Colloquium 1996 Panel III : Armed Forces and Defence Industry in Transition Economies: The Human Dimension

Poland: Labour Force in the Transition Period: Specific Focus on Military Sector Katarzyna Zukrowska Professor, Institute of Development and Strategic Studies, Warsaw, Poland Summary and Introduction The labour market in Poland was always different in comparison with other Central European (CEE) countries. This had a direct impact on transition strategy in its consecutive stages, which in addition to similarities with other economies in transition encompassed also some individual, national features. Moreover, the macrostabilisation programme turned out to be original and different compared with similar approaches introduced elsewhere. Adjustments of the military sector were an inseparable part of the overall systemic change in the economic field. The goal of this paper is to present: specific features of the systemic transition in Poland which had to take into account the human dimension of the process; influence of systemic changes after 1989 on labour markets, to be accompanied by presentation of statistical limitations during the transition period; problems arising in regions of military production concentration. The main argument of this paper is that systemic changes in Poland were tightly connected with the human dimension. On the one hand they have taken into account the limited time in which the reformers can do their job, as the credit given by the population lasts only for a limited period. On the other hand the acquired strategy was based on the assumption that its effectiveness is closely linked with calculation of its costs which have to be as small as possible. Shock strategy, despite its burdens which were concentrated in the first period, brought about the quickest departure from the old system, resulted in the most shallow production depression in the region and led towards quickest return of the pre-1989 production level.

Specifics of the Polish Labour Market Before giving characteristics of the Polish labour market one should state why this specific factor is so important in the whole transition. The nature of arguments which show the importance of the situation on the labour market are different. First, transformation is closely linked with politics, especially in the first stages of changes. In such circumstances politicians have to take into account how long they will get credit from their voters. This is closely connected with both objective and subjective factors. The objective factors include: (1) effective changes; (2) realised aspirations of the citizens; (3) perception of the ruling elite; (4) changes in standards of living. The subjective factors incorporate: (1) the balance between expectations and realities; (2) susceptibility of the society to information given by the mass media with its new "exposure effect"; (3) rate of mental adjustments of the society, including the period required to understand the market mechanism and democratic model in politics and to become tolerant; (4) period needed to create an open society. Second, transition brings deep changes in people's mentality, behaviour, surroundings, and it incorporates numerous interactions. It is difficult to adjust to a new legal, economic, social etc... setting which, in the process of creation, is accompanied by legal gaps, institutional adjustments and different kind of bottlenecks and controversies. Third, people are exposed to new temptations and have the right to choose between different options in their life, work, politics. Moreover, they start to live in comparatively unstable conditions, facing ownership changes, unemployment, restructuring of the economy. They can begin their own business, they can go bankrupt or their company can have financial difficulties. Fourth, everyone can look for support of people facing similar problems or with similar interests. This can happen in business circles, the political sphere or (in case of specific group interests) at local to regional level. The moods of the population, in such complex circumstances, are often unpredictable, although they have to be accepted by the politicians: they represent the result of the introduced democratic mechanism, which accepts or rejects some of the solutions which are proposed for everyday reality. Those moods determine the outcome of elections and the speed of introduction of changes. All those factors have shaped the strategy of systemic change in Poland which was prepared long before 1989. Those preparations have proved to be effective and precise in both fields: (1) the economy with shock therapy and (2) politics with gradual change. There is ample evidence which indicates that the background for systemic changes was established already in the communist regime, indirectly pointing to specific cooperation of General Wojciech Jaruzelski with the opposition leaders. This evidence can be supported by the following: (1) the strategy of systemic changes was shaped by the results of the referendum in 1987 on acceptance of democratic changes and the burdens of such a process; (2) before 1989 