There is no question communism was a terrible system that ruined countless lives. On an economic ground, it was equally miserable. Ineffective allocation of resources based on central planning, rather than market-derived price ended up in a massive bankruptcy. However, there are also some positive aspects which only a few dares to mention. The story of Polish economic miracle of the last two decades is a good example. 

Poland – successful transformation story

Poland is one of the few countries which made a successful transformation from the communist system into full capitalism. From one of the poorest and underdeveloped country back in 1989, it became one of the world’s fastest-growing country in the last 25 years. Within one generation the country moved from a poor emerging market to a high-income developed country. Marcin Piatkowski’s book – “Europe’s growth champion” –  is an excellent study of the origins and drivers of that success. 

Communism – different way to look at

One of the most surprising and controversial things I found in that book was a different angle to look at Poland’s communist past. Arguably, without communism, the economic miracle we have seen in Poland since 1989 would be probably unachievable. 

Why? Because communism (and II World War) erased all the remainings of the feudal social structures which prevented Poland from building growth-promoting institutions in the last few centuries. It made Polish society inclusive with very low inequalities and good education system accessible to everyone. Something which is worth keeping in mind nowadays, when most developed countries are moving in the opposite direction. 

As Piatkowski argues in the book – its usually the extractive elites that prevent the countries from unleashing their full potential. It takes external shock (communism in Poland’s case) to change the status quo. 

Transition to capitalism

The transition to market economy started in Poland in 1989 when the radical economic program ( “Balcerowicz’s plan”) was introduced. There was an unprecedented consensus in the society and among political elites about the policy direction. Thanks to the social and political cohesion Poland managed to build strong independent institutions which were the key for sustained progress. The other essential factors were supportive cultural background, strong pro-Western leaders and an external anchor in the form of the EU. It all came at the right time and with some luck allowed the country to enter its “Golden Age”. 

From risky to safe-haven assets

I was lucky to observe the successful transition not only by growing up in this country but also later in my professional life. When I started investing in government bonds, Poland was no longer trading as a risky country. However, every time some stress in the markets emerged the first reaction was to sell Polish assets, expecting higher risk premium (i.e. lower prices). After many years since the transformation, the economic framework in Poland proved to be surprisingly resilient. Investors responded with a different attitude towards Polish assets. Instead of selling them as a run-away from emerging markets, investors started to buy them as part of the flight to safe-haven assets. That was something many local fund managers had difficulties in understanding (myself including). Being too close and remembering the past too well is often blurring the big picture. That is why its sometimes good to step back and change the perspective. 

In the search for the next emerging market champion

As M. Piatkowski humbly admits “we economist know much less than we think we know”. And the success was far from guaranteed at the beginning of a transformation. It is worth understanding Poland story when looking for the next champions in the emerging markets. And worth acknowledging some positive aspects that came from communism, especially in terms of social cohesion. All other parts are undeniably negative.