Economic Strengths and Challenges

Poland needs to cultivate and promote its competitive economic advantages – a highly educated population, low cost labor, geographic location – and tackle effectively its challenges – excessive red tape, corruption, and a poor infrastructure. 

Poland is strategically situated at the center of Europe and has the largest economy of all of the former Soviet bloc countries, with a well established heavy industry base. Poland could be the assembly, warehouse, and transport hub of Eastern Europe. But after more than 15 years of pioneering free market experiments, Poland’s economy is not keeping up with many of its East European neighbors. The higher growth rates posted from 2000 to 2004 are now expected to diminish, despite an environment of increased liquidity provided by EU accession funds, stable foreign direct investment (FDI) flows, continued government spending, and a dynamic consumer services sector driven by rising incomes and improved access to credit.  Moreover, high unemployment rates persist despite a continuous stream of foreign companies establishing a presence in Poland. Corruption and red tape are serious impediments to continued foreign investment as is Poland’s underdeveloped infrastructure. (See below)

The government will also face a challenge in keeping its well-educated population in Poland.[1] A large percentage of Poles (more than one million students by some accounts) are enrolled at universities. Many of them are technically proficient and fluent in English and German. But in recent years a large number of educated Poles have left the country to take jobs in the EU and elsewhere. By some estimates, Poland has lost an average of 26,000 people per year since 1989[2]. Since 2004, for example, 200,000 Poles have gone to Ireland alone.[3] The brain drain will accelerate unless Poland implements economic policies and incentives that create faster growth in order to employ the surging population of university graduates.

Poland is also losing its low cost labor advantage.  In 2004 Poland’s minimum monthly wage was €190 versus €1,286 for France and €490 for Spain. Yet Poland’s minimum wage was significantly higher than that of Latvia, Lithuania or Slovakia.[4] Poland’s labor cost advantage should be exploited now in order to strengthen the industrial base before wages equalize with the rest of the EU. The equalization of wages has already started and will inevitably subject numerous Polish economic sectors to medium-term price pressure.

One of Poland’s greatest impediments to economic growth is its underdeveloped infrastructure.  Poland is ideally located at the crossroads of Europe. An underdeveloped infrastructure, however, prevents Poland from taking full advantage of its attractive geographical location and seriously undermines the prospects for future growth[5]. Poland’s infrastructure of modern roads and transportation is in catastrophic condition. It has the worst road network in Europe, with only 3% of its main roads meeting EU standards. Its motorway density is one-sixth that of other central European countries. There are various reasons for the infrastructure problems: building roads is expensive, there is a lack of trust in public/private partnerships, which the new government argues are open to potential corruption, and there is legal ambiguity about who owns the land. Now that Poland is a member of the EU, it can tap into community funds for infrastructure development. It could also impose a gasoline excise tax to rapidly build highways, and introduce an effective eminent domain law to enable the rapid purchase of adequate roadbeds.[6]  An additional challenge, however, will be to get different sectors of local government plus the government ministry to agree to a plan. Ironically, the lack of adequate roads has resulted in the rapid development and expansion of the airport infrastructure. Low-cost carriers such as RyanAir[7] and EasyJet have transformed cities such as Krakow and Wroclaw into booming tourist destinations with rapidly expanding hospitality sectors.

The government must increase access to capital in order to encourage the entrepreneurial sector and promote growth. Poland has a very high rate of small entrepreneurs and small farms. Inadequate access to capital, however, limits the prospects for small and medium enterprises and farms (“SMEF”), and the regulatory environment is burdensome. The majority of the commercial banks has focused on the consumer sector by emphasizing products such as mortgages and credit cards, but has failed to satisfy the demands of the SMEF sector.

Poland lacks channels that could provide risk capital to potentially viable startup ventures. Entrepreneurs with limited options to develop start-up companies in Poland tend to pursue their goals in other countries. The opportunity exists to establish formal channels to attract investment capital from the large Polish diasporas in the US, Canada, and elsewhere. Such risk capital could stimulate the development of an entire venture capital industry in Poland.

