Polish transformation story of 1989 - Jeffrey Sachs lecture - Part V: Source of a high standard of living

Łódź, Poland, 6th of June, 2014 - Jeffrey Sachs lecture
co-organizer of the event: Zbigniew Galar

Part V: Source of a high standard of living

We have to really step back for a moment, probably Łódź is a good, difficult place to do that but also an appropriate place to do that, to understand some of this, because the key point is the following. A high standard of living in a country comes from a high level of productivity. A high level of productivity means a few things. First, it means good international competitiveness, being at the cutting edge of technology, and good skills in the labor market. That’s the fundamental of high productivity anywhere. The whole Soviet System, of course, could not deliver that. The Soviet System could at best deliver a massive fifth rate version of that. Why? Well, many things were wrong with the Soviet System but one of the interesting, deep things that were wrong is that the Russia starting with Bolshevik Revolution, to just take the steep back, was of course, backward of an economy. And the model of Soviet development was: “copy technology from outside”. So bringing workers and engineers from Ford Motor Company from the River Rush plant and build automobile industry. Bringing experts from Germany and build an aircraft industry, so forth. In a way, if you take a historical view of this it’s in some sense remarkable, what the Soviet Union did. Because it was able to develop every industry including aeronautics, aviation, computer industry, all of it. Almost all of it, third-rate by international standards. Nothing competitive, except maybe the military sector. But even there not so much. Still, it’s a great accomplishment in one sense, even though it was a barbaric system and how many people died in the process. But unbelievable what the engineers, the Russian engineers, and others accomplished in this system. But what you learn from economic history is, it’s a reckless idea to try to do this kind of development of technology within a closed society. Because really quality technology depends on being part of the global scientific and engineering system, not a local one. And what The Soviet Union accomplished was building modern technology in a closed society. And it was able to copy just about everything but with a time lag of 10 or 20 years and with technology that was not competitive in anything. And you look till today – what is Russia export: gas, petroleum. It does not export manufactured goods, even thou it’s a major manufacturing country. It has got a huge industrial base. What industry is Russia competitive in, till today? I don’t know of any. Except for the military – this is the one place. But not in any civilian technologies. Because everything lags behind.

Poland was caught at that. In a quite fundamental way. Poland had lots of industry. None of it was competitive internationally. Almost none of it. Basically none of it. And Łódź probably, I don’t know the details but my guess that the textile industry here was lagging already even in normal textile terms probably 20 years behind in many different areas by 1989. But then it happened – in the textile industry, all went to China, at the same time, so no textile industry virtually survived, except very high ends sophisticated Italian textiles very high in fashion. It’s possible but not from where Łódź was in 1989. And The United States lost millions of workers in the textile sector even having been part of the world economy. Even having led a lot of that technology.

So my feeling, not just my gut, my studied feeling about Poland and about this region was: “What a mess.” Because a whole industrial landscape but none of it designed to fit the world economy. It was designed to fit a collapsed Soviet, decrepit system. And it reached the kind of end. So there was no doubt in 1989, that the amount of structural appeals that this country was gone face was going to be vast. No one could doubt that. I’ve said that on a thousand occasions. That’s why I said: “Cancel the debts, get help, do everything possible. Make Poland part of Europe as fast as possible.”

Two big things happened here. Positive from the start. One, of course, was an incredible number of small-scale enterprises, hundreds of thousands of small-scale enterprises started in this country. That’s polish entrepreneurship. That is incredible energy. That started, we watched the numbers month by month, partly it was coming out of the shadow into a registry, but a lot of it was just incredible polish business “go do something” sense. So the energy in this country was enormous. It had been in a black market, it had been in opposition, it had been in repression. It was not possible to make businesses before, the shortages ended and then suddenly people were able to make businesses, this was a revolution from the bottom up, in the economy. The second was a big inflow of foreign investment, huge and it started right at the beginning. And it was really transformative. Volkswagen, of course, the whole German automobile industry, what Poland now produces for so many international value chains.

I helped to bring one of the first investments to this country. Because in the middle of 1989 I was contacted by the ADD about their interest in investing, meaning buying the turbine manufacturing in Poland and investing in that. I went to meet their board and said: “I think it’s a good idea because Poland is really gone have reformed and it’s gone have a convertible currency. It will be able to make profits. Get profits out and so forth.” They started with a significant investment right from the first moment. And if you look at the curve of foreign direct investment in this country, Poland has been a recipient of vast, vast inflow of foreign investment from Germany in particular, but from all over Europe and actually from all over the world.

