Economic Freedom Above All

Professor Leszek Balcerowicz, former deputy prime minister and finance minister, author of the economic reform plan from 1989, the time of Poland’s transition from a centrally planned economy to a free market economy, talks to Witold Żygulski.

Economists predict that Poland is facing its big-

gest economic crisis in more than 30 years, comparable - although this is hard to believe - to the one from the time of the systemic breakthrough; do you agree with such a forecast, and if so, what are the reasons for this state of affairs?

Reservations about the consequences of the ruling Law and Justice (PiS) party’s policies in the economy and also the violation and the destruction of the rule of law, were raised almost immediately after the party won the parliamentary elections in 2015. It was apparent what this could, in all likelihood, lead to. The policy of increasing the politicization of the economy from month to month, of increasing the role of the state within it, which is always a political role, could only result in one thing. It was therefore not difficult to predict that a serious crisis was coming. Negative effects, as always, arrive late. There is always a lag time between a bad thing and its effects on the economy. For the first two to three years of the United Right’s rule, we had a period of prosperity in the global economy. Now, the fatal errors in domestic policy are being compounded by the recession that has occurred in almost all countries that count in the global economic system.

Therefore, we can be certain that we will find ourselves in a state of stagflation in the coming years, meaning zero or minimal economic growth combined with ever-present high inflation and compounding budget problems. These problems will accrue dramatically, such is the delayed effect of the government’s misguided economic policies. The causes have already occurred, so no matter who governs Poland after next year’s parliamentary elections, the effects will manifest themselves. This does not mean, of course, adopting a stance of not caring who comes into power, because we are interested in the future. The current ruling team has done a lot of wrong, which is becoming acute not only because of the external crisis but because of the deformations of the state system that have occurred and are still occurring. There will be a huge burden of responsibility on those who will, hopefully, replace the PiS government.

There is not the slightest doubt about what needs to be done to restore the rule of law in Poland, meaning

Adam Glapiński, NBP Governor

an authentic tripartite division of power. What needs to change in particular is the situation in which the courts and the prosecutor’s office have turned into a tool for persecuting the opposition, political opponents of PiS, acting in an absolutely ruthless manner, violating all rules of decency. In addition to the activities of the judiciary, the work of the police and special services, also all too often treated as a tool in the political struggle, will also have to be looked at closely. I see no solution here other than firm and swift action immediately after the new team comes into power. Fortunately, it seems that the current opposition, regardless of which grouping is involved, is fully aware of this.

Of course, we might have to reckon with an obstacle to the introduction of new regulations aimed at restoring the rule of law in Poland, namely the attitude of President Andrzej Duda, a politician with roots in PiS. But if the opposition gains a sufficient majority in the parliament, this is not an insurmountable obstacle.

THE NBP, UNDOUBTEDLY AT THE BEHEST OF THE GOVERNMENT, CONTINUES TO PRINT MONEY WITHOUT COVER, WHICH CONTINUES TO FUEL INFLATIONARY PROCESSES

Economic recovery is much more questionable. For some hard-to-understand reason, the opposition parties, including the largest of them, the Civic Platform (PO), are not revealing what they intend to do to restore stability to the economy, to get Poland back on the path of economic growth, to start developing again. To make matters worse, there is no shortage of examples of parliamentary support for PiS’s destructive budget policies, including and mainly handouts, i.e. offering more and more money to different groups without looking at the consequences, including long-term ones. It is said that elections are not won without populism, but the proponents of this idea confuse populism with popularity. The two are not synonymous, even though both words begin with the letter “P.” The assumption that public opinion will favor the group that outbids the others with its populism leads to the systematic destruction of the foundations of a healthy economy. Populism excludes responsibility, the rationality of decisions both for the moment and those with far-reaching, systemic consequences. It is fraudulent politics.

One argument being raised in the political discussion in Poland is that, despite its increasingly criticized policies, PiS is still supported by about 30 percent of citizens. But this is not a majority.

