Prospects for the Polish Economy in 1999-2000

Richard J. Hunter, Jr.

and

Leo V. Ryan. C.S.V.

This is an updated version of a paper delivered at the PIASA meeting in June 1999.

Some economists predict that 1999 and 2000 could be difficult years for the Polish economy. Before discussing this proposition, a summary of the Polish economic situation is in order (1):

The main political groupings in Poland are as follows:

Solidarity Electoral Action (AWS), a coalition of around 40 parties and groups organized around the Solidarity Trade Union Movement. Chair: Marian Krzaklewski, a former academic specializing in computer science; Parliamentary leader: Prime Minister Jerzy Buzek, former professor of chemical engineering. Voter support for the AWS declined in 1998 (compared to 1997). In January 1999, Buzek was elected chairman of the Solidarity Electoral Action Social Movement (RS AWS).

Democratic Left Alliance (SLD), former members of the Communist party and their supporters, now embracing the principle of "social democracy." Leader: President Aleksander Kwasniewski, who defeated Lech Wa´sa for President in 1995, with 52 percent of the vote. Parliamentary leader: Leszek Miller. Voter support for the SLD grew in 1998 (compared to 1997).

Freedom Union (UW), the self-defined successor to the first Solidarity Parliamentary grouping, espousing what Balcerowicz describes as "liberal, free market" ideas. Leader: Leszek Balcerowicz, architect of Poland's economic reforms (stabilization and privatization programs) in the government of former Prime Minister Tadeusz Mazowiecki. The Freedom Union has never been able to win a majority or even plurality support in Polish society.

Polish Peasant Party (PSL), a relatively small farmers' party which has been declining in importance as agricultural issues continue to take a back seat in the Polish ruling circles' plans for Poland. Leader: Jaroslaw Kalinowski. The PSL's poor showing in the 1997 parliamentary elections (losing two-thirds of its votes from the 1993 Parliamentary elections) cost the SLD its major coalition partner in the Sejm and the PSL's chair, former Prime Minister Waldemar Pawlak, his party leadership position.

Movement for the Reconstruction of Poland (ROP), promoting Polish nationhood and traditional moral and social values. Leader: former Prime Minister Jan Olszewski. The ROP barely made the five percent barrier for representation in the Sejm in the 1997 parliamentary elections.

The Self-Defense Farmers' Trade Union or Samoobrona, recently organized by Andrzej Lepper, a populist who has led demonstrations and road blocks to demand higher farm prices. It has maintained a high profile in the confrontation between the government and various disaffected Polish farmer groups.

Christian National Movement (ZChN), a component of the ruling AWS-UW coalition. Leader: Ryszard Czarnecki. It advocates "economic patriotism" in granting tax relief to Polish citizens and investment benefits to Polish domestic investors. It is extremely wary of foreign investment and foreign influence in Poland. (2)

Russia's economic and political crises have had some impact on Poland. The government stated that there had been an almost total breakdown in food exports to the Russian market, depressing domestic prices dramatically. The situation has been compounded by a slight recession in Germany, which has been Poland's biggest economic partner for the past seven years. The share of Poland's exports to Germany accounts for 36.3 percent of their total value, while imports from Germany account for 26.4 percent of Polish imports. In 1998, the value of Polish-German trade amounted to 30.1 percent of the total Polish foreign trade.

Coupled with a period of political infighting, the economic downturn has raised social tensions. Budgets are tight and the government of Prime Minister Jerzy Buzek remains committed to reducing the budget deficit to zero by the year 2002, the year in which Poland hopes to enter the European Union. This tight schedule makes the desperately poor lower-third of society blame the AWS and its partners for their poverty, unemployment, abominable post-communist housing and other hardships. The SLD skillfully exploits these grievances, and it hopes to rise to power in the next election.

