Queen s Global Markets A PREMIER UNDERGRADUATE THINK-TANK

Queen s Global Markets A PREMIER UNDERGRADUATE THINK-TANK Poland: Lessons of an Economic Success Story Europe Team Ho Gordon Thackway Bogden Martone 10.14.2014

Agenda 1. Post Soviet Economic Liberalization 2. Performance during the Financial Crisis 3. Political Structure 4. Monetary & Fiscal Policies 5. Future of Poland 2

Introduction to Poland s Economy And the Surrounding Issues To the east, Russian aggression has paralyzed Ukraine s hope for faster economic development. To the south, Hungary flirts with authoritarianism and still struggles to climb out of the last recession. To the north, Lithuania and the other Baltic States are being squeezed by the cycle of escalating trade sanctions between Moscow and the European Union. Source: Financial Times 3

The Fall of Communism Poland s Growth since becoming a Free-Market Economy Leszek Balcerowicz Former Chairman of National Bank of Poland In office Sept. 12, 1989 Dec. 23,1991 Polish Economic Transformation of 1990 Balcerowicz Plan Reform Package Transitioned communist economy to capitalist market economy The Plan: o Prices moved freely o Abolished subsidiaries o Tightened money supply o Devalued currency The Result: o Economic stability o Absence of food shortages o Increased supply of goods Prices skyrocketed Unemployment rate went up Source: The World Bank, New York Times 4

The Presidents of Poland How they turned the country around First country to unshackle itself from communism in Europe End of the People s Republic of Poland Resulted from tension between citizens and communist government Walsea Presidency (1990-1995) Continued progress made by Balcerowicz Great progress to achieving fully-democratic parliament and a market economy Not popular among Poles Now speaks around the world about politics and economic strategies Kwaśniewski Presidency (1995-2000) Defeated Walsea in election of 1995 (51.7% to 48.3) Pursuit of closer ties to the EU and NATO Less focus on transition to market economy, unlike his predecessor The president of all Poles Support reached as high as 80% Kwaśniewski Presidency (2000-2005) Greatest achievement was bringing new Constitution of Poland to replace the current Stalinist document Secured Polish membership in NATO After 2001 attacks, Poland became large ally of US in war on terror Now teaches at Georgetown University in the practice of Global Leadership Source: The Economist 5

GDP Per Capita (USD ) Poland s New Golden Age How they have managed to become the European Financial Center 1994 Poland s economy began to take off o Joined the OECD: stimulates world trade and economic progress Growth rate exceeded 6% for the next three years Decline in 2001 strict monetary policy Decline in 2009 global financial crisis o Only economy in Europe to avoid recession through financial crisis 2012 Poland s GDP almost 20% higher than beginning of crisis 16000 GDP Per Capita (1985-2013) 14000 12000 10000 8000 6000 4000 2000 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: The World Bank 6

Poland s Political Parties Poland has developed a relatively open democracy Civic Platform (PO) Liberal-conservative, Christian democratic party - Largest party in the Sejm and Senate - Led by Donald Tusk, Prime Minister from 2007-2014 and upcoming President of the European Council Historically focused on: - Privatization of remaining public enterprises - Pro-business policies - Reforming the election process - Making the National Bank of Poland independent - Labour law reform - Recently raised some sales taxes and slowed rate of privatization, leading to accusations of populism Law and Justice (PIS) National-conservative party - Second- largest political party in the Sejm and Senate - Founded by the Kaczynski twins in 2001, governing Poland from 2005-2007 Historically focused on: - Battling corruption - Intervening in the economy through protectionist measures - Increasing criminal penalties - Aligning itself with Catholic church - Strongly socially conservative Your Movement Social-liberal, pro-european party - Third largest party in the Sejm, not represented in the Senate - Founded in 2013 as a successor to the Palikot s Movement Party - Headed by Janusz Palikot Historically focused on: - Ending religious education in state schools - Switching to a proportional representation system - Abolishing the Senate - Widely ranging and ill-defined economic views - Socially liberal, proponent of legalizing abortion and samesex marriage Source: Financial Times 7

Relative Growth Democracy and Economic Growth Poland s institution-building and transition to a democratic state strongly contributed to growth Relative Post-Soviet Era GDP Growth Corruption Perceptions Index 2013 Ranking 300 38. Poland 47. Hungary 49. Latvia 57. Czech Republic 61. Slovakia 123. Belarus 127. Russia 144. Ukraine 250 200 150 Poland Hungary Russia 100 World Press Freedom Index 2014 Ranking 50 Ukraine 13. Czech Republic 19. Poland 20. Slovakia 37. Latvia 64. Hungary 127. Ukraine 148. Russia 157. Belarus - 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Year Source: Transparency International, Reporters Without Borders 8

