Going Local in the Framework of Europe 2020: EESC Round Table on Industrial Policy Warsaw

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"Going local" in the framework of Europe 2020

EESC Round Table on Industrial Policy – Warsaw, 27-28 June 2011

On 4 May 2011, the European Economic and Social Committee (EESC) adopted an opinion on the European Commission's Communication on industrial policy, one of the flagship initiatives of the Europe2020 Strategy. The adoption of the opinion is subject to several follow-up actions. As part of these follow-up actions, a one-and-a-half day roundtable on industrial policy was organised in Warsaw to collect input from relevant Polish industrial policy stakeholders in order to evaluate grassroots engagement in the reform process. The roundtable was structured in three blocks, with institutions, social partners and other stakeholders. Each of the three blocks was subdivided into a series of interviews between athree-member EESC delegation – rapporteur, corapporteur and chairman of the relevant study group – and one or more stakeholders (see programme attached). Questions were sent beforehand to the participants – along with the Commission Communication and the EESC opinion – to provide them with guidelines on the issues to be tackled during the meeting. However, freedom was given to each organisation to refer to industrial policy as it perceives it. This is a summary report of the outcomes of the discussions and must not be seen as the minutes of the meetings.

The roundtable in Poland will be followed by a similar event in Madrid on 20-21 October.

Economic context

Poland has been a success story in terms of economic growth during the last 20 years of the market economy. GDP growth has been the strongest in the EU area (e.g. average growth of 5.4% of GDP in the period 2005-2008). However, GDP growth is expected to remain in the medium term lower than before the crisis and lower than in other countries with same level of development. Growth is expected to be faster than in EU-15, but this advantage will decline around 2040 mainly because of demographic trends. One of the weaknesses of the Polish economy is the low investment level relative to GDP – only around 23 %, not sufficient to cumulate capital efficiently. As a consequence, the level of innovation leaves much to be desired. Labour productivity in Poland has been improving but remains low, also compared to other new Member States.Despite intensive privatisation – especially during the years 1990-2005 –it is still very much on the agenda.

Why is the Polish economy doing well, in spite of its weak points? It is claimed that there is a paradox: on the one hand, Polish industry learned quickly to be competitive and flexible, mainly due to relatively low production costs; on the other hand, a long-term strategic approach is said to be lacking. It seems that in past years the lack of coordination has resulted in a diversified company base (private & state-owned; large & SMEs; industrial & service-oriented companies), which has been quoted as one of the reasons for good economic performance. Nevertheless, there is concern about what will happen over the next decades if a strategy is not developed to face long-term challenges such as demographic change and energy requirements. It is argued that the current challenges in public finances provide limited space for the government to take forward-looking action.

An important measure aimed at increasing competitiveness would be to raise employment levels, especially among women and elderly workers (people aged 50 or over). This could have a significant effect on GDP growth and decrease the gap between pre- and post-crisis rates. In 2010, the Polish employment rate in the age range 20-64 was 64.6% (source: Eurostat), far below the EU2020 target of 75%. People outside the job market represent a waste of opportunities and a fiscal burden on public finances. At the moment there is no efficient incentive to bring these people back onto the job market. Equalising the retirement age between genders, raising the statutory retirement age and minimising the number of people retiring early would also be useful measures to increase employment.

According to the World Bank ranking "Ease of Doing Business", the business environment is worse than in other EU-10 countries and worse than the EU-15 average. Tax regulations are often referred to as an obstacle for companies,along with bureaucracy. Some voices would like the EU to exert more pressure on Poland to make progress along the path of further deregulation and simplification. It is suggested that it would be beneficial for the Polish government to improve significantly monitoring of labour productivity and of export market shares in order to appraise which sectors are competitive and design targeted support actions. Other challenges are: cutting public deficits, increasing domestic savings to fund investment, promoting immigration and diversifying exports.

Features of Polish industrial policy against the backdrop of EU2020

After the fall of communism Polish industrial policy was mainly sector-specific and concentrated on restructuring and privatisation to enhance competitiveness of the industry. Accession to the EU in 2004 was a turning point towards a more horizontal approach. In 2007 the Ministry of the Economy published a paper setting out industrial policy guidelines of a horizontal nature which brought to the forefront framework conditions, innovation and technological absorption, as well as human capital responding to market needs. Since then,the EU2020 Strategy and the National Reform Plans have been launched and the Polish government has decided to reduce the number of strategies from 41 to 9. Although they do not form an integral industrial strategy, three of these remaining nine strategies are the most crucial for industry: Innovative and Efficient Economy; Energy Security and Environment; Development of Human Resources. These strategies do not include any instruments in the strict sense of the word but rather areas of intervention. There is ongoing work to develop the Enterprise Development Programme (2012-2020) as part of the "Innovative and Efficient Economy" strategy. This programme, likely to have a predominant horizontal approach complemented by some sector-specific elements, will provide new infrastructure for innovation and enterprise support. Nevertheless, a number of stakeholders fear that the programme will just be a paper exercise.