Poland started to institutionalise its external relations with international organisations which were supportive in the process of systemic changes; (3) several politically difficult decisions were undertaken in the last period before political power was passed to the opposition leaders; (4) several institutions went through introductory changes leading towards deeper reforms of systemic changes. Short comments on the human dimension of systemic changes lead us directly to the issue of the labour market. The Polish economy, in the form of the labour market, possesses several characteristic features, as follows: the size of the market is comparatively big; the rate of birth was and still is positive and one of the highest in the region; the share of agriculture was rather high in overall employment; the scale of hidden unemployment was one of the highest in the region, estimated at 25-35%; Poland was the source of both emigration and labour export in the form of services produced at home or abroad. Some listed features of the labour market in Poland are statistically illustrated in Table 1. They had direct impact on the acquired strategy of systemic changes, in which the main focus was put on the process of emancipation of the economy from political guidance in the shortest possible time with concentration of the burdens of transformation in the first stages. In practice this has turned out to be the most effective strategy in the region, which can be measured in different ways: (1) by the period required for departure from transition stagnation; (2) by the period needed to stabilise prices, controlling inflation; (3) by results in diminishing unemployment; (4) by changes in the structure of the economy; (5) by speed of the privatisation process; (6) by shifts in foreign trade where some markets were replaced by others; (7) by the size of foreign currency reserves; (8) by the size of foreign direct investments. Table 1 Characteristics of the Labour market in Poland, Czech Republic, Hungary and Slovak Republic in 1994  Country Inhabitants in mln Share of agriculture in % Unemployment in % Poland Czech Rep. Hungary Slovak Rep. 38544 10336 10259 5347 21.9 (30.2) 3.04 15.4 (18.5) 10.10 15.2 3.3 11.3 14.6 Figures in brackets characterise 1980, showing the changes. Unfortunately it was impossible to get data on the Czech Republic and Slovakia separately for the period when these countries formed one republic. Source: Rocznik Statystyczny GUS 1995, Warsaw 1996; Statistical Bulletin on Poland, Czech Republic, Slovakia, Hungary, January 1996. The socialist system, with a central command and distributive economy, has produced huge imbalances between supply and demand of the market, caused by improper structure of the economy, controlled prices and autonomous development. This has resulted in an "economy of deficits", using the term which was introduced by Janos Kornai (1). The side effect of such imbalances on the consumer market was reflected in forced savings or an inflationary overhang, resulting directly from controlled prices and disrupted structure of production. The scale of imbalance of the Polish economy was relatively bigger than in other countries of the region. This has influenced directly the acquired strategy of systemic changes, which had to be: (1) rapid; (2) most effective in the relatively short period, when the society still accepts the burdens of transformation; (3) the period of support was expanded by often politically-made shifts (2).

Changes After 1989 Systemic changes in the post-Communist countries commenced in 1989, although some reforms have their roots in former decades, with Poland in that number (as was indicated in the former chapter). The results of strategies for change are diversified, such as by different approaches in the economic field which incorporated two interconnected steps: (1) strategy of stabilisation; (2) openness of the economy. The aim of systemic change in CEE countries was to build simultaneously a political democracy and a market economy. The programme of changes has set in motion processes that took decades in developed democracies to be fully established, yet are still not completed as they are a "never ending story". All former attempts (more or less successful in transforming the system) in other regions were usually focused only on one of those elements, either the political system or the economy. In most such cases the market was considered as a more or less stable background that could give birth to a new political system, evolved from dictatorship or monarchy. Transition in CEE was a more complex venture, as it embraced both political life and a rearrangement from the command-distributing system towards a market oriented economy. Specialists led discussions on which should be the first step in those changes? Should it be the political life or marketisation of the economy? From which side should the first kick come? Should countries follow one pattern of transition or are there several optional ways on that route? Nobody was able to answer those questions precisely and fully. No ready prescriptions existed in