marvin

Bus 487 Politics and Economics of Development







Country Report: Poland





April 24, 2000









Submitted by:

Sangram Bhosale

Craig Fowlkes

Jeffrey Gustafson

Christopher Kulp

Pete Rocha







1

TABLE OF CONTENTS







 Introduction



 Political and Economic Institutions



o Political

o Economic

 Current Account Deficit



 Infrastructure



 European Union Membership



 Conclusion



 Appendix – Bibliography



 Appendix – Exhibits



o Exhibit 1: Economic Indicators, 1991-1998

o Exhibit 2: GDP at Constant Prices, 1970-2002

o Exhibit 3: Top 10 Foreign Investor’s Confidence Index, January 2000

o Exhibit 4: Foreign Direct Investment, 1994-2000

o Exhibit 5: Administrative Reform in Poland

o Exhibit 6: Privatization through 1998

o Exhibit 7: Employment Structure, 1998-1999

o Exhibit 8: Business Entities, 1989-1997

o Exhibit 9: Indicators of Private Sector Dynamism, 1989-1998

o Exhibit 10: Foreign Direct Investment in Poland (as of Dec 13, 1999)

 Appendix – Contact List









2

Introduction



Based on the research that our group conducted prior to visiting Poland, combined with the



interviews and research that we conducted in the cities of Warsaw, Gdansk, Poznan, and Krakow, we are



bullish about Poland’s long-term economic prospects, albeit somewhat less bullish about Poland’s short and



medium-term economic prospects. At this point we recommend Poland to those investors considering



making a country bet.



In explaining our view we will focus on the four factors which we believe will determine the level of



success which is achieved. These four factors are 1) Political and Economic Institutions, 2) Current Account



Deficit, 3) Infrastructure and 4) impending European Union membership. In attempting to explain these



current factors and the issues facing Poland, it is tempting to focus only on recent developments, such as the



collapse of communism and institution of market reforms. However, our research and trip to Poland only



further reinforced that it is essential to look at Poland’s prospects through the prism of their history.



Because of the lack of natural boundaries on the east and west, Poland has been an inviting target for



neighboring and nearby countries and other invaders such as the Mongols and Teutonic Knights. Therefore,



Poland has been very much shaped by its tumultuous history of invasion and occupation by foreign powers,



particularly by their historically antagonistic neighbors to the east and west, Russia and Germany,



respectively. Poland was even partitioned out of existence by Russia, Prussia and Germany for a period of



130 years, ending at the conclusion of World War I.



Poland struggled to establish a democratic government for the next 20 years, until the most



devastating period in Polish history began on September 1, 1939. Germany invaded Poland on that day and



World War II began. Poland had a reputation as one of the most tolerant countries in Europe of Jews, thus



they had a populous and thriving Jewish community. During the period between 1939 and 1945, virtually all



of Poland’s 3 million Jews were annihilated by the Nazis, and a similar number of Polish gentiles perished in



the war. In all 6 million Poles died, a number equivalent to 15% of the population; the country’s population



is only now returning to pre-WWII population levels. Besides the horrendous loss of life, the war left most



of the country in ruins, inflicting both deep material and psychic scars.





3

Poland had a communist system forced upon them by the Soviet Union at the conclusion of WWII,



and it was a system that the majority of Poles never accepted as their own. In talks with older Poles, they



often told us of secretly listening to Radio Free Europe and Voice of America to obtain accurate news,



instead of the propaganda to which they were subjected. It was also interesting to hear that heroes at work or



in government were those who rebelled against the system and did things unconventionally and without



“following the book”. This rebellion against the communist system led to the Solidarity movement, and



despite considerable efforts by communist authorities to silence Solidarity and its leader, Lech Walesa, Poles



continued to press for greater freedoms and autonomy. This culminated in the sweeping victory by the



Solidarity movement over the Communist party in the 1989 elections, thus leading to the fall of communism



in Poland.



From Poland’s early history, they have been influenced more by the West than their Slavic neighbors



of Eastern Orthodox heritage. This westward orientation, reflected in Poland’s status as the easternmost



outpost of Catholic tradition, helps to explain Poland’s tenacious sense of belonging to the West. This



identification with the West and strong national view of themselves as Poles has made their transition to



democracy and capitalism easier. The Polish people were much more willing to do away with the



communist system that was forced upon them, and they have been less averse to the economic shock therapy



which has been needed since 1989.







