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What does the future look like for Poland's economic growth?

Posted on 6 November 2019

Poland’s ruling Law and Justice Party is winning hearts and minds with its election-spending pledges, seeking to redistribute wealth after almost three decades of growth have created one of the strongest economies in Europe.

However critics are saying that the redistribution policies, which include a 90 per cent hike in the minimum wage, could seriously harm the low-cost manufacturing base that has driven the country’s expansion and curtail development of the white collar and high-tech industries the government has been hoping to foster.

As part of the spending promises wages will now rise from €520 per month to €930 by 2024.  Pensioners will receive more money, young people will pay less tax and there will be more cash for farmers.

Ruling party leader Jaroslaw Kaczynski told a rally in Gdansk that the changes marked the “end of the post-colonial concept of Poland as a source of cheap labour”. He added: “We owe it to Poles to increase living standards. We deserve the same level of life as in the West.”

The wage hike makes Polish labour expensive – the minimum wage rises from 46 per cent of the average wage in 2018 to 57 per cent in 2024, significantly more than in most countries in the OECD and lagging only France, Portugal and Slovenia, according to Bloomberg.

The extra sting in the tail is that the measures will be partially funded by the removal of a cap on social security contributions, which will mean anyone earning over 142,900 zloty (€32,695) will pay more.

In theory, many scholars have argued that a minimum wage is no bad thing. Higher wages promote a feelgood factor among employees encouraging them to spend more in the economy. It can also decrease turnover at businesses and increase productivity among workers.

This may be especially true in Poland, where the economy is strongly consumer driven. The domestic consumer market comprises about 61 per cent of its gross domestic product and putting extra cash in the pockets of workers will help drive household consumption.

But business groups say the hike is too far, too fast and will damage the country’s stellar economic growth. Gross domestic product has risen by an average annual rate of 4.2 per cent since 1992, helped by manufacturing investment from companies such as Carlsberg, BMW, Fiat, Sikorsky, Pratt & Whitney and Airbus.

Poland’s business confederation Lewiatan says the increase will add 16 per cent to company costs, while the removal of the cap on social security for higher wage earners will reduce net salaries in this sector by 11 per cent.

In an open letter to the prime minister, Lewiatan argues the policies will hurt Poland’s ability to attract investment in high-end jobs in banking and IT by making it more costly to compete for white-collar workers.

That could be doubly serious. In the past few years Poland has gained a strong reputation for tech and startups, with one of the most startup-friendly ecosystems across Europe. The Wolves Summit, Google Campus, and MIT Enterprise Forum Poland are just some of international companies now found in Warsaw. The country has also become a major place for video game development, with more than 300 companies located there.

Economists at ING agree the changes will push up the cost of doing business, especially for the country’s thriving small-and medium-sized enterprises, which may not be able to pass on the costs to the consumer. The “aggressive hike of minimum wages is another new burden for the corporate sector,” which undermines the propensity to invest, they argue.

Overall the changes aren’t likely to have a negative impact on overall employment. In fact, with 4 per cent unemployment, nearly all sectors of the economy are complaining of labour shortages. So much so, the government last year opened its doors to more immigration, in particular from six former Soviet states.

But in its attempt to woo voters, the government may be taking a blunt instrument to speed structural changes in its economy and risk an unhappy ending to a European success story.

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