Monday, June 04, 2007

Poland, Is The Party Over?

Claus has been posting on some of the macroeconomic capacity issues which face the East European "Lynx" economies in the light of massive demographic exodus that has taken place in some countries in this group in recent years.

I had long meant to post about this article from the Financial Times, which drew attention to the way in which young university graduates have been leaving Poland, and in particular Eastern Poland, in very large numbers:

Poland has seen one of the largest peacetime migrations in history as about 1m people, many of them young, have moved west to find work, although there are no hard official numbers. There are estimated to be 250,000 Poles in Ireland, about 500,000 in Britain and more than 600,000 in Germany.

While those numbers include doctors, plumbers, welders and office workers, a large number of migrants are young people fresh out of university looking for foreign experience and wages four or five times higher than they could earn at home.

Sitting in the Jadlodajnia Filozoficzna (which translates as the Philosophical Diner), Beata Tymkoff says that the effects of the migration have been even more dire in eastern Poland, where wages are lower and where there are very few foreign investors. In Lublin, in Poland's north-east, "the nightlife there died. Everyone left," she says. "The bands that played there and the people that listened to them, they're all gone."

The missing clubbers are recently graduated 20-somethings, a generation that in former times would have been enjoying its first pay cheques. Their migration is causing labour shortages, even though Poland's official unemployment rate is 14.9 per cent, the highest in the EU. The real rate is probably much lower once people working at home or abroad but still officially on the unemployment rolls are discounted. Many others, particularly former workers at now dissolved collective farms and older miners and workers in communist-era heavy industries, are often unemployable.

So the key issue here is what is happening to Poland's human capital stock? As the Polish economy grows and this stock steadily diminishes, something somewhere is going to hit a limit. (Same story - even if on a rather gentler scale - Italy, and same story Serbia, to name only two more cases of what is now evidently a very general problem).

The article tries to end up on a rather positive note:

"If Poland's young migrants return home, attracted perhaps by rising wages and increasing demand for their labour, they'll be able to find the same kind of music they partied to in London, Glasgow and Dublin."

As they say, if they return home. The if in question is rather a big one it seems to me. Especially since the level of wages necessary to attract people back would be unthinkable in terms of the kind of slow and steady economic development which Eastern Europe needs in the medium term.

Coincidentally I came across this article on Poland in Bloomberg this morning. In particular there is this:

Poland must cut labor costs urgently to halt emigration, lift employment and avoid a slackening of economic growth, Deputy Finance Minister Katarzyna Zajdel-Kurowska said.

The nation must end the ``vicious circle'' in which employers face growing difficulty finding workers as people leave for jobs abroad and the unemployment rate remains the highest in the European Union, Zajdel-Kurowska said in an interview on May 31.

and then this on the state of the budget deficit:

Poland must maintain fast growth to bring down the debt burden and reduce the budget deficit to 3 percent of gross domestic product, meeting euro-adoption criteria laid down when it joined the EU in 2004.

The ruling Law & Justice party plans to cut employees' contributions to social welfare funds by 3 percentage points this year and by a further 2 percentage points next year. Employers' contributions will be cut by 2 percentage points.

``The most clear bottleneck in the Polish economy is the labor market as still-high labor taxes and high social spending do nothing to encourage greater participation,'' said Thomas Laursen, the World Bank's chief economist for the European Union's eastern members, at a press conference in Warsaw on May 31. ``There's not much you can do about emigration, but there's a lot you can do to address the situation on the Polish labor market.''

Unfortunately however the migration and the high level of social spending may well be interconnected, at least in the longer term, since with very low fertility - 1.2 Tfr - increasing life expectancy, and a hemorrhage of population in the middle age groups, the burden of meeting the health and welfare costs of the elderly will fall on an increasingly smaller proportion of the total population.

And of course the pressure to reduce the "tax wedge" which weighs down on job creation is meeting with strong resistance from some quarters:

Junior coalition partners Self Defense and the Polish Families League, will not support the cuts in costs as they want the money to be spent on wage increase for physicians, teachers and other groups threatening strikes for higher pay. The average salary in Poland is a fifth of the EU average. The unemployment rate was 13 percent in April.

In addition there is obviously now a growing skills and age mis-match. As Claus indicates some 20% of GDP still comes from agriculture, but this is produced by a population with relatively low educational levels, and after the migration, an increasingly elderly one. The same may be true of the 13% of the population which is currently unemployed. Although many of these workers could be employed in the lower skilled occupations typically occupied by migrants in a West European or United States context, and for West European and US wages, there may well be cultural and other resistance to them doing this in the Polish context and for Polish wages. Of course part of the solution would be to maintain sufficient levels of economic growth to attract inward migration in the way Spain and Ireland have done. But to be able to sustain the necessary growth Poland needs to move steadily up the value chain in terms of the profile of economic activities being undertaken. But this is just what is going to become very, very difficult to do given the recent brain drain of the young and educated.

