Recession 2007-2009 in CEE The case of Poland Poland was the only economy among the European Union members which avoided the recession in 2007-2009. I’m going to present those factors which in my opinion made the worldwide turmoil easer for Polish economy. The main reasons why Poland avoided the recession

Most countries from CEE region dropped into recession during 2007-2009 period. Only Poland outperformed and registered only the slowdown

Why Poland avoided the recession? Six factors Share of credit in the economy Share of export in the economy Share of shadow economy Structural factors Labor productivity Flexible exchange rate of Polish zloty Market forces EU funds Regulations I divided them for 3 groups: structural factors are mostly related to the stage of economic development (1,2,3). …

1. Low dependence on business and consumer credit Credit to private sector (households and business) in Poland as % of GDP, 1999-2009 Despite the rapid development of financial sector in Poland during last 20 years, the dependence on bank credit for financing business activity and consumption has never been high. It rose from 25% in 1999 to 53% in 2009. But mostly – credit for households especially mortgages, while the share of credit in business to GDP was almost constant. Banks usually followed very restrictive policy to the private business, especially medium and small companies. Borrowers were not exposed to a sudden cut of credit (especially households) – smoothed consumption. The banking sector stayed in the good condition. The share of non-performing loans: 2007- 7%; 2008- 4.5%; 2009 – 5.5%.

1. Domestic credit of private sector in selected countries as % of GDP in 2008 In 2008 the share of credit to private sector achieved around 50% of GDP, which was much below the average for high developed economies and the countries from Eastern Europe. Only Slovakia had the lower ratio of credit dept to GDP. During the boom, the low share of credit in financing business and households activity was perceived as negative factor, limiting the development of the economy and faced a lot of critics among economists, businessman's and polititician. During recession it became the advantage. Borrowers were not exposed to a sudden cut of credit (especially households) – smoothed consumption. On other hand the banking sector stayed in the good condition. The share of non-performing loans in banking sector even improved from: 7% in 2007 to 4.5% in 2008 and little deteriorated in 2009 to 5.5%.

2.Relatively small external ties, big domestic market Poland is a medium size economy with a large domestic market. It is less dependent on export than other countries in the region. The relatively low dependence of the Polish economy on export moderated the influence of the word economic turmoil throughout the foreign trade channel. An additional, significant factor stabilizing export was the flexible exchange rate, which I'm going to present later.

3. Shadow economy Shadow economy in 2009 as % of GDP, selected OECD countries Officially the share of shadow economy accounted to the GDP is about 14-16%. According to the research prepared by the world wide expert – Friedrich Schneider from Linz University it amounted almost 27% in 2009, which was much more above the average for European Union and other countries from the region. Shadow economy absorbs the negative shocks of economic slowdown and recession by smoothing consumption. The research prepared by CSO shows that about 60% of the product produced in the shadow economy is used for individual consumption in households. The additional 8% up to 10% of the GDP may be created in the shadow economy which used to expand during recession. Source: Friedrich Schneider, The Size of the Shadow Economy for 25 Transition Countries over 1999/00 to 2006/07: What do we know”, September 2009.

4. Growing productivity and competitiveness of the Polish economy An important factor moderating the effects of the worldwide recession was the consistent growth of the competitiveness of the Polish economy, which was expressed mainly by the improvement of the labor productivity. According to the report prepared by the Conference Board in the years 1991-2009 the productivity calculated as the GDP value per one hour of work increased in Poland every year by nearrly 4%. In highly developed countries this increase was smaller by over the half.

FDI in Poland, 2006-2009 in billion EUR After the Polish accession to the European Union an important factor increasing productivity was the inflow of Foreign Direct Investments. 2007 was the record year with the value of direct investments reaching over 17 billion EUR. Relatively cheap labor force and low corporate taxes – Poland has flat 19% CIT made Poland good place for investors. The important from the cumulative effect of the FDI inflow was also fact that foreign investors did not transferred their profits abroad but reinvested them (the light blue boxes). In 2008 Poland moved up in the Foreign Direct Investment Confidence Index created by AT Kearny from the 22nd to the 6th ranking position after China, USA, India, Brazil and Germany.

5. Floating exchange rate of Polish zloty depreciation appreciation The exchange rate of Polish zloty had a stabilizing effect on the economy during the worldwide recession. It appreciated up to the mid of 2008, when the oil and other commodity prices were growing. Stronger złoty during that time decreased the costs of import, prevented the increase of costs of doing business and household’s expenses. The depreciation of zloty during the deepest economic downturn - since the mid of 2008 up the beginning of 2009, - worked up to the competitiveness of Polish export, - slowed down Polish import which was additional factor allowing increase domestic production.

Results: In consequence there was no export collapse, but only slower growth rate of export and positive contribution of net export to the GDP.

6. The net inflow of EU funds in mln euro Poland as a member of the European Union has been the greatest beneficiary of EU funds. The largest inflow of this funds occurred in the years 2007-2009. About 61% of those funds was earmarked to infrastructure (transport, communication, etc.), about 22% were spend on development of human resources, and about 17% for direct support of the manufacturing sector.

Results: The inflow of EU founds in 2004-2013 (in mln euro) to Poland and its impact on GDP growth (estimation) Initial inflow of European funds did not resulted in increase of economic growth, but the cumulated effect occurred in 2007 and 2008. The assessments of EU funds impact on DGP growth differs among author, but usually does not exceed 1 percentage point per year. This one presented on the slide are one of the more conservative estimations. The gradual increase of UE financial funds had a synergy effect and stimulated economic growth. Funds earmarked for transport infrastructure increased the reserved of public capital, which was used by the private sector prevented from bankruptcy many firms from building sector. Funds allocated for the development of human recourses contributed to the increase of labor productivity. All kinds of EU funds had a stabilizing effect on the labor market and stimulated consumption (public and private).

GDP Consumption Low dependence on credit Big domestic market Shadow economy Productivity NET Export Floating exchange rate EU funds Small share of export The six factors I pointed out to stimulated mainly consumption (public & private) and export/import. Some of them are in fact negative and show the weakness of Polish economy like large share of shadow economy, the low level of openness and relatively small share of credit in financing economic activity. However at the time of recession they decreased fragility on external shocks. No one factor I presented would stabilize the economy taken separately. Most of them supported each other which resulted as a positive effect to the economic growth.