Jakub Kowalczyk | Lancaster University
At the beginning of the 1990s, Poland was one of the poorest European countries. In fact, after the dissolution of the USSR, Ukraine (in terms of GDP) was richer than Poland. Now, Poland is the sixth-largest economy in the EU. How could a country turn its economic fortune upside down in just thirty years?
As much as it sounds counterintuitive, the communist regime laid foundations for the economic growth. It is no doubt that the centrally planned economy was inefficient and wasteful, however, the secret is in the changes in Polish society that were introduced by the communists. For the first time in Polish history, everyone stood a chance at building their own fortune when the regime fell. Why is that?
When Poland regained its independence in 1918, it was plagued with a lot of problems. After all, it is not often the case that a country regains independence after 123 years and has to unify three completely different regimes. Some of the biggest issues were a weak economy, high inequality, and common illiteracy. Only people who were previously members of the aristocracy, and whose families had enough money, were able to succeed. To make things worse, when the Great Depression hit in 1929, the government decided to maintain high exchange rates between Polish Złoty and other major currencies. This prevented the economy from adjusting to the new situation, and as a result, the economic crisis lasted longer than it should have, making an already poor society even poorer.
Then, the Second World War happened, and the country was back to square one - if not even worse. Not only was it completely destroyed, it also had new borders and it could neither use the funds provided in the Marshall Plan nor reparations paid by Germany as the Soviet Union took most of it. On top of that, the new communist government had relatively low popular support (that didn’t matter that much, because the society was too tired to rebel at the time and wanted to focus on rebuilding the country). It could not do much to access either funds from the Marshall Plan or reparations because the USSR would simply either replace the government with a new one or make Poland a new Soviet republic. The communists were well aware of that and decided to make the best use of the resources available, however, it would have all been for nothing were it not for the genuine will of the Polish people to rebuild their country from shambles. When the political turmoil finally settled down, the authorities had the time to tackle some of the longstanding issues. Illiteracy was drastically reduced, and everyone, no matter their background, could access higher education if they wanted to. The number of new houses built reached an all-time high, which to this date has still not been beaten nationally.
It is true that the quality of these houses might have been sub-par but at least people finally had somewhere to live, and they had access to their own bathroom (at the time this was a luxury!). Everyone had a job, as that was the government’s policy. Sure, some of these jobs were created for the sake of providing employment which became critical when the centrally planned economy was on the verge of collapse in the 1980s. However, at that time, in the 1940s-1950s, people craved peace of mind and stability. The communist regime provided that. The economic inequality wasn’t that big of an issue anymore. As per the common anecdote, ‘everyone had the money, there was just nothing to buy in the store’. Sometimes, even if something, like a car, was available and someone had enough money to buy it, they couldn’t do so. They had to put their name down on a special list, pay, and then they would be able to collect their car in a few years. As a result, money wasn’t that important anymore because it simply couldn’t get you more than anyone else.
Why am I saying all this? Because rapid economic development is impossible without proper foundations. For Poland, the communist regime “prepared” the country for what came in 1989 onwards as the old, centrally planned economy was heading for a collapse in the 1980s. For the first time in Polish history, there was an equality of opportunities. The education system was egalitarian and provided good education to everyone, raising the human capital of the Polish economy. In fact, even after the collapse of the regime, the education system did not change that much. Despite all of its drawbacks, it provided astonishing results. Even today, Polish pupils are among the best in Europe and the world according to the Programme for International Student Assessment (PISA).
The government, aware that change was inevitable, introduced in 1988 the “Wilczek Act” (named after the then Minister of Industry Mieczysław Wilczek). In fifty-four short articles, the act made it extremely easy to become an entrepreneur. Its main idea was “laissez-faire” (‘let do’) and to this date, a lot of Polish economists consider this act as an example of how to introduce economic freedom. The following year, the communist regime fell. The new government, led by the first non-communist Prime Minister Tadeusz Mazowiecki, had to act fast as the economy was in a dire state. Inflation reached levels not seen since the beginning of the Second Polish Republic, shops were empty, and people had to queue for hours to purchase basic items.
The economy was in a deep recession, and public debt was so high that the country was unable to pay its foreign debt and had to finance the deficit by printing money which further fuelled inflation. The Prime Minister decided to give the task of reviving the economy to Leszek Balcerowicz who became the Minister of Finance and Deputy Prime Minister. He had to act fast so the citizens could feel a positive change as soon as possible. With some of the most prominent Polish economists he created a reform plan called the “Balcerowicz Plan”. The plan was later on called “Shock Therapy” due to the scope and pace of the changes. Almost overnight the heavily regulated communist economy became a capitalist free-market economy.
It might be hard for a Western reader to understand why the plan was such a shock to Poles. After all, it only introduced something that was a norm in the West. The secret lies in the scope of economic protection provided by the communist state. Employment (with a decent wage) was guaranteed by the state. The state regulated all of the prices so basic items were always affordable to everyone (however, supply was a different story…). Everyone could get their own house (however, they would have to wait a few years, sometimes even more) regardless of their income. Children were able to go every summer for a proper holiday within Poland as the state funded that as well. And these are only a few of the economic protections provided by the communist government. In the long run, it turned out, that it was not affordable, and the “Balcerowicz Plan” suddenly brought everyone back to reality by ending all of this protection. For the first time in around 45 years, Poles had to learn the harsh realities of unemployment and free-market pricing.
