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Three Seas Talks #1 – Marek Dietl, PhD, CEO of the Warsaw Stock Exchange

Stefan: My name is Stefan Tompson and this is the series of podcasts for the Institute of New Europe about the Three Seas Initiative. Today I am speaking with Marek Dietl, the head of the Warsaw Stock Exchange.

Marek, perhaps you could start with a brief introduction about you – who you are, your work. That would be a nice starting point.

Marek: Thank you very much, Stefan. Thank you for having me on this podcast series. It is really a pleasure. It is really important for us to be part of this Three Seas Initiative, as the Warsaw Stock Exchange. What the CEO of the Warsaw Stock Exchange does? Basically my main job is to talk to issuers and investors. Stock exchanges try to connect both sides. We are so called two-sided market, on one hand we have issuers, companies, and on the other hand we have investors. And my particular role is to talk to our global investors and from this point I can tell you that this Three Seas Initiative is extremely important.

Our model investor is based in New York or Hong Kong, so roughly 50,000 km away from Warsaw. If you look at the world map and put in its center Hong Kong or New York you can see that Poland is a small country. Smaller than it is in reality, since we use maps to present the globe, so the proportions are distorted. From the perspective of this model investor, Warsaw Stock Exchange is rather small.

From the perspective of the region, when we talk about even 13 countries (12 3SI countries plus Greece as from our perspective it would be better if Greece was included in the Three Seas Initiative), WSE has 51% market share in the trading volume. So, from the perspective of the New York or Hong Kong investor we have a small exchange, but from the perspective of the region we are rather big. We are twice as big as Vienna Stock Exchange, four times bigger that Athens Stock Exchange, eight times bigger than Budapest Stock Exchange. But from the perspective of that global investor, it is really difficult to justify investing your time is such a small market, like Polish market.

On the other hand, there is a really nice story behind the growth of the East part of the European Union, so as an investor you have a set of mixed feelings. On the one hand you want to participate in this economic success of this region, including Austria, as even in Austria you can see what economist call “Osteuropa-Effekt” – the effect of Eastern Europe, which means that the opening of the Central Eastern Europe was very beneficial for Austrian economy. So you would like to be part of this success story. On the other hand, you don’t know how to do this in an effective manner.

So either you select, one, two, three companies from the region based on their market capitalization and free flows, so liquidity. And then you have rather limited exposure to the particular industries and particular companies. And they might not develop faster than their peers in the West because of their industry of company dividend or whatever… Or you go for passive investment meaning that you invest in the index funds or ETF or whatever. But then you would like to have full scope of the Three Seas countries, just to have some kind of diversification between industries, countries and so on. All in all, you would expect the higher return than in the highly developed countries.

This is where we, WSE, come in. In the 3SI there are two markets that have this developed status, capital markets, they are in this most advanced form. It’s Vienna and Warsaw. So basically, when the investors have limits to invest only in the developed markets, they go for the synthetic instruments like ETF, index funds, which are listed on Vienna or Warsaw. When we approach investor in, let’s say, New York or somewhere in Asia, for me it is much more handy if I can speak about the region and I give data on the size of the region rather than of the Poland alone. So basically this concept of the Three Seas region is actually helpful in my everyday job.

Stefan: The story of Polish growth it is a fairly known story to us, Poles. I mean, 27 years of an uninterrupted economic growth, 1992 to 2019. Interrupted only by Covid. Something like 3.4% of an average growth rate per annum. So this is this incredible growth that has happened in the last three decades. What is less known to Poles, and to the broader region, are the stories of the smaller countries around us. So obviously Poland is the biggest country in Central-Eastern Europe. It is the most meaningful one in terms of population, in terms of economy.

What are the broad outlines, what are the sort of the broad brush strokes of the rest of the Central Eastern Europe? And more importantly what are the stories of the trade and the economic ties between those countries?

From all of the other interviews that I had the recurring element has been what an important trading partner Germany is. Much less was said about than the importance of our own closest neighbors to our own economy.

Marek: You actually touched a lot of points here. Basically if you look at the map of Europe, or just the one of the European Union, and it’s a temperature map – showing different colors depending on the rate of growth over the last 20 years or so – you will immediately spot that there is Ireland in the West, which was growing very, very nicely in the EU, and the Three Seas Initiative countries, way overperforming their Western European peers. So, basically, Three Seas is a region of high growth and that high growth is true for every country. We don’t have to go into every single economy, but each country there were different drivers of the growth.

So there are countries like Czechia, Slovakia, Hungary, which were growing through relatively high level of investment to the GDP, and with the very tight links to the Western Europe, especially when it comes to automotive industry. There are some countries, which were growing more due to high consumption. And there is also Poland with its very diverse growth drivers. We did not have as high level of investment to GDP as above mentioned countries like Czechia and so on, but when you look at the industries with highest value added, we had actually very high investment there. So, our investment were more targeted and we built up a very diverse economy.

