Warsaw in Pole position of central European grid

“Pole and Hungarian brothers be,” an old adage goes, “good for fight and good for party.” Yet, with Poland’s overtaking Japan in real income per capita this year and joining the G20, the economic outlook of the two supposedly twin nations could not be more different.

It is an extraordinary reversal of fortunes. Back in 1989, ordinary Poles faced empty shelves and the threat of hyperinflation. Meanwhile, Hungarians were already becoming comfortable with a bourgeoning private sector, which had been allowed to operate in the final years of the communist regime.

In the 1990s, Hungary counted among the most successful post-communist economies — today it appears to be lagging behind Romania and Bulgaria in real individual consumption, making it the poorest member state of the EU.

The economic divergence of post-communist central and eastern Europe, including Poland and Hungary, is one of the under-reported stories of the past 40 years. While Poles and Czechs are catching up with, and in some cases overtaking, their western European counterparts, Hungarians and some other post-communist economies have no such luck.

In Slovakia, for example, the populist government of Robert Fico has recently embarked on a programme of budget consolidation, mainly by trying to increase tax revenue. It does so despite the fact that the country’s debt to GDP ratio is relatively low, just above the Maastricht-mandated 60 per cent.

The emergency measures betray a sense of nervousness about the government’s ability to borrow at favourable rates — especially against the background of sluggish growth.

Packages for early delivery

The confidence of international markets that Poland enjoys, despite a debt burden comparable to, say, Slovakia, reflects the economy’s different, and much stronger, fundamentals. Poland’s budget deficit, as a proportion of GDP, is expected to exceed that of Slovakia this year, but so does its expected growth rate (over 3 per cent, compared to 1 per cent). It is also telling that the deficit does not simply reflect runaway entitlement spending — though fiscal sustainability of social safety nets is a problem shared by all — but rather the country’s impressive defence build-up.

The story of Poland’s economic success starts with the early package of harsh macroeconomic stabilisation measures, enacted in the early 1990s by Leszek Balcerowicz, the legendary finance minister, who saw radical policies as necessary for establishing Poland as a creditworthy market economy on a trajectory to join the West.

What has distinguished Poland since is the sustained nature of its effort to sustain economic and productivity growth. In the late 1990s, for example, the country embarked on a major schooling reform. Today, Poland not only outperforms its peers in PISA rankings of students’ test scores, but also finds itself ahead of Finland and Germany.

Nor has the effort to keep the Polish economy growing stopped in recent years. The government is, for example, considering replacing the traditional corporate income tax with a tax on distributed profits — a change that would reduce the marginal tax rate on investment and accelerate growth.

European dividends

Since joining the EU, Poland has also cashed in a net €163bn ($190bn), mostly in cohesion funds and agricultural support. It may be hard to rigorously assess their impact on the Polish economy, relative to other EU newcomers. Anecdotally, however, Poles seem to have done a much better job in channelling that investment towards productive uses than their Visegrad neighbours, as evidenced by the state of Polish transport infrastructure and public services — especially when compared to those in Slovakia or Hungary.

This is not to paint a naively optimistic picture of the country. Poland has not been immune to bad economic policy ideas and destructive political polarisation. The Civic Platform government nationalised private pension assets in 2014 to plug a hole in government finances. The subsequent Law and Justice (PiS) government expanded costly entitlements and sought to wrestle control over key economic sectors away from foreign investors.

One manifestation was the creeping nationalisation of significant parts of the banking industry, with key financial institutions such as Pekao and Alior still under partial government control. The PiS government, in place until 2023, also saw a sustained attack on the independence of the judiciary, reflected in Poland’s worsening scores on various measures of rule of law.

Lively start-up sector

Poland’s size, of course, affords the economy more leeway to experiment with questionable policy ideas than, say, Slovakia or Hungary. The Warsaw Stock Exchange is the largest in the region, with a market capitalisation of more than $600bn. Thanks to its size, the country also has a lively ecosystem of venture capital and start-ups, especially in software and in medical technologies.

It would be a categoric error, in 2025, to look at all post-communist countries, in or outside the EU and Nato, through the same prism. There is no question that in its post-1989 history, Poland has emerged as a regional power, with one of the most impressive militaries on the continent and a far healthier economic outlook than some of its western European partners.

At a minimum, it would be wise to afford it a more prominent place at the table discussing both the challenges of European security and those of European competitiveness and growth.

Dalibor Rohac is a senior fellow at the American Enterprise Institute in Washington DC