Business Culture for a Transition Economy - Essay Example

Poland: Business Culture As Source of Inner Strength For a Transition Economy I. Introduction This report as prepared by ______________ and ________________ postulates that business culture plays an increasingly vital role in the transition of many countries from a centrally planned to a market economy, which is currently the cynosure of world attention. Taking Poland as a case study, we maintain that the underlying strengths or weaknesses in the cultural values of these transition economies ultimately tell on how they measure up to the challenges of change and reform. According to Hofstede, G. (1980), the characteristics of culture "seep into the business organizations operating in one country such that society and organization reflect each other structurally." If that were so, the rough sailing of a number of the transition economies may be traced to a shortcoming of culture. Brazil and Russia are prime examples. After Brazil disengaged itself from longtime military rule and opened its market to the world, its economy went from bad to worse (CAFOD, 2003). As for Russia, the major source of the difficulties was the soft loans that continued to be granted to large state companies in larger amounts even after the country dismantled the communist apparatus to embrace the open market policy (Ingves, 2002). The grant of non-collateralized loans is part of a culture fostered by a centralized economy in which power and privilege are concentrated in a few hands. Both cases also demonstrated the importance of building the required institutions, markets and legal infrastructure for the economic takeoff of transition markets. The experiences of Brazil and Russia also provided valuable lessons to other countries moving from a centrally planned to a market economy. In the view of IMF and other world financial institutions, another such lesson can be drawn from the initial success of Poland en route to a free market regime. Poland was one of 10 former members of the communist bloc in central and eastern Europe whose economies had been severely circumscribed by the Soviet Union for over half a century. Stefan Ingves, Director of the IMF Monetary and Exchange Affairs Department, in 2002 described Poland's approach to financial restructuring as both "novel and exemplary." This made reference to the other transition economies in Europe, which are made up of large but inefficient industrial sector and large but underdeveloped agriculture. Poland was also compared to China, which similarly embarked on market reforms while groaning under the high levels of non-performing loans, with nearly one-third of these bad loans accounted for by state-owned enterprises. In Poland, a lot of things have happened since then to put the country's transition strategy to an acid test. One of the major challenges was the 2004 entry of Poland to the European Union. With this development, the question may be asked: Are the prospects for Poland as a successful transition economy still as good as they appeared at the initial stages II. History Poland sits astride the trade and commercial routes between the east and west and between the south and north of Europe, making it the gateway of western Europe to the eastern countries of Belarus, Ukraine and Moldova. This strategic location made Poland the favorite destination of Europeans immigrants since earlier times. As waves of these immigrants came to settle in Poland, it was forced to forge a series of unions with neighboring nations. There was the union with Hungary in 1370-1586, Lithuania (1386-17950, Sweden (1587-1600), and Saxony (1697-1764). Thus, before Poland assumed its present name, this territory that stretches from one end of the Baltic Sea to the other end of the Black Sea, and from the Silesian border to within 300 miles of Moscow, hosted a rich mixture of nationalities and beliefs. The original Poles had the choicest spots at the central and western section of the country. The transposed Lithuanians, Latvians and Estonians occupied the north; the Lutheran Germans lived near the border with Prussia; the orthodox Ukrainians and Byelorussians, together with the Moslem Tartars, were in the east; the Jews were scattered throughout. This explains why nationhood first came to Poland under the name Polish-Lithuanian Commonwealth in 1569, for which it was known for 226 years ending in 1795. The territory had undergone two more changes of official name since then: as the Second Polish Republic (1918-1939) and People's Republic of Poland (1945-1989). The political system that would persist until today was already in place when it was made out as a shared Polish-Lithuanian territory, through the two-house Parliament consisting of the Senate and the Sejm. This lawmaking system was established in 1493, a period in Polish history that historians describe as its Golden Age or age of tolerance, when it attracted masses of