Poland – currently

Polish economy undeniably belongs to one of the faster-developing economies in terms of GDP growth (6,2% in 2006, 5,5% in mid-2007) or foreign investment (11,1 bln EUR in 2006). The rising employment, increasing wages and high entrepreneurship spirit (according to 2007 Eurobarometer survey conducted by European Commission half of Poles want to start-up their own company ) indicate that Poland may be an attractive place to invest corporate money. Despite all favorable economic ratios one may be confused by seeing Poland on one of the last positions among EU countries as for business competitiveness.
Is it only the political ineffectualness that result in Poland’s 48th position in Global Competitiveness Index 2007 and Iceland that is on 14th place? Why are such countries as Tunisia or Barbados ranked higher (30th place and 31st place respectively) than the country which was considered as a symbol of well-applied economic reforms from the early 1990s ? In order to answer this complex question one must look at the structure of the ranking and identify what are the main categories in which Poland lag behind many other EU countries.

The measures

GDP as a factor indicating wealth of particular nation does not cover income of self-sustaining households or the black economy. What is also a concern for analysts, the state-provided utilities market is often undermined.

One of significant measures may be the easiness of starting-up businesses and the favorable attitude of all the business environment towards entrepreneurs.
The competitiveness may also be measured by evaluating the degree of bureaucratic decisions which affect not only companies, but also wealth of all citizens.
One may argue that the other indices such as HDI index published by United Nations do better mirror the actual state of country’s wealth. In this ranking, Poland managed to reach 36th position (2005).

Global competitiveness index as a key measure for Polish competitiveness

Global Competitiveness Index assess the ability of countries to provide high levels of prosperity to their citizens via measuring institutions policies and factors that set the sustainable current and medium-term levels of economic prosperity.
These factors include: Institutions, Infrastructure, Macroeconomics, Health, Quality of Education, Market efficiency, Technological readiness, Business sophistication and Innovation.

Developing countries usually concentrate on higher efficiency of production which constitute for first three factors. As they become the developed country, competitiveness in quality of education, market efficiency or benefits from technology become increasingly important to the country. As the country becomes well-developed (advanced) economy, it must move into innovation and business sophistication in order to be competitive. Not surprisingly, Poland belongs to a group of developed countries.
One of Poland’s great weaknesses are the bureaucratic ties stated in current business law that does not allow great competitiveness of Polish enterprises. In this category Poland received 41st place in 2005 Index of Economic Freedom, 53rd place in Index of Economic Freedom of the World 2006 and only 48th place in The Global Competitiveness Report 2006-2007.

The overall result of competitiveness of Polish economy in world statistics is not favorable: Poland is somewhere between 40th and 50th place.
That is why foreign investors consider Poland as being in 2nd category of countries: developed country, which lies somewhere between rich, stable economies of very well developed economies and developing countries. Many investors also see Poland as belonging to CEMEA group of countries – which offer low quality of conducting business. Maybe the problem lies in low recognition of Poland as a country. Poland does not have a product or brand that will be well associated with a country. For instance Finland is associated with Nokia phones, Skype and Linux IT systems, Czech Republic with Skoda cars and Pilsner beer. Poland still needs to create a product or brand that will help promote Poland as an innovative country.

The fastest improvement of the current state of matters Poland could gain by constant liberalization of the economy, reducing the bureaucratic barriers and corruption. There is also a potential of well-educated human resources such as students who win worldwide economic and IT competition. It is the more promising while well-educated citizens became an important reason behind Finland success after recession caused by USSR collapse.

Surprisingly, Polish government acclaimed report: Entrepreneurship in Poland (2007) on 27th July 2007 which stated that “low position of Poland result mainly from weak evaluation of conducting business activity and low effectiveness of public spending”. By approving this statement, the Polish government somewhat admitted to not conducting necessary reforms, it did not however encouraged all ministries to quickly present plan of action to change this state of matters.

