Why you should care
Because this economy could be a global bellwether.
Ah, Poland: Just 15 months ago, you were the pride of Europe. Even as your well-to-do neighbors floundered, you clocked year after year of uninterrupted growth, now for a world-leading 24 years, often bobbing around 5 percent. You earned billions in foreign direct investment.
But now you’ve ushered in a far-right populist government with pronounced authoritarian tendencies. Investors, it’s said, are getting cold feet. For the first time ever, the EU is investigating the state of a member nation’s democracy — yours. You’ve gone from regional poster child to the problem child in the corner.
Or have you?
Never mind the chiding. A growing chorus of economists and investors insists that Poland remains on a high-growth trajectory in the long term. University of Warsaw economist Bartek Rokicki cites the fundamentals: One of Europe’s best education systems, a highly skilled workforce and, perhaps most of all, a cheap cost of labor. It’s true that Poland’s growth has stalled, but it’s still chugging along at around 3 percent — enviable in any Western country, and greater than all but a couple of European highfliers, such as Ireland and Slovakia. It’s unlikely, experts argue, that a populist government could gut all this. Indeed, Poland’s greatest economic threat isn’t its internal politics, but the rise of populism elsewhere and the attendant risk of European disintegration, says Jakub Jaworowski from the Boston Consulting Group.
More than any other nation, Poland has benefited from Europe’s regional integration. The country has spent much of the past quarter-century as the EU’s globalization darling, so much so that the former prime minister, Donald Tusk, is now the president of the European Council. Over that time, it followed the Brussels-directed model of development, based on pro-business reform, FDI and capturing huge sums off EU infrastructure-investment funds. Just 15 years ago, starting a business was like “the Wild West,” says American expat Nava DeKime, who owns a bagel shop in Krakow. Now huge malls built with foreign money encircle the historic city. DeKime says he’s witnessed a shift, from under-the-counter dealings to formalization.
Partly as a result of integration and FDI, Poland has already become the factory behind Europe’s factory: Poland exports more than $50 billion to its neighbor and largest trading partner, Germany, with the auto industry forming the bulk of this trade. “If you buy German cars or electronics in the U.S., they’re probably made in Poland,” says Marcon Brol, a professor at the Wrocław University of Economics.
Despite the controversial political policies of the governing Law and Justice (PiS) party — including unconstitutionally overhauling the country’s highest court — some see an upside to its economic agenda. Jan Sowa, a Krakow-based sociologist, decries the “neoliberal” policies of old that, he argues, resulted in low-wage, high-inequality growth. The PiS manifesto includes proposals such as a monthly subsidy of 500 zloty ($119) for each second and subsequent child a family has, and an hourly minimum wage for part-time employees. Sowa believes such policies can counter child poverty, boost birthrates in a terminally aging population and help workers share in economic growth.
These moves are certainly controversial and may backfire: Already, because of the changes to employment law and minimum wages, the largest McDonald’s in the center of Krakow is refurbishing its store to automate the ordering process and so employ fewer workers. But the greater threat to Poland’s economy, observers say, comes from its dependence on European ties. While having its own currency and a more closed economy than some other central European powerhouses, like Slovakia and Hungary, insulated it from the financial crisis, Poland remains vulnerable to external shocks. Indeed, the recent slowdown in growth started before the current government took office, and is at least partly attributable to a slowdown in Germany, as well as souring relations with fellow neighbor Russia, another key trading partner, explains Brol.
Then there’s Poland’s “lost labor” problem. After joining the EU just over a decade ago, up to one in 20 Poles left the country to seek work elsewhere, a labor gap that has been partly filled by around 1 million Ukrainians working in Poland today. But the youth exodus is slowing, Brol thinks, at least judging by the proportion of his students sticking in Wrocław, the country’s fourth-largest city, where the unemployment rate is just 4%. While external watchdogs fear the government’s generous child-benefit policy could cause fiscal damage, the Polish economists aren’t worried: The country has a constitutional debt limit of 60% of GDP, and the PiS doesn’t have a large enough parliamentary majority to change that. As a result, they expect the party to get kicked out of office before too long, as they won’t be able to afford to fund their promises.
For better or for worse, populism has been en vogue in 2016, and may well prove the style of the season into next year, too. But it’s not uncharted territory: “We’ve kind of led the way” in the election of populists, says Sowa. As long as Poland doesn’t get kicked out of the EU for crimes against democracy — and as long as the EU itself doesn’t fall apart — Poland’s economy might just live to tell the tale.