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National Heritage and
Economic Policies in Free and
Sovereign Poland after 1918
CA S I M I R    DADA K
Abstract
Poland, whenever free and sovereign, has since 1918 implemented economic policies that  emphasise free markets. This approach has failed to produce a rapid rate of economic growth, so the country is still substantially underdeveloped. Although significant government investment in 1936–9 resulted in strong economic growth and a higher standard of living, today’s Poland continues to pursue neo-liberal economic policies. This paper links these policies to the nation’s
heritage, which stresses limited government. Such beliefs ruled the actions of the nation’s ruling class before partitions in the eighteenth century and during the inter-war period, and continue  to dominate economic policy now.
Since 1918, Poland, whenever free and sovereign, has implemented economic policies based on the concept of limited government and free markets. Low taxation  and a very weak central government were the hallmarks of the Polish-Lithuanian  Commonwealth (1569–1795), factors that greatly contributed to the partition of the  country. Neo-liberal views profoundly influenced the economic thinking of policymakers  during the inter-war period.

1 The outcome was dismal as Poland suffered  during the Great Depression more than any other nation.

2 Following the demise of communism, Poland adopted ‘shock therapy’ – a
programme of rapid and radical change founded on a neo-liberal model.

3 This  approach to transition was, perhaps, not only a strong reaction to forty-five years of heavy government planning and control under communism, but also the nation’s restoration of its traditions of very limited government. This approach, however, I am grateful to two anonymous referees and to Jim Sadkovich for very constructive comments on earlier drafts.
Hollins University, Dept. of Business and Economics, Roanoke, VA 24020, USA; [email protected]
1 Leopold Wellisz, Foreign Capital in Poland (London: George Allen and Unwin, 1938), 164–5.
2 Christina D. Romer, ‘The Nation in Depression’, Journal of Economic Perspectives, 7, 2 (1993), 19–39.
3 Leszek Balcerowicz, ‘Transition to the Market Economy: Poland, 1989–1983 in Comparative Perspective’, Economic Policy, 9, 19 (1994), 71–97, 78–80.
Contemporary European History, 21, 2 (2012), pp. 193–214 C  Cambridge University Press 2012
doi:10.1017/S0960777312000112
194

Contemporary European History failed to produce a fast economic catch-up, and the country remains significantly underdeveloped today.
The only period of brisk economic growth that free and sovereign Poland
experienced during the past ninety years is associated with significant government  investment in 1936–9. Present-day Poland seems to be in great need of a modern  version of such a strategy and the decision-makers may want to revisit the events that  took place during those years.
Poland’s libertarian traditions  Poland’s tradition has been par excellence libertarian, if not anarchistic.

4 The liberties  (or the ‘Golden Freedom’ as they were once called) that the dominant societal class,  the nobility (szlachta), enjoyed in the Polish-Lithuanian Commonwealth had few contemporary parallels. By the mid-seventeenth century, the Crown enjoyed very limited power, a single deputy had the right to block any bill in the parliament (the  Liberum Veto) and nobles enjoyed a constitutional right to rebel against the King.

5 The legislative power devolved to provincial dietines (sejmiki) rendering the national  parliament (Sejm) critically dependent on, if not subordinate to them.

6 The nobility  was so distrustful of the central power of the state that the Crown was deprived of the means to execute law and the administration of justice became ‘extremely  haphazard’.

7 As a result, unlike in the rest of Europe, central bureaucracy did not
develop.

8 By the late seventeenth century Golden Freedom had left Poland in a state
of ‘paralysis punctuated by anarchy’.

9 Because the nobility completely controlled the legislative and the Crownwasweak, the szlachta ‘monopolised the wealth, the power and the administration, secular and spiritual, social and political of the whole countryside’.

10 The nobility extended its liberties to the economic sphere: nobles paid exceptionally low taxes and were free from import duties, fees and tolls.11 Consequently, the central government had very little revenue.

12 4

Norman Davies, God’s Playground: A History of Poland, 2 vols. (New York: Columbia University Press,
1984), vol. 1, 321.
5 Thomas Munck, Seventeenth Century Europe: State, Conflict and the Social Order in Europe 1598–1700
(New York: St. Martin’s Press, 1990), 203.
6 Davies, Playground, vol. 1, 323–30.
7 Davies, Playground, vol. 1, 348–55, here 351.
8 Jerzy Lukowski and Hubert Zawadzki, A Concise History of Poland (Cambridge: Cambridge University
Press, 2001), 68.
9 M. B. Biskupski, The History of Poland (Westport: Greenwood Press, 2000), here 17.
10 W. F. Reddaway, J. H. Penson, O. Halecki and R. Dyboski, eds, The Cambridge History of Poland: From
Augustus II to Pilsudski (1697–1935) (London: Cambridge University Press, 1951), xiv.
11 M. K. Dziewanowski, Poland in the Twentieth Century (New York: Columbia University Press, 1977),
19–21.
12  In 1785 per capita tax revenues were equal to 35 English shillings in the Netherlands, 34 in Great Britain  and to 1 in the Polish-Lithuanian Commonwealth: R.R. Palmer, The Age of Democratic Revolution: A
Political History of Europe and America, 1760–1800, vol. 1: The Challenge (Princeton: Princeton University  Press, 1959), 155.
National Heritage and Economic Policies in Free and Sovereign Poland after 1918 195
Table 1. Manufacturing production (1913 = 100)
1920 1929 1938
Czechoslovakia 69.8 171.8 145.5
Hungary 48.0 113.8 143.2
Finland 87.5 197.8 300.4
Poland 35.1 85.9 105.3
Romania 35.0 136.9 165.9
Europea 77.3 127.8 140.8
World 93.6 154.6 184.6
a18 countries
Source: Svennilson, Growth and Stagnation, 304–5.
The szlachta considered liberty the greatest gift fromGod, and therefore considered  the Polish political system part of the divine order of the universe and, as such, one that should never be changed. Consequently, ‘the state was static. Its only purpose and justification resided in the preservation of liberty and liberties’ of the  nobility.

13 Although, in the last quarter of the eighteenth century the ideas of the
Enlightenment were embraced by a segment of the elites, which in 1791 led to
the enactment of the Constitution of 3 May, the demise of the Polish-Lithuanian
Commonwealth that took place just four years later brought such changes to an abrupt  halt.
Poland’s underdevelopment in the wake of the First World War
In 1918 Poland regained independence and found itself in a very difficult economic  situation. The partitions had lasted over a century and Poland’s territory had been  effectively divided into three distinct economic regions, each connected to its former  centre.

14 The occupying empires, at best, provided little encouragement to economic
development and, at worst, directly discriminated against the Poles.

15 Moreover, the  region was among the most devastated in the First World War, and the following  wars of independence ravaged Poland for two more years. As a consequence,  the country was devastated and manufacturing output dropped precipitously.

16  Among East-Central European nations only Romania suffered a comparable decline
(Table 1).
13 Jerzy Lukowski, ‘Political Ideas Among the Polish Nobility in the Eighteenth Century (to 1788)’, The  Slavonic and East European Review, 82, 1 (2004), 1–26, here 12.
14 J. Taylor, Economic Development of Poland 1919–1950 (Ithaca: Cornell University Press, 1952), 18.
15 Frank B. Tipton and Robert Aldrich, An Economic and Social History of Europe, 1890–1939 (Baltimore:
Johns Hopkins University Press, 1987), 37.
16 Ingvar Svennilson, Growth and Stagnation in the European Economy (Geneva: United Nations Economic
Commission for Europe, 1954), 305.
196 Contemporary European History
Poland in the 1920s
In the pre-1795 Polish-Lithuanian Commonwealth, the nobility had comprised up to   10% of the total population, a relatively large proportion.17 After the partitions many  landless nobles moved to towns and joined the free professions and civil service.
Consequently, in 1918 the ruling class of the reborn Poland ‘comprised a landowning   aristocracy and a mainly non-commercial middle class of aristocratic origin . . .
[which] kept the mentality of the aristocracy, and [remained] different in character
from the bourgeoisies of either Western or South-Eastern Europe’. 

