A few remarks on the case study of Jan Krzysztof Bielecki EY Chairman of the Partners Board

3 March 2015 Political and economic transition can go hand in hand

► Contrary to intuition, more political turnover (shorter tenures), less power of political executives and more fragmented political system (multi party coalitions) supported the reform progress for the transition countries in the 1990s (EBRD, Transition Report 1998). ► In countries with successful reform effort (e.g. Poland), with some delay, economy prospered consolidating new institutions and democracy (EBRD, Transition Report 2014). ► While some economies thrive without much democracy (e.g. China), the new research suggests a casual link between democracy and GDP growth (Acemoglu et al., 2014).

Average tenure of government and EBRD transition Real GDP per capita evolution in indicator* (1 - little progress) in transition countries transition countries (1989 = 100) 4,0 210 Poland Czech

8 190 Estonia

9 Poland Republic

9 3,5

1 Estonia FYR

r 170

o Lithuania Slovakia SloveniaMacedonia Croatia a Latvia Romania t

c 3,0 150 i Kyrgyzstan d Bulgaria Romania Kazakhstan Lithuania n i Georgia 130 n Moldova Latvia

o Armenia

i 2,5

t Albania i Ukraine 110 Bulgaria s

n Azerbaijan a

r Uzbekistan t 2,0 90

D Hungary

R Tajikistan

B 70

E 1,5 Belarus Russia 50 Ukraine Turkmenistan 1,0 30 0 20 40 60 80 100 120 average tenure of government 1989-1999 (months) Source: EBRD, Transition Report 1998 Source: EBRD, Transition Report 1998 (data for 1989-1996), IMF (data for 1997-2014) * Scores reflect the assessments of EBRD country economists.

Page 2 Polish economic growth has been accompanied by the declining income inequality

► In Poland income inequality has been declining since 2005. ► In 2013 the distribution of incomes was more equal in Poland than in the most EU countries.

Gini coefficient* of equivalised** disposable Gini coefficient* of equivalised** disposable income before social transfers income before social transfers (pensions excluded from social transfers) (pensions excluded from social transfers) in 2005-2013 for selected EU countries in 2013 for selected EU countries 46,3 45 45 More income Lithuania 43 43 More income inequality Latvia inequality 41 41 39 Estonia 39 37 37 35,8 35 35 33,9 EU-28 33 (average) 33 31 Hungary 31 29 Poland 29 27 27 Slovenia 25

25 l ) c s y y y k n a a d d e a a e a a a n a d i l i i i i i i i i i a m r r m e l d n c c t e n n r n

Czech k a v n n n g a n u a a o g b t t n i a e n a d a a a a a I e l l o a u p a l g d a u a a g t e o a t e m g r v l l v m

Republic n o l u e n r r r r g S p i s L r m r n r e o w e o h u u o n I l P F e l C e F o G i t e E e v

Slovakia i S B B P S H S h R a K R D L t G

Source: Eurostat ( e h d 8 c e * 0 - perfect equality (everyone has the same income) N t 2 e i - z n

100 – perfect inequality (only one person has all the income) U C U ** Equivalised income is income that takes account of the differences in E a household's size and composition. Source: Eurostat

Page 3 Polish producers have been benefiting from improved labor cost competitiveness

► Polish labor costs have been growing relatively slow in relation to labor productivity. ► Effective nominal exchange rate in Poland has been relatively stable in the long run. ► As labor costs have not been domestically overinflated or affected by exchange rate mechanism, Polish producers have been gaining international cost competitiveness (measured by real effective exchange rate).

