Unia Lubelska Square, Warsaw (photo: Magda Ucińska-Wróbel)
To say that a country is rich means that the combined value of goods and services offered by business entities registered there is high, relative to the number of inhabitants. If an economy produces a lot in relation to the number of inhabitants, its inhabitants earn a lot and can spend a lot – they are rich. And this is the source of international importance – the state can spend more on tools to put pressure on other countries. They can also spend more money on the army.
The wealth of the state is a result of previous economic growth. There are three main ways to achieve this: through consumption, investment and innovation. The easiest to achieve is an increase based on consumption. If people for whatever reason spend more, for example because they receive benefits in the form of a programme such as 500+ (‘rodzina 500 plus’), it means that business will employ the unemployed and produce more – there will be growth. Sooner or later, however, the truth will catch up. Eventually there will be a shortage of unemployed and further growth will stall.
The second way to achieve growth is through investment. Businesses buy machines, thanks to which they can produce something. They use them and the total product of the economy is greater. This method also has its limitations, although they manifest themselves much later. Ultimately all people operate some machine and buying more doesn’t make sense, because nobody will be able to use them anyway.
The third way to achieve growth is through innovation. Scientists or engineers develop a machine which does the same thing faster or cheaper than ever before, which opens the way to more production. Alternatively, these people develop a way to produce a completely new product because so far no one has seen how to do it effectively (e.g. cheaply enough). On this principle, mobile phones, LCD monitors, electric cars and solar panels have recently appeared.
The richest countries are those that have innovative economies. Why? When a company develops something new, it temporarily becomes the only one which can produce it (if it’s a new product) or produce it in such a way (if it’s a new production method). Since there is no competition, it becomes
a monopolist and dictates high prices, its margins and profits are high. People employed there also earn a lot. Innovative economies primarily include such countries as the USA, Germany, Switzerland, Great Britain, generally the countries of north-western Europe, as well as South Korea and Japan.
Industries are diverse in terms of what role innovation plays. Let’s say that industries in which innovation is a typical way of making a profit can be called ‘offensive’. Such industries include electronics, pharmaceuticals, automotive, aviation, industrial automation and defence. Industries in which innovation does play such a significant role can be called ‘defensive’ – petrochemicals, energy, mining of raw materials, retail trade and banking.
The economy in which defensive industries dominate may be rich but it notes only such growth as the external environment. For example, Norway and Kuwait are countries rich in oil. The more the outside world needs oil (the richer it is), the more expensive it is and the richer these countries are. If however a country is not so generously blessed with mineral resources and has an economy focused on defensive industries, it is at most as rich as Spain. This country has its banks, its commercial networks, it produces this and that, but mainly with industrial automation tools previously developed elsewhere.
If any factors lead to capital being focused on defensive industries, it faces serious risk. Let’s examine three such examples. In the 1960s, major natural gas deposits were discovered in the Netherlands. Capital was involved in its extraction and the country became its exporter. As a result, dollars flowed rapidly into the Netherlands and its own currency became more expensive. Thus, industrial products produced abroad became cheaper in the Netherlands, so it was not profitable to produce them there. The Netherlands stopped developing. Hence economists call this phenomenon – which generally consists of economic stagnation caused by the discovery of mineral resources – the ‘Dutch disease’.
Let’s consider the fall of the Polish-Lithuanian Commonwealth – the ‘First Republic’ as it’s known in Poland. Its explanation has consumed a sea of ink. Certainly, the matter is complex but an economic factor which contributed significantly was fertile soil. The Republic had a natural advantage over Western Europe in food production. It was in this industry that capital concentrated. As a result of this, influence and political significance became focused in the hands of the food producers. Consequently, the Republic slept through the industrial revolution. In Western Europe, economic and therefore political importance was gained by entrepreneurs, who built factories and implemented new means of production. This entailed innovation and economic growth. The Republic obeyed the interests of the food-producing magnates. And there was no room for development and growth in this activity.
The third example worth considering here is modern Russia. The country is relatively rich in mineral resources. Russian capital is largely focused on their extraction. The economy is subordinated to this. In this situation, it is not surprising that Russian economic growth is rickety. In the years 2009-2018, it amounted to 0.85% on average. During this time the whole world achieved an average growth rate of 2.53%.
This is the American interest in relations with China, and this is also the case, for example, of German interest in relations with Eastern Europe, including Poland.
China is a country almost four times more populous than the US. If the Chinese produce goods and services of such value as the Americans, it will mean that China will be four times more powerful and in Chinese-US relations, the US will be a junior partner, just like Japan is in US-Japanese relations today. Meanwhile the average Chinese produces goods and services worth four times less (according to the currency of purchasing power parity). Because American production – including arms production – is simply better, the US is still a hegemon. Chinese productivity however is growing much faster than American so the situation is dynamic. What is the American interest in this respect and how can it be enforced?