Returning to strictly economic issues: The basic problem today, in my opinion, is the alarmingly low level of investment. It currently stands at less than 20 percent, lower than in most Western countries (not counting Greece). This raises serious concerns about the future. An extremely important test for the future government will therefore be to change this situation, to rebuild the investment climate, to rapidly increase the investment rate.

How can this be accomplished?

Part of the responsibility for the current situation lies with the populist PiS government, but even before, things were not as they should have been. Investors are guided by calculated profit, so first of all, it is necessary to make a reliable analysis of what part of investment in Poland in recent years has fallen to state, government projects, and what part to private investment, including foreign direct investment (FDI). The government boasts today that investor confidence in Poland is not waning, and is even growing, and gives some examples of projects, but experience teaches us to treat such declarations with caution. I can only add that I personally feel especially great skepticism about statements on this issue – and by no means only on this one – made by Prime Minister Mateusz Morawiecki.

From 2001 to 2007 you were the governor of the National Bank of Poland (NBP); inflation in Poland has been hitting new record highs, recently exceeding 17 percent. What is causing this?

Inflation is divided into two parts. The so-called core inflation is due to the domestic demand factor, the other part is related to price shocks that come from outside. From the analyses that I am aware of, including those prepared at the Civic Development Forum [an economic think-tank founded and headed by Prof. Balcerowicz in 2007], it appears that most of the inflation in Poland is attributable to core inflation. Therefore, the argument that this is, as the prime minister calls it, “Putinflation,” i.e., that the crisis unleashed by the Russian president after the armed aggression against Ukraine is to blame, does not withstand criticism. Domestic factors are decisive. The primary one is the central bank’s far-too-late response in the form of interest rate hikes. It was the right move, of course, but very belated, on top of which the public had been told for years, even as late as the end of last year, that there would be no rate hikes. Meanwhile, the Monetary Policy Council (RPP) has already raised the rates 11 times since then. The NBP’s reference rate has risen to 6.75 percent from a near-zero level of 0.10 percent. Now the central bank is considering whether the level is already sufficient or should be raised further; some economists augur a bleak scenario of the reference rate even reaching 9-10 percent. This is because the rate of state spending continues to rise, and with it the rate of the budget deficit. Experts consider next year’s draft state budget presented by the government to be completely unrealistic. The NBP, undoubtedly at the behest of the government, continues to print money without cover, which continues to fuel inflationary processes. One can say jokingly – though unfortunately, state financial policy is no laughing matter – that the team of Mateusz Morawiecki and [NBP Governor] Adam Glapiński is responsible for inflation.

Stabilizing monetary and fiscal policy is absolutely fundamental in Poland today if we want to avoid a crisis of enormous proportions, a long-term one at that. The state of stagflation that awaits us will have a negative impact on both income and expenditure. The gap between state revenue and spending is growing dramatically; FOR analyses show that it will be incomparably worse than the government predicts in its forecasts and budget plans. All this will happen, it needs underlining, under conditions of a global economic crisis.

Of course, a sizable part of the troubles associated with global price increases, primarily of energy raw materials, is due to the crisis caused by the war in Ukraine. If, which is what we all wish for, this factor disappeared and there was

some stabilization, the fight against inflation would certainly be easier. But this, as we know, is a long way off. In addition, domestic pro-inflationary factors will remain, and they should now be the main focus.

You talk about a rational state financial policy, but next year is a parliamentary election year, and we know that those in power will mainly want to win over the electorate by continuing to inject money into already over-the-top social programs such as the 13th, 14th and perhaps 15th pensions, family allowances, further wage increases for protesting professional groups, and so on....

