Interest rates may decrease, but the economy needs more than that

Jerzy Hausner (photo NBP/ A. Deluga-Góra)

MPC's last announcement makes it clear that the process of easing monetary policy has begun. We are witnessing an economic slowdown when it is difficult to keep the level of public debt in check. Our economy's sustainable development requires structural changes - says Professor Jerzy Hausner, a member of the MPC.

Obserwator Finansowy: “Real interest rates in Poland are relatively low, which means that for a long time, money has been too cheap in the Polish economy to enforce high efficiency and contribute to the creation of structural competitiveness ” – as you and Mirosław Gronicki wrote in an article in April 2012. Do you maintain this opinion given the situation today?

Jerzy Hausner: As for the general rule that we should strive to keep real interest rates positive, I do maintain my opinion. However, at the end of 2012, we can expect a visible drop in the inflation rate, and therefore it is advisable to decrease interest rates. Given that the economy is growing and that a certain shift in our economy towards more competitive structural solutions is necessary, I see no reason why we should pursue the policy of negative interest rates. The same opinion was repeatedly expressed by the President of the National Bank of Poland, Marek Belka, and I fully agree with him.

How far should the MPC go with the process of reducing interest rates in the entire cycle? Bank economists mentioned 150 basis points.

Economists, and especially bank analysts and other people who represent a certain group of market participants, often express this view publicly. It is their right to do so. However, I believe that a member of the Monetary Policy Council who has an announcement to make in relation to the state’s monetary policy should communicate it to the members of the Monetary Policy Council. Monetary policy should not be conducted individually; we are in charge of it as the Council, and therefore I would not reveal my intentions to the public, even if I was almost certain about the legitimacy of my opinions.

Instead, I can and I should refer to the decisions taken by the Council and to its announcements. The last announcement made by the Council makes it clear that the process of easing monetary policy has begun. How far will it go this cycle? I do not know. In early December, we shall meet again at a closed meeting to discuss actions to be taken in December – that much is certain. I do not think that we are facing a dramatic turn of policy. I suppose that our decision in December will be to pursue the process of easing monetary policy, which means that the lowering of interest rates can be expected. This is all that, in my opinion, a member of the Monetary Policy Council is authorized to say.

Could lower economic growth still be conducive to an increase in the public debt, despite fiscal tightening? Last year, you said that every economic downturn may increase our debt  by further 10 percentage points.

The economic downturn that took place at the beginning of the previous decade, that is in 2001-2002, led to a 10-percentage-point increase in the level of debt in relation to GDP. Afterwards, the debt admittedly dropped but only slightly, mainly due to the high economic growth at the time. However, a further slowdown in 2008-2009, not too significant and rather short, resulted in the debt’s increase by further 10 percentage points. Now we are witnessing a slowdown again.

Does this mean that we can expect a similar increase of the debt level?

I hope not. In 2008 and 2009, the government pursued a very expansionary fiscal policy. Now, we have to deal with the fiscal tightening. I do not expect a rapid increase of the debt-to-GDP ratio; however it is clear to me that, given this level of economic slowdown, keeping public finances in check will prove rather difficult. This year, serious problems with VAT, and with tax revenue in general, have been evident. We must reckon with the fact that our budget deficit remains relatively high. It may not grow, and I hope it doesn’t, but it will remain relatively high.

We have a line of resistance at the level of 55 percent debt-to-GDP ratio, and let us hope that we do not cross this line. It should also be noted that we are able to maintain this level because certain stop-gap solutions  have been adopted. These solutions are controversial at best and  not structural by nature but belong to the realm of accounting.

According the EU methodology, we are already exceeding the 55 percent margin.

Yes. According to the EU methodology, the present situation looks worse. Therefore, it must be remembered that the government avails itself of a number of one-off money injections, for example diverting  a part of the pension fund contributions, which means that, in effect, the current expenditure is reduced through generating new commitments in the future.

Actions and solutions adopted by the Ministry of Finance obviously reduce the current pressure, but they also blur the general image, because the fact that something has been accounted for in a different manner does not mean that it has automatically ceased to exist. One might say that there are countries with much higher debt levels. But why should we think that this is a favourable situation? The example of southern Europe proves that it is not favourable at all. And, in turn, the example of northern European countries shows that it pays off to pursue a policy allowing only moderate deficits. The initial budgets of many of these countries provide for a surplus and this is what we should aspire to as well.

Is the Polish potential GDP growth still 4 percent per year, or will it be downscaled permanently?

