Structural factors are weakening the prospects of the Polish economy

There are many indications that the period of fast growth of the Polish economy is already behind us. Simple growth reserves have been exhausted and high-tech production in has not been developed to a significant extent.

Long-term forecasting is a complex activity, because it is necessary to analyze many opportunities and threats to national development, as well as the impact of events in the country’s international environment. It is a common practice to adopt assumptions concerning the changes in the most important factors influencing economic growth. In such a situation, a development scenario is a better description than a forecast.

When assessing long-term prospects, it is more important to identify the threats to development in the horizon of a dozen or so years, for example up to the year 2030, than to consider the opportunities. In other words, it is necessary to determine which factors could weaken the pace of development and which could strengthen it.

There are many signs indicating that the period of fast growth of the Polish economy is already over. Simple growth reserves, such as cheap labor and competing with prices on the international markets, have been exhausted. Despite the efforts, it has not been possible to significantly expand high-tech production in Poland. Poland is a country in which medium-high technologies, such as the automotive, machine and chemical industries, have a high share in production and exports. However, in this type of business activity, the revenues, profits and the return on invested capital are lower than in the case of high technologies.

Problems on the labor market

One significant and real threat enterprises have faced over the past two or three years is the tight labor market, which is a consequence of many factors existing independently of each other. This includes both the effects of the demographic changes, which have negatively affected the labor market, as well as the low rate of professional activity in the society. Poland’s Ministry of Finance pointed out the risk of demographic factors for economic growth in the Monitor of convergence with the EMU published in June 2018.

According to the demographic forecasts of the Statistics Poland (GUS) from 2016, the working-age (18-64 years) resident population of Poland (i.e. people residing in the country for more than 12 months) will decrease by about 1,299,000 in the years 2017-2030. A more detailed look at the structure of that population reveals an unfavorable trend — the population in the so-called mobile working age (18-44 years) will decrease by 3,106, 000 people, while the population in the non-mobile working age will increase by 1,808,000 people. This means that the domestic labor force resources will not be able to meet the demand from the labor market.

Eurostat states that in 2017 the labor participation rate among people aged 20 to 64 amounted to 34.8 per cent in Poland, while the EU average was 41.7 per cent and the activity rate in Germany was 49.9 per cent. A rapid improvement of this indicator cannot be expected in light of the reduced retirement age and the economic emigration from Poland, especially among young people. The unemployment rate in Poland has recently declined substantially; however, the labor market will not be supported by a group of registered unemployed persons, which comprises about one million. These people are heavily concentrated in several counties, which are severely economically underdeveloped and where the unemployment rate is up to three times higher than the national average. These groups of the unemployed stand no chance of finding employment on the local market, and in addition their fitness for work is reduced by the structural mismatch between their qualifications and the market requirements, as well as the long duration of their unemployment.

The only remaining option is to top up the labor market with economic migrants from Ukraine or Asia, but in the long-term that would require appropriate actions within the immigration policy. For the time being, however, such activities mainly involve ad hoc interventions rather than consistent implementation of long-term policy concepts. Due to the relatively liberal regulations for short-term employment of foreigners, the effects of such activities on the part of enterprises seeking employees are particularly visible among the chain operators, such as hypermarkets, restaurants, hotels, food delivery services (Uber) and in the construction industry.

In business climate surveys conducted by GUS, the shortages of qualified workforce and the labor costs are mentioned by entrepreneurs as the most important and constantly growing barriers to doing business.

Uncertainty stunts investment

The second important threat to Poland’s long-term economic growth is the low propensity to invest among Polish enterprises. The investment rate in Poland (in relation to GDP) has remained lower than the EU average for many years (20.1 per cent in 2017) and has recently decreased further (from 20 per cent in 2015 to 17.7 per cent in 2017). The investment rate in the sector of non-financial corporations (calculated in relation to their gross value added) in 2016 amounted to 21.6 per cent (the EU average was 22.7 per cent) and was significantly lower than in the countries of the region (29.2 per cent in the Czech Republic, 27.9 per cent in Slovakia, and 22.9 per cent in Hungary).

The reasons for the low investment propensity of Polish enterprises are varied and complex. The most frequently mentioned factor in this respect is the high uncertainty relating to regulatory changes, and especially the quickly changing legislation, which complicates long-term business operations. Additionally, there is a lack of stability in the country’s structural macroeconomic policy. On the one hand, there are opportunities for entrepreneurs to take advantage of tax breaks and other investment incentives, but on the other, various burdensome procedures are introduced for smaller companies, such as the Standard Audit File or the VAT split payment mechanism.

Many experts point to the possibility of financing investments using the companies’ savings deposited on bank accounts, the total value of which amounts to PLN250bn. However, the utilization of these funds for investment purposes will be limited by the paradigm shift in capital management which emerged in the United States after the 2008 financial crisis, and subsequently spread to other countries, including Poland. Cash held in banks has become a strategic resource of enterprises. It provides them with independence from the banking sector, which has lost the companies’ trust during the crisis. At the same time these funds have become an element of building a company’s prestige in the eyes of the market.

Another relatively new factor discouraging companies from new investments is the situation on the labor market, which poses a serious risk for the entrepreneurs’ ability to find the personnel necessary to launch the operation of the completed investments. Meanwhile, the structure of the Polish economy’s productive capacity is more focused on labor-intensive production rather than capital-intensive production, which is the result of historical legacies, and in particular the availability of cheap labor.

The Polish economy is not mentally prepared for the replacement of workers with robots, even in areas where the benefits of such investments are undisputed. The ratios of robot utilization in Poland are significantly lower than in most countries of the European Union, but also in China and other Asian countries. According to data of the International Federation of Robotics, the so-called robot density, i.e. the number of industrial robots per 10,000 workers employed in industry, reached 32 units in Poland. The average robot density in China in this period was more than twice as high (68 units), and was more than three times higher on average in Europe (99 robots).

How to boost innovation

Another problem of Polish enterprises is the low level of innovation, which reduces their international competitiveness. The problem is not that there is no improvement in terms of innovation, but that it is occurring at a slower rate than in other countries. It is little consolation that a similar problem exists in all the countries of the region and is to a large extent a legacy of the centrally planned economy.

The numerous programs introduced by economic authorities will not be enough to significantly improve the level of competitiveness in Poland. Concentrated efforts should be focused to a greater extent on education, improving the quality of social capital, especially in the area of teamwork skills, building trust and eliminating negative habits such as low tax morale, acceptance of mediocrity or cheating in school, which distort young people’s approach to diligent work in the future.

One of the strengths of the Polish economy, which isn’t always appreciated and taken into account by analysts, is the attitude of entrepreneurs manifested in their optimistic perception of the development opportunities of their industries and the entire economy. I believe that the attitudes of Polish entrepreneurs, who refused to acknowledge the outbreak of the crisis in 2009, contributed to the country’s ability to resist the recession which affected Europe at that time. The current good economic situation in Poland is once again encouraging positive reactions from entrepreneurs.

In recent years the average annual rate of growth in Poland has exceeded the EU average by 2 to 3 percentage points. As a result of the described above factors, this differential will most likely fall to 1 to 2 percentage points in the coming decade of the 2020s. In addition, Poland needs to be aware of the fact that the closer it gets to the level of development of the leading EU countries, the more difficult it will be to achieve spectacular rates of economic growth. This applies more to countries with larger economies, such as Poland, than to smaller ones, such as the Czech Republic, Slovakia or the Baltic states.

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