Reflections on the Economic Transformation of the Czech Republic, Hungary, Poland and the Slovak Republic

dr Paweł WojciechowskiDeputy Foreign Minister

Ministry of Foreign Affairs of the Republic of Poland

OECD, Paris, 20 November 2009

„20 years after”Challenges and Opportunities

Perception of transformation in Visegrad countries is positive

Source: „Return to Europe” report by Institute of Public Affairs, in cooperation with Policy Association for an Open Society. Financed by the European Commission and the Visegrad Fund, October 2009

Content

I. Measuring the success of transformation

II. The economic crisis – what next?

III. Challenges and opportunities

I. Measuring the success of transformation

How to measure the success of economic transformation?

Poland:

• Average salary: $20 in 1989, $100 in 1990, $1000 in 2009

• GDP increased eight-fold in years 1989 - 2008

• GDP growth rate about 2 times EU average

probably the only EU member country to experience GDP growth in 2009, estimated at 1.2%

GDP per capita in 2008 (PPP) as % of EU27 average

Source: Eurostat, July 2009

Convergence of CEE to WE in GDP per capita

* Includes: Albania, Bulgaria, Czech Republic, Slovakia, Poland, Romania, Hungary, former Yugoslavia

Source: A. Maddison (2003), „The World Economy: Historical Statistics, Development Centre Studies, OECD, Paris; after: „The Coming Golden Age of New Europe”, M. Piatkowski, Center for European Policy Analysis, October 2009; and Eurostat

Western Europe = 100

II. The economic crisis – what next?

Reasons for outstanding performance of Polish economy during crisis

• Relatively small openness of the Polish economy

• Size of the internal market and strong domestic demand

• Solid and stable banking sector

• Floating exchange rate and zloty’s depreciation

• Counter-crisis measures to mitigate economic slowdown and maintain macroeconomic stability

PL: low openness of the economy

Source: National Bank of Poland, June 2009

PL: high % GDP share of private consumption

Country Year Private consumption Public consumption

Poland

2000 64% 17%

2004 65% 18%

2008 61% 17%

Czech Republic

2000 52% 22%

2004 50% 23%

2008 49% 21%

Hungary

2000 51% 22%

2004 53% 24%

2008 52% 23%

Slovakia

2000 55% 21%

2004 56% 20%

2008 56% 18%

Source: National Bank of Poland, June 2009

•Risk-based capital ratio: 11.2% (Q1 2009)

•ROE – net earnings to average core capital: 16.7%, ROA - 1.2% (Q1 2009)

•Loans-to-GDP ratio: 48% (2008; total loans to non-financial customers)

•Housing loans accounting for 33%of total loans - 16% of GDP (vs. EU average above 50% and ratios in UK, Denmark or Netherlands at ca. 100%)

PL: stable banking sector Loans and deposits1) in 2006-2009 (PLN bn)

Source: Ministry of Finance, Polish Financial Supervision Authority

1) Loans - claims on non-financial and general government sector. Deposits - liabilities towards non-financial and general government sector

Counter-crisis measures in Poland – as % in GDP 2008 - 2010

Source: OECD, June 2009

MerrillLynch

Volatility of Poland’s GDP growth projections in 2008 and 2009

IMF

World Bank

OECD

EC

III. Challenges and opportunities

Major achievements of Polish transformation

Fiscal reform 1990-93: GG Deficit from 7.4% to GG Surplus 3.1 %

Privatization after 1989: 5909 SOEs privatized as of end of 2008

Lowering long-term implied debt by reforming pension system

Decentralization of public finances through administrative system reform

Succesful introduction of CIT, VAT, PIT

but new challenges arise

but awaiting fiscal consolidation today

but 2544 companies still to be privatized

but need to continue working on a universal pension system and decrease fiscal burden resulting from early retirement

but still improvement of system’s transparency required

but still an overall reform simplifying the tax system needed

Post-crisis challenges for the Polish economy

• Deterioration of government finances in 2009-11, with general government deficit forecast to rise

• Delayed recovery in 2010 reflecting a lagged response to the effects of the economic downturn

• Growing unemployment

• EURO accession

• Structural reforms: Health, Tax and Social Security

Political challenges in making reforms happen• No „easy” and „quick” solutions

• Weaker external „accession related” motivation

• Smaller „peer” pressure in the midst of the crisis

• Political myth that reforms are „costly”

Summary• Transformation accelerated the CEE convergence to West

European/EU values and standards of living

• Transformation was successful because CEE countries were politically more stable than other EMs (higher level of openness, freedoms and democracy, more homogenous population, higher level of external security)

• Willingness to reform has decreased after EU-accession, but will probably increase in the post-crisis period of recovery, because crisis exposed fragilities of CEE, such as pro-cyclical structure of public finances and high reliance on external financing

• Paradoxically, crisis may create momentum for reforms in CEE countries and faster real convergence with WE

• Need to improve public communication/transparency, economic education and legislative sequencing

Thank you for your attention

Reflections on the Economic Transformation of the Czech Republic, Hungary, Poland and the Slovak Republic

dr Paweł WojciechowskiDeputy Foreign Minister

Ministry of Foreign Affairs of the Republic of Poland

OECD, Paris, 20 November 2009

„20 years after”Challenges and Opportunities