18  Poland successfully overcame enormous challenges after November 1918, to a
large degree because Marshal Joseph Pilsudski exercised strong executive powers
independently of the Diet.19 A provisional constitution was adopted, a parliament
was elected, a single currency replaced the six that were in circulation and the war
against Soviet Russia was won. The transition period came to an end with the
adoption of the Constitution of March 1921 and elections to a new Diet in the
following year. The Constitution called for a parliamentary democracy with a weak
executive. The main reason behind this choice, apart from personal animosities, was  an effort to prevent tyranny, this time in the form of Pilsudski, the man who had   successfully led the war effort.
In a nation with numerous ethnic minorities and a very stratified society the system  produced a fragmented electorate.20 As a result, forming governments and passing  new legislation became difficult and the pace of reform slowed down. Currency  unification was not followed with the establishment of a central bank. A common  fiscal system did not emerge until the autumn of 1925 and a single land tax was not  introduced until 1936.

21 The process of unification of business law took equally long.
For instance, a Code of Civil Procedure appeared in 1933 and a Commercial Code
a year later.

22 Courts were not immune to the overall paralysis and contracts were
enforced less forcefully than before the First World War.

23  However, the slow unification of government finances proved to be the delay that was the most detrimental to the economic health of the new state. In 1921 the budget deficit exceeded 55% of expenditure. The deficit was reduced to less than 7% in the
17 Lukowski and Zawadzki, History, 67.
18 Hugh Seton-Watson, Eastern Europe between the Wars, 1918–1941, 3rd edn (New York: Harper and
Row, 1967), 123–4. The author speaks of ethnic Poles and ignores a very large and business-oriented
Jewish community: Joseph Marcus, Social and Political History of the Jews in Poland, 1919–1939 (Berlin:
Mouton Publishers, 1983).
19 J. H. Penson, ‘The First Years of the Republic’, in Reddaway, Penson, Halecki and Dyboski, History,
567–88, 576.
20 A. J. Groth, ‘Polish Elections 1919–1928’, Slavic Review, 24, 4 (1965), 653–5.
21 Zbigniew Landau, ‘The Economic Integration of Poland 1918–23’, in Paul Latawski, ed., The
Reconstruction of Poland, 1914–1923 (London: Macmillan, 1992), 144–57, 149.
22 Ferdynand Zweig, Poland between Two Wars: A Critical Study of Social and Economic Changes (London:
Secker and Warburg, 1944), 30.
23 Władysław Grabski, Dwa lata pracy u podstaw pa´nstwowo´sci naszej 1924–1925, ed. Marian Marek
Drozdowski, 2nd edn (Warsaw: Szkoła Główna Gospodarstwa Wiejskiego, 2003), 275.
National Heritage and Economic Policies in Free and Sovereign Poland after 1918 197
following year, but in 1923 it swelled back to the 1921 level.24 This took place in
spite of rapid economic recovery.25Wages and salaries of government employees were  adjusted for inflation but taxes were not and the situation got progressively worse.
Moreover, ‘tax evasion had historically seemed a patriotic duty to Poles, who did
not much alter their habits now that the nation was independent’.26 To bridge the
shortfall the government resorted to the printing of money.
Inflation turned into hyperinflation as the amount of notes in circulation
skyrocketed from 793 billion Polish marks in 1922 to 125,372 billion in 1923.

27 Real wages of workers plunged and in the autumn of 1923 a wave of strikes and riots   swept throughout the nation. In several cities bloody fighting erupted and dozens
were killed.

28 The situation became critical. To stabilise the economy, the Sejm
agreed to revalue taxes, impose a tax on wealth and cut government expenditure.

29 A government of experts headed by Władysław Grabski obtained from the Diet
significant freedom in implementing the program. These steps brought about a quick  turn for the better, and in early 1924 the budget was in balance and the currency   stopped depreciating.

30 The following year, however, problems emerged because tax
revenues fell short of the goal. Grabski believed that the Parliament’s prescribed 333
million per year in wealth taxes were too onerous and aimed at collecting only 200
million; he therefore did not enforce the law vigorously.

31 In 1924 he accomplished his
goal, but the following year this tax yielded only 61.4 million, a budget gap emerged  again and the plan collapsed. In 1926 a new government increased taxes by 10% and  balanced the budget.

32 As a result, by the middle of 1926 the economy was stabilised  and growth was restored. But on 12 May Pilsudski staged a coup d’état and, as a result,
the executive branch was strengthened.33 Political stability and economic prosperity  in the late 1920s enabled the government to record fiscal surpluses – sometimes  substantial – up until 1931.

34 The surpluses were by no means a result of onerous taxation; as in the Polish-
Lithuanian Commonwealth, taxes were low. In 1929 the total revenue of the central   government amounted to 9.3% of national income, compared to 12.0, 15.0, 15.4,
24 Taylor, Poland, 45.
25 Janusz Kali´nski and Zbigniew Landau, Gospodarka Polski w XX wieku (Warsaw: Polskie Wydawnictwo
Ekonomiczne, 1998), 57.
26 Richard M.Watt, Bitter Glory: Poland and Its Fate 1918 to 1939 (New York: Simon and Schuster, 1979),
203.
27 League of Nations, Statistical Year-book, 1926, 143, available at: http://www.library.northwestern.
edu/govinfo/collections/league/stat.html# (last visited 26 Oct. 2010).
28 Watt, Glory, 204–5.
29 Zbigniew Landau and Jerzy Tomaszewski,Wdobie inflacji 1918–1923 (Warsaw: Ksia˛z˙ka iWiedza, 1967).
30 In 1924 the depreciated mark was exchanged into zlotys at the rate of 1,800,000 marks to one zloty.
The value of the zloty was made equal to one gold franc: Janusz Skodlarski, Zarys historii gospodarczej
Polski (Warsaw: Wydawnictwo Naukowe PWN, 2005), 245–6.
31 Grabski, Dwa, 255.
32 Władysław Malinowski, Stabilizacja waluty w Polsce w latach 1924 i 1927 w ´swietle literatury (Cracow:
Towarzystwo Ekonomiczne w Krakowie, 1933), 21.
33 Biskupski, History, 78.
34 GłównyUrza˛d StatystycznyRzeczypospolitej Polskiej (GUS)Mały Rocznik Statystyczny, 1931 (Warsaw:
Główny Urza˛d Statystyczny Rzeczypospolitej Polskiej, 1931), 148.
198 Contemporary European History
Table 2. Real GDP per capita (Poland = 100)
Year Bulgaria Finland Hungary Romania 12-WEC U.S.A.
1929 55.7 128.3 116.9 54.4 207.2 325.8
1936 91.9 201.8 161.2 73.5 277.7 381.9
1938 73.1 164.5 121.7 56.9 220.8 280.7
Note: 12-WEC (Western European Countries) includes Austria, Belgium, Denmark, Finland, France,
Germany, Italy, Netherlands, Norway, Sweden, Switzerland and the United Kingdom.
Source: Maddison, Historical Statistics.

19.2 and 22.8% in, respectively, Bulgaria, Yugoslavia, Czechoslovakia, France and
Hungary.

35 Similarly, national debt was held at a relatively very low level.
The concept of limited government perfectly meshed with the economic views
of the classical school. In Poland the main proponents of this position belonged to
the very influential ‘Cracow school’ headed by Professor Adam Krzy˙zanowski.

36 The  Parliament was dominated by the pro-business Right and activist policies found no  support there. The Pilsudski regime espoused equally conservative economic views.

37  In sum, the nation adopted an economic model characterised by the minimal role of central government in economic affairs, a focus on a balanced budget, and price and exchange-rate stability.