Political and Economic Institutions



Poland has experienced remarkable success over the last decade with most key economic indicators



(GDP, inflation, unemployment, and investment) showing significant improvement during this period



(Exhibit 1). In fact, Poland’s GDP in 1999 was approximately twenty percent higher than in 1989 (Exhibit



2). This is approximately a forty percent increase over 1992-1993, the low point in the aftermath of the



stabilization program. Poland’s performance is particularly impressive when one considers that most central



European states are just returning to 1989 levels of economic output while others, such as Ukraine and



Russia, have seen their economies shrink by two-thirds and one half respectively.





4

Three factors contributed to this success. First, Poland undertook a macroeconomic stabilization



program. Second, Poland implemented a series of reforms to privatize the economy. Third, Poland



established an institutional infrastructure to support these reforms. The institutionalization of economic and



political processes, in such areas as administrative responsibility, financial reform, property rights, rule of



law and corporate governance, were crucial in establishing a solid economic and political foundation. The



establishment of this framework - by which government, financial institutions, private enterprise and



individuals interact as institutions in a transparent manner – was a key factor making reform sustainable.



While these institutions played a significant role in Poland’s recent history, they will matter (perhaps more)



in safeguarding Poland’s future. The key to future success lies in how robust the framework is and how well



the institutions (political, financial and legal) regulate action in the face of potential new shocks.



Political



In terms of political institutions, Poland has created an enviable reputation as a stable political



environment. For example, while the immediate outcome of the impending elections remains unclear, no



one doubts that there will be a stable transition of power, as there has been since 1989. Additionally, even if



the AWS-UW coalition were to lose the upcoming elections to SLD (as many expect to happen), the general



consensus is that there would not be any significant change in economic policy. Confidence in Poland’s



political stability manifests itself in extremely high investor confidence and high levels of foreign direct



investment. For example, Poland placed fifth on A.T. Kearney’s Investor Confidence Index for January



2000 (Exhibit 3). Furthermore, foreign investors have poured approximately $30 billion into the country



since 1989, with nearly 80% of the total coming after 1996 (Exhibit 4).



An additional reform introduced in 1999 was the restructuring of local government. The number of



voivodships was reduced from 49 to 16 (Exhibit 5). In addition, the number of levels of local government



increased to three: voivodships (regions) poviats (counties) and gminas (communes). In addition to this



structural reform, there was a decentralization of responsibilities to local governments, particularly at the



level of poviat and gmina, in order to bring decision-making closer to those impacted by public decisions.



Each level has been provided with well-defined responsibilities.





5

No matter how sanguine the analysis of the current political situation there remain stiff challenges to



efficient rule. First, the central government must balance increasing local budget autonomy against fiscal



consolidation to prevent excessive deficits (i.e. soft budget constraints). Currently, local governments are



given little autonomy over tax policies and must rely on transfers from the central government to finance



their budgets in order to maintain fiscal restraint. For example, Poland had a general budget deficit of 3.5%



of GDP in 1999, up from 2.9% in 1997 and 2.5% in 1998. The increase resulted from costs incurred by the



social security system, arrears from state enterprises on social security contributions and taxes as well as



increased local government spending. Consequently, the budgetary system must be more transparent to



eliminate the problem of hiding the deficit outside the scope of the central government’s budget.



Second, the government must address systemic issues to alleviate regional inequalities. Currently,



the central government transfers wealth between various voivodships. However, significant discrepancies



exist in areas such as unemployment and investment. For example, while unemployment runs at



approximately 2-3% in the major cities, it can run as high as 30% in the less economically developed



regions. Moreover, there are significant differences between investments in these regions. Political reform



to maintain some social safety net is needed to ensure that Poland does not become any more divided than it



already is.



