Poland's Progress: Tusk's Approach to Economic Growth
Key Takeaways:
Donald Tusk's previous prime ministerial terms focused on implementing free-market policies and fostering economic stability; policies which are expected to continue under the current administration.
Allegations of corrupt practices and institutions established by the past PiS administration present a challenge to Tusk's reform efforts and may impact investors' perceptions of Poland's political integrity.
The Tusk administration is addressing challenges arising from unregulated competition in Ukraine while strengthening cooperation with the EU, particularly France and Germany, to restore the rule of law in Poland and enhance its political and economic standing within the EU.
Efforts to revamp the tax system, reduce business start-up costs, and provide incentives for high-risk projects reflect a strategy to sustain Poland's growth prospects and maintain competitiveness in the European industrial and business sphere.
Challenges from Duda and PiS
A notable aspect of the current Tusk administration is its rise to power without significant electoral backing, which now manifests in challenges to reform implementation amidst resistance from a prominent opposition party and the president. Tusk’s prime ministerial terms from 2007-2014 oversaw the implementation of free-market policies which facilitated a remarkable 29% growth of GDP over the period, with policies shielding Poland from some of the effects of the global financial recession in 2008. He worked to streamline bureaucracy, lower taxes to allure foreign investment, and privatise state-owned enterprises, fostering economic stability and outlining a clear strategy for free-market endeavours.
These policies will persist, with Tusk continuing the work started during his previous administrations and building upon the efforts of the PiS to enhance Poland's economic outlook. However, dealing with alleged corruption in the PiS party is a sensitive issue for Tusk, which could slow down economic reform efforts. It is important for Tusk to avoid appearing vengeful or engaging in misconduct, as any resemblance to his predecessor's methods could lead to accusations of undermining the rule of law. Already, the European Commission has accused Poland of attempting to illegally dissolve the state television channel. Poland's highest court also rejected the government's plans to overhaul public media, citing significant legal and constitutional concerns. These issues surrounding the rule of law will likely impact investors' perceptions of Poland's political integrity, raising concerns for companies considering investment and expansion in the country. However, this setback in his premiership was anticipated. Justice Minister Adam Bodnar recognises the need for a focused approach to restore the rule of law, noting that Poland has already signed a motion to join the European Public Prosecutor's Office. Joining the office signifies a re-alignment with European interests and a willingness to reinvigorate the rule of law by allowing a third party to monitor the country’s justice system.
While Duda posed challenges for Tusk during the initial 100 days of governance, he has recently adopted a more conciliatory approach, reducing tensions with the current government. Despite the apparent tension in their association, it is clear that Duda and PiS will inevitably separate, particularly as this term marks Duda's final tenure, making him ineligible for re-election. Former PM Jaroslaw Kaczynski suggests that this won't spell the end of Duda's political career, but rather a shift towards international endeavours. Hence, there is motivation for Duda to seek consensus with Tusk's political objectives and redefine his public persona towards centrism to preserve his political and legal standing both domestically and internationally. This is also reflected in recent polls of PIS, where the party has now been overtaken by Tusk’s coalition. Indeed, Tusk seems to face more significant opposition from within his coalition, particularly on critical issues such as the repeal of the abortion law. Discussions among coalition partners differ regarding the extent to which abortion should be permitted, including the circumstances under which it is acceptable.
Amidst protests by Polish farmers and truckers at the Ukrainian border, the Tusk administration is actively addressing the challenges arising from unregulated competition in Ukraine. Proposed solutions include stricter controls on paperwork and abandoning the ineffective EU permit system for countries bordering Ukraine. Tusk maintains the previous administration's protective stance on the grain ban and refrains from endorsing the extension of the EU free-trade deal until 2025. This demonstrates Tusk's consideration for PiS voters and his efforts to promote a less polarised society. It does not signal a departure from free-market principles but rather signifies a strategic adjustment to safeguard the integrity of the Polish economy, underscoring the importance of its logistical networks and exports.
Tusk Government's Influence on European Politics and Economics
Irrespective of the domestic political environment, Poland is positioning itself as a leader in European politics. Heightened cooperation between the Polish government and the EU is reflective of a renewed trilateral relationship involving France and Germany. This alliance, known as the Weimar Triangle, historically served as a platform for reconciliation and collaboration, hosting regular high-level meetings that yielded tangible outcomes across various domains such as foreign affairs, defence, culture, economics, and research. During the PiS administration, there was a noticeable decrease in trilateral engagements within this framework. However, it is likely that this trend will be reversed. Indeed, Tusk and the European Commission plan to reverse Article 7 of the European Treaty, aiming to draft a new "action plan" to restore the rule of law in Poland. This initiative seeks to end EU sanctions against Poland, which were primarily designed to limit its membership rights in response to concerns about the erosion of the rule of law under PiS leadership. Although the EU previously attempted to reduce Poland's voting power in the Council of the EU in 2017, this effort saw limited progress. Additionally, subtler measures were implemented, such as reducing EU funding allocation to Poland and imposing limitations on its access to the post-COVID recovery fund.
