Warsaw alternative looks less risky than the Anglo-American model

Warsaw's solution to crisis could yet be a masterstroke

Poland is following the Korean road to recovery. Controlled government deficits and a big currency fall seem to be stabilising its fragile economy.

By Martin Hutchinson
Last Updated: 9:52PM BST 17 Apr 2009

The country isn't in desperate straits. It wants $20bn (£13.5bn) from the International Monetary Fund. The facility would be only a precautionary flexible credit line, similar to Mexico's. Such a line, granted to countries with policies that the IMF deems sound, provides a backstop to existing foreign exchange reserves.

When Korea and other east Asian countries lost foreign support in 1997, they responded with austerity plans. Sharp currency devaluations made life at home more expensive, but supported exports. Governments preferred spending cuts to exploding deficits. Within a couple of years, Seoul and the others were running balance-of-payments surpluses that enabled them to repay or refinance debt and resume economic growth.

The Polish economy was bound to suffer from the decline in world trade and the drying up of foreign investment, which had peaked in 2007 at 5pc of GDP. But the country had fairly low government expenditure, at 25pc of GDP, a modest fiscal deficit and a free-market economic structure. It also had the freedom to let the zloty fall, since it was not tied to the euro, unlike the Baltic states, Slovakia and Bulgaria. The currency has dropped 30pc against the euro. That has kept exports stable in zloty terms, while imports are slightly down. The effective devaluation has also lessened the risk of deflation. Polish inflation is around 3.6pc.

It's too early for final judgement on the Polish approach. After all, the current account deficit is still expected to be 5pc of GDP in 2009 – a sum that has to be financed by foreigners.

But the Warsaw alternative looks less risky than the Anglo-American model of large "stimulus" programmes, huge budget deficits and rapid monetary expansion. In a small economy, such policies would have been likely to lead to a zloty collapse and a government debt crisis. Poland is right to look to Asia.

http://www.telegraph.co.uk/finance/breakingviewscom/5173214/Warsaws-solution-to-crisis-could-yet-be-a-masterstroke.html

Related Articles
Crisis has seen power shift and the East emerge from West's shadow
Asian shares mostly higher but caution lingers
Singapore's economy contracts 20pc in first quarter
Swiss slide into deflation signals the next chapter of this global crisis
A world currency moves nearer after Tim Geithner's slip