Polish economy buoyant despite political wrangling

Poland's economy appears impervious to the game of political musical chairs going on since last autumn's elections.

With first-quarter growth of 5.2 per cent this year, up from 4.2 per cent in the last quarter of 2005, and inflation of barely 1 per cent, Poland's business community has had a lot of good news to distract from the political wrangling.

"Investors have become immune to the constant coalition struggles in Poland and are much more resilient to change," says Laurence Mackin, editor of the Warsaw Business Journal.

"People are so keen to be a part of things here that they're willing to deal with anyone."

Last September's general election saw the pro-business Civic Platform (PO) passed at the finishing post by the conservative Law and Justice party of twin brothers Jaroslaw and Lech Kaczynski. Lech has since gone on to become president and, this week, Jaroslaw became prime minister.

"In government you've got Tweedle-dum and Tweedle-dumber and, until the PO get in, you're not going to get politicians with a real sense of what the business community is really looking for," says Gerald Brandan, an entrepreneur in pharmaceuticals distribution. "But in business here you have a growing momentum in Warsaw and there's a huge amount of activity outside Warsaw too."

The current political uncertainty doesn't alter the basic facts that have attracted around 30 Irish companies and over €1.2 billion in Irish investment to Poland in recent years.

Investors are attracted by a market of almost 40 million people, a high standard of education and a large young population with multiple language skills.

Added to that is the location, with Russia, Belarus and Ukraine to the east and a potential market of 250 million people.

The political scene appears to be calming down and Jaroslaw Kaczynski made his first visit as prime minister to the Warsaw Stock Exchange this week to stress that reform of the country's public finances is his top priority in office. "We will do everything to implement reform this year," he said. "The budget deficit will not exceed 30 billion zlotys (€7.4 billion) and [ we] will do nothing to endanger Poland's economic growth."

He said that his administration will be "the government of economic stability", which could be taken as a warning to one of his junior coalition partners, the left-wing, populist Self Defence party.

It has been calling for greater spending on agriculture and social welfare, even if that hits the budget austerity needed for euro zone entry.

The Polish government has yet to produce a euro zone timetable, but the loose end-of-the-decade deadline is now looking less likely, with 2012 seen as a more realistic date.

Poland has a chequered past in attracting foreign direct investment (FDI). Last year, it won $7.7 billion (€6 billion) in FDI and is expected to top $10 billion this year, still behind the $12 billion attracted by the Czech Republic last year.

By targeting the same electronics, automotive and service centre sectors as the Czech Republic and Slovakia, it has seen some spectacular losses, like when the Czechs presented a more attractive package of engineers and incentives and snatched out from under Polish noses a huge investment programme by carmakers Toyota and Kia.

Poland has its own success stories such as a €420 million investment by LG in Wroclaw and a new Microsoft innovation centre, but losses to the Czechs and Slovaks still sting and have caused worry that Poland will be seen as a less attractive investment location. "Hungary, a much smaller country than Poland, attracts just as much investment," said Adam Zolnowski, vice-president of the Polish Information and Foreign Investment Agency (PAIiIZ) in a recent interview.

"This clearly shows that Poland is not taking full advantage of its potential, such as the high ratings in various rankings of investment appeal. You could say Poland is having its moment in the sun, but that it has yet to make the best of it."

The investment agency is being reformed along the lines of Enterprise Ireland but if the current government really wants to impress investors, it will need to reform the tax system and invest in poor infrastructure.

In addition, some 43 per cent of Polish companies said in a recent survey that they had problems recruiting staff because of emigration.

That has helped drive up salaries, prompting calls from employers for the government to reduce their labour costs as well as the cost of setting up small and medium-sized enterprises.

Despite these concerns, an investor confidence survey by consultants Ernst & Young placed Poland fourth behind China, India, the US and Britain.

One in four of companies surveyed rated Poland favourably as an investment location and one in 10 said they had plans to invest here. The Economist Intelligence Unit ranked Poland the fifth most attractive location for company decentralisation.

Now, after 10 months of political uncertainty, the pressure is on the new Polish government to start governing.

"The trend is positive," said Karen Cohalan, director of Enterprise Ireland's Warsaw office, pointing to increasing domestic demand and a surge in home loans as positive signs for the future. "Foreign direct investment has undoubtedly been strong so far this year.

Previous initiatives such as the creation of special economic zones and bringing the corporate income tax rate down to one of the lowest in Europe have clearly set in motion a positive business investment environment."