A tale of two cities

By Karol Chlipalski and Aleksander Nowacki

The Małopolskie voivodship in the south-central part of the country has attracted only 6% of all foreign companies that have invested in Poland, according to Polish Foreign Investment Agency (PAIZ) statistics. This is less than half the amount of investment enjoyed by neighboring Silesia. By contrast, Mazowsze, which heads the regional ranking due to the attractiveness of Warsaw, has attracted 28%.

Of the firms listed in daily newspaper Rzeczpospolita's list of the 500 largest companies, 180 are located in Warsaw, while there are only 19 in Kraków. Such a disproportionate weighting of Warsaw leads some observers to claim that the country is developing in a way similar to that found in the Czech Republic or Hungary, whose respective capital cities Prague and Budapest are even more ahead of the rest of the country.

Many observers believe that this is the path that Poland is inevitably following, as with the exception of the capital, major cities fail to play the metropolitan role of attracting job seekers from the provinces, even if they enjoy relatively low unemployment rates. Others, however, argue that the widening gap between Warsaw and the rest of the country is the result of more favorable conditions for business activities in the capital as compared to the rest of the country.

In cities such as Kraków, the country's third largest city, growth is hindered by official incompetence, inefficiency and a failure to understand the concerns of business people. While the authorities and public opinion seem to be waiting for the problem to solve itself following EU accession, the city is increasingly going in a direction whereby it will not be able to enjoy the benefits of membership fully due to internal obstacles blocking its growth.

"You just have to accept that certain regions and cities will grow faster than other ones," said Marcin Nowicki, head of regional development and European integration research at the Gdańsk Institute for Market Economics. "Otherwise, you will have a situation where the weaker ones pull the leaders down. That is not good for the country."

There are, however, problems with such an approach, and Nowicki is the first to acknowledge this. While Warsaw attracted people from regions with high unemployment in the 1990s, the city's market has now become "full to the brim" and cannot absorb many more potential workers, unless economic growth picks up again, Nowicki said.

What's more, while all the major urban areas, with the exception of Łódź, have a relatively low unemployment rate, they do not all enjoy a positive migration ratio, meaning they fail to attract job seekers from the provinces. This would be much less of a problem in Hungary, where some 25% of the population is concentrated in Budapest, or even in Prague, which accounts for more than 15% of the Czech Republic's population. Only one in 20 Poles lives in Warsaw, making the role of other major cities much more prominent.

How can the problem of uneven development be addressed? And, more specifically, will the European Union, with its structural and cohesion funds designed to solve such problems, succeed in doing so?

While the authorities are enthusiastic about the prospect of extra money from Brussels, many economists take a more balanced view.

Pointing to the logic of public aid, Kristine Midelfart-Knarvik and Henry Overman of the London School of Economics argue that structural funds act as a direct growth stimulus to a very limited degree and only over a long period of time. Funds are at their most effective as an instrument of pro-growth policy when used primarily for investment in human capital and bringing up the qualifications of those on the labor market. This is evidenced by the experience of Ireland, while the cases of less financially successful countries, such as Greece and Portugal, demonstrate that heavy investment in infrastructure, albeit clearly beneficial, is not the way to quick growth. The danger of misallocating resources is great and there is a lot to be said for the theory that structural funds only work when they create favorable conditions for private investors.

That cannot be done simply through spending EU money, which is meant merely as a financial supplement to policies that are already in place. So where does our own country fit into this context?

"It makes me sad to see that we are waiting for someone to come from the outside and solve all our problems," said Krzysztof Dzierżawski, an economist at Warsaw's Adam Smith Center. "That is a very dangerous thing to do."

What needs to be done, according to Dzierżawski and other analysts, is to create conditions for private investment - the only way to give growth a boost - and to use structural funds to supplement them. The way things are looking now, this does not seem to be a likely scenario for Kraków.

Kraków falls behind

So far just a handful of international companies have decided to set up their operations in Kraków, including British Petroleum (BP), American mobile-handset maker Motorola, British hypermarket Tesco, American transportation component producer Delphi, French car-stereo maker Valeo and Coca-Cola. But soon there may be even fewer of them, as companies are pulling out of the city because of administrative barriers to conducting business.

The dwindling number of companies located in Kraków is surprising, given what would appear to be a positive investment environment in the city.

"(The city is) well located within a densely inhabited area, not expensive compared to Warsaw, (and has) a well trained workforce, low office rental costs and good transport connections," said Bogdan Drej, head of the Kraków municipality's department of strategy and development.

