## cr17221 ## Source details **Canonical URL:** [cr17221](https://www.imf.org/-/media/files/publications/cr/2017/cr17221.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17221.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17221.pdf.json) --- ### DEMOGRAPHIC HEADWINDS — Stylized facts and trends - Poland faces profound demographic changes: decline of fertility rate and growing life expectancy driven by longevity of older cohorts. - Share of seniors (aged 65+ years) at 15 percent of total population, 3 percentage points below EU average. - Old-age ratio projected to more than double by 2050, surpassing EU levels. - Age pyramid projected to become skewed toward old-age cohorts despite some uptick in fertility; share of working age groups will diminish dramatically. - Working age population (WAP) has been trending down since 2012 after years of growth. - Projections: some ¼ decline in the number of working age persons by 2050, one of the largest declines in the EU. - Under constant productivity assumption, decline in WAP/POP from 70 to 57 percent would imply a 19 percent lower GDP per capita: - GDP per capita = (GDP/WAP) * (WAP/POP). - Historical expansion of WAP was only partly utilized; increased unemployment and declined labor force participation dampened gains. - Recent developments: - Declining unemployment and rising participation supported employment growth despite shrinking WAP. - NBP projections: NAWRU was 6.3 percent and unemployment rate 6.1 percent in 2016; unemployment rate envisaged to stay below NAWRU in 2017–19; participation rate projected to deteriorate slightly. - Migration: - Sharp pickup in temporary migration after EU accession; mobile working age (18–44 years) accounted for ~60 percent of temporary migrants vs. 40 percent in total population (GUS, 2014). - Inflow of migrant workers, mainly from Ukraine: in 2016 employers issued 1.3 million declarations, more than a fourfold increase from 2013. - Declarations proxy migrant workers imperfectly: declarations allow hiring foreigners for up to 6 months within 12 consecutive months; approximate impact on employment is ½ of the change in declarations. - NBP estimated 1.22 declarations per Ukrainian worker; average stay 5 months in 2015. - Inflows exceeded outward migration recently, but sustainability uncertain if Ukraine improves or EU visa restrictions are relaxed. - Magnitude of demographic headwinds implies migrants unlikely to solve labor shortages going forward. - Growth implications: - Past GDP growth mostly reflected productivity gains; recent shift toward employment growth. - If productivity downtrend is stopped but employment follows WAP dynamics, GDP growth would slow to below 1½ percent in the next decades. - Labor productivity trended down for years; reversing this is challenging at higher income levels. ### DEMOGRAPHIC HEADWINDS — Policy directions and specific measures - Two broad policy categories: - Increase fertility, participation rates, or encourage inward migration. - Improve human capital, reallocate labor across sectors, or increase capital-to-labor ratio. - Fertility: - Poland’s total fertility rate among the lowest in the EU; forecasts assume some increase but not full generational replacement. - Opinion polls: optimal number of children for Polish women above two. - Family policy should support fertility without eroding already low female labor force participation. - Internationally useful measures: improve access to pre-school childcare, promote flexible work, lower tax rates on second earners. - Family 500+ program: family cash benefits among most generous in OECD; higher outlays may not necessarily translate into better fertility outcomes. - Labor force participation (LFP): - LFP in Poland low vs. advanced EU countries, widest gap in older cohorts, particularly females. - Closing gap vs. EU15 immediately could increase labor force by 1.3 million persons on average in 2017–50, offsetting only one-fifth of projected WAP decline. - Changing WAP characteristics (better education) could boost labor supply by some ½ million persons by 2050 (Kielczewska, Lewandowski, 2017). - Narrowing gap between prime-aged men and women by half could increase labor supply by ½ million persons by 2050 (Kielczewska, Lewandowski, 2017). - Recommended: lift effective retirement age (curtail special pension schemes), improve youth and female activity (promote flexible employment; part-time work is currently rare). - ZUS estimates: reducing retirement age will yield lower pension benefits, with men projected to receive 20 percent and female 32 percent lower pensions by 2050. - Migration: - Migrants from Ukraine mainly perform low-skilled jobs (construction, household services, agriculture) (NBP, 2016). - Need policies to attract skilled migrants to address skilled labor shortages; Responsible Development Strategy (RDS) recognizes this; Ministry of Family and Labor working on employers’ obligations for migrant workers. - Labor reallocation: - Structural transformation accounted for one-fifth of productivity gains since 2000. - Agriculture remains relatively large share of employment; RDS suggests 20 percent of agricultural workforce may be idle. - Improving business climate, attracting greenfield FDI, reducing labor market duality could facilitate reallocation (Ebeke, Krogulski, Sierhej, 2015). - Regions with stronger productivity growth moved labor from farming to higher-productivity sectors more successfully (Krogulski, Sierhej, Thegeya, 2016). - Quality of labor: - Within-sector productivity improvements have large potential; upgrading human capital is key. - Firms increasingly report skilled labor shortages; OECD analysis finds deficits in vocational education remain large (OECD, 2016). - Life-long learning weak by international standards, likely reflecting widespread temporary work with limited employer-provided training. ### RECENT POLICIES THAT MAY ADD TO DEMOGRAPHIC PRESSURES - Retirement age changes: - 2012: gradual increase in statutory retirement age from 60 (women)/65 (men) to equalized 67; target to be reached in 2020 for men and 2040 for women. - Authorities reversed increase, restoring 60/65 as of October 2017. - Relative to “no policy change” (retirement age equalized at 67), reversal will reduce WAP by close to 2½ million persons by 2050 (GUS, 2014). - Fiscal cost about ½ percent of GDP per year. - Child benefits (Family 500+): - Guarantees lump sum for each second and next child (poorer families eligible for first child); annual fiscal cost above 1 percent of GDP. - Program hoped to yield 290,000 additional births in ten years after introduction. - Estimates point to possible withdrawal of 240,000 persons from the labor market due to negative impact on female LFP (Myck, 2016). - Cross-country evidence: lump-sum cash benefits tend to discourage female employment (Christiansen and others, 2016a). - Projection of additional births based on Ministry of Family and Labor assessment (CoM, 2016); international evidence suggests limited effectiveness depending on country circumstances. - Other measures affecting labor market: - Increase in primary schooling age by one year to 7 years (overall duration intact): implies later work start, reducing labor supply by about 300,000—400,000 persons over long-term. - Minimum wage hikes outpaced average wage growth, raising minimum-to-average wage ratio from 35 percent in 2004 to an estimated 47 percent in 2017. - 2017: minimum hourly pay corresponding to minimum wage imposed on some civil law contracts (CLCs) widely used in service sector. - High minimum wage could harm youth employment; regional analysis suggests non-linear adverse effects become starker when minimum-to-average wage ratio reaches 45 percent (Raei and others, IMF, 2016). - Deflationary environment led authorities to depart from CPI-based indexation of minimum pension, mandating a 13 percent hike as of March 2017; hike likely reduces incentives to stay at work after reaching retirement age. ### IMPACT OF RECENT POLICIES ON LABOR SUPPLY AND FISCAL POSITION — Key numeric projections (working-age population 15–64, percent of working-age population in 2015) - Working-age population (15-64) levels (percent of 2015): - 2015: 100.0 - 2018: 97.3 - 2020: 95.3 - 2022: 93.4 - 2030: 89.0 - 2050: 74.2 - Change on 2015 (I): - 2018: 0.0 - 2020: -2.7 - 2022: -4.7 - 2030: -6.6 - 2050: -11.0 - Impact of recent policies (II) (net change): - 2018: -3.7 - 2020: -4.7 - 2022: -5.2 - 2030: -7.2 - 2050: -9.1 - Change on 2015 (I+II): - 2018: 0.0 - 2020: -6.5 - 2022: -9.4 - 2030: -11.8 - 2050: -18.2 - Components of policy impacts: - Retirement age reduction (2): -3.7 (2018); -4.7 (2020); -5.2 (2022); -5.8 (2030); -10.3 (2050) - New births due to Family 500+ program (3): 0.0 (2018–2022); 0.0 (2022); 0.0 (2030); 2.3 (2050) - Increased schooling age (4): 0.0 (2018–2020); 0.0 (2022); -1.5 (2030); -1.1 (2050) - Additional mitigating policies (III) totals: - 2018: 1.6 - 2020: 3.2 - 2022: 3.7 - 2030: 5.4 - 2050: 6.5 - Increased labor force participation (LFP) (5): 1.4 (2018); 2.8 (2020); 3.2 (2022); 4.2 (2030); 3.6 (2050) - Immigration (6): 0.2 (2018); 0.3 (2020); 0.5 (2022); 1.2 (2030); 2.9 (2050) - Recent and additional mitigating policies (II+III) net effects: - 2018: -2.1 - 2020: -1.5 - 2022: -1.5 - 2030: -1.8 - 2050: -2.7 - Resulting working age (I+II+III): - 2018: 0.0 - 2020: -4.9 - 2022: -6.2 - 2030: -8.1 - 2050: -12.7 - Alternative LFP scenario (IV) resulting working age: - 2018: 0.0 - 2020: -5.2 - 2022: -7.2 - 2030: -8.7 - 2050: -11.8 - Notes: - 1/ Eurostat baseline demographic scenario - 2/ Compared to no-policy change (retirement age equalized at 67) - 3/ Additional births as in official projections. Constant after 2026. - 4/ Primary school age increased from 6 to 7 in 2016 - 5/ As in the RDS, LFP goes up from 68 to 73 percent by 2030 and remains constant afterwards. - 6/ Migrant workers double from estimated 0.8 million in 2016. - 7/ Gradual convergence to LFP in Sweden 2015 (82 percent) ### CONCLUDING REMARKS ON DEMOGRAPHICS - Recent reversal from growing to shrinking WAP poses a challenge: labor supply will become constrained and growth impaired. - Mitigating factors exist: - Low LFP by international standards suggests scope for more efficient use of WAP. - Migration trends indicate Poland may become a recipient country. - Recent policies appear to have exacerbated adverse demographic trends. - Policy priorities: increase labor force participation and labor productivity, facilitate labor reallocation to more productive sectors, and