Poland’s Economy

The collapse of the Berlin Wall in 1989 and the subsequent changes that swept Eastern Europe were seen as a very positive transition for Poland. The country was in position to open its economic system and follow the rules of a market economy. Previously, it had labored under a politically manipulated, centrally planned economy. Poland was ready to join the developed world. The main difficulty, however, was that such a transition takes time. If not conducted carefully and gradually, the radical economic changes could in fact result in tremendous hardship for millions of citizens. Eager to achieve rapid prosperity, Eastern European governments sacrificed quality for time without comprehending the possible consequences. With the support of citizens longing for wealth after years of deprivation, economic reforms swept the region.

Minority voices that cautioned that only long-term sacrifice leads to prosperity were quickly silenced. It was understandable why so many people expected immediate, abundant wealth: If we get rid of the corrupt governments, they believed, we have the potential to explode economically and to take our place among the developed world’s economy. The attitude shared by many, because of inexperience, was that rapid economic progress was a right rather than a hard-­earned privilege. Forgotten was the fact that—­
no matter how corrupt the leadership—­perks such as free health care, job security, affordable education, and other benefits would eventually cease to exist. Privatization of inefficient state-owned factories and infrastructures could lead to layoffs. Wages, once artificially adjusted, could fall drastically, and national currency could lose its value. Being part of the international economic system meant that one had to be competitive to survive. If not, consequences could be dire. Additionally, in the early 1990s, economic hardships spread like wildfire throughout the post-­Communist countries. It would take years for regional economies to stabilize and begin to show progress. Poland shared this painful experience.

ECONOMIC CHALLENGES

The main problem, and one that was unavoidable, was how to reorganize the economy without negatively affecting people’s quality of life. The absence of small and medium-­sized companies proved to be a major challenge. In modern economies, these companies often form the backbone of the manufacturing and service sectors. A lack of adequate capital resources and currency reserves that could be invested in successful reforms created additional obstacles. The huge bureaucratic machine also had to be reduced. Agriculture and industry were in desperate need of modernization. A complex set of regulations, taxation systems, and lack of stimuli for immediate foreign investments all blocked early attempts at economic development.

ECONOMIC POTENTIAL

Despite all these problems, the advantages of location, area, and population size combined to make Poland a potentially attractive trading partner. This time, its location near Germany and Russia was a positive rather than a negative factor. It meant that the country would not be excluded from various regional economic initiatives. Eastward expansion of the European Union that failed to include Poland, for example, seemed unwise and counterproductive. Its sizable population was perceived as a body of consumers that, with an eventual increase in purchasing power, could become one of the major European markets. Despite a variety of internal difficulties, Poland’s economy was still one of the largest in Eastern Europe. Moreover widespread enthusiasm in Western Europe for the European Union’s enlargement in the 1990s added to Poland’s economic prospects.

CURRENT ECONOMIC CONDITIONS

After more than a decade devoted to the reform of its economic system, several major goals were accomplished. In 2005, Poland was integrated into the European Union, a development that immediately resulted in several important benefits. First, Poland entered a joint market of several hundred million consumers. Second, various customs and tariffs were erased, which made it much easier to import and export goods. Third, direct foreign investment in the Polish economy was encouraged and achieved. All of these factors contributed to an increase in the country’s gross national product (GNP) and the wealth of its citizens.

The ultimate goal of enhancing Poles’ quality of life appears to be slowly coming to fruition. Unemployment rates, still in the double digits (about 15 percent in early 2007), are decreasing gradually. This is of particular importance because not only does high unemployment burden a nation’s economy, but it also reflects a government’s inability to implement significant reforms. Analysts predict that, by 2009, unemployment rates should drop below 10 percent. The tertiary or service sector is expanding, as would be expected in an improving economy. Agriculture’s impact on the total economy has decreased to less than 4 percent of the GDP. In addition, most of the farms that were once state-­controlled are now in the hands of private ownership.

One relic of the Communist era—­the low productivity of workers—­has been improved. It may sound strange that worker productivity would have been an issue in a society that emphasizes labor productivity as its highest moral and economic goal, but it was the case. The workers put in as much effort their capitalist counterparts in the West, but their socialist system offered little incentive for their effort to realize personal economic gain and the system too often employed far more workers than a farm or factory needed.

Additionally, much of the economic exchange among members of the Warsaw Pact (an organization of East European Communist states) was compensation based. Goods were exchanged for other goods, rather than for money. Poland, for example, would receive a number of tractors from the Soviet Union in exchange for Polish steel. The value of products was arbitrarily decided, most frequently to Moscow’s benefit. No one asked the Polish factory if it actually needed tractors. This is just one of many examples that illustrates conditions of helplessness that eventually generated indifference among workers.

