100 down, 1,200 to go

by Marek Matraszek

Miller's government faces the begining of economic crisisPrime Minister Leszek Miller last week gave a press conference to mark 100 days of his government in power since last year's elections. Although it was an upbeat defense, one could not escape the thought that Miller remains a worried man. And rightly so, since he will be judged after four years of government, and not just three months, which although rocky, may yet prove to be the calm before the storm.It has not been an easy time for Miller, not that it could have been for any government that took office at the beginning of an economic crisis produced by years of neglect of the country's public finance system. That neglect, which has led to a ballooning budgetary deficit and an economic slowdown that together have pushed unemployment to more than 17%, is the cumulative effect of successive governments after 1989 ignoring hard economic realities. Successive prime ministers have indeed behaved as if they believed there was such a thing as a free lunch, installing and defending a bloated welfare system that, together with unfavorable demographics, has threatened the nation's finances. And there still remain swathes of the economy, especially in agriculture and heavy industry, that remain subsidized, albeit indirectly by the authorities failing to execute outstanding debts and tax payments. Finance Minister Marek Belka, in his first budget presented to Parliament at the end of last year, sought to do what he could to prevent further financial hemorrhaging in the short term by proposing a range of spending caps and sharply increasing indirect taxation on a range of goods and services. Yet most economists agree that these are short-term measures that might prevent a crisis this year, but fail to solve the deeper underlying problems that could yet result in trouble in 2003 and beyond.
It has been known that the government, and especially the Economy Ministry, has been working on a package of legislation designed to help promote small- and medium-sized businesses and remove bureaucratic barriers to entrepreneurship. At the same time, the Labor Ministry under Jerzy Hausner has been seeking to negotiate with the trade unions reforms to the Labor Code, which is universally regarded as being one of the major sources of high unemployment. Last week, however, Belka revealed what he might have in store and as a result provoked a barely concealed political storm. Speaking at a closed session of the government, Belka broached the possibility of instituting direct-payment systems for health and higher education services, arguing that most patients and students pay for their health and education informally through bribes and the need to buy their own equipment, medicines and books. Better to institute an open method of payment where there is then real accountability and transparency in payments made and services received. In truth, Belka was bravely commencing a public debate on the last reform taboo left in Poland: the need to effectively dismantle the post-1989 welfare state as the only way to rescue the long-term growth prospects of the economy.Yet the tentative proposals did not go down well in the meeting. In a confused series of events, government spokesman Michał Tober denied there had been such a discussion, before admitting that it had been raised but "only as a loose suggestion." Other ministers made similar denials. But the barely concealed row was enlightening in several areas. Firstly, it revealed the growing divisions between Belka and rest of the cabinet, which first surfaced openly over Belka's resistance to government proposals to reduce the independence of the Monetary Policy Council (RPP), and which were portended before the elections by statements by Belka over the need for increased taxes, which many feel ultimately cost the Democratic Left Alliance (SLD) their potential electoral majority. Miller sees Belka as an imposition from President Aleksander Kwaśniewski, and prefers to listen to his own economic advisers - led by economist Andrzej Sopoćko - who are privately openly critical of Belka. More importantly, however, the debate revealed the increasing paradoxes that will face Miller in the coming months. The bitter truth is that Miller is condemned to a fall in popularity in the long run, since if he were to implement the radical reforms that Belka has so far only half-mooted, he would inevitably lose support from his core electorate, which voted him into office precisely on the grounds that an SLD government would reverse the policies of the (former finance minister) Leszek Balcerowicz years. Yet to accede to the demands of the core SLD electorate and slow down on reform would inevitably provoke the potential for further economic trouble, increasing unemployment, and long-term economic decline. That would end in electoral catastrophe for Miller and the SLD, facing crucial elections and votes in each of the coming years: local elections in 2002, a European Union (EU) referendum in 2003, elections to the European Parliament in 2004, and parliamentary and presidential elections in 2005. Boxed in by electoral demands, Miller faces the unenviable choice of biting the bullet on reform now, or being forever hemmed in by fear of electoral losses in his term of office. Miller's only comfort is that as yet, the parliamentary opposition is too traumatized after their catastrophic defeat last year to be more than an irritating nuisance. But as they recover their coherence, and economic conditions worsen, he may yet look back on this period of government with warm nostalgia. Marek Matraszek is the Warsaw Director of CEC Government Relations. He can be e-mailed at director@cec.com.pl