## 1. Ex-Post Analysis of Potential Growth Projected in 2017 ## Source details **Canonical URL:** [1. Ex-Post Analysis of Potential Growth Projected in 2017](https://www.imf.org/-/media/files/publications/cr/2022/english/1polea2022002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1polea2022002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1polea2022002.pdf.json) --- ### Introduction - Poland achieved rapid post-transition convergence to EU income levels: PPP-adjusted GDP per capita rose from 43 percent to 72 percent of the EU average between 1995 and 2019. - The pandemic triggered Poland’s first recession in three decades; deep recessions typically produce scarring, but the shape of the recession and policy response matter for scarring outcomes. - Core questions: - How will medium-term potential growth compare to its pre-pandemic level? - To what extent should scarring to output be expected after the pandemic-induced recession? - Prepared by William Lindquist; contributions from Karim Foda; comments from the National Bank of Poland and Polish Ministry of Finance noted. ### Pre-Pandemic Potential Growth — Ex-Post Comparison with 2017 Projections - Findings: - IMF (2017) production-function estimate: potential growth likely in a range of 2.7 to 3.0 percent over 2017–22. - IMF (2017) projected average potential growth of 2.9 percent for 2017–19. - Actual GDP growth over 2017–19 averaged 5.0 percent. - New analysis estimates potential growth of 3.7 percent over 2017–19, indicating that earlier potential was under-projected. - By 2019, an estimated positive output gap of 2.7 percent of GDP had developed as output expanded above potential. - Drivers of underestimation in IMF (2017): - Total factor productivity (TFP) growth outpaced earlier projections. - Trend capital stock (investment) growth exceeded IMF (2017) estimates. - Labor contribution stronger than projected due to an unanticipated trend decline in unemployment. ### Assessment of Post-Pandemic Potential Growth — Factors of Production - Overview: - Analysis uses an expanded sample and examines implications of the pandemic and policy responses for labor, capital, and productivity. - The pandemic’s sharp but short-lived output drop and large policy support are central in limiting scarring. - Labor supply — observations and projections: - Employment: - Employment declined by 2 percent in Q2:2020 but “quickly recovered,” with pre-pandemic employment regained by the beginning of 2021. - The employment decline was much less severe than during the Global Financial Crisis. - Maintenance of employment relationships attributed to government aid conditional on maintaining employment and pre-pandemic labor market tightness encouraging labor hoarding. - Labor force participation: - The pandemic produced a modest decline in labor force participation of about 0.5 p.p. that was quickly reversed. - Participation continued to increase in 2021, but a change in the labor force survey methodology produced a series break, complicating interpretation. - The pandemic does not appear to have lowered labor force participation; further increases are hard to anticipate. - Unemployment and demographics: - The unemployment rate fell from nearly 10 percent in 2010 to around 3 percent currently. - The working-age population peaked in the early 2010s and will continue to shrink over the medium term. - Demographics and limited scope for further unemployment decline will constrain labor supply going forward. - The labor contribution to potential growth is projected to turn negative around 2022. - Foreign workers: - NBP estimates the effective number of foreign workers in Poland, mostly from Ukraine, has increased to well over 1 million, with a particularly sharp increase over the past few years. - Foreign workers were not considered in IMF (2017); IMF staff estimate they contributed on average 0.3 p.p. to potential growth over 2016–19. - Some foreign workers left Poland at the pandemic onset but returned; NBP estimates the effective number may level off over 2022–23. - The analysis assumes foreign workers will not contribute further to growth over the medium term, though upside risk exists. - Capital stock and investment: - NBP October 2021 Quick Monitoring Survey: investment optimism near the peak of the last investment cycle in 2018 with strong sentiment in industry, large firms, and exporters. - NFC net worth increased during the pandemic, driven by increases in currency and deposits linked to partially forgivable liquidity loans from the Polish Development Fund (PFR). - Strengthening of NFC balance sheets during the pandemic contrasts with the post-Global Financial Crisis period when net worth deteriorated as NFCs took on more debt. - Implication: NFCs are well positioned to support future investment. - Total factor productivity (TFP): - TFP growth contributed to the underestimation of potential in 2017; trend TFP growth over 2017–19 is estimated to have outpaced IMF (2017) projections. - The pandemic and structural shifts (e.g., changes in the nature of work and sectoral composition) create uncertainty about future productivity trends. ### Risks, Scarring, and Policy Implications - Scarring risk: - Deep recessions typically cause scarring by damaging factors of production, but the pandemic’s short-lived output drop and extensive policy support likely limited scarring in Poland. - Maintenance of employment relationships and strengthened corporate balance sheets mitigate scarring risk. - Downside risks: - Unfavorable demographics (shrinking working-age population) and limited further declines in unemployment pose downside pressure on labor supply and potential growth. - If foreign worker inflows do not continue or reverse, labor contribution may be more negative. - Uncertainty about TFP trajectory given structural changes could reduce potential growth. - Upside risks / supportive factors: - Continued strong private investment sentiment and improved NFC balance sheets support capital accumulation and medium-term potential growth. - Increased public investment, including funds from Next Generation EU grants, can bolster potential growth if effectively deployed. - Policy levers (implied): - Sustain labor force participation and facilitate productive foreign workforce participation to mitigate demographic headwinds. - Support private and public investment, and boost TFP via innovation, reallocation, digitalization, and skills. ### Key Quantitative Findings and Projections (selected) - IMF (2017) potential growth range for 2017–22: 2.7 to 3.0 percent. - IMF (2017) projected average potential growth for 2017–19: 2.9 percent. - Actual GDP growth averaged over 2017–19: 5.0 percent. - New estimated potential growth over 2017–19: 3.7 percent. - Positive output gap by 2019: 2.7 percent of GDP. - Employment decline in Q2:2020: 2 percent (recovered by beginning of 2021). - Labor force participation pandemic decline: about 0.5 p.p. (quickly reversed). - Unemployment rate: nearly 10 percent in 2010 → around 3 percent currently. - Estimated contribution of foreign workers to potential growth over 2016–19: 0.3 p.p. - Effective number of foreign workers: estimated well over 1 million (NBP 2021). - Labor contribution to potential growth projected to turn negative around 2022. ### Methodology note — production function approach - A standard Cobb-Douglas production function is used: Yt = At (Kt)^(1−α) (Lt