I think that today few economists would assert with conviction that our potential GDP growth is 4 percent. Some economists I have spoken to declare that it is slightly more than 3 percent, but other experts claim that it may even be lower than 3 percent.

Two years ago everyone would say that it was 4 percent.

Well, yes. If, however, the majority of economists today say that the potential GDP growth has dropped, this means that some negative structural phenomena have been in play. They were mainly due to external disturbances, of course, including the reduction of our export opportunities. Still, we need to be more competitive anyway, in order to boost exports and GDP growth. The current model of Polish economy’s competitiveness has clearly exhausted its potential. We built it on a relatively low wage growth.

Today, we even have to deal with a negative development of real wages. But can we base our competitive advantage on cheap labour for much longer? Cheap output cannot be of the highest quality. Therefore, we will have to move towards other types of production – those that require more advanced skills and competences. We will have to compete in a different way. And, in order to ensure that domestic consumption increases, we will need to pay better wages.

Let us have a look at demographic changes. We used to have vast young workforce resources and, demographically and economically, we still are a relatively young society, but this wave is slowly going away. The model based on a large low-cost labour force can no longer be pursued.

Another matter is the level of education in Poland, which in the 1990s was relatively high. What is more, access to education became much easier, which led to a rapid growth of human capital – both in terms of quantity and quality. Demographic changes mean that even if the number of students remains the same, the level of skills and competences of graduates will be gradually decreasing, and this means that the quality of human capital will become relatively lower as well.

What can be done about it?

We need to think what can be changed in the economic policy in order to generate factors and mechanisms that will raise the level of potential GDP, and therefore create conditions  for a faster growth while maintaining macroeconomic stability. This is not a task for the Monetary Policy Council, as economic growth is not our goal. The level of real growth compared to potential growth, however, determines whether we have room for maneuver in monetary policy. If the potential GDP is lower, interest rates cannot be drastically lowered. If, on the other hand, the potential GDP is higher, we can be bolder in our actions, as we do not need to fear strong inflationary pressures.

As for the current economic situation, it must be emphasized that any downturn will be reversed sooner or later. The only question is whether we will return to the 4 percent economic growth, or rather end up at 2.5 percent.

We have therefore run out of simple sources of growth and need to make conscious efforts aimed at innovation. However, what will be innovative in 10 years? At present, innovation is associated mainly with the Internet and we fail to notice that factories reopen throughout the U.S. and that manufacturing is becoming increasingly important.

Indeed, a shift has been taking place. We still believe that the introduction of a product into the market starts with technology and finishes with marketing, but we do not think any more that all the manufacturing process in the middle does not matter, as long as it is as cheap as possible. The model of economy based solely on trade and services, without manufacturing, can no longer be pursued. In this sense, the loss of a large part of the manufacturing sector is a vital problem for the United States and they are now changing their approach to the matter. It is a problem for the UK, which has been developing mainly through financial markets, etc. Countries that have pursued de-industrialization have lost their ability to compete. Greece, where the manufacturing sector’s share in GDP has dropped below 10 percent, is one of many such examples.

Is it good news to Poland that the manufacturing of goods is becoming important again?

It is good news, as we have quite a strong manufacturing base, even though the share of industrial output in the GDP has dropped from about 25 to 15 percent over the last 20 years. The process of de-industrialization has also been observed in Poland. And, apparently, it is time to say stop. For example, given that we have a pretty well-developed chemical industry, we need to think what to do to give it a chance to compete in the European and global markets. The price of gas is of great importance in this respect.

We must think whether it could be lower, but if not, it is probably somewhere else that we must seek this industry’s competitive advantages – and, once found, they must be reinforced. If the state (which remains a co-owner of this industry) decides that it is not interested in supporting it, we may soon lose our chemical industry.

What would such a long-term strategy entail?

It would require answering many important questions, such as what to do to make the price of energy utilities in Poland comparable, or preferably lower, than the price paid by our competitors, what to do to ensure that our industry has comparable access to capital and loans, or to highly skilled workforce. And I am not referring to statist policies here, to the creation of national champions. I am talking about modern policies  implemented for example by Denmark and other countries in northern Europe; they create appropriate conditions for their domestic companies to be able to grow and compete internationally.

These are not quick and easy solutions. It is enough to consider, for instance, our education system. The system of test-based exams kills imagination, and consequently also ingenuity and creativity – and this is precisely what citizens need to create innovations.

Interviewer: Marek Pielach

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