this particular field. Most of the studies which try to classify stabilisation programmes introduced in different countries and find common denominators and differences usually label the Polish programme as a liberal approach based on the IMF prescription. L. Balcerowicz, the author of Polish reform, also was inclined in his writings to classify his programme as a modification of a radical stabilisation-liberalisation approach (3). Recently the approach towards systemic reforms has changed. It is said that Balcerowicz's reform can not be evaluated as a pure model of one economic school, neither can it be considered as part of the way of thinking of IMF experts. The specifics of the model are clear when one tries to look for analogies with other programmes. Examining its monetarist approach one can find some similarities with the reforms applied in Chile (4). The concept of systemic change in Poland was prepared by a group of reformers which incorporated some actors from the national level as well as representatives of international organisations. The first group consisted of consecutive ministers of finance and chairmen of the Central Bank who negotiated with the institutions of Bretton Woods the conditions of transformation, external burden reduction and the level of interest rates for new loans needed to form the stabilisation fund. The main institutional partners who formulated the economic policy within this group incorporated also representatives of the government and the Parliament deputies. The second group embraced experts on reforms from the International Monetary Fund and the World Bank (5). L. Balcerowicz distinguishes the following models of transition (6): "(1) classical transition, meaning the extension of democracy in advanced capitalist countries between 1860 and 1920; (2) neoclassical transition, referring to democratisation in basically capitalist countries after the Second World War (West Germany, Italy and Japan in the 1940s; Spain and Portugal in the 1970's; some Latin American Countries in the 1970s and 1980s; South Korea and Taiwan in the 1980s; Argentina in the 1990s); and (4) Asian post-communist transition (China since the late 1970s and Vietnam since the late 1980s)". Systemic transition in CEE was different from the former experience. In the economic field it was clear, from the former experience, that there are at least two ways: orthodox and heterodox. Both were applied in practise and furnished us with failures and potent experience (7). The Polish reform programme falls into the category of heterodox approaches with three anchors: tight monetary policy, exchange rate and control over rate of increase of incomes. There is also a numerous group of supporters of a third way, opting for a gradual approach. Sharp differences between the two main strategies faded with passing time. Gradualists agree that macrostabilisation is the first phase of systemic changes in the economy. Their disagreement concerns the following stages, in which they foresee more place for an active approach of the state towards the economy and enterprises, while supporters of the heterodox and orthodox approach believe in market forces. Their point of view finds support in the realities of post-communist states. Practice in the CEE countries shows that application of heterodox or orthodox methods brought about a quicker departure from the transition depression. Not all of the countries were able to introduce them for political reasons, while others departed from the primary drawn aims, impatient in waiting for signs that the strategy really works. In other words, not just the economic model of transition mattered. Additional conditions had to be fulfilled in order to achieve a success in transformation of the system. Those conditions include political determination to change; support or acceptance of the transformation burdens by the nation; international support embracing financial aid, credits, specific knowledge and experience. They also have to take into account the conditions at the starting point of the reforms, which include: (1) state of openness of the economy; (2) the depth of destabilisation. Up to the end of the 1980s the degree of centralisation of external relations differed from country to country in the bloc. The most liberal model occurred in Poland and Hungary, the most centralised in the former Soviet Union and former Czechoslovakia. It is worth stressing that decentralisation of foreign relations was not everywhere reflected in a proportional scale of openness of the economy. In Poland the economy was traditionally less open than in Hungary and former Czechoslovakia, as measured by export per capita indicators or by foreign turnover/GNP ratios (8). The state of openness of the economy in each case was reflected in the scale of the internal market and self-sufficiency of production, one of the main goals of economic policy based on the principles of the war-economy. This in turn had an impact on at least two things: on the level of competitiveness of the economy (9). More open markets were able to compete easier with partners from the market