Poland's Foreign Trade
by Olivia Borecka
by Alejandro Cabrera
by Elena Zinchenko
Overview of Poland's Foreign Trade
The patterns of foreign trade in Poland during the period of command economy conformed to the general model of commerce within the Soviet Bloc. The character of the international trade system in the Soviet type economy largely reflects many aspects of communist ideology. USSR promoted self-sufficiency and avoided dependence on the Western imports for the evident political reasons. The Council of Mutual Economic Assistance was created in 1949 to counter the Marshall Plan. Members of the CMEA (also known as Comecon) had to cooperate together and provide certain goods to the Soviet Bloc in exchange for other goods. The value of trade was largely distorted due to the centrally controlled currency exchange and it was often drastically below the international market value. The multiple exchange rates of East European currencies made trade difficult, which resulted in establishing of a system of bilateral agreements in which they agreed on certain exchange rate or on conducting trade on barter basis. The institution of foreign trade was represented by monopolistic organizations. Foreign prices were completely isolated from socialist market, therefore international economic instabilities (i.e. change in pricing) didn't have much impact and didn't create much disturbance in East European economies.
The monopoly of Polish foreign trade was represented by the Ministry of Foreign Trade. The ministry formulated trade policy and coordinated the work of all individual organizations involved in trade matters. Foreign Trade Enterprises were the only entities authorized to negotiate and sign contracts with foreign companies. They also played role of intermediaries between suppliers and Polish firms. In 1980's individual Polish enterprises, due to reforms, obtained the right to undertake their own foreign trade dealings which contributed to a greater development of trade. It is interesting to note that Poland was the only country in the Comecon that allowed subsidiaries of non-Polish companies to do business in Poland. In the mid 1980's there was 252 such foreign-owned enterprises operating. Poland's involvement in trade was represented by the Poznan International Fair, one of the major trade shows in Eastern Europe, where industrial and consumer goods were displayed in annual exhibitions.
However the magnitude of Polish trade during the communist era wasn't that impressive. Although the largest country in the Soviet Bloc (after the USSR), with one-fourth of Eastern Europe's population, Poland had usually accounted for only slightly more than one-tenth of East Europe's trade. Approximately one-half of Poland's trade happened within the Comecon. The trade balance with Comecon countries became unfavorable in 1980. In fact Polish imports exceeded exports by a considerable margin for several decades until 1982, when nominal trade surplus was achieved by a radical reduction in imports. Poland relied on the Soviet Union for the supplies of petroleum, natural gas, iron ore, and other raw materials. Trade with the West became difficult for Poland in early 1980's due to the political unrest. All NATO countries suspended credits to Poland after the martial law was declared, making Poland a limited marked for the West. The enormous Polish debt to the West (largest in Comecon) and inability of repayment was also a huge obstacle to successful foreign trade, as Poland's doubtable creditworthiness discouraged many prospective traders.
The problem of Polish debt and its effect on trade deserves more detailed treatment. The years of 1971-73 were the years of Gierek's "specific economic maneuver", in which foreign credits were used to finance the long overdue modernization of Polish industry. The urgency of this reform was evident to Polish leaders as Poland's economic growth was steadily falling behind that of the less developed East European countries which had begun modernization in 1960s. The development strategy placed emphasis on modernizing Poland's economy as well as boosting living standards, especially for urban workers. To help to modernize industry, restructure the economy, and improve workers' productivity, the Polish planners believed that it was necessary to import large amounts of Western capital, technology, and consumer goods. Because current hard currency earnings and reserves were insufficient to pay for these imports, long-term borrowings had to take place. It was assumed that the debts will be repaid through the expanded exports of goods produced in the newly constructed plants.That's why the latest and most advanced technology was acquired. Because the wages in Poland were lower than in the West and energy and raw materials were abundant and cheaper, it seemed reasonable to expect a competitive edge for Polish exports in Western markets and repayment of the debts from hard currency profits. Unfortunately a severe recession that affected the developed market economy in 1974 interfered with Gierek's imaginative plan.
