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Interview with Mateusz Walewski: We still have a price advantage, but we have to move from “production” competitiveness to “technological” competitiveness

de Alexandra Pele , 4.1.2021

The imminent future of the economies of Central and Eastern Europe, the end of the tunnel for the Covid crisis, Eastern convergence – how does a Polish expert see the medium-term development of emerging EU states and what are Poland’s advantages in regards to European economic integration.

Read below the full interview with Mateusz Walewski (foto), chief economist and Director of Research at Bank Gospodarstwa Krajowego published in CRONICILE Curs de Guvernare, no. 92.

***

How do you see the role of Central and Eastern Europe in the future economy of the EU?

I think the role will not change so much. Obviously, CEE will be a bigger part of EU because I strongly believe that our part of Europe will suffer less from the pandemic than the EU. Most of our countries, with some exceptions, are less dependent on tourism than Italy or Spain. We have a lower share of services in our economies, especially those seriously hit by the pandemic. So strictly from a mathematical, statistical point of view, the share of CEE economy will rise but I don’t think the role will change.

The role will be the same. We will stay the fastest-growing part of EU and this is something that will not change because there are multiple reasons for that.The main being that we are still emerging markets, and our growth capabilities are simply higher than the rest of EU. We are in a convergence process and I think this process will not be stopped.

There are some expectations that after the pandemic some of the investments that before were offshore, some of the production chains will come back to Europe and most probably they will come back to our part of Europe. Near-shoring will replace off-shoring. It’s possible. Our economies will take advantage of that but I don’t think it will change the picture a lot. It will help some sectors. We can have some additional foreign investment but it will not be a real breakthrough.

What are CEE competitive advantages that can help the region catch-up to Western Europe?

Our main advantage is that the labour force in this part of the EU is relatively well educated and still relatively cheap. Obviously it depends on the country. We speak about one region but the situation in Romania, Slovenia, Poland, and Croatia can be completely different.

However,  we all share some general characteristics. We combine some characteristics of the emerging markets, such as competitive labour force and convergence with high quality of institutional environment resulting from our EU membership.  It is something that makes us different to other emerging markets where the institutional risk is much higher. Obviously this advantage with be diminishing over time, as our GDP per capita, and hence wages, continue convergence to the western European standards.

Before the pandemic there were some labour shortages in many CEE countries.

These are already visible in some production sectors but foreign investments are still coming in production sectors and they are still able to find workers.

Labour force is still an advantage for this market. It is drying out, both due to demographic reasons or due to rising wages. That’s why our future development model needs to be different.

It means that within 5 to 10 years we will have to look for other advantages. I think there are two advantages we can look for. The first one is, although to some extent it can also be viewed as a disadvantage, that our companies are much smaller, much younger than the companies in western European countries. It means they are much more flexible. On average, CEE companies are much better prepared to cope with quickly changing environments than huge corporations from developed countries.

I did in previous years a lot of research on polish companies investing abroad or expanding abroad. If you talk to these managers, they claim their main advantage is that they are much more flexible than their competitors from western Europe and due to the transition period they got used to quick changes, they got used to coping with new demands, to changing environments. This is something very specific to this part of Europe, which experienced transition. But this is a soft advantage.

The hard one is still our educated and creative  labour force. We still can have the price advantage, but this time on the technological – innovation, design, research, parts of the production cycle. We have to move from “production” competitiveness to “technological” competitiveness and we have all we need to be able to do it.

You talked about Polish companies investing abroad. How big are those investments?

There are not huge investments yet. Foreign direct investments in Poland are much higher than Polish investments abroad but this is due to the much shorter history of the market economics in Poland and other parts of Europe.

In general, we are capital importers, not exporters and this situation will last for next several years.

Looking forward to the next decade, which sectors should be encouraged to develop?

I think countries of the region have differ in respect to comparative advantages in various industries. There is no room for some common “industrial policy” for the region as a whole. What we can do together is to build an environment for all the industries to develop. That is why it is so important for the Three Seas Initiative to help build communications, energy and transport infrastructure to strengthen the links between our countries. It will also teach us how to run complicated international programs. This is something we are not very good at.

Obviously, there are some sectors, some projects that have to be supported by industrial policies. It should include innovative sectors, sectors of new or high technologies (for example biotechnology), sectors related to the green economy. I think that most of policymakers in our region are aware that our main sectors of development will not remain so in the future.

High-tech and green economy are the sectors of the future and they are supported by EU funds and this is an important source of financing for our region. If we want to rely on these funds, we have to put pressure on the development of these sectors.

However, living in market economy I would not want or even dare to say that we should, concentrate on one specific sector – for example IT. It is possible in centrally planned economies, like Belarus, but it is neither efficient nor possible or even desirable in market economies.

Romania’s economy is similar in structure to Poland’s. Poland was the only European country that did no go throw a recession a decade ago. What was Poland’s development strategy? How was the economy so resilient in the face of the last crisis?

