According to the Think About the Future Foundation, Poland stopped reducing the distance separating it from Western countries in terms of GDP per capita in 2009. Why had this happened?
"Poland globally. Escaping the average growth trap", a report by the Think About the Future Foundation (established by Ryszard Florek, a well-known Polish businessman), compares Poland's economic growth with those of the richest countries in the world, including South Korea. Korea, similar to China, Japan or Taiwan focused on developing home grown businesses and technologies. Poland, Similar to the Czech Republic, Slovakia and Hungary, has been focusing on foreign investments and foreign technologies since the 1990s. Which model proved better? During that period South Korea recorded much higher growth (measured by GDP) than Poland or our southern neighbours. In 1985 GDP per capita in Korea was at the same level as that in Poland, whereas today it is twice as large. The report by the Think About the Future Foundation compares GDP per capita growth and value in Poland and a number of the richest West European countries such as Germany, Sweden, Denmark, Austria and Switzerland. The report shows that not only did we not edge closer to these countries, but the gap has actually widened. And other countries in our part of Europe fared no better. And thus between 2008–2017 GDP per capita increases were as follows: in Poland by 2.6 thousand euros – to 12.2 thousand euros, in the Czech Republic also by 2.6 thousand euros – to 18.1 thousand, in Slovakia by 3.4 thousand – to 15.6 thousand, in Hungary by 2 thousand – to 12.7 thousand, in Lithuania by 4.7 thousand – to 14.9 thousand, in Romania by 2.7 thousand euros – to 9.6 thousand, in Estonia by 5.7 thousand – to 18 thousand, in Latvia by 2.7 thousand – to 13.9 thousand, and in Bulgaria by 2.3 thousand – to 7.3 thousand. Whereas in Germany it grew by 7.9 thousand euros – to 39.6 thousand euros, in Switzerland by 22.2 thousand – to 71.2 thousand, in Sweden by 9 thousand – to 47.2 thousand, in Denmark by 6.8 thousand – to 50.8 thousand, and in Austria also by 6.8 thousand – to 42.1 thousand. Some may wonder how that is possible as the economies in Poland, Slovakia and the Baltic States have been enjoying faster growth than the western countries. The answer is quite straightforward. If our GDP per capita is 3 or 4 times less than that in the rich western countries, then in order to reduce the gap between us and them, our GDP should grow 3 or 4 times as fast as theirs. But, unfortunately, that is not the case.
An industrial disaster
Why was it different for the Asian Tigers, who recorded 10% annual GDP growth over a number of decades? The "Poland globally" report identifies a number of causes. Primarily the fact that the Polish economy, across a lion's share of the most significant sectors is dominated by foreign corporations, which entails a considerable bunch of negative economic consequences. These include major capital outflows from Poland and less income tax revenues resulting from aggressive tax optimisation applied by many international corporations. And significantly that Polish companies, who have had to deal with much larger and more powerful competitors from the west, without such strong brands and large marketing budgets, have been mainly competing on price. And that is detrimental to profitability (they are significantly less profitable than Polish branches of western corporations), stems their growth and prevents meaningful capital from being accumulated for development and investments. On the other hand many economists, but also PwC, a well-known and renowned international consulting company, are emphasising that our country will not start catching up economically with the richer countries in the west without a number of strong domestic companies, who establish global brands known all over the world and develop their own high-tech. And why such a conclusion? Dr. Maciej Grodzicki from Jagiellonian University's Economics, Finance and Management Institute provides a very interesting answer to that question in his results of an analysis of how the industrial sectors in Poland, the Czech Republic, Slovakia and Hungary have been making up lost ground on western industry since the 1990s. He published his research results in a book entitled "Convergence under economic integration. The Visegrád Group in global value chains". Doctor Grodzicki points out that post 1989, the industries of those countries were deep in a recession, which took its largest toll in Poland. It is estimated that between 1989 and 1993 industrial production in Visegrád Group countries shrunk by more than a third, and in Poland by a staggering 40 per cent. "Andrzej Karpiński, Stanisław Paradysz, Paweł Soroka and others (2015) refer to the Polish case as an »industrial disaster« and demonstrate that after 1989, 240 large industrial plants were shut down, often with advanced research and development facilities" – states Maciej Grodzicki. The Polish industry suffered the most as it was more underdeveloped than those of our southern neighbours. However, that was not the only reason. In dr Grodzicki's opinion: "Unfortunately political transformation strategies contributed to such a course of events" In early 1990s the conditions for pursuing economic policies were undoubtedly very harsh... Nevertheless the attitude of political decision makers towards domestic industry in itself did nothing to improve its situation or even contributed to its shocking collapse. Here I am referring to decisions such as a sudden withdrawal of trade protection grants and instruments, choice of a privatisation strategy (sanctioning hostile takeovers, an ideological aversion of state ownership), subjecting national companies to a super-normative wages tax (Polish: popiwek) and a restrictive monetary policy". Far reaching and quick opening of the Polish market to foreign goods was also significant (by abolishing import duties for example). Subject to such conditions Polish producers stood no chance in a confrontation with much larger western corporations, which could bring to the fray much more modern technologies and products. Despite that, subsequent Polish governments persevered with opening the Polish market ever more to foreign goods even at a time when their hand was not being forced yet. And this means a long time before Poland's accession to the EU. Japan, South Korea and China opted for a completely different economic policy. According to dr Grodzicki, they followed or still follow protectionist policies and support their own industry in different ways. "As the potential of domestic businesses grew in those countries, trade and capital flows were gradually liberalised" - points out the academic.