The partnership represents a significant advancement for both Poland and the broader European community. This is particularly crucial at a time when the current Franco-German relationship is strained, evident in the issues of EU funding, defence spending, and EU reform. While the success of this triple alliance may hinge on the strength of Franco-German ties, Poland, a pivotal NATO member and influencer in the EU, can serve as a mediator and influence policies where divisions persist between the French and Germans.
Poland's accession to the EU in 2004, though not as an original member, positions it as a nation often representing the collective interests of the "rest of the EU". This holds broader implications both domestically and internationally. At home, Tusk can leverage this influence to build trust among key Polish demographic groups, who have previously felt neglected by EU institutions. During PiS rule, there was little political bargaining power available for the party to tackle the grievances of its key voters. Core PiS supporters, such as farmers and HGV drivers, who have been protesting Ukrainian food and grain imports, can now be more effectively addressed at a broader EU level, thanks to Tusk's adept statesmanship at the continental and institutional levels—a facet lacking under PiS. The first signs of this increased cooperation comes with a statement by the European Commission on using Repower EU funds to modernise the Polish economy. The Commission provided a favourable assessment of Poland's Recovery and Resilience plan, highlighting the implementation of seven new political reforms and investment opportunities. These include a focus of funding towards the agricultural and energy sectors, including the development of electricity distribution networks in rural areas, and socially, boosting the creation of new, greener jobs and skills.
Tusk has the capacity not only to champion the interests of core Polish voter groups within the EU but also to represent similar concerns in neighbouring countries like Romania, Hungary, and Slovakia, which have faced analogous protests and responses. This engagement, in turn, would facilitate the development of unified policies among Berlin, Paris, and Warsaw, enhancing the socio-economic and security framework of the entire European Union and serving as a central asset to the broader EU project. Poland, having escalated defence spending in response to the conflict in Ukraine, stands poised to leverage its exposure and proximity to the crisis to shape a more focused EU defence policy and allocate funding support to Ukraine. This influence carries considerable weight, particularly amidst the waning enthusiasm from the United States for trans-Atlantic defence cooperation. The prospect of a strategic alliance between Poland, France, and Germany emerges, potentially establishing them as the focal point for collective European security efforts. Since assuming power, Tusk has started talks between France and Germany to boost European defence independence. Poland's strategic location as a military transit hub gives it significant influence in shaping this agenda. Tusk also hinted at Poland joining a European air defence initiative led by Germany, likely strengthening ties between Poland and Germany.
Tusk’s long-term plan for economic growth
Between 2024 and 2025, Poland is focused on addressing its balance of payments deficit, which has resulted from resolving last year's energy crisis and stabilising the domestic gas and coal markets. This effort primarily involves a combination of ambitious renewable energy initiatives, with a focus on widespread solar panel installations, and a gradual reduction in reliance on coal and gas. Poland has pursued this strategy for years, minimising its vulnerability to energy shocks to a greater extent than other European countries, thus reducing the prominence of the energy crisis in the first place. Concerns have emerged regarding potential stagnation in the eurozone and the possibility of a German recession affecting Polish exports. Despite worries, the Zloty is expected to strengthen due to positive sentiment towards the Central and Eastern European (CEE) region, driven by anticipated improvements in Polish relations with the European Commission. Most notably, Poland is undergoing a shift from an export-driven to a service-based economy, as evidenced by falling exports in 2023. It is positioning itself as a key player in policymaking and an economic force within the broader European context. This is exemplified by Tusk's recent efforts aimed at rejuvenating the Polish state through enhanced integration with Europe.
In 2024, the central bank expresses optimism about finally receiving the long-awaited EU funds (EUR 5 billion) earmarked for Europe's post-COVID recovery and the Repower EU plan. Poland has consistently been a dominant force in the investment scene, accounting for approximately 31% of all completed deals in the CEE region from 2015 to 2021. Leading in both deal count and value, Poland has amassed a total reported transaction value of EUR 5.8 billion during this period, indicating a flourishing secondary industrial market and the rise of a resilient services sector.
