The next transformation

What sectors should Poland focus on to modernise its economy?
The idea that Poland needs to innovate in order to ensure its economy catches up to Western European levels seems to be slowly but surely filtering through with policy makers. At both national and local levels, politicians in Poland are beginning to talk about attracting more high-tech investments or R&D centres. They express their desire to create a Polish ‘Silicon Valley’ and show interest in building on Poland’s strong IT skill set and entrepreneurial spirit.
All of that is fine. But while R&D investments from foreign investors are welcome and high-tech IT clusters could greatly benefit Poland, innovation doesn’t have to come from outside or be built from scratch.
Innovation can happen, and should be encouraged, in sectors where Poland is already strong. The country has several industries ripe for an innovation jump that could propel the economy into the future. These include sectors in which Poland has so far held an advantage on the low-tech side, such as agriculture or manufacturing. Other industries that have long been dismissed as perpetually inefficient, such as mining and energy, can leapfrog into the 21st century. Technologically advanced industries where Poland already has a strong knowledge base and a cost advantage, such as pharmaceuticals, could also inject innovation into the Polish economy.
The benefits are clear: “Poland could achieve GDP growth above 4% each year between 2015 and 2025. This level of growth would put Polish per-capita GDP (PPP) in 2025 at 85% of the projected Western Europe (EU-15) average. This performance would see Poland attain the per capita GDP levels of Portugal, Spain, or even Italy, and be a globally competitive advanced economy,” said Tomasz Marciniak, a local partner at the Warsaw office of consultancy McKinsey & Co. McKinsey recently published a 96-page report called ‘Poland 2025: Europe’s new growth engine’ that explored how the country could accelerate its growth. Here, Poland Today takes an in-depth look into the report to find out precisely what can be done.
Agriculture: growing productivity
No one disputes that Poland’s agricultural sector is strong. The country is one of the world’s largest producers of apples, blueberries and raspberries, while its meat products enjoy popularity as far afield as Asia. Potential is high: Poland ranks fourth in the European Union in arable land, while over 200 million people live within 1,000 kilometres of the country. “Poland has more advantages than any other country for becoming Europe’s major food production and processing hub,” McKinsey said in the report.
However, the sector still has a productivity gap of about 59% compared with the rest of the EU. Average yields for its main crops (except sugar beets, where Poland leads) are around 40% lower than in comparable countries, such as Germany. Consolidation – both of food processing companies and farms themselves – could go a long way to bridging the divide. The average Polish farm size is 10 hectares, compared to 50 hectares in France or 90 in the UK. The fragmentation has led to inefficiencies, such as an oversupply of farming equipment: Poland now has 13 tractors for every 100 hectares of arable land. In Denmark the figure is just five. “Any significant improvement in productivity would require first increasing the size of the average Polish farm,” says the report.
To help along the consolidation process, authorities could encourage a few different solutions. One is contract farming, which allows processing companies to hire farmers as suppliers and set prices contractually. Another is producer co-operatives, which are already being promoted by the European Union and the Polish government. Co-operatives enable agricultural producers to integrate horizontally, while retaining land ownership and a measure of independence.
Advanced manufacturing: building a winner
Poland’s advanced manufacturing and high-tech sector has grown between 7% and 10% annually since 2004, though as a share of the economy it remains small, at only 2%. Growing this sector could have powerful knock-on effects for the whole economy: innovation in advanced industries often filters down to other sectors in the form of processes and technologies. However, growth in technology-intensive industries depends heavily on scientific advances that require high risk investments.
This can be overcome by encouraging high-tech manufacturing clusters, through which Polish firms could gain the scale required to have a significant footprint in the global market. “Clusters attract a qualified workforce, support knowledge development and knowledge sharing, and enable the consolidation of the supply chain, while raising the investment profile of the industry,” argues the report. There are already some models in Poland to follow. Aviation Valley, for example, is one of the strongest. Based in the country’s south-east, 90% of Polish aerospace production is concentrated there, including 119 companies and 23,000 workers.
Foreign acquisitions would allow Polish firms to bring on the experience and technology they haven’t yet acquired. Promotion of advanced manufacturing could boost exports, which is key due to Poland’s relatively small domestic market. There are several Polish examples that can be followed. These include Solaris, which produces electric buses that are exported to 28 countries, and the Polish Defence Holding, which recently raised R&D investment by a third – it now has 1,000 designers and engineers working on over 100 projects.
‘Foreign acquisitions would allow Polish firms to bring on the experience and technology they haven’t yet acquired’
Mining: digging for treasure
In coal mining, huge losses and mountains of unsold product are piling up for the industry in Poland, which is cursed with high labour costs and geologically difficult mines. However, it is blessed with large, deep reserves and a skilled, experienced workforce, as well as support from academic institutions such as the AGH University of Science and Technology and the Silesian University of Technology. Rather than allow the industry to die under a mountain of debt or keep it on life support through payouts from the national budget, Poland could reinvigorate it by improving efficiency and basing an R&D hub around the sector.
While more labour flexibility would be welcome, not all of the inefficiencies in Poland’s mines comes from intransigent workers. The report suggests using data analytics to enhance equipment availability and improved operating procedures to raise productivity. Automation doesn’t always have to mean reductions in the workforce either – the industry could improve both productivity and safety by introducing more remote-controlled processes. Mines could also improve utility efficiencies (using less water and energy) and raise safety standards. Shutting down unprofitable mines and increasing production in profitable ones would also help.
When it comes to R&D, Poland stands to benefit from the global trend toward automated mining technologies. “Poland’s mining industry has very strong foundations for world-class R&D capabilities in mining technologies,” reads the report. Academic resources, active mining equipment companies and significant demand from domestic mines offer a core around which an innovation cluster could be developed.
Energy: investment in the future
Poland’s energy sector is desperate for investment to upgrade its generation technology, revamp its outdated grid and develop renewable energy capabilities. Along with finding the financing for these projects, “efficient operations will be critical to provide the solid financial foundation needed to avoid putting pressure on energy prices and suppressing economic competitiveness,” says the report. Poland’s energy firms will have to go through some consolidation, and then maximise the efficiencies of their generation portfolios, perhaps upgrading hard coal burning facilities and waiting on riskier investments such as nuclear power and natural gas. The report also suggests revamping the market support system, so that it would subsidise only the lowest-cost renewable technologies. The effects of such reforms would be multiplied if they were coordinated with the European Union. “Development of European transmission capacities for electric power and gas would enhance interconnectivity while European coordination would boost security of supply,” the report adds.
Pharmaceuticals: prescription for innovation
Poland’s pharmaceutical industry is on a 10-year growth streak and by itself accounts for about 1% of GDP. Poland’s pharma market is the largest in the region and the sixth largest in the EU. Exports, especially to Western Europe, have been strong, as Polish producers focus on advanced-medicine markets. “Poland has established a solid reputation and fundamentals in the manufacture and marketing of pharmaceutical products,” says the report. The country’s strongest points include generic prescription drugs and branded over-the-counter (OTC) products. The sector boasts several modern manufacturing plants, with plenty of skilled labour.
According to the report, Poland could create its own high-tech pharma hub by becoming a European manufacturing centre for complex generics and biosimilars, by strengthening its role as a manufacturing contractor for European generics products and by becoming a packaging and logistics centre for European pharmaceutical companies. Here it can use its lower cost labour force, its familiarity with EU norms and its geography to its advantage. “Should Poland succeed in strengthening exports and becoming a European hub for generics manufacturing and logistics, manufacturing capacity as well as sales could nearly double,” predicts McKinsey.
Pieces in place
Agriculture, advanced manufacturing, mining, energy and pharmaceuticals are all sectors that could help form a foundation for a knowledge-based economy in Poland. Though no one is ready to dub them with a sexy (but hackneyed) moniker like ‘Silicon Valley’, they are sectors where Poland already has many of the pieces in place. And while very different, there are several common areas of focus that will help them become more innovative: clustering, consolidation, technological advancement and increased efficiency.
Achieving some of those goals will be harder than others, but that’s no excuse not to begin. The McKinsey report makes it clear: if Poland plays its cards right, by 2025 it could reach GDP levels on par with some Western European countries. That would be welcome news to Polish citizens, who long to reach the economic levels of their peers.

