The Sun Is Setting On Poland's Golden Age

Meet the new symbol of Poland

Poland’s Finance Ministry aims to have Poland in the top twenty richest countries in the world by 2022. In a distinctly triumphalist statement reported on TVN they projected that Polish GNP per capita will reach 80% of the EU average by the same year.

At the same time the ministry spokesman also revealed the economic theory that underpins their optimism:

“We understand that this is a very ambitious goal, but we are well aware that if we had not set ourselves such high targets over the past 25 years, we would not be where we are today.”

This is obviously where other governments have been going wrong. If only they would be optimistic and plan for 5% growth a year, surely it would magically appear and all our economic worries would be over.

Take the Italians, for example. Their government should learn from Poland and target growth a bit more optimistically because Italy's GNP per capita is actually lower now than 15 years ago. Or then again maybe achieving growth is a bit more difficult than simply wishing for it.

Of course, lots of people make the same mistake about the source of economic growth. You could call it the “Great Man Theory”. It goes something like this. Elect a great man, such as “the smartest guy in the room” Obama, and he will solve all your problems. As an ecstatic Susan Sarandon had it on the great man’s victory:

“He is a community organiser like Jesus was, and now we’re a community and he can organise us.”

But the reality is that most poor countries were impoverished by “great”  leaders who wisely planned their country's development down to the last detail and most rich ones got that way through the chaos of personal choice in a free marketplace. Maybe Susan Sarandon would appreciate that if her acting career had been organised by some government bureaucrat. Even a bimbo will tend to make a better job of managing her life than having one of good King Obama’s flunkies do it for her.

This decentralising principle of success is also behind Poland’s quite remarkable economic progress since 1989. Those 25 years since the communists fell have seen Poland’s GNP per capita increase from $1,694 in 1990 to $13,400 today according to the World Bank. That’s about a three-fold increase in real terms.

The source of all of that progress was the coincidence of three key factors. First, Poland was young with a median age of around 30 in 1990. Second, after 40 dreary years of communism, Poles were hungry for a taste of the good life. And third, Poles were set free by very brave and radical reforms passed by the first democratically elected government in 1990.

Fast forward to 2014 and those three factors behind Poland’s Golden Age of Growth are all looking pretty sickly. Sadly, the Polish people are about to discover that growth cannot be mandated by Finance Ministry wishful thinking.

Demography

Poland is no longer a young country. The median age is now 38. Whereas the Polish demographic pyramid of 1990 looked like the Palace of Culture (a wedding cake type structure in central Warsaw) the 2014 version suggests the image of a Christmas Tree. A tree with an ever lengthening trunk and no prospect of presents below. Economically speaking, there really is no substitute for the energy and innovation of the young.

Check out the numbers. Back in 1983 720,000 babies were born in Poland. Thirty years later that has fallen almost by half to 370,000. And that’s not the worst of it. The ruthless truth is that the 2013 number of births is actually boom time for Polish demographics. That’s because while there are currently 3.2 million Polish women between 25 and 35, there are only 1.8 million between 5 and 15. Twenty years down the road the number of births is likely to have fallen by half if women are still having as many children as now. A big if.

To see what that means economically, look no further than Rome. Italy had a million births in 1964. Twenty years later they were celebrating il surpasso as the Italian economy grew bigger than that of Britain. But now after the baby bust that has seen Italian births halve, Italy’s economy is just three quarters the size of the UK.

Hunger

For once the old men’s refrain about “the kids of today” has some truth to it. The current generation hitting the job market have much fewer siblings and a far more comfortable upbringing than their predecessors. Research shows that such children are much more likely to opt for one of the safe professions such as medicine, law or accountancy rather than taking an entrepreneurial shot at the big time. Admirable though the activities of these professions may be, they are essentially parasitic on the wealth creating sector.

Reform

The reforms of 1990 were radical and brave. Radical because they went deeper and were enacted more rapidly than in most of the rest of the countries in the region. Eastern European reform  experience proves the case for the “shock therapy” pace of transformation. Poland reformed fastest and deepest and went on to grow far more. The Czech Republic and Hungary reformed at a leisurely pace and grew respectably well. And Ukraine reformed hardly at all and its GNP per capita is now just a third of Poland’s. And Ukraine’s  geographical situation is no explanation for its poor performance. Tiny Estonia, bordering Russia and with a larger Russian minority, was a more radical reformer than even Poland and has also achieved even more.

That was then and this is now. Poland’s 1990 reformers were both radical and brave. Brave because meaningful reform is always painful and the Polish people never forgave the reformers. They got all the blame for the pain and none of the credit for enabling the tripling of Polish living standards. The first democratic government fell in 1993 and amazingly the Polish people turned back to the post-communist socialists to form the next government. Since then every attempt at reform has resulted in electoral suicide for the responsible party.

Citizen’s Platform (PO) which leads the current coalition is the first Polish party to be re-elected and has discovered the perfect election strategy. Use lots of catchy phrases about modernity and progress, but forget about actual modernisation. In fact PO even rolled back pension reform when they stole transferred private pension funds into state hands to avoid the need for necessary spending cuts a couple of years ago.

And the lack of any reform is a shame because Poland is in desperate need of change. Poland’s legal system needs dragging into the 20^th century, its bureaucracy is a disruptive disgrace, and its universities a rest home for lazy academics to name just the most obvious candidates for early attention.

Poland’s Future

If you want a vision of Poland’s future take a look at Italy.

Italy’s government debt stands north of 120% of GNP. This is not because the Italians are particularly profligate; it’s just that around the turn of the century Italy stopped growing. It stagnated because the young generation is just half as numerous as their parents.

Stagnation is hard.  Every year the debt burden is greater and the permanent pressure to cut spending is depressing. But stagnation is a picnic compared to what follows. The population continues to age, the economy contracts, the more energetic young emigrate, immigrants become troublesome as benefits are cut and civilisation itself begins to crumble...

Follow Italy’s downward spiral with interest, because Poland’s  demographic death spiral is about 20 years behind Italy’s.

Poland will not be among the world’s 20 richest countries.

Poland will get old before it gets rich.