Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized © 2017 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 123415141312 This work is the product of the staff of the World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Adaptation – If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the authors of theadaptationandarenotendorsedbyTheWorldBank. ACKNOWLEDGEMENTS This study was written by a team led by Enrique Aldaz-Carroll, Rogier van den Brink and Emilia Skrok. The core team members were Jan G¹ska, Gabriela Inchauste, Micha³ Myck, Marc Schiffbauer, Theo Thomas, and Gonzalo Varela. The work was initiated by Marina Wes, former Country Manager for Poland and the Baltic Countries, and was based on the framework developed by Bernard Funck, Global Lead in the Macroeconomics and Fiscal Management Global Practice. Arup Banerji, Regional Director, European Union, and Ivailo Izvorski, Lead Economist, provided guidance. The National Bank of Poland has been a valuable partner in this undertaking. Special thanks go to Pawe³ Samecki, Member of the Board, National Bank of Poland, for his interest, comments and suggestions at all stages of this work. The main authors and contributors to the report were: Chapter 1 (Governing) was written by Theo Thomas and Rogier van den Brink, with contributions from Emilia Skrok. Chapter 2 (Sustaining) was written by Emilia Skrok with contributions from Tomasz Jêdrzejowicz, Micha³ Kêpa, Thomas Laursen, Piotr Szpunar and Cevdet Cagdas Unal. Chapter 3 (Connecting) was written by Enrique Aldaz-Carroll, with contributions from Paulina Ho³da, Pawe³ Kaczmarczyk, Daria Taglioni, and Gonzalo Varela. Chapter 4 (Growing) was written by Marc Schiffbauer and Gonzalo Varela with contributions from Enrique Aldaz-Carroll, Paulina Holda and Ewa Korczyc. Chapter 5 (Including) was written by Gabriela Inchauste and Micha³ Myck, with contributions from Paulina Ho³da and Matija Laco. Special thanks are due to Jan G¹ska for his excellent research assistance and data management for the whole project. This report benefited from consultations and workshops organized in Warsaw and Washington, DC. The authors are grateful for valuable comments provided by the counterparts in Poland, in particular form the National Bank of Poland. The team also wishes to thank Erik Berglof (Director of the Institute of Global Affairs, London School of Economics), Wieslaw Szczuka (an Alternate Executive Director, World Bank), and Hans Timmer (Chief Economist, World Bank’s Europe and Central Asia) for comments and suggestions. Special thanks go to Deputy Prime Minister Mateusz Morawiecki and all participants of the event organized during the Annual Meetings 2016, ‘Poland: a development lesson for others’ and to participants of the event organized in Warsaw on March 2017: Marina Wes (World Bank Country Director for West Bank and Gaza, former Country Manager for Poland), Pawe³ Samecki (Member of the Management Board, National Bank of Poland), Rogier van den Brink (Lead Economist at the World Bank), Jerzy Kwieciñski (Deputy Minister of Economic Development), John Panzer (Director of the Global Practice for Macroeconomics and Fiscal Policy, the World Bank), ~ Carlos Pinerúa (Country Manager for Poland), Arup Banerji (Regional Director, European Union). The authors are also grateful for invaluable comments provided by peer reviewers: Jorge Araujo (Economic Advisor, Latin America & Caribbean Vice President Office), Erik Berglof (Director of the Institute of Global Affairs, London School of Economics), Daniel Lederman (Lead Economist, Latin America & Caribbean Chief Economist Office); and Mathew Verghis (Practice Manager, Macroeconomics and Fiscal Management Global Practice). Special thanks also goes to Lalita Moorty, Practice Manager in the Macroeconomics and Fiscal Management Global Practice, for her support. Finally, the team wishes to thank Mamta Murthi, former Country Director for Central Europe and the Baltic Countries of the World Bank for her valuable advice and guidance at the early stages of this work. Contents OVERVIEW 10 Chapter 1: GOVERNING 41 Chapter 2: SUSTAINING 73 Chapter 3: CONNECTING 105 Chapter 4: GROWING 134 Chapter 5: INCLUDING 162 5 Lessons from Poland, Insights for Poland Contents Boxes O.1 The Middle-Income Trap 15 1.1 Policy uncertainty: The case of Argentina 47 1.2 The quality of government is a determinant of the effectiveness of cohesion policy and support for innovation among EU regions 55 2.1 What is the prudent debt level? 