M. Sc.

Jacek Osadnik

Poland

Polish Economy Outlook (1989 - 2007)

1. Introduction.

Since turning point of 1989, Poland has undergone great political, social and economic changes. The biggest achievement of Polish administration and economy are introduction of democratic structures, the shift from a command economy to the free market and wide-ranging systemic reforms.

The start of the economic reform process was extremely tough. During the period of transformation, the Polish economy was still in an awful state and radical reform was selected as the only solution to save it. Without such reforms the costs of the transformation would have been significantly higher and Poland would not have come as far the road towards the EU as it has.

One fundamental priority of successive government has been economic growth. This is not only a condition of improving Poles' standards of living, but also a foundation for realizing the strategic goals of catching up with the developed economies of Europe and the rest of the world. The means of achieving this goals is EU membership.

The reforms of the transition period and subsequent hard and consistent monetary policy gave the Polish economy solid foundations: a strong currency and permanently falling inflation (currently at about 1%). The implementation of systemic reforms and responsible government policies, as well as improved global competitiveness, mean that expectation of a return to fast-track economic growth are justified.

2. Polish Economy Cycles

The business cycle or economic cycle refers to the fluctuations of economic activity about its long term growth trend. The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), and periods of relative stagnation or decline (contraction or recession). These fluctuations are often measured using the real gross domestic product. Despite being named cycles, these fluctuations in economic growth and decline do not follow a purely mechanical or predictable periodic pattern.

It appears that the economic cycle in Poland has made a full circle for the first time since the beginning of the country's transition to a free market economy. Many macroeconomic indicators are currently revisiting the record highs noted at the end of the 1990s, while the period of greater economic activity that commenced in 2004 can be likened to the revival Poland experienced between 1995 and 1997.

As it is stated in the article "Revisiting the past ?", elaborated by Piotr Bielski (Bank Zachodni WBK, Economist): it is important to note that both in the 1990s and now, the period of strong economic revival was preceded by a release of available capacity on the supply side of the economy and of serious labour force reserves. In the first period, this was powered by the systemic transformation, the activation of private entrepreneurship and the transformation recession of 1990- 91. Meanwhile, between 2001 and 2002, the changes were instigated by an economic downturn which was caused by, among other factors, the global economic situation and the restrictive domestic monetary policy which resulted in (forced on) a topdown restructuring of enterprises and improvements in Polish firms' efficiency and ability to compete. At the same time, both booms were preceded by important systemic developments, which contributed towards Poland's greater credibility in the eyes of international investors. In the early 1990s, this was the restructuring of the Polish foreign debt, a process that closed with the signing of an accord with the London Club in 1994. In 2004 this was Poland's accession to the European Union. Both events ignited significant growth in foreign direct investments.

The impact of these milestones was amplified by another positive time external factor: a good global economic climate (first period of stable growth of the global economy continued from the beginning of the 1990s to the end of the decade, the second period has lasted from 2003 to the present).

There is another thing that supported polish economy. Throughout the 1990s, the United States and other Western countries supported the growth of a free enterprise economy by providing economic aid, and lowering trade barriers. Poland graduated from U.S Agency for International Development (USAID) assistance in 2000 and paid the balance of its U.S.-held Paris Club debt in 2005.

The foremost factor that decided about the scale of the economic boom of 1995-1997 was the large-scale activation of the main economic motor in the form of dynamic growth in domestic demand and, in particular, extraordinarily high growth in gross fixed capital formation (average annual growth of approx. 20% over three years) and strong acceleration in private consumption (of up to approx. 9% year on year in 1996 and 7% in 1997).

Unfortunately, the economic growth structure - of internal demand clearly outperforming GDP growth - strongly undermined the overall macroeconomic balance. The rapid upturn in domestic demand powered strong acceleration of import growth and deterioration of the foreign trade balance. As a result, the current account balance quickly worsened - from a surplus of around 1% of GDP in 1994 to a deficit of 4% of GDP in 1998 (and more than 7% deficit in 1999 as a consequence of the Russian crisis which led to a crash in Polish exports to the east).

Similar economic trends can be observed today. In the current stage of development, domestic demand, as happened previously, has clearly risen in significance with the concurrent gradual deterioration of the balance of payments. Yet, though the direction of the changes seems similar, the scale of the changes appears to be more moderate than in the previous cycle (in particular in terms of the pace of consumption growth and of current account deterioration), and economic growth is more equally balanced.

In the previous economic cycle, the surge in private consumption as well as the forceful deterioration of Poland's payment situation, did not happen straight off the bat but only after a certain delay relative to the revived GDP growth. Private consumption moved full steam ahead only after the increasingly stronger demand for labour translated directly into a much speedier decline in the unemployment rate and more rapid growth in real wages (1996-1997).

As a result, even the imbalance on the current account did not become a problem until later. Thus, at present, the question remains whether if the pressures on

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