Beyond the iron gates of the Koneser Vodka Factory, a one-time icon of Warsaw’s industrial past, dozens of young Polish entrepreneurs gather around their laptops and steaming cups of coffee inside a redbrick building that used to host the distillery’s administration offices. Nurtured by Google Campus, a business accelerator launched by the US tech giant in 2015 and the first of its kind in central and eastern Europe (CEE), they replaced the scores of bureaucrats that ran the factory during Poland’s communist era, thus breathing fresh life into Praga, the blue-collar neighbourhood where the distillery is located. Now, Praga is a sign of Warsaw’s post-industrial transition, which began when the communist regime was dissolved in 1989, producing profound changes across the city.
“I have lived in five different Warsaws over the past 20 years, the pace of change has been so quick,” says Tony Housh, chairman of the American Chamber of Commerce (AmCham) in Poland and long-time expat in Warsaw. “None of these buildings were here,” he adds, pointing at the tower blocks surrounding the imposing Palace of Culture and Science, a ‘gift’ from Joseph Stalin to Poland designed by Soviet architect Lev Rudnev as a copy of one of Moscow’s ‘Seven Sisters’ high-rise buildings and one of the most iconic and controversial remnants of the country’s communist past.
With traces of its tumultuous history scattered everywhere – some city centre buildings still bear signs of German bullets dating from the Second World War – Warsaw is being born yet again, reasserting its reputation as the ‘Phoenix City’. Yet this time the city is not emerging from the ashes of some bloody war, but from the ruins of the communist rule over the country that lasted for more than four decades.
As Poland opened up its economy, Warsaw quickly became the natural base camp for foreign companies lured by the country’s transition to a market economy and its vast consumer numbers – with 38.5 million citizens, the country is by far the most populous in eastern Europe (excepting Russia). As the pace of development intensified and the country joined the EU in 2004, Warsaw even managed to shrug off its long-standing reputation for being an uneventful, unattractive city and turn itself into a lively eastern European capital with a growing business sector, wide cultural and leisure opportunities and improving infrastructure.
Foreign investors soon tapped into this resurgence, with large multinationals scaling up existing operations or establishing a first footprint in the city to serve the domestic market or the CEE region as a whole. Warsaw's vast pool of skilled workers, whose average wages are low when compared with those in western Europe, is also a magnet for the business services industry, which is relocating increasingly sophisticated functions to Warsaw.
Since joining the EU in 2004, Poland has emerged as one of the most acclaimed success stories of the union’s enlargement programme. The country posted an average economic growth of 4.4% in the 15-year period to 2011, according to Eurostat figures. It even managed to cope with the global financial crisis of 2008-09, when economic growth did slow, but did not turn into recession – the only EU country to manage this. After slowing further between 2012 and 2013, Poland's economic growth regained vigour and bounced back to 3.3% and 3.6% in 2014 and 2015, respectively.
“Economic growth in Poland is expected to remain robust and stable, driven by domestic demand,” the European Commission wrote in its 2015 autumn forecasts, estimating that this growth will be stable at 3.5% in both 2016 and 2017.
An FDI giant
This growth has been fuelled by steady inflows of FDI. The cumulative value of FDI in Poland amounted to €219bn at the end of 2014, according to Unctad figures, by far the largest investment stock accumulated in CEE countries. FDI made a large contribution to upgrading the country’s real estate provision, establishing successful export-oriented industries such as automotive or business services, and also to developing locally produced goods and services.
The country’s investment climate took a hit in January as credit rating agency Standard & Poor’s (S&P) downgraded the country’s sovereign rating to BBB+ (from A-) and rang an alarm bell over the possible consequences of the apparent attempt by the new government, elected in 2015, to weaken the independence of key institutions such as the constitutional court and public broadcasting. Despite this decision, S&P’s forecasts for Poland’s economic growth remain well above 3% for 2016 to 2019, which is in line with other international observers.
Warsaw lies at the heart of the Mazovian Voivodeship (province), which has been one of the engines of Poland’s economic growth since the 1990s. Home to 5 million inhabitants, 2 million of whom live in the Warsaw metropolitan area, the Mazovian economy grew by 4.1% in 2014, versus the 3.8% reported at a national level, according to figures by the city’s statistical office. Its contribution to the country's GDP thus reached 22.2%, almost twice as much as the second largest contributor, Silesian Voivodeship.
