The Polish Miracle

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Editor, news2biz POLAND

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Two decades after the fall of Communism and six years after the country's EU accession, Poland is no more the "Sick Man of Europe." In fact, in comparison with some of the old as well as new EU member states it's beginning to look like an athlete.

It's been almost a decade since I started reporting business news from Poland and the past two years, rather catastrophic for many global economies, have made my job more pleasant than ever. For once, I actually had a lot of good news to report. No more explaining why things that ought to work don’t seem to be working, no more seeking justification for eccentric and ineffective policies, no more embarrassing results in international rankings.

Instead, my new task became helping outsiders differentiate between Poland and some of the less fortunate EU members. The global media, which like to throw the whole of Central and Eastern Europe in one basket, regardless of the context, were slow to register the new dynamics. Fortunately, looking back at the past year or so, one may safely say that foreign investors and politicians seem to have learnt that as far as the economic situation is concerned, Poland and the CEE region are not necessarily the same thing and it pays off to understand the difference.

Poland was the only country in the European Union to register economic growth last year, at 1.7%. At the same time, GDP per head rose from 50% to 56% of the EU average in 2009 - a record jump that has a lot to do with recession elsewhere rather than a sudden improvement in Poland. Nevertheless, these factors combined with lower prices made Poland Europe's sixth-largest economy in terms of purchasing power parity.

What then, allowed the Polish economy to keep its head above water? Perhaps the number one factor was the country's huge domestic market (38m people – more than all of the other new member states combined), which has cushioned demand. After all, only some 40% of Poland's GDP is based on exports, which makes it less of a deadly blow when importers of Polish food, furniture and fertilizer fell into recession. By contrast, the Czech Republic and Hungary are nearly twice as dependent on exports. At the same time, Polish consumers never really fell for this whole "global crisis" talk. In a country where only a few years ago the registered unemployment stood above 20%, the current level of 12-13% (8.9% in January 2010 according to Eurostat methodology), does not seem that tragic. Hence, they kept on shopping.

Polish banks likewise remained in good shape, as they came late to the wild foreign-currency lending that proved so disastrous in Hungary and Latvia, and their cautious approach helped Poland avoid the credit-fueled boom-to-bust scenario that devastated so many other economies. Moreover, Polish consumers and businesses did not rush to use the foreign funding that flowed into the region in the wake of the 2004 EU enlargement for cheap real-estate loans as those in other countries did. Instead, Poles tended to develop their businesses with domestic resources. Paradoxically, Poland's conservative banking regulations and cautious lending policies (which some mistook for underdevelopment) was what saved the country from a catastrophe.

Last but not least, Poland remains a low-cost manufacturing center and recently also a major destination for service outsourcing projects. In the Baltics, for instance, foreign investors focused on the non-tradable sector (construction, real estate, banking), while in Poland more money was going into manufacturing and exports-oriented sectors. This continued to pay off, as even during the downturn exports made a positive contribution to GDP. Poland's currency, the zloty, provided a key cushion by falling in value, making Polish goods more competitive abroad, and domestic products – more attractive. It's a safety valve not independently available to the 16 countries that use the euro, or to the Baltic countries and Bulgaria, with their currencies pegged to the euro.

But what about the government? How much of Poland's economic miracle can be attributed to its politicians? Well, these good results owe more to luck than effective leadership. One thing is for sure – for the first time in years Poland has a sensible, business-friendly, center-right government with a majority in parliament. However, its biggest achievement to-date was not making life any more difficult for entrepreneurs, something which cannot be said of most of its predecessors. The expectations had been much higher, however, but many valuable initiatives have been abandoned due to constant wrangling with President Lech Kaczynski, who supports the opposition and gladly takes advantage of his veto prerogative.

Even though many long-term issues remain unresolved (for instance a low rate of participation in the workforce, growing public deficit, unreliable public services and huge economic emigration), the government has made attempts to tackle some of Poland's worst problems. A partial reform of the pension system, giant nationwide road-building program, strong emphasis on privatization, tax cuts, and efforts to reduce the country's stifling bureaucracy are just some examples of a certain new quality the Civic Platform (PO) cabinet brought into the political scene. Despite a recent scandal about lobbying by the gambling industry, the ruling party has enjoyed stable public support and its influence is likely to strengthen in the autumn, following the presidential elections.

According to all polls, whoever represents the PO in the vote, is bound to beat the incumbent president Lech Kaczynski, whose popularity rises only when he makes no public statements. The shambolic governments of the past are something most Poles would like to forget and most seem to prefer the cautious and boring present reality to any populist alternative at the moment. After all, by the grim standards of recent decades, or even centuries, the country has never been more stable, secure, rich, or better-run.