In general the government must make greater efforts to attract foreign direct investment.  Poland lags per capita in relation to its neighbors in the amount of FDI it has received. It should, however, be attractive for such investment because of the size of its market (40 million people), location (center of Europe), young and well-educated workforce, and low wages. Moreover, there is some concern that foreign investors will shift their attention to newer EU member states that offer even cheaper labor. Historically, the privatization process has been responsible for a large portion of FDI flows.  But the Polish economy is largely privatized at this point. So Poland will have to build global awareness about the advantages it can offer to potential investors. It would help to focus on key industries in which Poland can position itself most effectively. Some of the more successful sectors to date include the automotive industry, furniture manufacturing (already preeminent in Europe), and agriculture, particularly fruit and vegetables. The current agency in charge of attracting foreign capital[8] needs a broader mandate with powers to establish representative offices throughout the EU and North America.

One of the main obstacles to increasing direct foreign investment that must be addressed urgently is the high degree of corruption throughout all levels of government. Transparency International listed Poland at number 70 in its perceived corruption ranking, putting Poland in the same category as Syria and Burkina Faso and making it the most corrupt of all Central European countries. The new government has created an anti-corruption task force that is expected to employ around 500 elite investigators at a cost of $30 million annually. Some opposition politicians, especially from Civic Platform, maintain that this task force will only add an additional layer to the bureaucracy. They argue that the government should instead focus on enforcing existing anti-corruption laws.

The government will also have to tackle the problems of excessive red tape and the need for judicial reform, both of which hinder economic growth. One legacy of the Solidarity movement was labor laws that strongly favored trade union rights and interests at the expense of business development. Poland desperately needs to create a more efficient and fair judiciary and to develop a simplified tax system. CIT and VAT taxes are in line with the rest of the EU, but social security contributions and payroll taxes are excessive.[9]  According to a 2006 World Bank report ranking entrepreneur-friendly business climates worldwide, Poland fell from 45 to 54 out of 155 countries[10] in recent years.  Poland dropped in the rankings largely because of its overly burdensome tax regime and its excessively complicated legal regulations and bureaucracy. Poland has made efforts to fix these problems, but contract enforcement in Poland still takes an average of 980 days[11], making Poland 104th out of 155 countries worldwide in enforcing contracts. In order to do business in Poland, a company must pay 43 different taxes, giving Poland a ranking of 106 out of 155 countries worldwide. Estonia, by contrast, only has 11 business taxes.

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[1] Population (#23 in the world, US is #14, (http://www.nationmaster.com/graph-T/edu_sch_lif_exp_tot))

[2] (http://www.migrationinformation.org/Feature/poland_table1.cfm). Polish census data indicted that in 2002 there were 786,000 Poles living abroad (http://www.iom.int/DOCUMENTS/PUBLICATION/EN/IOM_III_PL.pdf)

[3] Cited in A Survey of Poland, The Economist, May 13, 2006, p.3.

[4] (http://www.eiro.eurofound.eu.int/2005/07/study/tn0507101s.html)

[5] (http://www.masterpage.com.pl/outlook/poland_roads.html)

[6] In a country where land was nationalized by the former communist government, there is an inherent distrust by the population for a concept like eminent domain and the government authorities will have to approach the topic diplomatically and with a sound financial benefit to the affected parties.

[7] “60 Years After VE Day: Rynair Liberates Poland”, 18 May 2005.

[8] PAIiIZ

[9] Katarzyna Dębek, “Temperature Slumps in Poland’s Business Climate” Warsaw Business Journal, p. 19, November 7-13, 2005

[10] Doing Business in 2006: Creating Jobs (http://www.doingbusiness.org)

[11] Doing Business in 2005: Removing Obstacles to Growth

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