Poland and Europe Europe s sixth-largest economy is a major proponent and benefactor of greater European integration Poland ascended to the European Union in 2004 European Aid Package Europe s Impact on Poland Poland has developed very close relationships with Germany o Germany invested $4.5bn in Poland in 2012 o Merkel recently expressed hope that Poland would eventually join the Eurozone once it gets past its current crisis 2011 Presidency of The Council of the EU Polish growth has been fuelled in part by a $317 billion EU aid package Thousands of new infrastructure projects including new roads, airports and schools European aid contributes ~1% to GDP growth per year A new poll shows 89% of Poles favour further European integration 70% of new EU aid funds will be used for innovation based projects At a time of growing euro-skepticism, Poland pushed for further European integration Improvements to EU patent regime Better border controls outside Schengen Area Speeding up the accession processes of Croatia, Turkey and Iceland Source: The Guardian, Financial Times 9

The Rise of Donald Tusk Tusk was chosen for one of the top jobs in Europe President of the European Council Was First Polish Prime Minister to be reelected since 1989 Appointed as President of the European Council (taking office December 1, 2014) Presides over meetings of EU s national leaders Responsible for setting meeting agendas Immediate Issues Russia: balance between countries that feel threatened, and those who have strong ties with Russia Economy: balance priorities of growing economies (Germany) with those still facing high unemployment (Greece, Italy) Integration: balance between countries look for more integration (Germany) and those looking for less (United Kingdom) Why is the Appointment important for Poland? Germany had a large role to play in Tusk s appointment Many Poles fear that Germany will Russia will strike a deal that hurts Poland (rerun of World War 2) Germany is sending Poland the message that it considers Poland to be a key player in the EU and that its interests won t be sacrificed Source: The Guardian, Bloomberg 10

Monetary Policy Poland s toolbox Interest Rates Inflation Rates Exchange Rates Reached 6% towards the end of 2008, dropped to around 3.5% after the crisis, back up above 4% in 2011 Benchmark interest rate now sits at around 2% but is subject to change in the very near-term rather than in the medium- to long-term Inflation in Poland has been below the central bank s target of 2.5% for the past 21 months Also hold a 1.5% minimum tolerance range Steady drop from ~4% in mid- 2012 down to close to 0% in mid-2013 Significant devaluation of the currency relative to the Euro during the financial crisis helped Poland stay alive and grow among poor-performing economies Robust foreign currency reserves were key Poland Interest Rates 8 6 4 2 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Poland Inflation Rate 6 5 4 3 2 1 0-1 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Don t expect us to postpone any possible future steps everything we ll do, we should do by the end of this year. - NBP Governor Marek Belka Source: World Bank, Bloomberg 11

Monetary Policy How it s fared What s Different? Money Supply Poland Euro Area Euro Zone GDP at the end of 2008 was more than 25x the size of Poland s; had less than 4x foreign currency reserves Trade Euro Region buys 54% of Poland s exports Largest importers of Polish goods: Germany (23%), UK (6.6%), France (6.0%), Czech Republic (5.8%), Russia (5.2%) Vehicles and parts including seats account for 10.6% of exported goods lack diversification Money Supply M1 in Poland has grown at a noticeably steady rate in the past Nearly tripled in Poland over the past 10 years while it has not yet doubled in the Euro Area in the same time frame Dodged deflation during the financial crisis while the Euro Area struggled and is now on pace However, there was negative inflation in July & August and today it was announced that the rate was -0.3% in September Money Supply (M1) Growth 30 25 20 15 10 5 0-5 2004 2006 2008 2010 2012 GDP Growth (%) 8 6 4 2 0-2 -4-6 2004 2006 2008 2010 2012 Source: World Bank, Bloomberg, Observatory of Economic Complexity 12

Monetary Policy Visualization Polish Zloty /... Poland Exports 0.6 0.5 0.4 0.3 0.2 0.1 USD Euro GBP 25000 20000 15000 10000 5000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Poland Exports, Eurozone Imports 22500 21500 20500 R² = 0.6653 19500 18500 17500 16500 15500 14500 13500 12500 4000 6000 8000 10000 12000 14000 16000 18000 20000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Poland Exports, German Imports From Poland 22000 20000 18000 16000 R² = 0.9576 14000 12000 10000 8000 6000 4000 2000 750 1250 1750 2250 2750 3250 3750 4250 4750 5250 Source: Bloomberg 13

Monetary Policy The Trilemma Money Supply Stable Exchange Rates Poland s choice to forfeit free capital mobility in favour of a stable exchange rate and monetary autonomy is mainly due to their plan to join ERM II eventually Monetary Policy Autonomy Free Capital Flows Also due to their adoption of an inflation target at 2.5%; while this hasn t been met in the past several years, it remains a central goal of the National Bank of Poland More exchange rate stability raises the growth rate and output volatility; more financial integration reduces the inflation rate & volatility as well as output volatility Source: Montenegrin Journal of Economics 14

Fiscal Policy Historical Key Drivers of Relative Success Level-headed approach Large internal economy, business-friendly political class, high GDP growth above 3% (way above Eurozone) Pre-2004, price controls were lifted, government wages were capped, trade was liberalized, and the Zloty was made convertible, entered the EU in 2004 with agreement to eventually switch to the Euro Other countries took on Austerity during the crisis, while Poland put their foot on the gas with spending Poland Government Spending Government Debt/GDP Source: Central Statistics Office of Poland, Bloomberg Businessweek 15