38 Such policies could hardly work in a society in which about 70% of the population
active in the labour force were employed in agriculture. Moreover, agriculture was
dominated by very small, subsistence landholdings. A significant number of those
living in the villages had no land at all and there were as many as 4.8 million
redundant people of working age living in the countryside.39 In 1925 land reform was
finally enacted, but the law made sure to minimise government’s involvement and,
consequently, progress was very slow.
In sum, the country was poor – probably as much as a quarter of its population
was living close to starvation.40 The difference in real GDP per capita between Poland
and developed countries was huge (Table 2).
The experiences of the early 1920s show that some 120 years after the demise
of the Polish-Lithuanian Commonwealth the traditions of the Nobles’ Democracy
35 GUS, Rocznik, 1937, 61, 357; Brian R. Mitchell, International Historical Statistics: Europe, 1750–1988
(New York: Stockton Press, 1992).
36 Malinowski, Stabilizacja, 10.
37 Zweig, Poland, 49.
38 Zbigniew Landau andWojciech Roszkowski, Polityka gospodarcza II RP i PRL (Warsaw:Wydawnictwo
Naukowe PWN, 1995); Skodlarski, Zarys historii.
39 Ludwik Landau, Jerzy Pa´nski and Edward Strzelecki, Bezrobocie w´sród chłopów (Warsaw: Instytut
Gospodarstwa Społecznego, 1939), 247. In 1935, the total population of Poland was 33.8 million
(League, Year-book, 1936–1937, 18).
40 Taylor, Poland, 29.
National Heritage and Economic Policies in Free and Sovereign Poland after 1918 199
were not entirely forgotten.41 Small, weak government, and a powerful, but badly
split legislative, as well as low taxation produced similar results – considerable
periods of political chaos and economic dislocation.42 The May 1926 coup brought  about stability, but the new regime (called Sanacja, or Regeneration) failed to  address fundamental economic problems, in particular land reform, industrial  underdevelopment, backward infrastructure and low competitiveness. Poland paid  a tremendous price for this omission during the Great Depression.
International competitiveness of the economy
Foreign trade data illustrate the relative underdevelopment of the country. Although
between 1923 and 1929 Polish exports grew from 2.06 to 2.81 billion constant 1927   zlotys, the rise was entirely due to an increase in exports of live animals, foodstuffs,  raw materials and semi-finished goods. On the other hand, exports of finished goods   recorded a decline in both absolute and relative terms: from 744 million zlotys (36.2%
of the total) to 552 million (19.6%).43 In comparison to other nations, the share of
finished goods in total exports was very low; for instance, in 1929 it was equal to 31.2,
33.0, 67.9 and 71.6% in, respectively, Estonia, Latvia, France and Czechoslovakia.44
The situation did not change much in the first half of the 1930s. Table 3
demonstrates that both in terms of the volume of exports per capita and the
composition of exports, Poland lagged behind not only the most developed nations,
but also its East-Central European competitors. The table also shows that in 1937
exports of ‘more elaborately transformed goods’ made less than 16% of the total. But
highly processed animal- and plant-based products made 81 million of the total of
190 million zlotys. On the other hand, the value of exported machinery and electrotechnical   products, pharmaceuticals and chemicals (including rubber), and means of  transportation was only 8, 11 and 1 million zlotys, respectively.

45  Poland was suffering from a shortage of capital and, as a result, the economy
was dominated by foreign interests that controlled key sectors of the economy. In
1933 foreigners controlled as much as 45.4% of equity capital of all publicly held
corporations.

46 The international investment position was very negative throughout
the inter-war period and foreign capital ‘was often of speculative kind’ and played
a ‘significant, if not always a beneficial role’.47 Nevertheless, the Polish government
41 ‘Poland’s aristocratic tradition was probably up to the Second World War stronger than elsewhere in
Europe’: Marcus, Jews, 6.
42 Marcus, Jews, 18–19.
43 GUS, Rocznik, 1930, 66–7.
44 League, Year-book, 1933–1934, 171–2.
45 GUS, Rocznik, 1939, 172.
46 GUS, Rocznik, 1938, 98.
47 The net investment position was negative 8.84 billion zlotys in 1929 and it declined to negative 6.5
billion zlotys in 1937 (GUS, Rocznik, 1931, 88; GUS, Rocznik, 1939, 242); P. Wandycz, The Price of
Freedom: A History of East Central Europe from the Middle Ages to the Present (New York: Routledge,
1993), 207.
200 Contemporary European History
Table 3. Foreign trade and exports structure
Total foreign trade
(zlotys/person) 1937 exports (% of total)
More elaborately
Country 1928 1937 Crude goods transformed goods
Czechoslovakia 733 276 15.5 59.9
Denmark 2,171 992 24.4 15.8
France 901 340 21.5 49.9
Hungary 370 185 48.2a 14.0a
Poland 193 71 42.1 15.9
Romania 183 102 N.a. N.a.
U.K. 1,708 816 12.3 65.2
U.S.A 676 253 27.9 44.0
a1938
N.a. – not available
Sources: GUS, Rocznik, 1939, 162; League, Year-book, 1938–9, 217.
Table 4. Balance on trade (goods and services), capital (capital and gold) and income flows (in mil. zlotys)
1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937
Trade −219 −711 −142 +284 +489 +330 +293 +306 +208 +183 +97
Capital +223 +1002 +512 −275 −65 −45 −130 −157 −86 −129 −163
Income −230 −284 −379 −450 −417 −285 −212 −166 −145 −172 −177
Sources: GUS, Rocznik, 1936, 158; GUS, Rocznik 1939, 244.
strove to attract more of it. To accomplish this goal, from 1927 on Poland kept the
value of its currency tied to gold at a fixed rate. The exchange rate was kept constant  despite significant trade deficits in 1927–9 (Table 4).
The current account problems arose from the overvaluation of the exchange rate
set in 1927.

48 The situation turned dramatic during the Great Depression, when an
overwhelming majority of nations resorted to devaluations (sometimes drastic) and
foreign exchange restrictions (Table 5). On the other hand, Poland adhered to the
gold standard and suffered a debilitating outflow of official reserves: between 1927  and 1936 its value declined from 1,412 to 423 million zlotys.

