Poland: Economic Restructuring and Donor Assistance (Chapter Report,
08/07/95, GAO/NSIAD-95-150).

GAO reviewed economic restructuring and donor assistance in Poland,
focusing on: (1) the status of Poland's economic restructuring efforts
in the areas of macroeconomic stabilization, foreign trade and
investment, privatization, and banking; (2) impediments to these
restructuring efforts; (3) the role donors have played in the
transformation process; and (4) lessons learned that could be useful to
other transition countries.

GAO found that: (1) although Poland has made major progress in
stabilizing and restructuring its economy and now has one of Europe's
fastest growing economies, it is experiencing high rates of inflation
and unemployment; (2) the International Monetary Fund and other donors
have played a major role in the reform process by requiring Poland to
adopt tough macroeconomic reforms in return for financial assistance,
but Poland's own reform efforts have been the critical factors to its
economic recovery; (3) improvements in facilitating trade and investment
require actions beyond the confines of assistance programs, such as
removing bureaucratic and tax obstacles to foreign investment and making
markets more accessible to Polish exports; (4) Polish economic reforms
have resulted in a rapidly growing private sector, but significant
portions of the Polish economy remains in the government's hands; (5)
donors are actively supporting Poland's efforts to restructure its
state-owned enterprises, but persistent delays threaten continued
support; (6) Poland has fundamentally reformed its banking sector, but
donors are now addressing major problems, such as bank privatization
delays and inadequate banking expertise; and (7) while donor assistance
can be important in supporting economic restructuring efforts, the
ultimate success of such efforts is more dependent on the transition
country's actions than those of outside participants.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-95-150
     TITLE:  Poland: Economic Restructuring and Donor Assistance
      DATE:  08/07/95
   SUBJECT:  Foreign governments
             Foreign economic assistance
             Foreign aid programs
             Economic growth
             Economic stabilization
             International economic relations
             Investments abroad
             Developing countries
             Non-government enterprises
IDENTIFIER:  Poland
             International Monetary Fund
             Polish Stabilization Fund
             Polish-American Enterprise Fund
             European Union
             
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Cover
================================================================ COVER


Report to Congressional Committees

August 1995

POLAND - ECONOMIC RESTRUCTURING
AND DONOR ASSISTANCE

GAO/NSIAD-95-150

Poland


Abbreviations
=============================================================== ABBREV

  CEFTA - Central European Free Trade Area
  CMEA - Council for Mutual Economic Assistance
  EBRD - European Bank for Reconstruction and Development
  ECE - Economic Commission for Europe
  EU - European Union
  FREB - Financial Restructuring of Enterprises and Banks
  G-24 - Group of 24
  GAO - General Accounting Office
  GATT - General Agreement on Tariffs and Trade
  GDP - gross domestic product
  IMF - International Monetary Fund
  KUKE - Polish Export Credit Insurance Corporation
  OECD - Organization for Economic Cooperation and Development
  OPIC - Overseas Private Investment Corporation
  PHARE - Poland and Hungary Assistance for Economic Restructuring
  SEED - Support for East European Democracy
  USAID - U.S.  Agency for International Development
  USCS - U.S.  Commercial Service

Letter
=============================================================== LETTER


B-261231

August 7, 1995

This report provides the results of our review of economic
restructuring in Poland and the effectiveness of donor assistance in
that country.  The analysis in this report highlights
a number of lessons learned from Poland's transition experience that
merit consideration by countries such as Russia, Ukraine, and others
not as far along the reform path as Poland.  This information should
be useful to your committees in their deliberations on the role of
U.S.  foreign assistance in the post-Cold War world. 

We are sending copies of this report to the Secretary of State; the
Secretary of the Treasury;
the Administrator, U.S.  Agency for International Development; and
other interested congressional committees.  Copies will also be made
available to others on request. 

If you or your staff have any questions concerning this report, I can
be reached at (202) 512-4128.  Major contributors to this report are
listed in appendix V. 

Harold J.  Johnson
Director, International Affairs Issues

List of Congressional Committees

The Honorable Jesse A.  Helms, Chairman
The Honorable Claiborne Pell
Ranking Minority Member
Committee on Foreign Relations
United States Senate

The Honorable Mitch McConnell, Chairman
The Honorable Patrick J.  Leahy
Ranking Minority Member
Subcommittee on Foreign Operations
Committee on Appropriations
United States Senate

The Honorable Benjamin A.  Gilman, Chairman
The Honorable Lee H.  Hamilton
Ranking Minority Member
Committee on International Relations
House of Representatives

The Honorable Sonny Callahan, Chairman
The Honorable Charles Wilson
Ranking Minority Member
Subcommittee on Foreign Operations,
 Export Financing and Related Programs
Committee on Appropriations
House of Representatives


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

Since the reform process began in Central and Eastern Europe in 1989,
Poland has undertaken some of the most dramatic economic reforms in
the region.  Although the United States now has assistance programs
in a number of Central and East European countries, Poland has
received the largest share of that assistance.  GAO's objectives in
examining U.S.  and other donor assistance in Poland were to (1)
assess the status and progress of the country's economic
restructuring in the key areas of macroeconomic stabilization,
foreign trade and investment, privatization, and banking; (2)
describe impediments to these restructuring efforts; (3) discuss the
role donors have played in the transformation process; and (4)
identify lessons learned that could be useful to other transition
countries. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Between 1990 and 1994, the G-24\1 and international financial
institutions\2 committed about $36 billion in assistance to Poland. 
As of September 1994, the United States had obligated $719 million in
grant assistance to Poland.  In addition, the United States has
provided about $700 million in Overseas Private Investment
Corporation financing and insurance for U.S.  businesses to
facilitate their investment in Poland, $355 million in Eximbank loan
guarantees and investment credits, and about $2.4 billion in official
debt forgiveness. 

A large part of the U.S.  technical assistance has been provided
under the Support for East European Democracy (SEED) Act of 1989
(P.L.  101-179), which authorized funding for Poland and other
Central and East European countries for fiscal years 1990 through
1992.  The SEED program was designed to assist Poland's
transformation to a democracy and a market-oriented economy.  Since
fiscal year 1993, the assistance has been funded under both the SEED
Act and the Foreign Assistance Act of 1961, as amended (P.L. 
87-195).  The U.S.  Agency for International Development's assistance
to Poland has primarily targeted private sector development, with
less assistance being directed at quality of life and democratic
institutions work. 


--------------------
\1 The G-24 is composed of Australia, Austria, Belgium, Canada,
Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy,
Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal,
Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the
United States. 

\2 International financial institutions include the International
Monetary Fund and multilateral development banks such as the World
Bank. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Poland has made substantial progress in stabilizing and restructuring
its economy.  For example, economic growth has resumed, and the
country now has one of the fastest growing economies in Europe. 
However, Poland is still struggling to overcome relatively high rates
of inflation and unemployment.  The International Monetary Fund and
other major donors played an important role in the early stages of
the reform process by requiring Poland to adopt tough macroeconomic
reforms in return for receiving substantial donor assistance. 
However, Poland's own efforts to implement tough reform measures and
apply consistent macroeconomic policy over several years have been
the critical factors in the country's economic recovery. 

Poland has achieved significant increases in its exports to the West
and a number of foreign companies have recently made significant
investments in Poland.  However, trade barriers hamper Poland's
exports of certain products to the European Union, and a number of
internal obstacles continue to impede foreign investment.  Donor
assistance has had only a marginal impact in facilitating trade and
investment.  Some of the most essential improvements in these areas
require Polish government or donor actions beyond the confines of
assistance programs, such as removing Poland's bureaucratic and tax
obstacles to foreign investment and making markets more accessible to
Polish exports. 

Poland's progress toward privatizing its economy has been mixed.  The
country's economic reforms have resulted in a rapidly growing private
sector, but significant portions of the Polish economy remain in the
hands of the government.  The United States and other donors are
actively supporting Poland's efforts to restructure enterprises and
implement its Mass Privatization Program; however, persistent delays
threaten continued donor support. 

Poland has fundamentally reformed its banking sector, but several
major problems remain, including delays in bank privatizations,
unclear policies regarding the licensing of foreign banks, and
inadequate banking expertise and bank supervision skills.  Donors
provided key financial support for recapitalizing Poland's
state-owned banks and restructuring their problem loan portfolios. 
Some early problems with donor technical assistance were encountered
but have been resolved, and donors are now addressing some of the
sector's most important remaining needs, such as the need for
improved banker training and enhanced bank supervision. 

While the situations of other transition countries vary greatly,
Poland's transition experience offers a number of lessons that merit
consideration by countries such as Russia, Ukraine, and others not as
far along the reform path as Poland.  These lessons suggest that
while donor assistance can be important in supporting economic
restructuring efforts in certain key areas, the ultimate success or
failure of such efforts is far more dependent upon the actions of the
transition country than it is upon those of outside participants. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      EARLY STABILIZATION EFFORTS
      HAVE BEEN SUCCESSFUL
-------------------------------------------------------- Chapter 0:4.1

In late 1989, Poland began a major stabilization program that became
the foundation for Poland's current economic recovery and continuing
restructuring.  These stabilization efforts included tightening
fiscal and monetary policy, liberalizing prices, devaluing the
currency, and controlling the growth of debt.  Western donors
provided substantial financial support for Polish stabilization,
including a $1 billion Polish Stabilization Fund, debt restructuring
and forgiveness as part of the Paris Club\3 agreement, and
International Monetary Fund standby arrangements. 

Poland's stabilization measures resulted in substantial declines in
output during the early years of transition.  However, after
maintaining consistent macroeconomic policy over several years,
Poland now has one of the fastest growing economies in Europe.  The
country's official gross domestic product grew by an estimated 5
percent in 1994 and is projected to grow by another 6 percent in
1995.  However, Poland still has inflation and unemployment problems. 
The estimated rates for 1994 were 31 percent and 15.9 percent,
respectively. 


--------------------
\3 The Paris Club is the mechanism the United States and other
official creditors use to reschedule debt from foreign countries that
are unable to meet their external debt obligations.  Paris Club
meetings are organized by the French Finance Ministry.  Traditional
participants of the Paris Club are the industrial country members of
the Organization for Economic Cooperation and Development. 
Membership varies and depends on which countries were official
lenders to a specific debtor country.  The Department of State
represents the U.S.  government in Paris Club negotiations. 


      OVERCOMING TRADE AND
      INVESTMENT OBSTACLES IS AN
      ESSENTIAL TASK FOR POLAND
-------------------------------------------------------- Chapter 0:4.2

Since the reform process began, Poland's trade with the West, and the
European Union in particular, has grown significantly.  For example,
in 1988, about 30 percent of Poland's exports and 27 percent of its
imports consisted of trade with the European Union.  By 1994, these
figures had grown to 53 percent and 54 percent, respectively. 
However, Poland continues to run a large trade deficit, and while a
preferential trade agreement exists between the European Union and
Poland, European Union protective measures limit Poland's access to
that market for certain products, such as some steel and agricultural
products. 

Poland has made progress in removing some obstacles to foreign direct
investment, and the country's 1991 Foreign Investment Law is
generally regarded as a satisfactory legal foundation for foreign
investment.  According to the Polish Agency for Foreign Investment,
the value of foreign direct investment in Poland exceeded $5 billion
and another $5.1 billion had been committed as of March 1995. 
Nevertheless, a number of bureaucratic, tax, and other obstacles
continue to impede such investment. 

Donor assistance has had only marginal impact in facilitating foreign
trade and investment.  For example, donors rejected Polish requests
for capital to fund an export credit insurance agency and instead
responded with little more than numerous consultant studies.  In
another case, the U.S.-funded American Business Center in Warsaw lost
money and was closed when comparable services quickly became
available through the private sector.  Some of the most persistent
impediments to foreign investment, such as bureaucratic and tax
uncertainties, demand the attention of the Polish government rather
than donors.  On the other hand, further reducing European Union
trade barriers could help Poland increase its exports, diminish its
trade deficit with the European Union, and earn additional foreign
exchange for further restructuring. 


      POLAND'S PROGRESS TOWARD
      PRIVATIZATION HAS BEEN MIXED
-------------------------------------------------------- Chapter 0:4.3

Poland's economic reforms have resulted in a growing private sector. 
Many new businesses have emerged and a large number of existing
small- and medium-sized retail businesses have been privatized. 
Poland's private sector is now the primary source of the country's
economic growth and a substantial base of Polish employment. 
However, the pace of privatization for larger state-owned enterprises
has been slower than expected, and significant portions of Polish
productive capacity and employment remain in the hands of the
government.  Privatization has been delayed because of indecision
brought about by changes in the government, the reluctance of
employees and managers at large state-owned enterprises to privatize,
and the poor financial position of many of these enterprises.  Many
donors have questioned whether the Polish government is fully
committed to the privatization process. 

Donors have demonstrated active support for Poland's Mass
Privatization Program and continue to commit capital and technical
assistance for the program, despite waning public and governmental
support.  However, donors are concerned about continued delays in
implementing the program.  If the Polish government fails to follow
through on its promise to move forward on the program in 1995, donor
support may erode. 


      REFORMS IN POLAND'S BANKING
      SECTOR
-------------------------------------------------------- Chapter 0:4.4

Legislation enacted in 1989 transformed Poland's old central bank,
which had served as the state conduit of credit to enterprises in the
command economy, into an independent central bank with
responsibilities for macroeconomic policies and supervision of banks. 
The regional branches of the old central bank were transformed into
individual commercial banks, some of which remain state-owned and
some of which have been privatized.  The government has recapitalized
state-owned banks and has made considerable progress in restructuring
their problem-loan portfolios.  Nevertheless, according to the
European Bank for Reconstruction and Development, the International
Monetary Fund, and others, bank privatization has been limited; many
private and cooperative banks are undercapitalized and badly managed;
the country's licensing policies regarding foreign banks lack
transparency; and Poland's small rural banks are in poor financial
condition.  According to the U.S.  Agency for International
Development and others, Poland's bank supervision capacity needs
further strengthening, and bankers need additional training. 
Organization for Economic Cooperation and Development officials and
other observers have reported that small- and medium-sized
enterprises in Poland continue to lack sufficient bank credit to
develop and expand operations. 

Donors have recognized the lack of available credit for small- and
medium-sized enterprises and have undertaken various activities to
help fill the gap.  The U.S.-sponsored Polish-American Enterprise
Fund has met with greater success than other donor programs in this
area, at least in part because the fund trained its own personnel
rather than relying on the existing banking skills in Poland. 

Multilateral and bilateral donors have provided strong support for
Polish efforts to recapitalize and restructure the loan portfolios of
state-owned banks.  A key feature of the program entails issuing
special government bonds to recapitalize the banks and establishing a
fund to service and redeem the bonds after the banks are privatized. 
This fund was established using resources that were no longer needed
for the Polish Stabilization Fund. 

According to Polish officials, early technical assistance in the
banking sector resulted in many consultants coming to Warsaw for 1-
or 2-week stays, interviewing officials, and producing reports that
merely repeated what they had been told.  However, more recently,
donors have better targeted technical assistance to address Poland's
need for enhanced bank supervision capabilities and improved credit
analysis skills by providing technical assistance and training to
entities such as the Ministry of Finance, the National Bank of
Poland, commercial banks, and the Warsaw School of Banking. 


      LESSONS LEARNED
-------------------------------------------------------- Chapter 0:4.5

Despite tremendous differences among countries in Central and Eastern
Europe and the former Soviet Union with respect to their economies,
their political situations, and a host of other variables, there are
a number of lessons learned from Poland's restructuring efforts that,
at a minimum, merit consideration by other transition countries and
those involved in assisting them.  Taken together, the lessons
summarized below suggest that while assistance can be important in
certain key areas, a transition country's reform progress depends
more upon its own actions than it does upon those of external donors. 

  Poland's own efforts in coupling tough reform measures with
     consistent macroeconomic policy over several years have been
     critical to the country's current economic recovery. 

  Some of the most important forms of donor assistance provided in
     support of Poland's transition were those that backed Poland's
     early macroeconomic stabilization and liberalization measures. 

  Some of the most important factors for improvement in Poland's
     foreign trade and investment situation require Polish or donor
     actions outside the confines of assistance. 

  Poland's early liberalization of foreign trade played an important
     role in helping state-owned enterprises adapt to market
     conditions. 

  In the area of privatization, the Polish experience indicates that
     encouraging the early development of a dynamic private sector is
     at least as important as the timing for undertaking large-scale
     privatization. 

  When imposing hard budget constraints and other market reforms that
     include curtailed government-to-industry subsidies for
     state-owned industry, transition country officials should be
     vigilant of state-owned firms circumventing the constraints and
     continuing to operate at a loss because of existing
     relationships with state-owned banks. 

