Taking stock of the last two decades
Paweł DOBROWOLSKI
Once we strip away the marketing rhetoric, it becomes evident that in the long run, all the countries in our region that have joined the EU and undertaken the necessary reforms are catching up with the West at a similar rate to Poland.
.The year 1989 saw the release of energy from the Poles and other nations in Central and Eastern Europe. All societies in our region have, to varying degrees, seized the opportunity to emulate the economic advancements of Western countries. Generally, those on the west side of the river Bug performed better, while those on the east side fared worse. At the beginning of the transition, Ukraine’s GNP per capita factoring in national purchasing power was akin to Poland’s. Today, our GNP per capita adjusted for purchasing power is three times higher than Ukraine’s.
Following 1989, we started compensating for decades, or even centuries, of economic development setbacks. Europe, once under Roman rule, had been experiencing significantly higher levels of development for centuries. Today, our GDP per head is reaching levels comparable to the most developed countries. Three decades ago, in 1989, our GDP per capita was a mere 11 per cent of Germany’s. Now, in 2023, this ratio has risen to 42 per cent! We have progressed even further in terms of national purchasing power: from 30 per cent of GDP per capita in Germany in 1989 to 70 per cent today.
Poland’s accession to the European Union in 2004 opened up new market opportunities for Polish entrepreneurs. The EU encompasses over 500 million consumers. This was probably the most important development stimulus for our economy. However, the European Union is not just a larger market; it also brings common economic regulations, technical standards and institutional solutions, many of which contribute to Poland’s accelerated growth.
The significance of common institutions and standards can be observed when comparing Poland and Mexico. Mexico borders the US and has a free trade agreement with Washington. It has been implementing market-oriented economic reforms since the early 1980s. Poland has only been implementing similar reforms since the early 1990s. But we are linked to our neighbours through shared institutions. In 1991, we signed an association agreement with the European Communities, which enhanced our economic credibility and set the course for our socio-economic transformation. In 1993, the Union laid down detailed criteria for Poland to fulfil in order to join the Community. Negotiations for Poland’s accession to the EU began in 1997 and were concluded in 2002. Prior to the 21st century, Poland had a lower GDP than Mexico, in both absolute terms and adjusted for local purchasing power. But since 2005, we have outperformed Mexico in both GDP per capita indicators.
However, there is no automatic guarantee that Poland will catch up with more prosperous economies. The economic gap between our country and the leader of each era has remained relatively constant for the past six centuries. The Maddison Project database provides data on GDP per capita for numerous economies, including Poland, going back several centuries. Over the last six hundred years, Poland’s GDP per capita (adjusted for purchasing power) has ranged roughly between 20 and 40 per cent of the GDP per capita of the economic leader of the time – first Italy, then England and, since the 20th century, the United States. This is good news in one respect: for several centuries, we have not been too far behind any of the leaders. But it is also a warning: whenever our GDP-to-leader-GDP ratio has reached the current levels, our growth came to a halt.
In Poland, we like to think of our country as a regional development leader. We proclaim we are catching up with the West faster than others. When I prepare presentations for foreign investors or raise funds for Polish entrepreneurs, I, too, show graphs of cumulative GDP growth since 1990. These figures invariably position Poland as a development leader. However, this is only a basic effect. In 1989 and 1990, the Polish economy experienced both a cyclical decline in GDP and a structural decline resulting from the transition to a market economy. Other countries in our region saw these minima in other years. If we compare the growth of economies since 1990, we are the leader. However, if we take 1995 as the baseline year, the region’s development frontrunner would be… Belarus.
Over short periods of a few or even a dozen years, some countries in the region experience faster economic while others grow more slowly. However, an analysis of the last three decades indicates that nations that have joined the EU and implemented the required reforms are pursuing Western nations at a comparable rate. Romania is a good example. In the early 1990s, Romania’s GDP per capita was similar to ours. However, the lack of reforms and corruption prevented the country from achieving the same level of progress as Poland. As a result, Poland’s GDP per capita in the 1990s was two and a half times higher than Romania’s in absolute terms and almost half as high after adjusting for local purchasing power. Soon, however, Romania began implementing reforms and integrating into the European economy. They started catching up with us at a very fast pace. Currently, they almost match us in terms of GDP per capita. Moreover, available forecasts suggest that in the next five years, the gap in GDP per capita between Poland and Romania will shrink to a few per cent.
Once we strip away the marketing rhetoric, it becomes evident that, in the long run, all the countries in our region that have joined the EU and undertaken the necessary reforms are catching up with the West at a similar rate to Poland. We can seek out multi-decade changes in GDP that are stripped of cyclical disturbances. We can compare the distance between our region’s countries and the economic powerhouse over long periods, such as before the Second World War or in the 19th century, to see whether our proximity to the leader has changed significantly. But when making an accurate comparison, it becomes challenging to single out any country in our region as the frontrunner in development. Different countries adopted market economies at varying times, with some implementing reforms earlier than others, but the result is largely the same: over the years, they have all experienced a comparable growth spurt.
What distinguishes Poland’s development in the last three decades is that despite starting from a deeply disadvantaged position – with a weaker economy in 1989 compared to the other countries in the region – we have achieved similar levels of progress as other countries in the area that have joined the EU.
