Poles look to replicate the Celtic Tiger

The rapid growth of the Irish economy has been closely studied in Poland, writes COLM KEENA, where the global recession is being kept at bay

BACK IN the late 1980s, Polish economist Leszek Balcerowicz and some friends had a hobby where they would speculate about what they would do if Poland was not under the control of the communists.

To their surprise, the socialist regime then collapsed and they found themselves in a position to put their ideas into practice.

"So by chance there was a group in Poland that was ready and we moved into government," he recalled during an interview in an office in the School of Economics in Warsaw this week. "We were young and we moved fast."

Poland was the first country to move from socialism to a market economy and arguably the most successful to date. Balcerowicz was a key player in the process. He was the country's first post-socialism minister for finance and has since served as president of the Polish National Bank and deputy prime minister. He is now a professor in the large Warsaw School of Economics.

He is a well-known and controversial figure in Polish society, where some have harsh views of the radical measures he advocated and put into practice. "A socialist economy can't be rebuilt piece by piece. It needs to be done quickly," he says when asked about what some describe as his "shock" tactics.

Rapid change and an upending of previous practices prompt the psychological changes necessary for the creation of a new system, he says. The opportunity to bring about dramatic change only existed during the short period of euphoria followed the collapse of the socialist regime.

As a result of the dramatic policies he and his group championed, whole industries were closed down and massive numbers of workers found themselves unemployed. There is a view that a whole generation was abandoned. When Balcerowicz is asked if he believes now he should have done things differently, he doesn't appear to think so.

He invites comparison between Poland and other transitional economies as if it is a trump card and it is hard to dispute the general view that it is currently at the head of the class. Poland was one of only nine countries in the world listed in a recent edition of the Economist as not likely to go into recession in the current global crisis - the only European country on the list. Last year it experienced 5 per cent growth. More recently, the IMF this week said Poland was now expected to experience a 0.7 per cent contraction this year. The Baltic countries, which were outpacing Poland in their growth have now gone from 10 per cent positive to 10 per cent negative, a drop of 20 percentage points.

"This is the best period in Polish history in the past 200 years," Balcerowicz says. And he believes joining the euro zone will further strengthen the potential of the Polish economy.

In truth the country is remarkably positive and optimistic in the context of the current global downturn. Its youthfulness as a market economy is one reason for this. Poles have not yet learned the dangerous delights of ratcheting up credit and total private debt is only 12 per cent of GDP (as against the EU average of 100 per cent).

The banks, in part because of their relative youth and lack of supposed sophistication, had very little exposure to collateralised debt and have little by way of toxic debt in their system. It is a large economy and has some scope for keeping the show on the road by stimulating internal consumption, though Balcerowicz is sceptical of stimulation packages and appears unimpressed with that aspect of the US response to its economic woes.

Some years ago, Polish per capita income was less than 30 per cent of the European average, now it is closer to 50 per cent. "Countries can catch up if they choose the right policies and politicians," says Balcerowicz, who has more recently become active in promoting civic activity in support of stable development. "The fight against populism never ends."

One of the harshest measures taken after the collapse of socialism was the closure of state-owned textile companies in Lodz, a city south of Warsaw and in the centre of Poland. It is an extraordinary city, which saw rapid expansion in the 19th century during which it grew into an industrial metropolis and one of the largest textile centres in Europe. Its huge red-bricked textile mills and the workers' housing and owners' palaces that were built immediately adjacent to the factories, survived the second World War. When the first post-socialism government closed the factories, tens of thousands of people were thrown on to the unemployment scrapheap and the city was dealt an enormous blow. But it has been fighting back.

In 2005 unemployment was more than 20 per cent, now it is down to just 7.8 per cent. The city has adopted an ambitious regeneration plan and a nearby special economic zone offers grants and tax exemption schemes to new employers that are at the maximum state aid levels on offer in the EU. The mills, a monument to industrial architecture, are being changed into offices, apartments, and hotels. EU aid is being used and massive infrastructural development is in the pipeline.

The city has a proud cultural as well as industrial history, especially in the areas of modern art, industrial architecture and film. Making the city an attractive place to live forms a key part of its regeneration plan, as it serves to keep its well-educated youth in the city and helps attract foreign direct investment, says Aleksandra Suszczewicz of the city's investor relations unit.

These policies have proved successful in attracting foreign investment, as was brought to Ireland's notice when Dell announced it was establishing a 3,000-job assembly operation in Lodz. The plant already employs 1,900 and is on its way to becoming in the largest employer in the zone. Polish corporation tax runs at 19 per cent and exemption equal to 50 per cent of the amount invested is available, with the exemption having to be used up by 2020. Small and medium-sized enterprises can qualify for even higher exemptions.

Labour costs in Lodz in the enterprise sector are about €830 a month, compared with €1,240 in Warsaw, according to Tomasz Banasiak of the Lodz Special Economic Zone. "We have 138 investors in the zone up to 2008 and we are hoping for more than 10 this year, which would make for more than 20,000 jobs."

The city of Wroclaw, near the Czech border, experienced an amazing 12.5 per cent economic growth last year, putting it ahead of China in terms of growth rate.

Tomasz Gondek, of the Wroclaw Agglomeration Development Agency, describes an economic growth plan based on attracting foreign investment and investing in infrastructure akin to a speeded-up version of Ireland's economic story.

Large manufacturing plants set up just a few years ago and based on low labour costs are being replaced by concerns higher up the enterprise food chain such as Google, which has a 100-staff centre set up last year that works closely with the Google office in Dublin.

Ninety per cent of the staff have a master's degree and the language ability of the local population was a key reason for the operation being established.

There is a surprising amount of knowledge and interest in Poland about recent Irish economic history. The rapid growth of the Irish economy and its success in catching up with its EU partners is seen in Poland as something it should emulate. Prime minister Donald Tusk was in part elected on the promise that he would do for Poland what the Irish had done for their economy. Winning the Dell plant must have been greatly encouraging in that context.

Another connection between the two economies is AIB's ownership of 70 per cent of Zachodni WBK bank, one of Poland's largest.

The news that AIB was looking at selling the bank broke on the day Stanislaw Kluza, chairman of the Polish Supervisory Authority, met a delegation of Irish journalists in his Warsaw office. He said a new owner for the bank must be approved by his authority.

While much of Polish banking is foreign-owned, there are measures to prevent the capital of these banks being moved abroad. At the moment Poland's foreign-owned banks are not paying dividends and are responding to the authority's request that they build up their capital ratios. At the end of February, the ratio for Polish banks stood at 10.7 per cent, according to Kluza.

"Capital is flowing into Poland, even in these very difficult economic circumstances," he says. "We feel that our economy can grow even in the very difficult conditions of 2009."