Poland: Don’t Confuse the Consequences with the Causes

Though The Economist correctly emphasizes that Poland’s ability to avoid recession in 2009 “stems partly from history and geography”, it is quite wrong when it claims there was “a classic Keynesian response to the downturn” (Few woes in Warsaw, April 28th). It’s a fact that there are big budget deficits (7.3% in 2009 and 7.9% last year), but the conclusion that it meant “a hefty fiscal stimulus” is mistaken. If only there was such, the picture would be much nicer. Indeed, in 2009 Poland was the only country in the EU with a positive rate of GDP growth (1.7%). However, it was a miserable 0.8 percent in Q1 of 2009, while still a robust 7.4 percent only two years earlier. Thus, falling from the ‘eighth floor’ it stopped at the ‘ground floor’, above zero, while other countries, falling from lower altitude, plunged into the basement, that is in recession.

If there was any serious fiscal stimulus the annual rate of growth in 2009 would have been app. 3.5%. Unfortunately, it did not happen, because the government, following the ill-advised policy of fiscal constraints, was very reluctant to run any special stimulus. The suggestions to do so were quickly rejected by the finance minister as counterproductive and inflationary. Yet it is true that the fiscal deficit jumped to a staggering 7.9% of GDP in 2009. But it occurred due to the fast shrinkage of the tax base resulting from the lack of a stimulus package! The large and unsustainable budget deficit of recent years is not a by-product of smart, ex ante Keynesian policy. It is the result of erroneous macroeconomic policy. A dearth of strong fiscal stimulus led to a significant slowing down of output and falling budgetary revenue.

One should not confuse the consequences with the causes. Only now, ex post, the government asserts that it ran a deliberately large deficit. It didn’t. So, now we have a huge deficit with sluggish growth. While in 2009 Poland was a ‘green island’, because out of the 25 emerging markets, to which The Economist refers to weekly to in the last two pages, only in four was the rate of growth higher, while in 2010 it was opposite: only four countries was the GDP growing slower.