Political Polonaise

Privatization and the rapid growth of a new entrepreneurial class have transformed Poland’s once-stodgy, centrally planned economy, Recently, Poland’s Prime Minister Józef Oleksy—a former member of that centrally planned past—spoke with CEOs in New York, reassuring them that his government remains a committed partner in the dance of economic liberalization.

January 1 1996 by JP Donlon


One of the first countries to shake off communist rule, Poland was also one of the first to reelect former communist politicians. Those 1993 elections were brought about by President Lech Walesa, former electrician and Solidarity leader, in the mistaken belief that he would consolidate his power and stabilize his anti-communist government. The exact opposite happened. A split Solidarity movement had to share power with a coalition led by SLD, the Democratic Left Alliance. Recently, the SLD’s 41-year-old leader, Aleksander Kwasniewski, a former minister in Poland‘s last communist-era government, narrowly beat Walesa in a second-round presidential election. He then promptly resigned his party membership in an attempt to shed the “ex-former-post Communist” label, all the while insisting he’s been a social democrat for the past six years. He joins SLD Prime Minister Józef Oleksy in a unified government that will lead Poland into the 21st century. “In the short term, Kwasniewski’s election will have no effect on Poland‘s economic reform,” says John Mroz, president of the Institute for East West Studies. “The concern lies in the medium term. Will we see a shift toward the Slovak model, in which political cronies get rewarded and private business is penalized?”

Before the elections, Prime Minister Oleksy spoke to CEOs at a Chief Executive forum in New York. Oleksy sought to persuade assembled business leaders, several of whom have sizable direct investments in Poland, that the government plans to continue its program of economic liberalization and privatization. Currently, 60 percent of its GDP comes from the private sector. Two-thirds of its trade is with European Union countries. A third of the country’s direct foreign investment comes from the U.S. Clearly, Oleksy & Co.—despite their ties to the discredited communist regime—do not wish to disturb this capital influx. The prime minister emphasized his government’s keenness to join the EU and NATO before the end of the century.

With 38 million people, Poland is roughly the same size as Spain. The fall of communism brought the country to the brink of economic collapse. Government responded with “shock therapy,” the name given to price liberalization and rapid privatization. This also led to rapid unemployment and underemployment, which produced internal friction within Solidarity and a certain nostalgia for the old bosses.

Poland‘s voters, observers say, are no longer frightened that former communists will bring back Stalinism. With Poland expected to continue the 5 percent growth rate it posted in 1995, there is obviously no need to worry on that score. With the unemployment rate down to 12 percent, the country is on a par with France and is doing better than Spain. Inflation has come down but remains stubbornly high at 25 percent. In December 1994, millions of Poles had the chance to buy coupons giving them a stake in the 15 national investment funds set up to manage more than 400 state companies included in the first round of the next mass privatization scheme.

Poland joins Hungary in returning former communists to power. Only the Czech Republic, led by single-minded intellectual Vaclav Klaus, has not done so. Described as Central Europe‘s Margaret Thatcher, Klaus tirelessly promotes his free-market reforms and Friedman-like monetary policies. Both the Poles and Hungarians claim they are no less market-oriented, only that their means must be more pragmatic. The poor financial condition of state enterprises remains an acute problem for officials in all three countries. In many cases, these enterprises continue to deliver products to traditional clients, expecting local banks or the government to bail them out with soft loans or monetized central bank policies.

Hungary attempted to restructure before privatization and leads the region in having the strictest bankruptcy laws, whereby enterprises are effectively privatized through liquidation. In contrast, the Czech government delayed implementation of bankruptcy until privatization was largely underway, thereby leaving the solvency question to private markets. Poland has pursued a two-track scheme, offering incentives to creditors to reorganize rather than liquidate debtors. The difficulty lies in the transition from central planning to market-based solutions. Bad debt or underperforming assets were made by public-sector banks to state-owned enterprises. There was no postwar tradition and, until recently, no legal framework to resolve unmet commitments. Poland, along with other Central European economies, is beginning the final phase of this transition.

PROGRESS REPORT

Józef Oleksy (Polish Prime Minister): Poland has recovered from its recession, hyperinflation, and lack of market infrastructure. For the third consecutive year, growth exceeds 5 percent. Our total trade in 1995 amounted to roughly $50 billion, and our foreign currency reserves are growing dramatically. Foreign investments are increasing slowly but surely, though they haven’t been as high as we had hoped. The current amount is $6 billion. We’re still figuring out how to attract investors.

