Poland is poised to learn a painful lesson about globalization and its increasing role in modernizing developing countries.
The old model of development, which used protectionism to give businesses in developing nations time to mature, is largely gone. Today, countries like China, Ireland and Poland import modernization by opening themselves to large foreign direct investments (FDI). When they embrace other policies to attract major multinational companies, the result is waves of FDI transfers of advanced technologies, business methods and even entire business organizations – and often the most rapid modernization ever seen.
Multinationals also have lots of choices about where to send their FDI. They look for places where the returns will be healthy and steady; and that points them to countries where the infrastructure is decent, workers have good skills and education, taxes are low, and the currency is sound. Critically, multinationals set up shop mainly in stable countries with governments which respect the rule of law.
So, when a country’s leaders dismiss the norms of international finance and commerce, the transfers that produced the rapid growth and income gains of the last decade will usually slow or even stop. Consider Argentina, where FDI inflows fell by two-thirds after Buenos Aires stiffed its foreign lenders for tens of billions of dollars and ignored court orders around the world to pay up.
The source of Poland’s looming problems began 20 years ago, in 1991, when the state telecommunications authorities made a deal with the Danish company GN Great Northern Telegraph to help build and operate an advanced fiber optic network that now reaches from Poland’s northern border to the one in the South. In return, the Poles agreed to share the revenues with the Danes for 15 years and to settle any disputes through international arbitration.
Ten years later, the two parties were facing off in the International Arbitral Tribunal in Austria, in accordance with their agreement, trying to settle a dispute over how much the Poles owed the Danes. But there’s been no resolution. Instead, Telekomunikacja Polska (TP) spent the better part of the past decade attacking the arbitrators for bias and challenging the credentials of the Tribunal’s experts. The arbitrators eventually ruled that the Polish company owed the Danes some $800 million. Yet the Poles have refused to honor the legally binding decision, claiming that it violates “principles of public policy in Poland,” and have now challenged it in Polish courts.
This is more than a private contract dispute. Although the Polish government completed privatization of the fiber optic system last August – the largest shareholder today is the French government through government-owned France Telecom. Warsaw’s final divestiture came after the arbitrators’ rulings, and the ultimate outcome clearly depends on the inclination of the Polish and French governments to respect the law. That seems especially pertinent as France chairs the G20 and Poland prepares to assume the presidency of the European Council in July.
For the Polish people, this is not a legal issue, but one of practical economics. If TP persists in thumbing its nose at its promises and international norms, multinational investors may well exact a price much larger than the arbitrators’ judgment.
In 2009, the stock of direct investments in Poland by foreign multinationals totalled some $183 billion, equal to 42 percent of Poland’s GDP. Nearly $80 billion of that flowed into Poland from 2005 to 2009, more than any other Eastern European economy received except Hungary. And these huge investments are the most important reason why Poland’s GDP is more than twice the size of any other Eastern European economy, and why real per-capita incomes increased by more than 20 percent over those five years.
The intransigence of the Polish and French authorities could put those gains at risk. In 2008, more than 20 major foreign companies maintained operations in Poland with sales of at least $1.5 billion each. The German trading company, Metro Group, turned generated sales there of nearly $14 billion, and production by Fiat and Volkswagen generated almost $13 billion in Polish sales.
If multinationals lose faith that Poland’s government will honor and enforce the legal commitments of their Polish partners, what rational investment officer will recommend that a company transfer its latest technologies and business organizations there? There are plenty of other welcoming countries in Eastern Europe, including the even faster-growing economies of Estonia and Slovenia.
As Poland prepares to lead the EU, its people should gird themselves for a hard lesson from the global economy. If the Polish government doesn’t fully recognize the findings of the international arbitration tribunal, a few shareholders may gain, but the prosperity of millions of Poles could suffer for years to come.
Robert Shapiro is the chairman of Sonecon, an economic advisory firm in Washington, D.C., and the chair of the Council for European Investment Security. He was under secretary of commerce for economic affairs in the Clinton administration
From Warsaw Business Journal
TP to lay off up to 5,000 people by 2016
TP costs France Telecom big
France Telecom writes down €889 million on TP
Giants PGE and Orange Polska begin cooperation
Black Tuesday for TP
Is Poland's ruling party finished?
BY Remi Adekoya
Migration and remittances in the euro zone periphery
BY Stratfor Global Intelligence