Thomas Laursen: Probably not as much as some of the more vulnerable countries in the region. I don't think anybody has a good sense of how bad this is, how deep the downturn is going to be, and how protracted the downturn will be.

I think that the fundamental causes are behind us, but we may not have seen the full repercussions. I think there's no doubt that the world economy is in for a slowdown, but it is unclear whether we are talking about a year or two, or about five or ten years.

Many analysts are comparing the current situation to 1929 - is that justified?

I think you're seeing parts of that [the 1929 crash], you're seeing parts of the 1970s, with rising commodity prices and inflationary pressures that may lead to a global economic slowdown.

But global policy makers - those in the US or Asia - are more or less managing the situation. Obviously you have the G7 forum and the discussions and the attempts to coordinate the policy response - but it's not very effective. But still, I don't think that things will get as bad as we've seen in the past.

Is the G7 the right place to decide on such a response?

I think the world has become much more interdependent and some of the emerging markets have become much more important: China, India, Brazil. So the forum for global policy coordination has become bigger. I don't know what the optimum forum is, but more effective international policy coordination is the best that one can hope for in this situation. 

Wages in Poland are growing at nearly 10 percent year-on-year. Can this be sustained or will it spur even higher inflation?

Wage growth is perhaps the biggest challenge when you look at the Polish economy from a macroeconomic perspective. Wage growth has accelerated quite a bit. When you take into account inflation, real wage growth is at some six or seven percent right now. That is on the high side. The question is: What is happening to productivity and exchange rates? What really matters is profitability and competitiveness.

When it comes to productivity, I think we are getting to the point where one has to get a little bit worried. The złoty has been rising quite fast. We've seen a little bit of a reversal recently, but by and large the złoty has appreciated by some 30 percent in nominal terms relative to a year ago. I don't think there is any doubt that competitiveness is getting squeezed.

Now while this is happening, employment has gone up quite significantly. Unemployment was 20 percent a few years ago and now it's seven or eight percent. Bottlenecks are emerging in the labor market. There are increasingly shortages of labor in various key sectors of the economy. This has been exacerbated - at least in the last couple of years - by a large outflow of workers to England and Ireland and other countries.

Some businesses are turning to labor from abroad because it's cheaper. Is this the wave of the future?

I think you can help address some of the current bottlenecks if there is a more liberal policy towards labor from abroad. Now, it's never easy to manage, because you have the Schengen arrangement and so once people are in Poland they can be anywhere in Europe and you have some issues that are not that easy to manage. But you have a surplus of labor right outside of the borders of Europe. You have a massive surplus of labor in North Africa and the Middle East. They have a completely opposite demographic situation. And if you talk about the longer term, it's going to be very difficult for Europe to continue growing rapidly without finding ways to address these demographic problems by absorbing some of the surplus labor from some of the regions in the periphery of Europe.

What steps can the government do to make sure that people get the standard of living that they expect, while at the same time combating inflation?

Wages are determined by the market and there's not a whole lot you can do about that. But there are two important things that the government can do to help alleviate the cost pressures that businesses are facing.

One of them is [reduce] the cost of hiring labor. The tax wedge on labor is very high in Poland. Social security contributions are very high, and the difference between the gross and the net wage is quite large. Personal income taxes are relatively high, and then you have these social security contributions. So it's very expensive to hire workers.

What can the government do about that? Not a whole lot on its own, because there is not enough room in the budget, there's not enough fiscal space for lowering taxes.

I think that Poland also needs to make room in the budget for financing infrastructure investments, whether it's roads or other infrastructure. It's a mathematical fact that the only way it can be done is to rationalize social spending.

In Poland social spending is still quite high. This goes back to the issue of early retirement, disability pensions, which are still quite high; healthcare spending which is certainly not as efficient as it could be.

The other thing that the government can do, and is working on, is lowering the cost of doing business in general through deregulation. Poland is now ranked 76^th [in the World Bank's 2009 "Doing Business" ranking] ... slightly worse [than last year] because other countries have been reforming faster. If you look at some of the categories that make up this overall assessment, it really makes you worry and wonder what is going on.