Jews, Hussites, Catholics from England and Scotland, and intellectuals from Renaissance Italy as they escaped religious persecution at home. This merry mix of cultures evolved into the Polish population of today, of whom 75 percent are practicing Catholics. As the now Republic of Poland, the nation's economy is underpinned by coal, textile, chemicals, machinery, iron and steel industries. Shortly after the Polish government launched a comprehensive reform plan to steer the economy to a market-oriented system in 1990, the country was able to expand its industrial base to include fertilizer, petrochemicals, machine tools, electrical machinery, electronics, cars and shipbuilding (Rybinsky, 2006). Over the last 15 years, Poland has made considerable progress in its transition process (EBRD). For example, the once marginal private industry now accounts for 75 percent of the country's economic activities and the market and investment conditions have been liberalized by a large degree. From 3.2 percent in 2004, economic growth rose to 5.3 percent in 2005 mainly due to increasing exports, investment and consumption. Deficit spending, a persistent problem among centrally planned economies, has fell to 2.5 percent of GDP from 3.9 percent in 2004. Public debt also settled at below 50 percent of GDP and the once runaway inflation rate is now pegged at 1 percent. III. Theory and Practice Studies on how culture influences the way business is run show that firms are more flexible and quick to adapt to crisis situations if managers are given to participative decision making (Burt, 2000). In Germany, for example, there is a prevailing business culture of co-determination at company level, which is exemplified by work councils often set up to prescribe management and plant operations. This decentralized, direct and participatory management system enables German companies to assimilate new technology faster. In contrast, the Ford-like culture prevalent among US and UK firms limits their production capability and renders them less flexible to deal with technological changes (Mueller, 1994). The reason is that the societal links between a firm's operating sections are perceived to be weak. Poland has demonstrated some flexibility that could be traced to culture. Following the collapse of the Soviet Union in 1991, Poland widened its first foray into liberalization along with the other member-countries of the communist bloc. Of the 10, only Poland, Hungary and the Czech Republic were noted to have made good, with their output surpassing their GDP per capita in purchasing power (Tupy, 2003). In reaction to the Russian crisis, Poland earlier relaxed its previously conservative and tight monetary policy, in the process bringing down interest rates and making the currency exchange rate more flexible (Roskrut, 2005). Time and circumstance, however, dictated a change of pace. In 1999, a fiscal crisis occurred as monetary authorities lost control over social security funds, which are doled out in huge amounts in the form of unemployment and health benefits as well as disability and old-age pension. As inflation surged and the current account deficit deteriorated, the National Bank of Poland (NBP), which functions as the country's central bank, responded with a series of measures now restoring, now reducing interest rates. This is what OECD (2006) means when it faulted Poland's budgetary policy for being "erratic" and "unpredictable," which sends the wrong signal to foreign investors. Overall, however, the OECD sees the country's underlying economic growth as capable of yielding sufficient revenues to lead to a more effective and faster deficit spending, a moderate level of public spending and tax cuts over time. From the evidence, Poland never stops striving to address the concerns about its wishy-washy fiscal and monetary policy. In 2000, for example, the government named Leszek Balcerowicz as NBP president, a man whose name and reputation came only second to Lech Walesa, founder of Solidarity whose devotion to the ideals of democracy and reform toppled communist rule in Poland in 1989. Balcerowicz's leadership at NBP was perceived far and wide as a guarantee of central bank independence. Thus, his stewardship at NBP contributed in no small measure to the 4-6 percent growth and the increase of foreign direct investment to $43 billion (Stylinsky, 2000). The reform programs undertaken by NBP included the cut of subsidies, end of price controls and the scaling down of large state-owned industries. As a result, the once empty store shelves started to fill up, hyperinflation cooled down and western creditors condoned half of Poland's $335-billion foreign debt. However, after 10 straight years of stocked shelves, giant malls and impressive self-confidence, the problems common to capitalism have started to show (Fisher, 2002). With government now out of the picture in the privatized companies, it could not do anything about