  While the role of donors is necessarily limited in some areas of
     the transition process, donors were able to play a useful role
     in supporting Poland's reform efforts in its banking sector. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

This report contains no recommendations. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

In commenting on a draft of this report, the U.S.  Agency for
International Development said that it agreed with GAO's conclusions
and that the report was a fair and balanced assessment of how donor
assistance had contributed to Poland's economic reform process.  The
Department of the Treasury also agreed with the report's conclusions
and offered helpful technical comments that have been incorporated
into the report where appropriate.  Although the Department of State
did not provide written comments, State officials said that they
agreed with the report's conclusions and that the report accurately
depicted Poland's economic restructuring progress, as well as the
role that donors have played in the transition process.  The Treasury
Department's and the U.S.  Agency for International Development's
comments are reprinted in appendixes III and IV, respectively. 


INTRODUCTION
============================================================ Chapter 1

Since the collapse of communism in Central and Eastern Europe, Poland
has undertaken some of the most dramatic economic reforms in the
region.  Donors have actively encouraged Poland in its efforts to
make the transition from a communist-led, centrally planned economy
to a free-market economy and a democratic political system.  The
United States has supported Poland's transition both financially and
diplomatically. 


   INTERNATIONAL ASSISTANCE AND
   DONOR COORDINATION
---------------------------------------------------------- Chapter 1:1

The major industrial countries and the international financial
institutions had committed about $36 billion in assistance to Poland
from 1990 through December 1994.  These commitments consisted of
emergency, humanitarian, infrastructure, and economic transformation
assistance; debt forgiveness; private sector investment;\1 export
credits; and investment guaranties.  The Group of 24 (G-24)\2
countries committed approximately $26.8 billion in bilateral
assistance to Poland and the International Monetary Fund (IMF), the
World Bank, and the European Bank for Reconstruction and Development
(EBRD) committed about $8.9 billion.\3 (See tables 1.1 and 1.2.)



                          Table 1.1
           
              G-24 Donor Commitments to Poland,
                  January 1990-December 1994

                   (Dollars in billions\a)

                                        Commitmen  Percentag
Donor                                         t\b          e
--------------------------------------  ---------  ---------
European Commission                          $1.6          6
European Investment Bank                      1.2          4
France                                        4.2         16
Germany                                       5.5         21
Italy                                         0.8          3
United Kingdom                                0.9          3
Other European Union countries                1.2          5
Canada                                        1.5          6
Japan                                         1.7          6
Sweden                                        0.8          3
Switzerland                                   0.8          3
United States                                 5.5         21
Others                                        1.1          4
============================================================
Total                                       $26.8      100\c
------------------------------------------------------------
\a Commitments were converted from European Currency Units at a rate
of $1.30 per unit. 

\b Commitments take a variety of forms and may include grants,
credits, loans, debt forgiveness, and investment guarantees. 

\c Figures do not add due to rounding. 

Source:  European Commission. 



                          Table 1.2
           
           International Institution Commitments to
              Poland, January 1990-December 1994

                   (Dollars in billions\a)

                                        Commitmen  Percentag
Donor                                           t          e
--------------------------------------  ---------  ---------
International Monetary Fund                  $4.3         48
World Bank                                    3.9         43
EBRD                                          0.8          9
============================================================
Total\b                                    $8.9\c        100
------------------------------------------------------------
\a Commitments were converted from European Currency Units at a rate
of $1.30 per unit. 

\b A separate figure for the Organization for Economic Cooperation
and Development support was not available. 

\c Figures do not add due to rounding. 

Source:  European Commission. 

The G-24 countries designated the European Commission, the executive
arm of the European Union (EU),\4 as the coordinator of these
assistance activities.  However, the European Commission acts
primarily as a clearinghouse for information on G-24 bilateral
assistance to the region rather than as a coordinator.  One of the
Commission's functions is generating the G-24 Scoreboard of
Assistance Commitments to the Central and Eastern European
Countries,\5 a listing of donor assistance pledged to the region by
G-24 countries. 

According to an EU official, the main function of the Commission's
delegation in Poland has been to arrange donor meetings.  Donor
coordination is generally handled by the Polish government's Council
of Ministers' Foreign Aid Office.  However, donors often bypass this
office and deal directly with the relevant ministries, or rely on
organizations outside the government of Poland to implement their
programs.  For example, most U.S.  assistance programs have been
implemented either directly with the private sector recipients or
through contractors and nongovernmental organizations with little
direct involvement on the part of the government of Poland. 


--------------------
\1 The European Bank for Reconstruction and Development and the
International Finance Corporation, a component of the World Bank, can
take an equity position in private sector companies. 

\2 The G-24 is composed of Australia, Austria, Belgium, Canada,
Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy,
Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal,
Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the
United States.  G-24 assistance commitments include the commitments
of European Union institutions in addition to those of its individual
member states. 

\3 Although the Organization for Economic Cooperation and Development
tracks official aid disbursements (as opposed to commitments) to
Poland and other countries, the latest data available are for 1993. 
Officials from the organization told us that they have encountered
difficulties in obtaining prompt and accurate information from donor
countries. 

\4 The EU data in this report refers to Belgium, Denmark, France,
Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,
Portugal, Spain, and the United Kingdom.  Effective January 1, 1995,
Austria, Finland, and Sweden became members of the EU. 

\5 The term "Central and Eastern Europe" refers here to Albania,
Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania,
Poland, Romania, Slovak Republic, Slovenia, and the former Yugoslavia
Republic of Macedonia. 


   U.S.  ASSISTANCE PROGRAM TO
   POLAND HAS EVOLVED
---------------------------------------------------------- Chapter 1:2

The Support for Eastern European Democracy (SEED) Act of 1989
(P.L.  101-179) authorized funding for Poland and other countries in
Central and Eastern Europe for fiscal years 1990 through 1992.  Since
1993, obligations for programs in the region have been funded under
both the SEED Act and the Foreign Assistance Act of 1961, as amended
(P.L.  87-195).  The United States had obligated about $719 million
in assistance as of September 1994 to help Poland's transformation to
a democracy and a market-oriented economy; the United States has also
provided about $700 million in Overseas Private Investment
Corporation financing and insurance for U.S.  businesses to
facilitate their investment in Poland, $355 million in Eximbank loan
guarantees and investment credits, and about $2.4 billion in official
debt forgiveness. 

Poland was one of the first countries of Central and Eastern Europe
to receive U.S.  assistance because it took the lead in the
transformation from communism to democracy and a market-oriented
economy.  Poland has received the largest share of U.S.  assistance
in the region.  This assistance was initially expected to be
necessary only for a transition period of about 5 years starting in
1990; however, the U.S.  Agency for International Development (USAID)
representative in Warsaw now believes that Poland will probably need
assistance for at least the next 5 years or until the country is
closer to economic integration with the EU. 

Pursuant to the SEED Act, the Deputy Secretary of State was
designated as the Coordinator of U.S.  Assistance to Central and
Eastern Europe in 1990.  The Coordinator was assisted by special
advisors from the Department of the Treasury, the Council of Economic
Advisors, and USAID.  In 1993, the Coordinator's office was placed
within State's Bureau for European Affairs. 

The U.S.  assistance program in Central and Eastern Europe was
initially designed with a regional rather than country-specific
approach and was centrally managed in Washington, D.C., with limited
authority delegated to U.S.  personnel in-country.  However, this
approach changed in 1993 as USAID devolved many of the management
responsibilities to the field at the direction of Congress.  The
USAID/Poland representative said that he now has an understanding
with USAID/Washington that no projects will be initiated in
Washington without the field office's concurrence.  The USAID
representative also said that he has requested control over all
contracts and work orders, indicating that this oversight and control
was necessary to coordinate and develop strategic plans for future
work in Poland. 

As shown in figure 1.1, the majority of U.S.  assistance to Poland
has been devoted to economic restructuring and assisting in Poland's
transformation to a market-based economy.  The remainder of the funds
have been obligated to support democratic initiatives and quality of
life issues.  Democratic initiatives projects included training for
parliamentary and local government officials and grants to support
the small and independent press media.  Quality of life projects
included technical assistance for the Polish public and private
housing sector, a model unemployment benefit payment office, and
technical assistance to help improve public sector environmental
services. 

   Figure 1.1:  U.S.  Assistance
   to Poland, Fiscal Years 1990-94
   (dollars in millions)

   (See figure in printed
   edition.)

Note:  Percentage calculations do not include assistance amounts
categorized as "miscellaneous," which comprise only a quarter of 1
percent ($1.8 million) of total assistance. 

The Polish Stabilization Fund and the Polish-American Enterprise Fund
account for the majority of funds obligated under the Economic
Restructuring Program for Poland.  (See fig.  1.2.)

   Figure 1.2:  Funds Obligated
   for Poland's Economic
   Restructuring, Fiscal Years
   1990-94 (dollars in millions)

   (See figure in printed
   edition.)

Under the SEED Act, the United States provided a $199-million
contribution to the multi-donor $1 billion Polish Stabilization Fund. 
The fund was established to (1) support a relatively fixed exchange
rate for the zloty (Poland's currency) after a sharp devaluation and
(2) help ensure that the zloty would be convertible for current
account transactions; that is, to allow residents to freely purchase
currency through authorized foreign exchange banks.  These objectives
have been accomplished, and the United States has authorized Poland
to use the $199 million held in reserves to recapitalize and
privatize the Polish state-owned banks. 

The SEED Act also authorized the Polish-American Enterprise Fund as a
private corporation with maximum flexibility in implementing the
fund's investment policies.  As of September 1994, about $250 million
had been obligated and the fund had disbursed about $227 million. 
The fund primarily makes loans to, or invests in, small- and
medium-sized businesses in which other financial institutions are
reluctant to invest. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:3

The objectives of this review were to (1) assess the status and
progress of Poland's economic restructuring in the key areas of
macroeconomic stabilization, foreign trade and investment,
privatization, and banking, (2) describe impediments to these
restructuring efforts, (3) discuss the role donors have played in the
transformation process, and (4) identify lessons learned that could
be useful to other transition countries. 

To address these issues, we interviewed officials of the Departments
of State and the Treasury and USAID in Washington, the Economic
Commission for Europe (ECE) in Geneva, the EU in Brussels, the
Organization for Economic Cooperation and Development (OECD) in
Paris, and the EBRD in London.  We also met with officials at the
British Know How Fund as well as Central and Eastern European experts
at the London School of Economics and other organizations.  In
Warsaw, we met with U.S.  embassy officials, USAID representatives,
U.N.  officials, IMF and World Bank officials, EU officials, and
officials of the British and Japanese embassies.  We also met with
officials from the Polish government, representatives of the
Polish-American Enterprise Fund, representatives of private sector
promotional organizations, and managers from U.S.  and German
companies doing business in Poland. 

We reviewed pertinent U.S., host, and donor-government documents, as
well as reports and studies by international organizations, academia,
and private sector groups.  We also used information from PlanEcon,
Inc., an economic consulting group specializing in Central and
Eastern Europe and the former Soviet Union, and information from the
Warsaw Economic Research Institute, a policy institute at the Warsaw
School of Economics. 

To describe factors hindering Polish exports, we relied heavily on
the reports and studies of international organizations as well as the
opinions of Polish and international organization officials. 

The data presented in the tables and figures of this report were
obtained from a number of different sources.  These data should be
interpreted and used with caution since the quality of the data could
not be verified in some cases. 

We performed our review from January 1994 through May 1995 in
accordance with generally accepted government auditing standards. 


EARLY STABILIZATION EFFORTS
SUCCESSFUL
============================================================ Chapter 2

The foundation for Poland's current economic recovery and continued
restructuring was the major stabilization and macroeconomic reform
efforts, referred to by some as "shock therapy" or "the big bang
approach," which began in late 1989 and early 1990.  The Polish
government took a wide range of actions to encourage stabilization,
including tightening fiscal and monetary policy, liberalizing prices,
devaluing the currency, and controlling the growth of debt.  Western
donors provided important support for such reforms and the United
States played a key role in initiating these forms of assistance. 
Poland's economy is now experiencing healthy growth. 


   EARLY POLISH STABILIZATION
   MEASURES CREATED BASIS FOR
   MARKET ECONOMY
---------------------------------------------------------- Chapter 2:1

In October 1989, the Polish government began implementing
macroeconomic stabilization and liberalization measures, and
accelerated the reform movement in January 1990.  Subsidies to
industry and households, for example, food subsidies, were sharply
cut.  Public investment spending was substantially reduced.  Money
growth was tightly controlled; the zloty was sharply devalued and
made convertible.\1 Wage growth was controlled with an excess wage
tax designed to limit the rate of increase in the wage bills of state
enterprises.  Prices were liberalized, bringing about a one-time jump
in the price level corresponding to the reduction in the real value
of the zloty.  Additional liberalization measures included the
establishment of a free-trade regime and liberalization of legal
requirements for setting up private enterprises.\2

Together, these efforts gave Poland the basic operating features of a
market economy and were widely considered to be essential first steps
toward overall economic restructuring.\3 The stabilization measures
decreased inflationary pressures, lowered government expenditures,
and improved the balance of payments.  However, these measures also
contributed to declines in economic output and corresponding growth
in unemployment.\4 The liberalization measures freed most of the
domestic price system, allowed for corrections in the relative prices
of goods still under state control, removed the state from
large-scale detailed direction of the economy, and provided an
environment conducive to the growth of a new private sector.\5

Some benefits resulted from important linkages between specific
measures.  For example, Poland's liberalization of trade subjected
the state sector to foreign competition.  Such competition provided
international relative prices that the previous monopolistic Polish
firms would not have offered, thus enabling the government to
liberalize prices.\6


--------------------
\1 A currency is considered convertible when it may be freely
exchanged for another currency. 

\2 David Lipton and Jeffrey Sachs, "Creating a Market Economy in
Eastern Europe:  The Case of Poland,"Brookings Papers on Economic
Activity 1 (Washington, D.C.:  the Brookings Institution, 1990), p. 
112; Jeffrey Sachs, Poland's Jump to the Market Economy (Cambridge: 
Massachusetts Institute of Technology Press, 1994), pp.  48, 49;
Andrew Berg and Olivier Jean Blanchard, "Stabilization and
Transition:  Poland, 1990-91,"The Transition in Eastern Europe,
Country Studies, Vol.  1 (Chicago:  the University of Chicago Press,
1994), pp.  52, 53; and Mark E.  Schaffer, The Economy of Poland,
Discussion Paper 67; and Centre for Economic Performance (London: 
London School of Economics, Mar.  1992), p.  21. 

\3 Schaffer, p.  21; and Alan H.  Gelb and Cheryl W.  Gray, The
Transformation of Economies in Central and Eastern Europe:  Issues,
Progress, and Prospects, Policy and Research Series, Vol.  17
(Washington, D.C.:  the World Bank, June 1991), p.  7. 

\4 Berg and Blanchard, pp.  52, 53; and Sachs, p.  56. 

\5 Schaffer, p.  21. 

\6 Sachs, pp.  49, 50, 65; and Schaffer, p.  23. 


   DONORS PROVIDED IMPORTANT
   SUPPORT FOR POLISH MEASURES
---------------------------------------------------------- Chapter 2:2

Western support for early Polish stabilization measures is cited by
Polish and donor officials as among the most significant assistance
provided to Poland.  For example, the Director of Poland's Bureau for
Foreign Assistance asserted that some of the most important
assistance efforts to date involved donor support for early Polish
macroeconomic stabilization actions in the form of the stabilization
fund, balance of payments support, and debt restructuring and
forgiveness.  The IMF's senior resident representative in Poland said
that these forms of assistance were timely and critical to Polish
macroeconomic stabilization efforts. 

The United States took the initiative in 1989 to mobilize $1 billion
from the international community for a Polish Stabilization Fund to
(1) support a relatively fixed exchange rate for the zloty after
sharp devaluation and (2) help ensure that the zloty was convertible
for current account transactions by creating additional foreign
exchange reserves.  Poland's foreign exchange reserves were further
bolstered by a $700 million standby arrangement\7 with the IMF.  This
balance of payments support helped allow Polish authorities to
introduce in January 1990 a convertible and stable exchange rate, and
the additional backing for the zloty made defense of the currency
more credible.\8

Another important form of early assistance to Poland was temporary
cash flow relief from external indebtedness.  To increase the chances
of successful stabilization, some believed it was important that debt
service payments be minimized in the early stages of transition.\9
Poland's external debt in convertible currencies at the end of 1990
was about $44 billion.  An estimated $33 billion was owed to official
bilateral creditors, referred to as the Paris Club,\10 and $10.7
billion, including $1.2 billion of short-term revolving credit, was
owed to Western commercial banks, known as the London Club.  Poland's
gross debt service\11 in 1990 was about $9 billion, or about 80
percent of its convertible currency merchandise export earnings.\12

In March 1991, under U.S.  leadership, the members of the Paris Club
agreed to forgive 50 percent of Poland's official debt.  In the first
stage, which was contingent on Poland's signing an agreement with the
IMF to restructure its economy, the official debt was reduced by 30
percent.  In the second stage, which was contingent upon Poland's
fulfillment of the terms of the IMF agreement, an additional
20-percent reduction was authorized in April 1994.  As part of the
initial 30-percent reduction, annual interest payments during the
first 3 years were reduced by 80 percent.  Principal payments were
also limited to less than $600 million annually.  For its part in the
agreement, the United States agreed to forgive
70 percent of its bilateral debt with Poland, 50 percent in the first
stage, and 20 percent in the second, which reduced Polish debt to the
U.S.  government from $3.4 billion to about $1 billion.\13

Under the Paris Club agreement, Poland also committed to seeking from
the London Club of commercial banks\14 a debt reorganization on terms
comparable to the Paris Club, allowing Poland to cease servicing this
debt in the interim.\15


--------------------
\7 IMF standby arrangements provide credit in a number of
installments and are conditioned upon implementing certain
macroeconomic policy changes aimed at overcoming balance of payments
difficulties. 

