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Poland’s quiet economic miracle

epa05600678 Employees assemble a Volkswagen Crafter van at the new Volkswagen Nutzfahrzeuge (Commercial Vehicles, VWN) factory in Wrzesnia, Poland, 24 October 2016. Volkswagen Commercial Vehicles invested roughly 800 million Euro in the 220 hectar area. Up to 3,000 employees are said to assemble the new Crafter at the factory. EPA/RAINER JENSEN

By Kyriacos Iacovides

FOR A COUNTRY that only adopted the market economy in 1989, Poland boasts astonishing achievements, described by some economists as “not being short of a miracle”.

Since 1990 the economy has grown exponentially and its GDP has doubled, making it, according to IMF data, number 24 in the world, a record made all the more remarkable considering the country is not blessed with natural resources.

Poland is the only EU member-state that did not experience a recession during the economic downturn of 2007-08, having enjoyed continuous growth since the collapse of communism. Cumulative GDP growth between 2009 and 2016 was 26.9 per cent, five times the EU average of five per cent. It is the best-performing central eastern European economy in the union with forecasts suggesting this will continue with growth rates expected close to three per cent this year and 2019.

It is a remarkable economic success story that has nevertheless received much less coverage in the media than the assorted banking disasters and bailouts in countries like Greece, Spain, Portugal, Italy and Cyprus. Big failure is more newsworthy than success, especially when it is built on financial caution, a conservative risk profile and a healthy, well-supervised banking sector. This caution and prudence displayed after the collapse of communism created the conditions for the Polish economic miracle.

Poland pulled off the transformation from a command economy into a thriving market economy impressively ensuring that it benefited the whole population in terms of income and quality of life. The country’s performance in the last quarter century is a compelling argument for free market economics. Everyone is significantly better off under capitalism because the transition was prudently managed and did not give rise to anarchic, lawless capitalism that benefits a tiny section of the population, as was the case in Russia. There are no oligarchs in Poland, while income inequality is close to the EU average.

 Polish Prime Minister Mateusz Morawiecki EPA-EFE/SZILARD KOSZTICSAK

The seeds of continuous economic growth were sowed immediately after the fall of communism, with Poland adopting western institutions and principles such as rule of law, competition, democracy and free press. While adoption of free market practices, during the transition from socialism created big income inequalities, it was also the reason why these were gradually reduced to the EU average.

Creating a business-friendly environment from the word go attracted investment from abroad, many big German companies setting up operations in Poland. In the early nineties, retail chains such as Rossman and Macros arrived, followed later by Lidl, Aldi and Kaufland. German companies opened some 4,000 stores in Poland. Chemical and pharmaceutical companies such as Bayer, BASF and Henkel established operations while others bought Polish production plants. In 2016 a new Volkswagen factory opened in central Poland and is expected to produce 100,000 Crafter delivery vans this year. More than 300,000 people are currently employed by German companies in Poland.

Foreign firms were not attracted just because of lower wages, a big internal market and proximity to markets but also because it had a stable currency, reliable banking sector, rule of law and a state that worked. In its first steps towards a market economy, it was also helped by EU funds which enabled the country to embark on the construction of highways which connected it to western European markets. Highway construction remains high on the list of the government’s priorities, with the budget for roads in 2017 reaching 26.1 billion zloty and this year expected to be 27.1 billion.

Senior economist at the World Bank Marcin Piatkowski gave another important reason for the economic miracle.

“Poland expanded the quantity and the quality of education. Today every second young person studies at university level, above the EU average, up from one out of 10 in 1989,” he wrote. “Despite relatively low spending on education, young Poles are also well-educated; according to the OECD PISA 2012 study, Polish 15-year-olds are more functionally literate than most western European and North American peers.”

In 2016/17 there were 1.35 million students, while 37 per cent of the working population has higher education, according to the Polish Investment and Trade Agency.

