Poland’s Population Problem

We believe Poland could become a major regional power, or even a great power, over the next several decades. But it is facing the same demographic challenge — increasing depopulation — as the rest of the industrialized world, and will struggle to overcome it. This article addresses that issue, and by extension, the issues facing all of us.

by Jacob L. Shapiro
August 25, 2018

Summary

The period between 1991 and today has been the most successful in Poland’s history. Since the collapse of the Soviet Union, Poland’s status as an independent nation-state has been cemented, and its economy has soared. It has even become a politically influential player in European politics, butting heads with Germany over who gets to make the rules in Brussels and emerging as the de facto leader of an anti-Russia Eastern European bloc. But like all European countries, Poland’s shrinking population poses a major challenge to its long run of prosperity. For decades now, the country has seen falling fertility rates and unsustainable emigration levels. How Poland responds to this challenge will go a long way in determining the future economic well-being and security of Poland as an independent state.

 

The Scope of the Problem

Since breaking free from the shackles of communism and Soviet micromanagement in 1989, Poland has been one of Eastern Europe’s most prominent success stories. Its per capita gross domestic product growth since 1991 is the third highest in Europe. Its real GDP growth rate since the 2008 global financial crisis is 4 percent, compared to the European Union’s 1.1 percent. According to Eurostat, unemployment, which exceeded 10 percent at times during the post-communist era, was 4.4 percent in March, and all indications suggest it will continue to drop. Though Poland still lags behind European heavyweights like Germany in terms of labor productivity, there are encouraging signs here as well. Poland’s labor productivity growth has been outpacing Germany’s since 2011.

But this period of prosperity came at a cost. In 1990, the government had to make some hard choices to attract foreign investment and aid. It built up its foreign reserves, eliminated price controls, increased interest rates and ended subsidies that propped up unprofitable companies. This resulted in an almost immediate 40 percent drop in real wages. Poland focused on exports to grow its economy, using its low-paid but highly educated workforce to become indispensable to Germany’s supply chain. In 1991, exports accounted for a quarter of Poland’s GDP. Last year, they accounted for more than half. The price of prosperity in this case was ceding economic leverage to a long-feared neighbor and historical enemy. And, as with all growth-oriented strategies, inequality was another byproduct. A 2017 EU-sponsored report showed that between 1989 and 2015, the top 1 percent of earners in Poland enjoyed twice as much of the country’s total income growth as the bottom 50 percent.

One of the consequences of these changes was that tens of thousands of Poles decided to leave the country to pursue opportunities elsewhere. This was by no means a new development. (Nor was Poland the only country where this was happening. Romania, for example, had the second-highest emigration rate in the world from 2007 to 2015 – surpassed only by Syria – according to the United Nations.) For almost six decades, Poles have been leaving their homeland in search of greener pastures. In 1989, the Polish government estimated that approximately 1.3 million Polish citizens had become long-term residents of foreign countries. The economic reforms Poland undertook in the early 1990s did nothing to halt the flow of Polish migrants abroad. Since 1989, approximately 25,000 Poles per year on average have emigrated from Poland, slightly less than the average in 1979-89. Poland’s joining the European Union in 2004 only made matters worse. In 2006 alone, roughly 50,000 Poles left the country to find opportunities abroad. These numbers may seem small – just 0.1 of Poland’s population – but they have had a significant effect over decades.

Calculating the number of Polish emigrants isn’t an exact science, however. The Polish government publishes an annual report on the number of citizens “temporarily” living abroad but prefaces the report with a host of warnings about the difficulty of measuring this figure. In 2016, the last year for which data is available, there were 2.5 million Poles living abroad. Some 83 percent of them lived in other European countries, including the United Kingdom (38 percent) and Germany (33 percent). (This is one of the many reasons Poland has been one of the most vocal advocates of reaching an agreement with the United Kingdom on Brexit.) A 2015 U.N. report, meanwhile, put the number at 4.4 million.

Poland’s demographics were such that it could ill afford to lose so many productive workers, both before and after its transition to a market economy. While Poland’s economic growth rates have been among Europe’s highest for the past two decades, its fertility rates have been among the lowest. In 1990, Poland’s fertility rate dropped below the replacement level of 2.1 children per woman. By 2005, the year after Poland joined the European Union, the fertility rate had fallen to 1.24 – the lowest in Europe. In 2016, the Polish government introduced a new policy called the 500+ program, which offers families a monthly payment of 500 zloty (112 euros) for every child after their first. Though this may have helped push the fertility rate up slightly to 1.45 last year, it is still below the EU average and far from the replacement rate.

