Poland in 1997

Leszek Balcerowicz
First Deputy Prime Minister and Minister of Finance

1997 was a successive year of rapid growth in the Polish economy. The increase in domestic demand, mostly in investment demand, was a basic factor in strengthening the business cycle. Investment inputs in economy and the construction and assembly production increased at a rate unrecorded in the entire transformation period. For the first time in seven years there was an increase in the number of apartments delivered for use. Advantageous trends existed in the labour market. 1997 was a further year of decline in inflation, growth in real salaries, rise in social benefits and in incomes of households. As a result, private consumption increased too. A high rate of growth in domestic demand was accompanied by the widening of trade balance and the balance of payment deficits.

Generally, favourable progress of economic process has been hindered by the most severe (both in terms of its extent and intensity) flood in Poland to date, which, in July, swamped most of the basins of the Odra river and the upper basin of the Vistula river. The damage caused by the flood was significant; thus the re-construction and modernisation of devastated property will require several years. However, it is believed that the effects of the flood did not seriously threaten the macroeconomic equilibrium in 1997.

It is estimated that the Gross Domestic Product (GDP) growth rate in 1997 amounted to 6,3 per cent, and was higher than the rate of growth achieved in 1996. Also, industrial production (in constant prices) increased by ten per cent as compared with 1996, mainly as a result of growing domestic demand for investment and consumer goods.


The dynamics of investments is very high. In 1995 investment inputs soared by 17,1 per cent, in 1996 by 19,2, while in 1997 they increased by about 20 per cent. These positive trends are the result of the improvement of the financial condition in the enterprises of the private sector, a greater availability of bank loans, and of the increasing accumulation of direct foreign investment. Other factors enhancing capital expenditure consisted of the re-structuring of corporate debts, favourable tax regulations, and significantly, ever improving adaptation to the conditions of a market economy. Private sector enterprises invested over 40 per cent more than in the previous year, and public sector entities were 17 per cent above the level of the preceding year.

The enterprises financed their capital expenditure mainly from retained profits, budgetary funds and bank loans. The role of external funding sources, other than banks and the budget, remains insignificant in the financing of investment.

An increasing role in investment is played by foreign capital. By that channel US$2.5 billion came into Poland in 1995 and approximately five billion dollars in 1996. Foreign investors are most interested in industry (62 per cent of all foreign investment outlays) and in the financial sector (21 per cent). Almost half of the invested funds come from countries of the European Union (EU), 25 per cent consists of North American capital, and ten per cent flows in from multilateral financial institutions.

Privatisation and the activity of the private sector

Further progress in the privatisation of the Polish economy has been achieved. Ownership transformation takes place through both changes in the status of state enterprises and the dynamic development of new private entities. Of the 8441 state enterprises registered in August 1990, 4086 enterprises and almost 1666 former state-owned farms have been included in the ownership transformation process - that is 68 per cent (June 1997).

At the end of 1997 the share of private enterprises exceeded 52 per cent in total industrial production and 88 per cent in construction, while amounting to 93 per cent in the retail trade, about 71 per cent in exports, and 80 per cent in imports. The private sector employed more than 67 per cent (over ten million persons) of the total labour force.

Unemployment, salaries and inflation

The improvement of economic activity and the creation of new jobs have an advantageous influence on the labour market.

At the end of 1996 the unemployment rate amounted to 13,2 per cent, compared to 14.9 per cent in 1995. At the end of 1997 unemployment fell to 1.95 million persons and the unemployment rate declined to 10.6 per cent, approximating the level observed in Western Europe. These are very advantageous tendencies because Poland is entering a period of dynamic growth as regards the number of people of active working age.

Positive developments in the business cycle stimulate the growth of employees' real salaries. In 1996 real salaries in the whole economy increased by 5,7 per cent and in 1997 they grew by 6,5 per cent.

The rate of inflation is falling, although it still remains high. In 1996 retail prices of goods and consumption services increased by 18.5 per cent (comparing December 1996 to December 1995) and in 1997 it grew by 13 per cent. The reduction in inflation results from slower growth in the prices of foodstuffs. On the other hand, the prices of services increased above the average rate.

Assessment of the economic situation of Poland in 1997 must be positive. A high rate of economic growth has been sustained. In 1997 the Polish economy again confirmed its resilience, independent of decisions of a political nature, and managed to sustain the momentum of its growth.


The economic strategy of Poland has three matters of interest. The first consists of targets; the second, of conditions; and the last, of those instruments necessary to achieve these goals.


The main target for Poland to achieve in upcoming years is economic growth that would be at least twice as high as the average for Western European countries; it means catching up. We are interested in growth that will both create new competitive employment positions and create appropriate conditions for decreasing the rate of inflation. Generally speaking, reaching all these goals: quick growth, competitive jobs and a decrease in inflation, is the reason for improving living conditions. They also form the basis for creating proper conditions for Poland to join the European Union (EU) as an energetic and prospering country. I hope that it will happen very soon. So far it can be concluded that the internal reforms and the external aim have a lot in common with each other.


At present we are in a situation where we are experiencing sustained growth in the economy. We are not denying the achievements of the past four years, however, we are aware of the fact that the potential of destabilisation has increased, reflected by the deficit in the trade balance. Therefore, the principal part of our strategy is to take all necessary measures to eliminate it. It is essential to add that the so-called economic fundamentals now look better in Poland than they did in Hungary before the economic crisis of 1994, and in the Czech Republic in 1996 and 1997. However, we take into account the fact that the present world economic situation is much more complicated as the result of the crisis in Asian 'tiger' countries. That is why we want to be careful. Caution in the name of growth. This statement leads me to the last aspect - instruments of economic policy.


Instruments can be divided into two groups: the first is the current macroeconomic policy.

We are carrying out and intend to maintain the policy which is aimed at the reduction of destabilisation. It means economic security in the interest of growth. Destabilisation would mean an interruption of further growth. The cautious budget that was passed by Parliament is a part of the pro-growth policy. We are expecting that the policy of the National Bank of Poland (NBP) will also become more and more effective.

The second fundamental group of instruments concerns reforms. Or in other words, structural changes. I am only going to point out some of the most important elements of structural reforms.

The creation of a better legal framework for economic activity, especially for the establishment and development of enterprises, is essential. With respect to this, one can distinguish two parts. The first is deregulation. Together with the co-operation of experts, journalists and economy representatives, we have begun a very important project, aimed to rule out all those regulations that are wrong or harmful. The second part of this process concerns the creation of a better legal framework, that means developing legal institutions that are essential for the proper functioning of the economy.

The second matter is to accelerate the privatisation process, especially in those fields in which privatisation was implemented too slowly during previous years. The privatisation of the infrastructure is at stake, that is: the telecommunication, power generating, metallurgy and financial sector. Our target is to carry out real privatisation, resulting in the disappearance of political control over the enterprises.

The next problem is to strengthen the competition. As soon as it becomes possible we are going to implement the principals of granting state aid, based on the standards of the EU. Furthermore, we want to complete the external liberalisation of the Polish economy, in accordance with agreements signed by our country with OECD and the EU.

The next problem is to introduce reforms to the Pension Plan System, which is extremely important for the development of capital markets and the avoidance of increasing problems.

Additionally, we want to modernise our education system. The acceptance of this important law is the question of the coming months. One is aware of the fact that besides its social significance, education also has huge economic influence - it determines the quality of the so-called human resource.

State decentralisation is also among our interests. It certainly plays an important role in the economic structure, since it is connected with changes in the public finance system and it produces opportunities for the best spending of public money.

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