Poland Economy

ECONOMY

Economic Transition
As the communists handed power to the Mazowiecki government in 1989, the economy was in crisis. Many basic goods were not available on store shelves. Inflation raged over 500%, and the government could not afford to make payments to its international creditors. While the official unemployment rate was low, many workers were employed in state-supported, loss-making industries that the state could no longer afford to support. The democratically elected Mazowiecki government responded with the Balcerowicz Plan, which freed most prices, dramatically reduced state control over the Polish economy, and clamped down on runaway inflation. The international community supported the Balcerowicz Plan with debt restructuring and fresh loans. With stability restored, Poland was able to offer its well-educated, low-wage workforce, its position in Europe’s center, and its tariff-free access to European Union (EU) markets to attract foreign investment--all with the goal of bringing Polish incomes up to the levels of those in the U.S. and Western Europe. One generation later, the reforms since 1989 have brought success and new challenges. Poland joined the EU in 2004. Its per capita economic growth rate has outpaced those of the U.S. and of its EU partners. Polish incomes have risen to 37% of U.S. incomes (up from 29% in 1997) and to 52% of EU-15 incomes (up from 41% in 1997), while inflation and unemployment have dropped to historic lows. Nonetheless, the hard work of restructuring remains incomplete if Poland is to reach full parity in terms of income with the historically wealthy countries of Western Europe.

Agriculture
Poland has a strong agricultural heritage with many products in high demand such as its high-quality fruits and vegetables, honey, hams, sausages, and dairy. It is a leading producer in Europe of dairy, apples, potatoes, and rye, with significant production of rapeseed, grains, hogs, and cattle. Nonetheless, agriculture remains among the least productive sectors of the Polish economy, employing 15.2% of the work force while contributing only 4% to the gross domestic product (GDP) (2007). Unlike the industrial sector, Poland's agricultural sector remained largely in private hands during the decades of communist rule. Most former state farms are now privately owned and represent the largest land holdings. Roughly 1.6 million farmers are considered rural dwellers who have other employment off the farm and produce food mostly for their own consumption. These farms are small, usually no larger than 5 hectares (12.36 acres) and are highly inefficient. There are about 200,000 farmers with plots over 15 hectares (37.07 acres), and 24,000 with plots up to 200 hectares (494.21 acres). These farmers produce about 90% of the food and enjoy better access to strong management techniques and technology.

Poland successfully transformed its farm economy to market principles following the end of communism but has now entered a period of greater state control of the market due to its membership in the European Union. Five years after Poland’s EU accession, its agricultural policy is dominated by the EU's Common Agricultural Policy and by its open borders with the other 26 EU members. Land prices have increased dramatically, but less than 1% of farm land is traded each year due to the single area payment scheme for the EU's direct subsidies, intended initially to ease EU compliance with World Trade Organization (WTO) rules and to simplify payments in countries with limited administrative capacity. This approach assigns subsidies based on land use and thus encourages small farmers to hold onto land or lease it rather than sell to neighbors. Subsidies have become almost half of total farm income in Poland.

Poland remains a net exporter of food products overall, including confectionery, processed fruit and vegetables, meat, and dairy products. However, the net advantage to exports is diminished each year. Polish processors often rely on imports to supplement domestic supplies of wheat, feed grains, vegetable oil, and protein meals, which are generally insufficient to meet domestic demand. Additionally, imports have risen as quickly as exports as Poland's growing middle-class consumers begin to demand more variety and year-round availability of their food choices. Finally, Poland has begun to import significant quantities of primary foodstuffs as it has open borders with larger, more efficient producers in other EU nations. Poland imports significant quantities of pork from other EU member states, and in 2008 became a net importer. Attempts to increase domestic feed grain production are hampered by the short growing season, poor soil, and the small size of farms.

In 2007, Poland experienced outbreaks of avian influenza (AI) in domestic poultry flocks. Poland's Veterinary Service identified and destroyed the domestic stock that was primarily in flocks of commercial laying hens. The United States is currently involved in the regulatory process to recognize Poland as AI-free.

Industry
While agriculture remains heavily protected, Poland’s transformation exposed its industries to global competition. Before World War II, Poland's industrial base was concentrated in the coal, textile, chemical, machinery, iron, and steel sectors. Today it extends to motor vehicles, fertilizers, petrochemicals, machine tools, electrical machinery, and electronics.

Polish industry suffered widespread damage during World War II, and many resources were directed toward reconstruction after the war. The communist economic system imposed in the late 1940s created large and unwieldy economic structures operated under a tight central command. In part because of this systemic rigidity, the economy performed poorly even in comparison with other economies in Central Europe. The reforms of the early 1990s included a widespread program to sell low-productivity, state-owned companies to private investors. The results of reform include more efficient, high-productivity producers, with a private sector that now accounts for over two-thirds of GDP. Nonetheless, the government has retained control of many large, state-owned enterprises, particularly in the transport (aviation and rail), mining, chemical, energy, finance, and defense sectors. Many Polish economists identify privatization of these government-run companies as the incomplete task of Poland’s economic transformation, and it is (perhaps optimistically) part of the government’s ambitious program for 2009/2010.

