Poland will succeed if Poles keep doing their part

The profits of three German automotive companies — Volkswagen, BMW and Mercedes-Benz — are higher than the profits of the entire Polish processing industry. So, the idea that Poland could quickly catch up with Germany and the German wages does not seem realistic.
Poland will succeed if Poles keep doing their part

Warsaw, Poland (©Filip Bramorski, CC BY-NC-ND)

Before we talk about the numbers, let’s ask a rhetorical question: “Is Poland able to independently produce something comparable to a Maybach or even a “regular” Mercedes in Poland? Is it manufacturing any products that are widely appreciated across the world and unmistakably associated with Poland?” In the Central Europe region, only the Czechs have a long-standing tradition of manufacturing and a history of success in this area. Many people outside Europe recognize brands such as Škoda, Bata, Zetor. This brings tangible benefits — the Czechs are more affluent than the Poles.

According to data cited by The Economist, the net profit from the sale of a single Porsche car is EUR16,250. This amount is enough to buy, for example, a well-equipped Toyota Corolla in Poland. Audi is less profitable — the profit per vehicle is EUR3,200 on average. The profit margin on Volkswagen vehicles is only EUR960, but the sales of these cars reach millions of units gives an effect of scale.

The German giants

Unfortunately, there are no comparable data available with regard to mass-manufactured Polish products, but I’d be surprised if we were able to find any purely Polish industrial goods with a profit per unit of more than several dozen EUR.

Countries that are able to produce Maybachs, are also able to afford generous salaries for their people. Meanwhile, countries such as Poland, will not be able to catch up with the global leaders based on strenuous labour alone, and will have to start using their brains instead.

The total gross profit generated in the entire Polish manufacturing sector amounted to EUR16.9bn in 2017. The profit level certainly didn’t grow significantly one or two years later, which means that it was approximately EUR11.8bn lower than the gross income of Germany’s big automotive companies alone. At the same time, it’s worth remembering that the costs of German carmakers include the handsome profits of thousands of local sub-contractors supplying them with sub-assemblies, parts and components.

In 2018, the German automotive giants achieved total revenues of EUR400bn. In the same year, the revenues of all Polish companies employing 10 or more people amounted to almost EUR850bn, which is only two times more than the — admittedly large and efficient – three big automotive companies from Germany.

Germany’s industry is four times more productive

The enormity of the manufacturing disparity between Germany and Poland is well illustrated, among other things, in the productivity gap, as measured by the gross profit. In 2018, the gross profit of the Polish sector of non-financial companies amounted to EUR40bn, and such enterprises with 10 or more workers employed a total of 9.86 million people.

This means that the average worker generated a gross profit of EUR4012 annually. According to Deutsche Bundesbank, in 2017, the operating profits of German non-financial enterprises amounted to EUR299.5bn, while the local statistical office reported that a total of approximately 27 million people were employed in non-financial sector enterprises. This means that one person employed in the German non-financial sector generated an operating profit of EUR11,000. Roughly speaking, productivity measured in such a way indicates that the German industry is approximately four times more efficient than the Polish industry.

Another measure of productivity utilizes a statistical aggregate in the form of Gross Value Added (GVA), that is, the value of production in the entire economy or a single sector minus the cost of all inputs and raw materials. This value is nearly synonymous with gross profit, so the result should be similar.

The German processing industry, which employed a total of 8 million people at the end of 2018, generated GVA of EUR682bn, which translates into EUR85,000 of added value for each employee.

The OECD 2017 data for Poland show that the GVA of the manufacturing industry in Poland was EUR82.6bn, and the total employment reached 3.44 million people, which gives a per capita value of EUR 23,000. In terms of the GVA, the German processing industry is almost four times more productive than the Polish industry.

Catching up with the leaders

However, although the automotive sector is a real jewel in the crown of the German industry, it is just one of many similarly successful branches. For example, in 2018, the local IT giant SAP achieved an operating profit of approximately EUR7.2bn, which is a billion more than BMW. But outside these and other giants, such as BASF, Bosch and ThyssenKrupp, there are also the German “invisible masters”, that is, companies which occupy the first or second position in the world within their own field and have revenues of less than USD5bn annually.

Are companies such as Grammer, Marquardt Group, Rosenberger, or Handtmann widely known? Probably not, and yet there are literally dozens of such little-known global leaders in Germany. Meanwhile, in Poland there are no heavyweight manufacturing champions. This is understandable but also disappointing, especially when one thinks about the success of companies such as Škoda. What is even worse, is that there are no companies in Poland which would be close to the podium even in the case of lowerweight classes.

