Poland
Recent Economic Developments
Author: International Monetary Fund
Publication Date:
30 Apr 1997
eISBN:
9781451831795
Language:
English
Keywords:
ISCR; CR; exchange rate; broad money; monetary policy; state enterprise; balance of payments; budget deficit; capital market
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This paper reviews economic developments in Poland during 1995–96. The focus is on macroeconomic developments in the real, fiscal, monetary, and external sectors, respectively, while structural policies are also reviewed. The paper examines the Polish tax system, the exchange and trade system, and poverty. It highlights that in 1996, Poland experienced its fifth consecutive year of economic growth. From late 1993 to about mid-1995, inflation remained in the 30–35 percent range as large external surpluses weakened monetary control.

Abstract

This paper reviews economic developments in Poland during 1995–96. The focus is on macroeconomic developments in the real, fiscal, monetary, and external sectors, respectively, while structural policies are also reviewed. The paper examines the Polish tax system, the exchange and trade system, and poverty. It highlights that in 1996, Poland experienced its fifth consecutive year of economic growth. From late 1993 to about mid-1995, inflation remained in the 30–35 percent range as large external surpluses weakened monetary control.

I. Introduction

1. It has become commonplace in recent years to name Poland as one of the most successful of the transition economies. A pioneer in transition from the very start, the country has since confirmed this status on numerous occasions, most importantly in being the first to reverse the output decline in 1992 and then to surpass the pretransition level of output in 1996. Rooted in the bold and comprehensive reforms of the initial “big-bang”, this success owes equally to the remarkable continuity of commitment to the principles of market orientation and financial stability, irrespective of the composition of the seven governments that have been in power since 1990. Two particular milestones in this regard were a major “second round” of fiscal adjustment and structural reforms in 1992–93, and sustained adherence to those principles by the new left-wing coalition that came to power in late 1993, embodied in the medium-term Strategy for Poland adopted in mid-1994. The results have been five successive years of economic growth, averaging 6 percent over the past three years; steady, even if gradual, progress to moderate inflation; and a dramatic shift from a chronically weak external position to one of fundamental strength with a large reserves cushion and an appreciating currency (Figure 1).

Figure 1.
Figure 1.

Poland: Selected Economic Indicators, 1990–96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Polish authorities; and staff estimates.

2. While much has been achieved, transition is by far not finished, in part reflecting the somewhat fitful progress in structural reforms after the initial “big bang”. Increasingly, moreover, the agenda of outstanding reforms is dominated by Poland’s over-arching goal of full integration with the most advanced industrial economies, in particular its objective of early accession to the European Union (EU). From a macroeconomic perspective, key issues here include Poland’s relatively low savings and investment ratios (both below 20 percent of GDP) and its still high inflation rate (just below 20 percent), both obstacles to the kind of sustained rapid growth required for smooth integration. A strategy to overcome these obstacles should center around further fiscal consolidation, tight monetary policy, and structural measures to bolster private savings, most important among them comprehensive and deep pension reform. Another key policy imperative arises from the still pervasive role of the state in the economy; in particular, rapid privatization of most of the remaining 4,000 or so enterprises still under the umbrella of the state will be pivotal in raising efficiency and attracting private capital on the scale required to ensure continued rapid economic growth.

3. Recent economic developments can be divided broadly into two phases: a period of accelerating, export-led growth (1994–95), followed by a period in which rising domestic demand became the main engine of growth (1996).1 Strong improvements in competitiveness combined with the recovery in western markets to produce the export boom of 1994–95, with official export earnings up by about two thirds and a near tripling of inflows from unrecorded trade. Transformation-induced rapid productivity growth, together with a devaluation and large fiscal adjustment in 1993, were the main factors boosting Polish competitiveness during this period. The downside of this was a halt in disinflation as the progressively undervalued exchange rate produced external surpluses that proved difficult to sterilize, pushing monetary expansion and keeping inflation at 30–35 percent for nearly two years.

