Poland’s Economy Pre-Communism’s Fall

Polish Companies Reacted to Ethical Issues and Changes in Business Standards Since the Fall of Communism in 1989?

Poland’s Economy Pre-Communism’s Fall

Poland’s Natural Resources

Minerals and Fuels

Agricultural Resources

Labor Force

The Polish Economy Under Communism

System Structure

Development Strategy

The Centrally-Planned Economy

Establishing the Planning Formula

Retrenchment and Adjustment in the 1960s

Reliance on Technology in the 1970s

Reform Failure in the 1980s

Poland’s Economy After the Fall of Communism

Poland After the Fall of Communism

Fall of Communism

Marketization and Stabilization

Required Short-Term Changes

Section 2.3.2. The Shock Strategy

Section 2.3.3. Initial Results

Section 2.3.4. Long-Term Requirements

Section 2.4. Macroeconomic Indicators for 1990-91

Section 2.4.1. Price Increases

Section 2.4.2. Impact on Productivity and Wages

Section 2.4.3. Statistical Distortions

Section 2.4.4. Agricultural Imbalances

Section 2.4.5. Causes of Decline

Section 2.5.The Polish Post-Communism Privatization Process

Section 2.6. Structure of Poland’s Economy: Post-Communism

Section 2.6.1. Fuels and Energy

Section 2.6.2. Coal

Section 2.6.3. Oil and Gas

Section 2.6.4. Power Generation

Section 2.6.5. Industry

Section 2.6.6. Light Industry

Section 2.6.7. Automotive Industry

Section 2.6.8. Construction Machinery

Section 2.6.9. Banking and Finance

Section 2.7. The State Banking System

Section 2.8. Banking Reform, 1990-92

Section 2.8.1. Insurance and Securities Reform

Section 2.8.2. New Financial Institutions

Section 2.8.3. Foreign Loans and Money Supply

Section 2.8.4. Foreign Trade

Section 2.8.5. The Foreign Trade Mechanism

Section 2.9. Post-communist Policy Adjustments

Section 2.10. The Role of Currency Exchange

Section 2.11. Foreign Investment

Chapter 3: Business Ethics in Poland

Section 3.1. Introduction

Section 3.2. What is Meant (and Understood) by the Term ‘Business Ethics’ in Poland?

Section 3.3. Developing Standards of Business Ethics in Poland

Section 3.3.1. The Polish Transition

Section 3.3.2. Difficulties in Adjusting

Section 3.3.3. Identifying the Problem: Polish Chamber Survey Results

Section 3.3.4. Setting Ethical Standards

Section 3.3.5. Letting Market Forces Work

Section 3.3.6. The Highlights from the Polish Chamber’s Sample Code of Ethics

Section 3.3.7. Western Aid In Fighting Corruption

Chapter 4: Conclusions

Bibliography

Introduction

The dissertation will look at the history of communism in Poland, and it’s fall. The dissertation will then look at the economy of Poland: the main natural resources, the economy under communism, the centrally planned economy, and the economy after the fall of communism. The dissertation will then move on to looking at the processes of marketization and stabilization in Poland, and the macroeconomic indicators for the crucial 1990-1991 period. The privatization process in Poland will be followed, and the subsequent structure of the economy will be analyzed. The main markets supporting the economy i.e., fuels and energy, industry, agriculture, fishing and forestry, banking and finance, and foreign trade.

It is absolutely fundamental for the purposes of this dissertation to analyze these factors in great detail, since they are fundamental to an understanding of the necessity for business ethics in Poland, and the challenges and difficulties faced when trying to implement ethical business principles in Poland.

Once the economic history of Poland has been discussed and analyzed, the dissertation will then move to looking at how Polish companies have reacted to ethical issues and changes in business standards since the fall of communism in 1989. This will take the form of looking, principally, at what constitutes ethical business in Poland, how ethical business is regulated and monitored in Poland, and how changes have been made so far in business ethics in Poland since the fall of communism, and how these changes relate to changes over the same period at an international level. A discussion on the merits of entering into the EU, in terms of business ethics, will also be entered into.

In summary, the research objectives of the dissertation are as follows:

To present an overview of the Polish economy and business life both pre- and post-communism’s fall.

To present a review of business ethics and its impact on international business.

To present an examination of the present state of business ethics in Poland.

To examine how and if international codes of ethics have influenced / continue to influence Polish business behaviors.

The dissertation will conclude with a short overview of the main analyses presented within the body of the dissertation, and will present a summary of the main findings, and an overview of the current state of business ethics in Poland.

Chapter 1: Poland’s Economy Pre-Communism’s Fall

Section 1.1. Poland’s Natural Resources

Poland’s rapid postwar industrialization was supported by a combination of readily available natural resources, especially economically important minerals (www.countrystudies.us/poland.htm).After the era of communist economics and politics ended in 1989, however, industrial policy makers contemplated major changes in the balance of resource consumption (www.countrystudies.us/poland.htm).

Section 1.1.1. Minerals and Fuels

Coal is Poland’s most important mineral resource (www.countrystudies.us/poland.htm).In 1980, total reserves were estimated at 130 billion tons (www.countrystudies.us/poland.htm).The largest coal deposits are located in Upper Silesia in the southwestern part of the country, where large-scale mining began in the nineteenth century (www.countrystudies.us/poland.htm).Silesian deposits, generally of high quality and easily accessible, accounted for about 75% of the country’s hard coal resources and 97% of its extraction in the 1980s (www.countrystudies.us/poland.htm).The Lublin region of eastern Poland was exploited in the 1980s as part of an expansion program to supplement Silesian hard coal for industry and export, but development of this relatively poor, geologically difficult, and very expensive field ended in 1990 (www.countrystudies.us/poland.htm).A number of unprofitable Upper Silesian mines also were to be closed in the early 1990s (www.countrystudies.us/poland.htm).

Poland also has significant quantities of lignite in the district of Zielona G. ra in the west and in two districts located in the central part of the country between the Vistula and the Oder rivers (www.countrystudies.us/poland.htm).This low-quality fuel has been used on a large scale for the production of electricity, despite its very damaging effect on the environment (www.countrystudies.us/poland.htm).Plans called for gradual reduction of lignite extraction and use in the 1990s (www.countrystudies.us/poland.htm).

Natural gas is extracted mostly in Upper Silesia, Lower Silesia, and in the southeastern part of the country (www.countrystudies.us/poland.htm).Production expanded in the 1960s and 1970s, then declined in the next decade (www.countrystudies.us/poland.htm).In 1989, domestic production covered 43% of the country’s total requirement (www.countrystudies.us/poland.htm).

A major offshore oilfield was discovered in the Baltic Sea in 1985 (www.countrystudies.us/poland.htm).Including that field and the older fields in the Carpathian Mountains in southeastern Poland, total oil reserves were estimated at 100 million tons in 1990 (www.countrystudies.us/poland.htm).Poland remained heavily dependent on the Soviet Union for petroleum throughout the 1980s (www.countrystudies.us/poland.htm).

Large reserves of sulfur at Tarnobrzeg and Stasz w in the south-central region make that material Poland’s most important non-metallic export mineral. Favorable geological conditions have supported large-scale operations in three mines yielding about 5 million tons annually (www.countrystudies.us/poland.htm).About 3 million tons of sulfuric acid, along with several other chemicals, are produced each year (www.countrystudies.us/poland.htm).

Poland has limited deposits of some nonferrous metal ores (www.countrystudies.us/poland.htm).The most significant is copper, which is extracted in large quantities at ten mines in Lower Silesia in southwestern Poland (www.countrystudies.us/poland.htm).Copper production expanded greatly after discovery of major new deposits in the 1960s and 1970s. In 1990 annual copper ore output was about 26 million tons, and 51% of electrolytic copper was exported (www.countrystudies.us/poland.htm).In 1982, Poland had the world’s fifth-largest deposits of lead and zinc (which occur in association) (www.countrystudies.us/poland.htm).The annual output of lead and zinc ores was about 5 million tons, supporting annual production of 164 thousand tons of zinc and 78,000 tons of lead (www.countrystudies.us/poland.htm).In 1990, about 76% of Poland’s zinc and nearly all its lead were used by domestic industry (www.countrystudies.us/poland.htm).

Although Poland had some fairly large iron ore deposits, this ore requires enrichment before processing (www.countrystudies.us/poland.htm).Until the 1970s, the main source of iron ore was the district of Czestochowa; but output there declined sharply in the early 1980s, and other deposits were of poor quality or provided such small quantities that exploitation was unprofitable (www.countrystudies.us/poland.htm).The country depended on iron imports from the Soviet Union and Sweden to support the rapid expansion of the steel industry that was a high priority in the communist era (www.countrystudies.us/poland.htm).

Rich deposits of salt provide an important raw material for the chemical industry (www.countrystudies.us/poland.htm).Salt mining, which began in the Middle Ages, was concentrated in the Wieliczka-Bochnia area near Krak w until the middle of the twentieth century; then the major salt-mining operations moved to a large deposit running northwest from d in central Poland. Salt is extracted in two ways: by removing it in solid form and by dissolving it underground, then pumping brine to the surface (www.countrystudies.us/poland.htm).Annual output declined from 6.2 million tons in 1987 and 1988 to 4.7 million tons in 1989 (www.countrystudies.us/poland.htm).Other mineral resources include bauxite, barite, gypsum, limestone, and silver (a byproduct of processing other metals) (www.countrystudies.us/poland.htm).

Section 1.1.2. Agricultural Resources

Poland’s climate features moderate temperatures and adequate rainfall that enable cultivation of most temperate-zone crops, including all the major grains, several industrial crops, and several varieties of fruit (www.countrystudies.us/poland.htm).Crops are distributed according to the substantial regional variations in soil and length of growing season (www.countrystudies.us/poland.htm).The sandy soils of the central plains are most suitable for rye, the richer soil in the south favors wheat and barley, and the poorer soil of the north is used for oats (www.countrystudies.us/poland.htm).All parts of Poland favor potato cultivation; sugar beets, the most important industrial crop, grow mainly in the west and southeast (www.countrystudies.us/poland.htm).

Section 1.1.3. Labor Force

At the end of 1991, about 30.7% of Poland’s estimated population of 38.3 million lived in urban centers with populations of 100,000 or more (www.countrystudies.us/poland.htm).The priority given urbanization and industrialization in postwar Poland caused the urban working class to grow dramatically and the rural working class to shrink proportionately in the first decade of communist rule (www.countrystudies.us/poland.htm).This process slowed considerably over the next three decades (www.countrystudies.us/poland.htm).

Section 1.2. The Polish Economy Under Communism

After World War II, a centrally planned socialist system was transplanted to Poland from the Soviet Union without any consideration for the differences in the level of development of the country, or its size, resource endowment, or cultural, social, and political traditions (www.countrystudies.us/poland.htm).The inadequacies of that system left Poland in an economic crisis in the late 1980s (www.countrystudies.us/poland.htm).

Section 1.2.1. System Structure

The new system was able to mobilize resources, but it could not ensure their efficient use (www.countrystudies.us/poland.htm).High but uneven rates of growth of the net material product (NMP), also called “national income” in Marxist terminology, were recorded over a rather long period (www.countrystudies.us/poland.htm).However, these gains were made at the expense of large investment outlays (www.countrystudies.us/poland.htm).Lacking support from foreign capital, these outlays could be financed only by severe restriction of consumption and a very high ratio of accumulation (forced saving) in the NMP (www.countrystudies.us/poland.htm).

During the communist period, the same cycle of errors occurred in Poland as in the other state-planned economies (www.countrystudies.us/poland.htm).The political and economic system enabled planners to select any rate of accumulation and investment; but, in the absence of direct warning signals from the system, accumulation often exceeded the optimum rate (www.countrystudies.us/poland.htm).Investment often covered an excessively broad front and had an over-extended gestation period; disappointingly low growth rates resulted from diminishing capital returns and from the lowering of worker incentives by excessive regulation of wages and constriction of consumption (www.countrystudies.us/poland.htm).Planners reacted to these conditions by further increasing the rate of accumulation and the volume of investment (www.countrystudies.us/poland.htm).

Investment funds mobilized in this wasteful way then were allocated without regard to consumer preference (www.countrystudies.us/poland.htm).Planners directed money to projects expected to speed growth in the economy (www.countrystudies.us/poland.htm).Again, considerable waste resulted from overinvestment in some branches and underinvestment in others (www.countrystudies.us/poland.htm).To achieve the required labor increases outside agriculture, planners manipulated participation ratios, especially of women, and made large-scale transfers of labor from rural areas (www.countrystudies.us/poland.htm).Shortages of capital and labor became prevalent despite government efforts to maintain equitable distribution (www.countrystudies.us/poland.htm).

An example of inefficient state planning was the unpaid exchange of technical documentation and blueprints among Comecon members on the basis of the Sofia Agreement of 1949 (www.countrystudies.us/poland.htm).The countries of origin had no incentive to make improvements before making plans available to other members of Comecon, even when improved technology was known to be available (www.countrystudies.us/poland.htm).For this reason, new factories often were obsolete by the time of completion: in turn, the machines and equipment these factories produced froze industry at an obsolete technological level (www.countrystudies.us/poland.htm).

The institutional framework of the centrally planned economy was able to insulate it to some extent from the impact of world economic trends (www.countrystudies.us/poland.htm).As a result, domestic industry was not exposed to foreign competition that would force improvements in efficiency or to foreign innovations that would make such improvements possible (www.countrystudies.us/poland.htm).Above all, the isolation of the system kept domestic prices totally unrelated to world prices (www.countrystudies.us/poland.htm).

Prices were determined administratively on the basis of costs plus a fixed percentage of planned profit (www.countrystudies.us/poland.htm).As every increase in production costs was absorbed by prices, the system provided no incentive for enterprises to reduce costs (www.countrystudies.us/poland.htm).On the contrary, higher costs resulted in a higher absolute value of profit, from which the enterprise hierarchy financed its bonuses and various amenities (www.countrystudies.us/poland.htm).When the price was fixed below the level of costs, the government provided subsidies, ensuring the enterprise its planned rate of profit (www.countrystudies.us/poland.htm).Enterprises producing the same types of goods belonged to administrative groups, called associations in the 1980s (www.countrystudies.us/poland.htm).Each of these groups was supervised by one of the industrial ministries (www.countrystudies.us/poland.htm).The ministry and the association controlled and coordinated the activities of all state enterprises and defended the interests of a given industry (www.countrystudies.us/poland.htm).The enterprises belonging to a given industrial group were not allowed to compete among themselves, and the profit gained by the most efficient was transferred to finance losses incurred by the least efficient (www.countrystudies.us/poland.htm).This practice further reduced incentives to seek profits and avoid losses (www.countrystudies.us/poland.htm).

