Wake Up, Sleeping Beauties

April 21, 2015

Marcin Piątkowski Dziennik Gazeta Prawna

All countries have their own industrial policies. So does Poland. We have quite many excellent development programmes. Since 1989 around 300 strategies have been developed. However, they have not been implemented.


Recently we have launched the cycle “New Industrial Revolution”. We believe that an innovative, modernised industry can give Poland an opportunity to avoid the trap of medium growth. Only in this way can we increase the innovativeness of our economy, which is really weak compared to other EU countries. The signs of new industrialisation are already visible in Germany and the US. Let’s join the best players.

We would like to invite our readers to discuss the necessity of increasing the role of industry in Poland. Or maybe a service economy is enough? Do we really need a new industrial policy?

All countries conduct their own industrial policy, as no country is economically neutral. For example, the US invests in sectors where the government sees the largest potential for growth. These are IT, nanotechnologies and biotechnologies. However, industrial policy has many faces – depreciating a currency, for instance, is one of the instruments of a de facto industrial policy as it supports exporters over importers. It is hard to imagine economic policy without an industrial policy aimed at supporting those parts of the economy that are most likely to boost the country’s economic development.

What sectors of the economy win in this competition?

Sometimes the manufacturing industry is the most popular, and sometimes it is services. However, in my opinion development of both sectors in not mutually exclusive. They should be both supported, focusing on those lines of business which have the greatest potential. We often tend to underestimate services, as it is difficult to measure changes in their productivity. In manufacturing, for example, each time a car is manufactured we know how long the whole production process took, what were the costs of parts and labour, that it will be sold for eleven thousand dollars and that we will have one thousand dollars of profit. For services, cost estimation is much more complex, as most of the service price is intangible, making it difficult to measure. For instance, how should we value progress and additional benefits to consumers resulting from the introduction of ATMs, online banking or paypass cards in banking? We can hardly observe this progress in our productivity statistics. Although it is a problem of methodology, it is of fundamental importance because having no means to reliably compare productivity between the manufacturing sector and the service sector, we cannot state which one is more valuable.

But some decisions must be taken.

In both sectors, there are lines of business which outperform the others. As far as Poland is concerned, BPO (business process outsourcing) has been successfully developing. Though it may not have added value equal to that of Apple’s products, a few years ago the BPO business hardly existed and provided no value added. I think there is no other line of business in Polish manufacturing which shows similar development trends. This demonstrates that industrial policy, despite its name, does not have to concern only “industry”. It is more a kind of response to the fundamental question of economic policy: is its only role to facilitate growth, which means creating a conducive environment for growth without further intervention or its role is also to support certain economic activities such as R&D, IT, energy production, which are crucial for the costs and competitiveness of the whole economy? This is the essence of industrial policy.

You are talking about sustainability. Have we not focused too much on services since 1989, neglecting the industry we inherited from the communist era as largely ineffective and cost-consuming?

Measuring balance in an economy is similar to rating the artistic aspects in figure ice skating. It is all subjective. There is no methodological meter from Sèvres able to determine that a healthy economy should have its GDP composed of, say, 25% industry and some other part of services. Any such standard would not make much sense, because according to the laws of economics we should rely primarily on our comparative advantages; in other words, leverage those economic activities in which we are the best. Some countries, such as Germany, excel at manufacturing, and this is their asset, while others like India focus on services, since they have large reserves of cheap and well-qualified workforces, giving them a competitive advantage.

And what does the Polish economy look against this background?

Industry still retains about a 20% share in Poland’s GDP, which is much above the EU average. For example, in France industry’s share in the GDP is only 11%, while in the UK, which is associated mainly with services, the share of industry is actually higher than in France. The ratio for Poland is higher than the EU average, so we should ask the question whether we want more industry. If the answer is yes, then what kind of industry, because, while Poland could produce more washing machines or dryers, this is not the point. It is about the added value which can be generated domestically. So this is not about attracting another producer to assemble fridges and then being pleased  to see the industry ratio in the GDP rise. It is rather about the share of the fridge’s value generated in Poland. Here, though, we have a dilemma: do we care more about producing a refrigerator with say PLN 100 of value added, or PLN 200 of value added produced in an BPO in Kraków, where an employee enters data into the accounting system of a Western company?

