Economy of Poland

Economy of Poland

Before World War II, Poland was a free-market economy based largely upon agriculture but with a few important centres of manufacturing and mining. After the initiation of communist rule in the 1940s, the country developed an increasingly industrial, state-run command economy based on the Soviet model. It operated within the rigid framework of Comecon (Council on Mutual Economic Assistance), an organization of Eastern-bloc countries dominated by the Soviet Union.

From the mid-1970s the Polish economy struggled with limited growth, largely as a result of an antiquated industrial infrastructure, government subsidies that masked inefficient production, and wages that were artificially high relative to productivity. In the late 1980s a swelling government deficit and hyperinflation brought about economic crisis. With the fall of communism and the demise of Comecon, the Polish economy became increasingly involved in the market-oriented global economy, for which it was ill-suited. To try to achieve economic stability, the postcommunist government introduced an approach known as “shock therapy,” which sought both to control inflation and to expedite Poland’s transition to a market economy. As part of that plan, the government froze wages, removed price controls, phased out subsidies to state-owned enterprises, and permitted large-scale private enterprise.

As a result, in the early 1990s industrial output and gross domestic product (GDP) dropped significantly (agricultural production also fell, though largely owing to drought). Unemployment grew, affecting as many as one in seven Poles. Inflation, however, began to drop, from 250 percent in 1990 to 10 percent in 2000. Production and GDP also recorded dramatic turnarounds, with an average annual GDP growth of about 4 percent from 1990 to 2000. Poland’s balance of payments improved (partly as the result of debt forgiveness), and the country developed one of the leading economies of the former Eastern bloc, as well as one of the fastest growing in Europe. Unemployment, which had been high at the beginning of the decade, righted itself in the late 1990s, falling to levels similar to those in western Europe in 1997–98 (i.e., to about 10 percent). The percentage of unemployed persons, however, rose once again in the early 21st century, climbing above 18 percent in 2003, when a downturn in the Polish economy was accelerated by a worldwide economic slowdown.

Privatization of some of Poland’s large industries proved to be a slow process. Under communism the principal branches of industry, services, and trade were directly owned by the state. There was, however, a surprisingly large sector of legal self-employment, and small-scale private businesses—including workshops, services, and restaurants—proliferated. Moreover, some three-fourths of Poland’s farmland remained privately owned. A government collectivization campaign begun in 1949 was abandoned in 1956. After the fall of communism, both industry and agriculture became increasingly privatized. By the early 1990s, more than half the Polish economy was in private ownership, while more than four-fifths of Polish shops were privately owned.

The privatization of larger enterprises was more complicated. A number of these were transformed into joint-stock and limited-liability companies. To distribute ownership in them, the Mass Privatization Program was introduced in 1994, which created 15 national investment funds (NIFs) to serve as joint-stock companies for more than 500 large and medium-size firms that were privatized. Poles were able to purchase shares in these funds at a nominal price. Listed on the Warsaw Stock Exchange, the NIFs comprised a broad range of enterprises—not just individual companies or groups of companies—and this enabled citizens to possess a diversified interest in key Polish industries. By 2001 more than 6,800 state-owned enterprises had been involved in the privatization process, and the private sector accounted for more than 70 percent of GDP.

Development under the communist government stressed the classless and proletarian nature of society; however, the party elite enjoyed a range of privileges unavailable to ordinary workers. In postcommunist Poland, as private businesses proliferated, a small number of people became wealthy, and a middle class composed of entrepreneurs and urban professionals emerged. However, many people, in particular those on fixed incomes, suffered sharp declines in their standard of living. Crime, drug use, and corruption also increased, but such problems are not uncommon elsewhere in Europe. Also, greater wealth was found in western provinces near Germany than in eastern districts near Belarus and Ukraine.

As it made the transition to private ownership and the market economy, Poland became increasingly involved with international economic and political organizations. In 1991 it joined the Council of Europe; in 1995 it became a member of the World Trade Organization; and in 1996 it joined the Organisation for Economic Co-operation and Development. It gained full membership in NATO (North Atlantic Treaty Organization) in 1999, along with Hungary and the Czech Republic. An associate member of the European Union (EU) since 1994, Poland ascended to full membership in 2004.

