Cheer up

Poles and outsiders alike are too gloomy. Despite the country's fractious politics, its prospects are bright and its problems solvable, writes Edward Lucas

WARSAW airport immediately strikes the visitor as oddly cramped for something that seems so modern. That is because travel, like so many other things in Poland, is booming. A new airport building opened in 1992, replacing the ghastly concrete slum built by the communist central planners who ran Poland until 1989. The new building was designed to handle an ambitious 3.5m passengers a year. Last year it handled 7m, and this summer a new $225m terminal will open, raising capacity to 10m. Other Polish airports too are expanding at a cracking pace. The one at Katowice had just 16 passengers in 1991. In 1995 it had 15,000 and last year 1m.

Poland has become modern and prosperous on a scale that some still find surprising. Warsaw bristles with skyscrapers, and most of Poland is online. At the airport, three wireless internet networks compete for travellers' laptops. Across the road is a Marriott hotel, bustling with young, middle-class Poles in-between flights and business meetings, fiddling with their BlackBerries and chatting on their mobile phones.

But foreign travel is not a pastime only for Poland's rich. In another part of the airport, a large concrete barn known as the "Etudia" terminal is packed with Poles going to and from work abroad. Some are in suits; for Polish companies, low-cost travel is a boon, enabling them to do business abroad much more cheaply. But many of these passengers are the sort of people that you would not find in the Marriott. The older and more tired-looking ones are probably heading abroad for casual jobs in agriculture, construction or domestic service. At least such work brings in more money than similar drudgery at home.

The numbers working abroad are huge, even for a country with nearly 40m people. Since 2004, some 200,000 Poles have gone to Ireland, and probably over half a million to Britain. The main reason is that there are few jobs at home, especially for the young and the unskilled. General unemployment is running at 18% and youth unemployment at a shameful 40%, partly because of a demographic bulge, but also because Poland's hefty pension and social charges make its labour expensive. For a couple with two children, this tax "wedge" is 42%, the third-highest in the industrialised world. Only half the working-age population is active in the labour market (see chart 1, next page).

Migration and unemployment are big topics in the Polish media, which are by far the best of any post-communist country. Three heavyweight dailies, a zingy tabloid and three serious colour newsweeklies are on sale at every news-stand. But some news-stands are better than others. The state-owned chain, Ruch, offers cluttered layout, dim lighting and languid, even snarling service. Its main competitor, Relay, is much more user-friendly. That is because its smiling staff are the owners and employees of tiny businesses that rent the premises from the owner of the brand and use family labour--teenage children, spouses and parents--to avoid the job-killing tax and social charges. The Polish business environment may be full of obstacles, but the country's entrepreneurs are amazingly good at circumventing them.

Travel from the airport is revealing too. Rich Poles are met in limos; slightly poorer ones collect their cars from the hotel car park; the unwary take overpriced taxis, having failed to find the regular sort on offer round the corner. The poorest travel in the draughty, slow, old, dirty and pickpocket-infested bus that grinds its way to the city centre.

The best bits of Poland are now indistinguishable from their counterparts anywhere else in the world; the worst bits, including public services such as transport, are egregiously bad. Politicians, so far, have done little to dent that. "The Polish emerging market works much better than the Polish emerging democracy," says Grzegorz Kolodko, a former finance minister now based at one of Warsaw's top business schools.

As you inch into town, cast an eye on the concrete-panelled fences to right and left, and the vast tracts of former military land behind them. Those on the right have been sold off cheaply in murky circumstances under past governments: a good example of how bad public administration in the past has cheated the taxpayer, disillusioned voters and perhaps enriched crooks. On the left, behind a display of decaying tanks and rusty fighter planes, is the huge 60-hectare Zwirki site, centred on a shabby 1970s concrete conference building where the Warsaw Pact's generals once deliberated. That would be worth perhaps $100m if the government were to sell it simply as land. But the defence ministry is looking for a different, more lucrative sort of deal in which it would share in the profits from any development. That sort of deal would have been unthinkable when Poland's military property agency was run by bureaucrats. But now the agency is headed by a forceful retired Anglo-Polish investment banker, Maciej Olex-Szczytowski, who has moved to Warsaw to work, pro bono, for the new government, to help it live up to its motto: "Cheap and efficient".

