Interview with Grzegorz Kolodko
(FINANCIAL TIMES; Jul 31, 2002)
When Grzegorz Kolodko took office on July 6, foreign investors worried the left-leaning 53-year-old economist might put Polish state finance on a risky course of fiscal expansionism. Mr Kolodko has since shunned the press, relaying his policy plans via a handful of terse public appearances.
Mr Kolodko broke his silence on Wednesday in an interview with the Financial Times, his first with the foreign media since taking office. Exuding optimism, the minister said Poland remained on track to reduce its fiscal deficit to 3 per cent of GDP by 2005 and join the eurozone by 2006. He also defended a controversial plan to aid ailing companies by clearing their books of tax and other arrears to the state in exchange for a promise to restructure.
This is an abridged transcript of his interview:
Q: Newsweek Poland this week called the cabinet you serve Poland's "most anticapitalist government" since 1989. How do you respond to the assessment?
A: I think this government is very sympathetic to further structural and institutional reforms which would bring Poland to a full-fledged market economy. And if you compare it with the previous governments, I wouldn't say there's any delay or postponement of privatisation or other structural reforms.
Even before I joined the government, the [economic] programme of this cabinet - and not without good cause - has been coined "Entrepreneurship First of All". And the government does mean it... I think the difference between this government and maybe other political options is that there's not only great concern towards further opening up, privatisation, liberalisation, integration into the global economy - the European Union in particular - but there's also concern about the social aspect of the changes of the great change and of restructuring... To be brief, I would say that my government, Prime Minister Miller's government, is in a difficult quest for capitalism with a human face, with a Polish flavour.
FT: The National Bank of Poland has said that the floating-exchange rate is the best regime for Poland. Do you agree with this?
A: There is a joint commission which started to work immediately after I took office, and they are having twice a week a meeting which is discussing the issues, especially as concerns medium-term strategy from the angle of the best way to introduce the euro in Poland in due time. For the time being, we have the floating exchange-rate regime, and the discussion continues... Two years ago, just prior to the floating of the exchange rate by the central bank under the government of then-Prime Minister Jerzy Buzek, I published an essay entitled, "To tie or to float?"
As you know from elsewhere, the IMF has changed its mind recently too, and they are rather reluctant now to support any other regime than the extremes: either the floating system or the pegged or fixed [one] - because also of the very bad experience over the years, especially in the '90s, with all the other intermediate systems like a crawling peg, a crawling devaluation, dirty float. I still stick to my point that under the Polish circumstances either a floating or maybe a fixed exchange rate could be considered, especially since we have to fix the exchange rate against the euro in due time. So the question is, which due time?
FT: Before you took office, you suggested various specific exchange-rate regimes, including the introduction of a currency board, or government intervention to devalue the zloty and tie it to the euro. Do you still support these solutions?
A: Under Polish law the exchange-rate regime is the joint concern of the central bank and the government, which in turn is independent from the central bank. So what I have said as a researcher - very much independent - was very well argued at the moment. But now I am in real politics, and we are discussing issues with the central bank, and the exchange rate regime will be according to the agreement between the independent central bank and the government...
The problem is that the business sector, including the private one, including foreign compaines operating in Poland, are complaining of two things: first, that money's too expensive and credit is too costly, which is causing them very difficult problems; [second] that the exchange rate is not competitive enough if they are outward-oriented. Making this point still more general, I think that the chance of Poland to be a fast growing economy - and that is the most important target of my policy, to bring my country back to the path of fast growth in the range of 5-7 per cent, as it was in 1994-97, when I was previously in office - is based on the concept of export-led growth, which must replace import-fed growth we have observed recently...
So [the question] that arises is, is the current exchange-rate mechanism best? As long as it is seen as just an instrument of our economic policy - and here we differ a bit with the friends from the central bank, so we keep talking - the discussion is going on, but for the time being, the system is as it is.
FT: But you do support some kind of intervention? And would this intervention involve some future peg to the euro for the zloty?
A: That is what we must see - how this situation evolves, and how much the exchange rate would secure the competitiveness of the Polish economy. If under the current exchange rate regime the real exchange rate will be such that it boosts exports and contains a little bit of imports, forcing also the substitution of part of the excessive imports toward the domestic market, raising therefore the range of capacity utilisation and increasing the amount for containing unemployment, then it will be fine. Then we will not need any further intervention. But if it doesn't work, then we will look for this or that alternative. But that is what is being discussed until we see how the exchange rate really evolves in the short and medium term...
My first concern is to do what I can do on the government side - with respect for the independence of the central bank, even if we differ as far as certain evaluations or approach as far as policies are concerned. I will do everything possible to have this policy better co-ordinated, including efforts to bring the fiscal deficit down much further than envisaged or planned thus far.