steadily improve labor quality. --- ### RDS INVESTMENT TARGET — Appropriateness and gaps - RDS investment target: 25 percent of GDP. - Assessment: 25 percent of GDP investment rate is below predicted norm in recent years; target is achievable given fundamentals and external environment. - Actual investment shortfalls (2016): - Actual investment rate about 7 percentage points lower than the historical benchmark in 2016. - Actual investment rate about 8 percentage points below Poland’s predicted norm (as of 2016). - Interpretation: - 7 percentage point shortfall vs. historical benchmark implies longer convergence path compared to other advanced European countries. - 8 percentage point shortfall vs. predicted norm suggests investment below expected level for Poland’s characteristics. - Actual investment remains above the “golden rule” lower bound. - Method note: predicted norm accounts for regulatory efficiency, trade and financial openness, external demand, and terms of trade. ### INVESTMENT BARRIERS — Domestic and external factors - 1) Balance-sheet constraints: unlikely primary constraint; Polish firms’ debt burden among lowest in EU; debt-to-income ratio more than halved over past decade. - 2) Low rate of return: not the main constraint; return on capital rising since early 2000s; most profits retained; investment returns favorable among EU peers. - 3) Insufficient domestic savings: - Economy-wide saving rate: around 20 percent. - RDS desired benchmark investment rate: 25 percent. - Corporate savings constitute bulk of national savings; household financial savings and government savings are very low. - 4) Skilled labor shortages: - Problem across all sectors; high-tech subsectors have highest job vacancy rates. - Share of firms planning to increase wages in 2017 at record high. - Labor shortages contributed to faster labor cost increases in Poland than in EU recently. - 5) Weak external environment: - External demand, external financing conditions, and terms-of-trade significantly impact capital accumulation. - Reduced capital inflows after euro area crisis dampened capital accumulation; FDI inflows weaker than EMDE average recently. - 6) Limited space for external borrowing: - Current account primary balance higher than debt-stabilizing balance (REI May 2016 definition), indicating scope for external borrowing. - Private sector external debt close to 40 percent of GDP; excluding inter-company loans about 22 percent of GDP. - Reliance on foreign funding (2016:Q3): financial institutions 14 percent of total liabilities; non-financial corporations 44 percent; government reliance rose from 33 percent in 2007 to 47 percent in 2015. - 7) Domestic institutional/structural constraints (EIB survey highlights): - Main barriers to investment: political and regulatory climate (main barrier), uncertainty, business regulation, lack of skilled staff. - Polish firms more likely than EU peers to cite demand for products/services and infrastructure gaps (transportation, energy) as major barriers. - External finance constraints: reliance and share of externally finance-constrained firms close to EU average; SOEs more constrained than foreign firms; service sector and SMEs more constrained than industry or large firms. ### POLICIES — Projections and recommendations for boosting investment - Baseline projection: - With only moderate improvement in external environment, investment growth likely to stay around post-crisis average. - Near-term: strengthen due to pick-up in EU funds’ absorption and supportive external conditions (WEO). - Medium-term: revert to post-crisis average. - Investment-to-GDP ratio projected to gradually rise to about 21 percent of GDP by 2022 (below RDS target of 25 percent). - Policy focus: - Improve labor supply and quality: - Targeted vocational training and life-long learning to raise LFP and reduce skill mismatches. - Migration policies to attract highly-skilled immigrants and encourage greater permanent immigration. - Improve business climate: - Create more business-friendly regulatory environment; RDS includes 12 strategic projects on business regulatory reforms (7 on SMEs, 3 on innovation). - Clarify implementation schedules and communicate them to reduce uncertainty. - Upgrade infrastructure: - Prioritize ICT, transport, and energy projects. - Improve public investment efficiency (20 percent gap remains relative to efficiency frontier). - Rely on multilaterals/EU funding and private co-financing; enhance coordination of EU-funded programs. - Promote PPPs with accountability, transparency, and proper budget treatment of contingent liabilities. - Medium-term fiscal strategy: - Successful consolidation could create space for deficit-financed public investment in infrastructure. ### EIBIS SURVEY — Key business investment and finance findings (summary) - Survey: 479 firms in Poland (part of 12,500 firm EU survey). - Investment participation: four in five firms invested in last financial year (slightly below EU average); manufacturing more likely to invest; large firms more likely than SMEs; foreign firms more likely than SOEs. - Investment intensity (value per employee) in Poland lower than EU average; highest in infrastructure, then manufacturing. - Investment finance: ~two-thirds from internal sources; construction sector particularly reliant on internal funds; grants (EU Structural Funds) important. - External finance structure: bank loans, overdrafts & credit lines most popular; leasing popular; capital market financing negligible. - Financing constraints: proportion below EU average; SMEs face more constraints (rejected loan applications); SOEs more externally finance-constrained than foreign firms. - Short-term influences: political and regulatory climate cited as key reason for delaying investment; finance availability viewed positively. - Long-term barriers: uncertainty, business regulation, and availability of skilled staff. --- ### TFP AND PRODUCTIVITY — Conceptual decomposition and baseline outlook - Framework: OECD (2015) separating allocative efficiency (between-sector) vs. technical efficiency (within-sector); McMillan and Rodrik (2011) decomposition applied. - Findings: - Within-sector technical efficiency improved after GFC. - Allocative efficiency (between) sharply deteriorated after GFC, becoming negative and offsetting within-sector gains—possible drivers include labor hoarding and investment shift to lower-return sectors amid policy uncertainty. - Resource misallocation gaps diminished post-GFC in most sectors except agriculture and market services. - Poland progressed toward global technological frontier over two decades, but technical efficiency improvements have slowed recently. - Role of external conditions: - TFP growth historically correlated with GVC participation and external demand. - 1995–2011: rapid integration into German supply chains; high foreign value added in electronics, machinery, and motor vehicles (>40 percent). - Post-GFC: decline in GVC participation and TFP growth slowdown. - Staff cross-country regression suggests external demand and capital flows had large historical contributions to Poland’s TFP growth; projected EU recovery and accommodative global finance will provide limited medium-term support. - Role of domestic factors: - Structural and institutional factors affect both allocative and technical efficiency: economic structure, labor market flexibility, government efficiency, regulation restrictiveness, affordability of finance, infrastructure, institutions, R&D/innovation. - Poland lags OECD peers in infrastructure, business regulation, labor market efficiency, and R&D/innovation; strengths include market-friendly institutions, low barriers to trade and investment, limited regulatory complexity, and strong human capital quality. - Baseline TFP projection: - TFP growth expected to recover moderately near term, remain flat at around 1 percent over the medium term. - If manufacturing restores pre-crisis TFP peak, medium-term TFP could be closer to 1½ percent conditional on reforms and more FDI. - Investment increases expected gradual; limited boost to TFP from investment. - Aging workforce expected to have substantial negative impact on TFP after 2030: - Eurostat projections: five-year cumulative increase in share of senior workers ≥ 2 percentage points beyond 2030, which could translate into five-year cumulative decrease in TFP growth by 1.5 percentage points or more (Adler et al., 2017). - Comparison and implications: - Baseline TFP in line with Korea’s 1999 experience at similar income per capita; far below Korea’s fastest convergence episode. - To converge to EU average by 2030, TFP growth closer to 4 percent per year would be required under baseline assumptions. - Priority reform areas: infrastructure, business regulation, labor market efficiency, R&D/innovation; preserve comparative strengths (market-friendly institutions, low trade/investment barriers, limited regulatory complexity, strong human capital). --- ### LONG-RUN GROWTH — Baseline and reform scenarios (selected quantitative findings) - Baseline potential growth projected to stabilize around 2.7–3.0 percent—well below pre-crisis average. - Four reform areas analyzed: PMR, labor market reforms, infrastructure, R&D/innovation. - Three reform scenarios: - Scenario based on past performance of Poland and other OECD countries (realistic). - Scenario 2: close reform gaps by half relative to current OECD average by 2030 (except infrastructure). - Scenario 3: fully close reform gaps relative to current OECD average by 2030 (except infrastructure). - Infrastructure closing in all scenarios by 26 to 28 percent relative to EU average by 2030 given fiscal constraints. - Scenario-specific calibrated assumptions (selected exact figures): - PMR: closing gaps by around 25 percent in gas, 40 percent in airlines and road sectors, 45 percent in professional services and retail would each imply 0.4 points decline in relevant PMR sub-index. - Administrative burdens on startups: decline of 0.71 points would fully close gap vs. OECD average. - ALMPs: increase public expenditures on ALMPs from 10.5 percent to 14.8 percent of the GDP per capita (increase of 4.26 pp to fully close gap). - Childcare/early education: increase public expenditures by 0.18 percentage points (realistic target to close half the gap). - Employment protection: lower the employment protection index by 0.25 points. - R&D: maintain pace of doubling direct public funding of business R&D to increase by 0.04 pp to fully close gap. - Infrastructure: