Download Table 10. The public debt in Poland in 2000-2004

Henryk Ćwikliński
Anita Szymańska
University of Gdansk, Poland
COMPARISON OF IMPACT OF ECONOMIC POLICIES ON ABILITY
TO CREATE JOBS IN THE USA AND IN POLAND
(UPON ITS ENTRANCE TO THE EU)
Abstract
After the decade of 1990s when Poland adopted the successful program of market-oriented transition,
its continuation has been under threat since 2001. The striking drop in employment to about 51% of the
population in the age 15-64 and the unemployment rate of 20% give Poland the last position among the EU
members.
The authors try to find solutions to the Polish labor market studying the U.S. model of creating jobs as
well as European methods of improving their labor markets. The studies lead to the conclusion that there are
different degrees of labor market flexibility as well as national attitudes toward policy intervention. The main
issue is how to expand employment, raise productivity and, in effect, how to increase per capita income that is
now 41% of the OECD levels in Poland.
The further conclusion is that in order to increase the effective labor demand it is necessary to reestablish an appropriate balance between monetary and fiscal policies (the first one has been perfect since at least
1998). If so, it is necessary to speed up privatization and to restore public finances. The crucial aim is to reduce
cost of doing business by cutting in the tax wedge.
1. KEY INDICATORS OF LABOR MARKETS
In order to assess ability of an economy to create jobs it is necessary to review some of
the most important data concerning labor markets in the USA and in the EU countries. The
table 1 shows employment/population ratios in those countries in the period 1990-2003.
1
Table 1 Employment/population ratios in the USA and in the UE countries. Persons
aged 15-64 years (percentages)
1990
2000
2003
USAa
72.2
74.1
71.2
EU-15
61.4
63.6
64.8
EU- 25
-
-
63.6
Austria
.
67.9
68.2
Belgium
54.4
60.9
59.3
Cyprus
.
.
69.2
Czech Republic
.
65.2
64.7
75.4
76.4
75.1
Estonia
.
.
62.9
Finland
74.1
67.0
67.4
France
59.9
61.1
61.9
Germanyb
64.1
65.6
64.6
Greece
54.8
55.9
58.0
.
56.0
57.0
Ireland
52.1
64.5
65.0
Italy
52.6
53.9
56.2
Latvia
.
.
61.8
Lithuania
.
.
61.1
59.2
62.7
63.6
.
.
54.5
61.1
72.9
73.6
.
55.0
51.2
67.4
68.3
67.1
Slovak Republic
.
56.8
57.7
Slovenia
.
.
62.6
Spaina
51.8
57.4
60.7
Sweden
83.1
74.2
74.3
United Kingdom
72.5
72.4
72.9
Denmark
Hungary
Luxemburg
Malta
Netherlands
Poland
Portugal
a) refers to persons aged 16 to 64
b) data up to 1990 are for Western Germany only
. data not available
Source: OECD Employment Outlook 2004; Eurostat: www.europa.eu.int, U.S.
www.bls.gov.; GUS, own calculations.
Department of Labor:
2
In 2003, 71.2 percent of Americans between 16 and 64 years of age were employed, as
against 63.6 percent for the whole enlarged European Union, i.e. the same average level of
employment/population ratio in the EU when it consisted of 15 member countries in 2000.
Apart from the USA, in the table 1 there are also four other countries with the indicator higher
then 70 percent of employed population. These are the United Kingdom and Denmark where
the indicator has been very stable since at least 1990, Sweden where the indicator declined by
about 9 percent between 1990 and 2000 and the Netherlands where there has been an
acceleration of employed population by 12.5 percent since 1990. A considerable employment
growth could also be observed in Ireland and Spain to 65 and 60.7 percent respectively. By
contrast, in Finland employment declined by about 7 percent, to 67.4 percent of its population
in 2003.