The first years of reform were particularly hard. The economy did rebound quite quickly (in 1992 output growth, i.e. increase in GDP, was recorded) and inflation started to fall rapidly too. However, society had to pay the price. Some people (thanks to the “Wilczek Act”) were able to survive unemployment by becoming entrepreneurs, and the state did retain some basic benefits to support citizens, although they were nowhere near the level needed for survival. Up to this date, there is a lot of disagreement as to whether the “Balcerowicz Plan” was a success. People who managed to survive the hard years and became successful in the capitalist economy say that it was a success. Looking only at the economic indicators like GDP, rate of inflation, unemployment,etc., they are correct. After the first positive impact of the plan on the economy in 1992, the Polish economy was constantly growing until the COVID-19 pandemic. Even the Great Financial Crisis of 2008 was unable to bring recession to Poland. However, how much of this was due to the plan and how much was brought by the EU later on (Poland became a member of the bloc in 2004) is unknown but it is safe to say that after accessing the EU with its vast funds, the impact of the plan couldn’t be too significant. This is due to the EU’s Cohesion Policy which aims to provide additional funds to the poorest countries of the block. In the budget for the years 2007-2013, the EU allocated Poland more than eighty billion euros in Cohesion Policy funds. It is very likely that these funds helped the country weather the economic crisis more than the plan.
Critics of the plan (mostly those who didn’t manage to find their standing in capitalism) point to the social cost of the reforms and they often ask if there was another way. The simple answer is – of course – there was another way that was less costly for society. However, another question is whether it was feasible and desirable. Firstly, we need to take into account that economists all over the world at that time were in favour of liberal economic policies (mostly thanks to Thatcher and Reagan), so people voicing concerns for welfare were marginalised. Secondly, a slower pace of reforms would create more scope for corruption, especially as public enterprises were privatised, and the state was weak (this is the case for Russia and Ukraine). Ultimately, the choice was whether to make the society suffer more but for a shorter time, or to “spread” the suffering over time, and the government decided to go with the former. In the end, the approach taken by Balcerowicz was justified given the state of the Polish economy and public institutions in the 1990s.
The mistake was that no government until 2015 tried to “compensate” the poorest in society for their hardships. They were basically left to themselves, and the redistribution of wealth and income was almost non-existent. Upon Polish accession to the EU, a lot of those people decided to emigrate to rich Western European states as they had no prospect of a prosperous life in Poland. Most of them chose to go to the UK because it was one of the few rich EU countries that opened their labour markets straight away to Poles. As a result, Poland suffered a massive brain drain, losing some of the most valuable professionals perhaps forever. It turned out that those poorest Poles that didn’t manage to do well in the new capitalist economy, were in fact some of the most essential professionals like doctors (at the beginning of the 2000s, Poland had a surplus of doctors), nurses, builders, plumbers, etc. This, and the fact that there were still a significant number of Poles who didn’t feel the benefits of the economic transformation, paved the way for the populist Law and Justice (PiS) to win the parliamentary election in 2015 and rule for 8 years. It is important to note that PiS came to power by promising that everyone, most importantly the poorest, in the society will feel the positive impact of economic growth. And they delivered that as soon as they gained power. Ultimately, people were grateful that, for the first time since the fall of communism, there was a government that cared not only about economic growth but also provided welfare.
The Polish economy is now very strong with stable and high economic growth. This couldn’t be achieved without wise economic reforms implemented in the 1990s. Can there be any insights from the Polish story to current events? Argentina is about to experience an economic transformation similar to what happened in Poland in the 1990s. The new Argentinian President, Javier Milei, was elected on a platform that is proposing almost the same as what Balcerowicz did in Poland. However, will it be successful? Times have changed…
Further Reading:
Aleksandra Komornicka, ‘From "economic miracle" to the "sick man of the socialist camp": Poland and the West in the 1970s’, in European Socialist Regimes' Fateful Engagement with the West: National Strategies in the Long 1970s, ed. by Angela Romano and Federico Romero (Abingdon: Routledge, 2020).
Hartmut F. Lehmann, ‘The Polish Growth Miracle: Outcome of Persistent Reform Efforts’, IDEAS Working Paper Series from RePEc, 2012.
Jerzy J. Parysek and Magdalena Wdowicka, ‘Polish Socio-Economic Transformation: Winners and Losers at the Local Level’, European Urban and Regional Studies, 9.1 (2002) pp. 73–80.
Marek Ratajczak, ‘Polish Economics and the Polish Economy’, The History of Economic Thought, 51. 2 (2009), pp. 1–17.
Anghel N. Rugina, ‘How to Realize an ‘Economic Miracle’ in a Socialist Country: A Stabilization Plan for Poland’, International Journal of Social Economics, 19.7/8/9 (1992), pp. 160–171.
Ben Slay, The Polish Economy, (Princeton: Princeton University Press, 1994).
Piotr S. Wandycz, ‘The Second Republic, 1921-1939’, The Polish Review, 54.2 (2009), pp. 159–171.
Jakub Kowalczyk is currently doing a Master’s in Economics at Lancaster University. He intends to start a PhD in the same field next year with a focus on labour economics and economic inequality. In his spare time, Jakub likes to read about economic history.