4. In fact, persistent inflation as well as a strong recovery of investment were signs already in 1995 that macroeconomic forces were at work to reverse the necessarilyt emporary boom in net exports and competitiveness. The basic policy question then was essentially whether to restore equilibrium through nominal currency appreciation or inflation-induced real appreciation (barring further fiscal adjustment). The authorities’ decision in 1995 to opt for nominal appreciation set the stage for the transition first to sharply lower inflation, followed by a weakening in the external accounts, accelerating real wages and consumption, and sustained strong investment growth in 1996. The exchange rate-induced rebalancing of growth from external to domestic demand was compounded by the slowdown in western Europe and an unexpectedly sharp acceleration of domestic credit, fueled by lower interest rates (lowered by the National Bank mainly in an effort to contain capital inflows and limit the costs of sterilization), largely successful completion of commercial bank restructuring, and generally improved confidence. The outcome in 1996 was sustained rapid GDP growth of about 6 percent, notwithstanding a 4 percent of GDP swing in the external current account (to a small deficit of less than 1 percent of GDP) as domestic demand expanded by nearly 10 percent. Reflecting the exchange-rate based stabilization strategy, inflation came in under 20 percent, down from over 30 percent in mid-1995. By end-1996, a key policy issue was how to ensure a smooth completion of the transition to a moderate current account deficit, with continued progress on disinflation and high investment to provide for sustained mediumterm growth.

5. The following five sections of this paper examine Poland’s recent transition experience in greater detail, with particular emphasis on developments in 1995–96. In Chapters II–V, the focus is on macro-economic developments in the real, fiscal, monetary, and external sectors, respectively, while structural policies are reviewed in Chapter VI. Brief Appendices on the Polish tax system, the exchange and trade system, and poverty provide additional factual information. Four background studies attached to this paper analyze selected key issues particularly relevant to the 1996 Article IV consultation for Poland (SM/97/41 (2/11/97)). Attachment I examines targets and instruments of Poland’s monetary policy in recent years; estimates of the demand for money are presented in Attachment II; Attachment III contains an empirical analysis of the effectiveness of sterilization; and Attachment IV discusses factors influencing external trade performance.

II. Output, Employment, and Prices2

A. Overview

6. Seven years into transition, Poland in 1996 experienced its fifth consecutive year of economic growth. After falling almost 18 percent in 1990–91, Poland’s gross domestic product has recovered significantly, and now exceeds the levels recorded before embarking on transition. In terms of growth performance, Poland has established itself as the clear leader among the transition economies of Central and Eastern Europe (Figure 1). Indeed, the true picture may be even stronger, since recent research by the Central Statistical Office finds that official data may have exaggerated the severity of Poland’s initial recession. This impressive record, moreover, has been achieved despite the wholesale economic restructuring and changes in the product mix needed to bring the capacity to supply goods more closely into line with underlying investment and consumption demands. These very real—but difficult to quantify—effects mean that macroeconomic statistics may even understate performance over the last seven years.

Figure 1.
Figure 1.

Visegrad Countries: Gross Domestic Product and Inflation, 1988–96

(GDP Peak = 100)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: IMF, World Economic Outlook, October 1996.

7. Despite these achievements, Poland’s economic record during transition has not been without blemish. In particular, inflation has proven more resilient than anticipated and remains significantly higher than in many of the advanced central and eastern European economies. Though there was considerable success in fighting inflation in the first year of transition—conditions of near-hyperinflation being brought swiftly under control—subsequent progress has been more modest. In particular, from late 1993 to about mid-1995, inflation remained in the 30–35 percent range as large external surpluses weakened monetary control. This was followed by several months of rapid disinflation (to the low 20 percent range) mainly as a result of a hardened exchange rate and a good harvest in 1995. However, progress slowed again in 1996, with inflation ending the year at just under 20 percent. High unemployment, with large regional disparities, and a heavy social cost for certain parts of the population were other strains that have marked Poland’s transition experience. More generally, and partly related to these shortcomings, progress with structural reforms has been mixed, which continues to distort the economy’s true growth potential and makes the fight against inflation more difficult.

