How did the Polish economy grow so fast?

Once upon a time, not too long ago, the Polish economy was a basket case. Now, however, there are projections that the Polish economy will actually overtake Germany’s in the next 25 years.

This economic growth has happened despite large swathes of Polish people moving to other European countries in search of a better life.

The difference between Polish GDP per capita and Chinese GDP per capita was around $7,000 at the turn of the millennium. The gap is now about $17,000, still in favour to the Polish economy.

There is regular talk of the Chinese economic miracle, but the Polish economic miracle has also been incredible.

History of the Polish economy

The Polish economy spent about 50 years under the control of the Soviet Union. Unsurprisingly, this led to Poland being an incredibly poor and mismanaged country.

Following the end of World War 2, control of Poland transferred from Germany to the Soviet Union. One of the first economic reforms introduced was the nationalisation of land, without compensation.

Nationalisation without compensation then moved onto heavy industry across Poland. The Polish economy quickly became a centrally planned one.

During the 1980s, the economy of Poland really took a nosedive. Creditors were no longer willing to lend more money to the country and it defaulted on its debt.

At this point, the economy was still centrally controlled, with prices including that of money, set by the Soviet leadership.

Imports became increasingly rare which led to rationing and shortages of many Western goods.

Polish people became used to queueing for food and when they got to the front, one of two things happened. Either the store had no food left, or the food that was left was too expensive. It was incredibly tough.

The Polish economy was in crisis, which led to the country turning its back on socialism.

The Polish economy transformed

Like Estonia, Poland undertook a series of economic reforms to transition from a socialist economy to a capitalist one.

This process is known as shock treatment due its short term impacts and in Poland’s case, the pace the reforms were introduced.

In 1989, a group of experts pulled together the Balcerowicz Plan which was designed to transform the Polish economy.

The Plan was based off West Germany’s economic reforms following the end of World War 2. West Germany was booming, whilst East Germany struggled, and Poland knew which way it wanted to go.

On 6 October 1989, the Plan was presented to the public on television and in December that year, the Polish Government passed 10 acts designed to kickstart the transformation.

10 Acts of the Balcerowicz Plan

Act	Purpose
Financial economy within state-owned companies	Allowed state-owned businesses to declare bankruptcy and removed the guarantee that state-owned businesses would always be supported.
Banking law	Tightened monetary policy and prevented the central bank from financing Poland’s budget deficits.
Credit	Ended preferential interest rates for state-owned enterprises.
Taxation of excessive wage rise	The so-called Popiwek Tax that was designed to limit pay increases in the public sector to bring inflation under control.
New rules of taxation	Common taxation for all companies and abolishing specially negotiated tax rates for politically connected companies.
Economic activity of foreign investors	Opened the Polish economy up to foreign investors and loosened capital controls.
Foreign currencies	More freedom for the Polish Zloty to have its price determined by the market.
Customs	Created a uniform customs rate for all companies.
Employment	Created duties for unemployment agencies to get people into work.
Circumstances under which a worker could be laid off	Liberalised the labour market so poor performing employees could be removed.

This Plan was supported by both the IMF and World Bank, which was necessary due to Polish debt levels at the time.

This was the start of the transformation of the Polish economy.

Did the Polish economy improve?

In the short-term, the main difference in the Polish economy was the ending of shortages. For much of the 1980s, people couldn’t get the products they wanted.

After the reforms, these shortages disappeared almost immediately.

Before 1989, private trade was a criminal offence, so the place to get goods was the black market. Since private trade was liberalised, shops were full of products that people were buying.

The Christmas of 1989 was the first one for half a century when people could buy food and presents for the entire family. This was a huge deal for Poland due to its strong religious presence.

The Polish economy went from strength to strength.

Polish GDP

The Polish economy is quite unique in that it has continued to grow pretty much uninterrupted until the pandemic.

Average growth rates across the economy have been 4% per year. Despite the Dot Com bubble bursting, the Financial Crisis and the Eurozone crisis, the Polish economy has continued to get bigger.

Even during the pandemic, Polish GDP declined by a little over 2%, compared to 11% in Spain.

Ignoring GDP drops in 2020, Poland’s slowest year of growth was 2013 when it still grew by over 1%, despite the Eurozone Crisis.

On a per person basis, Polish GDP is the same size as Portugal’s and is quickly catching up to Spain. Not bad for a country that was under Soviet control less than 35 years ago.

According to the OECD, Polish GDP is expected to continue to grow up to 2060 (the data only goes up to that year).

The Polish economy becomes an exporter

The first 20 years as an independent nation, the Polish economy was primarily reliant on imports. Time was needed to develop competitive industries that could export globally.

From 2012 onwards, Poland has exported more than it has imported. This has provided extra growth for the Polish economy, and increased living standards.

Poland’s net exports have almost trebled over the last decade, which has prompted comparisons between the Polish economy and Germany’s.

German economic growth has benefited largely from exports of known car brands.

Whilst Poland also manufactures and exports some cars, its main export market is machinery, followed by electrical equipment.

Poland has quickly become an industrial nation, thanks to opening the economy up to international trade.

Not only did it help end shortages when the economy relied on imports, but it is now experiencing economic growth due to exports.

Has everyone benefitted?

Needless to say, poverty across Poland has vastly reduced since it became independent.

Household incomes have increased dramatically. In 1995, the average Polish worker earned approximately $16,500 per year. That same worker will now earn $32,500 per year.

In that same period, the average wage for an Italian worker has actually declined.

In 2005, around 12% of Polish people were classified as in poverty, according to the OECD. This has since fallen to under 10%.

Now you might argue that that is still 10% too many, but in many developed economies, the poverty rate has actually increased over the last 17 years.

The big challenge for the Polish economy is ensuring this growth continues and that everyone continues to benefit.

Conclusion

The Polish economy spent much of the 20th Century under the control of the Soviet Union. This caused economic destruction as land and industry were nationalised.

Output and wages were incredibly low due to all of the problems associated with centralised, planned economies.

Since the reforms of 1989, the Polish economy has gone from strength to strength. The economy has weathered all of the storms it has faced and continued to grow until 2020.

Opportunities have increased for Polish people across the board, with a huge increase in the number of jobs and wages available.

Poverty across Poland has also been reduced at the same time as it has been increasing in many other developed economies.

The Polish economy went from a failure to a success thanks to a short burst of shock therapy and market reforms.