Thursday, March 13, 2008


NB This piece largely written by the excellent but anonymous Economist stringer in Warsaw

Poland's economy

Work in progress

Mar 13th 2008 | WARSAW
From The Economist print edition

The Polish government has a long way to go to get the economy in shape

HIGH hopes, fine words and modest results. That is the story so far of Poland's newish centre-right government, in office since November, as it tries to sort out the country's deep-rooted economic problems in the face of a global slowdown. The previous government, an oddball coalition, frittered away the chances offered by rapid GDP growth (6.5% in 2007) to restructure public finances. Although strong growth in investment and consumption means that the economy is still looking good, competitiveness is suffering as wages grow faster than productivity and the currency appreciates.

The British-born finance minister, Jacek Rostowski, has ambitious-sounding plans to cut the budget deficit until it reaches 1% of GDP in 2011, thus shrinking public debt and preparing for possible entry into the euro area in 2012. But he needs convincing details to match his bold aims. At least Poland is now explicitly aiming to join the euro; the previous government's approach was “wait and see”. Personal income tax will be lower and flatter next year; other taxes will come down too. An economist who follows Poland closely says that the policy goals are “well thought out”, but adds that most reforms are still plans, often vague ones, not reality.

The urgent need is to raise productivity by liberalising the labour market, privatising state-owned enterprises and cutting red tape. Poland's bureaucracy has won a shaming 74th place in a World Bank ranking, behind even Bulgaria and Romania, the EU's newest and poorest members. A parliamentary committee is to examine superfluous regulation. Though little has changed so far, Henryka Bochniarz, head of the private employers' body, praises the government's “real determination” .

The prime minister, Donald Tusk, seems to lack grit. He has caved in to demands for higher wages by border guards and doctors; now the nurses are clamorous. The numbers of public employees able to retire in their 50s have only been shaved. Poland's labour-force participation rate is dire, at around 54%, ten points below the EU average. The government has pledged to boost legal employment by making it easier to set up a business. But it is still far easier in Britain, notes a Polish-based British businessman.

The government flinches at unpopular spending cuts, reflecting feelings in a reform-weary population. The president, Lech Kaczynski, is the twin brother of the former prime minister. He has an eye on re-election in 2010 and he wields a veto over new laws. Without costly deals with the opposition, Mr Tusk lacks the parliamentary majority to overrule him.

Bad relations between prime minister and president have spilled into a row about the central bank, one of the few public institutions trusted by most Poles. The bank's governor is an old friend of Mr Kaczynski's who supports the previous government's doveish monetary policy. That has alarmed inflation hawks (including the former governor) and caused conflict with the bank committee that sets interest rates. In January both deputy governors resigned. One, Krzysztof Rybinski, says that the dispute-ridden atmosphere at the bank has been “demotivating” for all the staff. Mr Tusk has so far refused to approve one of the governor's nominees as deputy. As inflation accelerates past 4%, the uncertainty matters. Higher prices mean higher public-sector wages, further undermining the planned fiscal tightening.

The new Polish government's heart may be in the right place. But it will need more than that if it is to put new Europe's largest economy on track.

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