THE WARSAW INSTITUTE REVIEW
Date: 12 March 2018 Author: Cezary Kaźmierczak
The Polish Economy – Challenges and Outlook
The economy is inseparable from politics. All market participants, both entrepreneurs and consumers, function within strictly defined legal conditions which are decided solely by politicians.
Economic life is also influenced by relations with other countries in the international arena – the national representatives managing the country retain the initiative here as well. This very close relationship between politics and the economy is clearly visible in the example of Poland. At the moment it is a rich country, if we use the entire globe as a reference point. It is enough, however, to narrow down the perspective to European countries or simply “developed” ones to see that, on this scale, Poland is only moderately well-off. This is the result of many factors – from those indirectly related to politics, through to those resulting from government decisions of a relatively short-term nature, up to great movements on the geopolitical stage. Understanding the processes that have occurred over the last century in Poland is necessary to comprehend not only the current economic situation of the country, but also to anticipate its potential.
Poland’s Level of Affluence
Let us start with hard facts. According to OECD (Organization for Economic Co-operation and Development) data for 2016, Poland is the fifteenth largest economy (measured by GDP) in the world. We are being outpaced not only by global powers such as the United States, Germany or the United Kingdom, but also by important nations, though far from superpowers, such as Spain or Australia. Of course Poland has a higher nominal GDP than countries much richer than it, such as Norway, which is a natural result of a larger number of inhabitants. It gets much worse if we look at the approximate level of the nation’s wealth, i.e. GDP per capita. Here, Poland already occupies a middling position (about $24,900 at constant prices), and it is one that’s more likely to drop than one that is on the verge of matching the best with a little effort. Poorer countries include Bulgaria, Romania, Latvia and Turkey, however tiny Estonia or the neighboring Czech Republic, are richer. One could conclude that there are no good reasons to be pleased. So where did the idea that Poland has achieved huge economic success since 1989 come from? And why is it that every year we hear that Poland is once again among the countries with the fastest economic growth in the EU? In order to answer these questions it is necessary, following the recommendation contained in the first paragraph, to analyze the historical processes directly affecting the condition of the Polish economy today.
It should be clearly stated that since 1989, Poland has enjoyed a second and also the longest period of full independence since the 1790s. At the end of the 18th century, the weakness of the Polish state and its inability to reform, resulting from the decadence of “noble democracy”, combined with political intrigues and hostile neighbors, allowed Russia, Prussia and Austria to divide Polish territory between them. In 1795, Poland disappeared from the world map and only thanks to the attitude and defensiveness of the Polish spirit, did the substance of the nation in the form of language, culture and tradition, survive. The partitions happened a long time ago, but their economic and social effects are still visible today. Informally we divide the country into Poland “A” and “B”, where the latter is much less developed. The genesis of this disparity can be found, among other places, in those partitions – the lands under the Prussian partition were characterized by much better infrastructure and development than the areas occupied by the other two empires. Even today, if we look at the railway network map of Poland, it is clearly visible that it is most extensive in the former Prussian partition.
Economic Development in the Interwar Period
As already stated, Poland regained its independence in 1918. The state was taken back from the occupiers (outside the lands of the Prussian partition) in a poor condition economically and in terms of infrastructure. This was made worse by the effect of World War I, during which – due to wide scale looting – Poland lost huge amounts of public and private property. The interwar period (the two decades following the regaining of independence until the outbreak of World War II) was in economic terms devoted primarily to the reconstruction of industry and the implementation of economic programs on a huge scale. For example building the port in Gdynia and making it the largest on the Baltic Sea, and construction of the Central Industrial Region inhabited by six million people, whose task was to increase the industrial potential of Poland. Thus in 1938, Poland was a wealthier country (GDP per capita) than countries such as Portugal, Spain and Greece.
