Poland: The Challenge of EU Integration

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

In the eyes of most economists, Poland is a
model of successful reform thanks to the impressive economic
momentum it has generated and the speed of structural change. But
how do things look when it comes to the second strategic objective
of Polish economic policy in recent years, namely getting into
shape for accession to the EU? Is Poland ready in economic terms to
join the EU club in the foreseeable future? There continue to be
widespread doubts on this score. During the ‘hot phase’ of
accession negotiations, it is indispensable to ask how close the
largest EU aspirant now is from an economic point of view to the
goal of EU membership and what challenges remain to be met.

Undeniable economic successes have been scored…

Numbers provide the most eloquent testimony to
Poland’s economic success in recent years: by racking up average
growth rates of nearly 5% in the period from 1992 to 2000, the
country has managed to increase aggregate economic output by 50%.
The equivalent figures for the Czech Republic and even for Hungary
look modest in comparison (see chart). Per-capita GDP (converted on
a purchasing-power-parity basis) leapt from EUR 4,500 in 1990 to
EUR 8,500 in 2000, which corresponds to 40% of the EU average.
Poland: GDP per capita

What ‘ingredients’ have gone into Poland’s recipe for
success?

  • First and foremost, it is important to point to the dynamic
    corporate sector, which constitutes the power-house of the Polish
    economy: in the wake of the comprehensive liberalisation measures
    and the macroeconomic stabilisation brought about within the
    framework of ‘shock-therapy’, newly-established private-sector
    corporations – rather than state-owned enterprises, which were only
    haltingly privatised – became the growth engine driving the
    economy. Speedy liberalisation of the foreign-trade sector and a
    well-functioning legal system have provided the necessary
    underpinning for the successful expansion of these Polish
    start-ups.
  • Once around 50% of Poland’s foreign liabilities had been
    forgiven by the Paris and London Clubs in 1994, a sharp jump in
    foreign direct investment was recorded, which contributed
    materially to the investment boom that kicked in during the mid-
    1990s. Stringent reforms und substantial foreign investment then
    enabled the reorganisation of the financial sector. As a result,
    Poland managed to prevent the kind of systemic crises which have
    taken such a heavy macroeconomic toll on other countries in the
    process of reform.
  • An active social policy has cushioned the impact of the reform
    process on the population and secured popular support for the
    policy of reform being pursued.

…but accession negotiations are proving tough

Initially, the task of adapting thousands of
national legal provisions to bring them into line with European law
overtaxed the Polish legislative process. It was only in the spring
of 2000 that the pace of legal convergence accelerated appreciably
with the setting-up of the so-called ‘Grand Committee for European
Issues’ at the level of the Polish parliament. This new
parliamentary committee scrutinizes all bills which have been
prepared by the ‘Interministerial Committee for European
Integration’ in collaboration with the competent ministries within
the context of the annual ‘National Programme for the Adoption of
the Acquis Communautaire’ (NPAA) and then makes proposals to
parliament regarding implementation. In this way, the accession
negotiations are being shielded to a greater extent from day-to-day
political in-fighting and are less exposed to the influence of
interest groups. Such a procedure gives rises to hopes that the
accession negotiations can be kept out of the forthcoming election
campaign – parliamentary elections are scheduled to take place in
September.

“Peer pressure” has been mounting since Nice

Although the Nice summit failed to live up to
the great expectations it had generated, the EU does now formally
regard itself as being ready for enlargement. Nice has provided a
‘road map’ from the European Commission governing the way forward
for the negotiations, but has also caused the accession process to
move into a qualitatively new phase. That this is the case is
evident, for example, from the growing interest demonstrated by the
member states, which previously had largely left the concrete
business of conducting negotiations to the European Commission. How
much progress has been made on the way to accession can now be told
from the number of chapters in the European Commission’s “road map”
which have been closed. This has put Poland under greater pressure
not to lag behind other countries. The more concrete the
time-schedule, the better the principle of ‘peer pressure’ – i.e.
mutual competition between the various EU aspirants – functions: in
the few months which have elapsed since the Nice summit, Poland has
been compelled by the progress at the negotiating table which its
peers have achieved to abandon a whole range of demands for
transitional periods, above all in environmental-policy, in order
not to allow the lead enjoyed by other candidates for accession to
increase too much, which would give fresh fuel to speculations that
Poland might possibly not join the Community in the first wave of
enlargement. Further adjustments in negotiation positions look
likely to be forthcoming in the near future.

