WARSAW — Since coming to power in 2015, Poland’s ruling Law and Justice (PiS) party has captured state institutions, attacked the independence of the courts and violated the basic norms of the legislative process.

Despite these controversial moves, the government has maintained a high level of support among Polish voters. In large part, that’s because the Polish economy is still surprisingly strong.

This strong performance has allowed PiS to claim it’s keeping the country on the right track, even as its disregard for the rule of law has scared off potential investors and measures designed to boost popular support among its voters threatens to undermine the economy.

In reality, Poland’s boom is the result of positive external shocks. And if the ruling party — which is all but certain to win the country's parliamentary election on October 13 — doesn’t push through serious reforms, the next downturn could seriously damage the country’s future.

Boom times

It might be hard to picture now. Between 2016 and 2018, GDP growth accelerated to 4.3 percent, employment jumped by 2.5 percent and unemployment fell to a record low of 3.9 percent. Inflation rose, but it remains below 2.5 percent.

If Poland's ruling party doesn't push through serious reforms, the next downturn could seriously damage the country's future.

Poles have seen an increase in revenues, boosted employment and wages, and increased revenue in the country’s pay-as-you-go pension system. Meanwhile, the country’s fiscal deficit declined to 0.4 percent in 2018 from 2.7 percent of GDP in 2015, and public debt dropped to 48.9 percent from 51.3 percent.

The large influx of Ukrainian workers — following Russia’s aggression campaign against Ukraine in 2014 — also added at least 0.5 percentage points to annual GDP growth between 2015 and 2018.

But Poland’s good fortunes are in large part the result of external factors. Poland’s fast GDP growth, for example, was due to the cyclical upswing in other EU countries, which peaked in 2017.

As the Continent experiences a serious slowdown, Poland won’t be immune to its effects. And barring another significant influx of workers from Ukraine, which is unlikely, the most optimistic projections for Poland’s employment figures is stagnation.

Law and Justice is adding to this uncertainty. Rather than building on the successes of the previous government and preparing the country for a downturn, it is pursuing short-sighted policies it can’t afford and will hamper long-term growth.

Poland’s good fortunes are in large part the result of external factors.

The government’s flagship project, known as 500+, is a case in point. The measure, which was introduced in 2016, presents families with children with a monthly subsidy of 500 zloty per child (about €115) free of personal income tax. At first, it covered just over half of children (around 3.6 million children) at an annual cost of 1.3 percent of GDP. In May, Law and Justice extended it to all children, raising the cost to 1.7 percent of GDP in 2020.

The measure, as experts warned before it was introduced, is inefficient and a waste of resources. It falls short of its stated goal — to incentivize young couples to have more children — and encourages women to withdraw from the labor market.

Rule of law

The ruling party’s attacks on the rule of law are also doing major damage to Poland’s long-term growth.

Businesses and investors have picked up on the fact that doing business in Poland holds political risks. While private investment has accelerated in other countries — including the Czech Republic, where it grew by 5.1 percent and Denmark, which saw a jump of 7 percent — it declined by 0.2 percent in Poland between 2016 and 2019. Previously — between 2013 and 2015 — it had grown by 5.6 percent.

Compounding the problem is the government’s campaign of nationalization and restricting economic freedom.

The Polish government has been buying up previously privatized companies, mostly in energy and banking, at an alarming rate. The share of banking assets controlled by state-owned banks has risen to more than 40 percent — a figure exceeded in Europe only in Belarus, Russia and Slovenia. This is a major risk to the stability and growth of the economy, as these banks will be susceptible to political pressure and could accumulate a large backlog of bad loans as a result.

The ruling party has also restricted economic freedom by banning businesses from operating on Sundays, introducing more complicated tax regulations and prohibited the sale of agricultural land. In the state sector, managers have been purged and replaced by party loyalists on a scale unprecedented in Poland after 1989.

Adding to these missteps is the government’s move to reverse an increase to the retirement age. Under measures put forward by the previous government, women’s retirement age was due to increase from 60 in 2013 to 67 in 2040, while men’s retirement age would go from 65 to 67. The government’s new policy means there will be fewer people in the work force while more people draw pensions, financed — in Poland’s system — by a shrinking number of workers.

Off track

What all of this means is that, in the event of a likely Europe-wide economic downturn, Poland will be less well-equipped to cope. To avoid a major slowdown and keep up with Western Europe, Poland urgently needs to implement a package of reforms that will set it back on the right path.

In the event of a likely Europe-wide economic downturn, Poland will be less well-equipped to cope.

Over the long term, the rate of Poland’s growth will depend on employment and labor productivity — both of which are dependent on the government instituting sound policies.

Poland’s working-age population is set to shrink by 0.8 percent annually between 2014 and 2040 — 0.3 percent of which is a direct result of the Law and Justice Party’s decision to lower the retirement age. If private investment, which is key to innovation, also continues to decline, labor productivity could suffer even more.

To turn things around, Poland must restore the rule of law, privatize the enlarged state sector and undo government monopolies, improve the climate for foreign direct investments, and engage in fiscal reforms, including — most crucially — raising the retirement age.

If Poland doesn’t change course soon, the massive economic growth it witnessed after 1989 — one of the country’s biggest achievements — will be a thing of the past.

Leszek Balcerowicz is a former Polish deputy prime minister and finance minister, and a former governor of the Central Bank of Poland. Aleksander Łaszek is chief economist at the Civil Development Forum, a think tank founded by Balcerowicz in 2007.