The employment/population ratios of 1990 for the new members of the EU can`t be
found in international statistics. In the 8 of them, liberated from the communist regime,
formally everyone had been even obliged to be employed before 1990. Of course, it hadn`t
been “full employment” but “unemployment on job” (Kornai, 1980). 14 years after the
beginning of the economic transition, the best employment/population ratio was 67.4 percent
in the Czech Republic and the worst one was in Poland: 51.2 percent. It was the worst
indicator among 25 members of the EU.
After the review of the data from the table 1, it is possible to lay down the following
outset conclusions:
-
the ability to create jobs in the US economic model is stable and relatively high; in the
EU it is generally lower and very different in particular member countries;
-
in Poland it is necessary to upgrade this ability, following the US or the best European
solutions.
It seems to be necessary to verify these conclusions by further analyses.
3
Table 2 Labor force participation rate in the USA and in the UE countries. Persons
aged 15-64 years (percentages)
1990
2000
2003
USAa
76.5
77.2
75.8
EU-15
67.1
69.4
70.3
EU- 19c
.
68.9
69.4
Austria
.
71.3
71.6
Belgium
58.7
65.2
64.3
.
71.6
70.4
Denmark
82.4
80.0
79.4
Finland
76.6
74.3
74.1
France
66.0
68.0
68.2
Germanyb
67.4
71.1
71.3
Greece
59.1
63.0
63.8
.
59.9
60.6
Ireland
60.1
67.4
68.0
Italy
59.5
60.3
61.6
Luxemburg
60.1
64.2
.
Netherlands
66.2
74.9
76.4
.
65.8
64.2
70.9
71.3
72.0
.
69.9
70.0
Spaina
61.7
66.7
68.5
Swedena
84.6
78.9
78.9
United Kingdom
77.8
76.6
76.6
Czech Republic
Hungary
Poland
Portugal
Slovak Republic
a) refers to persons aged 16 to 64
b) data up to 1990 are for Western Germany only
c) for the countries in this table only
. data not available
Source: OECD Employment Outlook 2004.
Participation rates are calculated as the labor force divided by the total working-age
population, where the count of the working-age population, the labor force, the employed and
the unemployed is normally restricted to individuals 15 or 16 through 64 years of age. As the
term “labor force”, used to calculate the labor force participation, considers employed as well
as unemployed, the indicators in the table 2 seem to be of less importance than those in the
table 1. Anyway, they confirm the outset conclusions.
4
The unemployment rate is the most important indicator used when discussing labor
market problems. These rates are presented in the table 3.
Table 3 Standardized unemployment rate in the USA and in EU countries. Persons
aged 15-64 years (percentages)
1990
2000
2003
USAa
5.7
4.0
6.1
EU-15
8.4
8.3
7.8
EU- 25d
.
.
9.1
Austria
.
4.7
4.7
Belgium
7.3
6.6
7.7
Cyprus
.
.
4.4
Czech Republic
.
8.8
7.8
8.5
4.5
5.5
Estonia
.
13.7
10.0
Finland
3.2
9.9
9.1
France
9.2
10.1
9.3
Germanyb
4.9
7.8
9.4
Greece
7.2
11.3
9.1
.
6.4
5.9
Ireland
13.3
4.4
4.5
Italy
11.5
10.6
8.7
Latvia
.
14.5
10.5
Lithuania
.
15.4
12.7
Luxemburg
1.6
2.4
.
Netherlands
7.7
2.7
3.6
Poland
6.3
16.4
20.0
Portugal
4.9
4.2
6.8
.
