Abstract
Poland has achieved rapid post-transition convergence to EU income levels over the last thirty years, the continuation of which will necessitate the maintenance of strong potential growth. The pandemic triggered Poland’s first recession in three decades. Deep recessions are typically associated with scarring, with the level of output failing to return to the previous trend over the medium term. Possible changes to the structure of post-pandemic economies also raise questions concerning the economy’s ability to sustain future growth. This chapter examines the question of post-pandemic potential growth using the production function approach, concluding that the unique nature of the recession—a sharp yet short-lived drop in output—and extraordinary policy support appear to have safeguarded factors of production, limiting scarring and setting the stage for a continuation of solid growth over the medium term. While unfavorable demographics are projected to cause a modest decline in potential growth over the medium term, policy initiatives can influence the pace of future growth and convergence.
Post-Pandemic Potential Growth and Scarring
Poland has achieved rapid post-transition convergence to EU income levels over the last thirty years, the continuation of which will necessitate the maintenance of strong potential growth. The pandemic triggered Poland’s first recession in three decades. Deep recessions are typically associated with scarring, with the level of output failing to return to the previous trend over the medium term. Possible changes to the structure of post-pandemic economies also raise questions concerning the economy’s ability to sustain future growth. This chapter examines the question of post-pandemic potential growth using the production function approach, concluding that the unique nature of the recession—a sharp yet short-lived drop in output—and extraordinary policy support appear to have safeguarded factors of production, limiting scarring and setting the stage for a continuation of solid growth over the medium term. While unfavorable demographics are projected to cause a modest decline in potential growth over the medium term, policy initiatives can influence the pace of future growth and convergence.
A. Introduction
1. Since the transition to a market economy, Poland has achieved significant convergence to EU income levels. The pandemic-induced recession ended three decades of uninterrupted growth. From 1995 to 2019, Poland’s PPP-adjusted GDP per capita had increased from 43 percent to 72 percent of the EU average. Such convergence was achieved not only through the avoidance of significant boom-bust cycles but also the maintenance of a solid rate of potential growth.
GDP Per Capita
(In euro, purchasing power parity (PPP) adjusted; percent of EU average)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Source: Eurostat.GDP Per Capita
(In euro, purchasing power parity (PPP) adjusted; percent of EU average)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Source: Eurostat.GDP Per Capita
(In euro, purchasing power parity (PPP) adjusted; percent of EU average)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Source: Eurostat.2. This chapter tackles two main questions: (1) how potential growth over the medium term may compare to its pre-pandemic level; and (2) the extent of scarring to output that may be expected following the pandemic-induced recession. The chapter begins with an overview of pre-pandemic potential growth and how actual outcomes compared to previous projections for potential growth. The main contribution of the paper is a new production function analysis of potential growth over the medium term. It is followed by a discussion of scarring after deep recessions, and how the experience in Poland may be different. The chapter concludes with a discussion of how policies can support potential growth and convergence in the years ahead.
B. Pre-Pandemic Potential Growth
3. A Selected Issues Paper for the 2017 Article IV consultation last analyzed medium-term potential growth.2 Using a production function approach, IMF (2017) concluded that potential growth would likely be in a range of 2.7 to 3.0 percent over the medium term (2017–22). Such a level of potential growth would have represented a continuation of the slower level of growth observed after the Global Financial Crisis, driven by more moderate total factor productivity (TFP) growth and unfavorable demographic trends that would lower the contribution of labor to potential growth.
Contributions to Potential Growth, Projected in 2017
(Percent)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Source: IMF (2017).Contributions to Potential Growth, Projected in 2017
(Percent)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Source: IMF (2017).Contributions to Potential Growth, Projected in 2017
(Percent)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Source: IMF (2017).4. Actual pre-pandemic GDP growth over 2017–19, however, significantly outperformed earlier estimates of potential growth. While IMF (2017) projected potential growth over this period to average 2.9 percent, actual growth subsequently averaged 5.0 percent (Figure 1). The new analysis of potential growth presented in this chapter (details in the next section) suggests that growth outperformed earlier-projected potential over this period in part because output expanded well above the level of potential, leading to the development of a positive output gap of 2.7 percent of GDP by 2019. But besides cyclical factors, new estimates for potential growth of 3.7 percent over 2017–19 also exceed those developed in IMF (2017).
