The Crisis in Poland: A Lesson in Political Economy

A Report from “Solidarity”

Editor’s Note: Over the last year the situation in Poland has changed dramatically. Where a year ago there was optimism about the possibility of reform—the Jaruzelski government had even passed special legislation for a special church-administered fund to channel Western aid to Polish farmers—the climate today is bitter. There was, of course, the murder of Father Jerzy Popieluszko and the subsequent trial of Polish security officers that turned into an attack on the church. This has been followed up by attacks on other clerics, including a bishop and one priest who had the Solidarity V-for-Victory symbol burned into his skin with cigarettes.

Of equal, if not more, importance is the actions the government has taken to increase its grip on society by further controlling the economy. As Solidarity members emphasize, it is easy for Westerners to see when one of their number—or a group, as is the case with the recent conviction of three trade union activists—gets sent to prison. It is more difficult, they say, to see when economic rights, crucial to any political liberties, are similarly crushed. Not only has this government blocked the church agricultural fund, it has centralized many other decisions. Regarding trade, last June General Jaruzelski initialed an agreement that effectively tied the Polish economy to that of the Soviet Union through the rest of this century. Recent evidence suggests that Jaruzelski even has an agreement to extend credits to the U.S.S.R. And with Mr. Gorbachev now taking a tough line, there is little chance for any relaxation of power.

The most recent development in Poland is the package of price increases forced by the government, the most recent of which was the raising of meat prices in July. This comes at a time when the standard of living continues its steady decline. In the words of Solidarity: “Mere survival has become a burden for Polish families.” The government has argued that its price increases are necessary for Poland’s membership in the International Monetary Fund. But in the following report signed by trade union president Lech Walesa, Solidarity argues that these are but a pretext by

Poland’s rulers for tightening their control. In its report Solidarity argues instead for free pricing and incentives to produce. Not least of the ironies is that it has taken an outlawed trade union behind the Iron Curtain to spell out economic truths so often ignored in the West, including their precious link with civil rights. We commend the report to our readers as an instructive document in political economy.

Forward

The currently scheduled price increases on basic foodstuffs are not intended to, nor will they, cure the Polish economy. They are yet another attempt to shift the burden of the authorities’ economic mismanagement on the society. Each previous increase was accompanied by a false pretense of concern for the economy from the authorities. The economy continued to limp along in a system functioning contrary to all common sense, laws and experience. Consecutive price hikes were always applied as a panacea for imminent disaster.

The inefficacious economic system wastes the Polish nation’s human and natural resources at an ever-increasing rate. The need for fundamental reform is ever more acute. Despite this, even reforms proposed by the authorities in 1981—and criticized by NSZZ “Solidarnosc” as insufficient—have long since been forgotten.

This is not the first time I have written about these problems, nor is it the first time NSZZ “Solidarnosc” is stressing the urgency of the situation. Both the 1980 Gdansk Agreement and our Union’s First National Convention in 1981 signaled our deep concern. This report is an economic analysis of the price increases and the standard of living, prepared in early 1985 by a group of “Solidarnosc” activists and advisors.

We are not opposing flexible market prices. We are fully aware of the role of prices in an economy that is ruled by proven economic laws, allowing countries to augment their national wealth. No matter how one looks at the problem of price increases, however, it must be emphasized that the poorest sector of our society must be economically buffered from them. These sectors are the hardest hit by the price hikes: what justification can be given for bullying the defenseless?

Poles are willing to make material sacrifices for the good of their country if the authorities of Poland guarantee a clear-cut and rational program of reform to check the escalating crisis. The society must be assured that the new price hikes will not result in yet another wasted effort of people and resources. Without this assurance, the Polish society will once again have to bear the monetary burden of:

— the authorities’ negligence and incompetence;

— the wasted achievements of past generations;

— the cost of money squandered on unnecessary and politically motivated investments;

— the lack of worker participation in their workplaces;

— a state of incompetent bureaucrats authorized to violate the law;

— a police state with a bloated security force used to intimate the nation instead of fighting crime.

This is an unjust burden that has been swelling for years, most rapidly in the past three years. We have every right to refuse this burden. Workers have every right to dissent and protest.

