Special Economic Zones will keep us in the middle-income trap. Interview with Tomasz Janyst

01.11.2018 | By Konrad Pomianowski and Tomasz Janyst

“Special Economic Zones (SEZ) will keep our economy in the middle income and the low-cost labour trap because they are designed to solidify this model. In general, special zones are part of the larger trend, so-called race to the bottom. It is reflected in the lowering of taxes for businesses to attract as many foreign companies as possible. Eventually, it is all at the expense of the state budget. Moreover, while companies pay lower Corporate Income Tax, no such benefits apply to average workers. Double standards pure and simple” Konrad Pomianowski talks with Tomasz Janyst, chairman of Kalecki Foundation on our dashed expectations of SEZ, the things that are profitable in capitalism today, why GDP does not tell the whole story and what Poland should do to escape the middle-income trap.

What is the exact purpose of Special Economic Zones? In our public debate, they function only as a tool to attract foreign investors. Is their role limited to this task?

In 1994, when the bill establishing the first SEZ was signed, the legislator’s aims were three-fold. First, attracting foreign businesses. It was – in the words of Jan Krzysztof Bielecki during one of the Kalecki Foundation conferences – “hunting for capitalists”. The level of domestic savings was low, and we barely had money to develop our economy. Hence, help from the West was our greatest need at that time.

After 25 years, can we declare that hunting a success?

Too big a success, I would say. In many sectors, the share of foreign capital rose rapidly and in some – e.g. in the banking sector – it became dominating. This, in turn, has entailed the risk of the rapid outflow of capital from Poland in the case when the head office of a foreign bank decides that it needs additional capital.

The second aim was…

… a fight against structural poverty in the regions where manufacturing plants were closed en masse and workers struggled to find new jobs. Those who wrote the SEZ bill were aware of the scale of inequalities between different regions. That is why the zones were supposed to be located in the regions where this structural poverty was highest.

Has this aim been fully realised?

Special zones did not overcome the problem of structural poverty. Also, employment agencies fared poorly when it came to retraining of workers, and instead preferred to draw in foreign ones or those from different regions. In effect, costs of labour have been lowered and – due to the less complicated procedure of lay-offs – flexibility of the market has been increased.

Should not, therefore, foreign companies that operate in the zones bear at least some burden? In exchange for a specific favours, maybe they should be charged with the responsibility to retrain the workers they employ?

Of course, it is possible to ask an investor during negotiations about planned expenses for training and workers development. One can consider this factor in the new SEZ bill as an important element taken into account when authorising an investment. Not as a compulsory factor, to be sure because every business operates in different market realities.

The problem, however, is much broader and affects the Polish economy as a whole, not only businesses operating in the special zones. According to statistics, there is a problem with the quantity and quality of professional training in Poland. Among small and medium businesses, they are non-existent, which makes it a structural issue.

Can the state help in any meaningful way?

Yes, one of its tools is the EU financed Operational Programme “Human Capital”. Also, training-related expenses, in some cases, are deductible for tax purposes.

But such a policy could well turn out to be a double-edged sword. Foreign companies would pay for training of Polish workers, but those best qualified would go on to work abroad.

Money is not everything. Poland can still be considered a country with relatively high social mobility. To the most talented workers, we can offer social advancement not only for themselves but also for their families and better prospects for their kids. In the West, it is much harder to move upwards in society. For example, in Florence, the wealthiest families have preserved their status since the 14th century. Even in the United States, repeating the “from rags-to-riches” scenario is much less possible than it used to be in the past.

What about the struggle against inequalities between different regions? Did SEZ fail here as well?

Unfortunately. In most cases, the decision on the location of an investment was taken by companies, not by state or regions. For example, Starachowice SEZ encompasses five voivodeships: łódzkie, świętokrzyskie, opolskie, mazowieckie and lubelskie. The situation is similar in the Tarnobrzeg SEZ. It is because companies considered their investments in places where special zones had not functioned before. Zones were enlarged then by the decision of central government at the request of a relevant economy minister. As a result, their original layout soon became fiction. Today, 50 per cent of investments are located in Warsaw. When the new bill enters into force, this share will probably be even higher.

What made Mazowsze voivodeship so attractive among investors?

