fedgazette

Impressions of an emerging market economy

Arthur J. Rolnick and Richard M. Todd led roundtable seminars on the subject of monetary policy implementation at the Warsaw School of Economics in February 1996.

Arthur J. Rolnick - Senior Vice President and Director of Research, 1985-2010

Published April 1, 1996  |  April 1996 issue

During a recent trip to Poland, I was struck by the economic vibrancy that was evident in Warsaw and Krakow. The streets were full of vehicles and shoppers, stores were well-stocked, restaurants and hotels were in plentiful supply, there was evidence of foreign investment, and the transportation infrastructure—including airports, roads and rail services—was modern and well-maintained.

In addition, the conversations that I had with Polish citizens supported these observations, including a revealing discussion with a cab driver who suggested a growing resentment among emerging classes, and whom I will revisit later in this column.

In many respects, Warsaw and Krakow are similar to many major Western European cities--thriving commerce set within a rich cultural and architectural heritage. Of course, there are also a great many distinctions between the cities of Poland and those of Western Europe, not the least of which is decades of communist control from the former Soviet Republic, which was preceded by the devastation of World War II. Not only was much of Poland's architectural history destroyed by the war, but so was much of its cultural legacy; many Poles were killed and some villages lost their entire populations, and of the over three million Jews who once lived in Poland, less than 15,000 remain. While the lives that were lost cannot be replaced, Poland has made great strides in reconstructing its economy.

Like many other former East European countries following the collapse of the Soviet Union, Poland's immersion in a market-based economy got off to a rocky start: In 1990, economic growth was minus 8 percent, productivity was down about 20 percent, inflation was soaring beyond 500 percent and domestic investment was off by 10 percent. By 1995, growth had improved to about 7 percent, productivity was growing at double-digit rates and domestic investment was climbing to 20 percent. Inflation, while still high at 28 percent last year, was much improved. Unemployment was still at 14 percent in 1995, but was heading down from its 1993 peak of over 16 percent. Moreover, I was told that Warsaw today is close to full employment.

While I had read about Poland's success at economic reform, I was skeptical. My only other trip to a former Soviet bloc country was to Romania, and my experience there—often drab cityscapes, little or no outward signs of foreign retail investment and little vehicular traffic—left me doubting that Poland could be so much more advanced. But I was wrong—in part, because of the determination of the Polish people, because of their acceptance of economic reform, and because Poland, for about 20 years prior to World War II, had some experience with a market-oriented economy.

As I mentioned earlier, aside from my personal perceptions and the favorable economic data that are coming out of that country, another indicator of Poland's economic vitality are the impressions my colleague and I received from the Polish people, including our hosts at the Warsaw School of Economics, government officials, teachers and students we worked with, and others we met during the trip.

We were told that five years ago there was little traffic on city streets and no traffic problems; today, streets are full of cars and traffic jams are becoming more frequent. While traffic problems may not be indicative of a rising quality of life to many Westerners, it does mean that more Poles can now afford cars and expand their travel options. On that note, we also heard that because of Poland's less expensive products, many Germans are crossing the border to shop; we were told that roughly $6 billion of Polish goods were purchased by Germans last year.

But this is more than just a boom in retail trade, according to a German businessman we met on a train who said German business investment in Poland is also growing. We met other businessmen, some of them representatives of U.S. international companies, who were also optimistic about opportunities in Poland. One executive from a German company, pointing out the similarity of Krakow and many other Western European towns, said that Polish business will soon be very competitive with the rest of Europe. I should also note that Polish farmers, for the most part, resisted Soviet attempts to collectivize Polish agriculture.

In terms of Poland's political situation, the West has been concerned about Lech Walesa's defeat last November to Democratic Left Alliance party chief Aleksander Kwasniewski, an ex-communist. Some have worried that Kwasniewski's election would usher in a return to old ways. This has not been the case. Kwasniewski has stated that he supports the economic reforms and they will continue. Indeed, even though Poland was ruled by the Soviet Union, Poles never embraced the party—we were told that membership never ranged more than 15 percent to 20 percent.

Finally, there's our cab driver, a fellow who could speak some English and was eager to talk about the Polish economy. While he thought that the economy was doing quite well, he was concerned that only the government and business people, from entrepreneurs to large business owners, were benefiting. He strongly supported the reform efforts and prized his new freedoms, but he was adamant about ensuring that all people share in the new economic growth.

Part of the cab driver's concern may have stemmed from the fact that his cab business had declined since the reforms, largely because under the old regime his rates were fixed at a low rate and more people traveled by cab. But I don't think his complaints were just sour grapes; we heard the same concern from a tour guide, who went so far as to suggest that if economic benefits don't flow to all people, there could be political problems.

While the cab driver and the tour guide may reflect feelings that could become problems for Poland, they do not necessarily suggest that the reform efforts are failing. In part, they may reflect people's nostalgic memories of an economy that guaranteed a job, if little else. But more than that, those concerns about equity may reveal that the market economy is actually working as planned; that is, in a market economy there are winners and losers, but if the economy is healthy, there are opportunities for all to become winners. We've heard similar equity concerns in our country recently, especially during this presidential election year, and while some may have different ideas about equity and about what, if anything, should be done to attain it, very few in this country think we should scrap our economic system.

As for Poland, with its central bank committed to holding back inflation, with the government committed to privatizing industry, and with other market reforms continuing, it has clearly become one of the rising stars of the emerging economies in Europe.

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