Innovation is created from private capital

Inglot’s store in NYC, USA [(vincent desjardins), CC BY]

The state does not have its own capital and in order to create something it first needs to take resources from someone else, says Professor Robert Ciborowski, the President of the University of Białystok.

CE Financial Observer: Generally speaking, is Poland benefiting or losing as a result of globalization? What can be done to start gaining in those aspects in which Poland is currently losing?

Prof. Robert Ciborowski: This is a difficult question, because in addition to the visible effects and costs, we must also take into account those that are invisible. Only then will we have a complete perspective. If we were to look only at the visible aspects, then Poland is probably gaining, mainly due to free trade, the flows of production factors or the access to technology.

Thanks to the easier access to capital, technology or knowledge and qualifications, the country is able to produce more and better. On the other hand, globalization opens up the markets for these products. Trade is expanding, and so Polish wealth is growing.

But we shouldn’t forget about the invisible elements, which may limit the positive effects: the costs of adjustments to globalization, the political issues and resulting regulations, the strategic commitments. Despite this, however, I believe that the overall balance is positive.

Could you provide an example of the costs of adjustment to globalization? Does this relate to the “necessity” of belonging to international structures?

This also relates to membership in such structures, but it’s primarily about the need to adapt to international regulations, e.g. climatic or trade regulations. For some countries this is a small cost, and for others it is a huge burden.

Poland would achieve greater benefits if its entrepreneurship was more “liberated” and open, that is, less regulated and less burdened with costs. Assuming, of course, that other countries would also liberate their markets, because that determines their accessibility. It would be unfortunate if the Polish economy opened up and other countries would become more closed, also in the regulatory sense. From a more global perspective, it’s worth thinking about international politics based on pragmatism, and not illusive alliances.

Which sectors of the Polish economy are not benefiting from globalization?

The entities losing on globalization are those who are not receiving capital inflows and who cannot compete internationally due to high costs or technological shortcomings. Industry lost the most during the period of systemic transformation. This mainly includes light manufacturing, electronic industry, machine industry and, of course, heavy industry. At present the sectors that are losing include domestic trade, transport or the electrotechnical industry.

Which sectors of the Polish economy have become the most globalized and which are the least globalized?

In this respect, Poland is not much different from other European countries. Services, such as trade, tourism and finance, are the most globalized sectors. The least globalized sectors include certain branches of manufacturing and agriculture. And these least globalized sectors are characterized by the greatest development constraints.

Why are these particular industries that you mentioned lagging behind? What would have to change in the Polish industry and in the Polish agriculture to have more dynamic development and greater advantage of globalization?

In order to take advantage of globalization, we must have competitive advantages (read more https://financialobserver.eu/poland/the-stakes-on-the-agricultural-and-food-market-are-high/). This mainly relates to advantages in terms of technology, i.e. qualitative advantages, or in terms of prices, i.e. quantitative advantages. In my opinion, Polish agriculture could already open up and gain a lot as a result, because it is prepared in both of the indicated areas. However, the regulations and the willingness to benefit from the EU common agricultural policy prevail.

The situation is a bit worse in the case of the manufacturing, because it simply suffers from underinvestment in many areas and is characterized by higher production costs. Some industries may compete with prices, such as, for example, the furniture industry, but in terms of technology it is much more difficult, especially in the machine industry or in the processing industry in general.

A lot has been going on lately in international trade. Are the changes in the economic policy of the United States really aiming to slowdown globalization?

I would not consider the recent actions of the United States in terms of a firm departure from globalization. Instead they indicate a desire to improve the position of those sectors which have not benefited or which have lost in the global processes, such as manufacturing. When their condition improves, Americans will return to a more open policy. It’s pure pragmatism. Or as Prince of Salina used to say: “For things to remain the same everything must change”.

How can the New Silk Road influence the process of economic globalization?

The New Silk Road may affect globalization only to a very limited extent, as the global balance of power is not likely to change because of it.

It seems to me that your opinion in this regard is quite original. Isn’t it true that the center of gravity of the global economy is already slowly shifting from the Anglo-Saxon world towards Asia? And if so, then the Silk Road would, in the long term, seal this change.

Indeed, the economy is slowly shifting. However, the achievement of world domination is contingent on two issues: military and technological dominance. Until China achieves such dominance, it’s hard to talk about any changes in the global leadership. I think that it will take some time for that country, because with such rapid development it will encounter problems that could cause a lot of internal unrest, e.g. demographic issues, problems related to income inequality, civil liberties.

