Productivity and long term growth

Economic Survey of Poland 2010: Making the most of globalisation

 

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The following OECD assessment and recommendations summarise chapter 3 of the Economic Survey of Poland published on 8 April 2010.

 

Contents

Policies to make the most of globalisation cover wide areas

Poland has made tremendous progress in increasing international linkages in capital, product and labour markets, as reflected by significant shifts in specialisation towards sectors with underlying comparative advantages. Yet, while maintaining macroeconomic stability is a prerequisite, a wide range of reforms could enhance participation in the globalisation process beyond EU integration, so as to better allocate resources, exploit economies of scale and speed up technology diffusion. These include the product  and labour market reforms discussed above that would help to respond to the ongoing structural changes that characterise globalisation. Given that investment needs easily exceed the flow of available domestic saving, attracting FDI is key. However, the positive effects of foreign capital inflows depend on the capacity of domestic firms to absorb them, and an appropriate institutional setting is necessary to extract all the benefits. Also, while globalisation tends to magnify economic inefficiencies, major obstacles that prevent firms from developing their full potential in export markets should be removed.


Reducing the role of the state and the administrative burden

The privatisation process should be reinvigorated and its credibility strengthened. Poland is the OECD country where the grip of the state on the economy is the tightest, and privatisation was largely stopped in the mid 2000s. While sales of public firms directly attract foreign investors, privatisation also represents a commitment to market economy principles, which tends to raise investors’ confidence. Beyond generating public revenues, greater private ownership would provide more scope to boost investment in a fiscally constrained environment, in addition to improving the governance of state owned enterprises and productive efficiency more generally. The government recently designed an ambitious privatisation programme involving the sale of 802 firms aimed at generating proceeds representing 2.7% of annual GDP between mid 2009 and end  2010. The plan fell short of its objectives for 2009, in part no doubt because of stock-market weakness. To ensure success this year reasonable asking prices will have to be set. In any case, the whole approach should be transparent and consistent and avoid overly generous compensation to the specific interests affected by the sales. Investors might not be inclined to participate in partial privatisations that leave open the possibility of future state intervention. In particular, the “golden veto” legislation by which the Treasury was allowed to maintain a privileged position in strategic state-controlled enterprises for public interest reasons may have de facto restricted FDI and lowered the market value of these companies. The Sejm has just passed a new law that abrogates the 2005 Golden Veto Act, which had been viewed by the European Commission as incompatible with EU law. In its place the new legislation, based on a December 2008 EU Directive, allows the government to implement various measures to protect critical energy infrastructure.


Improving the business environment has appropriately received increased attention by policymakers. However, despite the creation of a system of one stop shops, starting a company is still too costly and takes too long because multiple procedures involving numerous decision making entities have been maintained. Formalities to start up a business, get construction permits and register properties are excessive, risking corruption to get around them. Ongoing progress achieved under the implementation of the “Better Regulation” programme, aimed at improving the regulatory environment for doing business, should be extended. More generally, inefficient government bureaucracy hampers economic activity, and tax and legal regulations should be made more transparent and predictable.


Developing transport infrastructure and broadband internet

Modernising infrastructure would boost potential output growth and allocate resources more efficiently. Insufficient quantity and quality of motorways and under investment in the maintenance of existing transport infrastructure have combined with increasing transportation needs to make the development of road and rail networks a priority in order to reduce costs and attract foreign investors. As 40% of the EU funds allocated for 2007 13 will be used to develop transport, enhancing the capacity to absorb these funds efficiently will be essential. Progress has been made, and should be continued, to improve the legal framework for public procurement and the issuance of building permits; enhancing co ordination between all public and private parties involved in the process; systematically defining project priorities based on cost benefit analysis; and facilitating the issuance of temporary permits for foreign workers to avoid future labour shortages in construction related activities.


Broadband internet is insufficiently developed mainly due to the control maintained by the incumbent operator (TPSA) and the inability of the regulator (UKE) to ensure effective competition in the market. Discriminatory treatment of alternative operators limits the use of the incumbent’s infrastructure, and it is too soon to assess whether the recent agreement reached between the incumbent and UKE will succeed in ensuring equal access. Despite recent improvements to the regulatory framework, the power of the regulator should be strengthened further. Moreover, UKE should proceed with the functional separation of the incumbent, the effective unbundling of the local loop and the implementation of a wholesale pricing scheme that is consistent with costs and conducive to long term investments.


