Domestic agenda versus economic development

Elections in Poland

Domestic agenda versus economic development

Is the current strategy of Poland’s ruling political party beneficial to its long-term economic development?


What motivates citizens in Western democracies to vote for a particular party? Is it the policies? Is it credibility? Is it the charismatic leaders? Or do people vote with their wallet in front of mind?

If they vote with their wallet, it depends on their understanding of cause and effect. The EU has probably been the best thing to happen to Poland in the first hundred years since independence was restored at the end of the World War I, in 1918. And yet, there is scant recognition of the stability, economic aid and market access provided by the EU (80% of Polish trade is with other member states). It seems that all of this no longer ‘counts’ after 15 years of membership – it is taken for granted.

The numbers are, however, staggering. When Poland joined the EU in 2004, GDP per head was $6,684. It is on course to breach $15,6301 this year. In the 14 years to 2018, Poland has received Eur 125bn2 from the EU, which has financed hundreds of kilometres of highways, roads, sewerage systems, youth sports facilities, kindergartens and schools. The contribution for 2018 alone was equivalent to 3% of Polish GDP.

With that as a background, the casual observer might be surprised that the Warsaw government is in a four-year long arm wrestle with the EU – the incumbent PiS party, meaning Law and Justice, was elected in 2015 and is expected to win again on Sunday. It is an explicitly socially conservative and Christian party with strong nationalist/populist leanings.

As is the case in other countries, the party is concerned about the possibility of losing support to far-right parties and has escalated its anti-immigrant and conservative Catholic discourse to compensate. Unlike other EU members, in Poland around 40%3 of the population is still rural, and it has staunch conservative values and feels that Polish society has gone too far in terms of social liberalism.

The PiS has worked intensively – and controversially – to dismantle checks on its power by eroding the independence of key institutions. It has advanced the politicisation of the judiciary, the civil service and the media. It has restricted demonstrations and the freedom of the press, further restricted the least permissive abortion laws in Europe. Effectively, the PiS has worked to build a populist, working class-friendly economy with strong protectionist leanings. Part of that discourse is to push back against ‘EU meddling in Polish affairs’ and refusing to accept Syrian refugees as per the EU’s quota system.

The opposition is fragmented and in disarray, so the result is virtually certain to be another four years of PiS government, fundamentally changing Poland for the next generation.

Investment implications

For investors, there a number of implications, none of them positive. This means a more limited interpretation of ‘business friendly’ policies, potentially outright discrimination against foreign (even EU) companies investing in Poland, unless they are American – the PiS is explicitly Atlanticist, courting the Trump administration at every opportunity and offering to pay all the costs of a proposed permanent US military base in the country.

In spite of strong economic growth, investors would do well to incorporate assumptions of a deteriorating fiscal position in Poland over the next five years or so. This deterioration will be driven by a series of pre-electoral commitments made by PiS to increase welfare spending that will be impossible to step back from. Further, the continued intransigence by Warsaw versus the EU will inevitably result in lower payments from Brussels in the 2021-2027 EU budget.

The single-minded focus on recasting Poland to fit the PiS societal and cultural template is creating a significant obstacle to the country’s longer-term economic development. It means reforms that could boost the country’s poor productivity levels, which are still well below the EU average, are not even under consideration.

For investors, countries where banks and utility companies are re-nationalised, foreign companies are less welcome and the macroeconomic pressures are increasing, it is sensible to tread with caution. But Poland is an EU member and its business cycle is completely synchronised with Germany’s, whilst it remains assured of continued access to the largest trade group in the world, the European Union.

Perhaps it becomes a venue for fixed interest investors and small cap equity managers who stay away from the financial and retail sectors – both are subject to new revenue taxes, in spite of a negative ruling from the EU. Meanwhile the energy companies are being asked to cover the cost of keeping lossmaking mines operational.

Any pressure brought to bear by the EU will likely prove unsuccessful – especially if the PiS majority is significant. But this persistent defiance has a cost: in the vacuum left by a departing UK, there was a singular opportunity for Poland to gain a greater leadership role in EU affairs; that is now gone.

The outcome for Poland will probably be closer relations with Hungary (the other troublemaker in the EU) and increased efforts to build a stronger relationship with Washington, DC. In a world where the US is increasingly disinterested in foreign relations, it is not clear that this strategy pays off longer term.


Footnotes:

1 All GDP/head numbers sourced from IMF and Statista https://www.statista.com/statistics/376392/gross-domestic-product-gdp-per-capita-in-poland/

2 https://ec.europa.eu/budget/graphs/revenue_expediture.html

3 Source: Martin Currie proprietary database, World Bank

Definitions:

The European Union (EU) is an economic and political union established in 1993 by members of the European Community. The EU now comprises 28 countries after its expansion to include numerous Central and Eastern European nations.

Gross Domestic Product (“GDP”) is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

The PiS is Poland’s ruling Law and Justice political party.

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