49  Initially, Poland refrained from increasing tariffs and imposing quotas.

50 Instead,  the country addressed trade imbalances with heavy export subsidies at an estimated
48 Taylor, Poland, 146.
49 GUS, Rocznik, 1939, 213.
50 Henryk Zieli ´ nski, ‘Poland’s Economy between Two Wars’, in Bernadotte E. Schmitt, ed., Poland
(Berkeley: University of California Press, 1945), 169–83.
National Heritage and Economic Policies in Free and Sovereign Poland after 1918 201
Table 5. Nominal change in the value of currencies against the Polish zloty (between December 1928 and
March 1938) and dates (month and year) on which foreign exchange restrictions were imposed
Czecho-  Country slovakia Denmark France Hungary Italy Romania U.K. U.S.A.
Change (%) −29.9 −50.5 −53.2 −31.9 −40.1 −26.5 −39.1 −40.4
Restrictions 10/1931 11/1931 7/1931 5/1934 5/1932 9/1931a
aOnly between 6 March 1933 and 12 November 1934.
Source: GUS, Rocznik, 1938, 218.
Table 6. Changes from the peak (1928 or 1929 = 100) to the trough
Czecho-
Country slovakia Finland France Hungary Italy Poland U.K. U.S.A.
Industrial output 60 78 67 77 67 54 84 54
Steel production 31 n.a. 59 35 66 39 54 27
Employment 75 75 74 80 79 63 92 61
Stock market 52 n.a. 33 39 45 19 59 24
Gov. revenue 76 58 67 79 89 60 n.m. 52
n.a. – not available
n.m. – not meaningful, government revenue was declining until 1929 and rose afterwards.
Sources: GUS, Rocznik, 1938, 3, 7; League, Year-book, 1935–6, 68; League, Year-book, 1936–7, 164, 250.
annual cost of up to 500 million zlotys.51 Nevertheless, in 1938 Polish exports per
capita exceeded only those of Albania, compared to 1929 when Poland was also ahead
of Yugoslavia, Romania and Bulgaria.52
The Great Depression
The Great Depression had a profound impact on the economic activity and standard  of living in Poland. Between 1929 and 1933 nominal national income fell by 43%,  while, for instance, GDP in Great Britain, France and in both Bulgaria and Romania  declined by 9, 27 and 40%, respectively.53 Also in Poland a very low level of economic  activity persisted much longer.54 Table 6 illustrates changes in industrial output,  production of steel, employment in big and medium-size enterprises, stock market  level (industrial firms), and government revenue from taxes, duties and monopolies
from the peak level attained in 1928 or 1929 ( = 100) to the trough of the Depression 
51 Jerzy Tomaszewski and Zbigniew Landau, Polska w Europie i ´swiecie, 1918–1939 (Warsaw:Wydawnictwo
TRIO, 2005), 221; Kali´nski and Landau, Gospodarka, 122.
52 Tomaszewski and Landau, Polska, 242.
53 GUS, Rocznik, 1937, 61.
54 Marcus, Jews, 4–5.
202 Contemporary European History
in a number of nations. The table shows that Poland experienced an appalling decline  in the level of economic activity.
In the 1920s the United States imposed restrictions on immigration; a step that
adversely affected nations with a labour surplus.55 An excess supply of primary
commodities depressed prices and made it difficult for agriculture-based economies   to borrow and service existing debts.56 The Fed adopted contractionary monetary
policy in early 1928. This step was particularly ominous for Central and Eastern
European countries, because a very significant part of their borrowing was shortterm.
57 Poland relied on workers’ remittances, foodstuffs and coal made up most of
its exports, capital inflows were very important for investment and commerce and,
consequently, the nation started on a downward path even before economic crisis
erupted in America.58 The policy response of strict adherence to the gold standard
and the resulting deflation only made things worse.
Agriculture, the most important segment of the economy, was ruined. Between
1927–8 and 1931–2 the average net income of smaller farms declined from 210 zlotys
to 11 zlotys per hectare.59 Likewise, between 1929 and the trough of the Depression  the wages of agricultural workers were halved, while incomes of those employed in
industry dropped by only a quarter.60
A by-product of the laissez faire policy was a steady growth in the degree of
monopolisation. In 1923 there were only 31 cartels, but by 1928 the number grew
to 133, and it expanded to 274 by the end of 1935.61 During the years 1928–6 the
price index of products charged by cartels declined only by 25%.62 This development
hindered the goal of regaining international competitiveness through deflation. On  the other hand, it depressed real incomes of peasants who over the same period saw  the prices of goods they sold drop by two thirds.
Moreover, to attract foreign capital the Bank of Poland kept interest rates at a
very high level throughout the 1930s. In addition, Poland refrained from devaluing
its currency and in 1933 joined the Gold Bloc.63 But all this was to no avail. Poland
was perceived to be a risky investment and foreign firms transferred out interest and
55 David Khoudour-Castéras, ‘Labour Immobility and Exchange-Rate Regimes: An Alternative
Explanation for the Fall of the Inter-war Gold-Exchange Standard’, Journal of European Economic
History, 38, 1 (2009), 13–47.
56 Charles P. Kindleberger, The World in Depression 1929–1939 (Berkeley: University of California Press,
1973), 83–107.
57 Patricia Clavin, The Great Depression in Europe: 1929–1939 (New York: St. Martin’s Press, 2000), 85–6.
58 Barry Eichengreen, ‘The Origins and Nature of the Great Slump Revisited’, Economic History Review,
XLV, 2 (1992), 213–39.
59 GUS, Rocznik, 1934, 26.
60 GUS, Rocznik, 1939, 269, 274.
61 GUS, Rocznik, 1937, 107. In the following three years, however, over 100 national cartels were dissolved
(GUS, Rocznik, 1939, 122).
62 GUS, Rocznik, 1939, 245.
63 Tomaszewski and Landau, Polska, 191. Nations that floated their currencies early managed to recover
from the Great Depression much faster than those that did not: E. Choudhri and L. Kochin. ‘The
Exchange Rate and the International Transmission of Business Cycle Disturbances’, Journal of Money,
Credit, and Banking, 12, 4 (1980), 565–74.
National Heritage and Economic Policies in Free and Sovereign Poland after 1918 203
dividend incomes. Over the period of 1930–7 total net capital outflows were equal
to 3.1 billion zlotys (Table 4).64
Poland maintained a fixed exchange rate even after the Bloc disintegrated in 1936.
The government only introduced foreign exchange controls, suspended servicing
foreign debts and imposed import quotas.

65  Despite the exceptionally strong deflationary policy the real value of the zloty
increased by 9.8, 18.9 and 28.0% against, respectively, the British pound, American
dollar and French franc between 1929 and 1938. This depressed exports and caused a  tremendous drop in the level of economic activity, especially in investment. By 1932  the index of real investment plunged to 36 (1928 = 100) and by 1937 it recovered  only to 61.66 As a result of insufficient investment, in 1936 total productivity was equal  to one fifth of the European average, while for instance in Czechoslovakia it stood at
two-thirds.

67  In sum, Poland paid an extraordinary price for sticking to the gold standard.
Fixed exchange rates especially depressed the incomes of farmers who were not
getting higher prices for exports. On the other hand, the monopolisation of
industry prevented a comparable decline in the prices of goods farmers bought
and subsequently the price scissors widened. As a result, peasants lost whatever little
purchasing power they had and the countryside reverted to the state of natural
economy.

68
The Kwiatkowski Plan
The situation became unbearable and Poland entered a period of unprecedented
social unrest. In 1930 there were only 312 strikes involving a total of 48,000 workers,  but by 1936 the numbers increased to, respectively, 2,056 and 675,000.69 Even more  serious was the situation in the countryside, where a small-scale guerilla war erupted  and dozens were killed.

70 As in 1923, the situation became dire and the Sanacja was
forced to act.
In July 1936, Deputy Prime Minister Eugeniusz Kwiatkowski introduced the
Four-Year Plan, which envisaged a modest increase in government spending.

71 The  64 According to Eugeniusz Kwiatkowski, total central government investment spending on the Four-  Year Plan (discussed below) was less than two billion zlotys: Eugeniusz Kwiatkowski, Gospodarstwo
Polski Niepodległej w okresie mi˛edzywojennym 1919–1939, ed. Marian Marek Drozdowski (Stalowa Wola:
Wydawnictwo Sztafeta, 2002).
65 Antony Polonsky, ‘Chapter 7: Poland without Pilsudski’, in R. F. Leslie, ed., The History of Poland
since 1863 (Cambridge: Cambridge University Press, 2004), 186–208.
66 GUS, Rocznik, 1937, 60.
67 Wandycz, Price, 208–14.
68 Eugeniusz Kwiatkowski, W walce z teraz´niejszo´scia˛ o lepsza˛ przyszło´s´c gospodarcza˛: Przemówienie na
plenum Sejmu w dniu 5 grudnia 1935 r. (Warsaw: Nakładem Tygodnika ‘Polska Gospodarcza’, 1935), 18.
69 GUS, Rocznik, 1938, 271.
70 Davies, Playground, vol. 2, 412.
71 The plan was actually accomplished in less than three years and, hence, is frequently called the
Three-Year Plan.
204 Contemporary European History
private sector failed to take advantage of this effort.72 Nevertheless, the programme
turned out to be a great success; by the end of 1938 the index of industrial production
rose by 40% from the 1935 level.73 This compared very favourably with both industrial
powers and developing nations. For instance, over the same period industrial output
rose by 6, 10, 17, 20 and 35% in, respectively, Italy, Great Britain, Finland, Hungary
and Germany, and it declined by 5% in the United States. Over the same period real
GDP grew by a stunning 40.9 per cent.74 Nevertheless, this leap was not sufficient
to recover the lost ground to many regional competitors and developed nations
(Table 2).
This impressive reversal in Poland’s economic performance resulted almost
exclusively from the government’s surge in investment spending on infrastructure
and heavy industry, including arms manufacturing. By the outset of the Second
World War the index of production of investment goods had increased by over 78%
and that of consumer goods by only 29%.