Factors that needs to be changed quickly

The World Bank “Doing business in 2007” report precisely unveils all factors causing unfavorable opinion about Polish business competitiveness:
1) Overregulation. Poland is at 75th place on 175 countries evaluated as to easiness of doing business.
2) Very long debt recovery process. It takes on average 980 days to execute money whereas for example in Lithuania it takes only 166 days.
3) Entry barriers for starting-up business. High start-up fees, high level of required capital and too much formal and legal issues result in 114th place on 175 countries.
4)Corporate tax level. In this category Poland received 71st place while an average entrepreneur pays 38,4% income tax and it takes 175 hours yearly to deal with tax issues.On the contrary, Poland received also positive notes as for individual investor protection on financial market (33rd place), corporate governance and transparency of transactions on financial market.

However, the overall evaluation of Poland as a business-friendly country was unfavorable. Poland does not belong to countries with business-friendly, reform-prone economy. In this statistics Poland lag behind all countries of EU community except Greece and Italy.

The Global Competitiveness report revealed Poland’s weaknesses: inefficient public spending, low elasticity of labor market, weakness of public institutions and corruption. However, Poland received good notes for quite high innovation potential, skilled human resources, use of new technology and the fact that Polish entrepreneurs put much impact on R&D (research and development) techniques.

Considering the above Poland needs to change:

-inefficient judicial system,
-reduce corruption,
-change inelastic labor law,
-reduce governmental impact on banking and insurance sector,
-not sufficient infrastructure,
-relatively low spending on R&D sector.
The report listed also strengths of Polish economy such as:
-low corporate income tax of 19%,
-good trade policy,
-good monetary policy.

However, according to Global Services Location Index created by AT Kearney consulting company, which measures investors’ willingness to locate their business services in particular country, Poland received favorable 18th position on 50 countries investigated.
As a summary of this part I may state that Poland needs changes which only can be done through new regulations favoring business competitiveness and reducing the unnecessary regulations which expand bureaucratic difficulties and tight entrepreneurial freedom.

Political conditions and strategies for the future

In here one must state that the role of wise governmental decisions is crucial in order to build competitive economy. In the years political parties (from AWS in 1998 then SLD in 2001 and PIS in 2005) only expanded the limitations for business activity. The business-friendly actions were supported with 2005 Poland EU accession, when many regulations had to be consistent with EU business law, and independent decision on lowering of the corporate income tax to 19% from 2003/2004. However, none of the parties mentioned above took real care about Polish economy. What is of great importance the earlier election in Poland (October 2007) won PO (Civil Platform) which is the most business-friendly party in recent Polish history. Many voters hope it will change the old regulations and will create favorable economic conditions for both business people and other citizens.

Its political program states that PO will:

-create detail, long-term macro economical plan for Polish economy,
-speed-up privatization processes,
-discontinue use of tax on capital income and tax on stock market profits,
-lower nontax charges incurred by employees and employers,
-rationalize state expenses,
-lower bureaucracy,
-lower personal income tax for all citizens,
-join ERM2 system for further EURO currency introduction.
Many economists such as Stanislaw Gomulka from London School of Economics or Witold Orlowski from PriceWaterhouseCoopers claim that fulfilling even only half of these promises could favorably increase competitiveness of Polish economy.

How to improve the overall competitiveness?

All the above mentioned issues which are part of PO party program will give an crucial incentive for Polish economy to develop more rapidly, freed of all inefficiencies. There are also other factors that must be improved in order to increase competitiveness:
1) give tax incentives or state donations for R&D activities in enterprises. The more innovative is the country, the better the future prospects for the economy. Significant innovation in one field can lead to creation of strong segment of the economy which could benefit in high tax-income to the state budget, high employment in companies from the sector and creation of many enterprises offering services to companies from the sector,
2) build cooperation between state-owned research centers and business so that to reach mutual advantages,
3) build more friendly environment for start-up companies: to attract financial institutions or so called “business angels” to give capital necessary in first, growth stage of business activity (state donation reducing interest to be paid by entrepreneur would be a good solution),
4) stimulate import and exchange of know-how with other EU countries,
5) create new ways for entrepreneurs to gain necessary capital: interact with financial institutions to build corporate bond market which will give lower cost of capital to medium-sized companies than corporate credit and will not require costly IPO process for going public.