In this artificial atmosphere, prices could not be related to market demand; and without a genuine price mechanism, resources could not be allocated efficiently (www.countrystudies.us/poland.htm).Much capital was wasted on enterprises of inappropriate size, location, and technology (www.countrystudies.us/poland.htm).Furthermore, planners could not identify which enterprises contributed to national income and which actually reduced it by using up more resources than the value added by their activities (www.countrystudies.us/poland.htm).The inability to make such distinctions was particularly harmful to the selection of products for export and decisions concerning import substitution, i.e., what should be produced within the country rather than imported (www.countrystudies.us/poland.htm).

Section 1.2.2. Development Strategy

In the postwar years, all East European countries including Poland adopted a fundamentally similar inward-looking development strategy following the Soviet model of accelerated industrialization and collectivization of agriculture (www.countrystudies.us/poland.htm).Planners attempted to enforce excessively high rates of growth and to achieve a relatively high degree of self-sufficiency (www.countrystudies.us/poland.htm).Strong autarkic tendencies were modified only by the shifting import requirements of the Soviet Union and by specialization agreements within Comecon; those agreements were limited, however, by their insulation from the factors of real profitability and comparative advantage (www.countrystudies.us/poland.htm).

In 1945, the Polish economy was completely disorganized and urgently needed reestablishment of its prewar industrial base (www.countrystudies.us/poland.htm).The initial central planning organization that began work in Poland in late 1945 stressed socialist rather than communist economic goals: relative decentralization, increased consumer goods production to raise the standard of living, and moderate investment in production facilities (www.countrystudies.us/poland.htm).In 1949, however, that approach was scrapped in favor of the completely centralized Soviet planning model (www.countrystudies.us/poland.htm).

During the 1950s, planners followed Stalin’s requirements for a higher growth rate in heavy industry than the overall industrial rate and a higher growth rate in the steel industry than that of heavy industry as a whole (www.countrystudies.us/poland.htm).This approach neglected the other economic sectors: agriculture, infrastructure, housing, services, and consumer goods (www.countrystudies.us/poland.htm).The sectors that were emphasized were all capital-, fuel-, and material-intensive (www.countrystudies.us/poland.htm).Materials shortages had developed already in the Comecon group by the 1960s (www.countrystudies.us/poland.htm).In response, Poland was required to expand its extraction of coal, copper, and sulfur, as well as its production of steel and other basic industrial materials without considering costs (www.countrystudies.us/poland.htm).

Stalinist planning also forcibly redirected foreign economic relations (www.countrystudies.us/poland.htm).Poland’s extensive interwar commercial links with Western Europe were reduced, and some important prewar markets were lost as trade with the Soviet Union expanded rapidly (www.countrystudies.us/poland.htm).For Poland, this trade was based mainly on export of coal and manufactured goods primarily from the rapidly growing heavy industries (www.countrystudies.us/poland.htm).In return, Poland became dependent on the supply of Soviet oil, natural gas, iron ore, and some other raw materials (www.countrystudies.us/poland.htm).This arrangement meant that Poland’s industrial structure adjusted to Soviet needs and specifications, yielding many products that could be sold only to the Soviet Union or its allies (www.countrystudies.us/poland.htm).Thus exports became heavily dependent on markets in Comecon (www.countrystudies.us/poland.htm).

Section 1.3. The Centrally-Planned Economy

This development strategy brought about a specific pattern of economic growth in Poland (www.countrystudies.us/poland.htm).As in the other centrally planned economies, rates of growth depended on increases in the quantity of inputs rather than on improvements in productivity (www.countrystudies.us/poland.htm).Material production remained high as long as greater quantities of inputs were available (www.countrystudies.us/poland.htm).

This pattern of growth priorities and the emerging industrial structure left no possibility of raising wages significantly (www.countrystudies.us/poland.htm).Wages had been reduced during the first industrialization drive of the early 1950s (www.countrystudies.us/poland.htm).For this reason, the Polish standard of living lagged behind that of Western Europe as the continent recovered from World War II (www.countrystudies.us/poland.htm).Already in the first postwar decade, awareness of this disparity began to cause social unrest, a situation that became a tradition during the next thirty-five years (www.countrystudies.us/poland.htm).

Section 1.3.1. Establishing the Planning Formula

Centralized planning ranged from broad, long-range statements of fundamental future development to guidance on the operation of specific enterprises (www.countrystudies.us/poland.htm).The basic planning unit for transformation of the Polish economy was the five-year plan, the first of which began in 1956 (www.countrystudies.us/poland.htm).Within that framework, current production goals were established in an annual operational plan, called the National Economic Plan (www.countrystudies.us/poland.htm).As the years passed, these plans contained more and more specific detail; because requirements and supplies could not be forecast in advance, plans were inconsistent and constantly needed revision (www.countrystudies.us/poland.htm).

The Soviet system had already encountered difficulties, however, in the overly ambitious Six-Year Plan of 1950-55 (www.countrystudies.us/poland.htm).Maladjustments, shortages, and bottlenecks appeared in the implementation of that plan, which was intended to create the infrastructure for the industrial future: heavy industry, mining, and power generation (www.countrystudies.us/poland.htm).In 1956, after workers’ riots in Poznan, a general uprising was averted only by a change in the leadership of the communist party, the Polish United Workers’ Party (Polska Zjednoczona Partia Robotnicza — PZPR) (www.countrystudies.us/poland.htm).The new government of Wladyslaw Gomulka promised modification of the system and changes in the development strategy (www.countrystudies.us/poland.htm).

Consumer goods received a larger share of the national product, and some quantities of grain and food were imported from the West (www.countrystudies.us/poland.htm).State control was mitigated by giving limited policy input to enterprises, and the rate of investment was reduced (www.countrystudies.us/poland.htm).Although a lively debate occurred on so-called “market socialism,” actual systemic reforms were limited and short-lived (www.countrystudies.us/poland.htm).Among the reform measures of 1956, the only significant lasting change was the decollectivization of agriculture (www.countrystudies.us/poland.htm).

Section 1.3.2. Retrenchment and Adjustment in the 1960s

By the early 1960s, economic directives again came only from the center, and heavy industry once more received disproportionate investment (www.countrystudies.us/poland.htm).At that point, the government began a new industrialization drive, which was again far too ambitious (www.countrystudies.us/poland.htm).Rates of investment were excessive, the number of unfinished industrial projects increased, and the time required for project completion was considerably extended (www.countrystudies.us/poland.htm).Structural distortions increased, and the rates of growth in high-priority sectors were adversely affected by the slower than expected growth in low-priority sectors (www.countrystudies.us/poland.htm).

Bottlenecks and shortages increased inefficiency (www.countrystudies.us/poland.htm).By the late 1960s, the economy was clearly stagnant, consumer goods were extremely scarce, and planners sought new approaches to avoid repetition of the social upheavals of 1956 (www.countrystudies.us/poland.htm).At this point, suppression of consumption to its previous levels had become politically dangerous, making a high rate of accumulation problematic at a time when demand for investment funds was growing rapidly (www.countrystudies.us/poland.htm).Due to these factors, additional investment funds were allocated to the neglected infrastructure and to the production of consumer goods (www.countrystudies.us/poland.htm).

Modernization efforts stressed technological restructuring rather than fundamental systemic reforms (www.countrystudies.us/poland.htm).However, a policy of “selective development,” introduced in 1968, required another acceleration of investments at the expense of consumption (www.countrystudies.us/poland.htm).Selective development and a new system of selectively applied financial incentives ended in the worker riots of December 1970 and a second forced change in the communist leadership in Poland (www.countrystudies.us/poland.htm).Meanwhile, no funds were invested in remedying the environmental crisis already being caused by excessive reliance on “dirty” lignite in the drive for heavy industrialization (www.countrystudies.us/poland.htm).

These conditions necessitated a switch from an “extensive” growth pattern (unlimited inputs) to an “intensive” pattern of growth that would ensure high rates of growth through improvements in productivity rather than in the amount of inputs (www.countrystudies.us/poland.htm).The new emphasis helped drive another reorganization of industry in the early 1970s (www.countrystudies.us/poland.htm).State enterprises were combined into a number of huge conglomerates called Big Economic Organizations (www.countrystudies.us/poland.htm).They were expected to increase efficiency by economies of scale (www.countrystudies.us/poland.htm).Wage increases were tied to net increases in the value of outputs as an incentive to labor productivity (www.countrystudies.us/poland.htm).

In practice, however, central planners could now control a smaller number of industrial units and regulate their activities more intensely (www.countrystudies.us/poland.htm).The system was never implemented fully, and no improvement in efficiency resulted (www.countrystudies.us/poland.htm).The failure of the 1973 reform demonstrated that the technological level of industrial products was still too low to permit significant increases in efficiency (www.countrystudies.us/poland.htm).

Section 1.3.3. Reliance on Technology in the 1970s

In the early 1970s, East-West detente, the accumulation of petrodollars in Western banks, and a recession in the West created an opportunity for Eastern Europe to import technology and capital from the West to restructure and modernize its industrial base (www.countrystudies.us/poland.htm).Poland was relatively late in introducing this so-called “new development strategy,” but it eventually went further in this direction than its Comecon allies (www.countrystudies.us/poland.htm).The share of trade with Comecon declined, and trade with other countries increased quite dramatically during the first half of the 1970s (www.countrystudies.us/poland.htm).

The technology import strategy was based on the assumption that, with the help of Western loans, a large-scale influx of advanced equipment, licenses, and other forms of technology transfer would automatically result in efficient production of modern, high- quality manufactured goods suitable for export to the West (www.countrystudies.us/poland.htm).Under those conditions, repayment of debts would not be difficult (www.countrystudies.us/poland.htm).Expansion of exports encountered considerable difficulties, however, partly because of the oil crisis and stagflation in the West, but mainly because the central planners remained unable to effect the required changes in the structure of production (www.countrystudies.us/poland.htm).

The investment drive, financed by foreign borrowing, exceeded the possibilities of the economy (www.countrystudies.us/poland.htm).Removed from direct contact with the foreign markets, centralized selection of exportables was ineffective in expanding the markets for Polish goods (www.countrystudies.us/poland.htm).At the same time, the dependence of the economy on imported Western materials, components, and machines inevitably increased (www.countrystudies.us/poland.htm).

By the middle of the 1970s, large trade deficits had been incurred with the Western countries (www.countrystudies.us/poland.htm).The negative balance of payments in convertible currencies increased from U.S.$100 million in 1970 to U.S.$3 billion in 1975 (www.countrystudies.us/poland.htm).During the same period, the gross convertible currency debt increased from U.S.$1.2 billion to U.S.$8.4 billion (www.countrystudies.us/poland.htm).Unable to expand exports to the West at the necessary pace, Polish planners began centralized restriction of imports (www.countrystudies.us/poland.htm).This policy in turn had an adverse effect on domestic production, including the production of exportables (www.countrystudies.us/poland.htm).

Section 1.3.4. Reform Failure in the 1980s

By 1980, it had become clear that the large-scale import of capital and technology from the West could not substitute for economic reform (www.countrystudies.us/poland.htm).On the contrary, systemic reforms were needed to ensure satisfactory absorption and diffusion of imported technology (www.countrystudies.us/poland.htm).Significant expansion of profitable exports to the world markets was impossible for an inflexible and overly centralized economic system (www.countrystudies.us/poland.htm).On the other hand, without an increase in exports, reducing or even servicing Poland’s rapidly increasing international debt was extremely difficult (www.countrystudies.us/poland.htm).

Meanwhile, the enormous investment drive of the early 1970s had destabilized the economy and developed strong inflationary pressure (www.countrystudies.us/poland.htm).Rates of NMP growth dropped throughout the second half of the decade, and the first absolute decline took place in 1979 (www.countrystudies.us/poland.htm).Although planners should have been adjusting the level of aggregate demand to the declining aggregate supply, they found this task politically and administratively difficult (www.countrystudies.us/poland.htm).The authorities also feared major price revisions, especially after workers’ riots forced withdrawal of a revision introduced in 1976 (www.countrystudies.us/poland.htm).In the late 1970s, some prices were increased gradually, whereas other increases were concealed by designating them for new, higher quality, or luxury items (www.countrystudies.us/poland.htm).The rest of the inflationary gap was suppressed by fixing prices administratively (www.countrystudies.us/poland.htm).

By the late 1970s, the shortage of consumer goods was acute (www.countrystudies.us/poland.htm).Nominal income increases continued as a “money illusion” to minimize social discontent and provide a work incentive (www.countrystudies.us/poland.htm).This strategy increased the “inflationary overhang,” the accumulated and unusable purchasing power in the hands of the population (www.countrystudies.us/poland.htm).At the same time, suppressed inflation spurred maladjustments and inequities in the production processes, further reducing the supply of goods (www.countrystudies.us/poland.htm).The deteriorating situation in the consumer goods market resulted in a series of watershed events: a wave of strikes that led to the formation of the Solidarity union in August 1980, a third enforced change in the communist leadership in September 1980, and the imposition of martial law in December 1981 (www.countrystudies.us/poland.htm).

Between 1978 and 1982, the NMP of Poland declined by 24%, and industrial production declined by 13.4% (www.countrystudies.us/poland.htm).The decline in production was followed by prolonged stagnation (www.countrystudies.us/poland.htm).Recognizing a strong grass-roots resistance to the existing system, the new government of Stanislaw Kania, who had replaced Edward Gierek, established the Commission for Economic Reform in late 1980 (www.countrystudies.us/poland.htm).This body presented a weakened version of drastic reforms recommended by the independent Polish Economic Society, an advisory board of economists formed earlier in 1980 (www.countrystudies.us/poland.htm).

Implemented hastily in mid-1981, the reforms nominally removed the PZPR from day-to-day economic management and gave the enterprises responsibility for their own financial condition and for planning (www.countrystudies.us/poland.htm).These decentralizing reforms were distorted by the constraints of martial law that had been imposed nationally in December 1981, however, and they failed to improve the economic situation (www.countrystudies.us/poland.htm).Internally inconsistent and insufficiently far-reaching, the reforms reduced central administrative control without establishing any of the fundamentals of an alternative market system (www.countrystudies.us/poland.htm).Thus, in effect, the economy operated from 1981 to 1989 in a systemic vacuum (www.countrystudies.us/poland.htm).

After 1985, the foreign trade situation further complicated Poland’s economic crisis (www.countrystudies.us/poland.htm).The relative importance of Comecon trade declined yearly, necessitating expanded trade with the West, particularly the European Community (EC) (www.countrystudies.us/poland.htm).This shift was a policy change for which neither the communist regime nor the economic system was prepared in the late 1980s (www.countrystudies.us/poland.htm).