The biggest problems in Poland are starting a business, getting the permits, licenses. These take very long and are very expensive. Getting construction permits and actually paying taxes is extremely complicated. In these three areas Poland ranks between 125 and 150 in the world. It cannot get much worse. For small businesses and new startups, this is a huge issue.

The financial system has not been keen on taking risks in Poland - which is good, but it also constrains the access to venture capital. And now there are some steps in the right direction. There is now a venture fund of funds, to actually provide seed money for smaller venture capital funds. And that's a good step.

But the question is "Why?" Why is it so difficult? Why isn't this improving faster? You hear the government is very keen on liberalizing and deregulating the economy and there are movements in the right direction. One recent plan is to significantly ease the burden of inspections. But from my understanding this - and it seems like a no-brainer - is also meeting a lot of resistance from within government circles.

How can reforming the educational system make Poland more competitive?

You have some issues in the education system still, though Poland has made quite a lot of progress in strengthening its education system, in particular by extending the period of general education. Poland, like many other countries in the region, tended to split people into two streams quite early, the technical stream and the general education stream. They have now extended the general education for at least one year and I think that you are beginning to see the positive results of this in terms of test scores and international assessments of students' skills.

Most evidence shows that it is better to extend the general education somewhat, for people to acquire broader, more adaptable, flexible skills rather than this narrow specialization early on, which can be useful if there is a demand for that skill. But markets change and if you have a particular skill that's not easily adaptable, then you have a problem.

We also have an issue in the higher education system where - certainly in the public institutions - there still isn't enough private financing and private-market influence. You still have too many people choosing what they like, but not necessarily what the market needs. So another big challenge is to ensure that the education system is actually providing the adaptable skills that the market needs now and might need in the coming years.

Prime Minister Tusk has set a goal of adopting the euro in 2011. Is this date too optimistic?

I think it is ambitious, but feasible.

Poland basically meets the Maastricht criteria for euro adoption. The fiscal deficit has been reduced to below three percent of GDP - this year it is likely to come in at slightly over two [percent]. The budget for next year targets 18.2 billion, which is a little less than two percent of GDP.

So the deficit has been reduced significantly, even given that the cost of the pension reform [of the 1990s] is now fully reflected in [the deficit]. Poland implemented pension reform in the late 1990s and it still has a significant impact because people switched from paying their contributions to the budget to paying into private pension funds. You still have a fiscal impact of around one or one and a half percent of GDP. This is the cost of reform and that reform was desirable, but this is now part of the deficit. And the deficit is now close to two [percent] or a bit less and that's with one or one and a half [percent] as a result of this pension reform. So the conduct of fiscal policy has been admirable.

So Poland meets the debt criterion because due to the rapid growth and reduction of the fiscal deficit public debt has declined quite strongly.

When it comes to inflation, Poland more or less right now is borderline meeting the criterion. It's the average plus or minus one and a half percent. Poland is still within that margin, though I haven't checked the latest numbers.

So the one criterion they don't meet is being part of the ERM-2 [exchange rate mechanism] for two years. Now, we talked about wages, we talked about the need to control inflation. Part of the increase in inflation also came from the surge in commodity prices - food, energy prices - and now we're seeing some easing - especially on energy prices, and this will help. I think that the conduct of monetary policy so far has been fairly prudent as well. Whether more tightening is needed to reign in wage and inflation pressures is a tough call. But macroeconomic policy has been very well conducted in Poland in the last couple of years. And that's a good premise.

Some analysts believe Poland should maintain control of its monetary policy. Do you think it's a good idea for Poland to adopt the euro so soon?

Much more important than whether the euro is introduced is having sound economic policy. And if you have that, things are fine with or without the euro. Whether it's 2011 or 2012 or 2013 is not so much an issue as having a firm and credible plan as to how to get there. It's not going to be January 1, 2011 - that would be difficult. But later in the year is feasible.