How, in the context of assembling, do you assess the industrial policy conducted so far in Poland?

Polish governments have often conducted an industrial policy without even realising it. Even in the 1990s, when Poland’s Minister of Industry Tadeusz Syryjczyk proclaimed that the best industrial policy is no industrial policy. This is not true, though, as each economic decision exerts a different impact on various sectors of the economy. As for my assessment of the policy, I believe that we have done well. There are many things we should have done better, but today we have become for the first time in our history the European champions of economic growth since 1989. We have more than doubled our GDP, leaving all the European peer countries behind we are also one of the world’s economic tigers, which has developed even faster than Korea, Taiwan or Singapore over the last twenty years. Poland has managed to accomplish a lot, which has allowed itto enter its new golden age. Never before has the quality of our life been so high. And could it have been better? Of course. But it could also have been much worse. We could have copied Ukraine, which at the beginning of the transformation had the same level of GDP as Poland, and yet today it is three times poorer than Poland. I think what still needs to be improved in Poland is the quality of the institutions and operational efficiency. These are the areas in which the state can do better, because I do not believe in doctrinally enforced support for particular industries.

Can we think strategically?

Yes. There are lots of strategies and their quality is improving. But when asked once whether he fears his opponents’ strategies, the boxer Mike Tyson said that the plans of the pretenders to the champion’s belt worked only until his first strike in the ring. This is a good analogy for our situation – we are good at developing economic development strategies, as there have been over 300 since 1989, but we have a problem with implementing them. This is clearly visible, for example, in the area of support for innovation. As the World Bank, we have conducted an analysis of Poland’s support system for innovations and it has revealed that we often tend to assume one thing, but the reality turns out to be different. We planned to make Chateaubriand, and ended up with sausages. Poland wanted to support small and middle-sized enterprises, but ended up supporting bigger enterprises. We were supposed to support research and development in high tech areas, yet in reality we supported low-tech sector. Finally, we meant to support innovations (high risk), but the end result has been the absorption of technologies or imitation. This shows that we have a problem with accomplishing the goals we set.

What is the source of the problem?

Institutions are only as good as the people who manage them. Since we all agree that innovations are crucial to catch up with the West, it is obvious that institutions supporting innovative undertakings should hire the best people from the public administration. They should be our special forces, something like the GROM of the economy. Risk is an inherent element in innovations, so to succeed one has to be highly flexible, energetic, competent and motivated. Such institutions already exist like, for instance, the National Centre for Research and Development (NCBR), which aims to become Europe’s leader in support for innovative enterprises, but this it is still just an exception. The quality of many institutions, including business support institutions, leaves much to be desired. It is not only the quality of the developed strategy that is crucial, but also its implementation in life. It is just like with a car – it is the engine and the drive system hidden under the bonnet which are the most important, rather than what we can see at first sight.

So, what should be done to make our car efficient?

The key to the success of industrial policy is the quality and flexibility of the personnel that implements it. It is about whether these people are willing to take risks, have clearly defined goals, if there is a system of incentives for them to take risks, and whether there is somebody who monitors and evaluates them. Whereas we still have a problem with these basic management rules. The objectives of many institutions are not clear. When it comes to incentives, there is a principle that public institutions will make money regardless of the results achieved. Finally, monitoring and evaluation in Poland need to be improved. At present it is really hard to say which development programme has worked. We do not know because we do not collect and evaluate the relevant data.

Are our elites aware of the weaknesses?