I am opposed to the current price increases because I am in favor of salvaging the Polish economy. Quickening our economic pace is futile if we are not going anywhere. We must first determine our direction together with the authorities; only then will there be any sense in quickening our pace and accepting additional material sacrifices that are indispensable for the future. Joint participation between the authorities and the society is essential if there is to be genuine dialogue on economic problems. We are always prepared to enter into an honest, open dialogue with the authorities for the good of the country. We are also always ready to shoulder additional sacrifices that truly benefit Poland.

Lech Walesa

Gdanski, 25 February 1985

Introduction

The fourth year after the imposition of the state of war began with the announcement of another food and consumer goods price increase—the third since the beginning of 1982. This situation calls for an evaluation of our nation’s current and future standard of living and of steps the society can take to protect itself against the deepening crisis.

The Polish nation, subjected to consumer market disruptions since the mid-seventies, has the right to demand in the mid-eighties: what next? On the eve of the 21st century, will we still have to make the same choice between rationing and “balanced prices” that make basic goods too expensive for the average consumer? The new price increases must be seen in light of this choice, itself imposed by the consequences of government economic policies and unfulfilled promises of reform.

In its 1980-1981 economic program based on self-management and cooperation with the authorities in fighting the crisis, NSZZ “Solidarnosc” adopted a platform on price increases and social policy that is worth recalling today. The trade union was never in favour of a fixed price system. Price fluctuations upward and downward, the latter largely unknown in our economy, are a natural consequence of self-regulating market mechanisms. In an economic reform program that would purge our economy of over-bureaucratisation and waste, prices would become genuine economic indicators, directing producer decisions according to consumer preferences. Our union also defined major income and social policies that foresaw financial indemnities for those sectors hardest hit by the price increases. Special clauses to this effect were included in the August 1980 Gdansk Agreements and later developed in documents written in late ’80 and early ’81. The postulate on wage indexation and social security included in these documents has a long history in the Polish trade union movement, dating back to 1923.

Price Increases Replace Reform

Contrary to earlier government forecasts and current propaganda, the historical opportunity for economic reform in Poland has been squandered. Government-imposed, piecemeal changes have not brought the significant improvements necessary for future development. A relationship of “mutual alibi” exists between the idea of reform and prices. Reform measures are used as a pretext for drastic price increases and, inversely, price increases serve as an argument for revoking reform. Propaganda attempts to depict a welfare state in which administrative measures buffer the society from arbitrary pricing policies imposed by ruthless industrial management. In practice, the government is limited to attempts at restoring equilibrium in the consumer market through price increases precisely because of the lack of supply-side economic reforms. The Polish people thus bear the brunt of the crisis.

The new price increases come at a time when the Polish society has not yet recovered from the severe 1982 increases implemented during the state of war. As a result of those prices hikes, food costs increased 150 % while real income fell an unprecedented 24% (assuming the 1981 pattern of consumption). A year ago, another food price increase was introduced on a similar scale as this year, but food rationing was not abandoned. It was followed by increases in rents, postal and telecommunication costs, train and coach fares that, according to cautious estimates, brought about a 16% increase in the cost of living. Although such an increase is three times higher than the European average, even it does not take into account specific phenomena of our “economy of deficiency” that are affecting living standards and are unaccounted for in government statistics. Bribes to obtain a certain commodity, the purchase of a second-hand item at a higher price or a more expensive substitute are all hidden costs. The low quality of various products, time spent searching for unavailable goods and waiting in queues, or buying food directly from the producers must also be taken into account in cost of living estimates….

At present, the national standard of living is 20% lower than in 1981. The authorities of Poland claim that the drastic decline is the inevitable price to be paid for economic reforms ensuring a better future. The price has been paid and will continue to be paid, but there is no ground for believing that the economy has benefited. The nation is experiencing its seventh year of inflation and, according to official estimates, the cost of living is 4.2 times higher than in 1978. The disorganization of the consumer market appears permanent; in some cases, meat, cold-cuts, and chocolate supplies are insufficient to cover even ration card quotas. As in the ’70s, when foreign credits were squandered, so today social sacrifices necessitated by the decline in the living standard are wasted because of ineffective economic policies and faulty decision-making….