workers complaining of delayed wages for as long as four months. This kind of problems compounded by the generally low income of workers may compel the Poles to migrate en masse to the western part of Europe after Poland's accession to EU in 2004. This is not allowed at the initial stages of accession, but in 2010 all barriers to the inter-EU movement of workers will be freed. The initial ban on workers from seeking cross-country jobs within EU is its most fundamental principle based on the idea that a free movement of people will reduce new members to second-class membership status (Tupy, 2003). The benefits expected from full EU membership include further stability to its political system and increased FDI for industry and infrastructure because of access to EU's structural funds for infrastructure. It will also open up the Polish economy to new ideas and technology and fresh capital, with foreign business likely to invest there now that under EU, foreign investors will be given a level playing field in all EU member-countries. As new EU member, Poland received 1 billion euros as direct subsidy for the period 2004-2006. This is equivalent to 3 percent of Poland's GDP, set as basis for this aid. As condition for this aid, Poland had to meet stringent EU standards on food production hygiene, public services, environmental protection, regional development, etc. (Brenton, 2004) There were concerns in EU that its Common Agricultural Policy (CAP) could swallow up Poland's large farming sector. CAP discourages overproduction by setting production quotas for each member country. The idea is to provide uniform levels of income among farmers in all member-countries. For example, Slovakia wanted to produce 400,000 heads of sheep and 1.2 billion liters of milk yearly, but EU set the limits at 218,00 heads of sheep and 950 million liters of milk. From the evidence, however, Poland is coping well with this particular challenge. It goes without saying understood that EU accepted Poland as member because the country met the usual criteria, which are mainly a functioning market economy and the capacity to cope with the competitive pressure and market forces within EU. The popular transition theory holds that countries going through this period have their monetary authorities learning on the job, accumulating experience as they face new problems and challenges. This is how it is happening in Poland. For the first two years of the transition, Poland was dominated by "correctional" inflation. On the currency, the policy also swung from a flexible exchange rate regime in 1995 to a fixed exchange rate and then to a "crawling peg" system (Klos & Wrobel). IV. Analysis Previous surveys faulted Poland for its high level of product market regulation (PMR) and other barriers to competition. This particular shortcoming has been addressed, such that the previously stratospheric costs of putting up a business in Poland had been reduced somewhat. So much still needs to be done in this area, however. This is one of the perceived obstacles to business activity and why foreign investors are yet to make a beeline at Poland's doorstep. One problem that has yet to be overcome in a more unequivocal way is the issue of corruption, with Poland topping the OECD list as having the worst reputation for corruption among all member-countries. Despite initial attempts at privatization, the level of public ownership remains high to make product competition suffer. In this regard, the OECD is pushing Poland to pursue privatization more vigorously, retaining public stakes only in areas involving genuine public or security concerns. The privatization program must also be based on consumer welfare not on protecting the producers' interests, alluding to the pattern of privatization carried out on the first state-owned firms. Obviously, the slow pace of privatization and the lackluster effort at weeding out corruption are influenced by culture, a lingering effect of the centrally planned economy, which nurtured the so-called "role culture." In a role culture, people perform their specific functions on equal terms, leaving the big political and economic decisions to a privileged few (Kotter & Heskett, 1992). The need then is to dismantle this privileged few for the smoother transition of Poland to a market economy. China attacked precisely the same problem by putting an acculturation slant in its reform program, doing away with a heritage of smallness that characterized its traditional way of doing business. Through the policy of zhua da fang xiao (leaving the small for the big one), China encouraged private firms to expand through public listing, liquidation, mergers, and sale (Steinfeld, 2004). On the government's Convergence Program (CP), the OECD finds it to be not very ambitious, another probable effect of culture that makes do with smallness. A January 2006 update of the CP said deficit spending had gone down to 4.7 percent of GDP