boost infrastructure investment-to-GDP ratio by 0.36 percentage points (annual average 2017–30) to close infrastructure gap by ~27 percent. - Modeling and elasticities: - Semi-structural general equilibrium model (FSGM variant). - PMR and R&D → TFP shocks; labor reforms → LFP shocks; infrastructure → public investment shock; private investment responds endogenously. - Elasticities from Barnes et al. (2013), Thevenon (2013), and April 2016 Fiscal Monitor used. - Reforms phased in over ten years (except infrastructure gradual 2017–2030); fiscal interactions accounted for. - Quantitative results by 2030 (exact reported figures): - Combined impact on GDP level by 2030: - Scenario based on past experiences: total impact about 7.01 percent. - Scenario closing half the gaps: about 6.84 percent. - Scenario fully closing gaps: around 11.41 percent. - Realistic scenario individual contributions to GDP level by 2030 (pp increase): - Relaxing administrative burdens on startups: 1.39 - Relaxing regulations on professional services and retail: 0.83 - Relaxing regulations on gas sector: 0.75 - Relaxing regulations on airlines and road sectors: 0.74 - Relaxing employment protection: 0.78 - Increasing infrastructure spending: 1.17 (with average impact on government deficit/GDP of 0.36 pp per year) - Increasing public spending on childcare services: 0.49 (with govt deficit/GDP impact of 0.11 pp per year) - Increasing direct public funding of business R&D: 0.49 (with govt deficit/GDP impact of 0.03 pp per year) - Increasing public spending on ALMP: 0.23 (with govt deficit/GDP impact of 0.13 pp per year) - Of total combined impact in realistic scenario: - Combined impact of all reforms: 7.01 (impact on government deficit/GDP: 0.66 pp increase, avg. per year) - Fiscally costly reforms account for 2.37 (reported as part of scenario aggregates). - Prioritization guidance: - PMR reforms (low fiscal cost) generate highest long-run output impact and should be prioritized when fiscal space limited. - Direct public funding for business R&D estimated to have largest impact on potential output per percentage point increase in government deficit/GDP. - With limited fiscal space, fiscally costly reforms could be financed initially by allocated EU funds. - Current favorable cyclical position supports undertaking structural reforms, including those with modest near-term contractionary effects. ### SUMMARY TABLE HIGHLIGHTS (selected figures reproduced exactly) - Baseline share/state: 25.8 percent - Current Level: 25.8 percent - Past Experience (2008-2013): - Impacts on Potential Output by 2030 (% increase): 1.40 - Average Impact on government deficit/GDP (pp increase/year; over 2017-2030): 0.43 - Scenario 1 (close infrastructure gap by 27.8 percent): - Impacts on Potential Output by 2030 (% increase): 0.78 - Average Impact on government deficit/GDP (pp increase/year): 0.25 - Scenario 2: - Impacts on Potential Output by 2030 (% increase): 7.01 and 6.84 - Average Impact on government deficit/GDP (pp increase/year): 0.66 - Of which fiscally costly reforms: 2.37 - Scenario 3: - Impacts on Potential Output by 2030 (% increase): 11.41 - Average Impact on government deficit/GDP (pp increase/year): 0.66 - Additional fiscally costly reform figures reported: 2.21 and 2.33 ### CONCLUDING IMPLICATIONS FOR LONG-RUN GROWTH - Shrinking labor supply and slower TFP growth imply much slower pace of income convergence to advanced Europe. - Realistic reform package (PMR, LFP increases, infrastructure, R&D) could lift Poland’s output level by about 7–11 percent by 2030, covering about 1/3 of distance to RDS convergence objectives; full convergence by 2030 would require greater reforms including human capital and institutional improvements. - Priorities: product market deregulation, labor market policies raising participation, infrastructure upgrades (efficiency and financing), and R&D/innovation support; leverage limited fiscal space and EU funds to maximize impact. *International Monetary Fund — Republic of Poland selected chapter (content unit: cr17221)* ### References _______________________________________________________________________________ 15 ### DEMOGRAPHIC HEADWINDS ### A. Stylized Facts and Trends - Poland faces profound demographic changes: decline of fertility rate and growing life expectancy driven by longevity of older cohorts. - Share of seniors (aged 65+ years) at 15 percent of total population, 3 percentage points below EU average. - Old-age ratio projected to more than double by 2050, surpassing EU levels. - Projections envisage that, despite some uptick in fertility rate, the age pyramid will become skewed toward old-age cohorts, while the share of working age groups will diminish dramatically. - Decline in working age population has already begun; following years of growth, the working age population has been trending down since 2012. - Demographic projections suggest a some ¼ decline in the number of working age persons by 2050, one of the largest declines in the EU. - Under the constant productivity assumption, such a decline in the share of working age population would lower GDP per capita by almost one-fifth. - GDP per capita could be written as GDP/POP=(GDP/WAP)*(WAP/POP). Assuming constant productivity, the projected decline in WAP/POP from 70 to 57 percent would imply a 19 percent lower GDP per capita. - Historical expansion of working age population was only partly utilized to boost potential growth; increased unemployment and declined labor force participation rates dampened potential gains. - Recent years: declining unemployment and rising participation supported employment growth despite diminishing working age population. - NBP latest projections suggest NAWRU was 6.3 percent and unemployment rate 6.1 percent in 2016, with unemployment rate envisaged to stay below NAWRU in 2017–19 and participation rate projected to deteriorate slightly. - Declining working age population could soon become a barrier to sustained employment gains and a constraint on growth, particularly with reductions in the retirement age. - Net migration was a past drag on labor supply but has changed recently: - Sharp pickup in temporary migration after EU accession. - Persons in mobile working age (18–44 years) accounted for around 60 percent of temporary migrants relative to 40 percent in total population (GUS, 2014). - Increasing inflow of migrant workers, mainly from Ukraine. - In 2016, employers issued 1.3 million declarations, more than a fourfold increase from 2013. - Declarations proxy migrant workers imperfectly: declarations allow hiring foreigners for a period not exceeding 6 months within 12 consecutive months; approximate impact on employment is ½ of the change in declarations. - NBP estimated that 1.22 declaration was issued per Ukrainian worker, and the average stay in Poland was 5 months in 2015. - While inflows of migrant workers exceeded outward migration recently, sustainability of continued large inflows may be in doubt if the situation in Ukraine improves or if the EU visa restrictions are relaxed further for Ukrainian citizens. - Magnitude of demographic headwinds is such that migrants are unlikely to solve labor market shortages going forward. - Current growth pattern is not sustainable given population trends: - Past GDP growth mostly reflected productivity gains; recent evolution toward a growing role of employment. - If a downtrend in productivity growth is stopped but employment follows working age population dynamics, GDP growth would slow to below 1½ percent in the next decades. - Labor productivity trended down for years; reversing this may not be easy given low hanging fruit largely exploited and harder productivity gains at higher per capita income levels. ### B. Policies - Policies need to support labor supply and productivity. Two broad policy categories: - Measures to increase fertility, participation rates, or encourage inward migration. - Measures to improve human capital, allocation of labor among sectors, or increase capital-to-labor ratio. - Fertility: - Poland’s total fertility rate is among the lowest in the EU; forecasts assume some increase but even the most optimistic scenarios do not envisage a recovery allowing full generational replacement. - Opinion polls suggest the optimal number of children for Polish women is above two. - Family policy should support fertility but newborns enter the labor market with a long lag. - Policies should not erode the already low female labor force participation. - International experience suggests improving access to pre-school childcare, promoting flexible work arrangements, or lowering tax rates on second earners could be useful. - With the new Family 500+ program, Poland’s family cash benefits would be among most generous in OECD. International evidence suggests higher outlays may not necessarily translate into better fertility outcomes. - Labor force participation: - Participation rates in Poland are low compared to advanced EU countries, with the widest gap in older cohorts, particularly females. - Closing the gap vs. EU15 immediately could increase labor force by 1.3 million persons on average in 2017–50, offsetting only one-fifth of the projected decline in the working age population. - Changing characteristics of the working age population (e.g., better education) could boost labor supply by some ½ million of persons by 2050 (Kielczewska, Lewandowski, 2017). - Narrowing the gap between prime-aged men and women by half could increase labor supply by ½ million persons by 2050 (Kielczewska, Lewandowski, 2017). - Policies to lift effective retirement age (e.g., curtailing special pension schemes) and improve activity among youth and females (e.g., promoting flexible employment, as part-time work is rare at present) are recommended. - ZUS estimates indicate reducing the retirement age will yield lower pension benefits, with men projected to receive 20 percent and female 32 percent lower pensions by 2050. - Migration: - Employers view migrants, predominantly from Ukraine, as a response to labor shortages; these migrants tend to perform mostly low-skilled jobs in construction, household services, or agriculture (NBP, 2016). - There is a need for policy to attract skilled migrants to augment other measures addressing demographic challenges and skilled labor shortages. - The Responsible Development Strategy recognizes this need; the Ministry of Family and Labor is working on changes in employers’ obligations related to migrant workers. - Labor reallocation: - Moving labor to more productive sectors could boost overall productivity; structural transformation accounted for one-fifth of productivity gains since 2000. - Least productive agriculture still represents a much larger share of employment than in developed EU countries; Responsible Development Strategy suggests that 20 percent of agricultural workforce may be idle. - Econometric analysis shows improving business climate, attracting greenfield FDI, or reducing labor market duality could facilitate labor reallocation among sectors (Ebeke, Krogulski, Sierhej, 2015). - Regions with stronger productivity growth were more successful in moving labor from farming to higher-productivity sectors (Krogulski, Sierhej, Thegeya, 2016). - Quality of labor: - Within-sector productivity improvements offer potentially larger gains; upgrading human capital would help improve sector-specific productivity. - Firms increasingly point to skilled labor shortages as a barrier to growth. - OECD analysis suggests deficits in vocational education remain large (OECD, 2016). - Life-long learning, especially among persons with lower education attainments, is weak by international standards, likely reflecting widespread temporary work where workers are less likely to obtain employer-provided training. *Republic of Poland — International Monetary Fund, June 23, 2017 (Demographic Headwinds chapter).