Time to Change Gears for Poland’s Economy
Poland is Europe’s growth champion. It has more than doubled its GDP per capita since the beginning of post-socialist transition in 1989, consistently growing since 1992, and was the only EU economy to avoid a recession in 2009. Poland is a prime example of the success of the European “convergence machine”. In 2014, the level of income adjusted for purchasing parity exceeded $24,000 and reached almost 65% of the level of income in the euro zone, the highest absolute and relative level since 1500 A.D.
However, past successes do not guarantee a prosperous future and Poland cannot afford to grow complacent. Given the significant productivity gap—Poland’s productivity per hour amounts to less than half of that in Germany —technology absorption will continue to drive private sector productivity in the near term, but it is unlikely to help sustain—not to mention accelerate—economic growth in the long term as Poland moves closer to the technology frontier. Investment in private sector R&D and innovation will have to increase far more rapidly. Growth can stagnate if Poland doesn’t start shifting from imitating others to generating new ideas, from quantity to quality, and from potato chips to microchips.
Time to Change Gears for Poland’s Economy
Some Skills should Come Before Jobs, Others Develop with the Job
To be clear from the onset: I will not oversimplify the unemployment (or inactivity) problem in the Western Balkan countries as solely due to a lack of skills in the population. Low employment rates result from both insufficient creation of jobs by enterprises and too-high a fraction of the workforce that is ill-equipped to take on the jobs that a modern economy creates. Both issues are intertwined. Solutions, therefore, require efforts on several fronts to enable a more vibrant private sector –including improvements in the business environment, enterprise restructuring, integration in global markets and promoting entrepreneurship— as well as to prepare workers for new job opportunities.
In my previous post I showed that Poland has become a country with the highest share of temporary contracts in Europe – now around 26.9% of workers. I argued that this process wasn’t triggered by interactions between several labor regulations. In particular, the use of civil law contracts (as opposed to those based on the labor code) has become increasingly common, resulting in a dual labor market, in which one segment of the work force is better off (in terms of wages, income, and training) than the other. The Polish government has labeled these contracts “junk contracts” but so far it has failed to truly address the issue. What can be done to overcome the current deadlock on this issue?
The political and economic transition of post-communist Central and Eastern European (CEE) countries brought substantial improvements in GDP per capita, productivity, incomes and standard of living. But certain worrying phenomena emerged on the labour markets. One of these was a rise in temporary employment, which has created a “dual labor market” – that is, a segmented market with workers in one segment more privileged than those in the other. For the CEE economies – especially Poland – the onset was in the 2000s. A variety of possible solutions exist, but so far the Polish government has done little to improve the situation.
The IT revolution has transformed labor markets globally in an unprecedented way. New jobs as well as new ways of working have appeared, and traditional skills and jobs have lost their dominance. World Bank Lead Economist Roberta Gatti looks at Poland's ability to address the challenges posed by these new realities.
In recent decades, many European countries have tried to instill greater labor market flexibility through increased use of fixed-term, temporary work contracts, as opposed to open-ended or permanent ones. The result has been dual labor markets, with temporary workers having fewer rights and job security than those on permanent contracts. One expert on the topic – Tito Boeri, Professor of Economics and Dean for Research at Bocconi University, Milan – stresses that temporary workers were especially hard hit during the Great Recession.
The 2008-2009 global financial crisis led to a number of large–scale government interventions across the world. These included massive provisions of liquidity, the takeover of weak financial institutions, the extension of deposit insurance schemes, purchases by the government of troubled assets, bank recapitalization and, of course, packages of fiscal stimulus, sometimes of a scale not seen since World War II. Even the IMF, the world’s traditional guardian of sound public finance, came out strongly in favor of fiscal loosening, arguing through its managing director that “if there has ever been a time in modern economic history when fiscal policy and a fiscal stimulus should be used, it's now” and that it should take place “everywhere where it's possible. Everywhere where you have some room concerning debt sustainability. Everywhere where inflation is low enough not to risk having some kind of return of inflation, this effort has to be made".
A couple of weeks ago, I was in Warsaw to attend a conference jointly organized by the Polish and Turkish Central Banks (“Polish and Turkish Transitions: Achievements and Challenges Ahead”) on the occasion of 600 years of diplomatic relations between Poland and Turkey. Six centuries of (predominantly friendly) relations is indeed worthy of commemoration, but for our Polish hosts another anniversary was of even greater importance: 25 years ago, Poland was the first country from the former Communist Block to embark on the transition towards democracy and market economy. For Poland and other Central and Eastern European countries that joined it as new members of the European Union 10 years ago, this transition laid the foundation for a remarkable economic, cultural and political revival as Indermit Gill and I have argued in Golden Growth. Indeed, many in Poland would agree with the Economist that Poland has not had it as good as today ever since it was the preeminent Central European power some 500 years ago.