So there is, it seems to me a growing problem here, one which is touched on in the following assessment made by the Polish Economics Ministry:

The Economy Ministry estimates that GDP may be lower by about 400 billion zloty through the year 2025 because 2 million Poles have emigrated since May 2004 and others will follow. As many as 3 million people are considering leaving in the coming years, according to a May 15 survey by IMAS Intl. for Rzeczpospolita.

Now I think any assessment at this point of GDP so far out into the future is a pretty thankless exercise, but the view expressed does at least recognise that there is going to be a problem, even if no one really knows quite what to do about it.


Anonymous said...

There seems to be a disconnect between the Financial Times "problem" -- 1 million Poles going West to find jobs that pay four or five times more -- and the Bloomberg "solution" -- cutting labor costs.

Cutting labor costs is a way to deal with high unemployment, not labor shortages. It may help give jobs to those left behind, but won't stop those leaving from venturing out.

Cutting labor costs will not suddenly quintuple salaries.

--Rich B.

Edward Hugh said...


"and the Bloomberg "solution" -- cutting labor costs."

Well, I agree that no-one is suddenly going to quintuple salaries, and stemming the outflow of workers is going to be hard for them. There isn't much they can do about the ones that have already left, but if they could improve labour market conditions they might be able to avoid some of those other three million mentioned in the article who indicate they would like to leave. The only way to stem the flow is to create more, better paid employment.

Addressing the tax wedge (ie lowering the employers costs in taking on new workers) is one of the ways of doing this. Please note that they are NOT proposing to cut wages, so the contradiction isn't quite as stark as you suggest.

But obviously, if you cut the tax wedge - as we are seeing in Germany and Italy - you either have to cut government spending or raise indirect taxes, niether of which are conducive to economic growth in the short term.

Plus... reducing spending makes it more difficult to address the fertility problem, which is why, presumeably, conservative coalition partners like Self Defense and the Polish Families League are up in arms.

No easy answers here, and that is why the proposals seem, perhaps to be so contradictory, since a lot here is a question of robbing Peter to pay Paul.

Edward Hugh said...

Or put another way Rich, do you have a better idea of how they can climb out of the hole? I would be interested to hear it if you do.

Will Baird said...

Why not let Ukrainians in? There are a lot of technically trained and competent people just across the border looking for jobs - or specifically steady wages - in a big way.

Edward Hugh said...

Hi will,

"Why not let Ukrainians in?"

Well yes, I think this, and things like it are going to be one part of the solution. Unfortunately though this is not a zero sum game, since it simply pushes the underlying problem one step further East, although, yes, I agree, it would help ease the situation in Poland.

Interesting to think about what this would do to consumption inside Poland, since these Ukrainians would be both:

a) paying taxes to support Polands elderly population
b) paying for their own private pensions
c) sending money home to support their 'old folks' in the Ukraine.

"or specifically steady wages"

and of course, while wages in Poland aren't exactly up to the level of Ireland and the UK, they are better than in Ukraine.

Incidentally, over the last few years there have been a growing number of Ukrainians arriving here in Spain, and while the country is comparatively large, it clearly can't meet population deficiencies across the entire EU :).

Edward Hugh said...

One other general point does occur to me here, and that is that, given the extraordinary rates of growth we are seeing in the global economy, knowledge economy workers and the like are going to be in increasingly short supply over the next decade or so.

India is already experiencing bottlenecks in this regard, and in another forum I participate in people are drawing attention to the shortage of qualified nurses in Japan. They are trying to attract workers from the Philippines, but given that wages have been steadily falling in Japan, to which should be addedthe evident cultural obstacles which exist, they are having very little succes and Philippinos are by and large heading for higher paying destinations.

This will certainly be something to watch for.

Anonymous said...

Or put another way Rich, do you have a better idea of how they can climb out of the hole? I would be interested to hear it if you do.

Not necessarily a better solution, more pointing out that some institutions have stock answers (like the "tax wedge") that they will trot out to solve problems, whether they are relevant or not.

I agree that immigration should be a large part of the solution, but I think what is really interesting is comparing this article to the one below, about German farmers' inability to bring in enough Poles to harvest their crops, because the Poles had better options elsewhere. Does Poland really want to get into a tax-cut fight to bring their citizens back, when they might end up losing to some other country who cut their taxes or opened their borders more?

If we're not happy with pushing the problem onto Ukraine -- which seems close enough to a failed state anyway that I don't see a problem with letting it fail -- then maybe there's something to the Phillipines model of creating a remittances-based economy.

I don't know how Polish government pension systems work, but it strikes me that the problem could be pretty temporary if you don't get pension credit for employment abroad. Then, in a generation, you have no people, but also no expenses because your citizens were all working elsewhere.