Chapter 2: Poland’s Economy After the Fall of Communism

Section 2.1. Poland After the Fall of Communism

In 1989, the NMP declined by 0.2% to a level 1% below the 1978 figure, and industrial production also declined slightly (www.countrystudies.us/poland.htm).Despite price controls, inflation increased from 25.3% in 1987 to 343.8% in 1989 (www.countrystudies.us/poland.htm).As the scarcity of goods rose sharply, lines in front of stores lengthened and social unrest grew (www.countrystudies.us/poland.htm).Shortages of materials and fuels, unreliable supply, and administrative disarray caused frequent shutdowns of industrial production lines (www.countrystudies.us/poland.htm).

Disequilibrium also increased rapidly in the external economy (www.countrystudies.us/poland.htm).The balance of payments deficit in hard currency (denominations exchanged on the world market) increased from U.S.$392 million in 1987 to U.S.$1,922 million in 1989, and the national debt grew from U.S.$39.2 billion to U.S.$40.8 billion during that period (www.countrystudies.us/poland.htm).In the last years of communist rule, hard-currency deficits were exacerbated by the priority still given to economic relations within Comecon (www.countrystudies.us/poland.htm).In its Comecon transactions between 1987 and 1989, Poland converted a current account deficit of 424 million transferable rubles (the artificial currency used in Comecon transactions but unrecognized outside the trading bloc) to a positive balance of 1,104 million transferable rubles as its ruble debt declined from 5.8 billion to 0.6 billion (www.countrystudies.us/poland.htm).These transactions meant that Poland was ignoring the catastrophic condition of its domestic economy to help alleviate the general shortages within Comecon by supporting a net outflow of capital (more exports than imports), most of which went to the Soviet Union (www.countrystudies.us/poland.htm).

In 1989, new policies in the Soviet Union made clear that Soviet retaliation against liberalization in Poland was no longer a real possibility (www.countrystudies.us/poland.htm).Under a new set of international conditions, the long history of riots and strikes by workers and students, criticism by the intellectual classes, and general lack of cooperation by society with the economic programs of successive communist governments ended in the collapse of the communist regime of Wojciech Jaruzelski in May 1989 (www.countrystudies.us/poland.htm).The proximate cause of its fall, however, was a deepening economic crisis (www.countrystudies.us/poland.htm).Although the crisis was a very effective political weapon for Polish noncommunist parties, the underlying structural defects of the national economy became a legacy of persistently intractable problems for the noncommunist governments that followed Jaruzelski (www.countrystudies.us/poland.htm).

Section 2.2. Fall of Communism

On the night of November 9, 1989, the Berlin Wall — “the most potent symbol of the cold-war division of Europe — “came down (www.state.gov/r/pa/ho/time/dr/17672.htm).Earlier that day, the Communist authorities of the German Democratic Republic had announced the removal of travel restrictions to democratic West Berlin (www.state.gov/r/pa/ho/time/dr/17672.htm).Thousands of East Germans streamed into the West, and in the course of the night, celebrants on both sides of the wall began to tear it down (www.state.gov/r/pa/ho/time/dr/17672.htm).

The collapse of the Berlin Wall was the culminating point of the revolutionary changes sweeping East Central Europe in 1989 (www.state.gov/r/pa/ho/time/dr/17672.htm).Throughout the Soviet bloc, reformers assumed power and ended over 40 years of dictatorial Communist rule (www.state.gov/r/pa/ho/time/dr/17672.htm).The reform movement that ended communism in East Central Europe began in Poland (www.state.gov/r/pa/ho/time/dr/17672.htm).Solidarity, an anti-Communist trade union and social movement, had forced Poland’s Communist government to recognize it in 1980 through a wave of strikes that gained international attention (www.state.gov/r/pa/ho/time/dr/17672.htm).In 1981, Poland’s Communist authorities, under pressure from Moscow, declared martial law, arrested Solidarity’s leaders, and banned the democratic trade union (www.state.gov/r/pa/ho/time/dr/17672.htm).The ban did not bring an end to Solidarity, as the movement simply went underground, and the rebellious Poles organized their own civil society, separate from the Communist government and its edicts (www.state.gov/r/pa/ho/time/dr/17672.htm).

In 1985, the assumption of power in the Soviet Union by a reformer, Mikhail Gorbachev, paved the way for political and economic reforms in East Central Europe (www.state.gov/r/pa/ho/time/dr/17672.htm).Gorbachev abandoned the “Brezhnev Doctrine” — “the Soviet Union’s policy of intervening with military force, if necessary, to preserve Communist rule in the region (www.state.gov/r/pa/ho/time/dr/17672.htm).Instead, he encouraged the local Communist leaders to seek new ways of gaining popular support for their rule (www.state.gov/r/pa/ho/time/dr/17672.htm).In Hungary, the Communist government initiated reforms in 1989 that led to the sanctioning of a multiparty system and competitive elections (www.state.gov/r/pa/ho/time/dr/17672.htm).In Poland, the Communists entered into round-table talks with a reinvigorated Solidarity (www.state.gov/r/pa/ho/time/dr/17672.htm).

As a result, Poland held its first competitive elections since before World War II, and in 1989, Solidarity formed the first non-Communist government within the Soviet bloc since 1948 (www.state.gov/r/pa/ho/time/dr/17672.htm).Inspired by their neighbors’ reforms, East Germans took to the streets in the summer and fall of 1989 to call for reforms, including freedom to visit West Berlin and West Germany (www.state.gov/r/pa/ho/time/dr/17672.htm).Moscow’s refusal to use military force to buoy the regime of East German leader Erich Honecker led to his replacement and the initiation of political reforms, leading up to the fateful decision to open the border crossings on the night of November 9, 1989 (www.state.gov/r/pa/ho/time/dr/17672.htm).

In the wake of the collapse of the Berlin Wall, Czechs and Slovaks took to the streets to demand political reforms in Czechoslovakia (www.state.gov/r/pa/ho/time/dr/17672.htm).Leading the demonstrations in Prague was dissident playwright Vaclav Havel, co-founder of the reform group Charter 77 (www.state.gov/r/pa/ho/time/dr/17672.htm).The Communist Party of Czechoslovakia quietly and peacefully transferred rule to Havel and the Czechoslovak reformers in what was later dubbed the “Velvet Revolution” (www.state.gov/r/pa/ho/time/dr/17672.htm).In Romania, the Communist regime of the hardliner Nicolae Ceausescu was overthrown by popular protest and force of arms in December 1989, and soon, the Communist parties of Bulgaria and Albania also ceded power (www.state.gov/r/pa/ho/time/dr/17672.htm).

The revolutions of 1989 marked the death knell of communism in Europe (www.state.gov/r/pa/ho/time/dr/17672.htm).As a result, not only was Germany reunified in 1990, but soon, revolution spread to the Soviet Union itself (www.state.gov/r/pa/ho/time/dr/17672.htm).After surviving a hard line coup attempt in 1991, Gorbachev was forced to cede power in Russia to Boris Yeltsin, who oversaw the dissolution of the Soviet Union (www.state.gov/r/pa/ho/time/dr/17672.htm).

The collapse of communism in East Central Europe and the Soviet Union marked the end of the cold war (www.state.gov/r/pa/ho/time/dr/17672.htm).The U.S. long-term policy of containing Soviet expansion while encouraging democratic reform in Central and Eastern Europe through scientific and cultural exchanges, information policy (e.g., Radio Free Europe and Radio Liberty), and the United States’ own example, provided invaluable support to the peoples of East Central Europe in their struggle for freedom (www.state.gov/r/pa/ho/time/dr/17672.htm).

Section 2.3. Marketization and Stabilization

The first non-communist government in Eastern Europe was formed in Poland by Tadeusz Mazowiecki after Solidarity won an overwhelming victory in the parliamentary election of June 1989 (www.countrystudies.us/poland.htm).The government came to office on September 12 and within one month announced an ambitious program of economic reforms (www.countrystudies.us/poland.htm).The objective was not to improve the socialist system, as had been the case in previous reforms, but to accomplish a rapid and complete transformation from the Soviet-type economy into a capitalist system and to reintegrate the Polish economy into the world economy (www.countrystudies.us/poland.htm).

Under the best of circumstances, accomplishing such a transformation would be an enormous task, but, like other Comecon countries, Poland had an inefficient industrial structure that was fuel- and material-intensive and a foreign trade mechanism incompatible with expansion of exports to the West (www.countrystudies.us/poland.htm).The inherited system did not support greater supply of consumer goods, nor was it any longer appropriate for trade with Poland’s Comecon partners, all of which were now restructuring their economies according to national requirements and resources (www.countrystudies.us/poland.htm).Without fundamental restructuring, the economy faced further declines in production, high unemployment, and strong inflationary pressure (www.countrystudies.us/poland.htm).Therefore, the first post-communist Polish governments pursued economic reform with great urgency, although they had limited success (www.countrystudies.us/poland.htm).

Section 2.3.1. Required Short-Term Changes

Modernization was a fundamental requirement: as a considerable part of Poland’s capital stock was obsolete or in poor condition, a very large share of the country’s industrial products was of poor quality (www.countrystudies.us/poland.htm).The system lacked a well-developed modern infrastructure, particularly in financial institutions, transportation and telecommunications, and housing (www.countrystudies.us/poland.htm).Without major improvement of infrastructure, the economy’s overall efficiency could not be raised significantly (www.countrystudies.us/poland.htm).Reform was further hampered by a shortage of well-trained managers and enterprise staff who understood the workings of the modern free enterprise economy and could function efficiently in such a system (www.countrystudies.us/poland.htm).Expenditures necessary to meet these needs were restricted or delayed, however, by simultaneous requirements to reduce inflation and the balance of payments disequilibrium (www.countrystudies.us/poland.htm).

Section 2.3.2. The Shock Strategy

The gravity of the economic crisis and the immediate threat of hyperinflation caused the Mazowiecki government to choose a “shock strategy,” called the Balcerowicz Plan after its chief architect, Minister of Finance Leszek Balcerowicz (www.countrystudies.us/poland.htm).The program received approval and financial support from the International Monetary Fund (IMF), and on January 1, 1990, a program for marketization was introduced together with harsh stabilization measures, a restructuring program, and a social program to protect the poorest members of the society (www.countrystudies.us/poland.htm).The program included liberalizing controls on almost all prices, eliminating most subsidies, and abolishing administrative allocation of resources in favor of trade, free establishment of private businesses, liberalization of the system of international economic relations, and introduction of internal currency convertibility with a currency devaluation of 32% (www.countrystudies.us/poland.htm).

At the same time, a very strict income policy was introduced (www.countrystudies.us/poland.htm).Although prices were allowed to rise suddenly to equalize supply and demand, nominal wage increases were limited to a fraction of the overall price increase of the previous month (www.countrystudies.us/poland.htm).Very heavy tax penalties were imposed on state enterprises whose wages exceeded these ceilings (www.countrystudies.us/poland.htm).This policy reduced real incomes and the real value of accumulated balances that, combined with inadequate supplies of goods and services, had caused prolonged inflationary pressure (www.countrystudies.us/poland.htm).Together with the lifting of restrictions on private economic activity, import policy reform and internal convertibility, the wage-and-price policy reestablished market equilibrium (www.countrystudies.us/poland.htm).

Section 2.3.3. Initial Results

Within one month, stores were well stocked, and the long lines in front of them had disappeared (www.countrystudies.us/poland.htm).Individual budgets rather than the availability of goods became the primary determinant of buying patterns (www.countrystudies.us/poland.htm).A large number of street vendors appeared, contributing to the supply of consumer goods and competing with established stores (www.countrystudies.us/poland.htm).This new type of enterprise often was the starting point for launching more established business units (www.countrystudies.us/poland.htm).

Besides income policy, the new government used highly restrictive monetary and fiscal policies to reduce aggregate demand (www.countrystudies.us/poland.htm).The reorganized central bank drastically limited the quantity of money by imposing a positive real rate of interest, introducing and subsequently increasing obligatory reserve ratios for the commercial banks, and imposing caps on credits (www.countrystudies.us/poland.htm).The budgetary deficit in 1989 had been equal to 11% of expenditures (www.countrystudies.us/poland.htm).

In 1990, this deficit was converted into a surplus of 1.3% of expenditures (www.countrystudies.us/poland.htm).The surplus then began to decline, however, in the second half of the year, and by the spring of 1991 negative economic factors had again created a large deficit (www.countrystudies.us/poland.htm).The government eliminated most enterprise subsidies from its budget and introduced specific tax reductions to force state enterprises to depend on their revenues (www.countrystudies.us/poland.htm).In the many cases where the government action threatened their operations, state enterprises gained time by developing a system of inter-enterprise credits, selling some extra equipment and materials, and obtaining extensions for the payment of taxes and debts (www.countrystudies.us/poland.htm).

Section 2.3.4. Long-Term Requirements

These rapidly introduced short-term policies quickly and fundamentally changed the workings of the Polish economy (www.countrystudies.us/poland.htm).Establishment of a full market system has other requirements, however, which take more time and are more problematic (www.countrystudies.us/poland.htm).The new Polish economy required a reorganized legal and institutional framework (www.countrystudies.us/poland.htm).Financial institutions, capital and labor markets, the taxation system, and contract laws required revision (www.countrystudies.us/poland.htm).Establishing systems for protection of consumers and of the environment was another priority (www.countrystudies.us/poland.htm).For these institutional changes, legislation had to be prepared, considered, and enacted by the government; then key personnel had to be trained to gradually bring the system to full efficiency (www.countrystudies.us/poland.htm).As many flaws in new legislation or regulations were only detectable after implementation, policy making took on an unstable, trial-and- error quality (www.countrystudies.us/poland.htm).Reform and stabilization measures did not meet expectations, and the country’s economic situation deteriorated in 1990-91 (www.countrystudies.us/poland.htm).

Section 2.4. Macroeconomic Indicators for 1990-91

Post-communist economic reform initially brought both positive and negative results in the key areas of prices, productivity, inflation, and wages (www.countrystudies.us/poland.htm).In general, early indicators showed that the adjustment to a market economy would require more time and greater social discomfort than was anticipated in 1989 (www.countrystudies.us/poland.htm).

Section 2.4.1. Price Increases

Sudden liberalization of prices brought an average price increase of 79.6% in the program’s first month (www.countrystudies.us/poland.htm).The high prices were intended to eliminate some major distortions in pricing and begin to adjust demand to the existing limited supply (www.countrystudies.us/poland.htm).Price liberalization stopped hyperinflation but, unexpectedly, inflation remained high (www.countrystudies.us/poland.htm).

Annual price increases were 250% in 1990 and 70.3% in 1991 (www.countrystudies.us/poland.htm).Except for the first quarter, however, average quarterly price increases in 1990 were considerably smaller than the equivalent increases in 1989, when the administrative system of price determination and controls still dominated (www.countrystudies.us/poland.htm).The average quarterly price increases were lower in 1991 than in 1990 (www.countrystudies.us/poland.htm).

