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  Assessment and Recommendations

  The slowdown in economic activity that was already evident at the time of the previous Economic Survey of Poland has  since intensified. GDP grew only 1 per cent in 2001, and unemployment reached about 19 per cent of the labour force. Since then the weakness of demand has persisted, with output expanding 0.5 per cent in the first quarter of 2002. In this environment, inflation fell to less than 4 per cent in 2001, and, as of May 2002, was 2 per cent. The driving force behind the slowdown has been a sharp fall in investment activity – in response to very high interest rates following the slowdown in European demand and the pick up in inflation in 2000. In contrast, and despite a 3.5 per cent fall in employment, strong real wage growth and large World War II related transfers have allowed private consumption to increase. Overall, the weakening of demand closed the large positive output gap that had opened up following the fast growth of the 1990s and resulted in a substantial negative one by mid-2002. This helped to quell the inflationary pressures that emerged in 2000 and was reflected in the narrowing of the current account deficit to a still high 4 per cent of GDP.

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  Recent Economic Developments

  The slowdown in GDP growth that began in 2000 intensified during 2001 and has continued into the first half of 2002 (Figure 1). As indicated in the previous Economic Survey of Poland (OECD, 2001) the cyclical downturn was a necessary and welcome response to the overheated state of the economy following several years of very strong growth and investment performance. Indeed, the slowdown bears the hallmarks of a classical investment cycle, although its impact on activity was exacerbated by the growth slowdown elsewhere in the world. The accompanying deterioration of the Polish labour market is worrisome. At more than 20 per cent of the labour force (on a labour-force survey basis), Poland’s unemployment rate is the highest in the OECD and almost half of the working-age population is not working. On the positive side, inflation has come down dramatically and as of May 2002 has been less than 4 per cent for over 6 months. Moreover, there are virtually no indications pointing to a return to higher rates of price increase. In this muted economic climate, indications are that the recovery in output in 2002 and 2003 will be moderate, and unemployment is likely to remain high over the near term. Looking further forward, a number of important reforms will be required in both labour and product markets if unemployment is to be brought down to acceptable levels and the economy is to achieve high rates of growth on a sustainable basis.

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  Macroeconomic Policies

  After 12 years of transition, Poland has succeeded in bringing inflationdown to a low rate and has kept it there for 7 months. This is an important accomplishment. Now, the main challenge before both the fiscal and monetary authorities is to ensure the permanence of this achievement, so that the Polish economy and population can reap all of the benefits of price stability. To meet this challenge will require adjustments in the macro policy mix and a more mutually supportive approach on the part of both the monetary and fiscal authorities.

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  Improving the Efficiency and Sustainability of Public Expenditure

  Notwithstanding the decline in public expenditure between 1990 and 1995, government spending has remained a relatively stable and high share of GDP (46 per cent in 2001). Moreover, as discussed in Chapter II, the rapid rise in the general government deficit in 2001 and medium-term spending pressures suggest that a fiscal consolidation will be necessary in order to prevent the debt from reaching its constitutional limit of 60 per cent of GDP. A number of important steps to control the future evolution of spending, such as the 1999 pension and the more recent (and arguably less successful) healthcare sector reform, have already been made but much more needs to be done. A further tax increase appears undesirable given the country’s already high tax burden and evidence that associates this with slower growth. Rather, budget consolidation and the government’s goal of increasing the economy’s potential rate of growth can best be achieved by a far ranging reevaluation and re-orientation of spending away from personal transfers that contribute to inactivity traps and towards productivity and employment augmenting policies. This, in turn, will require substantial improvements to public expenditure management systems so as to provide the authorities with the tools they need to identify and effectuate needed budgetary reallocations.

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  Implementing structural reform

  As described in previous OECD Economic Surveys and the Review of Regulatory Reform in Poland (OECD, 2002), Poland has made substantial progress towards establishing an institutional structure compatible with a well-functioning market economy. The private-sector now produces some 70 per cent of GDP; there are over 3 million independent firms; the Polish stock market is the most active and largest in central Europe and, in recent years, Poland has become a privileged destination for foreign direct investments. This transition has been facilitated by major changes to laws governing capital and product markets, and efforts to improve the regulatory framework. Increasingly industrial policy dictates and over-regulation are giving way to market forces, and economic relations are being governed by law, with independent regulators ensuring that competitive forces help to distribute the fruits of this transformation to the population as a whole. Despite substantial accomplishments over the past decade, problems persist. In product markets, an acceleration of the privatisation process and further strengthening of the regulatory environment are essential to speed up the rate at which Polish incomes rise to western European levels. Progress in improving the functioning of labour markets has been less marked. With unemployment now in excess of 20 per cent (based on the Labour Force Survey) and non-employment looking increasingly structural in nature (Chapter I), there is an urgent need to correct distortions so that market forces can complement efforts to reactivate the population.

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  Annex
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