\8 Lipton and Sachs, p.  118; and Sachs, p.  54. 

\9 Ibid. 

\10 The Paris Club is the mechanism the United States and other
official creditors use to reschedule debt from foreign countries that
are unable to meet their external debt obligations.  Paris Club
meetings are organized by the French Finance Ministry.  Traditional
participants of the Paris Club are the industrial country members of
the OECD.  Membership varies and depends on which countries were
official lenders to a specific debtor country.  The Department of
State represents the U.S.  government in Paris Club negotiations. 

\11 Gross debt service includes interest and principal payments on
short-, medium-, and long-term debt. 

\12 Poland and Hungary:  Economic Transition and U.S.  Assistance
(GAO/NSIAD-92-102, May 1, 1992),
p.  24. 

\13 GAO/NSIAD-92-102, p.  24. 

\14 Poland reached an agreement with the London Club banks in October
1994, resulting in an overall rate of debt reduction of slightly more
than 49 percent--terms comparable to the Paris Club agreement.  See
Tomasz Telma, "Outlook for Poland,"Review and Outlook for Eastern
Europe, PlanEcon (Dec.  1994), p.  125. 

\15 GAO/NSIAD-92-102, p.  24; and Lipton and Sachs, p.  118. 


   POLAND'S ECONOMY IS
   EXPERIENCING HEALTHY GROWTH
---------------------------------------------------------- Chapter 2:3

After suffering substantial declines in gross domestic product (GDP)
during the first 2 years of transition, Poland now leads
post-communist Europe in economic growth.  According to PlanEcon,
while Poland has made considerable progress in reducing inflation
from the high levels that existed when reforms began in 1989, the
country's projected rate of inflation for 1994 remained relatively
high at 31 percent.  Poland's unemployment rate was projected to
gradually decline in 1994 to a level of 15.9 percent by the end of
the year.  However, the country's official GDP grew by an estimated 5
percent in 1994 and is projected to grow by another 6 percent in
1995.  Figure 2.1 shows official and what has been termed "corrected"
Polish GDP levels for 1989-95.\16 Although Poland's official figures
indicate that the country's GDP has not completely recovered from the
substantial output declines experienced in the first
2 years of transition, PlanEcon's "corrected GDP" figures show that
the country's GDP has recovered from these declines and surpassed its
pretransition levels.  The IMF's senior resident representative in
Poland said that Poland's early macroeconomic stabilization measures
coupled with consistent macroeconomic policy over several years were
critical factors in the country's economic recovery. 

   Figure 2.1:  Official and
   Corrected Gross Domestic
   Product Figures for Poland,
   1989-95

   (See figure in printed
   edition.)

Note:  The 1995 figures are PlanEcon forecasts. 

Source:  Calculated from PlanEcon Report:  Polish Economic Monitor,
Vol.  X, Nos.  35-36, Nov.  4, 1994, and Vol.  XI, Nos.  11-12, May
19, 1995. 


--------------------
\16 PlanEcon has constructed "corrected GDP" figures by including
estimates of GDP generated in the unofficial (grey) economy and
accounting for quality improvements in goods and services. 


OVERCOMING TRADE AND INVESTMENT
OBSTACLES
============================================================ Chapter 3

Trade is widely viewed as a crucial factor in Poland's economic
restructuring.  Increased trade with the West, and the EU in
particular, is key to Poland's integration into the world economy,
especially since the collapse of trade among Poland's former Council
for Mutual Economic Assistance (CMEA) trading partners.  Although
Polish exports increased in 1994, Poland continues to run a large
trade deficit with the EU.  Despite the importance of Poland's trade
with the EU, West European trade barriers continue to hinder Polish
exports of certain products to that market, thereby hampering
restructuring efforts.  Donors have rendered limited assistance to
help facilitate Polish exports, and some assistance that has been
provided was of questionable usefulness. 

Foreign investment is considered essential to Poland's economic
restructuring efforts.  Although Poland has made progress removing
some impediments to foreign direct investment, many obstacles remain
that can be corrected by only the Polish government.  Nevertheless, a
number of U.S.  and foreign companies have recently made significant
investments in Poland.  Some early U.S.  assistance geared toward
improving the investment climate lacked focus because of pressure to
spend the money quickly, and U.S.  programs to support Polish
investment promotion have had limited impact. 


   TRADE WITH WEST IS INCREASINGLY
   IMPORTANT FOR POLAND
---------------------------------------------------------- Chapter 3:1

In 1990, as part of its transition efforts, Poland liberalized
foreign trade regimes.  This included eliminating many import
restrictions, demonopolizing foreign trade, allowing free access to
foreign currency, and establishing convertibility of the zloty. 

Growth in exports to the West is widely recognized as important to
Poland's continued economic recovery and integration into the world
economy.\1 In addition to increased imports resulting from opening up
its own markets to Western products, Poland achieved dramatic
increases in exports to the West, beginning in 1990.  As Poland
entered the initial stages of reform, exports to the industrialized
market economies were essential to preventing even larger declines in
output than had already occurred as a result of the collapse of trade
with former CMEA countries and the drop in Poland's internal demand. 
According to OECD, access to the more stable OECD area markets is
vital for Poland's continued economic growth and political
stability.\2 The ECE has reported that increased access to Western
markets can also act as a powerful stimulant to foreign investment
seeking an eastern base for exporting.\3

Of the OECD area markets, the large and geographically close EU
market represents Poland's most important trade partner.  For
example, in 1994, about 53 percent of Poland's exports and 54 percent
of its imports consisted of trade with the EU.  Though the United
States represents a potential market for Polish products, it accounts
for only 2 to 4 percent of Poland's trade.  Tables 3.1 and 3.2
describe aggregate trade for selected countries and regions between
1988 and 1994. 

As indicated in tables 3.1 and 3.2, Poland's trade with former CMEA
partners has declined in importance.  Although a Central European
Free Trade Area (CEFTA) agreement was negotiated among Poland, the
Czech Republic, Slovak Republic, and Hungary and went into effect in
March 1993, the ECE reported that the significance of the agreement
has been downplayed within the CEFTA countries and that few steps
have been taken to promote these trade links.\4 OECD officials echoed
that sentiment, explaining that while eastern markets could be very
important to Poland in the future, Polish companies engaging in
restructuring currently do not have enough "margin for error" to
emphasize dealings in countries with small markets and little ability
to pay for products. 



                                    Table 3.1
                     
                       Share of Polish Exports to Selected
                         Countries and Regions (1988-94)

                              (Dollars in millions)

                            1988    1989    1990    1991    1992    1993    1994
------------------------  ------  ------  ------  ------  ------  ------  ------
Total value of exports    $13,54  $13,52  $13,62  $14,91  $13,18  $15,41  $17,45
                               4       8       4       3       6       5       0
Country or region
EU                           30%     32%     47%     56%     58%     53%     53%
United States                  3       3       3       2       2       3       3
CMEA countries\a              42      31      22      17      15      19      19
of which
CEFTA\b                        8       7       5       5       5       3       3
USSR/Former Soviet Union      25      21      15      11       9      16      15
Other                         25      34      28      25      25      25      25

================================================================================
Total                       100%    100%    100%    100%    100%    100%    100%
--------------------------------------------------------------------------------
\a CMEA members are countries that were members in 1990.  The CMEA
ceased to exist on January 1, 1991; however, we continue to use this
designation for the years following to account for trade involving
countries representing the same geographical area.  In 1993, this
grouping included Bulgaria, the Czech Republic, Hungary, Poland,
Romania, the Slovak Republic, Cuba, Vietnam, and countries of the
former Soviet Union, including the Baltic states of Estonia, Latvia,
and Lithuania.  Trade with East Germany is reported with CMEA
countries in 1988.  Beginning with 1989, Poland does not report
separate trade with East Germany but includes this as trade with
Germany.  In 1988, trade with East Germany represented 4 percent of
Poland's total exports and 5 percent of its total imports. 

\b Beginning in 1993, the two separate countries of the Czech
Republic and the Slovak Republic replaced Czechoslovakia.  CEFTA did
not go into effect until 1993; however, we use this designation for
the years prior to account for trade involving countries representing
the same geographical area. 

Source:  Compiled from Polish-reported trade figures, International
Monetary Fund Direction of Trade computer database. 



                                    Table 3.2
                     
                      Share of Polish Imports From Selected
                         Countries and Regions (1988-94)

                              (Dollars in millions)

                            1988    1989    1990    1991    1992    1993    1994
------------------------  ------  ------  ------  ------  ------  ------  ------
Total value of imports    $13,83  $11,35  $8,974  $17,08  $15,20  $23,16  $24,09
                               4       7               4       4       9       9
Country or region
EU                           27%     34%     43%     50%     51%     53%     54%
United States                  2       1       2       2       3       4       3
CMEA countries                44      28      25      19      16      17      17
of which
CEFTA                          8       7       4       4       4       2       3
USSR/Former Soviet Union      27      18      20      14      11      15      14
Other                         27      37      30      29      30      25      26

================================================================================
Total                       100%    100%    100%    100%    100%  100%\a    100%
--------------------------------------------------------------------------------
\a Figures do not add due to rounding. 

Source:  Compiled from Polish-reported trade figures, International
Monetary Fund Direction of Trade computer database. 


--------------------
\1 Paul Mylonas, "Integration into the World Economy," Poland:  The
Path to a Market Economy, Occasional Paper 113; IMF, Oct.  1994, p. 
69; Economic Transition in Eastern Europe and the Former Soviet
Union, Transition Report; EBRD, Oct.  1994, p.  116; and Poland and
Hungary:  Economic Transition and U.S.  Assistance (GAO/NSIAD-92-102,
May 1, 1992), p.  20. 

\2 Barriers to Trade with the Economies in Transition, Center for
Cooperation with the Economies in Transition, OECD, 1994, p.9. 

\3 Economic Survey of Europe in 1993-1994 (New York and Geneva: 
Secretariat of the Economic Commission for Europe, United Nations,
1994), p.  149. 

\4 Economic Survey of Europe in 1993-1994, p.  149. 


      TRADE DEFICIT WITH THE EU
-------------------------------------------------------- Chapter 3:1.1

Although Polish exports increased in 1994 to over $17 billion, Poland
continues to run a large trade deficit with the West, primarily the
EU.  Poland's 1993 trade deficit of $7.8 billion was the largest in
its history, and $4.2 billion of this amount was with the EU (see
fig.  3.1).  However, in 1994, as a result of slower growth in
imports versus that of exports, Poland's trade deficit narrowed to
$6.6 billion, a 14-percent decline compared to 1993.  Poland's 1994
trade deficit with the EU was $3.8 billion, a 10-percent decline
compared to 1993. 

   Figure 3.1:  Poland's Balance
   of Trade (1988-94)

   (See figure in printed
   edition.)

Source:  Compiled from International Monetary Fund Direction of Trade
computer database. 


      TRADE BARRIERS PERSIST
-------------------------------------------------------- Chapter 3:1.2

A preferential trade agreement between Poland and the EU is part of
the EU-Poland Association Agreement, which became fully effective on
February 1, 1994.  The trade segments of the accord went into force
on March 1, 1992, in the form of an interim agreement, but under the
agreement barriers to trade in certain sensitive areas such as
textiles are to be removed only over a number of years.  Major
improvement in Poland's access to agricultural markets in the EU is
not expected soon.\5 Further, Polish officials maintain that the EU
continues to limit access to its markets through contingent
protective measures such as anti-dumping duties, countervailing
duties, and safeguard actions.\6

The Association Agreement is considered a precursor to Poland's
eventual membership in the EU, and a key feature is the gradual
elimination of tariffs over a 10-year period, leading to a free trade
area between the EU and Poland.  The agreement is considered to be
asymmetric in that the EU is required to grant immediate duty free
access on many goods, while Poland has a longer period of time to
grant full reciprocity.\7

The Association Agreement also provides for immediate elimination of
quantitative restrictions on many industrial products, with the
exception of textiles, coal and steel, which are accorded special
treatment as "sensitive products." Tariff reductions and phase-out of
quantitative restrictions for these sensitive products will take
place more gradually.\8 Customs duties levied on exports are also
slated for eventual elimination.  While the agreement provides for
limited trade preference for selected agricultural products over 5
years, in many cases, tariffs and tariff rate quotas will remain in
place at the end of the phase-in period, with the agreement merely
calling for the parties to consult on the possibility of granting
further concessions.\9

According to a report published by the IMF, the EU decided in 1993 to
further improve market access for Poland and other CEFTA countries in
response to criticism that, under the Association Agreement, the EU
was delaying access to those markets in which CEFTA countries have
the highest export potential.\10 The IMF and ECE reported that this
EU decision (1) accelerated by 2 years the scheduled reduction of EU
customs duties on certain imports of sensitive basic industrial
products, (2) increased by 10 percentage points the annual expansion
in quotas and ceilings for certain industrial products, (3)
implemented 6 months earlier than scheduled a reduction in
levies/duties on certain agricultural products subject to quotas, and
(4) began exempting from customs duties outward processing operations
in 1994.\11 The IMF report indicated that the most important
remaining restrictions appeared to be quotas on textiles, nontariff
barriers on agricultural products, and the threat of resorting to
safeguard provisions or anti-dumping actions.\12

Under the Association Agreement, tariffs existing in the EU and
Poland as of February 29, 1992, served as the base from which
reductions were to occur.  Reduced tariff levels agreed to in the
General Agreement on Tariffs and Trade (GATT) Uruguay Round replace
these tariffs as the base once such reductions go into effect.\13

Certain trade liberalization clauses in the Association Agreement are
contingent on agreements reached in the Uruguay Round.  For example,
the ECE reported that, for textiles and clothing, the agreement
provides for the elimination of EU quotas on imports from Poland over
a period equaling half of that agreed to in the Uruguay Round, but
not less than 5 years.\14

Poland was a member of GATT before undertaking economic reforms;
however, it was required to accept special terms reflecting the
state-controlled nature of its economy.  According to a Polish
official, Poland is now renegotiating its terms of accession with
GATT to reflect its economic reforms,\15

and the country became a founding member of the new World Trade
Organization, an outcome of the Uruguay Round agreements, on July 1,
1995. 

Under the Association Agreement, anti-dumping actions and other
contingent protective measures are permitted in accordance with GATT
articles.  The EU no longer includes Poland in its list of
state-trading economies for purposes of determining "normal prices"
in anti-dumping actions, but the ECE has reported that a country's
classification as a market economy does not necessarily imply that it
will be subject to fewer actions.\16

On the other hand, the ECE reported that transition countries such as
Poland will benefit from a Uruguay Round strengthening and extension
of GATT rules and authority, especially if this leads to stricter
control of anti-dumping procedures and contingent protective
measures.\17 A recent and as yet unpublished OECD study reported that
the Uruguay Round agreement should bring more clarity and certainty
regarding the initiation of anti-dumping actions.  However, another
recent, unpublished OECD study reported that how the new rules are
implemented will determine their actual impact and that Uruguay Round
results will probably make only modest changes to the way
anti-dumping regulations are applied to transition economies such as
Poland's.  The report also said that less stringent conditions on
safeguards may cause sufferers of import competition to choose this
method of protection rather than an anti-dumping investigation. 

Polish government and ECE officials told us that Poland's membership
in the World Trade Organization will help the country become more
fully integrated into the world economy.  Poland's representative for
GATT issues at the Polish Mission in Geneva said that Poland hoped to
benefit from the Uruguay Round and membership in the World Trade
Organization in that it would help the country consolidate its own
reforms in trade-related management and systems, rendering such
systems more stable, predictable, and coherent.  An ECE official
added that this development means that Poland is becoming more fully
grounded in the market system, making it more difficult to backtrack
on market reforms. 


--------------------
\5 Economic Survey of Europe in 1993-1994, pp.  149-157. 

\6 Dumping is the sale of a commodity in a foreign market at a lower
price than its fair market value in the domestic market.  Dumping is
generally recognized as unfair because the practice can disrupt
markets and injure producers of competitive products in an importing
country.  Article VI of General Agreement on Tariffs and Trade
permits imposition of anti-dumping duties equal to the difference
between the price sought in the importing country and the normal
value of the product in the exporting country.  A countervailing duty
is a special duty imposed by an importing country to offset the
economic effect of a subsidy and thus prevent injury to a domestic
industry caused by a subsidized import.  A safeguard is a temporary
import control or other trade restriction that a country imposes to
prevent injury to domestic industry from increased imports.  It is
designed to facilitate the adjustment of domestic industries to the
influx of fairly traded imports. 

