenue 3865.0 91.5 100.0 4560.9 95.7 100.0 Soc. Sector taxes 3306.6 78.3 3887.7 81.6 Turnover tax 1285.1 30.4 33.2 1422.6 29.8 31.2 Income (profit) tax 1119.9 26.5 29.0 1350.4 28.3 29.6 Wage tax 390.8 9.3 10.1 444.4 9.3 9.7 Real Estate tax 108.3 2.6 2.8 112.7 2.4 2.5 Capital depreciation 63.1 1.5 1.6 88.4 1.9 1.9 Foreign Trade taxes 297.5 7.0 7.7 322.2 6.8 7.1 PPWW (1986) 120.0 2.5 2.6 Other 41.9 1.0 1.1 27.0 0.6 0.6 Nonsoc. Sector taxes 112.0 2.7 2.9 144.5 3.0 3.2 Household taxes 65.9 1.6 1.7 75.1 1.6 1.6 Social Security 380.5 9.0 9.8 453.6 9.5 9.9 Nontax revenue 359.2 8.5 205.0 4.3 PFAZ (1985) 132.0 3.1 3.4 Fin.inst 93.6 2.2 96.0 2.0 Other 133.6 3.2 109.0 2.3 Source: Polish Authorities 184. Past policies have left the tax system complex and in need of an overhaul to unify personal income taxation, rationalize capital taxes levied on enterprises, and simplify the structure and reduce the level of tax rebates. A serious and disheartening adverse feature of the Polish fiscal system is the overabundance of tax rebates, at variable rates, sometimes subject to negotiation as a reward to enterprises for fulfilling diverse central objectives, including investment, quality improvements, production goals, export, and employment of old age pensioners. This reduces the progress made towards economy-wide rates in the last few years. These rebates are equivalent to specific subsidies, and like subsidies they ought to be reconsidered and limited to those for which a genuine case can be made; moreover, their reduction in number and complexity would undoubtedly increase their effectiveness, and could allow a reduction in the profit tax rate. Socialized Sector Taxation 185. Five main taxes are levied on the socialized (state and cooperative) sector. Turnover tax and profit tax predominate - they are of roughly equal importance and jointly amount to over 70 percent of tax revenue from the socialized sector. The other three are wage taxes, real estate tax and a tax - 70 - on above-norm total wage payments. The Ministry of Finance collects most of these taxes, except for agricultural taxes, which, like most private sector taxes, are collected by local authorities. 186. Turnover tax is a one-stage tax paid by producer or importer on sales to wholesale trade and is only levied on consumer goods and services. Basic rates are 10 percent on goods and 5 percent on services, but there are many exemptions (and in practice negative rates, i.e. subsidies) as well as higher rates. Forty percent of turnover tax revenue is from alcohol, cigarettes and petrol; the other 60 percent is mostly from consumer durables. The tax has been used as an instrument for steering contractual and regulated prices, sometimes changing according to market pressure: for instance the tax on carpets was raised considerably in 1982 when they were shortage goods, and then reduced later when a better market balance was achieved. It differs from the conventional turnover tax in the traditional CPE model, however, in that the rate is prefixed and is not a residual designed to equate demand with supply that has been determined on other grounds. 187. Profit tax (literally "income" tax on enterprises) is charged on profit (see para. 40-42 on the enterprise cash flow) including "unjustified" costs. A flat 65 percent rate was introduced in 1984 with full effect from 1987; meanwhile transitional arrangements and rebates for a small group of enterprises make for an average rate of 54 percent. In 1986 revenue from this tax was estimated at about 30 percent of total tax revenue from the socialized sector. 188. Taxes on wages represent 10 percent of tax revenue and 20 percent of earnings; in 1971-76 the policy was followed of eliminating personal wage tax in the socialized sector altogether, as an allegedly pointless internal transaction (which neglects the possible divergence between the correct pricing of labor as an input and the requirements of government incomes policy). About 85 percent is earmarked for local budgets, providing 15-20 percent of their revenues,X' and for the Cultural Development Fund. Social security taxes also contribute 10 percent of total tax revenue, and are about 43 percent of wage payments. Tax on estates is modest: 2 percent of the value of buildings and land, not allowing for depreciation but allowing for inflation from time to time, the effects of revaluations being distributed over a few years; and a 10-15 zloty charge per m2 land area. It is about 2.9 percent of state revenue from the socialized sector and 35 percent of it is a source of revenue for local authority budgets. Both taxes are accounted as an element of cost. 189. As we have already seen in para. 140 the wage bill of enterprises in 1983-85 was subject to payments made out of after-tax profits into a "state fund for professional activization" (i.e., training fund, or PFAZ), graded as a progressive percentage of wage increases over and above a statutory rate of increase. From January 1, 1986 this levy has been abolished and replaced by lo The rest comes from taxes on local enterprises, including Polonia firms, on real estate and on the non-socialized sector, as well as a share of central budget revenues. - 71 - a "tax on above-norm payments of remuneration" or PPWW. This tax is not intended to raise revenue but to enforce wage discipline; indeed Ministry of Finance officials claim that ideally they would like PPWW to raise no revenue at all. The actual regulations and their history are discussed in Appendix 1, while the drawbacks and advantages of the tax have been discussed in paras 140-143. 190. Other revenue from the socialized sector comes from a share of amortization, a tax nominally levied at a uniform rate of 50 percent but in practice amounting to an average rate of 15 percent because of extensive tax rebates. The rationale for this tax is that enterprises have received state grants in the past for purchasing their capital goods and are not taxed on the amortization of capital acquired since 1982, presumably self-financed from credit or own funds. While there may be a reasonable case for having some tax related to the value of capital acquired free of charge, in Polish circumstances the present amortization tax appears misguided. Straight line amortization provisions over-estimate replacement requirements because of interest earned but underestimate them because of inflation. In Poland the rate of inflation is higher than rates of interest, making enterprises short of replacement funds. In practice, the amortization tax must be seen as a way of reducing enterprise liquidity through a selective capital levy, i.e., an ad hoc measure which should be replaced by higher rates of other taxes. 191. There is also a tax on the revaluation of inventories, levied at a rate of 50 percent of the increase in administrative prices, of which half is earmarked for the FOZZ fund (see next para.) and half goes to the general budget, and there are sanctions and fines (for bad quality, improper pricing, until 1982 on "unjustified profits, etc.). The charges and subsidies on foreign trade (Equalization Account) do not appear separately in the state budget, but the balance appears under the Ministry of Foreign Trade entry in the budget. 192. A new tax which, like former PFAZ, is not called a tax because it is a payment into a central fund but is a tax to all intents and purposes, is FOZZ: a payment of 2 percent of fixed capital net of depreciation (plus 25 percent of the appreciation of enterprise inventories); subject to a ceiling of 20 percent of after income (profit) tax profits. FOZZ is paid from the development fund of the enterprise, into a central Foreign Debt Service Fund, a new fund set up by the Sejm, and held at the Central Bank to supplement existing Ministry of Foreign Trade funds earmarked for covering the increase in the cost of debt service resulting from zloty devaluations which raise the price of net export earnings bought from exporters, and used for debt service (see para 180). No provision had been made originally for the contingency of devaluation. FOZZ revenues are well below the increased debt service costs. Since the FOZZ charge is not related to each enterprise's past contribution to the Central Bank's exposure to foreign exchange risk, FOZZ is effectively a tax which--apart from the psychological effect of singling out and stressing a specific reason for a high tax burden--could be more appropriately replaced by higher rates of other taxes and a matching payment from the state budget to the Central Bank. - 72 - Private sector taxation 193. Private sector and personal income taxation are quantitatively unimportant (comprising 3.2 percent and 1.6 percent respectively of 1986 revenue) but present interesting and indicative features. The share of this tax burden has not changed in the last five years. Private enterprises pay a multi-phase turnover tax (except for materials obtained from the state sector) at the same basic rates as the socialized sector except for trade (zero rated in socialized trade, taxed at 5 percent in the private sector). There is no single income tax; incomes are taxed according to type. Labor incomes in the private sector are taxed at 12 percent. All personal incomes, including earnings in the socialized sector are subject to an "equalization" tax on income in excess of twice the national average, at a progressive rate starting at 5 percent on income above Zl 480,000 a year and rising to 75 percent for income over Zl 1,600,000 a year. An interesting development is the possibility of paying one's income into a special bank account, tax liability being assessed on withdrawals instead of credits, thereby averaging income out over time to reduce tax liability. Housebuilding investment up to Zl 900,000 can be deducted from taxable income. Private enterprise revenue (including investment income and the income of professionals with a private practice) is subject to a profit tax at progressive rates from 10 to 80 percent. Subsidies 194. Subsidies account for nearly half total current budgetary expenditure. They are an important instrument of income maintenance and redistribution. Polish practice distinguishes between so-called "objective subsidies", i.e. payments per unit of output, and "subjective subsidies" i.e. lump-sums paid to enterprises regardless of output levels, which are often used when the wide assortment of output of a loss-making sector would make objective subsidies difficult to administer; most subsidies fall under these headings but there are additional categories (see Table 18). While technically all subsidies accrue to enterprises, at least half benefit households, either directly (especially through foodstuff subsidies) or indirectly (through subsidization of food and pharmaceutical production, of building materials, etc.). Agricultural subsidies obviously benefit farmers, and some are intended to raise farm incomes as part of the policy of income parity with urban workers. Subsidies are often granted "post hoc" to cover deticits of loss-making enterprises-the well-known soft budget constraint. 