A European success story

Which EU economy has seen the fastest growth in GDP per capita over the last 20 years?

The answer is Poland. Polish GDP per capita has risen 116% since 2004, well above the EU average of 27% and a larger increase than in other fast-growing economies such as Ireland, Romania or Spain.

Poland’s trend growth of 3.7% is well ahead of the US and roughly three times German and French rates. Unlike western Europe, Polish incomes are on a rapidly rising trajectory.

As the US economist Noah Smith notes, “Poland ranks only behind South Korea as the great economic miracle of modern times. In 1990 it was a dysfunctional post-communist economy that was significantly poorer than Russia; now, the IMF expects it to soon overtake Japan, Spain, and Israel in per capita GDP”.

Poland’s transformation started well before it joined the EU in 2004. In contrast to the more gradual approach of other eastern bloc countries, Poland embraced “shock therapy” reforms in 1990, following the fall of its communist regime, with overnight price liberalisation, privatisation and a raft of pro-market reforms.

The reforms caused major social and economic disruption but, following a sharp recession, helped lay the ground for 28 years of uninterrupted growth, including through the global financial crisis. The pandemic ended that remarkable run, but the Polish recession of 2020 was milder than in most other European countries and growth bounced back to pre-pandemic rates.

The Poland that entered the EU in 2004 was a reformed, fast-growing economy. Membership enabled Poland to benefit from large infusions of regional and infrastructure funds and access to the EU’s vast single market. Poland borders seven other economies, four of them in the EU and the openness that has come with joining the EU has boosted trade, foreign investment, migration and innovation.

Unlike South Korea, where home-grown start-ups developed into global brands, Poland’s economic revival has relied on foreign direct investment (FDI). Low costs, improving infrastructure and the creation of special economic zones helped bring in foreign capital and expertise. The ensuing rejuvenation of manufacturing has, in turn, helped fuel exports and productivity growth.

Poland scores well in terms of education, with the OECD’s PISA attainment scores on maths, science and reading above German, French and Italian levels. Despite strong growth, wage rates remain less than half those in western Europe, meaning Poland remains an attractive location for manufacturing and outsourced services. Unemployment stands at just 3.2%, one of the lowest rates in the EU. Polish equities have delivered strong returns, easily outperforming UK and wider euro area markets in the last five years.

Poland is one of the great post-communist success stories. What gets less attention is that most central and eastern European economies have also enjoyed strong growth. All of the countries that joined the EU in 2004 and 2006 have grown more rapidly than their western European peers. Nonetheless, performance varies widely, for instance, Hungary’s economy expanding by 45% since 2004 compared to growth of 107% in Poland (a rate exceeded only by Malta, whose economy has expanded by 170%). Despite Poland’s superior growth rate, GDP per capita is higher today in Slovenia and the Czech Republic than Poland.

Nevertheless, Poland has economic heft. With a population of 38m people it is far larger than any other central or eastern EU country. It is the EU’s sixth-largest economy, below the Netherlands and ahead of Sweden. It is also playing an outsize role in the defence of Europe. Poland is expected to spend the equivalent of 5% of its GDP on defence this year, more than any other NATO country and more than twice the level of spending in Germany or the UK. Its armed forces are now the third largest in NATO behind the US and Turkey. Poland fields about 600 tanks, roughly four times British levels. A successful economy coupled with a keen sense of the threat from Russia has turned Poland into a major European military power.

Poland has come a long way since 1990. Prospects for growth look positive through the rest of this decade.

Perhaps Poland’s main challenge, one it shares with its neighbours, is demographic. Last year the number of births dropped to the lowest level since the second world war. Poland’s fertility rate is one of the lowest in the EU. Poland’s population is shrinking, albeit far more slowly than in, for instance, Bulgaria and Lithuania, where populations have contracted by more than 20% since 1990. Adaptability and resilience have been the hallmarks of Poland’s economic rebirth. Those qualities will stand it in good stead as it adjusts to an older, shrinking population.