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The Warsaw Voice » Other » February 4, 2010
Voice's Award
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Polish Remedy for the Crisis
February 4, 2010   
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This year will be better for Poland than 2009, says finance minister Jacek Rostowski, the winner of The Warsaw Voice's Chair of the Year 2009 award. Prof. Rostowski talks to Andrzej Jonas and Andrzej Ratajczyk.

Poland was the only European Union country that recorded positive economic growth last year. Why do you think that was the case? Was this the result of carefully thought-through government policies or-as some economists in this country would have it-just a fortunate combination of factors such as a depreciation of the national currency, which had a stimulating effect on exports, an influx of European funds, and increased automobile sales boosted by a German incentive program encouraging drivers to scrap old cars?
These factors were not decisive in explaining why the Polish economy avoided a recession. For example, the automotive industry in Poland accounts for a smaller percentage of gross domestic product (GDP) than in the Czech Republic, Slovakia, Sweden or Germany. Why should then a German car-scrapping program help Poland, and not these other countries? The depreciation of the zloty was certainly not a key factor, either. The Czech and Swedish currencies depreciated to a similar extent as the Polish currency, but this did not save these countries from severe GDP contraction in spite of the fact that exports account for a larger share of their GDP than Poland's. Nor was Poland's economic growth determined by EU funds invested here last year. All new EU member states were eligible for a similar amount or more EU funds in relation to GDP than Poland. But that did not help them.

It is absurd to argue that Poland's economic growth is explained by the fact that the domestic market makes a large contribution to GDP. In reality, the share of the domestic market is much smaller than in four of the other five largest EU countries (in other words, all except Germany).

So what are the real reasons for Poland's success story?
In my view, this was determined by three groups of factors: social, institutional and economic policy. As far as social factors are concerned, the flexibility and resilience of Polish entrepreneurs and the calm displayed by consumers were particularly important. But institutional factors were equally significant. The resilience of the Polish political system, its state institutions and its companies shows that over the past 20 years we have built an unusually strong policy and economy.

What role has the government played in all that?
The government refused to give way to panic. Our response was based on our trust in free market principles. And this explains why, in some areas we decided not to take action, while in others we moved quickly and decisively.

The Polish government chose its own way of combating the crisis. We resisted the pressure of the opposition, and refused to copy Western Europe, which implemented huge stimulus packages. In Poland, there were no interventionist measures designed to support individual sectors or enterprises. There were no special bailout plans. This was because we believed that Polish entrepreneurs would cope with the crisis without intervention. And our diagnosis proved to be right.

Wouldn't it be a bit risky to expect free market mechanisms to take care of everything?
That is why we took action where we believed it was necessary. First we focused on strengthening the banking system, so that no Polish bank would go under.

Despite huge pressure from the banking community, we decided against introducing government guarantees for interbank transactions. Instead, we increased bank deposit guarantees. We also passed laws to ensure the liquidity of financial institutions and to inject extra funds into the banking sector where it was necessary. However, it proved not to be needed.

Above all we took action to protect the banking system from the serious threat of the uncontrolled depreciation of the zloty. When it was necessary, in March 2008 we sold euros. This stopped the zloty depreciation in its tracks. We also secured a flexible credit line of $20 billion from the International Monetary Fund (IMF), which considerably increased Poland's international credibility.

Second, we introduced a savings and revenue package worth almost 2 percent of GDP during 2009, in several slices. This limited the deterioration of public finances resulting from the crisis. While everyone in Western Europe was introducing stimulus packages, Poland came up with a savings package. Poland was the only country that did this when it was not obliged to do so by circumstances, as Hungary or Latvia were. Poland's savings package was huge-zl.12 billion. That was important because it boosted Poland's credibility on debt and currency markets, at a time when the financial press throughout the world was writing about the vulnerability of Central Europe.

Another thing we did was the introduction of a law on what are called bridging pensions. This made it possible to save around zl.350 billion, or 27 percent of GDP, in hidden public debt. These savings result from limits to early retirement rights, which were previously enjoyed by some 6 million people in Poland. The Polish prime minister spoke out in the international arena against protectionism at two European summits. A joint initiative by Donald Tusk and other Central European prime ministers, to support European Commission President José Manuel Barroso, put the brakes on resurgent protectionism. This was important because concern over a rising wave of protectionism in Western Europe was one of the reasons for the weakening of the zloty and other regional currencies. I think it is thanks to all these policies and initiatives that Poland managed to avoid a recession.

