The upcoming elections witness various political factions vying with one another through the bidding of promises. With few exceptions, the prevailing approach involves the selection of specific societal groups – potential electorates – and the articulation of a myriad of commitments directed towards them. Unfortunately, this approach tends to eclipse the comprehensive, medium- and long-term perspective on socio-economic processes that is so crucial at this juncture. Meanwhile, the world is not standing still; in fact, it is accelerating.
The shocks that will shape the new global economic structure
From an economic perspective, we find ourselves at a highly critical juncture. Deep adjustments are underway, stemming from four distinct shocks. Three of these shocks have a global dimension. The conflict in Ukraine has induced an energy shock, necessitating a radical reorientation of supply chains and a high degree of price volatility that is likely to persist for years. The war also represents a geopolitical shock, reflecting escalating tensions between the West and Russia, as well as between the West and China. This entails a reduction in global cooperation and an intensification of rivalry, necessitating a restructuring of businesses and ultimately signaling the end of the so-called peace dividend, resulting in reduced defense expenditure. The third shock is technological: the pandemic, energy crisis, and the proliferation of solutions such as generative AI have accelerated the transformation towards digitization, the adoption of green technologies, and automation and robotics. We are also witnessing an accelerated erosion of competencies – there will be fewer and fewer areas where knowledge acquired once will suffice for several or even a dozen years.
The fourth shock experienced by our economy is internal in nature. It is a demographic shock characterized by the rapid aging of society and changes in the ratio of working to non-working individuals. While the decline in the number of working-age individuals has been with us for quite some time, we are currently experiencing a new phase in which essentially all reserves have been depleted. The unemployment rate is low, and the remaining potential for increasing workforce participation among certain groups is relatively limited.
Why are these shocks so significant? They imply substantial changes in relative prices across multiple dimensions: labor prices relative to capital, raw materials relative to finished products, one commodity relative to another, one currency relative to others (i.e., exchange rate changes), one set of wages relative to another, and so forth. This, in turn, means that we are witnessing disruptions in the profitability of virtually all forms of business operations (some industries/companies are on the upside, while others are on the downside), as well as growing uncertainty among workers regarding the question of “what will I be doing tomorrow?”
The ultimate consequence of these processes will be a transformation of the economic structure. If we aim to make another leap in development, it should become even more advanced in terms of competence and technology. However, it is essential to remember that the processes described above have a global dimension. We are facing the most significant change in the international division of labor, and therefore in the creation of value and income, in over 30 years. These shocks mean that countries that were strong in the production of internal combustion engine cars must now compete anew in the electric vehicle market. Countries strong in fossil fuel-related production may lose ground if they do not develop green technologies, and so on. This implies that the winners of the global model of the past 30 years – including Poland – have no guarantee of future success. Furthermore, their risk is heightened because success typically leads to complacency.
We are dozing off
Though Poland still possesses enormous potential and could leverage the processes of structural change to achieve another developmental leap, numerous signs suggest that we are dozing off at a crucial global moment. The first of these signs is the fact that, for the main part of the political scene, the struggle over who will write the history of the transformation, what happened in and after 1989, takes precedence over our future. This very element lies at the heart of the escalating disputes concerning matters related to the rule of law and the paralysis of key institutions. In a moment, we may pay for this with the possible loss of EU funds, which are crucial for financing technological and green transformation.
Secondly, the division of the GDP cake has relegated the focus on its growth to the background, as is evident when tracking successive election campaigns. According to Eurostat data, social expenditures as a percentage of GDP are currently approximately 3 percentage points higher than in other countries in the region. They are at levels characteristic of wealthier countries, which simultaneously have significantly higher levels of income redistribution – the ratio of tax revenue to GDP – than we do. While these countries provide additional resources for this purpose, in our case, tax cuts are one of the favorite forms of pandering to the electorate. As a result, financing social expenditures occurs at the expense of other critical areas. Despite the first invasion of Ukraine, defense spending has remained unchanged since 2015; in the case of healthcare, expenditures only began to rise after the pandemic; salaries in administration remained frozen for many years, affecting the ability to compete with the private sector, and so on. When, due to a lack of foresight, some expenditures need to be dramatically increased – for example, doubling or even tripling defense spending – instead of applying the common-sense principle that “sustained expenditure growth requires sustained sources of funding,” the latter is achieved through an increase in debt, thereby passing the burden of neglect onto future generations.
