Polish transformation story of 1989 - Jeffrey Sachs lecture - Part VI: A good illustration

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

Part VI: A good illustration

The way to have rising living standards is to have rising skills and technological capacity in general. No one want’s to live on low wages that are supposed to be the beginning of a process of rising living standards and in general, that is happening in Poland. Let’s be clear, that, this is not a static story. The income increases in Poland have been fast and quite substantial. But there is more to go and there is definitely more possibility of that. I would look at countries like Korea for example or Singapore is another interesting example, but Korea’s got more population and it’s probably a good illustration. They’ve surpassed a Poland’s income starting from a lower base.

When you’re in Korea everything, and I’ve been going to Korea since 1986, is always about: “What are we gone do next on technology? What’s our next step on technology? How can we innovate next on technology?”
And with a tremendous focus on technical training, research and development and advancing in international competitiveness. They do this almost in an unbelievable focused way. And that’s been East Asia’s model in general. Is a kind of engineering led development with the idea of marching of technology chain. Leaving behind a low wage work for someone else and getting to higher and higher income. The schools are excellent. The work effort is of course very significant. And the sense of exporting as the national mission is extremely high. So it’s international competitiveness but in higher and higher valued products.

Poland can do that, of course. Poland is well located. I felt this is a long story but Poland has all of the things that are needed to accomplish that kind of continued rise of technology and sophistication and innovation. I think the main trick if I would say, the low-cost trick to this, is to leverage a lot for an investment. You look at, take Singapore for example. Singapore based all its export growth on foreign companies operating in Singapore, almost all of it. Of course, they have another advantage which is that they are one of the world main ports so they used their geographic advantage.

Probably the most interesting thing is, what are the companies doing here. So the usual story is, I don’t know what Dell does here, I know that Dell is here because it’s moved an assembly plant here. What I would press Dell is: “Why don’t you move some R&D here? We’ve got lots of smart people in this country.”
And I would work hard with Dell to say: “You’re already operating here, you are already doing this. We want some design jobs and we can do it. We have a technical university here. Work with the university, we are gone to improve the curriculum but we want you to open an R&D center here.”
That’s what I would do. And I would try to do that with any of the companies that are operating here. We don’t want to stop here. We’ve got a great tradition of, which Poland has, of very sophisticated science and technology. But I would press these companies: “Come on, we want some R&D.”
That’s actually what the Asian companies do all the time is: “OK, now open your R&D center here. And keep it small if you want at the start. Work with our universities but keep upgrading.”
Don’t look down on the jobs but ask them to do more. And I believe that that’s possible because you’ve got a big tracked record, you have got complete access obviously to Europe by definition, you’ve good favorable geography, you’ve got relatively low-cost engineering skills. That’s how I would try to push this harder.

Question I: (Zbigniew Galar)
I would like to ask you, if you see, especially Łódź, as a future place for Business Process Outsourcing, I mean BPO like Infosys? Because I heard a lecture of director of Infosys and he said, that, besides India, Poland is the best place for such an investment. The main question is: “Is it good or bad, what do you think?”

Good, it’s good. Take investment and then upgrade the investment. Don’t say: “That’s not good enough!” but rather show: “OK, you’re here, you’re working, now we can do this, this…”
Because really it’s been increasing the sophistication, the quality. If you’re doing basic manufacturing at one moment, you can do design at the next moment, you can do R&D at the next moment, you can do global services at the next moment. And so that’s the kind of upgrading that is really possible. And the more you attract international quality companies, the more it’s possible to make that kind of critical mass that can do that.

Question II:
Do you have any explanation why polish governments at the beginning of the 90-ties completely privatized most industries, probably most of those companies would collapse in free market competition, but they were not given a single chance, in fact?