\7 Summary of the EU-Poland Association Agreement, provided by the
Department of Commerce; Economic Survey of Europe in 1993-1994, pp. 
149-157; Paul Mylonas, pp.  69, 70; and Economic Transition in
Eastern Europe and the Former Soviet Union, p.  112. 

\8 Duties for textiles and clothing are scheduled to be phased out
over 6 years and quotas eliminated by 1998.  Steel and coal duties
are to be removed over 5 years, quantitative restrictions for steel
are to be eliminated immediately and those for coal, with limited
exceptions, after 1 year.  See the discussion by Paul Mylonas, pp. 
69, 70. 

\9 Summary of the EU-Poland Association Agreement; and Economic
Survey of Europe in 1993-1994, pp.  149-157. 

\10 Paul Mylonas, pp.  69-71. 

\11 Economic Survey of Europe in 1993-1994, pp.  149-157. 

\12 Paul Mylonas, p.  71. 

\13 Summary of the EU-Poland Association Agreement. 

\14 Economic Bulletin for Europe, Volume 45 (1993); (New York and
Geneva:  Secretariat of the Economic Commission for Europe, United
Nations, 1994), pp.  4,5. 

\15 Economic Survey of Europe in 1993-1994, p.  151; and Economic
Transition in Eastern Europe and the Former Soviet Union, p.  116. 

\16 Economic Survey of Europe in 1993-1994, p.  155. 

\17 Economic Bulletin for Europe, Volume 45 (1993), pp.  4,5; and
Economic Survey of Europe in 1993-1994, pp.  11, 12. 


      BARRIERS HAMPER
      RESTRUCTURING EFFORTS
-------------------------------------------------------- Chapter 3:1.3

The Directors of Poland's Bureau for European Integration and Bureau
for Foreign Assistance, the Director of the Trade Instruments
Department of the Polish Ministry of Foreign Economic Relations, and
the Economic and Commercial Counselors of the Polish Embassy in
London told us that they support the EU-Poland Association Agreement. 
However, they maintained that the EU continues to limit Polish access
to its markets through contingent protective measures (anti-dumping
duties, countervailing duties, and safeguard actions) or the threat
of such measures.  These officials said that when Poland proves to be
competitive in a particular area, these barriers often come into
play.  The ECE reported that imports of certain sensitive eastern
goods generated complaints in West European countries that culminated
in a number of import restrictions.  The result was that while
standard measures of protection (such as tariffs and quotas)
diminished, contingent protection measures were used more frequently. 
They also reported that a steady stream of warnings in addition to
official actions may result in eastern exporters making voluntary
reductions in the growth of sales to reduce the probability of formal
complaints being lodged.\18 Table 3.3 lists EU protectionist measures
against Polish imports between July 1992 and December 1993, as
reported by the IMF. 



                          Table 3.3
           
           Protectionist Measures Introduced by the
                 EU, July 1992-December 1993

                                                 Introductio
                                                           n
Product                 Description                     date
----------------------  -----------------------  -----------
Silicon                 EU imposed provisional       7/06/92
                         duties of 32 percent
                         on imports of silicon
                         after Commission
                         determined that
                         dumping had occurred.
Frozen black currants   EU imposed                  10/01/92
 and strawberries        countervailing duties
                         in amount of the
                         difference between
                         Polish prices and EU
                         minimum import prices.
Seamless steel tubes    EU imposed provisional      11/15/92
                         anti-dumping duties of
                         10.8 percent for 4
                         months pending an
                         inquiry.
                        EU made preliminary         11/15/92
 Steel tubes             affirmative
                         determination in
                         dumping case.
Hermalite pig iron      EU initiated a dumping      12/09/92
                         investigation of
                         imports.
Ferro-silicon           EU imposed definitive       12/14/92
                         anti-dumping duties of
                         32 percent on imports.
Steel tubes             EU extended for 2            3/08/93
                         months preliminary
                         anti-dumping duties on
                         steel tubing.
Frozen black currants   EU amended a regulation      4/01/93
 and strawberries        imposing minimum
                         prices on imports.
Live animals and fresh  EU imposed import            5/10/93
 meat                    prohibition on animals
                         and fresh meat because
                         of cases of foot-and-
                         mouth disease in
                         Italy.
Urea                    EU initiated a dumping       5/13/93
                         investigation of
                         imports of urea.
Urea ammonium nitrate   EU initiated a dumping       5/13/93
                         investigation of
                         imports of urea
                         ammonium nitrate.
Steel tubes             EU imposed definitive        5/15/93
                         anti-dumping duties on
                         imports of steel tubes
                         (10.8 percent).
Seamless pipes and      EU imposed definitive        5/15/93
 tubes of iron and       anti-dumping duties on
 steel                   imports (11.7
                         percent).
Cherries                EU agreed to introduce       7/19/93
                         minimum port prices on
                         cherries.
------------------------------------------------------------
Source:  Liam P.  Ebrill, Ajai Chopra, Charalambos Christofides, Paul
Mylonas, Inci Otker, and Gerd Schwartz; Poland:  The Path to a Market
Economy, Occasional Paper 113; International Monetary Fund, Oct. 
1994, p.  107. 

As earlier noted, Polish exports to the EU grew substantially in
recent years.  (See table 3.1.) For example, between 1990 and 1993,
Poland's total exports to the EU increased at an annually compounded
rate of
11.5 percent.\19 However, for the selected commodities that were
targeted by the EU contingent protective measures listed in table
3.3, Poland's exports to the EU declined at an average annual rate of
8.1 percent during the same period.\20

In 1990, these exports, valued at $429 million, accounted for 6.5
percent of Poland's total exports to the EU.  By 1993, the value of
these exports had declined to $334 million, or 3.6 percent of
Poland's total exports to the EU.  These data indicate that although
EU protectionist measures did not prevent Poland from expanding its
total exports to the EU, such measures did have an adverse impact on
Polish exports of the targeted products. 

According to the Director of Poland's Bureau for European
Integration, one of the most unfair examples of contingent protection
measures involves the filing of anti-dumping cases.  A study prepared
for the OECD found that although EU authorities had agreed to speed
up tariff reductions and enlarge zero-duty ceilings and quotas for
some sensitive goods, EU anti-dumping investigations had the effect
of minimizing these actions.\21 The above-mentioned Polish official
and the Economic and Commercial Counselors of the Polish Embassy in
London said that the idea that Polish companies can afford to engage
in predatory dumping on the EU markets is not logical. 

Another example of contingent measures involves the use of EU health
and sanitation standards to restrict Polish agricultural exports. 
OECD officials told us that some EU countries abuse these standards
to protect their own industries, while technically complying with
GATT rules.  For example, in May 1993 the EU imposed a 1-month ban on
imports of live animals, meat, milk, and dairy products from across
Eastern Europe for sanitary reasons.  The OECD reported that,
although EU officials portrayed the action as an urgent health
measure, Polish and other East European officials described it as a
protectionist measure.\22 The Director of Poland's Bureau for Foreign
Assistance told us that his government had estimated Poland's losses
related to the temporary ban at $60 to $80 million.  The ECE quotes
reported estimates of Poland's losses related to the ban at closer to
$30 million.\23

Polish officials pointed out that now, when Poland is engaging in the
painful aspects of economic restructuring, the country is in need of
export markets.  Limited market access could necessitate extremely
disruptive scaling down, which may be of a magnitude greater than
necessary in some industries.  Such disruption makes it more
difficult for Polish politicians to maintain support for reforms. 
Polish officials added that barriers such as anti-dumping mechanisms
are being employed by the EU in areas where Poland is undergoing some
of the deepest and most disruptive economic restructuring.  Polish
officials noted the irony in the fact that it is necessary to use EU
technical assistance to obtain advice on how to shrink Polish
industries that have been negatively affected by EU trade barriers. 

Another problem with barriers to Polish exports is that it makes it
difficult for Polish politicians to resist demands for increased
Polish protectionism.  Polish officials told us that recently the
government of Poland has paid increased attention to calls for
protecting certain of its own markets.  Indeed, the IMF reported
that, in 1992, Poland raised duties on a variety of products and
that, in 1993, Poland further revised its tariff structure, lowering
duties on imported raw materials and semi-finished products and
increasing it on finished products and agricultural goods.  Poland
also introduced a tax on sugar content, established licensing
requirements on the imports of chicken meat, milk products and wine,
and, in 1994, introduced variable import levies on several
agriculture products.\24 The ECE reported that Polish authorities
claim that such measures are a response to protectionism in the
West.\25 Some observers fear that increased Polish protectionism
could boost domestic fiscal imbalances and erode trust and much
needed financial support abroad or that such policies could become
entrenched, as they are in the West.\26


--------------------
\18 Economic Bulletin for Europe, pp.  99-116, 122-123, 141-154; and
Economic Survey of Europe in 1993-1994, pp.  149-157. 

\19 We used EU reported imports from Poland as a measure of Polish
exports.  These figures vary somewhat from Polish-reported exports. 
For example, freight and insurance charges are handled differently. 

\20 We used 1990--the year Poland liberalized its foreign trade
regimes--as the base year for this analysis.  The latest year for
which commodity-level data for EU imports are available is 1993. 
Commodity-level data for Denmark was not available for 1993.  We used
two alternative methods to approximate 1993 Danish imports of the
selected products from Poland.  Both methods gave similar results
when combined with the remaining 1993 EU trade data. 

\21 Source:  OECD, Paris, 1994. 

\22 Barriers to Trade with the Economies in Transition, p.  18. 

\23 Economic Bulletin for Europe, p.  113. 

\24 Paul Mylonas, p.  70. 

\25 Economic Bulletin for Europe, p.  111. 

\26 Tomasz Telma, "Outlook for Poland," PlanEcon Review and Outlook
for Eastern Europe, July 1994, p.  149; and Economic Survey of Europe
in 1993-1994, p.  157. 


      DONOR ASSISTANCE TO
      FACILITATE POLISH EXPORTS
      HAS BEEN LIMITED
-------------------------------------------------------- Chapter 3:1.4

Donors have not been helpful in responding to Polish requests for
assistance in establishing an effective export credit insurance
program in Poland.  Although numerous donor and Polish officials
stressed the importance of developing Poland's capability in this
area, officials from Poland's fledgling export credit insurance
cooperation (known by the Polish acronym "KUKE") experienced
difficulty in obtaining capital or any other practical assistance
aside from consultant-produced studies.  KUKE has established a
limited commercial risk insurance program, but it has been unable to
establish a political risk insurance program.  While commercial risk
insurance is useful for exporting to the stable OECD countries, both
types of insurance are considered important for Poland to reenter
riskier markets in former Soviet Union countries.  KUKE officials
told us that the Polish government had estimated export losses of $2
to $3 billion per year due to the lack of political risk insurance. 


   IMPEDIMENTS TO FOREIGN
   INVESTMENT
---------------------------------------------------------- Chapter 3:2

Foreign investment is expected to play a major role in the
transformation of Poland's economy.\27 Although Poland has made
progress removing some impediments to foreign direct investment, a
number of obstacles remain.  The country's 1991 Foreign Investment
Law is generally regarded as a satisfactory legal foundation for
foreign direct investment, and the telecommunications and transport
infrastructures in large urban areas have been much improved. 
Nevertheless, bureaucratic, tax, and other impediments persist that
only the Polish government can correct. 

Polish and donor officials as well as foreign investors repeatedly
told us that bureaucratic bottlenecks and indecision at the middle
management level in Polish ministries were persistent obstacles to
individual investment deals.  The officials said that while there is
strong support for foreign investment at the highest levels of the
Polish government, there is a large disparity between such high-level
support and actual practice within ministries.  Some officials
pointed to suspicion about foreign investment on the part of the
Polish people and media as having increased the wariness of local
governments and a middle-level bureaucracy already deeply steeped in
a culture of indecision.  A lack of access to credit was also cited
as a continuing obstacle to investment--a situation related to legal
impediments insofar as inadequate collateral law and other such
difficulties contribute to the problem.  (See ch.  5 for a discussion
of Poland's banking sector.)

Private sector and investor officials in Poland repeatedly cited
uncertainties and inconsistent interpretation of tax law on the part
of various governmental bodies from the Minister of Finance down to
local tax authorities as a recurring investment impediment.  For
example, the Chairman of the American Chamber of Commerce in Poland
told us that he knew of investors that had begun construction on new
plants predicated on the assumption that they would receive certain
tax exemptions, only to see the tax exemptions repealed for all but
those already transacting business.  Officials at the Foreign
Investors Chamber of Industry and Commerce\28 said that there have
been cases where the Finance Ministry declared that a company was not
liable for a particular tax, only to find several years later that
the local tax authority disagreed.  The officials said that the
interest and penalties associated with such multiyear discrepancies
are at a level spelling bankruptcy for companies choosing to
acquiesce to the local tax authority. 

In another case involving tax obstacles, the investor retreated.  In
October 1992, Amoco signed a $20-million contract with Poland for
petroleum exploration and exploitation.  According to company
officials, the agreement was conditional on the resolution of certain
tax issues that would have involved aligning Poland's oil and gas
taxation with that in Western Europe and other developed countries. 
The officials said that they engaged in negotiations with the
Ministry of Finance through December 1993, culminating in high-level
meetings with the President, Prime Minister, and Finance Minister and
that progress was slow but encouraging up until that time.  They were
poised to sign the final agreement with the Minister of Finance, when
the Prime Minister dismissed him, followed by a Finance Ministry
retrenchment from previously agreed to positions.  After several
months of indecision within the Ministry, in April 1994, Amoco
finally relinquished its rights to explore.  According to company
officials, if agreement had been reached and sizable deposits were
found, it could have led to a development contract of $100 to $150
million.  Company officials recently told us that although the Polish
government has since resolved the tax issues and the company has
proceeded with other exploration projects in Poland, the original
exploration project will not be resumed. 


--------------------
\27 Foreign Direct Investment in Selected Central and Eastern
European Countries and New Independent States:  Policies and Trends
in Fourteen Economies in Transition, Center for Cooperation With the
Economies in Transition, OECD, 1993, p.  7; Investment Patterns of
Companies from OECD Member Countries into Central and Eastern Europe
and the Newly Independent States, a study prepared for the OECD by
Arthur Anderson, Aug.  1993, p.  2; The Investment Challenge in
Central and Eastern Europe, Chairman's Summary of "Opportunity East"
Conference, OECD, Apr.  1992, p.  1; Economic Survey of Europe in
1993-1994, p.  134; Economic Bulletin for Europe, p.  85; "Foreign
Investment in Former Communist Central Europe:  U.S.  Firms Play a
Vital Role,"International Economic Review, Feb.  1994, p.  13; and
(GAO/NSIAD-92-102, p.  24). 

\28 This organization's membership includes about 600 companies in
Poland, some of which are wholly foreign-owned and some of which are
joint ventures between foreign and Polish companies.  The Chamber
defends the interests of foreign investors, but differs from other
such organizations in that it does not represent one particular
country's companies in Poland; rather, its membership features a
variety of nationalities.  Most member companies are manufacturing
firms, but the Chamber's membership also includes some banks and
trading companies. 


      FOREIGN COMPANIES INVEST IN
      POLAND
-------------------------------------------------------- Chapter 3:2.1

Notwithstanding the existing impediments, a number of U.S.  and other
foreign companies have recently made significant investments in
Poland.  According to PlanEcon, the inflow of investments is expected
to accelerate in coming years now that a London Club\29

agreement has been reached and as more state-owned enterprises are
offered for sale.  According to the Polish Agency for Foreign
Investment, the value of direct investment in Poland exceeded $5
billion, and another $5.1 billion had been committed as of March
1995.\30 The United States is the largest investor country in Poland,
accounting for more than one-third of investments, or $1.7 billion,
followed by multinational companies, Germany, Italy, and the
Netherlands.  (See fig.  3.2.)

   Figure 3.2:  Cumulative Foreign
   Direct Investment in Poland by
   Leading Countries, January
   1990-March 1995

   (See figure in printed
   edition.)

Source:  Polish Agency for Foreign Investment, government of Poland. 

Many U.S.  firms investing in Poland are among the Fortune 500
companies, including Coca-Cola, PepsiCo, International Paper, and
others.  German investors are predominantly represented by small- and
medium-sized businesses, giving Germany the largest number of
individual investments in Poland.  In contrast, Italy's ranking as a
leading investor in Poland is primarily due to the investment of one
company, Fiat.  Table 3.4 shows the 10 largest company investors in
Poland from January 1990 to March 1995. 



                          Table 3.4
           
           Ten Largest Company Investors in Poland,
                   January 1990-March 1995

                    (Dollars in millions)

                                Funds     Funds  Country of
Investor                     invested   pledged  origin
---------------------------  --------  --------  -----------
International Paper              $275       $45  United
                                                  States
Fiat                              260     1,581  Italy
Coca-Cola                         235        50  United
                                                  States
ABB                               150         0  Internation
                                                  al
Thomson Consumer                  147        37  France
 Electronics
ING Group                         140         0  Netherlands
Procter & Gamble                  113       170  United
                                                  States
Curtis                            100         0  United
                                                  States
Unilever                           98         0  Internation
                                                  al
Epstein                            90       110  United
                                                  States
------------------------------------------------------------
Note:  This information was provided by the Polish Agency for Foreign
Investment.  We could not determine if adjustments for inflation and
currency values had been made. 

