Magazine
13:28 16 January 2022
Post by: Warsaw Business Journal

POLAND CAUGHT IN AN INVESTMENT TRAP?

Why are investments in the country decreasing, although there is more and more money for investments? BY SERGIUSZ PROKURAT

POLAND CAUGHT IN AN INVESTMENT TRAP?

About half of the value of global foreign investments is located in the most developed countries in the world — which is nothing unusual. Investing puts money to work. There is increasingly more money for investments. For many years, Poland has been an attractive country for foreign companies that have had a huge impact on the economic changes taking place in our country since the beginning of the economic transformation. Foreign companies have contributed with capital, technology, culture, and work organization, and today they play an important role in our economy. And the Covid-19 pandemic has not changed that. If we look at data reports by the Organization for Economic Cooperation and Development (OECD) to see which countries in the world benefited the most and which the least from the incoming FDI in the pandemic year of 2020, in the case of Poland it is: $8.6 billion in FDI in 2020, while in 2019 it was $11 billion — a 22% decrease year-on-year. Contrary to appearances, it is not bad. This result gives the 19th place in the world when we talk about the sum of attracted foreign investments. The data for 2020 and 2021 are optimistic — the great capital considers Poland an interesting place to allocate funds. A large part of FDI is in the real estate sector but the growth is driven by renewable energy projects.

Is there anything to worry about? Poland is an attractive place for international investors – the country is developing dynamically, labor is still cheaper than in Western Europe, and it provides well-educated employees who speak foreign languages, and yet, since 2015, economists have started to notice the problem of the falling share of investment in GDP. Investments in Poland viewed as a percentage of GDP dropped from 20.7% in 2011 to 16.7% in 2020, while reaching the lowest value since 2011 — the lowest share of investments in GDP since the beginning of the 1990s. Perhaps, this does not foreshadow a catastrophe, but it does show a certain trend.


SPENDING LESS AND LESS

In 2020, a lower investment rate was recorded, among others, by Greece (11.1%). In the same period, investments in the European Union increased from 20.8% to 21.6% of GDP. This means that since 2015, over the last few years, Polish companies have been spending less and less on new investment projects. This raises serious questions. At the beginning of the PiS rule, in 2015, there was a lot of talk about investments, about the need to increase them to 25% of GDP. Unfortunately, the course taken is completely different. The Polish engine of economic growth is consumption, and investments are in decline. In particular, it is the share of private investments in the economy that has been steadily declining — in 2015 it was still 15.6% of GDP. In 2018, Polish private investments — companies and households — were worth about 13.5% of GDP. Now, even less. At the same time, it is compensated by high public expenditure on investments (ranking among the top OECD countries), worth about 4% of GDP. Over several years, this trend has not been very favorable.

There are a number of reasons for that. The first and most apparent is the excessive promotion of consumption at the expense of savings, and thus potentially investment. Economics teaches that the propensity to invest consists of postponing current consumption, including collective consumption, in order to aggrandize future resources. The greater the propensity to invest, the greater is the expected benefit from postponing or abandoning current consumption. Meanwhile, social programs such as the 500+ child benefit program, the tourist voucher, or even the 13th and 14th retirement pension, point to the “Now or never!” social message, i.e. it is not worth tightening the belt — Poles are rich already and should consume at the level of Western Europe. Excessive consumption does not have to result in underestimated business investments, but let us remember that a large part of entrepreneurs is small businesses, but also ordinary people influenced by the governmental message. Additionally, people who are employees and who could potentially start businesses and invest are also under the spell of the “it’s consumption time” blitz. Inflation is the result of such an approach, i.e. excessive consumption fueled by governmental institutions and by the National Bank of Poland (NBP), which has intervened reluctantly or too tardily when it comes to raising interest rates. Inflation destroys savings, impedes planning, and discourages investment.