Ex-Post Analysis of Potential Growth Projected in 2017
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: Statistics Poland; IMF (2017); and IMF staff calculations.Ex-Post Analysis of Potential Growth Projected in 2017
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: Statistics Poland; IMF (2017); and IMF staff calculations.Ex-Post Analysis of Potential Growth Projected in 2017
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: Statistics Poland; IMF (2017); and IMF staff calculations.5. TFP and capital stock growth were the most important factors in the outperformance of earlier potential growth estimates. The contribution of labor turned out to be stronger than projected, driven by a trend decline in the unemployment rate that was unanticipated. Whereas IMF (2017) projected the rate of unemployment to remain around 5 percent, it subsequently declined to below 4 percent and remained at this level, suggesting a lower level of trend unemployment. More importantly, earlier projections also underestimated the trend levels of capital stock growth (i.e., investment) and TFP growth.
Contributions to Difference in Potential Growth Estimates
(Percentage point contribution, 2021 minus 2017 estimates)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations.Contributions to Difference in Potential Growth Estimates
(Percentage point contribution, 2021 minus 2017 estimates)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations.Contributions to Difference in Potential Growth Estimates
(Percentage point contribution, 2021 minus 2017 estimates)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations.C. Assessment of Post-Pandemic Potential Growth
6. A new analysis of potential growth should consider developments in the Polish economy during the pandemic and the shape of the post-pandemic economy and policies. The analysis in this section takes advantage of a longer sample period and adds new dimension to the examination of the factors of production; importantly, it also discusses the implications of the pandemic and the special questions it raises. Recessions typically have a negative impact on the factors of production, though policies can help to mitigate this effect3 Characteristics of the post-pandemic economy remain highly uncertain, with implications for the supply of labor, investment, and especially productivity as the nature of work changes and the sectoral composition of economies evolves. Increased public investment, including that to be financed by Next Generation EU grants, can also influence potential growth over the medium term.
7. The remainder of this section analyzes the possible contribution of each factor of production to medium-term potential growth. As illustrated by the ex-post analysis of the potential growth projections made in IMF (2017), such an exercise is prone to significant uncertainty. Nevertheless, this section will present the case for the possible evolution of each factor of production over the medium term, followed by a discussion of upside and downside risks.
Labor Supply
8. The decline in employment during the pandemic recession was short lived. Employment declined by 2 percent in Q22020 but quickly recovered, with the pre-pandemic level of employment regained by the beginning of 2021. The decline in employment at the beginning of the pandemic was also much less severe than that experienced during the Global Financial Crisis. The overall maintenance of employment relationships owes to government policies that provided aid to companies on the condition of maintaining employment levels. Pre-pandemic labor market tightness also likely played a role, as employers sought to hoard labor in the case of a quick rebound in activity.
Employment Growth
(Percent year-on-year, with HP filter trend; not including foreign workers)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: Statistics Poland; and IMF staff calculations.Employment Growth
(Percent year-on-year, with HP filter trend; not including foreign workers)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: Statistics Poland; and IMF staff calculations.Employment Growth
(Percent year-on-year, with HP filter trend; not including foreign workers)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: Statistics Poland; and IMF staff calculations.9. Labor force participation remains high. Along with a small decline in employment at the start of the pandemic, Poland also experienced a modest decline in labor force participation of about 0.5 p.p. that was quickly reversed. While the labor force participation rate continued to increase in 2021, a change in the labor force survey methodology resulted in a series break, making the increase difficult to interpret. Nevertheless, the pandemic does not appear to have lowered labor force participation. Additional increases in participation in the period ahead are hard to anticipate. Although the personal income tax reforms in the Polish Deal may have some positive impact on participation on a net basis, this effect is impossible to quantify at present and has not been included in the projections.
10. However, the demographic outlook is weak, and there is little scope for a further trend decline in unemployment. The working age population peaked in the early 2010s and will continue to shrink over the medium term. However, an increase in participation and a trend decline in the unemployment rate—from nearly 10 percent in 2010 to around 3 percent currently—bolstered the supply of labor over these years. Going forward, demographics and the lack of scope for a further decline in unemployment will constrain labor supply (Figure 2).