75
Although fiscal policy was instrumental in this rapid economic expansion, the
effort was financed by a massive increase in money supply.76 The amount of notes in circulation rose by almost 33% in 1938 and by another 37% in the first eight months  of 1939.

77 Yet, this tremendous increase in money in circulation had no impact on the
overall price level. At the end of 1937, the index of wholesale prices stood at 60.3 and  by July of 1939 it had actually declined to 58.0 (1929 = 100).78 This development was  not surprising given that in the middle of 1939 the number of registered unemployed  (414,500) was 3.3 times larger than the level recorded in 1928.79 Poland also had an  enormous number of people underemployed in agriculture, so the vast increase in  money supply had no impact on wages and the overall price level.
The immense growth in money supply also did not affect the total value of
deposits in commercial banks; at the end of 1938 it stood at 1,393 million zlotys,
an increase of 34 million (2.5%) from the year before.80 This miniscule expansion
reflected weak demand for loans resulting from widespread pessimism among private
investors. Because commercial banks had little incentive to attract more deposits,
there was no multiplier effect and, consequently, there was no upward pressure on  prices. The government also imposed higher taxes, primarily on salaries, wages and
72 Eugeniusz Kwiatkowski, Obraz gospodarstwa Polski w roku 1937: Przemówienie wygłoszone w Sejmie w  dniu 1 grudnia 1937 r. (Warsaw: Nakładem Tygodnika ‘Polska Gospodarcza’, 1937), 56.
73 GUS, Rocznik, 1939, 3.
74 Angus Maddison, Historical Statistics of the World Economy: 1–2008 AD, available at
www.ggdc.net/maddison/Historical_Statistics/vertical-file_02–2010.xls (last visited 16 Oct. 2010).
75 League, Year-book, 1939–1940, 165.
76 Rapid monetary expansion was decisive in overcoming the Great Depression in the U. S.: Christina
D. Romer, ‘What Ended the Great Depression?’ Journal of Economic History, 52, 4 (1992), 757–84.
77 League, Year-book, 1939–1940, 219.
78 League, Year-book, 1939–1940, 207.
79 League, Year-book, 1932–1933, 42; League, Year-book, 1939–1940, 71.
80 League, Year-book, 1939–1940, 233.
National Heritage and Economic Policies in Free and Sovereign Poland after 1918 205
pensions. But by the end of 1938 real GDP per capita was about 36.6% higher than
in 1935, limiting the tax’s negative effect.81
A modest increase in internal borrowing provided another source of funding. This
source of funds was neglected throughout the inter-war period despite the fact that   the level of national debt was very modest by international standards at the time.
In 1936 it stood at 136 zlotys per capita while, for instance, in Romania, Denmark,
Czechoslovakia and France it was equal to, respectively, 286, 425, 652 and 4,248
zlotys.82 Poland had practically no external funding – only a 2.6 billion franc loan
obtained from France in January 1937.

83
The Kwiatkowski plan was significantly different in character from, for instance,
the contemporaneous effort in Nazi Germany. The latter was focused above all on
war preparation. Kwiatkowski, however, understood that Poland needed investments   that could foster economic growth during times of peace.84 For example, he boasted  that in 1937 the state built ‘11 granaries, 67 creameries, 36 fruit warehouses, 2 oil   expelling plants, etc.’85 Only about a third of all funds were allocated to the arms   industry.

86
Grabski’s earlier reforms had been met with sharp criticism; there had been no end   to the complaints of fiscal oppression.87 The Kwiatkowski plan was met with similar   protests, and proponents of small government produced volumes of research showing   how inefficient state-run firms were. But most of their claims were unfounded.

88
Nevertheless, the government was criticised for pursuing statism to such an extent  that Kwiatkowski felt obliged to keep defending his policies.89 These accusations were  also not accurate, because the government was filling a void rather than displacing   the private sector.
The Grabski and Kwiatkowski reforms had another thing in common, both were
introduced when the executive branch was strengthened. Grabski operated largely   beyond the Sejm’s control. Kwiatkowski’s programme was initiated after the new   Constitution of 1935 invested the president with very extensive powers.

90
The great achievements of the Four-Year Plan laid the groundwork for a fifteenyear    programme, divided into five three-year plans, of far-reaching modernisation of

81 Maddison, Statistics.
82 GUS, Rocznik, 1938, 360.
83 Wellisz, Capital, 59. Until Sept. 1939 Poland received only a small fraction of the nominal sum
(Skodlarski, Zarys historii, 306).
84 Jerzy Goł˛ebiowski, ‘Polityka inwestycyjna Eugeniusza Kwiatkowskiego w latach 1936–1939’, Rocznik
Naukowo-Dydaktyczny WSP w Krakowie, 5 (1970), 279–91.
85 Kwiatkowski, Obraz, 30.
86 Marcus, Jews, 367.
87 Grabski, Dwa, 203–15.
88 Jerzy Goł˛ebiowski, ‘Zagadnienie rentowno´sci przedsi˛ebiorstw pa´nstwowych w Polsce    mi˛edzywojennej’, Studia Historyczne, XXIX, 4 (1986), 567–83.
89 Kwiatkowski, W walce, 42–3, Kwiatkowski, Obraz, 70–1.
90 Although the Constitution reflected a very strong authoritarian tendency within the Sanacja, the
regime also included a liberal faction. President Ignacy Mo´scicki and Kwiatkowski represented the   liberal wing (Marcus, Jews, 352–3).
206 Contemporary European History
the Polish economy.91 Unfortunately, the outbreak of the SecondWorldWar brought   a sudden end to this enterprise.
The 1936–9 period showed that Poland had the capacity to fund its own progress
and did not need to rely on foreign investment. It also indicated that Poland’s earlier   inter-war economic policy of attracting foreign capital, budget discipline, price   and exchange-rate stability, and an exceedingly limited government engagement    in economic affairs was probably misguided. The Four-Year Plan showed that there   was an alternative, a government-led effort to modernise the economy.

92
Poland after 1989 – the shock therapy
Nevertheless, experiences of the eighteenth century and the inter-war period seem
to be forgotten in present-day Poland. In 1989, after forty-five years of rapid, but
frequently misguided industrialisation, the country implemented a radical reform
founded on a neo-liberal economic model – ‘shock therapy’.
The programme was based on the so-calledWashington Consensus, a concept that
by now has lost most of its former glamour.93 The details of the plan were prepared    by Leszek Balcerowicz’s team in haste and without any consultations with other   economists, except for experts from the International Monetary Fund (IMF).94 No
attention was paid to foreign independent research which, for instance, forewarned   that ‘it is impractical – indeed suicidal – to make such a transition “overnight”’.

95
Also, a call for the erection of import tariffs to protect local industries against superior    foreign competitors during the transition period was ignored.96 A prediction that a   complete lack of competition in all markets could result in a Great-Depression-like    economic collapse was equally disregarded.

97
The most important features of the programme included rapid deregulation of the
economy, in particular the ending of most price controls, balancing the budget, quick
91 Eugeniusz Kwiatkowski, O wielko´s´c Rzeczypospolitej, Przemówienie wygłoszone w Sejmie w dniu 2 grudnia
1938 r. (Warsaw: Nakładem Tygodnika ‘Polska Gospodarcza’, 1938).
92 Other major economic ‘success stories’ of the inter-war period, including the construction of the
Gdynia seaport, the railway connecting the Silesian coal basin with Gdynia, and the fertiliser plant in
Mo´scice (Tarnów), were also government initiatives.
93 Dani Rodrik, ‘Goodbye Washington Consensus, Hello Washington Confusion? A Review of the
World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform’, Journal of
Economic Literature, XLIV, 4 (2006), 973–87.
94 Maciej Bałtowski and Maciej Miszewski, Transformacja gospodarcza w Polsce (Warsaw: Wydawnictwo
Naukowe PWN, 2006), 183–4. In the West, the main advocates of this approach were David Lipton
and Jeffrey Sachs: ‘Creating a Market Economy in Eastern Europe: The Case of Poland’, Brookings
Papers on Economic Activity, 1 (1990), 75–133.
95 E. A. Hewitt, ‘Economic Reform in the USSR, Eastern Europe, and China: The Politics of
Economics’, The American Economic Review, 79, 2 (1989), 16–20, here 18. Unfortunately, the outcome    was in line with that predicted by the author – wildly fluctuating relative prices and quantities and
massive unemployment.   