Negotiations concerning freedom of movement and acquisition
of real estate

Freedom of movement for workers and the
liberalisation of capital transactions in connection with the
acquisition of land are themes which have now become hotly debated
political issues in Poland too: on the one hand, the Polish
population attaches great symbolic importance to freedom of
movement; on the other hand, opening-up the EU labour market for
Polish workers is regarded as a significant component part of the
economic modernisation of the country. The Poles will probably be
able to live with the transitional solution put forward by the
European Commission in April of this year – a flexible procedure
according to which freedom of movement within the entire EU would
become possible after five (or, at any rate, a maximum of seven)
years while national regulations could already lead to wide-ranging
liberalisation measures even before the end of the period in
question. The preconditions here are that this arrangement does not
in practice discriminate against Polish workers vis-à-vis those
from other countries knocking on the EU door and that the
emigration of skilled workers (the ,brain-drain’ effect) is
forestalled.

The Poles are also aware of the political
constraints which probably shaped the European Commission’s
proposal to a greater extent than economic considerations. If the
regulation governing the freedom of Polish companies to offer
services is given a liberal construction (and this particular
freedom is probably of comparable economic importance for Poland to
freedom of movement for workers), this would help to increase
political acceptance of the overall package among the population.
The European Commission’s adverse stance vis-à-vis the German
government’s wish to limit freedom to provide services – another
basic freedom of the Single Market – is giving the Poles cause for
hope, especially since there are also strong economic arguments
against protracted transitional periods in this sphere.

Poland: exports to the EU according to product
categories The regulation governing the acquisition of real estate
by foreigners is by now a more or less equally strongly politicised
theme. Referring to anxieties among the population about a
‘sell-out’ of their country and to tangible problems in connection
with the forthcoming agricultural reform, Poland is calling for a
transitional period of 18 years prior to complete liberalisation.
Given that this issue does not touch on any significant economic
interests from the point of view of existing EU members and given
that Polan d would probably be able to make do with a shorter
transitional period, an agreement should prove possible. Not much
can admittedly be expected to happen in advance of the upcoming
parliamentary elections.

Is Poland’s economy ready for the Single Market?

In the European Commission’s eyes, the Polish
economy will be ready ‘in the near term’ to cope with the
competitive pressure prevailing in the Single Market. Certainly,
the time-horizon is the decisive point in view of the speed at
which structural change is taking place. Assuming that accession
takes place in the middle of the decade, there should still be
enough time to deal with the remaining open questions:

