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Saturday, July 14, 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.

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