The Next Economic Powerhouse? Poland

The New York Times | Ruchir Sharma | July 05, 2017

If getting rich is hard for individuals, it is harder still for nations. Of more than 190 countries tracked by the International Monetary Fund, fewer than 40 count as wealthy or advanced economies. The rest are known as emerging nations, and many of them have been emerging forever. The last large country to make it into the advanced class was South Korea, 20 years ago. The next major nation likely to join that club could be Poland, an under-the-radar economic star that President Trump will visit this week on his second overseas trip in office.

Mr. Trump will meet with leaders of the ruling Law and Justice party, who are thrilled that he has chosen to visit Warsaw before Berlin, Paris or Brussels, and participate in a meeting to promote regional economic ties in Eastern Europe. Other European leaders are unnerved by how Mr. Trump’s populism echoes the right-wing nationalism of his Polish hosts — both have been attacked as illiberal threats to the postwar Western order. But so far, two years of populism has not derailed a quarter-century of steady economic progress in Poland.

The I.M.F. has a complex definition of “advanced,” but a common thread is that all the nations have a per-capita income of at least around $15,000. Since Poland completed the transition from Communism to democracy in 1991, its economy has been growing at an average annual rate of 4 percent and, remarkably, has not suffered a single year of negative growth. In those 25 years, Poland’s average income has risen to near $13,000, from $2,300, and it is now on pace to pass the $15,000 mark by the turn of this decade.

This is testimony to the long-term fiscal sobriety of Poland’s leaders, and its sharp break with Communism. After the collapse of the Soviet bloc, Poland set out to distance itself as far as possible from Russia, and adopted the financial discipline and institutional reforms required to join the European Union.

In the last decade, Warsaw emerged as the conservative opposite of decadent Moscow. Its staid tycoons are almost incapable of the flashy self-promotion common among the Russian oligarchs, and they have embraced American-style entrepreneurship with an enthusiasm rarely found elsewhere in Europe.

This pro-American, anti-Russian streak runs deeper than the current populist mood, making Poland a natural and increasingly potent American ally. In the past the relationship has focused on military ties and geopolitics, but Poland is already one of the few NATO members meeting its commitment to spend at least 2 percent of gross domestic product on defense. This meeting shifts the focus to the regional economy at its breakout moment.

Since World War II, the few poor nations that made it rich tended to do so in regional clusters, starting with Italy, Spain and other countries in Southern Europe, and then East Asia. Japan, South Korea and Taiwan went unheralded for years before they were recognized as the “Asian miracle” economies.

Now Eastern Europe is rising, just as quietly, with small nations like the Czech Republic leading the way. Poland is close on its heels. With a population of nearly 40 million and a half-trillion-dollar economy that is already the world’s 24th largest, it is now big enough to put all of Eastern Europe on the global economic map.

Poland is working its way up just as the Asian miracles did, as a manufacturing power, even though this path is much harder now. Manufacturing is declining as a share of the global economy, and with China taking much of this shrinking pie, few other major manufacturing nations are still expanding their share of global exports. That select group of around half a dozen includes South Korea, the Czech Republic — and Poland.

No other sector has as much impact as manufacturing in generating the jobs and productivity gains that can make a nation rich. With its cheap currency and relatively low wages — still one-third those in Germany — Poland is more than competitive with the Asian manufacturing powers. Exports from manufacturing account for 33 percent of G.D.P. in Poland, well above the average for emerging nations of 22 percent.

Moreover, the secret to getting rich is less about speed than stability. Many emerging economies have managed to generate spurts of rapid growth, often well above Poland’s 4 percent average, only to lose all their gains by running up debts and heading into a crisis — like Brazil and Mexico in the early 1980s, and Indonesia and Thailand in the late 1990s.

Other emerging economies remain unstable partly because they still rely on exporting raw materials like oil or soybeans, and thus tie their fate to volatile swings in the global commodities market. Among the leading oil exporters, 90 percent are no richer today relative to the United States than they were the year they started producing oil. Most are poorer.

Today, of the 13 middle-income countries with average incomes of $10,000 to $15,000, nine are still dependent on commodity exports, including Brazil, Russia and Argentina. The other four are all in Eastern Europe, led by Poland.

None of the commodity-dependent economies is likely to grow steadily enough to become the next rich country, certainly not for long. Countries such as Argentina and Venezuela have in the past century become almost as rich as the United States, only to tumble after serial crises.

Export manufacturing prowess can stabilize a rising economy by generating reliable foreign revenue, allowing countries to invest heavily without running up huge debts. This is what happened in Poland. An exception is the manufacturing giant of China. In a headlong effort to fuel growth after the 2007 financial crisis, the Chinese government has encouraged a domestic lending boom that has driven up debts to nearly 300 percent of G.D.P., a risk that reduces China’s chances of becoming the next rich country.

If there is a threat to steady growth in Poland, it is its recent autocratic turn. Poland’s government has drawn fire from top European Union officials for interfering with the courts, cracking down on the news media and dissent, and refusing to accept Muslim refugees.

When Law and Justice took office, however, the concern was that it would derail growth by meddling in the private sector and trying to fulfill costly populist promises. While it has fulfilled pledges to lower the retirement age and subsidize families with two or more children, so far these policies have not caused much harm.

The deficit and public debt remain manageable. The currency remains stable, exports continue to boom and the trade balance is in surplus. Since its winning streak began in 1991, around 80 percent of Poland’s growth has been delivered by the private sector, and the momentum there remains strong.

So look beyond China and India, Russia and Brazil. Poland, rising the old-fashioned way, through manufacturing, is likely to be the next rich nation. And, as Mr. Trump will see, Poland is a vital ally not only on the NATO front line, but also as a leader of the world’s most vibrant economic bloc.