• Agriculture, forestry, and fishing

Polish agriculture was unique in the Soviet bloc in that private farms accounted for most of total output. Most of those private farms continue to be smaller than 12 acres (5 hectares). In postcommunist Poland farm incomes declined rapidly in real terms as the prices of industrial products rose, and imported processed foods from western Europe competed strongly with lower-quality Polish products. Many state farms collapsed after 1989, as did the system of state purchase upon which much of the private sector had relied. Throughout the 1990s the percentage of people employed in agriculture declined each year, owing in part to the liquidation of state farms, the aging of agricultural workers, and the drought of the early 1990s.

Nevertheless, Poland remains one of the world’s leading producers of rye and potatoes. Other principal crops include wheat and sugar beets. Poland’s largest fertile areas are Lower Silesia, the Little Poland Lowlands, the Kujawy, the Vistula delta, and the Lublin area. Soil quality varies, and the soil is somewhat poorer in large parts of central and northern Poland. Most farming is mixed, and beef cattle, dairy cows, and pigs are raised throughout the country. As Poland became increasingly integrated into the global economy during the mid-1990s, about half its agricultural exports went to the EU.

Although timberland and fisheries still struggle with a legacy of environmental damage, improvements in natural resources could be seen throughout the 1990s. In 2000 almost one-third of Polish tree stands still had defoliation of more than 25 percent, exceeding the levels for many of Poland’s European neighbours. Some four-fifths of the country’s wooded land is occupied by coniferous trees, with pine, larch, and spruce the most economically important. About 918,000 cubic feet (26,000 cubic metres) of roundwood was farmed in 2001. The fishing industry in Poland is small, and the total fish catch is between 200,000 and 300,000 metric tons per year.

• Resources and power

MINERALS

Poland is relatively well endowed with natural resources. Its principal mineral asset is bituminous coal, although brown coal is mined as well. Most of the bituminous output is derived from the rich Upper Silesian coalfield. During the late 20th century, however, extraction costs in many mines began to exceed profits. Falling prices and the challenges of privatization have slowed production levels. Other fuel resources include small amounts of petroleum and moderately large deposits of natural gas.

Sulfur is Poland’s second most important mineral, and the republic ranks among the world leaders in both reserves and production. Other important nonmetallic minerals include barite, salt, kaolin, limestone, chalk, gypsum, and marble. The historic salt mine in Wieliczka, near Kraków, has been in continuous use since the 13th century; in 1978 it was among the first places to be named a UNESCO World Heritage site. Poland also has important deposits of metallic minerals such as zinc and is a major world producer of copper and silver.

ENERGY

Nearly all of Poland’s energy is provided by thermal plants fired by bituminous coal and lignite, though in 1998 the government declared its intention to rely more on imported natural gas. Natural gas has largely replaced manufactured gas. Poland imports almost all of its petroleum and petroleum products. In 2000 mineral fuels and lubricants constituted about one-tenth of all imports. On the other hand, about one-fifteenth of electricity generated in Poland was exported. The bulk of the country’s hydroelectricity comes from the Carpathians, the Sudeten region, and the Brda and Vistula rivers.

• Manufacturing

During the period of communist rule, remarkable advances in industrial production were overshadowed to some extent by shortcomings in quality and by problems of organization. Moreover, industrial production in Poland—governed almost solely by quantitative requirements and dependent on inexpensive raw materials provided through Comecon—was largely inefficient and poorly prepared to compete in the global marketplace. Industrial output fell dramatically after the demise of communism, especially during the first years of shock therapy. There were declines of one-third or more in almost all areas of manufacturing and mining following the freeing of prices and the collapse of Comecon.

As Polish industry began to downsize, however, production improved, and by the mid-1990s manufacturing accounted for about two-fifths of GDP. As other sectors grew more quickly, manufacturing totaled about one-fifth of GDP by the end of the decade. The principal branches of the manufacturing sector are machinery and transport equipment, food products, metals and metal products, chemicals, beverages, tobacco, and textiles and clothing.

• Finance

During the communist era, all financial institutions were owned by the state beginning in 1944–45 and formed an integral part of centralized economic planning after 1949. The National Bank of Poland (Narodowy Bank Polski) acted as the main agent of the government’s financial policy, managing everything from the currency and money supply to wages and prices, credit, investment, and the detailed business of all state enterprises. In the late 1980s and early ’90s, the banking industry was reorganized. The National Bank became an independent central bank, with responsibility for regulating the banking sector and the currency. By 2000 there were about 75 private banks, though the state retained the controlling interest in about one-tenth of them.