I think there is a reason for it but it’s complicated and it won’t sound very satisfactory to you. But I think that it has to do with the depth of the transformation that Poland needed and the lack of clarity, the lack of knowledge about what the transformation would really bring. And the sense, which I shared, that the main transformation that was needed was the reorientation. That would be guided mainly by foreign investment and by startups. You see, I know this is one of the most painful issues of all, this, but with the starting point of 1989, there was going to be lots of industry that was gone close. This is a reality. That is the hardest thing in the world, to manage politically, nearly impossible. It’s also very hard handling economically, you don’t really know exactly… this was overwhelming, by the way, because there was a system before 1989, but it died. Thank God by the way. But it was a system and it died. And now there was no system and you had enterprises all over the country alone, and we have no Soviet market, we have no parts, we have no nothing. That’s really hard economically and politically.
As I said: “Two big things saved this country.”
Two and a half things saved this country. One was the new start-ups, some of them which came from taking machinery out of the old companies and doing things. And it created a tremendous amount of new activity. That was one. A second was the foreign investment. Really crucial. No major country in the world today does without that. Because that is how all the global value chains are made. Basically, it’s Poland’s connection with the German economy, which has been a huge part of the restructuring. And you couldn’t start with the Nokia just out of nowhere in 1989. There is good luck and then long legacies to make that happen.

So starting in 1989 you had bankruptcy, real financial bankruptcy. I mean literal bankruptcy, not as a figure of speech but bankruptcy. You had massive structural, terrible 40 years of delay of adjustment. Normally companies go down, other companies rise, but for 40 years there wasn’t so much structural change in this country. All of the sudden that collapsed. There was going to be lots of structural change. How do you manage that politically? How do you not save every company? How do you not save every job? How as a politician, democratically handle a difficult situation like that? It’s very hard I can tell you. And if you start there is no end.

And Poland was bankrupted also, so this was part of the reality. If there were one company, even if there were just a normal country and one company failing, that’s hard politically also you don’t even know whether to save it, not save it, whether the jobs should just go away or whether there is something to do. But when you have hundreds, it’s really hard, this is not Korea. The adjustment of the end of the communist era was not just normal market functioning. That’s why I am saying I always a continued to believe, 1989 and the first years are different from a long-term development of a country. I am perfectly happy to tell you: “Make industrial policy right now. To promote an industrial zone in each part of the country. In Łódź create a cluster, work on that.”
Fine, I believe in that. But in 1989 frankly it was really hard to think in those terms when you are in chaos and you are trying to make a currency work, you are trying to stabilize, you are trying to not have hyperinflation. You have a massive adjustment that’s actually going to happen because the jobs are not going to be saved, in most places or in many places. So to my mind, it’s a different situation and early 1990-ties was a different situation, that’s why I keep coming back to the fact that – what you do then, what you do now, are really quite different things. Now you have many options that you didn’t have then, in my opinion.

Question III:
As you know Poland is producing most of its energy from coal and we didn’t limit the CO2 emissions. And now it will have to change. Do you have any idea for Poland how to coup with this problem, in a way which will not destroy our economy?

It’s really a great question and the questions are getting harder and harder. Because climate change is real. It’s very serious and the world has to do something about it. And of course, Poland’s not the main actor in that. Because the main actor is China and then comes The United States, then comes EU as a whole and you know, you say for us: “Come on leave me alone! We’ve got other things to worry about.”
But the truth of the matter is that the whole world needs big adjustments and coal is the number one problem. It’s true. And I’ve written recently a paper that says: “There should be no more coal-fired power plants in the world. No new coal-fired power plants except if they are constructed with what’s called carbon capture and sequestration technology.”
So my advice to Poland, if it wants to continue to be coal producing and exporting country is, within the European debate to say the following, for the policy position: “We want to continue to be coal producers. We will not be able to be unless carbon capture sequestration as a true valid technology. It is a non-commercial technology right now. It is at best a pre-commercial technology, maybe it’s never gone be a commercial technology. But we won’t know until it’s tried.”

And what am personally advocating in my work with UN and I was in Australia a couple of weeks ago, which is a major coal exporting country, what’ve said to the foreign minister and to the environment minister was: “Lead a global coalition to develop carbon capture and sequestration technology and combined with Canada, The United States, India, China, let’s get Poland in there – European Union and work on this technology. Because that’s the only way that I know of in which coal can be saved on a large scale in the future.”
Maybe Poland wants to try to sneak by and say: “Well, we’re just small in the world. We want to continue doing what we’re doing.”
What I wouldn’t like to see from Poland is climate denial. Which is part of the scene of any country that has a lot of coal, people say: “This isn’t a real issue. It’s not serious. It’s a hoax. We don’t want to be involved in it. We don’t believe in it.”
That is not true, I promise you. It is not a hoax. It is a very serious global issue. And it’s not going away. The Obama administration is on a kind of war with coal right now, rightly so. It said: “No more new coal plants except with carbon capture and sequestration.”

