Beata Javorcik, Główna Ekonomistka EBOR (Fot. EBRD)
EBRD’s Chief Economist thus confirmed the growth forecasts issued for Poland in autumn 2020. She further added that the swift and strong monetary easing policy implemented by Narodowy Bank Polski and the asset purchase programme contributed to mitigating the negative impact of the pandemic on the Polish economy. “It shows that the Polish central bank has made good use of the experience gained by other central banks during the global financial crisis,” Beata Javorcik said.
Obserwator Finansowy: At the end of 2020, EBRD forecast that Poland would return to its pre-pandemic GDP levels by early 2022. Now – in the face of another pandemic wave in Poland and the prospect of a prolonged closure of many EU economies, including the German economy – should it be expected that this period will be prolonged? What will GDP growth be in 2021 and what will it be in 2022?
Beata Javorcik: The recession of 2020 proved to be shallower than expected and the recovery we forecast, of at least 3 per cent this year, will suffice to start the year 2022 at pre-pandemic GDP levels. Bear in mind that our GDP growth forecast for this year is still relatively conservative when compared to forecasts given by other major forecasting centres.
Detailed economic forecasts will be presented at the EBRD’s Annual Meeting on 29 June this year. The forecasts will relate to the economic situation in the bank’s countries of operation (mainly the countries in Central and Eastern Europe, the Caucasus, Central Asia, North Africa, the Middle East and Turkey), and so there will be no forecasts about the economic situation in Germany.
For more information on the Bank’s Annual Meeting, please visit our website.
In 2020, the Polish economy was driven by exports, and the share of Polish exports to Germany, for example, increased. At the same time, many experts say that the pandemic may change global trade relations and the directions of global value chains. Is this what is going to happen? Are we facing deglobalisation? Will local links be the source of strength?
It is too early to talk about deglobalisation. The growth rate of global exports will surely drop, as trade cannot expand forever and most of the opportunities to locate production in places offering cheaper labour have already been taken up. However, I would expect an increase in exports of services, which will be enabled by remote work replacing migration to a certain extent. Large disparities persist between countries in terms of earnings of an educated workforce, and this is a profit opportunity for those corporations that will be able to capitalise on this.
We will be paying more and more attention to building the resilience of these chains to shocks by way of diversifying suppliers, even if it entails higher costs.
The pandemic will further change our approach to global value chains. It has shown how dependent the world is on Chinese suppliers and it might mean that a potential natural disaster affecting China or a trade conflict involving that country may result in supply disruptions. What is more, the pandemic has drawn our attention to the fact that even events with a low probability do take place and can easily disrupt global value chains. Here, I am referring not only to climate changes, which will result in more extreme weather events, but also to the blockage of the Suez Canal by the container ship MV Ever Green. I think we will be paying more and more attention to building the resilience of these chains to shocks by way of diversifying suppliers, even if it entails higher costs.
What would be the result of such potential changes in global value chains for Poland? Could it be an opportunity to strengthen Poland’s export position in the largest geographically close Western European economies, or maybe a chance to win new markets?
Changes in global value chains will open up new opportunities for Poland. Automation will be its ally, making it possible to relocate production from countries with lower labour costs to Poland and replace Chinese suppliers on the German market, for instance. It will surely be easier to strengthen Poland’s position on the Western European markets than to win new, more geographically distant ones. The experience of many countries has shown that a good way to conquer new markets is to attract foreign direct investment (FDI). Unfortunately, UNCTAD projects a low level of FDI globally for the coming years, and so competition will be fierce and it will take a great deal of effort to attract investment inflows.
One of Poland’s most important trading partners is the United Kingdom. Will Brexit, which finally took place this year, weaken trade between Poland and the UK?
