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The Warsaw Voice » Other » November 18, 2009
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Reforms Vital for Growth
November 18, 2009   
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Prof. Leszek Balcerowicz, former central bank governor and ex-finance minister, talks to Andrzej Ratajczyk.

Poland could be the only country in the EU to have positive economic growth this year. Why Poland?
It is a combination of things. Objective factors include the size of the Polish market. Poland is a much larger country than, for example, Lithuania and the Czech Republic, which makes it less dependent on external markets. A factor related to economic policy, in turn, is that Poland never allowed a credit boom to the extent other countries did, especially before 2007. That was a result of the relatively cautious policy the central bank followed before 2007 as well as supervision of banks that sought to stop households from falling into excessive debt in convertible currencies.

But as we celebrate this relative success, let us not forget this performance by the Polish economy may turn out to be short-lived unless Poland launches several essential reforms. Without the reforms, long-lasting and stable economic growth will be difficult to maintain.

Which segment of the Polish economy should be reformed first?
The poor state of public finances is the biggest problem for the economy, and that's nothing new. Public finances have been ailing for years, except that in normal times, when there is no economic crisis, it is a chronic disease, while during an economic slowdown the disease enters an acute phase. The only cause of this disease is the bloated public spending that reaches 43-44 percent of Poland's GDP. This is far more than what western countries were spending when they were in a development phase similar to that in Poland now. The main part of public spending goes on welfare payouts, which in Poland are frequently misallocated. Contrary to the slogans we hear, the payouts do not always reach the poorest and most needy. What elaborate spending on welfare usually does is make people less willing to work and to make individual savings. Through these two mechanisms, spending on welfare slows economic growth down and when problems accumulate, they lead to an economic crisis. I consider this to be the main obstacle on the road to rapid and long-lasting development.

Poland and Polish people should be interested in catching up with the rich West as soon as possible. But this will depend on several reforms, reform of public finances being the most important one. This reform should result in a lower ratio of public spending to GDP, mainly to lower the deficit and lower taxes. That is tied to steps aimed at stimulating employment. Such steps should both make the unemployed take up jobs and make working people work longer, that is, retire at a later age. This is very important for the recovery of public finances and development.

Why is there so much resistance in Poland to any reform of public finances?
Fiscal policy is the most political of all economic policies. For example, monetary policy can be exercised with a degree of isolation from political pressures thanks to constitutional guarantees of the central bank's independence. Privatization is similar and while it is frequently the subject of public debates, privatization decisions as such are the domain of the Treasury Ministry and the government, which means they cannot be stopped by parliament or the president's veto. Budget policy, on the other hand, is the domain of parliament and so it is often a product of different political pressures. It is therefore extremely important to motivate the public and convince as many people as possible that a policy that leads to high taxes and escalating public debt is simply destructive.

The economic crisis has been fairly gentle on Poland so far. But unless the economic situation improves globally, Poland will find it hard to develop as fast as two or three years ago. Do you think the crisis has hit rock bottom yet and a rebound is around the corner? Or are we in for a second wave of crisis?
In modern history, we have only had one case of a huge economic crisis, the one in the 1930s. The depression was not a product of a free market, but a consequence of errors accumulating in the policies of the largest superpowers in the world, the United States among them. The contributing factors included the overly strict monetary policy of America's central bank and a succession of other mistakes, such as protectionism. That destroyed the first major wave of globalization which began in the second half of the 19th century. As far as the present crisis is concerned, a lot seems to indicate the bottom is near and we should bounce back soon. But nobody knows how strong the rebound will be. That will depend on what economic policies global superpowers adopt. For example, if countries which tried soothing the crisis by radically increasing their budget deficits and public debt (in relation to GDP) decide to mainly raise taxes to recover, they will slow their economic growth further. If, on the other hand, they choose to cut spending, they may stimulate economic growth in the longer run. This is a big unknown. The strength of the rebound will depend on the strategies adopted.

Another unknown is how aggressively countries decide to pursue the battle against climate change. Will declarations of a 20-percent cut in CO2 emissions and energy consumption by 2020, coupled with 20 percent of total energy production coming from renewable energy, be followed by a policy that in reality hinders the development of at least some EU member states? Will this policy be adapted to the real economic situation? There is a widespread myth that the fight against global warming will only bring benefits and cost nothing. That's obviously an illusion. It is an extra uncertainty factor too.

Can the fact that Poland has been coping with the crisis much better than other European countries consolidate its position in the region? Will investors finally begin to perceive Poland as a large and stable country rather than as just one of many emerging markets?
It will all depend on how the situation develops in the future. One good year does not determine everything. The situation is highly changeable, as shown by Hungary which has suffered an economic crash, caused mainly by an extremely careless budget policy. The result was a 7-percent fall in GDP, while spending had to be cut and taxes raised. However, next year Hungary's budget deficit will be much lower than Poland's. So if we just rest on our laurels over the good results in 2009 and fail to address our problems through reforms, especially in public finances, Poland may turn out to be just a seasonal tiger economy.
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