[REPORT] “Creative Destruction” versus “Entrepreneurial State.” On competition in Poland

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More and more publications point to the waning longevity of competition processes in developed economies, including the US and EU. Much evidence leads to the hypothesis that an analogous process is taking place in Poland. This report attempts to answer the question of the level of competition in the Polish economy, which is an inadequately analyzed phenomenon, both by public institutions and the academic world. It represents both an attempt to take an orderly look at the data available in this regard and to identify reasons on the part of the state that may limit the intensity of the competition process. Such barriers are growing in number, as Poland is currently undergoing a gradual change in the economic system toward a model dominated by arbitrary yet ubiquitous state activity, as well as the growing influence of ideas and related interest groups that challenge the meaning and benefits created by the process of market competition.

Poland could increase the economy’s productivity by as much as 10-14% in 10 years, provided deep reforms are implemented to increase the intensiveness of market competition. In countries with a more liberal business environment, private investment of the same value undertaken can have as much as a 3/4 greater impact on GDP than in economies heavily constrained by regulation.

  • Economic policy in Poland is not competition-friendly. Barriers to competition in Poland due to state interference are significantly higher than in most of the 38 OECD countries – our country ranked 25th in the 2018 aggregate ranking. The biggest problem is the negative impact of state ownership – Poland ranks 35th out of 38 countries, as well as anti-competitive regulations in network sectors – 28th in the ranking.
  • Strong competition prevails in only two Polish network sectors, which negatively affects the rest of the economy. Only the market for Internet providers and telephone services is characterized by more intense competition than in OECD countries. In the case of electricity, natural gas, air transport and water transport – there is much less competition in Poland than in OECD countries.
  • Poland restricts competition in at least 10 ways! The most important state interventions limiting or distorting competition in recent years include: a return to nationalization of companies (de facto); increased state control of the banking sector; marginalization of the public capital market, expansion of the activities of state-owned financing providers; bans: on agricultural land trading, trading on Sundays; sector regulations such as “pharmacy for the pharmacist,” “distance law” limiting investment in RES; support for state monopolies; high subsidies for selected sectors; sectoral taxes (banking, trade, sugar, etc.) or tax preferences for selected sectors or activities (e.g., concessions and preferential tax rates for programmers).
  • Pandemic state support has disrupted competition. During the 2020-2021 pandemic period, the number of closed businesses in Poland was nearly 40 percent lower than the 2008-2019 average. State financial support at the time certainly helped many companies avoid the threat of bankruptcy, but at the same time it sustained many inefficient companies, distorting competition.
  • Old companies “live” longer, new ones generate profits less often. Companies are noticing less and less competitive pressure in the markets in which they operate. Ten years ago, only 10 percent of small and medium-sized enterprises indicated that they felt weak or moderate competition. Currently, this percentage reaches 20%. Survival rates for new companies are rising, while the percentage of new companies making a profit is falling, which was also evident during the pandemic. At the same time, new companies in Poland created an average of 30 percent more jobs than entities that exited the market between 2015 and 2018.

Increasing the vitality of “creative destruction,” including equalization of the competitive environment between the private sector and favored state-owned companies, and ultimately broad privatization with the lowering of barriers to entry into network sectors is key to boosting Poland’s development, especially in the face of a very challenging geopolitical environment, high inflation and the energy-climate transformation. Otherwise, it will be difficult to achieve the needed volume and productivity of investment, with an acceptable level of risk for the private sector.

 

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