At the InterContinental hotel on Los Angeles’ Avenue of the Stars a clear sign of Poland’s economic self-confidence could be seen this month. Kicking off a Polish-American Innovation Week in California, Warsaw officials mingled with Silicon Valley investors to discuss both the country’s attractions and how it can become a “knowledge” economy.
Go back 25 years and, crushed by debt and 600 per cent inflation, it was ailing even compared with its communist peers. The transformation is remarkable, says Marcin Piatkowski, senior economist at the World Bank in Warsaw.
“There were few who would have predicted that Poland would do well, as opposed to countries such as Czechoslovakia or Hungary,” he says.
Thanks to well-handled reforms, Poland has enjoyed unbroken growth since 1992.
When communism ended, says Mr Piatkowski, exports were less than $10bn a year, mostly basic goods. Last year, exports were more than $200bn. And while EU and eurozone GDP have hardly grown since the end of 2008, Poland’s economy is 18 per cent bigger.
That success has been achieved on the back, above all, of large foreign direct investment flows. This has transformed Poland into a manufacturing centre of finished goods and components for western Europe, especially Germany.
The factors that attracted that investment persist: a well-educated yet cheap labour force, and an excellent geographical position. While salaries have been increasing in recent years, productivity has increased more, so unit labour costs have been declining. Add to that institutions which have caught up with western standards, says Mr Piatkowski, and the investment case remains compelling.
Yet the country faces short and longer-term challenges. EU economic weakness and the Ukraine-Russia crisis are squeezing short-term prospects.
With 80 per cent of exports going to the EU, says Witold Orlowski, chief economic adviser to PwC Poland, and only 8 per cent to Russia and Ukraine, the former is more significant. But Russia’s ban on EU food imports, in retaliation against western sanctions, has hit the food industry.
After growth slowed to 2 per cent in 2012 and 1.6 per cent in 2013, analysts had said at the start of the year it would rebound to about 4 per cent in 2014, but they now forecast about 3 per cent.
Mr Orlowski says Poland’s relatively large population, compared with smaller neighbours, provides a cushion. “We’ve got the privilege, compared with the Czechs and Hungarians, that the domestic market can compensate at least to some extent,” he says.
Moreover, falling oil prices and an oversupply of food products – fuelled by a strong harvest – have resulted in low inflation, and even, in recent months, technical deflation. That is boosting real incomes, and hence domestic demand, which should help support growth.
“Deflation isn’t coming from low growth, what we have is ‘good’ deflation,” says Ryszard Petru, president of the Association of Polish Economists.
Mr Petru adds that growth is also benefiting from a rebound in private investment, which slowed sharply after the financial crisis. State investment is set to increase next year, too, as the government launches projects backed by multibillion-euro EU funding that has helped Poland’s growth.
Mr Petru is optimistic about the short-term prospects, but warier of the longer-term challenge of sustaining growth at the level needed to close the income gap with west European economies.
“We should be growing by 2 percentage points faster than west European counterparts if we want to catch up to their level of development in 20 years.”
That will mean changing the economy so it can develop innovative, value-added products – rather than being a cheap maker of products created elsewhere. As Mr Piatkowski says, it must shift “from imitating to innovating”.
Analysts say the country has weaknesses to address. Secondary education is strong by international standards, but tertiary education lags behind, with a shortage of top-flight universities. That is resulting in a skills gap that partly explains Poland’s still relatively high unemployment.
Another priority is to nurture proper funding to support the entire product cycle from the earliest-stage research and development.
Mr Petru says the government should be cutting support to “old” industries such as coal mining, and pushing through modernising reforms and deregulation to create an environment in which new businesses can thrive.
“As long as we have this EU money flowing in, it’s easy to grow without doing too much,” he says. But the opportunity for superior, catch-up growth must not be lost, he adds, “otherwise we’ll end up like Portugal and Spain – poorer brothers to wealthier European countries”.
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