According to the Polish Agency for Foreign Investment, the largest
investment outlays went into the financial, food processing,
electro-mechanical, and telecommunications industries.  (See fig. 
3.3.) Polish and donor officials told us that the size of Poland's
domestic market, with 38 million inhabitants, is the single most
important factor in companies' decisions to invest in Poland. 

   Figure 3.3:  Foreign Investment
   in Poland by Sector, January
   1990-March 1995

   (See figure in printed
   edition.)

Source:  Polish Agency for Foreign Investment, government of Poland. 


--------------------
\29 Poland reached an agreement with the London Club banks in October
1994, resulting in an overall rate of debt reduction of slightly more
than 49 percent.  See Tomasz Telma, "Outlook for Poland," Review and
Outlook for Eastern Europe, PlanEcon (Dec.  1994), p.  125. 

\30 These figures include only those investments that exceed $1
million. 


      SOME EARLY ASSISTANCE WAS
      UNFOCUSED
-------------------------------------------------------- Chapter 3:2.2

Some early U.S.  technical assistance geared toward improving the
investment climate in Poland was unfocused.  For example, the United
States launched a program to help Poland improve its commercial law,
but the program design included few specific goals.  Rather than
designing projects to complement other efforts addressing key
economic restructuring impediments, USAID simply contracted with a
number of institutes and the Department of Commerce to develop
projects that would fit into several broad areas of commercial law
development--an approach that USAID officials said was driven by
congressional pressure to "get the money spent quickly." According to
USAID officials, the result has been scattered activities in an area
where efforts should be sparing and cautionary because of the need
for new laws to intermesh properly with existing legal codes. 

For example, one project involved having volunteers spend 4 to 6
weeks in Poland working on specific tasks such as helping to draft
legislation.  A USAID contractor working on a related project was
critical of this approach.  He indicated that it was too dependent on
the personalities of individual volunteers who generally have little
Polish language ability or lack the professional stature to work with
officials in Poland.  As an illustration of the difficulties posed by
such an approach, the contractor cited a recent endeavor to work with
Polish legal associations to establish a commercial law library in
Warsaw.  The volunteer in charge of this task, an American divorce
lawyer with no Polish language skills, had difficulty getting the
legal associations to work together effectively, and the project
faced delays in getting started.  USAID officials acknowledged that
the person in charge was "not the best person" for the job. 

The USAID contractor also expressed concern that Polish officials
were unable to use the results of a World Bank-sponsored project in
the area of collateral law.  He said that the Bank sponsored a
Western expert to draft legislation in London but that the work was
not useful to Polish officials because it did not intermesh properly
with existing laws.  He told us that, based upon his experience, no
important piece of legislation will be adopted in Poland that is not
prepared by Polish lawyers and that, while Polish legal experts
appreciate assistance and guidance from western specialists, the
legislation must ultimately be the work of Polish legal experts. 


      U.S.  INVESTMENT PROMOTION
      ASSISTANCE HAD LIMITED
      IMPACT
-------------------------------------------------------- Chapter 3:2.3

The United States supported a variety of efforts to help promote
investment in Poland, but many of these activities had limited
impact.  For example, the United States established an American
Business Center in Warsaw, and the U.S.  Commercial Service (USCS)\31

in Warsaw was given responsibility for running it.  The centers were
specifically authorized under the SEED Act and were intended to
provide temporary office space, phone, fax, and copy capabilities on
a reimbursable basis to U.S.  companies doing business in Central and
East European countries where reliable services of this sort were not
readily available when the transition process began.  The center in
Warsaw experienced difficulty in obtaining property and equipment in
a timely manner and found that the USCS office could not effectively
do its own work and run the center.  The center served over 500 firms
but lost money, partly because comparable services quickly became
available through the private sector.  Nevertheless, according to a
USCS official in Warsaw, the center served as a good test case for
centers opening later in the countries of the former Soviet Union. 

USAID also financed a project to (1) support the identification,
analysis, and marketing of large infrastructure projects; (2) promote
investment and trade, joint ventures, and co-ventures; and (3) assist
in project packaging and marketing.  However, USCS officials in
Warsaw said that the project was wasteful because it utilized
expensive consultants while lacking a clear plan.  USAID officials
acknowledged that the project was unsuccessful and said that they had
retargeted it. 

The Overseas Private Investment Corporation (OPIC) has provided $700
million in insurance and financing for U.S.  businesses investing in
Poland.  OPIC insures U.S.  investments in that country against
political risks and provides investment financing in the form of
direct loans and loan guaranties.  According to OPIC officials, a
1990 OPIC effort to provide guaranties for an investment fund
targeted toward Poland and other Central and East European countries
was dropped because the investment company managing the fund was
unsuccessful in obtaining the necessary private, counterpart funds. 
However, OPIC is now providing debt guaranties to cover a significant
portion of the capitalization for a venture capital fund to invest in
small- and medium-sized private enterprises in Poland.  The fund had
raised about $65 million in capital as of May 1995.  OPIC is
currently developing three additional investment funds targeted
toward Poland and other Central and East European countries.  OPIC
also sponsors investment missions to Poland for U.S.  executives to
learn about Poland's investment climate and to meet with government
officials, banks, prospective joint venture partners, and officials
from U.S.  companies already doing business there. 


--------------------
\31 Formerly the U.S.  & Foreign Commercial Service. 


POLAND'S PROGRESS TOWARD
PRIVATIZATION HAS BEEN MIXED
============================================================ Chapter 4

Probably the most fundamental change in transitioning from a
socialist command economic system to a market-oriented system is
privatization or changing the system of ownership.\1 Despite numerous
reforms, many of which were intended to lessen the role of government
in the economy, Poland's record in privatization thus far is mixed. 
The country's private sector has grown and many small- and
medium-sized retail businesses have been privatized.  Privatization
laws have set the framework for reducing the rest of the state
sector, but the pace of privatization for larger state-owned
enterprises has been slower than expected, and significant portions
of the Polish economy remain in the hands of the government.  The
United States and other donors are actively supporting Poland's
efforts to restructure enterprises and implement the country's Mass
Privatization Program; however, persistent delays threaten continued
donor support.  Changes in government, the reluctance among
state-owned enterprises to enter the privatization process, and the
poor financial condition of many enterprises have delayed
privatization efforts. 


--------------------
\1 Mark E.  Schaffer, The Economy of Poland, Discussion Paper 67;
Centre for Economic Performance, London School of Economics, Mar. 
1992, p.  43; and Mark Schaffer, "Polish Economic Transformation: 
From Recession to Recovery and the Challenges Ahead," Business
Strategy Review, Vol.  4, No.  3, Autumn 1993, p.  61. 


   POLAND'S PRIVATE SECTOR IS
   GROWING
---------------------------------------------------------- Chapter 4:1

When reforms began in late 1989 and early 1990, Polish reformers and
many Western economists were convinced that, to improve the
efficiency of the Polish economy, the state-owned enterprises had to
be converted to private ownership.  By transferring such enterprises
to private ownership, it was argued, the new owners would have a
vested interest in the success of the enterprise and therefore seek
to maximize profits by better utilizing labor, improving management,
and investing in capital improvements. 

At the outset of reforms, Poland was in a better position with
respect to ownership transformation than most other transition
countries in Central and Eastern Europe.  Since Poland had not
collectivized its agricultural sector during the socialist years as
other countries in the region had, most of this sector was already
private.  Further, the nonagricultural private sector was allowed to
expand between 1982 and 1989 as an element of the limited socialist
economic reform taking place during that period.  At the end of 1989,
over 23 percent of the Polish workforce was employed in private
agriculture, over 10 percent was employed in the nonagricultural
private sector, and 30 percent of the country's GDP was located in
both the agricultural and nonagricultural private sector.\2

After reforms began, Poland's private sector grew larger, both
through the privatization of existing firms and through the
establishment of new private firms.  Poland's early privatization
efforts, termed "small privatization," concentrated on rapidly
selling small labor-intensive firms, such as hotels, restaurants, and
shops.\3 Hundreds of thousands of small- and medium-sized retail
businesses have now been privatized, placing over 90 percent of this
sector in private hands.  After legal requirements for the set-up of
private enterprises were liberalized, many new private businesses
also emerged.  By December 1993, the number of small businesses had
risen to about 1.8 million, the number of private companies employing
more than 5 people had grown to over 66,000, and about 60 percent of
Poland's employment and over 50 percent of its GDP were located in
the private sector.\4 Poland's private sector is now the primary
source of the country's GDP growth.  A World Bank economist estimated
that Poland's private sector GDP grew by 13 percent in 1993, while
its public sector GDP declined by 4.1 percent. 

Despite the increased importance of Poland's private sector in
generating economic growth, the country continues to rely on
state-owned enterprises for a substantial portion of its industrial
production.  While the private sector share of Poland's industrial
output is rapidly growing, state-owned enterprises still accounted
for about two-thirds of the country's industrial production at the
end of 1993. 

The Polish government took steps to encourage these state-owned
enterprises to operate more independently as part of its initial
reforms.  The elimination of price controls, the opening of the
economy to international competition, the removal of most state
subsidies and the discontinuance of Central Bank soft money policies
encouraged some state-owned enterprises to become more cost conscious
and to search out market opportunities.  A 1993 World Bank paper on
the performance of
75 large, Polish state-owned enterprises following the introduction
of reforms reported that two-thirds of the studied enterprises showed
signs of adapting to the new marketplace conditions.\5 One of the
paper's authors later wrote that two of the most important lessons
learned from the study were that (1) hard budgets and competition can
stimulate state-owned enterprises to restructure before privatization
and (2) the incentive effects of anticipated privatization are very
important.\6

Nevertheless, Poland's state sector is being outperformed by the
country's emerging private sector.  According to a 1994 World Bank
paper, Poland's state-owned enterprises lag behind emerging private
firms in output growth, employment growth, investment growth, and
profitability.\7 The authors used a sample of 40 emerging private
firms, 45 privatized firms,
41 State-Treasury companies,\8 and 81 state-owned enterprises. 
Leszek Balcerowicz, Poland's former finance minister and author of
the country's 1989 and 1990 economic reform program, wrote that while
Poland's early reform measures induced many state enterprises to
adjust to the conditions of the market economy, an even larger
increase in their overall economic performance could be achieved if
they were privatized. 


--------------------
\2 Mark E.  Schaffer, The Economy of Poland, Discussion Paper 67;
Centre for Economic Performance, London School of Economics, March
1992, pp.  44,45; Mark Schaffer, "Polish Economic Transformation: 
From Recession to Recovery and the Challenges Ahead," Business
Strategy Review, Vol.  4, No.  3, Autumn 1993, p.  65; Georg Fischer
and Guy Standing, Structural Change in Central and Eastern Europe: 
Labour Market and Social Policy Implications, OECD, 1993, pp. 
133-135; and Economic Survey of Europe in 1993-1994 (New York and
Geneva:  Secretariat of the Economic Commission for Europe, United
Nations, 1994), pp.  199-212. 

\3 Fischer and Standing, p.  135. 

\4 Economic Survey of Europe in 1993-1994, pp.  199-212; and Poland: 
Fundamental Facts, Figures, and Regulations, Polish Agency for
Foreign Investment, Mar.  1994, pp.  20, 25. 

\5 Brian Pinto, Marek Belka, and Stefan Krajewski, Transforming State
Enterprises in Poland:  Microeconomic Evidence on Adjustment, Feb. 
1993. 

\6 Brian Pinto, "Brian Pinto Explains Why Polish State Firms Are
Restructuring," Transition Newsletter, World Bank, Sept.  1993. 

\7 Marek Belka, Saul Estrin, Mark E.  Schaffer, and I.J.  Singh,
Enterprise Adjustment in Poland:  Evidence from a Survey of 200
Private, Privatized, and State-Owned Firms, Sept.  1994. 

\8 State-owned enterprises are converted into State-Treasury
corporations as either joint stock or limited liability companies
through a process called "commercialization." Among other things,
commercialization establishes a clear supervisory structure, adjusts
enterprise operations to meet the requirements of Poland's commercial
code, and changes the legal status of the enterprise to allow foreign
capital participation.  The final step is either the sale of the
State-Treasury corporation to private investors or participation in
the Mass Privatization Program.  (See app.  I.)


   PACE OF LARGE-SCALE
   PRIVATIZATION SLOWER THAN
   EXPECTED
---------------------------------------------------------- Chapter 4:2

Notwithstanding Poland's success in privatizing small- and
medium-sized retail firms, relatively few of the larger state-owned
enterprises have been privatized.  The Privatization Law for
State-Owned Enterprises of July 1990 established the legal framework
for Poland's privatization program.  The law allows for two methods
of privatization:  (1) capital privatization\9 for larger enterprises
and (2) liquidation\10 for small- and medium-sized enterprises.\11
The workers and management of the state-owned enterprises, in
consultation with the Ministry of Privatization, select the method of
privatization. 

Poland's privatization program called for the sale of 50 percent of
Poland's state-owned enterprises over 3 years with the eventual goal
of privatizing 80 percent of such enterprises.  In December 1994,
4-1/2 years later, Poland's Ministry of Privatization reported that
approximately 36 percent of the original 8,441 state-owned
enterprises had been transformed under the privatization process.\12
(See fig.  4.1.) In addition, the government continues to play a
significant role in many of these transformed enterprises.  For
example, more than 500 of these enterprises are commercialized
corporations belonging to the State Treasury that are awaiting either
capital privatization or participation in Poland's Mass Privatization
Program. 

The World Bank's Resident Representative in Poland recently
acknowledged some advantages to commercialization of state-owned
enterprises; however, he emphasized that commercialization is not an
effective substitute for privatization.  He stated that privatization
is one of the main policies for further developing the productive
potential of the economy and that it is therefore of crucial
importance that it be accelerated rather than slowed down.\13

   Figure 4.1:  Poland's
   Privatization Results (as of
   December 31, 1994)

   (See figure in printed
   edition.)

Note:  Percentages were calculated using the Polish government's
baseline of 8,441 original state-owned firms. 

In commenting on a draft of this report, the Department of the
Treasury emphasized the importance of large-scale privatization. 
Treasury said that while some of Poland's state sector may have been
successful at restructuring, a still-large state sector continues to
promote misallocation of investment, poor fiscal controls, and
excessive monetary growth, and that repeated delay in the
privatization of larger concerns continues to be a drag on economic
growth and inflation control.  (Appendix I provides a discussion of
the various privatization processes available to Polish enterprises,
as well as the number of enterprises that have participated in each
process.)


--------------------
\9 Capital privatization entails converting the state-owned
enterprise to a State-Treasury corporation operating under the
commercial code, followed by sale to a private investor. 

\10 Liquidation entails immediately selling a state-owned enterprise,
transferring it to an existing business, or leasing it in part or
whole. 

\11 The small enterprises referred to here were not part of the early
"small privatization" of retail shops and other similar small
businesses. 

\12 Transformed here means the status of the state-owned enterprise
has changed.  This number does not reflect the number of enterprises
still awaiting approval for one of the privatization methods. 

\13 "Privatization Update," Monthly Digest of Investment
Opportunities, No.  26, The Warsaw Voice, Polish Agency for Foreign
Investment, Polish Ministry of Privatization, Polish Development
Bank, Dec.  1994, p.  1. 


   IMPLEMENTATION OF MASS
   PRIVATIZATION HAS BEEN STALLED
---------------------------------------------------------- Chapter 4:3

Early in the restructuring process Poland determined that the
restructuring and privatization of state-owned enterprises on an
individual basis would be too time consuming and expensive, and as of
January 1991, only five such enterprises had been successfully sold. 
Thus, the Ministry of Privatization sought to develop a program that
would privatize hundreds of state-owned enterprises at once. 

On April 30, 1993, the Polish Parliament passed the Law on National
Investment Funds that provides the legal framework for Poland's Mass
Privatization Program.  The goal of the program is to (1) improve the
efficiency and value of several hundred Polish state-owned
enterprises, (2) accelerate the privatization process in Poland, and
(3) provide each adult citizen with a stake in the privatization
process. 

As part of the Mass Privatization Program, Poland was to establish 20
specially constituted National Investment Funds.  These funds were to
assist in the restructuring of Polish companies by holding the shares
of state-owned enterprises taking part in the Mass Privatization
Program.\14 Each fund, operating as a joint stock company, was to be
run by a management team under contract to a specially selected
supervisory board.  The funds were to seek a listing on the Warsaw
Stock Exchange within a year of operation and remain in existence for
at least 10 years. 

Each state-owned enterprise entering the program is expected to have
its shares divided as follows:  33 percent held by a lead National
Investment Fund; 27 percent distributed equally to all other such
funds; 25 percent retained by the State Treasury; and 15 percent
distributed free of charge to enterprise employees.  Special share
certificates are to be offered free of charge to certain pensioners
and state employees. 