The Polish economy has quite beneficial economic structure from a crisis point of view. It is well balanced being with strong role of local demand (consumption and investment) and strong presence on foreign markets. The relation of exports to the Polish GDP is about 50%. In the The Czech Republic, it’s 100%. In Slovakia, it’s even higher.

In previous crises, mainly in 2008, own and flexible exchange rate was en important and positive factor because it’s depreciation increased the competitiveness of our export sector.

Parts of supply chains of western European corporations were transferred to Poland. When you look at the structure of Polish GDP when there is a crisis, exports drive us up very strongly. Polish exporters are quite resilient to crisis.

What is important our export structure is also quite balanced. We are not dependent on any sectors of our exports. None of the sectors plays decisive role, like for example automotive in Czechia. In Poland, it’s an important part of our exports, but it’s like 10-15% of total.

Poland is also strong exporter of food, furniture, general machinery, and last but not least services. If you look at the polish current account we have stable and serious current account surplus in exchange of services.

And how do you think the Polish economy is weathering this crisis?

It’s quite hard to have any forecasts. The number of infections is growing. All countries are either introducing or thinking about the next lockdowns. The first wave of the pandemic was very problematic because of the supply chain problems resulting from China shut down. We don’t have that now. If you look at any indicators for international trade, for manufacturing products, it doesn’t look so bad. The services are much more strongly affected.

In this wave, even though the number of infections is higher, the consequences for the economy will not be as devastating as in the first wave. If it doesn’t last long enough to seriously cut consumption of products it will touch so much on the industry. Tourism, hotels, restaurants, cultural services  are those most affected during the second wave.

There is some consensus on growth for next year, assuming the pandemic will end somewhere in the winter. So, starting from the second quarter, the growth is expected to be similar to the contraction this year. I wouldn’t pay much attention to the numbers because they can change. Everything depends on development of pandemics and  resulting lockdowns.

Most companies in Poland survived the first wave due to serious support from the government and related agencies. If you look at the number of employees, in the first half of the year we had a reduction in employment of 1%, one of the lowest resuctions in Europe. This time it can be different.

I’m sure there will be some support programs for companies in all European countries, to keep employment but it will be much more selective. To some extent, it was easier in the first lockdown because the assistance given did not need to be so well targeted.

Targeting means the process will be much more complicated, the assistance can arrive later and most probably there will be some companies that will suffer more than at spring.

Do you think this crisis will have long-lasting effects on the economy?

Yes and no. Every crisis has some long-lasting effects. Some companies will not survive it. New businesses will emerge, some stars will rise. It will have devastating effects on some sectors, like tourism, air transport, and the effects will last for some years.

It will also have effects on the fiscal plans of all the countries. In all developed countries, public debt increased seriously and it is largely financed by the central banks. The consequences of that process are not yet well recognised and will stay with us for several years.

Will it change anything structurally? It will change technologies for sure. We have some research showing that 20% of the companies that were not interested before switched partially or entirely to the internet. It accelerated digitalization at a pace nobody had anticipated before the pandemic happened.

The Three Seas Initiative – how feasible do you think this project is?

The Three Seas Initiative concentrates on three sectors: energy, digital, and transport infrastructure. If you look at any of these infrastructure sectors in our part of Europe, they are much less developed than in the rest of the EU. There is room to catch up.

During the last decades, infrastructure investments were to a large extent financed by the EU funds. This source of financing will be diminishing mainly because GDPs in our region are growing – we are richer and therefore entitled to less EU funds. There are also serious problems in countries of southern Europe that need additional support.

So we have to think about different sources of financing. Will we be able to fill the gaps through private money? No, but we have to be prepared and try to increase the share of other than public sources of financing. If you look at the share of privately financed infrastructural projects in CEE, it’s much smaller than in western Europe.

The goal of the fund is to attract international institutional investors to the most important  infrastructure investment projects in our region. We definitely need this private financing. I think these projects will also be attractive for investors. At first, the expected returns are higher in our region than in the rest of the EU. Our economies are to grow much faster and the return in infrastructure projects is strongly dependent on the pace of economic growth in the future.

At second we will most probably remain for at least a few years in the low-interest-rate and low-yield environment which is one of the possible consequences of high central bank financed public debts. International investors will look for projects with acceptable yields projects and with low risk. So they will look exactly for the projects we are speaking about. I’m sure therefore that Three Seas Initiative including the Three Seas Fund is needed and viable.

Next Generation-EU – Do you think we will have some trans-national projects in CEE using these EU funds?

We have to have them because we need them. We need infrastructure that connects our countries. There is a serious gap, and obviously it cannot be closed only with local public financing and private sources. We will still strongly relay on EU funds, including Next Generation EU, also for international projects. In previous years we had problems with cooperation. We have to learn how to cooperate better.

 

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