economies. Their engagement in the international division of labour was higher. Moreover, the gap between supply and demand on the internal market was relatively smaller. In other words, it was easier in their case to establish realistic prices, reflecting not only the costs but also relations between supply and demand; on the applied model of the transformation of the economy. In relatively more closed economies full openness was required, while in formerly more open economies full liberalisation was not considered as a precondition of systemic changes in the economic sphere. The results of the two strategies in the sixth year of their application speak for themselves. All the Visegrad-4 countries show positive economic indicators in 1994 and 1995(10). Poland achieved an increase of industrial production in May 1992, that is two years and five months after the application of "shock therapy". Moreover, the economy of this country is characterised by: the highest rate of growth in the region, a quick rate of growth of foreign reserves, decreasing imbalance between imports and exports, decreasing inflation, etc... The stabilisation phase of transformation is being followed by the restructuring phase, in which external factors are gaining new weight in comparison with former steps. Polish achievements in the reform process can be ascribed to a very simple mechanism, called the market. The whole idea of economic change consisted of a combination of external and domestic factors, which have made up the framework for the strategy of macrostabilisation. In such specific conditions it is very easy to find from available statistical data which country relies on the market mechanism and which does not. Statistical data, despite all the criticism it draws, can indicate which country follows the guidelines of the IMF and other international institutions in its stabilisation strategy and which is not persistent enough to follow harsh requirements of macrostabilisation. Such a strategy of simulation is short sighted. It diminishes the burdens of today, increasing them in the future and prolonging the time in which those burdens occur. Moreover, limited effects of changes reduce the period in which the population gives credit to the political powers to act. On the contrary, spectacular effects of the introduced strategy increases the support and credits for the politicians. This important problem is discussed in the next section on some misperceptions which accompany the whole period of transition. Misperceptions Reading most of the papers dealing with transformation one can conclude that transformation in most cases is a failure(11). Moreover, often economies with low inflation rates from the beginning of transformation, shallow depression and small unemployment rates are considered as best performers in the transition. This attitude is wrong and based on misperceptions and misunderstanding about what an economy of shortages and full employment really means and how it is possible to change it into a balanced and smoothly working mechanism steered fully by market. If one has full understanding of what those things really mean, one knows that inflation, unemployment and transition depression are calculated costs of transition from one economic system to another. An economy with falling production of, lets say, 50% a year, which is accompanied by a 2% unemployment rate, is a best proof that the market mechanism is not working. The same comments can be made with respect to inflation rates of more than 100% per year which are accompanied by, lets say, 30% interest rate. The question here is: who cheats whom? Economists can easily find which information makes sense and which does not. The belief that economic authorities applying the correct model, but that with the whole thing in their "specific" national conditions it does not work, is totally wrong. The quicker the economy is stabilised the sooner it is possible to achieve some growth, increase in real incomes, fall in unemployment and restructuring of the economy. Moreover, it is impossible to increase investments when prices are rising and the interest rate is lower than inflation. Neither are savings able to grow nor are foreign investors eager to export their capital to such a market. Misperceptions on the one hand, and unmatched indicators on the other, show that transition is a complicated process, with its adversaries and supporters, with those who know how to do it and those who try to catch up, with those who did it effectively and quickly and those who faced difficulties of different types in applying the stabilisation model. The practice of post-communist countries shows that the rate of transition not only varies from country to country but also from stage to stage of the process. Acceleration is intertwined with slow stages. The rate of implementing the programme is like a market cycle - after a fall there always comes a rise, after a rise there are periods of stagnation and again the full cycle starts from the very beginning. Explaining this in more detail, I have to say that all command-distributing economies had