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prof. Henryk Cwiklinski
University of Gdansk, Poland
WHY THE SECOND STAGE OF POLISH ECONOMIC
TRANSITION IS NECESSARY?
Poland has become a member of the European Union since May 1, 2004. It is the
country which was one of the best among developing countries during the decade of the
nineties and clearly the best among economies formerly in the Soviet sphere. Following the
fall of communism in 1989, Poland adopted an aggressive program of market – oriented
reforms. As the result, the transition recession took only two years in Poland (1990 and 1991).
Since 1992 the economy has grown – in 1995 and in 1997 even by about 7%. Inflation which
was the biggest economic problem with the CPI rate of 585.8% in 1990, was reduced to 7.3%
in 1999 and to 0.8% in 2003. Also industrial production rose even by almost 12% in 1994 as
well as in 1997 and the rate of investment was about 20% a year in the period 1995 – 1997
(GUS, 2003).
Till 2002 European Commission published regular reports on Polish economic
developments every year. According to the “2000 Regular Report from the European
Commission on Poland’s Progress Towards Accession”, Poland was perceived as a
functioning market economy which should be able to cope with competitive pressure and
market forces within the E.U. “in the near term, provided it continues and completes its (…)
reform efforts”. Similar conclusion could be found in the next E.C. reports till the last one of
2002. The first “Comprehensive monitoring Report” of 2003, which replaces earlier “Regular
Reports”, focuses on recommendations for improvement in the areas where the continuation
of the reform path is under threat.
Unfortunately, it can be proved that the economic transition in Poland has been
stopped or – at least – interrupted since 2001 (Cwiklinski 2003). While in other neighbour
countries, for example in Slovakia, Lithuania, Latvia and Estonia the beginning of the XXI
century has brought immense progress in transition of their economies, in Poland – except of
very successful monetary policy – it has been wasted time. The main indices of economic
development in Poland since 2000 are presented in the table 1.
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Table 1.
Basic indices of Poland’s Economic Developments in 2000 – 2003.
2000
2001
Real GDP growth (%)
4.1
1.1
2002
1.3
2003
3.7
Industrial production (%)
7.1
-1.4
1.5
8.4
Consumer price index
10.1
5.5
1.9
0.8
Rate of investment (% of GDP)
24.3
21.0
19.2
·
Investment (y-y %)
3.3
-10.2
-7.2
-0.9
Household consumption (%)
2.7
2.1
3.3
3.2
Income pre capita (Euro) (1)
9200
9400
9500
·
Employment growth (%)
-1.6
-3.2
-0.9
-2.3
Unemployment (% of labour force) (2)
15.1
19.4
20.0
20.0
Budget expenditure (% of GDP)
48.7
45.3 (3)
47.0 (3)
47.9 (3)
State budget balance (% of GDP) (2)
-2.7
-4.5
-5.1
-4.6
Public debt (% of GDP)
39.3
40.2
45.9
49.0 (4)
Reserve assets (billion Euro) (2)
29.5
30.1
28.5
26.9
Trade (billion Euro) (2)
-
exports
34.6
38.3
39.0
43.8 (4)
-
imports
50.6
52.4
51.0
55.4 (4)
-
balance
-16.0
-14.1
-12.0
-11.6 (4)
10 601
7 146
6 064
6 420
Current account balance (billion Euro)
-10.7
-8.0
-7.2
-3.5
Current units PLN/Euro (2)
3.85
3.50
3.98
4.40
FDI (net) inflows (million USD)
(1) purchase power standard
(2) at the end of a year
(3) according to the ESA 95
(4) provisional figures
Source: NBP, EC Reports, GUS, PAIZ
The figures in the table 1 show that reducing inflation from double – digit level in
2000 to 0.8 percent in 2003 has been the best result of the Polish economic transition. The
sharp fall in inflation and the absence of inflationary pressures have allowed the monetary
Policy Council to gradually cut its key reference rate to 5.25 percent at the end of 2003.
Unfortunately, the growing fiscal deficit (much more than 3% of GDP) and growing
public debt (nearly half of GDP a year), together with high unemployment are the main
economic challenges of the Polish government.