8. These problems notwithstanding, Poland’s record of accelerating recovery and sustained, if somewhat slow and fitful, disinflation testifies to the overall success of its transition strategy. As is well known, this strategy combined wide-ranging external and domestic liberalization with generally tight financial policies, under a “multiple-anchor” approach that included low fiscal deficits, hard budget constraints on enterprises, an incomes policy, and an exchange rate anchor. Over the past two years, in particular, the hardening of the exchange rate has brought with it firmly lower inflation and, with falling interest rates, a welcome rebalancing of growth toward domestic demand. A key challenge for economic policy at this juncture is to manage this rebalancing in a way that sustains growth while maintaining progress with disinflation. From a medium-term perspective, policies aimed at raising Poland’s relatively low savings rate (below 20 percent of GDP) and removing the major structural barriers to growth will be necessary to sustain the recent pace of output performance.

B. Demand and Supply

9. Poland’s economic recovery started back in 1992, only two years after the “big bang” of macroeconomic stabilization and economic liberalization. At first the recovery was tentative, consumption-led and vulnerable to balance of payments constraints. The recovery strengthened in 1994 and 1995, led by sizeable increases in exports: the share of domestic demand in GDP fell, and the contribution of external demand to real GDP growth became strongly positive (Table 1). Sustained rapid increases in productivity, moderate real wage increases, and the lagged effects of devaluation in August 1993 boosted competitiveness, allowing Polish exports to benefit fully from the economic recovery in its main trading partners. The result was two consecutive years of 20 percent growth in export volumes, and a dramatic increase in unrecorded cross-border exports, with GDP growth averaging more than 6 percent in 1994 and 1995.3

Table 1.

Poland: Composition of Aggregate Demand, 1992-96

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Sources: Central Statistical Office; and staff estimates.

Excluding statistical discrepancy.

Contribution to GDP growth

10. Since then, the export-led recovery has broadened into a recovery fueled increasingly by domestic demand. Appreciation of the real exchange rate and the slowdown in Western Europe moderated export growth, while lower interest rates and strong real earnings growth strengthened domestic demand. Thus, while net exports made a sizeable negative contribution to growth in 1996, buoyant domestic demand was able to sustain GDP growth of around 6 percent.

11. Fixed investment increased by 9 percent in 1994 and 18.5 percent in 1995 (as measured on a national accounts basis), and is estimated to have grown by around 18 percent in 1996. The pickup in investment was encouraged by expanded investment tax credits, but also by rapid productivity gains coupled with modest real wage increases which increased profitability, particularly in the export sector. While retained earnings have been a major source of investment finance during the early stages of the upswing, more recently there has also been a rapid expansion of enterprise credit (Chapter IV). Finally, inflows of foreign direct investment (FDI) have also risen rapidly in recent years, albeit from a comparatively low base; at less than 2 percent of GDP (measured on a payments basis) there appears still ample scope for higher FDI inflows that should underpin sustained growth in the future.

12. Notwithstanding a sharp drop during the initial phase of transition, the manufacturing sector still dominates Polish investment, accounting for almost a quarter of total investment outlays, and increasing by half in real terms in 1994–95. Reflecting the increasingly broad-based recovery, investment growth in 1995 widened to include virtually all sectors, with higher than average increases in the service sectors (Table 2). During transition, the functional composition of investment has changed noticeably: while buildings and structures still account for around one-half of total investment expenditures, this ratio fell by ten percentage points from 1991–95, with the share of machinery and equipment increasing by almost twenty percentage points (Table 3). However, according to official statistics, the increase in the share of the private sector in total investment has been less pronounced, rising only 4 percentage points in the years 1991–95.

Table 2.

Poland: Sectoral Breakdown of Investment, 1991-95 1/

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Source: Data provided by the Polish authorities.

According to the Polish version of the NACE-EKD classification system.

