A Chasm That Will Not Go Away
Poland’s Minister for Entrepreneurship and Technology Jadwiga Emilewicz articulated a problem that the economies of Central Europe continue to grapple with even in this period of historically unique growth. When I talked to her in late November about what Poland is lacking despite excellent macroeconomic figures, she responded with a single word: investment. “It’s not to do with a lack of capital or public funding. Between them, Polish entrepreneurs have 150,000 million złotys in their bank accounts. We want them to invest more of this money,” Emilewicz said.
Until the end of 2017, Emilewicz served as Deputy Minister for Development in Prime Minister Mateusz Morawiecki’s government, which has set itself the goal of moving Poland higher up on the global economic ladder so that it is no longer dependent solely on cheap labor. Instead, it wants to encourage companies to create and produce goods or services with greater added value because this, along with trying to keep more foreign investments in Poland, can raise the incomes of the population and thus help to break out of the low-income median compared to Western Europe.
The Frustration Over Low Incomes
All Central European countries are grappling with the same problem as frustration over low incomes helps fuel dissatisfaction in the electorate and drive voters towards populists who will promise anything regardless of facts. The current Polish government with its costly social programs and promises is also primarily dependent on a favorable international climate and global growth. An increase in investment and innovation converted into internationally successful products, and thus also higher revenues for Polish firms and reduced dependence on the current cheap labor model, would represent a considerable, indeed historic, success—and not only for Morawiecki’s government.
How to increase the income of the electorate and keep more of the money foreign owners have been channeling to their own countries is a key question that various governments have tackled in different ways. The solution adopted by the Slovak government—attracting new foreign investors—appears rather outdated in light of current labor shortages. Following his 2010 election victory, Hungary’s Prime Minister Viktor Orbán put quite severe pressure on foreign owners of banks, telecom, and energy companies, introducing a special tax and dramatically increasing the share of domestic capital in these industries.
All Central European countries are grappling with the same problem as frustration over low incomes helps fuel dissatisfaction in the electorate and drive voters towards populists.
This, however, has bred much uncertainty, affecting domestic and foreign investors alike. The Polish conservative government tried to emulate his example after 2015, but Poland’s situation is quite di erent because of a much larger proportion of domestic capital.
Do the Central European Countries Owe Anything to the West?
Orbán has been turning Hungary into a highly centralized state and cultivating his own group of oligarchs who are dependent on him. In this context it is important to highlight that domestic Hungarian capital was in a very different position than other Central European countries. Balázs Jarábik, an analyst with the Carnegie Foundation, stated that in the 2015 ranking of the largest companies compiled by Deloitte a mere three percent of the Hungary’s largest companies were controlled by domestic capital, compared with 29.4 percent in Poland and 23.2 percent in the Czech Republic. Since then this g- ure has undoubtedly changed as the state has strengthened its grip on the banking and energy sectors.
The real problem the Czech Republic and Poland are facing now is what Viktor Orbán described quite bluntly in an interview with the German daily Bild and the French economist Thomas Piketty expressed more elegantly on his blog. Asked about solidarity regarding immigrants and the fact that Hungary had benefited from EU funding, Orbán did not mince his words: we do not owe anything to Germany as the greatest contributor to the EU budget since, in exchange for the EU funding, we have opened our market to all of Europe, including Germany.
How to increase the income of the electorate and keep more of the money foreign owners have been channeling to their own countries is a key question that various governments have tackled in different ways.
A New Starting Line After the 2009 Financial Crisis
Discussing various divisions within the European Union, Piketty said that over the past few years private companies have taken much more money out of Central Europe than these countries have received from the EU, pointing out that investors have exploited the weaker position of this region in desperate need of investment twenty years ago. He believes that, as a result, these countries still have low wages and disproportionately high margins. Piketty has calculated that the EU funding received by Poland, for example, between 2010 and 2016, amounted to just under three percent of GDP, while nearly ve percent of pro ts were taken out of the country. This disparity is even greater in the case of the Czech Republic, which received the equivalent of less than two percent of GDP while 7.6 percent was taken out.
Admittedly, the reader might object that this is adding up pears (EU funding) and apples (private pro ts), or that it raises the perennial question of which came first, the chicken (foreign investment) or the egg (modernization of production and efficiency). However, anyone asking themselves why in recent years the Poles, Hungarians, Czechs, and Slovaks have been voting the way they have done, will find a large part of the answer in the growing frustration people feel because of income inequality when they look at the West and at their own business elites. You have to consider everything that is in the basket and its current state and it does not matter much what in the basket has been picked by whom, where, and when. A new starting line appears to have been drawn following the 2009 financial crisis and the subsequent crisis of state institutions. The neoliberal model stopped working and the role of the state, which in many places had weakened below a sustainable level, has grown.
How to Keep More Money at Home?
Of course, this is not exclusively a Central European issue but—at least along the West-East axis dividing the European Union thirteen years after accession and twenty-seven years after the end of communism and the subsequent, often brutal, reforms—it does raise doubts as to the success of the transition.
Orbán has been turning Hungary into a highly centralized state and cultivating his own group of oligarchs who are dependent on him.
One might ask whether, for example, regulators should not have been tougher in the past, as in Poland from 2005 to 2007 under Jarosław Kaczynski’s first governments, when tighter oversight of mobile telecommunications helped to open up the market, attracting a fourth operator and forcing the other three to slash prices in a way the Czechs and Slovaks can only dream about.
A new starting line appears to have been drawn following the 2009 financial crisis and the subsequent crisis of state institutions.
Forcing domestic or foreign investors to keep more money at home, whether in the form of taxes or investment, is no straightforward matter. Companies distrust governments by definition, particularly those that behave unpredictably and show authoritarian tendencies. Jadwiga Emilewicz and her colleagues have a tough few months ahead of them. But we all await the outcome with great interest.
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