ASPIRATIONAL NATION

In its ‘Poland 2025’ report, McKinsey set out two potential growth scenarios – the first under a “business as usual” scenario, where Poland doesn’t make any economic reforms and the second where it makes a concerted effort to catch up with advanced economies. The differences are stark.

 

REAL GDP (USD BN)

Today (2013): 517

Business as usual 2025: 700

Aspirational 2025: 850

 

GDP PER CAPITA IN PPP (USD)

Today (2013): 23,000

Business as usual 2025: 32,000

Aspirational 2025: 40,000

 

GDP PER CAPITA IN PPP (AS % OF EU-15 AVERAGE )

Today (2013): 60%

Business as usual 2025: 70%

Aspirational 2025: 85%

 

POSITION IN EU-28 (GDP PER CAPITA IN PPP)

Today (2013): 23rd

Business as usual 2025: 22nd

Aspirational 2025: 17th

 

Sources: International Monetary Fund; McKinsey Growth Model

GROWTH INDUSTRY:

It is well known that Poland boasts high quality agricultural products and plenty of customers for them close by. But Polish agriculture has a productivity gap of 59% when compared with the rest of the EU. To close it, the experts at consultancy McKinsey & Co say Polish farms need to consolidate. “Any significant improvement in productivity would require first increasing the size of the average Polish farm,” says a recent report from the firm.

February 07, 2017
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