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Investment and infrastructure are important determinants of the competitiveness of economies. In this subsection, their role in shaping the competitiveness of the Polish economy is analyzed, taking into account the changes that have occurred since Poland joined the European Union in 2004.

Investment

An in-depth look at investment outlays in Poland during its first 10 years of Euro‑ pean Union membership, from 2004 to 2013, reveals two different periods in terms of the value and growth of this part of aggregate demand. From 2004 to 2008, the value of investment outlays grew consistently, with double‑digit growth in 2006 and 2007. That made it possible to reach a level of investment equal to values from before the deep drop during the 2001–2003 period. This positive change in investment in Poland was definitely a result of Poland’s EU accession and a general improvement in the Polish economy. In 2009 the value of investment outlays in the Polish economy began decreas‑ ing, except in 2011 when—together with GDP growth—investment increased by 8.4 %. In the last five years the growth and value of investment outlays have shown negative trends due to the influence of adverse effects of the global economic crisis. Nevertheless, as in the case of GDP growth, the adverse influence on Poland was relatively moderate, at least compared with the rest of the EU. The value of investment outlays decreased no more than 1.7 % in year‑on‑year terms, with a 17.6 % increase in 2007.

Growing investment has increased the competitiveness of the Polish economy on the one hand. On the other, Polish enterprises performed better on the European market and increased their investment outlays and thus their capacity to meet grow‑ ing demand. Because of a specific feedback mechanism described in the Keynesian

model, investment outlays influence the economy far more dramatically than private consumption or government spending and are responsible for the part of aggregate demand most dependent on the business climate. So, investment has stimulated both the demand and supply sides of the Polish economy. Both 2004 and 2005 marked a sig‑ nificant improvement in the Polish economy (with cumulative growth at around 9 %, compared with just 5.3 % during the 2002–2003 period). This automatically changed previous, negative trends in the value of investment and economic growth in Poland. In 2006 and 2007 the country’s GDP growth rate was higher than 6 %, with double‑ digit dynamics in investment. In 2008, the Polish economy expanded by 5.1% and the value of investment outlays grew by around 10 %. The following year marked a negative change in both GDP growth (1.6 %) and the value of investment (a decrease by 1%). In 2010, the Polish economy grew by 3.9 %, not enough to increase the value of invest‑ ment outlays, but the rate at which this part of aggregate demand decreased was lower than in the previous year (0.4 %). In 2011, Poland’s economic growth picked up again (to 4.5 %) and investment increased by around 8 % because of the feedback mechanism described above. The following year marked another deceleration in GDP growth (to 1.9 %) and the value of investment outlays dropped by 1.7 %, as expected.

The future path of investment growth in Poland is considered later in this chapter. Still, it is widely expected that the value of investment outlays will increase as a result of faster GDP growth (most probably 2.5 %‑3 %). That could mean that the feedback mechanism observed in the 2008–2012 period would be at work again.

Figure 5

Investment growth in Poland, 2004–2013

a _{preliminary data}

Source: Author’s own calculations based on Central Statistical Office data.

Contrary to optimistic expectations voiced last year by the government and some independent economists, 2013 most likely did not mark a positive change in investment in Poland, albeit the rate at which the value of investment outlays decreased dropped significantly compared with the previous year. This change in the rate at which the value of investment outlays decreased should be treated as a positive trend, despite the fact

that 2013 was another consecutive year of negative dynamics in this part of aggregate demand and the total amount of investment outlays was substantially lower than during the 2007–2011 period. The 2013 investment ratio (relation of investment outlays to the GDP in current prices) was 18.4 %, compared with 19.1% in 2012 and 20.3 % in 2011.

The significant deceleration in investment outlays and gross fixed capital formation in the Polish economy in 2012 occurred despite slower GDP growth than in the previ‑ ous year (1.6 % in 2013, compared with 1.9 % in 2012, according to preliminary data by the Central Statistical Office). This means that the link between this part of aggregate demand and the overall economic situation was not only different than in previous years, but also different than the relationship described by the Keynesian model. Yet, insofar as the data describing the Polish economy during the 2008–2012 period proved such a feedback mechanism, in 2013 the relationship between GDP growth and the value and growth of investment outlays was shaped in a totally different way.

The prime factor driving the decreasing negative growth of the investment pattern in 2013 was direct financing from the European Union budget combined with structural and cohesion funds, which fueled capital formation in both the public and private sectors. Data by the Ministry of Regional Development show that the total expendi‑ ture of businesses, institutions and individuals benefiting from EU funds in Poland in 2013 came to ZL255.2 billion and increased by ZL65.2 billion (in the part directly financed by the EU, the increase was ZL45.4 billion), compared with ZL68.6 billion in 2012 (ZL48.4 billion directly financed by the EU). In 2013, businesses, institutions and individuals benefiting from EU funds again spent more than 30 % of all structural and cohesion funds allocated to Poland under the EU’s 2007–2013 budget.