Table 3.

Poland: Investment by Type and Decision-Making Entity, 1991-95

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Source: Data provided by the Polish authorities.

Data for 1991 refer to construction and assembly works.

13. Consumption too has contributed to the recent recovery in domestic demand, increasing by around 4 percent in real terms in both 1994 and 1995, and by an estimated 7 percent in 1996. Real retail sales have grown rapidly, owing to (i) substantial increases in real wages—the fruits of successful economic transition—and (ii) rapid increases in real household credit (though from a low base), aided by falling interest rates. These factors, together with increasing recognition of the success and permanence of the transition to a market economy, have helped strengthen consumer confidence (Figure 2).

Figure 2.
Figure 2.

Poland: Selected Consumption Indicators, 1993–96

(Index; 1993 = 100)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Polish Central Statistical Office; Demoskop; and the National Bank of Poland.

14. The structure of Polish production has changed drastically with transition (Tables 4 and 5). The share of services in GDP has increased from little over one-third in 1989, to more than one-half in 1996, though part of this reflects statistical reclassification of economic activity. Despite this substantial increase, the share of services still remains low compared with the two-thirds share typical for OECD countries, though it should rise with the increasingly domestic demand-driven recovery.

Table 4.

Poland: Value Added by Sector, 1989-95

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Sources: Central Statistical Office, OECD, and staff estimates.

For 1989, in percent of GDP.

Table 5.

Poland: The Growth of Production, 1991-95

(Annual percent change in real terms)

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Sources: Central Statistical Office and staff estimates.

15. Though the share of industry in GDP has declined (measured in current prices), much of this reflects sharp adjustment in the early stage of transition, as well as some trend decline in the relative price of industrial products. In the early years, industrial output fell much more dramatically than in the more sheltered sectors of the economy, such as construction or services. Since then, industry has recovered strongly (Figure 3): in real terms, industrial value added has grown at close to 10 percent per annum from 1993 to 1995, and is estimated to have grown a little under 8 percent in 1996. Manufacturing continues to lead the way, with particularly rapid growth in 1995 and 1996 in such sectors as food products, leather goods, rubber goods, furniture, printing and publishing, and motor vehicles. While the volume of production in the mining sector has increased little, its share in value-added has increased largely because of sizeable increases in the domestic relative price of coal: unit labor costs are high relative to international standards, and large losses continue to be made. Measured in terms of value added, output in the construction sector was slower to recover, only rising strongly in 1995, when it increased 7.3 percent (Table 4). Growth slowed in the first quarter of 1996, the effect of a particularly harsh winter; however, with low real interest rates and the general pickup in domestic demand, the construction sector soon recovered in the remainder of the year, and is estimated to have recorded growth of around 4 percent for the year as a whole.

Figure 3.
Figure 3.

Poland: Selected Production Indicators, 1990–96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Polish Central Statistical Office; and staff calculations.

16. Agriculture still plays a major role in the Polish economy. Though its share in GDP has fallen five percentage points since 1989, to only a little over 7 percent in 1995 (Table 4), it still makes up more than a quarter of total Polish civilian employment. In addition, the considerable room for productivity improvements means that the agricultural sector itself has substantial growth potential; also, if utilized effectively, surplus labor in the agricultural sector should help sustain growth in other sectors of the economy. Finally, with food making up 40 percent of the CPI basket, and given the high levels of trade protection in agriculture, agricultural conditions are still the source of frequent supply shocks to inflation.

17. Four crops dominate Polish agricultural production: grain, rape, sugar beet, and potatoes (Tables 6 and 7). Together, these account for 80–85 percent of land under cultivation. In 1995, favorable weather conditions, combined with the trend increase in yields reflecting increased usage of fertilizers, created a bumper crop. Real value added in agriculture increased 12 percent that year, well above the average rate of GDP growth. In addition, the fall in food prices that resulted meant that consumer prices fell 0.9 percent that July, and increased only modestly in subsequent months, ratcheting the annual rate of inflation down by around 5 percentage points.

