Poland needs to continue reforms to catch up with West and prevent "inertia'

By bne IntelliNews May 15, 2014

Jan Cienski in Warsaw -

 

This year marks the 25th anniversary of the semi-democratic elections that signalled the end of communist rule in Poland, and the country is looking back on a host of crucial anniversaries – 25 years of democracy, 15 years of membership in Nato and 10 years since joining the EU.

All in all, these have been very good years for Poland. A quarter century ago, its per-capita GDP at purchasing power parity was only about a third of Western European levels. Now it's about two-thirds, making Poland one of the world's most stunning post-communist success stories.

The trick now for the country is to look at policies that will allow it to continue catching up over the next 25 years – perhaps eventually becoming indistinguishable from the Western European countries that have been richer than Poland for more than a millennium. "If you can't prove that something is impossible, then it must be possible,” says Leszek Balcerowicz, the architect of Poland's economic reforms launched in 1990, which turned it from a dysfunctional hyper-inflationary communist mess into one of Europe's fastest growing economies. He predicts that the average Pole could be a rich as the average German within 20 years.

But if that is to happen, Poland will have to make some deep changes in the way its economy functions.

Labour productivity

For the last 25 years, Poland's growth has been largely built on its qualified but cheap labour force. That powered both the hundreds of thousands of small startup businesses that have flourished since Balcerowicz's shock therapy reforms, as well as pulling in foreign investors like Volkswagen, Asian electronics makers and the dozens of companies building business process offshoring centres on the outskirts of many Polish cities.

That infusion of foreign capital and know-how, coupled with a local entrepreneurial bent, has seen Poland make startling progress in labour productivity. In 1992, the average Polish worker produced $9.90 of GDP per hour worked in constant 2005 dollars – that compared with $36.90 in Germany. By 2012 it was $23.60, just under half of the output of an average German.

But in the last few years, Poland's productivity growth has slowed, and there are fears it could follow the example of less successful EU members like Portugal, which halted its catch-up to richer parts of the Union and has stagnated for years.

Ryszard Petru, head of the Polish Association of Economists, estimates that there are two possible variants for Poland's course over the next 25 years. 

The first he dubs “inertia” and it sees Poland growing just a bit faster than the EU average, reaching about 70% of GDP per capita. Under this case, the government does little to reform, turns to populist measures to boost wages, and continues to rely heavily on the EU for investments. That would make it richer than it is today, but still not rich enough to prevent a steady outflow of migrants. It would also be too poor to be very attractive for newcomers. “Things get a bit better, but there is no breakthrough,” says Petru.

His second prediction calls for the government to undertake continual small steps to improve the business environment, to continue privatising state assets and working to boost investment in research and development. Polish companies would also shift from their current role of supplying cheap components to the German export machine to creating brands of their own and building a larger international presence. Universities would have to improve their standards and do a better job of working with the private sector. Rising wealth would pull in migrants, making up for one of the EU's lowest birth rates and for the outflow of as many as 2m people to wealthier parts of the EU over the last decade. Richer cities would also induce migrants from farms and villages to pull up stakes and move into more economically productive jobs. “We can reach the EU average, it just demands a lot of work. It's not a matter a spectacular successes. Rather, we just have to grow 1.0-1.5% faster than over the 'inertia' variant. Over time that makes an enormous difference,” says Petru.

There is still a lot of ground to make up. The EU's newest report on innovation has Poland fourth from the bottom among EU member states. In 2012, Poland spent just 0.9% of GDP on research and development, a jump from 0.77% in 2011, but still far below the levels spent by more advanced European countries. The government also plays a much larger role in R&D spending than in wealthier countries, a sign that Polish companies are not yet spending much on innovation.

All that implies that future governments will have the resilience to continue tweaking and improving the country's economy. “Poland doesn't need a revolution,” says Marcin Piatkowski, a World Bank economist. “We don't need to change the model, but to gradually adapt it. It's hard to tell Europe's growth champion that its model is flawed.”

Jan Cienski is a Senior Fellow at DemosEuropa, a Warsaw-based public policy think-tank

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