Even though in (socialist) theory, workers owned their factories, the reality was that they were powerless. Thus, with no power to make a difference, the workers became apathetic and remained indifferent for a long time. Today, Polish workers participate equally in the economic process. They are able to compete in a free market. As a result, most of the conditions that held the country’s economy back for such a long time have been erased.

During recent years, Poland’s gross domestic product (GDP) has experienced steady gains. Currently, the value of goods and services produced is increasing at about 6 percent annually. The per capita income is also showing robust growth, having risen above $14,000 in 2006. According to the United
Nations, however, Poland’s economy is ranked eighty-seventh, on the list of free economies. Compared to other European economies, it ranks thirty-seventh among 41 countries. Obviously, there is much room for improvement.

BRANCHES OF THE ECONOMY

National economies generally include three main branches. Primary industries involve agriculture and the extraction of natural resources; secondary industries are manufacturing-related activities; finally, the tertiary sector includes all service-related occupations. Countries striving to enter the postindustrial age attempt to expand the number of well-­paid service jobs. As this occurs, the contributions of agriculture and manufacturing to the gross domestic product decline.

Agriculture

Small, family-­
owned farms have been a backbone of Poland’s economy for a long period of time. Agriculture was one of Poland’s primary sources of income during the period of Communist control. For reasons discussed previously, farm production was low compared to that of Western economies. After the fall of Communism, it required a great deal of restructuring. One of the main issues was that the economic prosperity of too many people depended on agriculture: A reduction in government subsidies would lead to an increase in unemployment and a decrease in the standard of living for too many Poles. It was widely recognized that this could lead to political destabilization.

Unlike the United States, where farming has become a large corporate business, average Polish farms are less than 20 acres (8 hectares) in size. Without cooperation among farmers, a single farmer can hardly survive the challenges of a market economy. Transforming Poland’s agriculture became a priority for both the Polish government and the leaders of the European Union. Recent studies of agricultural employment within the EU show that 60 percent of Poland’s economic units (as defined by the Eurostat agency) have a 25 percent or higher rate of employment in the primary sector. Only in industrial centers such as the Cracow region and western Poland are rates some-what lower. In this context, a comparison with other new EU members—­Romania and Bulgaria—­is appropriate. In 2005, Poland had nearly twice as many small-­size farms (less than 20 acres) as Romania. Of course, the country’s size and population have much to do with this—­large countries should naturally show higher numbers—­but even Italy and Spain have only half as many small farms as Poland.

Statistical data, however, indicate some interesting changes that may affect the future of Poland’s agriculture. As noted, agriculture represents a higher percentage of the total economy of less-­developed countries (LDCs) than of well-­developed ones. At the same time, developed countries lead the world in acreage of agricultural land and in the yield of crops and livestock. They can afford a clean and protected environment, modern technology, and to meet the varying requirements in market demands. Thus, the comparison of different land use systems as they relate to agriculture can shed light on a country’s economic standing. Poland is no exception.

Changing consumer tastes, particularly within the developed world, have created a rapidly growing demand for organic agricultural products. Desire for a healthier lifestyle has boosted organic farming into a multibillion-dollar industry in the United States alone. Europeans are not far behind in their attempt to turn material prosperity into a healthy lifestyle. To keep pace, Poland will have to change its traditional farming practices as farmers convert to high-­earning organic farming practices. For now, however, Poland’s production of organically raised crops falls far behind that of Western Europe. In terms of area fully converted to agriculture, Poland’s impact on the European Union is currently barely visible. Italy, the United Kingdom, Spain, and France are the leaders in this category. Poland lags behind the pocket-sized Netherlands and even Finland, which stretches beyond the Arctic Circle. Yet unlike the Netherlands or Finland, Poland has great potential to expand its acreage of organically cultivated land, dairy operations, and grasslands.

With adequate capital investments and proper implementation and enforcement of environmental laws, Poland could become a European leader in organic agriculture.

Energy

For much of the past two centuries, Europe’s leading economies were those with well-­developed heavy industries. Growth in mining, iron smelting, and chemical production was perceived as highly desirable. Recently, things have changed. Countries are increasingly engaged in economic activities that produce minimal environmental degradation. Strict EU regulations require the cleanup of industrial zones and support a reduction in the emissions of carbon dioxide. Throughout the continent, the door has long been closed on an era of careless environmental pollution for the sake of economic progress. To meet requirements for membership, Poland had to transform its own energy sector to fit the standards of European Union regulations. Progress, of course, cannot be achieved overnight. It is very costly and will take many years to achieve.

