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This section focuses on assessing the main thrusts and key outcomes of structural policy in Poland. The main aim of this policy is to influence the supply side of the economy, and its outcomes fully materialize only in the long term. In general terms,

the effects of structural policy boil down to changes in the level and composition of the supply of goods and services in an economy and to changes in the structure of incentives determining the decisions of economic agents. By the same token, structural policy aims to create favorable conditions for sustainable economic growth and, more generally, for rapid socioeconomic development.

The key structural reforms carried out in Poland from 2007 to 2014 as part of the systemic transformation process included privatization, market liberalization, and increasing the scope of economic freedom in the broad sense. In this last case, steps undertaken by policy makers were aimed above all at reducing corruption and disman- tling or mitigating the adverse impact of bureaucratic hurdles hampering the expansion of private entrepreneurship. Other important goals and priorities of structural policy included promoting the development of markets and competition, and designing and implementing public finance sector reforms. This was combined with a more com- prehensive reform of the government sector itself, with a view to ensuring increased effectiveness and efficiency of government agencies and strengthening incentives fostering economic development (through measures such as an increased flow of posi- tive externalities for the private sector). Another important goal was broadening the scope of financial intermediation coupled with the development of financial markets.

Generally, the structural policy pursued in Poland from 2007 to 2014 deserves a positive assessment. However, it was not without flaws. In fact, policy makers would have probably achieved better results had they decided to embark on more far-reaching and comprehensive structural reforms in the analyzed period.

Below we tentatively assess Polish structural policy. We begin with a brief over- view of indicators of progress in structural reform that are published annually by the European Bank for Reconstruction and Development (EBRD). The indicators are classified into four categories (further sub-divided into nine areas) and refer to: (i) the enterprise sector, (ii) development of markets and competition, (iii) financial institutions, and (iv) infrastructure. Table 6.1 shows details.

As seen in Table 6.1, Poland made progress in structural reforms in the studied period in three of nine areas: privatization of state-owned enterprises (large-scale privatization), competition policy, and infrastructure development. Notably, in three other areas, Poland achieved its maximum scores in previous years, which implies there is no room for further improvement. As a result of its progress, the average score showing the overall advancement of structural reforms in Poland rose from 3.78 in 2007 to 3.87 in 2013. This trend can be also interpreted differently: while in 2007 Poland covered 83% of the road from “plan to market” (from the perspective adopted in this study, i.e. the development of market institutions), by 2013 the figure had grown to around 86%.

Table 6.1. Progress in structural reforms in Poland, 2007–2013

Year

Enterprise sector Development of markets _{and competition institutions}Financial

Infrastructure

Average score Large-scale privatization Small-scale privatization _{Enterprise restructuring and corporate governance}

Price liberalization

Trade and

exchange rate liberalization

Competition policy Banking sector Capital markets, insurance sector and other financial

services

2007 3.3 4.3 3.7 4.3 4.3 3.3 3.7 3.7 3.3 3.78

2014 3.7 4.3 3.7 4.3 4.3 3.7 3.7 3.7 3.7 3.87

Change +0.33 0 0 0 0 +0.33 0 0 +0,33 +0.09

Note: Scale from 1 to 4.3; the higher the score, the bigger is the progress of structural reforms.

Source: EBRD, Transition Report 2013, London 2013; EBRD, Transition Report 2007, London 2007; EBRD, Transition Report

Database: http://www.ebrd.com/pages/research/analysis/forecasts.shtml; own calculations.

The scores in Table 6.1, illustrating the progress of structural reforms in the area of financial institutions, have been extended and complemented by selected indicators of the development of financial markets in Poland from 2006 to 2012, shown in Table 6.2.

Table 6.2. Selected indicators of financial market development in Poland, 2006–2012 (% GDP)

Interest spreada _{to private sector}Domestic credit Stock market _{capitalization} Monetization ratio _(M2/GDP)

2006 2012 2006 2012 2008 2012 2006 2012

Level 3.3 4.0b _{33.4 53.7 21.0 36.3 45.5 57.8}

Change - –0.7 - +20.3 - +15.3 - +12.3

a _{Lending rate minus deposit rate (percentage points).}

b _{For 2012, the interest spread was calculated as the difference between the annual average interest rate on credit and}

deposits in domestic currency on the basis of National Bank of Poland data.

Source: World Bank, 2008 World Development Indicators, Washington, D. C., 2008; World Bank, World Development Indi-

cators Database 2014: http://databank.worldbank.org/; IMF, International Financial Statistics, May 2008, Washington,

D. C.; National Bank of Poland (NBP): http://www.nbp.pl.

The data in Table 6.2 imply that the studied period marked a remarkable develop- ment of financial markets in Poland. The GDP share of domestic credit to the private sector rose, the Warsaw Stock Exchange increased its capitalization, and the moneti- zation ratio in the Polish economy showed an upward trend. Compared with previ- ous years, the interest spread diminished significantly and remained stable in the range of 3 to 4 percentage points; in 2002, it stood at 5.8 p.p. In transition countries in Southeastern Europe, the spread ranged from 3.4 to 9.1 p.p., whereas in the Com-

monwealth of Independent States it ranged from 3.6 to 17.5 p.p. (Rapacki, Matkowski, Próchniak, 2013). The interest spread is commonly viewed by economists as one of the most important gauges of systematic risk inherent in the financial system, or as a yardstick measuring the efficiency of the banking sector and the security of financial transactions. Consequently, Poland’s interest spread data can be interpreted as point- ing to a downward trend in the perception of systematic risk in the Polish economy, both compared with the past and against the background of other transition countries.

