Closing the Wealth Gap in Central Europe

Maciej Kisilowski in conversation with Wojciech Przybylski and Anna Wójcik

Maciej Kisilowski
25 May 2017

WP: What path of development should Central Europe choose once the flow of European funds is cut or severely reduced?

MK: But why should we resign ourselves to thinking it must be cut? If our primary aim, our national or regional interest, is for our economies to catch up with the West, then we should do everything possible to prevent the funds from being cut. Obviously, this requires a less confrontational foreign policy. At some point, we should ask ourselves what we – Poles, Czechs, Slovaks, Hungarians – really want. Do we want Western-style prosperity or is our true ambition to become the “messiahs of Europe” ushering in new alternatives to liberal democracy? You cannot do both these things at the same time.

Looking at the political debate in our region, I am shocked that its participants – from the left to the right – have so little genuine interest in economic development. Politicians and journalists do mention the need for growth, but it is clear they feel so much more at ease debating social, ideological, cultural or even constitutional issues. Meanwhile, the average Central European family earns over 3.5 times less than the average German family! All other areas of our policy debate should be subordinated to the strategic goal of dealing with this monstrous chasm.

AW: Let’s talk about the economy then. The European Commission’s prognosis for the Polish GDP growth rate in 2017 is 3.2%. For Hungary this rate is 3.5%, for Czechia 2.6%, and remaining close to 3% for Slovakia. Should we be satisfied with these numbers? What growth rate does Central Europe need to really push forward?

MK: Well, it is surely better than zero [laughter]! Seriously, the glass is always half-full and half-empty. But let us keep in mind that our geopolitical situation is perhaps the best in our entire history, that we receive tremendous amount of aid from the EU, that our societies are educated and hard-working. Taking it all into account, we should aspire to more than a growth rate satisfactory for the developed economies of Western Europe. We should aspire to closing the income gap between us and Western Europe within one generation! This would mean growth that we saw in Ireland or South Korea – from 6 to even 9–10 % per capita. This, however, would require enormous political and social mobilisation. It is no wonder that a jump in growth is usually achieved by small countries—Singapore, Ireland, Israel—that can effectively align their societies around their development strategy.

It is also worth noting that starting the discussion with the GDP growth figures is actually not particularly reasonable. High growth is only a consequence of an attractive and internally consistent strategy. This is not only the case with countries, but also with successful corporations. Bill Gates or Steve Jobs did not start by declaring “I want to be very rich.” They began with a compelling idea for adding value to the global economy—for developing something people will want to buy. Becoming rich came almost as a by-product of this creative strategic idea. Our countries must think the same way: what is it really that may make Poland, Czechia, Slovakia, Hungary competitive—beyond cheap labour?

When we look at it that way, we may face even more fundamental questions. In case of Poland, for instance, perhaps the country is simply too large and too economically and socially heterogeneous to have just one development strategy. Other Visegrad countries may, in this sense, be better positioned to repeat the success of Ireland or Singapore. Of course, this is said assuming that their governments concentrate on developing and supporting a compelling strategy for building a high-end, knowledge-intensive economy—and not on pursuing exotic political projects like illiberal democracy.

Meanwhile in Poland, the only way out of the current stalemate may be through creating a basket of mutually supportive regional strategies. A strategy may be written for an area that has common values, popular support for a given development path and of an adequate size for creating a globally attractive innovation cluster.

WP: So, is it worth to pursue thinking about development of military production in central Poland or creating an aerial valley in the south-east of the country?

MK: This is a question for industry experts. In “Administrategia,” my recent book about strategic management in the public-sector institutions, or during workshops with central and local government officials, I am careful to avoid questions in the vein of “What should be our strategy?” Strategic management is a set of practices that help experts formulate and implement effective strategies. It is a fishing rod, not a fish.

Thus, what I can say is that a good strategy is not a silver bullet, one “great idea,” but rather a puzzle of mutually supportive elements that add up to a compelling story. Ireland decided to become the best location for European headquarters of American corporations. Almost every are of Irish public policy—from tax system to education and the way they spent the EU money—was aligned with this strategy. Israel bet on small and medium-sized enterprises developed in close connection with enormous military spending. When building development strategies, you must contend with different myths or paradigms, like the conviction that it is good to support small and medium-sized enterprises in each and every situation. From a strategic management perspective, our favourite regional pastime of copying individual Western practices is particularly problematic. Specific policy solutions must fit your overall strategy, which means what will work in one country may not work in another.

AW: Does the same apply to strategies for metropolitan areas?

MK: Of course. Every town and city in our region can and should work out its own consistent, competitive strategy. Sibiu in Romania is a good example. A little more than a decade ago it was one of the poorest Romanian cities. But under the leadership of mayor Klaus Iohannis, currently the president of Romania, the city and its surrounding county decided to take advantage of Sibiu’s German roots to redesigned itself as the Romanian “little Berlin.” Together with Luxembourg, Sibiu was the European Capital of Culture in 2007. The historical centre was meticulously renovated, and a new airport terminal was constructed. The city invested a lot into organizing cyclical cultural events, occupying the niche of so-called event tourism.

