Reference no: EM13515956

The Polish Surprise

As the financial crisis of 2008 and 2009 unfolded, countries across Europe were hit hard. A notable exception was Poland, whose economy grew by 1.5 percent during 2009, while every other economy in the European Union contracted. In 2010 and 2011, Poland achieved a growth rate of 3.9 and 3.8 percent, respectively, which were among the best in the EU. How did Poland achieve this?

In 1989, Poland elected its first democratic government after more than four decades of Communist rule. Since then, like many other eastern European countries, Poland has embraced market-based economic policies, opened its markets to international trade and foreign investment, and privatized many state-owned businesses. In 2004, the country joined the European Union, giving it easy access to the large consumer markets of Western Europe. All this helped transform Poland into a major exporter. Exports account for about 40 percent of gross domestic product (in contrast, they account for around 12 percent in the United States). As a consequence, between 1989 and 2010, Poland recorded the highest sustained growth in the region. Real GDP doubled over this period, compared to a 70 percent increase in neighboring Slovakia and 45 percent in the Czech Republic.

Poland’s government has also been fiscally conservative, keeping public debt in check, not allowing it to expand during the recession as many other countries did. This led to investor confidence in the country. Consequently, there was no large outflow of funds during the 2008–2009 economic turmoil. This stands in stark contrast to what happened in the Baltic states and Greece, where investors pulled money out of those economies during 2008 and 2009, driving their currencies down, raising the cost of government debt, and precipitating a full-blown economic crisis that required the IMF and EU to step in with financial assistance.

Poland also got lucky. A tight monetary squeeze in the early 2000s, which was designed to curb inflation and ease Poland’s entry into the European Union, headed off the asset price bubble, particularly surging home prices that hurt so many other economies around the world. Ironically, the Polish government had been criticized for its tight monetary policy earlier in the decade, but in 2008 and 2009 it served the country well. Moreover, in 2009 Poland benefited from the economic stimulus in neighboring Germany, its largest trading partner. A scheme to boost demand for German automobile companies by giving cash grants to people who exchanged old cars for new ones (a “cash for clunkers”program) helped Poland because the country has several automobile plants and was selling many cars and components to Germany.

None of this is to say that Poland is a model state. The country still has substantial problems. Migrant workers returning from western Europe have swelled the ranks of the unemployed. In 2009, unemployment hit 11 percent, and it remained there through 2011.

The tax system is complex and archaic. A study by the World Bank put the Polish tax system at 151st out of the 183 countries it surveyed. Extensive regulations can still make it difficult to do business in Poland: The World Bank ranked Poland 76th in ease of doing business. Even after 20 years, the transition from a socialist economy to a market-based system is still not complete, and many state-owned enterprises remain.

On the other hand, the Polish government has committed itself to changing much of this. Steps are being taken to simplify tax laws, reduce tax rates, and remove bureaucratic hurdles to doing business in the country. An example was the Entrepreneurship Law passed in March 2009, which dramatically reduced the number of health, labor, and tax controls that companies had to comply with, making it much easier to start a business in the country. Also, after a six-year standstill, Poland privatized state-owned enterprises that accounted for 0.6 percent of GDP in 2009 and those accounting for another 2.5 percent of GDP in 2010.

1. From the perspective of international business, what is attractive about the Polish economy? What are the weaknesses and risks associated with doing business there?