Poland: A Case Study for Efficient Markets?
Poland’s GDP grew by 1.7% in 2009. It was the only European country with positive economic growth that year. “What did Poland do right?” is what many pundits were asking throughout 2011, late 2010, and has recently been brought up yet again. Poland has even been called the “case study for free markets.” In this political election year, where many are calling for the repeal of Dodd-Frank, dismantling of the Treasury’s Office of Financial Research, and the Consumer Protection Financial Bureau, it would be good to discuss Poland and whether it truly is the “case study” for free market economics.
Commentators have argued that Poland’s Finance Minister and Prime Minister “have an unyielding belief in the free markets.” Equating Poland’s policies to Austrian economics advocated by F. A. Hayek and his mentor Von Mises. Using Von Mises for economic policy is a bit misplaced as even Friedman, loyalist supporter of F. A. Hayek, has harsh criticism for Von Mises’ intolerance for opposing economic views. Von Mises is more of an early to mid-1900s example of today’s hard-right conservative policies, than strong analytic economic policies.
In fact, Von Mises presented an ideological type of economist, opting to support fascism to quash support for communism. He also, simultaneously opposed progressive tax to the point that he vehemently disagreed with economists so much that he used today’s strong economic analysis of calling them “all socialists” by using the “slippery slope” logical fallacy. Mises’ logic being that a progressive tax will somehow always lead to socialism.
One website gave several repeated “free market” reasons for Poland’s success. Poland had “suspended all new planned regulations,” and set about into “a mode of deregulation.” They then cut “their three-tiered income tax rate from 19%, 30%, and 40%, to two tiers: 18% and 32%.” The website also states that they initiated an IPO, in 2009, for the state-owned power utility, Polska Grupa Energetyczna. This IPO raised over two billion dollars which the government has used to fund its budget and keep taxes in check. The website concludes that Poland is
“Transforming itself into a laissez-faire paradise. Free markets and the Austrian economic theories of Mises and Hayek have wide support in the government and the general population. They are intimately familiar with the hazards of central economic planning and are understandably reluctant to travel that road again.”
In the summer of 2011, there was a week-long KGMI program at AU’s Kogod School of Business where several Poland dignitaries spoke on the growing “BRIC” economies and specifically Poland’s good fortune. Rafal Szajewski, project manager of the Polish Foreign Investment Agency, stated that one of the major reasons why Poland was able to stay out of the recession was that it had a large demand from its own domestic market. Poland did not rely on export trade deficits like the U.S.; many may not know that one of the primary dangers that Keynes warned about on a regular basis was export trade deficits. Poland also experienced a very large growth of its middle class that it had not seen in the previous 10 years; implying that people were spending more in their own economy. A Polish representative also stated that another major reason that Poland was not affected by the external shock of the credit crisis was because it had very strong financial regulations in place; domestic Polish banks were not as easily able to invest in exotic financial products nor were they allowed heavy usage of leverage (debt), as opposed to US financial institutions.
U.S. economist, John Taylor, has stated that the flexible exchange rate in Poland was also a key factor in keeping exports at normative levels. Poland, despite having joined the European Union, never adopted the Euro and continues to use the Polish Zloty. In the lead up to the recession, the Zloty had appreciated against the Euro but quickly fell and depreciation set in. This helped keep the pricing of Polish products in line with the buying ability of the importing countries.
Also note, Poland’s 2009 report states some interesting facts that the “case-study” supporters should be aware of:
1. Starting in 2008 through 2009 Poland’s Central Bank lowered their interest a number of times, much like the U.S., lowering their rate from almost 5% to a low in July 2009 of 3.5%.
2. During these times, Poland moved ahead with reduction of CO2 emissions, and implemented law’s requiring increase in the use of renewable energy sources (predicting an effect on the economy due to the “necessity to increase expenses. However, at the same time, the regulations may prompt the development of new technologies and engineering.”).
3. It’s regulatory reforms were targeted to non-financial companies, for example introducing bankruptcy of natural persons which are not entrepreneurs, enhancing economic zones, various business association amendments, and introducing stimulus-like “financial support for investment” programs that were as high as 30% of qualified costs of investment in particular zones.
4. Poland has had guaranteed universal free health care since 1952. Poland’s healthcare law is also more expansive than the current system in the U.S.
5. Poland has Value added Taxes (VAT). Depending on sectors, the taxes rise and fall, especially for “environmental” taxes.
Now, it is not a completely fair or equal comparison, in terms of a case study application, for Poland to be used for U.S. purposes. But some pure-free-market pundits posit Poland’s success to be the exemplary case study for “free market economics.” The country is hardly the best example of free market success. It is an example of a hybrid market success with strong yet smart regulation. The country reduced regulation for its “main street” businesses and increased regulation for its financial sector. As we saw in the credit crisis, the financial sector can take down an economy regardless of how strong the main street economy is. Poland didn’t have that problem, yet pundits here in the U.S. still argue against financial regulation when history and successful examples like Poland show that strong smart regulation is in fact needed.
Questions:
1. What do you infer from this Case study?
2. What has Poland done right for it to grow at 1.7 % during the financial crisis?
3. Do a SWOT analysis on the above mentioned case.
4. Can Poland be called a Free-market economy? Why?
5. Pen down a short briefing to the case study.