It seems that, quite apart from economic and political factors, psychology also played a role in the face of the crisis. Would you agree that the government was able to pursue its policies without bending to popular demands-for a quick revision of the budget law, for example-because it had a large degree of public confidence?
It was very important that we did not panic and amend the 2009 budget too early. If we had done that, we would have unnecessarily made the market more nervous, adding to the nervousness that already existed due to the depreciation of the zloty. The main problem related to the supplementary budget was that until mid-year we did not have the macroeconomic statistics that we needed to make well founded mid-year forecasts. The question was how the market and the public would react to such a revision. Had we acted too early, the initially scant tax receipts would have forced us either to make additional dramatic spending cuts or to plan for a huge budget deficit. Either solution would have added to the nervousness of consumers and companies. That is why it was important that we decided to go ahead with the supplementary budget only at mid-year. In this way we also avoided further revisions.

Has your previous experience as an adviser to former deputy prime minister and finance minister Leszek Balcerowicz in introducing economic reforms in this country during the crisis of the early 1990s helped you in your current work?
I'm convinced that the experience I gained in 1990-1991 has been the basis of my steady nerves in this crisis. I was well aware of the chaos that often prevails at a time of crisis. I knew that in crisis situations, every other day one gets completely new information about unexpected threats. And three days later this information often turns out to be untrue, and the threat is either nonexistent or looks completely different. I knew that in a crisis every piece of information needs to be quadruple-checked and analyzed twice before one can begin to act on it. But to be able to react like this, one needs to be familiar with the nature of crisis situations. And it was precisely this familiarity that allowed me to remain calm and react rationally to very fast moving developments.

Many observers of Polish politics attributed your stoicism to the fact that you were born and grew up in Britain. You come from a family of Polish immigrants. Your father held a senior state post in Britain. It would have been natural for you to live and pursue your career to Britain, just like most immigrant families do. But you have chosen to keep in touch with Poland and started to work for the Polish government, culminating in your appointment as finance minister. What made you choose this particular career path?
I was born in England, into a Polish family. We always spoke Polish at home. I didn't learn English until I was five. The fact that my father was a British civil servant didn't really matter. As a former empire, Britain is a multinational country and one can be both Polish and British at the same time. This explains why I never lost my national identity.

Besides, my strong ties with Poland resulted from my family's anticommunist opinions. I particularly had contact with the Solidarity movement. In fact, it was in this community that I met my future wife, who was organizing an exhibition about Solidarity in London. Later I met Polish opposition economists Waldemar Kuczyński and Ryszard Bugaj as well as Leszek Balcerowicz, for whom I worked as his adviser a few years later.

The Polish economy escaped the crisis relatively unscathed last year. Will the same be the case this year? Aren't you afraid of a second wave of the crisis? What are the government's priorities for 2010?
I don't have a crystal ball, but it seems to me that there will be no second wave of crisis. And I think that this year will be better for Poland than 2009. Our strategy will certainly change because our priorities are changing. Last year we prevented economic contraction while introducing a very large reduction in expenditure. This policy was crucial for maintaining Poland's credibility. Now we must focus on consistently reducing the public sector deficit so as to maintain the public debt-to-GDP ratio below the legally mandated the level of 55%. So this year policy will be different.

For this year we have a very responsible and conservative budget that provides for zero-percent wage growth and a 10-percent nominal reduction in other current and capital expenditure. And we are preparing for the years ahead, a period during which we will have to consistently reduce the deficit. According to European Commission forecasts, if, from the overall public debt figure, we subtract public debt resulting from the need to compensate for open pension fund (OFE) premiums-which are expenses that other countries do not incur and which reduce our implicit pension debt-then at the end of this year Poland's debt-to-GDP ratio will be around 42 percent, while the average for the euro zone will be 84 percent. This would rank us in ninth place among European Union countries with the lowest debt. My ambition is to make sure that Poland makes it into the top five in this league table a few years from now.

Keeping public debt and the deficit at an appropriate level is not only a matter of the country's international credibility but also a condition for entering the euro zone. When will Poland be ready to adopt the single European currency?
Prime Minister Donald Tusk recently said that 2015 is a realistic date for Poland to adopt the euro. But we are not aiming for this date as an overriding goal. We are not yet at this stage. First we must deal with the problem of the debt-to-GDP ratio, which will also indirectly require bringing down the deficit. And this is our priority. Once this is taken care of, we will be thinking of the next step to take. Joining the euro zone is a strategic goal for this government, but one for the medium term.

Awards for Rostowski
Banking and finance magazine The Banker has named Polish Finance Minister Jacek Rostowski as best finance minister in Europe in 2009. The magazine chose Rostowski after consulting bankers and economists. Rostowski was praised for his swift reaction to the global economic crisis. He also won plaudits for asking the International Monetary Fund for a credit line that helped stabilize the zloty.

Rostowski's "calm and astute handling of the global financial crisis helped to sustain investor confidence," The Banker said. "He also grasped ahead of other governments in Central and Eastern Europe the significance of the International Monetary Fund's new fast-track flexible credit line."

Earlier, in October 2009, Euromoney magazine Emerging Markets named Rostowski Finance Minister of the Year for Emerging Europe 2009, praising him for "using the right financial instruments at the right time."
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