* ### 7. Recent policies may add to demographic pressures. Instead of addressing risks to ### 7. Recent policies may add to demographic pressures. Instead of addressing risks to sustainable growth posed by adverse demographics, some recent measures are likely to have the opposite effect: ### Retirement age - Changes enacted in 2012 imposed gradual increase in statutory retirement age from 60 years for women and 65 years for men to an equalized 67 years, with this target to be reached in 2020 for men and in 2040 for women. - The authorities decided to reverse this process, restoring previous retirement age (60/65) as of October 2017. - Relative to the “no policy change scenario”, this decision will reduce the working age population by close to 2½ million persons by 2050 (GUS, 2014). - It will also imply a sizeable fiscal cost at about ½ percent of GDP per year. ### Child benefits (Family 500+) - The new child benefits scheme (Family 500+) guarantees a lump sum benefit for each second and next child in a family (poorer families are also eligible to receive this benefit for the first child), implying annual fiscal cost of above 1 percent of GDP. - The program is hoped to encourage fertility, yielding 290,000 additional births in ten years after its introduction. - Estimates point to a possible withdrawal of 240,000 persons from the labor market due to negative impact on female labor force participation rates (Myck, 2016). - Cross-country experience suggests that lump-sum cash benefits tend to discourage female employment (Christiansen and others, 2016a). - The projection of additional births is based on Ministry of Family and Labor impact assessment to the law of family benefits (CoM, 2016). International evidence suggests effectiveness may be limited depending on country-specific circumstances. ### Other recent measures affecting the labor market - Increase in primary schooling age by one year to 7 years, keeping overall duration of primary and secondary education intact: Other things equal, this would imply a later start of work, reducing labor supply by about 300,000—400,000 persons over long-term. - Minimum wage hikes significantly outpaced average wage growth in recent years, increasing the minimum to average wage ratio from 35 percent in 2004 to an estimated 47 percent in 2017, relatively high compared to EU peers. - As of 2017, a minimum hourly pay, corresponding to the minimum wage, was imposed on some civil law contracts (CLCs), which were widely used in the service sector, like cleaning or security. - High level of minimum wage could potentially be harmful, especially for youth employment. Analysis for the region suggests non-linear adverse effects on employment, becoming starker when the minimum-to-average wage ratio reaches 45 percent (Raei and others, IMF, 2016). - Given deflationary environment in recent years, the authorities departed from the CPI based indexation of minimum pension, mandating a 13 percent hike as of March 2017. - The 13 percent hike, apart from increasing aging related cost, is likely to reduce incentives to stay at work after reaching retirement age. ### Impact of recent policies on labor supply and fiscal position - Estimates presented in Table 1 suggest that recent policies (notably the reversal of the 2013 retirement age increase) have significantly exacerbated already unfavorable trends in the working age population. - This conclusion holds even after allowing for positive impact of the new child benefits on fertility and mitigating factors such as higher participation rates or increasing immigration. - Recent policy measures entail large fiscal costs, with child benefits and lower retirement age alone likely to have a negative fiscal impact of above 10 percent of GDP in the next decade, thus squeezing domestic savings and limiting resources for investments. ### Key numeric projections from Table 1 (working-age population 15–64, percent of working-age population in 2015) - Working-age population (15-64) levels: - 2015: 100.0 - 2018: 97.3 - 2020: 95.3 - 2022: 93.4 - 2030: 89.0 - 2050: 74.2 - Change on 2015 (I): - 2018: 0.0 - 2020: -2.7 - 2022: -4.7 - 2030: -6.6 - 2050: -11.0 - (and -25.8 by 2050 shown in table as part of baseline sequence) - Impact of recent policies (II) (net change): - 2018: -3.7 - 2020: -4.7 - 2022: -5.2 - 2030: -7.2 - 2050: -9.1 - Change on 2015 (I+II): - 2018: 0.0 - 2020: -6.5 - 2022: -9.4 - 2030: -11.8 - 2050: -18.2 - (resulting working-age declines reaching -35.0 in table sequence) - Components of policy impacts: - Retirement age reduction (2): -3.7 (2018), -4.7 (2020), -5.2 (2022), -5.8 (2030), -10.3 (2050) - New births due to Family 500+ program (3): 0.0 (2018–2022), 0.0 (2022), 0.0 (2030), 2.3 (2050) - Increased schooling age (4): 0.0 (2018–2020), 0.0 (2022), -1.5 (2030), -1.1 (2050) - Additional mitigating policies (III) totals: - 2018: 1.6 - 2020: 3.2 - 2022: 3.7 - 2030: 5.4 - 2050: 6.5 - Increased labor force participation (LFP) (5): 1.4 (2018), 2.8 (2020), 3.2 (2022), 4.2 (2030), 3.6 (2050) - Immigration (6): 0.2 (2018), 0.3 (2020), 0.5 (2022), 1.2 (2030), 2.9 (2050) - Recent and additional mitigating policies (II+III) net effects: - 2018: -2.1 - 2020: -1.5 - 2022: -1.5 - 2030: -1.8 - 2050: -2.7 - Resulting working age (I+II+III): - 2018: 0.0 - 2020: -4.9 - 2022: -6.2 - 2030: -8.1 - 2050: -12.7 - (and -28.5 in extended table sequence) - Alternative LFP scenario (IV) resulting working age: - 2018: 0.0 - 2020: -5.2 - 2022: -7.2 - 2030: -8.7 - 2050: -11.8 - (and -22.0 in extended table sequence) Notes from table: - 1/ Eurostat baseline demographic scenario - 2/ Compared to no-policy change (retirement age equalized at 67) - 3/ Additional births as in official projections. Constant after 2026. - 4/ Primary school age increased from 6 to 7 in 2016 - 5/ As in the RDS, LFP goes up from 68 to 73 percent by 2030 and remains constant afterwards. - 6/ Migrant workers double from estimated 0.8 million in 2016. - 7/ Gradual convergence to LFP in Sweden 2015 (82 percent) ### Concluding remarks - Over past decades, Poland enjoyed a steady increase of the working-age population. The recent reversal of this trend poses a challenge for growth going forward, as labor supply will become constrained. - Mitigating factors exist and, if managed properly, may smooth the transition: - Labor force participation is low by international standards, suggesting scope for more efficient use of the working-age population. - Recent migration trends suggest that Poland may become a recipient country. - Recent policies seem to have exacerbated the adverse impact of demographic trends. - Policy priorities: Measures to increase labor force participation and labor productivity will be key. Measures facilitating labor reallocation towards more productive sectors and a steady improvement of labor quality are likely to yield significant gains as well. *International Monetary Fund — Republic of Poland selected chapter (content unit: cr17221)* ### 7. The investment target set out in the RDS seems appropriate given Poland’s ### 7. The investment target set out in the RDS seems appropriate given Poland’s ### Appropriateness of the RDS investment target - The RDS investment target: 25 percent of GDP. - Assessment: The 25 percent of GDP investment rate is below the predicted norm in recent years, suggesting the RDS target is achievable given Poland’s fundamentals, structural characteristics, and external environment. - Historical context: The RDS target is a bit below the historical benchmark, indicating that a higher level of optimal investment could also be feasible based on the historical experience of other advanced European countries. ### Investment gaps and benchmarks - Actual investment shortfalls (2016): - Actual investment rate about 7 percentage points lower than the historical benchmark in 2016. - Actual investment rate about 8 percentage points below Poland’s predicted norm (as of 2016). - Interpretation: - The 7 percentage point shortfall vs. the historical benchmark implies Poland’s convergence path could take longer than the time horizon during which other advanced European countries achieved convergence. - The 8 percentage point shortfall vs. the predicted norm (which accounts for development level, economic fundamentals, structural characteristics, and country-specific external conditions) suggests investment below what might be expected for a country with Poland’s characteristics. - The actual investment rate remains above the “golden rule” lower bound. - Methodology note: The predicted norm accounts for regulatory efficiency, trade and financial openness, external demand, and terms of trade (see Appendix I in source). ### Investment barriers — role of domestic and external factors - Overview question: What are the key constraints on investment in Poland? The analysis considers multiple candidate explanations: - 1) Balance-sheet constraints - Finding: Unlikely to be a primary constraint. - Evidence: The debt burden of Polish firms is among the lowest in the EU and the debt-to-income ratio has more than halved over the past decade. - 2) Low rate of return on investment - Finding: Not likely the main constraint. - Evidence: - Return on capital in Poland has been rising since the early 2000s. - Most corporate profits have been retained rather than distributed. - Investment returns in Poland rank favorably among EU countries, especially versus other Eastern European competitors for inward FDI. - 3) Insufficient domestic savings - Economy-wide saving rate: around 20 percent. - RDS desired benchmark for aggregate investment rate: 25 percent. - Distribution of savings: - Bulk of national savings are corporate sector savings, which do not seem low relative to firms’ gross operating income or compared to other EU countries. - Household financial savings and government savings are very low. - 4) Skilled labor shortages - Finding: Skilled labor shortages are a problem across all sectors (see Chapter 1). - Evidence and related indicators: - High-tech subsectors (notably ICT) have the highest job vacancy rate, followed by professional, scientific and technical services. - Share of firms with plans to increase wages in 2017 is at a record high. - Labor shortages likely contributed to faster increases in labor costs in Poland than in the EU in recent years. - Implication: While firms may absorb some near-term wage hikes without reducing capital expenditures, rising wages could dampen profit margins and reduce business investment going forward. - 5) Weak external environment - Channels: Weak external demand, unfavorable terms of trade, and tighter external financing conditions can reduce firms’ investment incentives and inward FDI. - Empirical findings: - Regression analysis indicates country-specific external factors (external demand, external financing conditions, and terms-of-trade) significantly impact capital accumulation in EMDEs. - Factor decomposition for Poland shows sizable capital inflows supported capital accumulation since the 1990s; reduced capital inflows after the euro area crisis dampened capital accumulation. - FDI inflows in Poland have been weaker than inflows in EMDEs on average in recent years. - 6) Limited space for external borrowing - Assessment: Some space for external borrowing appears to exist. - Indicators: - Current account primary balance is higher than the debt-stabilizing balance, indicating scope for external borrowing without compromising external debt sustainability (as defined in REI May 2016). - Private sector external debt close to 40 percent of GDP; excluding inter-company loans, about 22 percent of GDP. - Reliance on foreign funding (2016:Q3): - Financial institutions: 14 percent of total liabilities. - Non-financial corporations: 44 percent of total liabilities. - Government reliance on foreign funding increased from 33 percent in 2007 to 47 percent in 2015. - Caveat: Aggregate numbers mask significant differences within the private sector. - 7) Domestic institutional/structural constraints (EIB survey highlights) - Main barriers firms cite for implementing planned investment in the current financial year: - Political and regulatory climate (main barrier). - Likely driven by high policy uncertainty globally and in Europe, plus domestic regulatory uncertainties. - Key long-term structural barriers: - Uncertainty, business regulation, and lack of skilled staff. - Shortage of skilled staff matters more for foreign firms than for Polish firms in general or SOEs. - Other constraints where Polish firms differ from EU peers: - Firms more likely to consider demand for products and services, and infrastructure gaps in transportation and energy sectors, as significant barriers to investment. - External finance constraints (EIBIS): - Reliance on external finance and share of externally finance-constrained firms in Poland close to EU average. - SOEs in Poland face more external finance constraints than foreign firms. - Firms in the service sector and SMEs are more constrained than firms in industry or large firms. ### Policies — projections and recommendations - Baseline projection for investment growth: - With only a moderate improvement in the external environment over the medium-term, investment growth in Poland is likely to stay around its post-crisis average. - Near-term: investment growth projected to strengthen due to pick-up in EU funds’ absorption and supportive external conditions (WEO forecasts). - Medium-term: investment projected to revert to post-crisis average. - Resulting investment-to-GDP ratio: projected to gradually rise to about 21 percent of GDP by 2022. - Note: 21 percent of GDP by 2022 is below the RDS target (25 percent) and estimated optimal investment benchmarks; it is also below investment rates observed in fast-converging economies (example: South Korea had an investment rate of over 30 percent of GDP when at about the same income level as Poland is now). - Policy focus: tackle structural bottlenecks and domestic institutional constraints - Improve labor supply and quality of labor: - Targeted measures supporting vocational training and life-long learning to raise LFP and reduce skill mismatches. - Migration policies to attract highly-skilled immigrants and encourage greater permanent immigration (see Chapter 1). - Improve business climate: - Create a more business-friendly regulatory environment (highlighted in the RDS). - RDS plans: 12 strategic projects (out of 175) on business regulatory reforms, focusing on SMEs (7 projects) and innovation (3 projects). - Caveat: Frequent regulatory changes with uncertain timetables can hurt investment; therefore, clarify implementation schedules and communicate them to the public. - Upgrade infrastructure: - RDS identifies strategic projects where gaps are large: ICT, transport, and energy. - Given limited near-term fiscal space, priority actions: - Improve efficiency of public investment (gap of 20 percent remains relative to the efficiency frontier despite notable improvements since EU accession). - Rely primarily on funding from multilaterals/EU and co-financing from the private sector for high-priority infrastructure projects. - Enhance coordination of Polish participation in EU-funded programs and create an integrated development investment system to use EU funds more effectively. - Promote Public-Private-Partnerships (PPPs) and measures to create a better climate for PPPs, while ensuring accountability and transparency and properly reflecting PPP-linked contingent liabilities in budget documents. - Medium-term fiscal strategy: - A successful medium-term fiscal consolidation strategy could create fiscal space for additional deficit-financed public investment in infrastructure. ### Box: Business investment and investment finance — EIBIS survey key points - Survey coverage: EIBIS is an annual EU-wide survey of 12,500 firms; 479 firms in Poland. - Investment participation and intensity: - Four in five firms in Poland reported investing in the last financial year (slightly below EU average). - Manufacturing firms more likely to invest; construction less active. - Large firms more likely to invest than SMEs; the large/SME gap is larger in Poland than in the EU on average. - Foreign firms more likely to invest than SOEs. - Investment intensity (investment value per employee) in Poland is lower than the EU average; gap persists even after adjusting for GDP per capita differences. - Investment intensity highest in infrastructure, followed by manufacturing. - Dynamics: - On average, firms invested more in 2016 than in the previous year, with large sectoral variation. - Foreign-owned firms much more likely to increase investment than domestically-owned firms. *International Monetary Fund — Republic of Poland (chapter content).* ### Box 1. Business Investment and Investment Finance in Poland—the EIBIS Survey (continued) ### Box 1. Business Investment and Investment Finance in Poland—the EIBIS Survey (continued) ### Investment retrospect and capital quality - About 18 per cent of Polish companies report that they have invested too little in retrospect, which is somewhat above the EU average. - Almost none of the firms believe that they invested too much. - Firms that underinvested report a lower share of state-of-the-art machinery and energy-efficient commercial buildings relative to those companies that made sufficient investment in the past. - Suboptimal investment in the past is therefore reflected in the lower quality of the capital stock. ### Investment finance: sources and structure - About two-thirds of funding comes from internal sources. - The construction sector is particularly reliant on internal capital accumulation. - SMEs are more likely to use mostly internal finance compared to larger corporates. - Intra-group funding and external finance are used, but internal funds or retained earnings are predominant. ### Structure of external finance - Bank-intermediated products—such as bank loans, overdrafts & credit lines—are the most popular forms of external finance. - Leasing is also a popular form of financing, as in the rest of the EU. - Grants are an important source of external funding in Poland, reflecting availability of EU Structural Funds for private-sector investment projects (particularly infrastructure development and for SMEs). - Overdrafts play a particularly important role in financing investment in the construction industry. - Capital market based financing—newly issued bonds and newly issued equity—play a negligible role. ### Financing constraints - The proportion of firms experiencing financing constraints is somewhat lower in Poland than the EU average. - SMEs are much more likely to face financing constraints than large firms. - SMEs typically face financing constraints in the form of rejected loan applications. - Larger firms more typically face milder forms of financial barriers, such as receiving less credit than they asked for. - SOEs are more externally finance constrained than foreign firms. - A proportionally higher share of construction companies report available financing to be too expensive. ### Short-term influences on investment (net percentage effects) - Political and regulatory climate is cited as one of the key reasons for delaying investment. - Availability of external or internal finance is cited as a positive, rather than a negative factor in net percentage terms; Polish firms have a more positive view than the average EU company. - Firms reporting that their investment in the past three years remained below their needs are more likely to assert that the availability of internal finance affects their ability to carry out planned investment negatively. ### Long-term structural barriers to