Do Not Rest on Your Laurels, Poland

February 19, 2015

Marina Wes, Theo Thomas Rzeczpospolita

This article was first published in Rzeczpospolita on 18 February, 2015.

Polish economy is doing well, but that does not mean the “if it ain’t broke, don’t fix it” should apply – say the World Bank experts Marina Wes and Theo Thomas*.

It is beyond doubt that Polish economy is doing well and it maintained its good standing last year. In 2014 economic growth was twice as high as the year before and amounted to 3,3 percent. In this respect Poland stands out, in a positive manner, when compared to euro zone economies, where growth in 2014 is estimated at 0,8 percent. According to projections, published recently in a World Bank „Global Economic Prospects" report, global economy cannot achieve a higher growth rate, as many high income countries are still struggling with the impact of the global financial crisis, and emerging economies are characterized by lower dynamics.

Reserves are running out

Poland should not stop at achieving good results in unfavorable market conditions. If it continues to develop at the current rate, it will be another 20 years before the Poles’ real income is equal to EU average. Moreover, maintaining a high level of productivity and economic growth in a higher income situation may turn out to be difficult.

Reserves in form of enterprises moving their operations to Poland are running out. In the future, the growth rate will depend to a much greater extent on increasing productivity within the enterprises themselves. This requires higher investments, innovations and introducing new technologies.

It is a difficult process, especially since the importance of services sector is increasing in the economy. That is why it’s common for growth rate to decrease in middle-income countries. Sometimes it decreases so much, that the convergence process and income equalization compared to most developed countries come to a halt. Some countries fall into “middle income trap” and remain “trapped” between high and low level in the long term. Poland is also facing challenges related to rapid aging of the society.

Three dimensions of improvement

In the future, Poland will have to face the problem of aging society, while trying to maintain productivity growth. That is why actions are necessary in a number of dimensions.

First, the key thing for lasting economic rebound in Poland and more generally, in Europe, is increase in investment, which was growing rather sluggishly in the entire region. Investments are important as they not only allow increased production and developing new products – which is something of a challenge for Polish enterprises, where innovations traditionally remained on a low level – but they are a measure of trust and faith in economic growth prospects.

Since 2008, a decline in investments is observed across the region, caused by credit activity getting slowed down by the banks, activities undertaken by companies and governments in order to reduce debt levels, as well as by decrease in investor’s trust. EU has proposed a new European Fund for Strategic Investments (also known as Juncker Plan), which is to supply European economy with 315 billion EUR (equal to 2 percent of EU’s GDP) within the next three years to stimulate investment. The proposal was received favorably, however it relies largely on private financing. The initiative shall succeed if the money involved results in inflow of additional funds for new investment projects, which would not be implemented without them.

Labor market

Second, important problems of the labor market were not solved, which potentially might have a negative impact on economic growth in the future. Those include long term unemployment, especially among youth and unqualified workers, low level of labor market participation among older workers, and lack of skills in various generations of workers. Active labor market policies should allow matching workers’ skills with employment opportunities and support employment by, e.g. creating nurseries and kindergartens to support working parents. Other problems – such as increasing duality of the labor market (which offers different conditions for the permanently employed and different conditions to those on temporary contracts) and persisting regional divergence, as well as high level of poverty among the employed – indicate the need to reach appropriate balance between flexibility and fairness of the labor market.

Encouragement for innovations

Third, policies intended to increase productivity should create incentives for innovation, in order to bring Poland onto the technology development path. How efficient technology development is going to be here shall depend on mutual relations between education sector, infrastructure sector and regulation of products and labor market. Poland should promote entrepreneurs able to identify and tackle the right business risk.

The World Bank cooperates with Poland to significantly increase productivity and economic growth, while remembering that the benefits of economic growth should be shared by all the citizens.

*Marina Wes is the World Bank representative in Poland. Theo Thomas is the World Bank economist for Central Europe.

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