The Road to Nowhere

The authorities are less cautious in substantiating the reasons for the current price hikes than they were last year, yet their arguments are similar and, once again, economically unacceptable. Our union’s counter-arguments are as follows:

*First, the argument for the necessity of raising consumer prices to match escalating food production costs is false. The last three years of bountiful cole seed, potatoes and seed crops and grain harvests in Poland, as well as record-breaking sugar crops, would have reduced or at least stabilized food prices in any normal economy. Price increases in such a situation indicate widespread waste and mismanagement, the cost of which is again thrown on the society.

* Second, profit, ostensibly one of the objectives of the price increases, is an artificial category devoid of any economic significance in our system. What is profitable today can become unprofitable tomorrow, and vice-versa, because of the government’s manipulation of prices. The range of prices determined by supply and demand has fallen to 40% for consumer goods and 28% for farm produce. Prices and costs are not subject to market regulation. It is impossible to make a real evaluation of the economic consequences of any price increase because there is practically no competitive open market in food production in Poland.

*Third, the society should not be deluded that the increases will guarantee higher quality products: quality has never become a substitute for quantity in the Polish crisis. A constant decline in quality renders questionable the statistical progress claimed by the authorities in the 1982-1984 period. Consumers are confronted daily with this decline….

*Fourth, neither can budget deficits be reduced nor can more money be made available for welfare subsidies if the government continues on its merry way. Even if the price increases are fully implemented, the 138 billion zloty deficit, resulting from large-scale mining and metallurgy industry subsidies, still remains. In 1984, state coalmining subsidies increased more than 50% while foodstuff subsidies only ‘increased by 6%. There is reason to doubt that decreases in food production subsidies will lead to increases in such vital social needs as health care, education, culture, social security and housing, rather than in official needs such as arms production, and expansion of the police and security organs. There are also other areas where more significant cutbacks could be made instead of decreases in food production subsidies. For instance, the 29.3% growth in state bureaucracy recorded between 1982 and 1984 could be eliminated.

*Fifth, a considerable improvement in the food market cannot be achieved by price increases because a significant fall in demand cannot be expected. Wealthier groups can alter their spending patterns. For poorer sectors, basic fixed expenses such as rent, food, heating, transportation and health costs, constitute almost 100% of household budgets; demand is therefore rendered very inelastic. For these sectors, further food price increases may result in an increase in demand for basic goods at the expense of other items—this is a phenomenon known from past experience.

*Sixth, once again, the wrong method has been applied for reducing the demand for goods. An inflationary gap has been created by a scarcity of manufactured goods and a surplus in the supply of money available for the purchase of these goods. This gap affects primarily manufactured goods and not food items. Consequently, people have money, yet must wait months and years to buy, for example, refrigerators, washing machines and cars. Moreover, the money supply is concentrated in a very small, wealthy sector of the society: 80% of all savings are held by 20% of all bank account holders. Only the wealthiest families have accumulated savings in the last few years. Thus, the draining effect of the price hikes on food items will affect most severely those with little or no savings—people who have difficulty making ends meet and must supplement their budgets by finding additional work and sources of income outside their workplace. The increases will therefore not reduce the inflationary gap as would, for instance, an increase in the cost of “luxury” manufactured items. The authorities’ reluctance to implement such an increase gives rise to a conjecture that will be dealt with below.

*Seventh, instead of price increases, we suggest lifting the rationing of certain goods. The food market is close to equilibrium and the suspension of rationing, with the exception of meat and chocolate, could have occurred at the time of last year’s price hike or even earlier. It is therefore untrue to claim, as do the authorities, that the lifting of rationing requires price increases on such a scale. One of the reasons behind the rationing of many articles is the freedom it has given the authorities to deal with the surplus of production that is not rationed—it has enabled them to increase exports, reduce imports or distribute the surplus to privileged citizens loyal to the authorities.