Six per cent of Polish exports is destined for the UK. Brexit has not introduced tariffs on EU, including Polish, exports to the UK, but it will nonetheless push up the administrative costs of these exports. Additional costs include the requirement to complete a customs declaration, the cost of obtaining an export health certificate for products of animal origin and high-risk foods of non-animal origin, delays linked to sanitary control requirements, etc. The changes will also hit Polish food exports to the UK.
In the structure of GDP growth in Poland, the volume of private investment still remains too small and the level of foreign investment (FDI) has gone down significantly. Can large public investments, financed by the government and local governments, effectively make up for what companies are not doing sufficiently?
Certainly not. Public investment will never replace investment by firms, and especially investment by foreign firms. It is true that public investment, such as investment in road and rail infrastructure, in increasing the energy efficiency of public buildings, etc., is a great means of sustaining economic growth, as it also involves many branches of the economy indirectly, thereby contributing to the preservation of employment and private consumption. But, it is not a substitute for FDI, because FDI is primarily an inflow of knowledge, technology, and innovation. FDI is also an inflow of information about new export markets and a way to broaden the export offer and increase the added value of products directed to foreign markets.
Public investment will never replace investment by firms, and especially investment by foreign firms. FDI is primarily an inflow of knowledge, technology, and innovation.
Private business will start to invest once the uncertainty around the further development of the pandemic has been reduced and when the economic environment and the prospects for returns from these investments are positive. The vaccination programme (though a little slow) and research on new medicines to treat COVID-19 are the light at the end of the tunnel. Besides, business is adapting to the new environment of conducting business activity and reaching out to customers through the internet, among other things. It should, however, be borne in mind that many sectors of the economy (e.g. catering, hairdressing, or beauty services) cannot operate on the internet.
It has been almost exactly one year since the Polish central bank launched the asset purchase programme. How do you evaluate the year of Polish QE? Has the Polish central bank effectively used the experience of other central banks, both from the 2008-2009 crisis and the crisis we are currently facing, among other things?
The quick and strong monetary easing policy implemented by Narodowy Bank Polski and the asset purchase programme helped mitigate the negative effects of the pandemic on the Polish economy. This proves that the Polish central bank has made good use of the experience of other central banks from the period of the global financial crisis. The actions taken by NBP were very positively assessed by the IMF during the last consultation held in February this year.
Despite the large QE programmes implemented by the world’s major central banks, international institutions do not see any lasting threat of inflationary pressure. Narodowy Bank Polski forecasts similarly. Is the threat of inflation possible in the world after the pandemic subsides?
Aid programmes, including QE, increase the money supply in the economy. The question is what that money is spent on. If governments are directing it mainly to households, then increased savings – and then expected increased spending – will lead to higher inflation once the restrictions have been loosened. But, if the long-term restrictions imposed in response to the pandemic or shifts in consumer preferences reduce the consumption of services and increase demand for industrial products, then globalisation will help keep inflation low. In China, production has moved into full swing, although demand has not returned to the levels before the pandemic, and so no export price increases have been recorded so far.
The quick and strong monetary easing policy implemented by Narodowy Bank Polski and the asset purchase programme helped mitigate the negative effects of the pandemic on the Polish economy.
If aid programmes are targeted primarily at companies, then when these companies do not operate because of lockdown, such measures only help companies survive the crisis by hibernating them, only slightly affecting inflation.
So far, many states have fought the pandemic intensively while increasing debt. Will this higher level of government debt pose a problem for the post-pandemic world?
Increasing debt levels are, to a greater extent, a challenge posed by aging populations and the risk of slower nominal growth in the long run. COVID-19-related spending certainly increases debt, but if the spending is well-planned, it is transitory and hedges against permanent losses in employment and potential growth slowdowns. Debt incurred to tackle a crisis that arises once every few decades should be paid off over many years.
Will the pandemic support green energy and ecology? Right now, the world is being flooded with an unstoppable wave of pandemic-related rubbish, such as used masks, etc. Many countries may not be able to generate funds to restructure energy production.
