The Analysis of Polish Economy Based on the IS-LM Model - Term Paper Example

The analysis of Polish economy based on the IS-LM model applied for last 60 years (from 1950-2010) Poland is located in central European map, and it borders a host of seven states including Germany and Russia. Its history has been known to revolve around the presence of these two powerful states, which includes the period at which each of the countries occupied it. Poland has been able to grow and thrive to success, despite its involvement in at least two of the most tragic wars alongside being under the occupation of these two powerful countries. To understand the economic trend of Poland as a nation, it is vital to revisit the country’s history on a brief note of hoe it came into existence. Poland’s history can be traced back to 840 AD, where Slavic tribes inhabited Polish land. During this period upto around 1080, they experienced a number of challenges and misfortunes, ranging from corruption in their noble ancestral land, to the fear of facing invasion by foreign and neighboring nations. The partition of Poland first began in the 18th century when the Russian State organized invasion of the country in 1764, after they realized the feeble state in which Poland languished. Immediately after taking over Poland, Russia subdivided the country between themselves and their closest ally states. The country’s division took place into three partitions namely, Austria, Prussia and Russia. In the years to come especially between 1946 and 1947 communism took toll in Poland, integrating the country into the Soviet Union as a proxy state (Keynes 30) This meant that Poland joined the league of all countries under the Communist banner and rule. After the World War I and World War II in which Poland was involved in, parliamentary elections took place in 1947 and the Communist Social Party garnered over 85% of the votes hence, taking rule over Poland making it a Communist State. In regards to business and economy, IS-LM Structures, is a model, which helps in assessing sales revenue, with the help of a microeconomic data. This is possible through the testing of statistical data against the revenue, through the IS-LM model projected data that shows the sequence and time of the microeconomic data. The IS symbolizes the Income Spending whereas, LM symbolizes the Lending and Money supply. The IS-LM structure was introduced by Sir John Hicks, and has been vital in the wake of elaborating major economic terms in the Keynesian Microeconomics dating back in 1937 (Hicks 155) The IS-LM structure involves two economic graphs converging, one denotes income and savings and the other graph denotes the supply and demand of money. The vital variables in this model are the interest and income. According to Scholars like Mark Hayes in his book, The Economics of Keynes, income is a dependant variable, which is influenced by Intrest, which is the independent variable. In the LM curve, interest rate is the one influenced by income, which is now the independent variable. Despite this explanation, Hayes argues that, according to proposed variables by Keynes, most economist experts lose bearing in the IS-LM model. He states that, liquidity, consumption and income are the independent variables (Keynes 32) In the wake of 1970s, Poland underwent a serious negative change economically, when their highly priced economy base fell on the decline to its worst. Part of the problems included, unfavorable weather and economic targets, which had not been met. The prices of commodities rose up and out of control for people of the middle class level and lower class to afford. With the harsh economic times, many people turned to rioting as their cause of action, a move that did not go down well with the government, forcing them to result in drastic measures by taking matters in their own capacity (Hicks 149) The government declared a one-week state of emergency following the distorted economic state in the country. These helped in curbing the ongoing riots, but it was of no use since, many people had lost their lives in the protests. Through these actions, the western world especially the United States were forced to help foster business ties with states all over the world. Poland’s economy has drastically evolved over the years, and its study is divided into four parts. The first batch shows Poland’s economic trend from the current comparative stage on the world’s ladder of development, in which an historical perspective presents itself. In the period between 1950 and 1989, a period referred to as the command economy, Poland’s economic trend faced a real divergent position. The gap of development became broad with time, and it did not only apply to the Western industrialized economies, but also to the socialist states in what was known as, vis-a-vis. (Dosi 28) In the second batch, a swift catching-up procedure of the vis-a-vis economies in the period of between 1990 and 2005 using the help of economic growth data and indices, elaborated that, there was a relative development magnitude. According to the records of this period, Poland was listed as the fastest growing state in terms of economic transition, displaying a GDP growth rate higher than the average for the European Union. The Third batch is the one comparing the Polish’s economic trend worldwide especially in the larger European Union. The comparison was in term of the economic potential, total GDP measure and the level of development measured by the per capita GDP (Dosi 29) In the command economy times, the contemporary past of Poland lagged on the mainstream of economic development, which took place in the Centre, particularly in Western Europe, and later on spreading to Japan, North America and South East of Asia. Because of this, the country remained relatively underdeveloped. This was witnessed through the Per Capita GDP recording less than a half of the prevailed level in countries that had advanced industrially like France, Germany and the United Kingdom. After the Word War II, Poland managed to rise above less developed countries in the South of Europe, in states such as, Greece, Portugal and Spain. Poland achieved a development compared to that of Italy and Hungary. This made Poland among the leading state in the world economic level, rivaling powerful nations such as Germany and France and in general