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IMF Working Paper: Rapid economic recovery earns Poland recognition as East European ‘tiger’

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2000
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When Poland began its transformation to a market economy in 1989, it was in a deep crisis and thought to be facing greater challenges than its central and eastern European neighbors. By late 1991, however, it had begun to recover and went on to register remarkably strong growth in the 1990s. In their IMF Working Paper The “Soaring Eagle”: Anatomy of the Polish Take-Off in the 1990s, authors Mark De Broeck and Vincent Koen explain Poland’s success, put its overall growth performance in perspective, and look at the country’s growth prospects over the next few years.

Although Poland’s economic contraction was deeper than any the country had experienced since World War II, it was, according to De Broeck and Koen, shallower and shorter than in most of the other transition countries. From the onset of the recovery in 1991 through 1998, Poland enjoyed seven years of uninterrupted growth at an average rate of more than 5 percent a year, exceeding most official and unofficial projections. Poland outperformed its relatively successful central and eastern European neighbors (see chart, this page) and even more, the other transition countries.

Patterns of growth

De Broeck and Koen examined the available sectoral, ownership, and regional data to identify key features of Poland’s growth and, despite the uneven quality of the data, were able to draw some broad conclusions.

During the 1990s, growth was driven first and foremost by industry, specifically manufacturing, while mining and agriculture stagnated (see chart, page 90). Although the centrally planned economies were widely perceived to be heavily oriented toward industry, the authors discovered less of a shift from industry to services in Poland than might have been expected. They attribute this paradox to the fact that services, broadly defined, encompass activities that were “overweight” under central planning (for example, freight and certain government administrative functions) alongside those that were underdeveloped (such as trade, hotels and restaurants, and financial intermediation). De Broeck and Koen point out that consumer-oriented services did, indeed, expand rapidly.

The 1990s witnessed a surge in the number of private sector firms and entrepreneurs. Between 1991 and 1998, the number of registered commercial law companies increased more than two and a half times, to 136,500; that of joint ventures rose almost eightfold, to about 37,000; and that of individual entrepreneurs increased more than 50 percent, to more than two million. This boom, the authors argue, reflects a correction to the distorted size distribution of industrial firms under central planning as well as the expansion of a small business sector. The authors point to another feature of Poland’s performance in the 1990s—the greater dynamism in the private sector. The private sector share in output increased more rapidly than did its share in employment, particularly in industry. Productivity gains were thus higher in private than in public enterprises.

Turning to the regional dimension, growth appears not to have been uniform. De Broeck and Koen conclude that Warsaw and a few other large regions that recorded above-average growth were largely responsible for Poland’s overall performance, with Warsaw alone accounting for about one-fifth of nationwide growth between 1992 and 1996. The main mining region (Katowice) also recorded above-average GDP growth despite the decline of the mining industry. The authors believe that in many regions the stagnation of certain sectors was offset by increased activity in other sectors, which, they suggest, might be indirect evidence that restructuring has been taking place.

Industrial output

In light of the important contribution of industry to Poland’s growth performance, De Broeck and Koen further analyze the data for that sector to provide insight into the growth process. Between 1991 and 1998, the share of manufacturing in total industry rose to 90 percent, an increase of almost 12 percentage points, and output almost doubled. At a more disaggregated level, production increased in all manufacturing sectors but declined or even collapsed for a number of individual products. Production of radios and metal cutting machines, for example, dropped precipitously.

Poland and neighboring countries: real GDP

(1989 = 100)

Data: National statistical offices

Over the same period, De Broeck and Koen report, the share of mining in total industry fell by half, to 5 percent. The contraction in this sector lasted through 1993, and output plummeted in 1998 against a background of weakening coal prices and rising imports.

