After a successful transformation Poland begins to drift

Warsaw, Poland (CC By Radek Kołakowski)

A quarter of a century after the formation of Tadeusz Mazowiecki’s government, in which Deputy Prime Minister Leszek Balcerowicz was responsible for the economic reforms, economists are trying to answer the question as to whether Poland has exhausted its opportunities of development and what impulses are needed for Poland to take advantage of future opportunities.

The balance sheet of the Polish transformation is judged to be clearly beneficial, particularly in comparison with other former socialist states. Poland did not slide into recession during the period of global crisis. This helps to highlight Poland’s success, but in questions about the future, doubts persist as to whether our country can still cope.

It is worth recalling data which illustrate the scale of the leap forward during the last 25 years in comparison with the states which were at that time in the Soviet bloc. Cumulative GDP growth in Poland between 1990-2012 amounted to almost 130 percent. Only Estonia achieved a similar result, while Slovakia, the next on the list, recorded GDP growth of 70 percent. Other countries faired much worse.

GDP per capita increased in Poland from USD 10,000 in 1990 to over USD 22,000 in 2012. In comparison with the states of our region, in 1990 GDP per capita in Poland was only slightly higher than in Bulgaria and lower than everywhere else. Now it is still lower than, for example, in Slovenia, Slovakia and the Czech Republic, but in none of these states did GDP per capita more than double.

– Poland has a quarter of a century of spectacular economic success behind it – said professor Anders Aslund, senior fellow in the Peterson Institute for International Economics and specialist on economic transformations in Central and Eastern Europe, at the mBank – CASE seminar. – The key reforms were carried out in the years 1989-1991 and it was then that Poland gained its advantage. It undertook much deeper and stronger reforms than other countries – he added.

The strongest criticism levelled against the transformation period comes from professor Grzegorz Kołodko, who was twice deputy prime minister and minister of finance in left-wing governments. He defines Leszek Balcerowicz’s reform plan as “a shock without therapy” and claims that it was not until the rejection of the Washington Consensus during his time in government in 1995-1997 that Poland was led along the path of rapid growth (the Washington Consensus  obliges states transforming their economies to observe fiscal discipline, liberalize trade and financial markets, deregulate and liquidate barriers to foreign investment, maintain the convertibility of the currency and carry out privatisation).

Grzegorz Kołodko also believes that Poland took advantage up to 2007 of only two thirds of its growth potential. “… more could have been achieved at a lower cost… During the transformation Poland squandered its chances of much greater GDP growth than it managed to achieve” – he wrote in the quoted text, adding that systemic and economic transformation in Poland is a “two-thirds” success.

– Poland is the wonder child of the Washington Consensus… We can say that all the recommendations were carried out almost precisely to the letter and the country achieved economic success. Perhaps we are one of the few countries that can say this so unequivocally – said professor Witold Orłowski, Chief Economic Adviser at PwC.

What are the barriers to growth?

An evaluation of future opportunities is, however, much more difficult than an evaluation of the past transformation. Poland achieved high competitiveness in the “manufacturing chain” thanks to low labour costs. It is precisely thanks to this that when the crisis hit, the factories of foreign companies in Poland continued to work at full steam, while even in Germany jobs were lost – says Anders Aslund. Thanks to this, Polish exports rose from EUR 50bn in 2000 to over EUR 180bn in 2012.

Competitiveness arising from low labour costs and the manufacture of relatively simple products and intermediate products can, however, lead to the “middle income trap”. In 2012 unit labour costs reached the record low value of 84 percent of the value that they were in the year 2000. However, already in the next few years, cost competitiveness could be undermined by the opening of EU markets for Ukraine, where labour costs are even lower.

At the same time the current size of expenditure on research and development, which amounts to 0.9 percent of GDP, does not bode well for a rapid transition to a knowledge-based economy, which depends on innovation and a technological leap forward. In comparison, the USA, Sweden, Finland, Austria, Germany and Denmark all spend 3 percent of GDP per year on research and development.

Poland also has a low ratio of investment to GDP. This ratio has persisted below 25 percent since the year 2000, and in 2012 it fell below 20 percent, reaching the lowest levels of the last quarter of a century. However, an increase in investment is possible either thanks to the import of capital or thanks to a growth in the country’s savings.

– A country that is developing rapidly should invest between 25-30 percent of GDP – says Anders Aslund.

– If we look in the long-term, then we do not speak of a low rate of investment, but of a low rate of saving. This is the problem that Poland has not resolved, as, indeed, none of the countries of the transformation have. It is not possible to maintain a high rate of investment with a low rate of saving without worsening the external balance – added Witold Orłowski.

However, is it possible to generate greater investment with low savings and similarly low wage income?

– In a situation where it is not possible to generate higher budget deficits, it is necessary to turn away from changes that cause a diminishing share of wages in the structure of the national income – said Jerzy Osiatyński, member of the Monetary Policy Council.