  • Given that it has been almost completely liberalised already,
    the Polish
    export sector is already thoroughly exposed to
    European and international competition. 70% of aggregate Polish
    exports are shipped to the EU. As trade with the EU has expanded,
    so the structure of Polish exports has changed. The country has
    transformed itself from an exporter of agricultural products and
    raw materials into an exporter of industrial and consumer goods, a
    field where wage-cost advantages alone do not secure
    competitiveness. Technology-intensive products, and goods which can
    only be manufactured with the use of qualified labour, have now
    become the engine fuelling export growth, accounting for half of
    total shipments.
  • In view of the large number of foreign companies with a
    presence there, competition on the
    Polish market has been lively for some time now.
    Studies have concluded that companies located in Poland display a
    degree of competitiveness which measures up to the standard in
    certain EU member states. This is true above all of the
    medium-sized enterprises, almost three-quarters of which are now
    operating in conjunction with foreign partners. There are still
    problems with respect to government subsidy policy and the
    effectiveness of the country’s regulatory body overseeing
    competition policy. On an annual basis, Poland disburses state aid
    to companies and regions corresponding to 1-2% of GDP (above all in
    the form of exemptions from taxes and social-insurance
    contributions), but this is not far out of line with the EU average
    of 1.2% (1998). Nonetheless, harmonising Poland’s subsidy strategy
    with the requirements of EU competition policy will remain a task
    on the agenda in the medium term.
  • The biggest question-marks are hanging over the competitiveness
    of Polish
    heavy industry and agriculture. According to IMF
    calculations, annual losses corresponding to up to 1% of the gross
    domestic product are being racked up in the mining sector alone,
    which still has a payroll of over 200,000. On the other hand, the
    pace of structural change is considerable – by comparison with
    Western Europe in particular. Both the number of pits and the
    volume of coal extracted have halved over the past decade. 60,000
    mining jobs were lost in 1999 alone. The knock-on effects for the
    labour market were cushioned by a successful programme launched by
    the World Bank. The constellation is even more problematic in the
    steel industry, which is plagued by overcapacity. The plan here is
    to reduce the number of employees from the current level of over
    80,000 to around 40,000 by 2003 within the framework of
    privatisation measures. A comprehensive reform programme has still
    to be evolved in the case of the agricultural sector, which is
    dominated by unproductive small and medium-sized farms; although
    its share in GDP is comparable with that generated by the Spanish
    agricultural sector, it still accounts for as much as 15-18% of the
    Polish workforce. At present, only a small proportion of the
    sizeable volume of budgetary expenditure earmarked for agriculture
    is being channelled into modernisation. In view of how heavily
    agriculture is regulated within the EU, however, the question as to
    whether small Polish farms will prove competitive hinges not least
    on the shape of the EU’s future agricultural policy.
  • Given that consolidation took place ea rly on with the support
    of ample foreign direct investment, the Polish
    financial sector is in good shape. In terms of the
    aggregate balance-sheet total, 70% of the banking system is
    currently in foreign hands. The equivalent ratio for the insurance
    industry is also in excess of 50%. It is of course true that the
    cumulative balance-sheet total of all Polish banks only
    corresponded to 62% of GDP at year-end 1999, which is still
    considerably below the EU average of 210% and reveals how much
    catching up Poland still has to do. In terms of inherent stability,
    on the other hand, the Polish banking system can keep up not only
    with other accession candidates but also on an international level.
    Average capital adequacy in the Polish banking sector came to an
    impressive 12.6% in September 2000. And the effectiveness of the
    supervisory authority for the banking sector has been lastingly
    strengthened in recent years by the evolution of risk-management
    procedures. One major weakness afflicting the Polish capital market
    is the underdeveloped market for corporate bonds. Even large Polish
    corporations are often unable to obtain the financing they require
    since they have recourse neither to (closely monitored) banks nor
    to the relevant segment of the bond market. However, the pension
    reform which was implemented in 1999 should help to develop this
    particular market in the medium term.

Options in terms of exchange-rate policy
 

The Polish National Bank’s decision of April
2000 to switch from a crawling-peg regime (involving a fluctuation
margin and a predetermined monthly depreciation rate) to a system
of free exchange rates has provisionally brought to an end the
debate in Poland as to which currency regime provides the best
preparation for EMU. It would be quite wrong to underestimate the
requirements which a currency regime has to fulfil in the run-up to
participation in EMU: the goals of disinflation and interest-rate
convergence imposed by the Maastricht criteria have got to be
attained in an environment of liberalised capital markets. In
particular the consequences deriving from the phasing-out of the
remaining controls on the movement of capital continue to be
unclear. Admittedly, Poland has already made more progress on
liberalising capital movements than Spain, for example, had done by
the early 1990s. However, comparative studies point to a distinct
increase in potentially volatile portfolio investment, whereas it
was long-term foreign direct investment which held centre stage in
the past. The upshot could be short-term inflows and outflows of
speculative funds, leading in turn to sharp fluctuations in the
exchange rate, which would in turn generate problems in the
domestic financial sector as well as in the real economy.

From the Polish National Bank’s point of view,
however, the advantages of floating the exchange rate outweigh the
disadvantages. For one thing, volatile capital flows tend to be
even more problematic under a fixed-exchange-rate regime. For
another, risk premia rise in the case of floating exchange rates
and support hedging open currency positions. Furthermore, the
initial ERM II parity can be determined in the market, which could
well enhance confidence in the currency further down the road. But
there are also unmistakable disadvantages: domestic economic policy
is exposed to the volatility in international financial markets. It
remains to be seen whether this will have a positive effect by
bringing about greater transparency or whether short-term
mood-swings in the financial markets will make it harder to conduct
a long-termist economic policy. The hefty exchange-rate
fluctuations witnessed over the past twelve months give some idea
of how difficult the task could turn out to be.

