Polish Reforms: The Job Is Only Half Done

ONE of the best examples of change in Poland, is found, appropriately, on New World Street. The Warsaw Stock Exchange -- epicenter of burgeoning capitalism -- makes its home in what used to be the bastion of totalitarian rule, the Communist Party headquarters.

The buzz of activity at the exchange, and the general bustle on central Warsaw's sidewalks, shows the entrepreneurial spirit that has come alive in the five years since communism's collapse. Among the former communist Soviet bloc nations, Poland is a leader in transforming its old planned system to a free market.

It is alone among Central European nations in recording economic growth every year since 1992. More than 50 percent of gross domestic product now is generated by the private sector.

But government officials and economists admit that more must be done to ensure the nation's entrepreneurial enthusiasm matures into a sound market economy. Daunting obstacles -- including social welfare reform and the need to privatize large-scale enterprises -- currently stand in the path.

Reform difficult

''In many ways the policy making environment is now more difficult than at the start of the [economic] transition,'' the Organization for Economic Cooperation and Development, based in Paris, says in a new survey of Polish reform efforts.

''Poland's transformation is far from complete and maintaining the momentum of reform is essential in ensuring a successful outcome,'' adds an International Monetary Fund report released last October.

Inflation and unemployment, remain stubbornly high -- at around 30 percent and 15 percent respectively. The country is also saddled with much debt and a budget deficit, the legacy of communist-era fiscal policies.

The government is projecting continuing robust growth, averaging around 5 percent a year through 1997, and expects the inflation rate to come down into the single digits.

But meeting popular expectations is proving difficult, and the going appears to be getting tougher. The annual inflation rate was projected at 29.7 percent in December, significantly above government forecasts, raising doubts that the target of 17 percent inflation in 1995 can be met. IMF Director Michel Camdessus recently described Poland's high inflation as its ''Achilles' heel.''

To tame inflation and keep state finances in order, rapid progress must be made in restructuring social welfare and in privatization, experts say.

''In the absence of privatization, there's the risk that inefficient state enterprises will keep pressing for subsidies. This could undermine public finances,'' says Stanislaw Gomulka, a London School of Economics professor who serves as an adviser to the Polish Finance Ministry.

The governing coalition, headed by Waldemar Pawlak of the Peasant Party, has been wary of privatizing big factories because such moves would likely cause a rise in unemployment, experts say. About 440 large-scale enterprises have been earmarked for privatization but the plan hasn't moved ahead.

Further, the coalition partners are undecided over which industrial sectors -- particularly coal and energy -- should remain in state hands, says Jerzy Szmajdzinski, general secretary of the Democratic Left Alliance, the largest coalition party.

As for social welfare reform, about 9 million of Poland's 38 million people receive some sort of state pension. That means the non-farm worker to pensioner ratio is roughly 1 to 1 -- an indicator of yawning budget deficits and suffocating taxes. Many pensioners are under 65, thanks to communist-era work rules permitting early retirement.

Many economists, and even some politicians such as Mr. Szmajdzinski, say the current social welfare system represents a time-bomb that must be defused. However, little is being done. Presidential elections are approaching and no politician wants to risk alienating voters by introducing austerity measures.

''We have a populist president,'' Mr. Gomulka says, referring to Lech Walesa, ''and the governing coalition is responding in kind. They aren't ready for change.''

A crucial question for progress on reform is whether Poland's small, but growing number of ''haves'' now exercise enough influence to convince the government to press on. The coalition is currently under pressure from the legions of ''have-nots,'' who have emerged since the launch of ''shock therapy'' in 1990.

With further reforms in a state of limbo, foreign investment has begun to slow. In 1994, foreign investment totaled $1.35 billion, 19 percent lower than 1993's $1.65 billion.

Uneasy entrepreneurs

Meanwhile, some Polish entrepreneurs say they're starting to feel uneasy about the business climate. Lower taxes, greater liberalization, and privatization are needed to improve the mood, says Jaroslaw Mulewicz, a Warsaw business consultant.

''The failure to privatize means giant enterprises are being subsidized and not paying taxes,'' Mr. Mulewicz says. ''That spoils the mood. Private businessmen say 'if they don't pay taxes, then why should I.' There's a lack of any moral conduct. People bend the law to meet their needs.''

Gomulka and other economists warn that if the present problems aren't quickly solved, Poland may fail to achieve a chief objective; rapid integration into the Western economic and political order. The European Union, for example, is unlikely to seriously consider Poland's application for membership until its economy rests on a solid foundation.

The inability to integrate with the West could leave Poland in what has proven to be a historically vulnerable position -- stuck in a geopolitical no-man's land between Russia and the West.