Overview Of The Economic Growth Of Poland Economics Essay

Poland’s economy looked bleak during the 1980s. Few would consider Poland as a business hub due to its low economic growth and soaring inflation rate (Nuti, 1986). Fast-forward to the 21st century, Poland’s economy has changed tremendously. It is not just the only European country to survive the current recession but it is still experiencing rapid growth [1] . What could have possibly instigated Poland’s this drastic change in the time span of only 2 decades?

This essay will use the PESTLE [2] analysis to understand the positive force that initiated the economic growth and also examine the causes that might hinder Poland’s future economic growth. Porter’s Diamond will be used for the critical evaluation and support of the PESTLE analysis.

Political Reform

The fall of communism in 1989 had led to vast improvements in Poland’s economy. One might disagree with that because the event took place over 20 years ago, however, the effect of political change does not happen overnight and there would be a time lag involved (Gillespie, 1999). The most significant change after the fall of communism is in stabilising the country. Poland is the 29th politically most stable country with the index score of 4.5 (Economic Intelligence Unit, 2009). This provides a sense of security for investment and business, for example, if Poland is in an unstable situation akin to the current Libyan crisis, people would avoid investing in the country.

In contrast to a communist state, a democratic country allows the voice of people to be heard, and their opinions and views to be realised. Citizens in democratic countries tend to have greater respect for the leaders they chose for themselves compared to otherwise. For example, in a company, a bottom-up leadership has a better effect than a top-down leadership because workers would respect the leader and this allows employees to bring out best of their skill set and experience. Similar principle applies for macroeconomic levels. Additionally, a democratic country is highly likely to prosper due to reduced frictional social interactions among citizens (Kariel, 1956).

Furthermore, the Polish government has developed a radical program known as the “Shock Therapy” to curb hyper inflation. Poland was once ruled under a planned economy system. “Shock Therapy” is a transition from a planned economy system to market economy. It is a sudden release of price, followed by the removal of subsidies and large scale privatisations of previously publicly owned companies (Murell, 1993). This program has both short and long term effects. The planned economy provided employment to almost every citizen but with inflation rates of around 600% (Cottarelli & Szapáry, 1998), low wages and severe shortages of basic necessities. This “Shock Therapy” suppressed the hyperinflation and stopped the food shortage (Haggard & Webb, 1996). However, all these problems are only short term problems. The ideal result lies in the long term measure. One of the key reasons of why Poland economy growth has been so steady in the past few years was because of its market economy (Kornai, 2000). This has provided opportunities for small service firms to contribute to Poland’s economy (Nunnally, 2010), which was unachievable during the communist era. Market economies encourage international business because the barriers to entry are lowered increasing the opportunity for success and lowering sunk costs.

Poland also has excellent relations with foreign countries allowing it to benefit from several advantages such as enjoying tax free zones within the EU since joining it in May 2004 (Papazoglou, Pentecost, & Marques, 2006). This is important because imported goods within Europe are cheaper, hence lowering production costs. Another vital factor of entering the EU is curbing the high unemployment rate. Since adopting the free market policy, Poland has high unemployment rates [3] . By joining the EU, Poland’s unemployed workforce is able to look for jobs outside Poland. Lowering unemployment rates is crucial in reducing social problems and creating a better environment for investors.

Economic Advantages

In addition to political factors, economic factors have also enhanced economic growth. The first step was implementing a floating exchange to curb hyperinflation (Sachs, 1996) which, in addition, helped Poland to survive the current economic crisis by facilitating economic adjustments. During the economic crisis, the Zloty depreciated against the Euro and Sterling. This meant Polish goods were more competitive than European goods both at home and abroad. One might think that there are so many countries with lower exchange rates, so why would investors invest in Poland? The answer lies in the nature of its currency- Zloty is very stable as a currency [4] , it only oscillates within a certain range. This is very important for a business because cost of production would not fluctuate and there would be less uncertainty. Investors tend to avoid the risks arising from uncertainty and the Zloty provides a sense of security to businessmen and investors. In planning to adopt the euro in 2015 (Dnevnik.bg, 2010), Poland will be forgoing the competitive advantage of its currency. To evaluate, this is a good option as the global economy grows as the Euro will provide more advantages (Gulde, Kahkonen, & Keller, 2000).