It can be explained by many factors, such as well-developed communication routes, access to the qualified workforce, modern office spaces. Mazowsze is a more universal area, while other regions have their own specialisations.

What was the third aim of the SEZ bill?

It was focused on enhancing the competitiveness of the Polish economy. Authors of the bill assumed that the experience, know-how, specific business-related and organisational knowledge, patents and intellectual property rights brought to our market by foreign investors would inevitably penetrate the Polish economy.

Unfortunately, reality negatively verified these hopes. As we pointed out in our report on foreign capital, in Poland, research and development-related expenses are relatively low. At that time, we estimated that it was 0.9% of GDP. In 2016, we reached the level of 0.97%.

It is an increase of 1% of GDP.

It depends. Among the countries of our region, only Slovakians have a similar level of R&D expenditures. In Hungary, this figure stands at 1.8% of GDP, in the Czech Republic at 2%, not to mention Germany, where it is 3%. At the same time, the EU’s average is 2%.

What does it have to do with SEZ?

The level of R&D expenditures shows what kind of companies we managed to attract by establishing special zones. We are talking not about the innovative ones, but those that emphasise low cost of labour. Nothing has changed. That is why we have recently become home to Amazon’s logistics centre or Mercedes’ manufacturing plant in Jawor.

So the transfer of knowledge does not occur in special zones? 

This model does not create opportunities for transfer of technology. It does, however, with respect to the transfer of human capital, as the best-skilled workers find jobs abroad, in headquarters of foreign companies. Which constitutes a classic example of brain drain.

Previously, SEZ was all about numbers. The scale of investment, utility area, amount of money an investor expected to get from Polish state (meaning the level of the tax cut), number of workers. Qualitative issues, such as the type of job or remuneration, used to be in the background.

So, Poland as an assembly plant of foreign companies…

Special Economic Zones will keep our economy in the middle income and the low-cost labour trap because they are designed to solidify this model. In general, special zones are part of a larger trend, so-called race to the bottom. It is reflected in the lowering of taxes for businesses to attract as many foreign companies as possible. Eventually, it is all at the expense of the state budget. Moreover, while companies play lower Corporate Income Tax, no such benefits apply to average workers. Double standards pure and simple.

It is easy, however, to turn the discussion around and say that we can abandon this race. Only then we would not have any inflow of foreign capital to our budget, and Polish workers will suffer as well. Is it not a stalemate?

It is. And that is why it is essential to introduce some more comprehensive solutions or make use of the so-called beneficial constraints. True, many regulations, such as minimum wage and workplace safety regulations, can limit competitiveness and the race to the bottom, but they are in effect, beneficial for the economy, as demand rises and the costs of healthcare are lowered.

In your latest report Foreign capital: are we a sub-supplier economy? you write: “Just as is the case of the other countries of the Visegrad Four, the Polish economy has certain traits of a sub-supplier economy – particularly for the German economy.” You also point out that approximately 25% of Polish export goes to Germany and economic cycles of both economies have been largely synchronised throughout the last decade. “In the supply chain of the German economy, Poland is a low value-added element” Are we Germany’s assembly plant?

It just means that, whether we like it or not, the Polish economy is mainly dependent on the German economy. When the latter rises, the former also fares well. In Poland, we want to talk about GDP. But GDP does not tell the whole story. When Polish sub-supplier sends the effect of his work to the plant in Germany, this constitutes a part of Poland’s export to Germany. And it does not matter that this export takes place within a German, not a Polish, company. That is why the most important index in the public debate should be GNP, that is the gross national product.

In the long run, this model is dysfunctional because we are forced to play the role of “eternal second”.

That is why in our report we suggested that the Polish economy should be more independent. This could be obtained by diversification of imports and exports and an increase in domestic production. We call this value added in the supply chain.

In the contemporary economy, a cycle of production is long and complex. Take for example Apple. Simplistically, basic elements of their products, such as little screws, are made somewhere in Asia. They are then put together in another place and subsequently, they are sent to the United States, where the finished product is decorated with the famous logo. It is American capital that owns the bitten apple. If we follow through the value of particular elements in the supply chain, we get a picture, wherein from the process of manufacturing up to the marketing and sales departments, the added value is relatively low. The real profit is made on technological patents and intellectual property. The real money is therefore in the American centre, not in Asian peripheries.