Would Poland stand to benefit or lose from the implementation of this project, and what does that depend on?

Poland could only benefit from this project if it has anything to sell to China. The Silk Road will create a huge channel for the delivery of Chinese products to Europe, but it’s worth asking whether there is a danger that it could become a one-way street. We have to ask the question: in what areas can Poland compete with China or what can it supply to that country? Balanced trade flows along the Silk Road may be beneficial, but a lack of balance is more of a threat.

How do you assess the level of preparation of Polish enterprises for competition amid increasing globalization? How are they coping?

Polish enterprises are doing very well, despite much worse fiscal and regulatory conditions than in other countries. And they would do even better if these conditions improved. Companies always cope better in global conditions than states. Besides, the less state intervention in the economy, the greater the private prosperity.

Is it really that simple: cut taxes, reduce bureaucracy and all of a sudden Polish companies become more competitive on the international scale?

They at least would have the ability to compete. Whether they would succeed, I don’t know. They would have more capital and more leeway in their operations, and that’s a good starting point.

Can you identify Polish companies that have done well on the global market? Polish champions of globalization?

We are doing the best in the IT industry, which was the fastest to catch up with global standards after the transformation. I would mention companies such as Comarch or Asseco. But you can also find examples in other sectors. I’m thinking about companies such as Fakro or Inglot. Of course, this is not the scale of the world’s largest corporations, but that could happen in the future.

My faith in Polish companies, however, relates mainly to start-ups. Each year, there are more and more Polish entities among the most dynamic companies in various industries. This shows the strength of Polish entrepreneurship, which is still pent up in many cases and is waiting to be set free. Provided young people don’t leave the country, but start developing entrepreneurship domestically, then we can be optimistic.

Why is there still no Polish corporation that’s really big and operates globally?

It’s not easy to become a large international corporation today, primarily due to capital and legal barriers. Unfortunately, in Poland there was no capital accumulation in the transformation period, which prevented large-scale investments. Poland started from a very low level and it needs a lot of time to catch up with the highly developed countries, assuming that the barriers to entrepreneurship are reduced.

Besides, today’s huge corporations are largely supported by governments, for example through legislation or taxes, which creates for them an incomparably better operating environment. Companies that are still up-and-coming cannot count on such support. Just think of how Poland treats large foreign investors as opposed to small domestic companies. It should be the opposite. The state should make it easier for dynamic companies to acquire wealth. Then it will have a chance to attain a level of capital that would match that of the foreign companies.

The example of Finnish Nokia, and the history of that company, shows that massive state support does not guarantee eternal growth. Sometimes it even hinders it.

Lately there have been many discussions about the fact that the Polish economy should be more innovative. But in what way should it be innovative, how should it prepare for the coming stages of globalization? Do you see a place and role solely for private capital here, or is there also room for state capital?

Innovation is created from private capital. If there is a possibility to accumulate it, then there is a chance for more complex investments and for their higher competitiveness, that is, innovation. The state should finance inventions if such a need arises, mainly as part of academic research, but in a very limited way, due to the effectiveness of public spending.

But there are many examples where state capital was behind powerful innovations, or subsidized them. Mariana Mazzucato writes about this in her book “The Entrepreneurial State”.

I would prefer to talk about private capital taken over by the state. The title of the book you are referring to is an obvious oxymoron. As I mentioned, the state does not have its own capital and in order to create something it first needs to take resources from someone else. With these collected funds, reduced by the fiscal costs, it will create something that is needed from the point of view of the state, and not of the market, and secondly it will do it more expensively, taking longer than if a private entrepreneur did it. Thanks to this, a product will be created, which the state will present as a success, because after all it will facilitate or improve something. We will also be happy, because it’s always something new. That’s the visible part of the equation. And now let’s talk about what we cannot see: without state intervention we could have a different product, more suited to our needs, as well as lower taxes, that is, more capital. Thus, by creating something, the state simultaneously eliminates a number of other ideas or products that would arise if the companies’ capital was not taken away. Bastiat’s “The Broken Window Fallacy” explains this perfectly.