As a result of Gierek's policy a very fast trade expansion occurred in Poland in the 1970s, as far as imports from industrial countries were concerned. Overall imports grew by 125.2% and those from Western countries by 263%, compared to exports- only 68%. The resulting deficit was covered by increasing flow of foreign loans, creating thus a vicious cycle. At the end of the 1980s Poland was one of the biggest debtors in the world and the biggest among the Soviet Bloc countries. Poland lost its creditworthiness as, since 1981, she was unable to pay all the interest and to repay the principal when its loans were maturing. In 1981-82 imports had to be cut drastically as debt-servicing difficulties increased, which had contributed to 25% decline in output; the worst depression in any industrialized country since World War II. The prolonged and steep reduction in Poland's machinery imports and halting of license purchases from the West, during the 1980s, caused a severe decline in Poland's export competitiveness.
With one half of its total area being arable, Poland had a potential for agricultural exports. Traditionally, agricultural produce was exported, but a series of bad harvests after 1975 led to continuing imports of fodder and grain. Poland's agricultural exports were targeted at non-communist countries. In fact Soviet Union encouraged agricultural exports in exchange for capital and industrial imports. Another significant export was sawn softwood, taken mostly from state-owned forests. The most important, however, was coal and metals. Poland was, in fact, the leading producer of hard coal, and one of the world's largest coal exporters. Poland's production of minerals was coordinated with that of other countries in Comecon. For example Poland's aluminum was produced from alumina supplied by Hungary and Yugoslavia. Fuels, coke, iron and steel were also exported by Poland. A large measure of Poland's exports consisted of machinery and transport equipment, with complete plants, power and electrical machinery, and vessels the most important item. Other raw materials, semifinished goods and industrial spare parts were imported. Outside the Comecon West Germany and the UK were important trading partners to Poland.
Just like every aspect in command economy, foreign trade also was a subject of central planning. Five-year plans defined the volume and composition of exports and imports, as well as the areas and countries to be traded with. Within the broad outlines of the five-year plan, more specific annual plans were worked out on the basis of previous year's results. This is how Poland was able to control the trade deficit by limiting imports in the 1980's. A great deal of trading with CMEA was done on the basis of bilateral agreements and barter. Poland was a leading supplier of coal to other East European countries and Soviet Union. Coal was often exchanged for other goods to avoid the problem of currency convertibility. As mentioned above, the CMEA pricing of traded goods could be often undervalued because of the currency exchange problem. Also, Poland's domestic prices didn't reflect world-market prices and were isolated from trade. This and other aspects of command economy contributed to the difficulties in conducting trade with western countries.
We can clearly see that foreign trade in Poland as well as in other East European countries was limited by constrains enforced by the Soviet-type economy. Undermining the importance of trade by the communist planners and ignoring the competitive advantage contributed to its distorted development.
Sources of Information:
Policy Alternatives In Polish Foreign Economic Relations Under A Soviet Type System From 1950-1989
Many of the difficulties which Poland's economy faced in the field of foreign economic relations have their roots in the 1950's. These are the far-reaching consequences of at least three developments: (1) The Stalinist policy of building socialism, with its highly centralized and heavily bureaucratic system of planning and management of the economy; (2) The Soviet-type industrialization drive; and (3) The forced separation of the economy from the West ( Kanet 329).
There was a strong relation between the economic system which was then introduced and the development strategy which was adopted. The centralized bureaucratic system of planning and management was incompatible with an "outward looking" strategy (Kanet 330). In other words, the inflexible controls and administrative commands necessary in order to protect the economy from outside forces led to the acceptance of the concept of a closed economy, with foreign trade playing almost no role, and of the strategy based on import substitution and the development of industries producing investment goods which were required for the development of industry within the country.
The Polish Six-Year Plan (1950-1955), like all other East European plans at that time, was based on the assumption that a rapid development of heavy industry should increase the degree of self-sufficiency of the economy. This task was expected to be achieved without an increase in the import of raw materials. The necessary import of investment goods was expected to be financed by almost doubling the export of food and other agricultural products. It was not taken into consideration that a considerable part of imports was needed for the capital intensive sectors. The actual development of trade deferred from the planned strategy. The agricultural exports did not increase to the expected level, the standard of living was drastically reduced, the import of machine and equipment exceeded the planned quantities, and the planned level of investment could only be secured by additional unplanned imports (Kanet 331). At the same time, the high priority industries were unable to produce for export. An attempt to produce large numbers of investment goods resulted in a limited scale, high cost, and a low level of technological sophistication. Nobody really knew how much of national income was exporting with every item of its exports. An industrial structure was created which ignored developments in the outside world, not only in the west but even in other countries of the bloc, except the Soviet import requirements. This last factor is usually overlooked but it played a very important role, as exports to the Soviet Union had a powerful impact on shaping the Polish industrial structure (Kanet 334).