In the short term, the pandemic crisis is causing further environmental pollution through the increased (though justified) use of disposable masks, gloves, and other protective gear used to protect us against pathogens. However, in the medium to long run, corporate aid programmes, including banking sector financing, should be directed at green energy and ecology. If we are to support companies, we should support those that are not ‘zombies’, those that invest in forward-looking and environmentally positive technologies.
Our last year’s Transition Report explains the role of the state in stimulating a post-pandemic green economy. In the short term, the state should support green projects which are work-intensive and employment-generating, such as thermal insulation of buildings or green infrastructure. It may also require that companies receiving state aid commit to conducting an energy audit (the audit could also be state-subsidised). Many companies see no need to invest in energy saving, as they only focus on expenses related to such investments, even though they are aware of the profits they can bring. In the medium term, the state should regulate energy prices, among other things, by removing unnecessary subsidies for the extraction of fossil fuels and imposing the right tax on CO2 emissions by industry. In the long run, the state should allow for creative destruction that will promote clean and sustainable economic growth.
The August survey, conducted with the German ifo Institut, showed that the pandemic has made society more aware of the dangers of climate change. This was confirmed by 31% of respondents in Poland, more than a half in Turkey, and a fifth in Belarus. I think that support for green policies will grow.
Will the post-pandemic world be substantially and permanently poorer? Will the societies and consumers of the Western world be permanently impoverished? Will they stop buying, travelling, or investing?
It is highly probable that the “hunger” for travel will result in a great desire to travel again just as before the pandemic. It was demonstrated by last year’s summer holidays. The countries that loosened their restrictions, such as Croatia and Greece, were flooded with tourists.
The effects of the pandemic will be spread disproportionately over richer countries and poorer, developing economies. Obviously, poor economies, that is the economies in which governments cannot afford to implement sufficient aid packages – burdened with more debt and failed businesses – will suffer more severely.
And what about the world’s poorest countries? Will severe poverty increase there, and can major international institutions deal with such a scale of needs in the poorer countries of Africa, Asia, and South America?
The number of people living in severe poverty has fallen from 1.9 billion in 1990 to 689 million in 2017. This is an enormous success that has unfortunately been jeopardised by the pandemic. The World Bank estimates that some 119-124 million people joined the group living in severe poverty last year. This poses a major challenge for international bodies. Many developing countries are faced with the problem of debt. There is open talk of a new debt crisis on the horizon. Hence the discussions on enhancing IMF financing through changes in the number and allocation of the Special Drawing Rights, which would make it possible to increase the international reserves of IMF member countries.
Many developing countries are faced with the problem of debt. There is open talk of a new debt crisis on the horizon.
Of course, international aid alone is not enough. Developing countries have to solve many structural problems, that is to say, problems of the labour market, health care, education, and corruption. Financing alone, without improving the activities of domestic institutions, will work only in the short run.
What directions and trends will remain permanent in the post-pandemic Western world – the ones in the field of work organisation or education, those related to technological innovation and social communication, or others?
By all means, new technologies are here to stay. Today, corporations are doing well in the virtual world. A hybrid system – a few days in the office and a few days of work from home – will be more difficult to put into practice. Here, the challenge will be to ensure that the voices of remote workers are as important as the voices of those sitting at the office conference table. Women will most likely prefer more days of remote work, which will entail the risk that their voices will be less heard and their work will be less appreciated.
In the case of certain positions and functions, remote work will become a standard. And that means it will be possible to hire employees who even live in other countries. For corporations, it’s an opportunity to cut costs, but for skilled workers in Eastern Europe it’s a chance to get better paid jobs across virtual borders. It will be much easier to introduce such a system in EU countries due to common data protection regulations and the possibility of visa-free travel.
– Interview by Maciej Danielewicz
Beata Javorcik is Chief Economist of the European Bank for Reconstruction and Development (EBRD) in London, Professor of Economics at the University of Oxford and a fellow of All Souls College.