But from the perspective of the investors, growth is just one thing, the other is the stock of capital and how the capital is actually controlled. In the Three Seas region, practically with no exceptions, over 1/3 of the GDP is produced by the companies with foreign control. If you compare it to the Western Europe, or the US, it’s absolutely double or triple the average. It was pointed out in 2008 by two scientists that there is another model of economy here in the region, it’s called dependent market economy. On the one hand we are growing very fast, but we take advantage of the foreign direct investment, which used to flood the region. We ended up with very nice macroeconomic parameters, but at the expense of the ownership and the control of the capital.

So we should not be surprised that the ties with the Western Europe are so important for the countries of the region, especially smaller countries, and  that the position in the value chains of the multinational companies is absolutely the key thing. For example, Poland and Hungary are competing for outsourcing centers, for large West conglomerates, because there are very nice jobs there, but obviously this is outsourcing not the headquarters. The 3SI countries are after more and more direct foreign investment. How is it going to play out in the future? I don’t know.

That is why the economic success of the region is not so well known world-wide, because we do not really have locally grown companies that are global. There are very few of them. And usually they are in the niches. I was doing research together with Slovenian friends 12 years ago and we discovered 210 companies in the region which had top 3 rank globally in their respective industries. But most of them, if not all, were in niche industries. They are not mainstream. We don’t have a Sony in the region, or an automotive brand like Volkswagen. Although we do produce a lot of Volkswagens. That’s the answer to the second part of your question.

Third part of your question, the fundamental question of the economy, is if location and size matters for your economic development. When I was a student I was studying very carefully social-economic geography, because there was still this way of thinking that your economy is determined by your location and your geographic features. Modern economy theory says that the human capital plays the pivotal role in your growth, as well as your institutions, if they are inclusive, meaning that people can make a career based on merits. And it seems that our region is performing quite well in that regard.

Prof. Piątkowski from World Bank showed very nicely in his book on Polish economic growth that a very flexible social structure and enormous opportunities for development of talent were the key drivers of growth for Poland. That is probably applicable for most of the countries in the region, but not all. Unfortunately there are some exceptions. We also benefitted a lot from the very favorable demographics at the beginning of the 21st century. This edge is now disappearing, by the way, because the demography of the region, especially of Poland, is worse and worse. I don’t know what will be in the future, but our competitive edge in terms of number of young people, who were well educated and willing to work hard was used quite well in the 90s. Of course, we could still argue that it could have been used better.

Last part of your question was about this cooperation East-West or North-South. When you look at the relevant data, you see a lot of export. 50% of Polish export is within the multi-national corporations, so it’s mainly heading West. There is even this economic system in place, in which you produce in Poland, but you put “made in Germany” label on that product and send it to China or to the US. This is all true.

If you look at the number of issuers or potential issuers, at the Warsaw Stock Exchange we have more issuers, equity issuers, than for example Deutsche Boerse. So in terms of number of companies we are quite rich in the issuers. When they expand, and most of the expand abroad, they start with the region. Of course these companies are smaller, so in the statistics you don’t really see that. But I think we underestimate how important are the ties within the region for the local companies, and these companies continue to grow.

To build global companies like German, Swiss or Swedish ones you need 2-3 generations. It is very rare that the first generation already is capable of building a global company. Usually it takes years and a lot of stamina. On many instances, you are tempted to sell your business and be rich for the next four generations. There are plenty of other things that can happen between that ambitious goal is reached. So it is very rare and very difficult to build a global company and it requires 50 years plus. And it’s only been 30 years since the transformation, so… In addition, the stock of capital [in our region] is so limited that it might takes us even longer than these 50 years.

Stefan: That was a very concise answer to what was actually a very broad question. Sorry for the breadth of the question. You already started half-answering the next question. What are the biggest challenges that lie ahead? You already pointed out demography and that we haven’t had enough time yet. What are some other key challenges to our economic growth, and maintaining its pace, if that’s even possible. I mean, if that track record of economic growth is even maintainable.

Marek: In the nutshell, the main challenge is that it is much easier to catch up than to run ahead of the group. Anyone who did track and field knows this very well. Basically we are at this stage in the region where in some aspects we have to run head. It’s not like we can import some healthcare or financing models from Germany, implement it and we will be fine. We actually have to work on our countries’ institutions and the question is if our civil servants are ready for that and so on. On the corporate level it is the same. You have to come up with new products not only copy the existing ones and do them a bit better or cheaper. It is the fundamental problem of any economy that passes the stage when you have benefits of being underdeveloped. I don’t know how it’s going to play out. You can build very competitive economy like Finland and have little growth – your economic parameters might be very strong, but still you are not growing.