Such chain value cycles are present in every business and affects every product. With Poland, the problem is that in these chains, the majority of our companies are located closer to Asia than to the US. We are the sixth largest producer and fourth largest exporter of furniture in the world – most of the products in IKEA are made of wood from Poland. We are also a major supplier of chickens to KFC. However, neither in case of furniture nor the case of chickens, our final profit is high, and others gain substantially more. It shows a broader problem of the Polish economy – very few Polish products and Polish companies are on top of these capitalist value chains.

So, what should we do, if we want to be closer to the US than to Bangladesh?

First of all, we have to look for niches, where it is possible to build these value chains with the leading role of Polish companies. But our products need to be much technologically advanced. A good example here would be a rapidly-developing video games industry or fintech sector, which evolves much faster than in the West. Tellingly, the use of credit cards – not-so-innovative products after all – is much more pervasive in Poland than it is in the West and we are the second fastest developing market for companies in the mould of Revoult. Our government only begins to recognise this potential. In response to the rapidly-developing fintech sector, The Polish Financial Supervision Authority set up a financial innovations development task force, charged with creating a more favourable environment for new fintech businesses.

And again, we need to mention the need of state’s expenditures for R&D. The second thing is stability and regulation transparency. Today, the largest businesses can benefit from legal loopholes and can afford to pay for tax optimisation. In this aspect, small and medium companies cannot compete with them. The role of the government, therefore, should be to create equal opportunities for all entities, regardless of their size or country of origin.

But is it not a paradox to speak about equal opportunities when SEZ in principle create inequalities? Because how else can we call a situation when companies that operate in the zones have been exempted from taxes for many years?

A pro-active economic policy always leads to certain inequalities, because particular sectors, or regions are inevitably being favoured. That is why enacted regulations should come under close scrutiny to determine whether they are beneficial for the economy as a whole, or the number of those who benefit is much more limited.

Can the new SEZ bill help in finding solutions to the abovementioned problems?

First of all, we should be glad that the new regulation, at last, introduces qualitative – not only quantitative as it used to be – criteria for preferred investments.

But specific criteria are missing from the bill. They are supposed to be introduced by the relevant economy minister’s decree.

This is a typical way of proceeding for this kind of legislation. It allows for greater flexibility and quicker reactions to any changes in the business environment. As far as this matter is concerned, I am an optimist.

So, what kind of qualitative criteria should be introduced, to make the advancement of Polish companies in the global value chain easier?

First, important thing is compatibility of ongoing foreign investments with the medium-term development strategy of the Polish economy, better known as “Morawiecki Plan”. When granting permission for new investments, we have to look for synergy between foreign and Polish companies, locate western entities in places where similar Polish companies already exist and enable the creation of Polish-foreign business clusters. Moreover, the investments which are coherent with priorities outlined in Morawiecki Plan, such as the support for electromobility, should take precedence over others.

The second, often overlooked, the thing is the issue of labour. Previously, foreign companies that operated in the zones offered scandalously low wages or used the services of temporary employment agencies to bypass the legal labour standards. According to some media reports, these wages were as low as… 1 zloty per hour. Lack of effective labour law enforcement is still a fundamental problem of our economy.

After 25 years of existence of Special Economic Zones in Poland, do we need them anymore? Or do we have to look for another structural solution to tackle challenges ahead?

In hindsight, Special Economic Zones did not fulfil their role. And those that have been established under a new law on supporting new investments, so-called one economic zone, are in operation only since September. A universal mechanism of tax exemption seems to be a better solution than the system of special zones. At the moment, however, the level of regional investments is still low, and foreign direct investments were halved in 2017. And the most up-to-date data to assess the latest solutions is not yet available. We should wait for it, before we propose new solutions.

Translation from Polish: Łukasz Gadzała

 

This publication has been cofinanced by the Ministry of Foreign Affairs of the Republic of Poland within “Cooperation in Public Diplomacy 2018” programme.
This publication reflects the views of the author and not the official stance of the Ministry of Foreign Affairs of the Republic of Poland.

 

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