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The following OECD assessment and recommendations summarise Chapter 5 of the Economic Survey of Poland 2006 published on 28 June 2006.
Contents
Should more be done to make work pay and increase mobility?
While training will improve job prospects for many unemployed, they also need to have the right incentives to look for jobs. A large part of the population receives social transfers, some of which are generous relative to the average wage, with no job search requirement. The disability pension scheme, which covers a significant share of the inactive, used to be a major culprit. Access has been tightened, and re-assessment of those previously given temporary pensions has succeeded in substantially lowering the stock of beneficiaries. However, nothing has been done to re-evaluate the condition of those who were previously given permanent pensions, even though many may be capable of some sort of work. Recipients of disability benefits should be subject to regular monitoring of their work capacity. The right to social benefits for those who are able to work should be linked to the obligation to look for a job and to accept retraining when offered; for the longer-term unemployed, this may include willingness to move to another location where jobs are available. These measures require a more active and responsible role for the public employment service (PES). PES staff themselves should be better trained and be given incentives to improve performance.
Access to other benefits, such as survivors’ pensions, has not been touched, and pre-retirement schemes have grown rapidly, offsetting some of the positive impact of the reform of the disability scheme on labour supply; the average effective retirement age has actually fallen in recent years. Pre- and early-retirement programmes should be fully phased out as previously intended.
Other aspects of the social transfer system are also problematic for structural adjustment. The separate system of social security for farmers and their dependants (KRUS) is one of these. The high level of subsidy to KRUS creates a disincentive to leave the agricultural sector, despite its extremely low productivity. Even if farmers previously merited exceptional treatment, because of their low incomes or special position in society, this is no longer justifiable, particularly as subsidies from the EU Common Agricultural Policy are beginning to bolster agricultural incomes. Farmers should receive treatment equal to, but no better than, those in the general scheme; in the longer run the two should be merged. At a minimum the fixed contribution approach used in KRUS should be replaced by a system of contributions proportional to income so that affluent farmers would pay more relative to their benefits.
Neither employment legislation protection (EPL) nor the minimum wage are the major cause of high unemployment, but the popularity of short-term contracts and the probable extent of informal employment suggest that they can be obstacles for specific groups, such as the low-skilled and older workers, to price themselves into jobs. Moreover, given the likely magnitude and pace of structural change, Poland cannot content itself with average labour market flexibility; it needs to be more flexible than most:
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The government should consider further easing EPL on both indefinite and fixed-term contracts. The prohibition on dismissing workers within four years of retirement should be abolished, as it will serve to discourage employers from hiring older workers.
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The minimum wage, which has fallen to around 34% of average wages over the past decade, will increase substantially under a new indexation rule. Even though it is unlikely to reach the long-term target of 50% of the average wage in the near future, any substantial increase, combined with the high tax wedge, will keep many low-skilled workers out of a job. The government should revise the rule so as to avoid an increase in the cost of unskilled labour. The current exemption allowing some young workers to be paid less than the minimum wage could be extended to apply to other groups, notably the long-term unemployed.
Though labour market incentives are crucial in encouraging geographical mobility, the cost of finding accommodation can offset even quite significant income incentives to move. In the past, rent controls, security of tenure legislation and limited supply of new housing in areas of growing demand meant that these costs were indeed high. Most rent controls have now been abolished, but security of tenure legislation and legal delays if a landlord wishes to take court action are still a disincentive for owners to rent out their property. While reasonable protection against abusive landlord behaviour should be retained, the level of tenant protection should be reduced and treatment of disputes by the courts accelerated. New housing supply should be encouraged by allowing well planned urban development, not by subsidising mortgages, which will benefit mostly the already relatively well-off and further increase prices
How can the business framework for entrepreneurship and innovation be improved?
Previous Surveys have repeatedly criticised Poland for high levels of product market regulation (PMR) and other barriers to competition. Much has been done to improve the situation, especially in terms of reducing the costs of setting up businesses. Some of these changes were implemented after 2003 when the latest indicators showed Poland with the highest overall level of PMR, but it remains among the highest: the business environment is still not sufficiently conducive to entrepreneurship. The low share of investment in GDP is further evidence of a lack of confidence and obstacles to business activity. Further reductions in regulatory and administrative barriers to entrepreneurship must be given priority. Although corruption indicators do not form part of the PMR comparisons, Poland has the worst reputation for corruption among OECD countries on the more informal indicators published by respected non-governmental organisations. The government should persevere with attempts to eliminate corruption as it is a disincentive to both domestic entrepreneurs and potential foreign investors.
OECD indicators show that Poland’s product market competition suffers especially from the high level of public ownership. Privatisation policy has been dilatory in recent years, and a recently resolved dispute about a banking merger between two foreign-owned banks has encouraged the view that the current government favours retaining a major State influence in this and possibly other sectors; this has unfortunately also created perceptions of an ambivalent attitude to foreign investment. Privatisation should be pursued more vigorously, retaining public stakes only where there is a genuine public or security concern based on consumer welfare, not on protecting producer interests.
Business expansion and technical progress are often thought to depend on high levels of research and development (R&D) expenditure, and indeed this is how the frontiers of technology are pushed out. R&D in Poland represents a smaller share of GDP than in any other OECD country. Not all countries with low shares of R&D grow slowly, however. Although, for a low-income country like Poland, targeting increases in R&D expenditure on basic research would be a mistake, studies show that R&D activity can help existing technologies to be absorbed more easily. But most Polish R&D is currently undertaken in the public sector, especially in specialised research institutes. Public unconditional finance for these institutes should be reduced, and they should be increasingly required to finance themselves through competitive project selection and commercial joint ventures; similar methods should be applied to the research side of HEI activities.
New ideas need not mean new technology; improvements can often be achieved with innovation in design, marketing or work organisation. In addition to investment in human capital that improves absorption and dissemination of innovative ideas, discussed earlier, this means ensuring that Poland is open to new ideas from abroad. The government should re-affirm its commitment to the involvement of foreign enterprise on equal terms.
Ideas also need to circulate freely within Poland, and the regional networks operated by or linked to PARP, the agency for enterprise development, are a good tool for giving access to information and advice to the many Polish SMEs. PARP should be encouraged to develop its networks, and they should be co ordinated or preferably merged with other similar networks – those related to agriculture, for example.
The 2005 law on support for innovation has a number of useful ideas for improving the flow of finance to potential innovating companies. In putting it into operation, the authorities should try to leverage private finance, involving venture capital companies, and take care to monitor different approaches for their effectiveness, retaining what works and discarding what does not.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
The complete edition of the Economic Survey of the Poland 2006 is available from:
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SourceOECD for subscribing institutions and many libraries
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OLISnet, under "Publication Locator", for government officials with accounts (suscribe)
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Additional information
For further information please contact the Poland Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by Paul O'Brien and Stéphanie Jamet under the supervision of Peter Jarrett.
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