NATO Economic Colloquium 1997

Evaluation of Structural Changes in Polish Industry and in Foreign Capital Flow to Poland in the Period of Systemic Transformation Zofia Wysokinska Advisor to the Minister of the Economy and Institute of Economics University of Lodz, Poland Programme of industrial policy in Poland The programme of industrial policy prepared by the Polish Ministry of Industry and Trade for the years 1995-1997 under the title of International Competitiveness of Polish Industry lays stress on three essential directions of action: export promotion policy aimed at accelerating the rate of economic growth, technological policy intended to raise the technological level in industry and finally a policy of structural changes both to boost the commercialisation and privatisation of enterprises, and to make changes in the structure of industry in regions with high industrial concentration and with regard to enterprises' internal restructuring (1). The growth of international competitiveness of Polish industry is also the main strategic goal of Poland's industrial policy until the year 2010; this goal will be achieved thanks to gains in innovativeness, entrepreneurship and efficiency in the economic sphere with simultaneous respect for the principles of durable development (2). Both of the above-mentioned programmes take into account the World Bank's approach which stresses the maintenance of economic growth and improving the international competitiveness of firms as the fundamental goals of structural policy (3). Besides the macroeconomic aspects of economic stabilisation and liberalisation of the economy, the Bank's approach also stresses the need to limit structural policy to suprasectoral (horizontal) tools in such areas as technology, export promotion and the creation of favourable conditions for the development of small and medium-sized enterprises (4). The approach taken by the World Bank and the European Commission differs from the industrial policy pursued in the countries of South East Asia in the 1970s and 1980s; the latter having the following main conditions necessary to achieve structural adjustment: the creation of investment funds to gain durable economic growth; the need to pursue a long-term industrial policy that promotes targeted industries; the creation of funds to promote infant industries; the need to allow for the specific national features of a reforming economy, in particular its stage of economic development (5). The programme of industrial policy International Competitiveness of Polish Industry adopted by the government on 16 May 1995 is based on the horizontal approach of the World Bank, but adjusted to suit the present-day external determinants in the form of international commitments (WTO/UE/OECD). Nevertheless, it is hard to negate the efficacy of the methods of industrial policy applied chiefly in the 1970s in South-East Asia, especially in the context of the high rates of economic growth, of export growth, and of FDI inflows to target industries that contributed to the enhanced standing of these countries in the World economy. Changes in the structure of industry by intensity of use of production factors in the period 1992-1995 Introduction This paper presents the results of analysis carried out to examine the structural changes which took place in Polish industry, foreign trade and the structure of foreign capital flows from the viewpoint of whether these changes had a favourable impact on the growth of competitiveness of the economy and of industry in particular. The analysis of the changes taking place in the structure of industry (regarding sales, employment and financial results) was conducted according to the European Classification of Activity (EKD) used in Poland since 1993. To get comparable statistics on industry in 1992 expressed according to the Classification of the National Economy, these statistics were converted into EKD in accordance with the binding "conversion key". Also, the EKD was used to analyse changes in the structure of foreign capital flowing into Poland in the form of foreign direct investment. Structural changes in foreign trade were analysed in accordance with the Standard International Trade Classification (SITC) used by the UN. In accordance with the theory of international trade, the assumption was taken that a "shift" in the structure from resource-intensive products to labour- and next capital- intensive products to products with a higher technology input can constitute a trend favourable to the growth of competitive exports by a given country (6). Changes in the structure of sales The share of resource-intensive sectors decreased (by about 7%) in favour of an increase (by about 1.5%) in the share of sectors turning out standard products using basic technology and in favour of technology-intensive sectors based on supplies of components (by 1%) and on technologies at a higher innovation degree (by about 4%). Labour-intensive sectors kept their position in the structure of industry in the analysed period of time, increasing their share slightly (by 0.5%). Changes in the structure of the above-mentioned sectors of industry should be evaluated as positive especially owing to the drop in the share of resource-intensive sectors and growth in importance of sectors with a higher level of technology. Changes in the structure of industrial employment Resource-intensive sectors as well as technology-intensive sectors based on technologies at a higher level of innovation recorded drops in their shares of employment (by 2.0% and 1.7% respectively) in favour of an increase in the share of labour-intensive sectors (by 3.4%) and a minimal increase in technology-intensive based mainly on supplies of components (by 3%). Sectors producing standard products based on mature technology kept their share in the structure of employment at a steady level (16.6%) throughout the entire examined period. In general, the growth in the share of technology-intensive sectors in the structure of sales with a simultaneous decline in their share of employment can be regarded as a positive tendency because it may indicate an increase in labour productivity. The reverse, less favourable trend is observed in the case of labour-intensive sectors. Changes in the structure of exports In the years between 1992 and 1995, the following changes were recorded in the structure of total Polish exports of goods and in exports to major buyers, i.e. to the European Union, Central and Eastern Europe and the former USSR, CEFTA, EFTA and developing countries including newly industrialised countries of South East Asia: Total exports recorded a fall of over 10% in the share of resource-intensive products and of 1% in the share of capital-intensive products in favour of an increase in the share of labour-intensive products (by over 12%); Exports to the EU and EFTA recorded structural change trends similar to those in total trade (see Table 1). Additionally - which should be noted as a positive development - the share of high-level technology-intensive products rose by over 2% in 1995 in comparison with 1994 (see Table 2). Exports to Central and Eastern Europe and to the CIS recorded trends similar to those in total exports. The fact that the share