The law of the political jungle can be no excuse. Harm to the economy cannot be tolerated. It must be made clear that a budget disaster is looming. We already have a serious drop in economic growth, and analysts are predicting it will stop altogether. Without a radical change in economic policy, especially fiscal policy, the situation will not change. This change must be accompanied by the liberalization of the economy; without this, GDP growth will not take off. If the current ruling team does not decide to quickly reform economic policy, they should be held firmly accountable for this; it is simply acting to the detriment of the state.

What do you think of the idea, presented recently by Deputy Prime Minister and Minister of State Assets Jacek Sasin, of a tax on excess profits? All companies – state-owned and private – that achieved a profit increase of more than 20 percent year-on-year would pay a 50-percent tax that, among other things, would be used to finance additional expenses of local governments and public institutions resulting from the increase in energy prices?

One columnist described this idea as a “Bolshevik surtax” and I fully agree with this term. If excessive profits are made by state-controlled enterprises, no special tax law is needed to investigate this. Extending such a tax obligation to private entities is nothing more than resorting to methods known from the period of the People’s Republic of Poland, when tax offices-imposed duties, at their whim, on the few private entrepreneurs of the time, who, by the way, contributed significantly to increasing economic growth and improving the dire market situation. This is a desperate attempt to get additional money into the empty state coffers, a cure far worse than the disease. The authors of this idea don’t know where the problem lies – are taxes too low or is there too much spending?

In your opinion, does the current opposition have any precise plan for economic reforms?

This is a difficult question. Today’s opposition groups differ greatly among themselves, and sometimes not very rational views on economic issues clash. This also applies to the largest opposition party, the PO, within which people also do not agree completely on the fundamental directions of future necessary reforms and how to implement them. Most of the opposition today is focused on criticizing the government’s policies, paradoxically also those of its populist elements that, as I said earlier, it supports during parliamentary votes. I am also a bit concerned that I often hear more sensible statements about economics from Szymon Hołownia, the leader of political newcomer Polska 2050, than from experienced PO politicians.

If you were now to create a second “Balcerowicz Plan” [the original plan was a package of systemic reforms introduced by Poland’s first non-communist government in the fall of 1989, when the country was transitioning from a centrally controlled economy to a market economy], what would be its main pillars?

They are obvious. First, combating inflation, which is an evil, though fortunately an evil felt by the people, so it will be easier to win them over to necessary changes. Secondly, firmly restoring the rule of law, which will of course enable the restoration of normal relations with the European Union, which will be followed by the unblocking of EU funds due to Poland from the National Recovery Plan (KPO). The country needs them to finance numerous investment projects, especially in the pending transition period until the European and global economies achieve a balance that was first disturbed by the COVID-19 pandemic [to combat the economic consequences of which the Recovery Fund was established], then by the war unleashed by Russia in Ukraine.

IT MUST BE MADE CLEAR THAT A BUDGET DISASTER IS LOOMING. WE ALREADY HAVE A SERIOUS DROP IN ECONOMIC GROWTH, AND ANALYSTS ARE PREDICTING IT WILL STOP ALTOGETHER

The theory promoted by the government in recent months, that Poland will be able to cope perfectly well without the near PLN 160 billion from the European Commission, that economic plans can be carried out at our own expense, and that Poland can withdraw completely from cooperation within the framework of the EU Recovery Fund package, is completely absurd. Third, removing politics from the economy, shutting down the PiS “manor farm” created over the past seven years [i.e., treating state assets like one’s own property], where every Treasury-owned company is swarming with the “family and friends” of ministers or other government officials, usually completely incompetent and often using their position to pursue business for their own benefit, by means of methods bordering on the illegal or simply illegal. Private companies would never employ such people. In short: deregulation and privatization of the economy. A draft privatization plan with the participation of private pension funds has already been prepared.

Do you see any area in the Polish economy that can become a fast-acting lever for accelerating its growth?

As a rule, I shy away from predicting “economic tigers” – this has to be done by the market. Everything, I repeat, everything should be based on economic freedom in the broadest sense. Without it, nothing will succeed.