Ross Marchand is the director of policy for the Taxpayers Protection Alliance.
Since the Soviet Union breathed its last breath, Poland has seen turbocharged economic growth and increased opportunities for its citizenry. Economic output per person has increased nearly seven-fold, and so far, the Polish economy shows no signs of slowing down. In the past three years alone, unemployment has fallen from more than 6 percent to less than 4 percent, even as inflation remains in check. But there is a danger lurking over the horizon, corporate favoritism, a kryptonite that threatens to short-circuit the Poland’s miraculous boom. The form of insidious crony capitalism in Poland will lead to fewer investment opportunities for Poles and makes it increasingly difficult for foreign companies to do business in the Eastern European nation. For the sake of its citizenry and continued economic growth, Poland must scrap its unfair cluster of crony policies and extend prosperity nationwide.
As countries regularly exceed or underachieve expectations set for them by “experts,” growth and prosperity never fail to baffle financial analysts and market prognosticators. Having plenty of natural resources, for instance, is no guarantee of national prosperity. Afghanistan may well have $1 trillion in untapped mineral wealth, but it barely matters when few companies are willing to venture there and try to claim untold riches. Poland is far safer and more stable than Afghanistan, but their vast mineral deposits are underexplored thanks to an onerous tax regime unlike any other in the world.
Implemented in 2012, Poland’s Mineral Extraction Tax (MET) heaps an 80+ percent tax on mining metals such as copper and silver that are in high-and-increasing demand across the world. But this isn’t any pesky, old tax. The government takes the money as soon as the minerals leave the ground, based on the value of the minerals extracted rather than sold. As a result, any small company and/or foreign enterprise seeking to start up mining operations in Poland will face an enormous uphill battle to get their goods to market. Under the current regime, new entrants have to pay these ludicrous extraction taxes even before there’s any guarantee that they’ll be able to profit off of their product.
It’s no coincidence that Poland’s tax structure is diabolically effective in keeping foreign companies out of the country. The steep levy remains in place largely due to the clout of KGHM, a state-backed mining company that basically runs the entire industry in Poland. Unlike any upstart entrants, KGHM already has access to a ready-made market of willing consumers. To them, the tax is more of a cost of doing business (i.e. keeping out their competitors) than a risk to their bottom-line. A 2019 Ernst & Young analysis found that a new mining company trying to compete with KGHM would need thirty years for their cash flows to offset capital and labor costs, versus around 20 years for Canada and the US. And unlike in North America, new miners in Poland must compete with an entrenched company that cannot go out of business. For this reason, the Ernst & Young analysts note, “from the perspective of a mining company, projects development would not be economically feasible [in Poland].”
Fortunately, cronyism is not Poland’s destiny. Following the defeat of communism in the early 1990s, Eastern European countries (including Poland) successfully ended state-run monopolies and opened their markets up to competition. This led to widespread, positive changes to productivity and spearheaded the economic development of the entire region. Poland’s drive to open up energy markets to greater competition in 2009 even helped stave off a recession in the country as the rest of the world got caught up in strong economic tailwinds. By reforming and reducing its mining tax, Poland can continue to charge forward and perhaps match the prosperity of Germany relatively quickly. But, that goal will only be achieved if officials can stamp out cronyism in Polska. The country must limit the power of a greedy few to pave the way for millions of Poles to thrive.