Fast forward twenty-two years, and South Korea is an economic behemoth. This country of 51 million people has the world's 12th largest economy and boasts some of the world's leading technology brands. Economically, South Korea still hasn't caught up with its former occupier and oppressor, Japan, but the gap is now a manageable 25%. South Koreans no longer emigrate to labor in Japanese factories and farm fields. They have much better prospects at home.
Poland could learn a lot from South Korea. Poland's story tracks the South Korean one so closely that there is no need to point out the obvious parallels. Poland is on the same economic trajectory as South Korea, just twenty years behind. Even better: although South Korea was ground zero for the Asian Financial Crisis, Poland has wisely avoided the European one.
The Asian crisis was caused by the crash of overvalued currencies. In the European crisis, the Baltic States intentionally adopted the Euro at overvalued exchange rates -- and lost a decade of economic growth. Poland kept its own currency, let it fall relative to the Euro (at a time when the Euro itself was falling), and sailed through without a recession. High-income Poles with foreign currency mortgages had a tough time, but most Poles with low and average incomes made it through the crisis with their livelihoods intact.
The Polish government is now moving to clean up the legacy of foreign-currency loans, as well it should. No democratic country should allow households to borrow in a foreign currency, because householders are voters, and they tend to vote for an overvalued currency that chokes off the economy (but helps them repay their loans). That's what happened in the Baltics. There's no reason to take that risk in Poland.
With effective currency management focused on the needs of Poland's own economy, not on subsidizing the mortgages and overseas travel of the well-to-do, there is every reason to believe that Poland will continue to grow toward German levels of GDP per capita. The biggest threat to an export economy like Poland's is currency overvaluation. When the entire political class consists of high-income people who would personally benefit from an overvalued currency, it can be tough to keep things on track.
The second biggest threat to Poland's continued prosperity is austerity. Polish wages have been growing rapidly for the last two years, and some economists are getting nervous. Poland's ongoing political tensions don't help. When the government raises the minimum wage, its critics are too ready to label that a cynical bid for the votes of the poor. It would be much better if all parties got behind efforts to raise wages for ordinary Poles. That would take the issue out of the realm of politics and ensure policy continuity for decades to come.
In classical economic theory, economic convergence is the easiest thing in the world: open your borders to trade and investment, and the technology will flow right in. It may be difficult to become the world's number one economy (that requires inventing new technologies), but it is easy to reach number two by adopting best practices from number one. In this view, Poland doesn't have to reinvent the wheel. It can just copy a German wheel and roll forward to prosperity.
But if growth is so easy, why isn't everyone doing it? The problem for classical economics is that it just doesn't work. Copying a German wheel is easy; learning how to use it is hard. In the 1990s, neoclassical economists came to understand that the real barrier to economic growth wasn't a lack of technology. It was the lack of a society competent to put technology to good use.
Strong societies can rapidly bounce back from total economic destruction, like Germany and Japan did after World War Two. But there are no easy shortcuts to making a society strong. A strong society means an educated population, labor mobility, and individual choice. Liberal politicians love that message. But it also means supporting families with children, a comprehensive social safety net, and quality healthcare. Solidarist parties prefer that message. Put both messages together, and you have the supply-side recipe for sustained economic growth.
The supply side is important, but unless your economy depends entirely on exports, the demand side matters even more. Over the last two decades, Poland has been transformed into one of the world's leading export economies. Exports have risen from less than one-quarter of GDP to more than one-half. But it's unlikely that they can go much higher. The next phase of Poland's growth trajectory will have to depend on an expansion in domestic demand.
And that means increasing the incomes of the poor, the elderly, the disabled, and everyone else in the bottom two-thirds of the income distribution. The reason is simple. When rich people get more money, they save it, and their savings enter a global investment pool that seeks the highest returns available anywhere in the world. When poor people get more money, they spend it -- locally. To increase domestic demand, you have to skew the income distribution to favor the poor.
It's not only Poland's economy that would benefit from higher wages. Its society would benefit, too. Poland is currently in the ridiculous situation of sending its young people abroad to seek higher wages in western Europe while it imports young Ukrainians to work low-wage jobs in Poland. The only sane resolution to this situation is to drive up wages and benefits enough to attract Poles back to Poland. Meanwhile, Polish companies should be encouraged to relocate low-wage production work to Ukraine itself.
Do As They Do
When Poland regained its policy autonomy in 1989, its society had been warped by fifty years of occupation and oppression. Thirty years later, Poland has reemerged as a fundamentally European society, culturally and organizationally not so different from its rich western neighbors. Unfortunately, those neighbors have a strong interest in keeping Poland poor. They don't actually say that they want Poland to be poor, or perhaps even think that they want Poland to be poor, but the fact is that a poor Poland serves their needs better than a rich Poland. What could be better for German companies than a Poland that keeps wages low and adopts the Euro?
That's why the simplest guide to economic growth in middle income countries like Poland is "do as they do, not as they say." Don't take the advice of rich countries. Take the policies of rich countries, and implement them in your own. South Korea and the other Asian tigers have famously ignored the economic advice of international institutions and economists. Instead of doing what they were told, they did what they saw successful countries doing. And they succeeded.
Poland can succeed too. It won't catch up to Germany any time soon, but with good currency management and an improvement in domestic demand, it can reach two-thirds of German GDP per capita by 2040 or 2050. At that point, it would be roughly as wealthy as Germany is today. Looking out toward the end of the century, the economic dividing line between eastern Germany and western Poland should slowly but surely disappear.
To make that happen, Poland will have to transform its society into one that operates more like western European societies than like eastern European ones. Poland's levels of income inequality and public spending are already nearing western standards, but there is still room for lower inequality and higher spending. Wages and welfare payments have to come up. And taxes should be made more progressive, meaning tax cuts for the poor and tax increases for the well-paid.
When corporations want to know how they're doing, they benchmark their key indicators to those of their peers. Countries should do the same. If Poland wants to achieve western European levels of economic productivity, it should try to hit western European levels on key social indicators like wages, inequality, taxation, and social spending. Get these key social indicators right, and the economy is bound to follow.
Salvatore Babones is a scientific advisor at the Centrum Stosunków Międzynarodowych in Warsaw an associate professor at the University of Sydney.
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