Statement by Minister Janusz Steinhoff for the Euro-Invest 2000

Prepared in agreement with the European Commission

Poland is at the fore of the countries in our region as regards the growth of Gross Domestic Product (GDP), industrial production, and primarily the pace of investment and foreign investment inflow. According to estimates, GDP for 1998 will be higher by almost five per cent. It should be underlined that this growth was accompanied by a significant drop in inflation, stabilisation of the unemployment rate (ten per cent), an increase in real wages and social benefits. Recently, the Monetary Policy Council reduced interest rates because the inflation rate was lower than that envisaged in the budgetary law, reaching 8.4 per cent.

Industrial production is becoming increasingly modern, with improved quality and supported by advanced marketing techniques. In 1997, the branches considered to be engines of technological progress increased output twice as fast as the rest of the industry and their share in the total value of production increased from 11.0 to 12.4 per cent. The same statement applies to 1998, because the data for the first nine months indicates that the fastest growth of the production sold was achieved in branches offering highly modern products, eg, 27.4 per cent in electronics, 25.0 per cent in metal products and 22.3 per cent in mechanical vehicles.

Labour productivity increased by 12 per cent in 1997. It has been discovered that when Polish workers are provided with adequate conditions, they may respond to the challenge of modern economy. This is also confirmed by foreign investors.

In 1998, labour productivity was expected to increase by about ten per cent. However, the crisis in Russia and disturbances on the Asian and South American markets had an adverse effect on Poland's foreign trade and the pace of growth. The construction of the State budget rested on an assumption of a 5.1 per cent growth of GDP. In the expert's opinion, the foreign trade deficit is too high (US$9.3 million after the first nine months of 1998). The strong position of the Polish currency contributed to this situation. For this reason, certain industries face great difficulties, for example, the light industry: its financial results after eight months of 1998 were 50 per cent worse than in the same period of the preceding year. Its position is most seriously affected by exports from Asia at exceptionally low, often dumping prices. Polish producers are still not active enough in monitoring such processes and applying to the Ministry of the Economy to initiate protective measures. Poland is in the process of intensive talks with Russia, the Ukraine and other Commonwealth Independent States (CIS) to maintain an adequate level of trade. However, financial crisis in these states offers limited possibilities in this area. On the other hand, Poland managed to change the trade orientation of its economy on time, and at present, the European Union (EU) Member States account for 65 per cent of its foreign trade.

One could say that the strongest aspect of Poland's economy is the people - both employees and entrepreneurs who, in the last year, produced more and more and what is especially important - invested. All these activities resulted both in economic growth and increased revenues of the state and local budgets and an improved quality of life of the citizens.

Other sources of Poland's success include due care about the macroeconomic basis, a consistent and wise monetary policy, and liberalisation and privatisation processes. What is missing so far, and what the present Government is trying to make up, is a number of restructuring activities and reforms. Restructuring plans have been completed concerning the steel industry (approved by the Government and presented to the EU) and the coal industry (approved by Parliament in the form of a legal act). Soon the Government will complete work on a restructuring plan for the defence industry. One may say that this is the next fundamental issue concerning the economy, so that it does not bear the burden of ineffective industries and large loss-makers, but on the contrary, obtains due profits from these industries. At a time of such comprehensive restructuring, the rate of growth may decrease. This fact should be borne in mind when talking to those expressing their disappointment that the growth rate in Poland may achieve 'only' five per cent. Adjusting Poland's economy to the EU rules, besides catching up with the developed European economies and application of restructuring processes, ranks among the major tasks of the Ministry of the Economy. The most significant project in this area and one of the most fundamental is a draft law on the rules of granting public aid to entrepreneurs and its monitoring. The draft has already been submitted to and discussed with the Government. It will approximate the public aid rules in Poland to those in the EU. Without this law one cannot speak about pursuing an industrial policy which will provide for transparency of public aid. The Government has already completed work on a monumental draft law on business activity which is a sort of a constitution of the economy, establishing a legal framework for entrepreneurship in Poland. The law is, to a maximum extent, harmonised with the EU acquis because it will provide a basis for conducting business, not only within the territory of Poland, but also the EU.

The law will ultimately provide for equal treatment of domestic and foreign economic operators, and by substantially reducing the number of licences and administrative decisions, will reduce state intervention in the economy. Finally, the Ministry of the Economy is preparing a number of secondary legislation acts introducing, eg, the new energy law which provides for demonopolisation of the energy market in Poland.

Due to the reforms I have spoken about, with an improvement in world economic trends, Poland will be able to make the next leap in its economic growth.

On 31 March 1998, the accession negotiations with the EU commenced. If today Poland transposed the entire EU acquis communautaire, thus totally exposing itself to the competitive forces within the EU single market, this would be an enormously strong shock for many regions of the country, many industries and also many social groups. Since the establishment of the COMECON system, never in the history of the EU has a country so big, with such large potential, yet unfortunately, so poor, ever applied for membership. The scale of the problem may be illustrated by the fact that the standard of living in Poland equals only 31 per cent of the EU average. Poland is evidently poorer than Hungary, the Czech Republic or Slovenia. On the other hand, in the last five years Poland has managed to reduce the distance to a degree impossible for any other Central and Eastern European state. The GDP growth amounted to five per cent on average, ie, twice as fast as in the 15 most developed countries. Membership prospects helped to reduce the distance. First, in reforming the economy, we have a European law pattern to which we have to adjust. Transposition of economic law is a difficult task for my Ministry, but at the same time, its effect is and will be rapid rationalisation of the economy, resulting, in turn, in its improved effectiveness. Prospective membership is an important argument for foreign investors who bring new capital, new technologies, access to distribution channels, new management systems, etc, into Poland. In 1997, foreign investment per capita (US$122) was higher than in Portugal and close to that in Spain. The foreign direct investment (FDI) dynamics in the first eight months of 1998 was still high, amounting to 125 per cent. In the third quarter alone, the FDI inflow to Poland amounted to $1 billion.

We have already had a very positive experience in our contact with the EU, first as regards the Association Treaty or European Agreement. A direct effect of Poland's association with the EU was increasing liberalisation of foreign trade, which in 1999 will culminate in establishing a free trade area in industrial products (except for steel and automobiles). Based on our studies, I may say that increasing liberalisation in our trade with the EU is more an opportunity than a threat to Poland's industry. Initially, Poland's reaction to zero tariff was slower and weaker than in the EU, because Poland's preparation was worse. But since 1994, a more dynamic growth in exports of Polish industrial products in the liberalised group than in that subject to customs duty has been observed. I will not change this view, even faced with the worst effects of foreign trade, which in my opinion is a result of the situation in Russia and Asia and a strong position of the Polish currency, not a permanent lack of competitiveness in Poland's economy. A detailed analysis has shown that there are areas in the economy which, in the process of liberalisation, are able to adjust to competition. One might fear that the dangers to Poland's economy, caused by consumer imports, would be larger than chances offered by investment imports. Since 1996, and also today, the share of consumer imports is bigger than that of investment imports. However, one should take into account the effect of increasing FDI, which brings about increased volume and improved quality of domestic production and indirectly limits supply imports. In the forthcoming period between 2001-2003, the effect caused by the use of an increasing investment import should be stronger than the effect of increased consumption.

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