18.8
17.6
Spaina
16.1
13.9
11.4
Sweden
1.8
5.9
5.8
United Kingdom
6.8
5.6
4.9
Denmark
Hungary
Slovak Republic
a) refers to persons aged 16 to 64
b) data up to 1990 are for Western Germany only
d) data for June 2004
. data not available
Source: OECD Employment Outlook 2004, National Bank of Poland, Statistical Offices (Bureaus) of Estonia,
Latvia and Lithuania, I. Kuhnert: An Overview of the Economics of the New Members States, Eurostat:
www.europa.eu.int
5
Unemployment in the USA has been lower than in the EU-15 throughout the period
considered. The rates of unemployment over the time were, however, far from uniform in the
EU. Austria and the UK had rather stable, low rates of unemployment, whereas the
Netherlands, Ireland and Denmark made a great progress reducing their rates to 3.6; 4.5 and
5.5 percent respectively, i.e. to the “American” level. The rate for Sweden rose from 1.8
percent in 1990 to 5.8 percent in 2003 but it still remains low. By contrast, the rate of
unemployment grew substantially in Germany (after the unification) and in Finland from 4.9
in 1990 to 9.4 percent in 2003 and from 3.2 percent in 1990 to 9.1 percent in 2003
respectively.
The average rate of unemployment is higher in the new member states of the EU. It
was 14.3 percent in 2003 (Kuhnert 2004). A strong impact on this figure is made by the rate
for Poland. It has been about 20 percent for last years (over 3 million adult citizens). It is the
very serious problem to be solved by upgrading Poland`s ability to create jobs. The data from
the table 4 remain this opinion beyond any doubts.
Table 4 Incidence of long-term unemployment in the USA and in the selected EU
countries (as a percentage of total unemployment)
2003
USA
11.8
EU-15
43.4
EU- 19a
45.3
Austria
24.5
Belgium
46.3
Czech Republic
49.9
Denmark
19.9
Finland
24.7
France
33.8
Germany
50.0
Greece
56.5
Hungary
42.2
Ireland
35.4
Italy
58.2
Luxemburg
27.4
Netherlands
29.2
6
Poland
52.5
Portugal
32.0
Slovak Republic
61.1
Spain
39.8
Sweden
17.8
United Kingdom
23.0
a) for above countries only
Source: Eurostat: www.europa.eu.int; U.S. Department of Labor: www.bls.gov; Employment Outlook 2004.
Figures from the table 4 show that in the USA only 11.8 percent of unemployed could
not find a job for a longer period than 12 months. It is an evidence that the unemployment in
the USA, with its rate about 6 percent is mostly frictional. It can be considered as a natural
rate of unemployment. An average share of unemployment longer than a year in the total
number of jobless people in the EU was about 4 times worse than in the USA in 2003. This
indicator was relatively good in Sweden (17.8%), Denmark (19.9%), in the UK (23%) and in
Austria (24.5%) but in the countries, where the long-term unemployment was 50 percent or
even more (the Czech Republic, Germany, Poland, Greece, Italy and the Slovak Republic), it
can be an evidence of strong structural unemployment and/or serious macroeconomic
problems.
In international reviews there are many other indicators which concern in a particular
manner examining the labor issues, for example: employment/population rates by selected age
groups, by educational attainment, by composition of part-time employment with women`s
share in part employment; average annual hours actually worked per person in employment,
public expenditure and participant inflows in labor market programs and many others. These
problems deserve a separate book. In this paper, however, it seems to be necessary to examine
one additional factor, i.e. tax wedges on labor. The tax wedge is the difference between what
employers pay out in wages and social security charges and what employees take home after
tax and social security deductions. The high tax wedge, measured as a percentage of the
overall cost to an employer, can be a major obstacle to job creation and people`s willingness
to work.
7
Table 5 Household Tax Wedge in the USA and in the selected EU countries in 2003 (as
total labor costs equivalent to the average production worker)a
One earner family with
two children
USA
15.5
EU-15
29.5
EU- 19b
30.4
Austria
29.5
Belgium
39.0
Czech Republic
30.6
Denmark
30.1
Finland
37.8
France
40.0
Germany
33.5
Greece
34.3
Hungary
30.5
Ireland
7.4
Italy
35.5
Luxemburg
9.6
Netherlands
33.7
Poland
41.3
Portugal
23.7
Slovak Republic
32.3
Spain
30.9
Sweden
39.5
United Kingdom
18.3
a) The tax wedge reflects income tax plus employee contribution less cash benefits plus employer social
contributions.
b) for above countries only
Source: OECD (2004), Taxing Wages 2002-2003: www.oecd.org/document.
