Polish Productivity Surges

A report by the Conference Board has found that Poland’s productivity growth accelerated by 7.7 per cent last year, second to China and much higher than the rich economies of western Europe or the US. It calculated that gross domestic product per hour worked was $19.90 for Polish workers, outpacing the $19.40 for South Korea.

But Polish productivity is still less than half the average of west European countries, and trails most of its ex-communist neighbours.

David Yoon, human resources director at the LGE factory about 100km north of Warsaw, says that Polish workers were initially unhappy about some of his company’s management techniques, such as hanging large signs above the production line exhorting workers to “Get it right the first time”, and “Don’t say ‘No’ but seek alternative solutions”.

“Some of the older workers said it reminded them of communist times, but now they are used to it,” he says.

The Korean company is setting up training programmes as it starts to exhaust the local talent pool of workers for the factory, which has become LGE’s main European flat-screen television set producer.

“The fundamentals of Polish workers are not bad,” says Mr Yoon. “And once they have been taught a technique, they stick to it exactly. Every month, we break production records.”

The Koreans are not the only ones impressed with the quality of their Polish workers.

A recent study by KPMG, the auditing company, found that most foreign investors were impressed by the high level of qualification in their Polish workforces.

Poland’s rapid leap in productivity is taking place in spite of the drag caused by the 20 per cent of the Polish workforce that is employed in agriculture – producing only 3 per cent of GDP. The country also has the highest level of unemployment in the European Union, at 17.8 per cent, and the lowest level of labour participation in the OECD, the world’s most industrialised countries.

Many of those out of work are unemployable in a modern economy and some Polish companies are experiencing difficulty in finding qualified workers. A recent study by Poland’s central bank found that 42 per cent of firms had trouble finding qualified workers.

The booming city of Wroclaw in western Poland is trying to lure expatriates working in the UK to return home to take up jobs with the many foreign companies relocating there.

Although Polish companies restructured following the slump in the economy in 2001-2002, the fastest productivity growth is found in businesses owned by foreign investors.

“Productivity is higher for most foreign investors than for the average Polish company, since investors build new, modern facilities using the latest technology and operations design know-how” says Michal Kwiecinski, of McKinsey & Company, the management consultants.

“Very often, their productivity is even higher than in their home country facilities, because companies tend to optimise their processes in parallel to transferring production or service centres to Poland.”

That is the case with LGE, which has expanded so rapidly in Poland that it quickly outgrew the factory built in 2004, when it began production in Mlawa. It has now moved into a much larger new factory.

Other plants are being built by the company near Wroclaw in a joint venture with Philips of the Netherlands.

Polish salaries, although much lower than western Europe, are 200 per cent higher than in LGE’s factories in China and Indonesia, and went up 6 per cent last year.

But LGE has no plans to reduce its Polish investment.

“We can overcome wage differences by productivity,” says Mr Yoon.

Welfare Costs Threaten German Reform Agenda?

My feeling is that the honeymoon days of Angela Merkel's government are not too far from over. What we have seen is an excess of euphoria, based on the idea that the German economy is now, at last, about to finally take off, and a lack of any real appetite to get down to the serious agenda of reform which is, more urgent than ever. Some measure of the magnitude of the what might be referred to as the submerged part of the iceberg can be seen in this article in the FT today detailing how welfare speding continues to accelerate:

Spiralling welfare costs could add €4bn to Germany’s 2006 budget deficit and undermine Chancellor Angela Merkel’s efforts to bring her country’s finances under control, members of her coalition have warned.

Confidential government statistics show that a faster-than-expected rise in the number of households claiming long-term unemployment benefits could bring this year’s deficit from a planned €38.3bn to well above €40bn ($49bn, £27.7bn).

This would dash consensus expectations among economists that the deficit will fall below 3 per cent of gross domestic product – or back in line with European fiscal rules – this year for the first time since 2002.

While Ms Merkel could still meet her cautious pledge to abide by the rules by next year, the spending explosion could lift the 2007 deficit above planned public investments, putting the budget in breach of the constitution.

“The cost explosion is threatening to blow a hole in the budget,” said a coalition insider who asked not to be named, adding that Franz Müntefering, the labour minister, “must come up with an answer”.

Figures published by the Federal Labour Agency show the number of households claiming “unemployment benefit II”, the most basic form of welfare support, comparable to the UK’s income support, has risen from 2.9m to 3.9m since its introduction 15 months ago.

According to a labour ministry document obtained by the FT, the actual number is even higher. The document shows the agency’s monthly reports, based on samples, had underestimated the number of claimants by 200,000 a month throughout last year, suggesting today’s figure was around 4.2m.

Extrapolating from the benefits paid so far this year, aides to Peer Steinbrück, the finance minister and like Mr Müntefering a Social Democrat, estimate total payments in 2006 could reach €28bn, well above the €24.4bn provided for in the budget.

Ironically, the benefit, also known as “Hartz IV” and introduced by Gerhard Schröder, Ms Merkel’s predecessor, as part of his social security and labour market reforms, was meant to cut welfare support and sparked loud protests at the time.

But, as Mr Müntefering conceded in an interview with the FT three weeks ago, loopholes have since appeared in the system that have led to a flood of claims.

Young jobseekers, for instance, have moved out of their parents’ homes and into their own flats in order to claim generous rent subsidies. Many workers whose monthly wage is lower than the basic benefit have yet to claim the top-up welfare payments they are entitled to.

“Even today, I am told, people are finding out that they have claims,” Mr Müntefering told the FT three weeks ago. “There is nothing criminal there, but it is a grey area we must look into.”

The labour ministry says benefit payments over the first quarter are a poor guide to the rest of the year because unemployment is expected to fall as economic growth accelerates in coming months.

A ministry spokeswoman said an “optimisation” bill to be drafted by the summer would cut spending on long-term jobseekers by about €1.2bn a year from 2007 onwards. Other measures already enacted should generate €500m-€600m in savings from next year.

Based on current trends, however, this would not suffice to offset the rise in claims.

“Another problem,” said a finance ministry official, “is that we doubt the labour ministry is serious about cutting spending. The guys at the lower levels are dragging their feet. Their culture is to give stuff away, not to clamp down.”

In one respect alone, news that her fiscal consolidation plan may be in jeopardy could be a blessing for Ms Merkel. It should make it easier to justify a hefty, three-point increase in value-added tax planned for next January.

Who Will Be The First To Blink?

Methinks the first serious test of the eurosystem is now looming on the horizon. The title of this post refers to an earlier point made by Nouriel Roubini. The FT this morning is reporting that:

"The German cabinet will on Wednesday endorse a 2006 budget that breaks the European Union's fiscal rules for the fifth year in a row, amid criticism that Angela Merkel’s coalition government is failing to meet its own target to cut spending."

If this is confirmed the EU Commission and the ECB will then have to respond. One of these fine days all hell is going to break loose in the financial markets. Will that be sooner or later? We await developments.