Economic



Success in developing the economic system is dependent upon the evolution of sound capital and



credit markets. There are three primary benefits to a solid banking system. First, it facilitates the efficient



allocation of capital. Second, it allows government to implement stabilizing policy via the central bank,



which controls the money supply. Third, it provides the central bank with a robust mechanism to supervise



the commercial banking system. These needs have spurred the reforms of a number of institutions in order to



modernize the Polish financial industry. Among the reforms were the Banking Act (1989), the National



Bank of Poland (NBP) Act (1989), the creation of the Ministry of Finance (1990), the Trading in Securities



and Trust Funds Act (1991) and the creation of the Securities Commission (1991). The Banking Act (1994),









6

the NBP Act (1994) and other subsequent acts were enacted to bring Poland into compliance with



international standards.



The banking system was a mono-bank model prior to 1989, with the NBP acting as both the central



bank and as the commercial bank in a single-tier system. The Banking Act and the NBP Act scrapped



Poland’s centralized banking system and set in place a new two-tier system. The NBP abandoned its former



function as a credit and deposit bank for companies or households and assumed a supervisory role over



banking operations, including such functions as regulating monetary and foreign exchange rate policies,



monitoring the balance of payments and representing Poland’s interests in international banking circles. In



the second-tier, nine banks were formed to service the commercial segment that the NBP had served prior to



1989. With the implementation of this new banking system, the Polish government created the Ministry of



Finance to provide regulatory oversight.



To create sound capital and credit markets, the Polish government implemented the Trading in



Securities and Trust Funds Act to govern the public issuance and secondary trading of securities on the stock



exchange and over-the-counter (OTC) markets. The primary institution of this new capital market was the



Warsaw Stock Exchange. Moreover, the Securities Commission was established to regulate the public



capital market, monitor new issuance of stock and license brokerage houses.



By reducing distortions and inefficiencies in the financial industry, capital has increasingly flowed to



more efficient uses, allowing the development of private enterprise. Under the privatization program, Poland



has achieved a monumental restructuring of its economy (Exhibit 6). The impact was profound: as of 1999,



approximately 70% of Poland’s GDP is produced by the private sector in comparison to 1989, when the



public sector employed nearly 75% of the workforce (Exhibit 7). Moreover, small business entrepreneurship



was a significant driver of the economy creating nearly 700,000 jobs between 1989 and 1991 (Exhibit 8).



This has continued with almost another million jobs between 1995 and 1998. Finally, we can see the impact



of the private sector on the Polish economy examining in detail changes in the private sectors share of output



and employment by sector (Exhibit 9).









7

One significant area requiring improvement is the system of financial intermediation. Poland must



increase the pool of funds available through intermediate savings and investment. Surprisingly few Poles,



approximately 15-20%, have checking or savings accounts, compared with 80-85% in the EU. In short,



Poland still functions in many respects as a cash economy. The consequence of this shortcoming is a smaller



pool of capital for business growth. It is estimated that approximately, 70% of companies currently use



internal funds for growth, with 20% obtaining capital from Banks and 10% from the stock market. This can



be a potential constraint on future economic activity, particularly for entrepreneurial ventures, which have



been such a strong engine of growth for the country.



Legal institutions are paramount in supporting economic activity, as clear legal regulations are a



cornerstone of sophisticated financial markets. These regulations are of little assurance without enforcement.



Therefore, regulations must be accompanied by a legal infrastructure to ensure transparency, security and



transferability to guard against expropriation. This is especially true in the case of shareholder rights and the



concept of corporate governance. Indirect evidence of increasing investor confidence in legal reforms can be



found in the composition of shareholders in the Warsaw Stock market. During the initial stages of



privatization, an estimated 90% of company shares were held by individual investors. As of 1999 that



number had fallen to 40% individual investors, with the balance comprised of 40% foreign investors and



20% institutional investors.



In sum, Poland has done the heavy lifting of setting the major pieces of their political, financial and



legal framework in place. Now it must continue to refine the framework and maintain this stable institutional



infrastructure that is vital to its increasingly free-market activities.







