The sweeping win by the Civic Platform party (PO) in Poland’s general elections last year seemed to portend so much, in a move to a smarter, more market-oriented economy. But the promised changes haven’t happened. Why has the pace of reform been so slow?
For most of Poland’s business community, urban population and young people, there was a sense of relief when the market-oriented PO party ousted the right-wing Law & Justice (PiS) party in a comprehensive election victory last October.
Out went PiS prime minister Jaroslaw Kaczynski – the identical twin of president Lech Kaczynski – and in came Donald Tusk, who took office on November 16. Tusk, who polled more than 534,000 votes, achieved the best individual result in the electoral history of Poland’s third republic.
Out too went the government in-fighting that characterized the previous coalition of PiS nationalists, populists (the Self-Defence party) and neo-fascists (the League of Polish Families).
For many Poles there was profound satisfaction that the government was no longer going to squabble about religious or sexual issues but instead was going to address the country’s fiscal and economic challenges.
Economic surprise
These challenges are not immediately evident. On balance, the Polish economy continues to surprise everyone pleasantly – including the Poles themselves.
GDP grew by 6.5% last year and will average 4.9% this year according to the IMF’s latest forecast. This was only a small downgrade from 5% – in response to global credit concerns – suggesting that, for the first time in centuries, Poland may be a safe haven for investors rather than a danger zone.
The finance ministry forecasts 5.5% growth this year, followed by 5.0% in 2009. The zloty is strong – around a six-year high against the euro, almost a 12-year high against the pound and the strongest it has ever been against the dollar.
Both exports and imports are surging, and wages continue to soar. Anecdotal evidence suggests emigrant Poles are returning from countries such as the UK to find a better life in their country of birth. Polish unemployment has almost halved to 11% in just four years of EU membership.
Also during this time, urban real estate has more than doubled in price – based on increased supply of mortgage credit, rather than the foreign speculation seen in Spain and Bulgaria. Polish banks have minimal exposure to US subprime debt, and although house price growth stopped around six months ago, there are no signs so far of the bursting bubble that some analysts had feared.
All in all, the benefits of Poland’s convergence with the EU appear to be offsetting the effect of the crisis in world finance.
But challenges do exist. “The economy should quickly be deregulated, we need much less bureaucracy, and we need to change the pension system,” says Ryszard Petru, chief economist at Bank BPH in Warsaw.
Yet, politically, nothing much seems to be happening. Despite grand promises, the Tusk government and its minor coalition partner, the Peasant Party (PSL), have not attempted a single piece of radical reform since the two took office.
Moreover, Poland has specific risks and problems that need to be dealt with fast – the management of which will be the real test of the Tusk administration. “Nothing much has happened. We expected more; acceleration of reform is needed,” says Petru, who advised former finance minister and central bank chief Leszek Balcerowicz.
Reforms needed
As in several post-communist EU states facing similar issues, many Poles have the right to retire in their mid-50s creating a large burden on public finances. The PO had been expected to change this and motivate people to work longer, but instead has given in to successive demands by doctors, nurses and border guards for better conditions.
Meanwhile, the overhaul of Poland’s notorious road network and new stadium construction for the Euro 2012 football championships has barely started. Europe’s governing football body, UEFA, has threatened to move the tournament to Italy.
Deputy finance minister Stanislaw Gomulka, a London School of Economics lecturer, resigned on April 16, seemingly in protest at the slow pace of reform. “There’s huge pressure from politicians to talk a lot about issues they regard as ‘good’ politically,” Gomulka said two days after his resignation. “Ministers and politicians weren’t interested in discussing how to monitor increases in expenditure or what reforms need to be implemented to slow down that increase.”
And yet, finance minister Jacek Rostowski – who was born and raised in London, and has been tipped to succeed Tusk as prime minister – reiterated on April 24 that Poland is in a fit enough state to join ERM2 at some stage in 2009. He said he could make a more accurate forecast “by mid-year” when there will be greater visibility of the global financial crisis.
Janusz Jankowiak, chief economist for the country’s leading trade and industry lobby group, the Polish Business Roundtable (PRB), has an explanation: “Tusk wants to run for president in two years’ time. He might not want to make radical reforms early on that will lose him votes,” Jankowiak tells Emerging Markets.
President Lech Kaczynski has already tried to block PO legislation by threatening his veto, but he backed down when faced with a counter-threat of another snap general election. The problem could be overcome if Kaczynski is voted out in the 2010 presidential election and replaced by the PO’s candidate.
“The government faces sensitive social issues such as the change of the retirement age, so it needs time to prepare public opinion before it introduces such measures,” Jankowiak says. “But time for reform is running out because growth is slowing and inflation is rising.” Jankowiak is another advocate of immediate labour and pension reform, including cuts to social taxes, to encourage people to stay in work.
Both Jankowiak and BPH’s Petru added a caveat that the change in government isn’t purely cosmetic: good relations with the European Commission have enabled the PO to see the end of the Excessive Deficit Procedure, the EU’s method of encouraging budget discipline among member states. The government has also put Poland back on a market-oriented path, listing around 700 state-owned companies earmarked for privatization, including LOT Polish airlines, the national carrier.
“I’m happy the government has changed because we don’t have a bad press any more – we talk to Brussels and we’re back in Europe,” says Petru. “Before, we had a finance minister who couldn’t speak English and didn’t even go to Brussels. Now, if Tusk achieves even a third of the reforms he’s promised, I’ll be happy.”