Consequences of World War II Destruction and a Centrally Planned Economy
The development of the Second Polish Republic was effectively halted at the outbreak of World War II, during which Poland suffered huge losses, both human and economic. According to estimates by the Office of War Compensation (formed at the end of the war by the communist authorities), the damages resulting from the German occupation amounted to about $650 billion (roughly twice the annual GDP of Norway). After the war, Poland found itself in the Soviet Union’s sphere of influence. It was necessary to rebuild infrastructure, factories and practically entire cities (as in the case of Warsaw). Additionally, the socialist system introduced a centrally planned economy, nationalized industry, and fought against private enterprise. It was only on June 4, 1989, that the era of real socialism ended with the defeat of the communists in the Polish parliamentary elections. Unfortunately, it left its mark on the Polish economy for years to come. The democratic opposition took power over a country where hyperinflation was raging, shortages plagued the economy, and state-owned industrial plants were becoming increasingly inefficient. Both a political transformation and economic transformation were necessary. In Poland an unprecedented undertaking was carried out, involving a 180-degree turnabout in the economic system within the framework of parliamentary democracy. Many free-market reforms stabilized the exchange rate and caused intensive economic development, but it was not without social costs.
After Regaining Independence
From 1990 to 2015, Polish GDP per capita increased more than sevenfold, which was definitely the best result in Europe. At the same time, during the reforms as well as in the years following them, structural problems related to the transformation of the economy appeared. One of them was high unemployment – ranging from more than ten percent in the first half of the nineties to nearly twenty percent in the early twenty-first century.
At the moment, Poland is characterized by a free market economy, record low unemployment (6.9 percent in September 2017), a stable GDP growth rate (estimated at 3.7 percent in 2017) and good prospects for the near future. The foundation of the domestic economy is the dynamically developing sector of micro, small and medium-sized enterprises, which produce over 60 percent of Poland’s GDP. According to Eurostat, Polish GDP is mainly generated by trade, transport, industrial and construction enterprises. The share of agriculture (3.4 percent) is relatively low, as well as businesses in the information and communication sectors (3.5 percent). Our entrepreneurs are happy to trade with foreign partners (we can boast of a surplus in the balance of international trade), and Polish products are well-regarded worldwide. Therefore it seems that we have all the advantages needed to catch up with the wealthiest countries in Europe over the next few decades. And this is the basic ambition of Poles, especially after joining the European Union, when a whole generation of young people finally began to travel to the West unhindered and could compare their quality of life to that of their peers from other countries.
Structural Problems of the Polish Economy
Unfortunately, the Polish economy is still struggling with a few basic structural problems, which in the next few years may have key (negative) significance for its development. First of all, we are in a terrible demographic situation. This is a common problem for the European Union countries, but in Poland it can be felt front and center. Not only because we have one of the lowest fertility rates in the world, but also because we do not have capital saved up that could alleviate the costs of higher budgetary burdens imposed by the retirement system.
Secondly, the Polish economy is too heavily regulated. We create too many laws that are completely unnecessary for the healthy functioning of the market, and only restrict the activity of entrepreneurs who would like to develop new activities, but must instead spend long hours reading updated regulations.
Thirdly, there is a serious risk of falling into the trap of middling development, due to the fact that in competition with other countries we do not maximize the only advantages that we have at our disposal; given that competition in globalization takes place not only for commerce, but also for entire companies, and thus the budget revenues from taxes paid by them. During the boom caused by the implementation of basic free market principles in the West, Poland did not exist as a political entity, or it had to build its own state, or was destroyed during the war, or was in the Soviet zone of influence. In this situation, we had no way to compete with capital, know-how or inventions – there was no opportunity to create and accumulate these resources in Poland.
The only way we can compete is with laws and institutions, so that people will want to settle in Poland and that companies will see the benefits of transferring their activities to Poland. It will only be possible to catch up with the West in terms of affluence if these three problems are solved, although in reality the first two are consumed by the third. If Poland skillfully identifies potential competitive advantages relative to other countries, and then proceeds to effectively make the most of them, there is a good chance that in the coming decades it will join the richest countries in the European Union. And considering that twenty-eight years ago we were a nation on the verge of economic collapse, terribly indebted abroad, with declining industry and an eternal shortage of consumer goods – this would be an exceptional achievement.
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