Price increases should be considered as one of the symptoms of our economic system’s insolvency, especially with respect to its inability to cope with such inflationary factors as:

— heavy investments inherited from the 1970’s and additional recent investments, e.g., the second stage of the Katowice Steelworks enlargement plans, based on political rather than economic investment criteria (only 10% of total capital investment is spent on development of the agri-food industry);

— an enormous foreign debt and attempts to repay it at any cost by forcing unprofitable exports;

— the inertia of a production pattern that inhibits growth in consumer goods production, (discriminatory distribution of raw materials and discriminatory employment and wage policies in light industry);

— centralized decision-making that favours selected branches of industrial production by means of subsidies, tax breaks and privileged supplies of raw materials.

The chances for eradicating these inflationary factors remain very slight without far-reaching economic and political reforms that could create a favourable domestic and international climate, and without releasing the potential for increased supply inherent in the cooperative and private economic sectors.

The current price increases touch only the tip of the iceberg of our unreformed economy, and promise nothing more than yet another futile manipulation of the inflationary spiral. Worse, prices will once again fall prey to short-term manipulation, making chances very remote for rebuilding the economic mechanism and introducing a system of wages that motivates worker efficiency; thus provoking a further drop in public confidence for Polish currency.

The Polish economy’s “disease”… has not been properly treated. A gradual revival of old command-distribution policies is bound to bring on stagnation, inevitably increasing the development gap between our nation and nations that are making real progress.

Poverty as Political Power

The social costs incurred by the authorities’ short-term policies are intolerably high. Mere survival has become a burden for Polish families. Most families are experiencing deprivation, i.e. the subjective feeling of their poverty, brought about by comparison of present consumption levels with previous ones….

In the public sector, workers outside the sphere of material production have experienced an additional relative deterioration in their situation, while the most dramatic deterioration was experienced by university graduates whose salaries dropped to 55% of their 1979 level. The change in wage levels is disadvantageous to both the current operation of the economy and technological development. According to an unofficial estimate of the “Poland-2000” Committee in the Policy Academy of Sciences, the present wage level is equal in real terms to the 1946 level.

The problem of poverty in Poland is multi-dimensional and should be analyzed accordingly. In the first place, the food situation remains a major economic problem as yet to be resolved. A symptomatic shift in the spending pattern occurred in 1982, with food costs growing from 34 to 47% of family budgets. The problem has become particularly acute for large families, and retired and handicapped persons who are all forced to allocate up to 60% of their incomes to food. The average diet in Poland is characterized by its poor quality and low protein level, and the average meal lacks variety. Meat, butter, cheese, fish and flour consumption has fallen to a level of 10 years ago. As the retail system continues to malfunction, the purchase of food consumes increasingly more time and energy.

Food costs, which increasingly burden family budgets, naturally limit funds for other expenses. Culture, hygiene, education and leisure are usually the first items to be crossed off family budgets. Consequently, the cultural development of families is greatly reduced, which in turn leads to a deterioration of aspirations and moral values.

Poverty can manifest itself in a general decline in the quality of life in various areas not directly tied to income levels. The catastrophic housing situation is one such area. Ten million Poles—over a quarter of the population—suffer from a lack of or over-crowded housing, and the situation is worsening.

The deplorable fact remains that less than 200,000 new flats are available annually while there are about 300,000 new marriages per year. The inability to meet this fundamental housing need is threatening family life in a number of ways. Crowded accommodations can potentially lead to nervous breakdowns, alcoholism, divorce and abortions. It is no wonder that the housing situation is considered to be the major Polish social disaster, graver even than the quantitative and qualitative fall in food consumption. Home renovation and repair is also entirely inadequate, especially in light of the growing need for renovation due to poor construction. Old homes are deteriorating rapidly because of water and air pollution. In fact, the ecological situation points to another dimension of poverty in Poland. The lack of preventive measures, worse than in the far more industrialized West European countries, bodes catastrophe in the near future….

The effects of the crisis are not distributed evenly. A source of embarrassment to the authorities is the burgeoning category of people that lives below the minimum subsistence level. When this growing problem was first publicly recognized in 1980 by NSZZ “Solidarnosc,” estimates showed that 21% of Polish incomes fell below this level. The 1982 price increases raised the figure to 30%; the percentage being much higher among older people.