worldwide (Dosi 31). The period of command economy or what was referred as the ‘real socialism’, the broadening of the gap of development relatively grew, to the economies in the industrialized Western Europe. In the wake of 1989, when the systematic transition of the economy was taking place, the per capita GDP of Poland increased by about more than one-third of the economy. The country was experiencing a divergent growth process the same way with that of Southern European countries. In the wake of 1989, countries like Spain, Portugal and Greece had already caught up with the margin, which means they had gone above Poland in terms of the development status. In addition to this Poland had lost bearing related to most socialist states (Dosi, 30). The real divergence policy was brought to light in the 1980s, and some of the reasons was that, in the period between 1979 and 1982 Poland alone, experienced economic turmoil among the countries under the socialist banner. The other reasons are there was a deep contraction from the expected output and the Net Material product resulting to a net of 25 per cent. The decline in output was a clear indication of the inefficiencies experienced in the central planned economy. These reasons were all gathered and out under the martial law, which was introduced in 1981 December. The last minor reason is the ensued sanctions imposed on them by countries from the West. With these trends taking toll, the development gap of Poland and other Socialist Countries increased, and an example is that of Poland and Czech, which increased from 60% to 100% (Dosi, 30) In recent surveys, the current global economic state shows that Poland has been hit by the economic decline, but luckily, it has not reached the point experienced by other neighboring countries. In an interview with the Polish President, Lech Kaczynski stated that as well as other countries, the country was also hit by crisis like everyone else, but they had not experienced the same punishment as the surrounding countries. He stated that as the conditions continue to worsen, he was making sure that the country’s top brass and the citizens understand and come into terms with the global crisis. The economics analysts said that, it was a bold move for the President to come out into public and address the situation. On his part, it was a smart move as compared to the other Heads of State in the European Union who did not address the situation (Dosi, 34) In the wake of the economic slump in Poland, they managed to hold on to their steady exports, which was a move that helped them in maintaining the stability of their economic growth. A number of exports have gradually increased in the European market since Poland joined the European Union in 2004. The reason behind the exports increasing gradually is that Poland produces exports at an average rate, even with the current trend of economic difficulties. As much as they are able to maintain stability, the defects make the economy in some areas of Poland deteriorate since, it bears a huge burden on their economy (Dosi, 34) The trend continued to improve with recent years showing that the unemployment rate was high but with years to come, it has greatly reduced. For instance, in April 2008 the rate of unemployment was at 11.7%, but as time progresses the rate was decreasing, with the percentage decreasing upto 8.8%. In the wake of the coming years, the global economy started to experience some problems and at this point Poland had no idea of what the crisis had in store for hem (Dosi, 39) In December 2008, the unemployment was on the rise again going up by 3%, but there was no cause for alarm on this. When the New Year came, the economic crisis even became worse and from the period of between January and February 2009, the rate of unemployment in Poland rose by a percentage. However, even though the rate of unemployment was on the rise, the small rates at which it rose per month showed that things were not bad (Hicks, 13) The risk adverse investments and the tight credit policies also made the national banks in Poland to trade fairly well under the economic difficulties. The loaning and credit policies in Poland were strict hence, making it easy for them not to experience any problems in regards to the loans granted by the financial institutions. This was a very smart move on their part since; they could not authorize the loans and grants to anyone, without confirming if they are in a position to pay back in the stipulated period (Hicks, 151) In terms of infrastructure the Polish Government has put measures in place, which has ensured that the infrastructure as grown due to their grown economy. The move by government to prohibit loan to any construction company without knowing their financial status is what has controlled the rise of construction and infrastructure. The companies with ability to convince the polish government that, they have a solid plan to improve the infrastructure and their willingness to pay their loans in time were granted loans and were able to start the construction work. The Strict rules and policies in the bank was an indication that the Polish government was serious in their course to improve and maintain the stability of the country’s economy (Stiglitz, 30) The economy in Poland improved from the basis of the financial statements provided over the year, which helped greatly in reducing the rate of inflation and unemployment, while the economic status improved. Over the years, the statistical data proved that in regards to the economic status in Poland, the Real GDP in terms of billions of money has increased over the years. For instance, the rate in 1995 was $571.95 billion, while in 2008 it was at $1,028 billion. The Nominal GDP per capita in 1995 was at $3,603.96 billion, while in 2008 it stood at $11,860.79. This proves that, despite the economic crisis patterns over the years in Poland, they have fought relentlessly to keep the stability of their country moving (Stiglitz, 30) Works Cited Bertelsmann, E., Scarpetta, S. and Schivardi, F. 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Moggridge (ed.), the General Theory of Employment, Interest, and Money. London: Macmillan. 1936. Web. 17 Mar 2013. Stiglitz, J. “Rethinking Macroeconomics: What Failed, and How to Repair It.” Journal of the European Economic Association. 9, 591. 2011. Print. Read More