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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Malaysia is similar. We are now well off and educated enough to worry about such things.

My kids may worry about finding a decent job and saving up for property (genuine worries) but my grandparents were worried about keeping their children alive amidst malnutrition and infectious disease (with actual deaths)

That's a lot of progress when viewed on a chart

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Charlie Munger recently said the same thing about the US. His thesis is the world is driven more by envy than by greed, so relative wealth compared to the past is much less important than current relative wealth compared to the neighbor:


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Well said

things have changed big time

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The same goes to Malaysia. Ps : I’m malaysian.

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Croatia's No. 1 mistake

Taking the euro.

Go Polland!

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The argument of own currency is overblown. Even a very strong zloty has never hurt Polish exports. In the past both grew simultaneously. Industrial exports is re-exports so cheap currency doesn't help much.

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Not so much about strong or weak currency, it's about independence of monetary policy. That can really make a difference in avoiding crises that can derail development.

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I think that's the key.

Avoid drinking someone's else's Cool-Aid.

Will see how Croatia does in the next 5 years.

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Noted, I think it makes sense too.

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Viva La Polonia

EPOL is the Etf I am using to capture Polonia's growth ahead.

Who is positive in Europe?

No one...never listen to the noise.

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Poland is full of Slavs. Of course, they're all pessimists. Even the cheeriest, most optimistic Slav has to put on an unhappy face.

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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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A Polish friend once told me this joke:

A Polish gentleman is sitting in front of the hearth at his local pub, when his best friend walks in, and says, "Have you heard, Tomasz? We're Germans again."

Tomasz crosses himself, and replies, "Thank the good Lord, Piotr. I couldn't have taken another of those Russian winters."

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Saw an interview with Lech Walensa once, about a million years ago in the early or mid 90s. The one thing that stuck with me was the quote "I would trade much of our glorious history for some slightly better geography."

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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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Good case for Poland... some counterpoints though;

1) "Samsung in Korea != Nokia in Finland". Samsung definitely aren't just the guys that make phones... or even phones+TVs! They're an enormously diversified chaebol. They do everything from shipbuilding (Samsung Heavy Industries) to insurance and services. It's a definitely mistaken if we were to think of them like Nokia was in Finland, like "Oh, well, if the mobile phones market become much more competitive and commodified, then there's a lot of risk to the country".

If you look at the Economic Complexity Index - https://atlas.cid.harvard.edu/rankings - Korea really is not this state this is clustered around a narrow set of export industries; more comparable with Germany or Switzerland.

2) TFR and migration rates are really only a proxy for what is the problem facing developed countries; the Dependency Ratio. The DR is helped by citizens - young or old - who pay more tax than they cost, and harmed by citizens - young or old - who do not.

If we assume that's the world economy is probably going to be impacted by automation and AI the way that we think it will (middle layers of construction, services will disappear as jobs), that will probably take out the ability for a large proportion of the population to be revenue positive for governments in competition with machines, without doubling down on education that is longer and vastly more expensive than primary and secondary education were in the 20th century.

If that all is the case, then saving the (ballooning!) education budget and dumping it into capital improvements and FDI expenditures might be not be so bad. Not suggesting that TFR ever becomes a deadweight, but the advantages may not be so large, if developing a person to being revenue positive for the state gets much less cheap. (Meanwhile, although Poles don't do badly on these things, indices suggest that for a given level of length of time in education, Koreans top world indices of numeracy, literacy and adult life skills).

Also if high TFR is sustained by extra, economically inefficient income transfers, its less favourable than it seems to national finances.

In terms of migration from Ukraine helping with managing the DR, that does only work if you take the young from Ukraine (the country has the same as Poland, so taking everyone wouldn't help)... which leaves Ukraine as a poorer and also super-aging country. I'm not totally sure that it would be sustainable for Poland to only take the young, as for an increasingly large Ukrainian population, seeing their relatives in a desperate and destabilising situation back in the Old Country would seem to lead to political pressure for income transfers, (and there may also be footholds within international institutional frameworks that put pressure in this way). So again this might ultimately be less favourable than it seems.

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Those are some excellent points. Though I can debate, Poland may take us well immigrants from Belarus, Uzbekistan and eventually Russia. It already got 1mln+ working foreigners on different levels and many foreign students. Attracting talent from Africa and India is possible.

Your dependency ratio hypothesis is plausible but unproven.

Anyway, still, South Korea and Poland are remarkable success stories. For each of them, there are many so-so or failed ones.

I'm a big fan of SK. I hope it will monetize its military-industrial complex by expanding it to Poland. K-2 tanks and FA-50 could be a very compelling proposition across the globe, once production is diversified into two places.

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love the last part on Poland only taking the young from Ukraine will not work (possibly)

I think it happened back in Panama.

Many went to Panama to make money, but they sent it back home.

