Republic of Poland: Selected Issues
Author: International Monetary Fund
Publication Date:
25 Jun 2003
eISBN:
9781451831917
Language:
English
Keywords:
ISCR; CR; GDP; deficit; deficit in the state; deficit of the state budget; state guarantee; financing requirement; Fiscal stance; Fiscal risks; Budget planning and preparation
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This Selected Issues paper analyzes fiscal developments and the sustainability of the current fiscal stance in Poland. It analyzes fiscal risks and fiscal vulnerability by investigating the contingent liabilities of the government and by performing stress tests to gauge the exposure of the budget to fiscal risks. Using different approaches, the paper tries to determine the size of fiscal adjustment Poland needs to undertake to strengthen the fiscal position and to reduce exposure to fiscal risks to a more manageable level.

Abstract

This Selected Issues paper analyzes fiscal developments and the sustainability of the current fiscal stance in Poland. It analyzes fiscal risks and fiscal vulnerability by investigating the contingent liabilities of the government and by performing stress tests to gauge the exposure of the budget to fiscal risks. Using different approaches, the paper tries to determine the size of fiscal adjustment Poland needs to undertake to strengthen the fiscal position and to reduce exposure to fiscal risks to a more manageable level.

I. Fiscal policy, sustainability and fiscal risk on the way to EU accessionn1

A. Introduction

1. This paper analyzes fiscal developments and the sustainability of the current fiscal stance in Poland. It also analyzes fiscal risks and fiscal vulnerability by investigating the contingent liabilities of the government and by performing stress tests to gauge the exposure of the budget to fiscal risks. Using different approaches, the paper tries to determine the size of fiscal adjustment Poland needs to undertake to strengthen the fiscal position and to reduce exposure to fiscal risks to a more manageable level.

B. Fiscal Policy Stance

2. The headline deficit increased rapidly in the last two years. The general government overall deficit increased from 3.1 percent of GDP in 2000 to an estimated 6.7 percent in 2002 (Figure 1).2 Though a significant part of the increase in the headline deficit is attributable to the widening output gap, high deficits in the last two years are also explained by the weak underlying fiscal position. The cyclically adjusted overall deficit, the measure used here to gauge the underlying fiscal position, remained high throughout the second half of the 1990s (in the range of 3½ to 4½ percent of GDP) and was further increased in 2001 (by some ¾ percent of GDP). Even though the economy was brought to a virtual standstill by late 2001, the 2002 budget aimed at tightening the structural fiscal position (by some ⅔ percent of GDP). In the event, mainly as a result of lower-than-expected inflation, the ex post fiscal stance turned out to be neutral, and the headline deficit reached an estimated 6.7 percent of GDP.

Figure 1.
Figure 1.

Poland: Fiscal Policy Stance, 1995–2002

(In percent of GDP)

Citation: IMF Staff Country Reports 2003, 188; 10.5089/9781451831917.002.A001

Source: Staff calculations.1/ General government overall cash deficit and cyclically adjusted general government overall cash deficit.

C. Debt Dynamics

3. Public debt also increased rapidly during the last two years, from 40.7 percent of GDP at end-2000 to 47.6 percent at end-2002. Staff project public debt at 52 percent of GDP by end 2003. Moreover, if budget priorities are not rearranged to free up additional resources for co-financing EU financed projects and the contribution to the EU budget, additional net EU-related spending may reach ½ to 1 percent of GDP per year during 2004–06. This, together with the current weak structural fiscal position, will put continued pressure on public finances in the coming years. Even if the present output gap is fully eliminated by 2008, unchanged fiscal policies (defined as unchanged annual rate of change in real non-EU related primary expenditure) and the budgetary impact of EU accession are projected to lead to an increase in public debt relative to GDP to about 70 percent in 2013. Under this scenario, public debt would surpass the constitutional limit of 60 percent of GDP in 2007 (Box 1, Figure 2 and Table 1).

Figure 2.
Figure 2.