Society seems to be poised for a series of strikes and demonstrations. In January 1999, Poland's doctors and nurses threatened a nationwide strike over proposed reforms, demanding more state funding for hospital and outpatient care. Pig farmers, who have seen their prices cut in half partly because of the Russian crisis, have staged a series of protest road blocks. It is not the size of Polish farms that is at stake, but rather an inability of Poland's ruling class to facilitate the farmers' access to markets. The Polish countryside is desperately short of capital, and it expects the government to take the initiative in building roads and providing affordable transportation for farm products. The situation may grow worse as Poland further integrates its economy with that of Western Europe through membership in the EU. On 28 January 1999, Solidarity called a strike alert at the Sendzimir Steelworks, demanding guarantees of government orders during the period in which the plant was to be restructured. On 15 April 1999, a four-hour warning strike was staged by the Solidarity Trade Union at the Ursus tractor plant near Warsaw in protest against the government's economic policies. Solidarity warned that if the government did not meet its demands for the introduction of a more pro-family policy, equal taxation for all firms, increased housing construction credits, increases in contributions for health care organizations, and investment credits for the long-neglected countryside (fewer young people from the countryside attend institutions of higher learning now than 10 years ago), and keeping energy and gas prices steady, the protests would escalate and might take on a nationwide character.

Complaints are also being raised about the status of foreign capital in Poland, and some right wing groups have attempted to exploit fears (especially among those living in the former German territories) of German political and economic influence in Poland.

The coalition government of Prime Minister Buzek, in which economic policy is tightly controlled by Finance Minister Leszek Balcerowicz, is built around the sometimes awkward coalition of AWS and UW. It is struggling mightily to implement a program of economic and administrative reforms involving radical changes in the pension, health and education systems. The coalition has promised to stay together until the next scheduled parliamentary election in 2001. It will not be an easy task, given the internal policy contradictions that exist and the persistent personality conflicts that have arisen.

According to polls taken by the PBS polling center in Sopot, the public has a low opinion of many Polish political institutions, a situation reminiscent of public opinion during most of the fifty years of the Soviet occupation of Poland. This includes Buzek's government and both chambers of parliament. In fact, public opinion in general has once again turned negative, with economic pessimists more prevalent than economic optimists. However, it appears that this attitude is more a product of the decidedly "negative assessment" of current politicians and institutions than a real assessment of economic fundamentals.

One surprising exception is President Aleksander Kwasniewski who continues to garner a 70 percent approval. KwaÊniewski has been careful to retain a middle ground between confrontation with the Buzek government and using his powers of veto on legislation to appease his left-leaning constituency. In fact, as Kwasniewski takes on a decidedly more apolitical role, mainly reduced to official representational functions, his popularity continues to climb and his lead over probable Solidarity presidential candidate in the year 2000, Marian Krzaklewski, continues to grow.

But some economic news is very good. In Gdask, after two years of losses, the Northern Shipyard closed last year with a profit of $4.16 million. Poland's privatization efforts have yielded significant results. In 1998, sales included a limited stock market offering of Pekao, Poland's second biggest bank, and TPSA, the telecommunications utility. In 1999, plans include sales of strategic stakes in both Pekao and TPSA (210,000,000 shares worth $922,8 million), plus the privatization of PZU, the insurance company, and Rafineria Pock, an oil group. The total private sector employment is now 47.7 percent of the labor force (4,179,000 workers), while the public sector still employs 4,572,000 people. Finance Minister Balcerowicz predicts that inflation in 1999 will not be higher than 7.5 percent and that exports will rise by 9.3 percent. Japan's Nomura Brokerage House, a leader in economic analysis, suggests that Poland's credit rating deserves to be raised, since "its fundamental macroeconomic statistics are better than in other countries with the same ratings" (PAP, "Nomura: Poland Merits Higher Credit Ratings," 7 May 1999). Nomura predicts an increase in economic growth and an increase in foreign direct investment. FDI has reached an accumulated total of $30 billion, including more than $10 billion in 1998 alone, with German investments totaling $5.117 billion. Toyota plans to build a transmission factory in Poland by the year 2000, with a total investment of 20 billion yen. South Korea is currently Poland's largest trading partner in Asia, the relationship growing rapidly to $1.3 billion in 1998. One should add to this an increase in the value of the zoty against both the euro (+ 3 percent) and the dollar (+1.3 percent), and an expected rise in GDP in 1999 from a projected 3.5 percent to 4.4-5.0 percent. These optimistic views are echoed by the National Bank of Poland and by PAIZ, the government's investment agency.

