The 'Secret' of Poland's Success
[SIZE=-1]Wall Street Journal[/SIZE]
Warsaw stuck to its belief in free-market principles throughout the financial crisis and economic downtown, and has the performance to show for it.
Poland is the only country in Europe to have come through 2009 without recession. What is more, growth was about 1.5%, which is the trend rate of the euro-zone countries, though well below Poland's own potential. How can we account for Poland's success, and what lessons should we draw from it? Several factors account for the country's performance: strong institutions, a resilient economic structure, and well designed economic policy during the crisis. High levels of trust in the government ensured that statements by politicians about the strength of economic fundamentals and of the financial system were believed. This trust was partly based on the success of Poland's institutions and economy over the last 20 years, during which time the country has had the highest sustained growth in the region—real GDP has doubled over this period, while increasing only 70% in Slovakia, 45% in the Czech Republic, Hungary and Estonia, and not increasing at all in Russia and Bulgaria.
In common with other new EU member states, Poland has a relatively low level of financial leverage. This helped Poland and its neighbors avoid the bankruptcy of any major financial institutions (unlike some of the old member states of western Europe). Like a number of its neighbors, Poland also benefited from a significant depreciation of the zloty during the crisis. But this was not a key factor in its success as compared to Sweden or the Czech Republic which experienced similar depreciations. In fact, being a relatively large country, Poland (with exports accounting only for 40% of GDP) was less well placed to gain from depreciation than they were, with export shares of 77% and 54% respectively. In spite of this, these countries suffered from severe recession.
Nor can Poland's success be attributed to the German "cash for clunkers" program, as the car industry accounts for a smaller share of the Polish economy than in the Czech Republic, Sweden, Slovakia, and Germany itself.
The larger share of small and medium-size, owner-managed firms in Poland's economy certainly played an important role in the country's success. Poland's work force has one of the largest shares of entrepreneurs in all of Europe, and they proved highly resilient to the shock of the crisis, and flexible in their response to it. By rapidly cranking up the absorption of EU funds, the government also helped maintain demand and sustain investment. However, all new member states have benefited from EU funds in similar proportions.
What makes Poland stand out is the economic policy it pursued.
That policy was based on a profound belief in free market economics. Fiscal policy is a good example of this approach. Most countries instituted stimulus programs at the beginning of the crisis. Those that did not were generally ones that could not obtain the necessary financing, such as Hungary or the Baltic states. Poland was probably the only country in Europe which could afford to finance a stimulus program, but decided not to. Indeed, we did exactly the opposite, cutting expenditure at the height of the crisis (in December 2008 and January 2009) by the equivalent of 1% of GDP. We also took additional revenue measures in July 2009 amounting to 0.8% of GDP.
The aim of these highly orthodox (but at the time atypical) measures was to re-establish investor confidence in the country, at a time when central and eastern Europe was (wrongly, as it turned out) viewed as highly crisis-prone. This lack of confidence was leading to an uncontrolled depreciation of the region's currencies, and runaway depreciation was the only serious threat to the stability of the banking system (which had a moderate, though significant, amount of foreign currency exposure).
In March 2009 (before Poland's IMF credit line was finalized) the government undertook a program of selling euros from EU funds, as the then-highly depreciated zloty allowed these funds to be converted at a particularly advantageous rate. A welcome side effect of these sales was that depreciation was halted and reversed.
Throughout the crisis, Poland continued with its multi-year deregulation drive: Privatizing remaining state-owned companies, simplifying tax laws, cutting tax rates, and reducing bureaucratic hurdles to business. A key example was the entrepreneurship law of March 2009, which dramatically limits the restricted number of health, labor, tax, safety and fire controls that can be carried out in any business. Furthermore, we cut personal income tax rates from 19% and 30% to 18%, and from 40% to 32%, in 2009. Also, in December 2008, at the very height of the crisis, Poland completed its pension reform, which ensures that the average effective retirement age will rise by five years to 63, reducing implicit pension debt by about 25% of GDP. Almost everyone in Poland now has a personal pension account which will make it worth their while not only to work until the official retirement age (60 for women, 65 for men) but well beyond.
In 2009 we made it far easier for private landlords to repossess their property, even if that required the eviction of tenants. A similar law was one of the Margaret Thatcher's key reforms. It will facilitate labor mobility and the rapid development of the private rental sector.
After six years of privatization standstill, in 2009 Poland privatized state assets worth 0.6 % of GDP. In 2010 the government intends to privatize four times as much. The main aim is to return companies to the private sector, to depoliticize management, and to increase efficiency. An important side effect will be to reduce debt growth, while keeping taxes in check.
At the same time, the Polish government realized that only free trade would allow Poland to get through the crisis successfully, and allow Europe to avoid a repeat of the economic horrors of the 1930s. This is why at the EU summit, last March, the prime ministers of the Czech Republic and Poland—Mirek Topolanek and Donald Tusk—supported Jose Manuel Barroso's growing concerns about protectionism by some of the old EU members, and his call to ensure a renewed commitment to the basic principles of the European Union. Poland also believes that international solidarity is a key to successfully overcoming the crisis. That is why we have contributed to international financial support for Iceland, Latvia, and Moldova.
Poland has stuck to its belief in free market principles during the crisis. Instead of a stimulus package, it enacted an effective savings program, as well as implemented several key structural reforms. That is the "secret" of Poland's success.