Poland: Public Debt with Unchanged Fiscal Policies After 2003, 2000–16

(In percent of GDP)

Citation: IMF Staff Country Reports 2003, 188; 10.5089/9781451831917.002.A001

Source: Staff calculations.1/ Public debt includes the risk weighted stock of outstanding state treasury guarantees. Historical observations until 2002; staff projections for 2003–16.
Table 1.

Poland: Fiscal Sustainability Indicators for the General Government under Unchanged Fiscal Policies 2001–16 1/

(In Percent of GDP)

article image
Sources: Data provided by the authorities; and Fund staff estimates and projections.

Unchanged fiscal policies mean unchanged annual rates of increase in non-EU related real primary expenditure.

Includes the risk-weighted stock of outstanding guarantees as stipulated in the Public Finance Act.

Including the renewal of short-term debt (less than 1 year maturity) within the year.

Total interest cost divided by average stock of debt during the year and deflated by CPI.

Constitutional Debt Limit in Poland

Poland is unique among the EU accession countries in that it has a constitutional limit on public debt, 60 percent of GDP, and a set of supporting procedures, stipulated in the Public Finance Act (PFA), that are aimed at arresting the increase in the public debt-to-GDP ratio before it reaches 60 percent. The debt limit and the supporting procedures embedded in the constitution and the PFA are more stringent than the Maastricht debt limit for a number of reasons.

The effective constitutional limit on public debt is lower than the Maastricht limit because the limit applies to public debt including the risk weighted stock of outstanding treasury guarantees (PFA Art. 37). At end-2002, the risk weighted stock of treasury guarantees added to public debt amounted to 1.6 percent of GDP. (The total stock of outstanding guarantees at face value was 4.2 percent of GDP). Beside the overall limit on public debt, there is a limit on the amount of debt a sub-national government can accumulate (60 percent of revenues, PFA, Art. 114).

When public debt exceeds 50 percent of GDP, the first threshold for the supportive procedures, the deficit in the state budget for the following year presented to Parliament cannot be larger as a ratio to revenues than in the current year. The same limit applies to each sub-national government. (PFA, Art 45).

When public debt exceeds 55 percent of GDP, the deficit of the state budget in the budget for the following year should be set at a level which ensures that the public (treasury) debt-to GDP ratio (including the risk weighted stock of outstanding state guarantees) will not exceed the level reached in the latest year for which that ratio was officially published. For sub-national governments, the allowed level of the deficit would be reduced proportionally based on a formula which takes into account how close public debt is to 60 percent of GDP. (PFA Art. 45).

When public debt reaches 60 percent of GDP, public finance entities cannot issue new guarantees, within one month the government has to submit to Parliament an economic program aimed at reducing public debt below 60 percent of GDP, the government has to submit to parliament a balanced state budget for the next year, sub-national governments have to submit balanced budgets, and no guarantee can be issued by public finance entities in the subsequent fiscal year. (PFA Art. 45).

D. Fiscal Risks

4. Exposure to fiscal risks is significant and it is likely to increase in the future if fiscal policy remains unchanged. In determining the sustainability and gauging the vulnerability of fiscal policies, three major groups of fiscal risks will be considered: macroeconomic risks (stemming from changes in growth, the exchange rate and interest rates), refinancing risk, and risk stemming from contingent liabilities.

Macroeconomic risks

5. High potential growth in Poland is accompanied by high volatility of actual growth. While the average growth in Poland since 1992 has been some 2.3 percentage points above the average growth of the euro area, the standard deviation of growth from its average in Poland (1.9 percentage points) was also higher than in the euro area (by some 0.8 percentage point). Thus, fiscal risk stemming from fluctuation in growth is considerably higher than in most euro area countries. Looking forward, volatility in growth may diminish, as the period of rapid restructuring comes to an end, but it is likely to stay considerably higher than in the euro area.

6. A negative growth shock in 2005–07 similar in size to that in 2001–03 would significantly weaken public finances.3 It would raise general government deficit above 10 percent of GDP by 2007, which in turn would push public debt above 100 percent of GDP by 2012 (see Figure 3). These results suggest the magnitude of the vulnerability of public finances to a negative growth shock in Poland.