96 Timothy Snyder, ‘Soviet Monopoly’, in John Williamson, ed., Economic Consequences of Soviet
Disintegration (Washington, D.C.: Institute for International Economics, 1993), 175–243.
97 Kazimierz Dadak, ‘U progu Wielkiej Depresji?’, Kontakt, 101/102 (1990), 75–87.
National Heritage and Economic Policies in Free and Sovereign Poland after 1918 207
privatisation of state-owned enterprises, dismantling of trade barriers, and attracting
foreign portfolio and direct investment.98 Consequently, the role of the government   in the economy was drastically reduced. The quick loosening of government shackles    was supposed to bring about a robust growth rate.99 Unfortunately, just the opposite   happened. Between 1989 and 1991, GDP nose-dived by 18.3% and the index of
industrial production plunged to 63 (1989 = 100).100 Other nations that emulated
Poland performed as badly, or worse.

101
In Poland, initial reactions to the Balcerowicz programme were mixed.102 Since
then, foreign independent research has been less kind in the evaluation of the
programme. For instance, Joseph E. Stieglitz observed that ‘the shock therapy
approach to changing institutions is associated . . . (ironically) with Bolshevism in the    Russian Revolution’ and concluded that the present-day ‘shock therapy approach   tried to use many of the same principles for the reverse transition’.103 Robert    A. Mundell called the plan ‘a bungle of economic policy on an unprecedented
scale’.

104 Mundell also dismissed the hypothesis that the decreases in the level of
economic activity in nations that adopted shock therapy were the result of poor
national statistics.105 A comparison of the economic performance of countries that    implemented a form of shock therapy to that of China and Vietnam showed that neither the speed of liberalisation nor its degree played a significant and positive role    in a successful transformation to a market system, though a gradual reform did.

106
However, these views are not necessarily uniformly accepted.107
98 Leszek Balcerowicz, Barbara Blaszczyk and Marek Dabrowski, ‘The Polish Way to the Market    Economy 1989–1995’, in Wing Thye Woo, Stephen Parker and Jeffrey D. Sachs, eds, Economies    in Transition: Comparing Asia and Eastern Europe (Cambridge: The MIT Press, 1997); Jeffrey Sachs,
Poland’s Jump to the Market Economy (Cambridge: The MIT Press, 1993).
99 Tadeusz Kowalik, www.POLSKATRANSFORMACJA.pl (Warsaw: Warszawskie Wydawnictwo
Literackie Muza, 2009).
100 Balcerowicz, Blaszczyk and Dabrowski, ‘Polish Way’, 143; Sachs, Jump, 61.
101 Robert A. Mundell, ‘The Great Contractions in Transition Economies’, in Mario I. Blajer and Marko
Škreb, eds, Macroeconomic Stabilization in Transition Economies (Cambridge: Cambridge University
Press, 1997), 73–99. All other countries that introduced a form of shock therapy launched their
programmes at least one year later than Poland. Therefore, it is not uncommon to see studies using
1990 as the base year. This approach puts the Polish experience in a particularly good light, because
the over-10% 1990 GDP decline is omitted. In this fashion the World Bank (The First Ten Years:
Analysis and Lessons for Eastern Europe and the Former Soviet Union (Washington, D.C.: World Bank,
2002) found that ‘Poland had the shortest and mildest recession: a 6% drop in production over two
years’ (p. 3).
102 Bałtowski and Miszewski, Transformacja, 192–3.
103 Joseph E. Stieglitz, ‘Whither Reform? Ten Years of the Transition’, World Bank Annual Bank
Conference on Development Economics (Washington, D.C.: World Bank, 1999), 22.
104 Mundell, ‘Contractions’, 98–9.
105 Mundell, ‘Contractions’, 76–8.
106 Vladimir Popov, ‘Shock Therapy versus Gradualism Reconsidered: Lessons from Transition
Economies after 15 Years of Reforms’, Comparative Economic Studies, 49 (2007), 1–31.
107 For instance, Marek Dabrowski, Stanislaw Gomulka and Jacek Rostowski, in ‘Whence Reform? A
Critique of the Stiglitz Perspective’, LSE, CEP Discussion Paper no. 471 (2000), accused Stiglitz of
a ‘misinterpretation’ and ‘misdescription’ of the Chinese and former Soviet bloc transformations.
Anders Åslund, in How Capitalism Was Built: The Transformation of Central and Eastern Europe, Russia,
and Central Asia (Cambridge: Cambridge University Press, 2007), 63–9, argues that because of

