Poland is a big economy, with 38 million consumers.
It is on track to become an integrated part of the European Union, which will mean above-average economic growth for the foreseeable future. As such, Poland is a natural target for Canadian exporters and investors.
But there is a measure of reluctance to invest there, due to uncertainty and above-average risk. These headwinds must be dealt with, for Poland’s path into the European Union requires a great deal of investment, and there is no shortage of other countries willing to compete for the money.
Whether the investor is foreign or domestic, the biggest issue is fiscal. Companies are loath to invest when they are unsure of what taxation system they will face in the future.
At the moment, the new government is pulling out all the stops to spur economic growth, and is on track to produce an extraordinarily high fiscal deficit in 2004, over nine per cent of GDP.
This will take government debt above 55 per cent of GDP, a prospect which, according to law, will force dramatic – and therefore unbelievable – fiscal retrenchment during 2005. Should the debt reach the EU ceiling of 60 per cent of GDP, the fiscal law will turn even more draconian. A credible medium-term fiscal plan, taking the economy into the EU and then into line with Eurozone requirements, is clearly needed.
One way out of the fiscal nightmare would be to accelerate the process of privatization, which has faltered recently. Some 40 per cent of the economy still lies in state hands, and selling large chunks of it would do wonders for the fiscal situation.
However, privatization is proving to be philosophically difficult for the government. The legacy of communism persists, leaving large parts of the economy politicized. The government appoints the directors of the largest companies, and is loath to give these rights up. Their preference is to sell non- majority portions of state-owned companies, whereas foreign investors would prefer to purchase a controlling interest.
A certain amount of cronyism is one thing, but it is quite another when the situation fosters outright corruption. Anecdotal evidence suggests this is an important problem in Poland.
Privatization and depoliticization of economic decision-making is the surest way of eliminating corruption. Therefore, by pushing ahead with privatization, the government can make headway on its debt and corruption issues at the same time. This could give investment in Poland a significant lift, and accelerate Poland’s convergence with the wealthy countries in core Europe.
The bottom line? Poland has a bright future, even if that future seems likely to unfold more gradually than it will for some of its neighbours. Poland is larger than Hungary, the Czech Republic and Slovakia put together, so it will be worth the wait.
(Stephen Poloz is vice-president and chief economist for Export Development Canada. He can be reached at spoloz@edc.ca)
