Ćwiok: Poland’s economy has been developing at a rate of 6 percent GDP per year. What are Poland’s biggest challenges in terms of medium-term economic policies that need to be addressed so the country continues such good economic development?

Laursen: I think that the critical reforms are to raise employment rates as they are very low in Poland even when compared to other new EU member states. The employment rate is currently slightly above 50 percent of the working age population. The problems behind this issue are the early retirement and disability pensions and low labour force participation rates both among the young and the old, male and female. I think that the constraints of that low employment rate are becoming inevitable. There are skill shortages in many fields of the economy. Simply speaking, it is difficult to find workers not only in the construction sector. So to raise basic employment rates is absolutely critical particularly among the older generations. It is not only about higher employment rates but about productive employment and for that you need people with the right skills to fill the jobs. 

Ćwiok: Isn’t it because a large chunk of the workforce has gone abroad?

Laursen: It is clearly because of that but not only because of that. Many people indeed have left, but fortunately some are beginning to come back as economic prospects in Poland improve. But this is something about which we can do very little as there’s free movement of labour in the European Union. The only thing Polish lawmakers can do is improve economic prospects at home. 

Ćwiok: So, what can they do?

Laursen: This requires a range of reforms in different areas. First would be to remove some very favorable early- retirement privileges to allow people to work while receiving a pension, and also to lower what is called tax wedge on labour. Poland has very high taxes and social security contributions, which means that the economic benefit for going from being unemployed to being employed especially at the lower end of the wage scale is not that strong.

And I think that’s an important part of the solution. In order to lower that tax wedge one has to also look at the spending side of the equation. If you want to lower, say, social security contributions, you cannot just do that without looking at the associated spending because otherwise your reductions will have a negative fiscal impact which is not affordable. So a revisiting of the whole social insurance system is one of the critical elements of raising the employment rate in Poland. 

Another important element is on the education side. A lot has happened recently to improve the education system but still more needs to be done. It applies not only to Poland but the entire CEE region to make sure that the skills that are produced by the educational system are indeed the skills that the market needs or will need in the coming years. 

In the case of Poland, there’s already been some movement towards extending the period during which students undergo general education rather then having a system of early tracking into specialized vocational education and general education. Most evidence shows that it is better to have a longer general education period which provides students with broad skills and the adaptability to changing circumstances rather then very particular skills which make the labour force less adaptable to changing labour market circumstances.  And I think that that work is still not yet finished. 

There are some issues in higher education as well. One of them is making sure that what people chose to do in university is aligned closely to what the market needs. And then one solution to that is to introduce more private financing into higher education. 

Another problem is investment rates which in Poland are at more or less reasonable, to medium levels. I do think that there is a need at least over the medium term for some increase in investment rates including infrastructure. It is a big challenge for Poland in a broad sense. The road infrastructure is an obvious area but there is also the railway network, inland waterway system, and the energy sector. There are many areas of infrastructure that will require additional investment. 

Ćwiok: Where do you think the money can come from?

Laursen: A part of that has to be public money or potentially public-private partnerships (PPP). The latter have been difficult to do successfully not just in Poland but in many other countries. PPP is a very difficult model of financing. But if one gets it right, I think there is good potential do to in the infrastructure area. 

But even with all that there will be a need for additional public investments and this will require room in the state budget to do this. Obviously a lot of those projects will be financed by EU funds. But even then, beneficiaries need to co- finance these expenditures and they need to make sure that there is the capacity in the economy and the labour market to do it. Additionally, there will also be some projects that the EU will not finance but which will need to be financed by Poland itself. And that is just another reason why it is necessary to look at the system of social security as it eats up a significant chunk of Poland’s budget while the country needs to find more money in its budget to keep developing its economy.

In addition, there has to be some more room for spending on research and development (R&D). Not pure public R&D but PPP within research and development. Poland spends relatively little overall on this.

Ćwiok: Because of the level of technological backwardness, for years, Polish companies have been increasing their work efficiency by simply buying modern better equipment and production tools. Why do you think they need to look into investing into R&D at this stage?

Laursen: Poland is not alone in this world. There are other countries competing in the same areas where Poland, I think, could be quite strong. And things are moving fast. Innovation, R&D in small and medium-sized entrepreneurial businesses need to flourish because it is that sector where a lot of innovations take place. There is a lot of innovation and R&D on the higher level, through projects supported by governments, universities and think-tanks, but the other side of the equation is what takes place at the grassroots level through the emergence of new small businesses and enterprises. There Poland has a real issue. 

Ćwiok: But Poland is not viewed as a perfect place for startups...

Laursen: Indeed, Poland has not been doing very well in that respect. It ranks quite low in international comparisons on ease of Doing Business. Poland is much worse than some of the new EU member states including the Baltic States. So for Poland it is a big challenge for it makes it difficult for people to start a new business. There are a lot of regulations required to adjust to when starting a new business, a lot of red tape, very cumbersome tax administration, procedures, tax payments, difficulties in getting risk capital to invest in a small businesses because of deficiencies in the legal system, contract enforcement and many other business-sensitive areas such as building permits and the likes. And the whole environment, I think, is especially difficult for small businesses and startups. That is why the bulk part of FDI comes from big companies. And this inflow could have been much more dynamic in Poland. This requires some dramatic reforms to the whole business environment. 

