Economic Survey - Poland 2004: The challenge of regaining sustainable and fast growth

 

Poland’s accession to the European Union on 1st May 2004 marks a turning point in its economic and political history. It follows 15 years of profound change and accomplishment. More than 75 per cent of GDP is now produced in the private sector, the economy is well integrated with those of western European nations and inflation has been brought down to low levels. After an initial fall, output has been growing continuously for more than 10 years and, on average, Poles are much better off now than they were then. However, the striking drop in employment since 1998 is suggestive of serious remaining problems. To address these, much more needs to be done, notably in terms of raising productivity, expanding employment and increasing per capita income, which is 41 per cent of OECD levels.

What are the main challenges that Poland faces?

Indeed, unless the pace of improvement picks up, Poland’s convergence with the rest of the OECD is likely to be disappointingly slow. So as to accelerate this process and ensure that its fruits are widely shared, policy needs to address four main challenges:

  • In the short-run it will be critical to re-establish an appropriate balance between fiscal and monetary policy.
  • A stable macroeconomic framework, characterised by low inflation and sustainable public finances is an essential pre-requisite to healthy economic growth. Currently, fiscal policy is too relaxed, requiring higher than desirable real interest rates, with adverse consequences for investment, activity and potential output.
  • Over the medium to long term, increasing employment especially among young and older workers represents the most important challenge facing the Polish  economy. With only slightly more than one in two Poles of working-age employed and an unemployment rate of 19 per cent, getting people back into productive work will be critical both to re- establishing a fast growth path and ensuring that all of society benefits from convergence.
  • Investment conditions need to be improved so as to increase economic activity and the demand for labour. Higher investment levels would also serve to raise productivity, international competitiveness and the pace at which incomes converge with those in the rest of the OECD.
  • Finally, with 19 per cent of employment in agriculture producing only 3 per cent of GDP and with 30 per cent of the population in rural areas, speeding the pace of rural restructuring must form a central component of any development strategy for Poland. Over the long run, such restructuring could result in a 30 per cent increase in GDP.

Factors underlying potential output
2002

1. 15 to 64 years.
Source: OECD.

Each of these challenges is critical, and progress is needed in meeting all of them so as to move onto a more dynamic growth path that combines rising employment with better and more productive jobs. The challenges are also interdependent, with success in any area requiring progress in others. Policy reforms are therefore needed across a broad front and should be implemented coherently to take advantage of the synergies among them. Efforts to reduce dependency traps and increase financial incentives to take up work need to be matched by policies to raise flexibility and reduce costs in order to stimulate hiring by firms. Likewise, reforms in product markets that promote investment and job creation need to go hand-in-hand with policies to accelerate rural restructuring so as to facilitate the shift from lower to higher productivity jobs. Finally, because many of the required measures involve increasing the targeting of government expenditures in certain areas, they should help fiscal consolidation. This, plus the resulting stronger growth and employment will in turn help generate the additional resources necessary to finance a sustainable increase in the level of public investment in infrastructure and human capital.

What is the short-term outlook?

Addressing these challenges will be facilitated by the ongoing recovery, which saw GDP expand by 3.7 per cent in 2003 following two years of slow growth. Activity is expected to continue strengthening in 2004 and 2005, increasing by more than 4½ per cent a year allowing the output gap to close towards the end of the period. The global recovery suggests that export growth will remain strong. Nevertheless, reflecting a 1.7 per cent of GDP addition to fiscal stimulus programmed for this year and the past relaxation of monetary conditions, growth should be increasingly driven by domestic demand. In particular, investment activity is expected to pick up due to improved profitability, emerging capacity constraints and EU-accession related opportunities. Despite stronger growth, deep-seated problems in the labour market (see below) mean that employment growth will be weak and unemployment is projected to fall rather little. While increases in the prices of imported goods will generate some inflationary pressures, high unemployment and a negative output gap should ensure that headline inflation remains within the central banks revised target range for inflation of 2.5 ± 1 per cent. However, if domestic demand reacts more quickly to the fiscal and monetary stimulus, there is a risk that the economy may overheat, pushing up inflation and the current account deficit, provoking an increase in the risk premium on the zloty, even higher interest rates and choking off the recovery.

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The full edition of the OECD Economic Survey for Poland is available from:

Return to the OECD Economic Survey - Poland 2004 homepage

A printer-friendly Policy Brief (pdf format) may also be downloaded.  The Policy Brief contains the OECD assessment and recommendations, but does not include all of the charts available from the above pages

 

 

 

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