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  Assessment and Recommendations
  Entering the European Union in May 2004 gave an important boost to the Polish economy. GDP per head is currently under 45% of the EU average, but the long process of convergence has resumed. Although growth waned somewhat during 2005 when real GDP rose by only 3.2%, current prospects are for annual growth of 4½ per cent during 2006-07. EU funds will make an important contribution to improving public infrastructure and support policy in several other areas, provided they are used effectively.
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  Key Challenges
  Although inflation appears to have been controlled, and at least moderate economic growth has resumed, Poland faces important macroeconomic challenges in ensuring fiscal sustainability and aligning fiscal and monetary policy with the requirements for adoption of the euro. Its labour market performance is the worst in the OECD, with both low participation and high unemployment. Aspects of social and labour market policy and a poor business environment, including pervasive public ownership and weak framework conditions for entrepreneurship and innovation, seem to be behind this sub-standard performance. Although the education system has seen important progress over the last 15 years, there remain a number of areas where pursuing further reform in human capital development could contribute to improved labour market outcomes, faster productivity growth and greater equity.
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  Monetary and Exchange Rate Policies
  Monetary policymakers have successfully consolidated a lowinflation environment in Poland, ridding it of a major problem. The inflation-targeting regime is now well established, and both the economy and policy-making arrangements have shown a strong degree of resilience in the face of sharp swings in the real exchange rate. With the benefit of hindsight it seems that monetary settings may have been temporarily too tight in reaction to what turned out to be a short-lived increase in inflation after EU accession.
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  Achieving Fiscal Sustainability
  Although Poland’s fiscal position has improved in recent years, public expenditure is not well controlled. Moreover, despite an important earlier reform of the pension scheme, significant population ageing will generate upward pressure on spending. Expenditure on social transfers is particularly high, and the taxes required to finance them create a tax wedge that is one of the highest among OECD countries. Since EU accession, transfers to Poland have increased; this is an opportunity for the country but also a challenge for the budget. This chapter discusses: i) how to improve the fiscal framework in order to achieve fiscal sustainability; ii) means of reducing public expenditures so as to lower the tax wedge; iii) ways to efficiently absorb transfers from the EU.
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  Education and Training
  An effective system of education and training is important for both social and economic reasons. Its role in the Polish economy is to provide the current and future labour force with skills to facilitate both continuing productivity growth and reallocation of resources as structural adjustment proceeds. Important reforms to decentralise primary and secondary education in the late 1990s are now reaching maturity, as cohort sizes decline steeply. These reforms and PISA results have focused attention on quality control and the place of vocational education. Both are important in the tertiary sector, too, which has seen a four-fold expansion in 15 years, mushrooming of private-sector provision and questions on the appropriate balance of public and private funding. Participation in adult training is low too and, as elsewhere, seems to be concentrated among already relatively highly-educated groups but does not seem to be having much impact on improving the human capital of older and less skilled groups.
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  Encouraging Structural Adjustment
  GDP growth has been below potential for several years, with the exception of 2004. Structural change has continued, but in order to reduce unemployment and increase both actual and potential growth, adjustment will need to proceed more quickly. Labour force flexibility is restricted more by the social transfer system than by labour market policies themselves, although these and other factors such as the housing market and education do play a role. Adjustment and potential growth are also hindered by some features of the business environment, particularly aspects of product market regulation and the still-important role of the public sector in the economy, while policies to increase innovation have yet to produce significant results.
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