What steps to improve the overall investment climate?
Such efforts to overcome low employment need to be supplemented by measures in product markets to raise investment levels, which are only two thirds those observed in other emerging economies, and raise productivity levels which are among the lowest in the OECD. Policy needs to concentrate on: legal and administrative reforms that make banks more willing to lend and firms to invest; speeding the restructuring and privatisation of state-owned enterprises; and improving the country’s productive infrastructure. Such policies, by raising overall activity rates should also durably increase demand for labour and in conjunction with labour market reform speed the transition to higher employment rates.
This year’s reduction in the corporate income tax rate to 19 per cent and steps to improve the capacity of the Polish foreign investment agency should help the country regain some of the ground lost in the competition for foreign investment. However, more could probably be done to improve the agency’s effectiveness by making it a real one-stop investment shop, able to offer and sign investment deals. More generally, delays and administrative costs associated with building or expanding a site need to be radically curtailed so as to facilitate greenfield investments. On the domestic front, recent decisions to relax very strict banking regulations, notably as concerns the provisioning of loans, should help lower lending costs and, as such, improve aggregate investment performance. Similarly, improvements in the bankruptcy law and in the administration of real-estate registries should help increase banks’ capacity to collect on collateral and therefore their willingness to lend. However, excessively long judicial processes continue to pose a problem. Proposals to speed these up are welcome and should be given priority.
Picking up the pace of privatisation would not only help limit the accumulation of public debt, it would also help raise overall productivity growth. This will require a much more pragmatic and active approach to asset sales (especially among smaller firms) that places less emphasis on the sale price and more on the total cost/benefit to society. In particular, the authorities should reconsider the strategy of consolidating sectors prior to sale in order to create dominant players. Not only does it slow the sales process, any advantage in terms of higher sale prices may be more than offset by consumer losses due to higher prices that the consolidated firms’ enhanced market power allows them to charge. Efforts to accelerate privatisation would be helped by current proposals to extend the process by more actively selling residual stakes in those firms where, following past sales, the State retains a majority or controlling interest. The State’s continued presence in such companies (virtually all those sold as joint-stock companies), denies them much needed capital and slows hiring, and likely has played a role in the low offer prices and lack of interest in companies currently on sale. The authorities should also rethink the selling of minority stakes in several large State-owned firms through stock offerings. This approach risks perpetuating an ownership structure dominated by the State and the interests of politically appointed managers. In order to forcefully signal their commitment towards privatisation, the authorities should seek strategic investors for the remaining State-held companies. Taken together, these moves would have the dual impact of spurring risk taking and improving the corporate governance framework. Using the State’s controlling-stakes in firms is an inappropriate mechanism for pursuing industrial or social policies. Poland’s limited economic resources would be better used to create the overall conditions in which private firms could prosper.
Privatisation progress in selected transition economies
Per cent of GDP
Source: EBRD, Transition Report 2003 and OECD.
What priorities for infrastructure and rural development?
Liberated resources could be used to increase financing of infrastructure projects, spending on which, to a large extent, is crowded out by personal transfers on the one hand and subsidies to ailing state-owned companies. Areas where infrastructure investments are likely to generate the largest externalities include transportation and rental accommodation.
With only 600 kilometers of motorway and a rail system that is in an advanced stage of disrepair, Poland arguably has the sparsest transportation infrastructure in the OECD. Plans to triple the size of the road network and improve rail connections between major centres are laudable, but significant political and administrative resolve will be required to avoid repeating past failures to meet similar objectives.
Construction of and improvement of framework conditions for rental accommodation represents a further priority area for infrastructure development. Currently rent controls, excessively strong tenants rights and the absence of a rental culture limit labour mobility. A draft law, proposing to delay from 2005 until 2008 the elimination of rent controls because of concerns about protected rentor’s ability to pay should be amended so that the process of bringing protected rents up to market levels begins immediately. While protected rentors may have difficulty meeting a one-step hike implemented in 2005, there is no reason to expect that this will be any easier in 2008. More positively, the proposed draft law allows for a free market as concerns new contracts, thereby increasing incentives to add to the overall rental stock. However, the grandfathering of existing units risks creating a dual market. In addition, to be effective any liberalisation of rent controls will need to be supplemented with a relaxation of rules preventing landowners from evicting non-paying tenants. Finally, to level the playing field, housing-related tax incentives should be extended to include the for profit rental sector.
Km of motorways per 1000 square km, 2002 1
1. Except for Ireland (2001), Portugal (2000) and Spain (1999).
Source: European Conference of Ministers of Transport and World Bank.
Such steps, by increasing the stock of affordable rental housing should help reduce the financial risk that an employee takes in moving from a low-productivity low-employment area where living costs are relatively low, to one characterised by higher paying work but much higher housing costs. As such, it (like improvements to the transportation infrastructure) should help overcome some of the transactions costs that are limiting labour mobility in general and rural restructuring in particular. However, more needs to be done to reduce the substantial poverty traps in agriculture. In particular, the financial incentives to be considered a member of a farm household embodied in the special farmers’ social insurance scheme need to be reduced substantially. Proposals to increase contribution rates in the system, particularly for wealthier farming households, so as to decrease its current 95 per cent subsidisation rate go in this direction. However, to more directly impact dependency traps for low income farmers, such steps need to be extended so as to harmonise both benefits and contributions in the system with those available to non-farm workers. This could be achieved by raising contribution rates towards those in the general scheme or by introducing into the general system provisions for very low income earners that are similar to those in the farmers’ scheme. Such an option would have the additional advantage of lowering labour costs, and therefore the employability, of the low-skilled in the non-farm sector.
A harmonisation of benefits would also eliminate the relevance of land ownership requirements in the farmers’ system, thereby helping to remove a critical barrier to rural restructuring and productivity growth. Current rules require a farm household to have at least one hectare of land in order to access benefits (and less than two in order to have free access to unemployment insurance). This is a major factor explaining why the vast majority of farms are uneconomically small, which in turn explains why the rural population has become dependent on government transfers that, on average, represent one third of their income. The problem is all the more severe because as a result of land ownership rules, small holders are unwilling to sell their farms – preventing the consolidation that will be essential if agricultural productivity levels are to improve. Indeed, although the number of farms in excess of 15 hectares has been rising, the total number of smaller and uneconomic holdings has actually been increasing. In order to promote their consolidation policy should:
make registration of agricultural land obligatory and free (legal title for 30 per cent of agricultural land is not established, in part because costs for small holdings are prohibitive);
help develop a market in agricultural properties by reducing restrictions on the ownership of such land. While agricultural land prices may rise, these will increase the wealth of farmers, facilitate their access to financing for additional land purchases and make the purchase of an apartment in an urban area more affordable – thereby increasing urban- rural mobility;
eliminate the financial incentive to retain small farms, by harmonising benefits as outlined above.
Indicators of rural development
1. Agricultural value-added per agricultural worker divided by whole economy value-added divided by total employment.
2. Data concern 2002, except for Australia, Belgium, France, Ireland, Japan, Mexico and USA : 2001; Canada and Portugal : 2000.
3. Based on national accounts data including all agricultural employees.
4. Based on Agricutural census data and refers to agricultural employees whose main activity is farming.
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