--------------------
\14 The number of funds has since been reduced to 15. 


      DONOR COMMITMENTS TO
      POLAND'S MASS PRIVATIZATION
      PROGRAM
-------------------------------------------------------- Chapter 4:3.1

Ministry of Privatization documents state that donors have committed
approximately $245 million in assistance to Poland's Mass
Privatization Program.  (See table 4.1.)



                          Table 4.1
           
              Donor Commitments to Poland's Mass
            Privatization Program (as of February
                           1994)\a

                    (Dollars in thousands)

Donor                      Assistance                 Amount
-------------------------  -------------------------  ------
World Bank                 Distribution of share      $112,5
                            certificates, fund            00
                            manager fees, advisors,
                            printing, etc.
EBRD                       National Investment Fund   110,00
                            working capital funds        0\b
                            and loans/equity for
                            companies
USAID                      Common back office and     11,800
                            assistance to companies       \c
EU PHARE\d                 Advisers, fiscal agent,    10,140
                            printing, and training
Know How Fund              Distribution adviser          450
============================================================
Total                                                 $244,8
                                                        90\e
------------------------------------------------------------
\a Some of the committed assistance has already been provided to the
Ministry of Privatization. 

\b This figure includes $60 million to support the National
Investment Funds and $50 million for loans and/or equity to
companies. 

\c This figure includes $10 million in technical assistance to the
Mass Privatization Program and $1.8 million for the
post-privatization program.  It does not include separate but related
work at the Ministry of Privatization. 

\d Poland and Hungary Assistance for Economic Restructuring. 

\e The Ministry of Privatization did not provide amounts for some
assistance projects; therefore, the actual total could be higher. 

Source:  Poland's Ministry of Privatization. 

Based on available figures, the World Bank has provided the largest
share of funding and technical assistance to date.\15 The EBRD has
also committed a large share of this assistance, mostly in National
Investment Fund working capital and assistance to privatized
enterprises.  USAID, EU PHARE, and the British Know How Fund have
provided additional advisors and technical assistance to the program. 


--------------------
\15 In 1991, the World Bank provided a $280-million loan to assist
Poland's efforts to develop and implement a broad privatization
program and implement restructuring. 


      POTENTIAL PROBLEMS IN THE
      MASS PRIVATIZATION PROGRAM
-------------------------------------------------------- Chapter 4:3.2

Continued delays in the Mass Privatization Program have caused many
donors to question the Polish government's commitment to the
privatization process, and some donors have indicated that they may
consider cutting their assistance in this area.  Donor officials have
stated that progress in implementing the Mass Privatization Program
is necessary for continued commitment of assistance. 

In May 1994, Ministry of Privatization officials were confident that
the program would demonstrate satisfactory progress and the National
Investment Funds would begin operation in late 1994.  Nonetheless,
since then implementation of the program has slowed.  Although by the
end of August 1994, approximately 466 state-owned enterprises had
committed to participation in the program,\16 the government of
Poland delayed final approval of the participating enterprises until
mid-October.  As of October 1994, approximately 444 state-owned
enterprises were approved for the Mass Privatization Program. 
However, government differences over the composition of the National
Investment Fund managers continued to delay implementation until late
1994. 

Some donor officials expressed concern about the signal being sent to
state-owned enterprises by delays in implementing the Mass
Privatization Program.  An OECD official told us that the beneficial
restructuring of such enterprises will not continue if privatization
is put on hold.  He said that an important motivation for some of the
state-owned enterprises to restructure themselves is that they
anticipate that they will eventually be privatized.  Without the
certainty of eventual privatization, these enterprises might not
continue restructuring but instead might lobby the government to
reinstate subsidies.  Another donor official said that some
state-owned enterprises, particularly the larger ones, are avoiding
necessary changes in the hope that the government will announce a
program to alleviate their problems without the enterprise having to
go through privatization. 

USAID officials in Poland also expressed concerns about the effect of
delays in the privatization process.  According to one USAID
official, some members of the Polish government have discussed a
program of mass commercialization without any specific date for
privatization.  This proposed program would involve more than 1,000
state-owned enterprises, which, once commercialized, would be part of
the new "Ministry of Treasury." This new Ministry would act as a
holding company for Poland's commercialized enterprises.\17 USAID and
State Department officials in Poland were concerned that such a
program could have a negative effect on the overall privatization
process, potentially creating a commercialized state sector without a
plan for privatization.  A Polish law expert at the Library of
Congress agreed that the proposed program would cause further
privatization delays and would allow the government to maintain
indefinite ownership of commercialized firms.  Some donors have
indicated that they may consider cutting their assistance in this
area if privatization is further obstructed or delayed. 

The Ministry of Privatization has expressed some concerns about
continued donor support for the Mass Privatization Program.  A
Ministry official said he was concerned that the EBRD's Special
Restructuring Project\18 would absorb some of the money already set
aside for the Mass Privatization Program.  For example, he said the
EU PHARE may decide to reallocate money to the Special Restructuring
Project if it is the first program to get underway.  Another official
said the EU PHARE has been upset with the delay in the Mass
Privatization Program and may cut or end all future assistance to the
program.  According to the EU PHARE representative in Poland, no
additional PHARE funding was provided to the Ministry of
Privatization in 1993 because the Ministry had spent very little of
the earlier assistance.  According to the representative, Poland now
has a 2-year funding pipeline of PHARE assistance, and therefore, no
new funding is needed. 

U.S.  and EBRD support for post privatization was announced in July
1994, in connection with President Clinton's visit to Poland.  The
United States proposed a new effort to provide $75 million of equity
capital and technical assistance to support Poland's Mass
Privatization Program.  Under the new proposal, the Polish American
Enterprise Fund and EBRD will each commit $15 million for equity
investment, USAID will commit $10 million to technical assistance,
and an additional $50 million in financing will be generated by the
EBRD and others.  A U.S.  Treasury official familiar with the
proposal said the EBRD is expected to put forward the majority of the
capital.  The EBRD had already announced that the newly privatized
enterprises were eligible for approximately $300 million in EBRD
restructuring assistance that would be available to any Polish
enterprise on a case-by-case basis. 

Although more than 5,000 state-owned enterprises may remain after
implementation of the Mass Privatization Program, Poland and the
donor community expect the program to restart a delayed privatization
process, provide millions of Polish citizens with a stake in the
transformation process, and set the stage for continued privatization
in Poland.  According to the Department of the Treasury, enterprises
in the Mass Privatization Program account for only 8 percent of the
state sector.  However, a USAID official said that the state-owned
enterprises being privatized under the Mass Privatization Program and
other privatization initiatives represent a significant share of
Poland's state sector, with most of these privatized enterprises
coming from the ranks of the larger state-owned enterprises. 


--------------------
\16 According to a USAID official, more enterprises may be added to
the program in 1995. 

\17 According to a U.S.  embassy official in Warsaw, a new
privatization bill passed in the Polish parliament on June 30, 1995. 
The bill includes provisions that would provide for commercialization
of state-owned enterprises, while allowing the government to maintain
indefinite ownership; however, the bill does not specifically provide
for a new "Ministry of Treasury." The bill also would not affect
state-owned enterprises that are included in the Mass Privatization
Program.  A Polish law expert at the Library of Congress said that
the Polish president vetoed the bill on July 17, 1995, but that the
parliment subsequently voted successfully to override the veto. 

\18 The EBRD developed the Special Restructuring Project to assist
Polish banks in restructuring Polish state-owned enterprises.  (See
app.  II.)


   PRIVATIZATION DELAYS HAVE
   SEVERAL CAUSES
---------------------------------------------------------- Chapter 4:4

Poland's slow progress in privatizing larger state-owned enterprises
can be attributed to at least three factors:  (1) government
indecision brought about by the changes in Poland's government over
the past 4 years, (2) the reluctance among state-owned enterprise
employees and management to enter the privatization process, and (3)
the poor financial position of many state-owned enterprises. 


      GOVERNMENT INDECISION
-------------------------------------------------------- Chapter 4:4.1

The government of Poland announced its Mass Privatization Program in
June 1991, but did not enact laws to make such a program possible
until April 1993.  Meanwhile, the rate of privatization slowed as
each new coalition government reassessed the privatization approach
in the face of public criticism of the process.  For example, the new
government elected in 1993 reevaluated the country's privatization
efforts, and debates over revisions to the privatization legislation
and the roles of various ministries in the privatization process have
also delayed the process.  Also, high unemployment, fear of
foreigners buying up the country's assets, and concern over
undervaluation of state-owned enterprises have given advocates of the
status quo greater representation in the government. 


      RELUCTANCE OF STATE-OWNED
      ENTERPRISE EMPLOYEES AND
      MANAGERS
-------------------------------------------------------- Chapter 4:4.2

Uncertainty among workers and management at the state-owned
enterprises has also delayed privatization.  Under the Privatization
Act of 1990, the founding body\19 and the managers and workers'
councils at the state-owned enterprises must mutually agree on a
method of privatization and then apply to the Ministry of
Privatization for approval.  The Mass Privatization Program is also
dependent on workers and managers volunteering their enterprise for
the program.  While a large number of smaller state-owned enterprises
were liquidated in the early years of reform, the larger ones and
related trade unions were able to maintain the status quo until they
were granted a larger role in the privatization process.  According
to one Ministry of Privatization official, the state-owned
enterprises were more or less self-governing under the Solidarity
unions before the privatization process began.  Many state-owned
enterprises perceived any change in their status as a threat. 

A ministry official said that both management and workers at these
enterprises need to be educated on the benefits of privatization. 
Some of the worker and management concerns were addressed in the
Enterprise Pact, a document that came out of talks between the
government, state-owned enterprise managers, and trade unions.  The
provisions of the agreement were intended, among other things, to
increase employee participation in the management and equity
distribution of privatized enterprises and encourage the financial
restructuring of state-owned enterprises.  The Enterprise Pact was
signed by all parties in February 1993, and implementing the
provisions of the pact was a Ministry of Privatization priority for
1994.\20


--------------------
\19 The founding body is usually either the Ministry of Industry and
Commerce or a regional government. 

\20 According to a U.S.  Embassy official in Warsaw, the new
privatization bill that passed in the Polish parliament on June 30,
1995 did not include many of the Enterprise Pact provisions.  As
earlier noted, the Polish president vetoed the bill on July 17, 1995,
but the parliment subsequently voted successfully to override the
veto. 


      POOR FINANCIAL CONDITION OF
      STATE-OWNED ENTERPRISES
-------------------------------------------------------- Chapter 4:4.3

The poor financial condition of many state-owned enterprises has also
delayed the privatization process.  A Ministry of Privatization
official stated that many of the healthiest state-owned enterprises
have already been privatized, and before the remaining enterprises
will be attractive candidates for privatization, they need to be
restructured--a process that takes additional time.  A number of
these state-owned enterprises also have assets not related to their
core business that need to be sold separately, such as schools,
housing, hotels, resorts, and police stations. 

Various financial restructuring paths are available to these troubled
state-owned enterprises, all of which may require added time before
privatization can take place.  Among other methods, restructuring can
occur under (1) the Law on Financial Restructuring of Enterprises and
Banks, (2) the EBRD's Special Restructuring Project, and (3) the
Ministry of Privatization's Restructuring Through Privatization
Program.  (Appendix II provides a more detailed discussion of these
three methods.)


   UNITED STATES ADJUSTS PROGRAM
   EMPHASIS BECAUSE OF DELAYS
---------------------------------------------------------- Chapter 4:5

The United States adjusted the emphasis of its assistance program to
Poland when Poland's privatization programs experienced delays and
some of the U.S.  assistance efforts proved ineffective.  The U.S. 
government, through its reprogramming of earlier contributions, has
assisted in the restructuring of Polish state-owned enterprises prior
to privatization.  In addition, USAID has shifted its assistance
program to work more closely with the government of Poland after
USAID's initial approach proved costly and time-consuming. 

In 1989, both Poland and the donor community were in favor of the
rapid privatization of the country.  However, as the financial
condition of many state-owned enterprises became apparent and the
pace of privatization began to slow, the U.S.  and donor community
responded by helping to develop restructuring programs.  This
included using donor resources from the no longer needed Polish Zloty
Stabilization Fund, including the $199 million U.S.  contribution, to
establish the $415 million Polish Bank Privatization Fund.  The Bank
Privatization Fund was created to support the recapitalization of
Poland's ailing banks and to indirectly stabilize and restructure
Poland's indebted state-owned enterprises.  (See ch.  5 for a
discussion of donor assistance in Poland's banking sector.)

The enterprise restructuring being implemented by Poland and the
donors may better prepare some of the state-owned enterprises for
eventual privatization.  An October 1994 EBRD report stated that
rapid privatization is "often at the expense of ownership and
governance quality," whereas financial restructuring prior to the
sale of a state-owned enterprise "aims to attract high-quality
owners."\21

USAID's initial privatization strategy in Poland was based on the
assumption that the privatization process would take only a few
years.  The USAID office in Poland supported privatization through
assistance to individual enterprises or sectors with short-term
contractors. 

USAID provided assistance to a number of large Polish enterprises,
including LOT Airlines, the Huta Warszawa steel mill, and the
Sandomierz glass company.  USAID also assisted Poland's furniture and
glass sectors.  According to a USAID official, the agency believed
that privatizing a few large enterprises in the airline, steel,
glass, and furniture industries would have a ripple effect on the
economy.  Although USAID/Poland noted some achievements while
utilizing this approach, the mission concluded that firm-specific and
sectoral assistance was too time-consuming and costly.  For example,
the $3.7 million in USAID funding for the glass sector led to only
four state-owned enterprise privatizations, a cost of more than
$900,000 per enterprise privatized.  In addition, as of May 1994,
only four of eight targeted enterprises had been privatized under the
almost completed furniture sector project. 

USAID's sector-specific strategy problems were due in part to the
Ministry of Privatization's unwillingness to relinquish control over
certain state-owned enterprises and withholding of important
information related to the restructuring and privatization efforts. 
According to a USAID official, the government of Poland had initially
supported the firm-specific and sectoral assistance, but the Ministry
of Privatization wanted to include these enterprises in the Mass
Privatization Program and proved to be a powerful opposition force to
the USAID-supported contractors. 

Other USAID projects encountered government unwillingness to follow
through with privatization.  For example, USAID spent more than $1
million restructuring LOT Polish Airlines in preparation for its
privatization.  This was USAID's largest single firm- specific
privatization effort in Poland.  Although the assistance has been a
restructuring success, the project's goal of privatizing the airline
has not been met.  According to a USAID official, foreign investors
have shown interest in the airline, but the Polish government has
rejected these overtures. 

In 1993 USAID's privatization work in Poland began to shift from the
firm-specific and sectoral assistance approach and toward projects
assisting the Ministry of Privatization with the privatization
process.  According to the USAID representative in Poland, the early
privatization efforts were misdirected because they were based on an
assumption that the privatization work was short term and could be
performed with a 90-day consultant team. 

USAID is now building on its earlier work at the Ministry of
Privatization.  Beginning in 1992, USAID assisted the Ministry with
the National Investment Funds as well as share trading and
distribution practices.  USAID assistance in late 1993 included a
project that placed specialists in corporate finance as well as
mergers and acquisitions in the Ministry to assist with privatization
transactions.  Additional projects to assist the Ministry with the
Mass Privatization Program were being planned as of May 1994. 

USAID has also started a regional privatization project with the
Ministry of Privatization to assist Polish regional governments with
the privatization of state-owned enterprises.  The Ministry is
providing technical assistance to state-owned enterprises undergoing
privatization, assisting the regions with privatization strategies,
and helping to identify possible investors.  USAID is supplying the
training component for the overall program, while the EU PHARE
program will provide advisory services.  According to a USAID
official, the agency's Warsaw office is also planning a new pilot
program to assist some of these state-owned enterprises with their
privatization transactions, helping them to become eligible for
credit and capital from the Polish-American Enterprise Fund and other
donor programs. 


--------------------
\21 Transition Report:  Economic Transition in Eastern Europe and the
Former Soviet Union, EBRD, Oct.  1994, p.  49. 


REFORMS IN POLAND'S BANKING SECTOR
============================================================ Chapter 5

Over the last 5 years, Poland has fundamentally reformed its banking
sector.  Multilateral and bilateral donors have provided important
support for recapitalizing Poland's state-owned banks and for
restructuring the banks' problem loan portfolios.  Early problems
with donor technical assistance have been resolved.  Nonetheless,
bank privatization has been limited; many small private and
cooperative banks are in poor financial condition; policies regarding
the licensing of foreign banks are unclear, and small- and
medium-sized businesses continue to lack sufficient bank credit to
develop and expand their operations.  Donors have undertaken various
activities to help. 


   FUNDAMENTAL REFORMS
   ACCOMPLISHED
---------------------------------------------------------- Chapter 5:1

Poland's banking sector has undergone fundamental changes since the
beginning of reforms in 1989.  The country's old command economy
central bank has been transformed into an independent central bank
and its old regional branches have been converted into individual
commercial banks, some of which have been or are being privatized.  A
number of new private banks have also been established.  The
government has recapitalized the country's state-owned banks and has
made significant progress in restructuring their problem loan
portfolios. 