Until 1990, internal monetary operations were conducted in inconvertible local currency, while external operations were conducted either in foreign currency, especially U.S. dollars, or, for the Soviet bloc, in special units of account such as convertible rubles. Exchange rates against foreign hard currency were flexible according to the needs of the state bank. In 1990, as part of a government program to move the Polish economy toward a free-market system, the exchange rate of the złoty, Poland’s currency, was allowed to be set freely on the international currency markets. In 1995 a new, devalued złoty was introduced; it equaled 10,000 of the old złotys. After joining the EU in 2004, Poland prepared to also enter the EU’s economic zone and to adopt the euro as its currency.

Poland established a stock exchange in 1991 in Warsaw, and, by the end of 2001, some 230 companies were listed on it. A derivatives market was begun in 1998. At the turn of the century, more than 50 insurance companies were in operation, the largest of which was Polish National Insurance (Powszechny Zakład Ubezpieczeń). In the first decade of the postcommunist era, Poland received more foreign direct investment than any other former socialist country of Europe, rising from $89 million in 1990 to $10.6 billion in 2000.

• Trade

The fall of communism greatly affected Poland’s trade, which prior to the demise of the Soviet bloc was conducted within Comecon, including the export of coal and machinery to the Soviet Union and eastern Europe. In 1990, however, Germany edged out the Soviet Union as Poland’s primary trading partner, and by 2001 Germany accounted for one-fourth of Poland’s imports and one-third of its exports. Italy and France are also important to Polish trade. Machinery, metals, textiles and clothing, coal, and food account for the bulk of exports, and machinery, chemicals, and fuels are the major imports. Germany is the largest market for almost all categories of exports, while Russia remains by far the most important source of energy imports, and Germany and Italy serve as the chief sources of foreign machinery and chemicals.

• Services

The service industry greatly expanded in the final decade of the 20th century, at a rate of about 4 percent of GDP per year. Growth was pronounced in the sectors of financial services, retail, and travel and leisure. By the turn of the 21st century, the service industry accounted for about two-thirds of the country’s GDP and employed just less than one-half of the Polish workforce. In 2005 tourism contributed about $6 billion to the Polish economy, with most foreign tourists arriving from Germany and the Czech Republic.

• Labour and taxation

Under the communist system, unions, organized by individual industries, had to be approved by the state and party. Inasmuch as the government was a monopoly employer in all important branches of industry and because the trade union organization was run by the party, it can be argued that the trade unions were employer unions. Links between employees in different trades or different enterprises were not possible, and the rights to organize freely and strike were denied until the advent of the Independent Self-Governing Trade Union Solidarity (Niezależny Samorząd Związków Zawodowych Solidarność), better known simply as Solidarity. Founded in September 1980, shortly after widespread strikes organized by the Interfactory Strike Committee, Solidarity broke the monopoly of the official party unions, quickly gained mass support (even among party members), and extended its activities far beyond narrow syndicalist concerns. Widespread labour unrest during 1981 resulted in a government declaration of martial law in December and the arrest and detention of Solidarity leader Lech Wałęsa and others. Solidarity and its satellite organizations, such as Rural Solidarity (Wiejska Solidarność), were officially suppressed, and the leaders of the independent labour movement were denounced as “criminals.” The party ordered its managers and ministers to create new trade unions affiliated with the government-sponsored All Poland Trade Unions Alliance (Ogólnopolskie Porozumienie Związków Zawodowych; OPZZ) that would operate along the old lines of party control. Much of the membership of the re-created unions consisted of former Solidarity sympathizers, however, and the new unions were not entirely uncritical of party policy. In addition, despite its illegal status, Solidarity continued to have influence as an underground organization.

n 1988 renewed labour unrest and nationwide strikes forced negotiations between the government and Solidarity (held in early 1989) that resulted in the legalization of Solidarity and in Poland’s first free elections since World War II. From the 1990s both Solidarity and OPZZ were directly involved in politics, becoming core members of major political alliances, the Solidarity Electoral Action (Akcja Wyborcza Solidarność; AWS) and the Democratic Left Alliance (Sojusz Lewicy Demokratycznej; SLD), respectively. Following the political legitimization of Solidarity, Wałęsa, who had received the Nobel Prize for Peace in 1983, became Poland’s first directly elected president (1990–95).