195. In 1981 large wage increases, low output, shortages and price restraint severely damaged enterprise profitability, requiring substantial subsidy increases in that year and in 1982. The profitability of many enterprises in 1982 was partly restored by price increases which were large relative to the wage increases of that year. Large disparities in profitability between enterprises continue to be partly offset by subsidy payments. Coalmining, which is of particular importance for external balance, faces steeply rising costs and is subsidized both for household consumption and industrial use. Total subsidies in 1986 are expected to have risen by 35.3 percent with respect to 1985 (up 38.5 percent on consumption goods; 64.7 percent on intermediate inputs, while the net subsidy on foreign trade has fallen by 43.8 percent). They are planned to increase by 3 percent only in 1987, which amounts to roughly 15 percent reduction in real terms, and there are unfinalized plans involving further reductions (see para. 199). - 73 - Table 18: SUBSIDIES TO ENTERPRISES (million zlotys) Indices *as1 * 100 Strueture 1987 1987 (%) firoaun f ognod and services IRAs 1996 Plan 191 Plan 1 198 17 TOIL I-Jl. -A,Q 1.473.070 1.510.25 126. 1LJ lOLA 1 J0L Objective, subsidies (per unit of output) 740.895 1,044.S07 1,007,191 140.9 135.9 63.8 70.9 66.7 of retail goods and services 46S,320 610,316 611.424 131.2 131.4 40.0 41.4 40.5 1. Foodstuffs 310,244 401,297 399,750 129.3 128.8 26.7 27.2 26.5 of which: Dairy Products 132,794 187.391 181.240 .141.1 144.0 11.4 12.7 12.0 Meat Products 61,6S6 87.502 76,137 141.9 123.5 5.3 S.9 S.0 Grain Products 77,442 83.371 96,725 107.6 124.8 6.6 5.6 6.4 Fish 7,888 9,806 12.162 124.3 1S4.2 0.7 0.7 0.8 Poultry 4,842 5889 4,733 121.6 97.7 0.4 0.4 0.3 Fats 15.400 23,431 24,532 1S2.1 159.2 1.3 1.6 1.6 2. Non-food Products 63.646 90,7S4 89,940 142.6 141.3 5.4 6.2 5.9 of which: Coal (for consumption) 57,340 86,526 85.210 150.9 148.6 4.9 5.9 5.6 3. Passenger transportation 91,430 118,265 121,734 129.3 133.1 7.9 8.0 8.0 of which: Rail 78.180 97.210 101.032 124.3 129.2 6.7 6.6 6.7 Buses 13,024 20,824 20,452 159.9 157.0 1.1 1.4 1.3 Ships 226 231 250 102.2 110.6 0.02 0.02 0.06 Intermediate goads 275,575 434.191 39S,767 157S. 144.6 23.7 29.5 26.2 4. Agricultural Inputs 7. 25 130,907 174,096 169.4 22S.3 6.6 8.9 5.8 of which: Fertilizers 45,407 79.880 92,920 17S.9 204.6 3.9 5.4 6.15 tndustrial Fodder 28.947 4S,045 72,620 155.6 2S0.9 2.5 3.1 4.8 Pesticides & herbicides 2,820 S,982 7,791 212.1 276.3 0.2 0.4 0.S S. Inputs used outside of Agriculture !98,2"0'A 303,284 221,671/" 152.9 111.8 17.1 20.6 14.7 of which: Coal 176,000/A 275.462 197,300" 156.5 112.1 1S.1 18.7 13.1 Materials for light & chemical industries 14,923 18.198 15.436 121.9 103.4 1.3 1.2 1.0 6. *Subjective0 Subsidies (i.e.. lump sums) 37.37S 45,209 126,177" 120.9 337.6 3.2 3.1 a.3 of which: Metallurgy 19.083 22.800 24,800 119.5 129.9 1.6 1.5 1.6 Mining - - 84,500 - - - - 5.6 7. Subsidies for Comunal Housing and Economy 136,150 165,745 125,37S 121.7 92.1 11.7 11.2 8.3 8. Subsidies for Cooperative Housing S7.488 74,011 70,100 128.7 121.9 4.9 5.0 4.6 9. Net Subsidy. Foreign Trade Equalization Act 103,200 42,508 58,020 41.2 56.2 8.9 2.9 3.8 10. State Farms Subsidies 86,496 83,636 98,877 96.7 114.0 7.4 5.7 6.5 11. Supplementary Payments for Medicines - 17,454 25.185 - - - 1.2 1.7 /a Together with the return of accumulation included since 1986 in objective subsidies /1 In 1987 deficit of 10 mines will be included in subjective subsidies - 74 - Current trends 196. Current policy aims at the rapid elimination of the state budget deficit to be followed by a policy of balanced budgets and eventually modest surpluses to repay domestic government debt. At present, a balanced budget stance appears correct; but in the long run a more flexible approach might be necessary. A balanced budget can be either too bold or too timid according to circumstances, e.g. whether demand pressures require absorbing or whether unemployment develops. The level and structure of the state budget, as well as the scarcity of other policy instruments and restrictions on their use, give it considerable potential importance as an instrument of demand management. Domestic government dett, being held entirely by the Central Bank at no interest, has been effectively monetized already so that its repayment is not a policy problem. 197. Legislation exists which would allow turnover taxes to be imposed on inputs and investment goods. It is planned to introduce these for a very limited number of inputs (at a basic rate of 10 percent of sales price), and investment goods whose shortage is intense (some trucks, buses, machine tools and building and construction machinery at a rate of 25-30 percent). These price increases will help eliminate excessive demand, and facilitate the planned shift from administrative to contractual pricing and a reduction in the number of inputs centrally allocated. 198. A turnover tax is thought to offer less scope for enterprises to apply for exemptions and reductions. This has been a major problem with taxes on profits and excessive wage increases; it is reported that the Minister of Finance has asked to have the power to grant tax exemptions taken away from him by Government decree. However, turnover taxes on inputs have a "cascade" effect that distorts prices, encourages further vertical integration and possibly discourages exports (of both intermediate goods and, through backwards linkages, finished goods).1-' A value added tax would avoid these problems, and is therefore preferable to a turnover tax. 199. The government is also planning to substantially reduce subsidies in 1987-90. Two alternative plans are under discussion: either to freeze the level of nominal subsidies, or to reduce them by 60 percent. These reductions would be accompanied by price rises. Some subsidies would be maintained (for farms in the worst-rated land, for milk and other basic products) while those to transportation will be reduced at a slower pace. The reduction of subsidies reverses a well established pattern of yearly growth in nominal terms (20 percent in 1984, 17 percent in 1985, 42 percent in 1986); its impact on government finances will be very substantial. In the long term, any residual subsidy would have to be specifically justified on grounds of externalities, merit goods, or the necessity to support the consumption of those (like children or the very old) who depend on decisions taken by others on their behalf. It is preferable to target poorer groups specifically, -'/ Tax reliefs on exported intermediate goods would not solve the problem because these intermediate goods would themselves have inputs subject to taxation. This would either discourage exports of goods with potentially high domestic content or would encourage exporters to import inputs that could be produced locally. - 75 - rather than to use generalized subsidies which benefit the whole population. Targeting would require the government to (i) eliminate subsidies now being granted to groups that do not need them to achieve an adequate living standard; (ii) define clearly the characteristics and circumstances of groups entitled to receive each kind of government assistance; (iii) determine the amount of resources that the government can afford to transfer to these groups; (iv) identify the most efficient channels to convey these resources, defining efficiency both in terms of the ratio of delivered services to costs of delivery and the effectiveness of the transfers in improving the conditions of target groups. B. Monetary PolcY A Marginal Role 200. In the traditional CPE monetary policy is almost totally passive, i.e. the quantity of money is automatically adjusted by monetary authorities to planned physical flows (given planned prices) and to the degree of their actual implementation. Both before and after the recent attempts at economic reform, Polish monetary policy has had more scope than the average CPE, but its role has still been fairly marginal. 201. It might have been expected that monetary policy would already have become more important. Such a policy offers scope for influencing the activities of the large private sector, and the decentralized investments of enterprises. Moreover the large scale disequilibria of the Polish economy might be felt to require the discretionary use of policy instruments that in normal conditions are harnessed almost solely to the implementation of a plan. Aggregate and structural imbalances have been reflected in unplanned monetary flows, such as excessive liquid assets in the hands of the population and excess enterprise liquidity. Monetary policy in Poland has not, however, fully realized its potential role in the .estoration of equilibrium. There are several reason for this: (i) the reabsorption of monetary disequilibria has proceeded at a slow pace, because of perceived political constraints; (ii) the price level has been controlled to a very great extent through administrative means and tax rates and not through monetary policy; (iii) interest rate levels have been constrained by concern about income distribution and cost inflation. Insofar as monetary policy has been used, the continued monopolistic position of the Central Bank has allowed it to control almost completely the quantity of money directly through its own operations, instead of having to exercise indirect influence on a commercial banking sector distinct from itself. Inflation 202. Strong popular opposition to price rises, exacerbated by their infrequent occurrence and therefore their large cumulative size, has been a major factor in recent Polish economic and political history; attempted price rises revoked under the pressure of popular protest occurred in 1970, 1976, 1980 and triggered leadership changes in 1970 and 1980. Under Martial Law inflationary pressure became more open than before; but compensatory payments to both wage earners and savers had to be made. As a result of these constraints Poland has reduced but not tamed its open official inflation at the cost of hidden and repressed inflation. - 76 - 203. Open inflation in Poland followed a pattern similar to that of other Eastern European countries. Inflation during reconstruction was rapid, with retail prices rising in Poland by close to 200 percent between 1949 and 1953. This was followed by currency reform and a period of falling prices from mid-1953 to late 1956, with an average annual decrease of 3.9 percent in retail prices. A period of price stability ensued with open inflation running at about 2 percent in 1960-70, and around 2.5 percent a year during 1970-75. With the delayed impact of the first oil price shock on CMEA countries and the decline in the net transfer of foreign resources, inflation in Poland accelerated to 6.8 percent during 1975-80. The retail price index increased by 9.4 percent in 1980 and 21 percent in 1981. A major reform of prices in 1982 doubled the retail price index, while in the last four years it has continued at an average rate of 15-20 percent (see Table 19). Table 19: OPEN INFLATION (Annual Percentage Change) 1960-70 1270-75 1975-80 1980-85 1980 1981 1982 1983 *19f4f 128S .]ffi Retail Price Index 31.5 9.4 ?,.2 100.8 22.1 15.0 15.1 17.8 Cost of Living Index A/ 1.9 2.4 6.8 32.5 9.1 24.4 101.5 23.1 15.1 14.4 17.5 a/ Of households of employees in the socialized sector. 