Section 2.4.2. Impact on Productivity and Wages

Experts predicted that the highly restrictive stabilization policy would suppress production, but the extent of the decline exceeded all projections (www.countrystudies.us/poland.htm).Industrial output declined by 24% in 1990 and by another 12% in 1991 (www.countrystudies.us/poland.htm).In 1990, all branches of industry registered a substantial decline (www.countrystudies.us/poland.htm).In 1991, only the food industry showed a modest increase in output (www.countrystudies.us/poland.htm).In agriculture, the situation was somewhat better (www.countrystudies.us/poland.htm).Gross agricultural production declined by 2.2% in 1990 and by 2.4% in 1991 (www.countrystudies.us/poland.htm).In both years, however, the grain harvest was a very robust 28 million tons (www.countrystudies.us/poland.htm).

Gross domestic product (GDP) declined by 12% in 1990 and by 8% in 1991 (www.countrystudies.us/poland.htm).Gross fixed investment, after declining by 2.4% in 1989, decreased by 10.6% in 1990 and by 7.5% in 1991 (www.countrystudies.us/poland.htm).Consumption declined by 11.7% in 1990 but increased by 3.7% in 1991 (www.countrystudies.us/poland.htm).The decline in investment meant that no significant modernization and restructuring could take place, which in turn jeopardized future growth (www.countrystudies.us/poland.htm).The number of unemployed people reached 1.1 million or 6.1% of the labor force, at the end of 1990 and 2.2 million people, or 11.4%, at the end of 1991 (www.countrystudies.us/poland.htm).

Real personal incomes decreased by 22.3% in 1990, but they increased by 12.7% in January-September 1991 (www.countrystudies.us/poland.htm).Real wages, excluding agriculture and jobs financed directly from the state budget, declined by 29.2% in 1990 and increased by 2.0% in 1991 (www.countrystudies.us/poland.htm).The average real value of pensions decreased by 14% in 1990, then increased by 15% in 1991 (www.countrystudies.us/poland.htm).

Section 2.4.3. Statistical Distortions

Comparative statistics for this period, which generally caused overstatement of the 1990 decline, must be understood in their context (www.countrystudies.us/poland.htm).Two factors contributed to this faulty estimate (www.countrystudies.us/poland.htm).First, 1989 figures provided the basis for evaluating the economy’s 1990 performance (www.countrystudies.us/poland.htm).Traditionally, output statistics in centrally planned economies were inflated to show success in every case (www.countrystudies.us/poland.htm).Also, the 1989 figures did not reflect the low quality, unprofitable goods produced by subsidized state enterprises (www.countrystudies.us/poland.htm).Unprofitable production was shown as a statistical increase in NMP even as it reduced national income in the real world (www.countrystudies.us/poland.htm).Furthermore, until 1989 personal income and real wage calculations used the artificial official price index, so they were not a true measure of consumer purchasing power (www.countrystudies.us/poland.htm).

On the other hand, official statistics for 1990 and 1991 reflected a downward bias (www.countrystudies.us/poland.htm).Revenues and incomes deliberately were underestimated in order to avoid higher taxes (www.countrystudies.us/poland.htm).Due to these distortions, decentralized economic activity in the state sector and rapid growth in the private sector clearly required new methods of collecting and presenting statistics (www.countrystudies.us/poland.htm).In 1992, however, the Central Statistical Office in Poland had not yet removed the distortions of the previous system from its statistical formats (www.countrystudies.us/poland.htm).

Unemployment statistics also failed to keep pace with the actual economic situation (www.countrystudies.us/poland.htm).The rapid expansion of private enterprise in 1990 provided jobs for many people who had registered for benefits established at the beginning of the reform period (www.countrystudies.us/poland.htm).Meanwhile, legislation was slow to reform the accounting system (www.countrystudies.us/poland.htm).Even after statistical adjustment, however, the first three years of economic reform brought Poland genuine, deep decline in industrial production, in GDP, and in real personal incomes and wages (www.countrystudies.us/poland.htm).

Section 2.4.4. Agricultural Imbalances serious political problem developed in the agricultural sector during this period (www.countrystudies.us/poland.htm).Reduced domestic demand for food, the loss of Comecon markets, a rapid increase in imports, and relatively good harvests led to oversupply of agricultural products (www.countrystudies.us/poland.htm).Agricultural prices lagged behind the prices of goods and services purchased by Polish farmers (www.countrystudies.us/poland.htm).As a result, incomes fell farther than incomes in other sectors in 1990 and 1991 (www.countrystudies.us/poland.htm).This situation made farmers one of the most dissatisfied groups in Poland; although traditionally not politically active, farmers demonstrated en masse to improve their situation (www.countrystudies.us/poland.htm).In 1992, they demanded that government policy include higher tariffs, guaranteed minimum prices, and cheap credits to protect them from economic hardship (www.countrystudies.us/poland.htm).

Section 2.4.5. Causes of Decline

No single factor was responsible for Poland’s large-scale decline in production and incomes in 1990 and 1991 (www.countrystudies.us/poland.htm).The very restrictive stabilization policy caused some of the decline in economic indicators as well as increased unemployment (www.countrystudies.us/poland.htm).But when some fiscal and monetary restrictions were eased and real incomes increased late in 1990, inflation again increased (www.countrystudies.us/poland.htm).A similar succession of events in 1991 indicated that under prevailing conditions any increase in aggregate demand would lead to an increase in prices (hence inflation) rather than to an increase in output that would match the demand generated by higher wages (www.countrystudies.us/poland.htm).

An important reason for the unresponsiveness of supply was the inherited industrial structure, especially the poor condition of capital stock and shortages of various components and materials only available on the import market (www.countrystudies.us/poland.htm).But other factors also played a role. In many cases, enterprise managers failed to make responses and decisions appropriate to reform goals (www.countrystudies.us/poland.htm).The reform of 1981 had called for election of most managers by the workers’ councils of their enterprises (www.countrystudies.us/poland.htm).

Under the communist system, the political leverage of this relationship meant that managers sought to satisfy the councils by raising wages and avoiding layoffs through whatever strategy was available (www.countrystudies.us/poland.htm).Beginning in January 1990, however, the enterprises suddenly found themselves in a buyer’s market instead of the traditional seller’s market (www.countrystudies.us/poland.htm).Substantial and rapid adjustments within the enterprises were needed to cope with a decline in the domestic demand caused by a drastic reduction in personal incomes, cuts in government expenditures, and rapidly increasing imports (www.countrystudies.us/poland.htm).At the same time, the sudden elimination of the formerly secure Comecon markets, especially those in the Soviet Union and East Germany, made establishment of new markets in the West a condition of survival for many enterprises (www.countrystudies.us/poland.htm).

Few managers were prepared by training or experience to deal with this new requirement (www.countrystudies.us/poland.htm).No consulting or foreign trade brokerage firms were available to provide assistance, and the banking system that succeeded the old structure under the National Bank of Poland (Narodowy Bank Polski — NBP) had no experience in this respect (www.countrystudies.us/poland.htm).Although the elimination of price distortions and the introduction of an economically meaningful rate of exchange finally made profit and loss projections meaningful, the system of internal accounting within the enterprises still required considerable adjustment in 1992 (www.countrystudies.us/poland.htm).At that point, however, major changes in the product mix and improvements in quality were unlikely because anti-inflationary macroeconomic policy had caused a scarcity of investment funds for modernization and restructuring (www.countrystudies.us/poland.htm).

Another inhibiting factor was the persistent concentration of the post-communist Polish industrial structure, which in 1992 was still dominated by huge state-owned enterprises (www.countrystudies.us/poland.htm).In many cases, one enterprise monopolized an entire group of products (www.countrystudies.us/poland.htm).Antimonopoly legislation and an antimonopoly office established in 1990 had limited effect in the early post-communist years (www.countrystudies.us/poland.htm).Some large enterprises were split, and some monopolistic practices were stopped (www.countrystudies.us/poland.htm).Rapidly increasing imports provided new competition, but imports also reduced the market for domestic products and created an adverse trade balance despite a surprisingly strong performance by Polish hard-currency exports (www.countrystudies.us/poland.htm).

Closing bankrupt or unprofitable state- or municipally owned enterprises proved especially difficult when the livelihood of entire communities or regions was based on one or two such plants (www.countrystudies.us/poland.htm).Powerful workers’ councils lobbied for continuation of the status quo (www.countrystudies.us/poland.htm).In 1992, thousands of bankrupt state enterprises survived on loans from other enterprises or from banks, which were not capable of enforcing repayment under the financial conditions of the time (www.countrystudies.us/poland.htm).

Section 2.5.The Polish Post-Communism Privatization Process

Transformation of more fundamental aspects of the economy have proceeded much more slowly than did the reforms undertaken in 1990 and 1991 (www.countrystudies.us/poland.htm).The most important feature of the longer-term transformation is the privatization of the means of production (www.countrystudies.us/poland.htm).The end of the communist system brought an immediate and dynamic growth in new privately owned businesses, most of which were small retailing, trade, and construction enterprises (www.countrystudies.us/poland.htm).In 1990 about 516,000 new businesses were established, while 154,000 were liquidated, a net increase of 362,000 (www.countrystudies.us/poland.htm).

Another 100,000 small businesses formerly owned by local government agencies were sold to private investors in the initial rush to privatization (www.countrystudies.us/poland.htm).By September 1991, an additional 1.4 million one-person businesses and 41,450 new companies had been registered since the beginning of the year (www.countrystudies.us/poland.htm).Overall, in 1990 and 1991 about 80% of Polish shops went into private hands, and over 40% of imports went through private traders (www.countrystudies.us/poland.htm).

Legal and administrative preparations for privatization of state-owned enterprises took much longer than expected (www.countrystudies.us/poland.htm).The “small privatization” of shops, restaurants and other service establishments was a relatively simple process, but privatization of large enterprises proved much more difficult (www.countrystudies.us/poland.htm).By October 1991, some 227 larger enterprises had been converted into stock exchange-listed companies, and twenty of them had been privatized by offering them for public or private sale (www.countrystudies.us/poland.htm).

Some of these transactions involved foreign capital (www.countrystudies.us/poland.htm).To speed the process, the government of Prime Minister Jan Bielecki, which came to power in early 1990, had made capital vouchers available without charge to all adult citizens (www.countrystudies.us/poland.htm).The vouchers were to be exchangeable for shares in mutual investment funds (www.countrystudies.us/poland.htm).At first, these funds were to be managed under contract with foreign and domestic management firms (www.countrystudies.us/poland.htm).

Voucher holders would be allocated 27% of shares of the enterprises selected for “mass privatization” and would be able to purchase any 33% share of the privatized enterprises sold by auction (www.countrystudies.us/poland.htm).Due to their configuration, the vouchers were expected to give their holders effective control of these enterprises (www.countrystudies.us/poland.htm).Various technical problems delayed implementation of this program, as did the change of government at the beginning of 1992 (www.countrystudies.us/poland.htm).At that point, vouchers for fewer than ten major enterprises were being traded (www.countrystudies.us/poland.htm).

Already in 1990, the private sector had emerged as the most dynamic part of the economy (www.countrystudies.us/poland.htm).The economy’s overall GDP declined in 1990 by 12%, but it increased by 17% in the private sector (www.countrystudies.us/poland.htm).Total industrial production dropped by 23%, but the private sector production increased by 8% (www.countrystudies.us/poland.htm).

At the end of 1991, the private sector provided about 38% of employment; it was responsible for 22.1% of total industrial production, 43.9% of construction output, 70% of retail sales, and 16.3% of transportation services (www.countrystudies.us/poland.htm).Surprising growth occurred in private foreign trade activity, which accounted for 28% of foreign transactions in the first three quarters of 1991 (www.countrystudies.us/poland.htm).

By early 1992, some form of privatization had occurred in 17.4% of state enterprises (www.countrystudies.us/poland.htm).At that point, plans called for conversion of half of Poland’s state enterprises to private ownership by 1995 (www.countrystudies.us/poland.htm).

The rate of privatization had already slowed in 1992, however, partly because of reduced government outlays and continual alteration of program goals (www.countrystudies.us/poland.htm).Enterprises were restructured in several ways: medium-sized firms typically were liquidated, and large enterprises were transformed into stock companies and limited liability companies (www.countrystudies.us/poland.htm).

Section 2.6. Structure of Poland’s Economy: Post-Communism

Although Poland possessed abundant supplies of some natural resources, the structure and administration of the centrally planned system had long caused misallocation of those resources and of investment funds among the economic sectors (www.countrystudies.us/poland.htm).In addition, the cutoff of critical industrial inputs from the Soviet Union required major restructuring and rebalancing of all sectors (www.countrystudies.us/poland.htm).

Section 2.6.1. Fuels and Energy

Poland’s fuel and energy profile is dominated by coal, the only fuel in abundant domestic supply (www.countrystudies.us/poland.htm).Due to the lopsided and uneconomical dependence on this single fuel, the fuels and energy sector of the economy was a primary target for reorganization and streamlining in the early 1990s (www.countrystudies.us/poland.htm).In 1989, production of coke and extraction and refining of gas and oil accounted for 4.9% of Poland’s total industrial base (www.countrystudies.us/poland.htm).Electrical power generation accounted for 2.9% (www.countrystudies.us/poland.htm).However, these statistics were downward biased by the very low, heavily subsidized prices of the products of those industries (www.countrystudies.us/poland.htm).

Higher, market-established prices of fuels and electricity were expected to induce more economical fuel consumption, as were modern fuel-saving technologies in industry, construction, and transportation and gradual elimination of the most heavily fuel-intensive industries (www.countrystudies.us/poland.htm).By 1991 official policy had recognized that making such changes was less expensive than continuing the cycle of higher energy demand and production characteristic of the centrally planned economy (www.countrystudies.us/poland.htm).

Section 2.6.2. Coal

In 1992, coal continued to play a central role in the Polish economy, both in support of domestic industry and as an export commodity (www.countrystudies.us/poland.htm).In 1990, about 90% of the country’s energy production was based on hard coal and lignite (www.countrystudies.us/poland.htm).The two largest mines extracted over six million tons each in 1991, but the average mine produced between one million and three million tons (www.countrystudies.us/poland.htm).Compared with coalmines in Western Europe, Polish mining was quite inefficient because of isolation from technical advances made in the 1980s and, more recently, as we have seen, the lack of investment funds for modernization (www.countrystudies.us/poland.htm).

As the communist regimes ignored profitability in establishing quantitative output targets, coal output was expanded irrespective of costs, and inefficient mines were heavily subsidized (www.countrystudies.us/poland.htm).At the same time, the extensive type of mineral exploitation called for by central planning caused a very high ratio of waste (about 24% of output) as well as heavy environmental damage (www.countrystudies.us/poland.htm).Under the new planning system, a lower annual output is expected, but production operations are to be justified by profitability (www.countrystudies.us/poland.htm).