AHWt)^α. - K denotes the capital stock; historical capital stock data are from the European Commission’s AMECO database (real net capital stock). Projections use the perpetual inventory method: Kt = (1−ρ) Kt−1 + It. - Lt refers to total employment, separated by domestic employment and the effective number of foreign workers (NBP estimate). Trend employment is calculated using an HP filter; the labor contribution is broken into: (1) trend domestic economically active population; (2) trend effective foreign workers; (3) trend unemployment rate. - AHWt refers to average hours worked. - α (labor share) is set at 0.42. --- ### 16. Looking beyond a cyclical investment rebound ### Next Generation EU grants and investment dynamics - Approval of Poland’s National Recovery Plan would unlock some 4½ percent of GDP in grants, to be spent over 2022–26, which will increase public and private investment. - Baseline projections assume funds will begin to flow later in 2022, with the peak impact on growth experienced in 2023. - Public investment would be elevated through 2026. ### Capital accumulation and contribution to potential growth - Contribution of capital accumulation to growth is projected to rebound to pre-pandemic levels over the medium term as private investment recovers and public investment (linked to Next Generation EU projects) increases. - Compared to the January 2020 WEO scenario, the contribution of capital would be stronger over the medium term, boosted by Next Generation EU investments and a rebound in private investment from the recession. - Projected path: - Potential growth would average 3.3 percent over 2022–26, compared to the 3.7 percent estimated over 2017–19. - Capital stock growth and TFP are projected to remain strong; unless the number of foreign workers continues to increase, the contribution of labor will soon turn negative. ### Total Factor Productivity (TFP) - TFP growth accelerated over 2017–19 after a slowdown following the Global Financial Crisis. - Separating out the estimated contribution of foreign workers to potential growth (0.3 p.p. on average over 2015–19), TFP still made a solid contribution to potential growth before the pandemic. - Baseline projections for TFP: - TFP contribution to potential growth would increase slightly above pre-pandemic levels by 2023 before moderating over the medium term. - Even if this path materializes, the contribution of TFP would remain well below levels observed in the early 2000s. - Factors that could support stronger TFP growth: - Increased acceptance of remote and flexible work. - Demand for remotely provided business and IT services. - Potential nearshoring and reshoring increasing integration in global value chains. - Increased automation and robot adoption in response to labor supply shortages. ### Upside and downside risks to potential growth - Upside risks: - Continued arrivals of foreign workers from Ukraine and other sources. - Reverse migration of Poles abroad boosting labor supply. - PIT reform reducing the labor tax wedge at lower income levels and potentially increasing participation. - Significant reshoring or global supply chain shifts increasing investment and TFP. - Stronger-than-expected gains from remote work or automation. - Increased public investment (including Next Generation EU grants) improving infrastructure quality and productivity. - Downside risks: - Significant delay in implementation of Next Generation EU projects lowering investment growth and future productivity gains. - Worst-case legal scenarios related to foreign exchange mortgages damaging banks’ balance sheets and reducing private credit and investment. - Need for large-scale labor reallocation if contact-intensive sectors fail to return to pre-pandemic activity; near-term productivity declines during transitions and long-term drag if workers remain in low-productivity sectors. - Possible higher costs of the energy transition slowing TFP growth. ### Scarring after the pandemic recession - Definition: scarring is a persistent difference between pre-recession output projections and output subsequently realized over the medium term. - Baseline projections: - The path of output is projected to converge to pre-pandemic projections (January 2020 WEO) in 2024. - Output in 2026 would be 0.7 percent above the early projections (January 2020 WEO). - Reassessment of January 2020 WEO assumptions: - January 2020 WEO projected a slowdown in growth to 3.1 percent in 2020 and to 2.5 percent over the medium term. - Ex-post analysis: those projections implied sharp declines in capital accumulation and especially TFP growth relative to immediately prior years. - A more realistic early-2020 potential growth path would have shown a slow decline from around 3.8 percent in 2019 to just over 3 percent over the medium term. - Comparative outcomes: - Compared to the actual January 2020 WEO projections, output is projected to be about 0.7 percent higher in 2026 in the current projections. - Compared with the alternative early 2020 path, the level of output would be about 0.4 percent lower in 2026. - Conclusion: under the baseline projections, there would be only a minimal amount of scarring from the pandemic. - Poland’s projected experience vs typical post-pandemic losses: - The 2020 recession depth was typical of modern pandemics/epidemics in EMDEs, but the 2021 rebound and staff projections suggest a much stronger recovery than the usual post-pandemic experience. - Staff projections indicate little to no scarring to output, driven mainly by a strong recovery of the capital stock. - Strong policy support and Next Generation EU grants are projected to boost investment significantly and help drive the capital stock recovery. ### Policies to support potential growth and convergence (implied) - Expedite and ensure timely implementation of Next Generation EU projects to secure projected investment and productivity gains. - Maintain policies that support labor force participation and manage foreign labor inflows. - Support digital and automation adoption to harness potential TFP gains. - Preserve financial sector health to ensure availability of financing for private investment. --- ### 35. Policies can help support potential growth to allow continued income convergence ### Long-term growth and demographic challenge - Beyond a projected overall decline in population, a shrinking share of the working age population poses a long-term challenge. - Several factors that offset this trend—such as the large increase in foreign workers—are less certain to recur in coming years. - EU transfers have supported investment since accession, but business investment remains relatively low. - While strong TFP growth continues in the baseline projections, the post-pandemic outlook is subject to considerable uncertainty. ### Labor supply — findings and policy recommendations - Findings: - Domestic labor force participation has increased in recent years, but pockets of untapped labor remain. - Supply of labor from neighboring countries such as Ukraine may slow. - Policy recommendations: - Maximize labor supply by encouraging greater labor force participation. - The reduction in the labor tax wedge as part of the recent PIT reform may provide incentives for greater participation at lower income levels. - Support those with caretaking responsibilities, especially women, including through support for services such as childcare. - Consider