204. Hidden inflation is not recorded, but is also open - i.e. revealed by market transactions.-' First, prices can rise above the official level either in state shops or in private markets. Official price lists may lag behind actual prices .harged by retailing organizations within their discretionary power, e.g. for new products, including pseudo-novelties. Quality may deteriorate at constant prices. State goods may be sold at prices higher than state prices by retailers charging a premium to customers or by buyers reselling in a private market, or by private producers (in which case profits from private redistribution or production also boost incomes). Second, unrecorded open inflation can arise from quantity weights in official price indices understating the relative weights of goods whose actual market prices rise relatively faster. Third, unrecorded open inflation can arise from progressive forced substitution by consumers of goods which are available at their official price for goods which are not available; usually higher priced substitutes replaeo cheaper goods. There are a number of estimates of ~-' For a discussion of these issues see D.M.Nuti, Hidden and repressed inflation in Soviet-type economies: definitions, measurements and stabilization, Contributions to Political Economy, n 5, 1986, pp. 37-82. - 77 - hidden inflation for Poland in selected periods.-' These have involved such things as attempting independent estimates of real consumption growth, tracking the movements of black market exchange rates, and taking advantage of some bilateral comparison of consumption levels in Poland and Austria in 1964, 1973 and 1978 (estimated by the Central Statistical Offices of the two countries in the currencies of either country). None of the methods capture all the possible elements of underestimate listed above, yet all point to a sizeable underestimate of open inflation in official data up to the end of the 1970's. 205. A shortage of goods and services at their official prices in Poland is self-evident from long searches, queues, waiting lists, rationing, barter, and above norm inventories held by consumers and below norm by retailers. Shortage relative to demand at official prices is responsible for hidden inflation, since prices in non-state retrading and production are higher than the official level and are not fully - if at all - recorded. Prices in marginal transactions must be high enough (or the risk associated with those transactions, which are often illegal or semi-legal, must be high enough) to induce consumers to hold their liquid balances instead of transforming them into goods in the secondary market. Thus, barring exceptional circumstances of hyperinflationary demand pressure which does not find an open outlet, there is a trivial sense in which there is always monetary equilibrium in the economy as a whole (i.e. inclusive of the secondary sector). This kind of equilibrium, however, coexists with permanent excess demand for goods at the prices in the state sector when these are not market-clearing, or - seen from another side - unwanted excess liquid balances in the hands of the population, which become wanted only because of access to higher priced secondary retrading of goods. This is the phenomenon of so-called "repressed inflation". If hidden inflation was measured correctly, repressed inflation would be an alternative way of looking at shortages, not an additional problem; since our measures of hidden inflation are incomplete, an allowance for repressed inflation ought to be added to our estimates of hidden inflation. The differences in the definition of equilibrium and the question of additivity of hidden and repressed inflation are responsible for the very wide divergence of views between those who believe Poland is in a state of monetary equilibrium&' and those (including some official Polish sourcesl') worrying about inflationary gaps between current incomes and intended expenditure out of incomes and about the cumulative inflationary overhang (respectively luka and nawis in Polish). i' See T.H. Alton et al., Official and alternative consumer price indexes in Eastern Europe, selected years, 1960-78, Working Papers, L.W.I.F.R., New York, September 1979; W.P.Culberston and R.C. Amacher, Inflation in the planned economies: some estimates for Eastern Europe, Southern Economic Journal, vol.45, n.2, 1972, pp. 380-393. B. Askanas and K. Laski, Consumer prices and private consumption in Poland and Austria, Journal of Comparative Economics, vol.2, n.2, June 1985, pp. 164-177. 3' See for instance R.Portes, R.Quandt, D.Winter and S.Yeo, Macroeconomic planning and disequilibrium estimates for Poland, 1955-1980, NBER Working Paper n. 1182, Cambridge Mass. 1983. -' See the 1981 Government Report on the State of the Economy. For a fuller discussion of these issues see D.M. Nuti, cit. - 78 - .206. If, once monetary equilibrium is defined non-trivially i.e. with reference to state prices, the existence of repressed inflation or inflationary overhang cannot be denied, the measurement of its size and trend depends on arbitrary assumptions or conjectures about saving behaviour or the demand for money. Some relevant data are given in tables 20 and 21, respectively giving data for households' finance and a number of basic indicators. Some officials in the Ministry of Finance argue that monetary stock disequilibrium is exaggerated by ignoring differential savings rates between income groups. Liquid balances held by high income groups with high savings rates are more likely to be paid of voluntary savings than of liquidity overhang. Table 20: INCOME, EXPENDITURE AND FINANCIAL POSITION OF HOUSEHOLDS, 1980-85 (In billions of zlotys at current prices) 1980 198l 1982 19A3 1984 198S 1. Disposable Money Income 1,484.4 1,952.1 3,209.2 3,927.3 4,639.6 S,692.1 2. Consumption and other Current Money Expenditures 1,356.4 1,623.9 2,751.7 3,569.3 4,280.5 4,992.5 3. Savings (1-2) 128.0 328.2 457.5 358.0 359.1 699.6 4. Borrowing from Banks (net) 1.4 2.3 29.0 42.4 46.2 47.5 5. Capital Expenditure on Physical Assets (net) 38.4 48.1 94.9 109.6 122.1 138.4 6. Change in Gross Holdings of Financial Assets (3+4-5) 91.0 282.4 391.6 290.8 283.2 608.7 Currency (54.9) (104.7) (193.5) (98.9) (101.8) (175.6) Bank Deposits (36.1) (177.7) (198.1) (191.9) (181.4) (433.1) 7. Savings Rate (in percent of disposable money income) 8.6 16.8 14.3 9.1 7.7 12.3 Source: Polish Authorities 207. The Polish Central Bank (NBP) uses an estimate of the voluntary personal saving rate of 5.5 percent but this is acknowledged to be an extremely crude estimate. The decline of saving rates from the exceptionally high level of 1981 (17 percent) to 8 percent in 1984, coupled with trends in real income and other indicators, suggest a reduction of excess demand duriiig the period. The easing of monetary policy and recovery in real household incomes in 1985 at the same time as the growth of output slowed implies a widening of the imbalance in the consumer goods market. Nominal household income turned out to be some 6 percent higher than foreseen under the household income and expenditure plan while the supply of consumer goods was roughly as planned. The inference of growing imbalance is also supported by the sharp jump in the personal savings rate to over 12 percent in that year, though the parallel rise in the ratio of inventory to sales in 1985 points in the opposite direction, unless it reflects a growing divergence between the composition of demand and supply. - 79 - Table 21: BASIC INDICATORS ILLUSTRATING THE MONETARY AND MARKET SITUATION IN 1981-85 (Percentages) lsal - 1982 ___29UiM 1984 lsas Ratio between the increment of liquid assets in the hands of population and disposable income 14.4 12.0 7.2 5.9 10.7 Ratio between the value of end of year inventories" and liquid assets 17.7 24.2 28.7 31.9 - Ratio between the value of yearly market supplies^/ and disposable income 75.7 86.7 90.2 90.8 - Share of cash in the increase of liquid assets 36.9 49.2 33.9 35.5 - savings out of personal disposable income 16.8 14.3 9.1 7.7 12.3 Inventory to sales ratio of consumer goods' N-umber of days 52 43 33 38 A/ Of consuner goods. -' Reterred to av eotation index" in Polish Statistics The Stabilization Process 208. The precise measurement of inflationary overhang/repressed inflation is not essential for devising a stabilization policy, since in any case the degree of austerity deemed politically acceptable is bound to constrain the speed of stabilization. 209. The stabilization problem is often identified with determination of the equilibrium price level. )towever the price level which would clear all markets instantaneously (i.e. get rid of the overhang) is bound to be higher than the level which other things being equal would maintain equilibrium once reached. If the price level is pitched at an intermediate level between instantaneous market clearing and the maintenance of equilibrium, there will be a necessary adjustment period associated with it for market clearing to be eventually reached. Before the end of that period the current price level will be higher than necessary in long run equilibrium, i.e. curr#nt real wages will be lower than they would have to be without the overhang. It is possible that this is the present position is Poland, with prices not high enough to obtain market clearing but real wages-and hence price rises-being restrained in order to protect the pt'rchasing power of those members of society who have excess holdings of cash and liquid assets. Thus in addition to the target of flow equilibrium (between intended real consumption expenditure and actual supply), there is a need to achieve stock equilibrium (between existing liquid assets and the demand for them). Price increases, even if fully compensated by wage increases, help by reducing the real value of excess balances. Some of the excess balances should be channelled into savings by the introduction of attractive, high interest savings instruments. Policies which increase - 80 - output and improve consumer goods market balance will allow increase in living standards which, by making people feel better off, should help raise the savings rate. It is desirable to move as quickly as possible to stock and flow equilibrium since the stabilization process involves a necessary overshooting of prices. 