Based on 2003 figures, for a one earner married couple with two children at the same
earnings level, the tax wedge ranged from 7.4 percent in Ireland to 41.3 percent in Poland
which is the only country with the indicator over 40 percent and has the worst result in the EU
again. The Ireland`s indicator is two times better than the tax wedge in the USA (15.5
percent) which is, in turn, two times better than the average level in the EU. In the EU small
Luxemburg and the UK also have good results, respectively 9.6 and 18.3 percent but, by
8
contrast, in the EU there are 15 countries that have the tax wage at the level of about 30
percent and more. If in any of them, the unemployment rate and the rate of long-term
unemployment have been relatively low (for example in Sweden, France and Belgium) it
might be a proof that a great share of employees work for public sector (or, may be, for the
EU administration, as in the case of Belgium). The welfare state`s rules can also have
influence on such pattern of indicators.
It could be interesting if the tax wages change in the countries from the table 4. The
chart A gives an answer to this question.
Chart A
Change in the tax wedge for a married production worker with two children from 1996
to 2003 (in percentages)
Slovak Rep.
Poland
Austria
Netherlands
France
Czech Rep.
Denmark
Germany
Belgium
Greece
Spain
Portugal
Luxemburg
Finland
Sweden
U.K.
Italy
U.S.A.
Hungary
Ireland
-20
-15
-10
-5
0
5
10
%
Source: As in the table 5.
9
Data in the chart A show that Ireland saw the biggest fall in the tax wedge from 1996
to 2003, with a reduction of 18.3 percent, followed by Hungary (9.9 percent), the USA (8.3
percent), Italy (8.2 percent) and the United Kingdom (7.0 percent). However, in a number of
countries the tax wedge increased over the period, with seeing the biggest increase at 7.1
percent in the Slovak Republic. In Poland, with the tax wedge 41.3 percent in 2003, it rose by
1.8 percent in 1996-2003 period.
Now there is no doubt that it is necessary to improve ability to create jobs in Poland. A
rise in employment, however, has to be associated with a rise in productivity. The ILO report
(2003) says that an output per person employed in the USA reached a level of USD 60,728 in
2002 while in the EU – 15 countries an output per person employed was USD 43,034 (about
70 percent). Improving the EU`s productivity and raising the employment rate are
fundamental to achieving a more rapid rate of growth in the EU over the long term, especially
in the new member countries – as it is presented in the table 6.
Table 6 Labor productivity per person employed, EU-15 = 100
2002
EU-25
92.8
EU-15
100.0
New Members
52.2
Cyprus
78.3
Czech Republic
53.7
Estonia
41.8
Hungary
62.6
Latvia
37.1
Lithuania
41.9
Malta
89.8
Poland
48.8
Slovak Republic
56.2
Slovenia
68.4
Labor productivity = GDP in PPS per person employed
Source: Kuhnert (2004)
If overall labor productivity in the new member states is slightly above half the value
observed for the EU – 15 (in Poland it is even less than half) and the EU is being held back
relative to the USA in this respect of about 30 percent, the clear conclusion is that in order to
create jobs and to improve the productivity it is necessary to undertake serious measures
10
concerning not only the labor market itself but the whole macroeconomy in Poland, following
the US and the best European (for example Ireland`s) policies.
2. THE MAIN FEATURES OF THE U.S. AND EUROPEAN MODELS OF LABOR
MARKETS
As it is shown on the chart B, after the Second World War the unemployment rate has
never exceeded 10 percent in the USA.
The rates of unemployment on the level of natural ones as well as the shocking
difference between the USA and the EU in the incidence of long term unemployment (see
table 4) can be an evidence that even while large numbers of jobs are being destroyed, many
others are being created in the US at the same time (Solow 2000).
