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This is Poland, a country home to just under 38 million people and one of the fastest-growing
economies in Europe, which is a continent that has unfortunately been characterized
by slow or even negative economic progress in recent decades.
Poland is a fascinating economy for a number of reasons, not least of which is that by
all metrics it shouldn't really be as successful as it is, and that the economy is shifting
so rapidly that there is a good chance that the demographic statistics we just listed
are already wildly out of date, but more on that later.
Poland's economic performance may be strong when compared to its peers in the European
Union, but it's outstanding when compared to its former Soviet neighbours, up to and
including Russia, which is a country with a much larger labour pool, far more natural
resources and more international influence.
Despite this, where Russia and a lot of other former Soviet states fumbled the transition
to market-based, globally-cooperative economies, Poland succeeded despite dealing with modern
historical challenges that were unmatched anywhere else in the world.
If Poland's current rate of industrial growth continues, it could be one of the largest
economies in Europe, which has the potential to be a vital lifeline for the European Union
as it struggles with sustained economic stagnation amongst many key member states.
Outside of just being a nice good news story, Poland's economic success is also an invaluable
case study that could potentially be applied to other countries around the world, especially
those on both sides of the invasion of Ukraine.
Now no country exists without problems, and while Poland's economic growth has been nothing
short of remarkable, it is still a poor country by European standards and it is only just
starting to break into the global upper middle class.
This is a period of development where countries are typically at their most vulnerable and
even minor economic shocks can undo decades worth of progress.
There is no reason to believe that Poland won't be susceptible to the same challenges
of shifting demographics, the expectations of sustained growth, and getting out-competed
by the other countries that can do the same thing for the same price.
The country also faces some very real challenges that are unique to just Poland.
Its geopolitical neighbourhood is not awesome.
Part of the reason that it makes for such a great case study is because it is so geographically
close to the countries that are going to need to learn its lessons.
While the chance of Poland actually being invaded is extremely slim, the situation does
still present major challenges for the rapidly developing economy, but if it can address
these problems it may genuinely have a shot at being one of the world's wealthiest and
most influential economies, potentially even rivalling its neighbours Germany on a per-capita
basis.
So, how did Poland get to where it is today?
Why do economists find this development so outstanding?
Could the same lessons be applied to other countries that are completely economically
crippled?
And finally, could its current set of challenges undo decades worth of progress?
Once we have done all of that we can as always put Poland, one of Europe's rising economic
The economy of Poland as it exists today really got its start in 1990.
Before that, while the country wasn't technically a state of the Soviet Union, it fell effectively
under their control as it was led by a communist government indirectly picked by Moscow.
In 1989, with the failing dominance of the Soviet Union, the country elected a new party
for the first time since the old government was ousted during the country's invasion
in the second world war.
The new government set about the process of doing what a lot of former Soviet states in
the region including Russia itself were doing, privatizing.
In the communist economic system of the Soviet states, and by extension Poland, almost all
industries were state-owned with very few exceptions.
As these countries transitioned to free-market economies, these state-owned departments needed
to be changed into private companies.
This was a surprisingly challenging process in all of the countries because it becomes
difficult to decide who gets what.
In an established free-market economy, state-owned assets are sold off all the time.
A simple search of government privatizers should deliver a long list of articles about
things like electrical grids, highways, and even state-owned banks that get sold off to
private investors all the time.
This is sometimes controversial, but there's nothing inherently wrong with doing this because
oftentimes private enterprise with a profit motive and healthy competition can deliver
better results and cost consumers less overall than public-run organizations with no competition
and no particular incentive to be any kind of efficient.
Of course there is always a balance and the real economic debate is to be had over what
enterprises are best privatized and what are best kept as state services rather than arguing
that everything should be privatized or everything should be owned by the people.
But with that small tangent out of the way, Poland did realize that its current extreme
system of full state control over all industry was going to need a change.
This rapid process of privatization and adoption of free markets came to be known as shock
therapy because it was ultimately a necessary step for these countries, but its rapid and
somewhat haphazard administration pushed all of the former soviet states and Poland
back significantly.
And by the 1990s none of these countries were doing too fantastic to begin with, the former
soviet union didn't fall apart because its economy was booming.
