Jan 10, 2023Liked by Noah Smith

One of the weirdest things reading this in Poland is how pessimistic everyone here is – about inflation, recession, the war, the government – and how much of a success story it's seen as elsewhere. There are a lot of factors for this – cultural, economic, etc. – but it really is quite the dissonance.

One thing I always tell people though is that while Poles SAY they're pessimistic, their behaviour suggests otherwise, people are investing in a way that implies they think life will be better and richer in 5, 10, 25 years. I will say financial behaviour has changed a lot since the war in Ukraine started though – at lot more thinking about cushions, worst-case scenarios and rainy-day savings instead of trying to maximise returns.

Also, in the context of the EU, I feel like Poland has been helped a lot by keeping its own currency instead of adopting the Euro. Everyone here is obviously concerned by inflation, but a low złoty helps exports which really are the key to keeping the economy going. I'd be much more worried about the economy without that.

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Jan 10, 2023Liked by Noah Smith

"There are times when being right next door to Germany has not been an advantage for Poland..."

Oh dear.

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I love the post! Very insightful.

Though, as a Pole, I'm tired of hearing about the middle-income trap since the mid-90s. It is always around five years from now, but two decades later, it has not materialised yet.

The risk is real, but this is a challenge, not an inherent flaw. Since entrepreneurs and bureaucrats widely share this challenge, Poland got a fair shot at solving it.

Playing devil's advocate, the South Korean growth model relied on the autocratic genius of Park Chung-hee, a few giant conglomerates and incredibly long hours. For example GDP per hour worked is similar between South Korea and Poland. So South Korea made a lot of sacrifices to be rich with a lot of headwinds.

Poland took a more sustainable route.

In the future, I'm more optimistic about Poland than SK.

First demography. Poland's fertility is 1.4, and SK 0.8. Poland recently got an excellent track record with immigration from the east and integrating them. Looks like Poland will be able to poach a lot of talent from the east. South Korea struggles to attract foreign talent.

Second: Economic dynamism. Poland got a well-diversified industrial economy. We regularly see waves of new and old companies creatively being destructed. Some of them may go big.

Samsung Groups' affiliated companies account for 20% of South Korea's GDP.

Today, Samsung may be an asset, but there is a risk it may be a liability. Too big to fail.

It's better for the working class to dream of founding a new company than to score well on standardised tests to earn a Samsung salary.

SK risk stagnating like Japan.

Third, location. Poland is on the European plains, making it easier to trade and build up; climate change will affect it less than others, and it could benefit from the reconstruction of Ukraine.

North Korea got too far away to make unification easy.

Poland relies less on miracles to be prosperous in the next decade or two, while South Korea needs some significant changes to avoid stagnation.

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The lack of major international brands is certainly a topic of discussion in Poland but I think the worry is slightly overblown.

Poland indeed does not have major players in the most visible customer product sectors like automotive or electronics but I don't think it necessarily should pursue a strategy of trying to build one there. To build an automotive brand you need internal demand first, and then to invest that money into international expansion. Poland never had a strong automotive demand until now, when entering that (mostly shrinking) sector is very hard (I think Tesla is the only major brand that was created in the last 30-40 years).

But Poland has a lot of big and medium sized players in areas where the Polish economy is strong. For example, the amount of construction in Poland is mind-blowing (Warsaw doubled its housing square footage since 1995), and, as a result, Poland accounts of 29% of European window and door production, and it's mostly driven by Polish companies (Press Glass, Fakro, Eko-okna, Drutex etc.). Poland is also an European leader in trucking, and accordingly, a Polish company Wielton is a leader or at least in the top 3 in semi-trailer sales in many European markets, buying competitors left and right in the past 3 years. And so on.

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Jan 10, 2023·edited Jan 10, 2023Liked by Noah Smith

"This is a bit similar in spirit to the way Tennessee, Kentucky, and Alabama lured U.S. automakers away from high-wage unionized northern states with the promise of cheaper non-union labor. You don’t see Tennessee or those other states becoming home to the new Detroit; all the big car brands are still headquartered elsewhere. Eventually this strategy ran out of gas, but it worked for a while."

The primary (EDITED: from sole) reason this domestic (U.S.) strategy "ran out of gas" was there was/is no domestic industrial policy at the federal level to keep it going. A coherent federal policy established in the late 90s/early 21st century could have capitalized on the foreign direct investment in manufacturing brought about by Toyota, Honda, BMW and Mercedes that led those manufacturers to build assembly plants in the U.S. However, the Bush administration and Obama admin did not value these investments likely due to the focus on foreign adventures in Iraq and Afghanistan.

These investments into the "right to work" states of the South succeeded in spite of the lack of a domestic industrial policy regime which if a regime was codified would have resulted in further industrialization and higher wages in said areas. (Although I am not an economist and would certainly put that claim to test.)

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I can vouch for Timberborn, an excellent Polish video game about repopulating a post-apocalyptic wasteland with beavers.

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Did you look at the countries that were implementing this FDI - SEZ strategy and fail? Might be the success rate is not even 50% (that would be still great though)

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Jan 10, 2023Liked by Noah Smith

And some countries just blithely trade away whatever industrialization they had managed to achieve...