The National Bank of Poland Act and the Polish Banking Act, both
enacted in 1989, provided the framework for reforming the Polish
banking system.  These laws transformed the old central bank, which
had served as the state conduit of credit to enterprises in the
command economy, into an independent central bank with
responsibilities for macroeconomic policies and supervision of banks. 

The 1989 legislation also transformed the regional branches of the
original central bank into nine new state-owned commercial banks,
three of which have since been privatized.  These nine banks dominate
Poland's banking sector, and, along with four specialized banks\1
that remain from the prereform era, accounted for over 75 percent of
total banking sector assets as of mid-1993.  The remaining banking
sector assets are located in about 1,600 small cooperative banks,
which existed prior to reforms to serve agrarian interests, and 60
private and foreign banks established pursuant to the 1989
legislation. 

In 1991, the profitability of state-owned enterprises deteriorated
following the collapse of Poland's trade with its former CMEA
partners.  As a result, many state-owned enterprises relied
increasingly on debt to finance operations while their ability to
service such debt diminished.  The state-owned banks rolled over
credits, capitalized unpaid interest, and extended new loans to these
firms. 

In mid-1991, a Ministry of Finance audit of the state-owned
commercial banks revealed a high percentage of problem loans.  The
audit classified 16 percent of outstanding loans as not recoverable,
22 percent as having doubtful recovery, and 24 percent as not
current, and revealed that the banks' capital adequacy ratios were
significantly less than those required by Polish banking regulations. 
A USAID-contracted study reported that, despite divergent interests
within the government,\2 the Ministry of Finance directed the
state-owned commercial banks to tighten credit discipline over
delinquent enterprise borrowers in 1991 and 1992.  By 1992, according
to an IMF study, the quality of the portfolios had stabilized
somewhat. 

To deal with the bad debts of state-owned enterprises and the
inadequate capitalization of banks, the government of Poland enacted
the Financial Restructuring of Enterprises and Banks Act (FREB), in
February 1993.  The FREB approach involved banks in the restructuring
of state-owned enterprises with delinquent debts.  In the process,
the portfolios of the state-owned commercial banks\3

were improved, and the banks were recapitalized in preparation for
privatization.  In September 1993, the Polish government
recapitalized these banks using special government restructuring
bonds.  The bonds held by a particular bank are to be serviced by the
central government until privatization occurs, after which the bonds
are to be serviced and redeemed by the $415-million Polish Bank
Privatization Fund created with resources from the former Polish
Stabilization Fund. 

The primary elements of the program required banks to segregate loans
by likelihood of repayment, create reserves against those loans
considered unlikely or doubtful of recovery, set up workout
departments to manage the bad loans, and restructure their loan
portfolios. 

The restructuring act prohibited giving new loans and advances to
enterprises with loans classified as substandard.  Under the act,
each bank was to liquidate or restructure its loans assigned to a
problem portfolio by the end of April 1994, unless (1) the loans had
been restructured, (2) the debtor had been declared bankrupt, (3)
liquidation proceedings had been instituted with respect to the
debtor, or (4) the debtor had been servicing his debt obligations for
at least 3 months without interruption.  Considerable progress has
been made under this plan, and according to PlanEcon, by April 1994,
the seven state-owned commercial banks had settled over one-half of
the bad debts that qualified for the program. 


--------------------
\1 These specialized banks are dedicated to (1)foreign trade, (2)
foreign currency, (3) agriculture and cooperative banks, and (4)
savings and home mortgages.  A fifth specialized bank, the Polish
Development Bank, was established in 1990.  An export development
bank was established in 1988 and privatized in 1992. 

\2 There are conflicting incentives within the government as owner of
both state-owned enterprises and state-owned banks.  The cessation of
state subsidies to the enterprises generated pressure on the banks to
provide credits.  However, as insurer of the state-owned banks, the
state also had an interest in bank solvency. 

\3 Three of the original nine state-owned commercial banks have since
been privatized--Wielkopolski Bank Kredytowy, Bank Slaski, and Bank
Przemyslowo Handlowy.  The first had its reserves increased during
its privatization in August 1993; the second did not require
recapitalization before its privatization in autumn 1993.  According
to the Treasury Department, the third was privatized in 1995.  In
addition to the state-owned commercial banks, coverage under the FREB
was extended to two special cases, Bank Gospodarki Zywnosciowej (the
Bank for Food Economy) and Powszechna Kasa Oszczednosci (the
household savings bank). 


   SEVERAL MAJOR HURDLES REMAIN
---------------------------------------------------------- Chapter 5:2

Notwithstanding Poland's progress in reforming its banking sector,
several major hurdles remain.  According to Polish and donor
officials as well as other observers, bank privatization has been
limited; many small private banks are undercapitalized and badly
managed; the country's licensing policies for foreign banks lack
transparency; and Poland's small rural cooperative banks are in poor
financial condition.  According to these officials, Poland's bank
supervision capacity needs further strengthening, and bankers need
additional training.  Also, small- and medium-sized enterprises in
Poland continue to lack sufficient bank credit to develop and expand
their operations. 


      BANK PRIVATIZATION DELAYS
-------------------------------------------------------- Chapter 5:2.1

Although Poland has made considerable progress in restructuring the
portfolios of state-owned commercial banks, the government's plans
for reforming the financial sector go beyond improving the banks'
health.  A final goal of the FREB act is to privatize the remaining
state-owned banks, but progress has been slow.  Three of the nine
original state-owned commercial banks have been privatized, and
another is scheduled for privatization by the end of 1995.  However,
PlanEcon recently reported that those remaining will take more time
to privatize due in part to the weak performance of the Warsaw Stock
Exchange.\4 At the end of 1994, the Polish government was still the
largest shareholder in the banking sector, with over 69 percent of
the equity of all commercial banks and control of almost 80 percent
of all assets. 


--------------------
\4 PlanEcon Report:  Commercial Banks in Poland--Who's Best, Vol.  X,
Nos.  46-47, January 31, 1995. 


      SMALL PRIVATE BANKS HAVE HAD
      PROBLEMS
-------------------------------------------------------- Chapter 5:2.2

According to Polish government and donor officials, between 1990 and
1992, liberal bank licensing requirements led to the establishment of
a large number of small banks, many of which were undercapitalized
and badly managed.  Poland's central bank significantly tightened
regulations in 1993, resulting in a decline in the number of new bank
licenses issued.  However, donor officials told us that about 25
percent of these banks remain technically insolvent and qualify for
closure; and IMF reports confirm that many of these banks have loan
portfolio problems. 

Poland's central bank has directly "bailed out" some private banks. 
However, according to donor officials, the Polish government is
reluctant to close banks without compensating depositors.  Because
the central bank is concerned about the cost of closing banks, it is,
instead, encouraging the consolidation of financially troubled banks
with banks that are financially sound. 

The government recently made progress on another problem affecting
most private banks--a lack of deposit insurance.  In December 1994,
the government passed a law creating the Bank Guarantee Fund, which
will insure deposits at all banks--private and state-owned.  Donor
officials said that requirements for banks to submit to the Guarantee
Fund's strict lending standards and supervision would encourage
better lending policies and provide more stability for private banks. 


      LICENSING OF FOREIGN BANKS
      LACKS TRANSPARENCY
-------------------------------------------------------- Chapter 5:2.3

Foreign banks currently constitute the strongest portion of the
banking sector; however, a donor official told us that foreign
financial institutions are concerned about a lack of transparency in
the bank licensing process.  PlanEcon reported that, despite many
applications, Poland's central bank had issued only one new license
to a foreign bank between March 1992 and late 1994 and that the
government's licensing policy had been unclear.  According to an EBRD
official, Poland's central bank has tried to "force" Western banks to
buy problem banks as a prerequisite for obtaining banking licenses in
Poland.  However, he said that this policy has not been well received
by Western banks.  The PlanEcon report noted that the central bank
appeared to have become more willing to negotiate the licensing of
foreign banks by the end of 1994. 



      COOPERATIVE BANK FINANCIAL
      PROBLEMS
-------------------------------------------------------- Chapter 5:2.4

According to Polish and donor officials, Poland's 1,600 small
cooperative banks serving largely rural areas are also in poor
financial condition.  According to an IMF report, about 200 of 1,000
banks examined by the central bank qualified for bankruptcy as of
March 1994. 

PlanEcon reported that about 1,200 of the cooperative banks are
affiliated with the Bank for Food Economy, which was recapitalized
under Poland's FREB program in 1994.  However, the restructuring of
this bank's bad debts has been addressed only recently.  Because many
of the bad loans were owed by farmers, restructuring these loans is
considered politically difficult. 

The cooperative banks represent only 6 percent of Poland's banking
assets; however, they are a principal source of banking services for
Poland's agricultural population.  The failure of these cooperatives
would have severe budget consequences as these deposits are
guaranteed by the Treasury.  Additionally, given the large number of
institutions, they require a disproportionate amount of supervision
from the central bank. 


      BANKING SUPERVISION AND
      BANKER TRAINING INADEQUACIES
-------------------------------------------------------- Chapter 5:2.5

According to Polish government and donor officials, it is important
to create a cadre of Polish experts in areas such as banking
supervision and credit analysis before good lending practices can be
fully integrated into Poland's banking system.  A USAID-contracted
study concluded that while Poland's central bank has made rapid
progress in building its capacity in some areas, additional work
remained to be done in developing the bank's capacity to supervise
the banking sector.  The study also reported that training of bank
staff in Poland was needed and would continue to be needed for some
time. 


      SMALL- AND MEDIUM-SIZED
      ENTERPRISE CREDIT SHORTAGE
-------------------------------------------------------- Chapter 5:2.6

According to Polish and donor officials as well as other observers,
small- and medium-sized enterprises in Poland continue to lack
sufficient bank credit to develop and expand their operations. 
Poland's emerging private sector has generally encountered a
risk-averse, domestic banking system, and foreign commercial banks
that are unwilling to lend to new Polish ventures. 

According to Poland's Ministry of Finance, more than 80 percent of
the country's banking sector's business continues to take place in
state-owned banks.  While state banks have concentrated their
attention on working out the bad debts of state-owned enterprises and
providing new loans to the healthier state-owned enterprises, these
banks have remained cautious about providing new loans to small- and
medium-sized enterprises.  According to a development expert at the
London School of Economics, the reluctance to make loans to small-
and medium-sized businesses is compounded by Polish bankers' lack of
expertise in evaluating small business propositions.  He added that
poor collateral laws also limit the amount of credit available to
such firms. 

The government of Poland expects state-owned banks to continue
focusing on state-owned enterprises.  The Ministry of Finance's
"Strategy for Poland" commits the state banks to supporting such
firms in future years, stating "the government will be using
[state-owned] domestic banks to a larger extent for managing
state-owned wealth, for the privatization of state-owned enterprises,
and for bringing them back to health." The Ministry's financial
sector strategy says very little about bank assistance to Poland's
emerging private sector, particularly the small- and medium-sized
enterprises. 

Foreign commercial banks in Poland also have been cautious with their
lending.  According to an OECD official, the few foreign commercial
banks operating in Poland have limited their activities to larger
Western investors.  One Western banking official said his bank would
prefer a few large transactions over numerous small transactions. 
Some of this cautiousness was also attributed to the lack of a debt
accord between Poland and its commercial creditors; however, this
obstacle was resolved in October 1994 when Poland and the London Club
of commercial creditors signed an agreement to reduce and reschedule
Poland's more than $13 billion in private sector debt. 

Donors have recognized the lack of available credit for small and
medium-sized enterprises and have undertaken various activities to
help fill the gap.  According to Polish government and donor
officials, the U.S.-sponsored Polish-American Enterprise Fund\5 has
been more successful than other donor programs in this area.  The
Enterprise Fund's small loan component, the Enterprise Credit
Corporation, has assisted Poland's small- and medium-sized
enterprises with more than 2,300 small business loans worth over $56
million.  Fund and donor officials attribute the program's success in
reaching the smaller enterprises to the fact that it did not depend
upon the existing banking skills in Poland, but instead trained and
monitored the staff of the banks used as intermediaries.  We reported
on the Enterprise Fund's success in 1994.\6


--------------------
\5 Established under the SEED Act of 1989, the Enterprise Fund
promotes private sector development in Poland through equity
investments, grants, loans, technical assistance, and training. 

\6 Enterprise Funds:  Evolving Models for Private Sector Development
in Central and Eastern Europe (GAO/NSIAD-94-77, Mar.  9, 1994). 


   DONOR ASSISTANCE HAS BEEN
   INSTRUMENTAL IN REFORMS
---------------------------------------------------------- Chapter 5:3

The centerpiece of assistance in the Polish banking sector was donor
support for Poland's FREB program to restructure enterprises and
banks.  In collaboration with the World Bank, the Polish government
issued bonds to recapitalize the banks that are to be serviced and
redeemed by the Polish Bank Privatization Fund after the banks are
privatized.  This fund was established using resources that were no
longer needed for the Polish Zloty Stabilization Fund. 

The World Bank also provided a $450-million loan to assist in the
FREB program.  As part of this effort, the World Bank plans to help
the Polish government supervise an intervention fund.  This fund is
intended to act as a "hospital" for state-owned enterprises that are
too large to be liquidated. 


      DONORS PROVIDE TECHNICAL
      ASSISTANCE AND TRAINING
-------------------------------------------------------- Chapter 5:3.1

According to Polish government officials, some early technical
assistance to Poland's financial sector was of limited value, but
many of these problems have been resolved and donors are now
providing more useful assistance.  For example, officials told us
that in the early stages of reform, many consultants came to Warsaw
for 1- to 2-week stays, interviewed some officials, and then produced
reports that merely repeated everything they had been told. 

Polish officials told us that donor technical assistance and training
is now addressing some of the most important needs remaining in this
area, such as bank supervision and credit analysis.  For example, the
United States has provided long-term Department of the Treasury
advisors to various banks, Poland's central bank, and the Warsaw
School of Banking.  In addition, Peat Marwick-KPMG, through a USAID
contract, is working with the central bank to develop an on-site
inspection manual for bank supervision.  The manual development is
accompanied by advice on strategic planning for bank supervision. 
Peat Marwick-KPMG also provides advisers to the central bank to help
develop operations procedures for the General Inspectorate of Banking
Supervision, the central bank's unit for bank supervision and
examination. 

U.S.  Treasury advisers have been assigned to Polish commercial
banks, the central bank, and the Ministry of Finance.  Typically,
these advisers are fluent in Polish, reside in Poland, and are
assigned for a year or more.  They provide advice and training on a
multitude of subjects.  The adviser in the General Inspectorate of
Banking Supervision provides daily assistance to the officials and
staff on all aspects of banking supervision; helps formulate policy,
develop examination techniques, and train staff in financial analysis
and inspections; assists in development of the supervision manual;
and serves as a liaison with donors. 

The U.S.  Treasury Department also provides a long-term adviser to
the Warsaw School of Banking, along with some short-term instructors,
through a contract with Peat Marwick-KPMG.  This school is one of
three banking schools in Poland and focuses on training middle and
senior level managers.  With approximately 100,000 to 150,000 banking
personnel in Poland, a primary goal of the school is to develop a
cadre of Polish trainers to multiply the training effect of the
Western advisers. 

The Financial Service Volunteers Corps is also supported by the
U.S.  program, and provides volunteer technical expertise to
countries making the transition to a market economy.  The advisers
provided by this program tend to be short term and have worked on
projects such as drafting legislation and regulations, training bank
managers, advising policymakers, and assisting with the development
of basic financial products and services. 

Other bilateral and multilateral donors are also active in the
banking sector.  For example, the British Know How Fund supports 14
advisers at
3 Polish banks and the Ministry of Privatization, and has 2 advisers
in the Ministry of Finance.  The fund has been instrumental in the
privatization of a major bank, and has funded training for bank staff
at the Katowice Banking School. 

The EU PHARE Program has provided training to many financial
institutions, provided consultants to the workout departments of the
state-owned commercial banks, performed audits, and provided audit
assistance to the General Inspectorate of Banking Supervision. 


CONCLUSIONS AND LESSONS LEARNED
============================================================ Chapter 6

Since the reform process began in Central and Eastern Europe, Poland
has undertaken some of the most dramatic economic reforms in the
region.  While Poland continues to face a number of impediments to
its restructuring efforts, the country has made significant progress
toward economic restructuring in key areas such as macroeconomic
stabilization, foreign trade and investment, privatization, and
banking.  The United States and other donors have actively supported
Poland in its transition efforts, although this assistance has been
more useful in some areas than in others. 

