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Ryszard Rapacki Head and Professor, Ph.D. Department of Economics, Warsaw School of Economics LESSONS FROM TRANSFORMATION OF THE POLISH ECONOMY Presentation prepared for the EDAMBA meeting, Warsaw, 7 September 2009 Ryszard Rapacki Warsaw School of Economics 1 Contents I Introduction II Key outcomes of systemic transformation – an empirical picture III Strengths and weaknesses of Polish transformation IV Lessons from the Polish transition Ryszard Rapacki Warsaw School of Economics 2 Empirical picture Table 1 Relative development levels in Poland, EU countries and selected transition economies, 1989-2008 (GDP per capita at PPP, Poland = 100) 1989 1992 2000 2004 2005 2006 2007 Poland 100 100 100 100 100 100 100 Germany 279 350 246 230 228 217 215 France 268 320 239 218 216 209 204 Italy 274 327 242 211 204 198 190 UK 256 291 242 244 237 230 223 Spain 199 244 202 200 199 199 198 Ireland 195 252 271 280 281 282 282 Portugal 159 212 162 147 150 146 143 Greece 178 210 174 186 181 180 178 262 316 238 223 220 214 205 EU15 average1 (38) (32) (42) (45) (46) (47) (48) Czech Republic 197 194 142 148 150 148 150 Estonia 142 114 93 113 119 125 127 Hungary 146 140 116 125 123 122 117 Latvia 137 93 76 90 95 101 102 Lithuania 145 128 81 100 103 106 111 Slovakia 155 137 104 113 117 121 125 Slovenia 194 176 163 171 170 168 166 Bulgaria 122 108 58 67 69 70 70 Romania 89 79 54 67 69 73 79 1 – data in parentheses show Poland’s development level as a percentage of the EU15 average; 2008 100 201 187 175 203 181 242 131 166 192 (52) 140 117 109 97 106 125 156 70 79 Source: IMF, World Economic Outlook Database, September 2005 (for 1989 and 1992); Eurostat database (2000-2009) and own calculations. Ryszard Rapacki Warsaw School of Economics 3 Table 2 Growth of Gross Domestic Product, 1990-2008 Country Poland Czech Republic Estonia Hungary Latvia Lithuania Slovakia Slovenia Bulgaria Romania EU15 Real GDP growth rate Average annual % Annual % growth growth 1990-2008 2006 2007 20081 3.1 6.1 6.6 5.4 1.9 6.8 6.0 4.4 1.7 10.4 6.3 -1.3 1.5 4.1 1.1 1.7 1.1 11.9 10.2 -0.8 0.8 7.8 8.9 3.8 2.6 8.5 10.4 7.0 2.3 5.9 6.8 4.4 0.3 6.1 6.2 6.5 1.3 7.9 6.2 8.5 2.0 2.8 2.7 -0.1 Real GDP index in 2008 1989=100 178 145 137 134 123 117 164 154 113 128 146 2000=100 139 140 164 131 179 175 162 138 145 164 114 1 – forecast. Sources: World Development Indicators 2005, The World Bank, Washington 2005; Transition Report Update, EBRD, London, May 2005; Eurostat database; UN Economic Commission for Europe, Economic Survey for Europe, 2005 No. 2, Geneva 2005; VIIW Research Report No. 325, Special Issue on Economic Prospects of Central, East and Southeast Europe, Vienna, February 2006; own calculations. Ryszard Rapacki Warsaw School of Economics 4 Table 3 Progress in market (structural) reforms in ten CEE transition countries, 2008 Financial institutions Securities GoverBanking markets nance Trade reform Large Small and and Price and ex- Compe and scale scale nonenterpri liberali- change -tition liberalibank priva- privase zation rate policy zation of finantization tization restruinterest regime cial cturing rates institutions Enterprise sector Country CEE (EU10) Poland Czech Republic Estonia Hungary Latvia Lithuania Slovakia Slovenia Bulgaria Romania Average for EU-10 3.3 4 4 4 3.7 4 4 3 4 3.7 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4 3.7 3.7 3.3 3.7 3.7 3 3 3.7 3 2.7 2.7 Development of markets and competition 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 3,3 3 3.7 3.3 3 3,3 3.3 2.7 3 2.7 3.7 4 4 4 4 3.7 3.7 3.3 3.7 3.3 3.7 3.7 3.7 4 3 3,3 3 3 3 3 Infrastructure Infrastructure reform 3.3 3.3 3.3 3.7 3 3 2.7 3 3 3.3 Average score 3.78 3.81 3.92 3.96 3.62 3.69 3.70 3.40 3.54 3.44 3.68 Note: Scale from 1 to 4.3; the higher the score, the greater is the progress in the reform process. Source: EBRD, Transition Report 2008. Ryszard Rapacki Warsaw School of Economics 5 Strengths and weaknesses Table 4 Major strengths and weaknesses of systemic transformation in Poland Strengths Weaknesses Performance-based Fastest economic growth in the CEE region (and second-fastest in the entire group of 28 transition economies) in the 1990s and, as a derivative, between 1990 and 2008 Loss of leading position in economic growth since 2000; Poland’s GDP growth rate was below the average for the new EU members from Central and Eastern Europe Real convergence (or catching up) towards the EU15 – from 38% of the average in 1989 to 52% in 2008 (GDP per capita in PPP). Real economic divergence vis-à - m 2 P o 0 s 0 o l d e v 2 4 ) t o 0 a n e f a d l o t n h a e E 2 w p e d d 0 s r m U 0 - 8 1 ; a n e m 0 a k e b c s a r u r d e o a s n e m o t s u o f n t r i l t e s t e e y g h b b E t e h U e 7 s e d l 2 i w n e v e - a s ( n 2 0 0 8 t r a n k Export-driven economic growth after 2000; since 2006 it was coupled with strong investment expansion Low propensity to save and one of the lowest investment-GDP ratios in EU10 countries; large investment-domestic savings gap High, consistent growth of labour productivity and high TFP (total factor productivity) contribution to overall GDP growth; since 2005 the former has been coupled with rising employment level Reversal, since 2007, of hitherto downward trend of real unit labour costs, as a derivative of wage hikes in excess of labour productivity growth. This may undermine future price competitiveness of Polish exports Ryszard Rapacki Warsaw School of Economics 6 Table 4 (cont.) Major strengths and weaknesses of systemic transformation in Poland Strengths Weaknesses Performance-based Improving situation on the labour market; Failure in meeting the “golden rule” of nevertheless unemployment in Poland is still public finance, i.e. using fiscal deficit to excessive and ranks among the highest in finance public investment the EU-27. Moreover, the natural rate of unemployment