Moving from Low- to Higher Skills Equilibria. Political Parties and Institutional Change in Poland and Romania

This paper argues that governments can dramatically influence the sophistication level of their economies but that only some of them use this power. It explains what drives these differences while analyzing government policies in two relatively new democracies – Poland and Romania. It explains that some governments have successfully provided the environment for firms to move towards higher value-added activities, while others have been less active in this pursuit. It explains that this is due to the different electoral constraints that political parties in government have responded to while regulating these policies. Furthermore, the paper shows how successful governments have intervened in the economy. They have identified and simultaneously incentivized three key actors to invest in higher added value activities. They have bargained with multinational companies (MNCs) to attract sophisticated activities (i), they have incentivized students through scholarships or through secure employment by fostering links with enterprises (ii) and they have steered their higher education (HE) sectors towards the “hard sciences” (iii). The paper adds to the thriving debates in the literature focusing on value chains by showing how governments in new democracies intervene in the economy.