Six ideas for Poland

Poland is a developed country. But it can still get richer.

A Polish podcaster recently asked me: “What do you think we need to do to escape the Middle-Income Trap?”. I laughed. “You escaped it years ago,” I said. “You’re a high-income country.”

I wasn’t kidding. Poland’s economic rise has been among the world’s most remarkable. In 1991 it was a third as rich as countries like the UK, Japan, or Spain. But after three and a half decades of nearly uninterrupted growth, it’s almost as rich as those, and has already surpassed Portugal and Greece:

Poland is not yet as rich as the top countries — the U.S., Singapore, Switzerland, or Denmark. Its income levels are actually similar to America’s in 1991, when Poland began its upward climb. But anyone who says that America in the 90s was a middle-income country is abusing the term.

The fact that that podcaster — and several other journalists and other Polish folks I met on my week-long trip — all asked me some variant of the same question is a very good sign. Growth creates a momentum all its own — when your country has been defined by rapid growth for decades, the question of how to sustain growth is often at the top of mind.

So after thinking about the question for a while, I came up with six ideas of how Poland can boost itself into the upper rank of rich nations over the next couple of decades. None of these ideas is new, but hearing them from a foreign writer might help build buzz around them, and fill in some helpful details.

Idea 1: Drones, missiles, more drones, and more missiles

The most important thing for Poland’s future wealth, of course, is to prevent a disaster that could knock the country back down into middle-income status. And the biggest threat, by far, is Russia. Vladimir Putin bears historical grudges against Poland, and he fears that its recent success will entice countries like Ukraine and Belarus to turn away from Russia and toward the EU. Make no mistake — if Putin manages to conquer Ukraine, Poland is not far down on the menu.

Poland must therefore defend itself. Spending more on the military — Poland’s expenditure is expected to reach 5% of GDP this year, compared to just 2% in Germany — is essential. But money is only part of the equation — Poland needs the domestic manufacturing capacity to be able to actually make its weapons in large quantities, rather than just hoping that it can procure the weapons from someone else.

The two key weapons of the modern battlefield are drones and missiles (with missiles including artillery rockets, like those launched from a HIMARS). Ukraine and Russia have been consuming both in huge quantities. In a way, warfare is going back to the situation of World War I, where dumb-fire artillery and machine guns made swift advances very difficult, and war became a contest of ammo production. Poland thus needs to be able to make lots of drones and lots of missiles.

Fortunately, it’s well-positioned to do this.

Poland is the world’s second-largest manufacturer of batteries, which are the most important component of an FPV drone. It’s emerging as a destination for foreign direct investment in chip manufacturing, another crucial input. And its status as a locus of European EV manufacturing has given it the capacity to make electric motors as well. A drone, really, is just a battery, some chips, and a motor.

As for missiles, Poland benefits from being close to Ukraine, which was the center for Soviet rocket manufacturing. Ukrainians regularly invent their own excellent new missiles, but it’s hard to manufacture these in large numbers because the Russians can attack the factories. So why not have the Ukrainians make their missiles in Poland? That would make the factories safer, as well as giving them access to a large pool of local skilled labor.

Building up a tremendous amount of drone and missile manufacturing capacity in Poland would accomplish several purposes at once. First, and most importantly, it would bolster Poland’s own defense. Second, it would allow Poland to support Ukraine more effectively. But third, it would help Poland continue to grow its economy.

Usually we think of military-related spending as a cost to society — a necessary evil that makes a country poorer in order to make it more secure. But for Poland, missile and (especially) drone industries might be able to help it build the domestic brand champions that its FDI-centric development strategy has lacked so far. Developed countries are going to be looking to source battery-powered drones from someone other than China’s DJI, and a Polish drone company could fill that gap. As for missiles, they could help bootstrap a Polish aerospace industry.

So drones and missiles aren’t just essential for defense — they’re a potentially lucrative market in a world girding for a new cold war and trying to decouple from China.