Nominal unit labor costs* in Poland and ULC-deflated real effective exchange rate in Poland selected OECD countries (2000 = 100) and selected OECD countries (2000 = 100) 180 180 Beginning of Hungary 170 Appreciation Slovakia the global OECD (average) 160 160 financial crisis Czech Republic 140 150 Slovakia Hungary 140 Czech Republic Italy 120 OECD (average) 130 Greece Greece 120 100 Poland Germany 110 Germany 80 Poland 100 United States 90 60

Source: European Commission (AMECO database) *Nominal unit labor costs = (compensation of employees/number of employees)/(GDP at constant prices/total employment)

Page 4 Entrepreneurship has been playing an important role in Poland (especially during the economic transition)

► Small businesses were crucial for the Polish economy during the economic transition. ► The role of self-employed and small enterprises in Poland is still more important than in most OECD countries. ► Relatively many people in Poland that are not currently involved in any entrepreneurial activity intend to start a business within three years.

Share of self-employed* in total Percentage of individuals aged 18-64 who employment for selected countries in 2014 intend to start a business within three years in Poland and selected countries in 2014 % total employment % 25 35 31,7 21,6 19,7 30 20 15,9 25 14,4 14,9 19,7 15 20 10,3 15,1 15,6 9,0 9,8 13,9 10 15 11,4 11,5 12,1 6,3 9,8 10 5,9 5 5 0 0

Source: European Commission (AMECO database) Source: Global Entrepreneurship Monitor, 2014 Global Report * data includes self-employed in agriculture and self-employed that are probably not entrepreneurs (e.g. self-employed because of tax optimisation)

Page 5 Infrastructure investment in Poland was important during the crisis and remains a challenge in the long run

► After joining the EU Poland has experienced a surge in public investment, especially in road infrastructure. It helped to boost demand in Poland during the global financial crisis. ► The quality of Polish infrastructure has significantly improved, supporting the long term growth fundamentals. However, there is still a substantial infrastructure gap between Poland and other countries from the region and OECD.

Length of motorways, length of expressways Assessment of quality of overall infrastructure and public investment in Poland (e.g. transport, telephony, energy) for Poland and selected countries (1 – extremely underdeveloped, km % of GDP 7 – extensive and efficient) 3 500 7 7 Expressways and motorways length 3 044 3 000 2001-2014 CAGR: +11,5% 2 726 6 6 2 418 Catch-up effect 2 500 Poland joins 5 5 the EU 1 807 2 000 4 4 1 532 1 371 1 500 1 217 3 3 960 992 784 809 1 000 738 631 631 2 2 500 1 1

0 0 0

motorways (left axis) expressways (left axis) 2005-2006** 2013-2014*** public investment (right axis)

Source: Central Statistical Office of Poland Source: , The Global Competitiveness * Estimate based on GDDKiA 2014 annual report Report 2006-2007**/ 2014-2015*** (Executive Opinion Survey)

Page 6 International tax issues and development of EU Energy Union should be high on the future policy agenda

► Tax competition, tax avoidance and tax evasion constitute a major policy challenge for the developed countries and for the EU common market. ► Regulatory changes and investment are essential for the development of EU Energy Union that may boost European cost competitiveness and increase diversification of energy suppliers.

Changes between 2000 and 2014 in statutory Forecast of primary energy combined (central and local) CIT rates (max rate import dependence* for EU-28 countries pp. if progressive) in selected OECD countries % 6 57 4 56 2 0 55 -2 -4 54 -6 53 -8 -7,3 -10 52 -12 -11,0 -14 51 -16

) 50 c y y s y k c y s d a g n e e d d a a n a d i l i i i i i i r m r m r e l l l n d c a e c n r e n n n a n n a t t a o a u u g b b a t a e n i n a d a a a w I l s l l e o p r l a g d o a u u r e a g t t a t m e r r l l v m e u o n r n r g b S p p i s s o r r r n e S e e w o I u n A F P e l e u G e i F z e e E m v N t B S d H i h S R R A K e a D G t e ( x w t e k h i d u S c a D n e N L t v e i C U z o n l E C U S O

Source: OECD Source: European Commission, „EU Energy, Transport and GHG Emissions Trends To 2050 Reference Scenario 2013”, 2013 * (Import-Export)/(Gross Inland Consumption + Consumption of International Bunkers)

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