Poland will determine the end of the golden age on its own

Warsaw, Vistula river, Poland (MFA Poland, CC BY-NC)

CE Financial Observer: In an interview in 2013 you declared that Poland was entering its best time in 500 years. Was your prediction correct?

Marcin Piątkowski: Yes. I have been predicting the dawn of a new golden age for Poland for a decade, and I think that it has become a fact. Now Poland has the highest ever per capita income levels and quality of life indicators, both in absolute terms and also — more importantly — in relation to Western Europe. GDP per capita in Poland, based on purchasing power parity, currently amounts to 2/3 of the level recorded in Western European countries, and it will reach 70 per cent by the end of this decade. This is evident not only in the income levels and in the quality of life of Polish citizens (which is confirmed, among others, by the continuous improvement of the Better Life Index published by the OECD), but also in the results of the research Statistics Poland from the end of 2017 entitled “Quality of life in Poland”. These results indicate that Poles have never been more satisfied with their economic situation.

Poland’s previous “”golden age” from the 16^th century — and I have many doubts concerning that period — at best involved a small section of the society, i.e. the nobility, which accounted for less than 10 per cent of the population. Back then the indicators of income and property inequality were much higher than today, and reached levels similar to present-day Colombia or South Africa. The majority of Poles at that time had no idea that they were living in a “golden age””. According to the research conducted by Professor Andrzej Wyczański, at that time only 2 per cent of Polish peasants were literate. Polish society as a whole is only now experiencing a genuine golden age.

And yet there are some discrepancies when it comes to inequality. The level of income inequality measured by the Gini coefficient is theoretically decreasing (in 2004-2016 this coefficient fell from 37.6 per cent to 30 per cent), but the wealth inequality is constantly increasing.

It is true that it is difficult to accurately measure the level of inequality, because of the different definitions and measures of this concept. The most frequently used data, such as those from Eurostat, show that income inequality in Poland, measured by using the Gini index, is close to the European average. Poland is also getting closer to the levels recorded in Germany or Sweden when it comes to income disparity between the 20 per cent of the richest and the poorest inhabitants. In Poland this ratio dropped to a point where the incomes of the richest inhabitants amount to approx. 4.8 times the earnings of the poorest.

The data from the European Bank for Reconstruction and Development (EBRD) also show that Poland was the only democratic country among the post-socialist states in which from 1989 onwards income in all income deciles increased faster than in the wealthy G7 countries.

On the other hand, one could have some doubts as to the credibility of data based on surveys, because they do not reach the most affluent and the poorest Poles. Data from other sources, e.g. from personal income tax returns, show that income inequalities are much higher, and they also do not take into account the incomes of the richest people, who pay taxes, for example, in Cyprus. Income and wealth inequality is therefore a big problem, although it is less acute than previously in Poland’s history, and is no greater than in similar countries today. Social inclusiveness, additionally reinforced by the child benefits programs, such as 500+, and more progressive taxes, is and will be crucial for Poland’s further development.

In your book “Europe’s Growth Champion: Insights from the Economic Rise of Poland” you put forth a rather controversial thesis that Poland owes this inclusive growth to communism.

I am not an apologist of communism. It was a socially cruel and economically ineffective system that ultimately led to bankruptcy in 1989. However, I do show the influence of communism in the broader perspective of the new model of economic development which I propose.

In spite of its fundamental flaws, the Polish People’s Republic (PRL) laid the foundations for the Polish economic success after 1989, because after 1945 it abolished the old, feudal, extractive social structures based on the supremacy of narrow elites, which prevented Poland from developing for many centuries. For centuries Polish peasants had no rights and in fact did not differ much from slaves. The abolition of serfdom by the partitioning powers — against the will of the nobility — did not change much, because the avenues for social advancement were still unreachable. The same was true for slaves in the south of the United States, where the elites blocked the rights of liberated slaves until the 1960s, despite losing the Civil War.

At that time Poland created a model of an extractive economy ruled by the few in favor of the few, and not an inclusive economy, ruled by the many in the interests of the many. As shown by Daron Acemoglu and James Robinson in the bestseller “Why nations fail”, extractive economies do not develop, while inclusive economies do. Poland didn’t grow.

So how can a country change from an extractive economy to an inclusive economy?

Acemoglu and Robinson explain in their research why extractive economies are doomed to poverty, but they do not indicate how to go from an extractive economy to an inclusive one that has a chance of success. I believe that apart from just a few countries — United Kingdom, France and the Netherlands — there are almost no other countries that became inclusive on their own. Among the approximately 44 countries defined by the World Bank as high-income countries (excluding oil producers and small island nations), almost all of them became inclusive, because they were forced to do so by external factors.