of high-level technology-intensive products lowered considerably in 1995 (by over 3% in comparison with 1993) should be recorded as a negative tendency, and simultaneously there was a considerable growth in the value of exports to that region. Exports to CEFTA had a greater drop in the share of resource-intensive products than the drop in Poland's total exports in favour of an increase in the share of labour-intensive goods and a small increase (of about 2%) in the share of capital-intensive products. Exports to developing countries recorded a reverse tendency in the case of resource- intensive products compared with total exports, for these products increased their share by about 1%. This increase was especially notable in exports to newly industrialised countries of South East Asia (by about 4%). In 1994-1995, both high- and low- level technology-intensive goods increased their share slightly in comparison with 1992-1993 (see Table 2). This growth was most conspicuous in Polish exports to Asian NICs in 1995 - up from the level of 8.15% in 1994 to 18.72% in 1995 (see Table 2). Changes in the structure of exports by companies with foreign capital participation Exports by companies with foreign capital participation reached the level of US$ 4,716.3m, or 20% of total Polish exports. As for the share of total imports, these firms exceeded 30%. Almost 80% of these exports and 70% of these imports were to the EU. The structure of exports by firms with foreign capital is dominated by labour-intensive products (over 46% and their share was steadily rising in the analysed years). Technology-intensive goods increased their share by over 3% in 1995 in comparison with 1994 - which should be noted as a positive development - while resource- and capital-intensive products recorded falls by over 2% and 3% respectively (see Table 3). Changes in the structure of foreign direct investment flows The structure of cumulative flows of FDI into Poland - which reached US$6,832.2m spread over 362 firms with capital exceeding US$1m - recorded the following trends in the years 1992-1995: Since 1991 there has been a tendency towards a steady increase in foreign direct investment in labour-intensive branches (from 13% at the beginning of 1992 up to 25% in 1995) which is in accordance with the attraction of foreign capital to areas in which Poland has a so-called relative comparative advantage in exports against industrialised market economies resulting mainly from lower labour costs; The share of foreign investment in sectors with advanced technology fell in the analysed period to a level of about 25%, but this was accompanied by a fivefold increase in the volume of investment flow to these sectors (from the level of US$355m at the beginning of 1992 to US$1,643m by the end of 1994); In 1995, nearly half of all FDI was located in labour- and technology- intensive sectors, about 11% in capital intensive sectors characterised by a high share of standard, undifferentiated production, about 8% was concentrated in resource-intensive sectors, whilst the remaining 30% or so was placed in the service sector, mainly in finance (about 28%) and in trade and distribution of products (over 4%) - see Table 4. Summing up Changes which occurred in the structure of sales, exports and FDI flow between 1992 and 1995 can be evaluated as positive although slow, for they are characterised by a decrease in the share of resource-intensive sectors characteristic of less developed economies. By contrast, the almost 30% share attributable to labour intensive sectors remained constant whilst an increase of over 35% in total exports and of 44% in exports to the EU - now Poland's main trading partner - occurred. This is in line with Poland's comparative advantage resulting from its lower labour costs in comparison with those in developed market economies. The fact that sectors turning out the so-called technology-intensive products increased their share in the structure of sales in 1995 should also be evaluated as positive. A similar increase in the share of these products was also revealed in the structure of Polish exports mainly to the EU, EFTA and CEFTA and to Asian NICs. The above structural changes do not ensure the competitiveness of Polish exports of technology-intensive goods to Western Europe, CEFTA and to Asian NICs, but if this trend were continued, they may become a factor conducive to achieving this goal in the future. An essential impact on the structural changes in exports was exerted by companies with foreign capital which almost doubled the value of their exports of technology-intensive goods in 1995 compared with 1994. Foreign direct investment was located mainly in labour- and technology- intensive sectors. Firms with FDI accounted for over 20% of Polish exports and for 30% of total imports. A relatively high share of foreign investment in technology-intensive branches may have a positive impact on the structure of industry in the future and may also lead towards growth in the share of technology intensive products in the structure of exports by firms with foreign capital participation. The growth in the share of products with higher advanced technology occurred also in exports to Western Europe, CEFTA and Asian NICs in 1995, a favourable trend should it continue. Changes in the structure of production, exports and flow of foreign capital may be evaluated as favourable for the growth in competitiveness of industry, although these changes are still insufficient to ensure this goal in the near future. Such changes should be accompanied by a tendency towards the intensive growth of Poland's share in the international division of labour (mainly world trade) - this share was a mere 0.5% in 1995 compared with an even lower figure of 0.42% in 1992. These figures compare unfavourably with the late 1970s and early 1980s when Poland's share was about 1%, itself an unsatisfactory level given Poland's development capacity. Table 1 Structural changes in industry in 1992-1995 by use intensity of production factors (.PDF/16Kb) Table 2 Commodity and geographical structure of Polish exports in 1992-1995 (%) (.PDF/90Kb) Table 3 Exports by companies with foreign capital participation in 1992-1995 (US$million) (.PDF/24Kb) Table 4 Structure of cumulated flow of foreign direct investment according to European Classification of Activities (.PDF/32Kb) Footnotes International Competitiveness of Polish Industry. The programme of Industrial Policy for the Year 1995-1997, Ministry of Industry and Trade, Warsaw, 1997. Assumptions of the Strategy and Policy of Industry Development until the Year 2010, Ministry of Industry and Trade, Warsaw, October 1996. World Development Report 1996, From Plan to Market, The World Bank, Washington DC, 1996. As above. T. Yanagihara, The Role of Structural Adjustment Policy and Remaining Tasks - In Search of a New Approach to Economic Development, the 6th Economic Co-operation Symposium Keynote Report, 23-24 Oct. 1995, pp. 13-18; T. Ozawa, Foreign Direct Investment and Economic Development, Transnational Corporations, 1992, vol. 1 no. 1. Z. Wysokiska, Dynamic Interdependences of Foreign Trade in Central and eastern Europe in the Light of the Theory of Integration and International Trade, Lodz, 1995.