July 12, 2016 Print

After decades of communist rule, Poland transitioned to a democratic government and a market economy in 1989 — and the results were dramatic, with rapidly rising living standards that eclipsed most other post-socialist countries. A recent surge in populism, however, is threatening Poland’s economic miracle, warns economist Leszek Balcerowicz, founder of Atlas Network partner Civil Development Forum (FOR), in a study for the 4Liberty.eu website. Poland’s late 2015 elections brought the authoritarian Law and Justice (PiS) party to power, and with it an agenda to strengthen unilateral government power and reduce economic freedom.

“Since 1989, the political and economic transformation of Poland had been a success story,” said Marek Tatala, vice president and economist for FOR. “For more than two decades, the country was developing at a pace exceeding an average of 4 percent a year, faster than the other countries of Central and Eastern Europe. Unfortunately, the policies of the new populist and interventionist government of Law and Justice harm long-term growth, erode rule of law, and increase the risk of economic crisis. For many years, we have been concerned with situation of Hungary under Victor Orban, but now Poland is moving towards the black scenario — as emphasized in Professor Leszek Balcerowicz’s article. And the economic costs of populism can be substantial. It is why Civil Development Forum monitors and analyses the Polish government’s policies and warns against repeating Hungarian or Greek mistakes.”

In his study, Balcerowicz explains that although he anticipated some electoral success for PiS, the reality of its victory is even worse than he predicted.

“As I said, the attack on the rule of law, arbitrariness and unpredictability of the governing, deceitful propaganda, etc. degrade the image of Poland in the world, increase the risk of investment and speed up the outflow of capital, both domestic and foreign,” Balcerowicz  writes. “Of course, all that reduces the growth of our economy and increases the risk of a crisis, especially as the global economy shows more and more warning signals and alarming events. On top of that, the economic policy is — from the point of view of stability and development of our economy — wrong as well.”

In addition to its subversion of the rule of law, Balcerowicz explains, the populist economic policies of PiS would increase taxes by billions of Polish złoty (each about one quarter of the value of a U.S. dollar), require ballooning the already vast budget deficit, “drive nearly three-quarters of the banking sector into the red,” and pull thousands of workers out of the productive economy.

“Finally, the proposals and, in part, the actions already taken by PiS go towards weakening the driving forces of our economy, forces which now require strong reinforcement,” Balcerowicz writes. “Lowering the retirement age means that there are fewer people in the workforce which strikes a blow to the country’s finances. The 500+ program encourages thousands of people to give up their official jobs and the introduction of a minimum hourly wage impacts similarly. Legal chaos and discretionary taxes will discourage private investment, which is still too low anyway. Upholding the bloated sector of companies remaining under the control of politicians and officials, perhaps even increasing it, will inhibit the growth of the efficiency of the Polish economy, that has already weakened anyway in recent years. Banning the sale of agricultural land, thus paralyzing this market, would go in the same direction. And so on.”

Another paper by Marek Tatala, vice president and economist at FOR, explains how Poland is starting down the same populist path that led Greece to economic and political ruin. Poland should instead view Greece’s example as a cautionary tale of policies to avoid, Tatala warns.

“Greek fiscal laxity was a consequence of destructive populist competition between major political parties,” Tatala explains. “[S]ince 1974 the ruling parties exhibited a high degree of short-termism in their approach to policy making, with a success in the forthcoming elections as their primary objective. The destructive populist competition between the two dominant political parties led to development of a new political culture in Greece (as compared for example to the pre-1974 times) in which every elections brought further expansionary and redistributive policies as a method to attract voters. In other words, Greece has fallen into a populist trap and is still unable to escape it.”

Decades of Greek officials pandering to voters and well connected special interests have ultimately led to runaway government spending; ever-expanding public-sector compensation; protectionism for favored businesses and industries in the nominally private sector; heavily regulated markets that lead to low competition and high unemployment; a dizzying array of tax laws, loopholes, and evasion techniques; and a hostile environment for outside investment.

“Poland should learn from the Greek mistakes,” Tatala writes. “After economic success in the last 25 years, we should not fall into a populist trap and do our utmost to avoid having our very own ‘lost decade’ as it will hamper Poland’s catching up to the West. We simply cannot afford it. … Catching up to the wealthier countries of the West is the most important goal for Poland economically and the best way to permanently improve the well-being of ordinary citizens. Economic populism will not make anyone’s life better (maybe only of some politicians). What is more, it may be very costly if the crisis scenario comes true.”

Balcerowicz thinks that the PiS coalition ultimately has a smaller and more unstable base than populist movements in other countries, which makes it unlikely “to be a strong and lasting organization.” However, he warns, advocates of free markets, accountable government, and the rule of law can’t simply “sit back and wait for its end.” The future is unpredictable, and political movements can gain traction in surprising ways over time. “Therefore, using our civil liberties, one has to act — in an organized , systematic and growing manner,” Balcerowicz concludes. “And these freedoms must be defended like the pupil of the eye.”