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A Magazine of Ideas

Poland’s Economy Outperforms Its

Quarrelsome Leaders
By Brent M. Eastwood Monday, August 13, 2007

Filed under: World Watch, Government & Politics

Intra-European bickering may derail the country’s economic

growth.

Conventional wisdom says investors are cautious

with countries that have abrasive and controversial foreign policies. So why is Poland, despite
increasingly testy relations with Russia, Germany, and other EU countries, still a healthy target
for investment? Polish Finance Minister Zyta Gilowska says Poland is facing “five fat years” due
to lower deficits, lower unemployment, strong exports, a stable banking sector, and healthy
pension and mutual funds. Compared to many of its Central and Eastern European (CEE)
neighbors, the country is considered a popular choice for foreign direct investment.

According to the “European Attractiveness Survey 2007,” from Ernst and Young, Poland ranked
seventh globally among FDI destinations. Due to its productivity, human capital, low labor cost,
and flexible employment force, Poland ranked number one in terms of jobs created by FDI with
31,115 new jobs in 2006. This was a considerable boost since Poland has a smaller population of
38 million people. The UK ranked second with 27,481 new jobs created followed by France with
20,509. The Czech Republic and Romania round out the top five.

FDI, according to Matthew Bishop in the book Essential Economics, is investing done mainly by
companies in another country, and can include expanding an existing local business. It often
takes place trough the target country’s stock market, and this is where Poland has outperformed
among its peers. Poland began its mutual fund industry in 1992 and was careful to regulate the
industry and bring it along slowly, creating what is now a “strong and confident sector.” The
country also enjoys one of the healthiest banking sectors among CEE countries since it managed
to avoid the banking scandals that plagued Russia and the Czech Republic.

Poland has also, surprisingly, been selected to host the Euro 2012 soccer tournament—which
should be a shot in the arm to future tourism. It is enjoying one its lowest budget deficits and
highest GDP growth rate in years. Its Central Statistics Office boasts that last year Poland had a
6.1 percent growth rate and is expected to eclipse 6 percent again this year. Unemployment is
finally expected to drop below 10 percent.

However, when it comes to foreign policy, Poland today finds itself in a rather lonely position in
the EU. It seems the country can not break away from controversy. The latest incident is an
unfortunate Polish magazine cover depicting a bare-breasted German Chancellor Angela Merkel
nursing Polish rulers Jaroslaw and Lech Kaczynski. The magazine editors were attempting to
show that Germany is in control of Poland and that Merkel acts as an “evil step-mother.” This
merited a response from a German newspaper that called the Kaczynskis “poison dwarves.”

The latest EU summit in June was another case in point. Poland, a small nation within the EU,
has long advocated an EU voting system based on equality among countries, rather than equal
voting power from population. The Poles gave up on this idea almost immediately after the
negotiations started, but not before Polish Prime Minister Jaroslaw Kaczynski said that Poland’s
population would have been a lot larger if it had not been for the Nazi Holocaust. This comment,
infuriated the Germans even more and made other EU countries grumble, since most members of
the EU had always observed a moratorium on dredging up the Nazi past.

Although Poland seems to be enjoying a strong economy and is still a good target for foreign
direct investment, it is not clear how long the country’s leaders can keep taking a unilateralist
and nationalist approach through its relations with the EU and Russia. Most Poles still favor
membership in the EU with 86 percent approving of membership in recent polls. Eurosceptic
countries such as the United Kingdom can thumb their noses at the EU, but Poland is a long way
from the power and prestige of the UK. Poland is also not going to win any friends by picking
fights with Germany. All of this quarreling distracts Poland from what should be its main foreign
and domestic policy goals—to mend fences with the Russians, improve stability, and grow the
economy.

Brent M. Eastwood is an Adjunct Professor at George Mason University School of Public Policy.