From an American perspective, it would be best if China plunged into a political and economic crisis and split into a number of countries the size of Laos. Under these conditions, American hegemony could last for hundreds of years. The situation in China, however, is not moving in this direction and the only way to bring it about from the outside is a full-scale war in which the Americans would have to fight in China and win. In the US, however, there is a lack of political support for such action. It may appear when China drives the US out of some markets, thus causing the US to enter into an economic crisis. In this scenario, the mood for confrontation amongst American voters will probably be more popular than it is today.
A less optimistic option, but still acceptable to the US is that China becomes something like an Asian Spain: it is a nice place to live, the country is saturated with capital, but this is oriented towards defensive industries; per capita productivity is around twice as low as it is in America; China remains a global factory for unprocessed products, but because the people there earn fairly, this production is not so competitive. In this variant, the US produces twice as few goods and services (the Chinese are two times less productive but there are four times more of them), but it dominates technologically and militarily. Dreams of this kind are revealed by American politicians and journalists prompting China to switch to an economy whose development is stimulated by consumption. They say this: ‘why should you cut down and save by living in small apartments and driving weak cars? Buy yourselves luxury apartments and better cars.’ In the long run, this would only serve American power.
Therefore, it was expelled from the US market as a supplier of building elements for telecommunications networks. What’s more, the US is putting unprecedented pressure on its allies not to do business with Huawei.
Of course, it is difficult to rule out the possibility that Huaweii actually did install modules enabling espionage in its devices. Perhaps however it was only a pretext. Huaweii operates in the highly offensive electronics and telecommunications industry. The development of this company would mean pushing Apple out of the US market. Above all, however, Huawei’s development creates a new situation in which a Chinese company is emerging which constitutes a driver for the growth of the Chinese economy through innovation. This opens the way for the Chinese economy to a productivity per capita comparable to that of America and to the displacement from the market of high-tech American products by their Chinese equivalents. In fact, if this happened on a large scale, it would represent the end of American hegemony in the world. That’s why it is in the American interest to cut Huawei off from markets and stop the organically-financed (i.e. from current revenues) growth of this company. From the American point of view, the Chinese should focus on the production of textiles or plastic tableware but not develop into electronics. The US will not be able to respond with this type of measure to every Chinese company operating in an offensive industry, which is why they are starting a trade war with China. It’s a question of American raison d’État.
Just as it is in the US interest to limit the innovation of the Chinese economy, so it is in the interest of Germany to limit the innovation of the Polish economy. For now, economic relations between our countries are shaped according to the rich-poor model. Germany provides us with cars and production equipment, while we provide Germany with low-processed products, e.g. furniture. Poland has grown into a giant in furniture production. For example, 20% of the products globally distributed by Ikea come from Poland. China is the only country that is ahead of us in this respect, with China supplying rather furniture accessories while Poland provides the main wooden and wood-like furniture components. Furniture production however is a defensive industry. Development in it is a derivative of innovation in another field – industrial automation, the area of German dominance.
The WIG20 index, the 20 largest publicly-listed companies in Poland, is dominated by banks and energy companies as well as other defensive businesses par excellence. We have two telecoms, both dominated by foreign capital, and a producer of computer games – the only representative of an industry that is strictly offensive. If Poland is to be rich, the WIG20 should be dominated by offensive companies. Let us remember that no-one will help us in this because our wealth and importance will be a competition and a threat to others. So where can we find in Poland resilient businesses in offensive industries?
What’s more, companies in a country open to international trade must be effective and quickly adapt to changing realities because they compete with the whole world. This forces them to be resilient and innovative. Maritime countries are more involved in trade than inland ones, hence one of the basic laws of geopolitics: maritime countries are richer than land ones.
However, some land countries are equally rich under the same mechanism. Switzerland is rich because the entrepreneurs there had to be resilient enough to cope with competition from Germany and Italy at the same time, and simultaneously accumulated capital by producing for both of these neighbours’ markets.
They are not usually the most intelligent colleagues and relatives, because such people already have a job suitable for their competences. That is why state-owned enterprises are usually poorly-managed and must be subsidised; our mines are a good example here. Meanwhile the enterprise in the offensive industry must be well managed because it is subject to constant restructuring – adapting to changing technology.
An absolute nightmare are state-owned companies operating in the arms industry, which is offensive par excellence. We have there everything that goes against the interests of the state. First, poor management performed by politicians’ colleagues. Secondly, trade unions making sure that nobody works there too hard and that the company does not adapt its staff to changing technological challenges. Thirdly, the state’s possession of a military equipment manufacturer suggests to politicians that it is necessary to supply the army with that manufacturer. As a result, the army gets miserable, anachronistic equipment and ammunition which explodes itself causing injuries to soldiers. Our native national defence industry provides a grim illustration of the above rules.