Yet, many privatization issues remain unsolved. A handful of money-losing state-owned enterprises still retain government subsidies. The government plans to force such units to stand on their own through privatization, but the process is painful for those skilled workers who are employed in these enterprises and who will lose their jobs thanks to inept management.

The National Investment Funds (NIFs) were established four years ago. Fifteen NIFs have been established, and mass privatization certificates were issued to 27 million adult Poles at the nominal rate of Z 20 per certificate. The NIF program was designed to make ordinary Poles co-owners in an emerging capital market, and teach budding entrepreneurs the basics of investing. The NIFs were comprised of 512 individual enterprises, and the program promised easy access to loans and new technologies for Polish industry. The results have been somewhat disappointing. Almost immediately after receiving certificates, 60 percent of holders resold their certificates for a small profit (often directly outside banks and other sales offices). Only 0.3 percent sold certificates through the Warsaw Stock Exchange. About ten percent had no idea at all what to do with the certificates. Several hundred thousand certificates were stashed away and are now worthless because their holders forgot to convert them to NIF stock by 1 January 1999. These developments reflect the poverty of the Polish population (those who sold them immediately were in desperate need of cash) and the pernicious results of the Soviet-controlled education which kept the bulk of the population unaware of the modes of operation of modern society and economy.

This mass privatization program was put together by Minister Janusz Lewandowski under the SLD government. When that government was replaced by the AWS government, Lewandowski said that the NIF program was less than successful because the Buzek government failed to support the NIFs in 1998. Lewandowski blamed the Treasury, which he said "sent unclear signals and changed the rules for remunerating NIF managing firms, in addition to influencing shareholders, meetings, and the process of consolidation." (Polityka, No. 18, 1 May 1999). Still, the Polish NIF program compares favorably with similar mass privatization programs in other Central and Eastern European countries.

Thus the Poland of 1999 remains a paradox. Economic and political change has remade the country since the dark days of martial law in 1981-1983. Yet the benefits of Poland's economic progress have often been unevenly distributed. There is a profound dissatisfaction in society that many of the "winners" in the "new Poland" are members of the old intelligentsia and political nomenklatura who suffer from a certain amnesia about their roles under the discredited communist system (see Richard J. Hunter and Leo V. Ryan, From Autarchy to Market: Polish Economics and Politics 1945-1999, Westport, CT: Praeger, 1998). While no one seriously supports a return to the former closed system, 44 percent of respondents in an April 1999 Pentor Poll maintained that the Polish economy was in a bad condition. Forty five percent said it was partly good, partly bad and only 11 percent spoke positively about the current economic situation. Perhaps this negative attitude reflects the view that too few people, especially the young, have seen their material fortunes dramatically improve while the aged, country dwellers, and the undereducated have continued to lag behind.

It is this paradox of a growing capitalist class side by side with a large disaffected minority that will provide the backdrop and the battleground for both the presidential election in the year 2000 and the parliamentary elections scheduled for just a year later. Should President KwaÊniewski gain reelection as he is poised to do, and should the former communists in the SLD return to power in the parliament as current polls suggest, it would mean that the voters (who a decade ago voted decisively against communism) are desperate enough to pay heed to the promises of postcommunists.

1. Stefan Wagstyl and Christopher Bobinski, "Braced for a difficult year," The Financial Times, 30 March 1999.

2. Christopher Bobinski, "Tug of war between two giants," The Financial Times, 30 March 1999; Janusz Golebiowski, "Political Developments in Poland," Poland: International Economic Report, 1997/1998, edited by Marek Lubiski (Warsaw: Warsaw School of Economics, 1998), 9-17; "Radical Farmer's Union Holds Congress," http://web.lexis-nexis.com; Leszek Balcerowicz, Socialism, Capitalism, Transformation (Budapest: Central European University Press, 1995); Jeffrey Sachs, Poland's Jump to a Market Economy (Cambridge, MA: MIT Press, 1993).

Back to the September 1999 issue
The Sarmatian Review
sarmatia@rice.edu
Last updated 10/11/99