Of course, in such a model you must do something with the new hotel base that is being constructed. So the second, synergic leg of Sibiu’s strategy has been to attract German industrial investments. There were less than 1% native Germans in Sibiu, but it had a German school and theatre. The city used these institutions to promote itself as a place with good living conditions for German-speaking expats. Today Sibiu is one of the richest cities in Romania. The local airport does not have a flight connection with Bucharest, but Lufthansa flies there from five cities in Germany.

The example of Sibiu shows that, obviously, a good strategy has to build on the unique resources of a given city or region, and also that it can be directed in very different ways. For instance, Warsaw has a relatively well developed financial sector and a highly convenient city airport, and a population that is able (and willing!) to speak English. Could this be the basis for building a strategy of attracting headquarters of Western corporations, for example from London? Perhaps, but this would require steps like introducing English as the second working language of public administration in the city and investing in local cultural infrastructure accessible to expats. Kraków, Prague and Budapest could strive to become the Central European academic centres. Of course, in the case of Budapest, we are seeing the reverse trend, connected with the intensive efforts of the government to chase my own, global university, CEU, out of Hungary. That is a poignant example of how we, Central Europeans, often undermine our own developmental opportunities.

WP: Indeed. What about the characteristics of the region? During the recent Visegrad Innovators Summit, Professor Marianna Mazzucato played first fiddle. She argued that there was a need for a more active role of the state in the economy, but the examples she cites are all from Western Europe and the USA…

MK: Mazzucato is obviously right, but the context in which she makes her argument is indeed very different. In the UK and the US, public sector institutions are generally very well managed and the challenge is mostly to convince the societies that government should play a more active role in people’s lives. That’s what Mazzucato does, and very aptly. In Central Europe, however, the situation is precisely the opposite. For Poles, Czechs and Hungarians, partly because of our socialist legacies, an active state is not so much a controversial aspiration. We may want better public health care or education, or less bureaucratic regulations, but very few Central Europeans want to experiment with wholesale privatisation of key public services or with aggressive deregulation. So, when she speaks in Warsaw, Mazzucato is largely preaching to the choir. The key problem is not to convince people to the entrepreneurial state but to improve our governmental institutions so that they can actually get there—to become modern, knowledge-intensive organisations.

In “Administrategia,: we argue that just focusing on efficiency—faster, better, more—is not enough. Using modern strategic management tools is key. Only with a clear direction and the courage to select priorities you can create a context in which creative ideas emerge.

WP: So, what does it mean for a country to be innovative in Central European practice?

MK: On the one hand, this is about a radical improvement of the quality of our public services. We need innovative thinking here because we want good schools, courts, and hospitals, while having at our disposal only a fraction of the funds richer countries can spend in these areas. The importance of strategic choices is clearly illustrated in the Polish example. Poland struggles with problems in many areas of public service. On the European Health Consumer Index, the Polish health care system ranks fifth in Europe… Fifth from the bottom! But our general education is actually one of the better systems in the OECD. So, what did our government decide? They focused almost all their energy on a highly ideological, disruptive reform of… general education. They are, in other words, fixing something that is not broken and leaving really broken things alone. That is a textbook example of how not to do strategic innovation.

But governmental innovation goes beyond an individual type of public service. It is about creating a consistent, smart environment for businesses to grow and be competitive. It is about Sibiu reinventing itself as “little Berlin” and taking hundreds of initiatives, big and small, to support this vision. We need a lot more of such bold visions if we really want our children to live in a second Ireland and not only in a campaign ad about second Ireland.

WP: For the moment, we are witnessing the centralisation of state power. The subsequent governments will not resist this temptation easily.

MK: We need to work at the roots here. Politicians and civil servants are by and large rationally self-interested creatures. This is why, our key task is to convince them that strategic government is not only in the interest of our nations or the region, but also in their personal interest. My co-author and I recently trained a group of elected leaders of local governments. Our message was not about what I just told you—the fate of our children. Instead, we simply said: “Strategic management will allow you to run in the next election with a campaign slogan more concrete, more original, more meaningful, and ultimately more effective than the omnipresent <<<Let’s make our town friendly!>>>. Even if you lose, a strategy that you have successfully developed and implemented will become your personal brand and help you find a well-paid job outside government.” In short, we must convince politicians that if we have not only just a little larger cookie but maybe a whole cake to share, everyone will benefit.

Photo: Maurycy Gomulicki, Midas, Warsaw, 2016 photo by Marek Krzyżanek, courtesy of Zachęta National Gallery of Art

The conversation was originally held in Polish and translated by Aleksandra Małecka.

Maciej Kisilowski is an Associate Professor of Law and Public Management at the Central European University and the co-author of the book Administrategia, published in Poland by Studio EMKA, in Hungary by HVG Kiado, and in Romania by Curtea Veche.