They do realise in which direction we are going, and it is not all bad. However, it is worth to focus on the effective implementation of strategies in life, on the professional management of the process, and the analysis of the effects. Our problem lies in the fact that we report on how much money is spent from the EU brilliantly, but we are often not able to demonstrate the results of the expenses made, that is how much profit we have generated, what the amount of added value is, or how many new jobs we have created. Tekes, a Finnish innovation support agency, should serve as our role model. We invited their representatives to tell us more about their innovation support model. They came andshowed us two straight lines on a chart. One of the lines, nearly flat, represented the rate of development of companies which had nothing to do with them. The other line that rose sharply upwards – these were the companies which received support from them. This shows the effects of the agency’s work, and the benefits for the economy. What would such a chart for Poland look like? It is not possible to draw it, because the relevant institutions do not collect and analyse data. What is more, they cannot ask the proper questions: not how much we have invested, but what profit we are making. As a result, we are not really sure which of the several dozen innovation support instruments provided as part of the previous EU financial perspective has proven the most effective.

Do we lag far behind the best-performing countries?

So far we have reached the stage where we know what we do not know. The administration must go further, it must learn how to evaluate the quality of the work done and its results. Without it, there is no chance for a successful industrial policy. It is necessary, for example, to change the attitude towards enterprises applying for EU subsidies. Often the objectives are noble but, at an implementation level, the criteria are set so that innovative companies are rejected as risky, young, and lacking in experience. Yet this is exactly the type of companies that should get support.
In consequence, what remains from the river of companies that apply is only a stream, and, what is worse, the profiles of the companies chosen are not always compliant with the programme’s assumptions. What we also need to know is what the difference between those companies that have received public support and those that have not is, and what the net result is. Only then will we know how effective the measures being taken are. The website of the ministry of infrastructure features a counter showing how much we have invested thanks to the EU, but I would prefer a counter demonstrating how much profit we have made.

So what should this support model look for Poland?

In Finland, the representatives of Tekes get in their cars and travel to companies all around the country, directly asking the entrepreneurs how they can help. It is hard to imagine something like that in Poland. The role of public sector institutions, however, should consist in reaching out to those enterprises which often do not want to have anything to do with the public sector. No one tries to seek our champions and ask them a fundamental question: how can we help you?
It is not always about money. A representative of such an institution may help an entrepreneur go abroad to train in innovation management or guide them through the entire process of patenting a solution. Entrepreneurs often do not even realise that they can obtain a Polish, European or, if need be, an American patent for their ideas. Show me one office in Poland that knows how to do it and which offers companies comprehensive assistance.

Which areas should we support? A few years ago it seemed that shale gas production had great potential.

I am not sure if shale gas is a good example of the failure of the state. Failure would be when the state did not support this idea, regardless of the final result. The prime minister is hardly to blame for not finding shale gas in the bores. Who knows, maybe the future will spin a new technology, far more successful than fracking.

Is there something else worth investing in apart from shale gas?

The government has already specified that there is. We have many strategies, including several unofficial ones.
An example of such prioritisation is a list of smart specialisations developed by the Ministry of Economy. This includes 18 areas in which Poland intends to spend EUR 10 billion by 2020, mainly from EU funds. The list features, for instance, healthy food production – the government has decided it is one of our strengths and it should be supported. Yet, selecting priorities is only the end of the first section of the path. What is more important is what we do after determining our priorities and how we review our choices. The list of priorities should be active, reacting to changes in the economy, to the rise of new industries. These are the assumptions behind the domestic smart specialisations – the 18 areas selected should be constantly verified. To make it possible, it is necessary to let business have the most say with regards to decisions on innovations. It is entrepreneurs who should tell us where they see potential for development in business and innovations.

How should this be put into practice?

In cooperation with the Ministry of Economy, we as the World Bankare now designing and testing a process (entrepreneurial discovery process), which will collect from entrepreneurs information on business and technological trends, facilitate reaching out to those enterprises with the highest potential for development, and help adjust public support instruments to business’s changing needs. The system is also meant to help identify “champion companies” as well as “sleeping beauties”. The former are already successful, but need help to spread their wings. The latter need an impulse to start to develop, as they have potential that they have yet to recognise. Someone needs to help them transform from roaches to sharks, or at least join a shoal that has the strength of impact to make its way around the world. In other words, it is not enough to state that “production of healthy food is the future”, you also need to know if there are companies in the industry that want to become global champions. If their owners are interested only in everyday survival, raising children, buying a Mercedes and retiring – why should we be bothered with such companies? It is a complex task to identify these potential champions, because the most frequent answer to the question of what the government can do for them is: leave us alone.