What to do then? Establishing enterprises in an industry that (almost) does not exist in the country is extremely difficult. There are no specialists on the market because universities do not educate them. And universities do not educate them because graduates could not count on employment since there are no enterprises in the industry. Getting out of this vicious circle requires a prudent state policy whose pillars are government investment in science and government investment in innovation in enterprises. Fortunately, there are good models. You just have to do what the USA, Germany, Japan or South Korea have done in this area. However, it is not necessary for us to listen to the promptings of the Germans or the Americans because it is not in their interests that we be as rich as they are.
Business innovations are often a business extension of new scientific concepts. It is no wonder then, that rich countries are generally those whose science is at a high level. The number of Nobel prize winners from the country certainly predicts its wealth better than the amount of mineral resources found in its territory. Luckily, recent reforms have brought Polish science out of lethargy and it may soon become noticeable in the world. Certainly, further transformations are needed. In particular, from a Polish university it is still practically impossible to dismiss an inept employee and universities are still a shelter for people who are not suitable for work there. This must change. Secondly, in relation to the civilised world, the income of scientists is too much from basic salaries and too little from grants. We should imitate the Czechs in this matter, i.e. basic salaries should be lower and the money saved in this way should be pumped into the grant system. This is how it works in the USA. An American electronics professor for normal functioning at the university needs a budget at the level of 600,000 US dollars per year, which they spend on salaries (postdocs and doctoral students) and other costs of conducting scientific research. This money comes mainly from grants funded in one way or another by the government. The US government finances research projects that fit into its development priorities and are led by scientists who show efficiency. Meanwhile, the Polish government simply gives universities money and universities pay it to employees who conduct classes with students – regardless of whether these employees conduct meaningful research or not. Fortunately, Act 2.0 on science and higher education improves this mechanism, although still only a negligible portion of the money for education and universities is allotted via grant competitions.
Another tool to support business innovation is government support for innovative projects in business. Innovation is a risky activity, new ideas work or do not; investing in these ideas earns or turns out to be a waste. Through financial support, the government can increase the willingness of enterprises, especially small and medium-sized ones, to undertake this type of activity. Rich countries usually have entire ministries that deal mainly with this. The Japanese Ministry of Economy, Trade and Industry is a model example of such an administration. It is believed that the spectacular economic success achieved by Japan from World War II to the end of the 1980s was a consequence of the activities of this ministry. The Korean Ministry of Trade, Industry and Energy is modelled on it. It has achieved rather impressive results considering the fact that in the 1950s, this country resembled the countries of sub-Saharan Africa and is now richer than Italy.
Meanwhile, in Poland, we are trying to build governmental agencies of this kind and we have three since January 2018: the Ministry of Investment and Economic Development, the Ministry of Entrepreneurship and Technology, and the Ministry of Digital Affairs. The effect, of course, is that the impact of these three is times smaller than if it were one ministry. In addition, they compete for the same resources. For now, it’s difficult to talk about the spectacular results of the work of these ministries but maybe time will tell. The creation of ministries in the middle of a parliamentary term prevents an objective evaluation of their work at the end of this term, therefore this is not good practice.
Everyone was once in the store or in the bank. Meanwhile, hardly anyone was in the office of the software company. These are probably the sources of the widespread belief amongst the Polish public that retail and banking are the ‘geese laying the golden eggs’. This is a misunderstanding. Currently, the world’s most valuable enterprises are: Microsoft, Apple, Amazon, Alphabet (the owner of Google) and Facebook. This is what geese laying golden eggs look like. Meanwhile on 7th June 2017, PZU and the Polish Development Fund acquired a controlling interest of PEKAO SA, which was previously in foreign hands, for 10.2 billion PLN. At the same time the annual budget of National Science Center financing fundamental research in Poland was 1.1 bln PLN. If this symbolises priorities of Polish economic policy, then we are condemning ourselves to be a poor country of no importance.
In a sense, wealth and poverty are a matter of choice. If industries are emerging in the country that will make this country rich, voters will work in these industries to support such government policies that in turn support those industries. Wealth and power will be strengthened. If the state raises large state-owned banks, they will have political power. Then it will only be a matter of time before they need to be subsidised, just as Poland subsidises mines because of the political strength accumulated there. This is not the way to wealth and power. But it could be even worse. The state could ‘breed’ a group of people living on social policy. They will always vote in one direction: for the expansion of this policy at the expense of other areas. This is a popular scenario in the world. The choice of wealth is not easy, which is why rich and significant countries are few – and poor and insignificant countries are many.
Autor
Paweł Wawrzyński
Ph.D., D.Sc. is a deputy director of the Institute of Computer Science Warsaw University of Technology. His academic background includes computer science and economics. His scientific research focuses on artificial intelligence, neural networks, and machine learning. He is an inventor holding a number of patents in areas including telecommunications, aviation, and transport. His professional experience includes management in electronics, finance, and construction sectors. He has been an economic journalist in “Do Rzeczy” weekly. He is an author of one book.
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