At the end of the 1980s, some eighty-four shaft mines and four large open-cast lignite mines were in operation (www.countrystudies.us/poland.htm).Plans for the 1990s call for closing many of those mines (www.countrystudies.us/poland.htm).In 1991, annual coal output declined from the 193 million tons mined in 1988 to 140 million tons, and output was expected to remain at the lower level in 1992 (www.countrystudies.us/poland.htm).During the same period, extraction of lignite declined from 73 million tons to 69 million, with 70 million tons the maximum annual output expected for the next few years (www.countrystudies.us/poland.htm).In 1989, about 16% of Poland’s coal and 19% of its coke were exported (www.countrystudies.us/poland.htm).In 1990, these shares increased to 19% and 26.6%, respectively, because a recession reduced domestic demand for coal (www.countrystudies.us/poland.htm).

The post-communist governments abolished centralized allocation of coal and partially liberalized prices (www.countrystudies.us/poland.htm).By 1992, a relatively free coal market had been created, and subsidies were gradually reduced (www.countrystudies.us/poland.htm).This process also abolished the central administrations for coal mining and for electricity generation that had ensured state monopoly of those industries and perpetuated wasteful resource management (www.countrystudies.us/poland.htm).

The reform program made both coalmines and power generation plants autonomous state enterprises fully competitive among themselves (www.countrystudies.us/poland.htm).To offset the loss of subsidies, price increases of as much as 13% were contemplated, although the planned rise of 5% had already aroused strong objections from industrial customers (www.countrystudies.us/poland.htm).The 1991 economic restructuring program of the Bielecki government envisaged establishment of ten independent and competing coalmining companies, several wholesalers, and one export agency (www.countrystudies.us/poland.htm).Following the World Bank’s advice, a holding company for lignite mines was also considered (www.countrystudies.us/poland.htm).

By the end of 1991, however, the Polish coal industry was in serious economic trouble (www.countrystudies.us/poland.htm).Fifty-six of sixty-seven mines ended 1991 showing losses, and only seven showed profits sufficient to cover all obligations (www.countrystudies.us/poland.htm).In 1991, government subsidies dropped from their 1990 total of 9.1 billion zloty to 5.9 billion zloty, but individual mines still received as much as 2.2 billion (www.countrystudies.us/poland.htm).Liquidation, already accomplished at six mines by 1992, cost between 0.6 and 1.5 billion zloty per mine, not counting the economic cost of added unemployment (coal mining in Poland is much more labor intensive than in the West) (www.countrystudies.us/poland.htm).

An alternative solution, combining individual mines into complexes, had been attempted in the 1970s efficiency campaign but did not have the expected impact (www.countrystudies.us/poland.htm).In mid-1992, mines and power plants had large coal surpluses that seemingly could not be alleviated by domestic consumption (www.countrystudies.us/poland.htm).At that point, the disparity between low domestic demand and continuing supply threatened to raise unemployment by forcing more mines to close (www.countrystudies.us/poland.htm).

Section 2.6.3. Oil and Gas

After rising sharply in the early 1970s, domestic oil production dropped and remained at about 350,000 tons per year into the 1980s because no new deposits were discovered (www.countrystudies.us/poland.htm).Domestic oil had never accounted for more than 5% of total consumption, but even this figure had dropped sharply by 1980 (www.countrystudies.us/poland.htm).Under these circumstances, the Soviet Union supplied between 80% and 100% of Poland’s imported oil, with some purchases from the Middle East when market conditions permitted (www.countrystudies.us/poland.htm).

Poland received Soviet oil through the Druzhba Pipeline, which remained the chief source of imported oil in early 1992 (www.countrystudies.us/poland.htm).The line supplied the major refinery at Plock. Oil arriving by ship from other sources was processed at a refinery near Gdansk (www.countrystudies.us/poland.htm).In 1992, however, the pattern of Polish oil imports changed markedly: as the Druzhba Pipeline was considered subject to political pressure and delivery taxes by the countries through which it passed, and because Russian crude oil was high in environmentally undesirable sulfur, Poland cut imports from that source from 63% in 1991 to 36% in 1992 (www.countrystudies.us/poland.htm).The gap was to be filled by North Sea (British and Norwegian) oil imports, which rose from 19.5 to 26% in 1991, and by the Organization of Petroleum Exporting Countries (OPEC) imports, which rose from 17.5 to 38% in 1992 (www.countrystudies.us/poland.htm).To accommodate more North Sea oil, the transloading capacity of the North Harbor facility at Gdansk was doubled in 1992 (www.countrystudies.us/poland.htm).

Domestic natural gas provided a much higher percentage of national consumption than did domestic oil (www.countrystudies.us/poland.htm).Although pipeline imports of gas from the Soviet Union rose sharply in the 1970s and early 1980s, reaching 5.3 billion cubic meters in 1981, domestic output remained slightly ahead of that figure (www.countrystudies.us/poland.htm).Domestic natural gas exploration was pursued vigorously in the 1980s, but equipment shortages hampered the effort (www.countrystudies.us/poland.htm).By 1991, however, Polish experts declared the country potentially self-sufficient in natural gas; in 1990 and 1991, large-scale agreements with United States firms brought about new exploration in Silesia and made possible extraction of gas from Poland’s many intact coal seams (www.countrystudies.us/poland.htm).

New domestic gas sources opened the prospect of reducing reliance on coal and saving the hard currency spent on the 7 billion cubic meters of gas imported (mostly from the former Soviet Union) in 1991 (www.countrystudies.us/poland.htm).No natural gas was imported from the West in 1991, nor did plans for 1992 call for such imports (www.countrystudies.us/poland.htm).At the end of 1991, a new agreement with Russia maintained both oil and gas deliveries from that country at approximately their previous levels (www.countrystudies.us/poland.htm).(Some 5 million tons of oil were delivered from Russia in 1991(www.countrystudies.us/poland.htm))At the same time, plans called for linkage of Polish and German gas lines as early as 1993, making Poland’s gas supply more flexible (www.countrystudies.us/poland.htm).

Section 2.6.4. Power Generation

In 1989, the electric power generation industry comprised seventy enterprises (www.countrystudies.us/poland.htm).Between 1980 and 1991, the industry’s power production increased from 122 billion kilowatt hours to 135 billion kilowatt hours (www.countrystudies.us/poland.htm).By 1990 a large proportion of obsolete or aging generation machines and equipment required replacement (www.countrystudies.us/poland.htm).

Modernization was especially critical to achieve efficient utilization of fuels and to reduce transmission losses through the national power grid (www.countrystudies.us/poland.htm).A wide range of technical improvements and higher energy prices were expected to reduce losses and waste in 1992, making possible a subsequent reduction in annual power generation to 128 billion kilowatt hours (www.countrystudies.us/poland.htm).

Estimates of energy price increases necessary to achieve conservation ranged as high as five times the subsidized levels of the late 1980s (www.countrystudies.us/poland.htm).Meanwhile, obstacles to energy conservation included the lack of meters to measure consumption, widespread use of central heating without charges proportional to consumption, and the high cost of new generating equipment, such as boilers, needed to upgrade generation efficiency (www.countrystudies.us/poland.htm).

During the communist period, hydroelectric power stations were not expanded because of the easy availability of the lignite burned in conventional thermoelectric plants (www.countrystudies.us/poland.htm).All hydroelectric stations existing in 1992 were built before World War II. Plans in the 1980s called for construction of three nuclear power stations (www.countrystudies.us/poland.htm).

The first, at Zarnowiec in south-central Poland, was scheduled to open in 1991 and be at full production in 1993 (www.countrystudies.us/poland.htm).After long years of construction and controversy, however, doubts about the safety of the station’s Soviet-made equipment (similar to that used at Chernobyl’) caused the first post-communist government to abandon the project. Some 86% of participants in a 1990 referendum voted against completion (www.countrystudies.us/poland.htm).

A second station had been started near Klempicz in west-central Poland, but work on it was stopped in 1989 (www.countrystudies.us/poland.htm).The third station never passed the planning stage, and in 1992 Poland remained without any nuclear power capacity (www.countrystudies.us/poland.htm).It had, however, joined its Comecon partners in investing in large nuclear stations in Ukraine, from which Poland received power in the 1980s (www.countrystudies.us/poland.htm).

The World Bank’s advice on restructuring Poland’s power industry included reorganization into four or five companies with seventeen regional subsidiaries responsible for power distribution (www.countrystudies.us/poland.htm).All these companies initially would be state owned but eventually would be privatized (www.countrystudies.us/poland.htm).

Section 2.6.5. Industry

The range of products manufactured in Polish plants increased greatly in the postwar years, mostly through construction of new facilities in the period of accelerated industrialization (www.countrystudies.us/poland.htm).By the 1980s, heavy industry produced processed metals (mainly iron, steel, zinc, lead, and copper) and derivative products; chemicals; a wide variety of transportation equipment, including ships and motor vehicles; electrical and non-electrical machines and equipment; and electronic and computer equipment (www.countrystudies.us/poland.htm).The most important light industry was textiles (www.countrystudies.us/poland.htm).

Under the central planning system, statistics on production by individual industries and on their relative shares in total industrial production through the communist period were distorted by administrative price fixing and unequal distribution of industrial subsidies (www.countrystudies.us/poland.htm).In general, however, between 1960 and 1989 the relative importance of food processing declined steadily while that of the engineering and chemical industries grew steadily (www.countrystudies.us/poland.htm).

The share of light industry declined early in the period but then increased under the stimulus of expanded Soviet export markets (www.countrystudies.us/poland.htm).The relative importance of the metallurgical, mineral, and wood and paper industries remained basically unchanged (www.countrystudies.us/poland.htm).Within the engineering group, the machine building, transport equipment, and electro-technical and electronic industries increased in relative importance between 1960 and 1989 (www.countrystudies.us/poland.htm).

The engineering and chemical industries received a considerable injection of Western technology, including patents and licenses, under the technology import program of the 1970s (www.countrystudies.us/poland.htm).In the late 1980s and early 1990s, however, economic crisis, recession, and post-communist reform measures brought a drastic decline in output in those industries (www.countrystudies.us/poland.htm).For example, output of the artificial fertilizer industry dropped 32% between 1989 and 1990, mostly because rising fertilizer prices reduced domestic demand (www.countrystudies.us/poland.htm).A sharper drop was prevented by quadrupling fertilizer exports: in 1991 output of nitrogenous fertilizers remained stable, but output of phosphoric fertilizers again dropped sharply (www.countrystudies.us/poland.htm).

Some existing manufacturing facilities could support expansion of production, but others required modernization before they could be exploited efficiently to meet Poland’s new economic priorities (www.countrystudies.us/poland.htm).Other facilities offered no possibility of expansion or modernization and were simply closed (www.countrystudies.us/poland.htm).In the Polish steel industry, which was second only to that of the Soviet Union in Comecon, only two plants had been built between 1945 and 1982 (www.countrystudies.us/poland.htm).The Lenin Iron and Steel Plant at Nowa Huta, the largest in the country, was built near Kielce in 1954 with aid from the Soviet Union (www.countrystudies.us/poland.htm).Although some plants were modernized in the intervening years, most of the prewar Polish steel plants featured low productivity, low-quality metal, and poor working conditions, as well as very high pollution levels (www.countrystudies.us/poland.htm).

With the help of foreign experts, the Bielecki government undertook a number of sectoral studies (www.countrystudies.us/poland.htm).The objective was to draw attention to the existing obstacles to growth and to increase international competitiveness of industrial enterprises in various sectors (www.countrystudies.us/poland.htm).Four major restructuring programs were prepared in cooperation with United Nations experts (www.countrystudies.us/poland.htm).They included improving the management and modernization of the agricultural machinery industry, restructuring the production of fertilizers, improving management and technology in the pharmaceutical industry, and increasing the degree of automation in various branches of industry (www.countrystudies.us/poland.htm).

Section 2.6.6. Light Industry

On behalf of the World Bank, United States experts assessed Polish light industry in early 1991 (www.countrystudies.us/poland.htm).They found the critical difference between Polish and West European manufacturing systems to be computerization; the high degree of computerization utilized by the latter systems enabled them to use short production series and make quick design changes (www.countrystudies.us/poland.htm).In textiles, Polish machinery was geared to produce intermediate-quality yarn that could not be made into exportable products (www.countrystudies.us/poland.htm).Polish finishing machinery was also outmoded (www.countrystudies.us/poland.htm).Although textile enterprises had been privatized quite early, they nevertheless remained too labor-intensive and used materials inefficiently, according to the report (www.countrystudies.us/poland.htm).On the other hand, Polish combed woolens and linen products were rated as potentially competitive in the European market (www.countrystudies.us/poland.htm).

Section 2.6.7. Automotive Industry

In 1992, the Polish automotive industry was expecting to modernize through a series of joint ventures with Western firms (www.countrystudies.us/poland.htm).In 1992, the Fiat Corporation, the pioneer of Western automobile production in Eastern Europe since 1973, invested in Polish production of a new model at its Bielsko-Biala plant (www.countrystudies.us/poland.htm).Fiat was to arrange for export of a large part of the output of that model (www.countrystudies.us/poland.htm).Also in 1992, General Motors Europe, the European branch of the United States automotive giant, was expected to begin assembling cars in Warsaw by agreement with the Warsaw-based Passenger Car Plant. Volvo of Sweden planned to produce buses, trucks, and tractors at a plant near Wroclaw following the signing of a joint venture agreement in early 1992 (www.countrystudies.us/poland.htm).

Section 2.6.8. Construction Machinery

The construction machinery industry, which expanded during the 1970s on the basis of Western licenses, traditionally exported a large proportion of its output to the Soviet Union, with which some joint ventures were established (www.countrystudies.us/poland.htm).Under license, with Western firms, Polish machinery plants produced mobile cranes, heavy truck axles, hydraulic equipment, truck-mounted concrete mixers, and other construction machinery (www.countrystudies.us/poland.htm).

In the 1980s, reduced Western investments in Poland curtailed demand for these products (www.countrystudies.us/poland.htm).In the 1990s, the highly centralized, bureaucratic construction machine industry was reorganized into a large number of small- and medium-sized private firms (www.countrystudies.us/poland.htm).The reorganization targeted expansion of the housing construction industry, which received high priority in reform planning (www.countrystudies.us/poland.htm).The second goal of this reorganization was to revive demand for the relatively modern and sophisticated construction machines that the Polish industry was able to produce (www.countrystudies.us/poland.htm).