By the time of claiming effective independence most of Poland's population lived in complete
poverty and the country had a per capita output of around $1200 USD, similar to a country
like Zimbabwe or Pakistan today accounting for inflation.
Now in Poland economists still refer to this process of privatization as shock therapy,
but it was a lot less shocking than it was in the other countries.
Poland didn't lose nearly as much economic capacity during the transition because its
new government favored a slow and steady approach to changing from a centrally planned economy.
Most large industries remained under state control initially, and it wasn't until the
mid-2000s that most major industries in the country were privately run.
Instead of splitting up state assets and deciding who would get them in a process that, let's
be honest, was wildly susceptible to corruption, Poland adopted the philosophy of if private
industry really was better and more efficient, it would let its citizens build it up from
scratch to compete with existing state-owned enterprises.
The theory was that if the private sector was so great it should have no problem outcompeting
the large cumbersome state-owned companies.
This strategy still achieved the same end goal of economic liberalization, but when
compared to the other countries, Russia in particular, it didn't create an environment
where people could just bribe or subvert their way into being handed the country's resources,
they were simply liberated to go out and build wealth for themselves.
Poland does have far fewer natural resources than its ex-soviet neighbors, so there was
arguably less opportunity to hand natural resource wealth over to a small group of oligarchs,
but the slow and steady approach did mean that small local industries were allowed to
grow basically from the beginning of market transition.
The slower approach also made the country more economically stable because the landscape
of the economy wasn't being changed overnight.
Again, in Russia by comparison, people basically went to sleep in an economy where the state,
at least theoretically, provided them with everything they needed and assigned them
specific responsibilities, and then woke up in an economy where they had to figure everything
out for themselves.
Given this environment, it's perhaps unsurprising that Russia was marred by such political instability
in the years that followed, and unfortunately this is a vicious feedback loop.
If a country is politically unstable, advanced industries will struggle to get established
there.
Without advanced industries, the country will struggle with economic instability, and if
people are not looked after economically, they are going to demand political change
leading to further political instability.
Poland by contrast maintained enough political stability that it became one of the first
former Soviet republics to become members of notoriously selective international groups
like NATO and the European Union.
Beyond just getting its foot in the door to these big international groups, the relative
stability combined with the still far lower incomes demanded by Polish workers at the
time meant that it became a highly attractive destination for low-cost manufacturing.
Major industrial European nations, Germany and France in particular, set up industrial
relations with Poland to build less technical components for advanced end products like
motor vehicles and airplanes.
Poland already had decent manufacturing industries in place, and when it joined the European
Union it became very easy for these countries to do business there and made the necessary
investments needed to modernize their existing factories.
Instead of paying far more expensive French or German workers to build basic parts that
didn't need a lot of skill or outsourcing that manufacturing to a country like China,
which was outside of the EU and therefore attracted significant import taxes, it was
much more cost-effective to set up manufacturing in Poland, especially since it now shared
a direct land border with a unified Germany.
Poland never adopted the euro like other former soviet states such as Latvia, Lithuania and
Estonia so there was that that made cross-border business slightly more difficult, but given
its industrial potential it was still a more popular destination to set up industry, although
these other states have also benefited from this too, just to a slightly lesser degree.
Even today Poland trades almost exclusively with Europe, and while that's been a great
opportunity for the country and one of the primary drivers of its sustained economic
growth it does have some drawbacks.
Poland has been able to grow its domestic economy by providing a larger amount of progressively
more technical and valuable exports to the big European manufacturing powers, but there
is an eventual limit to that.
The growth of the countries that Poland is selling its exports to have mostly been stagnant
for more than a decade now, which means eventually Poland is going to reach a limit on how much
it can sell to these countries.
It could start exporting its manufactured goods to other countries around the world,
but it wouldn't be competing with the same advantages that it has when exporting stuff
within the EU.
Because the European Union taxes most imports entering its borders, but it doesn't tax
any trade between member nations, Poland didn't need to be the most globally competitive nation
to become regionally competitive, as long as it could provide products that were cheaper
than traditional centres of low-cost manufacturing after an import tariff, it would keep being
able to export goods.
