By Kamil Tchorek
Despite political chaos, Poland’s economy remains buoyant. But the government’s approach to economic policy continues to cause alarm
Poland’s right-wing government is so busy starting fights that it has left the economy almost entirely untouched. This is no bad thing, say top economists, because the country is doing well on its own, thanks to two years of EU membership and 18 years of post-communist reform.
“The government are populists rather than economic liberals, and we’re better off without their involvement,” says Janusz Jankowiak, chief economist for the country’s leading trade and industry lobby group, the Polish Business Roundtable (PRB). “The economy is good because the government doesn’t have time to interfere,” he says.
Inflation remains relatively low by regional standards, estimated at 2.3% year-on-year in April 2007, but this is within touching distance of the National Bank of Poland (NBP) target of 2.5%. In response, the central bank raised its benchmark interest rate to 4.25% in April 2007, from 4.0%.
The strength of the economy is impressive, given the economy may grow about 6% this year, according to finance minister Zyta Gilowska’s latest forecast. Foreign direct investment was over $10 billion in 2006 – a record. Imports rose by 23%, while exports rose by 22.6%. Unemployment is high at about 15%, as expected but has fallen from around 20% in just two years. Urban house prices continue an unprecedented boom on increased supply of mortgage credit. Inflation has fallen to around 1.5%, and, as expected, new central bank (NBP) governor Slawomir Skrzypek raised interest rates on April 25, by 25 basis points, the first hike in almost three years.
This is a stunning economic performance, given the confounding stance of the ruling Law and Justice (PiS) party, elected in late 2005. The government’s economic policy remains unclear, while its promises have set off alarm bells: the government wants voters to “enjoy the fruits of economic growth”, and hopes to reduce income tax and national insurance payments; at the same time, there is a pledge to increase state pension payouts – a policy mix that has disturbed many analysts. “The government wants to increase disposable income for populist reasons rather than economic reasons,” says PRB’s Jankowiak. “They would create inflationary pressure and increase the deficit even further. They obviously don’t care about EC deadlines for fiscal tightening.”
The budget deficit is currently 4% of gross domestic product. Poland is required by the EU accession treaty to adopt the euro, though a budget deficit of less than 3% is a prerequisite. EU reporting standards, coming into force this month, will stop Poland’s past practice of declaring private pension payments as national revenue. This will increase the deficit figure to almost 6%. Moreover, the ruling coalition is planning new items of spending that could amount to more than 3% of GDP, according to Raffaella Tenconi, CEE economist at Dresdner Kleinwort.
The government’s big economic achievement was securing about $80 billion of EU money for the 2007-13 period. It has also learned to direct EU structural funds. Elsewhere it has failed. There is a plan to reduce the time it takes to open a business from 31 days to three days, but the move has never come. The country still has an inflexible labour code, an inefficient legal system and suffers from corruption, despite an anti-communist crackdown meant to combat graft.
Key question
“Economic growth is high but the question is – why isn’t it higher?” asks Ryszard Petru, chief economist at Bank BPH in Warsaw, who advised former finance minister and NBP chief Leszek Balcerowicz. “Other accession states are doing even better, and there really should be more fiscal reform and economic legislation.”
According to Grzegorz Kolodoko, a former finance minister and architect of Poland’s neoliberal reforms, the main problem is the current government’s “ridiculous, ill-advised, backward-looking, policies. The Polish problem is much more a political one than an economic one,” he tells Emerging Markets.
Poland’s productivity rate is far lower than it should be, at around 50% of the EU average, Petru says. Economic growth could fulfil its potential if the government took quick, practical steps to cut welfare spending further and reduce the shadow economy. Poland’s fast reduction in unemployment is firstly thanks to around one million Poles emigrating to find work, particularly to the UK and Ireland, since EU accession. Emigrants contribute more to their new countries of residence than to Poland through remittances, Petru also says.
Standard & Poor’s expects Poland’s real GDP growth to slow gradually to 5.0% in 2010, from 6.6% this year. Average consumer price inflation is expected to peak at 2.6% in 2008, before falling steadily to 2.5% in 2010. However, this depends on whether the new NBP governor Slawomir Skrzypek, who is a former deputy mayor of Warsaw and close to the ruling party, pushes monetary policy in a more dovish direction. After the rate hike in April 2007, Skrzypek was insistent that investors should not assume this was the start of an extended round of monetary tightening. This created an apparent tension with the NBP’s official statement warning that its inflation target could be breached in early 2008.
“Skrzypek will do everything to raise rates as late as possible, but luckily there are nine people on the Monetary Policy Council who can outvote him,” PRB’s Jankowiak says. “Skrzypek isn’t a professional economist but a politician,” adds Jankowiak, who met Skrzypek and finance minister Zyta Gilowska shortly before the April interest rate decision. This is perhaps harsh, as Skrzypek has qualifications in economics and finance, and has spent part of his career working in the Polish banking and insurance sectors. Nevertheless, his focus was more on the regulatory side, and he has to date declined one-to-one interviews with foreign journalists on the grounds that he needs to familiarize himself with monetary policy issues.
