Poland’s Economic Destiny: Middle-Income Trap?

In 2016, Mateusz Morawiecki announced his grand plan “Strategy for Responsible Development,” which was accepted as the Polish government’s official economic strategy in 2017. Since that time, the then-Finance Minister and Deputy Prime minister has moved up to become Prime Minister.

That is one more reason to pay attention to his plan – all the more so as his political elevation happened to enable him to focus the national economy fully on the implementation of that strategy.

Morawiecki as top gun

Morawiecki’s main mission is addressing the challenge of Poland escaping the middle-income trap. For all the success of the Polish economy post-1990, and despite the fact that Poland’s economy is performing very well when viewed against the broader backdrop of Polish history, the challenge is steep.

It is also a debate that matters greatly to the political fortunes of the governing PiS party. Its electoral success has raised expectations in the population at large that it does not want to disappoint.

After all, PiS cannot count on the political opposition in the country remaining disorganized forever.

Debate about the middle-income trap

Generally speaking, the debate about the middle-income trap originates from concerns about slower economic growth rates that are typically observed in many economies after they have exited from the so-called post-transition periods. It affects the former Communist countries as much as it does Turkey, for example.

In the scientific literature, there is no consensus on the question whether the transition from middle-income to high-income levels is not different than any other transition, for example from low-income to middle-income levels.

It is natural that the low-income countries manage to grow faster. That is predominantly the result of the low-base effect and imitation gains. However, the more emerging economies converge with the better developed economies, the slower the pave of further convergence.

Some economies manage to close this convergence gap (consider Ireland) and some get stuck at the middle-income level (e.g., Portugal).

An overly ambitious goal?

Surprisingly enough, some analysts are sceptical even about the existence of middle income trap. They point to the argument that, after the Second World War, most countries did not make it to the high-income levels.

It is statistically and logically expected that most of the growth trajectories will stagnate at average levels.

Low-income countries predominantly take advantage of their disadvantages (“the benefit of backwardness”). For example, they can generate a higher expected return from capital (due to the small existing stock of capital, or due to relatively easy technology and knowhow transfer).

At higher levels of economic development, when the production process is characterized by higher levels of complexity, some other qualities are important. This predominantly concerns the continuous improvement of education, training, research and innovation.

In other words, after the “easy” productivity gains have already been exploited, the economy needs to develop its own engines of growth.

The word “trap” also suggests that the middle-income stagnation may be the result of some internal or external barriers, from which the economy needs to free itself.

Five “development traps”

In the Polish case, in his “Strategy for Responsible Development” Prime Minister Mateusz Morawiecki diagnoses that Poland is trapped in five “developmental traps”: the middle-income trap, a lack of balance trap (that is, the balance between the Polish and foreign capital), the average product trap, the demographic trap and the weak institutions trap.

The overall objective of his “Strategy for Responsible Development” is to increase incomes and to improve social and economic cohesion. Morawiecki foresees that in 2030, an average Polish family will have disposable income at the levels of 95% of EU average (equal to Italian levels).

How is that going to be achieved? His strategy focuses on five fields: The first is re-industrialisation, the second is the development of innovative companies, the third is called “capital for development,” the fourth is foreign expansion and the fifth is social and regional development. They all address the problem of the middle income trap directly or indirectly.

The issue with any such plan is not the diagnostic part, but its prescriptive potential. As it stands, it appears full of wishful thinking and lacks the precise formulation of the methods that will lead to achieving the targeted goals.

Also, Morawiecki’s theory and the economic reality are diverging more and more. For example, Morawiecki intends to build the independent economy based predominantly on EU funds.

Of course, his realistic assessment flies in the face of the Polish economic nationalists’ language. They are eager to reject EU funds as dependency on a neo-colonial settlement mind set and domination with money from abroad.

That political choice will obviously make it much harder for the national economic strategy to succeed.