Walking on a tightrope

Prof. Elżbieta Mączyńska, President of the Polish Economic Society, says Poland’s economy needs a shot of caffeine, like a morning coffee.
Last year brought a significant slowdown in the GDP growth rate in Poland, mainly due to a decline in investments. Is this a cause for worry, or just the effect of the break between two EU budget forecasts?

Prof. Elżbieta Mączyńska, President of the Polish Economic Society: It’s crucial to draw conclusions and look for answers to the question of why the slowdown occurred, and whether it affects other economies as well. We have to consider whether, and to what extent, the slowdown was determined by internal or external causes. It’s worth noting, for example, that the World Bank recently raised its 2017 GDP growth forecast for Poland. Most experts forecast that this year will be good for Poland in terms of GDP growth. But we can only be moderately pleased by this, just as we should be only moderately worried by the slowdown. After all, to a certain extent the acceleration in the growth rate is the result of the low statistical base last year. But primarily, the downturn in investments is the consequence of a pause in the use of EU funds, and for this we can blame both the previous and the present governments. Those are internal factors.

Elzbieta Maczynska
Photo: Katarzyna Prokuska
Can we look at the last year as a sad sequence of events?

I wouldn’t treat it that way on any account. Our economy suffered a collapse in investment, and that always brings on a slowdown. However, the slowdown in GDP growth would have been much more serious if not for assistance in the form of private consumption, and that was reinforced by the 500+ [government social aid] programme. Also important is an increase in household purchasing power as a result of increasing salaries and deflation. This is all the more important in that Poland’s existing model for development, based on low wages, has not only exhausted itself but has begun to harm the economy. First of all, it constitutes a barrier to innovation – high wages, contrary to low wages, encourage businesses to seek alternatives to increased employment. In terms of the labour market this can be a problem, but not in Poland, because unfortunately Poland is suffering from a demographic collapse, meaning a low birth rate and a declining number of people of working age, plus emigration.

Surely demographic problems aren’t the best way to drive innovation?

According to forecasts by the Government Population Council and others, Poland’s population will decrease by about 4.5-5 million by 2050. That’s a very big loss. The fertility rate — the number of births per woman – currently averages 1.3, while for the population to remain constant it should be 2.2. A bigger problem, however, is not the falling population, which dramatically worsens the demographic structure, including by reducing the number of people of working age. The only social group that is growing is seniors. And this entails future budget problems. In terms of market potential, the seniors group isn’t very attractive, because Poland lacks a developed ‘silver economy’, that is, an economic policy aimed at activating seniors and their resources on the market. There are still no market solutions that are senior-friendly, such as reverse mortgages, mortgage loans and life annuities. Current solutions are not beneficial and secure enough for seniors; in fact they tend to put seniors off.

Let’s get back to the condition of the economy today. Is basing growth on consumption rather than investment heading in the right direction?

Of course it isn’t. Everyone knows that a condition of long-term, stable growth is investment. This is all the more important in that in Poland we are dealing with a liquidity trap, that is, a situation where businesses have money, but don’t invest. And why not? Because they haven’t got enough motivation to decide to invest, or clear, encouraging enough prospects for seeing a satisfactory rate of return. In the second case, deflation has had an adverse effect. One can discuss at length when and for whom deflation is beneficial and for whom it isn’t. But even when it’s combined with a reduction in costs, deflation still has a discouraging effect on producers. This has been proven by theory – especially behavioural economics – and practice. So after a long period of obstinate deflation, we should be glad when inflation appears, and there’s no reason – at least for the moment – to lament over rising prices if that growth does not exceed the inflation target set, that is, 2.5 percent. Such moderate inflation is invigorating for the economy, like a morning coffee, where deflation has a numbing effect. A further problem, not only for Poland, is that symptoms of an economy of excess are appearing.

You mean demand is lagging behind supply?

