Poland is the only country in Europe likely to register economic growth this year. It is now hoping to follow in the footsteps of the EU’s previous star pupil, Ireland, writes Ginanne Brownell.
It is early September in the Polish mountain village of Krynica. Strolling among the crowd of tourists are people such as former Spanish prime minister José María Aznar, Nobel Peace Prize winner (and Poland’s first post-Communist president) Lech Walesa and the EU’s commissioner for enterprise and industry, Günter Verheugen. But these politicians and former world leaders are not here for the spa facilities that this area is renowned for – they have come to network with more than 2000 top business executives, economists and politicians at the annual Krynica Economic Forum, dubbed ‘the Davos of eastern Europe’
It was just after the Berlin Wall fell that the first conference, organised by Warsaw-based think tank Institute of Eastern Studies, was held for central and eastern European heads trying to sort out what it meant to be a part of the free market economy. Nineteen years on, it makes perfect sense that Poland is the place where world leaders are gathering to discuss the financial crisis; the country has turned out to be the superstar not just among its central and eastern European neighbours, but across Europe as a whole. This year the Polish economy is expected to be the only one in Europe that has not contracted and has grown – by 1%. Hungary’s economy is expected to contract by more than 5%, while Estonia, Latvia and Lithuania could experience up to 18% GDP contractions. “We are like a green island in a sea of stagnation,” says Waldemar Pawlak, Poland’s minister of economy and deputy prime minister.
Because Poland has had such a strong record of economic growth, the International Monetary Fund gave the country a $20.5bn loan as part of its ‘flexible credit line’, which is seen as a type of insurance for strong performing countries, and in the Cushman & Wakefield 2009 European Cities Monitor, Warsaw replaced Moscow as the city expected to see the biggest influx of investments by foreign companies in the next five years.
Investors have already been tapping in, with companies such as ABB, Fujitsu and Proctor & Gamble all making recent large investments. “I wouldn’t say Poland is a Slavic tiger, because that would imply that the country has been making a huge jump, being very aggressive and going quite quickly,” says Adam Zolnowski, a senior advisor for PricewaterhouseCoopers (PwC) in Warsaw. “Poland is more like a bison, moving slowly but starting to gain speed.”
Although in the current economic climate it may be better to be a bison, Poland could learn a thing or two from Ireland’s ‘Celtic tiger’ that rampaged across the globe luring investors during the late 1990s and early 2000s. In many ways the two countries share historical parallels – strong Catholic backbones, traditionally agriculture-based economies, struggles against occupiers and citizens emigrating due to the economic and political climate at home – and both countries benefited greatly from EU accession and membership using aid to invest in areas such as infrastructure. Both countries also got their fiscal houses in order in the 1990s by pursuing policies of economic liberalisation.
The EU membership, tax incentives, government grants and low wages that attracted foreign investors to Ireland are similar to the types of enticements that Poland is using to tempt companies today. With the Polish workforce – estimates claim that 800,000 left for western Europe around the time of EU accession in 2004 – now coming back in droves as the Irish did during their Celtic tiger heyday, Poland’s investment potential could be on an even greater trajectory (minus, it is to be hoped, the bust).
Manufacturing, it seems, is the biggest draw in the country; Dell has actually moved its European manufacturing base from Limerick, Ireland, to the western Polish city of Lodz to improve productivity and reduce costs. Ireland’s loss has been Poland’s gain – it is expected that the factory will employ up to 3000 people during the next three years – but can Poland successfully do what Ireland did and diversify from a manufacturing-based investment destination to high-value-chain activities?
Several experts believe that Poland can. “Spain and Ireland have been two stories of great success in the EU and Poland could follow that same path,” says Mr Aznar. “If Poland can keep a flexible economy, have more capacity to compete and more openness to the world, then the possibilities for Poland are very strong.” One of Poland’s strengths – in part because it is such a large country – is that it has not been reliant on one or two sectors, unlike its neighbours, Hungary and the Slovak Republic, which were too dependent on the automotive industry. When the sector ran into difficulties, so did their economies.
