08/16/2015 10:57 am ET Updated Aug 16, 2016

Poland on the Economic Periphery

Poland is in the center of Europe. Poles often stress that their country is in Central Europe, not Eastern Europe. The title of Norman Davies' immense study of Poland is The Heart of Europe. Indeed, throughout history Poland has been central to the European experience, from the medieval curriculum at Jagiellonian University in Krakow and the scientific theories of Copernicus to the agonies of the country's dismemberment in 1795 and the tragic role it played in World War II. As the locus of the Solidarity trade union movement in the 1980s, Poland was also central to the fall of Communism.

After the post-Communist transition period, Poland has boasted of its economic success. It weathered the difficult years of transformation in the 1990s to emerge, by the late 2000s, as the only country strong enough to maintain economic growth during the financial crisis that gripped all of Europe. It now aspires to be an economic leader in the region and for Europe as a whole.

As economist Ryszard Bugaj points out, however, Poland's economic growth of 4-5 percent has been decent but not all that remarkable.

"This economic growth was not impressive against the background of economic history," he told me in an interview in his office in Warsaw in August 2013.

Most economies during transition periods grew faster than we did, including European economies following World War II. It is also extremely important to keep in mind that we had one-time reserves that we used, and we don't have them anymore.

For instance, the one-time program of privatization was not optimal either from the point of view of efficacy or the strengthening of public finance. Another one-time reserve that is often forgotten was the good shape of the world's economy on which we were dependent.

But what concerns Bugaj is not so much the growth rate but the relationship the Polish economy maintains with the rest of Europe. And here Poland's centrality diminishes. Small countries often have no choice but to align themselves with larger economic entities, as for instance the Baltic countries have done inside the European Union. But Poland is not a small country. It is the sixth largest EU country by population, and the largest country in East-Central Europe (twice the size of its nearest competitor, Romania).

"In Poland one question has to be answered: is Poland trying to be economically independent, or does it want to be a part of another, bigger economic structure?" Bugaj asks.

Without making a conscious decision, we decided on the second path. And now Poland has become to a large degree a peripheral economy in relation to Germany. My personal opinion is that in the long term this was the wrong decision since we had another option. This option is still available, though the chances are smaller.

That option would be, for Bugaj, the French model. "We should decide on a system that's rather social and somewhat statist," he suggested.

That there are no international enterprises in Poland is a warning sign. Such enterprises can only be established under a government umbrella. These kinds of companies were established in France.

The French spend a lot of money in support of these state enterprises, and in terms of technology they are far ahead of England where such enterprises have almost disappeared. On the contrary, England before the First World War was a powerhouse in terms of technology while France did not achieve anything.

In my opinion we should go down the 'French path.' I realize that there are only a few examples of countries where this policy was implemented successfully, like Israel. Another good example is Finland. We should look for such models.

Bugaj once served in parliament as a representative of the closest thing Poland had to a Labor Party, something called Labor Solidarity. Although he still feels connected to the Polish Left -- the pre-World War II non-Communist Left -- his views have changed somewhat since we last talked in 1993. In our conversation 20 years later, we talked about the economic policies of the Left and Right in Poland, his take on the state of the Solidarity trade union today, and why he feels that he was naïve in his earlier belief in democracy.

The Interview

What is your perspective on the Polish economy? Most Western economists believe that the Polish economy is a success. What is your opinion?

I am more skeptical. Of course, compared to other European countries, the Polish economy performed quite well during the crisis. It's a question of interpretation, about what the reasons are for such a course of events. Especially during the second phase of the process of transformation at the end of the 20th century, Poland built a specific model of capitalism that could be characterized as more market-driven than those of most European countries. It resembled more the American than the European model. Some of my economist colleagues think that this is the main reason why Poland went through the crisis so smoothly. I do not agree with this point though. I am not the only one, but we are in the minority. I believe that the reason we avoided the recession is that even though all essential components of the neoliberal economy have been implemented, we did not succeed in particular in eliminating the operation of automatic stabilizers.

In 2009, 2010, and 2012, and even in 2013, public sector revenue decreased while budgetary expenditures have remained the same. Thus the deficit has increased. In the short term, this keeps overall demand on the same level; in the long term the increasing deficit leads to an explosion of public debt. Something similar took place among European countries. Also in the United States. The more liberal-oriented economists supported the idea of Poland entering the Eurozone. But we did not enter the Eurozone. In 2009, the value of the zloty weakened. The weak zloty exchange rate, in turn, increased export viability. Connected to that, according to the statistics for domestic prices, exports of course did not fall.

That of course had an important significance. However, if we look at the long term, serious problems appear. Polish national debt is not that high compared to other countries in the world. Compared to Europe, it is somewhere in the middle. However, our constitution and the public finance bill include a provision on the so-called prudence threshold [which establishes a limit on public debt as a percentage of GDP]. I took a position against this during the creation of the constitution (in the last phase the Polish constitution was created through cross-party talks because its passage required a 2/3 majority vote and therefore compromise was necessary). At that time there was no constitution in the world that included such a prudence threshold provision. The only advantage of such a provision is its preventive quality. It cannot be applied in practice. Let's say we have a 5 percent GDP deficit in the public finance sector and we exceed the level of 55% debt-to-GDP ratio. According to the public finance bill, next year's budget should be balanced. Thus a recession would be guaranteed for next year, not to mention the social consequences that would result from the required decrease in public expenditures.