Who falls in this category? First are social security recipients, pensioners and large families. Young families setting up households must also be included. These social groups have one factor in common: a lack of financial means to make decisions. With nearly 100% of their income going toward fixed expenses, these groups must decide between various fundamental needs. A number of studies reveal the emergence of a trend of impoverishment that is passed from generation to generation….

An increasing number of people are falling below the poverty line for two main reasons. First, foodstuffs and other basic goods become expensive very rapidly. Second, social security benefits are depreciated by inflation. Government policies exacerbate social stratification, thus violating the basic ‘principle of social justice as the poor become even poorer. The weakest groups, those with little bargaining power where national income distribution is concerned, are pushed below the poverty line; state priorities are achieved, budgetary problems are glossed over and flagrantly inflationary policies are conducted all at their expense.

But, it is a problem requiring discussion of its causes and social effects for, in some cases, the situation is alarming.

The years 1982-1984, referred to by the authorities as a period of “improvement” because of an insignificant increase in industrial output, were also years of growing impoverishment. The decrease in life expectancy and rise in infant mortality are two major indicators illustrating this fact. With this in mind, additional price increases—that can only lead to a further drop in food consumption in the poorest sectors of society—are intolerable.

Regression

Different social groups are struggling to defend their living standards in various ways and with varying results. The Polish economic system does not, however, encourage the most effective means of fighting the crisis and growing impoverishment: hard work and increased productivity.

A growing number of bread-winners, dismayed by the lack of better wage prospects in their official workplaces and unable to otherwise supplement their incomes, are turning to the so-called “second circuit”—an official euphemism for illegal black market activities. Most workers try, however, to compensate for the growing cost of living by working overtime, weekends and holidays….

The gradual decline in social security payments to working families is yet another kind of economic pressure and, at the same time, another reversal of the 1980 Agreements. The economic foundations of the family are undermined because male bread-winners with large families are not able to earn salaries on which they can support their families. Even in one-child households, this enduring situation is intolerable. The “professional re-activization” of women, originally heralded as a great success of the system, disrupts the role of the family as caretaker and educator.

Since 1982, the authorities have been cutting back on social benefits. The price increases are a continuation of this trend because only a nominal increase in family benefits is foreseen. The level of benefits was established before wide-scale inflation set in (pre-1980) and now very few families are eligible. These family benefits, paid to households with unemployed housewives and school children, have dropped to less than one-half of their value in 1950. As for child care benefits, the government’s short-sighted policy is not only socially but also economically detrimental: it costs far more to subsidize day-care centers and pay sick-leave for a working mother at home with an ill child than it does to pay child-care benefits to a housewife who remains at home….

A serious danger in the current crisis lies in the political advantages the authorities clearly intend to gain from the general scarcity of supply. In attempting to find justifications for the unjustified and continued rationing of certain goods, the lack of interest in consumer market improvements, the arbitrary and ad-hoc granting of indemnities, we conclude that the authorities cling to old methods of command-distribution and resist self-regulatory market mechanisms in order to maintain power.

It is thus better for them to hold a “price consultation” than to introduce an automatic regulating system, because it enables them to bribe particular groups with indemnities. Hiking up the prices of luxury consumer goods does not serve the interests of the authorities because these goods are readily accessible only to privileged members of the power apparatus (restricted sales, special foreign currency stores, etc.), who therefore can only benefit from the market imbalance.

A similar effect is achieved when a surplus of rationed goods is at the authorities’ disposal. The workers’ demand for meat rationing in August 1980 was a reaction to the system of privileged sales, not only of cars and luxury goods, but also of meat. Such sales were widespread in the 1970’s and are currently being reintroduced and expanded: rationed goods can be bought without ration cards in “better” canteens and other inaccessible goods are allocated to particular enterprises or institutions, and even “deserving” individuals. The neo-trade unions play an important role in perpetuating this discriminatory system, as does the ZSMP (Polish Socialist Youth Union) as far as housing allocations for young couples are concerned.

Poverty and scarcity of supply are manipulated skillfully and willfully by the authorities in order to politically subordinate the Polish society. Clearly, the interests of the regime in increasing prices do not correspond to those of the nation.

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