reversing the previous reduction in the retirement age to increase participation of older workers. - Consider opening Poland to additional sources of immigration. - Relax restrictions on foreign workers’ periods of employment to boost labor supply. ### Investment — findings and policy recommendations - Findings: - While investment is projected to recover over the medium term, private investment is not high in international context. - Business groups point to shortages of skilled labor as an important impediment to higher corporate investment. - The cost of emissions has made access to clean energy an increasingly important factor in companies’ FDI decisions. - The banking sector remains an important financing source of private investment. - Policy recommendations: - Develop a long-term financing strategy for the energy transition to improve access to clean energy for firms. - Proactively encourage resolution of foreign exchange mortgage legal risks. - Redesign the bank asset tax to reduce banks’ incentive to hold Treasury securities at the possible expense of private credit. - Maximize the efficiency of public investment by improving information flows across public entities to facilitate a more collaborative infrastructure framework with greater complementarities of infrastructure projects. ### Total Factor Productivity (TFP) — findings and policy recommendations - Findings: - Strong TFP growth is assumed in baseline projections but faces considerable uncertainty. - Policy recommendations: - Pursue active labor market policies, including training and upskilling, with a special focus on digital skills to facilitate reallocation of labor to higher-productivity activities. - Consider policies to attract skilled, high productivity migrants. - Promote policies associated with GVC participation, including the quality of infrastructure and institutions, and educational quality. - Consider further incentives for private companies to invest in R&D and innovation. --- ### Decarbonization, Energy Policy 2040, and Fit for 55 implications ### Decarbonization — overview and key findings - Since the 1990 reference date for the Paris Agreement, GHG emissions have declined by 16 percent, while size of the economy more than tripled. - Poland accounts for 0.9 percent of global emissions. - Power sector is the biggest source of emissions and remains heavily reliant on coal; emissions intensity is almost three times above the EU average. - Coal heating accounts for a quarter of total energy consumption by Polish households. - Transport sector emissions have consistently increased, driven by an increase in passenger cars and deficient public transport. - Manufacturing accounts for nearly a fifth of gross value added; manufacturing emissions intensity declined, yielding 37 percent reduction in emissions intensity of output from 2010. - Poland has a relatively high share of emissions-intensive industries, making it vulnerable to carbon leakage. ### Fit for 55 — main proposed changes and expected effects for Poland - Proposed changes: - Review of the ETS: accelerate annual allowances reduction from 1.74 percent to 2.2 percent. - Free allocation for industries vulnerable to carbon leakage phased out after 2026 and replaced by a Carbon Border Adjustment Mechanism. - Additional financing from the Modernization Fund for lower-income states, including Poland. - Establish a new ETS for buildings and road transport; Social Climate Fund to mitigate social implications. - Update Effort Sharing Regulation: increase EU-wide target for non-ETS sectors from 29 to 40 percent by 2030 compared to 2005 levels. - Tighten targets for renewable energy share in consumption: proposed increase from 32 percent to 40 percent by 2030. - Phase-out of new ICE vehicle sales from 2035. - Expected effects for Poland: - Higher CO2 prices will affect the energy market; resources to finance transformation would increase through higher allowance auction revenues and reallocation via the Modernization Fund and the Innovation Fund. - New ETS for buildings and road transport would strongly affect Poland because it would cover currently exempted small heat generators, many relying on coal. - A large fleet of relatively old and less efficient passenger cars will make a new carbon pricing scheme costly for citizens. - Phase-out of ICE cars creates an opportunity given Poland’s role in the electromobility supply chain, but consumer adoption will take time because of the pattern of importing used cars. ### Energy Policy 2040 (adopted February 2021) - Targets and pathways: - Cut GHG emissions by at least 30 percent by 2030. - Reduce the share of coal-fueled electricity to below 56 percent by 2030. - Decarbonization initially based on renewable energy (mostly wind) and supplemented with gas; gradual introduction of nuclear power in the 2040s. - Energy security and market measures: - New investment in gas and oil storage, new pipelines, and enhanced LNG import capacity. - Construction of new gas-fueled power blocks to ensure reliable electricity supply; fossil fuels framed as transitional. - Market-based tools: dynamic energy pricing, greater role for distribution system operators, smart-grid integrated meters, increased number of individual power sources. - Energy poverty: - Share of people affected expected to decline from 9.3 percent in 2019 to 6 percent by 2030. - Policy instruments: - State programs for decarbonization (building insulation subsidies, replacement of coal furnaces, green public transport). - Subsidies to individual PV installations supported rapid capacity expansion. - Electromobility scheme expanded to firms and institutions. - Recommendation: redesign tax incentives toward cleaner fuels and technologies; consider carbon tax with proceeds used to support vulnerable households. - ETS role: - ETS remains the most impactful decarbonization mechanism. - Sale of allowances allocated to Poland generated over 1 percent of GDP in 2021, boosted by carryover from ETS Phase III (2013–20). - Historically, Poland spent about half of ETS proceeds on climate action (in line with ETS directive minimum requirements). - A proposed Fund for Energy Transformation financed from ETS proceeds is expected to increase that share and support transition in the power sector, including financing of nuclear power. ### Investment and financing needs and sources - Energy Policy 2040 envisages investment outlays equivalent to nearly 35 percent of 2021 GDP spread over the present decade, with almost one half of these outlays in the energy sector. - Available EU support (percentages of 2021 GDP): - multiannual EU funds framework: 3 percent, - Next Generation EU funds: 2½ percent, - redistribution of ETS revenues: 1½ percent, - on top of domestic ETS revenues: 4½ percent. - BAU vs Energy transition scenarios (Plan for Energy and Climate estimates): - BAU scenario investment outlays in the 2020s: 30 percent of 2021 GDP. - Energy transition scenario outlays: 35 percent of 2021 GDP. - Multiple financing sources require skillful management to cover priorities while avoiding overlaps; some outlays may not be eligible for preferential financing and some will involve state participation (e.g., nuclear). ### Challenges for the energy sector (Box 2) - Risks and indicators: - Ageing power plants and infrastructure increase risk of outages. - Effective capacity of main producers expected to drop by 20 percent