over-employment or hidden unemployment, as the system was based on full employment. The rate of hidden unemployment, or overemployment, was estimated at 25-35%. Poland had the biggest reserves of labour with positive growth of population, especially when we compare similar indicators for Czechoslovakia or Hungary, both experiencing a negative indicator in this field. Moreover, Hungary in the 1970-1980s had the highest labour-activity rate, exceeding 100% of the population of working age. Now this country experiences the highest ratio between employment and retired work-force. This situation had a direct impact on the effectiveness of the whole economy of each of the three countries. A similar situation exists with limited competition, as signalled in comments on economic openness of the whole economy of each of the three countries and their competitiveness. Most indicative of the result of transition, unemployment is one of the features indicating the creation of a labour market. It also reflects the fact that market mechanisms are operating in the economy as management starts to count the costs and seek possibilities to reduce them. Economies in all CEE countries were characterised by: (1) lower prices in comparison with the world level; (2) state control of prices; (3) disequilibrium between supply and demand, often called a "seller's market". Liberalisation of prices introduces equilibrium, causing at the same time a high jump in price levels. Economic openness as a measure accompanying liberalisation of prices helps to reach equilibrium at a lower level than would happen in autonomous conditions. Moreover, it helps to incorporate the correct structure of prices and introduces competition to the economy, resulting, at the same time, in new patterns, packaging, and innovations in the acquired technology. A lack of decline of industrial production is also one of the signs that the economic system has not been changed. Production in post-communist countries was competitive in conditions of closed or semi-closed market, but in most cases it can not survive in an open economy. Limited competitiveness is the reason for this phenomenon. Moreover, after the first years of transformation, there is no doubt that all those features are not easy for the citizens of the transforming country to cope with. Despite that fact, they reflect that changes are underway, and we can not say that a country is pretending. The set of indicators reflect realities, which are negated by increased competition. They reveal the limited competitiveness of the former autarchic economies. Measuring the Depth of Changes The transformation can be measured by different indicators, none of them precise. The reason behind imprecise measures lies in changes of the economy, difficulties in gathering and processing statistics, and limited possibilities of making comparisons for a longer period. Moreover, it is impossible to measure positive developments properly (e.g. elimination of shortages) or to show certain negative phenomena which were not shown before but in the new conditions are perceived as social costs(12). Those problems reflect the lack of a synthetic indicator of depth of systemic transformations through which all the post-communist countries are going. Generally the indicators of depth of transformations can be divided into four groups: (1) simple statistics indicating the state of the economy (macro-stabilisation, ownership changes, branch restructuring, foreign trade indicators, etc..); (2) indexes or comments reflecting systemic changes; (3) changes in competitiveness of the economy; (4) changes on the micro-level. The first group reflects the stage of stabilisation policy which is implemented in the economy. The second group represents the indicators of the second stage of systemic changes, which are preconditioned by stabilisation of the economy, when growth occurs as the economy departs from the transitional depression. The third group reflects changes in competitiveness of the economy, which is achieved in consecutive stages. The fourth group indicates changes on the level of the enterprise, which has to react to signals from the market which are put into motion by effective macrostabilisation.

Table 2 Selected data on the economies of Poland, Czech Republic, Hungary and Slovakia Country GDP value compared with former year Level of inflation GDP in 1995 1993 1994 1995 1993 1994 1995 (1989=100) Czech Repub. Hungary Poland Slovakia 0 - 2 4 - 4 2 2 4.5 0 3 1 5 1 21 23 33 23 10 22 27 16 10 20 22.5 10 85 86 100 84 Source: Economics of Transition, Volume 3 (4) 1995.

Table 3 The level of external debt in mln $US Year/Country Czech Repub. Hungary Poland Slovakia 1993 1994 1995 8496 10694 13654 24560 28251 33034 47246 42174 44557 3626 4310 4910 Source: Statistical Bulletin Poland-Czech Republic-Hungary-Slovakia. GUS 1995, Warsaw January 1996, p. 11

Table 4 The exchange rates of national currencies towards $US  Year/Country Czech Crone Hungar. Forint Polish Zloty Slovak Crone 1993 1994 1995 29.96 28.05 26.36 100.70 110.69 132.50 2.1344 2.4372 2.4330 33.20 31.28 29.54 Source: as above, p. 12.