208 Contemporary European History
The momentous decline in the level of economic activity produced a backlash. In
September 1993, the Alliance of the Democratic Left (SLD in Polish), the rebranded
former Communist party, won the elections and reversed many excesses of the
Balcerowicz program. The heavy, discriminatory taxation of state-owned enterprises
was lessened, large sums were spent on the restructuring of struggling firms and aid
to agriculture was restored.108
As a result, the growth rate jumped from 3.8% in 1993 to 5.2% in the following
year, and remained very strong for the following three years (Table 7).109 But the
SLD rule was marred by corruption and political scandals and the 1997 elections
returned Balcerowicz to power. As a result, neo-liberal reforms were pursued with
new enthusiasm.110 By 2001 the rate of economic growth had come to a standstill and    unemployment grew drastically (Table 7) and the SLD again won a decisive victory.
However, history did not repeat itself; this time around, there was no economic
upswing, although corruption and political scandals did reach new heights. The state     of affairs during the second SLD government approached chaos.111
Constitutional reforms 
Notwithstanding the calamity that shock therapy brought upon the country, neoliberal   views continue to dominate economic discourse in Poland. Numerous think   tanks and networks, generously supported by Western sources, have disseminated
these beliefs.112 As a result, the political programmes of the ‘liberal’ and ‘conservative’
parties in Poland continued to conform to these positions. Before the 2007 elections    faulty statistics the post-shock therapy decline was actually much lower, and approvingly quotes    Andrew Berg (‘Supply and Demand Factors in the Output Decline in East and Central Europe’,
Empirica, 21, 1994, 3–36) purporting that ‘Poland did not really see any decline in output’ (p. 69).
Bałtowski and Miszewski, Transformacja, 192, think highly of the Balcerowicz programme. Even    Grzegorz W. Kolodko, a staunch critic of the Balcerowicz programme, stresses that his views should    not be understood as supporting gradualism: Grzegorz W. Kolodko and D. Mario Nuti, The Polish
Alternative, Old Myths, Hard Facts and New Strategies in the Successful Transformation of the Polish Economy,   Institute of Finance Working Papers no. 55 (1997), 32–4.
108 Bałtowski and Miszewski, Transformacja, 265; Kolodko and Nuti, Alternative, 67. The Balcerowicz
plan created ‘one of the most liberal trade regimes in the world’ which, in turn, led to a substantial   deterioration in the current account balance, and some trade barriers had to be reinstated in Aug.
1991 (Kolodko and Nuti, Alternative, 28–9). This probably marked the first break from the shock   therapy orthodoxy.
109 As a result, Joseph E. Stiglitz, in Globalization and Its Discontents (New York: W. W.Norton and    Company, 2003), 180–1, took a positive view of Poland’s transformation.
110 An important feature of this new drive was privatisation. Kazimierz Pozna´ nski, in Wielki Przekr˛et,   Kl˛eska Polskich Reform (Warsaw: Towarzystwo Wydawnicze i Literackie, 2000), 150, estimates that
state-owned enterprises were sold at 7 to 9% of their fair value.
111 Jadwiga Staniszkis, O władzy i bezsilno´sci (Cracow: Wydawnictwo Literackie, 2006), 21.
112 Dorothee Bohle and Gisela Neunhöffer, ‘Why Is There No Third Way? The Role of Neoliberal
Ideology, Networks and Think Tanks in Combating Market Socialism and Shaping Transformation    in Poland’, in Dieter Plehwe, Bernhard Walpen and Gisela Neunhöffer, eds, Neoliberal Hegemony: A
Global Critique (New York: Routledge, 2006), 89–104.
National Heritage and Economic Policies in Free and Sovereign Poland after 1918 209
Table 7. Poland, main economic indicators (1994–2007)
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
GDP growth 5.2 7.0 6.2 7.1 5.0 4.5 4.3 1.2 1.4 3.9 5.3 3.6 6.2 6.8
(% change)
Unemployment 16.0 14.9 13.2 10.9 10.2 13.4 16.1 18.3 20.0 19.7 19.0 17.8 13.9 9.6
rate (%)
Trade balance +2.5 +2.2 −1.4 −3.9 −4.8 −5.9 −6.4 −3.7 −3.5 −2.7 −2.4 −0.7 −1.8 −2.9
(% of GDP)
Budget balance −3.1 −4.4 −4.9 −4.6 −4.3 −2.3 −3.0 −5.3 −5.0 −6.2 −5.4 −4.1 −3.6 −1.9
(% of GDP)
National debt 69.0 49.0 43.4 42.9 38.9 39.6 36.8 37.6 42.2 47.1 45.7 47.1 47.7 45.0
(% of GDP)
Sources: Eurostat, Statistics; European Bank for Reconstruction and Development, Transition Report: Ten Years of Transition (London: European Bank for Reconstruction and Development,
1999), 253.
210 Contemporary European History
both major political parties, Civic Platform (PO) and Law and Justice (PiS),
propagated low taxation and free markets.113
The current situation resembles the 1920s in many other respects. The 1997
Constitution, like that of March 1921, again gives the Sejm huge powers and greatly
limits those of the President.114 Until the 2007 elections, the Diet had been very
fragmented. As a result, reforms, especially of the legal system, had progressed very
slowly. To aggravate matters, the quality of new legislation is wanting and, as a
result, the legal system lacks consistency, functionality, stability and transparency. It
is complex and allows government bureaucrats to make arbitrary decisions regarding
important issues.115 The tax system violates some fundamental principles, specifically    those of efficiency, stability, consistency and equity,116 so it hinders entrepreneurship.117
Courts work sluggishly and prosecutors are slow to investigate corruption.118
In sum, Poland is a very weak state because power and responsibility are
decentralised. Indeed, power is often located outside formal democratic institutions    and the executive is sometimes commercialised. Jadwiga Staniszkis has therefore    concluded that ‘the state appears to be a loosely co-ordinated federation of bureaucrats’.119
International competitiveness of the economy – revisited
The gap between Poland and the developed world is still very significant and there
are few indications that the country will soon catch up (Table 8). The levels of
spending on investment and research and development are well below those recorded    by other European emerging market competitors. Poland ranks twenty-second in
the European Union in terms of innovation performance and progress in this area is    slow.120
113 Program PO, Polska zasługuje na cud gospodarczy, available at http://www.platforma.org/pl/program/
(last visited 16 Oct. 2010), PiS programme 2007 available at http://www.pis.org.pl/dokumenty.php
(last visited 16 Oct. 2010).
114 Leszek Lech Garlicki, ‘The Presidency in the New Polish Constitution’, East European Constitutional
Review, 6, 2&3 (1997), 81–9.
115 Wiesław Nowak, ‘Konstytucja. Prawo. ´Swiadomo´s´c prawna’, in Waldemar J. Wołpiuk, 10 lat    obowia˛zywania Konstytucji RP – i co dalej? (Warsaw: Wydawnictwo Wyz˙szej Szkoły Zarza˛dzania i
Prawa im. Heleny Chodakowskiej w Warszawie, 2008), 67–90.
116 Grzegorz Szczodrowski, ‘Polski system podatkowy – ocena i mo˙zliwo´sci zmian’, in Grzegorz  Szczodrowski, ed., Transformacja gospodarcza a sektor publiczny (Gda´nsk: Wydawnictwo Uniwersytetu
Gda´nskiego, 2002), 81–113.
117 Bałtowski and Miszewski, Transformacja, 264.
118 Freedom House, Country Reports, available at: http://www.freedomhouse.org/template.cfm?page =
22&country = 7900&year = 2010 (last visited April 12 2011).
119 Jadwiga,Staniszkis, Post-communism, The Emerging Enigma (Warsaw: Institute of Political Studies,
Polish Academy of Sciences, 1999), 145–210, here 148 (emphasis in the original).
120 Poland is behind all Western European countries, as well as Estonia, the Czech Republic and    Hungary: Pro Inno Europe, Innovation Union Scoreboard 2010, The Innovation Union’s performance
scoreboard for Research and Innovation (1 Feb. 2011), 9–10, available at: http://www.proinnoeurope.   eu/metrics (last visited 20 Dec. 2011).
National Heritage and Economic Policies in Free and Sovereign Poland after 1918 211
Table 8. Poland’s relative performance
Czech Rep. Hungary Poland Slovakia EU-15 U.S.A.
GDP/capita (2007) 80 62 54 67 112 151
(EU-27 = 100)
GDP growth (in %) 4.4 3.6 4.1 5.6 2.3 2.6
(2000–07 average)
Investments (% of GDP) 26.3 22.6 19.8 26.2 20.0 19.5
(2000–07 average)
Productivity/hour (2007) 53.8 50.2 43.6 63.4 100.0 115.8
(EU-15 = 100)
Exports/capita (2007) 9.9 8.1 3.3 8.8 11.4 4.0
(in 000s €)
Hi-tech exports (2007) 14.1 25.2 3.8 5.4 14.3a 28.5
(% of manufactured
exports)
R&D expenditure (2007) 1.6 1.0 0.6 0.5 2.0a 2.7
(% of GDP)
aEuro-area
EU-15 includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Holland, Ireland, Italy,
Luxembourg, Portugal, Spain, Sweden and the United Kingdom.
Source: Eurostat, Statistics; The World Bank, World Development Indicators, available at http://data.
worldbank.org (last visited 4 Nov. 2010).
Throughout the transition period, Poland has eschewed any sort of industrial
policy.121 The neo-liberal bias is one factor, but the weakness of the state is certainly  another major issue. A weak executive lacks the necessary muscle to overcome  powerful interests, fight corruption, change ineffective procedures, reform the legal  system, and, in general, protect the national interest.122
As a result, even the development of basic infrastructure has been neglected.
In 2004 the density of motorways in Poland was only 1.8 km per 1,000 km2 or
slightly more than a quarter of what the Czech Republic, Slovakia and Hungary
enjoyed and a tiny fraction of Germany’s (33.7 km per 1,000 km2).123 The
underdevelopment of infrastructure hurts the nation’s competitiveness. The 2010– 11 Global Competitiveness Report ranks Poland overall thirty-ninth, but in terms of  the quality of infrastructure the nation is rated a distant seventy-second.

 124
As in the inter-war period, the state has substantial borrowing capacity, and the
level of national debt is relatively low.125 But the 1997 Constitution sets a limit on
121 Staniszkis, O władzy, 153.
122 Staniszkis, O władzy, 177–81.
123 Organisation for Economic Co-operation and Development (OECD), Economic Policy Reforms 2009:
Going for Growth (Paris: OECD, 2009), 99.
124 World Economic Forum, The Global Competitiveness Report 2010–011, Klaus Schwab, ed. (Geneva:   World Economic Forum, 2010), 13–20.
125 For instance, the 2008 national debt of 47.1% of the GDP was much smaller than the Euroarea’s   average of 69.9 per cent: Eurostat, Statistics, available at http://epp.eurostat.ec.europa.eu/
portal/page/portal/statistics/search_database (last visited 16 April 2011).
212 Contemporary European History  Poland’s indebtedness at 60% of GDP.126 This, in turn, results in inefficient outcomes.
For instance, constructing motorways is much cheaper if the task is performed by a  state agency rather than by the private sector: 2.3–4.1 million versus 5.6–6.1 million   euros per kilometre.127 But the laissez faire attitude and the limit on national debt  force the adoption of the more expensive option.
The relative underdevelopment is by no means limited to infrastructure; the IMF
estimates that the amount of capital per worker in Poland is equal to a tenth of that   in Germany.128 Agriculture is still a very important industry; yet, in some ways, it is
as backward today as it was before the Second World War. In 2007 almost 15% of the    labour force was employed in this sector, 68.5% of farms had holdings of less than   five hectares and only 1% had more than fifty hectares.129
Poland refrained even from the implementation of a pro-export strategy, an aspect   of the Asian model strongly recommended by the World Bank.130 Furthermore,   the central bank is totally independent of both the Sejm and the Executive.