The picture of structural policy and its impact on the development of financial markets in Poland is not free of trouble spots. Of particular significance are changes that took place between 2011 and 2014 in Poland’s new pension system, which was launched in 1999 and was viewed by many economists as an institutional innovation. The changes were based on a gradual limiting of the role of privately managed pen- sion funds (OFE) to the point of dismantling the original three-pillar pension system. The objective of the multi-pillar system was to diversify and thus reduce the level of risk faced by its participants. At the same time, the new pension system was designed as a vehicle aimed at increasing the propensity to save (which is traditionally low in Poland), enhancing the expansion of the domestic capital market, and consequently accelerating long-term economic growth. The negative perception of these changes by international financial markets led the EBRD to downgrade Poland’s score in its 2014 Transition Report due to insufficient progress the country has made in structural reforms in the “capital markets, insurance sector and other financial services” area.

The next important area reflecting the goals and outcomes of structural policy in Poland in 2007–2014 is the scope of economic freedom and the incidence of per- ceived corruption. Table 6.3 has the relevant data.

Table 6.3. Indicators of economic freedom and corruption in Poland, 2007–2014

Index of Economic Freedom

Heritage Foundation Corruption Perception Index Transparency International

2007 2014 2007 2013

Level 57.4 (83) 67.0 (50) 46 (58) 60 (38)

Change - + 9.6 (+33) - +14 (+20)

Notes: Index of economic freedom – scale from 0 to 100; the higher the index, the broader is the scope of economic freedom.

The index is an average of scores in 10 areas: (1) business freedom, (2) trade freedom, (3) fiscal freedom, (4) govern- ment size, (5) monetary freedom, (6) investment freedom, (7) financial freedom, (8) protection of property rights, (9) freedom from corruption, and (10) labor freedom.

Global rank in brackets; the 2009 ranking list contained 179 countries.

Transparency International corruption index – scale from 1 to 10; the higher the index the lower is the corruption level.

The index is calculated based on similar indices of other institutions and the authors’ own research. The figures in brac- kets represent the global ranks of countries; the 2008 ranking covered 180 countries.

Source: The Heritage Foundation, 2014 Index of Economic Freedom, Washington, D.C, 2014: http://www.heritage. org/index/; Transparency International, Corruption Perceptions Index: http://www.transparency.org/cpi2013/results; authors’ computations.

The data clearly show that the structural policy pursued in Poland in the analyzed period contributed to a considerable broadening of the scope of economic freedom. At the same time, it brought down the level of perceived corruption. As a result, Poland significantly improved its relative international position in the Heritage Foundation and Transparency International rankings, moving up by 33 and 20 places respectively.

To make this assessment of economic freedom and corruption more comprehen- sive, Table 6.4 furnishes data on changes in the business environment in Poland from 2007 to 2013.

Table 6.4. The business environment in Poland, 2007–2013

Entry regulations _enforcementContract Employing workers Insolvency procedures

Number of startup

procedures _{Time required}

to start a business

(days)

Number of procedures required to register

property Time required to register property (days) Number of procedures Time required (days)

Employment rigidity index (scale from 0= flexible to 100= rigid) Time to resolve insolvency (years) Level 4 (10) 30 (31) 6 (6) 35 (197) 33 (38) 685/830 25 (37) 3.0 (3.0)

Change –6 –1 0 –162 –6 –145 –12 0

Source: World Bank, World Development Indicators Database 2014: http://databank.worldbank.org/.

The data shows that the business environment considerably improved in Poland in the studied period. The improvement applied to six of the eight areas singled out in the table. The most spectacular progress took place in terms of shortening the time required to register property (by 82%) as well as in terms of a reduction in the number of startup procedures (by 60%). At the same time, the flexibility of the labor market (understood as the ease of hiring and firing workers) increased, the effec- tiveness of contract enforcement improved, and market entry barriers were slightly lowered. On the other hand, the number of procedures required to register property did not change, and the effectiveness of insolvency procedures (and, more generally, the quality of business judiciary) remained low. Although Poland has not been ranked among countries with the most attractive conditions for doing business in Central and Eastern Europe, the progress it has made in this area over the past several years has contributed to strengthening the country’s competitive position in the region.

According to the most recent World Bank report (World Bank, 2014), the year produced further favorable changes in the business environment in Poland. These included a reduced cost of plugging into the power grid and improved access to energy.

Moreover, improvements were made in the process of registering property (real estate) and notarial fees were reduced. Finally, due to the launch of a new system of export and import clearance (with a new terminal in Gdańsk), the time of clearance has been reduced by two days. As a result, the World Bank’s newest Doing Business publication ranks Poland 32nd _{worldwide, up 40 places since 2009.}2

However, the conditions of doing business in Poland vary greatly. For example, Poland ranks 137th _{worldwide (among 189 countries) in terms of the ease of obtain-}

ing building permits, and does only slightly better in terms of paying taxes (87th_{) and}

procedures related to registering a new business (85th_{). On the other hand, Polish}

businesses enjoy relatively favorable conditions in terms of access to credit (17th_).

Overall, the priorities and outcomes of structural policy pursued in Poland in 2007– 2014 deserve a positive evaluation. Yet the policy was not free of weaknesses. Above all, it failed to adequately address many strategic development challenges. For example, policy makers failed to design and implement comprehensive, in-depth reforms for the public finance sector and the labor market, and they also provided insufficient support to the R&D sector. In the next section, we briefly discuss the most important challenges facing economic policy makers.