Another factor behind the deceleration in investment was the relatively moder‑ ate course of the financial crisis in Poland, at least compared with the rest of the EU. From 2008 to 2013 the Polish economy expanded by almost 20 %, while the average cumulative growth in the EU as a whole was close to zero. However, the crisis led to a general decline in confidence among both households and enterprises, triggering a decreased propensity to consume and invest. The rate at which investment grew fell in 2008, followed by a significant drop in investment outlays in 2009 and 2010. In addition, in the first two years of the crisis, the availability of credit offered to both households and enterprises decreased significantly because of a new, restrictive policy introduced by commercial banks. However, as time passed, banks became accustomed to the poorer climate and started to lend money to enterprises planning investment projects, which led to a positive growth rate for investment in 2011. In 2012–2013, the value of investment outlays dropped again (by 2 %). Notably, the non-financial sector recorded substantial financial results, which enabled it to finance investment projects with its own funds.

The key factor that led to continued negative trends in investment, alongside slower GDP growth, was a significant drop in the foreign direct investment (FDI). Preliminary data by the Polish central bank (NBP) show that FDI in Poland not only decreased but its value was negative (–$2.9 billion) in 2013. The NBP said this was chiefly due to a single decision to close down a special‑purpose entity established previously in

Poland. As a result of that decision, Poland lost almost $3 billion in FDI. Such deci‑ sions made by foreign owners of such special-purpose entities have a major influence on Polish statistics, but regardless of that, last year marked a significant change in the FDI inflow to Poland. From 2004 to 2011 foreign direct investment in Poland reached $10‑24 billion annually. In 2012 it was only $4.8 billion and this decrease was accom‑ panied by an increased outflow of foreign capital, amounting to $4 billion. In 2013, the FDI inflow was negative for the first time since the NBP began publishing its own statistics. The most important question is whether this change is only temporary or whether the negative trend will continue in the longer term. That could mean that Poland is losing its selling points. Admittedly, according to a ranking list of the best destinations for direct investment compiled by A.T. Kearney, Poland moved from 23rd to 19th place in 2013, but this did not lead to financial decisions. Besides, Poland had been ranked higher in previous years: fifth in 2005 and sixth in 2010.

A comparison of changes in investment outlays in Poland with those of the Czech Republic, Slovakia, and Hungary—Poland’s main competitors in the region for foreign capital—shows that, although the level and growth of capital formation in all the Central and Eastern European countries that have joined the EU is mainly determined

by external factors, there are significant differences between them (Figure 6).6 _More

precisely, the value and growth of investment outlays in the Czech Republic, Slovakia, and Hungary are changing in the same way, and this increasingly visible convergence trend is different than the pattern influencing investment in Poland.

Figure 6

A comparison of investment growth in Poland, the Czech Republic, Hungary, and Slovakia, 2008–2013

a _{preliminary data}

Source: Author’s own calculations based on Eurostat data.

6 _{The data on investment outlays in the Czech Republic, Hungary, and Slovakia in 2008–2013} come from the Eurostat website: http://epp.eurostat.cec.eu.int.

In 2013, investment in the Czech Republic was projected to increase by around 0.8 %, which—as in the case of all of the analyzed countries—marked a positive change fol‑ lowing a prolonged negative trend. Nevertheless, the Czech economy has been unable to return to its 2008 investment level. After a nearly 24 % drop in 2009 and another cumulative drop of 7.5 % in 2011 and 2012, the Czech economy cannot reach a stable growth rate in this part of aggregate demand.

Until 2013 data on investment outlays and their growth showed that, in the ana‑ lyzed group of countries, the Slovak pattern was been the closest to that of Poland, although the 4.4 % growth in investment in Slovakia could mean a future change in this pattern. Alongside Poland, Slovakia managed to maintain positive investment growth in 2010 and 2011. Slovakia’s 2011 growth rate was lower than Poland’s, but in 2010 and 2013 the value of investment outlays in Slovakia increased, whereas investment in Poland declined. While the Slovak investment growth path was simi‑ lar to that of Poland until 2009, 2010 marked a major change and the endogenous factors influencing the dynamics of investment outlays not only offset the negative influence of external problems, but resulted in higher investment outlays than in the previous year. The amplitude of variations in the value of investment in Slovakia is the highest in the group. Regardless of whether the rate rises or falls, in Slovakia the figure is always the highest.

Hungary, like the Czech Republic and Slovakia, also recorded a positive growth rate for investment in 2013 (1.9 %). Thus Poland was the only country in the group that failed to change its unfavorable investment climate last year.