investment - The main long-term structural barriers for Polish firms are: - Uncertainty - Business regulation - Availability of staff with the right skills - Polish firms are more likely than EU peers to consider: - Demand for products and services - Infrastructure gaps in transportation and energy sectors as major barriers to investment. - In contrast to other EU firms, labor regulations and digital infrastructure are not viewed as significant investment constraints by Polish firms. - For firms that have invested too little, availability of external finance is also an important barrier. - Foreign firms operating in Poland report being relatively more constrained than SOEs in availability of skilled staff, business and labor regulations. - SOEs seem to be relatively more constrained in terms of external finance. ### Appendix I. Empirical Estimation of Investment Norm (summary of methodology and key regression results) - The “predicted norm” is estimated using a panel fixed-effects regression model for 28 EU countries over the past three decades. Estimates shown in Figure 4 are based on the specification that includes both country and year fixed effects, as well as countries’ economic fundamentals, structural characteristics and external conditions (see column (10) in the table). - The dependent variable is investment/GDP; independent variables use their lagged values. - Uncertainty is calculated as the standard deviation of real GDP growth by 3 year rolling window. - Key coefficients and statistics from column (10) of Table 1 (Fundamentals + Structural + External specification): - Real GDP per capita: -7.159 *** (1.329) - Real domestic demand growth: 0.299 *** (0.0492) - Growth in private credit/GDP: 0.0514 *** (0.0198) - Growth uncertainty 2/: 0.0303 - Real interest rate: -0.522 *** (0.0823) - Public debt/GDP: -0.0554 *** (0.00853) - Regulation efficiency: 0.686 ** (0.339) - Financial openness: 3.090 *** (1.001) - Trade tariff: 0.148 * (0.0845) - External demand growth: 0.210 (0.162) - Commodity TOT: 0.308 * (0.163) - Constant: 75.53 *** (21.28) - Observations: 332 - R-squared: 0.772 - Number of countries: 22 - Regression specifications including country fixed effects, year fixed effects, and various controls produce robust results broadly in line with expectations. Random-effects model specification is also estimated as a robustness test. *Source: EIBIS Survey. Prepared by Aron Gereben and Philipp-Bastian Brutscher (both EIB); Appendix I prepared by IMF staff (regression results reproduced from Table 1 in the source).* ### 10. In what follows, we use the OECD framework to disentangle different factors that ### 10. In what follows, we use the OECD framework to disentangle different factors that ### Conceptual framework and TFP decomposition - Uses the OECD (2015) framework separating allocative efficiency (cross-sector) vs. technical efficiency (within-sector), and external conditions vs. domestic factors (Figure 5). - Decomposition (McMillan and Rodrik (2011) approach) for Poland indicates: - Continued improvement in the “within” component (within-sector technical efficiency) after the GFC. - A sharp deterioration in the “between” component (allocative efficiency across sectors) after the GFC, which became negative and almost completely offset the positive within-sector contribution. - Possible drivers of worsening allocative efficiency: labor hoarding (limited labor mobility across sectors) and investment shifting toward low-risk/low-return (less productive) sectors amid high macroeconomic and policy uncertainty. - Resource misallocation within sectors (following Hsieh and Klenow (2009))—measured as gaps in marginal products of labor and capital across firms—has generally diminished following the GFC in most sectors, except in agriculture and market services. - Poland has shown steady progress toward the global technological frontier over the last two decades, but recent improvements in technical efficiency have slowed. ### The role of external conditions - Poland’s TFP growth historically correlated strongly with GVC participation, which is influenced by external demand (Figure 7, chart 1). - During 1995-2011, rapid integration into German supply chains, notably in manufacturing and services. - Polish exports of computers and electronics, machinery and equipment, and motor vehicles have foreign value added of more than 40 percent. - After the GFC, growth in Poland’s GVC participation declined amid the global trade slowdown, coinciding with a significant TFP growth slowdown. - Staff estimates (cross-country panel regression covering 86 advanced and emerging market economies, following April 2017 WEO approach) suggest: - External demand (proxy for GVC participation) and capital flows had the largest historical contributions to Poland’s TFP growth. - Going forward, projected recovery in the EU and continued accommodative global financial conditions imply external environment will provide some support to Poland’s TFP growth over the medium term, but such support will be limited. ### The role of domestic factors - Literature-identified structural and institutional characteristics affecting allocative and technical efficiencies: - Factors affecting both allocative and technical efficiencies: structure of the economy (relative shares of agriculture, manufacturing, and service sectors), labor market flexibility, government efficiency, restrictiveness of regulation. - Factors affecting allocative efficiency: affordability of financial services, business climate. - Factors affecting technical efficiency: quality of institutions (judicial independence, impartial courts, protection of property rights), infrastructure gaps. - R&D/innovation: evidence mixed—complementary R&D spending that facilitates adoption of global advanced technologies by domestic firms appears most effective for emerging and developing countries. - Poland’s structural and institutional progress over 25 years, but gaps remain: - Areas where Poland lags OECD peers: infrastructure, business regulation, labor market efficiency, and R&D/innovation. Poland-specific studies further identify shortcomings in human capital development and institutions/government efficiency. A still relatively high share of agriculture and relatively low share of services suggest scope to re-allocate resources toward higher-productivity sectors. - Areas of relative strength: market-friendly institutions; low barriers to trade and investment; less regulatory complexity and less regulatory protection of incumbents; relatively high quality of human capital. - Chapter 4 (of source) provides in-depth analysis and quantification of reform impacts on long-term potential growth. ### Baseline TFP growth in the medium term - Baseline drivers: - Continued improvement in technical efficiency, supported by projected improvement in the external environment. - Allocative inefficiencies expected to remain a drag absent further structural reforms. - Domestic demographics and projected investment path will also affect TFP growth. - Baseline projection: - Poland’s TFP growth will recover moderately in the near term but will remain flat at around 1 percent over the medium term (Figure 9). - Key considerations behind the baseline: - External demand from key export destinations expected to recover moderately in the near term, but recovery will be more gradual over the medium term (based on latest WEO projections). External demand projected to boost TFP growth only moderately. - If manufacturing can increase GVC participation more than suggested by external demand recovery (e.g., if manufacturing sector’s TFP growth returns to its pre-crisis peak), medium-term TFP growth could be closer to 1½ percent, but this would likely require additional reform efforts and more FDI. - Investment expected to increase only gradually, especially private investment; boost to TFP from investment projected to be limited. - Adler et al. (2017) finds that a 1 percentage point increase in the investment-to-capital stock ratio could boost annual TFP growth by 0.506 percentage points. - Aging workforce expected to have a substantial negative impact on TFP after 2030. Recent studies (Aiyar et al. (2016) and Adler et al. (2017)) find statistically significant impacts of aging on TFP growth. - Eurostat projections: a five-year cumulative increase in the share of senior workers is expected to be 2 percentage points or more beyond 2030, which could translate into a five-year cumulative decrease in TFP growth by 1.5 percentage points or more based on Adler et al. (2017). - Comparison with historical episodes: - Baseline TFP projections are in line with Korea’s experience when Korea had a similar level of income per capita (1999) as Poland (2015). - Baseline falls short of Korea’s fastest convergence episode (starting around 1982). Even matching Korea’s 1980s–1990s TFP growth, Poland’s income convergence to EU average would occur sometime beyond 2030. - To achieve income convergence with the EU average by 2030, TFP growth closer to 4 percent per year would be required under the baseline assumptions on working-age population and public investment; simulations use the IMF’s Flexible System of Global Models (FSGM) and standard growth accounting approach. ### Concluding remarks and policy implications - Reinvigorating TFP growth requires closing structural gaps and better leveraging comparative strengths. - Current assessment: - Poland’s long-term average TFP level is relatively high compared to EM peers. - Recent TFP growth slowdown after the GFC is similar to experiences in many EMs. - A protracted slowdown would hinder income convergence toward EU living standards. - With existing domestic structural bottlenecks and limited external support, Poland’s TFP growth will likely remain lower than its pre-crisis level over the medium term. - Priority reform areas to boost TFP: - Infrastructure - Business regulation - Labor market efficiency - R&D/innovation - Preserve and leverage comparative strengths: - Maintain market-friendly institutions, low barriers to trade and investment, limited regulatory complexity and protection of incumbents, and strong human capital quality. - Chapter 4 discusses reform scenarios and quantifies their impact on potential growth. *Source: cr17221 - 10. In what follows, we use the OECD framework to disentangle different factors that (Republic of Poland, IMF staff analysis).