Figure 3.
Figure 3.

Poland: Deficit and Debt under Alternative Growth Scenarios, 2000–16

(In percent of GDP)

Citation: IMF Staff Country Reports 2003, 188; 10.5089/9781451831917.002.A001

Source: Staff calculations.1/ In the alternative scenario, GDP growth was reduced by 3 percentage points in 2005–06 and by 1¾ percentage points in 2007 (compared to the original scenario shown in Table 1). This would widen the negative output gap to 5 percent of potential GDP. The output gap would close by 2011. All other assumptions were kept unchanged.

7. The budget is also vulnerable to exchange rate and interest rate shocks although to a lesser extent, for plausible ranges of shocks, than to growth shocks. By reducing the share of foreign debt in total debt, from close to ½ at end-1999 to below ⅓ by end-2002, Poland significantly reduced the exposure of the budget to exchange rate risk. An illustrative 10 percent nominal depreciation for two years (2005–06, returning to the original path in 2007 and leaving all other assumptions shown in Table 1 unchanged) would result in an increase in the overall deficit relative to GDP by less than 0.1 percentage point lasting only for two years. However, the impact of an increase in domestic interest rates would be considerably stronger. As Figure 4 shows, a 200-basis point increase in domestic interest rates for two years (2005–06, returning to the original path in 2007 and leaving all other assumptions shown in Table 1 unchanged) would result in a lasting increase in deficit, peaking at ¾ percentage point in the third year and would push up the public debt-to-GDP ratio by 2½ percentage points in the longer run. Though the kind of nominal (and real) interest rate changes Poland went through in 2000–02 are unlikely to happen again, as price stability has been achieved by now, domestic interest rates may remain volatile in the future.

Figure 4.
Figure 4.

Poland: General Government Deficit under Alternative Interest Rate Assumptions, 2000–16

(In percent)

Citation: IMF Staff Country Reports 2003, 188; 10.5089/9781451831917.002.A001

Source: Staff calculations.1/ In the alternative scenario, domestic interest rates increased by 200 basis points in 2005–06 (compared to the original scenario presented in Table 1); all other assumptions kept unchanged.

Refinancing risk

8. As public debt continues to increase under unchanged policies, gross borrowing requirement also reaches higher levels. Under unchanged policies, it is projected to be close to 70 percent of total revenue by 2004, compared to 34 percent in 2001 (Table 1). This means that even a short period of market turbulence could pose a threat to public finances and eventually to macroeconomic stability, unless the government keeps sufficiently large liquid reserves—a costly proposition which could also make macroeconomic management more difficult. As the average maturity of new borrowing is assumed to gradually increase (from 2¾ years in 2002 to 3½ years in 2005), the gross borrowing requirement is projected to decline, even though debt relative to revenue is projected to increase until 2013 under unchanged policies.

Contingent liabilities

9. Contingent liabilities of the budget are also a potential threat to the stability of public finances. At end-2002, outstanding state treasury guarantees were ZL 32.6 billion or 4.2 percent of GDP. The 2003 state budget allows the government to issue ZL 23 billion or 2.9 percent of GDP of new guarantees.

10. The Ministry of Finance has a well-designed system of recording and monitoring guarantees. The existing system of risk assessment follows the best practice in commercial banking, and it is based on a well-maintained data base of financial information on the beneficiaries. Moreover, the risk weighted stock of outstanding guarantees is included in public debt (adding some 1.6 percent of GDP to public debt at end-2002). Nonetheless, a rapidly increasing stock of outstanding guarantees will inevitably increase the risk the state budget will have to undertake. This risk is not necessarily reflected in current deficit measures, as the allocation for expected payments on called guarantees in the budget bears no direct relationship to the risk-weighted stock of outstanding guarantees included in the public debt.

