Towards a stronger and greener Polish economy


Remarks by Angel Gurría, OECD Secretary-General, launch of the 2012 OECD Economic Survey of Poland

28 March 2012
Warsaw, Poland
(As prepared for delivery)

Ladies and Gentlemen,
It is a pleasure to be here today to present the 2012 OECD Economic Survey of Poland. I thank you, Deputy Prime Minister Pawlak, for the support of your government, and all officials and experts who worked with us on this important document.

Poland – OECD’s growth Champion since 2007
Let me just start by congratulating you: throughout the global and European economic crisis, Poland has been the OECD’s champion in terms of cumulative real GDP growth.

Indeed, Poland’s growth trajectory has been impressive.
Since 2005, Poland caught up with the EU15 by reducing its per capita income differential by an average 2 percentage points per year to reach 58 percent of the EU15 average in 2011. This is more than double the rate achieved in the first half of the 2000s. And in 2011, real GDP is estimated to have risen by 4.3%, against a much lower average for the OECD as a whole.

So how did Poland keep doing so well despite the crisis and ensuing recession?

First, thanks to sound fundamentals. Polish banks were not exposed to the riskiest assets and derivatives. Prudential regulation was effective and, at  67% of GDP, external debt is also lower than in other Eastern European countries.

Second, supportive public investment - driven partly by substantial inflows of EU funds - has also contributed to the strong performance.

A third key component was the useful exchange-rate flexibility in the time of crisis.

And finally, sound growth was enhanced by the phasing out of the initial macroeconomic stimulus, followed by an appropriate gradual tightening of monetary and fiscal policies in 2011.

But even with this success, there is no room for complacency. To borrow the words of the great Polish writer Stanisław Jerzy Lec: “On every summit you are on the brink of an abyss.” Indeed, Poland must continue to build on its past achievements and make further progress in areas where reforms are needed to sustain strong growth in the years to come. Let me tell you why.

Poland faces a number of short term challenges.
Poland’s economy is set to slow in the near term. Real GDP growth is projected to fall to about 3% in 2012 and 2013, mainly due to the European slowdown and Poland’s fiscal retrenchment. Unemployment is expected to stay high at about 10%. In addition, returning to an annual inflation rate of 2.5% might take longer than expected and inflation risks are tilted to the upside.

Moreover, Poland is not immune to contagion risks from its European partners. In particular, some Polish banks have accumulated significant liabilities with non-residents which amount to more than EUR 50 billion. This might translate into potential liquidity risks. So, the reliance on banks’ foreign funding should be lowered.

Poland is well equipped to deal with a slowdown.  Even if activity turns out to be weaker than projected, Poland would have policy space to cushion the shock by easing monetary conditions – provided that the zloty does not weaken substantially. And automatic fiscal stabilisers should be allowed to work within the constraints imposed by the constitutional debt rule.

Fiscal consolidation is key to reduce vulnerabilities.
Lowering the deficit can help limit price pressures, keep external debt under control and enhance fiscal credibility. And the Government is likely to achieve its target its deficit of 2.9% of GDP in 2012 and of 2.5% in 2013.

However, these objectives could be even more ambitious to embark on a steadier path towards the European Union’s Medium-Term objective of a deficit of 1% of GDP in 2015.

How can such consolidation be achieved? Additional measures should focus on cutting tax expenditures, reforming the farmers’ social security system and enhancing public-sector efficiency. Other necessary changes include shifting the tax structure from labour to property and environmental taxes.

At the same time, the fiscal framework should be strengthened by introducing a deficit rule, putting in place detailed multi-year budgeting and spending ceilings, creating an independent fiscal council and harmonising the domestic and Maastricht definitions of government debt.

In this respect, the pension reform plans which are being discussed in Poland are critical. The OECD supports the plans to raise and equalise retirement ages for men and women at 67. This reform is essential to promote seniors’ employment in the context of Poland’s peaking population. And it would also lead to an increase in pension replacement rates, which will otherwise be on the low side.

Improving Poland’s health-care system should be high on the policy agenda.
Improving Poland’s health-care system can help cope with ageing, boost economic performance and increase productivity by reducing absenteeism, extending working life and raising the incentive to acquire human capital.

Despite recent improvements, the health status of the Polish population remains unequal. To give you just one example, the life expectancy of 30 year old men is 12 years lower for those with low education than it is for those who completed higher education. Also, access to care is inequitably restricted due to lengthy waiting times, high co-payments for drugs and only basic dental coverage by public insurance.

Poland should therefore confront these limitations and shorten waiting lists. This could be achieved by targeting additional funding to reduce waiting times; enhancing computerisation; and, more generally, realising efficiency gains. Poland should extend insurance coverage to dentistry and introduce co-payments on medical services, while imposing a means-tested cap on the total level of out-of-pocket payments.

Of course, some of these measures will be costly for the public purse. But we should put these costs into perspective – at only 5.3% of GDP, public health-care spending is relatively low in Poland today. Growing health-care needs could be accommodated by savings on other public expenditures and by raising additional resources. Areas to consider include the use of less distortive tax bases; an increase in employee health contributions when a freely co-insured spouse does not work; an extension of the social insurance contribution base to uncovered earnings; and a rise in farmers’ contributions.

The government could also improve the efficiency of the health sector. For example, hospitals should be provided with clearer incentives to rationalise their use of financial resources. The transparency of physicians’ dual employment in the public and private sectors should be increased. And better use of scarce resources should be fostered by reallocating some of them from hospitals to less expensive primary care, by strengthening the gate-keeping function of generalists.

Poland should place greater emphasis on greener growth.
Poland should also reap its huge potential for cutting greenhouse gas emissions by minimising their abatement costs. While the country is on track to meet its international greenhouse-gas emissions commitments, it will most probably need to cut its emissions even further in the future, especially if the European Commission’s proposal on the Low Carbon Roadmap is implemented.

Therefore, to ensure that the country’s substantial reduction is realised in a least-cost fashion, Poland should impose an economy-wide single carbon price. This will be key to minimising abatement costs, given that the current explicit and implicit carbon prices vary widely across different energy sources. Relevant measures include eliminating tax exemptions for the household use of coal and gas while compensating poor households, increasing taxes on diesel and reducing taxes on petrol.

In addition, Poland should further liberalise its electricity market. Continued public ownership of electricity generation and the lack of effective separation of producers and distributors are curbing new entries and limiting the role of an organised wholesale electricity market.

Last but not least, to embark on greener growth, policies to increase the production of nuclear power and natural gas from shale formation must take into account risks and the short and long term environmental costs of these energy sources.

Ladies and Gentlemen,
The above was just a bare sketch of OECD’s recommendations in this Survey. But to sum up: to sustain its exemplary record of growth, Poland must persevere on fiscal consolidation, health care reform and climate change.

Let me assure you - the OECD is at your disposal to help you implement these recommendations. Now is the time for reforms to accelerate the catch-up and underpin the confidence in Poland’s economic future. Now is the time for a stronger and greener Polish economy. Now is the time for better policies for better lives!

Thank you.