210. In the stabilization process, monetary policy cannot be separated from fiscal policy, given the premises of national wage and price policy, the dominant size of the socialized sector, and the commitment to plan implementation. In spite of -the new autonomy of the Central Bank, the role of monetary policy remains that bf providing the economy with the liqtnidity required to satisfy the transaction needs of plan implementation, while preventing the accumulation of excess liquidity in individual sectors and in the economy as a whole. This presumes a budgetary stance consistent with macroeconomic balance and a pattern of taxes and subsidies consistent with sectoral equilibrium; moreover the importance of fiscal policy derives from the paucity of the instruments at the disposal of monetary authorities. 211. The key innovation in the recent monetary reform, as we have seen in paras 158-161 the introduction of "creditworthiness" of enterprises, in the socialized as in the non-socialized sector. Discussion of monetary policy, as opposed to the traditional automatic adjustment of monetary and financial flows, presumes the implementation of this principle in the Bank's relations with profit-minded enterprises subject to "hard" budget constraints. A number of systemic obstacles to the implementation of these assumptions have been discussed already: the combination of central and commercial banking functions in NBP and its monopoly of commercial banking; the undue interference of "founders"; the sectoral or even enterprise immobility of financial capital; and the lack of indirect instruments of economic policy, i.e. parameters to which enterprises and financial intermediaries might efficiently adjust, and the continued reliance on direct intervention instead of "arms-length" commercial relations. These systemic problems are a legacy from the past that future reform is designed to overcome-at least in principle it is fairly clear what ought to be done, whatever the difficulties in implementation. 212. In one respect, however, the way forward is less clear. The persistence of structural imbalances means that the strict application of creditworthiness - i.e. of market-clearing prices and financial discipline - would drive to the wall a number of enterprises for no fault of theirs, but because of misinvestments undertaken at a time of central direction, while many -oterprises would enjoy excessive profits and liquidity also for no merit of theirs. This may have little to do with the quality of management or the rate of profit on new investment. If enterprises were driven by a very strong desire to maximize the return to capital, and if there were effective mechanisms for capital and managerial mobility, this might not matter very much, since the market might be expected to carry out its own restructuring on the basis of future profitability, no matter what its initial starting point. Unfortunately enterprises still think primarily in terms of expanding their own activities even if the return on investment is higher elsewhere. If further expansion of a profitable enterprise appears distinctly unprofitable, managers are more likely to favor raising wages than seeking ways to invest elsewhere. As noted in Annex III, the Mission's visits to enterprises suggested that few enterprise managers think in terms of profit as the return on capital, rather than a permissible mark-up over costs. Although - 81 - administrative and regulated prices can alleviate this problem this might be at the expense of imbalance in the market for goods. Clearly monetary policy and financial discipline can work properly only after structural imbalances have been eliminated or strongly reduced. The appropriate instruments for handling these imbalances are fiscal, but this carries the risk of weakening still further the stimuli for market-determined adjustment processes. 213. In order to induce a reduction in the growth rate of nominal domestic demand and help in the elimination of the imbalance between the purchasing power of the stock of monetary assets and the value of goods and services at the planned price level, the Central Bank (NBP) would have to implement policies aimed at: i) reducing the rate of monetary creation; and ii) provoking an increase in the demand for monetary and financial assets. Each of the two policies would be more effective when used together. In capitalist countries these objectives can be accomplished simultaneously because contractionary monetary policies result in increased real rates of interest which reduce demand for credit (thus curbing the growth rate of nominal domestic demand) and raise demand for financial assets (further reducing the grr.eth of nominal domestic demand through reducing the expenditure velocity of money). 214. In Poland, however, the elasticity of demand for credit with respect to interest rates and, therefore, the elasticity of nominal domestic demand with respect to interest rates is likely to be very low as long as prices and price formulas are based on "necessary costs". In order to make monetary policies more effective, in such an environment, it can be expected that instruments adjusting monetary quantities directly, such as the imposition of a ceiling on the growth rate of the banking system's net domestic assets, would be necessary, leaving the role of the interest rate confined, at least in the short run, to affect the demand for financial assets. 215. It is necessary for the interest rate to increase in order to encourage further savings, tn discipline investment, and to increase the liquid balances of the population held voluntarily (see paras. 169-171). Over the last few years Polish depositors of foreign exchange have been earning rates of return in zlotys (i.e. interest plus the appreciation in the zloty price of their foreign exchange) which are multiples of the rate earned on zloty savings. If high rates of return on dollar deposits are acceptable, there is no reason why higher and comparable rates should not be paid also on financial assets denominated in zlotys. It is probable that the high differential in the rate of return on foreign exchange and domestic currency savings is an important factor in the gross overvaluation of the dollar in the black matket. Once the economy is on the way to "remonetization" it is essential to remove this kind of differential even if it is thought that demand is not very elastic, because otherwise it gives a quite incorrect economic signal. For the same reason it will be necessary to raise the interest charged to borrowers in the socialized sector, even if demand is thought to be inelastic, up to levels consistent with the deposit rates, allowing for a margin of intermediation, in order to provide a more reliable indicator for the determination of capital rental. 216. A ceiling on the rate of expansion of the banking system's net domestic assets (as part of a stabilization program) is usually estimated so as to gradually reduce monetary ctaation to the level of the expected increase -82 - in demand for monetary and financial assets, which is not far from the expected growth rate of real production plus the rate of inflation plus the financial deepening (positive if velocity is decreasing and negative in the opposite case). In the Polish case, if interest rates are raised, the ceiling would be in tne range of 8-12 percent if inflation is to be reduced to one-digit levels as in stated intentions. These rates are considerably below the 28 percent expansion of net domestic assets in 1985, and could most likely be approached only gradually between 1987 and 1990. 217. Fiscal surpluses can have beneficial monetary effects only if they are not accompanied by a sihultaneous increase in credit or transfers from the banking system to bodies that absorb the fiscal deficit. For example if the recently created Fund for the Repayment of the External Debt (FOZZ) was in deficit and this was covered with credit or transfers from NBP, this amount should be deducted from the budget surplus to arrive at its appropriate measurement. The range of special funds and the network of ad hoc transactions between the budget and the banking system increases the danger of distorting compensatory payments. - 83 - Pawt V: THE UNFINRISED REFORM Achievements 218. The implementation of the original Polish reform project of 1981 has resulted in significant changes. They were reviewed above and include the rapid growth and greater security of the private sector; the considerable reduction of the area subject to direct commands; the growth of the scope of markets, through the extension of contractual prices and international prices; the greater opening of the economy and the provs ion for foreign currency retention by exporters; the liberalization of e%ployment and wages; the overhaul and development of banking anc credit, and the articulation of fiscal policy, to regulate the economy through policy instruments; and modest but tangible progress in self-management compared to the traditional CPE model. There has been a vast new legislative output, consolidating the progress made and setting an obstacle to reversals. Economic information is made widely available to the public - such as the survey of the performance of the largest 500 enterprises, now in its third edition. There are wide-ranging discussions of economic issues in professional circles and in the media, and reports of the Consultative Economic Council, set up to advise the Prime Minister but often very critical of the progress of the economic reform, are published. Recently the large scale Commission for Economic Reform has resumed its activity and a new, more broadly based Reform Commission has been set up under the auspices of the Association of Polish Economists (PTE). 219. These changes from direct commands of the central authorities to indirect means of economic control over enterprise activity have made the Polish economic system more capable of responding-however little and slowly--to exogenous changes, for instance in the external environment, in technology, in factor supply, and in population needs. Enterprises cannot ignore domestic and international market prices of their inputs and outputs, and must respond to changes in parameters (tax rates, exchange rates, interest rates, subsidies, etc.) made by the center. The system's response is sluggish, but the main achievement of the economic reform is that the economy is beginning to respond. "Parametric Centralization" 220. The new Polish system is a far cry from the theoretical model of "market socialism" or of the "socialization of the plarning progress" desired by radical reformers. It is also still far from what was envisaged in the 1981 official reform project. A large core of central planning (see paras. 