Stefan: Sorry to interrupt. Finland does have mostly upper middle society that lives on a very comfortable level.

Marek: Yes, that is true. They are simply rich. In the history of almost any successful country you can see the following evolution: you start poor, you work hard to save something, when you work hard you grow. In the beginning you only see the return of your labor force. Later on you save a little bit and start to see the return on the capital. And you grow, grow, grow. Sometime later you are effectively rich, but you still think you are poor. So you still work hard, although you have the stock of the capital. The same happens in Poland and in the region. In Slovenia and Czechia it happened even earlier than in Poland. Now over 40% of the people in the region is able to save anything, up from 5% 20 years ago. So it is a huge change. People start to accumulate the capital, but still they are working hard.

In Slovenia and Czechia, which are rich countries, this happened a bit earlier, but in Poland it is a quite recent phenomenon. In the last 5 years people started to have enough to save something.  And this is a moment, when either you continue to work hard and accumulate more capital, in this Max Weber capitalistic, protestant country way of “we work even if we are rich”. Or you can follow in the footsteps of many countries of the Western Europe, and to some extent the US, and start spending more than you earn. Decreasing your stock of capital, basically. Poland depends on the eurozone, so I have the best wishes for the eurozone, but in the eurozone you see many countries running into huge deficit. They spend more than they have, so they get more and more indebted and effectively poorer. Their net assets are decreasing because of their high debt.

What happens when you are not working hard and you have decreasing stock of capital because you spend more than you earn? At the end, the only thing that you have is the reputation. Happened to many noble families in the 18th century. The price of the wheat was going down so they were exploiting their peasants more to sell more wheat to maintain their lifestyle. But they were not able to maintain that, so they indebted themselves more and more, and many families went bankrupt due to their wish to maintain their lifestyle despite much lower income. This can happen on the country level or on the company level. Everything that stays is your reputation, your name, whatever.

This is of course a sad development and I don’t know which direction will the region go. From my trips, and before pandemics I was travelling quite extensively and doing Three Seas stock exchange conferences, I still see a lot of entrepreneurs who are working hard and are very ambitious. But I also see the second generation of entrepreneurs, who do not necessarily want to work that hard. They’d rather spend than earn. And this of course makes me worried. How it’s going to play out? Will we keep up the pace with hard work and overtake today’s richer countries in the Western Europe? It is not certain. It strongly depends on micro foundations not a macro economics. This is the biggest challenge.

And there are some smaller challenges too, like infrastructure. I had other interviews about that. I believe that if there is a will there will be a solution. So I don’t believe that it is a real bottleneck. I don’t believe that if you have a great rating, investment opportunities or whatever across the board, that travelling 5 hours instead of 3 hours to see a client is really such a problem. You are still going to travel there. I think that the most prominent question mark on the Three Seas Initiative is whether we will still be able and willing to work hard. And if we have enough labor force, so good demographics.

Stefan: Just to bounce back on one of things you said… The data does reflect that my generation, somewhere on the younger side of the Millennials and edging towards gen Z, is the first generation in the Western Europe, in the West, that will be overall worse off than their parents and their grandparents. In Poland, the reverse is true. I believe, from anecdotal evidence, that this is also true across Central and Eastern Europe. So in the entire region my generation will be better off than our parents and most certainly our grandparents, who were stuck behind the Iron Curtain.

It is very interesting what you said on this. You speak from the point of view of a person who deals with the economics at a very different level than me. It is very interesting to hear your concerns whether there will be the will to work in my generations. Or whether we will be happy with semi catching up to the West and will just want to spend.

I think there is also something else that is very difficult to measure, but it’s very relevant. It’s this sense of enthusiasm. I do think that my generation has this sense of enthusiasm. There is a great sense of hope that our countries are going somewhere. There is still a vague sense that we can still be better off, we are still behind, we have to catch up. And that we are catching up. That sense of hope and enthusiasm from feeling that we are better off that our parents.

There is also this massive shift happening in my generation – people growing up in Poland and those rather young grown-ups in Poland, will be the very first generation is some 250 years to actually inherit anything from their parents. Which is something that is going to be such a fundamental shift. This will change the approach of Polish entrepreneurs and of Polish society, now that the wealth we accumulate can be handed over to our children. Without being lost, or destroyed, or wrecked by invading Nazis or occupying communists confiscating it all.

So, I think, to answer some of the questions that you yourself asked about what was going to happen… I have a very profound sense of enthusiasm. That’s just a side note.

Moving on…

Marek: Hopefully, you are right.

Stefan: Hopefully. What’s the role than Poland should play in the Three Seas process of speeding up economic cooperation in the region?