This is a potential trap. In terms of the long-term effects of the transition, it was a success in many ways, but it has also been challenged. Yesterday I gave a speech at the annual meeting of the national committee of Solidarity and I mentioned that although the benefits of transition were distributed unequally, the transition can be regarded as success. Some of the delegates did not want to hear the word "success." A more critical assessment is that the transition established the "peripheral" structure of our economy. There is no Polish company with a global position in the international market. Not a one. And also a great inequality arose.

There are also certain analogies to Greece. In the Greek scenario, they tried to replace taxes with borrowed money. In Poland taxes were decreased a priori. Now we have a regressive tax system comparable to the U.S. model. It might even be worse. At the same time, there is no social consensus around deep public expenditure cuts, and I don't believe there will be such in the future. There's no drama because we are receiving large transfers from Brussels. But there will soon be changes. We find ourselves in a dramatic situation if we talk about political stability. In the next election there will be very low voter turnout, just like the U.S. congressional elections (not the presidential elections). As a result of this and our parliamentary cabinet system, the winning party may have a problem forming a majority government.

Poland is now on the horns of a dilemma. Respected Polish economists like Leszek Balcerowicz are not taking into consideration the social, economic, and political determinants. They only say "reforms, reforms, reforms," which means the neo-liberal program. But political stability is a very important factor for economic growth and development. Political difficulties can have major economic consequences. I am also afraid of the emergence of a large populist movement, and by populist I do not necessarily mean the leftist or statist movement. Populism can be liberal too. Therefore I think that [Former Minister of Justice] Jaroslaw Gowin, when he refers to the tradition of Thatcherism, does not know what is he talking about. He bases his opinion about economic reforms on strictly ideological judgments. I would say it is like with the attempts to reform the Communist system. You can try, but you won't succeed, and the effects of those attempts will be fatal.

I'd like to ask you about Poland's dependence on the European Union. On one hand it is obviously good that there are additional EU funds, but on the other hand this dependence might be dangerous. What is your opinion?

First of all we don't get as much money as one may think. There are numerous factors to be considered. It's not just our high dues. We have to take into account the fact that maintaining our relationship with the EU is very costly. For instance, the Agency for Restructuring Agriculture, whose only responsibility is to maintain relations with the EU, employs several thousand people. It is simply a middleman that distributes European founds. That bureaucratic apparatus costs quite a lot. Also, the dues are rising quickly, with the annual contribution of member states now amounting to around 3 billion euro. Of course, in the next seven years, a significant net transfer from the EU seems to be guaranteed.

I used to work as a presidential advisor under Jaroslaw Kaczyński, whom I knew for a long time. When Poland was about to sign the Lisbon Treaty, I told him that it was necessary to distinguish between two things. The treaty would adversely affect us, but the consequences of not signing would be much worse. Brussels owns effective tools to punish us for using our veto power. Our choice when it came to various decisions touching on deeper integration was rather illusory. I personally believe that we should not enter the Eurozone (happily we did not do so). I guess it is still too early to decide whether the Eurozone project can be achieved. It is obvious, though, that European elites invested a lot into this project and will protect it at all costs. But it's an open question whether Europe is capable of creating a common currency. In my view: not in the near future.

My view differs from the leftist-liberal standpoint of others. I consider that the idea of a common currency cannot be reconciled with a democratic order. I believe that democracy at its core is national. It is rooted in tradition, history, and the communicative codes of national languages. I don't think it is possible for democracy right now to function outside of the nation-state. If Brussels increases its power, that will just translate into an enlargement of the EU's bureaucracy.

In the long term the Eurozone project has a chance of success only in northern Europe: Germany, the Netherlands, Austria, maybe France. But that is about it. There are significant differences in the economic structure between north and south as well as between the old EU and Poland and the rest of the countries. We should not also go further with the integration of the banking system. I made these suggestions to President Kaczynski. In theory we have a veto power, but to exercise this right could cost us a lot. We must not squander our veto power.

Another important issue is the environmental program of the EU. For countries like Poland, this program is extremely unfair. Countries like France polluted a lot but have now switched to nuclear power plants while we, because of our delayed development, are still using conventional energy sources. The overall accumulation of our air pollution over the last several hundred years is nothing compared to that of Germany. Nonetheless we pay a lot since we have to pay for what we emit right now, not for the overall amount of air pollutants. This undermines Polish competitiveness, which used to be based on two factors: cheap labor and cheap energy. With the increase of wages, labor has become more expensive. The increase of energy prices significantly diminishes our competitiveness.

You talked about populism. Obviously that's a very serious issue in this region.

To read the rest of the interview, click here.