Current Account Deficit



One cannot evaluate Poland’s near future without evaluating the relatively large Current Account



deficit. Viewed simply the current accout deficit shows that Polish consumers are purchasing more imported



goods and services than they are selling. This results in fewer funds going to Polish firms for investment,



and less tax revenue going to the government. This is particularly difficult for state run businesses, which





8

continue to act as a drain on the government’s treasury. In addition, Officials at the International Monetary



Fund (IMF) have warned Poland that failure to resolve the deficit “leaves the country vulnerable to closer



scrutiny by financial markets and the consequential risk of a severe currency crisis” (Europe Review World



of Information, 11/11/99).



Poland’s account deficit challenge over the next 5 years will be four-fold. First, it must attempt to



maintain a level of foreign investment high enough to counteract the immediate account deficit. This might



prove difficult, as inventor confidence must be sustained until the government begins to actively manage the



account deficit.



Second Poland must make stronger efforts to educate their population on economic issues. In our



discussions with the Ministry of Economics, officials stressed that it was growing increasingly difficult to



impose the necessary reforms, including those aimed at solving the account deficit problem. The



population’s general lack of understanding of the issues at hand was one of the primary obstacles in



furthering the reforms. The officials expressed regret that “as tough as the last reforms were (the shock



therapy reforms of the early 80’s), we now realize that we should have gone farther while we had the



people’s full support”.



A third issue facing the Polish government is focusing efforts on attracting specific types of foreign



investment. Jozef Olesky, a former Left Democratic Alliance Prime Minister recently said, ”Only 20 per



cent of foreign investment is high-technology. The rest is Coca Cola and consumer products.” (FT-London,



8/25/99) While this is somewhat overstated (Exhibit 10), increasing the quality of foreign investment to



include higher economic value added industries will enable Poland to increase exports. Recent efforts to



encourage FDI, such as reducing the corporate tax rate from 40% to 30%, are a step in the right direction.



Finally, Poland must continue to exercise discipline in its fiscal policies. In the last few months, the



ruling coalition has backed off of its goal to balance the budget by this year. One additional factor which



could provide relief would be the timely privatization sale of the 100 remaining large businesses. This would



generate over $5B (Economist, 3/4/00) in revenues for the government, while eliminating a large burden



from the governments treasury.





9

Infrastructure



If we are to explain why Poland has “succeeded” where others have failed in the wake of post-



communism, we must pay attention not only to policy but to factors that allowed policy to be executed. The



institutions that exist constitute a nation’s economic infrastructure, which has a critical impact either



facilitating or limiting production. In general, rich economies have greater resources per capita – more



capital, both human and non-human, and better technology connecting the two. Nations which develop an



economic infrastructure that favors private production over state intervention will be more prosperous.



A new economic infrastructure is being created by technological revolution. As this infrastructure



develops, measured output and productivity gains should result in wealth gains. However, the barriers to



adopting the new technologies can be formidable. Poland has 15 telephone lines per 100 persons,



significantly lower than the EU average of about 48. Since the early 1990’s, Poland has undertaken



initiatives to improve its telecommunication infrastructure and to foster the development of an emerging



Information Technology industry. Previous large investments and privatization initiatives, including the



privatization of telecom monopoly Telekomunickacja Polska, TPSA, (35% stake was sold to French and



Italian firms in Q1, 2000) have improved communications with the rest of the world. However, local



communication systems are still based on old technologies, although reliability has improved substantially.



Thus, while firms operating in countries such as the US are experiencing tremendous productivity gains



through the use of Internet and intranet, firms operating in Poland are currently at a disadvantage. As telecom



infrastructure continues to improve, the coupling of educated professionals with growth in the use of the



Internet will provide an opportunity for commercial use of IT technology that can be a source of leading-



edge technology and jobs for Poland. Thus, tracking the strategic investments that Poland makes in



improving its technology infrastructure can be a strong predictor of future economic performance.



Despite progress in some areas, such as telecommunications, infrastructure bottlenecks persist in



transportation, causing congestion which may inhibit growth. This is particularly conspicuous in the case of



the 5,400 miles of Poland’s main road network, which is quantitatively and qualitatively lacking (European



Commission, 1998). Poland can remain internationally competitive to the extent that it can promote the





10

transport of goods as efficiently and smoothly as possible. There are two reasons for the degradation in



Poland’s roadways. First, the decade after communist rule ended has seen steady economic growth that has



attracted increasing Foreign Direct Investment (FDI). However, this economic success has created a winner’s



curse – the more investment attracted, the more traffic was created on Poland’s weak highway system. The



traffic and poor roads mean trucks average 28mph in Poland compared with 50mph in neighboring Germany.



