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Basic Statistics of Poland (2008)
Executive summary Poland’s economic performance in 2009 was strong, given the global downturn. Although excess demand was substantial prior to the crisis, the external imbalance was modest relative to some neighbours’ and contagion was contained. Macro-policy responses to the slowdown were largely appropriate, and the sharp depreciation of the zloty cushioned the impact of the foreign shock, but contributed to the postponement of euro adoption. The slowdown even cooled off residual inflationary pressure, while the swift turnaround in wages helped limit job losses. A number of issues should be addressed, however, to strengthen Poland’s position in a globalising world and ensure sustainable growth, given the prospects of future euro adoption, persistently large EU transfers and desirable inflows of foreign direct investment.
Assessment and recommendations Despite a severe slowdown, Poland was less affected by the global recession than other OECD countries, especially in Eastern Europe. Indeed, it is expected to have recorded the best real growth outcome in the OECD in 2009 (at 1.7%), before recovering steadily towards 3% growth in 2011. Resilient final demand and the solidity of the financial system helped to contain the contagion of the economic crisis, which hit some other countries in the region so harshly. At the outset the economy had been suffering from significant excess demand, which has been eliminated by the slowdown, but external imbalances were not so large as to threaten stability.
Ensuring a balanced recovery after the global downturn Poland recorded the best real GDP growth performance among OECD countries during the global downturn. As it entered the recession with excess-demand pressure, the economic crisis curbed the imbalances that had been growing since 2006 due to an insufficiently tight macro-policy mix. In the midst of the crisis, as a result of the rise in global risk aversion that hit Central and Eastern European countries hard, the fear of collapse of the mainly foreign-owned Polish financial system and of massive capital outflows triggered a sharp depreciation of the zloty, providing a powerful underpinning to the economy. However, foreign parent banks supported their Polish affiliates and outflows seem to have been contained. Swift monetary policy reaction, using both conventional and exceptional instruments, macro-prudential measures, a small fiscal package, absorption of EU funds, government involvement to defend the zloty and IMF support all helped to restore confidence. Nevertheless, Poland was not spared from a significant slowdown, which has left the fiscal position under great strain to meet the constitutional debt rule, especially as the underlying budget deficit had widened pro-cyclically before the crisis. Combined with the unstable exchange rate, Poland had to postpone moving ahead with the euro adoption process. The shorter-term macroeconomic challenges are to restore fiscal discipline through public-finance reforms covering pension, tax and public-sector efficiency, absorb unprecedented transfers from the European Union and avoid overheating pressure and serious imbalances down the road. Given the recovery prospects, the withdrawal of monetary stimulus should begin soon, to avoid the early re-appearance of demand pressure, if fiscal policy is not tightened significantly in the immediate future.
Preparing for euro adoption The objective of joining the euro area has become an important priority in the policy agenda of the current government. The chapter focuses on the major structural reforms necessary to prepare for euro adoption that should allow a sustainable fulfilment of the Maastricht criteria and maximisation of the ensuing various benefits. These reforms are desirable independent of the effective date of adoption, given the necessity to restore fiscal discipline, maintain price stability and ensure a balanced growth going forward. However, they are even more essential in the run up to euro adoption as the process of real and nominal convergence remains largely incomplete, which requires a substantial strengthening of alternative adjustment mechanisms to domestic interest- and exchange-rate changes. The reforms should aim to: create strong institutions to ensure fiscal sustainability and an efficient counter-cyclical rules-based fiscal policy supported by an independent fiscal council; promote flexibility in labour and product markets; and head off the risk of a boombust cycle triggered by much lower real interest rates, too rapid credit expansion and overblown perceived permanent income gains. The timing of euro adoption should therefore be determined by the speed of the implementation of reforms; otherwise the outcome of early membership without appropriate preparation may turn out to be difficult and risky. Yet, provided that adequate reforms are implemented, euro adoption should speed up the convergence process.
Making the most of globalisation Since its transformation 20 years ago, the Polish economy has become increasingly connected with the international economy. The implementation of market-economy principles and the increasing participation in globalisation have fostered convergence towards higher living standards and have led to a significant shift in sectoral specialisation. Yet according to most globalisation indicators, Poland lags behind other OECD countries in the region. Challenges are widespread to improve Poland’s position in global markets, as reflected by its performance in terms of inflows of foreign direct investment (FDI), benefits reaped from FDI and both volume and technological content of exports. These challenges cover the following areas: the privatisation process; development of transport and telecommunication infrastructures; the business environment; the role of the foreign investment agency (PAIiIZ); the future of Special Economic Zones; human capital; R&D; the role of SMEs; export promotion; and a better allocation of resources via downsized agriculture, enhanced labour mobility, increased competition and financial deepening.
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