Cost competition
In order to re-build and modernise its industry, Visegrád Group countries with Poland in their midst focused on foreign investments. And, according to dr. Grodzicki's research, up until a certain point the results of such an approach were quite good. This was because these western corporations installed the latest technology and solutions at their Polish factories, worked with home producers contracting them to manufacture subassemblies and components. All that contributed to a rapid modernisation of the Polish industry and facilitated considerable export growth. Factories owned by western corporations in Poland were to a large extent geared towards foreign markets. The downfall of this model was its reliance on a cost competition model. Factories in Poland or Slovakia attracted investments from foreign corporations for two primary reasons: proximity of large, wealthy West European markets and significantly lower production costs than in the West. The problem was that international corporations operate on the basis of the fragmentation of production principle (that means it is distributed – some factories manufacture semi-finished products, parts and components, and these are then assembled in different factories), create and manage something called global value chains. These begin with raw materials' suppliers and end at the corporations' head offices responsible for management, marketing and sales of finished products, where new technologies are developed, where research and development as well as design works are carried out. Manufacturers of semi-finished goods, components and subassemblies as well as companies which assemble them into finished goods are between the two extremes. The higher one is in such a value chain, the more one earns and achieves higher margins. And those lower down find that competition is fiercer (the simpler the tasks to be done the more companies there are able to perform it) and profits are lower. The snag is that – as emphasised by Grodzicki – Poland, the Czech Republic, Slovakia and Hungary are amongst the countries most integrated with global value chains, but at mid-level: they act as sub-suppliers, subcontractors and assemblers.
Factories owned by foreign corporations usually perform that function, but also production facilities of Polish companies which work with them. In practice this would mean that Polish companies contracted by a western clothing enterprise for example produce apparel which is then sold under a foreign brand achieving margins much higher than those available to the Polish subcontractor. The same can be said for most Polish furniture or dairy exports. All in all Polish branches of international corporations do not develop new technologies, do not innovate and do not have their own research and development centres. Their head offices are the places where technologies are created and then utilised elsewhere. And that is one of the answers to the question of why Poland fails to perform well in innovation rankings, spends much less on research and development works and why its share of technologically advanced products in production and export is much lower than those of rich western countries. According to dr Grodzicki, countries within global value chains are split into central countries, technology leaders who are "producers of scientific and technical knowledge" and peripheral countries. The former are found at the tops of the chains, countries chosen for head offices of international corporations, research and development centres, places where new technologies are developed. Whereas peripheral countries provide the subcontractors and sub-suppliers. The Visegrád Group states as well as Poland are part of the latter group, stuck at this level within global value chains. As a result of such circumstances, wages in these countries rose very slowly and are still only a fraction of those enjoyed in rich western countries. Therefore the question of how Poland can move up these chains is key. As only then will we be able to reduce the gap between us and the rich western countries. International corporations who have their head officers in the West, would have to move them here for us to be able to make any progress. However, that will not happen. Thus the only way forward is to create powerful, international brands and companies, which would have their head offices in Poland. And that requires an appropriately a focused national industrial policy. Germany, for example, has such a policy. Since 1989 Poland has not had one. It has been creating and trying to purse one since just under four years ago, but it is still too early to assess its accuracy and performance. According to doctor Maciej Grodzicki, there are very few examples of peripheral, less developed countries being promoted to the "central countries" category and "worldwide international economic inequalities are immensely permanent and become more ingrained with time". Therefore Poland will not find it easy to join the ranks of the richest countries in the world. However, looking at South Korea for example, we know that such a feat is possible.
Jacek Krzemiński
Published in DoRzeczy No. 39/341 in 2019.