Section 2.6.9. Banking and Finance

In the reform programs of the early 1990s, major restructuring of Poland’s financial infrastructure was a top priority in order to achieve more efficient movement of money through the domestic economy and to provide a secure environment for the foreign investment that was expected to carry Poland through its post-communist economic slump (www.countrystudies.us/poland.htm).

Section 2.7. The State Banking System highly concentrated state banking monopoly was a typical feature of East European economies in the communist period (www.countrystudies.us/poland.htm).In Poland, the monopoly was composed of the National Bank of Poland (Narodowy Bank Polski — NBP), which had replaced the prewar Western-style Bank of Poland in 1945; the Commercial Bank (Bank Handlowy — BH), which had a monopoly in financing foreign trade; the Polish Savings Office, which controlled transactions with private international transfers; and about 1,600 small regional and specialized cooperative banks that jointly formed the Bank of Food Economy (www.countrystudies.us/poland.htm).

To encourage private savings, a specialized savings bank, the General Savings Office, was established in 1987 by detaching designated departments from the NBP (www.countrystudies.us/poland.htm).In 1988 nine state-owned commercial banks were formed from regional branches of the NBP, and a state Export Development Bank was established (www.countrystudies.us/poland.htm).

Legislation was introduced in 1989 to allow private individuals, both Poles and foreigners, to form banks as limited stock companies (www.countrystudies.us/poland.htm).Between 1989 and 1991, a total of seventy licenses were issued to private banks, including seven banks funded by foreign capital, two cooperative banks, and three branches of foreign banks (www.countrystudies.us/poland.htm).

In October 1991, privatization of the Export Development Bank began, and the nine state commercial banks (which until that time still operated as they had under the old NBP) were transformed into limited stock companies (www.countrystudies.us/poland.htm).The State Treasury owned and operated the banks for an intermediate period while they prepared for privatization (www.countrystudies.us/poland.htm).

Section 2.8. Banking Reform, 1990-92 fundamental reorganization of the banking sector took place between 1990 and 1992 (www.countrystudies.us/poland.htm).The NBP lost all its central planning functions, including holding the accounts of state enterprises, making transfers among them, crediting their operations, and exercising financial control of their activities (www.countrystudies.us/poland.htm).The NBP thus became only a central bank, and state enterprises competed with other businesses for the scarce credits available from commercial banks (www.countrystudies.us/poland.htm).In its new form, the NBP exercised a considerable degree of autonomy in monetary policy and performed the same functions as the central banks in West European countries or the Federal Reserve System in the United States (www.countrystudies.us/poland.htm).

Nevertheless, the entire Polish banking system remained inefficient in the early 1990s because of backward banking technology and a very serious shortage of trained personnel in all branches (www.countrystudies.us/poland.htm).Considerable technical and financial aid from the World Bank, the IMF, and the central banks of Western countries was expected to improve the situation eventually (www.countrystudies.us/poland.htm).

Section 2.8.1. Insurance and Securities Reform

In July 1990, the insurance system was reorganized (www.countrystudies.us/poland.htm).Abolished were the monopoly State Insurance Company, which had been responsible for all domestic insurance, and the Insurance and Reinsurance Company, which had been responsible for all foreign transactions (www.countrystudies.us/poland.htm).Domestic and foreign-owned private limited stock and mutual insurance companies were then allowed to begin operating (www.countrystudies.us/poland.htm).At the same time, procedures were introduced to maintain adequate financial reserves and legal protection for people and assets insured (www.countrystudies.us/poland.htm).At the end of 1991, twenty-two insurance companies were operating in Poland, six of which were foreign-owned (www.countrystudies.us/poland.htm).

In early 1991, important legislation was introduced to regulate securities transactions and establish a stock exchange in Warsaw (www.countrystudies.us/poland.htm).At the same time, a securities commission was formed for consumer protection (www.countrystudies.us/poland.htm).A year later, the shares of eleven Polish companies were being traded weekly on the new exchange (www.countrystudies.us/poland.htm).Restructuring the financial market not only was necessary for increasing the overall efficiency of the economy and accelerating privatization but also was a precondition for the rapid influx of Western capital critical to economic development (www.countrystudies.us/poland.htm).

Section 2.8.2. New Financial Institutions

Several specialized financial institutions were established with direct or indirect help from the Polish government, international organizations, and foreign experts to facilitate economic restructuring (www.countrystudies.us/poland.htm).They include the Agency for Industrial Development, the Polish Development Bank, the Export Finance Insurance Corporation, the Enterprise Consulting Foundation, the Employment Fund, and a growing number of consulting firms (www.countrystudies.us/poland.htm).These institutions are expected to provide credit guarantees, help to establish new businesses, purchase a certain quantity of shares of the companies being converted to private enterprise, and facilitate leasing, financial restructuring, and bankruptcy processes (www.countrystudies.us/poland.htm).Some of the new institutions received designated funds from international financial organizations. The European Bank for Reconstruction and Development (EBRD) established a Joint Investment Fund in cooperation with the Polish Development Bank (www.countrystudies.us/poland.htm).

Section 2.8.3. Foreign Loans and Money Supply

In April 1991, representatives of the seventeen major West European creditor governments collectively known as the Paris Club agreed to a two-phase, 50% reduction of Poland’s debt on government loans (www.countrystudies.us/poland.htm).The United States made a similar reduction of 70% (www.countrystudies.us/poland.htm).

Terms for servicing of the debt were rearranged, with payments to escalate gradually from U.S.$0.5 billion in 1992-93 to U.S.$1.5 billion later in the decade (www.countrystudies.us/poland.htm).Negotiations with Western commercial banks, the so-called London Club, continued in 1992 (www.countrystudies.us/poland.htm).The hard currency debt was reduced from U.S.$48.5 billion at the end of 1990 to U.S.$44.3 billion in August 1991, partly because of the debt relief of U.S.$1.6 billion effected by the United States and partly as the revaluation of the dollar against other Western currencies reduced the debt in those currencies (www.countrystudies.us/poland.htm).

In 1991, the total money supply in Poland, counting both zlotys and convertible currency, increased by 83.9 trillion zlotys (www.countrystudies.us/poland.htm).Of this amount, over 90% belonged to private individuals or private enterprises, and about 6% belonged to state enterprises (www.countrystudies.us/poland.htm).The increase in the money supply came mainly from higher bank debts owed by economic units and the government (www.countrystudies.us/poland.htm).

A midyear alteration of the exchange rate between the zloty and the United States dollar also played a major role (www.countrystudies.us/poland.htm).Foreign currency held in Polish bank accounts increased by 13.2% in 1991 because more accounts were opened in 1991 (www.countrystudies.us/poland.htm).Although money in personal savings accounts grew by 250% in 1991, money held by enterprises in bank accounts grew by only 12.4% in the same period (www.countrystudies.us/poland.htm).Estimated total foreign currency resources declined by over 3% in 1991 to U.S.$5.3 billion (www.countrystudies.us/poland.htm).

Section 2.8.4. Foreign Trade

In the early 1990s, internal and external economic conditions forced a major reappraisal of Poland’s export and import policies (www.countrystudies.us/poland.htm).The once-profitable export markets of the Soviet Union were a much less reliable source of income after that empire disintegrated and hard currency became the predominant medium of exchange among its former members (www.countrystudies.us/poland.htm).In this situation, increased trade with much more demanding Western partners became the primary goal of Polish trade policy (www.countrystudies.us/poland.htm).

Section 2.8.5. The Foreign Trade Mechanism

Centrally planned economies typically minimized trade with free-trade markets because their central bureaucratic systems could not adjust quickly to changing situations in foreign markets (www.countrystudies.us/poland.htm).The high degree of self-sufficiency that was a declared economic objective of Comecon made trade with the West a difficult undertaking for an economy such as Poland’s (www.countrystudies.us/poland.htm).On the other hand, the basically bilateral barter agreements that characterized trade within Comecon often had made expansion of trade within the organization problematic (www.countrystudies.us/poland.htm).

State monopoly of foreign trade was an integral part of centrally planned economic systems (www.countrystudies.us/poland.htm).Even after some decentralization of this field in Poland during the 1980s, the Ministry of Foreign Economic Relations maintained direct or indirect control of all foreign trade activities (www.countrystudies.us/poland.htm).Originally, trading activities in the communist system were conducted exclusively by the specialized foreign trade organizations (FTOs), which isolated domestic producers of exportables and domestic buyers of imported goods from the world market (www.countrystudies.us/poland.htm).

Then, in the late 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 (www.countrystudies.us/poland.htm).Nonetheless, many enterprises still preferred the risk-free, conventional approach to foreign trade through an FTO, relying on guaranteed Comecon markets and avoiding marketing efforts and quality control requirements (www.countrystudies.us/poland.htm).

Prior to 1990, the Polish foreign trade system included the following elements: a required license or concession to conduct any foreign transactions; allocation of quotas by planners for the import and export of most basic raw materials and intermediate goods; state allocation and control of exchange and transfer of most foreign currencies; an arbitrary rate of currency exchange lacking all relation to real economic conditions; and artificial leveling of domestic and foreign prices by transfers within a special account of the state budget (www.countrystudies.us/poland.htm).Even among Comecon countries, Poland’s foreign trade had particularly low value (www.countrystudies.us/poland.htm).Its share of total world exports, 0.6% in 1985, dropped to 0.4% in 1989 (www.countrystudies.us/poland.htm).The share of imports dropped even lower, from 0.5 to 0.3%, in the same period (www.countrystudies.us/poland.htm).

In early 1990, Poland entered a painful process of massive transformation for which reintegration into the world economy was a primary objective (www.countrystudies.us/poland.htm).The first post-communist government dismantled the existing foreign trade mechanism and replaced it with a mechanism compatible with an open market economy (www.countrystudies.us/poland.htm).This change eliminated license and concession requirements for the conduct of foreign trade activities, eliminated quotas except in trade with the Soviet Union, introduced internal convertibility of the zloty and free exchange of foreign currencies, and accepted the rate of exchange as the main instrument of adjustment of exports and imports, supported by a liberal tariff system (www.countrystudies.us/poland.htm).

Section 2.9. Post-communist Policy Adjustments

In early 1990, the Mazowiecki government planned to maintain Poland’s high export volume to the Soviet Union for an indefinite period (www.countrystudies.us/poland.htm).The goal of this plan was to ensure a long-term position for Poland in that important market and to protect domestic industry from a further decline in production and increased unemployment (www.countrystudies.us/poland.htm).Subsequently, however, an export limit became necessary to avoid accumulating an excessive surplus of useless transferable rubles (www.countrystudies.us/poland.htm).

In 1992, after the Soviet Union split into a number of independent states, the Polish government had no indication whether existing balances would ever be exchanged into convertible currencies, or under what conditions that might happen (www.countrystudies.us/poland.htm).

In December 1991, Poland reached agreement on associate membership in the European Community (EC) (www.countrystudies.us/poland.htm).Having taken this intermediate step, the Polish government set the goal of full EC membership by the year 2000 (www.countrystudies.us/poland.htm).Among the provisions of associate membership were gradual removal of EC tariffs and quotas on Polish food exports; immediate removal of EC tariffs on most industrial goods imported from Poland and full membership for Poland in the EC free trade area for industrial goods in 1999; EC financial aid to restructure the Polish economy; and agreements on labor transfer, rights of settlement, cultural cooperation, and other issues (www.countrystudies.us/poland.htm).The agreement, which required ratification by the Polish government, all twelve member nations of the EC, and the European Parliament, went into interim operation as those bodies considered its merits (www.countrystudies.us/poland.htm).Both houses of the Polish parliament ratified the agreement in July 1992 (www.countrystudies.us/poland.htm).

Section 2.10. The Role of Currency Exchange

In this situation, expanded exports to the West provided the only alternative for the many enterprises whose survival depended on foreign trade (www.countrystudies.us/poland.htm).The government’s stabilization policy had an impact that promised expansion of exports to hard-currency markets (www.countrystudies.us/poland.htm).In 1991, drastic limitation of domestic demand, devaluation of the zloty by 32%, and liberalization of access to foreign trade by private entrepreneurs resulted in significant expansion of export earnings in convertible currencies (www.countrystudies.us/poland.htm).In 1990, the volume of hard-currency exports increased by 40.9% to over $US12 billion, while hard-currency imports increased by 6.3%, securing a positive trade balance of $US2.6 billion (www.countrystudies.us/poland.htm).

The level of exports earning hard currency in 1990 was particularly impressive in comparison with the generally sluggish growth of that category in the late 1980s (www.countrystudies.us/poland.htm).In the last years of the communist era, fuel exports declined steadily, and metallurgical exports decreased in three of the last five communist years (www.countrystudies.us/poland.htm).Construction work in countries paying in hard currency declined in the first three years of the period, whereas exports from the wood and paper, engineering, and chemical industries behaved unevenly (www.countrystudies.us/poland.htm).

In 1990, by contrast, hard-currency exports increased in most sectors of the economy (www.countrystudies.us/poland.htm).The largest increases in that category were achieved in agricultural, metallurgical, and chemical products (www.countrystudies.us/poland.htm).In general, the share of manufactured products in Poland’s export mix declined sharply with the sudden shift away from Comecon trade (www.countrystudies.us/poland.htm).

In 1990, the largest major categories of manufactured exports were, respectively, machines and transport equipment, miscellaneous manufactured goods, and chemicals; their share of total exports was 42.4%, compared with 67.3% for the same categories in 1985 (www.countrystudies.us/poland.htm).Growth in exports of food, raw materials, and fuels accounted for the difference (www.countrystudies.us/poland.htm).

Although the share of engineering products among exports declined, that group was the most important single earner of hard currency in 1990, followed by metallurgical, chemical, and food products (www.countrystudies.us/poland.htm).In 1992, all those industries possessed considerable capacity to expand their productivity, given appropriate investment in modernization and efficient marketing (www.countrystudies.us/poland.htm).

However, both modernization and marketing depended heavily on cooperation with Western firms (www.countrystudies.us/poland.htm).Despite the remarkable increase in hard currency exports in 1990, their overall impact on the national economy was limited by the strong effect of reduced transferable ruble exports on the priority sectors (www.countrystudies.us/poland.htm).In 1990, Polish light industry led the general decline in ruble exports (www.countrystudies.us/poland.htm).

At the beginning of 1991, however, the growth rate of hard currency exports declined, and imports increased very rapidly (www.countrystudies.us/poland.htm).Inflation remained high, and the advantage created by the 1990 devaluation slowly eroded (www.countrystudies.us/poland.htm).Another devaluation, this time 17%, was effected in May 1991 (www.countrystudies.us/poland.htm).At the same time, the zloty was pegged to a combination of hard currencies instead of to the dollar alone (www.countrystudies.us/poland.htm).