Panama got nothing left from the good days because it was all transfer back to those countries where people came from in the first place.

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Arguably Poland had a better starting point post communism than SK did in the fifties. I mean SK was poorer than India at that point I think as well as a number of African countries.

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What's your take on 'starting point' ?

Can you share with us those or that edge over South Korea.

SK was in a very bad position.

I had friends there and the stories are really sad.

Thanks for adding your perspective.

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I got curious about the actual estimates so I pulled up my copy of the 2018 Maddison Project's GDP per capita estimates ("cgdppc", "Real GDP per capita in 2011US$, multiple benchmarks (suitable for cross-country income comparisons)") and had a quick look.

For Poland those estimates are $8187 in 1988, $8417 in 1989, and $7476 in 1990. As for South Korea and India in the 1950s, I see

1950: S Korea at $1122 and India at $1417;

1954: S Korea at $1414 and India at $1419;

1955: S Korea at $1494 and India at $1392;

1959: S Korea at $1511 and India at $1353.

South Korea does indeed appear to have had lower income than India early in the 1950s. As for Africa, picking its 3 most populous countries (Nigeria, Ethiopia, Egypt): the Maddison Project has Egypt at $1983 in 1950, then around $1500 or $1600 for the rest of the 1950s; Ethiopia between $650 and $750 through the 1950s; and Nigeria growing from $1503 in 1950 to $2054 in 1955 to $2262 in 1959.

So Ning seems broadly correct quantitatively: Poland was far richer when it de-Communized than S Korea was in the 1950s, S Korea was poorer than India in GDP-per-capita terms circa 1950, and S Korea was even poorer than multiple African countries (2 out of the 3 big ones I picked) for some of the 1950s, granting that these cross-continent historical GDP reconstructions aren't very robust.

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By the 1980s, after Solidarity, Poland was noted as having a hybrid economy. The idea was that if a private enterprise was small enough or well enough hidden, it was ignored or sometimes even encouraged. Obviously, a lot depended on who got ticked off, but the Polish economy was already in transition. (I got the impression that Poland was not unique in this.)

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this data so good...so good.

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Nothing particularly clever, just that SK's was really, really low. There's a reason why it's held up the the success story, even though it's poorer than say Singapore right now.

If you're asking why the starting points I chose, it's just because it's the point where you could say they were running the country themselves as opposed to being colonised by a foreign power, albeit in a local dictatorship in SK's case.

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True you cannot go much lower if you are mega poor.

thanks for your reply :)

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I love when someone quotes fertility rate because with new humans NO future.

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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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Agree on brand. They take time to develop. Plenty of companies are trying to build a brand; they got early success in many industries, e.g. luxury yachts (Sunreef yachts), food (Maspex conglomerate), delivery (InPost), ...

We also try to push boundaries in deep technology e.g. satellites (SAR Iceye), sensors (VIGO Photonics), solar (Sunroof, ML System), RFID (Talkin’ Things)...

All of them try to venture abroad.

So it's not a lack of trying or failure, there is just an absence of rapid success, which might just mean it takes a longer time to develop a champion.

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I am not Polish, but also from Eastern Europe and debate how build brands is everywhere. Over the years I have reached same conclusion - worries are overblown.

1) Most brands never go global, but they can still be strong local or regional brands. Does average American know what is Ryanair? And average European what is Delta?

2) Business to Business sector has its own strong brands, but they are not well know for general public. How many people can name TSMC (largest chipmaker in the world, makrket cap 400B) or ASML (largest manufacturer of photolithography, market cap 200B)? In fact, BTB sector is full of strong brands what are very well known in their particular area, but almost unknown outside.

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They don't have to be the big brands, but they need to be local companies that reinvest locally. Germany is full of highly specialized little companies that are considered the best in their class. Bloomberg had an article on this recently. Who knew that there even was a best-in-the-world pipe bending equipment company except people in industries that have to bend pipe?

Does Poland have a lot of truck customization companies? That's the kind of thing I'd expect if Poland is big in trucking. Having that kind of industrial infill makes a huge difference in an economy, and it's not the kind of thing that attracts FDI, though it can feed on it.

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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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The transplanting of factories is still continuing. The Inflation Reduction Act has restricted the electric vehicle rebate to autos built within the U.S., so foreign carmakers plan on building their EVs in the U.S. Hyundai is building a plant in Georgia for its Ioniq line, Vietnam's Vinfast is building a plant in North Carolina, Volkswagen might also bring its EVs to Tennessee.

One key driver of this is also the southern states' incentive packages, which are multibillion-dollar dowries. I saw a chart recently that many of these incentives add up to $150,000 per job created or more.

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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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Fun game! Now with Beaverbots!

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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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Awww, thank you. The first one might take a long answer, but the second one is easy: Every post is the first draft. :-)

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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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I thought such muttering was reserved for twitter. I guess not.

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It comes as 44 years as a canadian economist...