My starting point is that the deficit is hovering around 5.5 per cent of GDP, which is a pity. It shouldn't be there - for a number of years,including my years in office previously, it was below 3 per cent... So [my] policy is to contain this fiscal deficit, cutting certain expenditures by raising the fiscal discipline, by gradual absorption of the shadow economy - altogether by widening the fiscal or tax basis and on the other hand we will continue the downward adjustment of the tax rates, including corporate taxes, to make more room for capital formation and to make the Polish economy more competitive in Europe and in the global economy. And if we go in this direction, I think that also - being under strong pressure from the market - we may expect that real interest rates will go down. Which in turn causes the falling of the costs of public debt. And which will make money and credit more accessible for the business sector, including for small and medium-sized enterprises, which are already form about a third of the working labour force, because as you know we have unfortunately extremely high rate of unemployment - approaching 18 per cent. And within this framework you must see the exchange rate.
Again, this is the means of the policy, not its end - and maybe the difference between me and other policymakers is that I do not confuse the ends with the means.
FT: I've heard reports that the government might be considering changing Article 24 of the central bank charter, which governs relations between the government and the central bank in setting exchange rate policies. Is it true you're looking into this?
A: No; I don't know where you've heard such rumours. I said it firmly and clearly, both in parliament and in my first interview for the Polish press: that the central bank is an independent institution and if we change the exchange rate system, it will be done only in agreement between the central bank and the government.
FT: So you don't support pressure tactics; you don't support the law - now before parliament - that would increase the size of the Monetary Policy Council?
A: I'm against that.
FT: So any change in the exchange rate regime will have to come with the central bank's agreement?
A: Yes, because this is according to the constitution. The problem is that I respect the constitution, by all means, but I must also must respect the economic laws. And there are certain problems sometimes. While we may differ as far as the views are concerned, I hope we won't differ as far as the long term interests of Polish economic development are concerned. So we are discussing how to accomplish the [other] target, which is fast growth and bringing Poland on our behalf into the European family. And we are discussing the technical matters with the central bank... For the time being, these are technical discussions between the two institutions. So maybe this is causing some rumours.
FT: What is your target for the 2003 budget deficit?
A: I'm working on the draft budget - what I got here as a legacy from my colleague and friend Belka is 5.5 per cent of GDP, and definitely that is too high... I would be happy if we start from 4 [per cent of GDP] - say 4.9 per cent. I'm looking for a way to contain the fiscal deficit next year compared to the previous year and this year by at least half a percentage point, and if I find a way to cut it further, then I will not hesitate to push to this end. This isn't possible next year, but I would like to see the deficit below 3 per cent again in 2005.
FT: And then entry to the eurozone when?
A: Six years ago, I prepared a programme which was part of my strategy for Poland at that time, which was called "Euro 2006". At that time, the criticism was that this is premature - first of all, there's no euro; second of all, how can you be sure we'll be in the European Union? And why isn't it better to keep our national currency?
Since then we've had the adoption of the euro, the biggest success in European economic policy since the second world war. And now I'm saying what I said in 1996: this wasn't an illusion, it was a reliable vision. Now, the question is, are we able - assuming we join the European Union on 1st July 2004, which I am convinced is going to happen - which will allow us to raise our competitiveness and help close the gap between my contry and the other countries of the European Union - 2006. And even if it doesn't happen, and we do it on say, 1st January 2007, I will be saying that in the United States it will still be 2006 because of the time difference. One day will not make a difference.
I run marathons. Recently I ran the marathon in Toronto. My aim was to make it in four hours, and I did it - in three hours, 38 minutes. That made me happy. Then in January I ran the San Diego marathon, and my aim was to make it in less than four hours. I made it in four hours seven minutes, but I was very happy that I did make it.
You may apply this way of reason to Poland's joining euroland: I think that the most important is not the date, it's not the day, it's not the moment. The most important is that we play the 'minimax game' - we will maximise our gains, and minimise the costs we have to pay for such an accomplishment. So take my word that I will do whatever is possible to have Poland there in 2006, but I wouldn't consider it to be a falure if it was 2007 - the same way I wouldn't consider making the San Diego marathon in 4:07.
FT: Your "anticrisis package" [offering to bail out troubled firms in exchange for a pledge to restructure] has come under criticism. Why should the state help chronic non-payers?
A: This is the proposal: by means of stick and carrot, take it or leave it, you may now restructure financially, to get liquidity, to get back credibility, or you must be liquidated. So this is the proposal: to be cured or to die, to leave the market, or to be able to perform in a competitive way on the market. This is an offer - take it or leave it - to all companies, whether public or private, foreign or domestic - in exchange for something.