As a result of decades of negative net migration, as well as its low fertility rate, Poland’s population is trending downward. It decreased for the first time in 2000, by about 9,000. For a country with a population of roughly 38 million, this was a statistically insignificant drop. Poland’s population has remained stagnant ever since – although it did increase in 2017 by roughly 1,000. And if estimates are to be believed, the population is headed for a steep fall. The government’s latest projections suggest that by 2030, the population will fall by 3.2 percent, or almost 1.2 million people. Even if the government’s drive to encourage family growth is wildly successful – and there’s no reason to expect that it will be – it will take years for Poland to recover from the period of stagnation.

All countries with declining populations face similar challenges. Societies generally rely on younger populations to support the social safety net needed to take care of older populations. So in countries like Poland where the working-age population is decreasing as the number of retirees is increasing, a tremendous strain is placed on the government’s bottom line. By 2025, the Polish population over 60 is projected to increase 17 percent while the population below 60 will decline by 6 percent. Furthermore, a recent Organization for Economic Co-operation and Development study on future net replacement rates for pensions showed that low- and average-income workers in Poland beginning their careers today could expect a pension of only about 38 percent of their salaries, hardly enough to make ends meet.

Reforming or cutting pension programs can be political suicide, especially in countries where the electorate is aging. This is especially true in Poland, where the government, led by the Law and Justice party, or PiS, campaigned on helping families, increasing government spending and distributing economic gains more evenly. The previous Polish government tried in 2013 to implement a gradual increase of the retirement age for both sexes to 67 years old by 2020. The current government overturned that policy last October, lowering the retirement age to 60 for women and 65 for men. The government estimates this will result in a 0.5 percent decline in GDP this year. A 2017 European Commission report was less optimistic, predicting the policy will eventually lead to a 7 percent drop in per capita GDP. The government has also floated the idea of a second 500+ program for retirees to supplement their pension payments.

If the PiS were to make tough reforms, it would alienate its base and cripple the party’s chances at re-election. Tough reforms might also discourage Polish citizens living abroad from one day returning to Poland. The government’s goal is not just to slow emigration, but to encourage those 2.5 million citizens who have already left the country to come back and help soften the effects of the demographic crunch, giving the government’s policies more time to work. To do that, Poland must be able to present itself as a more attractive place for these citizens to earn a living and make a life than the U.K. and Germany. The PiS recognizes this, and its social programs are designed as much with this in mind as placating the party’s base. It’s a double-edged sword, however. If PiS policies fail, it will in effect have kicked the can down the road to ensure its own political survival. Eventually, the PiS or some other Polish government will be forced to make difficult decisions, just as the Walesa government did in the early 1990s, but without the popular support that the collapse of the Soviet Union engendered.

 

Poland’s Options

There are four ways Poland can try to overcome its demographic constraints. The first is to increase the fertility rate – easier said than done. The early results of Poland’s 500+ program are positive, but increasing the fertility rate to replacement level will require more than a monthly payout. The PiS has therefore also invested in child care. The percentage of children between 3 years old and the compulsory school age receiving child care for 30 hours or more weekly has increased from 36 percent in 2015, when the PiS was elected, to 46 percent in 2016. The PiS has also promised to make public kindergartens accessible to all children over the age of 3 by the end of the year. In addition, the previous government revamped the labor code to give Polish workers some of the most generous parental leave allowances in the world.

Poland’s second option is to increase the efficiency of and participation in its labor force. The government’s decision to lower the retirement age cuts against this goal, and Eurostat data shows that since Poland implemented the lower retirement age, participation in the labor force by both men and women between the ages of 60 and 69 has decreased by almost 5 percent. At the same time, life expectancy is rising, increasing by eight years for men and five years for women since 1990. Men can now expect to live to 74 and women to 82. The PiS decision to cut the retirement age has therefore placed a heavier burden on a shrinking population.