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What? Who are the "big boys" here? The *only* countries wealthier than Canada on a PPP basis with a larger population are the US and Germany. Are Singapore, Ireland, Switzerland, Taiwan, Denmark, *Iceland*, etc somehow masterminds of the world, intentionally keeping us poor? Canada's issues - our issues - are almost entirely self-inflicted, especially our diehard focus on resource extraction.

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Exactly! Canada is quite literally one of the richest, most stable countries in the world. Both Malaysia and Poland would kill to be as prosperous.

As far as resources go, i always found it interesting just how resource driven Canada is. I suppose that can’t be helped considering Canada’s neighbor is 10 times the size, but it might be in Canada’s best interest to diversify and expand its internal market

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80% of US GDP (at 94% of US hours worked) with generally more of a safety net and less stress seems . . . not bad?

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You sound like Trump (though referring to another country.)

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80% of German GDP is all Poland can hope for anyway

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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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Simon, some pushback regarding points #1 and #3.

#1 There is A LOT of room to build rails and roads, especially big motorways. Just zoom out at google maps at Hungary/Czech and Poland, not even mentioning Germany or Benelux countries.

#3 Absolute reverse. Yes, some young man came back to Ukraine since the start of the war, but net there is HUUUGE inflow of people. Like millions. On the ground here my feeling and feeling of my friends/family is like official numbers are way too low. Back then there was a lot of Ukrainians and Belarusians in PL, but mainly students and man in working age. Right now there are whole families and they are integrating fast to the society.

I sadly concur with point #2.

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Google maps doesnt like the polish road naming scheme. The S roads are as good as any european highways but google doesnt treat them as such

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#1 Road network will be almost finished soon. I suppose there won't be much need for it since main cities are already connected. There is no need for wide motorway in the north (Szczecin-Gdansk-Olsztyn), because the density there is lower than in the south plus this northern path is not utilised so much by international/domestic trade.

Railway network is a different thing. It would for sure both improve quality of life and logistics. Currently there is quite a big issue with coal transportation (ironically, from ports to the south, contrary to historical direction), not enough sidetracks, not enough stations on the road.

Housing upgrade is another issue, there is a lot of substandard housing, even in main cities.

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There are the main motorways (I think the one between Prague and Wroclaw still has a way to go) but also connection of secondary cities to main cities (for example Jelena Gora to Wroclaw) still needs work. Those roads often go through villages and could do with more bypasses.

Rail is definitely something that could do with lots more investment.

Housing is also something that needs a lot of work. And also suffers from lack of skilled/trained people to upgrade existing stock and build new stock.

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Sorry poorly worded I think.

For point 1 it wasn't about the lack of space or otherwise to build infrastructure rather the build out of infrastructure hasn't kept paced with the economic growth and now the Polish government is trying to catch up but can't build fast enough.

I think they can't build fast enough because they lack the people in Poland with the right skills/training. Be it heavy machinery drivers, engineers etc.

In terms of point 3 is specifically around people with skills/training needed to build the infrastructure (including housing). Yes, there has been an influx with Ukrainian families but those often don't have the skills/training needed for building infrastructure. It was the young men of working age that went back to fight that largely had those skills/training.

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Okay, it was poorly worded. You hit the nail in the head with noticing the problem in #1.

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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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Jan 28, 2023·edited Jan 28, 2023

Excellent comment. I will be a bit contoversial and say the lower price level is due to them not adopting the euro. Look at Slovakia the year before they adopted the euro and now. Their price level has skyrocketed despite not growing faster. Eurostat has the data on price levels going back 20+ years.

It's possible to be rich and still be fairly cheap: look at Taiwan. Nominal GDP per capita close to 35K but in PPP close to 55K. Skilled migration will indeed be difficult because Paris is a cosmopolitan world city. Poland has nothing like it. Even Berlin doesn't quite measure up. They get many academics but not too many techies/entrepreneurs. Poland also doesn't have a large pool to draw from like e.g. Spain and Latin America since it never had colonies.

For all these reasons, I suspect they will probably max out at the level of Italy at best. Which is not bad, yet also not great.

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Well, for the mass of citizens of a country, convergence in PPP terms is pretty darn good.

Though I’d expect PPP and price to converge over the long term anyway.

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It's possible that price level will converge - that will mean pain for funds flows derived from exports, FDI, transfers via the European Union, and that may provide some strong headwinds to economic growth.

It's worth considering when comparing Poland to neighbours who've grown similarly after 2010 (https://ourworldindata.org/grapher/gdp-per-capita-worldbank?tab=chart&country=POL~CZE~HUN~ROU~HRV~SVK), but may be less exposed to potential pain from a readjustment of the price level.

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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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Noah did a post about Ukraine's economy around the time of the start of the Russian invasion. The upshot: Ukraine's elites are heinously corrupt and ate all the opportunity.

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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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