For that reason, I am positive it will fuel the Polish economy and even if I will not give you now the precise figure, I am positive that the rate of GDP growth, especially 4th quarter of this year / 4th quarter of last year, will not be much higher than the first semester of this year/ first semester of last year, but will be even higher than envisaged by the government thus far. I think it will be within the range of 2-3 per cent [compared with estimates of 1.5 per cent]. Fourth quarter, if everything is under control, the execution of this program is carried out in a reasonable way, then we can exceed the rate of growth of 2 per cent for the fourth quarter, and the higher the better.
FT: Some economists worry that the anticrisis package could have a deleterious effect on the budget. What do you say?
A: This exercise will have a positive influence on the state budget because the arrears which will be written off are only those that are nonperforming, and where there is no chance to collect them. So if you want an international perspective, I'm very supportive for writing down 99 per cent of Mozambique's debt because there isn't a way to collect this debt. Of course, it's also my concern that what is the follow up? Do we have the mechanism to ensure that the problem is not reproduced?
FT: Doesn't it also encourage moral hazard by telegraphing to conscientious taxpayers that they are naive for keeping their payments current?
A: No, and I'll tell you why. First of all, the proposal is something in exchange for something. And this is nonperforming debt relief in exchange for a minor restructuring fee and a restructuring program. And one has to compare this programme with the alternative: that we do nothing. Successive finance ministers kepty trying and kept trying [to collect taxes from these troubled firms], and the problem was the same as with Mozambique. It's that simple.
But there is the question of moral hazard. What about companies that pay tax on a regular basis? There is also a positive proposal in the package, so-called tax premium: we will write into part of the costs of liquidity caused by overdue payments of these businesses into the tax costs, so they will be deducted to the tax base. So the good firms will get a little premium, and the bad firms will get a chance to get liquidity and restructure financially. Not only in the short run - I will collect more money because of the restructuring fee - but for all of us taxpayers it is giving us that they will not be lossmakers but profitmakers and pay their taxes. I'd like to see this in the cash flow in next year's budget...
We are also looking at a new law in the government on August 13, then presenting in parliament by the end of August - a new law on bankruptcy. There is something new in our system which has been quite weak in our system, which I refer to as Title Four: Poland's Chapter Eleven - an institution which will clean the economic structure from ailing companies in a reliable period of time, bringing this endeavour clear procedures: either you are swimming or you are drowning...
We are introducing the new bankruptcy law, and we are giving to them both the stick and the carrot: either they will restructure and they will be able to perform... but certain firms will not be able to take advantage of my proposal. They will go into bankruptcy, and they will be liquidated. It's a complex programme.
I'm not protecting old, uncompetitive activities; I'm trying to provoke a move into the right direction, which is faster growth. Our concern is that there be faster growth of new businesses than the rate of loss of old ones.... There are already positive trends in the Polish economy which are contributing to growing output. If we block a series of bankruptcies that would otherwise happen, we will have more of this growth. That's my reasoning.
FT: Standard & Poor's has downgraded two of your ratings. How much of a setback does this represent to your efforts?
A: It has nothing to do with my programme and my policy. The warning [from S&P that downgrades were possible] was 3-4 weeks ago, and was based on an evaluation of medium-term financial strategy. But I regret that it has happened. I think that the market will make its own judgement, and there's much more good news as far as the future of Poland's economy is concerned, than the bad news, and I think that especially long term investors remain bullish as far as our arguments are concerned. And I'll do everything possible to convince the agencies that they should change this rating soon.
I think they'll see we're serious about fiscal discipline, that the fiscal deficit is falling, that there's sound coordination of fiscal and monetary policy. Definitely they will see that investors are putting trust in the Polish economy. They will share more of my optimism. But I know these institutions. I know the way they look at the markets, and I understand there were causes for such concern. But I will deliver simply more and more good news. And I think the experts for these agencies will appreciate this.
FT: When are you hoping for this?
A: I hope they can change their minds even before Christmas. When they see that next year's budget is much better than this year's budget, and that it's built on an accelerated growth rate for Poland's economy, and that we're on track to join the European Union, they'll see the good news. Words are words and deeds are deeds. Now we are delivering words. What investors are looking for are the deeds. We will deliver these deeds and this good news, and the markets will react in the proper way. I'm very much a fan of financial investors, and I'm very much aware that we need co-operation as far as financing of the public debt is concerned. They're doing very good business in Poland, and there's no reason why that would change.
FT: Polish finance ministers have, on average, notoriously short terms in office. How long do you think you'll hold the job?
A: My predecessor, Marek Belka, was finance minister twice, but only for eight months and 16 months altogether. But when I was finance minister the first time, I was there for three years. And that was the longest tenure of any finance minister in the period of Poland's post-communist transformation. I hope I will repeat it.
The time horizon I'm working with is the end of the constitutional term of this government - which is to say three years or even more from now. So we have three years, and maybe many more ahead of us. I'm not sure that's going to happen, but that's my time horizon. So I'm attacking the issues which are very difficult, but by and large we know how to approach them.