Economic policy under the auspices of EU accession

There are good reasons to believe that Poland
and the other EU aspirants will work up a considerable level of
economic momentum in the run-up to the enlargement deadline. Lower
sovereign ris ks, improved investment conditions and the fruits of
the reforms which have already been implemented could boost
investment activity and cause growth to ratchet up again to 6-7%
per annum. All the same, it would be wrong to overlook the
challenges to economic-policymakers which are set to materialise.
Opinion polls are currently suggesting that the parliamentary
elections due in September will bring about another change of
government. However, it is unlikely that preparations for accession
would slow down or that the markets would become jittery in the
event of victory going to the Social Democratic party SLD, headed
by Leszek Miller.

A crucial task awaiting the next administration
is the orchestration of structural change in rural regions.
Although there is full employment in the city of Warsaw, eastern
parts of the country – marked by agricultural structures – are
having to contend with unemployment rates which in some cases
exceed 30%. Labour mobility is very low even within Poland. It can
be predicted at the same time that the eastern regions stand to
profit far less from Poland’s integration into the EU than their
western counterparts. It will be the task of a forward-looking
structural policy to deliver political stability in the face of the
growing gulf between the east and the west of the country, but also
to come to terms both with budgetary constraints and with the
dictates of Brussels competition policy.

Containment of excessive current-account
deficits is likely to be a further focus of economic policy in
future. Although growth rates for Polish exports have recently been
in the double digits, further more-than- proportionate import
growth cannot be ruled out in the medium term: as in the case of
southern EU member states, progressive economic modernisation is
likely to be accompanied by a rapid increase in capital-goods
imports. The latter could be soundly funded above all by
foreign-direct-investment flows, a conclusion also reached by the
European Commission in the background paper it prepared for the
informal meeting between Ecofin and the Finance Ministers of the
accession candidates which took place in April of this year. It is
true that the Polish market is likely to exercise a growing
attraction on foreign investors, with so-called greenfield
investment continuing to post rapid growth. At the same time,
however, capital flows in connection with privatisation projects
are going to decline. The most likely assumption, then, is that
inward direct investment into Poland is set to stabilise at a high
level and that we are no longer going to see dramatic growth
rates.

A widespread opinion among economists is that
fiscal policy is the instrument best suited to containing excessive
current-account deficits. But the fact remains that it will be a
major political endeavour to push through an overly restrictive
budgetary policy in the coming years: on the expenditure side, a
substantial amount of new investment will have to be made in
connection with the adoption of EU law, above all in the
environmental, transportation and agricultural fields. Even though
aid will be forthcoming from Brussels, a large proportion of the
costs in question will have to be borne by the public sector.
Estimates conclude that the adoption of the entire acquis will
involve annual adjustment expenditure of up to 5% of GDP. It is an
open question whether countervailing fiscal-political measures will
prove politically viable, and indeed whether the consolidation
measures planned at the moment (a balanced budget is projected for
2003) are realistic.

Conclusion

In spite of the undeniable successes which the
country has scored on the reform front, the hurdles separating
Poland from accession to the EU still appear to be high. However,
it is important to take a differentiated view here. With respect to
some critical issues, the real problem is not the relatively
unfavourable state of the Polish economy but rather the sheer size
of the country. Poland has a larger population than all the other
EU aspirants together who have a serious chance of joining in the
first enlargement wave: the problems cropping up when it comes to
integrating new members are frequently less acute in the case of
other accession candidates not on account of structural differences
relative to Poland but because difficulties do not bulk as large
due to lower population levels. The other side of the coin is that
the financial and politically sensitive questions of principle
connected with the eastward enlargement of the EU are concentrated,
as though in a lens, in the case of Polish accession – and are
generating corresponding political heat. This would also explain
why Poland’s accession negotiations regularly provoke a greater
degree of controversy. There will be even greater political
challenges to meet when the accession process enters its final
phase. What matters from the point of view of Poland’s
reform-oriented politicians is to ensure as concrete an accession
scenario as possible in the years remaining, which will permit both
reform momentum and economic momentum to be maintained. It would
therefore be a cause for concern if the negotiation positions of
the EU were to be increasingly overshadowed by short-termist
election considerations. The best way to keep the costs of the
enlargement process low is obviously to ensure that Poland’s
impressive economic dynamism is maintained.

 

For in-depth analysis, see the Deutsche Bank
Research

Enlargement Monitor.
 

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