Idea 2: Bank finance

The question of how to finance Polish drone and missile companies — as well as other national champions in general — is crucial. When people talk about financing new companies, they often talk about venture capital. But venture capital is good at helping companies start up, and bad at helping them scale — once a company gets large enough, equity finance becomes too costly, and venture’s pockets are no longer deep enough. Thus, every manufacturing company that successfully scales up, does so using massive amounts of debt.

There are two ways to borrow money — banks, and markets. Issuing junk bonds is a risky way to finance yourself, because markets move around a lot from the actions of traders (in economics jargon, they display excess volatility). Bank loans create a more stable long-term relationship between lender and borrower, which de-risks debt finance from the borrowing company’s perspective.

Of course, that means banks themselves take on extra risk when they lend to manufacturers hoping to scale up. That makes it hard for banks to compete with junk bond markets, which is why American banks tend to focus more on mortgage lending, or on “financial plumbing” stuff, rather than loaning money to manufacturers. (In fact I think this is an underrated reason for America’s manufacturing weakness, but that’s a topic for another post.)

Fortunately, banks have another advantage — they make it easy for the government to put its thumb on the scale. Many successfully industrializing countries in East Asia — Japan, China, and South Korea — found plenty of ways to induce their banks to lend lots of money to manufacturers at low rates. I won’t go into all the details, but basically the two strategies are:

1. Government taking a major role in bank ownership and operation (“policy banks”)

2. Incentives for private banks to make cheap loans to companies in favored industries (a type of industrial policy)

Using these strategies, a government can induce banks to support industrialization, while making it less likely that industrial policy will run afoul of rules prohibiting government subsidies (such as the EU’s State Aid rules).

Poland’s banks are currently tiny. Here is a list of their largest banks by assets:

Source: Statista

PKO BP, the largest Polish bank, wouldn’t even crack the top ten in Germany, a country only about twice Poland’s size.

So far this hasn’t been much of a problem, because Poland has relied so much on foreign investment that it didn’t need big banks of its own. But if it’s going to build domestic champion brands of its own, Poland will need bigger banks.

Fortunately, Poland has already thought of the idea of enmeshing the government in its banking sector. Several of its major banks, including the top two from the chart above, have substantial minority ownership by the Polish state. There’s also a policy bank called BGK, or National Development Bank of Poland, with a substantial amount of assets.

Of course, government involvement in the banking sector is also fraught with dangers. It can easily be an invitation to corruption and cronyism. And it shifts much of the risk of industrialization from companies to taxpayers — South Korea and Japan both had banking crises when their big banks lent too much, too carelessly.

But all in all, a crisis like that — which South Korea managed to swiftly recover from — doesn’t have to be a disaster. It’s a crisis of growth, like an asset bubble that leaves behind valuable infrastructure and innovations to power the next phase of growth. In Poland’s case, bank finance, if wielded skillfully, would probably help create the kind of national champions that the country so far lacks.

Note, by the way, that this sort of industrial policy shouldn’t be Poland’s only strategy for continued development. I firmly believe that countries should try several different growth strategies at once, both for diversification and to increase the complexity of their economies. Poland should absolutely keep trying to encourage FDI, as well as using venture finance to build a domestic software industry. Bank-supported industrialization should only be one piece of Poland’s multi-pronged strategy.

Idea 3: Domestic EV companies

Speaking of things that could benefit from bank financing and industrial policy, let’s talk about the electric car industry.

Poland has done marvelously at attracting foreign direct investment, and it should continue to do so. But at the same time, having well-known domestic brands — “national champions”, as they’re sometimes called — can be a second source of growth. Domestic brands control their own technology, and are thus not at the whim of foreigners who may decide to keep their highest-value activities in their home countries. They also make extra money simply from brand recognition.

