Commission Report (2002): Poland

The capacity to cope with competitive pressure and market forces within the Union

The ability to fulfil this criterion depends on the existence of a market economy and a stable macroeconomic framework, allowing economic agents to make decisions in a climate of predictability. It also requires a sufficient amount of human and physical capital, including infrastructure. State enterprises need to be restructured and all enterprises need to invest to improve their efficiency. Furthermore, the more access enterprises have to outside finance and the more successful they are at restructuring and innovating, the greater will be their capacity to adapt. Overall, an economy will be better able to take on the obligations of membership the higher the degree of economic integration it achieves with the Union before accession. Both the volume and the range of products traded with EU Member States provide evidence of such integration.

A sufficient degree of macroeconomic stabilisation has been sustained for a sufficient period of time to avoid distortions in the decisions of economic agents. A sound overall legal framework underpins investor confidence. The restructuring and reallocation of resources in the economy can nevertheless be further enhanced.

The overall quality of the education system has helped Poland to build up its level of human capital to compete in the single market and the global economy. The Polish education system has a wide coverage and ensures a satisfactory level of access to education. Net enrolment ratios have increased since 1997, for primary (from 98% to 98.6%), secondary (from 81.2% to 84%) and tertiary education (from 22.2% to 30.6%) The capacity of the education system to deliver to the workforce the skills to match labour market demands is still, however, insufficient. The current government has reversed many of the features of the 1999 education reform. The main shortcomings are issues relating to the quality and relevance of the curriculum, inefficient use of resources in the system against the backdrop of rapid demographic changes, a still relatively low share of the population with higher education (around 7%) and increasing disparities in access to education and training between rural and urban areas. Besides education, other structural policies that are needed to improve the functioning of the labour market have been only partially implemented. There has been for a long time some degree of consensus among policy-makers on the underlying obstacles to reducing unemployment, such as obstacles to workers' mobility, the relatively high cost of labour (tax wedge, lack of differentiation in the minimum wage) and shortcomings of the public employment service. This is reflected in the fact that the unemployment rate for low-skilled workers amounts to a very high 26%. However, the implementation of remedies in these areas has been protracted, even though in the most recent period, the Polish government has committed to ­ and started the legislative process for implementation of ­ an ambitious package of measures under the ``First Job'' component of its new medium-term economic strategy.

The investment boom between 1997 and 2000 has enabled Poland to continue to replace its obsolete capital stock and foster product innovation and the competitiveness of its firms. The gross domestic investment ratio has averaged 25.2% between 1997 and 2001, but has fallen sharply in the last year. At 19%, private fixed investment is now low. Gross fixed capital formation of the general government in ESA 95 terms is reported by the Polish authorities at a modest 3.1% of GDP, a level actually lower than in 1997. Foreign direct investment inflows have also had a key role in lifting the level of technology and competitiveness of the economy. FDI as a percentage of GDP has increased from 2.1% in 1997 to 3.7% last year, with a peak of 5.2% in 2000, marked by a few large one-off transactions linked to privatisation. The stock of accumulated inflows, however, is still not particularly high on a per capita basis at EUR 952. In cumulative terms, the sectors that have benefited the most from FDI are food, drinks and tobacco products (11.1% of total inflows) and transportation equipment (11%), as well as financial services (23%). Even though these sectors are not a priori the most export-oriented, there is considerable evidence that inflows of foreign direct investment have contributed to restructuring, the upgrading of the structure of foreign trade and a greater participation of Polish firms in global production and distribution networks.

Transport and other physical infrastructure are still bottlenecks to Poland's growth potential. In particular, the poor quality of the road network, which has suffered from under-investment in renewal and modernisation, is a key factor that increases the cost of doing business. The government has announced, as part of its new medium term economic strategy, plans to considerably increase future infrastructure spending in this area. As far as telecommunications infrastructure is concerned, the number of telephone subscribers has doubled since 1997, but the ratio of telephone density for fixed lines is still half of the EU average. One of the most positive developments in the most recent period is that the internet accessibility ratio (measured as the number of computers with their own address and connected to the internet per 1000 inhabitants) is reported to be growing rapidly. At 0.75% of GDP, spending on research and development is low by international standards, and mainly financed by the state.