Labor Market Projections
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: Statistics Poland; and IMF staff projections.Labor Market Projections
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: Statistics Poland; and IMF staff projections.Labor Market Projections
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: Statistics Poland; and IMF staff projections.11. A continued contribution of foreign workers to the labor supply is uncertain over the medium term. The National Bank of Poland (NBP) estimates that 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 (NBP 2021).4 The contribution of foreign workers to potential growth was not considered in IMF (2017),5 but foreign workers can now be estimated to have made a significant contribution to potential growth in recent years, on average 0.3 p.p. over 2016–19.6 While some foreign workers left Poland at the beginning of the pandemic, they have since returned. As the NBP estimates that the effective number of foreign workers may level off over 2022–23 (NBP 2021), this analysis assumes that foreign workers will not contribute further to growth over the medium term, though upside risk is evident.
Effective Number of Foreign Workers 1/
(Thousands)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
1/ IMF staff assumptions begin starting in 2024.Sources: NBP July 2021 Inflation Report; and IMF staff estimates.Effective Number of Foreign Workers 1/
(Thousands)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
1/ IMF staff assumptions begin starting in 2024.Sources: NBP July 2021 Inflation Report; and IMF staff estimates.Effective Number of Foreign Workers 1/
(Thousands)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
1/ IMF staff assumptions begin starting in 2024.Sources: NBP July 2021 Inflation Report; and IMF staff estimates.12. Despite a lack of labor market scarring from the pandemic, the labor contribution to potential growth is projected to turn negative around 2022. Labor supply made a significant contribution to potential growth over 2013–19, with increasing participation, a trend decrease in unemployment, and a growing number of foreign workers offsetting a decline in the working age population. Going forward, however, absent continued growth of foreign workers, the contribution of labor to potential growth is likely to turn negative around 2022 (Figure 3).
Labor Contribution to Potential Growth
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations and projections.Labor Contribution to Potential Growth
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations and projections.Labor Contribution to Potential Growth
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations and projections.13. Compared to pre-pandemic projections, labor supply is now projected to be a smaller drag on growth in the near term. The contribution of labor implied in the last pre-pandemic projections (January 2020 WEO) was projected to turn negative more quickly, based on an assumed high level of the trend unemployment rate. Assuming that the current level of unemployment can be maintained over the medium term, labor would present a smaller drag on growth for a few years, but the projections converge over the medium term (Figure 3).
Capital Stock
14. Survey data suggest that cyclical private investment is set to rebound. The NBP’s October 2021 Quick Monitoring Survey of corporates reported that investment optimism was near the peak of the last investment cycle in 2018, with strong sentiment in industry, large firms, and exporters. Corporates also showed strong interest in new investments.
15. Strong balance sheets position non-financial corporates (NFCs) well for future investment. During the pandemic, the net worth of NFCs in Poland increased, based on an increase in currency and deposits that can be linked to partially forgivable liquidity loans offered by the Polish Development Fund (PFR) (Figure 4). The strengthening of NFC balance sheets during the pandemic is a stark contrast to the experience after the Global Financial Crisis, when net worth deteriorated as NFCs took on more debt.
Non-Financial Corporate Balance Sheets
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: ECB; and IMF staff calculations.Non-Financial Corporate Balance Sheets
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: ECB; and IMF staff calculations.Non-Financial Corporate Balance Sheets
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: ECB; and IMF staff calculations.
Index of New Investments
(Percent of companies surveyed)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: October 2021 NBP Quick Monitoring Survey.Index of New Investments
(Percent of companies surveyed)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: October 2021 NBP Quick Monitoring Survey.Index of New Investments
(Percent of companies surveyed)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: October 2021 NBP Quick Monitoring Survey.16. Looking beyond a cyclical investment rebound, Next Generation EU grants can also provide a boost to investment over the medium term. While the European Commission has not yet approved Poland’s National Recovery Plan, approval would unlock some 4½ percent of GDP in grants, to be spent over 2022–26, which will increase public and private investment. The baseline projections assume that funds will begin to flow later in 2022, with the peak impact on growth experienced in 2023. Public investment, however, would be elevated through 2026.