Similar to agriculture, energy production and consumption must undergo serious transformation. Poland has large deposits of coal in the southwestern part of the country. Because it is both abundant and relatively cheap, the country continues to rely on coal-fired plants as its primary source of electricity.

In fact, the plants provide enough electricity to satisfy not only domestic demands but also a surplus that is exported to neigh-­boring countries. Poland has limited hydroelectric-generating potential and inadequate deposits of oil and natural gas. This has left the country in a rather difficult position. To decrease its dependence on environment-­polluting coal, it must utilize other options. Wind and solar energy are options, but they are far from adequate replacements. It will take years, if not decades, for Poland to lessen its dependence on coal, a resource that it still has in abundance.

During the Communist era, the flow of affordable oil and natural gas from the Soviet Union was enormously helpful. The artificially discounted prices reflected political considerations rather than true market values. Since the fall of the USSR, circumstances have radically changed. Today, Russia continues to be Poland’s main supplier of imported energy, but prices are far from discounted.

Stuck between demands for change in its energy policy and inadequate oil and gas resources, Poland currently relies on Russia and some additional imports from other regions. Domestic production is minimal, whereas consumption has doubled in recent years. In fact, Poland imports more than 10 times as much oil and natural gas as it produces. Natural gas, which pollutes less and is relatively inexpensive, must be delivered through pipelines from Siberia and Central Asia.

In this context, Poland’s geographic location is both a blessing and a curse. Because the countries west of Poland, like Germany, Europe’s leading economy also rely on Russian gas and oil, they need pipelines to cross Polish territory. Poland receives royalties for the use of its territory for this purpose. It also connects major Polish cities to two of the largest pipelines: Yamal-­Europe (from Russia through Belarus) and Brotherhood (through Ukraine). The only pipeline that directly connects Russia and Germany passes through the Baltic Sea, a route that Poland vigorously fought. This pipeline would eventually branch out to reach Poland, it transit royalties from it.

Industry and Service

The largest direct contributors to Poland’s GNP are industry and services, which in 2006 accounted for 31 percent and 64 percent of the nation’s economy, respectively. (Agriculture’s role in the national economy is much higher than the reported 4.8 percent, which does not include labor or other related contributions. In fact, many agriculture-­related activities also fall into the industry and service categories.) These figures indicate a positive trend toward a postindustrial economy. No single aspect of industrial production dominates; rather, a wide range of mainly heavy-­industry manufacturing properly describes the industrial emphasis. Manufactured goods for households, automobiles, and foodstuffs also are produced—­mostly for domestic markets, but some for export. Still, if Poland is to be successful in the global marketplace, it must diversify its industry and increase the quality of its products. (Can you find any item in your home that was manufactured in Poland?) If the country can achieve a better international reputation for its products, it will greatly improve its current negative trade balance.

Rapid growth in the service sector has been influenced by liberalization of the banking system and better regulation of corporate policies. This allows opportunity for the growth of large corporations as well as small businesses. Attracted by low-cost labor and Poland’s location, many foreign companies are creating subsidiaries that cater to central and eastern European markets. In 2007, for example, the Internet giant Google decided to open offices in Warsaw and employ a local workforce. From there, Google plans to further expand throughout the region. Between 300 and 400 American companies, attracted by the various advantages that Poland offers, currently operate within the country.

One of the rapidly growing aspects of the local economy is tourism. The variety of attractions for both domestic and international tourists has helped tourism become an important contributor to the service sector. This is not to suggest that Poland measures up to tourism giants such as France or Spain. Nonetheless, it ranks among the 15 most visited countries in the world. It benefits from the fact that it is quite affordable, because prices are generally far lower than in Western Europe. Being a predominantly rural country has also paid off with regard to tourism; increasing interest in village tourism and ecotourism making Poland an attractive destination.

TRADE

The transition from a traditional to a developed economy comes with a price. This change is reflected in such effects as high internal and external debt, a sharp increase in imports, and a negative trade balance. Short-­term sacrifices are needed to achieve long-­term prosperity. Poland’s experience has not differed from this tradition. Public debt accounts for 49 percent of the gross domestic product despite continuous growth of the national economy. Fortunately, inflation has been stabilized and fluctuates between 1 and 2 percent. The trade balance continues to be negative, primarily because of the need to import oil and natural gas.

