Poland

POLAND Rank: 87 Regional Rank: 35 of 41 oland’s economy is 58.8 percent free, according to our 2007 assessment, which makes it the world’s 87th freest economy. Its overall score is 2.8 percentage points lower than last year, partially reflecting new methodological detail. Poland is ranked 35th out of 41 countries in the European region, and its overall score is much lower than the regional average. P The economy is 58.8% free 100 80 @ @ @@ @ @ @ @ @ @ @@ @ @ @ @@ @ @ @ @ @@ @@ @ @@ @ @ @ @ @ @ Poland scores well in trade freedom and monetary freedom. The average tariff rate is low, but non-tariff barriers include distortionary EU subsidies of agricultural and other goods. Inflation is also low. Poland has a fairly high top personal income tax rate, but its corporate rate is relatively low. Poland faces several economic challenges, as do other formerly Communist nations, but is progressing. Freedom from government, freedom from corruption, and labor freedom remain weak. The court system, though fairly reliable, is prone to inefficiency and sudden changes in laws or regulations. Foreign investment is generally welcome, but foreign ownership of companies in certain industries is limited. The financial sector, while subject to government interference, is well-regarded overall. BACKGROUND: Poland’s struggle for freedom from the Soviet Union ended in 1990, with Solidarity sweeping parliament and the presidency. A pioneer among countries making the transition from Communism to free markets, Poland has managed to tame inflation and achieve rapid real income growth and is now a member of the European Union. Many problems, like high unemployment, remain. The country continues to work on further economic liberalization through a robust but chaotic democratic process. Key Polish exports include foodstuffs, chemicals, steel, and transport equipment. 60 40 Europe Average = 67.5 World Average = 60.6 20 0 1995 2007 QUICK FACTS Population: 38.2 million GDP (PPP): $495.4 billion 5.3% growth in 2004 3.2% 5-yr. comp. ann. growth $12,974 per capita Unemployment: 19.6% Inflation (CPI): 3.6% FDI (net inflow): $5.4 billion Official Development Assistance: Multilateral: $1.1 billion Bilateral: $433 million (1% from the U.S.) External Debt: $99.2 billion Exports: $95.3 billion Primarily machinery, transport equipment, intermediate and miscellaneous manufactured goods, food, live animals Imports: $99.9 billion Primarily machinery, transport equipment, intermediate manufactured goods, chemicals, minerals, fuels, lubricants, related materials How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index. 313 POLAND’S TEN ECONOMIC FREEDOMS Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 56.1 76.6 79.1 55.3 80.3 50 50 50 34 56.2 0 utility rates and sets official prices for pharmaceutical and medical materials, taxi services, and any other goods or services as required to maintain the proper functioning of the economy. Consequently, an additional 10 percent is deducted from Poland’s monetary freedom score to account for these policies. L L L L L L L L L L 50 100 INVESTMENT FREEDOM — 50% Polish law allows for 100 percent foreign ownership of domestic businesses but sets ceilings on the share of foreign ownership in various industries. Foreign ownership of land is restricted. Both residents and non-residents may hold foreign exchange accounts, subject to certain restrictions, including government approval for resident accounts held abroad. Payments, transactions, and transfers over a specified amount must be conducted through a domestic bank. Capital transactions with nations outside the EU are subject to restrictions and government approval. 100 = most free, = world average BUSINESS FREEDOM — 56.1% Starting a business takes an average of 31 days, compared to the world average of 48 days. To maximize entrepreneurship and job creation, it should be easier to start a company. Obtaining a business license and closing a business can be difficult, and regulations are sometimes inconsistent. The government has put more emphasis on reducing bureaucratic barriers to business. The overall freedom to start, operate, and close a business is restricted by the national regulatory environment. FINANCIAL FREEDOM — 50% Poland’s financial system is open and well regulated, but government influence is considerable. Credit is available on market terms, and foreign investors can access domestic financial markets. The banking sector is dominated by 12 commercial banks, two of which are government-controlled and the remaining 10 of which are foreign-controlled. Foreign banks control around 70 percent of banking assets. The government provides low-interest loans to farmers and homeowners. The insurance sector has been growing strongly. The Polish government controls the country’s largest insurer. Capital markets are expanding, as is the stock exchange. TRADE FREEDOM — 76.6% Poland’s trade policy is the same as those of other members of the European Union. The common EU weighted average tariff rate was 1.7 percent in 2005. Various non-tariff barriers are reflected in EU and Polish government policy, including agricultural and manufacturing subsidies, regulatory and licensing restrictions, and other market access restrictions. The government also implements non-transparent pharmaceutical regulations. Consequently, an additional 20 percent is deducted from Poland’s trade freedom score. PROPERTY RIGHTS — 50% Property rights are moderately well protected. The judicial system is slow to resolve cases, and investors complain about the unexpected issuance of or changes in laws and regulations. FISCAL FREEDOM — 79.1% Poland has a high income tax rate and a low corporate tax rate. The top income tax rate is 40 percent, and the top corporate tax rate is 19 percent. Other taxes include a value-added tax (VAT) and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 34.3 percent. FREEDOM FROM CORRUPTION — 34% Corruption is perceived as significant. Poland ranks 70th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005. FREEDOM FROM GOVERNMENT — 55.3% Total government expenditures in Poland, including consumption and transfer payments, are high. In the most recent year, government spending equaled 42.9 percent of GDP, and the government received 5.2 percent of its revenues from state-owned enterprises and government ownership of property. LABOR FREEDOM — 56.2% The labor market operates under inflexible employment regulations that hinder overall productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee is relatively costly. Poland’s small and medium-sized companies have cited the rigid labor code as a barrier to the creation of new jobs. In response to growing unemployment, there have been debates on means to increase labor flexibility. MONETARY FREEDOM — 80.3% Inflation in Poland is relatively low, averaging 2.4 percent between 2003 and 2005. Relatively stable prices explain most of the monetary freedom score. As a participant in the EU’s Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. The government also monitors 314 2007 Index of Economic Freedom