Open for business

"European quality, Polish prices, Czech VAT." The sign captures Polish capitalism in a nutshell. Marek Glinkowski's doors and windows business is based in Poland, but as close to its customers in the Czech Republic as is physically possible, in the last building before the bridge over the river Olza that links the Polish city of Cieszyn with its suburb of Tesin in the Czech Republic. Mr Glinkowski's firm epitomises the way Polish businesses are now attacking the newly opened markets of neighbouring countries--which is one reason for the leap in Poland's exports from $61 billion in 2003 to $95 billion last year.

Until Poland joined the European Union in May 2004, Cieszyn, known in Habsburg days as "Little Vienna", was a pretty but rather depressed town on Poland's periphery, isolated from the rest of the country by bad roads and from the rest of Europe by the border. Getting goods across the bridge was difficult because of complicated paperwork and unpredictable queues. Mr Glinkowski says his business, founded in August 2004, simply would not have been possible before entry into the EU. Thanks to Poland's big domestic market, doors and windows there are 10-15% cheaper than in the neighbouring Czech Republic. Mr Glinkowski now has a sales force of four based in the Czech Republic, and 12 Polish craftsmen who drive over the border to install the windows.

For small firms such as Mr Glinkowski's, Poland's entry into the EU has transformed the business environment. Instead of being isolated behind customs barriers, they can sell their wares anywhere. Mr Glinkowski's biggest problem now is Poland's own bureaucracy, particularly as regards taxes. The tax rates are not much higher than those of its post-communist neighbours, but their administration is hugely more bureaucratic. Whereas the Czech tax authorities deal with his value-added tax in just 60 days, in Poland getting VAT refunded on exports takes around six months. And tax is only one of myriad administrative problems.

These are not just the usual entrepreneur's whinges. In the World Bank's latest comparison of the business environment in different countries, Poland comes 54th, behind such places as Kuwait, Tonga and Armenia. It is beaten by all its post-communist competitors in central Europe, except stodgy Slovenia. The cost of setting up a firm, for example, equals 22% of GDP per person, against an average of 13% in the post-communist region as a whole. In Poland an everyday business project--building a warehouse--involves 25 bureaucratic procedures and takes 322 days, compared with 21 procedures taking 252 days elsewhere in the region (and a lightning 70 days in America).

A half-hour drive to the north it is the same story, of success and frustration, but on a larger scale. Mokate, a privately held company with 1,000 employees and sales of 300m zloty, is Poland's best-known producer of prepared drinks. Some are strikingly, even piratically, similar to international brands of coffee; others are inventive to the point of oddness. The main product line is foil-packed cappuccino powder (flavours include vanilla and almond). Then there are teabags, regular, flavoured and even one spiked with a patented form of powdered alcohol to produce a mulled wine of sorts. Post-communist consumers are lively experimenters.

Mokate is a third-generation family firm. When its pre-war restaurants and shops were nationalised under communism, the Mokrysz family started up a private building-supplies firm, which survived even though the company claims it suffered from "persecution". Certainly Mokate has done remarkably well since 1990, increasing its sales more than fiftyfold in 15 years after moving from cement in sacks to coffee-creamer in sachets. EU membership has greatly boosted its exports and the firm now sells to 55 countries.

Whereas Mr Glinkowski's success is based on a low-cost, low-tech product, Mokate's edge is in high technology and know-how. Its ultra-modern powder tower rises like a skyscraper over a gleaming white R&D facility, looking slightly out of place in the impoverished countryside around it, where a decrepit coal mine, now closed, used to be the main employer. Food scientists produce a stream of new consumer products.

But even though the ingredients of the two firms' success are different, Mokate's spokesman, Jerzy Chrystowski, is just as frustrated with the government as is Mr Glinkowski. "We just want the rules to stay the same," he moans. "They are always changing: VAT, corporation tax, excise duty. One day all our vendors, even tiny roadside stalls, had to buy cash registers. Now they are told it's not necessary after all. And everything is overformalised and slow. The procedures are too rigid."

That is the big challenge facing Poland, and the central subject of this survey. The country's private sector is increasingly able to compete with the rest of the world, whereas the public sector, wasteful, expensive and bloody-minded, is not. That is one reason why up to a million Poles are now working abroad. But this migration, symptomatic of Poland's problems, also holds the key to their solution.

Article forms part of a survey on Poland in this issue of The Economist. Author says that despite Poland's fractious politics, its prospects are bright and its problems solvable.

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