So perhaps a different question should be asked?

Of course. Investors are rarely asked about what they want to invest in. We tend to think that it may be biotechnology or nanotechnology, because 150 countries invest in them and, if a minister decides it should be supported, no one will criticise him. But it is worth asking the people operating in these industries whether our country really has potential in this field and, if so, what should we invest in specifically. Let me give you an example: it seemed to us that Poland might have a competitive advantage in the area of smart homes technology, that is everything from mobile apps through CO boilers, to passive energy-saving solutions. We started a discussion with a group of entrepreneurs from Lower Silesia operating in this industry. It turned out that they thought that the smart home was not necessarily the specialisation with the greatest potential. Instead they suggested assisted living technology, that is the technology, which involves solutions that assist the disabled and elderly people to live a decent life. And that we have the products, services and people in this field that can create a competitive advantage.

OK, let’s assume that we will collect such information from companies. So what’s next?

We should compare this information with the actual knowledge, research and scientific potential in a given industry, market analyses and statistics, for example, as to the level of labor productivity in a given area.
Such a process, based not only on official data from an official’s desk but primarily on information obtained directly from entrepreneurs, will help us decide if we have the potential in a given field and whether and how public aid can support that field. Currently the authorities make decisions mainly based on data compiled by the Central Statistical Office (GUS), data which are often one- or two-years old. What decisions about the future, especially about the future of innovations, can we make now, while we rely on out-of-date information? It’s like looking in the rear-view mirror while driving.

Does this mean that an effective industrial policy relies on consulting business first?

Yes, but that is not all. Institutions need to obtain information from business in various ways, and again the key is in the execution of the idea. The information collected must be of high quality. The prime minister or voivodeship marshals should be like generals at war: taking decisions based on data from many different sources and remaining flexible in the face of change. Today there is a shortage of data, which means we have a problem. We do not know what instruments should be used in specific situations to achieve our goals. We may have a general strategy, like during a war, but then the strategy has to be translated into concrete tasks for the commanders of particular fronts. We have a strategy – we want to catch up with the West in the next 20 years - but, when we take a closer look, it turns out that our commanders are relying on old maps when taking decisions on what to do next.

In what areas do you see – even intuitively - potential for investments as part of industrial policy?

I am not going to point to specific industries. But note one thing: there are no obsolete industries, there are only obsolete technologies. Every industry contains modern technologies which can create high added value. Let me give you an example of a company from the Świętokrzyskie Voivodeship operating in the agro food-industry, manufacturing oil from strawberry seeds and selling it for EUR 200 per litre. The conclusion is that all businesses, even apparently not very modern ones, are capable of generating product with added value per employee higher than, say, in KGHM. Therefore, the key is to create a system which will identify companies with the greatest potential, and offer them effective and professional assistance. This, though, often requires a fundamental change in the way of thinking of the decision-makers and the functioning of institutions.

Thus, those in power should not come up with great doctrines such as, for instance, 'from now on we will support metallurgy' or 'we will focus on electronics'.

A strategy as such is not enough. It is worth to do homework in those organic elements which eventually decide if, at the end of a day, we end up with a Ferrari or a Lada. And this does not mean that our public sector is not aware of this. Because it is, and Poland has a plan. The decision-makers realise that there is huge difference between producing potato chips and micro-chips. The role of the public sector is to push the economy towards micro-chips. How do we do this in Poland? We are trying to do this like most other countries in the world, by supporting research and development as well as innovations. However, success hinges not just on good strategies, but mostly on the execution.


*Interview originally published by Dziennik Gazeta Prawna on April 6, 2015.