23-35) has outlived the emergency circumstances that justified its survival: operational programs, government contracts, and direct central allocation of materials and foreign exchange remain. Industrial concentration tempts enterprises to misuse their greater autonomy, and competition has been further diminished by the growing role of enterprise associations. (Issues concerning industrial concentration are discussed in Annex III.) Workers' participation! in enterprise decision-making has not beeu large; and there are other reform provisions, for instance about commercial banking, which have only recently been added to the agenda. 221. The main gap between the reform' pioject and its implementation is the ability of traditional branch Ministries to influence the economic parameters - 84 - for individual enterprises. In their new role as "founders" Ministries continue to be the bearers of sectoral viewpoints and interests and to pursue traditional investment and industrial policies. The problem is widely recognized. In a recent speech to the PZPR Central Committee, First Secretary Wojciech Jaruzelski observed - in connection with an ongoing review of organizational structures - that "Ministers should primarily represent the state towards enterprises and not the other way round." Others have commented that the new system amounts to "indirect centralization".I' Of course no model of market socialism precludes the government from attempting indirectly to establish the level and pattern of investment, or anything else within the scope of its preferences, through indirect instruments of economic policy. What makes the Polish system distinctly different from the original design is that indirect instruments of economic policies are very frequently individualized by enterprise, instead of being generalized to the whole economy or at least a whole sector. This is true of a wide range of parameters: "subjective" subsidies, currency retention ratios, regulated prices, PFAZ/PPWW formulas and rates, tax rebates and interest rate reliefs, as well as many informal instruments of pressure and inducement, strengthened by the "founders"' control over managerial salaries and careers. 222. In this system "central authorities try to manipulate the decisions of the formally autonomous enterprises with the help of financial and direct administrative measures" while "the enterprises try to manipulate the decisions of the central authorities, which affect them, by bargaining for various exemptions, more favorable treatment and allocation of scarce resources" (Fallcnbuchl, loc. cit.). The center and productive units continuously negotiate the scope of orders, material supplies, hard currency allocation, employment, prices, taxes and amortization, subsidies, licenses and investment (see Otta, loc. cit.). There is little sense that unprofitable activity will be harshly penalized, or that successful entrepreneurship will bring lasting economic reward. Economic reform still has very far to go in imparting cost-consciousness, profit-mindedness, managerial independence, and competitiveness on the part of enterprises and other economic agents. Critics of the present system have used the labels "informal command planning", "manipulative system", "model of authorizations and bargaining", and "parametric centralization" to convey the difference between the Polish system and its original model. 223. It has to be recognized that the new system was introd&wced at a time when the central authorities had lost much of their control over economic processes and drastic falls in income probably made radical abolition of central controls over prices, wages and the allocation of imports and key inputs impossible. The system has been flexible enough and efficient enough to allow a substantial recovery, in most respects close to previously achieved levels, without hyperinflation or unemployment. Nevertheless, the system retains severe limitations. It cannot be expected to sustain microeconomic efficiency, simply because it prevents the exploitation of opportunities for substitution in both production and consumption. It cannot guide growth in the uncharted areas of higher production and structural change because it lacks both the coordination capacity of the old system and the flexibility of market processes. Some of the limitations derive from policy inconsistencies, 1' C. Jozefiak, "Uwagi do NPSG na lata 1986-90" (mimeo), Lodz, May 1986. - 85 - such as the exposure to international prices and the frequent Over-valuation of the zloty; the use of credit without positive real interest rates; the introduction of contractual prices and their partial freezing; these inconsistencies and all the ad hoc measures, exemptions and suspensions which they produce, however, are themselves the product of the system and of the obstacles which impede its reform. Obstacles to economic reform 224. The first obstacle in the way of economic reform is the persistence of shortages (and occasional surpluses): it goes without saying that markets cannot be expected to function and to guide economic choices if consumers and firms cannot obtain all they wish to purchase (or sell what they want) in these markets at the ruling price. Price rigidities can only be accommodated as a transitory occasional phenomenon in a market economy; price upward and downward flexibility is a necessary precondition of successful reform. The contin-ued strong drive to invest, which still seems to be a systemic feature of the Polish economy, and the alleged social limits to both austerity in domestic consumption and open inflation, risk perpetuating existing shortage, and with it the remnants of the old system. 225. The second obstacle to economic reform is structural imbalance. If market clearing prices prevailed - i.e. if the first obstacle was removed - enterprises would be exposed to disequilibrium rents and losses unrelated to their own decisions and performance, but due to the structure of the economy resulting from old decisions taken by central authorities operating under different principles. This has led to a felt need for various kinds of subsidies, taxes and ad hoc measures to insulate enterprises from unfair gains and losses. These measures, however, in turn slow down the response of enterprises to market stimuli. This is an aspect of the familiar conflict between efficiency and fairness, which has to be tackled before tampering with regulations. (The same problem also arises with respect to undesired distributional effects on consumers, which also ideally would require compensatory taxation and subsidies for maintaining a fair distribution). This is why it is desirable to act on quantity adjustments as well as price changes to restore equilibrium. 226. Another obstacle to reform is the haste with which changes have been continuously made, before their full effects have been worked out, only to be rectified, suspended or even reversed soon afterwards: Instability of new regulations leads to frustrations and inertia, blunting whatever automatic mechanisms of response the system can summon. Some of these changes are due to unexpected side-effects of institutional innovations, but are often introduced to cope with predictable implications or consequences which were neglected, or with opposition expressed by vested interests. 227. Finally, there is still sizeable resistance against the further implementation of the reform project. While the gains that can be derived from economic reform in the future, even if potentially large, are uncertain, not directly identifiable and widely spread across the economy, there are also losses (of power, prestige, or real consumption) associated with the reform which are certain, up-front and concentrated on specific pressure groups. This asymmetry makes for more organized and vocal resistance than would be the case if gains and losses were similarly distributed. - 86 - The "Second Stage" of Economic Reform 228. The Party Congress of July 1986 approved the launching of the "second stage" of economic reform. This was not intended to imply any distinction between stages of implementation, but rather an official recognition that the reform was unfinished and that its completion remained high on the political agenda. Following the Party Congress there appeared to be considerable uncertainty as to precisely what the "second stage" was supposed to entail. A bill submitted to Parliament in November 1986, proposing changes in 11 laws regulating the socialized sector, was widely thought to indicate the Government's intentions. The proposals included an extension of the right of state enterprises to form limited liability and joint stock companies, including with private producers, requiring "founders"' authorization only in the latter case. Other proposals also strengthened enterprise autonomy. But some of the measures entailed a reduction in worker self-management, which provoked strong criticism. They also demonstrated a possible dilemma between requirements of short-term stabilization and the reform program. In order to resist the inflationary spiral, which could develop if enterprises with increasing profits were permitted to raise real wages while others tried to maintain them, the bill enabled periodic wage freezes, changed the PPWW wage tax on above-norm wage increases to apply to all enterprises regardless of performance, and made official and regulated prices on long term government contracts subject to surcharges and rebates decided by the Ministry of Finance. Opposition to some of the measures, both in Parliament and the Press, led to their withdrawal. 229. The widespread discussion that accompanied this episode confirmed the underlying support for the principles of the reform, and the desire for its extension. A Plenary Session of the Party's Central Committee in December 1986 took the decision that systemic reform had to be accelerated. In April 1987 a special supplement of Rzeczpospolita published "Theses Concerning the Second Stage of the Economic Reform" (proposals for discussion), which had been prepared under the auspices of The Secretariat of the Economic Reform Commission, with widespread participation of many other organizations and individuals. The document is intended to present ideas rather than a concrete program. After these have been subjected to extensive public debate, a Ministerial committee will formulate an action program, for approval during the autumn of 1987. There are 173 theses, several of which propose alternative variants for changes in a particular policy. In some instances there is considerable detail and a timetable; in others only the general line of change. They were published after this Report had been completed, and it would take considerable time to discuss fully the ideas themselves or issues concerning their implementation. What follows is only a brief overview. 