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Watching
the world's leaders stumble their way through the economic crisis, it often
feels as if political success and economic understanding are mutually exclusive.
Even the Chinese, who over the past generation have engineered a
dramatic turnaround from their Maoist economic nightmare, show a
remarkable willingness to pursue a monetary policy (a currency peg to the
U.S. dollar) that yields no benefit to their citizens. Amid this morass of
economic quackery, it is refreshing to see a clear ray of sanity emanating
from one country: Poland.
Last summer, I was invited to speak at the Economic Forum in Krynica, a
resort town in Southern Poland. I was amazed at the level of economic
activity and civic spirit that was on display throughout the country. I also
was fairly surprised that my economic views, which are routinely
ridiculed at home, have much wider support among the Polish economic officials
who presented at the conference.
This common sense understanding was showcased in an opinion piece published
this week in the Financial Times by Polish Finance Minister Jacek
Rostowski. Contrary to the public flogging of the free
market currently underway in Washington, under the auspices of the
Financial Crisis Inquiry Commission, Rostowski explains how governments
caused the Crash of 2008 by removing the necessary element of fear from
the markets. He states that this was symptomatic of the "deep
Keynesian project," in which governments over the last half
century have looked to smooth the economic cycle through periodic floods
of monetary expansion and government spending. I couldn't have
said it better myself.
A product of the Solidarity movement that opposed the Polish Communist Party
in the 1980's, Mr. Rostowski, like many of his colleagues in the current
Polish Administration, is intimately familiar with the hazards of central
economic planning. He has seen this movie before, and he knows how it ends.
Instead, Poland has enacted economic policies that are informed by a belief
in Austrian School (read: free market) economics. After the downfall of the
Communists in 1989, Rostowski was part of a group that called for "shock
therapy": the rapid privatization of state-owned enterprises and the
dismantling of price and currency controls.
In 2007, the center-libertarian Civic Platform party was put in power,
with Rostowski as Finance Minister. Along with Prime Minister Donald Tusk, he
has continued the process of transforming Poland into a laissez-faire
paradise. Not accidentally, Poland is the only EU member state that
showed positive GDP growth in 2009, at 1.9%. Also its public debt, at
roughly 55% of GDP, compares favorably with its neighbors - and with the
United States.
A top priority of their administration was reduction of the income
tax. The previous system, with three-tiers of 19%, 30%, and 40%, has
been reduced to two tiers: 18% and 32%. In addition, the system's
minimal use of deductions and credits makes it radically simpler than the
U.S. income tax.
In the meantime, Civic Platform is continuing its move toward
privatization. Recently, Poland held an IPO for its state-owned power
utility, Polska Grupa Energetyczna. According to a news report, "The
sale brought in $2.1bn, pricing at the top end of the bankers' guidance
range, and becoming Europe's largest IPO of the year." The
government has used these revenues to fund its budget and keep taxes in
check. More importantly, it has returned capital to the marketplace to be
used in the most efficient manner.
Civic Platform also understands that regulation hurts small
business disproportionately by raising barriers of
entry. Fortunately for Poland, a multi-year program of deregulation has
been a boon for small businesses, and has given the country the most
entrepreneurs of any state in Europe. This may explain
the country's resilience in the face of the global economic crisis.
Poland's current growth is also fueled by an influx of foreign
investment. To encourage such inflows, Rostowski has laid out
a specific plan to adopt the euro as the country's currency by
2015. While I have never been crazy about the euro concept, as opposed to a
gold standard, the effort indicates to foreign investors a desire to control
inflation. Assuming the block is able to stick together, the European Central
Bank is considered a reliable enforcer of strict monetary policy. Poland's
zloty rapidly devalued after it was allowed to float, and though the rate of
inflation is declining, it remains high. Eurozone membership will impose
external discipline on the Polish government, even if Civic Platform
loses power.
Anecdotally, I can attest that these people are hungry for free markets. My
visit to Krynica was a breath of fresh air, and a startling reminder of how
far America has strayed. If the Polish people can hold onto the traumatic
lessons of communism, and continue undeterred down their current path, then
this battleground of the 20th century may be the paragon of the 21st.
For a more
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Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
For a more in depth analysis of the tenuous
position of the American economy, the housing and mortgage markets, and U.S.
dollar denominated investments, read my new book : The Little Book of Bull Moves in Bear Markets" (Wiley,
2008).
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