In addition, our inflation rate has decreased from 650 1995. We hope it will go percent to 25 percent in below the 10 percent mark by 1998. This year, the government will reduce taxes from 5 percent to 3 percent, eventually eliminating them altogether.

Many of these developments are the result of the progress we’ve made in our privatization process. And we are pushing to make even more progress this year. In 1996, we plan to finalize the privatization of the tobacco, fuel, telecommunications, and power generation industries. Likewise, we are moving to restructure large ranches and the metallurgy and founding industries. With government assistance, metallurgy has found both domestic and foreign means to finance its modernization projects and technology. Unfortunately, the privatization means laying off 40,000 in staff, but that is a trade-off we must make.

We are beginning to privatize the copper mining industry, but have run into some problems in the coal mining industry. Coal mining has always been a source of social unrest in Poland, so we have halted the proposed restructuring temporarily until we can sort out the labor differences. Since I don’t want to see my government run out of office, I’m taking this particular privatization project as calmly as I can.

Our next two challenges are reforming our insurance system and dealing with the agricultural situation. Adjusting our agriculture to European standards cost us a lot. We don’t have funds for this, and the EU doesn’t seem willing to provide us with any. However, we expect the EU eventually either will modify its approach or find extra funds to modernize Poland‘s agriculture.

In the meantime, we are promoting close cooperation with our neighbors, including Russia, Lithuania, Ukraine, and Belarus. We are pursuing a policy of regional activity and hope to put an Eastern European free trade agreement, SAFTA, into operation by 1998. This will mean free movement of labor, services, and capital among Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Bulgaria, Romania, and Lithuania, giving investors access to a market of 100 million people with no custom duties on agricultural produce.

INVESTOR RELATIONS

Arnold B. Pollard (CE): How has the free flow of capital and repatriation of funds changed over the last year and a half, and how will it continue after the recent elections?

Oleksy: The elections did not affect economic freedoms. Having a free-market economy is a predetermined affair and not subject to any political discussions. The elections were presidential ones, and the president has no constitutional powers applicable to the economy. Obviously, he can veto some laws, but the government has a parliamentary majority, which can override the veto.

Andrzej Wieczorkiewicz (Undersecretary of State, Office of the Council of Ministers): We have no trouble with the repatriation of capital and profits, though there may be some technical obstacles because of weaknesses in our banking system. However, more and more foreign banks are opening branches here, so that problem is being solved. While we have never had any problems regarding companies’ financing techniques, the cabinet and prime minister have decided to organize fluctuations in foreign exchange rates. Also, a new amendment is in the works authorizing companies to keep foreign currencies for some period of time, perhaps six months.

H. Onno Ruding (Citicorp/Citibank): In the first years of Poland‘s privatization process, the dominant force of foreign investment was related to consumer products, which require more short-term investments. Now, many people in the West question whether Poland can attract longterm capital investments.

Oleksy: We clearly realize what must be done, and we want to reassure everyone in the West that there can be no retreat in terms of market reform. Having said that, you must remember Poland was a socialist state for 40 years, so it’s sometimes difficult to maintain an accelerated pace of reform. Keep in mind that market reforms in all the post-communist countries are not occurring in a social vacuum. They are being put in place before the eyes of people whose thinking often is still dominated by socialist-oriented approaches and who are used to a low—but guaranteed—standard of living. We have to convince these people of the benefits of reform, because any social unrest in this country could destroy all of our achievements to date. So far, we have maintained our unemployment rate at 3 million, but that costs the state a lot of money. We are trying to strike some sort of balance, but it is difficult. We just have to keep taking the middle road.

Paolo Fresco (General Electric): Our company is very diverse—it deals with everything from lamps to aircraft engines to banking. Where can we make the best contribution to Poland?

Oleksy: First, in the banking system and the services provided to it. Second, in highway construction projects and management of the motorways themselves. Third, in the privatization of our fuel and telecommunications industries. In addition, GE should be more interested in copper processing. While we could sell you a few of our coal mines at a cheap price, unfortunately, I’m sure you would not buy them.