by the end of the 2020s (Energy Regulator (URE) information). - Grid operator warned that some 4GW of additional capacity will be needed compared to current plans to ensure reliability later this decade. - Drivers of decommissioning: - Most power plants built almost 40 years ago. - CO2 emissions prices render coal-fueled generation increasingly costly. - High-emitting plants will no longer be able to participate in the capacity market from 2026 per EU regulations. - Timing of nuclear power: - First nuclear block envisaged to be connected only in 2033; government considering new support scheme for coal power in the interim. - Needed mitigation actions: - Acceleration in renewable energy capacity. - Investment in grid for demand management (dynamic pricing) and higher import capacity. ### Social dimension and just transition - Social impacts: - High incidence of energy poverty, especially among older people. - Less affluent households in older buildings heated with coal face higher transition costs. - Policy responses: - Financial support for the most vulnerable households. - Development of district heating and improved clean public transportation to reduce private car use. - Subsidies to electric vehicles will primarily benefit those who can afford a new car. - Transition in mining regions: - Government memorandum with coal mining trade unions in April 2021 includes coal phase-down by 2049 and provisions on financing of mines and wage indexation. - Conditions to mitigate transition better than in the 1990s: tight labor market, high FDI penetration, small share of mining in total employment. - Lignite mining areas are less diversified and require special attention. - Poland committed to phase-down coal mining by the 2040s; a firmer phase-out date would facilitate planning. ### Regulatory framework and governance - Need for a predictable regulatory environment that considers multiple stakeholders and avoids unexpected regulatory obstacles to allow long-term planning. - Government control over majority of energy companies and coal mines could facilitate implementation but may give rise to conflicts of interest. - Transparency and appropriate consultation are key to ensure credible regulatory change and maintain level-playing field for private investors. ### Conclusions and policy recommendations on decarbonization - Authorities should consider setting a carbon neutrality target date. - Amend the decarbonization strategy to reflect evolving EU climate policy and carbon market prospects. - Review regulatory framework to ensure a level playing field between state-owned companies and private investors to boost investment. - Prepare a comprehensive long-term financing strategy given decarbonization costs (about 35 percent of 2021 GDP in 2020s) and potential need for large fiscal spending and state guarantees. - Consider carbon tax and rebates to incentivize private sector decarbonization while protecting the most vulnerable households. - Deploy EU resources to mitigate fiscal and external balance impacts and manage multiple financing sources and state participation carefully to avoid overlaps and ensure coverage of priority areas. *Italic: Source — IMF staff chapter “1. Ex-Post Analysis of Potential Growth Projected in 2017” and related sections (Republic of Poland), February 2, 2022.* ### 1. Ex-Post Analysis of Potential Growth Projected in 2017 ________________________________ 5 ### 1. Ex-Post Analysis of Potential Growth Projected in 2017 ### Introduction - Poland achieved rapid post-transition convergence to EU income levels over the last thirty years; PPP-adjusted GDP per capita rose from 43 percent to 72 percent of the EU average between 1995 and 2019. - The pandemic triggered Poland’s first recession in three decades; deep recessions typically produce scarring (permanent output losses), but the shape of the recession and policy response matter for scarring outcomes. - Two core questions addressed: - How will medium-term potential growth compare to its pre-pandemic level? - To what extent should scarring to output be expected after the pandemic-induced recession? *Prepared by William Lindquist; contributions from Karim Foda; comments from the National Bank of Poland and Polish Ministry of Finance noted.* ### Pre-Pandemic Potential Growth — Ex-Post Comparison with 2017 Projections - IMF (2017) production-function estimate: potential growth likely in a range of 2.7 to 3.0 percent over 2017–22. - IMF (2017) projected average potential growth of 2.9 percent for 2017–19. - Actual GDP growth over 2017–19 averaged 5.0 percent. - New analysis estimates potential growth of 3.7 percent over 2017–19, indicating that earlier potential was under-projected. - By 2019, an estimated positive output gap of 2.7 percent of GDP had developed as output expanded above potential. - Key contributors to the underestimation in 2017: - Total factor productivity (TFP) growth outpaced earlier projections. - Trend capital stock (investment) growth exceeded IMF (2017) estimates. - Labor contribution stronger than projected due to an unanticipated trend decline in unemployment. ### Assessment of Post-Pandemic Potential Growth — Factors of Production - Overview: - Analysis uses an expanded sample and examines implications of the pandemic and policy responses for labor, capital, and productivity. - Recessions typically harm factors of production, but policies can mitigate scarring; the pandemic’s unique, sharp but short-lived output drop and large policy support are central considerations. - Labor supply: observations and projections - Employment: - Employment declined by 2 percent in Q2:2020 but “quickly recovered,” with pre-pandemic employment regained by the beginning of 2021. - The employment decline was much less severe than during the Global Financial Crisis. - Maintenance of employment relationships attributed to government aid conditional on maintaining employment and pre-pandemic labor market tightness encouraging labor hoarding. - Labor force participation: - The pandemic produced a modest decline in labor force participation of about 0.5 p.p. that was quickly reversed. - Participation continued to increase in 2021, but a change in the labor force survey methodology produced a series break, complicating interpretation. - The pandemic does not appear to have lowered labor force participation; further increases are hard to anticipate. - Unemployment and demographics: - The unemployment rate fell from nearly 10 percent in 2010 to around 3 percent currently. - The working-age population peaked in the early 2010s and will continue to shrink over the medium term. - Demographics and limited scope for further unemployment decline will constrain labor supply going forward. - The labor contribution to potential growth is projected to turn negative around 2022. - Foreign workers: - The National Bank of Poland (NBP) estimates the effective number of foreign workers in Poland, mostly from Ukraine, has increased to well over 1 million, with a particularly sharp increase over the past few years. - Foreign workers were not considered in IMF (2017); IMF staff estimate they contributed on average 0.3 p.p. to potential growth over 2016–19. - Some foreign workers left Poland at the pandemic onset but returned; NBP estimates the effective number may level off over 2022–23. - The analysis assumes foreign workers will not contribute further to growth over the medium