These were the two most significant transformative, positive developments. This start of small businesses by the hundreds of thousands and the connections of Poland with major companies. Most international trade actually goes through multinational companies in our era. Most international trade is big companies producing all over the world, site sourcing products and then selling globally. Poland became a global ex-seller of gas turbines for example because it was producing ADD gas turbines right from the start. Poland is a major global exporter of many industrial products now. It wasn’t before. The curve has a sword but that’s because of reconnecting with world-class technology through major companies. This is, in my opinion, the fundamental part of a transformation. It takes time. It has been built over time. And given the starting place for Poland, to my mind, it’s remarkable how fast it happened. It was very obvious from the beginning that many people could not find a foothold in that. Enterprises went down. Many people were trained for skills that didn’t have a market anymore, for companies that didn’t have a market for, employers, regions in this country. Some regions, especially near the German border, soared and other regions were disadvantaged, especially, of course, to the east where everything is tougher. And so this was also part of the reality. I don’t know of any magic to answer those things. What I do believe fully is, people need help, they need support, you don’t leave people to their own devices, you don’t leave people to suffer, you need social support. You need to the extent possible and it’s not always as simple as it sounds, you know it better than I do, people need training, retraining. I believe in a very active government, policy for that. I believe in active government policy, to help to bring foreign investment. I believe in helping to speed that up. I believe in helping to have higher education play a significant role in that because any city with a major university should have the university be playing an important economic role not only an important educational role. But an important role in helping start new businesses, training and so forth. But what I don’t know personally is any magic to that of how to make this right early on. Because a high income doesn’t come from just wishing it. It actually comes from structures of competitive technologies, skills, market access, organization and so on.

The fact that Poland now is when measured what I call international prices in an income of 22 000 $ per capita, and the highest ratio that Poland has ever had relative to The United States for example. That’s a success but it’s not a uniform success. It’s a success in a landscape that is absolutely filled with disaster areas, filled with declining cities, declining sectors. And to tell you, by the way, that giving it’s, not to say that it’s pleasant but it’s like that for every market economy I know. And in The United States, unfortunately, it’s like that all over the place. My own hometown is Detroit. Detroit is, you know, I know the comparisons they made to Łódź but believe me Łódź is light years ahead of Detroit. Detroit has fallen by the factor of three in population. It’s a very complicated story but it’s not just Detroit, if you take the train from Boston to Washington as I do often, you pass through many cities of just boarded up, absolutely boarded up. They are gone. They don’t exist as economies. Old people live there but there is no work, there is no life. That’s The United States, it’s been a market economy for 200 years. And still, it’s, by the way, the most technologically advanced economy. It’s not the fairest economy, it’s got many things wrong with it but it is a very sophisticated economy. And you can find lots of cities that are boarded up. No one knew how to do this without that but what Poland starting point was just about the worst I’ve seen ever anywhere.

Except if you go east of Europe and then it gets worse and if you go further east it gets even worse. Russia seems to me like a scrapyard. You know, wherever you were in Russia, all you saw was rotting and rusted steel, just scrap, everywhere. Planes dismantled in the middle of the airfield. It was shocking to see. It was like an industrial graveyard in 1991. So I didn’t have an answer to that then I don’t have an answer to that now in terms of how one makes that, it’s nothing like aggregate demand or Keynesian economics. It’s got nothing to do with those issues, nothing. It has to do with the real economic restructuring. Poland was cut off from reality for 45 years. Even longer than that obviously in many ways. And this neighborhood was never so easy in the 200 years before that. So let’s be clear, this is not the simple story.

Fairness, protecting people in need – a thousand percent, training, encouraging, linkages with global value chains, encouraging entrepreneurship – a thousand percent but solutions that take somehow find every factory to survive I don’t know how to do it now, I didn’t know how to do it then. I never have seen an answer to that question.

End of part V

To be continued...

Jeffrey Sachs

Transcript from the audio recording:
Zbigniew Galar

Lecture license: Creative Commons 2.0:
Jeffrey Sachs
Transcipt license: Creative Commons 2.0:
Zbigniew Galar

Audio and PDF transcript of the recording will be available under the last part.