Lessons from 2009 for Poland

Thursday, December 30, 2010 »

Poland was the ONLY country in the EU to avoid recession in 2009. In 2010 we expect again the record level in Europe (around 2% GDP growth). How was such an economic top performance possible?

Probably the most important aspect was that Poland had a relative low debt ratio (about 50% of GDP) and that this debt was mainly in the home currency. With hindsight one might say that the lack of economic stimulating initiatives and the resulting slow growth and low debt under the reign of the Kaczynski-brothers wasn’t the worst option.

The truth is more complex. In fact the country was well prepared in the nineties by people such as Leszek Balcerowicz (by building up important foreign reserves, removing price controls, eliminating many subsidies, imposing a strict monetary and budgetary regime, etc.). The economic expansion of 2003-08 gave PIS an easy ride and the fact that this growth was not used to create a healthier budget balance is a unique lost opportunity. Improving that balance becomes now in the economic downturn very important and it is of course much harder to do it now. Many more issues were not addressed by the PIS rulers.

The credit line of the IMF that was allocated in May 2009 (20.6Bln USD) did not only provide added creditworthiness but it was also seen as a confirmation of the IMF’s belief in the countries ability to address the crisis and respond appropriately.

Other important factors were the relatively strong internal market, the low level of debt of individuals (that avoided a real estate crash for example), the responsiveness of the the zloty (sharp depreciation, but then again a steady climb indicates that the possibility for the PLN to float did not have much real value but psychologically it helped), the external imbalance was modest to ok, the dynamic job market allowed salaries to react, and of course the enormous EU cohesion funds.

Poland became the largest recipient in absolute numbers: about 3.3% of the GDP for the years to come. We must use these funds to create structural economic independence for the country, create a climate of competence and competitiveness, and attract more structural Foreign Direct Investments (FDIs). To achieve that, there are a few areas in which we will have to improve.

Corporate taxes are too high in order to compete with the Czech Republic, Bulgaria or Ireland. Although just decreasing taxes is not a good idea, because this becomes pro-cyclical. This means that lower taxes will lower the income of the government in an economic downturn, exactly when it needs as stable base. This means that the government should seek to shift income base from companies to private persons (why keep the special advantages for farmers?), real estate, certain forms of ownership, alcohol and cigarettes, natural resources, emissions, etc. To keep the internal market strong, a low VAT policy would be beneficial. Trustworthiness. A government should strive to continuity in economical and fiscal policies. An investor does not choose Poland because one government lowers taxes. Only when he believes that for the decades to come this policy will be sustained he will consider Poland. Simplify and modernize laws. Why would each district be allowed to have a different interpretation of the utterly complicated tax laws? What a waste of resources in both public and private sector, what a wrong focus for the investor! Would it not make sense to strive for transparent legislation where no interpretation is possible. Improve our infrastructure such as roads (and maybe consider something stronger than asphalt), fast trains and especially environmental friendly and efficient public transport such as trams. Introduce the Euro fast. Insecurity about the exchange rate is a big damper on FDIs.

In short, we should now start to prepare for the day that the money flow to Poland will stop! We should remain modest and don’t spend more than that we have (i.e. keep the government debt low). And of course keep the associated risks low, so have it in PLN or have it hedged to PLN).