Projected Next Generation EU Funds Spending
(Percent of GDP)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Source: IMF staff projections.Projected Next Generation EU Funds Spending
(Percent of GDP)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Source: IMF staff projections.Projected Next Generation EU Funds Spending
(Percent of GDP)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Source: IMF staff projections.17. The contribution of capital accumulation to growth is projected to rebound to pre-pandemic levels over the medium term. The capital contribution to potential growth declined during the pandemic recession as private investment contracted. Over the medium term, with a recovery of private investment as a percent of GDP to pre-pandemic levels and an increase in public investment (linked to Next Generation EU projects), the contribution of capital to potential growth would return to its strong pre-pandemic level, while remaining below its peak levels a decade ago (Figure 5). 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.
Capital Stock Contribution to Potential Growth
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: Statistics Poland; and IMF staff calculations and projections.Capital Stock Contribution to Potential Growth
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: Statistics Poland; and IMF staff calculations and projections.Capital Stock Contribution to Potential Growth
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: Statistics Poland; and IMF staff calculations and projections.Total Factor Productivity
18. TFP growth had accelerated before the pandemic. After a slowdown in the years following the Global Financial Crisis, TFP growth accelerated over 2017–19, possibly in part due to strengthening external demand that tends to be correlated with TFP growth in Poland (IMF 2017). The NBP has pointed to the increasing capacity of the Polish economy for innovation and its growing position in global value chains as factors behind strong pre-pandemic TFP growth (NBP 2019).
Estimated TFP Contribution to Potential GDP Growth
(Percentage points)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations.Estimated TFP Contribution to Potential GDP Growth
(Percentage points)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations.Estimated TFP Contribution to Potential GDP Growth
(Percentage points)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations.19. Including foreign workers in growth accounting helps obtain better estimates of TFP’s strong contribution to pre-pandemic GDP growth. Because TFP is the residual of observed GDP and more measurable factors of production (labor and capital), the exclusion of foreign workers—which are admittedly difficult to measure but did indeed exist and contribute to output—would allocate their contribution to TFP. 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.
20. While highly uncertain, on balance, the shape of the post-pandemic economy is likely to favor the continuation of strong TFP growth. The increased acceptance of remote and flexible work may contribute to high productivity of labor in existing jobs. Poland is also well positioned to take advantage of a likely increase in demand for remotely provided business and IT services, areas that have contributed to Polish services export growth in recent years. These jobs tend to be high productivity. Should companies seek a greater degree of localization in supply chains after the pandemic, Poland would likely be a primary destination within the EU for such nearshoring investment, which would further strengthen Poland’s position in global value chains. Finally, anecdotal evidence suggests that companies are preparing to increase automation in response to labor supply shortages in Poland. Recent research also suggests that pandemics tend to accelerate robot adoption, which raises productivity (Sedik and Yoo, 2021).
21. In the baseline projections, the contribution of TFP to potential growth remains strong over the medium term. Coming out of a brief trend decline in TFP growth during the pandemic, the contribution of TFP would increase slightly above pre-pandemic levels by 2023 before moderating over the medium term. If such a path were to materialize, the contribution of TFP would still remain well below the levels observed in the early 2000s.
Estimated TFP Contribution to Potential GDP Growth
(Percentage points)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations.Estimated TFP Contribution to Potential GDP Growth
(Percentage points)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations.Estimated TFP Contribution to Potential GDP Growth
(Percentage points)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations.Potential Growth: Baseline and Risks
22. In sum, potential growth over the medium term is projected to return to near pre-pandemic levels. Potential growth would average 3.3 percent over 2022–26, compared to the 3.7 percent estimated over 2017–19. The modest slowdown in potential growth would not come from pandemic-related scarring to the factors of production but rather pre-existing labor supply challenges related to demographics. Unless the number of foreign workers continues to increase, the contribution of labor will soon turn negative, though capital stock growth and TFP are projected to remain strong.
