Thursday, May 11, 2006

Poland survey chapter 4: Economy

So much to do

May 11th 2006
From The Economist print edition

From the economy to the legal system, a lot needs to be put right

SO WHERE does the new administration go from here? Provided that external conditions remain favourable, things could still turn out well, with the government settling in and controversy dying down. But there are dangers. One is Law and Justice's insatiable appetite for a scrap, which might lead to a serious conflict with the European Union, or a jealous putsch against Mr Marcinkiewicz.

Another danger is that the government's remarkable lack of co-ordination might get in the way of reform. A few weeks ago Mr Olex-Szczytowski and his colleagues at the defence ministry were surprised to hear Mr Marcinkiewicz announce the abolition of the military property agency on television. That plan, drafted by a junior official, had reached the prime minister's desk without brushing reality. No sooner was the plan announced than it was forgotten.

But the greatest danger is of an external economic shock. If the government were to alarm foreign investors (for example by ruling out joining the euro, rather than just making sceptical noises), that could prompt a collapse in the stockmarket and the currency. The resulting economic slowdown, in turn, would restrict government spending, making it impossible to oil the political wheels.

For the government's critics, such an economic disaster would be the best medicine possible. A run on the zloty, soaring inflation and sagging growth (preferably all three) would be an appropriate penalty for what they see as the innumerate populism of the Kaczynskis and their allies.

But for the moment none of this seems to be happening. The central government budget deficit in 2005 was 27.5 billion zloty, a mere 2.8% of GDP. The 2006 budget (inherited from the previous government and only slightly tweaked since) provides for just a small rise in the deficit, to 30.6 billion zloty. Growth in 2005 was only 3.2%, but increased to an estimated 5.2% at an annual rate in the first quarter of this year and is expected to reach 4.4% for the year as a whole. Average inflation in 2005 was 2.2%; real wages rose by just 1.7%.

Most importantly, exports are booming. The Economist Intelligence Unit, a sister organisation of The Economist, thinks that they will keep growing by more than 8% annually for at least the next four years. True, imports are rising sharply too, but that includes lots of capital goods needed for modernising the economy. The current-account deficit is a very manageable $4.8 billion, or 1.6% of GDP. Net foreign direct investment last year reached $7.5 billion, roughly what you would expect for a post-communist country of Poland's size.

These numbers are encouraging, but they are not great. Many of Poland's neighbours are doing better. The Czech Republic notched up annual growth of 6.9% at the end of 2005. Lithuania, on which the Poles tend to look down, reached 8.8% and Estonia 11.1%. Admittedly small countries may find it easier to put their economies right, and Poland is getting richer quicker than other big post-communist countries such as Romania and Ukraine that have remained outside the EU. But then Poland is much closer to the rich part of Europe, and its workers are better educated. The fairest comparison is with the average for the eight post-communist countries that have joined the EU (see chart 3). Poland scores poorly here, as it does on a wider comparison with mostly much poorer countries across the region (see chart 4).

This is particularly true for employment. In its advice to the new government, the International Monetary Fund said that the labour market needed urgent attention. It called on the government to take advantage of “unusually favourable” conditions to deal with fiscal and structural weaknesses and raise private investment and job creation.

Easier said than done. Mr Marcinkiewicz's office is strikingly underpowered, both in people and in clout. The best advertisement for the government are the ministries that are quietly getting on with piecemeal reform, particularly things that do not require legislation. “We are the government, so we don't have much to do with politics,” says a senior prime ministerial adviser, in all seriousness.

But not every problem can be tackled that way. Privatisation, for example, is not being pursued with sufficient vigour. Electricity privatisation has been stymied by pressure from the trade unions, and the petrochemical industry is off limits. The same is probably true for the post office and the railway infrastructure. But that still leaves plenty of opportunities elsewhere, not just for selling the minority stakes that the state still holds in scores of firms, but for disposing of wholly state-owned companies too. Pawel Szalamacha, the dynamic deputy privatisation minister, says that Ruch, the sleepy state-owned chain of newspaper kiosks, will be restructured and sold this summer. “It's a post-socialist corporate bureaucracy in the worst sense of the word,” he says. At the military property agency, Mr Olex-Szczytowski plans to raise more than 2 billion zloty by 2009 from selling surplus property, and to cut procurement costs by a tenth through centralised purchasing and online auctions.

Tax reform is high on the list of the government's priorities. From 2009, all but the richest Poles will pay a flat-rate income tax of 18%. The government is also promising indexation of tax thresholds and speedy cuts in social charges to make labour cheaper. At a tax conference organised in Warsaw in March by the American Chambers of Commerce in central Europe, there was no shortage of complaints from the Polish-based companies. But Miroslaw Barszcz, the deputy finance minister in charge of taxation, was given an appreciative reception. A former tax partner at the Warsaw office of Baker & McKenzie, an international law firm, he batted back even the most technical questions, and then started handing out dollops of good news for companies: VAT returns, for example, would in future need to be filed only quarterly, not monthly. A tax-reform package at the end of March went even further, allowing most companies to file their corporate tax returns only once a year.

Law and order is also receiving plenty of attention. The government is setting up a powerful new central anti-corruption office with hundreds of new staff, which has pitched the justice minister, Zbigniew Ziobro, into a furious confrontation with the country's legal establishment. Critics say that the anti-corruption office will just create an extra bureaucratic layer in the already top-heavy criminal-justice system. With half a dozen agencies already entitled to bug potential wrongdoers, why does Poland need another one?

“Current structures are ineffective, so we must create a new one,” says Mr Marcinkiewicz. “We need lawyers and economists working there, and above all people not connected with communist Poland.” The main concern for Mr Ziobro, an energetic 35-year-old lawyer, is to speed up and clean up the justice system. Getting a court judgment against a defaulting debtor, for example, on average takes 850 days. “It should take 30 days, not nearly three years,” says Mr Ziobro. He wants courts to work round the clock to deal with hooligans, and to raise productivity by computerising paperwork. By the end of the year every judge will have a clerk to deal with timetabling, witness summonses and research. Mr Ziobro thinks that “judges should spend their time on adjudication, not bureaucracy.”

Poland has 5,000 advocates and 20,000 solicitors, but 12m cases pending. The answer is more lawyers. The biggest reform has been to break the profession's cartel on admission. Mr Ziobro reckons that 90% of Polish legal professionals are the children or grandchildren of lawyers. But now anyone with a law degree and three years of related experience can take the exams. He is also increasing the numbers of examining magistrates by half and reforming the ineffective bailiff system.

It is hard to overstate the importance of all this. For example, the constipated legal system is a big brake on bank lending to small business, which is unusually low in Poland. If collecting bad debts is slow and costly, only the biggest and best customers are likely to get loans.

The danger is that by attacking on all fronts, even a minister as energetic as Mr Ziobro will lose focus. He burns with enthusiasm to clean up corruption in the police, increase salaries and put more officers on the beat; he wants to tackle organised crime properly; to crack down on bribe-taking; to make the bankruptcy procedures faster and simpler; to encourage dispute resolution outside the courtroom; and, overall, “not just to catch up on the European level, but exceed it”. All that would be a tall order even with the support of the legal profession. Given its active resistance, he will find it harder still.

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