Starting with the first group of indicators of the transition - some of them are already listed in Table 1 or above in Table 2 and they overlap: (1) level of inflation; (2) unemployment rate, tendencies on the labour market; rate of the GDP growth; changes in the foreign trade. Others include the increase of external turnover value, geographic reorientation of foreign trade, share of private sector, rate of creation of small and medium enterprises, changes in the structure of the economy. The third group of indicators embraces: (1) measures of stabilisation, a precondition for further improvement of competitiveness; (2) measures of changing competitiveness. The last group of indicators embraces (1) changes in the strategies of enterprises in consecutive stages of transformation which range from passive continuation, through struggle for survival, looking for financial sources for investments and introducing innovations; (2) changes in financial liquidity of companies; (3) innovativeness; (4) level of investments and general tendencies in this field; (5) structural and managerial changes; (6) ownership; (7) internationalisation. The measures of systemic changes listed above clearly show that macrostabilisation is a precondition for all other activities undertaken in the economy. Signals unleashed by macrostabilisation with its liberalisation of prices, foreign exchange, increased competition, open access to foreign currency, external markets etc... create a new environment for enterprises. Their reaction goes through typical stages from passiveness at the beginning, when the management waits for help from the administrative centre, to a more active approach, in which the management seeks solutions of their own. The interdependencies between signals and reactions on the micro-level in the first stages of transformation are rather clear. The strength of receiving the signals depends on reserves which are possessed by the enterprise in the period when the transformation starts. The bigger the reserves, the longer is the period of adjustments. A similar situation exists with the paternalistic activities from the administrative centre, which are aimed at helping the enterprise to survive. The best example of this specific situation can be given by the enterprises of the Polish arms industry, which have gone through the most difficult adjustment strategy. Military Sector In 1995, about 150 companies participated in the production of arms, military and quartermaster's equipment (so called "special production"). Most of the enterprises have played a role of supplier or cooperation partner with deliveries of general appropriation. The core of the military industry consists of 31 companies which are supervised by the Ministry of Industry and Trade (MIT). Those enterprises deal with 90% of all orders which are placed within the defence industry by the MoD and other contractors of special production. Alongside this number of enterprises, there are an additional 13 companies which are under the supervision of the MoD. They supply repair services to this specific market, specialising in repairs of military equipment. Orders of the MoD which deal with the goods of general purpose (or dual-use) are carried out by 23 additional enterprises. In 1989, 128 firms enjoyed the status of special production enterprises. Of that number, 39 companies were producing military equipment as a final product. The remaining 89 companies were focusing their activities on dual-use products or general use products, additionally supplying the market with services of different types, including reconditioning. Poland - like most remaining European countries - can not abandon totally production for military purposes, even though it does not always correspond with the criterion of economic effectiveness. There are several factors that influence possibilities of meeting the defence needs of the state: Poland, today, is not a member of political and military alliances. Under such circumstances, the national defence industry is the only reliable source of deliveries for the army in case of war or threat of an open conflict; the national arms industry is the best source, in economic terms, which is able to meet the needs of the army in supplies of technical equipment and overhaul services. Taking into account the fact that prices of the military equipment produced in Poland are in some cases two or three time lower than world prices, lack of a national industry would have been equivalent to a significant increase of costs for the maintenance of the military forces; the export of arms and military equipment - conditioned by sufficiently developed production capacities accompanied by scientific research centres - is a source of financing necessary imports of modern defence technology and repair services, as well as a wide range of materials and contemporary sub-assemblies, lack of which would totally preclude the production of some important military systems; special production is of a unique character and different than in other branches of manufacturing industries - it cannot be supplemented. This fact is decisive about the settlement of the defence industry in the defence system of the country and national economy. And