New Projections: Contributions to Potential Growth
(Percent)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations.New Projections: Contributions to Potential Growth
(Percent)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations.New Projections: Contributions to Potential Growth
(Percent)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations.23. Should upside risks materialize, potential growth could be stronger. Foreign workers could continue to arrive from Ukraine, and other sources of foreign labor could also be tapped, adding to the labor contribution to growth in the context of labor supply challenges. Possible reverse migration of Poles abroad could bolster labor supply. The recent PIT reform also reduces the labor tax wedge at lower income levels and could increase participation. A significant increase in reshoring or global supply chains could further increase investment and TFP growth. Furthermore, the contribution of remote work or automation to TFP growth could be stronger than expected. An increase in public investment, including from Next Generation EU grants, could improve infrastructure quality and productivity.
24. Downside risks to potential growth also loom. A significant delay in the implementation of Next Generation EU projects would lower investment growth and the possible future productivity gains of improved infrastructure quality. Should the worst-case legal scenarios related to foreign exchange mortgages materialize in the banking sector, banks may provide less credit to the private sector as they rebuild their balance sheets, lowering investment. A need for a significant reallocation of labor across sectors, should contact-intensive sectors fail to return to pre-pandemic activity levels, would also have implications for productivity. In the near term, productivity may decline as workers transition between sectors. However, a failure to reallocate workers away from low-productivity sectors would represent a drag on productivity over the medium term. Over the medium term, the possible cost of the energy transition may slow TFP growth, if it becomes more costly to produce a given unit of output.
D. Scarring After the Pandemic Recession
Extent of Projected Scarring
25. The current baseline projections suggest no scarring from the pandemic recession in Poland. As used here, scarring is defined as a persistent difference between pre-recession output projections and output subsequently realized over the medium term. Expected scarring would thus be given by the difference between two projected paths. The path of output is currently projected to converge to pre-pandemic projections (January 2020 WEO) in 2024, and output in 2026 would be 0.7 percent above the early projections.
26. With hindsight, IMF staff’s pre-pandemic medium-term growth projections were informed by an overly pessimistic view of potential growth. In the January 2020 WEO, staff projected a slowdown in growth to 3.1 percent in 2020 and to 2.5 percent over the medium term. An ex-post analysis of the implicit assumptions on potential growth imbedded in these projections reveals that they implied sharp declines in capital accumulation and, especially, TFP growth, relative to immediately prior years. Thus, a comparison between the January 2020 WEO projections and the current projections may not be sufficient to assess expected scarring from the pandemic.
27. A more realistic pre-pandemic potential growth outlook would have been much stronger. A more positive view of potential growth in early 2020 would clearly have been appropriate. Based on information available at the time, an alternative path for potential growth would have been based on similar assumptions for labor supply and investment but taken a much more positive view of TFP growth over the medium term. A realistic path, for example, would have shown a slow decline in the rate of potential growth from around 3.8 percent in 2019 to just over 3 percent over the medium term (Figure 6).
Potential Growth Implied by January 2020 WEO Projections
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations.Potential Growth Implied by January 2020 WEO Projections
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations.Potential Growth Implied by January 2020 WEO Projections
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations.28. Counterintuitively, a stronger pre-pandemic view on potential growth would not necessarily have produced significantly faster medium-term growth projections. A full production function analysis in early 2020 would have also shown that a significantly positive output gap had formed by 2019. Because IMF staff’s medium-term projections generally are constructed so that output gaps close over the medium term (approximately a five-year horizon), a reduction of the output gap would have required actual growth projections to underperform potential.7 Counterintuitively, the growth rates required to close the output gap would have produced a projected path of GDP growth that differed fairly little from the actual January 2020 projections (Figure 7).
Alternative Scenario for Early 2020 GDP Growth Projections
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations and projections.Alternative Scenario for Early 2020 GDP Growth Projections
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations and projections.Alternative Scenario for Early 2020 GDP Growth Projections
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: IMF staff calculations and projections.29. Thus, even a more realistic pre-pandemic view of potential growth would still point to little scarring to the pandemic, under the current baseline projections. A comparison of the difference between currently projected output in 2026 versus that projected in the January 2020 WEO or an alternative early 2020 path shows little difference in the implied scarring. 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. A fair conclusion is thus that should the baseline projections materialize over the medium term, there would be only a minimal amount of scarring from the pandemic.