As the matter of fact, the difference between American and European unemployment
arises from the cumulation of several differences in institutions and policies discussed by
Solow (2000):
-
the relatively low replacement rate embodied in the US compared with most European
countries – as Ostoj (2002) wrote unemployment benefits were at the level of some 12
percent of average wages in the USA while in Europe from 18 percent in the UK to 71
percent in Denmark in 1990s.
-
relatively short duration of benefits allowed in the USA – maximum 6 months (also in
the Czech Republic and in Estonia), compared with 12 months in the UK, in Hungary
and Slovakia, 24 months – for example in Spain, 36 months in Germany, 54 months in
France and no limits in Belgium (The World Bank 2002),
-
the broad scope of legal restrictions on discharging workers in Europe which has the
long-run effect of discouraging job creation;
-
the relatively low minimum wage in the US, which allows higher employment of lowproductivity workers at the expense of greater wage inequality (for example in the
retail-trade absorbing a large number of low-productivity, low-wage workers);
-
the US labor market generally allows greater wage differentiation between classes of
workers than in Europe;
-
the greater density and power of trade unions in Europe;
11
-
the wider wedge of payroll taxes and social charges in Europe (except Ireland and the
UK – see table 5);
12
Chart B
Standardized unemployment rates in the U.S.A. (as a percentage of total labor force)
%
12
10
8
6
4
2
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
1950
1948
0
Source: U.S. Department of Labor: www.bls.gov
13
-
effective indexing of nominal wages in order to maintain real wages in administration
or in selected branches in some European countries – as the result real wages don`t
keep pace with productivity and can be an important barrier to increase employment;
-
generally higher product-market deregulation (of opening hours, land use, banking
practices etc.) in the USA, which always helps to reduce unemployment by improving
employment prospects.
Of course, there are also many other factors that influence ability to create jobs and can be
the subject of comparison (for example: early-retirement schemes, invalid or sick pay
schemes, decentralization of wage determination, regular or temporary contracts regulations
and other). Generally, most of European markets are perceived as rigid and inflexible when
compared with these in North America, where legislation is less protective of employment
and foster greater mobility. Additionally, the tax burden on labor in Central and Eastern
European countries, the new members of the E.U., is the highest in Europe. Instead of
adopting law ensuring greater flexibility of their labor markets, they devote big amounts of
budgetary resources to the unemployed (The World Bank 2002).
The European analysts are perfectly aware of the above problems. One can find
remarks on the widening gap between the GDP per person employed between the US and the
EU that is the result of a widening productivity gap between Europe and the United States as
well as on the fact that in Europe employment growth stalled in 2003 and the rate of
unemployment rose slightly. They pay attention to the budget deficits that increased in many
countries, in some cases to levels inconsistent with long-term economic stability and to low
level of investment, creating new jobs (for example: E.C. articles on Europe 2004)
The Lisbon strategy has been the official and the most important EU document issued
in response to these problems. The Lisbon strategy entails a variety of targets and objectives,
agreed not only at the Lisbon Council itself (March 2000) but also at Stockholm (March
2001), Göteborg (June 2001) and Barcelona (March 2002). Not all are quantified or timespecific, but those, which concern employment, are the following:
-
an overall employment rate of 67% in 2005 (Stockholm) and 70% in 2010 (Lisbon);
-
a female employment rate of 57% in 2005 (Stockholm) and 60% in 2010 (Lisbon);
-
an employment rate for workers aged 55-64 of 50% in 2010 (Stockholm);
14
-
an increase of five years by 2010 in the average effective retirement age (Barcelona);
-
available childcare by 2010 for 90% of pre-school children over three and for 33% of
and
children under three (Barcelona).(source: European Economy, July 2003, no. 4)
In March 2004 the Economic Policy Committee (EPC) published its annual report on
structural reforms untitled “Reinforcing implementation”. The reform priorities there are as
follows:
1. Strongly promote growth-oriented economic strategies by stimulating both productivity and
employment rates within a framework of sound fiscal and macroeconomic policies.