In fact, some development theorists believed that countries couldn’t reach developed-country status on the back of FDI, for exactly this reason. Poland has proven those theorists wrong, but cultivating domestic brands is still a good idea for a second, parallel development track. And one area where Poland seems well-positioned to create domestic brands is the electric vehicle industry.

Clay Christensen believed that big old companies became captured by their existing customers, and thus had trouble adopting new technologies that initially served smaller markets. This is the essence of the notion of “disruption”. This is a good explanation for why Chinese companies (and Tesla) came out of nowhere to dominate the global EV industry — every big old auto company, from Volkswagen and Stellantis to Ford and Toyota, is primarily an internal combustion car company, and they’ve all had trouble pivoting to EVs. That left an opening for electric-first car companies like BYD, SAIC, and Tesla to come in and leapfrog the old companies.

This puts Poland’s economy, which has benefitted enormously from FDI by big old auto companies, under threat. Fortunately, Poland is probably better-positioned than any EU country to capitalize on the switch to EVs by starting its own EV companies.

Poland has all or most of the basic ingredients needed to build EVs. As previously noted, it’s the world’s second-biggest battery manufacturer. Decades of FDI by car companies like Volkswagen has created a huge base of Polish engineers and workers with deep knowledge of how to build cars. The country has plenty of electric motor companies too. Meanwhile, the world is rushing to put tariffs on Chinese EVs. So why not step in to meet some of that frustrated demand?

The Polish government and some local entrepreneurs have already had this idea. The result is Izera, a joint venture with China’s Geely and an Italian company. Unfortunately, Izera is not doing so well, with massive delays making it questionable whether the project will ever succeed.

The basic idea of Polish electric car companies is sound, but the Izera method is probably not a great way to go about it. The biggest problem is that there’s only one of it. By putting all of its EV eggs in one basket, Poland risked having the entire project stalled by mismanagement.

There’s a reason I italicized the “s” in “companies” in the title of this section. The way you create a national champion is not to put a whole bunch of government money behind a single company — that’s what Malaysia tried with Proton, and it failed. Even Taiwan’s TSMC is only the most successful of a whole bunch of similar companies — it just happened to be better than UMC and the rest.

The way to create national champions is to create a bunch of companies in an industry and let them fight it out. Government support is fine, but it should be spread out among various players. It should also be temporary — after a time it’ll be clear which companies in an industry succeeded and which failed, and the failures need to be cut off. The winners will acquire them.

Idea 4: Foreign entrepreneurs

When I discussed some of the above ideas with Polish journalists and government workers, one common complaint I heard was that Poland doesn’t have enough entrepreneurs. Some spoke of a “loser mentality” that stops Polish folks from dreaming big (a complaint I’ve heard in Japan as well, though I have no idea how true it is). Others lamented that all of Poland’s best entrepreneurs go to America.

My standard response to these complaints is to get immigrant entrepreneurs. This is how America does it, after all — almost half of the biggest U.S. companies were founded by immigrants or the children of immigrants. Immigration selects for entrepreneurial types — it takes a lot of initiative and risk tolerance to get up and move to a foreign land. And immigrants tend to be cut off from the typical networks of jobs available to the native-born, which motivates them to start their own companies.

Poland doesn’t have the appeal America does, but there are plenty of places that it could tap for entrepreneurs looking for an alterative to the U.S. Ukraine is obviously the most important source, along with other East European and Balkan countries that are poorer than Poland. India is much poorer than Poland, and has furnished many of America’s top corporate leaders. And there are probably a fair number of iconoclastic Germans and Swedes who are dissatisfied with the culture or the weather in their home countries but would prefer not to leave Europe.

Like many countries, Poland already has a startup visa, which is good. But Poland is still sort of a well-kept secret in terms of “places you could move to”. A marketing campaign could help fix this. The government could partner with VCs to roll out the red carpet for foreign entrepreneurs, offering concierge services for getting people started in the country — not just in business, but with housing, bank accounts, and so on.