Ćwiok: Where do you see opportunities for investment?

Laursen: On the investment agenda there is some important issues such as privatization. The government is pursuing this agenda quite actively they have an ambitious privatization plan for the coming years. But as I understand it, it leaves out some of the so-called strategic sector companies, such as the telecommunications, and energy sector, where I think it is worth looking at whether these companies should remain in public hands. It is so because of the fairly large investment needs in some of these sectors which can materialize much more effectively if the companies are privately owned. So these are the most important issues when we think in terms of medium-term growth prospects in Poland.  

Ćwiok: How about long-term prospects. What are the main challenges in such a time-frame?

Laursen: You hear some discussions, but not many, about the climate change. This is a very important long-term issue which affects more or less all the countries in the world. Poland is part of that story and it has some fairly strong commitment on the climate change agenda. In December, Poland is hosting the Climate Summit in Poznań. It is a very important event and hopefully one that will show the rest of the world that Poland is ready to deal with these challenges. 

But climate change issues are long-term ones and therefore do not seem to be very high on the list of priorities in Poland. In some ways it is understandable because there are so many other issues. At the same time, it is unfortunate because there is not much time to waste in terms of when to begin to deal with it. 

Ćwiok: Yet, some politicians in Poland say the limits on carbon dioxide emissions imposed by the EU on Poland are just the EU’s way of dwarfing Poland’s economic potential...

Laursen: Some of the regulations regarding the limits of carbon-dioxide emissions are controversial without any doubt and these discussions for sure will continue. The need to begin to think about how to best address these challenges is really what matters the most. How do we organize ourselves in terms of energy production, energy efficiency and transportation?  

Ćwiok: What else is important in the long-term perspective apart from the climate change?

Laursen: Regional development is something that is close to the heart of the EU. And again, it is not something that you would hear a lot of discussion about in Poland. Eastern Poland tends to be rather poor, and there are large differences existing within richer regions of Poland. These issues are extremely important in terms of ensuring a stable, well-balanced and sustainable economic development for the country. Regional policies need to focus on both supporting emerging growth poles, typically around the large cities, but also addressing infrastructure bottlenecks, problems of lower-quality education, and market failures in less-developed regions to give these a better chance to develop as well. It is somewhat ironic that people seem more willing to move abroad to look for work than to move from a poor to a richer area in Poland. So again, these are longer-term development issues. 

Ćwiok: When it comes to regional development policies, public administration has a lot of influence on shaping them and utilizing the opportunities that the EU offers. Any issues there?

Laursen: Public administration is a very sensitive issue. Many of the new EU member states if not all of them actually, have faced some quite difficult challenges in terms of modernizing their public administration over the past 10-15 years. In Poland, public administration is becoming a bit of a bottleneck for economic development. You still have excessive regulations in private sector activity. Some call it bureaucracy, red tape, regulations... But it is a very important area in starting new investment programs. A part of this has to do, I think, with the fact that administration tends to be very top- down, very centralized with not enough delegation of responsibility and accountability at lower levels. Sometimes it seems there’s a preference for doing nothing instead of doing something that is needed, because by doing nothing they at least have done nothing wrong. So, the whole performance orientation of the public administration is a big issue. 

Let’s take the whole civil service system. For one, it is a very much seniority-based system; secondly there is a huge turnover at the highest levels. Deputy ministers are changed every time there is a new government in power. And because of that there is very little continuity. If the system was more delegated things would be much more stable. 

Then there is the whole area of delegation of accountability and performance orientation. That is very much important in making administrative decisions. Political affiliations or seniority in the system are extremely complicated issues but I think there are some good examples around the world to look at.

Another issue is coordination across various parts of the public sector, both vertically between central and regional governments and, even more importantly, within the central government administration. I think there is some scope for enhancing the efficiency of the whole process and strengthening the process of policy coordination, cohesion, and the overall setup of policies that are pursued. It is not about this government it is about the system. These are institutional reforms that are needed. And those are not impossible reforms to do: Slovakia and the Baltic Republics have come some way along the path of such reforms. It may be easier for a small country to make such reforms than it is for a big country, but if you look around Europe, certainly there are some good examples such as Ireland, the UK, or Scandinavian countries. Of course, there is no one solution and one model to follow but there are some principles which have to do with with focusing on a budgetary process, which is more of a public finance management issue but, the critical thing is to have a public finance budgetary process that is sufficiently forward-looking enough. 

Ćwiok: What does it mean for Poland?

Laursen: Basically, Poland still has an annual budget process whereas the wisdom nowadays is that countries need a more medium-term budget framework of three years. It is important because there are some types of investments that by nature are long-term and without long-term budget planning you never know how much money you will have to cover those projects. Some countries have, for example, 7-10 year capital allocation outlook. The government’s plans for a new Public Finance Act are an important step in the right direction. 

Ćwiok: Do you think Poland will handle all that’s necessary? 

Laursen: It is going to be hard work and I know that a lot of those issues are already being discussed by the government and some reforms are underway. And that’s why I am very optimistic for Poland and I think that the country’s prospects are very bright.

See also:

• Thomas Laursen Interview with Poland Monthly
  
  
• Profile: Thomas Laursen, the New Country Manager for Poland And The Baltic Countries
  
  
• Press Release: Thomas Laursen Takes Over As the New World Bank Country Manager For Poland And the Baltic States