The most common shock was armed interventions — as in the case of Napoleon’s invasion of Western Europe and the elimination of the remnants of feudalism, or the imposition of new institutions by the Americans in the Pacific. Without General MacArthur, there would be no democratic constitution and agricultural reform in Japan, which created an inclusive society for the first time in that nation’s history. The success of today’s Taiwan, Singapore and South Korea also wouldn’t have happened without the fundamental redistribution of economic assets. This is because the unpleasant, external shocks in these countries contributed to the breakup of the existing feudal structures that were detrimental to development. This can be understood intuitively: the ruling elites have no interest in sharing their wealth and power. Something has to force them to do that.

What would the Polish economy look like if there had been no communism or war?

If there had been no Polish People’s Republic after the war, Poland would not automatically get rich, as some claim. Maybe it would have succeeded, but maybe not. Firstly, the detrimental influences of the extractive political and economic elite, which was reluctant to change, would have persisted.

This could have meant a continuation of the situation existing in the Second Polish Republic, when the land owners blocked the strengthening of the state, and the loudly proclaimed agrarian reform led to the parceling and allocation to peasants of only 7 per cent of the land. Despite the significant economic backwardness in 1938 Polish distance to the West was no smaller than in 1913.

The notion that Poland would be developing similarly to Spain, Portugal or Greece is also not justified, if only because its geographical location right next to the Soviet Union would have deterred Western investors and, consequently, would have hampered the influx of capital. Poland also wouldn’t have got foreign currency inflows from tourism, which these “hot countries” used to finance their key modernization imports. And finally, it must not be forgotten that both Spain and Portugal were ruled by dictatorships until the 1970s, which made economic reforms easier. The Polish democracy, if it had survived, would have been in a more difficult position.

You’re saying that Poland has been inhibiting its growth for centuries and it was only external interference that finally helped the development?

From the point of view of economic development, although of course not from the point of view of patriotism, heroism or the love of freedom, the former Polish state had anti-developmental institutions — the country did not have strong legal institutions, open borders, a strong state or market competition.

During the Polish People’s Republic, Poland became a more egalitarian and better educated country. In 1960, as much as 7 per cent of Poles were already educated at universities, which was almost the same as in much wealthier France. Millions of peasants were moved from villages to cities by creating jobs. As a result, after the fall of the Polish People’s Republic in 1989, for the first time in history, Poland had an egalitarian and inclusive society that wanted things to simply “be normal” and to finally catch up with the West. Such a strong social consensus had never existed before.

The current strong elites, educated in the West — the children of the educational revolution of the Polish People’s Republic — pursued a better economic policy than in other countries undergoing transformation. For the first time in history, a native Polish middle class was also formed, which became a stronghold of democracy and the free market. Finally, Poland was lucky and Western Europe opened up to Eastern Europe, dragged us into the European Union and started sending EUR instead of tanks.

The fact that Poland has become — as you say — the European champion of growth — is once again owed to an external impulse, i.e. to the European Union?

According to various studies, European funds contributed about 0.5 percentage points to Polish economic growth rate after it joined the EU. Assuming all additional externalities, the impact of these funds was therefore one of the important factors, but not the main engine of Polish growth. The fact that Polish GDP per capita has increased by almost 150 per cent since 1989, and not by 50 per cent — as in the case of Hungary — and that the growth was higher than in any other country in Europe, is the result of its economic policies. Among others, the deep structural reforms, the fast development of institutions, the effective restructuring of foreign debt and the luckily delayed privatization, as a result of which Poland doesn’t have oligarchs today.

How will a 20 per cent reduction in funding for Poland in the new EU budget for the years 2021-2027 affect the course of “golden age”?

It is time to write about the golden age without quotation marks. Poland has never been in a better condition, it has never before been the champion of Europe and the world in economic growth, as for 25 years it has been growing faster than South Korea, Taiwan, Singapore or any other country in the world at a similar level of development. Poland will continue to develop quickly for a long time. I believe that it will be at least until 2030, that is, until it reaches about 80 per cent of the income level of Western Europe. This will be the highest income level in Polish history. It will have well-educated employees, increasing productivity and open borders, and increasingly good infrastructure, a good business climate, low taxes and macroeconomic stability, which is underestimated by the malcontents.

However, the possible end of Polish success will not be determined by the reduction of EU funds. A reduction of funds by 20 per cent will slow down the growth, but only by 0.2-0.3 percentage points at the most. Poland’s further development, especially after 2030, will depend more on its approach to solving demographic problems, building strong institutions, cultural convergence with the rest of Europe, innovation, and the promotion of entrepreneurship. The end of this golden age, which is really the only one Poland ever had in its history, will not be determined by the European Union, but by Poles alone.

Marcin Piatkowski, PhD, is a senior economist at the World Bank’s office in Beijing, China.

Warsaw, Vistula river, Poland (MFA Poland, CC BY-NC)

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