Breathing Fresh Air Into The Economy

Poland's new ruling coalition plans to boost growth with pro-business reforms

Foreign investors cheered two days after Poland's Sept. 25 parliamentary election, when the winning Law & Justice Party appointed pro-market Kazimierz Marcinkiewcz as the Prime Minister designate to build a new coalition government. Many had rooted for the more liberal Civic Platform party, which backed a flat tax and came in second. But they were pleased that a reformist would be playing a key role.

Marcinkiewcz, 46, was quick to promise that a strong coalition would push pro-business policies. He aims to cut the budget deficit, boost government efficiency, curb corruption, and raise spending on infrastructure. Instead of a flat tax, Law & Justice has proposed lowering the top rate to 32%, from 40%. "What they have announced will be very healthy for the economy," says Grzegorz Rogalinski, managing director for German software giant SAP in Poland. "It seems like a miracle."

The economic point man for Law & Justice, Marcinkiewcz wants to rev up growth to between 6% and 7% a year. Growth has sagged this year to a forecast 3.5% -- well above Western European countries but too slow to make a real dent in the 17.8% jobless rate. If Marcinkiewcz delivers, the economy could be poised for rapid changes. "This government could kick Poland into higher gear," says Richard Laba, president of Motorola Poland.

Indeed, the economy has proven surprisingly resilient in the face of zig-zagging politics. Despite election victories by ex-communists or populist firebrands, Poland's politicians constantly prove less radical in office than they present themselves in campaigns. And the economy, left to its own devices, steadily gains muscle. "The internal dynamic comes from entrepreneurial drive," says Jan Krzysztof Bielecki, chief executive of Poland's Bank Pekao. "There is a competitive spirit, which is pushing the country higher and higher."

Many investors believe Poland is poised for takeoff in the next two to three years. Coming off four years of rule by the ex-communist Democratic Left Alliance (SLD) party, the country's gains are impressive. Foreign investment and exports are surging, with officials estimating new foreign investment deals worth $10 billion for 2005, including outlays by LG Philips, Hewlett-Packard (HPQ ), Gillette (G ), and IBM (IBM ). The Polish zloty is stable, inflation is a low 1.9%, and hundreds of millions of dollars in EU funds are starting to restructure a huge and inefficient farm sector and bankroll training and marketing at Polish enterprises. Even once-small family-owned businesses are steadily growing and gaining European reach in everything from clothing to chemicals. Export-strong companies are rushing to the stock exchange to do initial public offerings and, for the first time, hiring top global investment bankers to help them snap up companies across Europe.


Even if left-leaning members of the Law & Justice party seek to hijack policymaking, constraints abound. EU membership will impose strict fiscal restraints on the country. Deficit spending, for example, would imperil access to EU funding. "There are many anchors for the Polish economy. One is the EU, the other is requirements by foreign investors. I don't expect a big change in policy," says Henryka Bochniarz, an entrepreneur and candidate in presidential elections on Oct. 9.

Poles learned the hard way. In 2003, global auto makers PSA Peugeot Citroën (PEUGY ), Toyota (TM ), and Hyundai rejected Poland in favor of Slovakia and the Czech Republic for three car plants that cost $1 billion each in investments. Stung, Poland scrambled to improve its attractiveness to investors and offer cash incentives to companies that create higher-value jobs. "This is the ideal time and the right place to build R&D. The people are qualified, the labor is cheap, and the Poles are keen for a new challenge," says Marek Adamiak, country director for U.S. auto supplier Delphi Corp. (DPH ), which has six factories in Poland and a new R&D center in Krakow. With investors creating thousands of new jobs, Marcinkiewcz may well steer the party faithful toward market-friendly reforms.

By Gail Edmondson, with Bogdan Turek, in Warsaw

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