TCS Daily

Poland Keeps Smiling

By Kamila Pajer - October 22, 2004 12:00 AM

There was a famous joke in the communist era that the foot (in Polish "foot" and "rate" are homonyms) should be wrapped up in newspaper for it grows the fastest in the press. The origin of the joke was that the press was constantly feeding us with great news about the state of our economy, even when the reality was quite different. People learned that the more the depressing the reality, the more optimistic the news.

At that time, the press was censored and controlled. Today it is supposed to be free and to present only the truth. Imagine how surprised journalists were, then, to find the results of The Global Competitiveness Report 2004-2005 (GCR), the study by World Economic Forum, which says Poland is the least competitive economy in the European Union and has dramatically dropped in the ranking since last year. For more than a year the press has been trying to convince everyone that Poland has one of the most dynamic rates of economic growth and that business thrives.

Revealingly, the study is not a mere estimation but rather the result of interviews with business leaders who admit that there many problems that make their lives difficult and that they feel deeply pessimistic about the future of their firms.

Most of the new European Union countries have dropped in the ranking during their first year of accession: Malta dropped 13 places (from 19 last year to 32 this year), Latvia 7 (from 37 to 44), Hungary 6 (from 33 to 39), Slovenia 2 (from 31 to 33) and Czech Republic 1 (from 39 to 40). Hungary, once the most dynamic economy of the ten new EU countries, has a serious budget deficit that hampers economic growth and a high rate of inflation - partly due to a raise in the already high VAT rate the moment the country joined the EU.

Poland shows the most precipitous drop in the GCR ranking: 15 places, from 45th position last year to 60th this year. Polish businessmen complain about the quality of public institutions, administrative laziness and corruption. According to the study by Transparency International, Poland is the most corrupt country in the EU. The businessmen admit they even pay bribes to be exempt from taxation. They emphasize that the law changes too often and is made in a way that leaves the administration many ways to interpret it. Moreover the law seriously and unjustifiably restricts people's freedom and therefore forces them not to respect it. Poland was also criticized for running a large budget deficit.

One of the reasons for the large budget deficit and state enforcement of ever greater taxes is the contribution the country has to pay to the EU budget for being a member state. And as the ruling politicians consider mining, trains, buses, ships, schools, clinics, petrol, painting, theatre, cinema and countless other things as strategic issues for the nation that have to be financed forever from public money, revenues have to be collected from everybody to pay for them. Therefore we finance public organization of our everyday life and also raise money for the EU budget, try to pay debts and to be attractive for those who are still willing to credit us.

Another reason for the Polish score is that the long and complicated process of EU accession negotiations was so "successful" that now everything is get higher as EU regulations require raising the VAT on services or introducing new and complicated regulations.

There are economies that perform well. Estonia is now at the 20th position in the GCR ranking Lithuania has climbed to the 36th position (France dropped to 27th and Italy to 47th). They are praised for running budget surpluses and for having low levels of corruption. The two countries are already considered as euro-zone candidates for their low inflation and deficits. The main difference between the Polish and Baltic economies is taxes. In Estonia there is 26 percent flat income tax and reinvested corporate profit is tax free; in Lithuania taxes are even lower. In Poland there are two kinds of income taxes - progressive personal income tax of 19 perecent, 30 percent and 40 percent and - introduced this year - flat corporate income tax of 19 percent. Businesses may be exempt from taxation but must convince - one way or another - the revenue office. Most of the public enterprises have already been privatized in Estonia but in Poland many are still financed by the state budget. The law in Estonia is simple whereas in Poland the law is very complicated and the courts work so slowly that it usually takes them more that a year to solve a case and even then debts remain unpaid.

World Economic Forum economist Jennifer Blanke suggested that Poland should lower taxes, introduce simple law and reform judiciary to become more competitive and ensure economic growth. She might be disappointed. for there are studies that keep the Polish government in a sunny mood. In response to the disappointing for Poland WEF ranking, the European Commission has announced that according to its studies Poland is the most dynamic economy in the EU not counting the Baltics. The Commission also promised that Poland will continue to be the best European economy for many years. The reason is the high level of consumption, foreign investment (thanks to EU membership) and - last but not least - EU structural aid funds. Many old EU economies suffer from stagnation. One might conclude from the Commission studies that it is less important to reform socialized economies than to properly fill out applications for aid funds. There is however one minor problem: the EU countries that experience stagnation cannot afford to provide for our golden future.


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