In October, the fixed exchange rate was replaced by an adjustable rate that would be devalued automatically by 1.8% every month as a partial hedge against inflation (www.countrystudies.us/poland.htm).The final import figure for 1991 was 87.4% higher than that for 1990 (www.countrystudies.us/poland.htm).In 1991, exports in convertible currencies were a little over U.S.$14.6 billion and imports were nearly U.S.$15.5 billion, creating a hard-currency trade deficit of about U.S.$900 million (www.countrystudies.us/poland.htm).

Figures for the first five months of 1992 showed a reversal of the previous year’s imbalance (www.countrystudies.us/poland.htm).The hard-currency trade surplus of U.S.$340 million reported for that period was attributed to a combination of commodity turnover and cancellation of interest payments in Poland’s debt reduction agreement with the Paris Club (www.countrystudies.us/poland.htm) s.

For years under the old system, Poland dispersed small amounts of its export and import trade to a large number of non-Comecon countries on all continents (www.countrystudies.us/poland.htm).Experts considered such dispersion a policy weakness because marginal suppliers and buyers usually trade at less favorable terms than high-volume partners, making the former expendable in hard times (www.countrystudies.us/poland.htm).

This factor became even more important in the first post-communist years; in 1990 Poland’s fifteen top import customers absorbed only 81.3% of exports, while the fifteen top suppliers contributed 86.2% of Polish imports (www.countrystudies.us/poland.htm).Poland’s traditional partners in the former Soviet Union and Germany (before and after their respective realignments) retained disproportionately high shares in both categories in 1990 (www.countrystudies.us/poland.htm).

Section 2.11. Foreign Investment

By the end of 1991, Poland had obtained U.S.$2.5 billion from the World Bank and other international financial organizations and U.S.$3.5 billion in bilateral credits and guarantees of credit from Western governments (www.countrystudies.us/poland.htm).In 1992, however, the limited absorptive capacity of the country still restricted the amounts of foreign cash and credit that could be used (www.countrystudies.us/poland.htm).Only U.S.$428 million was utilized in 1990, about U.S.$800 million in 1991 (www.countrystudies.us/poland.htm).A significant increase was expected in 1992 (www.countrystudies.us/poland.htm).

Poland’s net balance of payments deficit, calculated as the difference between credits used and the amount paid to service the national debt, was more than U.S.$1.3 billion in 1989, U.S.$312 million in 1990, and U.S.$449 million in 1991 (www.countrystudies.us/poland.htm).In the long run, even investment credits and continued growth of exports could not maintain a balance of payments equilibrium without a substantial inflow of direct foreign investments (www.countrystudies.us/poland.htm).

Cooperative enterprises with foreign firms also offered access to advanced technology, better export trade, improved management and training, and attractive job opportunities for younger members of the workforce (www.countrystudies.us/poland.htm).The first year of post-communist rule brought an initial surge of investment in which permits for formation of foreign companies more than doubled (www.countrystudies.us/poland.htm).A number of United States, British, French, Swiss, Swedish, Dutch, and Japanese firms started Polish enterprises (www.countrystudies.us/poland.htm).Significantly, the share of permits issued to German firms dropped from 60% in 1989 to 40% in 1990, and that figure was expected to remain at about 30% after 1991 (www.countrystudies.us/poland.htm).

Despite the adoption of very liberal investment legislation in the middle of 1991, however, the year did not bring the anticipated investment increases (www.countrystudies.us/poland.htm).In 1991 and 1992, major inhibiting factors were real and perceived political instability, conflicting and slow changes in economic policy, a faulty system for taxation of foreign enterprises, and a steep decline in the GNP (www.countrystudies.us/poland.htm).In spite of the increase in registered foreign direct investment projects between 1989 and 1991, the registered foreign capital involved in these projects was only U.S.$353 million in 1990 and U.S.$670 million in 1991 (www.countrystudies.us/poland.htm).The actual investment amounts were not more than 40% of those amounts (www.countrystudies.us/poland.htm).

At the end of 1991, some 4,800 partnerships operated with foreign participation (www.countrystudies.us/poland.htm).Of these, 43% were in industry, 24% in trade, and 6.6% in agriculture; about two-thirds of foreign ventures were concentrated in the economic centers of Warsaw, Poznan, Gdansk, Szczecin, Katowice, and d – meaning that foreign investment was not benefiting many of Poland’s less prosperous regions (www.countrystudies.us/poland.htm).Altogether, the foreign partnerships generated less than 1% of Poland’s total national income in 1991 (www.countrystudies.us/poland.htm).

Chapter 3: Business Ethics in Poland

Section 3.1. Introduction

As we have seen in the previous Chapters of this dissertation, Poland has had a troubled economic history since the fall of communism in Poland in 1989. This in-depth overview of Poland’s economic history was absolutely necessary, in order to lay bare the troubled background upon which Poland’s current level of business ethics has been built. We have seen that Poland has been dependent upon foreign help at certain periods throughout its post-communism development, and that it is currently aiming to join the EU. It is a suggestion of this dissertation that Poland has had to develop the level of business ethics it currently has, precisely in order to be able to attract favorable reviews for its behavior, and therefore to attract foreign investment, to help its economy, and to stabilize and develop its business environment. Building upon the background thus given, and this premise, this Chapter will look at what is widely recognized to constitute business ethics, and at the current level of business ethics in Poland.

Section 3.2. What is Meant (and Understood) by the Term ‘Business Ethics’ in Poland?

The word ‘ethics’ comes from the Greek word ‘ethos’, which means custom, habit, or something that arises out of habit. After some time, this word evolved and now it is connected with the behavior of the human being (Chryssides, 1999).

Ethics (jn a business context) is usually referred to as that set of norms and moral standards that is accepted by certain community. The term ‘Business Ethics’ was created by the combination of two very well-known words “ethics” and “business” (Gasparski, 1999). Business ethics means a set of standards that is recognized, approved and which is abided by in the world of business.

The ethics of Polish businessman is exactly the same as the ethical thinking of the rest of society. As with the rest of the world, in Poland, there are companies that make their payments on time, and there are companies that don’t pay at all. Unfortunately, the weakness of those national institutions responsible for enforcing the law encourages many companies not to pay at all (Gasparski, 1999).

In general, business in Poland is not very well organized. Businessmen know how they should run their companies, but if no one else cares about the law, it is left for people wanting to follow the law to wonder why should they be bothered, especially if this is likely – as is often the case – to pose problems for them. There are only a few companies in Poland that have published, usable, code of ethics. The biggest companies in Poland are trying to propagate honesty in business, but none of them decided to do something like, for example, one of English companies did (Dielt, 1999).

At the beginning of the 1990’s, one of the leading English companies offered one million pounds to the university of London, to create a Department of Ethics at London Business School. That was the first step towards changes in the comprehension and understanding that ethics in business is a very important issue, that no longer can be treated as not existing one (Gasparski, 1999).

The low ethical levels of Polish businessman is mainly connected with their way of thinking about business, which has been heavily influenced by their experiences of communism, when, in order to survive difficult times, people had to behave in unethical ways, or even to cheat. Luckily, young managers who graduated after the 1990’s had to learn about ethics as a part of their studies, and hence have a different attitude to many businessmen who learnt their trade in pre-1990 times (Filek, 1992). Is there actually a chance to change the attitude of these people, and exactly how did Polish companies react to the need to think about ethical issues after the fall of communism?

As we have seen, Polish businessman will have to learn positive patterns of conduct once Poland becomes a member of EU, and indeed, perhaps even to become a member of the EU. In the EU, the ethics of business evolved over a period of many years, and a certain set of rules, that all companies have to obey, have already been created (Ciszewska, 1998).

In the development of business ethics in Poland, many changes have been made so far, and many others have to be made in the future. It should, however, be remembered that it is – and will continue to be – very difficult to change the current mindset of many Polish businessmen quickly, especially after almost 50 years of living behind the iron curtain. The whole of Polish society needs to learn to think in a different way, and many bad habits will have to be replaced with good ones (Dyonizak, 1997).

What changes has been made so far in ethics in Polish business, and what is its relation to international ethics standards? This question will be answered throughout the next section. Multinational companies very often use their power in non-ethical ways, in order to force governments to change their legislation. This is present in Poland nowadays, as international business and international governments have a great deal of influence on Polish business. As a famous business ethicist says, “A close look reveals that a great deal of economic life depends for its viability on a certain limited degree of ethical commitment. Purely selfish behavior of individuals is really incompatible with any kind of settled economic life. There is almost invariably some element of trust and confidence. Much business is done on the basis of verbal assurance” (Kenneth J. Arrow).

The ethics of business is a very complicated science, as the ethical attitudes to the problems of the Polish economy are so complex that it gives rise to very dogged discussions about business ethics. In recent years in Poland, the interest in ethical problems has increased, not just in business circles: it can be observed among all circles of society nowadays, but especially in the world of business (Dyllus, 1997).

There are a few reasons that can be suggested for why we currently observe such a sudden increase in interest for this subject. The first reason is that people are much better informed by the mass media about scandals and different kinds of frauds in the world of business nowadays than they have ever been. This has completely changed society’s point-of-view, such that, nowadays, expressions like “business is business” are completely outdated.

According to Davies, if business ethics are a field of knowledge, and are a guiding principle for reformative action, the aims of which are to contribute to the resolution of such problems of the concentration of ownership and control, this field will have to go beyond the closed-circuit of the “business is business” logic and start to look for, and to evaluate, genuine alternatives (Davies, 1997). In this situation, in Poland, as in other countries worldwide, companies have had to create clear and accessible codes of ethics. In Poland, this has been undertaken through the opening of various research institutes for business ethics, including the CEBI (The Center of Business Ethics, Poland), and the Polish Association for Business Ethics (EBEN-Poland).

The need for an ethical order is nothing new, however, and one of the first to have noticed this was Kant: according to Kant, ethics is the outcome of the use of human reason, which undertakes investigations a priori, or independently of experience (Kant).

The motivation for work and entrepreneurship are eternal subjects with which to be able to assess moral and ideological disputes (Rybak, 1999). The subject of ethics was widely explored in different disciplines of science, such as: religions, philosophies, which directly led to development of work philosophy, or the ethics of economy (Lipiec 1992), which is commonly known as the ethics of business.

This discipline expends and is related to ethics, which represents a very wide philosophical – sociological context, as well as the economy, which represents the whole range of management science (Lipiec, 1992). There are many questions related to the ethics of business, for example, if there is any sense to transfer the whole theory and methodology of ethics to real life situations and to business. This viewpoint creates not only the ethics of business, but also to some degree, the “meta-ethics of business” (Lewicka, 1996). This all has an impact on some aspects of economic relations, management and sales, such that behind the serious moral problems, there are also meta-ethics issues.

The next section will look at those standards that have been developed in Poland for implementing ethical business practices: how they were implemented, how they were received, and how they have developed since their implementation.

Section 3.3. Developing Standards of Business Ethics in Poland

Five years ago, private-sector business activity and market-based democracy were new concepts for many Poles (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Basking in the glow of the fall of the Berlin Wall, Poles looked forward eagerly to the greater prosperity that they felt sure democracy would bring (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Indeed, Poland’s new economic and political systems have brought a remarkable transformation, perhaps best symbolized by the rapid growth of the private sector and the large number of political parties competing in fair, regular elections (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Despite its impressive achievements, Poland’s post-communist transition has raised a host of difficult questions (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).An especially challenging issue involves the behavior of Poland’s many new private firms, in particular the question of how to differentiate between legitimate and illegal profit-seeking activities in an environment, where legal and regulatory standards are still evolving (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).As Andrzej Zawislak, chairman of the Polish Chamber’s committee on professional ethics, notes, moral standards and ethical behavior are an essential aspect of economic growth (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Nonetheless, the development of norms for appropriate business behavior or standards of business ethics is often overlooked (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Moreover, the importance of business ethics is not yet well understood in the Polish, indeed international, business community (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

To shed further light on the relation between business ethics and the institutional, legal and moral development required for markets and business to function efficiently, the Institute for Private Enterprise and Democracy of the Polish Chamber of Commerce, with support from the Center for International Private Enterprise, sponsored a landmark conference in Warsaw in October 2001 (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).At the conference, a sample code of ethics was presented to representatives of local and regional Chambers of Commerce throughout Poland (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).This sample code, to be described in further detail later in this section, is intended to serve as the basis for establishing transparent standards of business ethics in Poland (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Section 3.3.1. The Polish Transition

When the Polish experiment with market-based democracy began five years ago, few observers within or outside of the country knew what to expect (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).After all, the collapse of central planning on such a large scale was as surprising as it was dramatic (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).It is no exaggeration to say that the years since the fall of communism have brought truly remarkable changes, changes that have made a world of difference (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Private-sector business activity, for example, has grown by leaps and bounds (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).All told, the burgeoning Polish private sector now employs more than 60% of the national workforce and accounts for more than 50% of Polish GNP (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Ninety percent of retail business activity, 80% of foreign trade, 75% of construction, 40% of transportation services, and one-third of industrial production is in the hands of the private sector (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Although a welcome development, such spectacular private-sector growth has not come without difficulties (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Unemployment, for example, also has grown by leaps and bounds, from an official rate of less than one percent in 1990 to more than 15% today (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).And in regions like Lodz and Mielec, where large state-owned enterprises have gone bankrupt, the unemployment rate actually exceeds 20% (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Surveys conducted prior to last fall’s elections, moreover, showed that some 40% of all Poles now live in poverty and that for roughly 60% of them, conditions have worsened over the past year (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Still, many Poles are doing well under the new market reforms and are profiting financially from their new freedom (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Many of Poland’s new private-sector businesspersons and entrepreneurs are making a small fortune as manufacturers, traders, shop owners, restaurateurs, venture capitalists and the like (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).In fact, there are now almost 1.8 million private companies in Poland (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Most of Poland’s new entrepreneurs are honest businesspersons who have adapted admirably to the uncertainties brought on by the transition from a command economy to a market-based system (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

However, as Poland moves toward establishing a democratic, market-oriented society, it is still in the process of creating fixed and settled norms of legal, commercial and political discourse (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Standard legal frameworks for business, such as commercial codes; bankruptcy laws; mortgage and forfeiture rights; tort, civil and contract law; rules governing privatization; commercial lending institutions; and a convertible currency are still unfolding (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Until they are fully functional, the private sector will not grow to its full potential, and illegal activities – the so-called “black” or “gray” markets – will flourish (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).In a May 1993 poll of 570 firms operating in eleven Polish voivodships (counties), 70% of respondents cited the incongruity of legal regulations and gaps in Polish law as a hindrance to their ability to do business (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).In addition, the lax regulatory environment provides opportunities not only for shrewd entrepreneurs, but for corrupt operators to make profits by exploiting their previous positions (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Section 3.3.2. Difficulties in Adjusting

