Poland: Steadfast On The Road
To A New Golden Age
Since the beginning of its post-Communist transition in 1989, Poland has been the fastest growing economy in Europe, doubling its Growth Domestic Product (GDP) per capita over the last two decades. It was also the only economy in Europe, which did not stop growing during the global crisis, expanding its GDP by 20 percent between 2007 and 2012. Despite hitting a soft patch in early 2013, growth is picking up again. The International Monetary Fund (IMF) projects that the Polish economy will expand by 2.4 percent in 2014, and around 3 percent per year until 2018. This would allow Poland to catch up with the level of income of Portugal, and reach the highest level of income relative to Western Europe in its history.
This remarkable performance, especially since 2009, has been supported by a depreciated exchange rate — which increased the price attractiveness of Polish exports and turned the country into a “China of Europe” — as well as by low private and public sector debt leverage and flexible labor markets. In addition, close proximity to the German growth engine, which absorbs almost one third of Polish exports, has been useful. Finally, a conservative banking sector, which has been well capitalized, liquid and profitable throughout the crisis, has supported lending.
But broadly prudent economic management was also important. Stimulative monetary and fiscal policies supported growth and allowed Poland to become Europe’s “green island” of growth. Fiscal stimulus was particularly helpful, with the general government deficit increasing from 3.8 percent of GDP in 2008 to above 7 percent in 2009 and 2010, and close to 5 percent on average during 2011-2013. This Keynesian maneuver of increased public spending was skillfully couched in the rhetoric of fiscal discipline, which helped soothe the financial markets.
Going forward, economic policy will need to spur the ongoing economic recovery, supported by the rejuvenation of the Euro-zone, and mitigate the risks related to the Federal Reserve’s monetary normalization. Fiscal policy will need to become tighter to keep public debt in check and to reduce Poland’s vulnerability to the Federal Reserve’s tapering, which will lead to more expensive and less abundant foreign inflows. However, unlike Turkey, South Africa, Brazil or Indonesia, Poland is much less likely to be affected by the potential market turmoil owing to its still relatively low debt leverage, flexible exchange rate and small current account deficit, which is projected to amount to around 3 percent of GDP in 2014 and is largely financed by FDI and inflows from the European Union (EU).
However, tighter policy should not come at the cost of the still sorely needed public investment, as Poland’s per capita capital stock is only one third of that in Western Europe. The collapse of public investment that followed last year’s European Soccer Championship should not be repeated. The pension funds reform, while controversial, will reduce the public debt to below 50 percent of GDP and would thus allow additional fiscal space to finance high-return public investment, especially in roads, railways and broadband, that will be co-funded by the EU during the 2014-2020 budget perspective. Not a single Euro should be lost in what will be the last such generous infusion of EU funds — one exceeding the value of the post-war Marshall Plan for the whole of Europe. Monetary policy should continue to be accommodative until the economic recovery is firmly on track. The strong credibility of Poland’s central bank, despite some hiccups last year when it raised rates only to cut them down soon after, should also keep inflation expectations in place.
Above all, however, Warsaw will need to implement structural reforms to keep the growth momentum going. These should focus on employment, innovation and the business climate. When it comes to employment, raising the retirement age to 67 years (one of the highest in the world relative to life expectancy) last year was much welcome, but it will not be sufficient to tangibly raise employment rates on its own. Providing more efficient support in the job search process, relaxing rental market regulations to increase internal mobility and improving training programs to reduce skill mismatches, especially among the older 50+ generation, will be vital. With regard to innovation, a fundamental change of paradigm is necessary. Warsaw needs to move away from the “business as usual” model of public support — which despite an investment of almost $13 billion in the last couple of years is yet to be reflected in improved enterprise innovation statistics — to a model that is fully focused on the needs of enterprises and is sufficiently user-friendly to ensure that the promising young startups manage to maneuver through the bureaucracy. Finally, notwithstanding Poland’s recent progress reflected in the World Bank’s Doing Business ranking, which lists it as the 45th economy in the world in terms business friendliness (a jump from the 74th place two years ago), it is still far from the top 30, where Warsaw should aim to be.
Ultimately, such structural reforms could raise Poland’s potential growth rate to four percent per year and help prepare it for accession to the Euro-zone around 2020. However, it is not clear whether the government will maintain its reform appetite in the run up to the parliamentary elections in 2015. The experience of the last two decades is not entirely encouraging. Nonetheless, Poland’s convergence with Western Europe will continue, even if at a pace below the country’s potential.
By Marcin Piatkowski
– Dr. Marcin Piatkowski is Assistant Professor of Economics at the Kozminski University in Warsaw. He was formerly Chief Economist of PKO BP and Advisor to Poland‘s Deputy Premier and Minister of Finance.
– This article first appeared in the November 5, 2013 issue Central Europe Digest. Reprinted with permission. Central Europe Digest is a publication of the Center for European Policy Analysis (CEPA), a Washington, DC-based research institute devoted to the study of Central and Eastern Europe. Material published in the Digest is original, exclusive to CEPA and not reproduced from outside sources. www.cepa.org