Tusk's coalition agreement underlines the government’s imperative to reinstate financial transparency in Poland. The strategy includes releasing a white paper on state finances to scrutinise and implement more technocratic methods for evaluating the efficiency and operational expenses of institutions or practices established by PiS. This initiative seeks to foster a more conducive environment for business growth and to empower future Polish entrepreneurs by enhancing trust in government institutions. A primary objective is to decentralise state responsibilities to local governments, granting them the autonomy to boost their revenues and strategically plan investments in underserved areas. Tusk aims to streamline oversight practices on local governments, enabling them to have greater control over economic and policy decisions, including matters such as wages, industries, education, and public services like transportation. Additional commitments involve depoliticising the scientific and higher education sectors, reinstating university autonomy and funding. The aim is to increase the number of Polish university publications, thereby enhancing the competitiveness of the economy and facilitating knowledge exchange between academia and entrepreneurs.
The Tusk government is also revamping the tax system and reducing business start-up costs, with a focus on small and medium-sized enterprises (SMEs). The removal of the Sunday trading ban aligns businesses with European norms, reducing unnecessary operational costs for small entrepreneurs. Poland's social insurance institution now provides sick pay from the first day of absence, further supporting SMEs. The government aims to limit inspections for small entrepreneurs to six days per year, reducing the regulatory burden and enhancing flexibility for business scaling. These changes adhere to EU directives and OECD recommendations, simplifying the tax system through digitised reporting and settlements. This modernised tax system facilitates easier LLC setup in Poland, known for flexibility and low financial commitment. Shifting liability to shareholders is an attractive option for low-risk ventures, aligning with Tusk's goal to foster a new business services sector while maintaining Poland's strong industrial position in the CEE region. This approach also contributes to Poland's status as a country with below-average levels of debt, both in the private and public sectors.
The country is actively addressing the financing needs of high-risk projects. The state is introducing allowances for businesses requiring R&D and digitisation, while committing to a stable public expenditure program supported by EU funds. This strategy aims to sustain Poland's growth prospects and maintain a competitive edge in the European industrial and business sphere. Both foreign and domestic investors and business owners are eligible for corporate income tax exemptions within designated Polish investment zones. They can also apply for grants for strategic projects or new investments, provided they meet specific conditions set by the Polish Investment and Trade Agency. Eligible businesses include those starting or expanding operations, diversifying, or making significant changes to production processes across various sectors, with the exception of certain traditional industries. Additionally, the business services sector, which encompasses IT services, research, auditing, engineering, technical research, and accounting, is eligible for these benefits.
Poland’s key market trends
Over the past decade, Poland's equity market has proven to be an attractive investment destination. The WIG20 index, featuring the country's 20 top-performing companies, currently boasts a favourable price-to-earnings ratio, an enticing option for investors seeking to contribute to Poland's economic growth. The appeal is heightened by a growing interest from foreign politicians and investors, particularly those from European neighbours like the UK, Germany, and Czechia. Despite the conflict in neighbouring Ukraine, Poland remains a secure and stable investment environment, achieving 21st position among the world's 25 most developed economies in 2023. Designated as a developed market by FTSE Russell and STOXX, Poland maintains stable outlooks from major credit rating agencies, with S&P rating at A-, Moody's at A2, and Fitch at A-.
ESG
A common trend in recent acquisitions involves targeting companies with a strong or growing ESG (Environmental, Social, and Governance) profile. For example, a UK-based investor recently acquired Krakow-based InPost, drawn to the company's network of 30,000 automated parcel machines and 27,000 pickup/drop-off points, leading to lower operational costs and a reduced carbon footprint compared to traditional, door-to-door delivery services. Similarly, Dino, Poland's rapidly growing supermarket chain, backed by Enterprise Investors, has expanded its store network from 511 in 2015 to 2,156 in 2022, maintaining a higher ESG rating than Western counterparts like Carrefour and Metro. Plans include installing solar panels on rooftops and distribution centres to further reduce the company's carbon footprint and enhance its ESG rating.
Recognising the increasing significance of ESG initiatives in the field, Poland has seized the opportunity to strengthen its existing industrial sector. Doing so means they are leveraging their industrial capabilities and skilled workforce to establish a self-sufficient economy, reducing dependence on foreign markets, labour, and resources. Despite differing perceptions of ESG’s credibility, Poland views it as a critical avenue for enhancing its business sector, fostering new growth and innovation. This shift is expected to create diverse job opportunities and cultivate a competitive and dynamic business environment over the next decade.