After 5 years of reforms, Poland's experience in transitioning to a
market-oriented system offers some lessons that could be of interest
to countries such as Russia, Ukraine, and others not as far along the
reform path as Poland.  Because there are tremendous differences
among transition countries in Central and Eastern Europe and the
former Soviet Union as to the size of their economies and
populations, their political situations, their ethnic compositions,
and a host of other variables, the lessons of Poland have differing
applicability to each of the other transition countries. 
Nevertheless, there are a number of lessons learned from Poland's
restructuring efforts in several key areas that, at a minimum, merit
consideration by the other transition countries and those involved in
assisting these countries. 

Two such lessons involve Poland's early efforts to stabilize and
liberalize its economy.  The first is that Poland's own efforts in
coupling tough reform measures with consistent macroeconomic policy
over several years were critical to the country's current economic
recovery.  The second is that some of the most important forms of
donor assistance provided in support of Poland's transition were
those that backed Poland's early macroeconomic stabilization and
liberalization measures.  The Polish government took a wide range of
actions, including cutting subsidies to industry and households,
tightening monetary policy, devaluing the currency, liberalizing
prices, establishing a free-trade regime, and liberalizing the legal
requirements for setting up private enterprises.  Donors supported
these measures in the form of the Polish Stabilization Fund, balance
of payments support, and debt restructuring and forgiveness.  By
creating the basic operating features of a market economy, Poland
effectively set the stage for further economic restructuring and
integration into the world economy.  The country is now experiencing
healthy economic growth. 

While Poland's economy is currently among the fastest growing in
Europe, the country's continued economic growth and integration into
the world economy is widely considered to depend at least in part
upon increased foreign trade and investment.  Some of the most
important factors for improvement in these areas require Polish or
donor government actions beyond the confines of assistance.  Poland
has achieved dramatic increases in its exports to the West, and a
number of U.S.  and other foreign companies have recently made
significant investments in the country.  However, Poland continues to
run a large trade deficit, trade barriers hamper its exports of
certain products to the EU, and a number of obstacles continue to
impede foreign investment.  Some of the most persistent investment
impediments, such as bureaucratic and tax uncertainties, demand the
attention of the Polish government rather than of donors.  On the
other hand, further reducing EU trade barriers could help Poland
increase its exports, diminish its trade deficit with the EU, and
earn additional foreign exchange for further restructuring. 

In addition to its long-term importance for economic growth, foreign
trade had a more immediate bearing on the success of early reform
measures, and early liberalization of foreign trade played a critical
role in helping state-owned enterprises adapt to market conditions. 
Poland liberalized foreign trade regimes as an element of the
country's early stabilization and liberalization measures.  By doing
so, Poland subjected its state sector to foreign competition and
provided international relative prices that monopolistic Polish firms
would not have offered in an environment of liberalized prices.  The
opening of the economy to international competition, the removal of
state subsidies, and the discontinuance of central bank soft money
policies encouraged some state-owned enterprises to become more cost
conscious and search out market opportunities. 

Poland's experience in creating market conditions suggests another
important lesson--that encouraging the early development of a dynamic
private sector is at least as important as the timing for undertaking
large-scale privatization.  While the pace of privatization for
Poland's larger state-owned enterprises has been slower than
expected, this slow progress has been offset by the success of the
country's private sector.  Poland's early measures to remove the
state from large-scale detailed direction of the economy and to
provide an environment conducive to private sector development
resulted in a rapidly growing private sector.  Many new businesses
have emerged and a large number of small- and medium-sized retail
businesses have been privatized.  Poland's private sector is now the
primary source of the country's economic growth and a substantial
base of Polish employment. 

Notwithstanding the success of Poland's private sector, significant
portions of Polish productive capacity and employment remain in the
hands of the government.  Some are concerned that without the
certainty of the eventual privatization of larger state-owned
enterprises, such firms might not continue restructuring but instead
might lobby the government to reinstate subsidies.  Donors have
actively supported Poland' efforts to restructure enterprises and
implement the country's Mass Privatization Program despite waning
public and governmental support.  However, donors are concerned about
continued delays in implementing the program.  If the Polish
government fails to follow through on its promise to move forward on
the Mass Privatization Program in 1995, donor support for the program
may erode. 

Poland's experience in restructuring its banking sector offers some
additional lessons.  Although several major problems remain in this
area, the country's banking sector has undergone fundamental changes
since the beginning of reforms in 1989.  Nevertheless, even when
faced with hard budget contraints and other market reforms that
included curtailed government-to-industry subsidies, many state-owned
enterprises were able to circumvent the constraints and continue
financing loss-making operations through their relationships with
state-owned banks.  When the profitability of state-owned firms
deteriorated following the collapse of Poland's trade with its former
CMEA partners, many such firms relied increasingly on debt to finance
operations while their ability to service such debt diminished.  The
state-owned banks reacted by continuing to lend, rolling over
credits, and in many cases capitalizing unpaid interest, contributing
to a high percentage of problem loans and technical insolvency. 

Poland's experience in restructuring its banking sector shows that
donors were able to play a useful role in supporting the country's
reform efforts in this area.  Multilateral and bilateral donors
provided strong support for Polish efforts to recapitalize and
restructure the problem loan portfolios of state-owned banks, and
considerable progress has been made under this plan.  In addition to
recapitalizing the banks, the program has contributed to the
restructuring of many of the indebted state-owned enterprises.  Donor
technical assistance has also been useful in the banking sector. 

Although a great deal of economic restructuring remains to be done in
Poland, the country has made impressive progress toward the goal of
transforming its economy into a full-fledged, market-oriented system. 
Poland's task would certainly have been more difficult without donor
support in certain key areas; however, donor assistance is not a
guarantee of success.  Without Poland's consistent commitment to
reforms, its determination to take early and decisive reform actions,
and its persistence in building the basic institutions and legal
infrastructure required for a functioning market economy, the
country's progress could not have been as substantial.  Poland's
experience suggests that the ultimate success or failure of reform
efforts is far more dependent upon the actions of the transition
country than it is upon those of outside participants. 


METHODS OF PRIVATIZATION
=========================================================== Appendix I


   CAPITAL PRIVATIZATION OF
   STATE-OWNED ENTERPRISES
--------------------------------------------------------- Appendix I:1

A state-owned enterprise undergoing capital privatization must first
be converted into a State-Treasury corporation as either a joint
stock or a limited liability company, a process called
"commercialization." Among other things, commercialization of a
state-owned enterprise establishes a clear supervisory structure,
adjusts enterprise operations to meet the requirements of Poland's
commercial code, and changes the legal status of the enterprise to
allow foreign capital participation.  The final step is the sale of
this State Treasury corporation to private investors within 2 years. 
(See fig.  I.1.) Some of these State- Treasury companies have also
been put aside for the planned Mass Privatization Program, a program
that is discussed in chapter 4.  The government has used capital
privatization rather than liquidation in the case of the larger, more
strategically important enterprises. 



(See figure in printed edition.)Figure I.1:  Capital Privatization
Process

The pace of commercialization slowed dramatically in 1993.  (See
table I.1.) While the number of ownership transformations into
State-Treasury companies in 1994 compensated for some of the slowdown
in 1993, the pace of commercialization still lags behind the first
few years of the transformation process.  However, a new
privatization bill passed by the Polish parliament in June 1995 may
increase the number of enterprises undergoing commercialization. 

The number of companies that underwent capital privatization has also
slowed.  Although the number of State-Treasury companies sold through
capital privatization increased from 1990 to 1993, as shown in table
I.1, this number decreased in 1994.  Another two State-Treasury
companies underwent capital privatization in the first 2 months of
1995. 



                          Table I.1
           
                Status of Commercialization &
                        Privatization

                                                        Tota
Status                    1990  1991  1992  1993  1994     l
------------------------  ----  ----  ----  ----  ----  ----
Number of enterprises       38   222   220    47   186   713
 commercialized
 (becoming State
 Treasury companies
State Treasury companies     6    21    24    48    37   136
 that underwent capital
 privatization
------------------------------------------------------------
As the numbers in table I.1 indicate, the majority of State- Treasury
companies still await either capital privatization or implementation
of the Mass Privatization Program.\1 These companies remain
state-owned enterprises, albeit commercialized state-owned
enterprises.  Even in the case of the State-Treasury companies that
underwent capital privatization, the government can still retain an
equity position in these companies.  The Ministry of Privatization
considers a state-owned enterprise to be privatized when at least 51
percent of its shares are in private hands. 


--------------------
\1 Under Poland's Mass Privatization Program, 444 state-owned
enterprises are to be privatized in 1995. 


      LIQUIDATION OF STATE-OWNED
      ENTERPRISES
------------------------------------------------------- Appendix I:1.1

A Polish state-owned enterprise can also undergo liquidation.  After
liquidation has been chosen, an enterprise is to be sold, transferred
to an existing business or leased in part or whole.  Liquidation can
be performed through "direct privatization" or bankruptcy.  (See fig. 
I.2.) Under the process called "direct privatization," a state-owned
enterprise is either sold, transferred to an existing company, or
leased in part or whole.  The second option, bankruptcy, is most
often used with state-owned enterprises in poor financial condition. 
In this case, the assets of the state-owned enterprise are sold in
order to satisfy creditors. 

   Figure I.2:  Liquidation
   Process

   (See figure in printed
   edition.)

Direct privatization has been more popular than capital
privatization, comprising about 88 percent of all privatization by
the end of 1994.  Most enterprises privatized through direct
privatization were leased back to the employees and/or management at
the enterprise.  (See table I.2.) A Ministry of Privatization
document states that these leased enterprises employed approximately
220,000 workers at the end of December 1993.\2



                          Table I.2
           
            Method of Direct Privatization (as of
                      February 28, 1995)

                                                   Number of
                                                  enterprise
Direct privatization method used                           s
------------------------------------------------  ----------
Enterprise leased back to employees/management           776
Enterprise sold                                          188
Enterprise transferred to an existing company             49
Combination of above methods                              67
============================================================
Total                                                  1,080
------------------------------------------------------------
The rate of direct privatization has slowed since the beginning of
the process.  The number of state-owned enterprises privatized
through direct privatization decreased from 1991 to 1994.  (See table
I.3.) In addition, although 1,248 enterprises had initiated
liquidation by bankruptcy by the end of 1994, the rate of new cases
over this period has steadily declined. 



                          Table I.3
           
                    Status of Liquidation

                                                        Tota
Status                    1990  1991  1992  1993  1994     l
------------------------  ----  ----  ----  ----  ----  ----
Direct privatization        31   418   270   195   127  1,04
                                                           1
Liquidation by              18   522   317   260   131  1,24
 bankruptcy                                                8
------------------------------------------------------------
The government of Poland maintains an interest in the state-owned
enterprises that underwent direct privatization.  In about 72 percent
of the cases, the enterprises were leased back to the management and
employees, often at a subsidized interest rate.\3

One U.S.  embassy official said since the assets in these new
enterprises are held by the government, the new enterprises should
still be considered state-owned.  A Polish government official stated
that continued state ownership of these enterprises may also
forestall restructuring and new investment as long as their assets
remain in the hands of the state. 

Foreign direct investment has assisted Poland's privatization
efforts.  Foreign investors are offered two methods of investment in
state-owned enterprises.  Foreign investors can (1) purchase a
state-owned enterprise through capital privatization or direct
privatization, with the invested capital going to the State Treasury
or (2) start a joint venture with a state-owned enterprise, with the
invested capital going to the enterprise itself.  According to the
Ministry of Privatization, capital privatization has been the most
successful in attracting foreign direct investment.  As of February
1994, foreign investors had participated in 40 sales through capital
privatization. 


--------------------
\2 More current employment numbers were not available in March 29,
1995, documents prepared by the Department of Foreign Relations of
the Ministry of Privatization. 

\3 A U.S.  embassy official in Poland told us that these leases will
run for about 10 years. 


METHODS OF RESTRUCTURING
========================================================== Appendix II


   BANK SUPERVISED RESTRUCTURING
-------------------------------------------------------- Appendix II:1

In February 1993, the Polish government enacted the Law on Financial
Restructuring of Enterprises and Banks.  This law, discussed in
greater detail in chapter 5, was intended to recapitalize the banks
carrying bad debt from state-owned enterprises and, indirectly,
restructure such bank-supported enterprises.  These state-owned
enterprises, previously unattractive for privatization because of
excessive debt, now have access to new credit and debt restructuring
if they agree to undergo bank-supervised restructuring.  Once
enterprises and their creditors agree to undergo restructuring, the
healthier enterprises will be restructured while the worst
enterprises will be liquidated.  The banks performing the
restructuring are entitled to swap the enterprise debt for an equity
position or sell equity in the enterprise to outside investors. 

Another element of the Law on Financial Restructuring of Enterprises
and Banks is an intervention fund.  This fund acts as a "hospital"
for the worst state-owned enterprises in the bank portfolios.  These
enterprises are generally too large to be liquidated.  The government
of Poland, with the help of the World Bank, supervises the
intervention fund. 


      POLISH SPECIAL RESTRUCTURING
      PROJECT
------------------------------------------------------ Appendix II:1.1

Another restructuring program, the Polish Special Restructuring
Project, was developed by the EBRD to assist Polish banks with the
restructuring of Polish state-owned enterprises.  The project will
help to stabilize, restructure, and privatize about 30 such
enterprises.  One EBRD official said the two criteria for entering
the program are that a state-owned enterprise cannot be in the Mass
Privatization Program and the enterprise must be in worse condition
than the Mass Privatization Program enterprises but still be
"potentially viable." The official said he expects some of the
project's candidates to be former Mass Privatization Program
candidates whose condition has deteriorated while waiting for the
Mass Privatization Program to begin. 

In November 1994, the EBRD signed a framework agreement to provide
$40 million in the form of equity investment and another $40 million
in loans to the Polish banks involved in the Special Restructuring
Project.  Another $12 million in technical assistance has been
committed by the EU PHARE program.  However, according to an EBRD
official, no disbursement had been made under the project as of June
30, 1995.  The officials said that implementation of the project is
awaiting final agreements between the EBRD and the Polish government
and between the EBRD and the Polish banks involved in the project. 


      PRIVATIZATION THROUGH
      RESTRUCTURING
------------------------------------------------------ Appendix II:1.2

Another Ministry of Privatization initiative, entitled Privatization
Through Restructuring, allows the Ministry to hire a management group
to restructure and privatize small- and medium-sized state-owned
enterprises.  Under the program, such enterprises are expected to be
privatized within 2 years of the assigning of the contract, but
extensions can be granted.  An enterprise will be considered
privatized when at least 51 percent of its equity has been
transferred to private investors.  As of February 1994, 27
state-owned enterprises were participating in the pilot phase of the
program. 




(See figure in printed edition.)APPENDIX III
COMMENTS FROM THE DEPARTMENT OF
THE TREASURY
========================================================== Appendix II



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the Department of the Treasury's
letter dated June 21, 1995. 


   GAO COMMENTS
-------------------------------------------------------- Appendix II:2

1.  We agree that large-scale privatization is important.  In chapter
4, we point out some of the concerns related to continued delays in
privatizing larger state-owned firms and note that state-owned firms
lag behind private firms in output, employment, and investment growth
as well as profitability.  We also note a World Bank official's
observation that commercialization is not an effective substitute for
privatization and include his opinion that it is of crucial
importance that privatization be accelerated rather than slowed down. 
We have added Treasury's concerns about delays in privatization to
those already noted. 

2.  We added this updated information to our report. 

3.  We include the Polish government's baseline figure of 8,441
original state-owned firms and note that 64.4 percent of these firms
remain state-owned.  We also note that as of October 1994, about 444
state-owned firms were approved for the Mass Privatization Program
and that more than 5,000 state-owned firms may remain after
implementation of the program.  We have added Treasury's calculation
that enterprises in the Mass Privatization Program account for only 8
percent of the state sector. 

4.  According to a U.S.  embassy official in Warsaw, while the
original draft of the new privatization bill favored a more rapid
privatization process, the version that passed in the Polish
parliament on June 30, 1995, is expected to slow the pace of
privatization.  For example, one provision in the bill states that
the commercialization of state-owned enterprises does not have to end
in privatization.  The official indicated that this provision would
allow the government to maintain indefinite ownership.  In addition,
while the original draft bill would have allowed the Ministry of
Privatization to initiate the privatization process without the
approval of the enterprises and founding organs (various ministries
and local governments), the bill that passed states that the founding
organs must give their approval.  The bill also states that
privatization of "strategic" enterprises must be approved by
parliament.  A Polish law expert at the Library of Congress said that
the Polish president vetoed the bill on July 17, 1995, but that the
parliment subsequently voted successfully to override the veto.  We
have added a footnote in chapter 4 to reflect these recent
developments. 




(See figure in printed edition.)Appendix IV
COMMENTS FROM THE UNITED STATES
AGENCY FOR INTERNATIONAL
DEVELOPMENT
========================================================== Appendix II


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V


   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix V:1

Louis H.  Zanardi, Assistant Director
Michael J.  Courts, Project Manager
Bruce L.  Kutnick, Economist
Muriel J.  Forster, Senior Evaluator
Bill J.  Keller, Evaluator
John D.  DeForge, Adviser


   EUROPEAN OFFICE
--------------------------------------------------------- Appendix V:2

Walter E.  Bayer, Jr., Evaluator