11. Large, financially weak state-owned companies, in particular in coal mining, steel and defense industries, and the Polish State Railways, are also an important source of contingent liabilities in Poland. Some of the borrowing of these companies has already been guaranteed by the state treasury, and, thus, is accounted for in the public debt. As the restructuring progresses, the state treasury could be called upon to issue further guarantees to support these companies. In 2002, the Polish State Railways issued over Zl 2.7 billion (0.4 percent of GDP) of new debt guaranteed by the state treasury, while the Industrial Development Agency issued Zl 600 million (0.1 percent of GDP) in state treasury guaranteed debt to support the restructuring of the steel industry.

E. The Size of the Required Fiscal Adjustment

12. This analysis suggests a need for strengthening the structural fiscal position. The calculations below attempt to gauge the size of the required structural adjustment.

Fiscal adjustment due to the constitutional limit on public debt

13. The constitutional debt limit sets legally binding limits on deficit at each level of the general government, starting when public debt reaches 50 percent, which is likely to happen this year. The rule would require that in the 2005 budget (as the end-2003 public debt number would be officially published in May 2004) the deficit relative to revenue be kept below its level in 2003 (Box 1). However, this is not likely to effectively limit the deficit, as under unchanged policies, the general government deficit would remain within the prescribed limit. Nonetheless, some of the sub-national governments and/or the state budget, depending on how transfers are budgeted, may face constraints on their deficits already in 2005. Under unchanged policies, the next threshold for the ratio of general government debt to GDP, 55 percent, would be exceeded in 2004. This would require an adjustment in the 2006 budget that stops the increase in the public debt-to-GDP ratio—effectively a reduction in general government expenditure relative to GDP of 2¼ percentage points, which could be achieved only by keeping total primary expenditure (excluding EU-financed projects and transfers to the EU budget) unchanged in nominal terms. This would reduce the structural deficit relative to GDP to 1½ percentage points below its 2003 level. If the adjustment was permanent, it would keep public debt below 60 percent of GDP in the subsequent years.

Fiscal adjustment required to meet the Maastricht fiscal criteria by 2006

14. The authorities’ goal is to meet the Maastricht criteria by 2006. As the calculations in the Staff Report for the 2003 Article IV Consultation (SM/03/181) suggest, this would require a structural adjustment relative to GDP of around 1¼ percentage points between 2004 and 2006. If it is to be achieved through expenditure measures, the annual increase in real primary expenditure, excluding EU-financed budget programs, would have to be kept below 1 percent in 2004–06. If Eurostat ruled that the second-pillar pension funds are not part of the general government, the required fiscal adjustment relative to GDP would have to be some 2 percentage points larger.4 In this case, real primary expenditure, excluding EU-financed budget programs, would have to be reduced by about ½ percent annually in 2004–06.

F. Fiscal Risk and Fiscal Position

15. By improving the fiscal position, Poland could lower the exposure of the budget to fiscal risk. This section assesses the size of the fiscal adjustment that would substantially reduce risk stemming from growth volatility, perhaps the biggest risk the budget is exposed to at this stage. Specifically, an adjustment as discussed in the Staff Report for the 2003 Article IV Consultation (SM/03/181) (real primary expenditure restraint sufficient to reduce the structural deficit relative to GDP by 1¼ percentage points by 2006) and not reversed through 2010, would significantly reduce the impact on the debt ratio of a growth shock comparable to that shown in Figure 3. That shock, which would push public debt above 100 percent of GDP if it happened on the base of present policies, would cause only a temporary increase in the debt-to-GDP ratio if it occurred after 2011, when public debt would be down to 52 percent of GDP (Figure 5). A strengthened fiscal position, together with a higher average maturity (and duration) of public debt, would also significantly reduce the exposure to refinancing and interest rate risks. Under the adjustment scenario, by 2011, the gross financing requirement of the budget relative to its own revenues would be some ⅓ less than what it would be without adjustment.

Figure 5.
Figure 5.

Poland: Public Debt under Alternative Growth Assumptions, 2000–16

(In percent)

Citation: IMF Staff Country Reports 2003, 188; 10.5089/9781451831917.002.A001

Source: Staff calculations.1/ In the alternative scenario, GDP growth was reduced by 3 percentage points in 2011–12 and by 1¾ percentage points in 2013 (compared to the adjustment scenario); all other assumptions were kept unchanged.