Currently, Poland conducts industrial policy in a way that Polish stakeholders consider to be generally in line with EU2020 objectives, even though its main features were defined before the latter were formulated. The main thrust of Polish industrial policy is to build a clear and stable legal environment for a) the development of enterprises, b) the privatisation of state-owned companies and c) supporting innovation.

The Tripartite Commission is perceived by the government to be a good practice providing a real platform for ongoing dialogue. Four sectoral committees (textiles, steel, chemical and construction and municipal services) meet regularly and, according to the government, they are heard effectively. Nevertheless, the preponderant view amongst social partners – especially trade unions – is more nuanced. In their opinion, discussions about strategies are not taking place at the proper level and, therefore, such strategies meet neither the reality nor the needs of the Polish economy and society. They argue, further, that there is no real reflection on the implications of EU policies and that companies – SMEs in particular – are not supported enough in their endeavours to adapt. However, no-one denies the value of the Tripartite Commission; on the contrary, the feeling is that it should be developed further, especially as an efficient tool for social dialogue.

Despite the government'sefforts to meet the needs of industry, there is a certain feeling of dissatisfaction, based on the claim that the measures conceived by the government are short-sighted – there would be a lack of long-term focus – and do not take sufficient advantage of the favourable winds that have blown for the Polish economy over the last years (including during the crisis, which has not hit Poland hard). It is often argued that industrial policy lacks coherence and coordination(amongst the various ministries involved). Some players contend that the transformation process at a microeconomic level is too superficial; deeper transformation, further privatisation should take place, along with better lawmaking that increases the efficiency of public administrations and associated institutions. Many of the stakeholders hold that there should be more focus on competitive advantages and specialisation of sectors, so as to identify the branches that should be developed more intensively.

Infrastructure remains a pending issue, and the need to equip the country with modern,efficient networks (transport, broadband, etc.) is unanimously recognised. R&D and innovation (see the relevant section hereunder, for more details) appear to be a major field for improvement, due to the current low level of technology in a number of sectors. EU funds should be used more efficiently in order to improve ICT as a means to boost competitiveness and, by so doing,create more job opportunities.

During the roundtable, the impression emerged that discussion of industrial policy in Poland is not linked enough to the European context. EU2020 has not been "internalised" as yet, remaining an "external" reference, not always deemed to be in line with Polish needs.At some points of the round table, the impression emerged that, in some respects, Poland takes growth in Asia as the benchmark rather than looking at developments in Europe. Commission initiatives would need improvement and clarification, according to several players. In some instances, Polish industry does not seem to be seen as part of the European industrial network.

Finally, the regional dimension is not to be neglected. Although Warsaw takes the lead in the definition of industrial policy, regional and local governments set up schemes – such as "special economic zones" – aimed at attracting investment (sometimes these include incentives in relation to which subnational governments find it difficult to deliver). Regional lobbying is also an issue, naturally.

Foreign investment/access to markets

Poland is an open market which has succeeded in attracting foreign direct investment (FDI) in manufacturing and services. Nevertheless, R&D-intensive FDI is insufficient.

Up to two-thirds of Polish exports take place as a result of foreign investment. Competitive Polish grassroots business is developing as well, in sectors such as furniture and yacht construction. Amongst Poland's competitive advantages attracting FDI, the following have been identified: relatively low labour costs; skilled workforce; central location; reasonable trade regulations. Industry perceives that the position of the Polish government is FDI-friendly.

On the other hand, some claim that the government pays little attention to stimulating outward investment.Despite this, Poland is a leading foreign investor among EU-10 countries (outward investment remains modest compared toEU-15 countries, though). The majority of Polish firms investing abroad are regional players rather than global. Over 80% of Polish capital is invested in Europe, mainly in the neighbouring countries. Eastward investment is motivated by lower production costs in the target countries, while westward investment aims at acquiring strategic assets. The bulk of investment abroad is directed at the services sector, led by financial intermediation and business services.

R&D and innovation

All stakeholders share the perception that the spending in research and development (R&D)leaves much to be desired, in terms of both investment levels and efficiency. Thus, the high- and mid-tech sectors continue to represent a low share of the total industrial structure in Poland. R&D financing concentrates excessively on the public sector, and the major problem is the low level of private spending – only around 0.25% of GDP, one of the lowest in the EU. Innovation performance also lags behind. Businesses believe that Polish innovation capacity falls short of the critical massneeded to support national companies in the global markets. Spill-over effects from the universities are very low, too.

