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Investment Outlook Fourth Quarter 2018 - Economic Growth Lessons from the Blue Danube

By: Dennis S. Fulmer
Wednesday, February 6, 2019

This past October, my wife and I enjoyed traveling the Danube River, enjoying the historic cities and charming small towns. Through our education via tour guides, it was fascinating to hear about the transition of the Czech Republic, Hungary and Slovakia from Communism to Capitalism.   Shortly before we began our journey, I had read that Poland was the first nation from the former Soviet bloc to graduate from “emerging” status to “developed” status by the Financial Times and Stock Exchange, or FTSE.  This new status was due to a combination of a rising standard of living and the development of Poland’s capital markets, making it a safer place for investors.  We did not visit Poland, but during our tour of Bratislava, Slovakia we heard about their booming economy and the numerous auto-assembly plants in the Slovakia.  The newest plant makes the Land Rover Discovery, and the Slovaks also make Volkswagen Touregs, Porshce Cayennes, Kia Sportages and some vehicles for Peugeot.  Tax incentives have helped attract these companies, along with a low-cost labor force and recent construction of better highways.  Czechoslovakia has roots in Cleveland and Pittsburg, as, after World War I, Czechs and Slovaks from those cities lobbied President Wilson to create their own country.  It is worth noting that Czechoslovakia amicably split into the Czech Republic and Slovakia ten years ago.   

After some post-trip research, I discovered that Poland has had the most rapid growth of these former Soviet Bloc countries after the fall of the Iron Curtain in 1989.  Poland’s success was due to the rapid and nearly complete switch to free market pricing, the creation of a credible central bank, and the end of all subsidies and favored treatment to state owned companies.  This shock therapy was painful for many, but the store shelves soon filled up with products and many new small businesses emerged as the assets of state-owned companies moved into private hands after the state-owned businesses went bankrupt.   The official name of this plan was the Balcerowicz Plan, after Polish economist Leszek Balcerowicz.  He started out with the Communist Party and then became an advisor with the independent (anti-government) union known as Solidarity, prior to the end of the Soviet Union.  Columbia University economist Jeffrey Sacks also had significant input in this plan as well as advising other struggling, emerging economies.  The Balcerowicz Plan excelled at rapidly achieving free markets, while other nations struggled with a slower transition, leaving some oligarchs with too much control.  Despite their rapid growth, these countries are still poor when compared to the United States, with incomes ranging from $12,000 to $17,000 versus $58,000 in the U.S., as computed by the World Bank.

The dramatic success of free markets in former Soviet Bloc countries is similar to the rapid growth America experienced as the invisible hand of capitalism brought together underutilized resources in the 1800’s.  Nearby, our colleague Lynn Hamilton comments on Alan Greenspan’s new book Growth in America, which is a fascinating read about these events.  

Sources:  Brookings Institute articles on Poland by Marcin Piatkowski and Brian Pinto 

The Economist – Central Europe’s Goldilocks Economies 7/50/18

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