Why did Rogernomics work in Poland?

00:19, Sep 02 2014
Brian Easton
Wellington economist and scholar Brian Easton.

In the two years after the Berlin Wall fell in 1989 and Poland (among others) detached itself from the Russian Empire, the Polish economy contracted by about a sixth. They call it 'shock therapy' but the policies which were pursued - privatisation, market liberalisation, the withdrawal of subsidies - were much like what we call 'Rogernomics'. However, unlike the New Zealand experience the policies seemed to have succeeded; since 1992 their GDP per capita has grown 4.4 per cent annually; in contrast to New Zealand's 1.9 per cent.

I was given many explanations for the Polish economic miracle while in Poland as a guest of the Polish embassy in Wellington. I focus on three of particular relevance to New Zealand.

The first is they did not ignore the export sector. Right next to its giant German motor economy Poland was better placed than we are. Their poorly managed government-owned manufacturing was privatised, replacing clapped-out party hacks with more competent managers or the business went to the wall. The Swedish furniture giant, IKEA, bought some of the factories which had been supplying it and overhauled them. Today furniture is one of Poland's biggest exports (not only from IKEA).

Our Rogernomes did not pay much attention to the export sector, treating it on a par with the domestic one. A small economy like New Zealand (or even Poland with about eight times our population) can latch on to growth markets elsewhere - a small supplier can even increase its share in a slow-growing market. A flourishing export sector drags along the rest of the economy. A quarter of a century after the Rogernomics failure we still have not learned this lesson.

Second, Polish industrial performance is underpinned by the quality of their industrial workers, attributed to the quality of their secondary and tertiary education and training, a Central European phenomenon famously illustrated by the quality of the German workforce, Polish wages are relatively lower, so German business relocates production to Poland. One is not surprised that Poland's biggest export to New Zealand is agricultural machinery, often based on German design and German-owned factories using Polish workers.

New Zealand pays little attention to the training of middle-level workers, putting its effort into the top level (degrees).We even abolished apprenticeship training in the early 1990s. Our approach partly arises from our British heritage - British workers are no match for German ones - plus our casual can-do/number-eight-fencing-wire attitude. We forget that poor workmanship has been a major factor in the leaky homes debacle. It is sobering is that the more focused German training approach began over 150 years ago. (I was impressed by the high quality of Polish design. It may come out of their middle level training, rather than a focus on the elite.)

A third message is that the Poles were willing to make sacrifices in the short run for long run gains. It was explained to me that their stoicism came from that East-Central Europeans having gone through hardships in the past - the Great Depression, the Second World War, the sufferings under the Russian Empire.

New Zealand politicians of all shades operate on the basis that we are unwilling to make the sacrifices, deferring difficult decisions in the hope that something will turn up. (It does not help when politicians ask for sacrifices but exclude their friends from them.)

I don't want to suggest that the Polish economy is perfect. Its standard of living is still low by Western European standards, it has more regional inequality than would be acceptable here and its unemployment rate of 13 percent is high (although given how entrepreneurial Poles are, many of the 'unemployed' are probably active in the unrecorded economy).

One day the Polish economic miracle will come to an end when its economic growth slows down to a rate similar to that of its Western neighbours. But Poles will remember their shock therapy with an affection we do not give Rogernomics, Hopefully they will not forget its lessons. Nor should we.

Brian Easton is a Wellington economist and scholar.