FINAL REPORT TO NATIONAL COUNCIL FOR SOVIET AND EAST EUROPEAN RESEARC H TITLE : The Impact of Wester n Technology on Polan d ' s Economy : 1970-198 4 AUTHOR : Joanna Poznansk i Kazimierz Poznansk i Jan Svejna r Katherine Terrel l CONTRACTOR : Cornell University PRINCIPAL INVESTIGATOR : Jan Svejna r COUNCIL CONTRACT NUMBER : 628- 5 DATE : December, 198 5 The work leading to this report was supported by funds provide d by the National Council for Soviet and East European Research . Table of Contents Pag e Summary (i) - (iii ) Introduction 1 1. Overview of the Polish Economy since 1970 2 1 .1 The Expansion Program of 1971-1975 3 1 .2 Economic Adjustment of 1976-1979 1 1 1 .3 Prolonged Economic Crisis : 1980 24 1 .4 Conclusion 4 1 Footnotes 43 2. Microeconomic Evidence on the Impact of Western Technolog y Imports on the Polish Economy 4 5 2 .1 Imports of Western Technology 46 2 .2 Disembodied Technology Transfers 43 2 .3 Embodied Technology Imports 5 1 2 .4 Impact on Hard-Currency Exports 5 9 2 .5 Changes in Market Shares 60 2 .6 Efficiency of Exports 6 9 2 .7 Western Technology and Trade Directions 7 7 2 .8 Conclusion 8 6 Footnotes 8 8 3. The Impact of Western Technology on Industrial Output 9 1 3 .1 Description of Variables 9 1 3 .2 Production Function Analysis 9 5 3 .3 Conclusion 10 5 Footnotes 10 7 4. The Macroeconomic (Input-Output) Analyses of Optima l Demand-Oriented Policy 109 4 .1 Introduction 109 4 .2 Methodology 11 0 4 .3 Main Results 11 5 4 .4 Summary and Conclusions 130 Appendices 133 chemicals and metallurgy, the imported western technology did not generate th e expected gains in productivity . The macroeconomic (input-analysis) indicates that Poland followed a rather risky strategy in the 1970's by promoting sectors with high impor t content and often low linkage effects . Our calculations suggest that in th e early 1970s demand stimulating policies should have been geared primaril y towards metallurgy, food, agriculture, light industry and construction . Th e relative neglect of agriculture may have been the single most importan t omission of the supply-oriented policy . -1 - Introductio n The present report summarizes the results of a two-year study undertake n jointly by Jan Svejnar and Katherine Terrell of Cornell University, Kazimier z Poznanski of Rensselaer Polytechnic Institute, and Joanna Gorecka Poznanski o f Skidmore College . The research project focused on the specific issue of th e effects of Western technology imports on the Polish economy and on a mor e general issue of what would have been the optimal economic (industrial) polic y in Poland in the 1970s and 1980s . Chapter 1 of the report provides a general survey of the major economi c and political developments since 1970 . Chapter 2 presents microeconomi c evidence on the extent of Western technology imports and their impact o n hard-currency exports and efficiency . Chapter 3 reports the results of a sectoral analysis which assesses the impact of western capital imports on th e total factor productivity of nine major Polish industries . In contrast to th e microeconomic and sectoral supply-side analyses of chapters 2 and 3, chapter 4 uses the 1969 and 1977 Polish input-output tables to establish whic h industries ought to have received priority from the standpoint of a demand-oriented economic strategy . Chapters 1 and 2 were written by Kazimierz and Joanna Poznanski, chapte r 3 by Katherine Terrell and chapter 4 by Jan Svejnar . Richard Chaykowski, Lu c Leruth, Robert Moore, Pierre Nicolas, and Magdalena Okulicz-Koziren provide d valuable research assistance . The authors also greatly benefitted from dat a supplied by Stanislaw Gomulka and Jan Vanous as well as from discussions wit h George Staller, Zbigniew Fallenbuchl, and Bozena Leven . Any errors are th e authors' responsibility . 1 . Overview of the Polish Economy Since 197 0 The purpose of this chapter is to provide a general pictur e of major developments in the Polish economy since 1970 . I n particular, an effort is made to identify the factors that hav e led to the current economic crisis and the forces that prevente d Poland from entering another period of sustained growth . We believe that only within such a broad context can one properl y assess the im pact of western technology imports on the growt h performance of Poland ' s economy . The authors recognize here that the expansionary polic y which Edward Gierek selected in 1971 - not much different fro m the policies of many other leaders in Eastern Europe - would hav e resulted in serious economic crisis in any case, one evidence o f this being the fact that such aggressive investors as Hungary an d Romania have ended up in deep economic difficulties