I can’t identify all the priorities; our government commissioner for foreign investments should be giving out advance information on our priorities and preferences. Then, we’ll make alterations to attract partners with foreign capital.

Susan J. Kropf (Avon Products): Duties on luxury goods were reduced by approximately 20 percent in 1995. Will these reductions continue, both within the Visograd countries, as well as in Western and Central Europe?

Jerzy Kozminski (Polish ambassador to U.S.): Poland signed an agreement with the European Union countries so the reduction will be on the procedure in the year 2000, and all goods will move around these countries and Poland with zero taxation. In the Visograd countries, the free trade zone will be established one year later.

In terms of trade between the U.S. and Poland, there is no sign that such an agreement will be signed in the future; however, both countries have joined the World Trade Organization, so that may be a step in the right direction. I believe that in a few years, goods produced in the U.S. could get better access to the Polish market.

The bottom line is that investors in Poland will gain the opportunity to move goods virtually tax-free to a vast amount of Europe.

Fresco: It seems European firms are investing heavily in Poland, while American firms have been lagging behind. Do you foresee that trend continuing?

Oleksy: Right now, 33 percent of the foreign investment in Poland is from the U.S. Clearly, we are anxious to see more U.S. capital come to Poland, but we had trouble dealing with some potential investors, such as General Motors. We met with GM managers to discuss the company taking over our largest car manufacturing facility a year ago, but only silence followed the talks. Then South Korea‘s Daiwa made an offer and provided the funds within two months. GM claimed it made an offer first, but it never followed through. We need investors to make a commitment and come through on it quickly.

UNION TALK

J.P. Donlon (CE): Moving to international politics, how will developments in Russia and the former Soviet Union States affect Poland and its plans to integrate with the EU and NATO?

Oleksy: They won’t affect our EU plans, because that is not a political issue. On the NATO front, the Russians oppose Poland‘s aspirations to membership. I have spoken with President Yeltsin on this issue, and we obviously have a difference of opinion. However, we do not accept Russia‘s threats, and we expect that the West won’t modify its policies. We hope that the U.S. will support us as it has done in the past.

Simply put, we have to be persistent in pursuing a dialogue with Russia to explain our motivations for joining NATO.

Pollard: What is your timetable for joining the EU?

Oleksy: We expect Poland will be admitted to NATO sooner than to the EU, because the latter adjustment process is much more complicated. Our EU timetable is as follows: Sometime in the first six months of this year, there will be an intergovernmental conference on the EU verdict, which will conclude in mid-1997. Within six months of that, negotiations will begin between the EU and Poland; they probably will last a minimum of a year and a half to two years. Thus, we hope a decision will be made by the year 2000.

Laborious negotiations and adjustments will be necessary—some within the EU itself. The Maastricht Treaty may have to be reworked. All this will take time and effort. But we hope for a happy ending. It would be a great disappointment to Poland if the final effect of the radical turnaround in Eastern Europe were merely Germany‘s reunification rather than European unity.


WHO’S WHO OF FORUM PARTICIPANTS

Paolo Fresco, vice chairman and executive officer, $60.1 billion General Electric in Fairfield, CT, diversified technology, manufacturing, services.

Harvey M. Hament, president and chief executive, privately held Harco International in New York, international business.

Jerzy Kaminski, undersecretary of State, Ministry of Foreign Economic Cooperation, Poland.

Jerzy Kozminski, Polish ambassador to the U.S.

Susan J. Kropf, senior vice president, global product and business development/president, Eastern Europe, $4.3 billion Avon Products in New York, beauty and related products.

Jaroslaw Kurek, press officer, Polish Embassy in Washington.

Robert W. Lear, executive-in-residence, Columbia Graduate Business School, CE advisory board chairman, former chief executive, F.&M. Schaefer.

Jozef Oleksy, prime minister of Poland.

Jan Wojciech Piekarski, chief of Protocol, Ministry of Foreign Affairs, Poland.

H. Onno Ruding, vice chairman, Citicorp/Citibank in New York; former Minister of Finance, The Netherlands.

Andrzej Wieczorkiewicz, undersecretary of State, Office of the Council of Ministers, Poland.

Boguslaw Zaleski, director, Department of International Relations, Office of the Council of Ministers, Poland.