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
The role of the state institutions in Polish economy
There are three most important institutions which are responsible for proper economic
developments in every country: a central bank, a parliament and a government with its
administration. Their policy is decisive for the development and maintenance of a transparent
and stable economy based on efficient private sector activities as well as good management of
public resources. When the Polish monetary policy has been perfect, these are the parliament
and the government which are responsible for the fact that the transition path has nearly come
to a halt since 2001.
The government still controls about 30 percent of economic activity and remains an
owner in sectors such as for example coal, steel and rail transport. In 1990 when the transition
was begun, there were 8453 state – owned firms to be privatised. The total quantity of state –
owned firms and companies fully or partly owned by the state treasury in 2002 are presented
in the table 2.
Table 2.
State – owned firms and companies of state treasury stock in Poland in 2002
Total
of which
value of capital
Functioning
3263
2130
Going bankrupt
Firms partly owned by
Owned by treasury
treasury (PLN bln)
(PLN bln)
69.9
48.7
1133
Source: “Rzeczpospolita”, July 31st, 2003
The figures of the table 2 prove that the privatization hasn’t been still completed in
Poland as it is sometimes suggested by the media. 38.6 percent of all enterprises in Poland are
subject to collective ownership. Also, progress in the restructuring of the remaining state –
controlled industries has been insufficient and the adoption of several sectoral restructuring
industries hasn’t brought positive results (2003 EU Comprehensive Country Monitoring
Report: Poland). Further analysis show that if we take into consideration the value of core
capital, 16.7 percent of total value of all state – controlled enterprises were in the sector
“electricity”, 14 percent in “crude oil and gas” and 7 percent in “financial sector”. Taking into
consideration the quantity of those firms, in 2002 16.7 percent of the state – controlled ones
could be found in the sector “trade” and 11 percent belonged to the sector “industry”.
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One third of these enterprises (1133) were under procedure leading them to
bankruptcy (where–of 813 belonged totally to the state). These were mainly firms connected
with agriculture industry (60 percent) as well as light industry (56 percent), shipyard,
construction and steel industries (each over 42 percent).
The problem is because the state – owned enterprises have had immense debts paid
actually by taxpayers. In 2002 the debts of the mining sector were of PLN 22.5 billion. In
2003 the Ministry of Economy declared it was going to pay PLN 14 billion of these debts
(“Rzeczpospolita”. July 30th, 2003). Restructuring costs of this branch were estimated of
further PLN 2 billion till 2006. The debts of the Polish state – owned steel industry were of
about PLN 11 billion. Almost the same were debts of the Polish State Railways. Their lose
was of almost PLN 8.5 billion in 2001 and PLN 10.8 billion in 2002 (“Rzeczpospolita”,
Febr. 8-9th, 2003, May 7th, 2003).
At the same time the state’s (actually the taxpayers’) “aid” to these sectors as well as
to other ones was great. It was estimated as of PLN 2.65 billion for the mining sector and for
the Polish State Railways of PLN 2.1 billion in 2001. It was the amount three times higher
than the state’s spending for R&D this year. If we add “the aid” to other sectors – especially
agriculture state agencies – the total value of the subsidies of the state was worth almost PLN
11 billion (1.5 percent of GDP) in 2001 (“Rzeczpospolita”, Oct. 29, 2002).
The list of evidences of the central administrations’ involvement in the Polish
economy could be much longer. The main daily Polish paper “Rzeczpospolita” publishes a
list of 500 firms with the highest incomes every year. In 2002, among 25 companies of the
highest incomes, there were more than half owned or directly managed by the state
administration but many of them were making losses (Orlowski, 2003). Their incomes were
the highest because of their monopolistic position or special parliament regulations. Poland
still needs to finish restructuring and privatisation of the state – controlled industries, in
particular in the coal mining, gas, electricity, chemicals, steel and defence sector.

Privatisation
At the end of 2002, only 76 percent of GDP was produced in the private sector, and the
state – in different legal forms – still owned or had a majority or controlling stake in over
3200 firms. The progress in privatisation is presented in the table 3.
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Table 3.