G. Conclusions

16. Though the current fiscal stance is not unsustainable in a technical sense, reducing fiscal vulnerability, as well as complying with the constitutional limit on debt and meeting the Maastrich criteria will require a major fiscal adjustment. Specifically, the calculations in this analysis suggest that the structural fiscal position will have to improve by at least 1¼ to 1½ percent of GDP over 2004–06. An adjustment of this size is likely to keep public debt below 55 percent and reduce general government net borrowing (ESA95, with second-pillar pension funds included) below 3 percent of GDP by 2006. In any event, the constitutional clause on the debt limit and the supporting procedures in the Public Finance Act will require this adjustment when public debt exceeds 55 percent of GDP. But without a well-designed package of structural fiscal, mainly social expenditure, reforms, ad hoc attempts to comply with the law are likely to be unsustainable in the longer run. Moreover, most structural expenditure reforms need time, in many cases several years, to produce sizable savings. Thus, delaying the adjustment until the law mandates would almost inevitably lead to a low quality and socially costly adjustment.

1

Prepared by István P. Székely.

2

Unless stated differently, the analysis presented in this chapter uses general government overall balance on a cash basis (GFS86), including payments in compensation for insufficient indexation in the 1990s, as a measure of fiscal deficit.

3

In this scenario, the output gap would widen to 5 percent of potential GDP in 2006 and would close by 2011.

4

The 3 percent Maastricht deficit limit applies to general government net borrowing (ESA95). This deficit measure (as interpreted by the authorities) is different from general government overall (cash) deficit (GFS86) for several reasons, the most important one being the treatment of second-pillar pension funds. In 2002, the authorities reclassified these funds as part of the general government. This resulted in a reduction of the net borrowing of the general government of some 1.3 percent of GDP. As these funds will continue to have increasing surpluses, the difference due to this reclassification is likely to reach around 2 percent of GDP in 2006. Thus, if Eurostat does not accept the authorities’ interpretation of ESA95, the net borrowing of the general government will be larger by some 2 percent of GDP in 2006.

APPENDIX I: The Polish Labor Force Survey

The LFS is conducted as a sample survey which allows the generalization of its results to the whole population. The quarterly sample currently amounts to 24,570 housing units and generates, on average, 50,000 observations each quarter. The survey was carried out quarterly, sampling individuals on the mid-month week containing the 15th day. Since the fourth quarter of 1999, a continuous observation method (mobile surveying week for all months of each quarter) has been used.

This chapter uses data for the first quarter of each year from 1995 to 2002. Data for the first quarter of 1993 and 1994 were also available but significant discontinuities in the way key variables were recorded (sector of employment, occupation categories, firm ownership, among others) prevented the inclusion of these first two years in the panel data used in the estimation. Consistent information on region of residence for the whole sample period was also available thanks to special data work performed by GUS analysts.19

Hourly wage information is obtained after dividing reported monthly net (of social security contributions) earnings of employees by actual weekly hours of work in the reference week. Therefore, the sample does not include self-employees. As to be expected from the aggregate reduction in employment in Poland throughout the sample period, the size of the resulting database varied from about 16,200 observations in 1995 to about 10,500 in 2002. The entire panel data used in the first step regression contains about 112,000 observations.

APPENDIX II: Capital Accumulation and Technological Growth in Poland

Using a simple Cobb-Douglas production function, the output level is determined by labor-saving technological growth, labor and capital inputs as in (A. 1):

Y=(A*N)α*K(1−α)(A.1)

A, the technology variable, can be obtained by residual using measures of output and production inputs as well as an estimate of the labor elasticity, a. For output and labor input, GDP and total employment were used. The labor elasticity was assumed to be 0.7 throughout the sample, as in many calculations for other countries. Besides the usual caveats with this type of calculation, there are no official estimates of the capital stock for Poland. The methodology proposed in Doyle, Kuijs, and Guorong (2001) to calculate the capital stock in Poland using national accounts data on gross fixed investment was used instead. Briefly, the basic assumptions are:

  • a) 1985 capital-output ratio was 10 percent lower than the one in Hungary (see Borensztein and Montiel (1991));

  • b) depreciation rate set at 5.5 percent, lower than the one used for other Central European Countries because of the larger share of buildings in total capital stock in Poland;

  • c) transition to a market economy made 35 percent of the capital stock obsolete in 1991.