term, though upside risk exists. - Labor contribution — comparative notes - Compared to pre-pandemic projections (January 2020 WEO), labor supply is now projected to be a smaller drag on near-term growth because of lower assumed trend unemployment; projections converge over the medium term. - Capital stock and investment - Survey signals: - NBP October 2021 Quick Monitoring Survey: investment optimism near the peak of the last investment cycle in 2018 with strong sentiment in industry, large firms, and exporters; strong interest in new investments reported. - Non-financial corporate (NFC) balance sheets: - NFC net worth increased during the pandemic, driven by increases in currency and deposits linked to partially forgivable liquidity loans from the Polish Development Fund (PFR). - Strengthening of NFC balance sheets during the pandemic contrasts with the post-Global Financial Crisis period when net worth deteriorated as NFCs took on more debt. - Implication: NFCs are well positioned to support future investment. - Total factor productivity (TFP) - TFP growth contributed to the underestimation of potential in 2017; trend TFP growth over 2017–19 is estimated to have outpaced IMF (2017) projections. - The pandemic and structural shifts (e.g., changes in the nature of work and sectoral composition) create uncertainty about future productivity trends. ### Risks, Scarring, and Policy Implications - Scarring risk: - Deep recessions typically cause scarring (permanent output losses) by damaging factors of production, but the pandemic’s short-lived output drop and extensive policy support likely limited scarring in Poland. - The maintenance of employment relationships and strengthened corporate balance sheets are factors that mitigate scarring risk. - Downside risks: - Unfavorable demographics (shrinking working-age population) and limited further declines in unemployment pose downside pressure on labor supply and potential growth. - If foreign worker inflows do not continue or reverse, labor contribution may be more negative. - Uncertainty about TFP trajectory given structural changes could reduce potential growth. - Upside risks / supportive factors: - Continued strong private investment sentiment and improved NFC balance sheets support capital accumulation and medium-term potential growth. - Increased public investment, including funds from Next Generation EU grants, can bolster potential growth if effectively deployed. - Policy levers (implied): - Policies that sustain labor force participation and facilitate productive foreign workforce participation can help mitigate demographic headwinds. - Policies that support private and public investment, and that boost TFP (innovation, reallocation, digitalization, skills) can raise medium-term potential growth. ### Key Quantitative Findings and Projections (selected) - IMF (2017) potential growth range for 2017–22: 2.7 to 3.0 percent. - IMF (2017) projected average potential growth for 2017–19: 2.9 percent. - Actual GDP growth averaged over 2017–19: 5.0 percent. - New estimated potential growth over 2017–19: 3.7 percent. - Positive output gap by 2019: 2.7 percent of GDP. - Employment decline in Q2:2020: 2 percent (recovered by beginning of 2021). - Labor force participation pandemic decline: about 0.5 p.p. (quickly reversed). - Unemployment rate: nearly 10 percent in 2010 → around 3 percent currently. - Estimated contribution of foreign workers to potential growth over 2016–19: 0.3 p.p. - Effective number of foreign workers: estimated well over 1 million (NBP 2021). - Labor contribution to potential growth projected to turn negative around 2022. _Italic: Source — IMF staff chapter “1. Ex-Post Analysis of Potential Growth Projected in 2017” (Republic of Poland), February 2, 2022._ ### 16. Looking beyond a cyclical investment ### 16. Looking beyond a cyclical investment rebound ### Next Generation EU grants and investment dynamics - Approval of Poland’s National Recovery Plan would unlock some 4½ percent of GDP in grants, to be spent over 2022–26, which will increase public and private investment. - Baseline projections assume funds will begin to flow later in 2022, with the peak impact on growth experienced in 2023. - Public investment would be elevated through 2026. ### Capital accumulation and contribution to potential growth - The contribution of capital accumulation to growth is projected to rebound to pre-pandemic levels over the medium term as private investment recovers and public investment (linked to Next Generation EU projects) increases. - Compared to the January 2020 WEO scenario, the contribution of capital would be stronger over the medium term, boosted by Next Generation EU investments and a rebound in private investment from the recession. - Projected path highlights: - Potential growth would average 3.3 percent over 2022–26, compared to the 3.7 percent estimated over 2017–19. - Capital stock growth and TFP are projected to remain strong; unless the number of foreign workers continues to increase, the contribution of labor will soon turn negative. ### Total Factor Productivity (TFP) - TFP growth accelerated over 2017–19 after a slowdown following the Global Financial Crisis. - Separating out the estimated contribution of foreign workers to potential growth (0.3 p.p. on average over 2015–19), TFP still made a solid contribution to potential growth before the pandemic. - Baseline projections for TFP: - TFP contribution to potential growth would increase slightly above pre-pandemic levels by 2023 before moderating over the medium term. - Even if this path materializes, the contribution of TFP would remain well below levels observed in the early 2000s. - Factors that could support stronger TFP growth: - Increased acceptance of remote and flexible work. - Demand for remotely provided business and IT services. - Potential nearshoring and reshoring increasing integration in global value chains. - Increased automation and robot adoption in response to labor supply shortages. ### Upside and downside risks to potential growth - Upside risks: - Continued arrivals of foreign workers from Ukraine and other sources. - Reverse migration of Poles abroad boosting labor supply. - PIT reform reducing the labor tax wedge at lower income levels and potentially increasing participation. - Significant reshoring or global supply chain shifts increasing investment and TFP. - Stronger-than-expected gains from remote work or automation. - Increased public investment (including Next Generation EU grants) improving infrastructure quality and productivity. - Downside risks: - Significant delay in implementation of Next Generation EU projects lowering investment growth and future productivity gains. - Worst-case legal scenarios related to foreign exchange mortgages damaging banks’ balance sheets and reducing private credit and investment. - Need for large-scale labor reallocation if contact-intensive sectors fail to return to pre-pandemic activity; near-term productivity declines during transitions and long-term drag if workers remain in low-productivity sectors. - Possible higher costs of the energy transition slowing TFP growth. ### Scarring after the pandemic recession - Definition used: scarring is a persistent difference between pre-recession output projections and output subsequently realized over the medium term. - Baseline projection outcomes: - The path of output is projected to converge to