Fiscal Policy What have they done differently? Poland vs. Latvia Exchange Rates Latvia s GDP Growth has been inconsistent while Poland s has risen steadily Poland ran a sharper government budget deficit before the crisis and maintained spending throughout it; has not cut back significantly since Latvia spiked government expenditure at the onset of the crisis while Poland didn t react sharply Government spending / GDP in Poland hasn t moved outside of the 40-45% range over the past 10 years while Latvia s has moved all over the place Still running a deficit above 3% that isn t likely to change any time soon but focus lies more heavily on economic growth rather than fiscal responsibility Poland Latvia Fiscal Deliverables Conclusion Lowering top tax rate from 40% to 32% in 2009 Hosting the 2012 European Soccer Championships Ability to devalue currency, paired with government s confidence to continue to spend, allowed for economic prosperity through the crisis until today Source: Forbes, Bloomberg 16

Future of Poland Threats to Poland s future growth Risks to Poland s future outlook Increase labor wages Lose competitive advantage in the world market Avoid Middle-Income Trap Diversification of trading partners Germany accounts for ~22% of Poland s imports and exports Russia represents 11% of total imports The Russia / Ukraine standoff Government bureaucracy A significant increase in civil servants State ownership still remains high Ranks 45 th in the World Bank s ease-of-doing business index Comparable Hourly Labor Cost ( ) Ranking Starting a Business 12.00 110 10.00 90 8.00 70 6.00 50 4.00 30 2.00 2000 2004 2008 2009 2010 2011 2012 2013 Czech Republic Slovakia Poland Hungary Romania 10 Puerto Rico South Africa Peru Colombia Montenegro Poland Source: OEC, Bloomberg, The Economist 17

Future of Poland Necessary Domestic Policies to Ensure Sustainability of Growth Domestic Investments Improve productivity gap with western Europe Invest in R&D and high grow industries Increase value-added ladder Produce more high-tech and knowledge-intensive exports Polish firms productivity per hour is still only around 60% of companies in the EU 15 countries Reduce state-owned ownership and lower barriers to entrepreneurship Increase FDI Become more Global No internationally known Polish firms Improvement in education system and transport / energy structure EU funding Lowest road transport infrastructure quality in OECD Coal constitutes 55% of consumption R&D Spending as a % of GDP GDP per hour worked 2.5% 50 2.0% 40 1.5% 30 1.0% 20 0.5% 2000 2002 2004 2006 2008 2010 2012 10 2006 2007 2008 2009 2010 2011 2012 2013 Poland European Union (28 countries) Poland Euro area (15 countries) G7 Source: OEC, Bloomberg, The Economist 18

Poland and the Eurozone Polish Intensions Polish Aspiration Current exclusion Poland has strong intentions to join the Eurozone around 2016 Criteria must be met prior to Poland joining o EU system must cope with how to keep the gate open between the EU 17 and the EU 27 o How to organize a passerelle between those in the Eurozone striving for further integration Interaction with the EU How can Poland Play a Role? Poland s way to currently engage in discussions is also its way to stay in an ever more integrated Europe Poland s Emergence Warsaw s Understanding of Power In 2007 Poland broke away from the reputation of a blocking state o New government began to conceive of the country as a catch up power Source: Financial Times 19

Poland s EU Relations Conflict Between the Big Three United Kingdom France Germany Fiscal Compact Disagreement regarding fiscal compact (formally stability and growth pact) led to the UK declining the offer to join o UK was elbowed aside and the other member states created a separate institutional architecture for the Eurozone alone This pushed Poland a step backwards as the UK became a liability, undermining the efforts of non-eurozone members to affect decisions 2012 Presidential Election Revealed French economic and political frailty, weakening the Franco-German Duo o Allowed Poland to overcome its historical tensions with France Paris losing its privileged relation with Berlin has not altered France s intention of granting no support to Poland entering the Eurozone Polish Support Warsaw has experienced a gradual rapprochement with Berlin. Germany and has emerged as the guarantor of Poland's inclusion into the Eurozone Skepticism surrounding the relationship between the two o Germany is Poland's largest export market and is also the biggest sole investor into the Polish economy Source: European Commission, Financial Times 20

Poland Moving Forward New Found Support Conditional Support Provided you include us in decision-making, Poland will support you German Polish Duo? European Success ESIFs Comparison to BRICS Love Between Ministers Poland s Dependence EU Commits Difference in Purpose Germany and Poland Poland above all else European Commission s BRIC Bank focus will seem more committed needs a successful adoption of Partnership be on the to delivering concepts, Europe and a Agreement with Poland development of ideas, and political functioning Germany using EU Structural and emerging economies commitment to Europe in that it doesn t go Investment Funds Will not have control than any other EU global on its own Poland Now receives over legislative members o Germany the biggest allocation authority o Quotes given needs a strong among the EU s 28 Allocation of funds from Sikorski partner in member states from BRICS can be o Letter sent to Europe as Solidifies EU s support compared to that of the EU from the France is falling for Poland the European two behind Commission Source: European Commission, Carnegie Europe 21

Questions? 22