Table 6.

Poland: Production and Yields of Selected Crops, 1989–95

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Source: Data provided by the Central Statistical Office.

At current prices; in percent of total.

From four cereals plus triticale.

Total fruit production.

Table 7.

Poland: The Growth and Structure of Agricultural Production, 1989-95 1/

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Sources: Central Statistical Office, Rocznik statystyczny (various issues); and data provided by the Polish authorities.

Excludes agricultural services.

According to the KGN classification.

According to the Polish version of NACE-EKD.

Provisional data.

Gross agricultural production minus intermediate consumption.

Final agricultural production minus value of products of agricultural origin bought by agricultural producers.

Gross agricultural production minus material costs.

Data for individual farms.

18. In 1996, the severe winter held back farm production. Output in agriculture is estimated to have barely increased, with value-added actually declining; grain production is expected to fall 2 million tons to only a little over 24 million tons. At the same time, world wheat prices also rose significantly. This has had a direct impact on the CPI but also, by raising the price of feed, it set in train a classic “hog cycle”. The price of pork fell early in the year as (unprofitable) pigs were sent to slaughter, but picked up later in the year, reflecting the reduction in pig supply. Finally, with food prices falling less this year than last, the annual inflation rate picked up in the summer. Even so, for the year as a whole, the increase in food prices in 1996 was still below the overall CPI inflation rate.

C. Wages and the Labor Market

19. Despite recent rapid growth in output, employment increases have been surprisingly modest: total employment first increased only in 1994—two years after the recovery in output had started—and then only by 1 percent (Tables 8, 9 and 10). The increase in private sector employment has been more substantial, though in part this reflects classification changes. These modest gains may reflect considerable labor hoarding in the early years of transition, as the collapse in output far exceeded the fall in employment. Measured labor productivity fell in the early years but, as output growth accelerated, more recently there have been significant increases in measured labor productivity, particularly in manufacturing, achieved initially with relatively little increase in investment.

Table 8.

Poland: Employment by Sectors, 1989-93

(Annual averages)

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Source: Data provided by the Polish authorities.

According to the KGN national classification.

Since 1993 in the public sector.

Table 9.

Poland: Total Employment by Sector, 1993-95

(Annual averages)

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Sources: Central Statistical Office and staff estimates.
Table 10.

Poland: Private Sector Employment by Sector, 1993-95

(Annual averages)

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Sources: Central Statistical Office and staff estimates.

20. Despite the small reported increases in employment, the unemployment rate has fallen significantly. After peaking at almost 17 percent in mid 1994, the unemployment rate has fallen to a little over 13 percent at the end of 1996. The divergence between figures for employment and unemployment in part reflects developments in the shadow economy, but also the progressive tightening of rules governing eligibility for unemployment benefits (Chapter VI). For example, in 1996 unemployment benefits for school-leavers were replaced with grants for training or apprenticeships: the result was 100–200,000 fewer school-leavers than usual registering as unemployed in the summer, reducing the unemployment rate by 0.5 to 0.9 percentage points. Existing eligibility rules have also been more tightly enforced, and the value of unemployment benefit has been reduced by indexing to prices instead of wages, bringing unemployment benefit indexation in line with the indexation of the minimum wage.

21. Correcting for these effects, the fall in Poland’s unemployment rate may have been more gradual than suggested by the official registered unemployed rate. The Labor Force Survey, conducted using ILO-based methods, counts as unemployed only those who actively seek work but who do not work at all, whereas the registered unemployed may include people with informal, part-time employment. This method suggests that the unemployment rate peaked at 15.9 percent in early 1994, and then fell gradually to 11.6 percent in August 1996 (Figure 4).

Figure 4.
Figure 4.

Poland: Unemployment Rates, 1992–96

(In percent)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: Polish Central Statistical Office.