Productivity and investment

Early in the recovery, improved resource utilization was the major determinant of growth in Poland. Before the beginning of Poland’s transformation to a market economy and during the contraction, labor hoarding (defined as labor that would not have been employed if the economy had functioned as a market economy with the same level of output) occurred on large scale. By the time output started to rally, there was a labor “overhang,” or surplus, of about 30 percent. Employment gradually declined for two more years and expanded very little after 1993. By 1998, real GDP stood at 42 percent above its 1991 trough, but employment was not higher than it had been at the beginning of the decade. Labor productivity rose by about 6 percent a year during the initial phase of the recovery, but subsequently slowed down somewhat as the contribution of improved resource utilization to growth declined.

Labor productivity was boosted by an investment surge that helped quantitatively but also qualitatively rebuild a rather worn-out and obsolete capital stock. Investment boomed between 1994 and 1998, rising on average by 16 percent a year, with a strong foreign contribution. Poland’s productivity gains, the authors say, largely reflect the country’s response to the increasingly competitive environment facing its industries in the 1990s as trade surged—particularly manufacturing trade with the European Union (EU) countries—following the collapse of central planning and the consequent economic liberalization.

Ingredients of Poland’s success

How was it possible for Poland to grow so rapidly given the monumental structural changes it faced during the transition to a market system? According to the authors, the country’s success was due to a combination of relatively favorable initial conditions and fundamentally sound policies. The ingredients of the Polish success story include

  • an early political window of opportunity, as seen in a period of “extraordinary politics,” during which the population showed a readiness to accept the costs of radical change;

  • a sizable private sector at the start of the transition;

  • early and comprehensive price and trade liberalization;

  • early and broad dismantling of obstacles to foreign trade, which hastened the reorientation of trade toward the West and pressured firms to restructure;

  • generous external debt relief, which paved the way for inflows of foreign direct investment;

  • low entry barriers for new firms, which eased the way for labor to move from state-owned to new private enterprises;

  • an established legal system that made contract enforcement possible;

  • the imposition of hard budget constraints on public enterprises;

  • entrepreneurial dynamism in the private sector;

  • cautious macroeconomic policies, including an exchange rate policy designed to avoid overvaluation of the currency; and

  • a relatively liberal social safety net that cushioned the social strains associated with restructuring.

Poland’s prospects

In 1998 and early 1999, Poland’s economy experienced a marked slowdown. The deceleration was partly due to temporary factors, namely, the tightening of financial policies (intended to restrain domestic demand and contain a widening current account deficit) and the adverse shock associated with the collapse in demand from transition countries farther east. But the slowdown also called into question the sustainability of rapid growth.

De Broeck and Koen anticipate that infrastructure weaknesses—including an inadequate road network and problems in the judiciary system—will hinder growth in the future. These shortcomings, they say, “slow down or altogether discourage certain business ventures but also facilitate corruption, which has been shown to be growth inhibiting.” They also mention that the investment boom that helped Poland rebuild its capital stock may subside if corporate profitability, which began to deteriorate in 1998, continues to decline. In the plus column, the authors note that as unprofitable industries shrink, “the drag on overall growth from those sectors will diminish.” Sluggish growth would delay the needed adjustment in agriculture and heavy industry and would hamper the implementation of the ambitious structural reforms launched in 1999.

Poland: contribution of manufacturing to overall GDP growth

(percentage points)

Data: Poland’s Central Statistical Office and authors’ calculations

Although Poland grew more vigorously than other transition economies during the 1990s, a number of countries around the world recorded even faster growth during this period, and most countries experienced comparable episodes of robust growth in past decades. However, De Broeck and Koen stress, few of them faced challenges commensurate with those confronting the transition economies. Despite its recent growth record, Poland is unlikely to achieve the per capita income levels of the EU countries any time soon. Given the existing gap between Poland and the poorer EU members—Greece and Portugal—it might take Poland another generation to catch up even with these countries.

Copies of IMF Working Paper/00/06, The “Soaring Eagle”: Anatomy of the Polish Take-Off in the 1990s, by Mark De Broeck and Vincent Koen, are available for $7.00 from IMF Publication Services. For details about ordering, please see page 94.

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