The next barrier to development is that although Poland comes out very well in PISA tests assessing pupils’ skills and the number of students in higher education has tripled in the last quarter of a century, only two higher education institutions – the University of Warsaw and the Jagiellonian University in Kraków – barely made it into the ranking of the 500 best universities in the world.

– Increase investment, improve the quality of higher education and spend on research and development – these are crucial changes if Poland wants to keep up – says Anders Aslund.

Political consensus – mission impossible

Let us return once again to the beginnings of the “turning point”. The president of mBank, Cezary Stypułkowski, draws attention to the fact that already in the 1980s in the reform circles of the Polish United Workers’ Party there was a discussion on changing the economic system.

– Changes were discussed, but impotence ran very deep. The system was completely unwieldy– he said.

The beginning of the change of the economic system took place, however, towards the end of the Polish Peoples’ Republic thanks to the introduction in late 1988 of the Act on economic activity drawn up by the then minister of industry, Mieczysław Wilczek, and the prime minister, Mieczysław Rakowski. This allowed the creation of private enterprises and jobs for those who lost their jobs in the state enterprises.

Stanisława Golinowska, professor of the Jagiellonian University in Kraków adds that the explosion of small businesses was fed by the wave of economic migration abroad that had started in the 1970s and the transfers from emigrants, who supplied the small businessmen with significant capital injections.

– We ourselves were surprised by what an entrepreneurial nation we are. It was one of the factors which played a key role in the first years – says Witold Orłowski.

– Small businesses would have needed another leap – adds Stanisława Golinowska.

The political consensus which was built around the conviction of the necessity for the reforms in Poland lasted quite a long time, but it was a phenomenon that was unrepeatable in the history of the last 25 years. It was a completely different situation from now, when even such an obvious reform – in the light of growing life expectancy and unfavourable demographic changes – as extending the retirement age, becomes an opportunity to instigate  a fierce political struggle and incite social unrest.

– A parliamentary commission worked on Balcerowicz’s packet of reforms with very active and strong support from the Polish United Workers’ Party. If it hadn’t been for that, during the post-communist governments there would have been significant changes. But there weren’t any – says Jerzy Osiatyński.

Andres Aslund believes that the “war at the top”, which led to fierce disputes, had a negative influence by slowing down privatisation and introducing instability into public finances. However, he adds that these issues did not play a key role in the success of the transformation. On the other hand, political instability and frequent changes of government in the first period were characteristic of the majority of countries that were in this phase of development.

– We should not forget about the protective umbrella which Lech Wałęsa opened up and held over us for a long time – said Jerzy Osiatyński.

Negligence

Economists admit that the transformation did not avoid mistakes which continue to be a burden to Poland’s development today, although they say that they were rather mistakes of negligence. The first of these was the lack of reform of state and public institutions. The most severe effects – according to Stanisława Golinowska – are still felt today in the health care system and the judicial system.

Polish economic courts are unique in Europe and the situation is changing very slowly. According to the report of the World Bank “Doing Business”, collection of receivables from contracts lasts 685 days in Poland, of which the court procedure alone lasts 480 days. In the last 10 years there has been an improvement, because in 2005 it lasted… 1000 days. On the other hand, in Lithuania the whole procedure lasts 166 days. Lawyers themselves admit that society has no confidence in the courts, particularly in the lower courts, nor in the objectivity of their decisions. There are cases where judges remove from the courtroom the social observers of the Helsinki Foundation for Human Rights.

– What was the biggest mistake? We believed that our public institutions resembled those in the rest of the world, unlike the banks and enterprises. This was a mistake. Our public institutions were very distant from the standards of the developed countries, and once they were allowed to get entrenched and adapt to the new conditions, it was very difficult to change them – said Witold Orłowski.

Social capital is being destroyed

The start of the transformation was also possible thanks to the social capital accumulated by “Solidarity”, and was manifested during the elections in June 1989. Jerzy Osiatyński claims that it was also accumulated thanks to political events – regaining independence and the withdrawal of the armies of the USSR from Poland.

– This gave us the feeling that we are a sovereign source of very difficult economic changes, masters of our own country. One should consider the question of the economic reforms against this background. This was not only an exercise in economic transformation itself. Perhaps this is why we succeeded as we did – he said.

– There were people who had the courage to face a challenge which was entirely beyond our imagination. But it was also a moment when they did not make it the subject of a dispute. It happened in real circumstances, in the framework of a very favourable political moment, between the belief and imagination of Leszek Balcerowicz, and the belief of the people that they were building a new reality – said Cezary Stypułkowski.

The recent “Social Diagnosis” says that, while in 2003 there were small signs of the creation of a civil society, there was a further fall in one of the lowest indicators in Europe of general trust, civil activity, work for the local community and willingness to enter into sharing relations.

– It is easy to build small companies with little social capital, but difficult to build big ones – says Witold Orłowski.

The low social capital, constantly subjected to further waves of destruction, the stubbornly accumulated “negative social capital”, as Alejandro Portes, professor of Princeton University, describes it, could become a permanent barrier to economic development. Perhaps this is the most important reason why Poland could drift rather than change dynamically for the better.

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