If Poland could produce a car air-conditioning unit for 500 euro and China with its lower-cost
labour force and more established industrial infrastructure could produce the same thing
for 400 euro, but you got hit with a 150 euro import tax, then even though China is
more competitive, an EU country like Germany would still choose to buy its components from
Poland.
Of course this is a very oversimplified example, the exact trade taxes and restrictions in
place for trading partners within the European Union is incredibly extensive and complicated,
but the basic theory still stands.
Now while this has been a great opportunity for Poland, it's kind of trapped it.
If it tried to trade globally it would easily be out-competed by cheaper centres that it's
currently protected from because of its EU membership.
Its location is also great for trading within the European continent, but it's surprisingly
isolated from the world's oceans through the Baltic Sea.
Now other European countries have been able to competitively trade with the rest of the
world, but for now at least Poland doesn't quite have the same cachet of Germany, France
or even Italy where global consumers are willing to pay a premium for luxury cars or consumer
goods because a handbag made in Poland doesn't quite elicit the same feelings of luxury as
a handbag made in France.
While being restricted by its gilded cage of captive trade partners that aren't growing
much themselves, Poland will also have to deal with the fact that as it and its people
continue to grow wealthier they are going to become less competitive.
Today after three decades of sustained economic growth Poland has a GDP per capita of 18,000
US dollars, about 50% higher than the global average, but still significantly lower than
most other European centres, especially those in the west.
But if this continues to grow at the rate it currently has been, which hopefully it
will, then wages are going to continue to grow as well, which they have been.
Eventually Poland is going to lose its comparative advantage as a low-cost destination for manufacturing
to other Eastern European countries that are coming up behind it.
This is known as the middle-income trap where a country becomes too rich to be competitive
with low-cost labour, but not rich enough to develop its own advanced industries.
This is something that we have explored many times on the channel before when we looked
at economies like South Korea, Japan, Taiwan, Vietnam, Brazil and even China.
Some countries can successfully make the jump, and some really do struggle and end
up going backwards.
The only difference in Poland's case is that it is falling into the middle-income
trap within a market that itself is struggling to remain globally competitive, and that's
just the first of the country's major challenges.
Most economists agree that membership in the EU was a positive step for Poland.
Not only did it clearly demonstrate that it was a country worthy of being let into a fairly
exclusive club, it also gave it a captive market to grow its economy off of.
But it didn't come without drawbacks.
The first was simply that because the EU reduced the barriers to workers finding a
job in any member country to effectively zero, Poland had a major problem with brain drain.
The smartest, youngest, and most productive workers now had the option to stay in Poland
or they could alternatively go just across the border into Germany where they could earn
on average twice as much for work in much the same industry.
A lot of well-educated young Polish workers already learnt German and English as a second
or third language, so it was an easy step for a lot of them to take.
Additionally, a lot of the same companies that were operating in Poland to produce component
manufacturing parts also had operations in wealthier Western European countries, so a
lot of Polish workers could stay with their employer while getting a job that paid more.
Remittances where workers moving money over the border would send money back home to their
families in Poland at the peak accounted for nearly 3% of total GDP, which did help, but
it didn't make up for the lost tax revenue and labor force since it was mostly young
workers at the peak of their career.
From the perspective of a heartless economist with a singular focus on maximizing output,
this situation meant that Poland just had the leftovers of people that were less economically
ambitious or older and on average required more social services while contributing less
to the tax base.
This trend obviously slowed growth, but as we explored earlier incomes are rising and
now the difference between working in Germany and working in Poland is not as extreme as
it was even a decade ago.
As that creates the problem of the middle income trap it is also solving the problem
of brain drain provided that Poland can find work for all these people returning home.
The movement of young workers should be closely monitored, but it is no longer the country's
primary demographic concern.
Outside of the countries directly involved in the conflict the invasion of Ukraine has
perhaps most intensely been felt in Poland.
It has the same energy concerns as most other countries in Europe, but on top of that given
its geographic position directly bordering the conflict zone it has been used as a base
of operations by forces supplying military and civilian aid to Ukraine.
It has also been by far the most popular destination for over 1.6 million refugees fleeing the
conflict.