What’s more, increasing the fertility rate, as the government would like to do, would also limit women’s participation in the labor force. In the first quarter of 2018, 21 percent of Polish women 25-54 years old did not participate in the workforce. That is not far off the EU average of 20 percent, but it is significantly higher than countries like Germany (17 percent), France (17 percent) and Latvia (14 percent). A 2015 report by consulting firm McKinsey estimated that if Poland could increase the participation of women in the workforce by just 4 percent, it would add 300,000 people to the labor pool. In effect, Poland is sending mixed messages to women – have more babies and stay home with them longer, but also get back to work as soon as possible.

Instead, Poland will likely focus on younger workers to close the labor gap. In Q1 2018, the participation rate for both genders 20-24 years old in the labor market was just 60 percent – again, in line with the EU average but well off countries like Germany (69 percent) and the Netherlands (74 percent). The government could help these young Polish citizens enter the workforce by investing in education and training programs, a policy that fits within its broader strategy.

In addition, Poland will continue to focus on increasing productivity. Despite the fact that labor productivity is growing faster in Poland than in Germany and other major European economies, the gap between them is still large. According to the OECD, GDP per hour worked (measured in 2010 constant prices and purchasing power parity) was $60.44 in Germany but only $30.35 in Poland. This will require Poland to reduce its economic dependence on Germany and invest in infrastructure, technology and education, but thus far, it has fallen short. A 2013 International Monetary Fund study found that of the Central and Eastern European states that have integrated their economies into the German supply chain, Poland had done the least to move into knowledge-intensive manufacturing sectors and capitalize on technology transfers to fuel productivity growth. As it moves in this direction, it will come into greater competition with Germany, and Germany possesses ample leverage over Poland in this regard. The more Poland can break away from the German economy, the more it can attempt to boost worker productivity.

Poland’s third option is to lure Polish emigrants back from Germany, the U.K. and other Western European countries. Every Polish government since 1960 has tried to do this, including the PiS. But the PiS’ offers of subsidies and social programs won’t be enough on their own to bring back the majority of Poles. For one thing, wages in Poland are still relatively low. In 2017, the minimum wage was 1,498 euros ($1,767) a month in Germany but just 473 euros a month in Poland – and even this is a fairly high minimum wage for an Eastern European country. In 2016, the average salary in Germany was more than three times the average salary in Poland, though rent and consumer prices are roughly 40 percent lower in Poland. The dilemma for Poland, however, is that increasing wages may entice Poles to return home, but they will also hurt Poland’s competitive advantage over Germany and other countries – a tradeoff Warsaw may be willing to make if it is to grow into a major European power.

But salaries aren’t everything. Successive Polish governments have also poured billions of euros into making Poland a more attractive place to live. From 2007 to 2013, the government invested in more than 700 cultural projects such as a new concert hall in Katowice, a city of some 300,000 in southern Poland, and a new opera house in Bialystok, a city roughly the same size in eastern Poland. The PiS has continued this cultural stimulus spending. In 2016, for example, the Culture Ministry paid 100 million euros for an art collection of some 86,000 artworks and 250,000 books. It may seem odd that a government that lambasted its predecessor for wasteful spending would spend this amount of money on an art collection. But for the PiS, it’s a worthy investment to instill a sense of pride in Polish citizens, both those in Poland who may be considering leaving and those who have already left.

Poland’s efforts appear to have worked, at least somewhat, both in preventing Poles from leaving the country and in attracting them back. In 2016, for the first time in 56 years, Poland’s net migration was positive. Compared to 2014, emigration from Poland dropped by 57 percent, while immigration to Poland increased 9 percent. The result was that 1,500 more people came to Poland than left in 2016. A similar pattern was observed in 2017. Poland’s national statistics office warns that it is “difficult to assess” whether this trend will continue, as there’s a lack of data on emigration. But this unexpected shift is the primary reason for Poland’s slight increase in total population last year, and while it hardly suggests that Poland’s demographic issues are solved, it is both a promising indicator that Poland is becoming a more attractive place to live and a sign of things to come.

The last option is the most politically risky: encouraging immigration to Poland. The current government has been opposed to accepting immigrants and refugees, but no other option could make as big a difference in Poland’s population problem than opening the door to immigration. The problem isn’t yet serious enough to persuade both the PiS and Polish society to accept immigration as a solution – but that might change. Take Japan as an example. Its population, like Poland’s, is aging. Japan is one of the most homogeneous countries in the world, and historically resistant to immigration, but it has seen the number of foreign workers double in the past five years to fill jobs that simply can’t be filled by the domestic population. If Japan can be forced into such an about-face, Poland can too.

