-Analysis-
What explains the Polish economic success story?
We can’t necessarily credit our governments, apart from actions taken in the first years of post-Communism transformation. More recent administrations have not implemented the reforms and pursued policies that effectively responded to the needs of the moment. And yet… Poland’s economy is growing faster than the economies of the richer countries of Western Europe.
What’s the main reason? We owe our success to globalization.
The Polish economy, less than two years after the beginning of the transformation in 1990, began to grow at a fairly rapid pace, which in the years 1992-2024 amounted to an average of 4.0% per year.
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The economies of some countries in Southeast Asia, China, South Korea, Taiwan grew much faster, but they owed this to a very high savings rate, as well as a lower starting level.
The growth rate of the Polish economy was approximately twice as fast as the entire European Union, including Germany. Thanks to this, each year we are getting closer and closer to the average EU level of wealth, with real wages across the economy having increased by 150% during this time. Since 1994, average wages have fallen only once (in the inflationary year 2022).
Poland’s development can be shown through various measures, such as labor productivity, the size of industrial production and exports, but also the number of apartments built, the level of household equipment in households with household appliances, the number of mobile phones, vacation trips abroad, etc.
Leaders and followers
Professor Stanisław Gomułka, a researcher of economic growth mechanisms, divides countries into technological leaders (Technology Frontier Areas) and followers, which benefit from the catch-up effect. In this mechanism, the rate of growth of labor productivity, (and thus production) depends on the introduction of the latest generation of innovations, which require large expenditures on research and development, as well as an overall good education system .
Institutional solutions are also necessary that protect the copyrights of innovators and companies that have invested in the innovations.
The Polish economy’s rise is certainly not due to the economic policy of successive governments,
Followers, or catching-up countries, also known as emerging markets, can acquire innovations from technological leaders, and their growth rate depends mainly on the ability to transfer and absorb them. Followers usually grow faster.
The high rate of growth of the Polish economy is certainly not due to the economic policy of successive governments, which is far from optimal. In the rankings of the competitiveness of the economy, Poland is far from where it could be. According to the Tax Foundation Europe, the Polish tax system is one of the worst in the European Union and in the whole of Europe. Poland occupies a distant, 17th place in the ranking of economic freedom, prepared by the Fraser Institute.
Polish governments, apart from the first years of transformation, did not implement reforms and pursued policies focused on short-term goals. Billions of dollars worth of złoty are wasted each year on supporting unprofitable coal mines, and the indirect effect of this is having one of Europe’s highest wholesale electricity prices. Poland also has one of the lowest levels of investment outlays in relation to GDP in the European Union. In the last 10 years, it was an average of 18.0%, with the EU average being 21.3%.
Window of opportunity
And yet the Polish economy is growing faster than the economies of the richer countries of Western Europe, because we benefit from the catch-up effect. For this effect to occur, two conditions must be met. The first is the stability of the catching-up country. The second is good relations with countries classified as Technology Frontier Area and the absence of barriers to the flow of goods, capital, technology, people and know-how.
These conditions were not met in pre-World War II Poland, which had bad relations with almost all of its neighbors, including a full-fledged economic war with the largest of them – Germany. Protectionist policy, economic nationalism, which was the standard especially in the 1930s, hindered the development of especially poorer countries.
The window of opportunity opened for Poland after 1989 not only because we moved away from central control of the state economy and radical market reforms were carried out in the years 1989-1993, but also because of the wave of globalization rising all over the world.
Global flows
Globalization means a greater integration of the world, greater flows of goods, people, capital, ideas. Sometimes this process accelerates, and sometimes it slows down or is even undone, which pushes governments towards economic and political nationalism.
The previous peak of globalization occurred at the turn of the 19th and 20th centuries, and in some respects it was greater than what we have been observing now for over 30 years.
Contemporary globalization was facilitated by processes that began in the late 1980s. After the collapse of the Soviet empire, many previously isolated countries joined the global market. This also applied to China and India, which abandoned the model of a centrally managed economy.
Successive rounds of negotiations on trade facilitation led to average customs tariffs falling from 40% in 1947 to around 3% in 2012. Non-tariff barriers were also relaxed. In 1995, the World Trade Organization was established, with 160 member countries.
Individual processes are located in countries where their relative advantages can be used.
Globalization was facilitated by faster and cheaper communication, the emergence of the Internet, as well as the convertibility of national currencies and the abolition of restrictions on international payments. Poland’s currency, the złoty, became partially convertible in January 1990, and since 2000 its exchange rate has been floating.
Internationalization allows for lower production costs. Individual processes are located in countries where their relative advantages can be used. Labor-intensive processes where there is an abundance of qualified labor, capital-intensive processes in countries with large capital resources.
Large corporations, trying to maximize profits, moved their plants to countries with large labor resources, especially if employees could be hired more cheaply and trained quickly. The increase in the inflow of foreign direct investment led to the creation of global value chains. It is estimated that over a quarter of world trade takes place within these chains.
Polish export explosion
Participation in global value chains gave Polish companies access to production technology, better management methods, and above all to foreign markets. Thanks to this, the pace of Polish exports has been stunning in recent decades.
Exports began to grow already in the first year of economic reforms, when the production indicators monitored by the Central Statistical Office were still falling. In 1989, exports amounted to $13.5 billion, and in 2024 to $380.3 billion, or 28 times more. Every year, exports measured in current dollars grew by an average of 10%. However, it is worth remembering that companies with foreign capital are responsible for nearly 60% of Polish exports and over 60% of investment outlays by non-financial enterprises.
We spend less on R&D than many richer countries, and yet labor productivity is growing
It is common to hear complaints about Poland spending too little on research and development. Indeed, we spend less than many richer countries, and yet labor productivity is growing, which is currently the main factor in economic growth and a condition for real wage growth. The increase in productivity occurs because new, more efficient machines, devices and organizational solutions are used in the production process, most of which flow to Poland from abroad.
Enemies of globalization, Followers of economic nationalism
As an explicit opponent of globalization, Donald Trump, believes that it has deprived the United States of millions of jobs in the manufacturing industry. This is a simplified view, because a large part of jobs disappeared in the U.S. due to the increase in industrial efficiency. On the other hand, Poland was and will be a beneficiary of international corporations moving production plants to countries with cheaper and skilled labor resources.
The opposite of an economy open to globalization is economic nationalism. It means preferring domestic companies, even if they are less efficient, less innovative and offer products at higher prices.
The policy of economic and political nationalism is usually popular (until it goes bankrupt), because it appears to be based on a “common sense”, which is actually a false understanding of economic, political and social processes. Globalization forces cultural changes, liberalization of customs, abandonment of traditional rituals. Newcomers from abroad appear in the country.
For many people, these are undesirable phenomena. The reaction to them is often a desire to close oneself off from the influx of foreign ideas, products and people. Therefore, a politician calling for economic nationalism can count on great popularity.
The obvious effect of economic nationalism is the reduction of international trade, the inhibition of the inflow of foreign capital and technology. This is particularly disadvantageous in less affluent countries, whose economies have so far grown rapidly, taking advantage of the catch-up effect.
Therefore, the policy of nationalists, who proclaim the affirmation of national interests, condemns the nation to remain on the periphery of civilization. Many mistakes have certainly been made in the economic policy of the last 35 years, but opening up to foreign capital and taking advantage of globalization was not one of them.
