Michael Roberts – Poles apart

The Polish electorate is divided between the towns and country; between the working class and neoliberal professional and business classes; and between supporting EU policy and opposing it. Sign of the times in Europe.

Michael Roberts is an Economist in the City of London and a prolific blogger.

Cross-posted from Michael’s blog

Poland has a general election on Sunday and this one seems pivotal for unity in the European Union, both on economic policy and on the EU leadership’s unquestioning support for Ukraine. Poland has 40m people, making it the most populated country in eastern Europe. And its influence in EU policy and actions has increased.

The governing Law and Justice Party coalition has been a thorn in the side of the EU Commission and leaders.  The government has blocked EU attempts to spread the burden of refugees across EU member states and it has changed its judiciary system to ensure government policies are not hindered by the ‘rule of law’, restricting press freedom.  And more recently, the government has suggested ending the sending of arms and funding support for Ukraine, because Ukraine’s grain exports are damaging Poland’s own large farming sector.

The opposition Civic Coalition is led by former PM and EU President Donald Tusk.  In contrast, this coalition stands fully in line with EU policy economically and on Ukraine; and it also seeks to reverse the strangling of the judicial system imposed by the government.

The latest polls suggest that Law and Justice will win the most seats but possibly not enough to form another government.  L&J will probably win because it has gained support over the years from its social welfare measures and from the more rural and religious communities.  The CC opposition is very much a neo-liberal party in economic and social policy, favouring fiscal austerity, ‘free markets, deregulation and a pro-EU stance (which is no longer so popular).  That’s part of the reason that the L&J has stayed in office for over eight years.

During that period there has also been a dramatic improvement in the Polish capitalist economy.  When the Soviet bloc collapsed and Poland’s returned to capitalism, there was a 13 to 1 gap between Poland’s national income per person and that of the united Germany.

In just over a generation since, Poland’s economy grew at about 4% a year in real terms. This was driven by a huge inflow of foreign capital, mainly from Germany, to take advantage of cheap Polish labour.  At the same time, millions of able-bodied Poles went abroad to find work and return hard currency to their families.  Some 2.5 million Poles, 7% of the population, lived and worked abroad, sending home remittances of USD 7.5 billion, or 1.7% of GDP each year.

Poland’s domestic labour force became a huge assembly line for German manufacturing products.  The export of these commodities enabled German capital to gain large profits, while the profitability of Polish capital rocketed.

This was made possible by what Marxist economic theory calls uneven and combined development.  The latest technology was employed by foreign (and to a lesser extent Polish) capital alongside cheap labour.  In the mid 2010s, car factories in Germany paid workers €3,122 a month, almost four times as much as their Polish, Czech, Slovak or Hungarian colleagues, who made €835 for similar work.  The productivity of labour rose strongly.

but the share of that new value going to labour fell to the second lowest in the EU..

And so the profitability of Polish capital rose, also helping to counteract any decline in the profitability of German capital.

In addition, once in the EU, Poland received 2.7% of GDP in EU transfers annually and sent 4.7% of GDP in profits to Western investors. Fully 28% of Poland’s exports go to Germany. Less than 6% of German exports go to Poland.

Poland’s economy remains dominated by foreign capital.  In Poland’s 14 Special Economic Zones (SSE) only 19.6% of entities are Polish investors; and there is total tax exemption for enterprises operating in SSEs so that the effective tax rate of foreign enterprises was 1.2 percentage point lower than that of domestic companies.

Foreigners dominate large-scale modern industry and services. The exports they send out are mostly mid-tech. The foreign owners benefit from value added generated in Poland. Polish small and medium-sized enterprises and mid-caps often struggle. Poland qualified for a mere 1% of the €80bn disbursed by the EU under its last programme for R&D.

So, within a single generation, Poland’s economy has expanded significantly, but at the same time it has gone from being one of the most egalitarian countries in Europe to one of the most unequal, at a level not seen since the years of domination by the Austro-Hungarian empire before 1914.

Research by Polish economists Michal Brzezinski, Michal Myck and Mateusz Najsztub, in their paper ‘Sharing the gains of transition’, indicates that Poland has one of the highest rates of inequality in the EU and also that the gap is widening. They find that the highest-income earners benefited most during the post-communist transformation: The annual rate of income growth for the top 5% of the population exceeded 3.5%, while the median income grew on average by about 2.5% per year. “According to our adjusted estimates, the cumulative growth in real income over 1994-2015 for the top 1% of Poles reached 122%-167%, while for the bottom 10% the corresponding number is at most 57%,”.

Some 20% of the population (7.3 million people) are still living in official poverty, while Gini coefficient of inequality (where 1 means all personal income goes to one person) which was at 0.27 in 1990 under Communist Poland has now jumped to 0.45, well above the EU average.

So the price of economic growth and increased incomes has been domination by foreign capital, with millions having to work abroad and leading to sharply increased inequality, so that only a minority have benefited from Poland’s ‘boom’.

And now things do not look so rosy ahead, as Poland goes into the 2020s.  The previously available cheap labour force has been exhausted.  Poland’s population is ageing.  Yes, the workforce has been augmented by an influx of refugees from Ukraine, some 1 million, but more than half these are women, elderly and children, not available on the whole to be used by Poland’s industries.  And many of these immigrants want to return to Ukraine after the war is over (if it is ever is).

At the same time, the previously large agricultural sector is in sharp decline both in contribution to GDP and employment.  As it declines, so do EU subsidies through the Common Agricultural Policy and those transfers have provided half of annual real GDP growth up to now.

Much depends now on Poland getting its share of Next Generation EU (NGEU) funds which could increase real GDP growth by 1% pt a year over the rest of this decade.  But the EU is blocking the release of these funds for investment because the current government has interfered with the ‘rule of law’ over judiciary and free speech.

The bounce-back from the pandemic slump has now faded. This year, the economy is likely to contract by around 0.5% in real GDP.  And from then on, real GDP growth is expected to be well below the pre-pandemic average.  At the same time, the post-pandemic inflationary spiral has driven down real wages in Poland for the first time since the 1990s.  Inflation is currently at 8% a year and is expected to slow to only 6% next year, well above the official target rate of 2.5%. Industrial output is falling and exports are being dampened by the recession in Poland’s dominant neighbour, Germany.

Manufacturing activity index (below 50 means contraction)

Frictions between Poland and Germany on the one hand and Poland and Ukraine on the other are likely to intensify, given the economic downturn and the response to that by the nationalist government, if it is returned to power.  The Polish electorate is divided between the towns and country; between the working class and neoliberal professional and business classes; and between supporting EU policy and opposing it.  Sign of the times in Europe.

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