Things keep getting better. GDP grew by 4.6 per cent in 2017 and forecast for this year is 4.2 per cent; exports increased by 10.2 per cent to a value of €203.7 billion last year and are in balance with imports. Foreign Direct Investment for 2016 was €12.6 billion, while the rate of inflation was a healthy two per cent in 2017 and is forecasted to reach 2.3 per cent this year. The unemployment rate, which was at 20 per cent in 2004, has steadily fallen and since 2017 is in single digits; this year it is forecasted to fall to a record low of 6.9 per cent.

What is admirable is there is no hint of complacency displayed about the country’s economic achievements. The deputy director of the newly created Ministry of Entrepreneurship and Technology, Symon Klus says that the country had fallen into “traps”, in the first years of the market economy, the most obvious being the “middle income trap” which was based on the utilisation of cheap labour for its development. Another was the manufacture of “an average product” that was an imitation of what was being produced by the bigger European companies.

In need of investment, the country also fell into the trap of relying too much on foreign capital, which, according to Klus led to foreign companies “controlling 95 per cent of food distribution and 66 per cent of exports”. Although foreign firms greatly contributed to growth, creating jobs and boosting consumption they also transferred a big part of their profits out of the country, which meant Poland was losing out to an extent. Weak institutions that meant there was low efficiency in tax collection was another trap.

When the Law and Justice Party swept into power some two and a half years ago, the new government decided to address these weaknesses in its development model. The Plan for Responsible Development was introduced in 2016, which gave the government a bigger role in managing the economy and stimulating growth. It was the idea of Prime Minister Mateusz Morawiecki, who at the time was serving as finance minister. Despite having a banking background – he had been chairman of Bank Zachodni BKK since 2007 – Morawiecki has increased the state’s role in the economy.

In an interview with Bloomberg last February, Morawiecki said: “Sometimes politicians are better at stimulating, and have to help in case of market failures or in areas like infrastructure.” Private capital in Poland, he said was too weak and cautious to lead growth, therefore increasing the state’s role was necessary. “The only thing we can do is to stimulate mid-size companies to go ahead and expand with our development instruments,” Morawiecki told Bloomberg.

Paradoxically, there is more central planning under the Law and Justice Party, but the emphasis is on helping small to medium businesses and start-ups. Klus mentioned a long list of solutions the government has devised as part of its Responsible Development Plan. There are many incentives for setting up businesses, mainly support for SMEs through loans, tax breaks, line of guarantees from a state bank, development funds for training, public procurements and a law for entrepreneurs among other things. The government has also introduced 14 special economic zones in cities with the highest unemployment.

The main objective of government planning is to take the economy towards innovative and high tech production, particularly start-ups. There is now an emphasis on “quality of jobs rather than the number of jobs created”, said Arkadiusz Tarnowski of the Polish Investment and Trade Agency. There are criteria for tax discounts, based on business engaging in research and development, co-operating with universities, employing graduates etc. Poland wants to transform its economic model “from labour intensive to knowledge intensive” in order to offerhigh-valuee services and encourage big banks, consultancy firms to set up operations in the country.

“In the ‘90s the model was business process outsourcing but in the 21st century we want knowledge process outsourcing,” said Tarnowski.

While the free market model served the country well after the fall of communism, the government is convinced that greater state involvement in the management of the economy is the way forward. After the spate of privatisations in the ‘90s, the state is now moving in the opposite direction buying banks and energy companies. There are also political reasons for this. Privatisations invariably led to big foreign firms taking over Polish companies and the government wants to reduce its dependence on foreign funding. Because of foreign ownership, there were annual outflows of $30 billion in dividends and other transfers.

With Polish capital unable to compete with big foreign firms, Morawiecki decided that the state could take this role and reduce dependence on foreign investment. He told Bloomberg that he wants to follow the growth model of Japan and South Korea where governments and big local companies drive expansion. If the growth forecasts for 2018 and ’19 prove accurate, it will be confirmation that the new growth model is working very well and go down as another economic success story, in which Poland seems to have acquired an expertise, in spite of five decades under communism.

 

 

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