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

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

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

Between 1978 and 1982, the NMP of Poland declined by 24 percent, and industrial production declined by 13.4 percent. The decline in production was followed by prolonged stagnation. Recognizing a strong grass-roots resistance to the existing system, the new government of Stanislaw Kania, who had replaced Edward Gierek, established the Commission for Economic Reform in late 1980. This body presented a weakened version of drastic reforms recommended by the independent Polish Economic Society, an advisory board of economists formed earlier in 1980. Implemented hastily in mid-1981, the reforms nominally removed the PZPR from day-to-day economic management and gave the enterprises responsibility for their own financial condition and for planning. These decentralizing reforms were distorted by the constraints of martial law that had been imposed nationally in December 1981, however, and they failed to improve the economic situation (see The Jaruzelski 3f6 i Interlude , ch. 1). Internally inconsistent and insufficiently far-reaching, the reforms reduced central administrative control without establishing any of the fundamentals of an alternative market system. Thus, in effect, the economy operated from 1981 to 1989 in a systemic vacuum.

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

Data as of October 1992