Accelerated implementation of structural reforms in labor and product markets, and an
effective transition to the knowledge-based economy are key to making the EU economies
more competitive and dynamic.
2. Tackling structural problems in labor markets and fostering labor supply are essential to
success, as the EPC identified a year ago. Progress in this area is insufficient to meet the
agreed Lisbon objectives, in particular for older workers. The EPC stresses that action is
needed, with the appropriate contribution of social partners in conformity with national
preferences, along the lines suggested by the European Employment Taskforce by Mr.Wim
Kok:
o increase flexibility inter alia by promoting wage bargaining systems to allow wages to
reflect better productivity differentials;
o rebalance the concept of job security to emphasize improving people`s capability to
gain employment and progress in work;
o take action on benefit reforms (level, durations and/or eligibility and availability
criteria) in addition to tax reforms already implemented, so as to make work pay. Measures
need to focus on increasing labor force participation/employment as well as improving fiscal
sustainability (European Economy, March 2004, no.7).
However, achieving of the above targets and objectives depends on economic policy of
each member state separately.
15
3. HOW TO EXPAND EMPLOYMENT AND RAISE PRODUCTIVITY IN POLAND?
In the case of Poland, the improvement of labor market performance is, first of all, the
question of more flexible regulations of this market. The main issue is how to expand
employment, raise productivity and, in effect, how to increase per capita income that is now
only 41 percent of the OECD average level in Poland.
During the decade of the 1990s the economic performance of this country was one of
the best among developing countries and clearly the best among economies formerly in the
Soviet sphere. The recession, caused by the transition to the market economy, took only two
years in Poland (1990 and 1991). Since 1992 the economy grew – in 1995 and in 1997 even
by about 7 percent a year. The rate of industrial production also rose by about 12 percent in
1994 and 1997. The income per capita rose from USD 3,844 in 1991 to 8,700 in 1999 (p.p.p.
indicator).
Unfortunately, the Poland`s economic transition hasn`t been completed (Ćwikliński
2003). The only important and notable exception is monetary policy. Thanks to its proper
strategy, the rate of inflation was reduced to 1.9 percent in 2003. Real interests, however,
remain high. The state`s budget is one of the main borrowers and it is a good reason to
perform researches if crowding – out effect occurs in Poland.
The second stage of the economic transition is necessary in Poland because of at least
two main reasons (Ćwikliński 2004):
o about 2,000 Polish companies, generating about a fourth of employment and GDP,
remain in state hands;
o restoring public finances is an urgent matter, both to prevent the public debt from
breaching the 60 percent constitutional limit and also to re-establish an appropriate
balance between fiscal and monetary policy so that interest rates can be safely
lowered.
In 1990 when the transition was begun, there were 8,453 state – owned firms to be
privatized. The total quantity of state – owned firms and, additionally, companies fully or
partly owned by the state treasury in 2002 are presented in the table 7.
16
Table 7. State – owned firms and companies of the state treasury stock in Poland in 2002
Total
of which
Functioning
3263
2130
value of capital
Going bankrupt
Firms partly owned by treasury
Owned by treasury
(PLN billion)
(PLN billion)
69.9
48.7
1133
Source: “Rzeczpospolita”, July 31st, 2003
The figures of the table 7 prove that the privatization hasn’t been still completed in
Poland as the media sometimes suggests it. 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”.
One third of these enterprises (1,133) 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 that 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).
17
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 privatization of
the state – controlled industries, in particular in the coal mining, gas, electricity, chemicals,
steel and defense sector. The progress in privatization is presented in the table 8.
Table 8. Privatization incomes in Poland 1997 – 2003 (PLN billion)
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 8 prove that there hasn’t been an important progress in
privatization since 2001. The incomes of the privatization amounted to only 25.5 percent in
2001, 8.2 percent in 2002 and 11.2 percent of the value of the privatization earned in 2000.
The slowdown in the privatization 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 privatization 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.
