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AM: Same old story for Poland as economic woes continue

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  • AM: Same old story for Poland as economic woes continue

    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.
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