Marek: First of all, we have a long standing tradition of moderating the cooperation in the region. We have to take into the account that in 1604, at the peak of the power of Poland, just before conquering Moscow and the Russian empire, Poland was the 5th largest economy in the world, and the 3rd largest in Europe. There were times when Poland was extremely powerful, and contrary to other colonial empires we formed a commonwealth of Poland and Lithuania. We have a tradition of building up coalitions, of consolidating nations (although that is a very modern concept), politics and economy in the region on the base of equality and not by force, sword or fire. So there is this huge difference between our legacy and the one of colonial states. I see it in the similar way now. We can build cooperations, we can start initiatives, do many things like joint infrastructure funds to invest in the region, as so on. But it should always be achieved in partnership mode, not in the colonial mode, even though it is much more difficult. Even in the small world of the stock exchanges it is still very difficult because there are some national interests and disparities. If other exchanges are very small, they might fear bigger exchanges like our exchange. Also, it is quite obvious that it is not a sphere without external influences. There are very pronounced interests of various economic powers in the region, regional powers and superpowers.

It is also not straightforward that Poland should increase its role in the region. It’s up to us if we can manage that. Based on what you just said about these ambitions, I think we can do this. We are a can-do nation, but it will take time and a lot of stamina and. There is also this weak spot – we are very good at being active but not very systematic in the way how we treat our neighbors. The same was visible in the interwar period. Every Polish government had a different policy how to deal with the Ukrainians. Today, we have a very clear view on NATO and the UE, but not a clear view across the political spectrum on how to approach the Three Seas Initiative as an concept. Your generation could change that.

Stefan: It feels like there is not a clear cut strategy at all around the Three Seas. There are infrastructural projects that need to be done, because there is a disparity between the North-South axis and East-West axis, that has to be addressed. But aside from that it does feel that the project is very much undefined, really. Beyond these notions that we need to build some pipelines, bridges, roads and railways.

Marek: We have to step into the shoes of the politicians. Roads, pipelines are very tangible. You need them in the media-based democracies where you need a very clear picture, and media-friendly statements. So we need to be realistic. Politics is about gaining and executing power and that will not change. I don’t like the expression “mature democracies” as Polish democracy started 500 years ago with 9 to 11 % of population being allowed to vote, but I mean countries with more experienced, more tenured, multi-generational civil servants. This is the level where the policies are done. We should be more clear about our role in the region and what we want to achieve. And step by step we should do this. We do it already to some extent, for example, current government is investing heavily in scholarships for foreign students, who want to study in Poland so there are first sings of that. But continuity is very important and we need to be systematic in what we do. And I don’t mean building one bridge after another, but consistent work on a daily basis.

Stefan: To conclude… I think of the achievements of the last 30 years in Poland, what has been done, the incredible shift in the society and how much has been accomplished in that time. If this is any metric to go by for the next 30 years, then one can only be really optimistic, and hopeful of what is coming next. I think a tremendous amount has been achieved and I think most people in Poland just got used to that and don’t see how far we’ve come, and how much has changed. When you are involved in the change on a day by day basis you can’t see that. But if you take a step back and you look at it, the shift is absolutely unbelievable. It is an incredible story. So if that’s the metric to go by, I can only be optimistic.

Marek: I can only agree with you. A German professor who is visiting Poland from time to time, once said “One thing is astonishing in Warsaw, that every time I visit there is a new skyscraper.” You don’t notice that when you live in here. So absolutely, I fully agree with you. But I can share with you one other insight. Back in 1997 we started student consulting company, first in the region, which was part of the European network of the junior enterprises. In 1999 we were doing international project for one of the top employers to see what are the preferences of the students in European countries when it comes to the process of employers selection. In France, most popular companies chosen were Danone, Renault, other French companies and only then let’s say McKinsey. In Germany, it was Daimler or whatever, and on the slot four was McKinsey and then Roland Berger. And in Poland it was: Artur Andersen, McKinsey, BCG, no Polish companies among top 20. Fast forward, I teach at the Warsaw School of Economics so I have hundreds of students per semester. I teach microeconomics. I talk to Polish students and they say “our dream job is to have a start-up, cause heavily financed by the government jobs are in start-ups. And if not a start-up, then before I start my own company, I would like to gain some experience in the Polish company that goes global.”

The priorities have completely shifted. It is a generational shift. For my generation the dream was to get a decent job at the global corporation. Now there are groups of ambitious people who would go for a lower salary of an exciting job in Polish global companies, which compete with other global players. Or they would like to start their own company. It is a complete shift of priorities and it is very promising. How it’s going to play out if we maintain our ambition and whether we will be taking over other economies in chart up to global top 5 like in 1604, I don’t know.

Stefan: We finish on that happy, optimistic note. Thank you very much Marek, I really appreciate your time. Thank you.

Marek: Thank you very much for your questions.