22. Figures from the Labor Force Survey present a complex pattern of Polish unemployment. As in its Western European neighbors, there is a significant share of long-term unemployed (just under 40 percent), the youth unemployment rate is relatively high, and unemployment rates are disproportionately high amongst the least educated. However, the increasing rate of flow into and out of unemployment (Table 12) suggests that a more fluid labor market may be emerging.

Table 11.

Poland: Population, Labor Force, Employment and Unemployment, 1989-95

(In thousands of persons; end of year)

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Source: Data provided by the Polish authorities.

The working age for men/women is defined to be between the ages of 18 and 64/59.

Employment statistics exclude workers doing military service, working in defense and public-safety related institutions, living abroad, or serving a jail sentence. These workers, however, are classified as part of the active labor force. Taking into account the different statistical treatment accorded to these workers, the calculated unemployment rate was close to zero through 1989.

Table 12.

Poland: Main Factors Determining Change in Unemployment, 1990-95

(In thousands of persons)

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Source: Data provided by the Central Statistical Office.

Inflows and outflows are estimates.

23. Regional disparities in Polish unemployment are immense, and reflect deep-rooted structural characteristics of the Polish economy. The disappearance of certain sections of heavy industry—especially when concentrated in one-company towns—and the liquidation of state farms have created regional pockets of high unemployment. In addition, the relatively small stock of housing and the lack of a well-developed housing market militate against labor mobility, making the problem of regional unemployment harder to solve.

24. Wage growth has picked up with the improved labor market conditions. After barely rising in 1994, latest official estimates suggest that economy-wide real wages increased 3.0 percent in 1995, net of income tax. This increase is estimated to have accelerated in 1996, to around 5 percent. Developments in the gross wage tell a similar story (Table 13), with wage growth outpacing consumer price inflation. Wage growth in the mining sector has been particularly erratic, rising much faster than average back in 1993 and 1994, before falling back a little in 1995. Wage growth in manufacturing has been consistently strong. Finally, while wage growth in the enterprise sector led the way in 1994, in 1995—reflecting indexation agreements and past election commitments—budgetary sector wages recovered to grow faster than average, narrowing the differential with the enterprise sector.

Table 13.

Poland: Wages and Salaries, 1992-96

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Sources: Central Statistical Office and staff estimates.

Figures for 1996 cover only the first nine months and, being based on a smaller statistical sample, are not directly comparable with figures for earlier years. However, the growth rates of wages for the first nine months of 1996 have been calculated using a consistent sample for both years, and hence are comparable.

25. The process of wage formation continues to evolve. In the early stages of transition, enterprise wages were controlled by the excess wages tax, or popiwek. This tax was designed to keep state enterprise wage growth in check, at a time when market mechanisms of control were still weak. At first, to bolster the macroeconomic stabilization, the marginal tax rate on enterprise average wage growth in excess of the pre-specified norm was set at the punitive rate of 500 percent. However, as hard budget constraints took hold, and the microeconomic distortions of the popiwek grew larger (disproportionate taxation of the most profitable firms, hindering their expansion), the system was progressively relaxed and finally abandoned at end-1994.

26. Under the present system of wage setting, increases in the base wages (excluding profit-related bonuses) of workers in firms with 50 or more employees are set by indicative wage norms, agreed on by a Tripartite Commission of government, trades unions, and employers’ organizations, taking into account government projections of such economic variables as real GDP growth, the inflation rate, and the maximum average wage increase. For example, the wage norm for 1996 was set at 21.8 percent, assuming 19.8 percent annual average inflation. Though the wage norms are not legally binding, the managers of state owned enterprises are subject to loss of pay or even dismissal for violating the wage norm if profitability deteriorates as a result. In extreme cases, sanctions might also include withdrawal of tax allowances to enterprises that violate the norm.