As a reality check, the resulting capital stock in 1998 matches an official estimate for the year.

The resulting path of labor-saving technological growth for Poland as well as calculations for selected European, Anglo-Saxon and Japanese economies are shown in the table below. The calculations for these other countries use OECD data for the business sector because that is the level of aggregation for which the OECD calculates the stock of capital. The same value for the labor elasticity, 0.7, is used. As it can be seen in the table, the technological growth after the mid-1990s broadly matches the figures for the other economies with the exception of the well-known cases of the USA and Canada where an acceleration of total factor productivity, associated to “new economy” effects, is present. Notice, however, that the data for these other economies should be marked down when making direct comparisons with Poland since it is to be expected larger technological growth in the business sector than in the economy as whole. The surge in technological growth in the first half of the 1990s (which is not included in the analysis in this chapter) is reasonable because it comes immediately after the transition from communism, and the rapid economic changes it entailed.

Table A1.

Labor-Saving Technological Growth in Selected Countries

(Percent change at an annual rate)

article image
Sources: OECD; Polish authorities; and author’s calculations

APPENDIX III: Technical Discussion of Econometric Estimates

Equation (12) is estimated using Feasible Generalized Least Squares (FGLS) to allow for variation in regional error variance and serial correlation of the residuals. The dependent variable is comprised of the coefficients of the interactive dummies adjusted for CPI inflation and a measure of labor-saving technological growth. The first problem with estimating the second-step equation (12) is that the interactive post-1998 term is likely to be quite correlated to the time dummies from 1999 to 2002. So, even though one should expect smaller wage/unemployment elasticity to come together with an outward shift of the wage-setting curve, in practice there may not be enough variation in the data to estimate both effects.

Estimates in columns (1) to (3) in Table A2 illustrate this problem. Column (1) lists the preferred specification used to derive the main conclusions in this chapter. Column (2) adds an interactive dummy with the unemployment elasticity for the post-1998 period. Column (3) excludes the time dummies but keeps the interactive term. In column (2), the interactive term with the unemployment rate is positive, as expected, but it is not statistically different from zero. The wage-setting curve is estimated to have shifted up continuously during the sample but the precision of the estimated shifts are weak after 1998 (with the exception of the shift in 2002). Lack of precision of these estimates suggests the collinearity argued above. The time dummies are excluded in the specification listed in column (3) and the coefficient of the interactive term is precisely estimated to be 0.03 while the estimated unemployment elasticity for before 1999 is -0.11. Because the exclusion of the time dummies may provoke more serious specification errors (and because an F-test reveal that they are jointly significant in specification (2) while the interactive term is not) specification (1) is chosen as the best one.

Table A2.

Poland: Estimates of the Wage-Setting Relationship 1/

article image
Source: Author’s estimation using first quarter LFS data from 1995 to 2002Notes: The year 1995 and the Dolnolaskie region are the excluded dummies in the estimations above. In column (5) the excluded dummy is the one for 1997 as the lag structure in that specification uses up two years of data.

Significant at 5 percent level;

Significant at 1 percent level.

Refers to Equation 12 in the text.

Several variations of equation (12) may prove to be important. First, the relationship between log unemployment and log wages may not be linear. In this case, higher order polynomials of the local unemployment rate can be used in the estimation of (12). Second, since wages may not adjust immediately to variations in unemployment, lagged wages should be included, which is a common practice in the literature on the Phillips curve.20

Blanchflower and Oswald (1994) showed some evidence that the relationship between wages and the unemployment rate is convex but can be well-approximated by a simple log-linear function as written in (12). Column (4) in Table A2 checks for non-linearities in this log specification by including a square term for the log unemployment rate. It provides only weak evidence of some non-linearity in the log specification as the coefficient of the quadratic term is statistically different from zero only at the 10 percent level of significance. The shifts in the wage curve were not affected by the inclusion of the quadratic term. Other specifications (including the cube of the log unemployment rate, for instance) were more strongly rejected by the data.