It is now becoming increasingly difficult to catch up with the global leaders, and because of that it is necessary to do it the smart way.

What others are doing?

As a result of the technological progress of the 20th century, it became possible for countries to rise from poverty and join the ranks of the global economic leaders at an even faster rate. The example of South Korea is pretty exceptional in this regard.

Macroeconomist Robert Barro of Harvard University wrote in 2003 that South Korea only needed 40 years to increase its GDP per capita tenfold. In this context Barro also pointed out that it took the Americans as many as 130 years — from 1870 to 2000 — to increase the GDP per capita by a factor of 10. This achievement is even more amazing, if we consider the fact that in 1950, that is, before the outbreak of the Korean War, the Koreans produced three times less than the Poles. At that time, the GDP per capita in Poland was almost USD2,500 and in South Korea it was less than USD900. Then the situation got even worse, because the country suffered heavy damage during the war.

Today, South Korea is a small country with a huge economy. In 2018, the GDP of Poland amounted to USD586bn, while that of South Korea reached USD1,619bn. This “tiny” nation produced almost as much as Russia, the world’s largest country by landmass.

While in the conditions of extremely fast-paced technological progress it could theoretically be possible to repeat the rapid development of the United Kingdom, the United States, Germany, or South Korea, it’s really hard to imagine such a thing. Especially in Poland, where people believe that they deserve prosperity solely due to the virtue of being European.

The British were exploiting capital from all over their empire, but they did not limit themselves to excess consumption like the Spaniards, who simply strangled their economy with the gold and silver flowing in from the New World. The ruling elites of the United Kingdom made sure that their people were well-fed and well-clothed, and then also provided the right conditions for them to learn, think and write — hence the country’s later industrial revolution.

Meanwhile, the Americans created a huge “single market” in their country, without duties and other barriers. They had plenty of capital, land and people, but above all they allowed people to make mistakes in business. They built their strength through creative destruction — on the ruins of the countless failed companies they build new, ultimately successful businesses.

Germany is a country of culture and philosophy, traditions of craftsmanship, military drill and discipline. The Koreans also exhibit obedience, but its nature is different and has Confucian roots. However, their main trait is primarily incredible diligence.

Consistently moving forward

Barring some black swan event, which would change everything or turn everything on its head, in the 21st century the economic success of individual countries will likely be a function of the resources spent on scientific research and universal education, which is a prerequisite for any advanced scientific activity.

Poland currently spends 1 per cent of the GDP on “research and development” (gross domestic expenditure on research and development, GERD). Meanwhile, gross domestic spending on R&D reaches 3 per cent of the GDP in Germany and 2.8 per cent in the United States (OECD data for 2017).

To make matters worse, in this case relative spending figures are less important than actual budgets. According to the OECD, in 2017, Poland’s GERD amounted to the equivalent of USD11.8bn (at Purchasing Power Parities). In Germany, these expenditures reached USD132bn, which means that up to 11 times more money was spent on the wages of PhDs and professors, as well as laboratories and experiments. In the United States, a total of USD543bn was spent on scientific research activities, that is, nearly 50 times more than in Poland.

The declarations that Poland could soon catch up with Germany and the Germans are out of place, because that is simply impossible within the next several generations without a change in the economic paradigm and without catastrophic shocks. Countries have to reach a certain level of maturity to transition to the subsequent stages of economic development and that successful start-ups will not grow in every country, even if they are supported with “artificial fertilizers”.

There are many signs that humanity is now getting close to a major turning point. More people are becoming aware that changing smartphones each year leads us to the edge of catastrophe, that while the Earth’s resources are still immense, in order to reach them we have to destroy fields, water bodies, soils and the atmosphere.

Our world is suffocating from the excess of economic paradoxes. There are more and more people, the cities are getting increasingly congested, and the same car models are now one and a half times larger than 30-40 years ago. In these twisted circumstances there is no universal answer to the question of what should be done in order to follow the aspirations of the Poles. It seems, however, that we shouldn’t be restless, constantly looking for new stimuli and inventing ever newer and better visions.

The last 30 years have seen an amazing success of the Polish economy and Polish entrepreneurs. No one really believed that the country would be able to emerge so quickly from the economic problems brought by the partitions, the two world wars and the Soviet Union’s totalitarianism.

Poland’s success was due to the fact that its governments chose the right direction and stayed on the course. Poland shouldn’t search for a third way or fall prey to new, supposedly beneficial trends. Let’s not believe in fantasies such as “new monetary theory”. Let’s just look at the world around and let’s see which way the wind is blowing. If Poland just does that, then the next 30 years will be good as well.

Warsaw, Poland (©Filip Bramorski, CC BY-NC-ND)

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