Reducing the skill mismatch and encouraging human capital deepening

The gap between the skills needed by firms and those provided by the education system has grown despite rising educational attainment. Recent measures encourage training at work; however, a comprehensive and flexible lifelong strategy should be developed. Students should be encouraged to study science and technology, and the links between employers and the education system should be strengthened. The currently discussed reform of the higher education system could foster FDI absorption and export performance by: systematically assessing the quality of higher education institutions and putting financing of public and private institutions on an equal footing; simplifying the student-loan scheme; and allocating academic positions based on transparent and competitive procedures.


Investment in R&D is low compared with other OECD countries in the region as a result of insufficient linkages between firms and universities and the relatively limited technological content of the industrial specialisation. One direct way to boost R&D expenditure would be to increase tax credits, especially given their currently low levels compared to the OECD average, so long as there is adequate monitoring and evaluation of its efficiency. Also, the quality of public research institutions is instrumental to increase the return on R&D investment. Current efforts to concentrate the public funding of research should be intensified in order to link resources to performance more systematically, thereby helping the best centres to reach a critical mass. Researchers should be encouraged to move in and out of businesses and financial incentives provided to develop scientific partnerships between firms and universities and to promote international research collaboration.


Strengthening the foreign investment agency and considering creating a separate agency to focus on export promotion

Expanding the financial capacity of the foreign investment agency (PAIiIZ) might boost FDI inflows significantly. PAIiIZ’s resources do not compare favourably with those of its competitors in neighbouring countries, and empirical evidence suggests that the size of such agencies’ budgets contributes heavily to inward FDI, especially when funds are targeted at activities to improve the quality of the investment and business climate. Moreover, PAIiIZ could be turned into an independent agency so as to participate more efficiently in the decision making process, with the power to make binding offers to foreign investors without resorting to lengthy approvals by ministries or other relevant authorities.


While the number of export promotion agencies has grown at a fast pace worldwide over the last two decades, this function remains fragmented in Poland. The creation of such an agency would bring together these activities in one place with an exclusive focus on export promotion and branch offices in key trading partner countries. Such an agency could encourage SMEs to co operate to access foreign markets and offer training support to overcome barriers related to managerial skills needed for engaging in export activities and to the acquisition of knowledge of international markets. It could also seek to raise Polish exporters’ awareness of the prohibition against bribing foreign public officials in international business transactions under Polish law and Poland’s commitments to combat such bribery under the OECD’s Anti-Bribery Convention. Also, the web presence of export promotion activities should be aligned with international best practice.


Deepening financial development

Financial development should be encouraged as a way to channel savings towards the most productive projects. The financial system has already been modernised significantly, in part due to the increasing role of foreign banks, but margins remain large, suggesting that competition is insufficient. Banking infrastructure is underdeveloped in rural areas. Co operative banks should be consolidated to reduce fixed costs and facilitate access to credit. Moreover, the legal framework for collateral suffers from the inefficiency of the commercial court system, which generates huge uncertainties for creditors in recovering pledged assets. Recent legislation aimed at simplifying procedures goes in the right direction, but enforcement should be strengthened and the senior position of the State to call collateral removed. The planned privatisation of the Warsaw Stock Exchange is of key importance, as it has the potential to enhance the Polish market’s integration within the network of European stock exchanges, broaden the listed companies’ shareholders base, improve liquidity and provide greater finance for SMEs.


Streamlining support to small  and medium sized firms

Compared to other OECD countries, including those in Eastern Europe, the distribution of Polish enterprises is heavily skewed toward small firms, suggesting that important obstacles prevent them from developing their businesses. These structural weaknesses might explain why exporters have trouble reaching distant markets. Previous OECD work focusing on Polish SMEs has argued that the fragmentation of support policies among various entities should be reduced and co ordination among them improved.


This is particularly the case for the government financing schemes that provide guarantees and facilitate access to finance. The loan and guarantee funds should be rationalised and their operation and fees standardised through consolidation or increased co operation. SMEs often lack basic skills in business and financial management, accounting and marketing. Hence, public support should target these areas for SME training. This applies as well to vocational training for which participation is heavily skewed against SME employees compared to other Eastern European countries.


Globalisation trends in Poland
As a percentage of GDP

1. Assets + liabilities in absolute terms divided by 2 and by GDP.
2. Imports + exports in absolute terms divided by 2 and by GDP.
Source: IMF, Balance of Payments database; OECD, National Accounts database.

 

How to obtain this publication

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations

The complete edition of the Economic Survey of Poland is available from:

 

Additional information

For further information please contact the Poland Desk at the OECD Economics Department at eco.survey@oecd.org.

The OECD Secretariat's report was prepared by Hervé Boulhol and Rafal Kierzenkowski under the supervision of  Peter Jarrett. Research assistance was provided by Patrizio Sicari.

 

 

 

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