Sustaining Poland's Hard-Won Prosperity (2000)

If deregulation, privatization, and openness to outside investment continue-- and the government steers clear of regulatory traps--Poland will continue to show that economic shock therapy can create a flourishing economy. Poland's miraculous resurgence in the 1990s is among the best-kept secrets of the global economy (Exhibit 1, on the next spread). The former Soviet satellite stands alone in having made the harrowing transition from the managed stagnation of communism to the high-growth mode of capitalism. Recently, the McKinsey Global Institute undertook a study of the Polish economy--an aggregate survey of the agricultural and manufacturing sectors, as well as a detailed analysis of general-merchandise retailing and of housing construction. [1] The study shows that the country's success has been founded on tight fiscal discipline, together with capital and product market reforms ensuring that all businesses compete on equal terms and thus quickly capture the benefits of rising productivity. As a result, Poland has attracted a large amount of foreign direct investment, which has propelled its rapid economic growth and gave it the ability to weather the 1998 global financial crisis (Exhibit 2). Even Hungary and the Czech Republic have seen their per capita gross domestic products decline since the downfall of the Soviet satellite regimes in 1989. But Poland's per capita GDP has surged by 16 percent (Exhibit 3) and is now nearly 50 percent higher than Russia's. Unemployment has fallen to around 10 percent, from 14 percent in 1993, and new jobs have been created at a healthy rate of 1 percent a year since 1994. As in all thriving modern economies, the engine of that employment growth has been the service sector; in fact, the manufacturing sector has actually shed jobs since 1994 (Exhibit 4) as a result of a rapid increase in productivity. Although Poland's manufacturing productivity is far from world-class, it is moving rapidly in the right direction. This positive dynamic--rising manufacturing productivity displacing workers who are then redeployed in new service sector jobs--is the cornerstone of our optimism about the Polish economy's prospects for continued success. All of our previous research shows that this is the path to a long-term improvement of living standards and the achievement of social stability. By almost completely opening up the economy to foreign capital and to the transfer of global best practices, Poland is moving up the development path very quickly. Under liberalization, jobs are being created in services fast enough to absorb workers displaced by rapid productivity improvements in manufacturing and agriculture. Besides measuring and evaluating Poland's performance, we also used the Global Institute's previous work on Brazil, France, Germany, Russia, South Korea, and the United Kingdom to determine whether the current economic-policy regime is sufficient to sustain strong economic and employment growth. [2] Our answer: yes. As long as deregulation, privatization, and openness to outside investment continue--and the government steers clear of the regulatory traps that now stifle employment growth in France and Germany--Poland will continue to prosper by allowing the process of economic evolution to proceed, much as it does in all healthy economies. Old jobs in old industries will go on being destroyed, and new jobs in new industries will more than replace them. The main issues still to be addressed are related to the land and property markets, which are still plagued by uncertain ownership rights and subsidies to tenants. Our detailed analysis of the retail and housing construction sectors shows that deregulation in these areas would create even more jobs, thus providing for a further reduction in the overall unemployment rate and a faster reallocation of displaced workers from the agriculture and manufacturing sectors. The vanishing industrial worker Lower trade barriers, ongoing deregulation and privatization, and the expiration of no-layoff policies are going to drive productivity increases that will continue to cut employment in manufacturing industries from food processing to mining. …