* ### References ### cr17221 - References ### References Cited - Adler, G., R. Duval, D. Furceri, S. Celik, K. Koloskova, and M. Poplawski-Ribeiro, April 2017, “Gone with the Headwinds: Global Productivity” and “Technical Appendices I-VIII”, International Monetary Fund Staff Discussion Note 17/04. - Aiyar, S., C. Ebeke, and X. Shao, 2016, “The Impact of Workforce Aging on European productivity”, Working Paper WP/16/238 (International Monetary Fund: Washington, DC). - Albinowski, M., J. Hagemejer, S. Lovo, and G. Varela, 2015, “Sustaining Micro Competitiveness to Ensure Convergence and Macro Resilience of the Polish Economy”, Republic of Poland, Ministry of Finance Working Paper No 21. - Andrle, M., 2017, “Structural and Fiscal Measures to Increase Potential Output in Austria”, Austria Selected Issues, IMF Country Report No. 17/27 (International Monetary Fund: Washington, DC). - Budina, N., 2017, “Spain: Drivers of Firm Productivity Growth”, Spain Selected Issues, IMF Country Report No. 17/24 (International Monetary Fund: Washington, DC). - Ebeke, C., K. Krogulski, and R. Sierhej, 2015, “Raising Productivity Growth in Poland: The Role of Structural Transformation”, Republic of Poland Selected Issues, IMF Country Report No. 15/183. - Egert, B., and P. Gal, December 2016, “The Quantification of Structural Reforms in OECD Countries: A New Framework”, OECD Economics Department Working Papers No. 1354. - Gal, P. N., 2013, “Measuring Total Factor Productivity at the Firm Level Using OECD-ORBIS,” OECD Economics Department Working Paper, No. 1049. - Gopinath, G., Kalemli-Ozcan, S., Karabarbounis L., and Villegas-Sanchez C., forthcoming, “Capital Allocation and Productivity in South Europe,” Quarterly Journal of Economics. - Hsieh, C., and P. J. Klenow, 2009, “Misallocation and Manufacturing TFP in China and India”, the Quarterly Journal of Economics, Vol. CXXIV, Issue 4. - International Monetary Fund, 2013, “German-Central European Supply Chain—Cluster Report”, Country Report No. 13/263 (International Monetary Fund: Washington, DC). - International Monetary Fund, 2015, “Where are We Headed? Perspectives on Potential Output?”, World Economic Outlook Chapter 3. - International Monetary Fund, 2016, “Time for a Supply-side Boost? Macroeconomic Effects of Labor and Product Market Reforms in Advanced Economies”, World Economic Outlook Chapter 3. - International Monetary Fund, 2016, "Central, Eastern and Southeastern: How to Get Back on the Fast Track?", Regional Economic Issues. - International Monetary Fund, 2017, “Roads Less Traveled: Growth in Emerging Market and Developing Economies in a Complicated External Environment”, World Economic Outlook Chapter 2. - Kalemli-Ozcan, S., and others, “How to Construct Nationally Representative Firm-Level Data From the ORBIS Global Database,” NBER Working Paper, No. 21558. - McMillan, M., and D. Rodrik, 2011, “Globalization, Structural Change and Productivity Growth”, NBER Working paper 17143. - OECD, 2015, “The Future of Productivity”, OECD. - Pragyan, D., 2016, “Post-Crisis Adjustment in Latvia: Evidence from Firm Level Data“, Republic of Latvia Selected Issues, Country Report No. 16/172 (International Monetary Fund: Washington, DC). *Appendix material and data descriptions follow in the document.* ### Appendix I — Data Sample (ORBIS) and Filtering Rules - Original ORBIS dataset: over five million firm-year observations for 2000–15. - Adjusted sample after filters and imputations: 128,845 firm-year observations over 2003–13. - Data filtering methodology follows Gal, 2013; Kalemli-Ozcan et al., 2015; and Gopinath et al., forthcoming. - Data imputations to extend coverage follow Gal (2013). Box A.1. Rules for Data Filtering and Imputation - Consolidation of the accounts: Drop firms with consolidated accounts (C1 and C2) if they are also classified with unconsolidated accounts. - Minimum number of employees: Drop firms with less than 3 employees. - Negative values for tangible fixed assets and value added: Drop firms that have negative values of tangible fixed assets or value added in any year. - Data imputation for value added: Fill in the gaps by summing up “Cost of employees” and “EBITDA”. - Data imputation for tangible fixed assets: Fill in the gaps with “Total Fixed Assets”. - Outliers: Drop firms if their capital, labor, or value added (at least one of them) has a growth rate in the top and bottom 0.1 percent of the growth distribution in the respective sector group at least once during the sample period. - Continuity of firm data: Keep firms that have data available for value added, capital stock, and labor for at least 3 consecutive years. This rule is relaxed only for 2012–13 to ensure sufficient observations. Table A.1. Aggregate Sample by Sector (2003–13 totals) - Total firm-year observations: 128,845 - Sector totals (sum across years shown in table): - Agriculture: 2,945 - Manufacturing: 31,340 - Construction: 10,698 - Trade: 47,567 - Market Services: 23,711 - Basic Services: 7,154 - Other Industries: 5,430 Source: ORBIS. ### Appendix I — Comparison of Data Sources (ORBIS vs BACH) - Alternative sector-level data source: BACH database (Banque de France), which gathers Polish data from the Statistical Survey of the Central Statistical Office (GUS) of Poland. - BACH provides sectoral aggregates of firm-level survey data; aggregation is for general purposes, not specifically for measuring TFP. - Coverage comparison for 2005–15: - Number of firms (2005–15): - BACH: 518,896 (firms with unconsolidated accounts only) - ORBIS: 5,155,047 (including both consolidated and unconsolidated) and 538,062 (including firms with unconsolidated accounts only) - Number of employees (2013): - BACH: 5,098,446 (unconsolidated firms only) - ORBIS: 10,403,750 (including both consolidated and unconsolidated firms) and 1,611,412 (including firms with unconsolidated accounts only) - When ORBIS includes firms with consolidated accounts (if unconsolidated accounts are not available), coverage of employment in the adjusted ORBIS sample is broadly comparable to BACH. Comparison Findings (sectoral TFP) - TFP levels have been relatively flat in manufacturing, trade, and market services sectors in both databases. - Basic services: TFP paths from both datasets similar until 2009; diverge afterwards. - Agriculture and Construction: Trends differ materially between databases. - BACH: Agriculture TFP increased the most over time and almost reached manufacturing TFP by 2013. - ORBIS: Agriculture productivity declined, notably after the GFC, and remained the lowest among sectors. - BACH: Construction experienced a large increase in TFP growth before the GFC, followed by a large decline. - ORBIS: Construction productivity was resilient during 2008–09 and largely flat afterwards. - Poland-specific comparison: Albinowski et al. (2015) find manufacturing average annual TFP growth of 5 percent over 2006–13; ORBIS-based estimate using the adjusted dataset shows an average annual manufacturing TFP growth of around 4 percent for the same period. Notes on sector aggregation - Sectors aggregated into 7 broad groups (NACE Rev 2) weighted by number of employees: - Agriculture: A-Agriculture, forestry, and fishing - Manufacturing: C-Manufacturing - Other Industries: B-Mining and quarrying; D-Electricity, gas, steam, and air conditioning supply; E-Water supply, sewerage, waste management and remediation activities - Construction: F-Construction - Trade: G-Wholesale and retail trade; repair of motor vehicles and motorcycles; H-Transportation and storage; I-Accommodation and food service activities - Market services: J-Information and communication; K-Financial and insurance activities; L-Real estate activities; M- Professional, scientific and technical activities; N-Administrative and support service activities - Basic Services: O-Public administration and defense, compulsory social security; P-Education; Q-Human health and social work activities; R-Arts, entertainment and recreation; S-Other service activities ### Long-Run Growth — Baseline and Reform Scenarios (Selected Findings) - Key statement: Shrinking labor supply and slower TFP growth imply a much slower pace of income convergence to advanced Europe going forward. - Illustrative reform scenario (calibrated on historical OECD experiences) suggests improvements in product and labor market regulations, higher infrastructure investment and R&D support could significantly increase Poland’s GDP level by 2030; additional efforts would be required to meet the government’s Responsible Development Strategy. A. Baseline Scenario — Summary Points - Need for fresh assessment of potential output to understand cyclical position and policy impacts. - Recent macro indicators: GDP growth strengthened to 4 percent (y/y) in 2017:Q1 amid record low unemployment and rising core inflation. - Output gap estimates vary across institutions. Methods for estimating potential output (three approaches) - Univariate Hodrick-Prescott (HP) filter: purely statistical; end-of-sample bias; mitigated by using forecasts. - Multivariate filter (MVF): Blagrave et al. (2015); uses inflation, unemployment and output gap relationships (Phillips curve, Okun’s law); incorporates medium-term forecasts to address end-of-sample problem; accuracy depends on assumed relationships and smoothing parameters. - Production function (PF) approach: Follows Podpiera et al. (2017); decomposes potential growth into Capital, Labor and TFP; captures cycles in AHW (average hours worked) and CU (capacity utilization); relies on HP filter to decompose factors. Empirical findings (estimates and decompositions) - All three methods indicate: - Post-crisis slowdown in potential growth. - Slightly positive output gap in 2016. - Estimated potential growth declined from pre-crisis peak of above 5 percent to 2.5–3 percent in 2016. - Output gap: Negative during global financial crisis and European debt crisis; largely closed by 2015; slightly positive opening in 2016. - Decomposition (PF approach) highlights: - Adjusted TFP contribution (adjusted for AHW and CU) dropped from pre-crisis peak of 3 percent to negative in 2016. - Standard TFP contribution (sum of adjusted TFP, AHW and CU) declined from 2.4 percent to around 0.7 percent in 2016. - Reduced labor contribution post-crisis largely reflects negative demographics; working age population declining since 2012. - Employment growth trend picked up moderately since 2012 but average hours worked (AHW) declined after the crisis. - Investment: Average growth of capital stock fluctuated around 3 percent; capacity utilization (CU) has been rising quickly and approaching pre-crisis peak. - Capital accumulation has become the main growth driver, supported by rising CU. Figures and empirical indicators cited - Figure references include cycles and trends for: Output gap (percent of potential GDP), Growth/Unemployment/Inflation (percent), Capacity Utilization (percent, industry survey), Employment Growth (percent, y/y), Average Hours Worked (Hours per week), Investment and Capital Stock (percent, y/y), and Contributions to Potential Growth (percent). *Italic: Source — cr17221, “References” and Appendix I, CR17221 PDF (IMF).