Given Poland's own extensive history of being stuck between major powers in Europe
and Russia the country has been accommodating, but it is coming at a significant cost.
1.6 million people entering a relatively small country within the span of two years is going
to be in economic shock no matter what, but a large share of these people are elderly
or young children.
Again speaking as an incredibly cold-hearted macroeconomist, people that consume more resources
than they produce.
Tragically of course there is currently no end in sight for the conflict, and even when
fighting does stop many commentators expect that people won't move back because of the
relative safety, better job opportunities and higher living standards offered by Poland.
Some issues are more important than maximizing economic output, and this is clearly one of
them, but it also has to be recognized that despite all of its success in recent decades
Poland is still not a rich advanced economy, yet at least.
And a major shock like this has the potential to undo a lot of the progress the country
has worked very hard for, while it makes the difficult, often perilous transition from
a manufacturing center to an advanced service-based economy.
In addition to this huge demographic shift Poland has also made commitments towards massively
expanding its military.
If it sticks to these plans it will have the largest military in Europe and be spending
as much as 5% of its total economic output on a military that will hopefully never be
needed.
That is a larger percentage than it was spending during the final years of the Soviet Union,
and more than double what it is at the moment.
National defense is a crucial aspect of any country, and it's understandable that Poland
wants to take a proactive approach to looking after itself given its vulnerable location
in the world, but this is going to be a significant economic burden on top of a growing number
of other economic burdens that Poland is going to need to manage to continue its growth and
catch up with its European peers.
Ok, now it's time to put Poland, one of Europe's fastest-growing major economies,
on the economics explained national leaderboard.
Starting as always with size, Poland has a GDP of 688 billion USD making it the 21st
largest economy in the world, ahead of Argentina and a fair way behind Switzerland.
Even still this is a major economic force, so for now it gets an 8 out of 10.
That output is spread out over a population of 37.7 million people as of 2020.
As we explored in this video that population is significantly higher now due to an influx
of refugees from Ukraine, and as population increases all other things being equal GDP
per capita will decrease, but according to the most recently available statistics the
country has a per capita output of $18,321 which is in line with regional peers like
Croatia and Hungary as the 52nd most productive country in the world on a per capita basis.
Poland gets a 6 out of 10.
Stability and confidence is an interesting one.
The country itself has shown that it can avoid problems with endemic corruption and economic
mismanagement.
It's not perfect, but it's by far and away better than most former soviet states.
The country has also been able to cultivate strong international relations and avoid higher
levels of government debt, something that will likely pay significant dividends with
the economic challenges it's facing as a result of losing its cost-competitive regional
advantage and the war in Ukraine.
Economic problems like these are always going to be a challenge, but a barely sustainable
level of debt can quickly turn a challenge into a crisis.
And for now at least, the debt rate in the country should be easily manageable, especially
since it also has easy access to the world's second most traded global currency, the euro.
Balancing the good with the bad, Poland gets a 7 out of 10.
Growth has been strong by regional standards, but that particular region is made up of countries
that have been experiencing very slow and often even negative growth.
Poland's slow and steady approach has been a blessing in disguise though.
Countries that can boast double-digit economic growth figures year after year are more often
than not resorting to some very unsustainable practices to achieve that growth, which can
easily come at the expense of long-term economic success measured over decades.
In many ways, Poland's roughly 5% annual growth rate is kind of the sweet spot for
a rapidly developing economy, but even still it's below the true outliers over the past
decade so it gets an 8 out of 10.
Finally, Industry.
Poland has built a very strong manufacturing industry and today it's moving into more
advanced value-adding services like technology, finance and engineering.
For now, it gets a 7 out of 10 because it's still growing and none of its industries
are world-leading in any capacity, but if it keeps developing like it has been that
could change very quickly.
Altogether that gives Poland an average score of 7.2 out of 10, which puts it up here on
the leaderboard.
A very respectable position and one that will hopefully be even better when exploring this
rapidly developing economy in a few years time.
We compared Poland's relative economic success a lot to Russia's in the post-soviet era.
Now we've already made an entire video on this one from Russia's perspective so we
didn't want to repeat too much here, but you should be able to click to that video
on your screen now for the full story.
Thanks for watching mate, bye.