Many sectors that have been privatised have been successfully restructured. But the agenda for reform in this area is not yet complete. In sectors such as power generation, banking, insurance, telecommunications, privatisation is well advanced and at the same time appropriate regulatory and supervisory legal frameworks have been adopted. Despite these achievements, however, the enforcement of supervision of monopolies tends to remain weak. As far as the remaining state-owned sectors are concerned, corporate governance by the public owner does not function well. Main challenges remaining are the restructuring and privatisation of energy distribution (where the decision to sell majority stakes should accelerate the process), coal mining (the sector is generating an operating profit but still makes losses net of state subsidies, despite substantial capacity reduction since 1997), steel (in which the amended law on restructuring of February 2002 was a step in the right direction), heavy chemicals and defence (only 5 transactions have taken place out of 26 firms targeted for privatisation). In the area of chemicals, the new strategy has not translated into concrete progress to date. The restructuring of the agricultural sector is also lagging, and requires structural measures to help the economy absorb labour that has already been shed in rural areas.

Shifts in the sectoral structure of the economy have taken place only slowly since 1997, and the industrial sector has continued to make a crucial contribution to catching up. The share of agriculture in GDP dropped from 5.5% in 1997 to 3.4% in 2001, but this sector continues to account for nearly 20% of employment in 2001, hardly down from the 20.5% share in 1997. The productivity gap between agriculture and other sectors of the economy has therefore further widened since 1997. Between 1997 and 2001, gross value added in agriculture fell by 9%. In contrast, manufacturing rose in the same period by around 14% and private services by more than 21%. The share of services in value added has increased by about 6.5 percentage points since 1997. Nevertheless, there has been less of a shift from industry to services then might have been expected from initial conditions.

Small and medium-sized enterprises have been the engine driving the economy, but have been confronted with difficulties in accessing external financing. The SME sector accounts for two thirds of total employment and half of GDP and exports. For most Polish firms, investment is still mostly financed through retained earnings. For SMEs, guarantee schemes and other access to finance support mechanisms (for example venture or seed capital) have yet to reach a critical mass and do not appear to reach micro-enterprises in rural areas sufficiently well. The range of other difficulties confronting SMEs growing from micro-enterprises are reflected by the relative importance of underground economic activity, estimated by the Polish statistical office at around 15% of GDP and actually rising in the last two years. Available data on the size-class structure of non-primary private enterprises show that the average enterprise in Poland employs five persons, a scale similar to that prevailing in the EU.

Interference by government in Poland's markets has been relatively contained in the last few years. The biggest source of market distortion remains the presence of state aid in both private and state-owned firms, even though the entry into force in January 2001 of the new state aid law was an important step in bringing Poland closer to international standards in this area. Hidden subsidies to the state-owned sector take the form of sizeable tax and social security arrears. inter-enterprise arrears between state-owned firms suggest that there is still a need for tighter financial discipline in the sector. In this context, recent proposals for debt forgiveness from the state to the enterprise sector carry significant potential risks of moral hazard and inadequate targeting. Poland has resorted to the use of non-tariff barriers in order to support sectors in difficulty such as textile, the car industry or ceramics. Remaining problems include the complexity and lack of transparency in standards and certification matters, and the failure to apply in a uniform fashion some provisions of the customs code.

Poland has successfully reoriented its trade towards EU markets, a shift spurred on by the Russian crisis of 1998. As an indicator of overall trade integration, the ratio of exports and imports of goods and services to GDP has increased over the period since 1997 from around 47% to 63.3% in 2001. Merchandise exports to the EU have been steady at around 70% of total exports since 1998 (from less than 65% in 1997), after a further reorientation in Polish export markets due to the one-off collapse in trade with Poland's eastern neighbours. Polish firms' ability to penetrate EU markets is also a reflection of the progressive upgrading of the composition of the country's export portfolio over the last five years. The share of raw materials and other non-processed products in total exports is decreasing in favour of manufactured goods in sectors that tend to be more skilled labour intensive or capital intensive. The evolution of the commodity composition of trade as per the SITC classification shows that manufactured goods other than machinery and transport equipment accounted in 2001 for 36.2% of total exports, against 21.6% in 1997. FDI inflows have played a key role in upgrading Poland's manufacturing and export capacity.

Poland's sustained export performance, in the context of sometime significant real appreciation of the currency, is an indicator of the competitiveness of the manufacturing base. High FDI inflows, together with the labour productivity gains associated with the acceleration of enterprise restructuring after 1998, have contributed to maintaining external competitiveness even in the periods in which the Polish currency appreciated against the currencies of the main trading partners, sometimes sharply. The real appreciation has been much more muted when measured by unit labour costs rather than consumer prices. Overall, the zloty has, in real terms, appreciated by only 4.2% since the end of 1997. However, this wage-based measure of the real effective exchange rate has increased more strongly in the recent period, by more than 12.5% over the last two years.

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