has run close to double-digit levels Increasing stock of human capital due to rising educational level and large-scale training activities Low innovative capability and too weak domestic private sector technological innovations Large and rising stock of entrepreneurial talent Relatively low (though improving) technical competitiveness of Polish exports: low share of processed and high tech goods (4% of total manufacturing exports) Underdevelopment of physical infrastructure (in particular roads) Relatively strong foreign financial position including manageable trade and current account deficits Ryszard Rapacki Warsaw School of Economics 7 Table 4 (cont.) Major strengths and weaknesses of systemic transformation in Poland Strengths Weaknesses Performance-based Resistance to international financial crises in the 1990s and early 2000s Widening gap between Poland (despite its fast progress) and other EU-10 countries, except Bulgaria and Romania, in the incidence of modern information and communication technologies and in access to Internet Growing investor confidence; decrease of perceived country risk and steady inflow of FDI Technological reconstruction of Polish economy and improvement of its international competitiveness due to increased FDI inflow Changing pattern of FDI – deployment of R&D and support activities to Poland (e.g. accounting and software development centres) Ryszard Rapacki Warsaw School of Economics 8 Table 4 (cont.) Major strengths and weaknesses of systemic transformation in Poland Strengths Weaknesses Institution-based Relatively broad content of ownership changes, not confined to formal transfer of property rights, as in most transition economies Delayed ‘top-down’ privatisation of several core sectors including network industries; too slow restructuring of sun set industries Advanced microeconomic restructuring, Unsettled problem of a part of property progress in corporate governance and rights’ allocation (restitution) growing responsiveness to market signals of former SOEs Important role of ‘grass-root’ privatization and expansion of SMEs making the Polish economy more and more resistant to political turmoil Strong equity bias in public expenditure programs (high priority of redistributive objective) at the cost of efficiency and negligence for important developmental goals Implementation of the innovative pension Low transparency of public finance; soft system reform which is likely to alleviate in budget constraint and strong rigidities in the future the problem of hidden public debt fiscal policy Ryszard Rapacki Warsaw School of Economics 9 Table 4 (cont.) Major strengths and weaknesses of systemic transformation in Poland Strengths Weaknesses Institution-based Positive impact of the new pension scheme on capital market development Insufficient government funding of domestic R&D and investment in human capital High quality of prudential regulations of the Polish stock exchange Overregulated labour market displaying many structural and institutional rigidities; high (though decreasing) tax wedge on labour costs Low level of social capital (or trust). Main symptoms include symmetrical distrust of Poles towards the government and vice versa; as a derivative, the latter erects multiple bureaucratic barriers and hurdles that constrain the scope of economic freedom Persistent symptoms of a Myrdalian ‘soft state’ (relatively high incidence of corruption, low effectiveness of the judiciary power, low enforcement of the law and government regulations) Ryszard Rapacki Warsaw School of Economics 10 Table 4 (cont.) Major strengths and weaknesses of systemic transformation in Poland Strengths Weaknesses Institution-based Mounting bureaucratic barriers for private enterprise and deteriorating business climate, which may be hold responsible for declining scores for Poland in international rankings of economic freedom and competitiveness Low quality of the political process in Poland and strong bias towards rentseeking at the cost of efficiency In most general terms, government failure to create positive externalities for private business and economic development Ryszard Rapacki Warsaw School of Economics 11 Lessons from the Polish transition Key success factors • Shock therapy + strong personality of the leader (Balcerowicz). • Social support including the 'Solidarity factor'. • Shock therapy vs. gradualism. In Poland – deep macroeconomic imbalances called for a radical approach. In general terms, the choice of transformation strategy should take into account the initial conditions including the command economy legacy. • Sequencing of the reforms – depends on initial conditions. However, complexity is required to create the ‘critical mass’ of the reforms and make them irreversible. If, like in Poland, deep macroeconomic disequilibrium is pervasive, the shock therapy is advisable while institutional reforms make take more evolutionary course (nevertheless, they should be implemented in full complexity to ensure positive synergy and necessary complementarities). Ryszard Rapacki Warsaw School of Economics 12 • The role of the ‘EU factor’ or “external anchor” – crucial at later stages of transition to the market. • Relative openness of the country since 1956 – exposure to Western culture and ideas. • Gierek’s decision in 1970 to open the borders - primitive accumulation of capital (including human) - explosion of small private entrepreneurship since 1989. • Relevance of historical traditions (Octavio Paz and his “Laberinto de la soledad”). Hence, the design of transformation strategy and accompanying economic policies should be compatible with national ‘identity’. • Consistent economic policy after 1989 despite changing governments. • Selected pre-war institutions (e.g. Commercial Code) on place. • Exchange rate regime: ‘fixers’ vs. ‘floaters’. Ryszard Rapacki Warsaw School of Economics 13