That’s right. On the one hand, this results from progress made in technological production, which has overtaken the growth in the population’s purchasing power, while this in turn is tied up with a great asymmetry in the distribution of wealth and social inequalities. In Poland today, and in all free-market economies, it would be pretty hard to find an example of a product or service people are queuing up for, even in the face of post-consumerist activities. The Hungarian economist Prof. Janos Kornai became famous decades ago for his publications in which he showed that a socialist, non-market economy is an economy of perpetual shortages. Today, however, he points to the threats resulting from the economy of excess that is characteristic of countries with free-market systems. An economy of excess inevitably leads to a waste of resources. Certainly, given a choice between the two, an economy of excess is better than an economy of shortage, but that doesn’t mean that in an economy of excess it’s the customer who rules. The fierce struggle among producers for the market, for buyers, means that various methods are employed in order to gain them, including ones that harm consumers. To mention just a couple of examples: advertising, which is irritation and an eyesore; as well as the increasing phenomenon of corrupt products, ironically described as “gold-plating products” or “anti-features”. The latter deliberately limit the yield and durability of equipment, especially items used regularly, in order to drive demand for new products.

So now we know that Poland engineered its own slowdown. What about external factors?

Since at least 2013 there’s been a discussion going on in the USA that was started by Prof. Lawrence Summers. Actually, he referred to a publication by Alvin Hansen from 1938. A discussion on the subject of secular – that is perpetual – stagnation. Summers and other economists, including Nobel laureate Paul Krugman, point to the growing risk of an absence of prospects for strong growth. To some extent, that hypothesis is being confirmed today, and is related to increasing social inequalities. This in turn is a consequence of fetishising economic growth while at the same time neglecting the issue of social progress. Under such conditions, demand does not keep up with supply, resulting in market excesses and the foundation is laid for crises or a permanent weakening in the tempo of economic growth. In such a situation, symptoms of the economy of excess and deflationary tendencies intensify. The risk of secular stagnation increases in a situation where growth in production, driven by technological progress, does not go hand in hand with growth in purchasing power. The looming crisis of globalisation and the growing tendency towards protectionism constitute an additional barrier when seeking new markets and purchases of goods and services. Naturally, Poland is not exempt from this type of threat. The shaky growth rate in many countries, including those in the eurozone, will certainly have an adverse effect on the Polish economy. And the more open the economy, the greater the effect.

Can we somehow separate the influence of external factors on the slowdown in Poland from those we’ve cooked up ourselves?

Of course those factors are connected. One of the internal factors is the political situation. Yet, it turns out that Polish entrepreneurs are quite tough, resistant to changes in the political situation; they know how to adapt, whatever happens. And this is an important competitive advantage of Polish companies. This ability to adjust to change, including political turbulence. In some measure, one can look on this adaptability and flexibility of producers as a legacy of the previous system, which was extremely unfavourable towards enterprise. The harsh conditions forced producers to be flexible. This doesn’t mean, however, that political instability or a bad political situation are not harmful. Practice shows that companies are ready to cooperate with any political party, and are able to skilfully separate politics from business. For the economy, this is certainly a benefit, although it may sometimes be seen as a sign of conformism.

Are we still an economy capable of attracting capital and investors who are not just looking for a quick profit, but are ready to make green field investments?

The example of the latest investment in Poland by Mercedes Benz Cars of about 500 million euros says yes. The Polish economy is mature enough that it can and should place demanding conditions on investors. We are an attractive economy for investors, especially because we are a large market that is still receptive. We also have well-educated personnel, cultural values, and better and better infrastructure. Those values, combined with the maturity of the market, are factors that in the near future should support restrictions in special economic zones. This is a complex problem in relation to estimating costs and benefits, but there’s a lot to show that the benefits have not always been satisfactory. It requires serious consideration and very detailed analyses, particularly in terms of creating better conditions for activating domestic capital.

Do you agree with deputy Prime Minister Mateusz Morawiecki that we don’t need foreign capital in Poland to exist, famously using the expression ‘capital has a nationality’?

Foreign capital is important, and very necessary to Poland, but not at any cost. The highly preferential conditions foreign capital obtained in Poland during the initial period of transformation were maintained for too long, and often without taking account of the full balance of benefits and costs. Simplifying somewhat, metaphorically, we can speak of the assembly hall syndrome as the dominant form of foreign investment. This together with the syndrome of an insufficient domestic rooting of foreign investments and foreign capital, meaning ease of capital emigration and an increased risk of economic destabilisation. That’s why it is so important today to build up domestic capital. After all, it’s hard to ignore the fact that capital does have a nationality. I’m a supporter of the Strategy for Responsible Development (SRD), though I have many reservations about the programme. But I agree with the direction it takes, and I believe that, almost 30 years after the transformation, it’s high time for a greater activation of domestic capital. If every year tens of billions of złoty are draining out of the country in the form of dividends, share of profit or interest, there’s something to fight for. So I’m not surprised when Mateusz Morawiecki says that, while Poland’s debt is slightly over 50 percent of GDP and Japan’s is over 200 percent, he’d prefer the latter. And why not? Because the government of Japan is in debt to its citizens, and it’s paying interest to them, and in that way domestic capital resources are increased.

