Lessons learned, Poland weathers slump

People pass in front of the Palace of Culture covered with a giant European Union flag in Warsaw.

‘We haven't seen the same sort of blowout'

Doug Saunders
London — Globe and Mail Update Last updated on Tuesday, Jul. 07, 2009 07:38AM EDT

To look across Europe today is to see an ocean of red ink and hastily spilled bailout funds, dotted with shuttered factories, abandoned construction sites, long jobless lines and toppled banks.
So you might be surprised to discover one of the most secure refuges from this perfect storm is on the eastern edge of Europe, in the post-Communist economy of Poland.
Hundreds of thousands of young Polish workers have flocked back from the battered economies of Britain and Ireland, where almost a million Poles filled those countries' service economies during the boom years after Poland joined the European Union in 2004. Once home, they find themselves entering a surprisingly robust economy that is poised to take off far more quickly than its neighbours to the west, north and south.
The streets of Warsaw and Gdansk are lively places full of free-spending shoppers and securely employed workers, even as Poland's neighbours beg for international bailouts amid catastrophic failures.

The World Bank says the economy of this nation of 38 million will grow by 0.5 per cent this year, 0.9 per cent next year and 3.5 per cent in 2011 – making Poland one of the few countries that will avoid a recession entirely and marking it as one of the most successful of medium-sized countries.
The rest of Europe, meanwhile, is facing economic decline and Poland's eastern neighbours are averaging catastrophic rates of 4-per-cent shrinkage.
Last month, Warsaw announced the latest in a long string of surprising economic results: Poland's current account balance – the difference between imports and exports – showed a surplus of €342-million ($555-million), far better than the €79-million deficit that had been forecast, indicating that Europeans are eagerly buying lower-priced Polish products.
On Monday, the debt-rating agency Standard & Poor's announced Poland will maintain its A-minus rating, even as most Central European countries are facing downgrades, because S&P analysts expect Poland to avoid a debt crisis – in part because its laws prevent it from maintaining high debt levels for long periods. “This is not a government going on a spending spree,” S&P analyst Kai Stukenbrock said.
It's a striking contrast to Poland's far wealthier next-door neighbour Germany, which has been devastated by collapsing export sales.
That's not the only impressive indicator to emerge. Last month, Poland's retail sales figures showed a strong increase over 2008, while sales are far down in most other European markets. And the zloty, Poland's currency, has gained value while other currencies, including the U.S. dollar, have been weakened by bailout initiatives.
Although many Polish companies are feeling the effects of the downturn, the country is not seeing large numbers of workers losing their jobs. Poland's jobless rate fell for the third month in a row in June, to 10.7 per cent, from 10.8 per cent in May, the Labour Ministry said yesterday.
What has Poland done to avoid the precipitous bust that has crippled Ireland and Spain, hobbled Britain and Germany, and turned its neighbours Hungary and the Baltic states into basket cases requiring emergency IMF bailouts?
In short, economists say, Poland avoided the boom-and-bust economy. While other countries were allowing their banks and corporations to leverage themselves into illusory prosperity – and amassed high levels of public debt in expectation of future revenues – Poland reined in its banks and firms, and experienced modest but stable growth for most of the past decade.
“Poland didn't go through quite the same degree of boom that some of its neighbours have, so we haven't seen the same sort of blowout in current account imbalances and financing leading to real estate booms and massive increases in credit in Poland as we saw in some of the other countries,” Mark Allen, the IMF's Poland representative, said in an interview. “Also, fiscal policy here in Poland has stayed under control, and debt levels have remained low. That is not as true in some of the other countries which have experienced crisis.”
Other factors include a floating exchange rate, which has kept exports competitive, a tool countries pegged to the euro haven't been able to use.