Internationalisation of Polish Services
Leveraging their robust industrial output and well-developed logistical sector, Polish companies are expanding their reach beyond the domestic market and into the broader CEE and pan-European regions. Having reached growth capacity in the domestic market, many Polish companies are finding success by taking their products abroad. A notable example is Allegro, the largest e-commerce platform in the region, which has expanded its business across six key markets in the wider CEE, with Czechia serving as a crucial subsidiary hub. Additionally, companies in the retail sector, such as CCC, LPP, Kazar, and Coccodrillo, have extended their presence to almost every continent. For instance, LPP, initially focused on the Polish market, has opened its first store in Tel Aviv and established a presence in Czechia, Russia, Hungary, and Latvia.
In this ongoing process, Polish companies are embracing digital transformation to facilitate their international expansion. Those at the forefront of this transformation experience nearly three times faster growth than their less technologically advanced counterparts. With a robust academic base producing around 350,000 graduates annually, 20% of whom are specialised STEM fields, Poland has a continuous influx of skilled professionals. Key IT Outsourcing (ITO) centres, including those by Luxoft, Tieto, and BLStream, collaborate with major multinational companies like Amazon's AWS, Microsoft, AT&T, and IBM across various software applications, infrastructure, and consulting services. This dynamic creates a self-sustaining economic output, allowing Polish IT programmers to not only export their services but also leverage these services for domestic market growth.
IT-based Services
The strength of Poland's international presence can be largely attributed to its thriving IT sector, which has become a cornerstone of the country's global reach. IT services present an excellent opportunity for economic globalisation, as the geographical location of publishers and developers becomes less significant due to the online nature of these services. Esteemed studios such as CD Projekt Red, CI Games, and Techland have capitalised on this potential, producing numerous triple-A titles and tapping into the extensive opportunities available in the global gaming industry. Other IT-related sectors, including the notable concentration of TMT-related services, are experiencing a growing influx of investments, marked by a notable increase in attention from private equity (PE) firms in the space. This can be seen in the value/percentage of deals related to this sector exponentially increasing since 2015. This is also underscored by the fact that over 50% of start-ups in Poland are emerging in the Information and Communication Technology (ICT) sector. These startups are thriving in areas such as mobile applications, e-commerce, business software, and education technology.
Current and prospective policies from both the previous Polish government and Tusk's administration signal a growing emphasis on fostering SMEs, with a particular focus on service-oriented enterprises. Many entrepreneurs in this sector opt for sole proprietorship due to its simplicity and minimal initial investment requirements, as the sole owner assumes all the venture's risks. Whether for programmers or business owners in larger enterprises, flexibility and start-up reliefs are essential, often providing two years of support for businesses in this dynamic industry.
Industrials in the Silesian Region
In the realm of business services, Silesia (located in the south-west, bordering Czechia) stands out as a highly developed region within Poland. As the country's most industrialised and urbanised region, Silesia boasts close connections to numerous European neighbours, including Germany. While the region's appeal has traditionally been driven by abundant natural resources such as zinc and lead, the spotlight now shines on companies specialising in new technologies, digitisation, and automation. A key factor contributing to this success is the Katowice Special Economic Zone, recognised as the second-best in the world in the Financial Times' FDI Business ranking.
Silesia is a hub for knowledge concentration in industrial areas and services management, making it an ideal location for both domestic and foreign production companies. The establishment of numerous industrial parks has attracted over 250 companies from 60 industries who are collaborating with other key European industrial centres like Germany’s North Rhine and France Hauts-de-France region. Renowned global brands like Alstom Power and, notably, Bombardier have chosen Silesia as the site for some of their manufacturing facilities. The Silesian local government operates independently, collaborating with foreign investors, facilitating trade missions, and participating in international trade fairs in various countries. Additionally, Silesian businesses have forged partnerships with companies from countries such as Georgia, Tunisia, and the UAE. The Upper Silesian Fund coordinates these efforts, providing comprehensive support to companies seeking knowledge, contacts, and practical tips for business establishment. This is where sectors like IT, financial services, and other specialised high-end industries, including energy, and the green economy tend to flourish in the country.
The surge in investment in Silesia can be attributed to funds allocated by the European Investment Bank. A total of EUR 500 million has been earmarked for investment, strategically distributed among cities such as Krakow, Wroclaw, and Dabrowa Gorzincza. This funding aims to support new urban development plans and the modernisation of key infrastructure, like roads and public services to stimulate growth of industrial services. The European Commission approved 16 regional programs for Silesia, empowering local governments to develop strategies, create jobs, and anticipate a 2.91% GDP increase in their economic output. These funds aim to transform the region into a "knowledge society" by fostering research and development entrepreneurship, enhancing its capabilities.