Nonetheless, the total value of foreign direct investment in Kraków amounts to only €2.4 billion ($2.7 billion), hardly an impressive figure in view of the more than €52 billion ($60 billion) invested in the country by foreign companies.

"We have thought several times about moving our office to Warsaw," said Dorota Adamska, a spokesperson for BP. As the most important reason she named the seven-year long delay in the building of a gas station in Kraków. Although all the necessary permits had been obtained, local residents protested against the project and the authorities were neither willing nor able to enforce the law.

"The rules are identical throughout the country," Adamska said. "But a lot depends on the way officials interpret the law. In Kraków, they decide against the investor as a general rule."

She went on to say that cooperation with the authorities is very difficult, citing the example of a request for an interpretation of a tax law that BP had addressed to the tax office. In reply, the company was told "we are not tax advisers."

"If we have stayed on, it is mostly for sentimental reasons," Adamska said. "Most of our employees do not want to leave this city."

In the face of such arguments it is clear that minor irritants, such as poor transport facilities and an inadequate airport from which only a few destinations are served, pale by comparison.

"Poland is becoming more and more centralized," Drej said. "Most of the decisions, licenses, opinions and permissions required for a company to function - especially one with foreign ownership - are done by the central offices in Warsaw. I've talked to several managers who told me that they would prefer to live and work in Kraków, which is more agreeable than Warsaw. As they are forced to spend three or four days a week in the capital for business purposes anyway, they do not have any choice."

But managers also complain about the business environment in the city, which they find far from friendly. Kraków-based RMF FM, the leading private radio station in the country, had a long and turbulent conflict with the municipal authorities over the extension of a rental contract for the old fort at Kopiec Kościuszki, where the radio station has its headquarters.

Tishman Speyer Properties, a New York-based real estate developer, could not come to an agreement with the municipality regarding the details of its €609-million ($700-million) development of a modern business and commercial center around Kraków's main train station.

"In Warsaw, there is economic activity on a large scale and of the highest professional standards, which forces the bureaucrats to make an effort and adapt to modern business requirements," said Maciej Lichy, a Kraków-born lawyer who has moved his legal firm to the capital. He explained that bureaucrats in Kraków lack experience in dealing with professional business partners. They also tend to become excessively "meticulous" in their procedures, which makes it almost impossible to run businesses.

"I have moved my business to Warsaw and have helped two other companies to do the same," he said. "A different way of thinking prevails here."

Lichy went on to criticize the Kraków courts, saying that they are not used to dealing with complex cases that require a great deal of sophistication.

"When they get a rental contract that numbers 50 pages, they simply do not know what to do with it," he said.

Bureaucracy the biggest obstacle

Andrzej Długosz, an entrepreneur from Kraków who now also has an operation in Warsaw said that bureaucracy is the biggest obstacle to business growth, citing the example of tax office clerks who are not qualified to deal with modern financial techniques.

"First they tell you 'That can't be done.' Why not? Because they don't know how to approach the problem," Długosz said, adding that the situation is pretty much the same all over the country with the exception of Warsaw. "Investors think first of all in terms of efficiency, and Kraków leaves a lot to be desired in that respect."

Anna Bryńska, a tax adviser at Salans law firm, is convinced that such problems, which she calls "latent tax burdens," form a significant, if difficult to quantify, portion of the costs of running a business in this country.

"Protracted court proceedings, flagrantly unfair rulings and a paranoid mentality among officials who think that everyone in the business world is a criminal and a fraud - these are all factors that make business activity difficult," she said. "It is clear that (these problems) are not evenly spread in different cities."

Bryńska said that Warsaw was way ahead of all other cities in this respect. Although she did not name Kraków among the least taxpayer-friendly cities, she agreed that it could be a factor restricting the city's growth by increasing non-quantifiable, but no less real, costs of economic activity.

Hope for change

Bogdan Drej of the Kraków municipal office declared that the new administration is doubling its effort to attract investors to the city, in contrast to the previous municipal government, which was more focused on developing infrastructure. He pointed to the recent completion of a spatial planning study and a municipal land and property inventory as removing at least some of the obstacles that investors encounter in Kraków. As a further sign of an increased awareness of the problems involved, he mentioned the setting up of a separate unit within the municipal office that will deal exclusively with foreign investors.

Should the authorities prove true to their promotion officer's word, there is a good chance that structural funds will not go down the drain in the country's historical capital.

But Andrzej Długosz remains skeptical.

"All the previous municipal governments claimed to be investor friendly," he said. "I believe they actually wanted to be, but the reality was never compatible with their declared intentions. You would need improvement at every level, even right at the bottom of the administrative structure. And the municipal government's real influence does not go that deep."