Another debate in the literature on wage equation estimation refers to its interpretation, While in its pure form equation (12) relates the level of wages to the level of unemployment it could be more appropriate to relate changes in wages to log unemployment. The data flatly rejects this alternative model (not shown) and also a variant of it when lagged log unemployment rate is included (also not shown). A less radical dynamic specification of (12) (and the one actually used and rejected by Blanchflower and Oswald (1994)) includes lagged wages as a regressor. The results are shown in column (5). Because of the presence of a lagged dependent variable, regional fixed effects, and serial correlation of the residuals Arellano and Bond (1991) GMM estimator is used. The coefficient of the lagged term is deemed to be insignificantly different from zero.21 The wage-setting curve is still estimated to have shifted up within the sample period.

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1

Prepared by Marcello Estevão.

2

A law was passed in October 2002 setting the minimum wage for labor market entrants as 80 percent of the nationally-set legal figure in the first year of work and 90 percent in the following year.

3

These figures are based on data from the Polish Labor Force Survey (LFS)—a different source of information on Poland than the one shown in Table 3. See Appendix I for a discussion of the LFS data used in this chapter.

4

With increased skill mismatches between downsized employees and the newly-installed machinery, the government stepped up social transfers, including earlier retirement schemes, to curb increases in unemployment. This also contributed to declining employment rates. Keane and Prasad (2002) show that this policy avoided a widening of the income distribution in Poland and likely helped ease political resistance to privatization and restructuring.

5

That is even more remarkable because after 8 years of large declines in GDP, Russia posted an average 6 percent growth between 1999 and 2002. In addition, Polish authorities mentioned that growing exports to Russia after 1999 were concentrated in new sectors while the establishments which previously exported to Russia remained closed.

6

Because of data availability, the analysis is constrained to seven major sectors. The Labor Force Survey register more disaggregated information on a person’s industry of employment. But, because of sample size problems, a finer sector aggregation would not be representative of regional employment in each industry.

7

For a recent discussion on the pros and cons of shift-share analysis and its algebra see Esteban (2000). This section follows the nomenclature in Traistaru and Wolff (2002).

8

An important caveat needs to be made: This result may change somewhat if more disaggregated information for industry employment were available. For instance, some regions may have been highly specialized in industries exporting goods to Russia around 1998. But, in the analysis presented here, employment in these industries fall under the large “manufacturing and mining” category. On the positive side, Traistaru and Wolff (2002) found similar results for Bulgaria, Hungary and Romania using a similar level of data aggregation.

9

Even though changes in regional labor force participation create a wedge between employment growth and movements in the unemployment rate, regional employment growth and unemployment rates are strongly negatively correlated (-0.21).

10

The theoretical framework is based on Estevão and Nigar (2002) and Blanchard (2000). Layard et al (1991) present a pertinent discussion of different labor market models with equilibrium unemployment.

11

Individuals’ income when unemployed depends on institutional arrangements, as well as on labor productivity while engaged in home production. The use of prices and technological growth as proxies for productivity in home production and variation in benefits replacement rates is justified because unemployment benefits and social transfers are usually at least partially indexed to inflation and tend to follow developments in productivity. See Blanchard and Katz (1997) for further discussion on the use of this approximation for unemployment income.

12

The share of labor costs in total value-added is traditionally used as a proxy for the output/employment elasticity in the production function when workers are paid their marginal product, i.e. when firms hire labor on their labor demand curve.

13

Technological progress is assumed to be labor augmenting (Harrod neutral) to allow for balanced growth in a dynamic setup. The measure proposed here is a proxy for this variable and has also been used in Blanchard (1997). See Appendix II for a description of how this measure was derived for Poland.