Privatisaton incomes in Poland 1997 – 2003 (PLN billion)
Years
Incomes
1997
6.6
1998
7.1
1999
13.3
2000
26.7
2001
6.8
2002
2.2
2003
3.0
Source: Ministry of Treasury, “Rzeczpospolita”, 15.4.2003, 31.7.2003
and CASE 1/2004
The data in the table 3 prove that there hasn’t been an important progress in
privatisation since 2001. The incomes of the privatisation amounted to only 25.5 percent in
2001, 8.2 percent in 2002 and 11.2 percent of the value of the privatisation earned in 2000.
The slowdown in the privatisation process partly reflects the fact that the most profitable
firms have already been sold, and most of the remaining state firms do not easily attract
investors (2003 EU Comprehensive Country Monitoring Report: Poland). The additional
conditions attached to the sales, notably to safeguard employment (i.e. thousands of voters),
further hamper the privatisation process. Also ,the state – owned companies are a good place
to offer posts for comrades belonging to a governing party. This way, the whole sectors, i.e.
mining, steel, chemicals, gas, agriculture and others still need considerable efforts to be
restructured.

Public finances
M. Carter, the former World Bank representative in Poland, completing his mission in
2002, told in an interview: “The main reason of insufficient economic growth are too high
budget expenditures for economic aid paid for state – owned companies (mines, steel
industry, railways and other monopolies) (“Rzeczpospolita”, 10-11.08.2002). As a matter of
fact, a deep restructuring of public expenditure is the second, very important issue of the
polish economic transition. This issue has been too difficult for all governments in
independent Poland since 1990 in the face of opposition from vested interest of bureaucrats,
public sector managers and trade unions. Every election campaign after 1992 was addressed
to those who were against hardship of economic transition. The result of the policy of doing
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nothing with restructuring of pubic expenditures have become evidently clear after the
election in 2001 when the post-communist party (SLD) formed the government. The figures
showing it are presented in the table 4.
Table 4.
Selected items of the state budget, 1999 – 2003
Year
Revenues
Total
Expenditures
Budget deficit
of which tax revenues
PLN billion
% of GDP
1999
125.9
112.7
138.4
- 12.5
- 2.0
2000
135.7
119.6
151.1
- 15.4
- 2.2
2001
140.5
119.1
172.9
- 32.4
- 4.3
2002
143.5
128.8
182.9
- 39.4
- 5.1
2003
152.2
135.2
189.2
- 37.0
- 4.6
Source: Ministry of Finance, CASE 2004
In 2003 the state budget deficit was PLN 37 bln, i.e. 4.6 percent of GDP. It was the
third year when the result was higher than the Maastricht criteria allow. Some 84 percent of
the deficit was financed on the domestic market, mainly by revenues from treasury bonds. It
should be stressed that such financing was equal to PLN 6.8 bln and therefore much higher
than the planned 1.9 bln. The planned state budget deficit was underestimated due to an
underestimation to extra – budgetary funds. The Labour Fund had spent its entire annual
transfers by the end of September 2003, with the Social Security Fund doing the same by end
of November. When their cash had gone, the activities of such funds had to be financed from
commercial bank credits.
This can be an example of decision which don’t increase the budget deficit (it is
expected to be of about 5 percent of GDP in 2004 again) but reflect in public debt figures. In
the table 5 with basic budget figures for 2004 it can be seen that the public debt is expected to
be of at least 55 percent of GDP this year.
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Table 5.
Basic budget figures for 2004 (and selected macroeconomic assumption)
BUDGET 2004 (PLN billion)
ANALYSTS COMMENTS
Expenditures
199.8
Revenues
154.5
Deficit
45.3 up to PLN 67.4 bill. (i.e. to 7.8% GDP)
Public Debt
·
55 – 60 % of GDP
SELECTED ASSUMPTION (growth rate in %)
GDP
5.0
in January ’04 seemed to be impossible, in
May ’04 it’s possible
Domestic Demand
5.0 a jump from 2.9% in 2003?
