GENEVA (ILO News) - Defying what had looked to be almost insurmountable economic problems at the outset of the decade, Poland's economy has enjoyed "an impressive economic performance" registering average annual growth rates of 5.5% since 1993 and reversing precipitous declines in output and employment which characterized the early stages of economic transition, according to an ILO report * released in Geneva today.

Although growth in 1999 will likely decelerate, it is still expected to be relatively high at 3.2%. Poland's recovery has been the fastest amongst the Central and Eastern European countries and the decade-long transition process "has fundamentally changed the relationship between Poland and the rest of the world, replacing politically determined economic links with former socialist countries with predominantly market-driven flows".

"The private sector has become the main engine of growth, representing nearly 70% of national output and employment, in an economy specialized in labour-intensive manufacturing exports.

While the specific impact of globalization on Poland's restructuring is difficult to isolate, the report says that "it can be safely asserted that trade and investment liberalization have contributed to upgrading and modernizing the production system." In the face of the initially negative effect of industrial downsizing on employment, foreign direct investment would appear to have boosted incomes: "Average wages in foreign-owned manufacturing companies are 50% higher than in the domestic manufacturing private sector," the report finds.

Unemployment, at 10-11% of the total workforce remains high, but it is down from early 1990s levels of about 15%.

The results of the study were discussed at a high-level national tripartite meeting in Warsaw in September and will be presented to a Working Party of the ILO Governing Body that is examining the social impact of globalization in selected countries.

However, the generally upbeat assessment of Poland's economic and labour market prospects, is clouded by "strong regional disparities." The report finds that the vast majority of new jobs and income opportunities are concentrated in urban centres, particularly Warsaw, while at the same time the rural economy has lagged behind.

In the countryside, "a large proportion of the labour force is either unemployed or underemployed." Agriculture, the ILO report shows, "accounts for over one-quarter of total employment, but only 6% of Gross Domestic Product".

"Between 1992 and 1997", the report says, "employment in Warsaw increased by almost 30% while at the same time 15 out of the 49 voivodships (districts) suffered net employment losses." Two voivodships suffered from unemployment rates in excess of 20% in 1998. In contrast, the unemployment rate in big cities was between 2-4%, "a situation of nearly full employment," the report notes.

If unchecked, the ILO analysis suggests, Poland's "unbalanced" growth process could have a negative effect on social stability and economic prospects by deepening income gaps between cities and towns and fuelling rapid growth in manufacturing wages, which have already led to erosion of the cost-competitiveness of some Polish exports.

The ILO report says that the regional imbalances "are mainly attributable to structural factors, most of which can only be corrected by way of government intervention, in cooperation with social partners." In particular, infrastructure is notoriously deficient outside the large cities and the paucity of roads, railways and telecommunications risks limiting the trade and development potential of rural areas. Shortfalls in vocational training and institutional support for agricultural diversification are also inhibiting factors for rural economic development.

The ILO study scrutinizes these and other potential problem areas and concludes that "the development of physical infrastructures and human capital can probably be regarded as a major policy priority in Poland." Infrastructure development targeting rural areas "would be especially important if the challenge of absorbing the high hidden unemployment in the agricultural sector is to be met".

It acknowledges that investments in the infrastructure and educational systems of the country would probably exert upward pressures on government spending and notes that the Government's medium-term strategy for public finances and economic development is for a marked rise in the share of public investments in GDP from around 3.5% to between 4.5-5% in the next few years.

At the same time, plans are for a substantial reduction in both corporate and personal income taxes, which may erode the Government's capacity to finance infrastructure and education projects. The analysis and policy conclusions of the ILO study "would tend to suggest that the development of infrastructure has become more urgent than a substantial cut in tax rates." Given the paramount importance of the trade-offs involved in the policy options, the ILO sees "a compelling argument for discussing these issues in the context of national tripartite institutions."

Making the education system more relevant to labour market requirements is another major challenge. Vocational education suffers from deficiencies and education levels in rural areas are low explaining the rural-urban gap in the country.

The study also recommends, a diversification of economic activities in rural areas and the promotion of social dialogue among the social partners.