Output Projections: Current and Pre-Pandemic
(Index, 2017 = 100)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Source: IMF staff projections.Output Projections: Current and Pre-Pandemic
(Index, 2017 = 100)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Source: IMF staff projections.Output Projections: Current and Pre-Pandemic
(Index, 2017 = 100)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Source: IMF staff projections.Comparison to Typical Post-Pandemic Output Losses
30. Deep recessions often leave long-lived scars to output. Scarring is the result of permanent damage to an economy’s supply potential, coming through several channels. First, unemployment may remain elevated for an extended period after the recession and some workers may drop out of the labor market, leaving a smaller labor force. Second, weak investment results in slower capital accumulation. Third, productivity can be reduced by resource allocation, bankruptcies of firms, and erosion of human capital (IMF 2021).8
31. Scarring from previous modern pandemics and epidemics tends to be higher than after a typical recession. However, the cumulative output loss after financial crises tends to be even higher. In a typical recession, scarring is mostly the result of weaker TFP growth, whereas weak post-crisis investment, in particular, tends to drive a larger permanent loss of output following pandemics or financial crises (IMF 2021).
Medium-Term Output Losses After Recessions
(Percentage points of GDP, cumulative impulse response function)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: April 2021 WEO Chapter 2, Figure 2.6.Medium-Term Output Losses After Recessions
(Percentage points of GDP, cumulative impulse response function)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: April 2021 WEO Chapter 2, Figure 2.6.Medium-Term Output Losses After Recessions
(Percentage points of GDP, cumulative impulse response function)
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Sources: April 2021 WEO Chapter 2, Figure 2.6.32. IMF staff projections suggest that Poland’s economic recovery would be much stronger than the usual post-pandemic experience. The depth of the recession in Poland in 2020 was typical of modern pandemics/epidemics in emerging market/developing economies (EMDEs) (Figure 8). The estimated rebound in 2021, however, was already larger than the usual experience, and staff projections for the path of the deviation of real GDP per capita relative to the pre-pandemic baseline suggest little to no scarring to output, far from the typical experience.9 While the projected recovery of TFP and employment relative to the pre-pandemic trend would be only moderately stronger than the typical experience, the strong recovery of the capital stock appears to be the main driver of the lack of scarring.
Output Losses After Modern Pandemics and Epidemics
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Note: The shaded areas represent 90 percent confidence interval bands around the WEO estimates.Sources: April 2021 WEO; and IMF staff calculations.Output Losses After Modern Pandemics and Epidemics
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Note: The shaded areas represent 90 percent confidence interval bands around the WEO estimates.Sources: April 2021 WEO; and IMF staff calculations.Output Losses After Modern Pandemics and Epidemics
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Note: The shaded areas represent 90 percent confidence interval bands around the WEO estimates.Sources: April 2021 WEO; and IMF staff calculations.33. The strength of policy support during the recession may account for Poland’s atypical experience, should such projections materialize over the medium term. As noted in IMF (2021), the global policy response to the pandemic—including in Poland—was unprecedented. Support for workers and firms helped maintain employment relationships, supported household incomes, prevented bankruptcies of firms, and averted the amplification of the shock through the financial sector. The maintenance of financial sector health also bodes well for the availability of financing for private investment. In the case of Poland, the strong recovery of the capital stock would be in part driven by new investment financed by Next Generation EU grants over the medium term, which are projected to boost investment significantly.
E. Policies to Support Potential Growth and Convergence
34. Underlying Poland’s enviable track record of income convergence has been a strong level of potential growth. Since 2001, potential growth has averaged around 3¾ percent, near the current level of estimated potential growth, despite having achieved significant income convergence over this period. Several factors have contributed to the maintenance of potential growth, despite income convergence and a declining working age population. A steady supply of foreign workers, mostly from Ukraine, has bolstered labor supply, driven by push and pull factors. EU capital transfers have supported investment, while Poland’s competitiveness, integration in the German manufacturing supply chain, and pools of skilled labor have fostered its integration into global value chains and emergence as a leader in skilled service exports in business and IT services.