this is so, despite the fact that the share of special industrial production of the country accounted in 1995 only for 0,4% of the total production output, and was nearly five times lower than in 1988 (1,9%) (13). The Polish arms industry manufactures or is able to manufacture several types of conventional weaponry and military equipment, such as: main battle tanks and armoured personnel carriers; some types of artillery systems, for instance 152 mm self-propelled howitzers and 23 mm anti-aircraft guns; multiple helicopters and light weight aircraft (training, training-combat, medical, transport); small ships (landing, mines countermeasures, reconnaissance, hydrographic) and fast patrol craft; anti-aircraft missile launcher and anti-tank guided missile launcher; small arms, ammunition (from 5,6 mm to 125 mm for tanks), explosives, mines, aerial bombs; several types of electronic equipment (for instance radio-stations, radio-location stations, signal equipment, telemeters, fire control systems). Since the end of the 1980s the scope of defence industry production (both types of deliveries, for military and civilian markets) has been shrinking in a systemic manner. Estimates in 1988 show, in 1995 constant prices, that the total value of production of the defence sector reached the level of 53,9 billion zloty. In 1990 the estimated value came down to 33,8 billion zloty, while in 1992 it reached the level of 13,1 billion zloty, expanding in 1995 to 23,0 billion zloty, which equals 43% of the value reached seven years earlier, when production was at its peak level. The value of special production has shrunk even on a larger scale, being estimated at 31 billion zloty in 1988. In 1990, the total value of production delivered for the national market and exports was estimated at 12 billion zloty, while in 1995 it reached the level of only 5,8 billion zloty. This means that in value terms the production was five times lower than in 1988. The share of utilisation of separate capacity, producing for military purposes, does not exceed 60-65% of total capacities. Nevertheless, it is much higher than in the case of capacity which is subordinated for special production. The latter amounts to only 20-25% of total capacities. Parallel with the decline of production of the arms industry, the level of employment in the sector was decreasing. In practice, this was equivalent to reductions in employment by half. In 1988, the sector employed 180.000 workers. In numerous cases lay-offs in the military sector have created serious social problems, particularly in towns which could not offer alternative source of employment (like Swidnik or Mielec). Changes concerning the scale of production and levels of employment were closely linked with the position of defence industry in the political and economic state system. Until 1989, the sector enjoyed a system of far reaching preferences and privileges (priorities in technical and raw materials supplies, priorities in access to low interest rate credits, taxation reductions, etc.) The whole set of preferences artificially increased the rentability of the companies and their competitiveness. At the beginning of the 1990's, the defence industry was incorporated into the main stream of the market economy. Today, the arms producing enterprises generally function under the same conditions as companies which supply the civilian sector. The fact that the above mentioned change of rules of the game was achieved without having to use special systemic shock-absorbers is one of the main reasons for the economic difficulties, which have been faced since the beginning of systemic transformations by enterprises engaged in military deliveries. This was done despite specific features that are characteristic of the whole sector, which limit the adaptation abilities, linked with the narrowly specialised and rigid structure of production factors. All in all, the military sector was the hardest hit part of the economy in the transition period. However, it would be difficult to invent a more effective tool for conversion and restructuring of the sector in difficult monetary conditions and the departure from command-distributing system towards a market driven economy. The facts mentioned above had a specific impact on conversion abilities. They also affected all assets of the enterprise that are one of the sources for financing the process of transition from military to civilian deliveries. It seems to be important to analyse why some of the enterprises were successful in their adjustments, while the others failed. There is no one answer to this question. Each case turns out to be very specific. Generally the background of the successful strategy can be ascribed to: good managerial qualities; success in finding a niche on the market for its products; good strategy in negotiating debt reductions; close cooperation with a strategic investor; effective restructuring; introduction of innovations; adjustments to new market demands. The state has tried to prepare a set of specific sector policies, but lack of financial sources prevented putting them into action. Moreover, regional policy, in the sense it exists in developed market economies, does not occur in Poland. There are several