Prof. Witold Orłowski answers questions about Polish economy

Matthew Day asks Professor Witold Orłowski whether the question marks hanging over the Polish economy are justified and if Poland is still a good market for investors.

Do you think since the election Poland is still a good place to invest in?

You may be surprised by this, but my answer is that Poland is still a good country to invest in. There are advantages of investing here, especially in long-term investment. Poland may not be the best country for short-term financial investment, but for anything longer, it’s obvious that Poland hasn’t lost any of its competitive advantage. The politics here can be bit a crazy but it is an EU country, with stable institutions in a democracy. There are problems here that have interested foreigners but they should not change the long-term perspective. Some sectors are being specifically targeted by the government, such as banking and big supermarket chains, but I would say the majority of Poland’s foreign investors are unaffected, even if the democracy is bit shakier than it used to be. All in all, Poland is still an EU country and the changes in the government do not affect the basic fundamentals of the country and its economy.

But could negative news about Poland damage the country’s image abroad?

It could be damaging but I wouldn’t say it will have a long-term impact. When it comes to the stock exchange, I think Poland will pay a price for policies that are not seen as market friendly but it’s not a fundamental change in the development of the country.

The Polish government has justified the introduction of a new banking tax by saying other countries have something similar. What impact do you think it will have?

It is true that Poland is not the only country in the world to introduce a banking tax; however, the problem is in the details of the tax. First of all: why did we introduce this tax? In Poland there is a feeling that the tax was introduced because of the rather naive belief that the banks belong to foreigners, and therefore they should pay more tax. The voters would not be sorry about this, but, as I said, it’s naive because the banks and big retail chains will avoid paying much of this tax by shifting the cost of it onto customers and suppliers. It’s part of a political message from the government: “We will find the money for all these bright and wonderful social programmes, and nobody in Poland will have to pay more because we will simply force the foreigners to pay more.” It is not xenophobic. It’s just an idea how to find money without making the voters unhappy. But I think it does show a certain degree of naivety within the government.

And you feel the costs will be passed on to customers?

And to suppliers. I have no doubt the banks will find a way to pass on the costs or find a way to shift money to other countries. But what was striking for me was the initial naivety of the government.

The government has also attacked another group of foreigners: the rating agencies, saying they have undermined monetary policies and weakened the central bank.

First of all, it was only one agency – Standard and Poor – that said it was carefully observing the situation in Poland, and changed the rating. It said it lowered the rating because the government is trying to weaken the system of checks and balances by attacking the constitutional court. But, there has been no signal from the government that it wants to do anything with the central bank. More importantly, the independence of the central bank is secured by EU treaty. So I think Standard and Poor was making far reaching assumptions about what is going to happen, without looking too much into the political context. I’m not saying a move against the central bank might not happen but for the time being it’s a very, very distant risk. Therefore, Standard and Poor’s downgrading can be seen as strange and a bit radical. It, however, should make the government think about the consequences of its actions. It’s worth comparing Poland to Hungary. Under Viktor Orban, the power of the ruling party was even bigger because it had a constitutional majority, but nothing really happened to the independence of the Hungarian central bank. There is a risk that Poland will have its rating downgraded by the other agencies in a couple of months but this will be due to public finances and deficit, not institutional changes.

To regain the economic initiative the government has recently rolled out the Morawiecki plan. What are your thoughts about that? Is it brave, ambitious or doomed to failure?

In a sense, it is a brave programme based on the belief that the economy could deliver more and be more innovative. If you listen to what the European Commission is saying about Poland, it is suggesting that the country should be more innovative and the government should make use of EU funds to achieve this. So if you look at the general direction, I don’t think there is anything wrong with the plan. But the problem starts when you ask how the government is going to realise its aims. To achieve this, they have to build up domestic capital and that requires encouraging saving; but so far the government has promoted consumption at the expense of saving. Also, firms need to invest more, but how the government is going to change the business sentiment? At the moment the business sentiment is not the best, and firms are rather cautious about investing. Mr Morawiecki is saying that we have EU funds and that we have to use them more efficiently, especially for knowledge- based growth. But, how are they going to do this without reforming public institutions? You need an efficient government to do this and quite frequently governments are better at losing money than spending it efficiently. Large-scale reforms need to be carried out by the government to ensure the public sector will be more qualified and better at spending the money efficiently. The problem is that, for the time being, I do not see the slightest hint that the reforms will take place. Actually, they have already weakened the civil service by eliminating obligatory exams. I can’t exclude the possibility that the Morawiecki plan will be implemented but I would like to see some steps going in that direction. For the time being I see the steps going in the opposite direction.

You’ve touched on the state of public finances. The government has rolled out the 500+ programme. Where is the money for that going to come from?

First of all, I must say Poland was underspending on family-related policies so increasing this expenditure is not a bad thing. On this, Poland is currently spending 3 percent of GDP, which is close to the EU average. There may have been more efficient ways of spending this money and I don’t think the government has chosen the most efficient way. How to finance it? It’s true the government has managed to put together a budget for this year with a small deficit, but they will have problems financing in the years after. The whole programme costs around 1 percent of GDP, and as the Polish budget deficit last year was slightly below 3 percent, it is not a dramatic situation. You can imagine an increase in the deficit without it causing a catastrophe, although it won’t be welcomed by the markets. The problem is what to do in the longer term. Poland cannot have a high deficit because the EU Commission will open initiatives against it, and this makes it likely the government will have to consider a significant increase in taxes. The government promised no more taxes – except for foreigners – and more expenditure, and it is impossible to deliver this. But Poland will not go into a large deficit: the government will have to increase taxes to close the deficit gap and that may slow the economy down. You can ask what foreign investors feel and whether they will worry about a slowing economy but you have to remember that a lot of investment, especially manufacturing, is not for the Polish market but the EU market.

Witold Orłowski

Chief economist at PwC in Poland, Professor Witold Orłowski is one of the country’s leading economists. A graduate of both Łódz and Harvard universities, he has worked for the World Bank, acted as adviser to Leszek Balcerowicz and was head of the Economics Advisory Council during the presidency of Aleksander Kwaśniewski. Over the years he has charted the economics of transformation in Central Europe and has become a popular commentator and columnist on economic affairs. He has written some nine books and close to 200 scientific papers.

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Written by: Matthew Day