Poland overhauled its system of taxation in the early 1990s, primarily via legislation passed in January 1993 that replaced a turnover tax with a type of value-added tax (VAT). Under that tax, fees accrued for the final purchaser with each transaction during a product’s development. Small businesses and some taxpayers were exempt from paying this VAT, and it was not applied to certain foodstuffs, medicines, and exports. Also in 1993, an excise duty was introduced, with higher rates applied to alcoholic beverages, tobacco products, and automobiles. In 1994 Poland unveiled three levels of personal income tax (21 percent, 33 percent, and 45 percent; in 2000 reduced to 19 percent, 30 percent, and 40 percent), attempting to offset the new burden with a simultaneous program of investment tax relief. Moreover, the extant corporate tax rate of 40 percent was reaffirmed (but reduced to 19 percent in 2003), and an import tax on foreign goods was initiated. Property tax laws in Poland allow tax breaks for owners of farms or forested lands.

• Transportation and telecommunications

RAILWAYS

The communications system in Poland developed in the 19th and early 20th centuries, when the country was divided between Russia, Germany, and Austria. The three areas thus developed in different economic and political conditions, and the main railway lines were centred on the capitals of the three empires. The density of the railway networks in the three sectors was uneven. In 1918 independent Poland took over the railroad system and redesigned and rebuilt it according to the standard European gauge. Among the most important railway lines built after that date were those linking Warsaw with Poznań and Kraków and a coal trunk line linking Upper Silesia with the newly built seaport of Gdynia.

After the devastation of World War II, the railway system was reconstructed once again, and the most heavily used lines were converted to electric power. Because of the location of the country, Polish lines were important in the carriage of transit freight among the socialist countries of eastern Europe, notably between the Soviet Union and East Germany and between Czechoslovakia and Poland’s ports.

Demand for rail transport fell sharply, however, after the communist era, for both freight and passengers. In the last decade of the 20th century, there was a 41 percent drop in railway tonnage and a 58 percent decrease in passenger trips by rail. The railways, administered by the Polish State Railways (Polskie Koleje Państwowe), began the process of privatization in the early 21st century. Light rail is available to commuters in more than a dozen cities.

HIGHWAYS

The highway system originally showed disproportions similar to those of the railways; that is, the densest network was on land belonging to Germany and the least dense on land belonging to Russia. An attempt to remedy this situation was made between 1918 and 1938 and again, though more intensively, after 1945. Modern multilane highways designed for high traffic volumes have been built in Warsaw, and projects have been undertaken to link Warsaw to provincial centres, but the road system in general is of low quality. About two-thirds of its 263,000 miles (424,000 km) is paved. In the 1990s the government began construction of limited-access highways built to European standards.

WATERWAYS

The middle course of the main Polish river, the Vistula, contains many navigational hazards, and the river is thus a less-important waterway than the smaller Oder. The modern Gliwice Canal links the Oder to the Upper Silesian industrial region and carries coal to the port of Szczecin. The Oder basin is also linked to the lower Vistula by the Bydgoszcz Canal. Inland navigation is of little importance in Poland, however, with less than 1 percent of Polish freight being carried on rivers and canals. On the other hand, shipping is well developed, and there are three large seaports—Szczecin (the largest), Gdynia, and Gdańsk—as well as smaller fishing and coastal navigation ports.

AIR TRANSPORT

Passenger air traffic has more than doubled since the collapse of Polish communism. Domestic and international air transport is provided by LOT (from Polskie Linie Lotnicze), a state-owned enterprise that completed negotiations for partial privatization in 1999. There are numerous international routes centred on the airport at Warsaw. Other airports are located in Kraków, Gdańsk, Wrocław, Katowice, Poznań, and Szczecin.

TELECOMMUNICATIONS

At the start of the 21st century, Poland had 11.4 million main telephone lines and more than 10 million cellular telephone users. In online communications the number of Internet users (3.8 million) slightly exceeded the number of personal computers (3.3 million), reflecting the presence of multiple users per terminal and of public computer stations. Televisions and radios were ubiquitous in Poland, with 15 and 20 million units, respectively.