reasons behind that, including: (1) limited advancement of administration reform (decentralisation); (2) lack of financial sources; (3) the phase of preparation of regional needs in this specific field. Nevertheless, some steps on a regional level are undertaken with cooperation of central institutions and funds supplied by the European Union (like PHARE, STRUDER). They are mainly focused on abolishing constraints on the labour market. As military production is geographically concentrated constraints lead, in practice, towards high regional rates of unemployment in districts where military lay-offs were concentrated. Compensating programmes are focused on retraining, job creation and restructuring the enterprises. They are also focused on increasing the elasticity of the labour-force. Conclusions Poland has applied a market-driven strategy of downsizing its military industrial potential. It was painful but at the same time effective, which does not mean that the problem has been solved once and for all. Recent strikes by workers from the arms industry in Poland indicate that tensions still exist in the sector. Capacities still exceed demand and are being reduced gradually. A market driven strategy is not equivalent to total lack of intervention from the state, as such a solution would be utopian in the case of the arms industry or any other branches of heavy industry, especially in conditions of geographic concentration and high regional unemployment rates, as experienced in Poland. Nevertheless, intervention in this specific sector was considered an ultimate goal, forcing management to create new, horizontal ties with the centre to replace the old ones. The evident paradox is the fact that the administrative centre does not have sufficient money for the intervention, but it does not want to admit this fact publicly, as this would be equal to losing its administrative powers, or even worse: the main purpose of its existence. The centre does not see that under the new market conditions the role of central administration is transformed from administering and ruling activities towards coordination and informing functions. Without realising this, the centre pretends that it still has its former political powers. Overall, reactions of enterprises towards the macrostabilisation strategy were in most cases successful, which can be measured by the limited number of companies with financial problems. Nevertheless, the geographic concentration of military production has resulted in regional concentrations of unemployment. The remedy for this is focused on increasing elasticity of the labour market, regionally financed retraining of workers and restructuring of the enterprises. Poland today is facing similar problems to those of developed countries in NATO, namely unemployment, youth unemployment and the growing age of the population. The main difference is that the unemployed, enterprises and administration in the West are better equipped to cope with such problems, while in Poland they are at the stage of learning. The lessons come not from school but in the process of learning by doing, which takes time. Footnotes Kornai Janos, Droga do wolnej gospodarki, Fundacja Polska Praca, Warsaw 1991. Balcerowicz Leszek, Socialism, Capitalism, Transformation, Central European University Press 1995, Budapest. Leszek Balcerowicz is the author and executor of the the reform strategy in the first stages of its implementation. Balcerowicz Leszek, Lessons from Economic Transition in Central and Eastern Europe, in: Poland International Economic Report 1993/1994, Warsaw School of Economics 1994 pp.193-200. Wojtyna Andrzej, Neoliberalne poglady ekonomiczne w Polsce i ich wplyw na model transformacji. Ekonomista 1995, No 5-6, p. 723-744. Gomulka Stanislaw, Programy reform w Polsce i Rosji w latach 1990-1994 oraz rola Miedzynarodowego Funduszu Walutowego i Banku Swiatowego: zasady bledy i wyniki, Gospodarka i Przyszlosc nr 1/1995 s. 91-113. S. Gomulka from London School of Economics was the adviser of consecutive ministers of finances, who were responsible for the shape of reform in years 1989-95. Since November 1995 he is an adviser to the president of the Polish National Bank. Balcerowicz Leszek, Understanding Post-Communist Transition, Journal of Democracy, Vol 5, No 4, October 1994, pp. 75-89, The Johns Hopkins University Press. The Politics of Economic Adjustment. International Constraints, Distributive Conflicts, and the State, ed. S. Haggard and R.R. Kaufman, Princeton University Press, Princeton, New Yersey 1992. Bozyk Pawel, An Evolutionary Model of Transformation of External relations, No 114, World Economic Research Institute, October 1994, p. 1. Emerging Market Economies Report 1993. World Economic Forum, IMD, The World Competitiveness Series, 1993, p. 23. Economies of Transition, Volume 3 (4), 1995. Statistical Tables, p. 525. This problem has been discussed also by the author in the chapter "Integration and Competitiveness", from Poland: Towards Increased Competitiveness and Development, Warsaw, IRiSS Working Papers No 6/1995, pp. 126-147. Balcerowicz Leszek, Socialism Capitalism Transformation, CEUP, op. cit. p. 323. "Cash", 4 November 1994, "Nowe Zycie Gospodarcze", 17 September 1995.