The major challenge for Poland is to overhaul the present culture of innovation where R&D is perceived more as a cost than as an investment, in other words, as a financial burden. Here, again, a long-term perspective is lacking. Usually, industry does notturn to scientific institutions or to innovation centres in search of answers/solutions to their needs. Both the research community and the business world should change their approach, to create more market-oriented R&D activities and set up more effective commercialisation schemes for the research results, in order to obtain a return from R&D investments.

The level of cooperation between science and industry is perceived as insufficient. There is a dramatic call for coordination and cooperation in this area. However, this might prove difficult as low trust seems to be a feature of Polish society (only 11% of Polish people trust other people, according to a survey quoted during the roundtable).

Industry is of the opinion that Polish science still fails to meet the desirable standards of excellence, although it acknowledges that the government has introduced significant reforms in recent years with a view to increasing the quality of research in Poland. Currently, public funding is based on a ranking of the universities and research institutes, which has increased the competition among them. The predominant feeling is that reforms point in the right direction, but many of them are no more than projects so far; implementation should be faster. This is not always easy, as some of them require a change in mentality.

Commercialisation of research results and use of applied technologies are the weak spots and remain real challenges in Poland. Polish academia is waiting for a new law in this field that should create more appropriate links between research and business activities. At the moment, there are overlapping projects and resources are not allocated efficiently; theyshould be more concentrated on the best-performing organisations.

A significant number of the stakeholders interviewed hold that the government tends to take the view that EU funds will solve the problem without further intervention on its part. The reality is, however, that enterprises are faced with serious barriers when they try to benefit from EU funding, which brings about a certain feeling of frustration as the funds are not used fast enough to keep pace with market developments. SMEs, in particular, find it difficult – in some cases even impossible – to apply for EU funding, in line with similar complaints voiced across Europe. Companies feel that access to programmes is hindered by excessive bureaucracy and disproportionate management requirements.

Given that emphasis is laid on EU funding compared to national resources, Polish research tends to target areas in which EU funding is available, which are not always consistent with the priorities set by the government. Also, European and national funding should be better synchronized in order to enhance the continuity of projects;in many cases there is concern as to how to find financial resources after the EU funding is finished.

Allocation of resources should be revised in order to ensure that public money is available for enterprises that are not able to draw financing from the markets. Coherent fiscal incentives for companies to invest in R&D are badly needed. Moreover, programmes focus too much on quantitative criteria and do not pay enough attention to other strategic, long-term objectives. Furthermore, quantitative criteria are often designed on the basis of relatively large companies and thus to the detriment of SMEs.

The number of national patent applications is modest – although it has increased during the crises – whilst the number of international patent applications is remarkably low. Large companies understand innovation better and have better access to EU funding. Only 1.5% of Polish SMEs are interested in R&D activities and the awareness of IPR opportunities remains low. The fact that patent fees are subject to VAT represents a further obstacle for SMEs.

Human capital and labour cost

Besides innovation, investment in human capital is deemed important by all stakeholders, especially by the social partners. EU funds should be used to increase the quality of education and training at all levels. Demand for highly-skilled workers is increasing in Poland, unlike demand for manual work. However, there is nosound strategy for higher education in place, which is needed to ensure that labour market demands are met. Like many countries, Poland suffers froma substantial shortage of engineers, which contrasts with the overabundance of graduates in other areas. More specifically, many of these highly qualified people – whose education costs so much to the country – end up leaving Poland because they cannot find suitable,well-paid jobs.

Currently, labour productivity is growing faster than salaries in industry. At the same time, real wages are decreasing. Trade unions are calling for the minimum wage to be increased to 50% of the average wage in Poland, in line with ILO recommendations; at present, the minimum wage is around EUR 230, i.e. 41% of the average wage. The phenomenon of the so-called "working poor" also exists in Poland, where 12% of employees live in poverty.

SMEs

Microentreprises account for 96% of Polish SMEs and consist typically of one employee besides the owner, while 3% of SMEs are small enterprises (the EU averageswere said to be 92% and 7%, respectively). One of the trends that these figures indicate is that, in Poland, the number of enterprises that go from "micro" to "small" is lower than in other EU Member States. In turn, this means that fewer companies reach the critical mass that would allow them to consolidate on the market and develop the potential for considering investment in R&D and accessing foreign markets. In other words, a dedicated policy for SMEs would be needed to enhance the development of companies.

According to a study, most microentreprises are satisfied with their situation and lack motivation to grow. These entrepreneurs noticed that larger companies experienced problems during the crises, while their small businessesresisted the crisis without major problems in their own local niche, based on a stable relationship with their traditional and "faithful" clients. A mere 12% of Polish SMEs envisage expansion strategies and this mindset is not likely to change drastically in the near future.