So why do we have to build our growth on increasing participation of the State in the economy, on a growing deficit? Is this the right direction?

With a budget deficit of around three percent of GDP, as it is now, we are walking a tightrope. There are many threats to our maintaining a balance in public finances, but at the same time certain reserves do exist. A document like the SRD helps identify long-term directions and socio-economic goals for the development of the country. By the nature of things, this does not concern operational activities. Certainly, given financial and other limitations, not all of the goals set forth in the SRD can be achieved in full, but even a partial implementation will bring us closer to them. Some of them require an initial impulse from the State. The electromobility programme is one of these. The experience of other, more developed countries proves that State support here is justified. For example, in France, under their electromobility development programme the State subsidises citizens for pro-ecology solutions, which initially causes an increase in expenditures, but gradually brings measurable benefits, while those outlays are returned, say, through reductions in smog and healthcare costs. Someone has to get the process started. If private investors won’t, it has to be the State. And those are the assumptions and goals of the SRD.

You mentioned that you support the Morawiecki plan, but don’t like everything in it. What are its weak points?

There are no clear foundations in the Strategy for using the 20-million strong Polish diaspora, mainly, though not only, to promote Poland and the Polish economy abroad. Such a large diaspora represents an enormous potential in social capital that is still insufficiently used.

Further, too little attention is paid in the SRD to the co-op sector. Throughout the period of transformation, that sector was treated a bit like an unwanted child. To some extent this is the legacy of the socialist system, in which co-operatives sometimes became caricatures of themselves. Yet, co-operatives can constitute an important element in activating local capital and developing social capital. They can also constitute an additional, stabilising, anti-crisis economic force. This is confirmed by experience in Germany and Scandinavia. Despite these and other shortcomings, I see the Strategy in a positive light. Even if not all of its goals can be achieved, even the partial implementation of them will have value and a strategic dimension, in line with the saying, ‘He who has begun is half done’.

But this is not the first long-term plan to have been undertaken by Polish governments over the last quarter-century since the fall of the Iron Curtain. And the fate of the others has been quite paltry.

That’s why we have to draw conclusions and consider why the strategies of Grzegorz Kołodko, Jerzy Hausner, Michał Boni and the rest were never achieved. A number of factors contributed. Certainly one of them was a strategic discontinuity as a consequence of changes in government. Each succeeding government worked out a new strategy, ignoring the strategic work of its predecessors. That’s why it’s worth noting that in the SRD, previous strategic documents have been incorporated, distinguishing this document from the others. No doubt the SRD’s biggest weakness is the lack of clarity in its description of how the goals accepted can be financed. Despite what is certainly a good diagnosis, a shortage of sources of financing can be a barrier to the implementation of the SRD. The strategies of previous governments were constructed almost solely in terms of using EU funds, and that was their weakness. In contrast, the SRD places great emphasis on activating domestic capital. That’s why one of the important issues for the success of the SRD is that the financial assistance provided to various entities should mainly be in the form of repayable assistance. Because as practice shows, non-repayable assistance can prove destructive, demobilising. Whereas the repayability of financial assistance ensures that sources of financing never dry up. This was confirmed in Germany, among other places, in connection with the assistance obtained under the Marshall Plan. Those funds, granted to businesses as repayable assistance, are still functioning today as an assistance fund allocated primarily to small businesses.

Elżbieta Mączyńska
Prof. Mączyńska is the president of the Polish Economic Society. She is a professor and the head of the research institute of enterprise of bankruptcies at the Warsaw School of Economics. She is a member of the National Development Council to the President, a member of the forecast committee “Poland 2000 Plus”, and a member of the Institute of Economics of the Polish Academy of Sciences. She was also the secretary of the Committee of Socio-Economic Strategy at the Council of Ministers.

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Written by: Bartek Goduslawski

Bartek Godusław- ski writes about top- ics related to public finance, monetary policy and financial markets. Since 2015 he has worked for leading daily busi- ness newspaper Puls Biznesu. Before this, he was deputy head of macroeconomic unit at Polish Press Agency (PAP) for two years. In 2016 he received the Grand Press Economy award for the best economic journalist in Poland.