That’s actually the ruling that it made, the new regulations that it announced a week ago. Other than that Poland has to think about the range of energy technologies in addition to its coal industry. Because Poland and every country need to move towards low carbon energy. Whether it’s wind power also because Poland has wind potential, whether it’s nuclear power. These are issues that every country needs to take. But I do believe that the world is gone grapple with this issue and that Poland is gone be part of the European approach to this issue and it needs to have a forward-looking strategy for this. I believe there is no future for coal unless carbon capture and sequestration prove to be a viable technology.

Question IV:
Don’t you think it’s unfair whatsoever when the banks lend money and they get nothing in return?

I believe in canceling debt when the debt is unpayable so I don’t believe in canceling debt just as a matter of will, I believe in canceling debt when it’s necessary to do so, to solve a historical problem. And that’s what’ve I always tried to argue that in the end, strangely enough, I’ve been involved in many, many debt issues now. It’s strange it is a moral issue in the end. It’s not a strictly economic issue in the narrowest sense. It actually is a moral issue in the sense of having to ask a question in the end: “Is it fair, to ask for debt relief in the particular historical circumstance that a country finds itself? Is it fair?”
If the answer is: “No, it’s not fair because if you just put in a little effort you can repay that debt.”
That even if you demand debt relief you will never get away with it. If on the other hand, you look at the historical situation and say: “Yeah, it’s fair. This country has really gotten hammered. The debt it so high, it’s fair that the country needs a fresh start.”
Then the markets will accept it and life will go on and the country gets a fresh start. So, it all depends on the circumstances, is my answer. And that’s now have been involved in this in many, many places in the world. And it’s a good answer. You can’t demand debt relief if you don’t deserve it. But if you do deserve it you should demand it, because nobody should suffer unbelievable hardship in the context of this kind of thing. When bankers lend they know that they may lose. That’s also part of financial markets. And so it’s a kind of pragmatic approach I believe.

Am not a libertarian and the reason is I don’t believe it’s right economically but I also don’t believe it’s right morally. Libertarianism is two doctrines, it seems to me. One is an economic doctrine that free markets are best. I don’t believe that. I believe that markets are best but markets that also have a public sector that can carry out certain fundamental responsibilities. So I believe in a mixed economy, not a pure market, free market economy. Second, libertarianism is a moral philosophy. It’s a moral philosophy that says that liberty is the highest virtue or the only virtue, I should say, and it comes, goes back to John Stuart Mill. Who said that there should be basically, everybody should have the maximum freedom as long as they are not harming the next person. I don’t believe that’s a full moral theory. I believe that a moral theory sees that they are lots of different moral virtues. Including compassion, including fairness and so forth. So one of the problems I have with libertarianism is that they say: “If somebody is very rich, their liberty is the most important thing. You can’t tax them, that’s a violation of their liberty. You can’t tax them, even if it is to help a starving person because liberty is the only value.”
It’s not my only value and from my understanding of our role as a social beings, and going back to Aristotle, which is my starting point, I see many virtues of which liberty is one but I don’t see it as the only one so I'll be very happy to tax a rich person, so that they can help poor person to eat. And that’s why I don’t find it compelling.

In general, in life, it’s always possible to take something that’s good and to declare it “the only good”. It’s a kind of reasoning which is seductive. And with libertarianism I find that seductive because liberty is good, it’s a very important good, but it’s not the only good. And libertarian thinking sometimes says: “It’s the only good.”
And that’s in fact what I think what libertarian is, in its modern sense, at least in The United States. So that’s why am not a libertarian. Both from a practical way of how an economy functions and from a moral philosophy point of view. I find it too restricted a vision of how society can work.

Thank you.

End of part VI

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.