Our extraordinary economic development coincides with extraordinary development in the economies of poorer countries in general.The past three decades have been an unprecedented phenomenon. For several centuries prior to this period, wealthier countries had grown faster than poorer ones.
There is no generally accepted explanation for the change in these three unusual decades. Economic theory did suggest that poorer economies should grow faster due to the abundance of untapped investment opportunities, and that capital should flow from richer to poorer economies. But throughout the previous few centuries, it had been the wealthier nations that had experienced more rapid growth.
Possible explanations for the last three decades of extraordinary development in poorer countries include the end of the conflict between the socialist and capitalist blocs, increased globalisation, the slowdown of technological and organisational progress and, finally, the spreading of knowledge about the causes of economic development and its growing influence on the decisions of societies.
Until around 1989, the world had been divided into warring socialist and capitalist blocs and the so-called Third World. The competition between the two blocs not only involved economic rivalry but also frequently escalated into wars and coups sponsored by one side or the other. One need only look at Syria or Libya today to see how conflict affects development.
Another possible explanation for the unprecedented development of poorer countries is increasing globalisation. Nowadays, a country doesn’t need to possess a complete range of mining, heavy and light industries in order to progress. Fragmentation of supply chains allows smaller economies to specialise in selected niches. Small countries with small markets can grow by participating in the international division of labour. Another advantage of globalisation is that it allows for widespread access to energy carriers through market mechanisms. Modern development is based on energy-intensive equipment. The last few decades of globalisation have commoditised the market for energy carriers. It is not necessary to have one’s own extractive industry. For a suitable fee, any economy can buy oil, gas, coal or nuclear fuel.
Perhaps the relative slowdown in productivity growth in highly developed economies was caused by the transition to the digital economy. When technological and organisational progress slows down, peripheral economies catch up with the most developed ones but fall behind when progress accelerates. It is possible that the continuous progress in data processing and transmission since the 1970s will soon lead to the acceleration of economic growth in the most advanced countries. It usually takes a decade, or even several decades, for major new technological discoveries to translate into a development pace. The new technology needs to be ‘embodied’ in machines, and the new machines need to find their optimal use through changes in the organisation of work that will adapt the economy to the new technology. Before these changes take place, the productivity growth of leaders slows down.
There is also a possibility that poorer countries will eventually learn to develop akin to the wealthier states. In 1776, Adam Smith published The Wealth of Nations, a book that started a systematic exploration of the subject of economic development. Since then, we have been trying to understand what causes economies to grow. Much of the world’s population lived through the 20th century’s failed experiment with centrally planned economies. Perhaps humanity simply took two centuries to grasp what economic development is and how to ensure it.
Poland’s extraordinary growth over the past three decades appears to be part of a wider phenomenon in which, for the first time, poorer countries are, on average, growing faster than richer ones.
Thirty years of development is a tremendous civilisational success, but for now, it is merely an episode of growth, not a sustained convergence with the West. The challenge is to maintain a similar growth rate advantage over the West for a period many times longer than three decades. Fragile growth is statistically the primary cause of poverty in certain countries. While they can experience rapid progress for a few years or even a couple of decades, external economic, political and military events, as well as internal political dynamics, eventually bring an end to this above-average growth.
Our efforts to catch up with the West are now being challenged by rising external risks. The 21st century is witnessing an escalating geopolitical confrontation. Additionally, numerous indications suggest that the most advanced Western countries are on the verge of experiencing a substantial surge in development due to the digitalisation of economies.
To sustain high levels of growth in Poland, we need to create conditions that encourage investment in production resources and skills, as well as enhance our economy’s ability to withstand economic shocks. We saw the effective mitigation of such a shock in the shielding programmes efficiently implemented by the Polish Development Fund during the pandemic. Amidst the lockdowns and disruption of global supply chains, the Fund’s business support interventions between 2020 and 2022 saved Polish entrepreneurs from the potential collapse that could have severely hindered Poland’s recent progress.
Maintaining a high rate of growth will require policies that reduce the burden of growth-limiting factors. Our focus should be on building and reinforcing a comprehensive range of institutions that foster development. The unpredictability of Polish tax law (not tax rates themselves!) is probably the main obstacle to our country’s development. The supply of profitable investments in Poland depends on the risk involved. A higher level of risk can negate the profitability that similar investments yield in other countries. The risk of tax uncertainty is even more acute, especially for more innovative projects in smaller, law-abiding companies. Unlike large corporations, these companies cannot afford to maintain extensive legal and tax departments. Should they face an audit or make an incorrect decision, they lack the resources to endure years of litigation with the tax authorities.
.The last three decades have been a huge success achieved under favourable conditions. There is no guarantee of making further progress in closing the gap with the richest. We can no longer rely on one major reform to provide decades of growth. Day by day, week by week, month by month, year by year and decade by decade, we must build an environment that promotes investment in production resources and skills. Development is achieved through the utilisation of socio-economic devices, which, day by day, decade after decade, enable the accumulation of theoretical knowledge, technical and organisational improvements, capital and investment.