It’s similar in the case of public procurement, for example, by the military, which has been presented in a positive light in the publication that you referred to. This is an obvious myth. We spend billions on the military so that it can create demand for something the army needs and which will only go to the civil sector after many years. I would even say, that were it not for the army, we would have more technologically advanced products, because private capital would care mainly about our expectations, and not those of the army.

In what direction should the Polish economy head taking into account the upcoming globalization challenges and demographic problems? Robotics, perhaps?

I don’t know whether Poland should move towards robotics, because that will result from the directions and the dynamics of development of Polish enterprises, as well as the global mega-trends. It should definitely move towards higher birth rates. It will not achieve much without properly developed human capital.

What is the recipe for making the Polish economy more effective in a globalized world?

Poland will achieve much greater benefits thanks to the private enterprises. The more state intervention in the economy, the less innovation and competitiveness. The implementation of innovation policy suffers from huge delays, which dooms it to ineffectiveness in light of the very dynamic environment and high international competition. Besides, the expectations of technological changes come from the markets and the activities of companies, and therefore they are the ones that have to create innovations.

Poland is taking a considerable number of immigrants, including students, originating mainly from Eastern Europe. How can we acquire human capital of the highest quality? Is there any chance of that at all, considering the position of our research centers, universities, and institutes of technology in global rankings?

For the time being, only a small percentage of the inflow is a high-quality human capital, which Poland should additionally connect with the low quality of the native human capital. This improves the economic situation in Poland only to a small extent. Meanwhile, the solution is very simple: lower fiscal burdens, less regulation, simpler and more transparent laws. Then more entities will want to move their capital to Poland. More people will come to work here, and the quality of that work will be better.

Additionally, Poland must create better economic conditions for those who want to stay in the country. I am reminded of a story once told by Keith Richards from the Rolling Stones. In the early 1970s, the highest tax rate in the United Kingdom was 83 per cent, and then it was increased to 98 per cent for income from capital gains and for so-called unearned income. This was synonymous with being told to leave the country, he once said in an interview. People must be able to become rich and to accumulate their income.

And getting back to Polish research centers — universities could offer a much higher quality of human capital if they enjoyed operating conditions, and primarily financial conditions, similar the ones found in more developed countries. Polish education lacks capital. The expenditures are too small, and the expectations are too high. And if we were to look at the efficiency, then with such low resources we achieve a lot anyway.

One question from the field of political fiction. Would Poland, as a fully sovereign entity remaining outside of the European Union, be able to enjoy the benefits of globalization to the same extent as today, when it has access to the common market?

The answer will also fall under the “fiction” category. If Poland was Switzerland or Singapore, and if the EU did not restrict access to its market to external entities to the same extent that it does today, then yes. In the current political situation and with the existing production structure of the Polish economy, Poland’s functioning outside of the EU would be possible, but very unfavorable. Although it should be remembered, that the entire institutional environment of the EU is a certain kind of a regulatory cost, and if it disappeared, many positive economic impulses would emerge.

Do you think that in the future a model of the Polish state could be developed that would respond to the current challenges of globalization? It seems that we have succeeded in this regard once in the past, when the Jagiellonian dynasty built an organism exploiting the grain boom and the new balance of power on the European trading map.

Of course. The Jagiellonians (14th-16th century) took advantage of the situation because they ruled an economy that was similar and even structurally better in relation to other countries. And it was an economically open state. At the same time, we must take into account the different reality, mainly in terms of foreign policy, and the size of that Polish state.

The creation and use of competitive advantages must be connected with dynamic and innovative entrepreneurship and the broad support of the foreign policy. Then it can be successful. Today, our economy does not meet these criteria.

Economic globalization has led to the creation of the so-called transnational class, also in Poland. This relates to the millionaires and billionaires who have Polish citizenship, but live in Switzerland, spend their holidays in the Caribbean, and have a business in Poland, which they often oversee remotely. What does the emergence of such a class of people mean for the country? How can their potential be used for the common good?

We need to encourage all entrepreneurs, not only those coming from Poland, to invest in Poland. But this cannot be done by simply appealing to values of community or patriotism. Instead we have to create economic conditions for working and for getting rich. Today, when investing capital anywhere in the world is easy as drinking a cup of coffee, so Poland has to be more competitive also in creating a place where people can make money. Entrepreneurs rarely look at what country they are dealing with, and more often look at the potential rate of return on investment.

Professor Robert Ciborowski is the President of the University of Białystok (northeastern part of Poland). He is associated with the Faculty of Economics and Management.

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