Perhaps not surprisingly, the transition has brought not only success for those able to adapt to the new ways, but uncertainty and anxiety, if not outright pain, for those who have not been able to adapt (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Although the standard of living has increased for the population as a whole, some groups in particular have had difficulty adjusting, such as farmers, pensioners, the unemployed, and workers in large state factories now collapsing under the weight of market forces and government fiscal and budgetary restraint (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

In addition, anxiety has been growing because the security of life during the era of central planning, when state workers were assured of a certain standard of living regardless of their performance, is gone (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Polish workers today must rely on their knowledge, skills and performance to attain their standard of living (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).While this situation offers more opportunities, it entails greater risk and uncertainty, concepts with which many workers are simply not accustomed (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

The present economic transition would be difficult for these people in any case, say Polish officials (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).What makes it almost unbearable, however, is the widespread perception in Poland that many of those who are “making it” are doing so through illicit and unethical means (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Popular discontent has been growing for some time in conjunction with the rising discrepancies in wealth between Poland’s richest and poorest citizens (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Many Poles have developed negative attitudes toward the business community (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

In an effort to promote a more positive image of the business community, as well as greater awareness of ethics issues in general, the Polish Chamber of Commerce convened the October conference in Warsaw as part of a landmark effort to develop standards of business ethics for its member companies (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Rather than focusing on ways of communicating the benefits of democracy to struggling, transition-weary citizens, the Chamber decided upon another approach: developing a set of business ethics principles, a code of conduct for business, that could be agreed upon and adhered to by all of its member companies (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Section 3.3.3. Identifying the Problem: Polish Chamber Survey Results

In March and April of 1993, the Polish Chamber of Commerce conducted surveys of 25 chambers of commerce and commercial associations throughout Poland as part of the process of developing a sample code of ethics (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).The surveys had a number of objectives (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm):

to identify the most important problems of business ethics;

to determine whether chambers of commerce were dealing with ethical problems;

to ascertain the ethical standards that chambers of commerce believe businesses should observe; and to identify the most blatant unethical conduct on the part of businesses (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Although 24 of the 25 chamber and commercial associations completed the survey, this high response rate is misleading: almost half of the chambers reported that they were not concerned with business ethics issues (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).The remaining chambers reported taking some interest in and action concerning ethics issues, ranging from involvement on boards of arbitration and commissions of inquiry to the expulsion of unethical member companies and the establishment of contract bid review boards (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).The relatively low level of awareness about the importance of business ethics to a market economy and the need for private companies to exercise social responsibility point to the need for efforts to promote greater awareness of ethics issues (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Several factors account for why ethics issues were not of greater importance for the chambers surveyed (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).During the socialist era, when property belonged to the state, the idea of “borrowing” property that did not belong to any other particular person seemed acceptable and was quite common (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Thus, society itself had a low level of awareness of or concern with ethics issues (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).In addition, little training in ethics was available in schools, colleges or business courses (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Asked to identify the most important ethics problems, the chambers rated them, in order of importance, as follows (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm):

honest competition and advertising;

integrity/loyalty to partners and customers;

obeying tax laws;

honoring contracts;

professionalism/competence/responsibility;

reputation;

taking undue advantage of a monopoly position; and obeying labor laws (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Significantly, more than half of those queried said that what is most needed to resolve these problems is better legislation and regulation, particularly in the financial sector; more adequate legal oversight; and more effective law enforcement – in other words, a more market-oriented economic and legal infrastructure (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).The establishment of Western-style legal codes alone was cited by more than 40% of the respondents as the most efficacious solution to the problem of crime and corruption in Poland (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).A related problem involves the simple matter of having enough courts available to hear and resolve pending legal disputes: issues that would take months to resolve in the West can drag on for years (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Almost half of the chambers surveyed cited as their top priority the need to strengthen the self-governing mechanisms of business (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Chambers of Commerce in Poland are charged with imposing ethical standards on their members (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Few actually do so, however, due to their weak position vis-a-vis the Polish business community (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Section 3.3.4. Setting Ethical Standards

The results of the surveys were used as inputs for a sample code of ethics developed for and presented at the conference (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).The code comprises a comprehensive set of ethics rules to govern Polish business activity (see box below) (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).The rules are part of an ongoing effort by the Chamber to “police its own” and enforce high standards of ethical conduct on Poland’s growing number of private-sector businesspersons (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Based on feedback from the members as well as further deliberations, this sample code will become finalized and will serve as a standard for Chamber members (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Significantly, the sample code is specific enough to draw attention to important ethical concerns now arising in Poland and other transition countries, but broad enough in scope to avoid the imposition of a rigid and unworkable straitjacket on entrepreneurs (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).This is important, say conference participants, because running a business is difficult in any case, especially in a country making the transition from socialism to capitalism (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Thus, a code of ethics that is too specific and too demanding risks being ignored by businessmen who might view it as utopian and, therefore, unworkable (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

In adopting such a code, the Chamber is undertaking an innovative approach that may serve as a model for the other nations undergoing the transition from command to market-based economic systems (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Indeed, business ethics and corporate social responsibility have grown increasingly important to reform leaders throughout the post-Communist world – and with good reason (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

For one thing, as long as business activity remains suspect and tainted by corruption, levels of Western aid may be reduced correspondingly (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Western investors, moreover, especially Americans bound by the Foreign Corrupt Practices Act, which prohibits them from paying off foreign government officials, will be loath to do business in this part of the world for fear of inviting trouble (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Section 3.3.5. Letting Market Forces Work

Foreign assistance, no matter how well-intended or well-administered, cannot solve the problem of white-collar crime and corruption in Poland, say members of the Polish Chamber of Commerce (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).There are, they say, simply too many reasons for too many people to “do the wrong thing,” thus, Poles themselves must bear the brunt of this problem (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

As Poland and the other ex-socialist countries solidify their market-based democracies, they will be more effective in combating white-collar crime and corruption (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).As far as the transformation process is concerned, speed is of the essence (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).As economist Jeffrey Sachs points out, governments in Eastern Europe and the former Soviet Union cannot replace the millions of former Communist party functionaries who now pervade the bureaucracies of the post-communist world (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).They can, however, sidestep them by moving quickly to replace antiquated communist-era legislation with more modern, up-to-date rules and regulations (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Dr. James Gwartney, a Professor of economics who spoke at the Chamber conference agrees. “Removal of roadblocks to competition,” says Gwartney, “licensing requirements and bureaucratic delays, for example” – is essential (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Such obstacles are merely invitations for government officials to demand, and unscrupulous businesses to provide, political favors in exchange for protected markets” (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).And, he adds, laws prohibiting fraud — the use of dishonesty and failure to provide a specified service as promised — need to be adopted and vigorously enforced (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

The actual experience with economic reform in Central and Eastern Europe and the NIS appears to prove Sachs and Gwartney correct (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Indeed, entrepreneurs doing business in that part of the world report that where the transformation to capitalism has been slowest — Russia and Ukraine, for instance — crime and corruption are a much greater burden (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).They say, however, that they are less of a problem in those countries that have moved most swiftly toward the free market — Poland and the Czech Republic, for example (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

It has become clear that the longer the old central planning bureaucracies are left in place, the greater the opportunities for nomenklatura or mafia types to engage in corrupt practices (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Thus, in places like Poland and the Czech Republic, corruption may have begun to subside in the last couple of years, as the legal and institutional structures necessary to combat it have begun to take hold (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Furthermore, Gwartney adds, competition “provides a valuable shield of protection against unethical behavior” (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).In a free market, after all, if a business cheats its customers and charges them too much, then consumers will cease doing business with that firm and instead seek out an alternate service provider (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Thus, “firms that are dependent on repeat customers,” says Gwartney, “will not be getting away with unethical, opportunistic behavior” (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).The problem in Poland and other countries now making the transition from socialism to capitalism, he argues, is that “businesses [there] have not had a sufficient amount of time to build positive reputations” (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Consequently, “consumers in transitional economies are more likely to be taken advantage of by unscrupulous sellers” (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

In any case, the “Rules of Ethics” drafted by the Polish Chamber of Commerce concern not what the government can do, but rather what business itself can do (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).They are, therefore, intended not so much to provide clear-cut answers to ethical problems, but rather to draw attention to the importance of ethical concerns in a market economy (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

These rules are only the “starting point” in the debate over the role of ethics in a market economy, not the end point, said one conference organizer (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Indeed, said one businessman, the debate on ethics “focuses our attention on these issues; but we cannot resolve them all today (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).What this conference does is set in motion the process whereby we can really think about the ethical considerations involved in making decisions in a market economy, which is something we really need to do” (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Said another businessman: “I am very happy to see that issues which have been overlooked for such a long time are now being opened to discussion, that important ethical concerns are now being applied to professional business activity. This is happening because business activity is developing quite rapidly [in Poland]. And it is really a question of whether we will have mechanisms that require rational and ethical behavior; because these, I believe, will determine whether our experience [with capitalism] is successful” (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Section 3.3.6. The Highlights from the Polish Chamber’s Sample Code of Ethics

The highlights of the Polish Chamber’s sample code of ethics include:

member organization should obey the law, act according to the rules governing social coexistence and proper morals, and respect rules of ethics in economic activity (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

A member organization should take account of the decent social interest in its economic activities (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

A member organization should take special care with regard to common goods, including the natural environment and its resources (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

It is strictly forbidden to make use of physical persons in an economic activity in a way that can be hazardous to their life or good health or that can lead to their demoralization (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

A member organization should meet all of the obligations that it voluntarily accepts (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

A member organization should obey the rules governing free and decent competition and providing for the equal treatment of all participants in economic activities (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

A member organization should undertake negotiations in good faith (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

A member organization should not knowingly limit output, sales, services or other activities, even if it has the wherewithal to do so, to increase prices, or create barriers or otherwise limit the activities of other economic entities (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Section 3.3.7. Western Aid In Fighting Corruption

It took centuries for the economic and legal infrastructure that supports a market-based democracy to develop in the West (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Fortunately, Poland and other ex-communist countries need not wait so long, but can take immediate advantage of Western experience to help stem the tide of white-collar crime and corruption (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Indeed, by insisting on adherence to the highest ethical standards in the conduct of business activity, Western governments, corporations and other public- and private-sector entities can provide entrepreneurs in Eastern Europe and the former Soviet Union with a powerful incentive to stay clean (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

The Polish-American Enterprise Fund provides a good example of how Western assistance can be a force for the better in the post-Communist world (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).The Fund was established in 1990 with an initial capital outlay of $240 million from the United States government and has since been supplemented with an additional $101 million from outside sources (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).It its first three years of operation, it provided nearly $130 million in financing to more than 2,300 small- and medium-sized private businesses in Poland (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Businesses wishing to receive financing from the Fund must demonstrate that they are engaged in legitimate business activity and wholly above board in their dealings (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Co-operation on legal issues has also been significant (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).Members of the Polish, Czech and Bulgarian Bars, for instance, have participated in workshops sponsored by the American Bar Association (ABA) designed to provide East European law makers, prosecutors and defense attorneys with technical legal assistance (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Part of the ABA’s Central and East European Law Initiative (CEELI), the workshops cover matters ranging from private property rights protection to civil-rights enforcement and typically provide East European lawmakers with a sophisticated level of expertise (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

The newspapers have reported an explosion of white collar crime in Poland since the conversion to capitalism,” explains Sarah N. Welling, a Professor of Law at the University of Kentucky and conference participant (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).”The challenge is to define the line between creative and aggressive entrepreneurial activity and fraud. Even once the line has been defined, it must be explained and communicated so that people to whom capitalism is new can understand it. This is a big assignment. We in the United States still have trouble with it and we have been working on it for over 200 years” (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm).

Chapter 4: Conclusions

The understanding of moral issues very often takes place in real-life problems at work, in the place where we are being judged and where we don’t want to get caught undertaking any unethical behavior (Steinmann). In this light, the ethics of business – in whichever part of the world, including Poland – may be a chance to increase awareness of ethics and behavior in society, which will obviously be beneficial in the future (Kamiaski, 1999). New generations of managers now fully aware of ethical issues will hopefully change the image of Polish businessmen, thereby generating more trust in Polish business in general, and encouraging more business for Poland as a whole, to help the economy and to help in development issues in the country as a whole.

Bibliography

Bowie E. (1999) Business Ethics a Kantian Perspective Oxford: Blackwell

Ciszewska B. (1998) Unethical behaviour Warszawa: Rzeczpospolita

Cryssides G.D.; Kaler J.H. (1999) Introduction to the ethics of business. Warszawa: PWN

Davies W.F. (1997) Current issues in business ethics London: Routledge

Dielt J.; Gasparski W. (1999) Can business be ethical? Warszawa: PWN.

Dyllus A. (1997) Polish political system transformations in context of ethics Warszawa: ATK

Dyonizak R. (1997) Manipulation of society Krak w: Universitas

Filek J. (1992) Ethics of responsibility Krak w: Etyka

Garton Ash, T. The Magic Lantern: The Revolution of ’89 Witnessed in Warsaw, Budapest, Berlin, and Prague (New York: Vintage Books, 1993).

Gasparski W. (1999) Ethics of business Warszawa: PWN.

Gasparski W.; Lewicka-Strzalecka A.; Miller D. (1998) Ethics of Business: WSHE

KamiA” ski J. (1999) Ethical prospect of negotiations. Warszawa: WSHE

Lewicka-Strzalecka A. (1996) Social responsibility in context of political transformations in Poland. Krak w: PWN

Lipiec J. (1992) Ethics of work. Krak w: Zarys

Rybak M. (1999) Development of Ethics Stages. WSHE

Saunders M, Lewis P., Thornhill A. (2003) Research methods for business students. London: Pearson

Stokes, G. The Walls Came Tumbling Down: The Collapse of Communism in Eastern Europe (New York: Oxford University Press, 1993).

BOX 1: The Most Important Problems of Business Ethics*

Fair competition and honest advertising

50 points

Integrity and loyalty to partners and customers

38 points

Obeying tax laws

34 points

Honoring contracts

22 points

Professionalism, competence, responsibility

21 points

Reputation

20 points

Not taking undue advantage of a monopoly position

Obeying labor laws

15 points

Corruption

13 points

Protecting the environment

13 points

Product quality

12 points

Note: 1-5 point scale; 1 point least important, 5 points most important; ranking based on total points; more than one response permitted (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm)

BOX 2: PROPOSALS FOR SOLVING ETHICAL PROBLEMS*

Settling and stabilizing binding law

Strengthening self-government.

Giving self-governing bodies the power to impose sanctions and award compensation.

Education for businessmen in the law and ethics

Drafting and adopting a business ethics code

Greater concessions

Making the courts and enforcement more efficient

Note: more than 1 response permitted (http://www.cipe.org/publications/fs/ert/e11/ethics-1.htm)

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