It's ambitious, but for such a time to be credible you have to find a balance between too ambitious and too unambitious. This [plan] is erring on the side of ambitiousness, but it makes some sense and it can also provide a positive for the 2012 Euro [soccer] championships. So I think the timing is not bad.

What are the Bank's activities here in Poland?

We're obviously not the main partner for Poland after they joined the EU, but there are still some of the medium- to long-term development challenges that Poland is facing and where the World Bank has unique expertise in some areas and could be a useful partner for Poland in terms of sharing knowledge and sharing experience from other places in the world.

It's a different relationship than in the past, and more one of being a knowledge partner, advisor especially on some of the more medium- to longer term issues: demographic changes, climate change, energy efficiency, transportation networks including how that relates to climate change.

There are also areas within the social sectors where the EU is not that closely involved. Especially if you look at health systems and reforms in healthcare, education, and pensions - these are areas where the EU is less involved where the bank has a lot of experience and a lot of knowledge which  can hopefully be useful to Poland.

We are hoping to find ways of working as a partner with the government on some of these issues. Part of it - and this is the way that the bank works - you can do some work without charging for it but otherwise a lot of this knowledge is best transferred through our lending operations. I think there is hopefully still some potential for doing that kind of business. But we are also trying to develop more of a fee-for-service type of business.

We are also beginning to talk to some of the sub-national governments who are interested in our services, including being willing to pay for these services. So I think we are at a quite important phase in our relationship with Poland. We believe that we have some value to offer and we're hopeful that we can find ways of cooperating with the government - both the central government and the sub-national governments.

The World Bank has been criticized for the way the bank's head is chosen - generally the US has the final say. Shouldn't the bank's president be chosen more democratically?

As a matter of principle, I think that international organizations have to evolve and their structures evolve to reflect the realities of today's world. And I think it is beginning to happen. We have seen some changes in the IMF for example in voting power. I think you are beginning to see some changes in the World Bank as well. If you look at the current strategic priorities of the World Bank they are quite global in nature.

And the philosophy of more of the knowledge bank, dealing with global public goods such as climate change - these are issues that resonate across the whole world. So it is true that on the governance side it take time to change these things and the way they have been done.

But I do think that important steps have been taken in terms of trying to make the institution truly global and to try and deal with the current issue and that process is certainly ongoing and I think we still have a lot of work to do to change this perception of the institution. It's not an easy task but I think we have to do a better job to explain to people what it is that we are and what we can do.

Is Poland dangerously dependent on energy supply from Russia? Should the EU stand by Poland's side?

Diversity of energy supplies is a desirable objective, as is diversity of supplies for almost anything that you need. Poland has a lot of potential in terms of improving its own energy supplies.

But there are many challenges and Poland has a fairly substantial coal industry which is and potentially can continue to be a very important source of energy. But given the commitments that Poland is facing on the climate change side, a major effort will have to go into improving efficiency and environmental friendliness for coal production. I think there is quite a lot of potential for alternative energy sources in Poland - wind energy as is nuclear energy.

Poland has the deal to share power from the Ignalina nuclear power plant with Lithuania, but that will only provide a limited amount of energy. It would take Poland at least 15 years to build its own nuclear plant.

That's true. But my understanding is there is a lot of potential for gas storage which may not exist or be fully utilized yet at this time. That is another area where one can secure supplies.

A lot of this is geopolitical. Russia is a natural supplier to Europe but then there are the geopolitical issues, and I really don't know how that's going to play out. But what is important is to integrate the energy systems in Europe better. You still have grids which are not connected - where you can have periods of excess supply in one grid and excess demand in another, but no way of equalizing the two and at the same time no way of very expensive storage of the excess supply in one grid.

So it's a hugely inefficient system. Connecting the grids - Central European, Northern European, has huge potential to increase the overall efficiency of energy production. That is an area where we at the World Bank can help look at the potential gains from integrating energy systems, and ways of improving efficiency of energy production and coal and helping to find ways of making coal plants more efficient and more environmentally friendly.