However, we are also falling behind in terms of the fundamental issue of the quality of institutional solutions. The aforementioned lack of strategic thinking and foresight is just one of many manifestations of this. The recently published Worldwide Governance Indicators for 2022 confirm that in terms of governance effectiveness, nearly 40% of the world’s countries are rated better than us, whereas just under 10 years ago, we were among the top 25% of the best-rated economies. In practice, this means that we are on track to the third tier. Numerous analyses by international organizations – Bertelsmann Stiftung, V-Dem, World Justice, Economic Freedom, etc. – point to institutional regression, manifested in, among other things, a high variability of regulations, low quality of enacted laws, prioritizing political loyalty over substance, changing the rules during the game (see solutions related to renewable energy), etc. The inability to build political consensus – and thus medium- and long-term transparency – around key transformation issues, such as the decarbonization path, is also of no small importance.
The quality of institutions has a tremendous impact on the sense of stability and security in decision-making, particularly in the realm of investment decisions. In this situation, it is not surprising that, according to the latest EU surveys (Eurobarometer), in the case of Poland, only 25% of surveyed companies – compared to the EU average of 53% – expressed confidence in the protection of investments by law and the courts. A lower percentage was only recorded in Cyprus. If we add to this the systemic problems with access to clean energy – crucial in terms of carbon footprint and, consequently, a competitive and modern economy – the declining trend in the investment rate should not come as a surprise. It much better reflects prospects for the future than individual, grandiose projects announced with pomp.
Electoral promises, or “more of the same”
The ongoing campaign does not inspire optimism. It lacks a strategic perspective on what is happening globally and its implications for our country. After the elections, regardless of the outcome, we face the prospect of another wave of regulatory and tax changes. With the state treasury becoming increasingly depleted – as evidenced by the upward trajectory of debt outlined in the Multiannual Financial Plan – there will be further tax cuts and increased social transfers.
Meanwhile, in our current situation, where employers are suffering due to a shortage of workers, the primary form of state assistance should be support for workforce participation and acquiring competencies that enable individuals to obtain satisfying and well-paying employment. In a context of significant defense needs, social assistance should reach those who genuinely need it. Furthermore, in the appropriate form – for instance, a key issue for an increasing group of elderly individuals today is the lack of access to long-term care facilities. This is a classic example of a situation where politicians have failed to recognize the demographic changes, and not everything can be solved by channeling more money to specific groups. The same applies to education, where the failure to adapt the school network to the declining number of students leads to an expansion of costs. At the same time, an increasing portion of funds allocated for education does not go to public institutions but flows to private schools, where parents believe that public education will not adequately prepare their children for modern life.
The success of the necessary structural changes also requires the efficient flow of resources, which in turn necessitates a well-functioning and depoliticized capital market, as well as new solutions related to the labor market. Formal recognition of the need to strengthen investor confidence – as outlined in the “Development Strategy of the Capital Market” – means nothing if it contradicts daily reality. In the context of the labor market, there is a need for new solutions that support lifelong learning and address issues related to the influx of workers from other countries. Today, many companies are faced with the dilemma of whether it is worthwhile to invest in the competencies of these workers, given the uncertainty about how long they will be able to remain employed.
In conclusion, in the early 1990s, society was willing to pay a high price associated with transformation to secure a better future for themselves and their children. Looking at how our country has changed, one can say that it was worth it. While not denying that the success of transformation should be wisely consumed today, it is worth noting that a significant portion of the political landscape has fallen into a dangerous extreme; it seeks to convince voters that the future does not matter, that only what you receive from public funds here and now matters.
Published (in Polish): Rzeczpospolita, 10.10.2023
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