The Wrong Government at the Wrong Time for Poland?

A socialist victory could speed the economic slide

The star pupil. That was Poland's reputation in the years that followed the collapse of communism in Central Europe and the Soviet Union. Under the guidance of the Solidarity Movement and its heirs, Polish policymakers seemed to do everything right. They flung open the borders to foreign investment, shed price controls, auctioned off state properties, and enforced a tight-money policy to smother inflation. If the pain was immense, so was the payoff. Poland has turned into one of Europe's low-cost manufacturing centers and has emerged as a top candidate from Central Europe to enter the European Union first.

But the star pupil is now in danger of flunking. Welded to the West European economy, Poland is now feeling the full brunt of the slowdown in the EU as well as the impact of its central bank's tight monetary policy. Poland's growth will barely top 1% this quarter, unemployment is hovering at 16%, and with tax receipts down and spending up, the budget deficit keeps ballooning. Jittery investors have been dumping Polish securities, sinking the zloty and plunging the Warsaw Stock Exchange to four-year lows. Tomasz Kosobucki, president of Katowice-based Web portal Hoga, blames the economic mess for his company's lackluster share performance since its flotation in May. As if all this were not bad enough, Poland's cherished goal of joining the EU in 2004 appears at risk, as negotiations are running behind schedule.

The bleak picture could repeat itself throughout Central Europe, so what happens next in Poland will reveal a lot about the region's future. That's especially so now that Poles are just days away from voting in national elections, which former president Lech Walesa says are "the most significant since the collapse of communism." Most opinion polls point to a resounding defeat of the right-of-center Solidarity Election Action (AWS) and victory for the socialist Democratic Left Alliance (SLD), the heirs to the old Polish Communist Party. Its leader, Leszek Miller, 55, warns that the victor will need a solid majority to turn the economy around. "[Poland needs] a strong government capable of real action," says the former member of the Communist Party Politburo.

Whether Miller has the right policy prescription to revive the ailing economy is an open question. Many business folk are skeptical. Their big fear is not a return to communist-style rule but a regime that carries out a mishmash of socialist spending programs and essentially shelves reform, just when tough measures are needed. Companies still want to see more state companies privatized. Businesses also want a reduction in onerous social-security contributions, and they yearn for a labor code that will make it cheaper and easier to hire and fire workers. But first and foremost, business wants to see the budget deficit, which is heading for an unsustainable 11% of gross domestic product, brought under control. The deficit has dragged down the currency, which has shed 15% of its value against the euro over the past eight weeks.

IMPORT TARIFFS? The SLD's vaguely worded proposal to cut the deficit without touching spending does not inspire much confidence. Analysts expect a hike in the value-added tax to generate more revenues. That could backfire by stifling consumer spending. Miller may also try to import tariffs on agricultural products and consumer goods, which could push up inflation and irk the EU.

Other SLD policies will undoubtedly unsettle foreign investors. Wieslaw Kaczmarek, an SLD member of Parliament who will likely be Treasury Minister, says he will prevent foreign banks and insurance companies from buying up more of Poland's financial sector. "Seventy percent is already in foreign hands," he says.

No doubt the SLD will feel pressure to be more pragmatic once it gets into office. It may tinker some with the labor code, and it wants to foster growth in the small-business sector. But if the world sinks deep into recession, Poland's old communists may yet discover the need to learn painful new lessons in reform.

By David Fairlamb and Bogdan Turek in Warsaw

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