Poland's Economic Experiment, Starring Thomas Piketty
(Bloomberg View) -- It's not often that a banker turned conservative politician approvingly quotes Thomas Piketty, but that is exactly what Prime Minister Mateusz Morawiecki did during an interview this week in Warsaw. A similar tension lies at the heart of his government's economic push in Poland: reasonable strategy roiled by leftist impulses.
The economic creed of Morawiecki -- and that of the ruling Law and Justice Party (PiS) -- is based on the idea that Poland needs to replace a development model that's too dependent on foreign investment. In laying out his vision, Morawiecki quotes the work of economists Andreas Noelke and Arjan Vliegenthart, whose typology of capitalism flavors didn't include a fitting definition for the eastern European model until they came up with "Dependent Market Economies." He also mentions the concept of "foreign-owned countries" that came up in a paper Piketty co-authored with Filip Novokmet and Gabriel Zucman last year.
"It's brutally said, but, on the other hand, it's a realistic picture of what happened over the last 25 years," Morawiecki said. "We have sold pretty much all of our economy." Calling out "our elephant in the room," he bemoans the money being sucked out of the country, "transferred every year in the form of dividends or interest on capital, interest on loans, deposits and current accounts."
That last bit is another Piketty reference. Last month, the anti-capitalist economist wrote about the profit outflows from eastern Europe, discussing them as a source of hidden inequality: When the profits flow out of a country, inequality measurements fail to catch the increase in shareholders' wealth and income. According to Morawiecki, Poland's annual net outflow is 75 billion to 80 billion zlotys ($22.1 billion to $23.6 billion), mostly from high-margin sectors of the economy such as banking, insurance and real estate that are 40 percent to 90 percent foreign-controlled. The foreign investment, the prime minister says, introduced beneficial competition to the economy, but "there was too much competitive pressure on society, on the business community and the entrepreneurs who do not have the appropriate tools to compete."
Now, Morawiecki's mission is to "slowly but surely to move the pendulum" toward what he calls a "subjective economy." That means a pause in privatization, which Morawiecki says contributed up to 14 billion zlotys a year to the budget, a preference for domestic over foreign borrowing (the share of Poland's debt owned by foreigners is down to 50 percent from about 60 percent three years ago) and a reliance on state enterprises to increase investment because private companies are too small and not boldly expansionist enough to provide the desired boost. It also means an aggressive stance on tax avoidance and evasion. Morawiecki is particularly happy about the PiS government's success in driving up revenue from the value-added tax, on which companies often used to cheat.
Contrary to warnings from the liberal economists who championed the "dependent model," the Polish economy has been doing well under PiS. Output growth reached 4.6 percent last year, compared with 2.5 percent for the European Union as a whole. Morawiecki boasts that "for the first time in 30 years, or maybe in 130 years," Poland had a positive current account balance in 2017. He even talks of a "little economic miracle." There's nothing fundamentally wrong with trying to boost domestic investment and improve tax collection, as it turns out.
The PiS, however, may be in too much of a hurry to distribute the fruits of its efforts -- and of the broader European recovery, which has stimulated the demand for Polish goods and driven unemployment down to the record low of 4.4 percent. Jakub Borowski, chief economist at Credit Agricole in Warsaw, says the key PiS social policies -- payments of 500 zlotys a month to families that have a second child and a reversal of the previous government's retirement age increase -- have boosted demand by 25 billlion zlotys a year, reduced poverty and inequality. But, he points out, a policy that's essentially aimed at turning Poland into a kind of Asian economic tiger driven by domestic investment requires increasing the saving rate. These social measures drive it down.
"The problem with Poles is they don't want to save," Borowski says. "Polish society really wants to catch up with the West, and even though the convergence isn't going as fast as we'd like, Poles want to consume as much as the guys on the other side of the river." That has meant a negative household saving rate, compared with Germany's 10 percent of disposable income. In a model that relies on domestic investment resources, it's left up to businesses and the government to compensate for the lack of savings -- but the government is spending the cash it generates from improved tax collection on social commitments that don't reduce poverty enough to stop emigration or bring back the 10 percent of Poland's population -- some 4.4 million people -- who live outside the country.
Borowski says the PiS government shouldn't have thrown away the previous government's hard work on getting Poles to accept a retirement age increase. It was a much-needed mechanism for increasing the national saving rate, and there aren't many other resources available. The government has introduced a voluntary pension scheme in which employers are required to partially match workers' contributions of 2 percent of income to retirement funds. Borowski praises the measure as reasonable but isn't sure it'll work, given Poles' aversion to saving.
The contrast between the socialist compulsion to spend when times are good and the government program's focus on domestic resources is, Borowski says, the fundamental contradiction of the PiS economic model: "The prime minister's diagnosis -- that something needs to be done to boost convergence -- is correct, but first there have to be blood, sweat and tears."
In addition to this basic problem, the governing party's penchant for conflict and discomfort is creating even more. According to a recent Polish National Bank survey, business executives see increasing barriers to growth such as the government's growing tax appetites; a lack of qualified workers that's exacerbated by the retirement age reversal and only partially replenished by Ukrainian immigration; and uncertainty about the business climate looking forward. "If there's an economic miracle, why are the perceived barriers getting higher?" Borowski says.
He also points out that a sharp increase in Poland's use of EU funds -- the volume of contracts for the aid jumped sharply at the end of 2017 -- will be a major source of growth this year. Yet PiS has picked a number of fights that threaten it. The awakening from Poland's sweet economic dream has the potential to be rough indeed.
Morawiecki and his team can't be blamed for trying a different growth model. Poland has the entrepreneurial drive, the resources and a formidable thirst for self-improvement that can be harnessed for it. But it may well be too early to turn Piketty's calls for a more equitable wealth and income distribution into governmental action. When the current favorable cycle ends, it might be too easy to declare the shift to more self-reliance a failed policy. Morawiecki and his government are cutting it close.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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