Second, over the past decade as obstacles to owning a car during the communist years were eliminated,



foreign automakers flooded the formerly closed market and increased the number of Polish-registered cars to



14 million (up by 50% since 1989). The communists had not expected to reach until this number of cars



until the second decade of the 21st century. According to the Transportation Ministry, 37% of Poland’s roads



need immediate repair and an additional 42% require work within three years. Improving the roads to EU



Standards would cost the equivalent of $23 billion, or roughly 60% of this years national GDP.



The East-West Polish highway is a crucial pipeline between the European Union and Eastern



Europe, constituting 80% of the traffic passing through Poland. This traffic can be expected to increase as the



Russian and other East European economies improve. Additionally, two-thirds of Poland’s foreign trade is



with the European Union, which continues to experience robust growth. This points to a continued increase



in transportation bottlenecks, which threaten to choke off further foreign investment. However, after years of



political wrangling and failed attempts at private highway financing, there is hope for a long-term solution to



this problem. The government earlier this year finally undertook financing to begin work on modernizing the



two main highways that connect its East-West and North-South borders.



In light of its poor road conditions, Poland is considering multimodal transportation systems which



includes reorganization of its struggling national railroad, including partial privatization. Rail freight tonnage



has dropped by half since the mid-eighties, due to intense competition from motor carriers and the sharp



decline in rail cargo traffic between Poland and the former Soviet Union States. However, the Polish officials



have recently given permission to several international private firms to use its tracks, which should help the



railroad industry come out of the red.









11

Transportation infrastructure is not only hampering international investment but is also slowing



internal development. In the context of geographical labor mobility, this may have implications as regards



the speed with which structural reforms can be implemented. Poland’s population is spread out among its



major cities, and poor road conditions and inadequate local train service in conjunction with inadequate local



telephone have created pockets of uneven development. This has made it difficult for businesses to achieve



economies of scale through expansion throughout Poland.







European Union Membership



The future of Poland will in large part be dictated by its relationship with Western Europe. As of



1998, trade with the countries of the European Union accounted for 70% of total trade, while FDI from EU



countries represented 60% of all investments. Clearly the EU is crucial for the continuing economic vitality



of Poland. Poland will attempt to cement these relationships by entering the European Union in 2002.



Accession into the Union is critical for three reasons beyond the overt economics mentioned above. First,



joining the European Union has tremendous symbolic value. Second, reforms related to EU membership



could be vital to long-term economic prospects. Third, the European Union may prove to be a key source of



funding for critical investment projects in Poland.



On a continent that was bifurcated for half a century, the terms East and West contain much more



meaning than geographical location. Instead, in the minds of most Poles East means backward regimes,



economic stagnation, and the past, whereas the West stands for progress and growing prospects for the



future. Membership in the European Union is a stamp of validation that demonstrates the rightful place of



Poland in Europe. Though the official line in Poland is that EU accession is on track for 2002, most



knowledgeable persons see that date as overly optimistic. A more likely scenario is that Poland will be ready



for the EU closer to 2005, but does this discrepancy in timing matter? It might in the sense that public



opinion polls show that only a slim majority (approximately 55%) of Poles actually favors membership in the



Union. If Poland is not accepted in the first round and if others such as Hungary are, this could cause



resentment among the population. A popular referendum might become much less likely and Poland might





12

find itself out of the EU for some time. This could have both internally and externally deleterious effects.



Domestically those who have been sacrificing in expectation that better days with the EU were ahead may



become unsettled and voice their discontent. This in turn might lead to more extremist national parties which



thus far have not been a factor on Poland’s political scene. Eventually reforms may be curtailed as a result.



From a foreign perspective, investor confidence might be shaken by delayed admittance into the EU. Capital



might seek other new EU states that have been approved and the wellspring of funds could go dry, affecting



development in the near future. Thus the symbolism of the EU could have very real impacts on the Polish



economy.



