wiiw Opinion Corner: Breaking out from the middle-income trap? Not at any price!

09 August 2016

In the last 25 years, Poland – just as most of the other CEE countries – closed a good deal of the income gap with respect to Western Europe. An assessment by Leon Podkaminer

In 1995 Poland’s per capita Gross Domestic Product (GDP) amounted to 32.8% of the German level. By 2010 that indicator had risen by 18.7 percentage points, to 51.5%. But over the recent five years the advance has moderated. In 2015 Poland’s GDP per capita stood at about 56.1% of the German level. It is reasonable to expect a further slowdown of the catch-up with the West in the future.

The “middle-income trap”

In my opinion, Poland (and other countries of our region) will get stuck in the ‘middle-income trap’. Slovenia – until recently the most affluent CEE country – finds itself already trapped. In 2005 the Slovenian GDP per capita stood at 73% of the German level. But by 2015 that indicator had fallen to 68.3%. By the way, also the aspiring countries of Southern Europe appear to have been caught in the ‘middle-income trap’. For instance, Spain’s GDP per capita in comparison to Germany’s deteriorated from 84.7% in 2005 to 73.2% in 2015.

Estimates available from the Maddison Project suggest that the Polish GDP per capita averaged to about 59.1% of the German level between 1870 and 1910. (In 1938 that level was even lower, at only 53.2%, while it was highest, at 77.6%, in 1948.) The remarkable progress achieved during the last quarter of a century – the progress the Poles are rightly proud of – must be seen in a historical perspective. That is, Poland is resuming ‘its own’ place in the European economy. Unfortunately, this is a peripheral place.

Beyond income factors

The consideration of the factors behind this state of affairs would take us far beyond the confines of this text. Quite certainly Poland’s (and other CEE countries’) relative underdevelopment has been rooted in very many intertwined factors: geographical, historical, social and political ones. Due to those factors the natural economic, social and political developments were stopped (or even reversed) in Poland for many centuries – while proceeding (and gathering speed) in the West. Undoubtedly, a fast making-up for the century-long delays – if at all possible – would be a Herculean achievement.   

EU membership

Poland’s EU membership has certainly contributed to the progress achieved so far. It has brought many advantages and helped the advance to the current income position. However, I am convinced that things are becoming increasingly difficult down the road. The chances of a ‘stumble’ (as so painfully experienced by Slovenia and Southern Europe) will increase significantly – especially should Poland give up its national currency. Nonetheless, by cautiously (and opportunistically) manoeuvring within the limits ‘imposed by Brussels’, Poland can count on continuing (though possibly unspectacular) improvements. Of course, it would have to conduct a competent policy in many areas. In particular, the country would have to avoid emotionally motivated ‘big forward leaps’, ‘radical policy accelerations’ and institutions of grandiloquent ‘long-term development plans’.

No Polish tiger

The strategy of ‘clever’ (if conservative) accommodation to the actual circumstances may be contrasted with the experience of the East Asian ‘tigers’. Starting with post-war Japan, these countries have undergone fantastic transformations. Within a relatively short time they broke out from the ‘middle-income trap’ (and some of them even from the utterly low-income trap), making up for the centuries-long economic backwardness. Their success has many roots – including state-directed industrial policies (in particular stipulating elaborate protectionism in foreign trade and foreign investment).

For many reasons Poland cannot emulate the East Asian way, and actually it should not even attempt to do so – not only because following that way brings about – due to ‘cultural differences’ – fatal consequences everywhere outside Asia (e.g. in Latin America). Also, because following that way would necessitate the withdrawal from the EU (which would entail the loss of EU transfer payments and the end to Poles having free access to EU labour markets). The decisive reason is that ‘the world has changed’. For strategic reasons the world (i.e. the United States in that case) benevolently tolerated the state-directed protectionism in its East Asian protectorates (long lethally threatened by the spread of aggressive Communism). At present there is no reason to suppose that the EU would passively tolerate Poland’s full-scale protectionism. Quite certainly the EU would reciprocate, targeting Polish exports. The ensuing trade war would bring about unimaginable losses to Poland – and only minor ones (if any) to the EU. 

Rather a creative player

Does Poland have only two policy options – either a frenzied solitary attack in expectation of an imminent (or fast) success in achieving affluence comparable with that of the West; or passive accommodation to the constraints ‘dictated from Brussels’, thus accepting inevitability an ‘economic climb’ that will be laborious and slow?

Not quite. There is also a possibility of a creative co-determination of the ‘constraints dictated by Brussels’. These constraints can support a ‘good growth’ in Poland (and in the entire EU) – or they can hinder it. Messrs Tusk and Rostowski, while in power, did not make proper use of that possibility. Rather, they made an improper use (e.g. actively supporting economically senseless decisions concerning the EU fiscal policy framework).

To be effective in co-determination of the EU policies one has to be at least polite in one’s contacts with the EU partners, or even friendly. As Professor Bartoszewski aptly remarked, ‘a maiden that is not nice-looking and has no dowry should at least be likeable’.

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