Est. 20min 06-07-2001 (updated: 08-04-2007 ) Euractiv is part of the Trust Project >>> Languages: Français | DeutschPrint Email Facebook X LinkedIn WhatsApp Telegram 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.