[SIZE=-1]Wall Street Journal[/SIZE]
Warsaw stuck to its belief in free-market principles throughout the financial crisis and economic downtown, and has the performance to show for it.
Poland is the only country in Europe to have come through 2009 without recession. What is more, growth was about 1.5%, which is the trend rate of the euro-zone countries, though well below Poland's own potential. How can we account for Poland's success, and what lessons should we draw from it? Several factors account for the country's performance: strong institutions, a resilient economic structure, and well designed economic policy during the crisis. High levels of trust in the government ensured that statements by politicians about the strength of economic fundamentals and of the financial system were believed. This trust was partly based on the success of Poland's institutions and economy over the last 20 years, during which time the country has had the highest sustained growth in the region—real GDP has doubled over this period, while increasing only 70% in Slovakia, 45% in the Czech Republic, Hungary and Estonia, and not increasing at all in Russia and Bulgaria.
In common with other new EU member states, Poland has a relatively low level of financial leverage. This helped Poland and its neighbors avoid the bankruptcy of any major financial institutions (unlike some of the old member states of western Europe). Like a number of its neighbors, Poland also benefited from a significant depreciation of the zloty during the crisis. But this was not a key factor in its success as compared to Sweden or the Czech Republic which experienced similar depreciations. In fact, being a relatively large country, Poland (with exports accounting only for 40% of GDP) was less well placed to gain from depreciation than they were, with export shares of 77% and 54% respectively. In spite of this, these countries suffered from severe recession.
Nor can Poland's success be attributed to the German "cash for clunkers" program, as the car industry accounts for a smaller share of the Polish economy than in the Czech Republic, Sweden, Slovakia, and Germany itself.
The larger share of small and medium-size, owner-managed firms in Poland's economy certainly played an important role in the country's success. Poland's work force has one of the largest shares of entrepreneurs in all of Europe, and they proved highly resilient to the shock of the crisis, and flexible in their response to it. By rapidly cranking up the absorption of EU funds, the government also helped maintain demand and sustain investment. However, all new member states have benefited from EU funds in similar proportions.
What makes Poland stand out is the economic policy it pursued.
That policy was based on a profound belief in free market economics. Fiscal policy is a good example of this approach. Most countries instituted stimulus programs at the beginning of the crisis. Those that did not were generally ones that could not obtain the necessary financing, such as Hungary or the Baltic states. Poland was probably the only country in Europe which could afford to finance a stimulus program, but decided not to. Indeed, we did exactly the opposite, cutting expenditure at the height of the crisis (in December 2008 and January 2009) by the equivalent of 1% of GDP. We also took additional revenue measures in July 2009 amounting to 0.8% of GDP.
The aim of these highly orthodox (but at the time atypical) measures was to re-establish investor confidence in the country, at a time when central and eastern Europe was (wrongly, as it turned out) viewed as highly crisis-prone. This lack of confidence was leading to an uncontrolled depreciation of the region's currencies, and runaway depreciation was the only serious threat to the stability of the banking system (which had a moderate, though significant, amount of foreign currency exposure).
In March 2009 (before Poland's IMF credit line was finalized) the government undertook a program of selling euros from EU funds, as the then-highly depreciated zloty allowed these funds to be converted at a particularly advantageous rate. A welcome side effect of these sales was that depreciation was halted and reversed.
Throughout the crisis, Poland continued with its multi-year deregulation drive: Privatizing remaining state-owned companies, simplifying tax laws, cutting tax rates, and reducing bureaucratic hurdles to business. A key example was the entrepreneurship law of March 2009, which dramatically limits the restricted number of health, labor, tax, safety and fire controls that can be carried out in any business. Furthermore, we cut personal income tax rates from 19% and 30% to 18%, and from 40% to 32%, in 2009. Also, in December 2008, at the very height of the crisis, Poland completed its pension reform, which ensures that the average effective retirement age will rise by five years to 63, reducing implicit pension debt by about 25% of GDP. Almost everyone in Poland now has a personal pension account which will make it worth their while not only to work until the official retirement age (60 for women, 65 for men) but well beyond.
In 2009 we made it far easier for private landlords to repossess their property, even if that required the eviction of tenants. A similar law was one of the Margaret Thatcher's key reforms. It will facilitate labor mobility and the rapid development of the private rental sector.
After six years of privatization standstill, in 2009 Poland privatized state assets worth 0.6 % of GDP. In 2010 the government intends to privatize four times as much. The main aim is to return companies to the private sector, to depoliticize management, and to increase efficiency. An important side effect will be to reduce debt growth, while keeping taxes in check.
At the same time, the Polish government realized that only free trade would allow Poland to get through the crisis successfully, and allow Europe to avoid a repeat of the economic horrors of the 1930s. This is why at the EU summit, last March, the prime ministers of the Czech Republic and Poland—Mirek Topolanek and Donald Tusk—supported Jose Manuel Barroso's growing concerns about protectionism by some of the old EU members, and his call to ensure a renewed commitment to the basic principles of the European Union. Poland also believes that international solidarity is a key to successfully overcoming the crisis. That is why we have contributed to international financial support for Iceland, Latvia, and Moldova.
Poland has stuck to its belief in free market principles during the crisis. Instead of a stimulus package, it enacted an effective savings program, as well as implemented several key structural reforms. That is the "secret" of Poland's success.
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