Average consumer price inflation is expected to peak at 2.7% in 2008 before steadily falling to 2.4% by 2011. This is provided NBP’s Skrzypek, dubbed a government stooge by his critics, presides over a round of rational interest rate hikes at Poland’s Monetary Policy Council, the forum of central bank decision-makers.
In February, Skrzypek said Poland may adopt the euro in 2012 or 2013, the first time he gave a forecast. He declined to be interviewed for this article, his press team citing inexperience with the press.
Tales of the distasteful
Poland’s demagogic tone is set by its leadership. The president, Lech Kaczynski, began his term by picking fights about Second World War history with big trade partners Germany and Russia. The EU warned him Poland faces sanctions if he acts on his wish to reinstitute the death penalty. One senior diplomat told Emerging Markets that Kaczynski is laughed at in Brussels because he so rarely shows up, frequently to Poland’s loss.
Despite promising the electorate he wouldn’t do so, the president ensured his identical twin brother, Jaroslaw Kaczynski, became prime minister. The latter heads up PiS in coalition with the far-right League of Polish Families (LPR) and a rabble-rousing party known as Self-Defence (Samoobrona).
The leader of Samoobrona has been accused of demanding sex in return for promoting his female staff. LPR’s All Poland Youth wing were photographed making Nazi salutes. In April, a group of PiS MPs split from the party because they were unable to preserve Poland’s anti-abortion law, already the strictest in Europe, by writing it into the constitution. The zloty fell slightly on the risk of snap elections, but has recovered to its strongest level for almost 18 months after the NBP hiked interest rates.
Due to squabbling within the coalition since it began 18 months ago, Poland has had five finance ministers, two foreign ministers, two interior ministers, two treasury ministers, two defence ministers and two prime ministers. Members of the coalition are prone to clumsy if not barbaric remarks. Comments about women’s rights, Jews, homosexuals and Tesco, Poland’s biggest British investor, have sparked international rows. Surveys show that most Poles were outraged too. Meanwhile, the government has put inordinate energy into a witch-hunt reminiscent of McCarthyism.
In October, the government denounced Poland’s secret intelligence agency (WSI) as a communist fifth column and disbanded it. In February, names of secret agents were published on the government’s website, and several diplomats had to return from their cover jobs in foreign embassies. A law introduced last month forces about 700,000 board members, journalists, politicians and academics to lustrate, or “ritually purify” themselves, by stating whether or not they were communist-era informers. The Association of Stock Exchange Issuers said some listed companies may lose competent executives because of the law. The clergy are exempt.
Scars of recent history
This agitated atmosphere is a direct result of Poland’s recent past. The country was first in central and eastern Europe to shrug off communism in 1989. It did so after decades of relatively peaceful resistance inspired by the Catholic Church. This ended in compromise between the government and opposition, in the manner of South Africa. Despite the political miracle, some Poles would have preferred revolution and retribution.
After 1989, many overt communists as well as covert informants kept their jobs in politics and industry. Most rebranded themselves as the New Left, committed to market economics but sympathetic to the victims of transition. When the new Solidarity government crumbled due to lack of administrative experience, ex-communists (the SLD) were elected to take their place. Before they were ousted, the SLD were on track to achieve a target to cut spending by around $17 billion by 2007. For example, the SLD reduced the number of people on disability benefit to about 250,000 from two million. State pensions were also cut. Consequently, Poland’s right is now profiting from the reforms of the left.
But the SLD were extraordinarily corrupt, often because of their privileged access to information. One of the many scandals involved former communist secret agents, Russian oilmen and stupendous bribes that may have swayed the outcome of an SLD privatization. The electorate abandoned the party and turned to the Kaczynskis’ spotless background and thirst for vengeance.
No panic
“The whole region has gone through such radical change that there is crisis everywhere, so it’s important not to exaggerate Poland’s troubles,” says Witold Orlowski, chief economic adviser at PricewaterhouseCoopers in Warsaw, who advised the last president, Aleksander Kwasniewski. “We could be using our growth better; we could have budget surplus or euro entry by 2009, but there are no catastrophes ahead.” Orlowski sees minimal risk of a market crash or zloty devaluation.
“Foreign investors look at the fundamentals of EU membership, the funding programme and the big single market, rather than political groupings and the budget deficit,” Orlowski also says.
Before the general elections in late 2005, PiS pledged an alliance with the liberal Civic Platform (PO), who were the favourite of international business, wanted speedy euro convergence and a flat tax of 15%. PO led in the polls until the final hour, when PiS turned on them and convinced poorer voters that flat taxes reduce disposable income. PO is now in opposition.
The biggest shake-up to Poland’s economy could happen if current political instability prompts early elections. Polls show the likely winner would be PO. But the party has failed to woo Poland’s huge agricultural constituency and would still have to find a coalition partner, probably PiS, as the other parties are more ideologically extreme. One way or another, PiS look set to influence the economy for several years.
On April 18, UEFA said the 2012 European Championships soccer tournament will be co-hosted by Poland. Economists are as excited as the politicians. The expected E80 million of required sports, transportation and tourism investment will come from existing development budgets rather than a new source of funding. But UEFA, rather than the EU, may have imposed the first deadline this under-performing and opportunistic government really cares about.