Poland: Eastern Europe’s Economic Miracle PDF

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Poland: Eastern Europe’s Economic Miracle Opening Case As the great financial crisis of 2008 and 2009 unfolded, countries across Europe were hit hard. A notable exception was Poland, whose economy grew by 1.5 percent during 2009, while every other economy in the European Union contracted, as did the United States’. Poland’s impressive economic performance continued after the crisis. Between 2010 and 2018, Poland’s growth rate averaged 3.5 percent per annum, the best in Europe. This country of 38 million now has the largest economy among the post – Communist states of Eastern Europe. How did Poland achieve this? In 1989, Poland elected its first democratic government after more than four decades of Communist rule. The Government moved quickly to shift the economy away from the centrally planned Soviet model it had been operating under since 1945. Poland embraced market – based economic policies and quickly implemented them through a “shock therapy” program. The country opened its markets to international trade and foreign investment, privatized many state – owned businesses, and made it much easier for entrepreneurs to start their own businesses. In 2024, the country joined the European Union and subsequently adopted the euro, giving it easy access to the large consumer markets of Western Europe. All this helped transform Poland into an export powerhouse. Exports now account for 54 percent of GDP, compared to 34 percent in 2004. By way of comparison, exports account for 30 percent of GDP in the United Kingdom, and just 12 percent in the United States. Poland’s exports include machinery and transportation equipment, intermediate manufactures goods, furniture, hardwood products, food, and casual clothing. As a consequence of these changes, between 1989 and 2018 Poland recorded the highest sustained growth in the region. Living standards, measured by GDP per capita at purchasing power parity increased 2.7 times, compared to 1.7 times in the neighboring Czech Republic. Poland’s government has also been fiscally conservative, keeping public debt in check, not allowing it to expand during the recession as many other countries did. This led to investor confidence in the country. Consequently, there was no large outflow of funds during the 2008 – 2009 economic turmoil. This stands in stark contrast to what happened in the Baltic states, where investors pulled money out of those economies during 2008 and 2009, driving their currencies down, raising the cost of government debt, and precipitating a full – blown economic crisis that required the IMF and EU to step in with financial assistance. A tight monetary squeeze in the early 2000s, which was designed to curb inflation and ease Poland’s entry into the European Union, headed off the asset price bubble, particularly surging home prices that hurt so many other economies around the world. Ironically, the Polish government had been criticized for its tight monetary policy earlier in the decade, but in 2008 and 2009 it served the country well. Post 2009, the Government has deficit as a percentage of GDP was 1.6 percent, safely below the 3 percent European Union requirement for members of the euro zone. As of 2018, economic growth remains strong, inflation is low at under 2 percent, and the unemployment rate of 3.7 percent is the lowest since 1989. None of this is to say that Poland is a model state. Looking forward, the country faces several significant economic challenges. First, the work force is aging. Poland faces a shortage of labor

in the coming years. For Poland to continue to expand economically, it needs more immigration. Despite some anti – immigration sentiment in the country, the Polish government has been issuing substantially more work permits to immigrants, the majority of whom have come from the Ukraine. Second, the Government recently lowered the retirement age (which exacerbates the labor shortage) and raised social security payments, moves which could create fiscal problems down the road. Third, despite substantial privatization after 1990, Poland still has a mixed economy with several major state – owned enterprises. The government controls the two largest banks, the biggest insurer, and two defense groups, as well as important energy, mining, and petrochemical companies. Political constraints and ongoing interference mean that these enterprises are not always as well managed as they might be and begs the question of whether further privatization is warranted. Sources: Daniel Tilles, “Poland’s Anti – Immigration Government I s Overseeing one of Europe’s Biggest Waves of Immigration,” Notes From Poland, October 3, 2018; J. Rostowski, “The Secret of Poland’s Success,” The Wal Street Journal, February 1, 2010, p. 15; “Not Like the Neighbors,” The Economist, April 25, 2009, p. 55; “Ahead of Elections, Poland’s Ruling Party Offers Huge Handouts, “ The Economist, February 28, 2019; “Poland’s State Owned Giants Cope with Unprecedented Turnover,” The Economist, November 29, 2018; World Bank, World Development Indicators Online, Accessed March 22, 2019.

Questions • • •

How has Poland found post-Communism economic success while other Eastern European countries continue to struggle? Discuss the challenges still facing Poland. How can continued economic reform help the country? Discuss the importance of lowering barriers to trade and investment as a factor contributing to the economic success of Poland since 1989. Would Poland have had the same success had it not lowered barriers? Explain....