27. However, the wage norms have not proved particularly effective at restraining wage growth. First, they contain elements of de facto indexation. The initial wage norm allowed average annual increases of 16 percent, 22 percent, 26 percent and 30 percent in the four quarters of 1995: an average annual increase of 23.5 percent, against 22.7 percent projected consumer price inflation. However, when consumer price inflation looked set to exceed the initial assumptions, the wage norm was revised at midyear to permit increases of 32 percent and 38 percent in the last two quarters of 1995, an annual average increase of 27 percent. Second, the wage norms have not proved binding. In 1995, wages actually increased 32.9 percent in enterprises governed by the wage norm, after substantial wage increases in the fourth quarter. Third, given the marked seasonal pattern of Polish wage growth, the quarterly phasing of the wage norm has been too generous in the first half of the year, and unrealistically harsh—and hence disregarded—toward February 19, 1997 the end of the year. Even so, the flexibility inherent in the wage norm system does at least offer the potential for greater relative wage flexibility, and for strengthening the link between wages and enterprise profitability.

28. In contrast, budgetary wages have been formally indexed to the rate of inflation for three consecutive years. This reflects the government’s commitment to raise budgetary wages relative to wages paid in the enterprise sector, so as to move closer to the pretransition pattern of relative wages. Indeed, the government is under a legal obligation to provide real growth in budgetary wages for the years 1995–98. For 1995, agreement was reached on an increase of average budgetary wages of some six percentage points above actual inflation; for 1996, and again in 1997, the increase was set at 5.5 percentage points. The amount of the real increase, and the timing of payment, is negotiated within the Tripartite Commission.

29. Thus, it is fair to conclude that considerable indexation remains in the Polish economy.4 Certainly pensions and unemployment benefits, and the minimum wage are indexed—initially to average wages, but increasingly to prices. In addition, budgetary wages have also been explicitly linked to actual inflation. The wage norm is more complex: it contains elements of forward looking indexation, but in practice it is revised with actual inflation developments. On the whole, it would seem that, as long as the authorities meet their inflation targets and the wage norm is adhered to, wage growth should not prove an obstacle to inflation reduction. However, there are at least two caveats. First, if the authorities miss their inflation target, the system will generate a rapid wage response, making subsequent inflation reduction even more difficult. Second, the wage norm has so far failed to bind. In fact, it may inadvertently establish a floor for wage increases, even in inefficient or loss-making enterprises.

D. Inflation and Prices

30. Against the impressive growth record of recent years, Poland’s inflation performance has lagged somewhat. Although hyperinflation has long since disappeared, inflation in Poland remains well above the average of its fellow Visegrad countries, let alone the average inflation rate in the European Union. Even so, generally tight financial policies have ensured a continued downward path for inflation, even if immediate progress has at times been complicated by undervaluation of the exchange rate (1994–95) or supply side shocks to the economy.

31. After declining sharply from over 600 percent during 1989 to 38 percent during 1993, inflation became stuck in the 30–35 percent range (Tables 14 and 15, Figure 5). In part, this was because gradual reductions in the rate of crawl were unable to resolve the underlying inflation problem caused by undervaluation of the level of the exchange rate. In addition, part of the explanation lies in the poor harvest of 1994: agricultural production fell, and food prices increased.

Table 14.

Poland: Price Developments, 1989-96

(Percent change)

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Source: Data provided by the Polish authorities, and staff calculations.

Final consumption expenditure.

Gross fixed capital formation.

For industry, producer prices are defined by the index of sales prices for sold output; for agriculture and construction, by the price index of gross output produced. According to the national classification (KGN).

According to the Polish version of the NACE-EKD classification system. Until 1993 indices include VAT; 1994-95 excluding VAT, including excise tax; from 1996 onwards excluding VAT and excise tax.

Producer prices in commercial heating plants.

The range of prices administered by the state has fallen over time. In 1996: the price of spirit alcohol is controlled; furnace fuels (coal, wood) are no longer controlled; control of medicine prices applies to a limited range of domestically produced pharmaceutical goods; the price of natural gas delivered through municipal installations is controlled; the state sets maximum prices for central heating and hot water—the index measures actual prices in force, which are sometimes below the state-set maximum.