A second factor related to EU accession is adoption of European standards. As a common economic



union, EU member states must be in compliance across a spectrum of issues. Areas such as pollution control



and agricultural policy must come online as a requisite to joining the Union. Much of the current discussion



between Poland and the EU is focused on setting dates to accomplish some of these goals. Assuming EU



membership for Poland, the government would be bound to carry out these reforms, unpopular though they



may be. This could be a boon to Poland’s long-term viability. Whereas under normal circumstance



politicians might skirt the issues to keep constituents happy, being co-opted into the EU would provide the



necessary incentive for difficult reforms. Domestic politicians could claim that their “hands are tied” and



therefore be freer to make tough choices unfettered by the normal constraints. Such actions could cut years



off the reform process and stimulate long-term growth all the more effectively. Therefore inclusion in the



European Union could contain salubrious “second order” effects.



A third possible impact of impending EU membership is access to EU purses. As we have seen in



the cases of Greece and Portugal, the European Union can act as a redistribution mechanism through



structural funds. This could vastly aid Poland in development of things such as a national highway system



and internal communications market. This is especially important given future budget constraints that are



likely to arise from the growing current account deficit. If the Polish government is to bring the current



account under control stricter budgetary measure will need to be enacted. This hardly goes hand in hand



with expensive undertakings needed in both physical infrastructure and social spending. The EU could





13

provide a way to both get the cake and eat it thereby allowing for continued development without



exacerbating current budgetary concerns.



The question of European Union membership looms large for the robustness of Poland’s future.



Current economic ties with the West are vital and membership in the EU could cement these bonds.



Exclusion from the EU in the first round of expansion could foster an anti-EU attitude that could spell



trouble for quite some time. Additionally, EU membership could provide the genesis for much need reform



by allowing politicians a buffer from domestic pressures. Finally the European Union has the potential to



provide funding for critical projects. This would allow the Polish government to meet their fiscal



responsibilities without abandoning progress. Therefore the EU figures to play a prominent role in the future



of Polish economic development.







Scenarios



In analyzing Poland’s future prospects, we have chosen to outline two extremes in outcome, a worst



case and best case scenario. These two opposite points on a continuum of outcomes are based on our most



reasonable evaluation of all factors. We are not assuming what we feel would be unreasonable scenarios in



which Poland hits the lotto (infrastructure financing is approved and begun immediately, exports increase



dramatically, imports fall sharply, the current account deficit disappears, etc.) or falls off the cliff (rampant



rise of nationalism, armed conflict with Russia, economy falls into depression, etc.). Our scenarios cover the



most likely negative scenario and most likely rosy scenario.



Under the negative scenario, Poland would continue to make limited progress on improving its



roadways and rail infrastructure. This could lead to increasing difficulty and cost in transportation of goods



manufactured in Poland, which would make Polish products less competitive in world markets and would



eventually lead to a decrease in the level of Polish exports. Assuming Polish demand for imported goods



continued to remain strong, this combination of rising imports and declining exports would only serve to



further exacerbate Poland’s current account deficit. A further increase in the trade deficit could cause a drop



in foreign investor confidence. Accompanying this drop in confidence would be a drop in foreign direct





14

investment, which is currently supporting the current account deficit. In order to make Poland more



appealing to these foreign investors, Polish monetary policy would likely raise interest rates. The effect



would be twofold. First, it would encourage foreign capital to flow back into Poland, and second, it would



make Polish exports more appealing while reducing the demand for more costly imports.



These shocks to the economy would likely lead to a recession with reduced tax revenues. Polish



standards of living would fall to reconcile the current account deficit. Inflationary pressures would act to



undermine people living on fixed incomes, and if increasing social security costs were not addressed and



local governments tried to spend their way out of this recession, this would further increase Poland’s budget



deficit. At this time the political will needed to enact difficult reforms (agricultural, environmental, etc.) and



achieve EU membership would likely not exist. Thus Poland’s prospects for joining the EU would be



slowed or pushed back indefinitely.



As noted the “best case” scenario is not a virtual utopia where the streets of Warsaw are lined with



gold, but rather a confluence of positive outcomes that increase Poland’s lot. As one would expect, various



political and economic factors are intertwined so that outlining a positive case for one variable often has



powerful spillover effects in other areas.