The government could also facilitate and assist visa applications for foreign entrepreneurs, who probably want to hire some of their initial workforces from their home countries. And it could partner with developers to create trendy urban villages where a bunch of different entrepreneurs live and interact, thus harnessing clustering effects. Poland could also harness the trend toward international venture capital investing, reaching out to big VC firms and helping them establish branch offices in the country.

Idea 5: Make Warsaw a modern, “Asian-style” megalopolis

When I wrote a thread narrating my trip to Warsaw, one anonymous commenter scoffed:

Apparently he thought “Warsaw is Asia” was an insult. But I’ve spent a good portion of my life in Asia, and its cities have a bustling modernity and vibrancy that’s tough to find in Europe.

And he’s not wrong. Warsaw has its (reconstructed) Old Town and winding bike paths, but the communists who rebuilt it after World War II gave much of the central city an “urban jungle” feeling not entirely different from what you might find in, say, South Korea. I’m sure that looked quite grim half a century ago, but the commercial development of the last three decades has given the city a more modern sort of beauty — wide boulevards and spacious public squares lined with restaurants, cafes, and boutiques, airy modern shopping malls, trendy new housing developments with retail on the first floor, and so on.

Elektrownia Powiśle

I found Warsaw’s cafes especially excellent — perhaps the best I’ve seen in any country, in pretty much every respect. Even the local Starbucks-type chain, Green Caffe Nero, was far better than chains in other countries I’ve been to. But my favorites were Cafe Kafka and Cza Cza:

Cafe Kafka

Cza Cza

Warsaw also has quite a few beautiful little boutiques selling specialized wares; some of these are intricately detailed in a way that almost rivals Japan:

This sort of commercial density, especially of small, independent businesses, is key to what makes Japanese cities such attractive places to visit and to live. In fact, Warsaw already has two of the other features that make Japanese cities so excellent: great trains, and very low violent crime rates.

Poland thus has a chance to make Warsaw into the kind of modern megalopolis that draws people to East Asian countries — a refreshing and unique alternative to European cities’ typical fare of old-towns and castles and scattered malls. Doing this would serve multiple purposes.

First, it would encourage urbanization. Poland is still less urbanized than a lot of other European countries; urbanization drives growth through agglomeration and clustering effects.¹ The glitz and glamor of an Asian-style Warsaw would be an attraction that would draw people in from the countryside.

Second, an “Asian-style Warsaw” would attract the kind of international entrepreneurs I talked about in the previous section — as well as even more FDI. It would basically act as an advertisement for the whole country. Krakow and Gdansk are lovely, but they aren’t distinctive enough to immediately make people think of “Poland” or plaster their pictures on the walls of trendy cafes around the world. But a more built-up Warsaw could stand out in ways that make it as instantly recognizable as Tokyo, Hong Kong, or Shanghai.

What would be needed to make Warsaw into this kind of modern megalopolis? It’s already partway there, and it just needs to lean into its existing strengths. First, zoning and land-use policies should encourage redevelopment in the city center, with an eye to tall mixed-use buildings — offices can coexist with restaurants, stores, hotels, and apartments. This might require tearing down a few old communist-era monstrosities, but I doubt most Varsovians² will particularly mind.

Second, small retail businesses should be encouraged. These are incredibly underrated as a source of urban vibrancy. They encourage foot traffic, because they add the possibility that you’ll discover something new by walking around. They also create distinctiveness — few people will travel to a foreign city to shop at Givenchy or Urban Outfitters. And they open up an alternative path to the middle class for both immigrants and native-born people who don’t just want to get a job at a big company.

