Sound fundamentals in turbulent times
Thomas Laursen: Probably not as much as some of the more vulnerable countries in the region. I don't think anybody has a good sense of how bad this is, how deep the downturn is going to be, and how protracted the downturn will be.
But the more important point I think is that the Polish economy is quite strong. There are no major macroeconomic imbalances that are threatening growth prospects.
Wages in Poland are growing at nearly 10 percent year-on-year. Can this be sustained or will it spur even higher inflation?
Wage growth is perhaps the biggest challenge when you look at the Polish economy from a macroeconomic perspective. Wage growth has accelerated quite a bit. When you take into account inflation, real wage growth is at some six or seven percent right now. That is on the high side. The question is: What is happening to productivity and exchange rates? What really matters is profitability and competitiveness.
I think we are getting to the point where one has to get a little worried. We've seen a bit of a reversal recently, but by and large the złoty has appreciated by some 30 percent in nominal terms relative to a year ago. I don't think there is any doubt that competitiveness is getting squeezed.
What steps can the government take to make sure that people get the standard of living that they expect, while at the same time combating inflation?
Wages are determined by the market and there's not a whole lot you can do about that. But there are two important things that the government can do to help alleviate the cost pressures that businesses are facing.
One of them is [to reduce] the cost of hiring labor. The tax wedge on labor is very high in Poland. Social security contributions are very high, and the difference between the gross and the net wage is quite large. Personal income taxes are relatively high, and then you have social security contributions. So it's very expensive to hire workers.
The government cannot do a whole lot about that on its own, because there is not enough room in the budget, there's not enough fiscal space for lowering taxes.
In Poland, social spending is still quite high. This goes back to the issue of early retirement; disability pensions, which are still quite high; health-care spending, which is certainly not as efficient as it could be.
Now the other thing that the government can do is lower the cost of doing business in general through deregulation.
Poland is now ranked 76th [in the World Bank's 2009 "Doing Business" ranking], actually slightly worse than last year because other countries have been reforming faster. And if you look at some of the categories that make up this overall assessment, it really makes you worry and wonder what is going on.
The biggest problems in Poland are starting a business, getting permits, licenses. Getting construction permits and actually paying taxes is extremely complicated. In these three areas Poland ranks between 125th and 150th in the world. It cannot get much worse. For small businesses and new startups, this is a huge issue.
Prime Minister Tusk has set a goal of adopting the euro in 2011. Is this date too optimistic?
I think it is ambitious, but feasible. It's not going to be January 1, 2011 - that would be difficult. But later in the year is feasible.
Poland basically meets the Maastricht criteria for euro adoption. The fiscal deficit has been reduced to below three percent of GDP - this year it is likely to come in at slightly over two [percent]. The budget for next year targets zł.18.2 billion, which is a little less than two percent of GDP.
So Poland meets the debt criterion because, due to the rapid growth and reduction of the fiscal deficit, public debt has declined quite strongly. When it comes to inflation, Poland is more or less borderline right now on meeting the criterion.
So the one criterion Poland doesn't meet is being part of the ERM-2 [exchange rate mechanism] for two years.
I think that the conduct of monetary policy so far has been fairly prudent as well. Whether more tightening is needed to reign in wage and inflation pressures is a tough call. But macroeconomic policy has been very well conducted in Poland in the last couple of years.
Some analysts believe Poland should maintain control of its monetary policy for as long as possible. Do you think it's a good idea for Poland to adopt the euro so soon?
Much more important than whether the euro is introduced is having sound economic policy. And if you have that, things are fine with or without the euro. Whether it's 2011 or 2012 or 2013 is not so much an issue as having a firm and credible plan as to how to get there.
What are the World Bank's activities here in Poland?
It's a different relationship than in the past, and more one of being a knowledge partner, an advisor, especially on some of the more medium- to longer-term issues: demographic changes, climate change, energy efficiency, transportation networks, including how those relates to climate change.
There are also areas within the social sectors where the EU is not that closely involved. Especially if you look at health systems and reforms in health care, education, and pensions - these are areas where the EU is less involved, where the bank has a lot of experience and a lot of knowledge which can hopefully be useful to Poland.
The World Bank has been criticized for the way the bank's head is chosen - generally the US has the final say. Shouldn't the bank's president be chosen more democratically?
As a matter of principle I think that international organizations have to evolve and their structures evolve to reflect the realities of today's world. And I think it is beginning to happen. We have seen some changes in the IMF, for example, in voting power. I think you are beginning to see some changes in the World Bank as well. If you look at the current strategic priorities of the World Bank, they are quite global in nature.
And the philosophy of more of the knowledge bank, dealing with global public goods such as climate change - these are issues that resonate across the whole world. So I do think that important steps have been taken in terms of trying to make the institution truly global and to try and deal with the current issue. That process is certainly ongoing and I think we still have a lot of work to do to change this perception of the institution. It's not an easy task but I think we have to do a better job to explain to people what it is that we are and what we can do.
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