The first effect in the domino trail of triumphs would be the accession of Poland to the European



Union in 2002. As discussed in that section of the paper, EU entrance would lead to reform of troubled



sectors such as agriculture and also provide funds for improvement of infrastructure. This in turn would



relieve the pressure of fiscal constraints that could choke off near-term development. The EU also provides a



tariff free zone that would boost Poland’s exports. As Polish labor is cheaper than that of Western Europe



Polish goods will have a competitive advantage and we would likely see a reduction in the current account



deficit as more Polish goods are sold abroad. Finally, EU acceptance would provide a final measure of



transparency for foreign investors. This would eliminate legal barriers providing greater confidence for



foreign capital. This move would allow the development of larger pools of capital enabling the development



of higher value-added industries.









15

Internal reform of state industry is also a key in terms of maximizing economic prosperity in Poland.



The final government holds in mining and manufacturing would be loosened so that gradual divestiture on



the money losing areas would take place. In order for this not to cause asymmetric shocks development in



other industries will have to absorb displaced workers. As demand in new industries are on the rise



employment patterns will shift gradually thereby avoiding large periods of recession.



Critical in all this is the continued pattern of government stability. As we have detailed change in



ruling political coalition has yet to produce deviations from the reform path. This must continue to be true.



The moderate political climate has meant that key economic opposing parties do not use issues as political



fodder and continuous reform has been possible. To enable such a productive environment this political



climate must persist. This will also provide continuity in government policy which is critical to the success



of Poland’s embryonic institutions. As these institutions fortify over time they will become a much-needed



rudder to steady the course of economic development. However, at present many institutions are still



developing and will need a steady environment to become robust. If political stability remains then the long-



term viability of institutions will increase and the overall conditions will improve.



These positive developments may or may not occur simultaneously. Any single event played out in



this fashion would benefit the Polish situation. One positive development may help reinforce others (e.g.



structural funds helping pave transition of state industries) and therefore the first positive step could lead to a



better climate overall.







Conclusion



Given our two divergent scenarios, we feel it is necessary to spell out what we feel to be the most



likely outcome. To restate our opening we are optimistic on Poland’s long-term prospects. The actions



undertaken by Poland in response to the end of the Communist era are a standard to which emerging market



countries should adhere. The original “shock therapy” was instrumental in creating an environment in which



private enterprise could flourish. Deregulation of most state industries was accomplished rapidly as



evidenced by the overhaul of the banking industry. This in turn created an environment which allowed





16

private investment to expand rapidly. These reforms also signaled to foreign investors that Poland was



dedicated to capitalist principles, which was key in attracting FDI from across the globe. This coupled with



political stability made Poland a rising star in the 1990’s.



For all of Poland’s success there were certainly shortcomings that manifest themselves today.



Agriculture, much of it subsistence farming, remains untouched by reform. Pensions and other social



spending issues have only recently been addressed, and the impacts have yet to be calculated. Compounding



these difficulties is the fact the current account deficit will impose unwanted fiscal restraints on Poland, if not



corrected soon. In other words not all the tough choices were made, and with elections pending over the next



18 months it is unlikely that major reform will be undertaken at a time when upsetting constituencies could



have major political ramifications.



These factors combine to create a scenario in which the next 2-4 year period could be difficult for the



Poles. A slight recession could evolve from the current account deficit and further harm already depressed



regions in the northeast of Poland, where investment and development are already scarce. This in turn could



create greater political tensions. These problems would be further exacerbated by non-accession into the



European Union. However, the reforms already taken have provided a strong base for further growth. FDI



in factories and production facilities is long-term and is unlikely to wither during a short downturn. The



legacy of political stability is a credential that draws foreign investors and will likely remain in force, given



the fact that extremist parties do not garner more than 5% of the vote in national elections. Therefore,



despite possible complications in the near future, Poland’s long-term prospects appear bright. These



prospects should not be dimmed by the inevitable growing pains associated with further reform. Though



there are tough choices still to be made, the most difficult ones have been taken and led to Poland’s current



success, which we imagine promulgating future prosperity in the years to come.









17

18