According to greenfield investment monitor fDi Markets, although Poland has been seeing significant investments in business services (in sixth place among business activities in Poland, with 121 projects from January 2003 to July 2009, and an average annual growth rate of 51.3%) and design, development and testing (seventh place with 52 projects and an average annual growth of 64.2%), the largest number of projects in Poland remain in the manufacturing industry with a total of 735 projects and an average growth of 17.3% a year. In Ireland, business services comes in at second place with 131 projects and 35.9% average growth a year, while manufacturing places third with 124 projects to date and annual growth at 19.3%.
“For Poland, moving up the chain there are some pros and cons,” says the IMF’s Mark Allen. “The country has some very smart people and in some sectors, such as IT, enough smart programmers to allow a move into the software business – but I would have thought there needs to be much more investment in things such as higher education.” Ireland’s investment in education and skills development – helped by EU funds – was something experts credit as being integral in helping to draw in more high-value investors during its peak; though Poland has seen a huge increase in the number of college-age students enrolling in higher education – from 11% of the population in 1995 to 30% a decade later – the country has a long way to go.
Tax incentives for high-value investors were something Ireland was also keen to promote and experts acknowledge the country’s low corporate rate of taxation – 10% to 12.5% during the late 1990s – as being a real pull for investors. Poland, though, because of its size and population – 38 million residents compared with Ireland’s 4 million – had to come up with something different. “A small country maybe can make more mileage for being a low tax base, but a large country has more difficulty to do that unless it really is prepared to reduce the size of government enormously,” says Mr Allen. “I do not think that Poland could afford to get in a bidding war in terms of things such as special tax treatments.”
Poland looked to Industrial Development Agency (IDA) Ireland, the country’s investment promotion agency, for ideas. “After a huge investment from [South Korean electronics company] LG in 2005 it occurred to the government to use the example of IDA to offer strategic grants to investors,” says PwC’s Mr Zolnowski, who spent time on a scholarship working for IDA. “So, suddenly Poland found a way to offer state aid in cash for flagship projects.”
The country has also been given EU money to finance investment projects in the area of innovation so, for example, companies that hire 200 people and spend E40m can get EU funds. “Last year, we introduced a scheme for innovators where all their profits can be reinvested into R&D and this is tax free, so arrangements are in place to help foreign investors,” says Mr Pawlak.
Those initiatives will help, but the country has a long way to go in order to catch up with Ireland to get those valued industries to make long-term, high-value investments. One of the areas for improvement is the way that Poland goes about generating investor interest in the country. IDA has been hugely credited for driving – if a bit egotistically, some might say – the Celtic tiger and really wooing industries to take a second look at a small island nation on the edge of Europe; IDA has 15 offices worldwide and a budget last year of more than €122m, whereas the Polish Information and Foreign Investment Agency (Paiz) only has an annual budget of about €4m, with no international offices.
John O’Brien, who sits on IDA’s executive committee, says that trying to attract foreign investors is a constant evolutionary process. “IBM came in here in the early 1990s largely to manufacture and employed about 2000 people,” he says. “It still employs that number but only about 300 are doing the manufacturing and the rest have moved into services and R&D, so what you have to do is adapt pretty quickly to the changing circumstances.”
Unlike IDA, which is funded by the government but retains overall control, Paiz is run by the Polish Ministry of Economy and because of its small budget is reliant on trade missions at its embassies to promote Poland. “Paiz has never been strong and it was given only a minor and supportive role by the ministry,” says Mr Zolnowski.
What Poland focused on instead was decentralising investment promotion so that regions – made up of economic zones that focused on specific sectors – promoted their locales separately to investors. “The local governments started to see that they could benefit from inward investments and so they started to create local agencies just like IDA to focus on a specific region and promote themselves abroad,” says Mr Zolnowski. That is helpful, but only if Paiz works in tandem to help support what these regional agencies are doing – so far results have been mixed. Is it better to have one-stop-shopping – such as IDA – or a plethora of choices that are competing for investment?
This was obvious at Krynica, where several regional investment agencies tried to lure high-value investors with presentations, parties and even a high-tech laser show put on by the city of Krakow. If that is anything to go b