Why Poland caught up: the long shadow of 1989

This article is a part of Poland Unpacked. Weekly intelligence for decision-makers

As early as the final years of the communist era, Poland already had a level of human capital comparable to that of many wealthier countries. Economies in which education and skills outpaced overall economic development have typically grown faster later on. Poland is a clear example of this pattern.

Human capital – which includes education and work experience – is widely recognized in economic research as one of the most important drivers of long-term economic growth. Nobel laureate Claudia Goldin, together with Larry Katz, attributed much of the United States’ economic advantage over Europe in the 20th century to a more widespread and inclusive education system.

Human capital and GDP per capita

The chart below shows that in 1989 there was a positive relationship between the level of human capital and GDP per capita. The human capital index used is based on years of schooling and estimated returns to investment in education. It is therefore a measure designed to capture the impact of education on worker productivity. The highest value in the sample, around 3.4 for Switzerland and the United States, indicates that the average worker had roughly 2.3 times more human capital than workers in countries with the lowest index values – Yemen and Burkina Faso, where the indicator stood at 1.03.

The measure, however, is not perfect. Returns to education, as well as its quality, are not estimated separately for individual countries but averaged across them. Moreover, human capital includes not only education but also work experience.

The observed positive relationship becomes even stronger when oil-exporting countries are excluded from the sample. These economies often have high GDP per capita primarily due to resource rents from natural resource extraction and capital-intensive production. At the same time, they frequently face talent outflows into the extractive sector and, more broadly, insufficient investment in education and science.

Human capital and Poland’s transition

A relatively high level of human capital likely also contributed significantly to Poland’s economic development over the past 35 years. In 1989, at the onset of systemic transformation, there was only one country with a lower GDP per capita than Poland but a higher human capital index. Poland’s score, at 2.71, was only marginally below Romania’s 2.73. At the same time, nearly half of the countries – 16 out of 38 – that had higher GDP per capita than Poland in 1989 nevertheless had lower levels of human capital.

Poland entered its systemic transformation with relatively strong human capital for several reasons. The key factor was the belief that mass education was essential to industrialization. Secondary education was widespread, illiteracy remained low, and the share of skilled technical workers, including engineers, was high. The main problem lay in the low productivity of enterprises, driven by weak incentives, inefficient allocation of resources – capital and labor – across firms, and technological backwardness. This was reflected in living standards across communist economies. Despite human capital levels comparable to those of many Western European countries – at least in quantitative terms – their GDP per capita was often closer to that of developing economies.

Over time, systemic transformation removed many of these constraints. The most important change was the improvement of incentives following the introduction of a market-based system. This also enabled a more efficient allocation of resources. Institutional reforms and the drive toward European integration encouraged foreign firms to invest in Poland. This facilitated technology transfer, including knowledge and management practices. For foreign investors, the appeal was not solely low labor costs, but rather their favorable ratio to the level of human capital. The establishment of relatively well-functioning market and state institutions made it possible to unlock the potential embedded in society, including that stemming from the level of education achieved before 1989.

A global perspective

A closer look at the chart reveals another pattern. Countries that in 1989 had a relatively higher level of human capital than would be expected given their GDP per capita – that is, those positioned above the trend line – tended to grow faster than countries below it. Examples include Poland, Romania, and South Korea, all highlighted in the chart.

By contrast, countries with a GDP per capita similar to Poland’s but significantly lower levels of human capital grew more slowly. This applies both to Latin American economies such as Brazil and Mexico, and to South Africa. More broadly, countries with high levels of inequality tend to invest less in public goods, including education.

A similar relationship can be observed when comparing the economic trajectories of China and India. Ten years after Deng Xiaoping’s reforms, China had a level of human capital significantly higher than what its income per capita would have suggested. In India, by contrast, it was roughly in line with its level of economic development. This was one of the factors contributing to China’s faster growth over the past 35 years.

This does not mean, however, that the relationship holds in every case. Argentina and Turkey offer a useful counterpoint. Despite Argentina’s significantly higher level of human capital in 1989, its economic growth was disappointing, while Turkey’s was relatively strong. The comparison is both interesting and ambiguous. Argentina was hit by a series of macroeconomic problems – from hyperinflation to repeated economic crises, most notably the 2001 collapse. At the same time, Turkey can hardly be described as a model of macroeconomic stability or high-quality institutions.

The educational success of the pre-1989 Poland: a missed opportunity

The chart below shows how the human capital index has evolved in selected countries over recent decades. Several patterns stand out. First is the already noted high level of the indicator in Poland in 1989. Equally striking is its increase in South Korea, as well as in Brazil, although in the latter case it occurred mainly over the past 20 years, following a long period of stagnation. It is worth bearing in mind the previously mentioned limitations of this measure.

Poland’s high human capital inherited from the communist period can be interpreted in two ways. One perspective emphasizes the achievements in expanding access to education after the Second World War. Yet it can also be seen as a symbol of a missed opportunity. Poland had a relatively better-educated society than wealthier countries such as Spain and Portugal – and it continues to retain this advantage. However, due to the internal contradictions of the communist system, it was unable to fully exploit this potential.

The democratization of Spain and Portugal in the 1970s, and their accession to the European Union a decade later, allowed them to enter a path of rapid economic growth earlier. As a result, although Poland has recently overtaken Portugal, it still lags behind Spain, despite its higher level of human capital. The level of development should therefore be understood as the outcome of an interaction between the knowledge and skills accumulated in society and the time elapsed since improvements in the quality of market and state institutions.

Human capital is an important – but not the only – source of economic growth. For knowledge and skills to translate into higher productivity, they must be complemented by sound institutions, stable economic policy, access to technology, and well-functioning markets. This is illustrated by the cases of Argentina and Turkey. The former, despite a high level of human capital, struggled for years with economic crises and macroeconomic instability. The latter grew more quickly despite numerous institutional shortcomings. The level of development is therefore determined not only by the quality of human capital, but also by an economy’s ability to put it to effective use.
Poland entered the transition period with one of the highest levels of human capital among countries at a similar income level. This was the result of long-term efforts to expand access to education, low illiteracy rates, and a high share of technical workers and engineers. The constraint was therefore not the population’s skills, but rather the inefficiency of the centrally planned economy, weak incentives for innovation, misallocation of resources, and technological backwardness.
Countries whose human capital levels were higher than would be suggested by their GDP per capita often recorded above-average growth in subsequent decades. This group included, among others, Poland, South Korea, and Romania. A high level of education and skills did not guarantee success, but it provided a solid foundation for faster catch-up growth once institutional quality and the business environment improved.