After two very difficult years, economic conditions in Poland improved during 1992. Despite the uncertainty in statistical information that still prevents a full assessment of the growth in private sector activity, the signs of recovery are unmistakable. Industrial production rose by 14.5 percent over the December 1991 level, driven by a healthy expansion of exports. Construction activity was also strong, driven by private sector activity. Early estimates point to an overall GDP growth of 1 percent, despite the effects of the serious drought that has affected all of Central Europe and led to crop losses of as high as 25 percent, and cutbacks in some public services. This is in sharp contrast with output losses of 12 and 7 percent in 1990 and 1991.

At the same time, important progress has been made in steering the economy away from the hyper inflation of the late 1980s. Average annual inflation declined from almost 600 percent in 1990 to 70 percent in 1991, to 43 percent in 1992, and 39 percent in the first quarter of 1993. Finally, after incurring important reserve losses in 1991, Poland’s external performance has improved considerably: a trade surplus of about $600 million allowed Poland to strengthen its reserve position to about 5 months of imports. Early results for 1993 point to a continuing good performance in industrial production, with a somewhat weaker external performance, mostly on account of lower growth in exports to the European Community.

These indications of recovery are encouraging and augur well for more sustained growth in 1993 and beyond. But they mask a sharp differential in the performance of the private and state-owned enterprise sectors. While the private sector took advantage of the considerable opportunities created by the opening of the economy and invested in emerging growth sectors, the parastatal sector inherited a legacy of overmanned facilities, outdated capital, and unclear governance that hampered its ability to respond to the new economic environment.

Private sector activity has provided the main engine of transformation and growth in Poland’s economy. First concentrated in trade and commerce, private sector activity has more recently extended to industry and construction, where it accounts for over half and a third of output, respectively. Overall, about half of Poland’s GDP is now produced by the private sector. This constitutes a positive response to the changes in the incentive environment, and is an indication of the potential for growth that remains to be unleashed in the Polish economy.

By contrast, the parastatal sector has had great difficulties in adjusting to the new economic conditions. External shocks, notably the demise of the Soviet Union and Soviet bloc trading arrangements, and the abolition of the complex system of subsidies, particularly on energy, played an important role in depressing industrial production in 1990 and 1991. This contributed significantly to the fall in output during that period. The effects of the recession, however, were compounded by internal management problems in state-owned enterprises, whose unit labor costs, productivity, and profitability deteriorated substantially in these two years.

The picture in 1992 was somewhat more complex. Despite the abatement of the recession in the parastatal sector, its financial position remained very weak. Many enterprises are severely constrained by the burden of debt accumulated in the past two years as a result of the lack of restructuring and adjustment to new market conditions. Some enterprises that are probably not economically viable have been allowed to continue to operate for lack of a viable exit mechanism. There is evidence, however, of signs of adjustment, at least in enterprises that have been able to respond to new business opportunities. This partial improvement appears to have been the result of a significant hardening of the budget constraint facing the enterprises. The no-bailout signal has been very clear from the government.

Directly related to the parastatal crisis, the structural public finance crisis is perhaps the single most worrying feature of the economic situation in Poland. On the expenditure side, increasing outlays originate mainly from the growth of social programs- because of inadequate design and increasing claims due to the recession.

Expectations of improved tax revenues have been repeatedly frustrated as the state enterprise tax base shrinks and the government is unable to mobilize sufficient resources from the expanding private sector. The result has been a steady increase in the general government deficit and its demands on bank and non-bank financing. The public sector, which registered a surplus in 1990, was forced to rely on domestic borrowing in 1991 to finance a deficit that amounted to over 6 percent of GDP. For 1992, the government adopted a deficit target of 5 percent of GDP, which was considered compatible with increased progress on the economy stabilization front. Despite the recovery in industrial output, however, revenues continued to lag behind expectations, and expenditures continued to inerease as a proportion of GDP. As a result, the defieit for the year climbed to some 6.5 percent of GDP despite correetive measures in late 1992. The larger defieit did not substantially affect inflation only beeause much strieter terms are now applied by the banking sector for credit to state enterprises. In the course of 1992 this contributed to freeing domestic resources for financing the deficit. Nevertheless, the size of the deficit remains a cause of concern, and continued recourse to domestic finaneing on the seale of 1992 may prove incompatible with macroeconomic stability.

Despite the apparent end of the recession, the social situation remains tense. After rapidly increasing to 12 percent of the labor foree through 1990 and 1991, unemployment stabilized somewhat in 1992, largely as a result of better output performance in industry. In mid-1993 it stood at 14.6 percent of the labor force, and could further increase as a result of the paring down of activity in a number of parastatals that are expected to undergo restructuring. This could lead to increases in the number of the poor as restructuring takes plaee, and to widening regional differences in the incidence of poverty due to the „company town” nature of past industrial development, thus making the maintenance of a viable social safety net a crucial priority for the government. The social tension has manifested itself in repeated strike threats that contributed to the political crisis. These tensions could be heightened by the uncertainty linked to the elections and the formation of new government.