230. Underlying the proposals is a reported consensus "on the conviction that there will be no success of the reform without equilibrium, just as there will be no equilibrium without the reform. In addition, there will be no positive effects of the reform, and no equilibrium, without changes in the structure of the economy." The suggestions can be grouped around certain themes. An overriding one is the need to achieve a market balance: there is a commitment to market-clearing prices, even accepting the pain of adjustment and the uneven distribution of the benefits and costs of such a policy. The subsidies that remain will be more sharply targetted. The substantial - 87 - reduction of mandatory wholesaling and elimination of rationing by 1990 are proposed (except for energy, and possibly a very few other items). Government orders would remain only for R&D, some restructuring and energy and material saving. Some direct regulation will remain, however, in the form of consumption norms for energy and material use. The rate of price adjustment is not yet fixed. The pros and cons of three scenarios of price adjustment are discussed - one taking only one year, one 2-3 years, and one much longer. 231. The principles of enterprise autonomy and self-management are familiar. Socialized enterprises will enjoy greater commercial and, especially, organizu nal freedom. Tax reform, of which there are different variants but which w&uld include both a personal income tax and a value-added tax, might leave enterprises with more control over the disposition of their earnings. Profits should generate resources for expansion in response to demand; competition among producers should promote efficiency; chronic unprofitability should lead-via bankruptcy--to liquidation. Interest rates will be positive in real terms and differentiated according to maturity and risk. Subsidies will be consistently reduced, and sector-specific parameters abandoned. Although enterprises will have much greater freedom to set prices, anti-monopoly laws will be enforced and some monopolistic enterprises will be broken up to foster competition. World (transaction) prices will be used for raw materials and intermediates, but general control will be maintained over the rate of price increases. 232. There is a recognition of the need to improve factor markets. There will be the possibility of forming joint-stock companies, with registered ownership of shares by employees. Individuals may become able to purchase and trade in bonds. The need to foster entrepreneurship and innovation is stressed. The development of private economic units in the sphere of services and small manufacturing will be encouraged. There will be a banking reform in which the NBP will become a central bank; other banks will be established to compete with each other. In the labor market there is a recognition that the "constitutional right to work must not mean a right to work in a given post, enterprise or trade for life" and therefore there is a need for transitional unemployment and retraining. There will be greater use of independently contracting labor teams, but controls over the growth of wages will remain. There are likely to be changes in some aspects of social security, such as requiring some payment for health services. Here again alternative policy variants are outlined. 233. Restructuring is needed; the coalmining, metallurgical and infrastructure sectors should take a smaller proportion of national resources. Greater participation in international trade is envisaged, and especially the growth of competitive exports. The measures of export promotion, such as the use of tax incentives, marketable export retention rights etc., discussed elsewhere in this Report will be retained or expanded. Export retention rates will be gradually unified and will become the main source of import financing. It is intended to maintain a policy of flexible and realistic exchange rates, and virtually any producer will be eligible for a license to export his product. - 88 - 234. One of the more politically sensitive issues concerns changes in the organizational structure both to reinforce enterprise autonomy and to eliminate the traditional role of branch ministries as lobbies on behalf of the enterprises they supervise. The theses envisage reducing the number of branch ministries, and a reduction of their supervisory role. One suggestion is to give a greater role to local administrative bodies: a more radical alternative suggests that the establishment and supervison of enterprises would become the responsibility not of existing parent bodies but of state banks that would hold shares in enterprises corresponding to the state endowment. Recognising the diversity of sectoral situations, there would be a move away from sectoral groupings of enterprises, but there would exist a variety of forms of associations, holding companies etc. Central control would operate through indirect regulators; the economic and legal conditions would be such to create sufficient economic incentive for enterprises to respon(i to them. 235. The spirit of the proposals is a liberal one: "Whatever is not prohibited, is allowed." It will not, however, be easy to liberalize with such a tight balance of payments, nor to make major price adjustments in an already inflationary situation, nor to restructure in circumstances of excess demand for labor. It is easy therefore to be sceptical, especially since many of the measures now proposed were originally among the 1981 reform proposals but have still not been implemented. Nevertheless, the reform menu has been reaffirmed and extended in an impressive way. The theses and this Report were written at the same time, and of course quite independently, but they reflect very similar assessments of the situation and analyses of policy priorities, and the proposals are a systematic attempt to tackle the prnblems that we have highlighted. 236. The fluctuating patterns of reforms and reversals in Poland and elsewhere in Eastern Europe suggest there is a great deal of resistance to reform, in spite of the popular demand for change. Reform that consists only of a gradual nibb'ing away at the edges of a centrally controlled hard-core, or the substitution of one set of regulations for another, will not break the habits of mind and behavioral instincts of enterprise directors and branch ministries that have developed during more than three decades. What is required is the determined and steady implementation of the new program, and a willingness to accept openly and according to transparent rules of the game the inequality of economic outcome that it implies for enterprises and individuals, including a degree of frictional unemployment. If the present proposals can be fully and consistently implemented, they offer an opportunity for a major and lasting improvement in the efficiency, international competitiveness and growth of the Polish economy. - 89 - APPENDIX 1 Proeressve Charges on the Eterrirse Ware Bi1h PFAZ (1 January 1983 to 31 December 1985)and PPWW (from 1 January 1986) A law of 29 December 1982 introduced with effect from 1 January 1983 a compulsory charge levied on the enterpribe wage bill, paid out of after tax (and subsidy) gross profits (so-called "distributed profit") into the State Training Fund (PFAZ) as advocated in the 1981 official reform project. Payments out of this fund were a small fraction of revenue and the initial balance and the subsequent changes of the fund were credited to the State Budget; the payment to PFAZ did not appear under tax revenue but otherwise was effectively a tax, and was treated as such by enterprises. A Government decree of 18 November 1985 replaced the PFAZ levy with a specific tax on above norm wage bills of enterprises (PPWW), leaving the PFAZ fund to be fed from the State Budget, with effect from 1 January 1986. The PFAZ charge was levied on the increment of the wage bill with respect to the previous year, depending on the growth rate of enterprise value added or output according to a two-level system of coefficients which could be modified at the discretion of the Ministry of Labor. The charge was calculated thus: i) The starting point of the calculation was the growth rate of gross value added (literally "net output sold", defined as the value of sales net of material inputs but gross of amortization) or, for some enterprises, the growth rate of a gross or physical indicator of output. ii) This growtb rate was multiplied by two "reductive coefficients", both within the range 0.5-1, fixed by the Council of Ministers every year and published in the yearly Central Plan documents; the first being nation-wide, the second being diversified according to specific types of output or entire sectors. iii) Increases of the total wage bill of the enterprise over and above its growth rate so corrected was subject to a charge ranging from 40 to 500 percent of those above norm wage bill increases, paid out of after tax profits as a priority charge. Bonus payments out of the Staff Fund over and above amounts corresponding to 7 per cent of the PFAZ-exempt wage bill were also subject to charges ranging from 100 to 400 percent of above norm increases, paid out of the Staff fund. iv) The Minister of Labor, in consultation with the Planning Commission Chairman, could, and frequently did, fix at his discretion the PFAZ-exempt bonus payment thresholds, for individual enterprises. v) Subject to its ability to finance wage payments and the related PFAZ charges the enterprise was free of statutory limits on its wage bill and average wage rate. - 90 - The PFAZ-exempt wage bill F1 at time 1 was given by (111.1) F =F (1 + 1 o .K .K) 0.n5 K,K s 1 0 - nf s n S S 0 If Kn = Ks 1 the charge-exempt wage bill would be a constant share of value added (if PFAZ is related to physical indicators of output, the product wage is a constant share of physical output). If Ka and/or K, < 1, Kn.Ks c 1 and the charge-exempt wage bill becomes a falling share of value added. Thus this type of charge discourages wage increases higher than productivity increases, presumably Ka indicating natiun-wide incomes policy, Ks being lower the higher sectoral productivity with rdspect to national average). Progressive rates of PFAZ charge would strengthen this disincentive as well as making for more uniform wages in the economy as a whole than would be the case for flat rates. There have been suggestions (for instance, by Rak, 1985, p. 150-1) that enterprises have been able to manipulate to their advantage indicators affecting PFAZ by altering prices and assortment without any real increase in either quantity or quality of output, especially in enterprises