Poland’s successful transformation (by Financial Times)

June 03, 2009

Poland’s successful transformation (by Financial Times)

Poland’s transformation into a market economy began two decades ago, when it became apparent that the central planning system had lost the competition with the western-style market.

In 1989, Poland was in a desperate economic condition, with economic disintegration and social tensions more advanced than elsewhere in the Soviet empire. The country was not servicing its external debt, near-hyperinflation undermined confidence, the economy was producing wrong products, workers had the wrong skills, and exports needed a radical redirection from east to west.

Apart from regaining macroeconomic stability, the most important immediate aim of the new non-Communist government was to liberalise prices in order to eliminate shortages.

The main long-term goal of the reforms was to close a large development gap which had opened up between western Europe and Poland, due in large part to Poland’s 120 years under foreign rule, followed by the devastation of the two world wars. These reforms included rapid privatisation of the economy, mainly through the emergence of a new private sector, and membership of the EU.

The initial ambition was for the economy to grow at an annual rate of 6-7 per cent. However, the average growth rate so far has been markedly lower, about 4.5 per cent a year. This is still about twice the rate of growth in the most developed EU countries. As a result GDP per head has increased in Poland from some 30 per cent to about 45 per cent of the level in those countries.

Looking back, it is clear that, given the starting point, the economic and political reforms of the past 20 years have been an extraordinary success. All the initial objectives of the reformers have to a large extent been achieved.

Poles now have what they probably wanted most: freedom of expression, work and travel throughout most of Europe, an unrestricted choice of ideas, a chance to develop talents, and potential access to a full range of modern products.

Still, many of the young and the entrepreneurial complain that the country has not been changing fast enough. Indeed, the dislocations caused by the transformation led millions to lose status and jobs. Financing their immediate needs has been a brake on investment and growth; large social transfers were apparently a necessary price to pay for social cohesion and political stability.

There are many important problems yet to be properly addressed. Poland is still far behind western Europe in the quality of public infrastructure and in the volume and quality of housing stock. A large part of the labour force is still locked in the countryside or economically inactive. The retirement age is so low that there are nearly as many pensioners as workers. Consequently, the labour participation rate remains below the EU average.

The research output of universities and industrial laboratories is insignificant. The energy industry is technologically outdated. By the standards of Germany, France or the UK, Poland is not yet an important industrial or scientific power. During the past decade there has been a resurgence of red tape and a sharp slowdown in privatisation.

The current difficult world environment is testing the capacity of the new Poland to absorb a large external shock. So far, the country is passing the test well. This is partly due to a much smaller role of the financial sector compared with western Europe or the US, and partly due to a relatively large domestic market.

However, regional comparisons suggest that Poland’s relatively strong fundamentals, both macro and micro, are also very helpful.

The principal aim of Poland’s economic policy during the next several years will be to meet the Maastricht criteria needed to join the eurozone. The process is expected to promote investment and growth by easing access to external savings at lower interest rates and by reducing the risk of macroeconomic instability.

The achievement of this objective would be helped by the completion of pension reforms, which is in any case an important aim in its own right. The countryside remains a big reservoir of young labour, but a much-improved system of education and training is needed to activate it.

During the next 20 years, Poland’s GDP a head seems to be on course to continue to expand at about 4-5 per cent a year and, by the end of that period, to reach the level of about 60 to 70 per cent of the per capita GDP in western Europe. (FINANCIAL TIMES)

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