Progressive economists challenge neoliberal prescription for Poland’s coronavirus recovery

By Wojciech Kość

Poland’s macroeconomic indicators for March have arrived, and they are not a pretty sight. The tough lockdown measures imposed by the government appear to have helped contain the spread of coronavirus, but they are hurting the economy.

Over the past three decades, Poland has experienced growth that is not only unprecedented, but also uninterrupted: GDP has expanded in every single calendar year since 1992, a unique achievement among European countries. But that stellar record will now come to an end.

The ongoing discussion over the best way to drag the Polish economy out of the post-pandemic slump has highlighted the emergence of some new thinking about economic policy – but also revived an old debate.

Poland’s spectacular overall growth – with GDP per capita (at purchasing power parity) overtaking that of Greece in 2016, and Portugal in 2019 – has not necessarily implied widespread gains. It has long been argued by some that Poland has neglected the role of the state in ensuring that the fruits of economic progress are shared out between more people.

The economic havoc wreaked by the pandemic has reignited a debate amongst economists about the right direction to take once the crisis subsides. Some argue that the heavy punch delivered by the coronavirus crisis to Poland’s economy provides the impetus to ditch the decades’ long neoliberal dogma on which post-1989 Polish economy was built.

The new numbers

What transpires from macroeconomic data for March – published throughout April by the state statistical office GUS – is that Poland indeed faces an unprecedented shock. “I think we’re not yet fully realising how deep this crisis is going to be,” says Zofia Łapniewska, an economist at the Jagiellonian University in Kraków.

“The government assumes that everything will restart in a month or two, reviving consumption, and we will return to the budget revenues that we had before the crisis. But that is not going to happen as long as there is no vaccine against the coronavirus,” she adds.

The hit to consumption – the driving force of Poland’s long-term economic growth – is already visible. Poland’s retail sales fell 9% in constant prices on annual basis in March, with some sectors suffering precipitous falls: turnover in the clothes and shoes sector sunk by 49.6%, car sales dropped by 30.9%, both year-on-year.

A quick return to pre-crisis levels is unlikely. As companies collapse and unemployment shoots up, wages will be dragged down too. Households will end up having less income to spend.

Meanwhile, industrial production fell 2.3% year-on-year in March, including an annual fall of 3% in the manufacturing segment. Almost half of the companies said they would not survive longer than 2-3 months in pandemic conditions, a survey by Research&Grow showed in early April.

Employment in the corporate sector fell 0.5% since February. That translates to a recorded loss of 34,000 jobs, although the actual number of redundancies in March alone could be closer to 100,000, if we account for layoffs in smaller companies and people working on so-called “junk contracts”, estimated Santander Bank Polska.

The figures for April – the first full month of lockdown – are likely to harbour more bad news. Development Minister Jadwiga Emilewicz warns that the unemployment rate could rise to 9-10% this year, from the current 5.4%. Some estimates put it at 11% by the late summer.

The unfolding crisis has also depressed some “softer” macroeconomic indicators. Poland’s Purchasing Managers’ Index (PMI) – a measure of sentiment in manufacturing and services – has fallen to its lowest level since the survey began in 1998. Sentiment among Polish consumers also nosedived to its worst reading since 2004.

The new ideas

The incoming tide of bad economic news may have a deeper effect too: it has prompted calls to revise the fundamental assumptions of Poland’s economic policy of the past decades.

The dogma so far has been that Poland should above all strive to maintain balanced public finances. In that thinking, the room for the government spending and fiscal policies aiming at, for example, full employment or creation of money, is limited.

Those latter ideas are, in essence, the premises of the Modern Monetary Theory (MMT), which some economists – such as Jan J. Zygmuntowski, head of Instrat, an economic think tank – would like to see Poland embrace as a way out of the coronavirus crisis. Zygmuntowski and a number of other progressive economists recently published a “Regeneration Manifesto” outlining what Poland’s new economic policy should comprise.

“The misconceptions about the impossibility of financing social needs from public funds should be rejected,” states the manifesto. “Economic theory, as well as the practice of many countries, including in Western Europe, showcases available sources of financing government spending in the form of a non-inflationary budget deficit and of raising selected taxes.”

“Budget deficit” and “tax increases” have been taboo terms to most, if not all, Polish governments after 1989. Since Law and Justice (PiS) took power in 2015, liberal think-tanks have riled against what they saw as the government’s irresponsible spending.

But for all of its handouts, even the PiS administration seems constrained by these traditional ideas. It proudly announced plans for the 2020 budget to be Poland’s first without deficit since 1989.

Those budgetary plans have now had to be revised due to the crisis. But, says Zygmuntowski, that traditional mode of thinking will make Poland’s recovery much harder in coming weeks and months, when the single most important issue for the government will be the rise in the number of people without work and the resulting drain on household incomes.

“Poles’ savings are small and won’t last long,” says Zygmuntowski. “What we’re going to see next will be households going into debt. That debt will have to be paid back, which will hold back consumption and prolong the crisis.”

To avert that scenario, Poland’s progressive economists argue that the government should be bolder in giving money to the people and accepting more debt and deficit.

“The government has now allocated 212 billion zloty to protect the economy. But what will happen if the economy remains stalled for another year?” asks Łapniewska. She suggests the money would be put to better use handed out as universal basic income.

“It seems that the government is afraid of a strong increase in public debt, despite the fact that in these macroeconomic conditions it would be a sound strategy,” says Maciej Grodzicki, another economist from the Jagiellonian University.

The authors of the manifesto also argue that Poland’s “conservative” economics neglect a number of ecological and social costs of growth. “Their effects include underfunded public services, a precarised labour market, a malfunctioning social assistance system, and damaged natural environment,” the manifesto says.

But for neoliberals, money creation is the highway to inflation – the early scare of Poland’s market reforms 30 years ago. And too much state in the economy smacks of “socialism”, which is usually used to draw negative parallels to the communist era.

The poster boy of Polish neoliberalism, Leszek Balcerowicz, who authored Poland’s “shock” reforms in its transition to a free market economy after 1989, told broadcaster TVN24 last week: “If the mistaken policy of the state doesn’t damage the economy via…too big public debt [coming from] uncontrolled expenditure, there should be a fast recovery.”

The question now will be whether the PiS government will remain constrained by this traditional economic orthodoxy or if, having already overseen a significant expansion of state welfare policies, it may be willing to listen to those calling for more radical solutions to the crisis.

Wojciech Kość is a journalist covering Poland and the Baltic states for bne IntelliNews. He also reports for Politico Europe and OKO.press, with a particular focus on energy and climate issues.