Structural and Macroeconomic Determinants of the Output Decline in Poland: 1990-91


WP/92/86-EA

Structural and Macroeconomic Determinants of the Output Decline
in Poland: 1990-91 by Eduardo R. Borensztein and Jonathan D. Ostry

In the two years following the initiation of market-oriented reforms,
Poland's measured output declined by nearly 20 percent. Although the actual
decline may have been somewhat smaller owing to systematic measurement
biases and inadequate monitoring of the emerging private sector, it is
unlikely that the qualitative picture would change significantly once these
factors were taken into account. After surveying the main characteristics
of the Polish economic program and the main developments in the real economy
since reforms began, this paper looks at two issues that are central to
interpreting the decline in economic activity.

Any economy facing a completely new relative price structure as Poland
did at the start of 1990 is likely to experience an interim period during
which output declines as resources are reallocated across sectors. This
is especially true in Poland, where significant adjustment costs and
uncertainty may delay an expansion of activities that are profitable under
the new relative price structure. Although the extent of output decline has
differed across sectors, employment reduction has been remarkably similar,
suggesting that little reallocation of labor across different activities has
taken place thus far. Other evidence reported in the paper also suggests
that relatively little of the output decline can be attributed to structural
change in the economy following the relative price shock.

This finding implies that much of the output decline is related to
macroeconomic factors. This paper tries to determine which macroeconomic
factors have been relatively important and, in particular, whether demand-
side shocks (relating, for example, to tight fiscal and monetary policies)
or supply-side shocks (relating to administered energy price increases
combined with tight credit conditions imposed on state enterprises) have
predominated. According to the results, the relative importance of these
shocks has varied over time in line with the overall policy stance. The
econometric results suggest that although administered energy price
increases have had a sizable negative effect on aggregate supply, their
impact on equilibrium output has been mitigated by the relative inelas-
ticity of demand for Polish industrial goods.