The industrialization drive ended in economic difficulties which already appeared in 1955. The workers riots, the politically explosive situations and the economic difficulties led to a change in leadership, production in the pace of industrialization, a greater stress on the production of consumption goods, and a change in attitude toward the expansion of production for exports. As a result of a new leadership, foreign trade played an active role, with imports exceeding exports and western foreign credits being obtained. 1958 was a year which throughout Eastern Europe, some serious efforts were made to introduce international specialization within the CMEA (Brus 203).
"The Polish October" of 1956 resulted in proposals for rational changes. In the field of foreign trade there was some decrease in the degree of centralization of decisions. International trade ceased to be regarded as simply "an instrument with the help of which the national economy could be supplied with necessary commodities which were in short supply (Brus 210)."
The policy in 1961-1965 period was in the field of foreign economic relations. The objective was the reduction in the dependence of foreign borrowing and improvement in the balance of payment by increasing exports. The repayment of foreign loans and contributions to the expansion of the raw materials production in the Soviet Union increased the outflow of capital. Some serious difficulties appeared by the middle of the 1960's. Although the importance of international economic relations had been reorganized, the expansion of trade encountered great obstacles, and no significant opening up of the economy took place. A serious conflict appeared between the need to increase investment in order to modernize and structure the economy and the need to reform the economic system. In Poland, it became clear during the 1960's that the industrial structure which had been created during the 1950's was obsolete. Reforms of the economic system would require some "slack" in the economy and an expansion in the production of consumption goods to provide material incentives (Brus 215). At the end of the 1960's by far the most important group of exports was composed of goods produced by electrotechnical and engineering industry (Brus 215). Although many economies were drawing attention to the fact that it was the economic system which created the greatest obstacle to the expansion of international economic relations were brushed aside (Brus 220). The investment drive, which was motivated by the desire to effect modernization and restructuring of the economy, increased capital accumulation.
The acceleration of international economic relations during the 1971-1975 period was an essential part of Gierek's "new development (Marer 135). The main objective was to increase investment and consumption. Large investments were needed to restructure and modernize the economy, while significant increases in consumption were expected to provide incentives to increase labor productivity, in addition to obtaining support for the new leadership and securing political stability.
The strategy had the following implications for foreign economic relations:
(1) Sufficiently big simultaneous increases in investment and consumption were possible only with the help of foreign credits. (2) In order to restructure and modernize the economy, the most modern technology should be imported, mainly from the advanced countries in the west. (3) Higher rates of growth of production would induce greater import of raw materials, this would create additional balance of payment pressures. (4) In order to reduce costs, improve quality, ensure technological progress, and secure high technical specification of produced goods, it will be necessary to restructure the economy to make it more specialized (Marer 141).
It was expected that, as the result of the application of this strategy, the intensive development would be ensured. This strategy was attractive for Poland because it gave the country a chance of overcoming the difficulties of the 1950-1960s.
The plan for 1976-1980 was built on the assumption that the productive capacity which had been expanded and modernized during 1971-1975 would permit an increase in export and a limitation of the expansion of import, to the extent that investment projects were of the import substitution type, and that it would be possible to convert a negative balance of trade into a positive one. The drastic switch from a negative to a positive balance of trade was a completely unrealistic objective and it has not yet been fulfilled (Kanet 353). In fact, every attempt to meet the target had an adverse effect on the economy. The plan for 1976 assumed faster growth of export than import. Moreover, the rate of growth of exports to the west was planned to be 14% per year with a considerable increase in machines and equipment. However, some Polish economist have pointed out that serious difficulties have already appeared, which might restrict the expansion. They include tariff and non-tariff obstacles to trade in the markets, strong domestic demand for machines in Poland, inability to adjust to changes in foreign demand and the lack of marketing, servicing, parts, and advertising (Kanet 363).