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Hey Noah, your research, analysis and write-ups are really impressive.

I’d really love to know more about:

1. How you research and what’s your process like

2. How much rewrites it takes you to perfect each issue

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The Malaysia-Poland way is not original. It's Canada.

A powerful food producer who no longer make tractors.

A country buying worthless US warplanes that can be turned off by the Pentagon with the touch of a button.

No longer any car design.

No electronic manufacturing.

No cultural exports (on the english side of the country).

The country who flew airliners before the US without aircraft design capacity thanks to Boeing destroying Bombardier at the behest of the US government.

A G7 country whose exports are crude oil, cheap paper, unprocessed ores, ingot aluminium, wheat, oats, barley, chickpeas and mustard seeds...

Barely any industrial research as the foreign head office will not allow it.

A deindustrialization almost on the scale as Indonesia.

The fate of such development is clear: Canada and US supposedly "share the defense of North America" through NORAD. On September 9 2001, candian officers at NORAD headquarters were pushed out of their seats, as sepoys could not be left in command of anything in real war.

Canada is stucked at 80% of US GDP and will never go higher. Neither will Poland and Malaysia.

Call it the almost high-income trap...

Personnal anecdote: thirty years ago, I was involved in an electronics start-up. We grew for ten years. When we tried to go public, the US VC were clear: every manager and science staff must be disposed off. So we sold to an european company who wanted us as a subsidiary helping them to enter the North American markets. The top managers were moved to Europe. Within two years, they were removed. The canadian research center was closed and the patents sent to Europe.

The big boys will never let you grow to their level.

"You don’t worry about whether that strategy will eventually make it harder to get as rich as the U.S. of 2023." Yes you must do. Because that way will not lead you to "US 2023".

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One thing not touched on in your article is the limits infrastructure places on growth. Poland is hitting the bounds. There is made dash to build/upgrade more infrastructure (roads, rail, ports/canals, housing etc) but it simple can’t keep pace.

There are probably multiple reasons for this but a major one I’ve seen is lack of tradies. So many left for other parts of EU in 2004 (and before) and the government hasn’t made any concerted effort to bring them back. The same with the highly skilled university graduates.

There was some backfill from Ukrainian immigrants but this rapidly reversed as loads of Ukrainians went home to fight at the start of the war.

This is going to be hard to reverse as it will likely require the current government to swallow its pride and row back on many of its cherished policies.

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A small mistake in the 'Europe’s Growth Champion' author name - it's Marcin Piatkowski, not Marcel.

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Pigs have flown! A serious, Western, mainstream, academic economist finds a use for industrial policy!

Seriously, those of us not reflexively opposed to trade barriers of any kind (including immigration controls) have been pilloried by most of the econ field for decades, so this is a welcome relief.

There's a great book on this subject called Global Trade and Conflicting National Interests. It likely requires an undergrad econ minor at least to get through it, but it's worth it. Bottom line, Ricardo was right for his time but wrong for all time. His models work for English wool and Portuguese wine but collapse beyond that. Even if the dollar value is the same, it really does matter whether you export solar panels or strawberries. There are also multiple equilibrium points when you are talking about multiple countries and multiple products. National industrial policy is about trying to shift the international eq in your favor.

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One thing worth bearing in mind with Poland is that, although in PPP terms, there is convergence, the price level is quite low compared to the big dogs of the OECD, and to Europe in general.

In fact the price level is probably quite low compared to South Korea!

Quick graphs comparing overall price level to real consumption per capita: https://imgur.com/a/Qc6znSs

(Own work, but using Penn World Tables data).

There's a general relationship with richer countries having higher price levels (although most noticeably island tax/tourism havens break the line, and I've removed Venezuela as it's on a different scale).

If you compare to the Republic of Korea, which has converged to pretty similar levels of real consumption to Poland, and Malaysia's in the same general neighbourhood, Poland and Malaysia still have a pretty low price level.

This makes sense; for an FDI intensive model to work, it helps to be offering more bang for bucks?

So is this a Golden Straitjacket that Poland and Malaysia can't escape? Can the zloty be worth a lot-y without breaking the economic model? And should they care if it is?

Well, at least if they want to travel or they want their challenger companies to be able to make international purchases (rather than get bought up by Big Boy American Private Equity) then it does matter a bit.

Skilled immigration also might be tough if you're converging at PPP but behind in price level - if a developer can move to France or Poland and they've got pretty similar living standards but their capital accumulation is worth about half as much in their starting country, they're generally not gonna go to Poland. Might get some digital nomads though.

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The starkest thing about that last graph is Ukraine after 1990... what on earth happened there, and what allowed Poland to so drastically leapfrog it?

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Jan 10, 2023·edited Jan 11, 2023

Excellent piece. “Maybe European companies might have stampeded to invest in Poland after communism and EU accession, even without government encouragement.” Speaking of stampedes, the largest percentage of Russians fleeing Putin’s war have gone to Poland. Imagine how many of Russia’s young, talented, high-tech knowledge workers Poland gained. It may be wise for Poland to invest more money in its startup sector.

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