pre-pandemic projections (January 2020 WEO) in 2024. - Output in 2026 would be 0.7 percent above the early projections (January 2020 WEO). - Reassessment of January 2020 WEO assumptions: - January 2020 WEO projected a slowdown in growth to 3.1 percent in 2020 and to 2.5 percent over the medium term. - Ex-post analysis: those projections implied sharp declines in capital accumulation and especially TFP growth relative to immediately prior years. - A more realistic early-2020 potential growth path would have shown a slow decline from around 3.8 percent in 2019 to just over 3 percent over the medium term. - Comparative outcomes: - Compared to the actual January 2020 WEO projections, output is projected to be about 0.7 percent higher in 2026 in the current projections. - Compared with the alternative early 2020 path, the level of output would be about 0.4 percent lower in 2026. - Conclusion: under the baseline projections, there would be only a minimal amount of scarring from the pandemic. ### Comparison to typical post-pandemic output losses - Typical findings: - Deep recessions often leave long-lived scars via elevated unemployment, weaker investment, and reduced productivity from resource misallocation and firm exits. - Scarring after pandemics/epidemics tends to be higher than after a typical recession; cumulative output loss after financial crises tends to be even higher. - In typical recessions, scarring is mostly due to weaker TFP growth; weak investment drives larger permanent losses after pandemics or financial crises. - Poland’s projected experience: - The depth of the recession in Poland in 2020 was typical of modern pandemics/epidemics in EMDEs, but the 2021 rebound and staff projections suggest a much stronger recovery than the usual post-pandemic experience. - Staff projections indicate little to no scarring to output, driven mainly by a strong recovery of the capital stock. - The strength of policy support during the recession (support for workers and firms, maintenance of financial sector health) likely contributed to the atypically strong recovery. - Next Generation EU grants are projected to boost investment significantly and help drive the capital stock recovery. ### Policies to support potential growth and convergence - Factors underlying Poland’s income convergence and maintained potential growth since 2001 (averaging around 3¾ percent): - A steady supply of foreign workers, mostly from Ukraine, bolstering labor supply. - EU capital transfers supporting investment. - Competitiveness, integration in the German manufacturing supply chain, and pools of skilled labor fostering integration into global value chains. - Emergence as a leader in skilled service exports in business and IT services. - Policy implications (implied by analysis of risks and drivers): - Expedite and ensure timely implementation of Next Generation EU projects to secure projected investment and productivity gains. - Maintain policies that support labor force participation and manage foreign labor inflows. - Support digital and automation adoption to harness potential TFP gains. - Preserve financial sector health to ensure availability of financing for private investment. *Source: IMF staff chapter "Looking beyond a cyclical investment rebound" (excerpt). ### 35. Policies can help support potential growth to allow continued income convergence. ### 35. Policies can help support potential growth to allow continued income convergence. ### Long-term growth and demographic challenge - Beyond a projected overall decline in population, a shrinking share of the working age population poses a long-term challenge. - Several factors that offset this trend—such as the large increase in foreign workers—are less certain to recur in coming years. - EU transfers have supported investment since accession, but business investment remains relatively low. - While strong TFP growth continues in the baseline projections, the post-pandemic outlook is subject to considerable uncertainty. ### Labor supply — findings and policy recommendations - Findings: - Domestic labor force participation has increased in recent years, but pockets of untapped labor remain. - Supply of labor from neighboring countries such as Ukraine may slow. - Policy recommendations: - Maximize labor supply by encouraging greater labor force participation. - The reduction in the labor tax wedge as part of the recent PIT reform may provide incentives for greater participation at lower income levels. - Pay particular attention to supporting those with caretaking responsibilities, especially women, including through support for services such as childcare. - Consider reversing the previous reduction in the retirement age to increase participation of older workers. - Consider opening Poland to additional sources of immigration. - Relax restrictions on foreign workers’ periods of employment to boost labor supply. ### Investment — findings and policy recommendations - Findings: - While investment is projected to recover over the medium term, private investment is not high in international context. - Business groups point to shortages of skilled labor as an important impediment to higher corporate investment. - The cost of emissions has made access to clean energy an increasingly important factor in companies’ FDI decisions. - The banking sector remains an important financing source of private investment. - Policy recommendations: - Develop a long-term financing strategy for the energy transition to improve access to clean energy for firms. - Proactively encourage resolution of foreign exchange mortgage legal risks. - Redesign the bank asset tax to reduce banks’ incentive to hold Treasury securities at the possible expense of private credit. - Maximize the efficiency of public investment by improving information flows across public entities to facilitate a more collaborative infrastructure framework with greater complementarities of infrastructure projects. ### Total Factor Productivity (TFP) — findings and policy recommendations - Findings: - Strong TFP growth is assumed in baseline projections but faces considerable uncertainty. - Policy recommendations: - Pursue active labor market policies, including training and upskilling, with a special focus on digital skills to facilitate reallocation of labor to higher-productivity activities. - Consider policies to attract skilled, high productivity migrants. - Promote policies associated with GVC participation, including the quality of infrastructure and institutions, and educational quality. - Consider further incentives for private companies to invest in R&D and innovation. ### Production function approach — key specification details - A standard Cobb-Douglas production function is used to decompose output into supply side factors, with TFP obtained as the residual. - Quarterly real output Yt specification (format preserved in source): - Yt = At (Kt)^(1−α) (Lt AHWt)^α - Definitions and methodological notes: - K denotes the capital stock. Historical capital stock data are sourced from the European Commission’s AMECO database (real net capital stock). Projections are made using the perpetual inventory method: Kt = (1−ρ) Kt−1 + It where ρ is the depreciation rate implied by historical data, Kt-1 is the previous period’s capital stock, and It is projected real gross fixed capital formation. - Lt refers to total employment, separated by domestic employment according