35. Policies can help support potential growth to allow continued income convergence. Beyond a projected overall decline in population, a shrinking share of the working age population poses a long-term challenge, and 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 (Figure 9). While strong TFP growth continues in the baseline projections, the post-pandemic outlook is subject to considerable uncertainty.
Business Investment
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Source: Eurostat.Business Investment
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Source: Eurostat.Business Investment
Citation: IMF Staff Country Reports 2022, 059; 10.5089/9798400203787.002.A001
Source: Eurostat.36. The authorities should take steps to maximize labor supply. While domestic labor force participation has increased in recent years, pockets of untapped labor remain. The reduction in the labor tax wedge as part of the recent PIT reform may provide incentives for greater participation at lower income levels. As demonstrated during the pandemic, particular attention needs to be paid to supporting those with caretaking responsibilities, especially women, to facilitate participation, including through support for services such as childcare. A reversal of the previous reduction in the retirement age would also increase participation of older workers. With the supply of labor from neighboring countries such as Ukraine possibly slowing, the authorities should consider opening Poland to additional sources of immigration. The relaxation of restrictions on foreign workers’ periods of employment would also boost labor supply.
37. 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 also made access to clean energy an increasingly important factor in companies’ FDI decisions, underscoring the importance of the development of a long-term financing strategy for the energy transition. As the banking sector remains an important financing source of private investment, the authorities should proactively encourage resolution of foreign exchange mortgage legal risks and redesign the bank asset tax to reduce banks’ incentive to hold Treasury securities at the possible expense of private credit. The authorities should also seek to 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.
38. Policies can also help maintain strong TFP growth. Active labor market policies, including training and upskilling, with a special focus on digital skills, can help facilitate the reallocation of labor to higher-productivity activities. The authorities should also consider policies to attract skilled, high productivity migrants. With global value chain (GVC) participation associated with TFP growth, the authorities should promote policies that tend to be associated with GVC participation, including the quality of infrastructure and institutions, and educational quality (Ilahi et al., 2019). Finally, the authorities could consider further incentives for private companies to invest in R&D and innovation.
References
Ilahi, Nadeem, Armine Khachatryan, William Lindquist, Nhu Nguyen, Faezeh Raei, and Jesmin Rahman. 2019. “Lifting Growth in the Western Balkans: The Role of Global Value Chains and Services Exports.” International Monetary Fund, Washington, D.C.
International Monetary Fund (IMF). 2017. “Poland: Selected Issues. IMF Country Report No. 17/221.” Washington, D.C.
International Monetary Fund (IMF). 2021. “After-Effects of the COVID-19 Pandemic: Prospects for Medium-Term Economic Damage” In World Economic Outlook: Managing Divergent Recoveries, Washington, D.C., April.
National Bank of Poland (NBP). 2019. Inflation Report. Warsaw, November.
National Bank of Poland (NBP). 2021. Inflation Report. Warsaw, July.
Podpiera, Jiří, Faezeh Raei, and Ara Stepanyan. 2017. “A Fresh Look at Potential Output in Central, Eastern, and Southeastern European Countries.” IMF Working Paper 17/37, International Monetary Fund, Washington, D.C.
Sedik, Tahshin and Jiae Yoo. 2021. “Pandemics and Automation: Will the Lost Jobs Come Back?” IMF Working Paper 21/11, International Monetary Fund, Washington, D.C.
Strzelecki, Paweł, Jakub Growiec, and Robert Wyszyński. 2020. “The Contribution of Immigration from Ukraine to Economic Growth in Poland.” NBP Working Paper No. 322., National Bank of Poland, Warsaw.
Appendix I. Production Function Approach
With some modifications and extensions, the production function (PF) approach is largely consistent with that taken in IMF (2017), which follows Podpiera et al. (2017). A standard Cobb-Douglas PF approach is used to decompose output into supply side factors, explicitly accounting for capital and labor inputs, with total factor productivity (TFP) obtained as the residual. The specification for quarterly real output Yt is:
Yt = At(Kt)(1-α)(LtAHWt)α
where:
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 several components: (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, which takes into account the cyclical component of the intensity of the utilization of labor inputs. Estimating the contribution of average hours worked attempts to obtain a more precise estimate of the contribution of TFP (At).