Many things have changed since the transitional period of Poland. Polish people have become richer over the years and Poland is one of the richest nations, second only to the Czechs in the Central Europe (Credit Suisse, 2010). Also, an average Polish is three times richer than an average Russian (Jedrzej, 2010). Their wealth leads to strong domestic consumption within Poland [5] which led to strong economic growth especially during the recession. Export based countries, such as Singapore, suffered greatly during the recession. The impact of the recession is less in the case of Poland because the domestic market within Poland is large and accounts for more than half of Poland’s market.

Although it is hard to believe, the initial high unemployment rate also boosted economic growth. Polish people are highly educated with 99% of their citizens being educated (TradingEconomics, 2009). Skilled and educated workers tend to be more expensive. However, due to the high unemployment rates, labour costs in Poland are comparatively lower than other countries, such as Germany. This is a strong selling point for investors abroad. These investments are crucial because it has reduced unemployment rates and increased economic activity in Poland, subsequently enhancing economic growth.

FDI has increased steadily since 1995 with the exception of 2008 and 2009 due to global economic crisis (United Nation Conference of Trade and Development, 2010). It has boosted economic activities greatly. Other than a cheap but skilled labour force, Special Economic Zones established by the Polish government has also attracted foreign investors. At present, there are 14 Special Economic Zone in Poland (KPMG, 2009). Different areas have different geographical landscapes allowing wide-ranges of businesses to be set up. These areas provide opportunities for tax exemption. The amount of tax exempted will depend on the size of the investment (Nam, 2004). The Special Economic Zones have attracted investors from all over the world, in particular investors from the EU as the benefits are greatly to their advantage to invest. The regulations are more flexible and they share the same benefits as Polish firms. These, combined with the stability exchange rate of Zloty, have attracted FDI from the EU as all investors stand an equal chance.

Porter’s Factor Conditions

Although Poland has enjoyed steady economic growth in recent years, there are still a few factors hindering their growth, for example, having poor transportation systems. Having good infrastructures enables a country to fully utilise their resources efficiently and effectively boosting the economy. Therefore for Poland to improve on their economic growth, they must improve on their infrastructure. In my opinion, the infrastructure would not be a concern because Euro 2012 will be held by Poland and funds had been provided by the EU as an aid to improve on their infrastructure (Szafranko, 2010).

Evaluation

As previously mentioned, political stability is key to economic growth but there are factors that unsettle Poland’s stability such as corruption [6] . This is a significant disadvantage, for instant, if the government invested in a £10million project but due to corruption, only £2 million is injected, the project would either be substandard or incomplete due to the amount of money lost. Furthermore, safety will also be a key concern due to the substandard undertakings. With this kind of uncertainties, investors will have their doubts when investing in the country. However, Poland has taken several measures to reduce corruption, and with more effort, corruption can be reduced.

Besides that, the country’s high unemployment rate can also be a concern for the country [7] . While it is true that the high unemployment rate saved Poland during the recession, it cannot be a long term plan for the country. A high rate of unemployment would cause stress within the country and crime rate would increase causing instability. Furthermore, it would also prevent the country for optimising their resources. Despite the current high unemployment, recent reports show that the unemployment rate is steadily decreasing over the years [8] .

Conclusion

In conclusion, there are many factors driving Poland’s economic growth such as political stability and stable exchange rates. Poland’s external competitiveness has been tested by the rise of the BRIC, notably China. There are numerous reasons why Poland has been able to attract large volumes of FDI, one of which is the Special Economic Zones with tax exemptions lowering business costs. Sound macroeconomic policies have sharpened Poland’s competitive edge and positioned it well to seize opportunities from joining the EU, therefore attracting more FDI leading to further growth. The main difficulty Poland now faces is corruptions. However, the extent to which this has affected Poland’s economic growth is hard to determine but the pull factors of economic growth outweighs this problem. There is also room for supplementary improvement to further boost the economy especially the developments of infrastructures. Nonetheless, the growth for Poland is sure to progress with the adoption of Euro and Euro 2012.