And unlike Japan, Poland was in the past a very diverse country. In the 14th century, major Polish cities like Gdansk and Krakow were cosmopolitan centers where German, Polish, Italian and Ruthenian were all regularly spoken. In 1618, the Polish-Lithuanian Commonwealth was a major European power. According to “Poland: A Historical Atlas,” 40 percent (4.4 million) of the commonwealth’s population was Polish, 30 percent (3.3 million) was Ukrainian, 15 percent (1.7 million) was Belarusian and 5 percent (700,000) was Lithuanian. The remaining 1.5 million people were a mixture of other groups including Jews, Germans, Prussians and Bohemians. A century later, reeling from numerous defeats, the Commonwealth was made up of 4.5 million Poles, 1.5 million Ukrainians, 1.2 million Belarusians, 800,000 Lithuanians and 500,000 Jews. Even into the 20th century, Poland was a diverse country. In the interwar period, when it briefly regained independence, 69 percent of Poland’s 32 million inhabitants were Polish, 10 percent were Ukrainian, 7.8 percent were Jewish, 4 percent were Ruthenian and the rest were various other minorities, according to a 1931 census. During these times, diversity wasn’t seen as a challenge to the Polish identity – it was merely a fact of life in Polish society.

Poland’s current ethnic makeup is a result of centuries of war and dismemberment, as diverse regions and populations have been carved out, leaving ethnic Poles as the strong majority. In fact, the lack of diversity in Poland today is one of the biggest differences between the country now and the various Polish kingdoms and republics of centuries past. According to the 2011 census, 93.8 percent of the country’s population is ethnically Polish. The largest ethnic minority, the Silesians, accounted for just 1.1 percent of the country’s 38 million inhabitants. The second-largest minority, Germans, accounted for just 0.2 percent.

Indeed, the Polish government has been resistant to immigration, or at least it appears that way from its public comments on the topic – and it certainly has been portrayed that way in the media. For example, Poland, along with Hungary and the Czech Republic, has led the opposition to EU refugee quotas. But Poland’s refusal to accept refugees from the Middle East belies the government’s openness to welcoming immigrants who can be more easily assimilated into Polish society to help ease the labor shortage. Poland’s minister of humanitarian aid estimated that there are up to 2 million Ukrainian migrants in Poland. In 2017, Polish employers filed 1.7 million applications for employment for Ukrainian citizens – a 350 percent increase compared to 2014. Thus far in 2018, nearly 168,000 temporary residence permits have been granted to Ukrainians – already more than were granted in 2017.

And Ukrainians are not the only foreign workers for whom Poland is opening its doors. Thus far in 2018, 21,442 temporary resident permits have been issued to workers from Germany, 18,243 to workers from Belarus, 12,548 to workers from Vietnam, 11,783 to workers from Russia and 9,224 to workers from China – all surpassing the totals from last year. Despite PiS’ nationalist rhetoric, it knows Poland needs to expand its labor pool and has looked beyond the country’s borders to do it. As Poland relies more on foreign workers, the government will have to establish some basis for dealing with them in the long term – either granting them citizenship or keeping them as temporary residents. It’ll also have to decide whether to limit immigration from certain groups, like Muslim refugees from the Middle East. But it has no choice in whether to increase the number of foreign workers – that reality can’t be avoided.

The current Polish government has taken a primarily nationalist approach to Poland’s demographic problem. It is introducing policies aimed at increasing the fertility rate while trying to stimulate the economy. There are limits, however, to the effectiveness of these policies, and when growth inevitably slows, the government will be forced to consider alternative measures – even ones it would rather avoid.

History has shown that Poland has been the most powerful when it incorporated diverse groups of people under a single, if often diffuse, state. Poland’s population problem, therefore, doesn’t have to herald the end of the country’s success story. If anything, it points to the ways Poland will evolve from a small, aging, insulated state to a regional power with broader interests. As in the past, provincialism will make way for power.

 

— Poland’s Population Problem originally appeared at Geopolitical Futures.