Twenty-five years ago, the end of the Cold War touched off a sea change that swept all of central and eastern Europe, resulting in an economic and political transformation of historic scale.
Shaking off decades of state control, industries were privatised and market-based competition was introduced all throughout the region, with the young Republic of Poland quickest to embrace the new normal: Benefitting from a well-handled post-communist transition, it morphed into a low-cost manufacturing centre and embraced the opportunity to tie in to Germany’s powerful export machine.
Accession to the European Union in 2004 confirmed the success of Poland’s western-focused pathway, whose economy has since grown by a third, compared with little more than two per cent for the struggling Eurozone. Yet, experts like Leszek Balcerowicz, who masterminded Poland’s early 1990s economic adjustment, now warn that the nation’s long-proven growth model could soon be out-dated.
“Poland’s economy has been a great success relative to other post-communist countries for the past 25 years, but past successes do not guarantee future success,” he told the Financial Times in September after information surfaced that the nation’s capital market, while solid by regional standards, is still lagging behind expectations for 2015. With data also pointing out that Poland’s energy, mining and agriculture industries are in need of reforming to compete with the ever-so ambitious west, Balcerowicz was prompted to stress Poland’s tardiness in promoting an innovation and ideas-led economy while weaning itself off the low-cost-labour driven growth model that served so well until now.
Agreed Olga Grygier-Siddons, PwC Chief Executive for central and eastern Europe, in a blog post published around the same time. “We have adopted good practices from our western allies. We have worked hard and GDP has grown every year — even during the global financial crisis. [But] the big question today is: How can the country sustain this momentum and continue to thrive?” she wrote.
According to Grygier-Siddons, there is a growing consensus that Poland – and arguably the entire post-USSR block – must change from ‘cost advantage’ economies to ‘value creation’ economies based on knowledge and innovation. “Much has been said about the structural changes required to make this happen: higher R&D spending; better linkage of academic research to the needs of industry; wider access to venture funding; and a more business friendly environment,” she said. “These are important contributory factors. However, for innovation to take root, there also needs to be significant progress in the way businesses and other institutions are managed.”
To the PwC Chief Executive, one inherent issue that could hold back the country from achieving future success is a lack of “progressive and emotionally intelligent” leadership and less of the traditional “big boss micromanaging culture that we inherited from the past”.
With many a Polish executive firmly focused on intellectual problem solving and reluctant to share information and collaborate both internally and externally, she emphasised that Poland may soon be facing a fully-fledged innovation crisis. “Poland’s journey since 2004 has been a huge success. To sustain this momentum, it must innovate to compete with economies that have been established for many centuries, where not only financial capital but also values and culture have been passed from one generation to the next,” she wrote. Part of that cultural advantage was openness to collaboration and the ability to trust, Grygier-Siddons added – an emotional shortfall she attested to almost every eastern European nation.
Becoming complacent and not continuing to innovate is a “real danger” for Poland, Adam Uszpolewicz, Chief Executive of Aviva Poland, one of the country’s largest insurance companies, agreed in another recent high-profile interview. He argued the country had been resting on its laurels for too long and may be facing considerable setbacks if issues like a deteriorating demographic, low national investment ratio and declining productivity growth were not addressed soon.
For now, however, Poland’s economic outlook is widely considered positive. Second-quarter growth was slightly below forecasts at 3.3 per cent, according to Poland’s statistics office, but still among the EU’s top-three fastest. Development indicators are all moving in the right direction, too – exports, private consumption, construction and industrial output are rising, and the country has recently left the EU’s ‘excessive deficit procedure’ again, effectively a punishment for excessive spending compared to tax income.
Key to that resilience could be the nation’s diverse economic fabric, which is often compared to neighbouring Germany, with Small and Medium-sized Enterprises (SME) accounting for about 70 per cent of employment, and 50 per cent of GDP. Wielton, the nation’s most successful trailer manufacturing business, started off in the SME bracket, for instance, and only just graduated to the next level after taking over French industry icon Fruehauf and what remained of bankrupt Italian troika Merker, Viberti and Cardi.
According to Wielton CEO, Mariusz Golec, the move has seen the OEM double its production capacity overnight, with the Italian three-piece now operating under the roof of newly founded Wielton subsidiary, Italiana Rimorchi Srl – making the Polish company a truly European corporation. “[Taking over Fruehauf, Merker, Viberti and Cardi] reflects Wielton’s key landmark projects for this year, even though we are facing many challenges related to the integration of all main assets in a single organisation within the Wielton Group,” he told Global Trailer at the time. “However, we are well prepared for this project and I am convinced that this is the best moment for the further development of Wielton.”
With private businesses like Wielton forging boldly ahead, Poland may just avoid the pitfall of stagnating growth that has been written on the wall as of late. Following the company’s small-scale example, the nation as a whole can now opt to stay the course, remaining a regionally focused middle-income economy, or seek to “accelerate the pace, catch up to the advanced economies, and become a globally competitive growth engine of Europe competing successfully on a global market”, as global consultancy McKinsey put it in a recent report.
McKinsey’s first, conservative option is a business-as-usual scenario, under which Poland’s GDP would grow at a moderate rate of 2.6 per cent annually – the average rate since 2008. As part of it, capital investment growth would fall slightly and the economy would have to face the negative effects of the looming demographic shift, especially regarding labour supply. On top of that, technology and efficiency growth might not be accelerated. “If this scenario develops, then by 2025 Polish real GDP per capita will have moved from 60 to 70 per cent of the EU-15 level*, reaching the levels of countries such as Portugal or Cyprus,” McKinsey says in the report.
Alternatively, Poland could seek to accelerate development and become the fastest-growing EU economy for the next decade. “By this second, aspirational scenario, Poland would achieve even greater prosperity, with GDP growth above four per cent annually between 2015 and 2025,” McKinsey predicts. “The advance would put Polish per capita GDP in 2025 at 85 per cent of the projected EU-15 average*. Such growth would allow Poland to attain levels not only of Portugal and Cyprus, but also of Spain, Slovenia, or even Italy.”
Under McKinsey’s best-case scenario, Poland would become a “globally competitive advanced economy” and a significant exporter of goods and services – effectively following the Wielton model. To achieve it, however, “Poland does not need to abandon its growth model, but a powerful collective effort will be needed,” McKinsey warns.
Indirectly referring back to successfully expanding businesses like Wielton, the consultancy says “diffusing” best practice from advanced sectors out to the less developed ones could accelerate the change process. “Supporting advantages for accelerated growth are significant – an educated and affordable workforce; geographical proximity to Western Europe, Russia, Ukraine and the Middle East; large internal demand from the population of 38 million; a stable macro-economic situation; and an increasingly favourable business environment.”
McKinsey’s aspirational scenario is reportedly designed to move the Polish economy from “good” to “great” with ten years of four per cent-plus annual growth. The business-as-usual scenario, of 2.6 per cent annual growth, it says, can seem sufficient for Poland, “but in today’s uncertain world economy, it hides certain risks”.
With Europe’s recovery from the five-year-old financial crisis remaining fragile and an internal innovation backlog looming, going for the high-growth option and remaining in the economic overtaking lane may therefore be the safest option for a nation many an analyst considers Europe’s next powerhouse.