(Bloomberg View) -- The Bloomberg consensus forecast for the Polish economy indicates 4.1 percent growth in 2017, the highest since 2011. At first glance, this is a feather in the cap of Poland's illiberal ruling Law and Justice (PiS) party. But a group of liberal economists including Leszek Balcerowicz, a former finance minister and deputy prime minister, and the architect of the country's early 1990s economic shock therapy, has issued a report warning that PiS policies could kill Polish growth altogether.
Balcerowicz, who now teaches at the Warsaw School of Economics, is one of the most globally recognized Poles, respected for transforming the country from a Communist wreck into a flexible, dynamic market economy that proved its resilience during Europe's recent economic troubles. So when he broadly condemns a government for messing up his work, that's a difficult call to ignore. And that's exactly what Balcerowicz does. According to him, in 2015, Poland faced three economic scenarios: Reforming the economy to sustain growth, keeping the status quo with an inevitable slowdown, and "a variant where the absence of reforms is combined with anti-reforms that undermine the pace of growth and stability of the Polish economy." The PiS government, Balcerowicz writes, went for the third scenario. According to him,
The favorable economic situation left by the predecessors and the economic upturn in the EU countries help to conceal these damages, but they will come out eventually.
A group of Polish experts headlined by Balcerowicz then proceeds to lay out why, in their opinion, PiS policies won't work. It's a thorough condemnation of the party's attempts to strengthen Poland's social safety net to bring it closer to Western European models -- one reason Poles elected the party in the first place.
The general argument goes as follows. By the time PiS came to power, Poland's potential for growing fast with low levels of investment was nearly exhausted. Now, greater outlay is needed to spur technological development and more sophisticated industries. But to be efficient, the investment push has to occur in the private sector, and in Poland, that would require a higher rate of savings or even more foreign investment. PiS makes both less likely by destabilizing the country's institutions, especially the courts, paralyzing the land market and tightening tax collection through more bureaucracy and higher penalties. Instead, PiS is increasing its control over the economy and subsidizing less efficient state enterprises and agricultural companies where productivity remains low. At 40 percent of assets, state participation in the banking sector is the highest in Central and Eastern Europe after Slovenia, where the government was forced to nationalize banks after a crisis.
Instead of stimulating private investment, the report points out, PiS increased public spending by 1.2 percent of economic output between 2015 and 2017 -- the most it has ever gone up in the post-Communist period -- by boosting family benefits. Another increase is coming next year, from the reversal of a retirement age increase. These measures depress the labor force participation of older workers and women and help boost household spending, which has become the main driving force of growth. The report's authors argue that this is unsustainable: Stable growth can only be driven by investment. The authors also point out the increase in Poland's debt relative to gross domestic product -- to 53.4 percent at the end of June, 2017 from 50.9 percent at the same point in 2015 -- despite the higher tax collection rate.
It's rare these days to read criticism of a European government's policies from the positions of pure economic liberalism: The recent economic crises have undermined the credibility of economists who rely heavily on the market-based recipes that succeeded in the 1990s. Today's orthodoxy is that public investment works and austerity doesn't, at least not always. Besides, Balcerowicz and his like-minded colleagues have an axe to grind: They're the current Polish government's political opponents. International institutions have noted the same trends as Balcerowicz and co., but they're not as pessimistic about Poland's economic future.
In its most recent note on Poland, issued earlier this month, the Organization for Economic Cooperation and Development said the country should be doing more to deal with emerging labor shortages and growing wage pressure. It also remarked on private consumption as the biggest driving factor of growth and predicted it would fade along with the effect of higher social spending. But it predicted that investment would "pick up despite policy uncertainty, as public and private agents gradually learn to draw on EU structural funds and take advantage of ultra-low real interest rates," and it said the labor shortage would be alleviated by the influx of Ukrainian workers from across the border.
In an October report, the World Bank, too, pointed to the dangerously tight labor market, expanding social spending and the consumption increases it has caused. But it echoed the OECD's optimism: "Early indicators (PMI, industrial and construction production, enterprise sentiment) suggest that firms are becoming more optimistic and are increasing their stocks, pointing to a forthcoming rebound in investment."
Depending on who's looking, the PiS glass is either half-empty or half-full. In the latter version, Poland isn't going down the same path as Putin's Russia, as Balcerowicz intimates: The government's tweaks to the social safety net and tax system aren't murdering medium-term or long-term growth. The pessimists, however, are playing a useful role: Nationalism and populism are paths on which it's easy for a government to go too far, especially when initial economic results appear as encouraging as they are in Poland today.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
To contact the editor responsible for this story: Therese Raphael at traphael4@bloomberg.net.
For more columns from Bloomberg View, visit http://www.bloomberg.com/view.
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