Third, the city should allow more visible signage. That doesn’t mean copying Tokyo or Seoul — Polish people will inevitably have different aesthetic tastes. But the city has a long history of flamboyant signage — its beautiful old neon signs have their own museum:

Making Warsaw into a megalopolis would also require more dense, transit-oriented development outside of the city’s “Centrum” area. If you walk for just an hour outside that city center, Warsaw’s immaculate boulevards give way to open fields, old communist-era housing (or even older buildings), and sleepy suburbs. This, for example, is the bank of the Vistula river, which runs right through the center of the city:

The more people move to Warsaw — from the Polish countryside or from other countries — the more these areas will have to be redeveloped and connected to the central area by fast trains. Zoning and city planning will have to plan for this expansion.

In any case, Warsaw is already on its way to becoming the kind of megalopolis that would increase Poland’s mindshare around the world. It just needs to lean into its strengths.

Idea 6: Establish closer relationships with South Korea and Japan

While we’re on the topic, there are plenty of parallels between Poland and the East Asian countries that grew quickly in the 20th century. South Korea, in particular, often gets compared with Poland, partly due to their medium size and rapid growth trajectories:

Korea and Poland also have somewhat similar histories — sandwiched between aggressive empires and subject to frequent invasions, lacking a colonial empire of their own.

Perhaps this is one reason why Korea and Poland have a history of friendship, cooperation, and investment. Korea loaned Poland a lot of money after the end of communism, and Korean companies were some of the first to invest in the country. That relationship has only deepened in recent years, with big investments by South Korean companies into Poland, more direct flights between the countries, arms deals, cooperation on Ukraine reconstruction, and so on.

Poland should aggressively try to build on this foundation. In addition to direct encouragement of Korean FDI, Poland should establish university research links with Korea, as well as cultural exchanges. Flights and travel packages should be discounted between the countries, and youth exchange programs should be offered. Korean language classes should be offered in Polish schools, and Polish offered in Korean schools. And the economic arms of Poland’s bureaucracy should establish close consultation with their Korean counterparts, with an eye to getting ideas for industrial policy. Some European thinkers are already recommending this:

Earlier this year, a major report suggested that as they seek to move away from the ‘extended workbench’ model, the states of Central and Eastern Europe and the Baltics could learn from the experiences of the East Asian tiger economies, such as South Korea…Combined with major structural changes such as decarbonisation and digitalisation, this means a new, innovation-based economic model is necessary. “Only then will these states be able to catch up with Western Europe in terms of productivity and living standards,” said Zuzana Zavarská, an economist at the Vienna Institute for International Economic Studies (wiiw) and co-author of the report…“Taiwan and South Korea have shown how effective a well-designed strategic industrial policy can be.”

In addition to Korea, Poland should also try to establish closer links with Japan. Japanese companies possess plenty of technology that would be highly complementary to the European companies that have provided the bulk of Poland’s FDI, and they’re always desperately looking for new markets and new production bases. Japan is also embarking on a defense buildup to guard against China, and Poland could help with that. And with Japan and South Korea finally becoming friends (especially in the face of the shared Chinese threat), there’s no need to choose between strategic partnerships with one or the other.

Basically, Poland grows like an East Asian country, so it should lean into this strength by partnering ever more closely with East Asia. European investment and linkages have been key to Poland’s development story so far — there’s no reason not to diversify and add another region to the list.

Anyway, there are six ideas for powering Poland to the next level of wealth. None of these are new ideas, but hopefully articulating them in an outsider’s voice helps shed new light on their potential.

And again, these ideas should be seen as additions to existing approaches like FDI and more typical suggestions like institutional improvements, targeted liberalization, and encouragement of tech startups, rather than as replacements for those ideas. But when it comes to economic growth, it’s never clear in advance what strategy will work; the best idea is always to “try all the things”, and see which ones are successful. Fortunately, Poland seems determined to keep its growth miracle going.

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1. There is some concern that urbanization lowers fertility rates. Poland’s fertility rates are already quite low. But the causal effect on fertility is probably small — maybe only a 10% reduction for the affected population, which would be only a modest fraction of the national population.

2. people who live in Warsaw