Exports
8.7
Imports
8.5
Real wages
4.0 doubts
Employment
1.0
Central Bank reference rate annual
average (in %)
it will be at the level of at least 5.25 as in
3.7 2003
Source: Budget for 2004

Conditions of stable development
The 2004 budget adopted by the parliament is largely based on higher revenues rather
than on deep spending cuts again. On the contrary, there are few chapters of the budget in
which spending costs are to be much higher than in 2003 – for example expenditures for
public administration are to rise from PLN 6.5 bln. in 2003 to PLN 7.6 bln. in 2004
(Jankowiak 2004). The government declared serious cuts for 2005: PLN 7.3 bln., for 2006:
PLN 6.7 bln. and PLN 9.9 bln in 2007 (“Rzeczpospolita”, 1.10.2003) but in the face of
change of the prime – minister and other changes in the cabinet in May 2004, nobody will
remember this declaration.
The high fiscal deficit and growing public debt are not only the evidence of too high
cost of the state’s ownership in the economy but they also are the main barrier to development
of private business. The government finances its budget deficit mainly from domestic
borrowing – as it was presented when giving examples from 2003. Commercial banks always
prefer to credit the state than business as it is less risky. The state’s demand for credits has
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been high enough to crowd out business credit applications. The crowding – out effect hasn’t
been the sole reason of diminishing the rate of investment in Poland (see table 1.). Also taxes
have been relatively high, particulary for a country as its income level. The total tax burden
on the economy was over 40 percent of GDP in 2002. The personal income tax rates have
been 19, 20 and 40 percent. The corporate rate (CIT) has been reduced to 19 percent but
social insurance contributions for pensions, disability, unemployment benefits health care and
other payments are heavy burden of net wages exceeding often 80 percent of net wages.
That’s why the private businesses want nor invest neither to employ new workers. The
result is that Poland has been the last on the list of the E.U. countries as it regards both: the
rate of unemployment and the rate of employment. The rate of unemployment has been at the
level of 20 percent since 2001 (see table 1) and the rate of employment of some 53 percent in
2002 for the population between 15 – 64 years old, certifying that only an every second
citizen of Poland has had a legal job (OECD 2003).
Few economists sometimes say that Poland in the E.U. should follow the Ireland’s
path. It seems to be clear that a great deal of work has to be done before entering this way.

Conclusions
Economic freedom was one of the aims of the transition from the totalitarian Soviet –
type regime to free society. The achievements of the early 1990s were immense but the work
hasn’t been completed. The role of politicians and the government administration has still
been too large in business. It creates too high costs (especially when having fully convertible
currency) and it has been the main obstacle to further economic development. As the result,
not market but the government imperfections are the main problem to be solved in Poland.
The government and its growing administration are kind of monopoly. They face no
competition in many of their activities becoming inefficient, distorting the allocation of
resources and – especially in the Polish case – preventing private companies from investing
and employing people.
The economic functions of government should be reduced to: enlarging and protecting
property rights (i.e. completing privatization in Poland), providing public goods like national
defence, reducing the inefficiencies associated with external costs and benefits (first of all
connected with the state’s activity in the economy), protecting and developing common
access resources (in the Poland’s case – the country having only 460 km of motorways –
development of transport infrastructure), providing for the public’s health (especially that the
reforms were abandoned after 2001 and the post – communist government returned to the
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Soviet system of health care financing) and security as well as stabilizing overall economic
activity by reducing the budget deficit and the public debt. This is the schedule for the second
stage of the economic transition in Poland.
This is also the essential condition enabling Poland to cope with competitive pressure
and market forces within the European Union. Following the Ireland’s path of development
would be possible then.
References
-
CASE (2004), Polish Economic Outlook, no.1
-
Cwiklinski H. (2003), Poland’s Incomplete Economic Transition, in “North European
and Baltic Sea Integration – the NEBI Yearbook 2003”, Springer Verlag, Berlin –
Heidelberg
-
2003
EU
Comprehensive
Country
Monitoring
Report:
Poland,
http://europa.eu.int/comm/enlargement/report2003/index.htm
-
GUS (2003), Statistical Yearbook of the Republic of Poland
-
Jankowiak J. (2004), Oszczędności maleją, dług rośnie, “Rzeczpospolita”, 11.02
-
NBP, Central Bank of Poland, http://www.nbp.pl
-
OECD (2003), Employment Outlook
-
Orlowski M. (2003), Lista 500, “Rzeczpospolita”
-
Regular Reports on Poland’s Progress Towards Accession 2000, 2002, com (2000,
2002) 700 final
-
Rzeczpospolita 2002, 2003, the main daily Polish paper
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