* ### 5. Over the medium term, on current policies, potential growth will likely remain below ### 5. Over the medium term, on current policies, potential growth will likely remain below ### Baseline outlook - Baseline potential growth is projected to stabilize around 2.7–3.0 percent. - This baseline is well below the pre-crisis average. - Drivers: - Unfavorable demographics will become more pronounced. - TFP growth is expected to recover somewhat reflecting an improvement in the external environment. - As investment gradually picks up, the contribution from capital accumulation will increase. ### Reform scenarios: scope and targeted areas - Four main reform areas analyzed: - Product market regulation (PMR): deregulation of network industries (gas, airlines and road sectors), easing administrative burdens for startups, changes to regulations of retail and professional services — expected to boost TFP and private investment. - Labor market reforms: active labor market policies (ALMP), increasing spending on childcare and early education, relaxing employment protection — expected to raise labor force participation, mobility, and reduce skills mismatches. - Infrastructure: increasing infrastructure investment to boost TFP and private investment. - R&D/innovation: increasing funding for R&D to boost R&D activity and innovation. - Three reform scenarios: - Scenario 1: calibrated to past performance of Poland and other OECD countries (described as the most realistic). - Scenario 2: close reform gaps by half relative to the current OECD average by 2030 (except infrastructure). - Scenario 3: fully close reform gaps relative to the current OECD average by 2030 (except infrastructure). - Infrastructure gaps in all three scenarios are closed by 26 to 28 percent relative to the EU average by 2030 (calculated as a residual given fiscal constraints). ### Scenario-specific reform assumptions (selected quantitative assumptions preserved exactly as in source) - PMR sub-indices: - Closing gaps relative to the current OECD average by around 25 percent in the gas sector, by 40 percent in the airlines and road sectors, and by 45 percent in the professional services and retail distribution would each imply a 0.4 points decline in the relevant PMR sub-index (roughly similar to average reform effort of other OECD countries during 2008-2013). - Administrative burdens on startups: a decline of 0.71 points in this PMR sub-index would allow Poland to fully close the gap relative to the current OECD average. - Labor market: - ALMPs: increase public expenditures on ALMPs from 10.5 percent to 14.8 percent of the GDP per capita (an increase of 4.26 pp to fully close the gap). - Childcare and early education: a realistic target is to increase public expenditures by 0.18 percentage points (close half of the gap relative to the OECD average); past change was 0.02 percentage points during 2008–13 while best performer increased by 0.73 percentage points. - Employment protection: lower the employment protection index by 0.25 points (i.e., below the OECD average). - R&D: - Poland has doubled direct public funding of business R&D between 2008 and 2013. Poland could aim to maintain the same pace to reach the OECD average (increase by 0.04 pp to fully close the gap relative to the current OECD average). - Infrastructure: - Boosting the infrastructure investment-to-GDP ratio by 0.36 percentage points (annual average during 2017–30, relative to the baseline) would allow Poland to close the infrastructure gap (proxied by public capital stock-to-GDP) relative to the EU average by around 27 percent. ### Modeling approach and elasticities - Impact assessment uses a semi-structural general equilibrium model calibrated for Poland (a variant of the IMF’s Flexible System of Global Models (FSGM)). - Mapping of reforms into macro variables: - PMR reforms and increased business R&D funding → shocks to TFP. - Labor market reforms → shocks to aggregate labor force participation (LFP) rate. - Infrastructure investment → shock to public investment. - Private investment responds endogenously to higher TFP. - Elasticities used to map policies to output: - ALMPs elasticities from Barnes et al. (2013). - Childcare and early education elasticities from Thevenon (2013). - Impact of increased government spending on business R&D from April 2016 Fiscal Monitor, Chapter 2. - Phasing and fiscal interactions: - All reforms except infrastructure are phased in over ten years; agents respond as reforms are phased in. - Additional infrastructure spending increases gradually between 2017 and 2030, sized by available fiscal space each year. - The impact of fiscally costly reforms on output includes the macroeconomic effects of the required increase in deficit financing. ### Quantitative results and estimated gains by 2030 - Combined impact on GDP level by 2030 under scenarios: - Scenario based on past experiences of Poland and best performers: total impact about 7.0 percent (combined of all reforms). - Scenario closing half of the reform gaps: about 6.8 percent. - Scenario fully closing reform gaps: around 11.4 percent. - In the realistic (past-experience) scenario, individual contributions to GDP level by 2030 (pp increase) include: - Relaxing administrative burdens on startups: 1.39 - Relaxing regulations on professional services and retail: 0.83 - Relaxing regulations on gas sector: 0.75 - Relaxing regulations on airlines and road sectors: 0.74 - Relaxing employment protection: 0.78 - Increasing infrastructure spending: 1.17 (with average impact on government deficit/GDP of 0.36 pp per year) - Increasing public spending on childcare services: 0.49 (with govt deficit/GDP impact of 0.11 pp per year) - Increasing direct public funding of business R&D: 0.49 (with govt deficit/GDP impact of 0.03 pp per year) - Increasing public spending on ALMP: 0.23 (with govt deficit/GDP impact of 0.13 pp per year) - Of total combined impact in scenario based on past experience: - Combined impact of all reforms: 7.01 (impact on government deficit/GDP: 0.66 pp increase, avg. per year) - Of which fiscally costly reforms account for 2.37 (impact on government deficit/GDP: 2.21 and 2.33 reported in table variants). - In the fully closing-gaps scenario, fiscally costly reforms utilize the entire available fiscal space; infrastructure closing is limited to about 27 percent relative to EU average given fiscal rules and debt considerations. ### Prioritization and policy implications - Prioritization should consider: potential impact on growth, available fiscal space, and the cyclical position of the economy. - PMR reforms (no fiscal outlays) generate the highest long-run output impact and should be prioritized when fiscal space is limited. - Direct public funding for business R&D is estimated to have the largest impact on potential output per percentage point increase in government deficit/GDP. - With limited fiscal space and fiscal rules to respect (including EDP and debt limits), fiscally costly reforms could initially be financed by allocated EU funds. - The current favorable cyclical position supports undertaking structural reforms, including those with modest near-term contractionary effects (e.g., relaxing employment protection) that yield sizable long-term gains. ### Relation to Responsible Development Strategy (RDS) and convergence - RDS overarching goal: Poland to converge with the EU average per capita income by 2030. - Staff estimates suggest reform scenarios focusing on PMR, raising labor force participation, upgrading infrastructure and increasing R&D support could lift Poland’s output level by about 7–11 percent by 2030. - This would cover about 1/3 of the distance to the RDS convergence objectives; reaching full convergence by 2030 would require greater reform efforts and progress in additional areas (e.g., human capital development, institutions/government efficiency). _Italic: Source: IMF staff calculations and analysis as presented in the provided content unit._ ### 25.8 percent ### 25.8 percent ### Scenarios and assumptions (by 2030) - Current Level: 25.8 percent - Past Experience (2008-2013) - Impacts on Potential Output by 2030 (% increase): 1.40 - Average Impact on government deficit/GDP (pp increase/year; over 2017-2030): 0.43 - Scenario 1: Closing the gaps based on past experience of Poland and best performers - Close the infrastructure gap relative to EU average by 27.8 percent - Impacts on Potential Output by 2030 (% increase): 0.78 - Average Impact on government deficit/GDP (pp increase/year; over 2017-2030): 0.25 - Scenario 2: Closing half of the reform gaps relative to the OECD average by 2030 - A combined impact of all reforms - Impacts on Potential Output by 2030 (% increase): 7.01 and 6.84 (two reported figures) - Average Impact on government deficit/GDP (pp increase/year; over 2017-2030): 0.66 (reported for both 7.01 and 6.84) - Of which fiscally costly reforms: 2.37 - Scenario 3: Closing the reform gaps relative to the OECD average fully by 2030 - Impacts on Potential Output by 2030 (% increase): 11.41 - Average Impact on government deficit/GDP (pp increase/year; over 2017-2030): 0.66 - Additional fiscally costly reform figures reported: 2.21 and 2.33 ### Key figures summary - Baseline share/state: 25.8 percent - Infrastructure gap to close relative to EU average in Scenario 1: 27.8 percent - Reported impacts on potential output by 2030 across scenarios: 1.40; 0.78; 7.01; 6.84; 11.41 - Reported average impact on government deficit/GDP (pp increase/year; over 2017-2030): 0.43; 0.25; 0.66 - Reported fiscally costly reform magnitudes: 2.37; 2.21; 2.33 ### Notes on presentation - Figures are presented as reported in the source, corresponding to columns labeled "Current Level", "Past Experience (2008-2013)", "Scenario 1", "Scenario 2", and "Scenario 3". - "A combined impact of all reforms" and "of which fiscally costly reforms" are distinct categories reported within the scenario matrix. *cr17221 - 25.8 percent* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17221.pdf_