Squaring the Circle in Europe’s Emerging Markets: The Case of Poland

The prevailing view in political economy is that advanced capitalist states seek to spur economic growth by coordinating private sector frameworks towards successful specialisation and through the development of complementary welfare production regimes. The fulfilment of these state functions has proved difficult in the emerging markets of Central Europe, however. In the Polish case, income transfers for pensioners and the unemployed – the core of the transitional social contract - have tended over time to crowd out more strategic social spending. The emerging region-wide race to the bottom on corporate and personal income tax rates rigidified Polish government finances still further. In the effort to square this circle, an exceptionally high tax wedge on labour helped induce what Esping Andersen cheerfully dubbed the ‘death spiral’ scenario, of low employment and lowered tax contributions requiring high payroll contributions to support the welfare system, which further lower employment, locking the Polish labour market into one of the lowest participation rates in Europe and a reliance on temporary contracts matched only in Spain. Until recently Poland’s neo-liberal growth strategy meant that ongoing institutional weaknesses, particularly in corporate finance and business coordination, were left largely untreated, thus deepening disparities between the developmental conditions facing foreign and domestic enterprises – this region’s version of ‘insider/outsider’ tensions. Polish governments, have found these divisions politically unsustainable and the upshot by 2014 was the highest continuous growth rates in the region, the collapse of the liberal social democratic left and the rise of authoritarian populism.