Do Not Invest in Eastern Poland: Intracountry Catch-Up Doesn’t Happen

Matt O’Brien tackles the question on everyone’s mind—funny posters aside, should you invest in Eastern Poland?

He says “yes” citing both Poland’s relatively high growth rate (thanks to stimulative monetary policy during the crisis) and specifically to Eastern Poland’s relative underdevelopment compared to the parts of the country that were ruled by Prussia or Austria during the partition era. “Poorer regions don’t always grow faster than richer ones,” he writes “indeed, eastern Poland didn’t during the past decade—but they should tend to catch-up over the longer-term.”

The theory he’s appealing to here is “conditional convergence” and unfortunately it’s dead wrong. Look around the world and you’ll see that region-to-region convergence almost never happens. Mississippi is poorer than Massachusetts and has been for a long time. The same goes for Northern Italy and Southern Italy, or Scotland and England. East Germany hasn’t caught up to West Germany since reunification despite massive public sector expenditure aimed at closing the gap. And the reason it doesn’t happen, roughly speaking, is that people move. The economic opportunities are better in the richer part of the country and the most ambitious people from the poor part of the country move toward opportunity. They leave behind a population that’s disproportionately composed of retired people, the less-ambitious segments of the native born population, and folks who’ve chosen to prioritize something in life other than big time professional success (bucolic country living, a strong sense of community, cheap land, whatever).

What about rapid catch-up growth in China? That’s real enough. But note that Chinese people can’t just pick up and move to London or New York or Tokyo. And internal to China there are huge regional barriers in prosperity that show no sign of closing. Instead, Chinese people are trying to move to coastal propserity. China is unusual in having large formal controls on internal migration that may change things down the road. But that’s not relevant to Poland. If you want to invest in Poland, west is best. Convergence is a myth.