-- Rich B.

Anonymous said...

I recently read an article about Poland wanting to recruit people from India and China. The Phillippines could be another good option given that it's catholic too. And Ukraine and Belarus of course. If they let in, say equal to 0,3% of the Polish population from these countries each year, it would by and large solve alot of the demographic troubles.

Randy McDonald said...

The most likely source of migrants for Poland can be found in the countries which lying to Poland's east which, in many ways, once were Poland's traditional hinterland. Ukraine is the chief candidate, but immigration from elsewhere in the former Soviet Union--perhaps, considering the Vietnamese diaspora, even further--seems fairly likely.

Anonymous said...

How important are remittances becoming to the Polish economy? Those may partly compensate for the loss of workers to Western Europe, but then again, remittances may stifle the desire to work of those who stay behind.

On the plus side, perhaps all this intra-European migration, and the fact that the migrants are also coming from 'Old Europe' countries such as Germany and Italy, will start to shift European perceptions towards migration and make the labour market a bit more integrated, at least among the well-educated.

Edward Hugh said...

Hi Colin

"How important are remittances becoming to the Polish economy?"

Hard to say since we seem to lack really reliable statistics. According to this power point presentation on Polish remittances I found they were roughly 2,000 million US dollars in 2003, a figure which while not insignificant, clearly isn't a vital determinant in the Polish economy.

On the other hand this link - which may well be much more up to date - suggests that they are now worth almost 2.5% of the Polish gross domestic product which is around the 250 billion euros level. This later estimate may well be nearer the mark since obviously large numbers of Poles migrated during 2004 and 2005.

Obviously at these latter levels they will be helping fuel the growth of the Polish economy, and pushing up the zloty.

Hi again Rich,

"then maybe there's something to the Phillipines model of creating a remittances-based economy."

Well I think we need to be careful here, since out-migration in a comparatively high fertility society like the Philippines (Tfr around 3.5), and a society with a fertility crisis like Poland (1.26 TFR).

In Poland population is at present a non-replaceable resource.

Traditionally - in places like the Philippines - out-migration has been a way of easing the pressure on a local labour market caused by comparatively large young generations entering in the hope of finding work.

The Polish picture is somewhat different, since the ship suddenly sprang a hole in the side and out they went.

Keynes's most important contribution to economic thinking wasn't the idea that - under certain conditions - something of economic interest could be gained by paying people to dig holes and fill them in again (the value of which is far from clear), but rather that in economic processes timing is everything, hence he distinguished between the short, the medium and the long term.

Now if we think in the short term only - say over one year intervals - remittances are very useful, but if we look at the medium term - say over 5 year intervals - we will rapidly realise that significant structural damage is being caused to the future path of the Polish economy by this massive outflow of young educated people. This will be hard to replace.

It is also important to remember that remittances do not run for ever, and tend to taper off with the passage of time.

Basically to grow the Polish economy - give the fertility environment - will need migrants anyway, but these would normal be expected to be low skilled, and doing the jobs no-one else wants to do.

The thing is migrants - as opposed to second generation children - don't just come becuase you want them to, or let them, they come because their is work. And the quantity of work depends on the dynamism of the labour market and the level of economic growth.

The US economist Dawn McLaren - in a piece I hope to post about next week - now argues that cross-border crossings from Mexico now constitute a leading indicator of the health of US economy, and especially of its construction sector. During the flat growth period of Q1 2007 apprehensions dropped to half the levl of a year earlier.

So if you don't create work you won't get migrants, and if you don't have the people to fill the jobs of the new economic profile you hope to get as you move up the value chain, then you won't get growth. This is going to be Poland's problem now.

As people are saying, points further east may help. However I also tend to agree with Randy that nothing here is clear, and that the smaller economies like the Czech Republic and Slovenia might fair better in this new version of the talent competition.

As I said, educated labour is likely to be in short supply at some point given global growth rates (those Keynesian timing problems again), and interestingly - since I mentioned India earlier - I found this this morning:

Tata Consultancy Services Ltd., India's largest computer-services provider, plans to add 5,000 workers in Mexico as competition for Indian engineers from rivals such as Accenture Ltd. lead to wage increases.A software-development center in the Mexican city of Guadalajara that opened last week will start with about 300 employees handling tasks done in India at the moment, Gabriel Rozman, who heads the Mumbai-based company's operations in Latin America, Spain and Portugal, said in an interview on June 4. Wage costs at Indian software companies such as Tata Consultancy have risen as global rivals including International Business Machines Corp. hire more engineers in the South Asian nation. A rising rupee is also crimping profit at these Indian companies, which get more than half of sales from the U.S.``We see costs rising in India and people becoming less available,'' Rozman said in the interview from Montevideo, capital of Uruguay. ``That's why we're going to places like Latin America, which has professionals and reasonable costs.''