131 It is  preoccupied only with price stability and pays no attention to employment.

132 As it  did during the inter-war period, it now keeps interest rates at a relatively high level.
This policy assures an overvalued zloty which, in turn, hinders exports.133 Poland
lags behind its European peers in terms of both high-end exports and exports per
inhabitant (Table 8). Significant trade deficits (Table 7), in turn, have contributed
to an increase in total foreign debt from $69.5 billion at the end of 2000 to $245.5
billion in 2008.134
Privatisation has also resulted in an increase in foreign control over the economy.
Consequently, Poland’s international investment position has greatly deteriorated.
In 1994, liabilities exceeded assets by $29.6 billion, but by 2008 the difference had
grown to $243.4 billion.135 This increase in debt has caused huge capital outflows.
The value of repatriated investment income during the years 2000–8 amounted to
126 Konstytucja Rzeczypospolitej Polskiej, Art. 216 § 5, available at http://www.sejm.gov.pl/
prawo/konst/polski/kon1.htm (last visited 30 Oct. 2010).
127 Paweł Szałamacha, ‘Kiedy zbudujemy autostrady’, Mie˛dzynarodowy Przegla˛d Polityczny, 25 (2010),
150–4.
128 Susan Schadler, Paulo Drummond, Louis Kuijs, Zuzana Murgasova and Rachel van Elkan, Adopting
the Euro in Central Europe: Challenges of the Next Step in European Integration, IMF, Occasional Paper
no. 234 (Washington, D.C.: IMF, 2005), 43.
129 Eurostat, Statistics.
130 World Bank, The East Asian Miracle: Economic Growth and Public Policy (Oxford: Oxford University
Press, 1993), 23–5. Only 3% of Polish small and medium enterprises report obtaining any    public financial assistance in this field, which ranks Poland twenty-third among thirty-three
European nations: European Commission, Internationalization of European SMEs (Brussels: European   Commission, 2010), 67.
131 Zbigniew Madej, ‘Konstytucja RP o ustroju społeczno-gospodarczym i roli banku centralnego’, in   Wołpiuk, 10 lat, 149–52.
132 Zdzisław Sadowski, Transformacja i rozwój, wybór prac, 2nd edn. (Warsaw: Wydawnictwo Polskiego
Towarzystwa Eknomicznego, 2005), 358.
133 Sadowski, Transformacja, 368.
134 Narodowy Bank Polski (NBP), Balance of Payments Statistics, available at: http://www.nbp.pl/
homen.aspx?c=/ascx/subgen.ascx&navid=5088 (last visited 12 April 2011).
135 NBP, Statistics.
National Heritage and Economic Policies in Free and Sovereign Poland after 1918 213
over $83 billion. The rapid opening of the economy to foreign investment has had
an important, and deleterious, side-effect: because small businesses lacked sufficient    time to grow, today local capital in Poland finds itself in a position similar to the one    it enjoyed during the inter-war years.

136
Finally, economic policies adopted after 1989 failed to lift the nation’s standard
of living to a European average. By 2002, five regions in Poland were rated the
poorest among the then European Union, with GDP per capita (at purchasing power    standard) equal to only about a third of the region’s average.137 The unemployment   rate was among the highest and the proportion of employed to total labour force    (employment rate) among the lowest in the European Union during 1999–2008.

138
Not surprisingly, Poland and Estonia were the only OECD countries that showed
significant net emigration during 1990–2008.

139
Conclusions
Unchecked liberty for the nobility guaranteed weak, limited and static government
in the Polish-Lithuanian Commonwealth. Yet, similar principles were adopted in
Poland after the nation regained independence in both 1918 and 1989. Consequently,  economic policies in the 1920s and after 1989 have been based on government nonintervention,   low taxation and free markets. The government has embraced budget   discipline and sought to stabilise prices and the exchange rate rather than modernise   the economy as a whole. Little effort has therefore been made to restructure   agriculture, foster economic growth and lower unemployment.
The outcome after 1989 has been similar to that after 1918: Poland lags behind
Western countries and is not catching up fast enough. The nation is in great need of    massive investment to upgrade infrastructure and to promote innovation and exports.
So far, the private sector has shown an inability to accomplish these goals. The
1936–9 experience and contemporary examples of the successful use of industrial
136 Wojciech Roszkowski, ‘Reflections on Poland’s Development after 1918 and after 1989’, The Polish    Quarterly of International Affairs, 1 (2008), 41–54.
137 Eurostat, ‘News Release: GDP per capita in 2002 ranged from 32% of the EU25 average in Lubelskie
to 315% in Inner London’, STAT/05/13. Studies find that government spending on infrastructure    enhances productivity and the rate of economic growth. An extensive review of this question can   be found in Ward Romp and Jakob de Haan, ‘Public Capital and Economic Growth: A Critical   Survey’, Perspektiven der Wirtschaftspolitik, 8, 1 (2007), 6–52.
138 Eurostat, Statistics. Only a small fraction of the unemployed receive government assistance; for
instance, in 2007 only 14.3% of all unemployedwere entitled to unemployment benefits (Ministerstwo
Pracy i Polityki Społecznej, Statystyki Rynku Pracy, Statystyki Strukturalne, grudzie´n 2010, available
at: http://www.psz.praca.gov.pl./main.php?do=ShowPage&nPID=867997&pT=details&sP=
CONTENT,objectID,867970 (last visited 12 April 2011).
139 OECD, StatExtracts, available at: http://stats.oecd.org/index.aspx (last visited 12 April 2011). The
OECD includes not only the most developed countries, but also Chile, the Czech Republic,
Hungary, Russia, Slovakia, Slovenia and Turkey.
214 Contemporary European History
policy, especially in Asia, show that the state can play an important role in economic
development.140
Following an extended period of wars in the seventeenth century, Poland
experienced a long period of substantial decline in its level of economic activity. Lack
of a national economic policy greatly contributed to this development.141 Economic   deterioration, in turn, contributed markedly to the demise of the Polish-Lithuanian   Commonwealth. A similar dislike for national economic policy during the inter-war   years resulted in significant economic underdevelopment, a factor that contributed    to the country’s crushing defeat in September 1939.
Although it seems unlikely that Poland will again face challenges similar to
those of the late eighteenth century or the late 1930s, the nation’s economic
underdevelopment and the relative weakness of the state make it more difficult
for Warsaw to defend and further Poland’s economic and political interests. The
importance of finding a viable economic policy is therefore not a theoretical question,   but one of vital national interest.
140 An interesting overview of Asian experiences in this respect can be found in, for instance, Poh-Kam   Wong and Chee-Yuen Ng, eds, Industrial Policy, Innovation and Economic Growth: The Experience of   Japan and the Asian NIEs (Singapore: Singapore University Press, 2001), or in EunMee Kim, ed., The
Four Asian Tigers, Economic Development and the Global Political Economy (San Diego, CA: Academic
Press, 1998). Dani Rodrik, ‘Industrial Policy: Don’t Ask Why, Ask How’, Middle East Development
Journal, 1, 1 (2009), 1–29, reviews successful cases of the use of industrial policy in Latin America.
141 Davies, Playground, vol. 1, 290.

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	22 sierpnia 2017 16:18

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