to the labor force survey and the effective number of foreign workers, as estimated by the NBP. Trend employment is calculated using an HP filter. The contribution of labor to potential growth is broken down into: (1) the trend component of the domestic economically active population; (2) the trend effective number of foreign workers; and (3) the trend unemployment rate. - AHWt refers to average hours worked, taking into account the cyclical component of the intensity of utilization of labor inputs. - α refers to the labor share in the production function, which is set at 0.42. ### Challenges of decarbonization — overview and key findings - Over the last three decades, Poland achieved a significant reduction in carbon emissions despite rapidly growing economic activity. - Since the 1990 reference date for the Paris Agreement, GHG emissions have declined by 16 percent, while size of the economy more than tripled. - Poland accounts for 0.9 percent of global emissions. - The power sector is by far the biggest source of emissions and remains heavily reliant on coal. - Heavy reliance on coal is responsible for emissions intensity being almost three times above the EU average. - Coal remains the mainstay of the power sector, only gradually supplemented with gas and renewable sources. - Decarbonization of the power sector is key to reducing emissions economy-wide; electrification will play a big part in transport, heating, and industry. - Household and transport sectors: - Coal heating accounts for a quarter of total energy consumption by Polish households. - The transport sector has been the only one consistently increasing emissions, driven by an increase in passenger cars and deficient public transport. - The motorization rate increased to one of the highest in the EU; average age of cars increased, worsening emissions outcomes. - Industry and agriculture: - Manufacturing accounts for nearly a fifth of gross value added. - Manufacturing emissions intensity declined, yielding 37 percent reduction in emissions intensity of output from 2010. - Agriculture output growth averaged 1 percent y/y on average over the last two decades, largely offset by modest improvements in emissions intensity. - Poland has a relatively high share of emissions-intensive industries, making it vulnerable to carbon leakage. ### Fit for 55 — implications summarized (Box 1) - Context: - The European Commission proposed a package to tighten policies to meet at least 55 percent GHG emissions reduction by 2030 compared to 1990 levels; discussions ongoing, with final approval expected by end-2022. - Main proposed changes and implications: - Review of the ETS system: accelerate pace of emissions allowances reduction from an annual rate of 1.74 percent to 2.2 percent. - Free allocation for industries vulnerable to carbon leakage would be phased out after 2026 and replaced by a Carbon Border Adjustment Mechanism. - Additional financing from the Modernization Fund would boost resources available to ten lower-income states, including Poland. - Establish a new ETS system for buildings and road transport; significant social implications mitigated by the Social Climate Fund. - Update Effort Sharing Regulation: increase EU-wide target of GHG reduction in these sectors from 29 to 40 percent by 2030 compared to 2005 levels. - Tighten targets for renewable energy share in consumption and for energy efficiency: current EU target of 32 percent of renewable energy by 2030 proposed to increase to 40 percent. - Phase-out of fossil-fueled powered vehicles: sale of new internal combustion engines (ICE) powered vehicles would be banned from 2035. - Expected effects for Poland: - Proposed changes in the ETS would push CO2 prices higher, with immediate effect on the energy market in Poland, while resources to finance energy transformation would increase through higher allowance auction revenues and reallocation via the Modernization Fund and the Innovation Fund. - The new ETS for buildings and road transport would strongly affect Poland because it would cover currently exempted small heat generators, the vast majority of which rely on coal. - A large fleet of relatively old and less efficient passenger cars will make a new carbon pricing scheme costly for citizens. - The phase-out of ICE cars creates an opportunity for Poland given its role in the electromobility supply chain, but consumer adoption will take time because of the pattern of importing used cars. _Italic: Source — 1polea2022002 - 35. Policies can help support potential growth to allow continued income convergence (PDF chapter/section)._ ### 11. As an EU member, Poland is a signatory of the Paris Agreement, contributing to the ### 11. As an EU member, Poland is a signatory of the Paris Agreement, contributing to the ### EU commitments and interim targets - Poland committed in late 2020 to participate in the EU’s goal of reducing GHG emissions by at least 55 percent by 2030. - Contributions will vary across countries, taking into account different starting points, specific national circumstances, and emission reduction potential. - Interim targets under binding EU climate policies cover: - emissions in non-ETS sectors, - the share of renewable energy, - energy consumption. - Poland is expected to have complied with targets for 2020; the final EC’s assessment is expected in Q1:2022. - Meeting 2030 targets will require additional policy efforts, particularly in non-ETS sectors. - The “Fit for 55” legislative package would: - stipulate an even sharper reduction in GHG emissions via steepening the path of ETS allowances reductions, - create a separate ETS system for buildings and road transport. ### Energy Policy 2040 strategy (adopted February 2021) - Defines three main policy areas: GHG emissions in the energy sector, good air quality, and just transition. - Targets and pathways: - cut GHG emissions by at least 30 percent by 2030, - reduce the share of coal-fueled electricity to below 56 percent by 2030. - Decarbonization of the power sector initially based on: - developing renewable energy, mostly wind farms, - supplemented with gas-fueled power. - Subsequent and gradual introduction of nuclear power will offset the coal phase-down in the 2040s. ### Energy security, markets, and energy poverty (policy emphases) - Energy security improvements planned via: - new investment in gas and oil storage, - new pipelines, - enhancing LNG imports capacity. - Ensuring reliable electricity supply requires construction of new gas-fueled power blocks; fossil fuels are framed as transitional. - Market-based solutions to manage higher shares of renewables, including: - tools to manage power demand (e.g., dynamic energy pricing), - greater role for distribution system operators, - replacement of power meters with devices integrated with smart grids, - increased number of individual power sources. - Energy poverty objective: - share of people affected expected to decline from 9.3 percent in 2019 to 6 percent by 2030, - specific measures not proposed in the strategy. ### Policy instruments: subsidies, taxes, and ETS - Subsidized climate policy instruments: - state programs for decarbonization (e.g., building insulation subsidies), - recent programs finance replacement of coal furnaces and promote green public transport, - subsidies to individual photovoltaic (PV) installations supported rapid expansion of installed capacity, - electromobility