Polish Economy

POLISH ECONOMY

Despite a few worries Poland remains Central Europe’s locomotive economy. Its GDP growth (4.8% in 1999), huge inward investments, rising industrial output and productivity, coupled with the entrepreneurial spirit of its young business community remind many of the boom years in the Far East.

All is not perfect of course. Current account shortfall is high and growing and budget deficit is on the rise. In addition unemployment is refusing to budge and inflation, although lower than before, does not fall fast enough from its 10% perch (February 2000).

On the reform front large privatisation programme is being prepared, covering many of the politically sensitive areas of the economy and the political debate is heating up.

The optimism about Polish economy has been endorsed in the recent Economist survey of CEO’s of the world’s largest companies who named Poland as the fifth most attractive investment target (after US, UK, Brazil and China).

Manufacturing output continues to rise. It’s currently 6.8 % up on the year ago and in March it was 11.5% higher than in February. Competitiveness was further strengthened by 10% fall of unit labour cost - measured in US dollars - in contrast to the previous years when it ran ahead of currency adjustments on the back of rising wages.

Aside from its own merits Poland’s economy has begun benefiting from the move away from the Far East by significant numbers of Western European operators – including large Scandinavian retailers. As a result Polish textile industry – on its knees a few years ago - is now ‘fully booked’ with orders.

Inward investments continue at $ 10-12 billion per annum. Retailing has been the fastest rising target industry with about $ 2 bn committed for 2000. This includes construction of shopping malls, hypermarkets, multiplex cinemas and sophisticated leisure centres. French and German operators, closely followed by Scandinavians do most of the running. British Tesco is catching up strongly with five hypermarket centres scheduled for this year. On a larger scale, just about every major car manufacturer now boasts Polish production capacity.

Privatisation, which draws in large amounts of additional foreign capital, will encompass all politically sensitive sectors this year including steel, railways, energy (already begun) and elements of the health service. To smooth public’s feathers 7% of all shares will be distributed to citizens.

Much is being made locally of up-grading Poland’s competitiveness (to 40th from 44th) by the new survey of the International Institute for Management Development in Lausanne. Russia remains bottom and the USA top. The commentary said that while the economy was developing satisfactorily the country continued being let down by its lack of care for the infrastructure and a large current account deficit. Inflation is also a worry (‘stubbornly high’). The infrastructure includes pace of introduction of the new economy. Internet access is the main negative factor. Poland offers world’s second highest cost of access after Japan. In contrast Finland (3rd) and Sweden promoted themselves on their new economy sophistication.

To help the economic growth the legislature introduced reaganomics to taxation with both personal and corporation taxes pegged to sliding scales for years to come.

Moves to further spur the economic growth are necessary. Budget deficit now hovers at 4.4% of GDP and the current account is $ 12.4 bn in the red. Exports resolutely remain behind imports and there are no signs of improvements on the horizon.

Low exports are result of a combination of factors. Bulk of the inward investments was made to gain local market share, as Poland is one of the largest markets in Europe. Producers of consumer goods were particularly active as were carmakers. Poles’ insatiable appetite for all their wares proved them right. Poland is the largest European market for Daewoo and many other mostly brown goods brands. At the same time Poland’s traditional exports markets – those to the East - collapsed with gusto. The businesses, which produce for these markets, are by and large unable to refocus on the west due to low quality and sophistication of their output. With no immediate large up-turn visible the situation remains bleak.

If unchecked, this situation may result in currency collapse and a substantial slowdown of inward investment with potentially serious, damaging short/medium-term consequences.

Corruption in economic life also hovers near the top of everyone’s attention but its wings are progressively clipped. National Audit Office (a very powerful body in Poland) paid a lot of attention to the problem recently, as did country’s popular president. Structural reforms within state administration are bearing fruit and removal of layers of state control of the economy will also diminish ability of officials to extract their pieces of silver.

Further pressure on nation’s finances is applied by the unemployment with 13.9% of the workforce claiming benefit in March 2000 (up from 12.1% in 1999). Official figures hide substantial grey economy element, which in finance ministry view support two million workers.

In recognition of these shortfalls Poland’s central bank allowed national currency (Zloty) to float freely and will now point its artillery on inflation.

To balance these specific threats to continuing prosperity one ought to notice that the hard currency reserves are burgeoning, comfortably exceeding current account deficit, and the national debt at 45% of GDP puts a few large EU economies in shame.

For all these reasons the focus on speedy EU accession is strong. Despite worries that EU Commission may slow the enlargement process, negotiations proceed apace and the main sticking points are nearing resolution. These are agricultural reform and free movement of labour. Although Polish agricultural sector is bloated (21% derive income from toiling the land) it hasn’t proved as big a barrier as it was feared. Large subsistence farming sector will be excluded from EU mechanisms as it does not produce for the marketplace and reforms of the remainder are proceeding. The biggest challenge will lie in adjusting health and hygiene standards to those required for exports to the EU.

EU will also demand quarantine on free labour movement but its duration should be acceptable to Poles. Germany for example will start experiencing labour shortages from 2011.

Overall it is expected that barring intra-EU infighting the country could be admitted in 2003, most likely together with Hungary and the Czech Republic. In many respects it is a very bold move by the Commission as the differences of living standards of the new members will be the greatest of all the new entries so far. Poland’s GDP per capita is now 15% that of Germany’s while the last ‘poor’ entrant – Portugal - recorded 40% at its entry point.

Overall Poland’s economic story since democratic transformation has been that of unending success helped by structural aid from the west but delivered and underpinned by the attitudes and entrepreneurial spirit of the Poles who unlike most others in the region grabbed their chance with both hands and held onto it steadily. Although many challenges lie ahead the pace of the catch-up and the quality of Polish effort guarantees them regaining their place amongst Europe’s leading economies.