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
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to those who were against hardship of the economic transition. The results of the policy of
doing 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 9.
Table 9. Selected items of the state budget, 1999 – 2003
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 billion, 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 billion and therefore much higher
than the planned 1.9 billion. The planned state budget deficit was underestimated due to an
underestimation to extra – budgetary funds. The Labor 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. As some spending remains off-budget in state funds and agencies,
where it is difficult to control, this can be an example of decisions, 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.
Table 10. The public debt in Poland in 2000-2004
Public debt (as % of GDP)a
2000
42.3
2001
43.2
2002
47.2
2003
51.6
2004b
54.8
a) calculation with ESA 95 gives better results
b) forecast
Source: Ministry of Finance, “Rzeczpospolita” 18th.05.2004.
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Yet the governments have made little progress on reforming public finance except
reduction in the corporate income tax (CIT) rate to 19 percent in 2004. On the other hand,
however, it has had to introduce for many goods and services “the ordinary rate” of VAT,
which in Poland is one of the highest in the EU (22 percent), since May 1st 2004. The money
of “the ordinary rate of VAT” has been one of the reasons of certain raise in inflation but it
has helped the government because non – discretionary spending, for example on public
sector wages, pensions and various allowances, accounts for nearly 70 percent of total public
outlay.
Conclusions
The Lisbon Strategy and many other EU official documents can remain “wishful
thinking” unless the role of politicians and government administration with their budgets is
limited in particular member countries. It creates too high costs and it can be the main
obstacle to further economic development.
Economic freedom was one of the aims of the transition from the totalitarian Soviettype regime to free society in Poland. The achievements of the early 1990s were immense but
the work hasn`t been completed. As the result, not market but the government imperfections
are the main problem to be solved in Poland. These imperfections prevent private companies
from investing and creating new jobs.
Tackling joblessness requires policies that increase both demand and effective labor
supply. Demand for labor has to be stimulated by policies that reduce firms’ cost of doing
business and promote private investment. The authorities should concentrate on public
expenditure reforms by improving medium – term budgetary planning and control
mechanisms in order to ensure that these plans are executed and that overall savings are
realized. Moreover, monitoring and parliamentary oversight of extra budgetary programs
should be raised to the same level as for programs financed directly from the state budget
(OECD Economic Survey of Poland, 2004). Tighter fiscal policy, by providing a more stable
macroeconomic environment and allowing interest rates to fall, should make investment more
affordable. Additionally, speeding-up privatization again should bring both: revenues to the
budget and savings when it is not necessary to pay for losses of the state owned enterprices.
In order to increase effective labor supply, following the US path and Ireland`s
example of development, it is necessary to sharply reduce the passive income support
provided to able-bodied individuals through the disability system and various premature labor
market withdrawal schemes. Rationalizing the personal transfer system, by restricting access
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to the disability system to persons who are actually physically unable to work, while
increasing means-tested support in the social assistance system for those in need, would be a
very important step toward exit from the fraudulent rules of the former Soviet system. Also
reductions in the minimum wage targeted on youth and new entrants and cuts in the tax
wedge for low-paid workers would help make hiring unskilled workers. There are also many
other issues that can influence on the improvement of the labor market performance and
reduce inactivity traps in Poland, for example benefits for unemployed, benefits and
contributions from farmers and general social assistance system that need to be harmonized
both to promote rural-urban migration and so as to facilitate farm consolidation. Together
with improving the quality of education in rural areas it should be an essential component of a
strategy to address rural poverty.
Poland`s economy lost too much time for its development between 1939 and 1989 and
made impressive progress in the 1990s. Now it is facing a challenge of the second stage of its
transition. It can`t be a transition to any form of a welfare state. In order to cope with
competitive pressure and market forces within the European Union, it is necessary to move
onto a more dynamic growth path that combines rising employment with more productive
jobs. The OECD (2004) estimates that unless policies change, Poland will not have achieved
average OECD income levels even in 50 years from now.
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