80 2.2 Local governments in Poland have more control over expenditures than revenues 81 2.3 Transiting from exchange rate targeting to inflation objectives: Poland and Israel 84 2.4 The Polish approach to dealing with nonperforming loans 89 2.5 External imbalances a threat to a growth model 94 2.6 Summary of policy options to support national saving in Poland 96 3.1 Gaining from integration through FDI spillovers 114 3.2 General Motors in Poland 115 3.3 Are Poland’s post-EU accession flows exceptional? Labor mobility in international perspective 117 3.4 Immigration’s role in supporting the Polish labor market 123 4.1 How did Poland’s allocative efficiency transform into jobs? 145 4.2 Education – Vital for keeping up 148 4.3 The decline of students in higher education 152 4.4 Dual mode higher education in Germany 153 5.1 Poland’s national minimum wage 168 5.2 Poverty was reduced through higher levels of education 174 5.3 Early human capital investment and equality of opportunity 175 5.4 Taxes and benefits in Poland, 2005 to 2014: A mixed bag 182 5.5 A new child benefit: The Family 500+ Program 186 5.6 United Kingdom Jobcentre Plus 187 Figures O.1 The pentagon of policies to assess the Polish Miracle 14 O.2 Per capita GDP growth for new HICs and trapped MICs 16 O.3 Robust political and improving economic institutions 16 O.4 High GDP growth and low volatility support graduation to high-income status 18 O.5 Inflation, new HICs, and trapped MICs, 2000–14 19 O.6 Total factor productivity and growth in the new HICs, 2000–14 21 O.7 Growth in manufacturing TFP in Poland, within and between firms, 1997–2013 22 O.8 Share of high-skilled employment, new and trapped HICs 23 O.9 Poverty in Poland, 2005–14 23 O.10 Income inequality, new and trapped MICs 24 O.11 Equality of access to education by region, new HICs and trapped MICs 24 O.12 Regional GDP: average annual nominal growth, 2005–14 25 O.13 Regional income disparities: GDP per capita as a percent of the national average, 2013 25 O.14 Achieving high-income status and average GDP growth, 1965–95 26 O.15 Gross saving rates in Poland, percent of GDP, 2000 and 2014 28 Contents 6 O.16 Hard infrastructure indicator averages, Poland and established HICs 29 O.17 Poland as a migration destination: Foreign borns in total employment, 2007, 2011 and 2014 30 O.18 Ranking of Poland on international innovation 31 O.19 Protection of intellectual property rights in Poland 31 O.20 Structure of Poland’s financial sector, 2014 (bonds 2011) 32 O.21 Happiness of people in Poland by region, 2003 and 2013 33 O.22 Wages and productivity, Germany and Poland, 2000–15 34 O.23 Shares of capital and labor in GDP, HICs, 2000–15 34 O.24 Nonstandard employment contracts, 2002–14 35 O.25 Unmet needs for medical examinations, selected HICs 35 O.26 The redistributive impact of direct taxes and transfers 36 1.1 Improvements in political indicators preceded those in economic indicators in Poland 45 1.2 Good governance and per capita income correlate strongly 48 1.3 Governance indicators are strongly related to development level 49 1.4 Most of Poland’s governance indicators have improved since 1996 49 1.5 Poland scores close to the established HICs and well above the trapped MICs on several governance indicators 49 1.6 The rule of law is closely associated with income level 50 1.7