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26.09.03, 06:25
Poland's economic challenge
Poland: Not the promising economy it once was
How things change.
A couple of years ago, after one of the most vigorous reform programmes in
the post-communist world, the Polish economy was the darling of the
investment community.
Key statistics, 2000
Population: 38.6 million
GDP per head: $4,080
Inflation: 10.1%
Foreign investment since 1991: $36bn
Exchange rate: Zl6.23:£1
Now, growth and investment are slumping, unemployment is on the rise, and
the mood is distinctly sour.
Poland's right-of-centre government was obliterated in Sunday's general
election - and the wilting economy was one of the main reasons why.
But with an incoming administration composed almost entirely of ex-
communists, what chance does the economy have of picking up?
Tiger no more
Not long ago, Poland was being referred to as Eastern Europe's "tiger"
economy.
How much will the election change?
Polish gross domestic product (GDP) grew by 7% in 1997, and by an annual 4-
5% over the following three years.
But that boom has fizzled out.
This year, GDP growth looks like being in the 1.5-2.0% range, and could well
come in much lower.
Last year, foreign direct investment was a record $13bn - easily the
strongest performance in the East European region.
This year, there is unlikely to be more than half that amount, and the
previous rush into the Warsaw stock market has all-but dried up, too.
At the same time, unemployment - a particularly sticky political issue in
Poland - is surging: the rate was 16% in August, up from 13.9% a year
earlier.
Government promises...
Part of this is the natural result of the slowdown among Poland's trading
partners, especially Germany, and of catastrophic floods that swept the
country last month.
Polish GDP growth
1996: 6%
1997: 6.8%
1998: 4.8%
1999: 4.1%
2000: 4.0%
2001 forecast: 1.5-2.0%
But the government of prime minister Jerzy Buzek, which was elected amid
such hopes in 1997, did not exactly help matters.
As a nominally right-wing coalition, Mr Buzek's government promised to keep
economic reform on the boil.
And since the Solidarity trade union was a component of the coalition,
Polish workers felt they were likely to get a good deal.
... but fails to deliver
But the loose alliance of governing parties spent more time squabbling than
pushing through reform.
The government has fallen out of favour
In the most recent example, Finance Minister Jaroslaw Bauc was sacked at the
end of August, after proposing an unpalatable but necessary austerity
package.
"There is an atmosphere where if someone sticks their head above the
parapet, it gets shot off," says Andrew Chilvers, editor of the Warsaw
Business Journal.
This has led to an almost complete halt in economic reform, especially
privatisation, which has always been controversial.
Two days before the election, the privatisation agency said it had blocked
the most keenly-awaited sale to date, that of oil monolith PKN Orlen.
Fundamentally troubled
The government's inaction may not be entirely to blame for Poland's economic
problems, but it has made it a scapegoat for the current situation.
Jerzy Buzek: Beset by squabbling partners
And it has made Poles and foreign investors look harder at the less-than-
pretty economic fundamentals.
Poland, although heavily industrialised in parts, is still a largely
agrarian economy.
Farming accounts for one-quarter of employment, but only around 5% of
economic output.
Average monthly wages, at less than 2,200 zloty (£353; $518), are below
those in neighbouring countries such as the Czech Republic and Hungary - and
that figure disguises deep inequalities between the metropolitan elite and
the rural poor.
Bad for business
Although foreign investment has helped boost some corporate sectors -
notably retailing - much of Polish industry remains inefficient and deeply
uncompetitive.
The communist era saddled Poland with some of the heaviest industry in
Eastern Europe, particularly steel and coal, which have little chance of
forging a role in the wider European economy.
And looming over everything is the massive Polish bureaucracy, one of the
least efficient civil services in Central Europe.
All these issues act as barriers to Poland's eventual ambition of joining
the European Union.
While political pressure for EU membership, both from inside and outside the
country, remains strong, the length of the process means that popular
enthusiasm is waning, with only a slim majority in favour of joining.
Left bounces back
So what chance is there of a turnaround?
Leszek Miller: No longer such an apparatchik
On the face of it, very little.
The incoming government, the Democratic Left Alliance (SLD) of Leszek
Miller, comprises almost entirely ex-communists.
Mr Miller himself is a former secretary of the central committee of the
Polish communist party.
In recent days, the SLD has made a series of troubling statements, in
particular a promise to re-examine the paltry number of privatisation deals
conducted under Mr Buzek's administration.
Investor cheer
But in a reverse of the usual political rules, most investors are looking
forward to the arrival of a left-wing government.
Aleksander Kwasniewski: new face of Polish communism
That is partly because it will be strong: the SLD should have a clear
majority on its own, rather than relying on a fissiparous coalition to get
its measures through parliament.
But it is also because the SLD is far slicker than most ex-communist parties
around Eastern Europe.
Poland's president, Aleksander Kwasniewski, is an SLD member and was a
minister in the dying days of the communist regime, but is highly regarded
for his smooth presentation skills and liberal policies.
The last period of SLD rule, during the mid-1990s, was considerably brisker
in pursuit of reform than Mr Buzek's government.
Jobs for the boys
On 19 September Mr Miller cheered investors by naming Marek Belka, a US-
trained economist, as his finance minister.
Mr Belka has already drawn up an austerity programme that goes beyond that
proposed by the unfortunate Mr Bauc.
And while the government will be changing, some of the most important
economic policy makers will stay on - notably central bank governor Leszek
Balcerowicz who, as finance minister, steered Poland through the radical
reforms of the early 1990s.
As Poland's economy faces its first slump since the Balcerowicz years, more
radical reforms may well be ahead.
