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Monday, 24 September, 2001, 16:43 GMT 17:43 UK
Poland's economic challenge
A retired Polish couple
Poland: Not the promising economy it once was
How things change.

A couple of years ago, after one of the most vigorous reform programmes in the post-communist world, the Polish economy was the darling of the investment community.

Key statistics, 2000
Population: 38.6 million
GDP per head: $4,080
Inflation: 10.1%
Foreign investment since 1991: $36bn
Exchange rate: Zl6.23:1
Now, growth and investment are slumping, unemployment is on the rise, and the mood is distinctly sour.

Poland's right-of-centre government was obliterated in Sunday's general election - and the wilting economy was one of the main reasons why.

But with an incoming administration composed almost entirely of ex-communists, what chance does the economy have of picking up?

Tiger no more

Not long ago, Poland was being referred to as Eastern Europe's "tiger" economy.

Putting up election posters in Warsaw
How much will the election change?

Polish gross domestic product (GDP) grew by 7% in 1997, and by an annual 4-5% over the following three years.

But that boom has fizzled out.

This year, GDP growth looks like being in the 1.5-2.0% range, and could well come in much lower.

Last year, foreign direct investment was a record $13bn - easily the strongest performance in the East European region.

This year, there is unlikely to be more than half that amount, and the previous rush into the Warsaw stock market has all-but dried up, too.

At the same time, unemployment - a particularly sticky political issue in Poland - is surging: the rate was 16% in August, up from 13.9% a year earlier.

Government promises...

Part of this is the natural result of the slowdown among Poland's trading partners, especially Germany, and of catastrophic floods that swept the country last month.

Polish GDP growth
1996: 6%
1997: 6.8%
1998: 4.8%
1999: 4.1%
2000: 4.0%
2001 forecast: 1.5-2.0%

But the government of prime minister Jerzy Buzek, which was elected amid such hopes in 1997, did not exactly help matters.

As a nominally right-wing coalition, Mr Buzek's government promised to keep economic reform on the boil.

And since the Solidarity trade union was a component of the coalition, Polish workers felt they were likely to get a good deal.

... but fails to deliver

But the loose alliance of governing parties spent more time squabbling than pushing through reform.

A demonstration in Warsaw
The government has fallen out of favour

In the most recent example, Finance Minister Jaroslaw Bauc was sacked at the end of August, after proposing an unpalatable but necessary austerity package.

"There is an atmosphere where if someone sticks their head above the parapet, it gets shot off," says Andrew Chilvers, editor of the Warsaw Business Journal.

This has led to an almost complete halt in economic reform, especially privatisation, which has always been controversial.

Two days before the election, the privatisation agency said it had blocked the most keenly-awaited sale to date, that of oil monolith PKN Orlen.

Fundamentally troubled

The government's inaction may not be entirely to blame for Poland's economic problems, but it has made it a scapegoat for the current situation.

Prime minister Jerzy Buzek
Jerzy Buzek: Beset by squabbling partners

And it has made Poles and foreign investors look harder at the less-than-pretty economic fundamentals.

Poland, although heavily industrialised in parts, is still a largely agrarian economy.

Farming accounts for one-quarter of employment, but only around 5% of economic output.

Average monthly wages, at less than 2,200 zloty (353; $518), are below those in neighbouring countries such as the Czech Republic and Hungary - and that figure disguises deep inequalities between the metropolitan elite and the rural poor.

Bad for business

Although foreign investment has helped boost some corporate sectors - notably retailing - much of Polish industry remains inefficient and deeply uncompetitive.

The communist era saddled Poland with some of the heaviest industry in Eastern Europe, particularly steel and coal, which have little chance of forging a role in the wider European economy.

And looming over everything is the massive Polish bureaucracy, one of the least efficient civil services in Central Europe.

All these issues act as barriers to Poland's eventual ambition of joining the European Union.

While political pressure for EU membership, both from inside and outside the country, remains strong, the length of the process means that popular enthusiasm is waning, with only a slim majority in favour of joining.

Left bounces back

So what chance is there of a turnaround?

SLD leader Leszek Miller
Leszek Miller: No longer such an apparatchik

On the face of it, very little.

The incoming government, the Democratic Left Alliance (SLD) of Leszek Miller, comprises almost entirely ex-communists.

Mr Miller himself is a former secretary of the central committee of the Polish communist party.

In recent days, the SLD has made a series of troubling statements, in particular a promise to re-examine the paltry number of privatisation deals conducted under Mr Buzek's administration.

Investor cheer

But in a reverse of the usual political rules, most investors are looking forward to the arrival of a left-wing government.

Aleksander Kwasniewski
Aleksander Kwasniewski: new face of Polish communism

That is partly because it will be strong: the SLD should have a clear majority on its own, rather than relying on a fissiparous coalition to get its measures through parliament.

But it is also because the SLD is far slicker than most ex-communist parties around Eastern Europe.

Poland's president, Aleksander Kwasniewski, is an SLD member and was a minister in the dying days of the communist regime, but is highly regarded for his smooth presentation skills and liberal policies.

The last period of SLD rule, during the mid-1990s, was considerably brisker in pursuit of reform than Mr Buzek's government.

Jobs for the boys

On 19 September Mr Miller cheered investors by naming Marek Belka, a US-trained economist, as his finance minister.

Mr Belka has already drawn up an austerity programme that goes beyond that proposed by the unfortunate Mr Bauc.

And while the government will be changing, some of the most important economic policy makers will stay on - notably central bank governor Leszek Balcerowicz who, as finance minister, steered Poland through the radical reforms of the early 1990s.

As Poland's economy faces its first slump since the Balcerowicz years, more radical reforms may well be ahead.

Michael Leville, Warsaw Business Journal
"The main problem right now is the budget deficit for next year"
The BBC's Raymond Furlong
"The government has been torn by in-fighting"
JP Morgan's Giancarlo Perasso
"The country has huge fiscal problems"
See also:

24 Sep 01 | Europe
Left victorious in Poland
07 Sep 01 | Country profiles
Country profile: Poland
03 Sep 01 | Business
Daewoo Polish plant bankrupt
27 Jul 01 | Business
Poland's top vodka brand for sale
16 Jun 01 | Europe
EU sets date for expansion
14 Jun 01 | Europe
The candidate countries
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