Critical Reflection

The PESTLE analysis allows clear insight of the country in the macroeconomic level. The political and economic aspects of the PESTLE provide a clear framework on how it affects the economical growth and the extent of the influence. However, the usage of PESTLE is limited to the present and does not give a wider picture of the future such as Poland is planning to adopt Euro in 2015. Under some circumstances, analysing the PESTLE is insufficient in certain aspects such as the infrastructure in Poland. Nevertheless, the Porter’s Diamond Factor Conditions are used to complement the weaknesses of this issue. However, both models fail to address one major factor, the regulatory factor given in the STEER [9] analysis which is important given the recent financial crisis. Furthermore, in my opinion, safety of a country is important as well. Safety is indispensable because it provides certainty for foreign investors. Although the PESTLE analysis is widely used and it provides information on various factors, I think a new model that incorporates more factors should be introduced.

There are many factors driving Poland’s economic growth, however, the level of contribution of each factor is uncertain. One might wonder how Hungary suffered from a different fate from Poland despite both having floating exchange rates. In my opinion, it is not just the floating exchange, but the different factors that complement each other that exist only within Poland to have boosted Poland’s economic growth.

Lastly, research was made based on recent statistics for data accuracy. However, sources from research using resources that date back to 20 years were also used. The results are important because this data provides an insight to the initiation of Poland’s economic growth after the downfall of communism. Some resources are subject to biased views, making it impossible to obtain a perfectly accurate reasoning. Mixed responses can be seen regarding the country’s progress. According to local Polish people in the university, it is said that Poland’s economy is not very promising. However, according to other reports, the results say otherwise. In my opinion, Poland’s progress is very promising but the government should provide more social benefits to the local Polish to prevent outward migration which may lead to ‘brain drain’.

Bibliography

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Appendix

Appendix 1

Poland’s economic growth has been steady with the exception of the economic crisis in 2008.

Source: Adapted from (Eurostat, 2011)

Appendix 2

PESTLE Analysis

In this essay, I utilised the Political and Economical factors in the PESTLE analysis. The PESTLE analysis provided me a clear framework to facilitate my research on the essay.

Appendix 3

Poland’s have high unemployment rate. However, over the last few years, unemployment has been decreasing steadily.

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Source: Adapted from (Eurostat, 2011)

Appendix 4

The Polish currency, Zlotych had depreciates against the Euro from 2008 to 2009 which caused the Polish currency to be more competitive in the market. Low currency value reduces the cost of borrowing hence it attracts investors to invest more in the country. Furthermore, the exchange rate is very stable, making it a reliable currency.

Source: Adapted from (National Bank of Poland, 2011)

Appendix 5

Poland’s domestic consumption is much bigger than the export. The high domestic consumption is one of the reasons that allowed Poland to enjoy a positive GDP despite the current economic crisis.

Source: Adapted from (Laposte, 2010)

Appendix 6

Poland’s is generally stable politically with the exception of corruptions.

Source: Adapted from (McKEEVER INSTITUTE of ECONOMIC POLICY ANALYSIS, 2004)

Appendix 7

Porter’s Diamond Factors Condition

The Porter’s Diamond factors condition analyses nation’s position in factors of production (E, 1990). From there, the key opportunity and threats can be highlighted clearly. In this case, the infrastructure is examined because it is the weak link in Poland’s economic growth. However, Poland infrastructure has been growing steadily (Business Monitor International, 2011).

Appendix 8

STEER Analysis

The STEER analysis is the updated version of the PESTLE framework. The main factor that differentiates STEER from PESTLE is the regulatory factor.