14

These countries were Australia, Austria, Canada, Germany, United Kingdom, Ireland, Italy, Netherlands, Norway, South Korea, Switzerland, and the United States.

15

The first-step equation (11) is estimated using first-quarter LFS data from 1995 to 2002. The matrix of individual characteristics is comprised of: age, gender, marriage status, seven categories for the level of education (completed degree), 22 occupation types, 32 sectors of employment, company ownership (private or public), dummies if the job is temporary or if the worker holds an additional job, number of months in the current job and town size. Some standard transformations of these characteristics were also included: the square of age, and interactions between the education dummies, and age and age square, to account for non-linearities between work experience, human capital and wages. Individual hourly wages are equal to reported monthly net (of social security contributions) earnings of paid employees divided by actual weekly hours of work. The estimated coefficients tend to conform to standard priors: returns to education are positive, length of job tenure (months of work) has a positive coefficient, wages increase with age at a decreasing rate, married individuals tend to receive larger wages, industry and occupation dummies are jointly-significant. The actual estimates can be obtained upon request from the author.

16

The unemployment rate according to official data on the number of people registered in the labor offices tend to be lower than the LFS-derived measure. The forecast presented in the staff report uses the registered unemployment rate data. So, the NAIRU consistent with the forecast would be a bit lower than the one discussed here.

17

Notice that part of the decline in investment could be related to the long-run adjustment process of the capital stock depicted in Figure 3. Nevertheless, an evaluation of such an effect is outside the scope of this chapter.

18

Lagged unemployment rates were used as instruments for an equation like (12) in the case of France. Here, estimates using lagged unemployment rates as instruments produced coefficients with very wide standard errors, and do not seem appropriate for the Polish data.

19

A large administrative reform in Poland in 1999 re-configured the regional breakdown from 42 to 16 entities. Therefore, original LFS data do not provide consistent information on region of residence throughout the sample period. The author thanks Hanna Strzelecka from the GUS, and Robert Sierhej and Cyrus Sassanpour from the IMF Resident Representative office in Warsaw for their help in obtaining the modified version of the LFS data. Dorota Holzer-Zelazewska from the World Bank and Beata Kudela from the IMF gave great help with data documentation and survey translations. Jan Rutkowski from the World Bank provided crucial insights on data availability for Poland at the beginning of this research.

21

Following the suggested procedure in Arellano and Bond (1991), the coefficient estimates and their standard errors are obtained from the robust one-step version of their GMM estimator. On the other hand, the model evaluation statistics reported at the bottom of column (5) are the ones obtained from their two-step estimator. The over-identifying restrictions imposed by their model cannot be rejected and the hypothesis of serial correlation of order one (but not of order two) are confirmed.

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Other IMF Content

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Cover IMF Staff Country Reports
Republic of Poland: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2003: Issue 188
Publisher:
International Monetary Fund
ISBN:
9781451831917
ISSN:
1934-7685
Pages:
44
DOI:
https://doi.org/10.5089/9781451831917.002
  • View in gallery

    Poland: Fiscal Policy Stance, 1995–2002

    (In percent of GDP)

  • View in gallery

    Poland: Public Debt with Unchanged Fiscal Policies After 2003, 2000–16

    (In percent of GDP)

  • View in gallery

    Poland: Deficit and Debt under Alternative Growth Scenarios, 2000–16

    (In percent of GDP)

  • View in gallery

    Poland: General Government Deficit under Alternative Interest Rate Assumptions, 2000–16

    (In percent)

  • View in gallery

    Poland: Public Debt under Alternative Growth Assumptions, 2000–16

    (In percent)

Poland: Fiscal Policy Stance, 1995–2002

(In percent of GDP)

Poland: Public Debt with Unchanged Fiscal Policies After 2003, 2000–16

(In percent of GDP)

Poland: Deficit and Debt under Alternative Growth Scenarios, 2000–16

(In percent of GDP)

Poland: General Government Deficit under Alternative Interest Rate Assumptions, 2000–16

(In percent)

Poland: Public Debt under Alternative Growth Assumptions, 2000–16

(In percent)