Accession to the EUA Reform and Growth Strategy for Poland
by Daniel F. Oaks

On March 31, 1998, the Czech Republic, Estonia, Hungary, Poland, and Slovenia, began formal accession negotiations with the European Union (EU). The World Bank is assisting applicant countries, including those that have not been invited to negotiate in the first round, to design preaccession reform strategies that would promote simultaneously economic growth and effective integration to the EU. One key vehicle for such support is the preparation of country economic reports focused on EU accession. The first of these reports was prepared for Poland.

In view of the complexity and sensitivity of many EU accession requirements, close collaboration with both Polish authorities and the European Commission was sought from the outset. The report focuses on the implications for economic strategy of formal EU membership requirements, such as reform of Poland’s legal, institutional, financial, and physical infrastructure. However, because a vibrant and growing economy is one of the surest signs that Poland can meet the challenges of EU membership, the report also addresses other factors that govern economic growth even though they are not formal EU requirements. These include, for example, privatization, pension reform, and opening of labor markets.

Poland’s accession to the EU will drive the pace and direction of policy and institutional reforms over the next decade. Membership will require that Poland adjust its institutions, laws, and regulations —including the capacity to implement and enforce them—as required by the EU’s acquis communautaire (the laws and regulations that are accepted by all member states).

Proposed Preaccession Strategy

The key elements of the macroeconomic and structural reform strategy proposed for the preaccession period:

• Macroeconomic strategy. A precondition of the reform and fastgrowth strategy is increasing the saving rate by about 5 percent of GDP over the next five years. Structural strengthening of public finances—particularly through social security reform, closure of unprofitable mines, and faster privatization—is crucial to improve public saving, provide incentives for private saving, and bring down inflation.
  

• EMU membership—and achieving price stability. The Copenhagen criteria applicable for Eastern applicants do not require that new members join the European Monetary Union (EMU), but it does require that they adhere to the objectives of the EMU. In practical terms this suggests that applicants implement the reforms needed to achieve price stability on a permanent basis.
  

• Mobilizing capital flows and domestic saving to finance investment is the key to rapid productivity growth and a quick catchup with the EU. Fast productivity growth, by facilitating a sustainable appreciation of the real exchange rate, and particularly if accompanied by a flexible exchange rate policy regime, is at the core of the disinflation strategy pursued by Poland.

Three Kinds of Reform

The structural reform strategy combines three different types of reform:

1. Winwin policies and reforms: early implementation is desirable for EU accession but these reforms are essential in their own right to support Poland’s economic growth. An example is the deregulation of infrastructure— energy, telecoms, transport— where EU directives envisage an enhanced role for markets and private sector participation. It is likely to attract substantial investment and help improve Poland’s competitiveness. For instance, Poland is already implementing a new energy law that will factor in compliance with EU regulations. It is important, however, to privatize energy operators, and rapidly establish an energy regulatory agency. In the case of transport, fiscal harmonization will require higher gasoline taxes; this can be used to fund the upgrading of Polish roads needed to handle heavier EU traffic.

As in infrastructure, complying with the EU acquis in the financial sector would also be pro-growth and pro-accession— that is, a win-win policy. It would help lower the cost of capital for Polish firms, encourage much needed investment, and improve the range and quality of services open to Polish savers, even if EU accession were delayed. The upgrading of Poland’s financial regulations and supervision is the most important requirement for EU accession. Since supervision is to be performed by the home country, it should be recognized as adequate by all countries in which the institution under supervision is active. (For example, supervision requirements for a French bank’s affiliate in Warsaw should match those of other EU member states where the bank has subsidiaries.) Unlike in the case of goods, the dismantling of barriers in not enough. Enhanced regulation and supervision is also crucial to deal with the potential fragility of financial institutions in the highly competitive EU single financial market and to mitigate the risks that may accompany large, inadequately intermediated capital flows.

2. Policies and reforms that are not a formal requirement for accession but are essential to growth and stabilization strategy (such as privatization and pension reform). Many large, socially sensitive or politically powerful state-owned enterprises (coal, steel, chemicals) and financial institutions have avoided major restructuring; their losses continue to be a drag on competitiveness and thus on the economy’s growth potential. Without faster privatization, state-owned firms will find it increasingly difficult to compete in Europe-wide markets and could cause fiscal and unemployment setbacks. EU competition regulations limit the amount of state aid permitted, so restructuring and privatization of these institutions would eventually become an implicit EU requirement anyway.

Public finances also remain vulnerable to adverse trends in social spending, representing almost twot-hirds of public expenditure. Key reforms of pension, health, and education could lead to a critical improvement in both public and private savings while reducing the high cost of hiring workers. (Social security taxes represent at present 48 percent of the worker payroll).

3. Policies and reforms whose adoption will require more time and careful sequencing of actions in order to maximize their benefits to Poland. (EU Common Agricultural Policy and environmental standards.) Total investment needs for environmental protection were estimated to be between ECU 50 billion to 80 billion over 20 years depending on how specific EU directives are interpreted. Poland will derive substantial environmental benefit from meeting certain EU standards quickly—especially for air quality—since this will reduce the burden of ill health and high mortality attributed to current conditions. Benefits in such areas are large relative to investment costs.

In other areas, however, such as water quality and wastewater treatment, direct benefits are smaller, less immediate, and difficult to measure. And the necessary investments are of such magnitude that early compliance (say, by 2002) may not be even technically possible. The key in this case is to develop a credible long term strategy for compliance.

The development of Poland’s human and institutional capacity—to adopt, implement, and enforce the terms of the acquis—could be one of the most rewarding investments but is also bound to be financially costly and politically difficult to sustain. EU aid in this area—if wisely used—can be helpful and non-distortionary. Improved institutional capacity will in fact be essential for effective and non-distortionary absorption of EU structural and cohesion aid. Large net transfers from these sources may not materialize, but if they do, without transparent, consistent, and objective criteria to ensure “additionality” of investment, they may hamper growth—as experience in Greece has shown.

CAPing the Agriculture

In agriculture the economic costs of adopting high EU intervention prices be-fore accession are too much for Poland’s budget or consumers to bear. They could also hinder incentives to improve efficiency. Support to special groups, if decided by the government, needs to be based on better-targeted income support schemes, not price intervention. This is the trend of the EU’s Common Agricultural Policy, which suggests that convergence in prices may be less of an issue by the time Poland accedes.

Poland’s extensive agenda in agriculture needs to focus instead on the strengthening of market institutions (land and regional wholesale markets, rural credit, privatization), more transparent intervention in cereals (including privatization of storage and trading functions), with the aim to reduce its production and adoption of EU technological and quality standards. Accession to the EU goes significantly beyond implementation of specific economic instruments or acts of European law. It is, first of all, a matter of creating the conditions under which Poland and the EU will be able to reap the benefits of integration. In this context, creating the conditions for fast and sustainable growth becomes the single most important “requirement” for EU accession.

The author is Senior Economist at the World Bank.