RISING UNCERTAINTY

The second reason is the rising uncertainty among Polish entrepreneurs. While international capital does not have a big problem with this — because it is focused on monumental investments — regulatory and judicial uncertainty is a curse for small and medium-sized enterprises (SMEs). The current parliament can pass a crucial change of law within a few or several days. It often becomes possible because the government overuses the pandemic path or the authoritarian model, in which there is no need to weigh logical arguments for and against so that public consultation can be skipped as well. Bad laws give rise to concerns, so entrepreneurs refrain from investing because they do not know which regulations will apply in a few months’ time. The reform of the judiciary does not help either, as it undermines the independence of courts and, as a consequence, weakens the conviction of business owners that in the case of a dispute with the state they will be able to count on the independence of judges.

There is also no equality sign between public and private investments. In business, public administration prefers State Treasury shareholding companies. This is justified by numerous public debates, which are supposed to convince people that the state is a great investor, and in which economists associated with the government, representing state-owned or state-financed think tanks, lead the way. This only makes politicians convinced about the further need to establish giants, whose names must include words like “national or Polish”. This discourages the private sector from initiating new projects. There is a phenomenon of “crowding out” of private investments by the state ones. The high public expenditure on investments masks the decline in private investments — the state as an investor will never replace the market.


THE FEAR OF NEW TAXES

Another factor that negatively affects the level of investment is the fear of introducing new industry levies, which has already been experienced by banking and trade, and higher taxes for businesses as part of the Polish Deal set to be introduced from 2022, a program aimed at introducing new taxes and further channels of redistribution to support the poorest — the electorate of the ruling party — at the expense of businesses, and thus at the expense of potential investments.

The Polish economy consists primarily of a large number of microenterprises and SMEs that employ 70-80% of the total number of people employed in the economy — and their share in generating the national income amounts to nearly 90%. Trade prevails in the first place, construction in the second, and craftsmanship in the third. Most companies do not have strategies, communication plans, visions, which cuts off their participation in large European public procurement tenders. They do not have logistics, services, R&D facilities, as well as adequate investment capital. Their problems are completely different than those of large corporations. They are touched not only by political topics — close to every Pole — but also by the struggle with a rather oppressive taxation system or the challenge of developing an organization without capital. Education is one of the most effective answers to these challenges and could potentially result in a spike in investments. Support for education or R&D programs is not a high priority in Poland. For example, R&D expenditure differs between the level of around 3% of GDP in Germany and less than 1% in Poland, and taking into account the base — German GDP is nominally six times greater than Polish GDP — Germany spends nominally 18 times more on R&D.


ECONOMIC SLOWDOWN

Long-term projections prepared by international organizations indicate that in the absence of reforms, in the future, the Polish economy will slow down significantly. It doesn’t have to be this way. Poorer countries can grow quickly by introducing simple solutions used previously in more developed countries as the distance to the world’s leaders narrows. However, maintaining further growth requires creating conditions that would allow for copying more advanced solutions and developing own ones. To achieve this, more efficient institutions are needed. Moreover, the pace of economic growth in Poland will be adversely affected by the aging in the society and the decreasing number of people of working age. The current economic model, based on consumption and social programs, is not enough to catch up with the wealthiest Western countries. In the years 1989-2019, GDP per capita in Poland grew at a rate of over 3.3% annually (IMF). However, according to the OECD projections (2018), growth will slow down to an average of 1.8% annually in 2020-2050.

Despite free-market reforms, after the last 30 years, there are still areas in Poland that require further changes. These problems include unfinished privatization, overregulation, inefficient judiciary, high volatility of law, and a confusing taxation system with numerous exceptions and privileges (agriculture, mining). Entire industries are not focused on finding market opportunities, but rather maintaining the status quo.

Poles are more willing to spend money than think about saving or investing, regardless of the fact that at the end of 2021 prices in Poland are rising practically at the fastest rate in Europe. Meanwhile, wise spending is part of wise investing. And it’s never too late to start.



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