Sunday Business Post, Ireland
Oct 24 2004

Same old story for Poland as economic woes continue

24/10/04 00:00

By Constantin Gurdgiev
Recently, while boarding a Dublin flight in Venice, I found myself
behind a group of Poles at the non-EU passport counter in the
airport.

A yuppie couple was having a heated debate.

“We should be in the other line; we are in Europe now,” argued the
boyfriend, pointing to the counter for the EU citizens departing the
Schengen zone.

“This one is shorter,” was his girlfriend’s curt response.

Six months after the pomp on the Phoenix Park lawn, when eight
eastern European flags were surrendered to the line of Irish guards,
Poland still remains in no-man’s land – with one foot on each side of
the EU’s paper curtain.

Any traveller landing in Warsaw today would agree that the EU’s
‘Great Hope’ never grew out of themid-1990s.

Warsaw is still full of grey Soviet-style buildings, a few
haphazardly-built modern high rises and shabby stores selling cheap
goods. Compared to its eastern rival, Moscow, it appears to be more
of a provincial capital than a European one.

The majority of experts on eastern Europe agree. According to Nouvel
Observateur magazine, after a short period of rapid economic growth
in the first half of the 1990s, Polish society came to a grinding
halt by the end of the century.

Two heavy anchors continue to hold Poland in its “post-colonial”
slumber – a preoccupation with its nationhood at the crossroads
between Russia and Europe, and a lack of will to implement structural
reforms.

Many Poles still blame Russia for their current state. Yet, 15 years
after the collapse of the Warsaw Pact, Estonia, the Czech Republic,
Slovenia and Lithuania have implemented significant economic reforms,
bringing them in line with the EU 15 in terms of productivity and
income.

Even Russia is booming, at an average 7.1 per cent growth per annum
over the last five years.

Meanwhile, Poland remains mired in nationalist politics and socialist
economics. Since 1990, its economy has grown at the annual rate of
2.6 per cent.

At the same time, budget deficits routinely reach 6 or 7 per cent of
GDP, while government debt grew to the current 51 per cent of GDP.
According to a ‘New Europe’ report that was published last month, it
will take 60 years for Poland to reach the EU15 average per capita
income.

Political instability remains a persistent problem – the latest
change of government, in May, was marred by a corruption scandal
involving the country’s prime minister.

Radical nationalist parties on both sides of the political spectrum
enjoy growing popularity, just as they did during the EU membership
referendum that was won with the help of a direct appeal from the
Vatican.

An unreformed court system – ranked on the same level as Burkina
Faso’s – means that commercial disputes are settled within 1,004 days
on average.

Not surprisingly, endemic corruption has meant that 32.7 per cent of
Polish firms are involved in bribery, compared to 29.2 per cent in
Russia and 22.7 per cent for the eastern European accession states.

In terms of business fears of organised crime, Poland fell from 74th
to 96th place worldwide this year, according to a report by the World
Economic Forum.

The main causes of economic stagnation in Poland are labour market
rigidity and lack of reforms. In the early 1990s, unemployment
reached 40 per cent, prompting the government to introduce drastic
policies to reduce labour force participation rates.

Incentives for early retirement, plus generous disability and
unemployment benefits, have led to a situation where the average
working wage buys the same standard of living as benefits to the
unemployed.

The resulting fiscal deficits have translated into rising taxation
and growing debt, while unemployment has returned, following an
initial drop, rising from 15 per cent in 1995 to 20 per cent last
year.

At the same time, while its competitors among the accession states
lowered their personal income tax (PIT), corporate taxes (CIT) and
Vat, Poland retained its high income tax structure of 1991, and
reduced Vat exemptions.

Compared with Slovakia’s 19 per cent flat rate of tax for all
categories of income, Poland has a maximum rate of 40 per cent on
PIT, 27 per cent on CIT (reduced to 19 per cent this year) and 22 per
cent on Vat.

The cost of the Polish welfare state is staggering: roughly 48 per
cent of the population employed in the private sector supports an
army of unemployed, retired and state employees. Moreover, large
numbers of young Poles are moving west in search of jobs.

Perverse incentives in the labour market, coupled with a halt to
privatisation reforms, have spelt disaster for foreign direct
investment. Over the last three years, investment in Poland has
shrunk by 5.5 per cent per annum – a decline matched only by Ukraine
and Macedonia.

At the same time, the pace of privatisation has slowed down, leaving
the state in control of over 25 per cent of the economy. This is the
highest degree of state interference amongst the accession states.

In recent years, Poland has lost out on such large-scale projects as
expansions by Peugeot, Hyundai and Toyota, which have gone instead to
the more investment-friendly Slovakia. Foreign investors are weary of
Poland’s unstable political climate, its low labour productivity and
its over-regulated markets.

Trade unions, with a penchant for militancy, protect high
minimum-wage laws and draconian restrictions on firing workers. Even
accounting for Poland’s EU membership, the country’s investment risk
is on par with Russia’s.

Not surprisingly, in terms of quality of business environment, Poland
falls below Russia and has the second lowest score of all accession
states, according to the European Bank for Reconstruction and
Development.

In terms of economic freedom, Poland ranks below even Armenia and
Albania as the 56th best economy in the world.

The most worrisome sign is that Poland’s reforms did not accelerate
in advance of the accession, or after it. The WEF has ranked Poland
as 60th in terms of competitiveness, below unstable and corrupt
states such as Trinidad and Tobago, El Salvador, Uruguay and Panama.

Instead, the political will and the economic necessity to adopt the
required changes have been reduced by Poland’s entry into the EU.
Right now, there is a serious threat that generous EU funding flows
and CAP subsidies will insulate Polish domestic producers from the
pressures of international competition.

As a large economy operating within a growing EU, the country needs
radical domestic reforms, considerably more privatisation and a
rethink of its social welfare policy.

As an agrarian economy with more than 20 per cent of the population
employed in agriculture, Poland needs to move in the direction of New
Zealand, with pro-market reforms in this sector. But, given the
current political climate in Warsaw, none of this is likely to happen
any time soon.

Constantin Gurdgiev is a lecturer in economics at Trinity College
Dublin and a director of the Open Republic Institute, which describes
itself as Ireland’s only independent non-government policy
organisation.