α refers to the labor share in the production function, which is set at 0.42, following IMF (2017). The labor share of output is set in line with the gross compensation of employees as a share of gross value added.
Prepared by William Lindquist. Contributions of Karim Foda on corporate balance sheets and total factor productivity are gratefully acknowledged. This work also benefited from comments from the National Bank of Poland and Polish Ministry of Finance received during a seminar as part of the 2021 Article IV mission.
Republic of Poland Selected Issues, IMF Country Report No. 17/221, devoted individual chapters to each factor of production. The chapter “Long-Run Growth—Baseline and Reform Scenarios” brought together baseline projections for potential growth over 2017 through 2022.
See Section D for a discussion of post-recession scarring.
The Labor Force Survey does not include foreign workers in its measures of employment or the economically active population.
Reliable estimates on the effective numbers of foreign workers were not available at the time, hindering their inclusion in the analysis in IMF (2017).
Strzelecki et. al. (2020) estimates that Ukrainian workers contributed about 0.5 p.p. to Poland’s GDP growth per year over 2013–18.
The 2020 recession subsequently served to close the output gap.
Bankruptcies can involve the (permanent or temporary) retirement of capital from production; but given the way the stock of capital is estimated, the associated reductions in potential output would be captured as variations of factor productivity.
As noted in the previous section, a comparison to a more realistic alternative January 2020 scenario would show a small amount of medium-term scarring to output.
References
Ministry of State Assets. 2019. “National Energy and Climate Plan for 2021–30.” Warsaw.
Ministry of Climate and Environment. 2021. “Energy Policy of Poland until 2040.” Warsaw.
Ministry of Environment. 2013. “Polish National Strategy for Adaptation to Climate Change (NAS 2020), with the perspective by 2030.” Warsaw.
Arregui, Nicolas, Ruo Chen, Christian Ebeke, Jan-Martin Frie, Daniel Garcia-Macia, Dora Iakova, Andreas Jobst, Louise Rabier, James Roaf, Anna Shabunina, Sebastian Weber. 2020a. “Sectoral Policies for Climate Change Mitigation in the EU.” IMF Departmental Paper No. 20/14, International Monetary Fund, Washington, D.C.
Chen, Jiaqian. Chepeliev, Maksym, Daniel Garcia Macia, Dora Iakova, James Roaf, Anna Shabunina, Dominique van der Mensbrugghe, Philippe Wingender. 2020b. “Sectoral Policies for Climate Change Mitigation in the EU.” IMF Departmental Paper No. 2020/13, International Monetary Fund, Washington, D.C.
Bucholtz, Sonia, Paweł Wróbel, 2021. “Gotowi na 55%—Przewodnik po finansowaniu transformacji energetycznej po 2021r.” Forum Energii, Warsaw.
World Bank Group. 2018. “Poland: Energy Transition—The Path to Sustainability in the Electricity and Heating Sector.” Washington, D.C.
Urząd Regulacji Energetyki. 2021. “Informacja na temat planów inwestycyjnych w nowe moce wytwórcze w latach 2020–34.” Warsaw.
Polskie Sieci Elektroenergetyczne. 2020. “Plan rozwoju w zakresie zaspokojenia obecnego i przyszłego zapotrzebowania na energię elektryczną na lata 2021–2030.” Konstancin-Jeziorna.
Prepared by Krzysztof Krogulski. This work benefited from comments from the Ministry of Climate and Environment, National Bank of Poland and Ministry of Finance received during a seminar part of the 2021 Article IV mission.
See ND-GAIN index by the University of Notre Dame or ESPON (2012), “Climate Change and Europe’s Regions.”
Strategic adaptation plan (Ministry of Environment, 2013) provides an overview of main risks and adaptation measures.
See IMF (2020a) and IMF (2020b) for discussion of climate policies in EU countries.
Conclusions from European Council meeting on December 11, 2020
Introduction of so-called 10H rule, limiting land suitable for construction of wind farms, and changes in the Law on Renewable Energy stopped the expansion of this fast-growing sector in 2016. As a result, foreign investors sued Poland in arbitration, while banks active in renewable financing were forced to significantly increase provisioning.
Global Coal to Clean Power Transition Statement signed during UN Climate Change Conference in Glasgow in 2021.