Poland has also been helped by remittances, the cash sent home by workers in the West; this foreign exchange injection amounted to more than $11-billion (U.S.) last year, or 2.5 per cent of the economy. This does not appear to have dropped significantly.
Indeed, the lesson for neighbouring countries seems to be that Poland learned to live within its means and to develop domestic markets for its products before becoming reliant on leveraged financing and export-only models.
There's no question some Polish regions have been hurt in the downturn: Silesia and Pomerania, in the southeast adjoining Germany, had prospered from a boom in German branch plant investment and had become known as the “Polish Silicon valley” for the indigenous high-tech industries spun off from that boom.
These regions are now hurting more than the Warsaw or Gdansk regions, in large part because of the declines in German industry (and there are signs that Polish businesses are now investing more in eastern Germany than vice versa).
Poland's relatively prudent approach to fiscal and banking matters, and to private sector debt financing, probably dates back to the final decade of Communist rule, which ended 20 years ago. The Communist leadership relied heavily on bank debt and foreign loans, and fell into a severe fiscal and monetary crisis in the final years of the 1980s – an Eastern Bloc credit crunch that was far worse than the global one today, and affected several neighbouring countries, bankrupting dozens of huge state-owned industries and plunging millions into joblessness.
The result is a deep aversion to large-scale debt that remains today, 20 years after Poland made a comparatively quick transition to a market economy.
As a result, while Hungary and the Baltic states are enduring IMF bailouts (with the usual painful adjustments to government structure and economic life required by the international lending body), Poland is one of only three countries in the world – and the only one in Europe – to have received a $20-billion IMF line of credit that allows it to withdraw its emergency funds as it likes, no strings attached. Since that credit line was provided in February, Poland has not had to use it.
If projections prove correct and Poland is poised for a strong recovery later next year, it could turn Warsaw, already a regional economic hub, into an entrepreneurial centre as well – something it has not done especially well in the past.
The hundreds of thousands of young returning workers (buoyed by personal savings), stable banks willing to finance, and foreign investors interested in Poland's comparatively strong and stable economy could be at the front end of an industrial renaissance.
Few Polish officials are willing to make such predictions out loud, and the next year will be socially and economically difficult as the government restrains spending. But if it succeeds, Poland could emerge as one of Europe's most respected economies.

Latest Comments

7/7/2009 10:27:55 AM
Sure fact. Just look at how many immigrants from Poland Came to Canada in recent years compared to 10 years ago. Stats don't say how many actually left Canada to Poland in recent years. Same for other Eastern Europe countries. People go to where it is better - now! I was in Poland, Czech Rep and Russia recently and many times before. Just judging by quality of main highways Toronto is way worse.

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7/7/2009 10:27:51 AM
So, we are to conclude that nationalism is a good thing. In Canada we are still on the globalisation bandwagon.

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Self Employed Tax Payer
7/7/2009 10:23:52 AM
What communism has taught the Poles and should have taught us as well is that you can not spend money you don't have.

I remember in the late 90's and into 2000's that while Canada was enjoying a single digit interest rate Poland had a 17% interest rate with corporations being asked to cough up over 20%. Money was never cheap so people learned to live with in their means (a concept that is lost on most of the world).

The Polish system has not been good to all, and the divide between rich and poor has grown significantly in the past decade. However it has shown the people that if you want more, you need to work harder and longer, not live on credit.

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7/7/2009 9:58:21 AM
Interesting to see an upbeat article about Poland. This is a country, which in 20th century exported about a million of its people to Canada (some 500,000 after 1980) but still trade between the two countries is tiny. It also remains a total mystery to most Canadians.

While most Canadian businesses were preoccupied with the US, Asia and "old Europe" a great opportunity was missed. A few other facts about Poland, which are worth mentioning: its auto industry is booming. Fiat 500 is made exclusively there as is Ford KA (at the Fiat factory) and Opel Astra. All these factories are most efficient in Europe. P & G's Pampers factory in Warsaw has led the efficiency race among all of P & G plants all over the world. Most of Cessna prop driven planes are powered by engines made in Poland. There are many other examples of economic success, which can be shown. During the twenty years after fall of communism Poland turned from a bankrupt nation to a thriving member of the EU.

By the way few people know that it is Poland where the process of dismantling communism started. When we remember the fall of the Berlin wall we must not forget that it was just another part of the domino, which begun in Poland.