using gross indicators. Of course the variety of indicators and, what is worse, the individual setting of enterprise parameters, make it impossible to assess the individual efficiency and the comparative performance of enterprises. The PPWW tax embodies the same general principles of national and sectoral incomes policy, with some cosmetic and some substantial differences with respect to PFAZ. Unlike PFAZ, PPWW is a formal tax. The tax-free wage bill increase is related to the previously period's tax-free wage bill. There are no more individualized coefficients for particular enterprises. There are, however, five alternative formulas at the discretion of the Ministry of Labor in consultation with "founding organs". These are: i) The growth formula: (III.2) F F (1 + 1 o .Ko ) 0 - S s 0 as in the former PFAZ case, with K. < 1 instead of Ks.K,, which is the same thing. The use of physical units for the measurement of S is now exceptional. The correcting coefficient is fixed by the Council of Ministers and is currently at the basic level of 0.40, raised, for each sector in which the share of pay in costs in 1984-85 was greater than 15 per cent, by 0.01 for each percentage point over l5 per cent subject to a maximum increase over the basic level of 0.15. Tnus the sectoral correcting coefficient cannot exceed 0.55. However a coefficient of 1 (i.e. stabilizing the share of earnings in value added) is applied in special cases (health services, services to agriculture, artistic handicraft, frarehising, invalids' cooperatives, - 91 - production of health apparatus and fire-fighting equipment). In the enterprises where a fall in productions occurs, a coefficient of 0.6 is applied regardless of the a coefficient which would apply to them in the case of output growth, except for agriculture and fishing activities where in case of output falls the rather punitive coefficient of 0.2 is applied. This growth formula is the basic and most frequent formula for determining PPWW tax liability. The October 1985 decree of the Council of Ministers envisages the applicability of any of the following alternative formulas, at the discretion of the Minister of Labor in consultation with the relevant branch Ministry. ii) The threshold formula: (111.3) F1 - Fo (1 + p) where p is the growth rate of earning free from the tax, fixed in the yearly Central Plan for the fiscal year. ii.) The share formula: (III.4) F, - S.U where U is the normative indicator of the share of earnings in gross value added, given by (III.5) U 0.97 Fo/So This involves a tax free share of earnings in value added falling over time at a steady rate of 3 per cent, regardless of anything else. The differences between the "growth formula" ad the "share formula" for determining the tax-free wage bill can be highlighted by expressing them as relations between the following variables so defined: gF growth rate of tax-free wage bill g8 growth rate of value added u rate of change of the share U of tax-free wage bill in the gross value added growth formula III.1 or III.2 share formula III.3 gp = K,jgs K ggp "8g+ K -1 1+K g u= 1 s - 1K (K-l) g /(1+g ) u = K - 1 < 0 for K < 1 l+gi < 1 for K < 1 and g > 0 - 92 - Both formulas involve a king of real fiscal drag eventually bringing the whole of earnings under PPWW progressive taxation, which makes sense only as a temporary measure of macroeconomic deflation and stabilization. iv) The profit formula: (111.6) F1u Fo (l + ;0 o Z0 - ;~~~ -=r( o .04 z 0 where Z is operational profit (bilansowy zysk), with a formula similar to the value added growth but with smaller elasticity of the tax exempt wage bill with respect to profit growth. Tax rates on the above norum wage bill are slightly higher than the rates of the former PFAZ levies, and are given in the following table. Excess wage bill over PPWW tax rate the tax exempt norm in percentage in percentage up to l 100 above 1 up to 2 150 above 2 up to 3 200 above 3 up to 4 300 above 4 up to 5 400 above 5 500 v) The individual tax threshold formula. Here tax exempt earnings Ft1 are fixed per man, as F1, - Wio + (at - ao) where Wto is the i-th worker's pay in the previous period and at and ao are the tax-free allowances fixed in the yearly plan for individual earnings in the two periods. The tax is still paid by the enterprise and not by workers, but at rates progressively levied on individual earnings over Fl,. The difference with the threshold formula III.3 is that here individual earnings are allowed to grow untaxed by an absolute amount (at - ao), whereas in the threshold formula III.3 the whole wage bill is allowed to grow at the rate p = (al - ao)/ao. The tax rates on individual earnings above Ft, are given in the following table. - 93 - Excess of yearly individual Percentage earnings over the tax exempt level rate of tax (in thousand zlotys) up to 24 5 over 24 up to 48 10 over 48 up to 72 15 over 72 up to 96 20 over 96 up to 132 25 over 132 up to 168 30 over 168 up to 216 35 over 216 up to 288 40 over 288 up to 360 45 over 360 up to 432 S0 over 432 up to 504 55 over 504 60 The PPWW tax is paid, like PFAZ' out of "distributed profits" (i.e. gross profit net of other taxes plus subsidies) as a prior charge after amortization; if this profit is not sufficient to cover PPWW the enterprise can use its reserve fund (whereas PFAZ could be paid out of the following year's profit). If earnings do not reach the tax-free threshold the. enterprise can set up reserves for tax-free payments in later years. PPWW is levied not only on wages but, like PFAZ, also on bonuses out of profits. The tax-free threshold is calculated as a "normative share of after tex profit" fixed for each enterprise for a "long period". This normative share is the ratio between 7 percent of average PFAZ-exempt earnings and 35 percent of average profits in the years 1984 and 1985, with further minor adjustments and corrections. Tax rates on bonuses out of profits are given below: Excess of bonuses and prices tax rate in relation to tax-free level in percentage in percentage up to 15 200 over 15 up to 30 300 over 30 400 From 1986 bonuses can only be raised when enterprises profits increase. See: Government decree on PPWW, 18 November 1985, Jasinski, 1985. 94 - APPENQLI 2 Commodities for which Prices are Administered by the HinistrX of Foreign Trade. for Export and Imnort. on the Aasis of Regulation No. 39 of the Minister of Foregan Trade. of December 31. 1986. Effective January-1. .1.2 Classification Number Inclusions Exclusions Description 1. Innuts of particular importance for production cost calculations: a. 01, 0211 coal. coal briquettes and coke exports to payments area I b. 0231, 0242-3 02442-32 petroleum and fuel oil c. 0411, 0412 iron ores d. 042, 043, 044. 0456, 045, 046, 047, 047-8111. exported iron and steel metallurgical products, 047-8121. excluding forgings, wheels, hoops. forge-rolled 047-82, 049, rings, turnouts, and railway acessories. 047-8300 welding, black-annealed, binding and spring wire e. 052 053-11, 0531-4 exported products of the non-ferrous metals 054 0541-11 industry and non-ferrous metal processed 055 0551, 0556-1 products excluding copper and forgings 056 0561, 0566-1, 0566-S (excluding imports of 055. 056, 058 058 0582-4, 0582-51, for production purposes) 05891, 0589-991 f. 0531-4, 0521-8 0531-41, 0521-81 gold and other noble metals and their scrap, including silver and silver scrap g. 1813 cellulose h. 1231-1, -2, 1231-191 artificial fertilizers, excluding -3, -4, -9 horticultural fertilizers and agricultural 1432-1, -2 limestone 1. 2321-1, -2, raw cattle, calf and pig leather -3, -5, J. 4011 4011-13,-23,-33, cereals, excluding millet, buckwheat, -43,-53,-63,-73 corn and seed 2. Final goods. with an important impact on the cost of living: a. 2313-1 2313-15, -19 pork, beef and veal, and their products, 2313-2 2313-25, -29 excluding delicatessen meat porducts 2313-3 2313-35, -39 2316-1,-2,-3,*4 2316-44, 47, 49 b. 2315-11, 2315-21, pork fat and lard, butter and vegetable fat 2358-2, 2491-115, -14,-22,-3 c. 2431 sugar d. 0242-2 gasol1ine and fuel oil, excluding bunker oil, - 95 - APPENDIX 3 Tax Relief Rates According to Export Tax Relief Rates According t Value (percentage) Export Value (Percentaiee) USSR and USSR and Clearing Socialist Clearing Export Convertible Agreements Markets Convertible Agreements Group Currency With Convertible Excluding Currency in Covertibl Area Currency Areas USSR Area Currency Are 1986 1987 1986 1987 1986 1987 1986 1987 1986 19E Groua i1' Highly Manufactured 8 12b' 8 8 4 4 15 25'' 15 1! Subassembly 12 18 12 12 6 6 22.5 37.5 22.5 2: Group II"' Medium Manufactured 6 6 6 6 3 3 15 15 15 V Selected&' Centrally Balance Products 2 2 2 . - 5 5 5 5 5 AX See attached lists b/ Enforced as of November 1, 1986 co Enforced as of January 1, 1987 - 96 - Products for which exports are eligible for tax reliefs, according to Resolution No. 24 of the Ministry of Foreign Trade of July 17. 1986 and, for Centrally Balanced Products, Regulation of the Ministry of Materials and Fuels Management of September 19, 1986 No. Branch code class. no. Description GROUP I PROQDUC 01 047 Cold-rolled, coated sheet and other metallurgical products 02 061,0623,063,064, Cast products (together with fixtures), tank structures 0654,0658.067 and tools, metal hardware,medical and sanitary equipment and furnishings. comxonly used metal products 03 07,08 Machines and equipment - Parts I and II 04 09 Products of the precision mechanical industry OS 10 Transport means 06 11, excluding 1121 Products of the electro-technical and electronic industries, excluding uninsulated wire 07 1245,1248 Synthetic dyes and products made of refined carbon 08 1324 Cosmetic and perfume products, excluding herb products 09 133, excluding 1336, Chemical agents for various applications 1337, 1338 10 134 Pharmaceutical products 11 13S Herb products 12 136, exluding 1362 Plastic products (excluding semi-finished products), rubber 1375,1377 and textile-rubber footwear, sports equipment, tourist equipment and rubber rescue equipment 13 151,152,153,154 Building glazing, glass for technical, household and packaging applications 14 16, excluding 168 Refined ceramics products, excluding reclaimed and waste raws 15 174 Joinery products and furniture 16 1753 Fish-joint packagings and baskets 17 177, excluding 1775. Other wooden products and wicker praducts, excluding semi- 1776,17775,1779 finished products 18 1917,1927,1936,1946 Finished textiles--cotton and cotton-like, wool and wool-like, flax and hemp, silk and silk-like 19 195,196 Products of the dicorative textile industry, haberdasher products 20 201 Knitted and hosiery products 21 21 Felt head-dress 22 21 Prodvets of the clothing industry 23 221S2,2216 Oressed, dyed and refined fur skins of precious animals 24 222.223,227 Foot-wear, excluding rubber, fur products and fur clothes, clothes, other products of the leather industry 25 2316,2317 Meat, game-animals and rabbit products 26 233,234 Products of the egg and poultry and processed fish products 27 235, excluding 23582 Dairy products 28 24, excluding 241,2431 Food industry products - Part II 29 25, excluding 2SS Food industry products - Part III 30 262 Animal utilization products 31 27 Printing industry products 32 28, excluding 2481 Other industrial products 33 41 Horticultural products 34 42, excluding 425151, 525152 Animal husbandry products 35 43, excluding 431 Products of the forestry and hunting economy 36 34,99 Complete objects and pieces otherwise unclassified 37 Material and non-material services - 97 - No. Branch code class. no. Description GROUP I! PRODUCTS 01 02411,02412,02413 Fuel products, oils and other petroleum processing products 02 0243.0244.0245,0246 Lubrication and s ecial oils, plastic greases excluding 024633 petroleum products of various applications 03 028 Other fuels, excluding wood, and their processing products 04 044,0451.048,049 Semi-finished hot-rjlled products, ready and rolled products not included in finished products. forged unfinished products and other products of the iron metallurgical industry 05 054,055, excluding Powder metallurgy products. non-ferrous metals 0552.056, excluding rolled products, extruded products, unfinished 0562.0S7,058. forged products, other products excluding OS892 06 062, excluding 0623, Metal structures. industrial metal products 065, excluding 0654. 