scheme expanded to firms and institutions to increase uptake. - Tax policy: - overall burden of “environmental taxes” comparable to other EU countries, - implicit subsidies to fossil fuels are sizable, particularly in residential use, - recommendation: redesign tax incentives toward cleaner fuels and technologies without significant increases in overall taxation, - carbon tax proposed to eliminate part of implicit subsidy, with proceeds used to support vulnerable households switching to less-carbon intensive energy sources. - EU Emissions Trading System (ETS): - remains the most impactful decarbonization mechanism in Poland, - provides direct financial incentives to reduce emissions in energy and industrial sectors, - freely allocated emission allowances in manufacturing are being phased out and prices of carbon emissions are increasing, - sale of allowances allocated to Poland generated over 1 percent of GDP in 2021, boosted by sales of allowances carried over from ETS Phase III (2013–20), - historically, Poland spent about half of ETS proceeds on climate action (in line with ETS directive minimum requirements), - a proposed Fund for Energy Transformation financed from ETS proceeds is expected to increase that share and support transition in the power sector, including financing of nuclear power. ### Investment and financing needs and sources - Energy Policy 2040 envisages investment outlays equivalent to nearly 35 percent of 2021 GDP spread over the present decade, with almost one half of these outlays in the energy sector. - Some investments are not strictly linked to decarbonization (e.g., fossil fuel infrastructure and terminals for energy security). - Available EU support (percentages of 2021 GDP): - multiannual EU funds framework: 3 percent, - Next Generation EU funds: 2½ percent, - redistribution of ETS revenues: 1½ percent, - on top of domestic ETS revenues: 4½ percent. - Additional financing sources: other EU-wide programs (e.g., Horizon Europe, InvestEU). - Multiple financing sources require skillful management to cover priorities while avoiding overlaps. - Some outlays may not be eligible for preferential financing (e.g., replacement investment in coal sector); some will involve state participation (e.g., long-term projects such as nuclear power), requiring a comprehensive financial strategy. ### Costs of decarbonization and alternative scenarios - Plan for Energy and Climate estimates: - BAU scenario investment outlays in the 2020s: 30 percent of 2021 GDP, - Energy transition scenario outlays: 35 percent of 2021 GDP. - Under a less ambitious BAU scenario: - support from the EU would be lower, - lower investment in renewable energy and higher energy demand would lead to GHG emissions increasing by 2 percent this decade, falling short of EU targets. - Tentative estimates of energy transition costs discussed by Ministry of State Assets, Forum Energii, and IMF staff. ### Challenges for the energy sector (Box 2) - Key risks and indicators: - Ageing power plants and infrastructure increase risk of outages. - Investment plans imply a sharp decline in domestically produced electricity. - Regulatory changes, including in capacity market, create risks for economic viability of coal-fueled generation. - Capacity projections and needs: - Effective capacity of main producers expected to drop by 20 percent by the end of the 2020s (information from Energy Regulator (URE)). - Grid operator warned that some 4GW of additional capacity will be needed compared to current plans to ensure reliability in the latter part of this decade. - Drivers of decommissioning: - most power plants built almost 40 years ago (wear and tear, low efficiency), - CO2 emissions prices render coal-fueled generation increasingly costly, - pursuant to EU regulations, high-emitting plants will no longer be able to participate in the capacity market from 2026. - Timing of nuclear power: - first nuclear block envisaged to be connected only in 2033; government considering new support scheme for coal power in the interim. - Needed mitigation actions: - acceleration in renewable energy capacity, - investment in grid for demand management (dynamic pricing) and higher import capacity. ### Social dimension and just transition - Social impacts to consider: - high incidence of energy poverty, especially among older people, - less affluent households in older buildings heated with coal face higher transition costs (new heat sources, insulation, higher running costs). - Policy responses: - financial support for most vulnerable households, - development of district heating, - reach and reliability of clean public transportation to reduce private car use, - subsidies to electric vehicles will primarily benefit those who can afford a new car. - Transition in mining regions: - government memorandum with coal mining trade unions in April 2021 includes coal phase-down by 2049 and provisions on financing of mines and wage indexation, - conditions to mitigate transition better than in the 1990s: tight labor market, high FDI penetration, small share of mining in total employment, - local authorities prepared just transition plans with EU support, - lignite mining areas are less diversified and require special attention, - Poland committed to phase-down coal mining by the 2040s; a firmer phase-out date would facilitate planning for coal mining transition. ### Regulatory framework and governance - Need for predictable regulatory environment that considers multiple stakeholders and avoids unexpected regulatory obstacles to allow long-term planning. - Government control over majority of energy companies and coal mines could facilitate implementation but may give rise to conflicts of interest. - Transparency and appropriate consultation are key to ensure credible regulatory change and maintain level-playing field for private investors. ### Conclusions and policy recommendations - Poland has embarked on decarbonization; Energy Policy 2040 represents high political support and reorientation of investments away from coal is already occurring. - Authorities should consider setting a carbon neutrality target date. - Decarbonization strategy should be amended to reflect evolving EU climate policy and carbon market prospects. - Given state ownership of most coal mines and energy producers, government action is needed as ageing capacity and deteriorating financial viability of coal generation create risks for energy supply stability. - Authorities should review regulatory framework to ensure a level playing field between state-owned companies and private investors to boost investment. - Financing considerations: - decarbonization will be costly (about 35 percent of 2021 GDP in 2020s) but the additional cost relative to BAU is moderate, - EU financing will support emissions-reducing investments, but large fiscal spending and state guarantees may be necessary, underscoring need for a long-term financing strategy. - Policy instruments recommended: - consider carbon tax and rebates to incentivize private sector decarbonization while protecting the most vulnerable households, - deploy EU resources to mitigate fiscal and external balance impacts, - manage multiple financing sources and state participation carefully to avoid overlaps and ensure coverage of priority areas. *Source: IMF staff report excerpt (Republic of Poland).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1polea2022002.pdf_