as well . However, it was the inability to pursue the necessary adjustments . once the economic risks were recognized that worsened the crisi s and made Poland the worst case in Eastern Europe . Moreover, it is argued that unresolved political tension s have prevented the regime from introducing an adequate rescu e package at critical times . The Polish experience as well as th e experience of other Eastern European countries show that th e economies in the region are equipped with a remarkably powerfu l stabilizing mechanisms that help them restore macroeconomi c equilibrium quickly (though in a costly fashion) . But these - -3 mechanisms work only under conditions of political stability tha t allow the regimes to enforce unpopular measures withou t undermining their ability to govern the economy . Poland is th e only case where this requirement has not been met during most o f the adjustment period . 1 .1 The Expansion Program of 1971-197 5 When Edward Gierek took over as First Secretary of th e Polish United Worker ' s Party (PUWP) at the end of 1970, th e Polish industry was stagnating and losing its technological edg e in the world economy . Moreover, years of deflationary incom e policies had had a detrimental impact on labor productivity and work discipline . Gierek ' s first response established limite d corrective measures (most of them in agriculture), followed by a set of far more radical moves which laid the foundations for the economic expansion of 1971-1975 . 1 Investment Program . In this respect, the outstanding featur e of the new economic policy involved a decision to accelerat e investment in an unprecedented .build-up of production capacities . By 1975, the volume of investment exceeded the 1970 level by 13 3 percent . By that time, the share of investment in the nationa l product soared above 25 percent (e .g ., 29 .0 per cent in 197 5 versus an average of 19 .4 percent for 1965-69) . This spurt wa s much stronger than that in any other East European country a t that time . Even Romania, with its aggressive growth policy, reported an increase in total investment of about 72 percent . Only in Hungary did the share of investment in national p roduc t approach that of Poland, but even there the increase in the leve l of total spending was not so abrupt as in Poland . ' The decision by Gierek radically to speed up the investmen t program was in part due to the logic of central planning, unde r which industrial units - from enterprises up to ministries - continually seek to push investment as high as possible . Normally, however, national leaders responsible for the economy as a whole have an interest in restraining such in-buil t ' expansion drives ' and ' investment hunger ' on the part of the individual industrial units, insofar as the national econom y faces ' hard ' budget constraints (e .g ., shortages of hard currenc y to pay for foreign equipment, limited physical capacity of th e construction industry) . In Gierek ' s case, no such interest i n restrainin g the pressure on investment appeared at that time .3 Instead, acceding to administrative p ressures represented a critical mode of buying support among important political actor s in the state bureaucracy . In fact, Gierek ' s assumption of the post of First Secretary in Poland was accom p anied by th e elevation of a large number of activists with strong industria l backgrounds . They showed much less concern for overall economi c balances than had the previous leadership elites . Almost none o f the top leaders under Gierek stood for the same qualities as th e old ' watchdogs ' of balanced plans under Boleslaw Bierut (e .g ., Minc and Szyr), or Wladyslaw Gomulka (e .g ., Jedrychowski and Jaszczuk) . Incomes Policy . Another important policy change was a decision sharply to accelerate the growth of real income compare d to the period 1966-1970, when real wages had grown slower tha n elsewhere in Eastern Europe . This target had to be achieved with relatively stable prices, a constraint virtually forced upo n Gierek by the industrial workers . Ironically, although the pric e rise Gomulka imposed in 1970 was a prime factor in Gierek ' s ris e to power, the latter initially resisted workers 1 demands to rol l back the p rice increases . However, faced with massive strikes in Lodz in February 1971, he restored the old prices and promise d not to raise the p rices for necessities over the next few years . As things turned out, the actual growth in incomes greatl y exceeded the initial plans for a rapid improvement i n consumption . In 1971-1975, nominal wages were allowed to increas e on average by 9 .6 percent yearly, more than three times th e original plan figure (Table 1) .