This is the second piece in a two-part series on Poland’s economy, the first of which examined the reasons behind its success.
Over two decades, Poland experienced the most stable high growth in the EU with an average rate of 3.7 percent a year, earning it the nickname of the European Tiger. This achievement was even more remarkable because it was inclusive: jobs and wages increased, inequality across income groups and regions remained low, and poverty declined.
But Poland’s rapid economic ascent created new challenges. The creative destruction on which the growth process was based also caused massive social changes that challenged citizens’ resilience. Workers moved from farms to factories and then to offices, with a significant increase in temporary or “junk” contracts and relatively limited social assistance. Together with automation trends, and its adverse impact on low-skilled jobs, many working-class families faced heightened anxiety and uncertainty about their future.
Senior Economist, Macro Economics & Fiscal Management - World Bank
Rogier van den Brink
Program Leader - World Bank
Senior Economist - World Bank
And while workers responded to the incentives coming from market competition by increasing labor productivity, Polish wages remained among the lowest in the EU. In 2015, the average hourly labor cost (excluding agriculture and public administration) was €25.00 in the EU, but just €8.60 in Poland, placing it in the bottom six of the EU28 countries. And the convergence with wages in Germany—its immediate neighbor to the west and an important destination for its workers—is occurring only slowly; productivity growth and real wages tracked each other significantly more in Germany than in Poland. For instance, between 2000 and 2016, Polish labor productivity (the output of goods and services per hour worked) grew by about 51 percent, but compensation for workers grew only 33 percent.
In addition, there is frustration even among those most favored by the economic trends. Polish people’s aspirations and perceptions grow as welfare improves: catching up with high-income economies in the EU, and in particular with Germany, is perceived by many to be frustratingly slow. This includes catching up on governance in the public sector, particularly in government effectiveness and accountability to citizens with the delivery of public services.
And it does not help that, as in the rest of Europe, there has been a loss in confidence in the EU, a key external anchor of Poland’s reforms. Accession and commitment to the EU’s acquis communautaire were key factors driving the vision and consistency of the reforms that propelled Poland into high income. But this anchor now faces challenges of its own:
Despite this [progress], many Europeans consider the Union as either too distant or too interfering in their day-to-day lives. Others question its added-value and ask how Europe improves their standard of living. And for too many, the EU fell short of their expectations as it struggled with its worst financial, economic and social crisis in post-war history (European Commission 2017:2).
The sources of growth that propelled Poland to high-income status and delivered major increases in prosperity have less scope now to bring about further large improvements in incomes. Many countries that reached high-income status have experienced relatively slow growth since. From the 1960s to the 1990s, only 10 countries entered the high-income country (HIC) club and had average annual GDP per capita growth close to or above 2 percent (see Figure 1).
Figure 1. Achieving high-income status and average GDP growth, 1965–95
Source: TED database.
Note: Countries in light green experienced annual GDP growth of about 2 percent or higher
Addressing these challenges in the present global context, is no small undertaking. Like the rest of the world, Poland now faces a different global context—one of lower growth and greater uncertainty. Manufacturing is less labor intensive than before. The fourth industrial revolution, characterized by the automation of production processes, is causing the loss of significant numbers of medium-skilled workers in the developed world.
The experience of consolidated high-income economies provides the following insights for Poland going forward (see Figure 2), as reported in “Lessons from Poland, Insights for Poland: A Sustainable and Inclusive Transition to High-Income Status.” First, better governing is needed to build more trust in government. This could be achieved by making public services more client-oriented, more transparent, and more efficient, and by involving citizens more directly in improving public service delivery. Second, sustaining sound macroeconomic policies will now need to include creating fiscal space to deal with the increasing pressures coming from aging and a more uncertain global context. Third, continuing to connect the country internationally to allow citizens to continue reaping the benefits of trade and integration implies ramping up investments in the appropriate hard and soft infrastructure. And the stance on migration can be more inclusive. Fourth, moving up the global value chains by focusing on the quality of products and services through more concerted support to innovation for it to become a key driver of growth. Finally, including all citizens means continuing to expand investment in quality education and health care for all. It also means striking a better balance between job security and labor market flexibility, supporting workers between jobs, targeting social spending to aging and vulnerable parts of population, and ensuring progressivity in the tax system.
Figure 2. Insights for Poland based on the experience of consolidated high-income economies
And finally, as the country rises to meet these challenges, it should make sure that it guards the shared vision and long-term policy continuity that have served the country so well in the past.