In the late 1970's and 80's, Poland experienced considerable economic difficulties, resulting primarily from a series of poor harvest, unrest among industrial workers, lagging technology, rising inflation, and the highest debt to the West of any Communist bloc nation. Despite the import of capital goods from the West, the inefficient market led to poor production and Poland was stuck with indebtedness.
The solutions which have been attempted do not seem to be of the type which would ensure dynamic growth based on the continuation of the policy of opening economic relations in the process of economic development of the country. It seems that no viable expansion of exports can be achieved until a serious reform of the economic system is introduced and the modernization and restructuring of the economy is affected not by a decision from the top, but as an outcome of decisions at the level of production and foreign trade. It is impossible for a country to restructure having no competitive advantage due to the inefficient internal operating market. The import of modern technology from the West is not enough and does not help if the domestic system does not work.
Foreign Trade in Poland During Communism
The Communist social engineering designed for eastern European countries following World War II also applied to Poland. The Polish economy during the communist system was centrally planned especially in the aspect of foreign trade. In the early years if the communist regime, Poland became more urban and industrial as a modern working class began to emerge. However, in the late 1940s and early 1950s the rule of the Polish Peopleís Republic became increasingly totalitarian and a full range of Stalinist features such as agricultural collectivization and imposition of the Soviet model on the political, economic, and social aspects of Polish life developed. One such feature was a rigid command economy controlled by highly centralized state planning that was introduced in the First Six-Year Plan, beginning in 1950.
The Polish centrally planned economy was directed at minimizing trade with free-trade markets because the central bureaucratic systems could not adjust quickly or sufficiently to the changing situations in foreign markets. The high degree of self-sufficiency that was a declared economic objective of the Communist government made trade with the West a difficult task, especially for an economy such as Polandís.
State monopoly of foreign trade was an integral part of centrally planned economic systems. Even after some decentralization of the realm of foreign trade during the 1980s, the Ministry of Foreign Economic Relations maintained direct and/or indirect control of all foreign trade activities within the country. Originally, trading activities in the communist system were conducted exclusively by the specialized foreign trade organizations (FTOs), which isolated domestic producers of exportable goods and domestic buyers of imported goods from the world market. An additional structural aspect of Polish communism was an overwhelmingly high percentage of trade with the Soviet Union as well as other communist countries with nonconvertible currencies. The table below shows Polish trade with nonconvertible
Share of Trade by Trading Area (%)
Area I: Markets with Nonconvertible Currency
Area II: Western Markets
Throughout the 1980s, some state and cooperative production enterprises received licenses from the Ministry of Foreign Economic Relations to become directly involved in foreign trade, and by 1988 the number of economic units authorized to conduct foreign trade had nearly tripled. Nonetheless, many enterprises still prefer the risk-free, conventional approach to foreign trade through an FTO, relying on guaranteed communist markets in order to avoid marketing efforts and quality requirements of the western markets. In most instances trade involved goods that were well below Western quality standards, and the goods were exchanged between controlled economies at prices that did not reflect relative prices that did not reflect relative prices on world markets.
Throughout the communist era in Poland the economy was completely re-designed to a degree that it was not able to function in the western world after the collapse of the Soviet Union. Polish economists faced the problem of an economy that produced goods that were not able to compete on the world market as well as the loss of a major trading partner: the Soviet Union
Ebrill, Liam, P., Poland: The Path to a Market Economy, International Monetary Fund, Washington, DC, 1994
Johnson, Simon and Loveman, Gary, Starting Over in Eastern Europe: Entrepreneurship and Economic Renewal, Harvard Business School Press, Boston, 1995
Marer, Paul and Siwinski, Wlodzimierz, Creditworthiness and Reform in Poland, Western and Polish Oerspectives, Indiana University Press, Indianapolis, 1988
 Johnson, Simon and Loveman, Gary, Starting Over in Eastern Europe: Entrepreneurship and Economic Renewal, Harvard Business School Press, Boston, 1995, pg. 25