Global Economic Crisis and Future Challenges
Prime Minister Donald Tusk’s September 2008 announcement that he intended to guide Poland into the Eurozone by January 2012 seemed a triumph of years of reform and growth. Polish inflation was low and contained. Unemployment had reached a historic low of 6.5%, and GDP had grown by 6.7% the previous year. Days later, U.S. investment bank Lehman Brothers collapsed, leading to an intensified phase of the global financial crisis. By mid-winter, the Polish zloty had lost nearly 50% of its value against the U.S. dollar and 35% against the Euro. Optimism about Poland’s economic success gave way to global concerns for the financial stability of the entire Central and Eastern European region amidst financial panic.

Despite the setback, Poland has weathered the global crisis as well as any country in Europe. It is the only country in the European Union that is still growing--at 1.1% in the second quarter of 2009. Its conservatively managed banking system--made up largely of Polish subsidiaries of large U.S. and Western European banks--held little in the way of “toxic assets” as the crisis struck. Fiscal moderation of recent years meant that the government’s accounts looked fitter than those of, for example, crisis-stricken Hungary or Latvia, while the independent National Bank of Poland’s prudence in managing Polish monetary policy constrained the formation of large asset bubbles. Finally, Poland’s freely floating exchange rate has supported Polish production--in contrast to the Baltic states, Slovakia, and others--by making Polish goods cheaper and foreign goods more expensive.

While financially healthier than many of its neighbors, Poland suffers from declining exports and investment. Unemployment has risen to 8.2% and looks set to continue growing. The Polish Government is struggling to contain unexpectedly large budget deficits in 2009 and 2010, largely by cutting spending, speeding up privatization, and extracting dividend payments from state-owned companies. Thanks also to the crisis, the government’s timeline to adopt the Euro has been extended indefinitely.

As they work to contain the economic crisis in Poland, Polish leaders, academics, and businesspeople are also considering the country’s post-crisis future. They point to a number of obstacles that continue to obstruct Poland’s progress toward reaching U.S. and Western European levels of income.

Poland has one of the lowest workforce participation rates in the EU--64%. (That is, 64% of able Polish adults work, compared to 75% of U.S. adults and 71% of EU adults.)
Small and medium-sized business formation is hampered by what the World Bank identifies as one of the least hospitable climates for new business formation in all of Europe.
Key infrastructure--particularly road and rail--remains underdeveloped.
National research and development spending is an EU-low 0.56% of GDP, while high technology’s share of total Polish exports is also an EU low, of 3.11%.
Many key Polish economic sectors remain in the hands of the state.

Foreign Trade

Polish trade is dominated by the EU--over 80% of its imports and exports come from or go to EU member states. Neighboring Germany is by far Poland's most important trading partner, accounting for nearly 30% of the value of Polish trade. Most Polish imports are energy and capital goods needed for industrial retooling and for manufacturing inputs, rather than consumption goods. Similarly, its major exports are cars, machinery, furniture, and iron/steel products. Poland, a member of the World Trade Organization (WTO) and the European Union, applies the EU's common external tariff to goods from other countries--including the U.S. While foreign trade is an important part of the Polish economy, Poland remains much less trade dependent than its Central European neighbors.

In the year after it joined the EU, Poland experienced an overall growth in exports of 30%. This growth was not confined to trade among EU partners: while exports to EU countries rose by 27%, exports to developing countries rose by 46%, and exports to Russia rose an unexpected 77%. Poland's trade balance continued to improve, with export growth significantly outpacing import growth. Opportunities for trade and investment continue to exist across virtually all sectors. The American Chamber of Commerce in Poland, founded in 1991 with seven members, now has more than 300 members. Strong economic growth potential, a large domestic market, EU membership, and political stability are the top reasons U.S. and other foreign companies do business in Poland.

GDP (2008): $530 billion.
Real GDP growth (2008): 4.9%.
Per capita GDP (2008): $13,900.
Rate of inflation (2008, average): 4.2%.
Natural resources: Coal, copper, sulfur, natural gas, silver, lead, salt.
Agriculture: Products--grains, hogs, dairy, potatoes, horticulture, sugar beets, oilseed.
Industry: Types--machine building, iron and steel, mining, shipbuilding, automobiles, furniture, textiles and apparel, chemicals, food processing, glass, beverages.
Trade (2008): Exports--$169.5 billion: furniture, cars, ships, coal, apparel. Imports--$206.1 billion: crude oil, passenger cars, pharmaceuticals, car parts, computers.