The city is Poland’s largest academic centre, with 77 tertiary education institutions enrolling some 244,466 students, according to KPMG estimates. Its unemployment rate is only 3.4% and employers have to compete to attract and retain talent. Today, the average earning for Varsovians is 5604 zlotys (€1270) a month, almost 25% above the national average, and this growing spending power is reflected by the dozens of international retailers and restaurants that crowd Warsaw's city centre, alongside emerging Polish brands and a few names coming straight from communist times, such as the mleczny bars, literally 'milky bars' or local cafeterias.
Foreign investors first showed up in Warsaw in the early 1990s, looking for opportunities from the ongoing privatisation of state assets and betting on the development of the largest market in the CEE region. That bet bore fruit. Companies that served the local market largely increased their operations as the Polish and CEE economy as a whole developed and started to build up manufacturing capacity across the country. Meanwhile, foreign real estate developers triggered massive redevelopments of industrial sites into office and commercial space in Mokotov and Wola. As Polish economic growth continued, Warsaw’s business proposition evolved.
“Today it’s more of a mixed picture,” says Mr Housh of AmCham. “One of the key elements that is still driving foreign investment is simply the size of the domestic market, where companies feel they can reach critical mass. And indeed today quite a few US investors such as General Electric, Procter & Gamble and International Paper use Warsaw as the headquarters for their CEE operations, and part of that comes out of the scale and scope of operations they can achieve here. But today the city has also become an extremely dynamic market for business outsourcing and internal support services.”
The availability of a large, young, tech-savvy, multilingual workforce whose wage demands are low saw Poland play a leading role in the global business services market, with dozens of business process outsourcing centres and shared service centres (SSC) springing up across the country in cities such as Krakow and Wrocław from the early 2000s onwards. Warsaw initially missed out as its higher costs made it less attractive than other Polish cities. Things are changing as the sector improves the quality of services it offers.
“Companies were originally relocating simple functions such as finance and accounting or human resources,” says Jacek Levernes, president of Poland's Association of Business Service Leaders (ABSL). “As initial investment exceeded expectations, they started looking at more sophisticated functions, to the extent that today they are establishing core operational centres as opposed to simple support centres. For those operations you need to find the right talent with the right experience, and this is where Warsaw comes back in the game.”
Today some global names run major operation in their SSCs in Warsaw. Among others, Citibank runs worldwide anti-money laundering checks there and Procter & Gamble engineers its supply chain logistics for the whole of Europe. Overall, the city’s business services sector has 105 active service centres, which are owned by 73 foreign investors, according to ABSL figures. It currently employs about 31,000 people, up from 18,800 at the beginning of 2013. The sector is also contributing to demand for new office space. Samsung is about to consolidate its research and development functions – currently scattered across the city – in a 21,000-square-metre lease in the Warsaw Spire, a new glass tower in Wola. Goldman Sachs is also relocating its technology and operations units to the Warsaw Spire.
Meanwhile, for those aiming to develop their own business, the city’s emerging start-up scene offers a natural ecosystem for turning new ideas into start-ups.
“We initially worked for international corporations, but dropped out after a few years. If you have an appetite for change, a big corporation is not for you,” says Anna Walkowska, an important figure in the local start-up scene who launched start-up community co-working centre Reaktor out of her living room. "So I just dropped everything and launched my start-up.”
The potential of Warsaw’s abundant human capital was augmented by generous flows of European funds targeting start-ups and innovation. “Money was never an issue in Poland. However, smart money was an issue,” adds Ms Walkowska. “I cannot say how many of the projects that have been funded are still alive.”
In just another sign of Warsaw’s attractiveness, there have been rumours that Samsung is even ready to move its European headquarters to the city from the UK, should the UK leave the EU, and Credit Suisse is believed to be willing to move functions to Warsaw that are currently based in London as part of its restructuring plans. Just a few years ago, the tale of the migrating Polish plumber became a symbol of eastern Europe's cheap, mobile workforce. The tide has quickly turned and, today, the Polish plumber, or perhaps his sons and daughters, are back in Warsaw and turning it into a modern capital vying for a place among top European cities.