In 2006, Poland exported $110.7 billion, yet imported products were worth $113.2 billion. Its trade partners are mainly countries in the region. Germany exchanges far more goods with Poland than any other country; it accounts for 28.2 percent of exports and 29.6 percent of imports. With the exception of France (6.1 percent of exports and 5.7 percent of imports), a negative trade balance exists with the other major trading partners: the Netherlands (4.2 percent vs. 5.9 percent), Italy (6.1 percent vs. 6.6 percent), and—­surprisingly, perhaps—­Russia (4.4 percent vs. 8.7 percent). In recent years, another valuable trading partner has appeared on the horizon.

Inexpensive Chinese manufactured goods have reached Poland, whereas few Polish products are sold in China. With the United States, on the other hand, the picture is exactly the opposite. In 2006, Poland exported $2.2 billion in goods to the United States, whereas imports amounted to $1.96 billion.

A negative trade balance generates external debt and lowers the ability of a country to pay off any loans at low interest rates. To protect their investments, lenders instead require a borrowers to pay debts at higher rates. Currently, Poland’s debt hovers at around $150 billion, and its GNP is $337 billion. Yet it appears likely that, due to its expanding economy, Poland will continue to improve its economic status during the coming years. Since 2005, exports have increased by more than 30 percent. If the trend continues, a reversal of the existing budget deficit can be expected in the foreseeable future. (A deficit occurs when the government spends more than it has and thus must borrow money.)

The next stage in Poland’s economic transformation will be the replacement of its currency, the zloty, with the euro—an event planned for 2012. Not all countries in the European Union have joined the socalled “eurozone.” The best example is the United Kingdom, which chose not to adopt the euro as its national currency. More commonly, members simply cannot meet the EU standards for monetary participation. For example, a country must not run an annual budget deficit over 3 percent. Thus far, Poland has not been able to adjust its spending and meet this benchmark. Its failure is justified (politically) by the continued high costs of modernization and expanding economic reforms.

TRANSPORTATION AND OTHER INFRASTRUCTURE

Government spending in an attempt to modernize is reflected in Poland’s investments in transportation and infrastructure. In the early 1990s, democratically elected governments inherited a woefully inadequate infrastructure, including transportation and communication networks. They quickly realized that the country needed rapid improvements if progress was to be achieved. The first step was to privatize previously state-­owned companies and to invest in infrastructure. This process is ongoing and is now supported by additional funding from agencies of the European Union.

Improvements in the roadway and railroad networks and telecommunications required immediate attention. The absence of expressways and high-­speed railway systems prevents the efficient movement of people and goods. Only two expressways (equivalent to U.S. interstate highways and turnpikes) exist, with a combined distance of less than 350 miles (563 kilometers). Considering Poland’s size, one can only imagine the need for improvements. The primary goals are to finish three expressways that will spread across the country, connect Poland’s major cities, and merge with the existing European road network. In the north-south direction, an expressway will connect Gdansk, the main port, with the industrial cities of Silesia and continue toward the heart of central Europe. In the vicinity of Lodz, it will meet the east-­west expressway that connects Germany with Ukraine, Belarus, and Russia. Another route will connect Germany with southern Poland’s industrial centers and continue toward southeastern Poland and Ukraine. Russia and Ukraine alone account for almost 200 million people and represent a potentially enormous market for European companies, which is why Poland has received large incentives to finalize construction projects as soon as possible. Its status as a transitional country is, again, emphasized.

Another issue is the growing congestion in Poland’s cities. European cities were built during medieval times to accommodate horses and carriages, not trucks and automobiles. Their streets, especially downtown, are narrow and curvy and can accommodate only a small number of vehicles. Yet down-towns are the main centers of business operations in many cities and employ thousands of people. The lack of parking spaces, congestion, and other traffic conditions create serious transportation and other infrastructure difficulties.

Few people owned personal vehicles in Communist countries. Not even the newer parts of towns were built to accommodate large numbers of cars and trucks. Once these countries took the capitalist route, owning an automobile meant enjoying a status symbol (despite the existence of low-­cost public transportation). Cities built to accommodate 100,000 vehicles, for example, suddenly found their streets choked by half a million or more cars crowding their streets. It will take many years and a huge investment of capital to fix Poland’s urban transportation problems.

Several thousand miles of navigable rivers and canals experience heavy use, as they have for centuries. Here, Poland’s physical geographic characteristics are rather valuable because barges can transport shipments across the lowland country. Poland also has a 12,772-mile (20,555-kilometer) railroad network. Scheduled airlines link Poland’s major cities and the country with destinations throughout Europe and much of the world.