in 2005 and was right on target for a much lower 3.7 percent in 2008. OECD thinks Poland can do better by setting a higher target, hewing its deficit closer to the assumed real economic growth of 4-5 percent annually. Be that as it may, the IMF and European Commission both expect Poland to grow this year by a similar or higher rate than the 4.8 percent posted in 2005. This will be helped along by a 2.1 percent overall growth in the eurozone, the destination of over half of Poland's exports. V. Conclusion At a recent EBRD Business Forum in London, former Polish President Aleksander Kwasniewski said: "On Monday, Wednesday and Friday, I am very pessimistic; on the three alternative days, I am optimistic and on Sunday I play tennis." Economic analysts in and out of Poland share this highly optimistic view. What Poland still needs to do is make its budgetary policy more predictable and less erratic, carry out further structural changes to encourage labor and capital to gravitate towards areas where they are most needed, improve the functions of the labor market, raise the very low employment rate, increase internal mobility, encourage entrepreneurs to develop, and expand the business horizon for investment and innovation to flourish. Analysts also see the need for the Polish government to give the National Bank of Poland a stronger image of independence, with a separate and autonomous agency to supervise the financial market. The government should also endorse and support the NBP inflation target of 1.5 to 3.5 percent. The IMF World Economic Outlook released in April 2006 says the future depends on four areas: the high and volatile oil prices, tightening financial market conditions, rising global imbalances and the avian flu epidemic SARS. Any of these factors could put Poland's transition process askew. As of now, global investors are drawn to Poland because of favorable liquidation conditions, attractive rates of returns, and good economic prospects (Rybinski, 2006). Poland's accession to EU and its future entry into the euro area have made the treasury bond market more attractive, with a daily turnover of 6 billion, the largest and most liquid in the region. What many observers find lacking is a "nominal or real anchor" that would enhance the transparency and credibility of its monetary and fiscal policies. This boils down to an image problem, which has something to do with the transparency and predictability of fiscal regulations. If Poland overcomes these problems, its future is made as one of the world's most successful transition economies. The transition economies have monetary authorities learning on the job, accumulating experience as they face new problems and challenges. This is happening in Poland, where for the first two years, the transition activities were dominated by correctional inflation. Since 1995, it also changed the policy on the zloty from a flexible exchange rate to fixed exchange rate and then to a crawling peg system. All this points to a flexible and responsive government policy that parallels the way China transformed its once backward economy into the powerhouse that it is today. Bibliography: Brand, H. (1982). "Foreign Labor Developments." Available online at: http://www.bls.gov/opub.mlr 1982/05/rpt4full.pdf Brenton, P. (2004). "The Economic Impact of Enlargement on the European Economy: Problems and Perspectives." Center for European Policy Studies, Place du Congres I, Brussels. Brief History of Poland. Available online at: http://www.magma. Ca/pfeiffer/poland/history.htm Catholic Agency for Overseas Development (2003). "Brazil After One Year of Workers Party." CAFOD, UK. EBRD. "EBRD and Poland." Available online at: http://www.ebrd.com/country/poland/index.htm Fisher, I. (2002). "As Poland Endures Hard Times, Capitalism Comes under Attack." New York Times, June 12, 2002. ICFTU (2004). "Poland's Informal Economy: A False Self-Employment Scandal." ICFTU online at: http://www. Global-unions.org Ingves, S. (2002). "Republic of Poland and the IMF." IMF, Washington DC. Klos, B. & Wrobel, E. "The Monetary Transmission Mechanism and the Structural Modeling of Inflation at NBP." 232 BIS Papers, No. 8. OECD (2006). "Economic Survey of Poland 2006." OECD Economics Department available at: webmaster@oecd.org Roskrut, M. (2005). "The Monetary and Fiscal Policy Mix in Poland." BIS Papers, No. 20-217. Rybinski, K. (2006). "Outlook for Poland's Economic and Financial Situation." Address at the Annual Meeting of the Association of Chartered Certified Accountants, Warsaw, May 18, 2006. Steinfeld, E. (2004). "Market Vision: The Interplay of Ideas and Institutions In Chinese Financial Restructuring." Political Studies, vol. 52-2004. Stylinski, A. (2000). "Balcerowicz to Head Poland Bank. " Associated Press, December 22, 2000. Tupy, M. (2003). "EU Enlargment: Costs, Benefits and Strategies for Central European Countries." Policy Analysis, No. 489, September 18, 2003. Read More