0658 07 1421 Un-insulated wire 08 122. excluding 1222- Inorganic products 5Sl5.52,553 and 1222-611 09 124. excludinj 124S, Organic products 1248 10 1268,12895 Other plastics, chemicals for soldering and welding 11 1311.32. (excluding Paints and varnishes, fatty-like glues, waxes, 1324),1336,1337,1338 chemicals not mentioned separately. acbestos- rubber products 12 1361,137, excluding Plastic products semi-fabricated in character, 1375,1377 rubber products 13 1413,1445,1464,147 Construction elements of stone, excluding wall elements, ceramic tiles and coverings. layered construction slabs and elements. refractories 14 171, (excluding 1715), Sawn timber and semi-finished sawn wood, chip- 1721,1722.1724.1725, board and fibreboard, joinery plywood, 1726,173,175, veneers and faceboards, wooden structures. (excluding 1753).176 matches 1S 177S.17761.1777S. Products of ordinary reed, wood wool, semi- 1779 fabricated wicker products and other wooden products 16 1814.181S.182 Paper, cardboard, paper products 17 202, (excluding 2027), Products ot felt and technical textile industry 203, 2063, 2064 knitted fabric, raw and finished unwoven cloth 18 2251 Dresses fur skins of comfon animals 19 2313.2322 Raw meat and byproducts of slaughter and neat processing, without hair and bristle 20 4014,40215 Grain and seed of leguminous plants for consumption t.nd fodder 21 402,403 Potatoes and other root crops, products of industrial plants 22 407.408 Field, meadow products, seeding material. reproductive material 23 431. excluding Wood 4311 11 - 98 - No. Branch code class. no. Description CENTRALLY BALANCED PRODUCTS 01 045, excluding 1451-3 Rolled final products 02 045 Steel pipes 03 0531-11 Copper 04 0531-41 Silver 05 1211-2 Sulphur 06 1222-551,552,553 Calcified soda and heavy ash 07 1222-611 Sodium hydrate (caustic soda) 08 1231-l,-4 Nitrogen fertilizers 09 1231-2,-4 Phosphorous fertilizers 10 127 Chemical fibres 11 2211 Heavy leather 12 2212 Light leather 13 2551 Industrial tobacco 14 1715-1,-2,-3 Wooden floor materials 15 2321 Raw hides for the tanning industry - 99 - APPENQIX 4 ExemRt ons from the PPWW tax on above-norm wage increases for exgorters Rates of increment to Exempted wages Increases above the norm (eergentages) Export groupAl USSR and Clearing Arrange- Convertible ments with Convertible Socialist Markets Currency Area Currency Area (excluding USSR) 1986 1987 1986 1987 1986 1987 Group I Highly Manufactured 20 30 20 20 15 iS Group II Medium Manufactured 1S 1S iS iS 10 10 Selected Centrally Balanced Products S S 5 S S S Surce: Ministry of Foreign Trade The rates are applied to calculate the allowed addition to the tax-free wage bill as follows: o a K . r .£ S where 0 is the additional tax-free wage bill, K is the standard tax-free wage bill, r is the rate as shown in the table above, E is the value, in transaction prices, of the exports sold, S is the value, in transaction prices, of the total produttion sold, minus turnover tax. - 100 - APPENDIX 5 PAY DIFFERENTIALS AMONG INDUSTRIES Mining/ Mining Mfgp. Constr. Transp. Agric. Mfg. Dispersion 1984 33,153 16,717 18,358 16,412 16,782 1.98 .32 1983 28,547 14,123 15,061 13,834 13,713 2.02 0.34 1982 22,912 10,845 11,625 10,816 11,925 2.11 0.34 1981 13,310 7,195 8,124 7,780 8,009 1.85 0.25 1980 9,912 5,723 6,469 6,200 5,816 1.73 0.23 1979 8,599 5,008 5,743 5,287 5,150 1.72 0.23 1978 7,865 4,608 5,342 4,837 4,830 1.71 0.22 1977 7,504 4,363 5,101 4,516 4,540 1.72 0.23 1976 7,035 4,059 4,812 4,213 4,122 1.73 0.23 1975 6,614 3,680 4,529 3,844 3,195 1.80 0.27 1974 5,077 3,063 3,881 3,332 2,807 1.66 0.22 1973 4,147 2,665 3,471 2,933 2,431 1.56 0.20 1972 3,839 2,443 2,992 2,573 2,178 1.57 0.21 1971 3,674 2,332 2,796 2,423 1,978 1.58 0.22 1970 3,501 2,215 2,675 2,281 1,858 1.58 0.22 1969 3,441 2,155 2,374 2,207 1,819 1.60 0.23 1968 3,032 2,074 2,491 2,155 1,752 1.46 0.19 Source: International Labor Statistics, ILO, 1985 and earlier years. - 101 - POLISH WAGES IN MANUFACTURING Industry 1974 198C 1981 1982 1983 1984 311-312 2,916 5,318 7,125 11,085 13,318 15,491 313 2,676 4,812 6,854 11,029 13,376 15,744 314 2,623 5,409 7,119 11,066 13,911 17,654 321 2,703 5,374 6,781 9,747 13,400 16,048 322 2,469 4,936 6,145 9,354 12,738 14,822 323 2,748 5,441 6,833 10,403 13,851 15,763 324 2,601 5,147 6,445 9,910 13,385 15,351 331 2,666 5,174 7,009 10,763 13,223 15,406 332 2,805 5,152 6,783 10,496 13,374 15,311 341 2,644 5,149 7,029 10,660 13,303 15,643 342 2,964 5,487 6,902 10,180 13,245 16,822 351 3,415 5,977 7,433 11,283 14,610 17,307 352 2,977 5,425 6,708 10,603 14,002 16,540 353 3,431 5,953 7,417 11,102 14,741 17,900 354 3,857 7,648 9,468 14,104 18,157 21,321 355 2,877 5,559 6,749 10,367 14,340 16,780 356 2,643 5,404 6,651 10,536 13,986 16,141 361 2,911 5,243 6,775 9,837 13,104 15,675 362 3,0e2 5,660 7,457 10,826 13,856 16,471 369 3,159 5,654 7,481 11,040 13,716 16,072 371 4,101 7,884 9,455 13,775 1b,591 22,272 372 3,967 7,685 9,690 13,703 18,332 21,829 381 29966 5,537 6,872 10,308 13,522 15,896 382 3,341 6,122 7,509 11,293 14,909 17,907 383 2,979 5,513 6,696 10,248 13,407 16,001 384 3,428 6,221 7,509 11,278 14,803 17,684 385 3,117 5,713 7,014 10,689 14,143 16,635 390 2,671 5,099 7,102 11,005 14,774 17,648 Mean 3,023.46 5,703.43 7,250.39 10,953.2' 14,289.89 16,933.36 ST DEV 420.39 777.39 857.37 1,119.11 1,519.52 1,889.52 Ratio 0.14 0.14 0.12 C.10 0.11 0.11 Industry Codes: 311-312 Food Manufacturing 354 Misc. Petrol Products 313 Beverage Industries 355 Manufacture Rubber Products 314 Tobacco Manufactures 356 Manufacture Plastic Products 321 Manufacture Textiles 361 Manufacture Pottery 322 Manufacture Apparel 362 Manufacture Glass 323 Manufacture Leather Products 369 Other Non-Metallic Mineral 324 Manufacture Footwear 371 Iron and Steel 331 Manufacture Wood Products 372 Non-Ferrous Metal Basic 332 Manufacture Furniture 381 Manu. Fabricated Metal Prod. 341 Manufacture Paper 382 Machinery Manufacture 342 Printing & Publishing 383 Electrical Machinery Manufacture 351 Manufacture Ind. Chemicals 384 Transport Equip. Manufacture 352 Manufacture Other Chemicals 385 Scientific Instrument Manufacture 353 Petroleum Refineries 390 Other Manufacturing Industries Source: International Labor Statistics, ILO, 1985 and earlier years. - 102 - APPENDIX 6 CONSOLIDATED BALANCE SHEET OF THE BANKING SYSTEM, 1980-86 (In billions of zlotys; end-of-period) 19D 19tl 1951 196 1986 196 5 Cu te to uoc1e11 u 30o79? 3,c.0 3.738.1 457 45366 5,291.1 5569 _ eO u 1,3604. 1,56U.0 1,884 2,M.4 2,30.1 2,51.6 2,741-. au1 e mma 6o _ t 109.7 1164 147.6 1754 304 299.) 3o1. ftdadtum ~~~~~~~~~~~~~~~~~~~W-3 IIJ: TM u n z g Ib**dr at41 aeita (05A) (37.J) (43) (43.) (46.3) (47.9) (66.6) kwto ae "t (n.n9 (75-6) (9S.W) (U9.1) (97.6) (110J) 011.6) tbic"t1u1muazmr5em 2. 3.1 7.J 13.1 14A 19A 234 11 (cm:um A - - 51.5 72.9 794 ueite to ImmO6.5 4. 76.0 U9.2 12.5 2. 2 W40 t1Uwlblt I_d Ie of pob ad arwm U TK W 3 in S11 W5I I_ (COMtata ard uga) 7.) 38.5 38.2 50.7 74.7 MA4 113.7 0w 0.6 1.2 1.3 3.0 2.7 3.9 5.5 'I ueiite to amau1 s 3. A.1 216.0 319.3 46.6 5MA. 673.5 Total etic rcsilt U S _7 2 S S 635. 6 752- Otbw dommk asK Sst wAd.th WAteh pt m cn d:1I 153.0 352.5 12D 3 J 1518.1 2 OSD.2 3614 relp varum t - - 607.5 0X.5 1,517.5 2 275A. T= other 105.2 1374 2W.J 323A 416.9 492.9 613.6 inwss5t8d an"" 47.3 214.9 172.5 188.2 125.8 37.8 333A Tot-l 41c *met. 3.616.9 4D7.J 5.411.5 4 29.9 1.435.7 9 4DD.1 W-WA ToWtalo p sant 2/ SD.1 Y1.1. 212.9 270.8 465.5 538.4 522.1 Asms * t Z 3 ti4 M97 4 I 1 %8.7 7 901.2 993.5 112135.9 b=ste of the socalid ctor 616.6 738.8 1010.0 1141Q7 1304 .7 1,U2.S Cab h dl*p 16A 31.5 41.0 5 71.59.3 dpits 163.4 204.6 316.1 331.0 396.3 481.1 56.0 - ecial fdb maw 133.2 143. 238.6 2974 324.3 39M.1 519.5 Izwmmt mats 141.6 157.1 l6.5 18.0 236.5 164.5 118.6 Ld d psits 76.1 68.A 129. 153.5 201.7 19.5 93.0 ,ar.li erun d4apute 76.1 U4.7 160.1 177.5 91.5 60.0 71.5 =ate. of mmuoclsed attles ad hndal& 80.3 1 09-6 1 514.1 1825 6 2 169.0 2 90 2 3 109.1 Omh holdinw 5W6b. 663.1 765.7 .8h 11 bS Dsid epsits 22.5 39.2 53.2 66.0 86.4 123.9 U3.2 of sI*ch: dwmqg socat sev1v depepia (13.6) (23.0) (37.4) (46.4) (57.9) (77.6) (73-n) Tia depsits 219.3 373.8 445.6 534.7 630.7 V8..3 1.059.? Slnp dosits 258.0 265.5 362.0 *74.6 545.8 701.2 654.0 Vot.elp oracy deposts 3A4 42.2 62.5 79.6 131.6 242.7 214.3 Cet Sicae !.1 3.2 6.6 7.2 11.6 11.3 13.2 of firwga l 1dtutim 137.8 143.6 165.4 246.1 257.2 365.6 374.8 Duposlts of the Ste Iram Ib Ltute W 55.1 X;7 W 5 1-i7 113.6 am - f 96.3 93.6 110.3 1754 164.9 236.9 261.2 Cu*ml 8w-t depodit 613.3 505.$ 331.8 373.5 525.7 636.6 6M.1 Ib4nw ~~~~~~~~3974 9.8 225.4 hI3 274.7 212.6 xtrah4vty fum 90.0 1C8.0 135.0 148.1 279.8 361.9 467.5 Pwalm Fund (15.1) (32.1) (15.7) (59.3) (136.5) (t-0) (398.8) WFAZ (-) (-) (24.2) (40.5) (70.4) (29.0) (16.9) 1a p8armt deposit 56.3 53.2 121.9 119.5 125.1 L54.5 112.0 Of ddch: eatbiptazy fasdW 1h HE 1W ai WI -50 Other dtic 1titm 231.0 21.1 26.0 397.5 541.4 565.3 418.1 Settlzs wAth stats lb pt 24.4 3 It 11II UT3 2 1. 63.9 Inur~ ad idtara t 79.2 147. 225.3 265.3 262A 361A 356.2 theladsslltd liabt-s 27A 17.2 29.0 22.1 148.3 in.? - Totdl dastje 1iabtit 2 35R.1 2LS7.9 3.40E.2 4.W1,9 4,8284.0 5I&.9 6.135.9 Total toriwz ui4luit 113.87 101.2 2,235.2 2438 3,073.2 4.059.6 4.999.O S hrt-ten 75.2 101.3 i4.2 9D.9 535.4 623.5 139.3 Sourte: Dotc provided by the Polish authotities. 1/ Acened laicne on the stcto budget rto settled itfreuently and p1ece.el. T/ Gold to Valued at US$400 an once. NOTES