Future disparities between private and social values

In the ex-post analysis the opportunity costs and benefits diverged from the private values due to the direct effects of policies and due to the divergences that could result from domestic policies in an indirect way (e.g. by neglecting the need for intervention in areas of competition policy, market institutions, investments in public goods). In all cases the decision to influence the magnitude of divergence was endogenous to domestic policy making. This, however, will change on accession to the EU because many common EU policies will have to be accepted by Poland as given - the set of policies that can be freely chosen by Polish decision-makers will become limited. The constrained set of policies will give rise to new social prices, which can be referred to as Euro-social prices (Pearson et al., 1987). In such a new policy context the divergences between the Euro-social prices and private prices reflect only the effects of direct and indirect policies that Poland will be allowed to apply sovereignly.

Disparities in revenues and costs

As far as output prices received by Polish producers are concerned, the estimated benchmark prices will represent new private prices. From the perspective of Poland’s social cost-benefit analysis, the new social prices will be represented by the Euro-social prices, which will amount to the new producer (private) prices net of: Poland’s budgetary contributions (per unit of product) to the maintenance of the CAP dairy prices above the world market level. Considering Poland’s relatively small share of the EU budget after accession, and other relevant information, one can estimate that the share of Poland’s corresponding contribution to the dairy CAP prices would amount to less than

58 In 1997 Gouda cheese price in Holland (5.62 DM) was below the levels reported by ZMP (1999) for Germany (6.06 DM) and Belgium (5.89 DM).

4 Dynamic Comparative Advantages – Effects of Integration with the EU 93 0.2%.⁵⁹ For simplicity, it is assumed that the Euro-social prices for dairy products will equal to the benchmark prices estimated in section 4.2.1. Given the working assumption about the date of accession, the Euro-social prices will already start to substitute for the social ones in 2004. Moreover, implicit to the method of estimating the benchmark prices for price alignment is the assumption that all non-policy divergences detected in the ex-post analysis will be removed.

The EU accession will also be associated with an imposition of certain constraints on policies in the factor markets. In the labour market several effects of conflicting influences on the level of real wages and labour costs can be expected. First, as already mentioned, Poland has to improve the functioning of the labour market to cope with the challenge of structural adjustment resulting from economic integration with the EU. Progress in this respect should limit the divergence between the private and social wage rates detected in the ex-post analysis. At the same time, however, the EU membership imposes the obligation to comply with the acquis communautaire in the field of employment and social affairs, which may have an enhancing impact on wages.⁶⁰ The liberalisation of intra-EU labour flow (even partial) can be conducive to an increase in the domestic wage rates in Poland. Considering the above effects, it is assumed that the previously described rates of growth in real wages accompanying the future economic growth (Table 4.1) can also represent the social (and from 2004 to Euro-social) values, and that between 1997 and 2004 the private labour costs will fully converge on the social levels through a gradual adjustment. This means that between 1997 and 2004 rates of real private wage growth are below those for social/shadow ones.

The private/social divergence in the capital costs will be affected by the EU accession in two major ways. First, Poland will have to align its State aid award provisions with the competition policy of the EU. This harmonisation is to impose stricter rules on capital subsidisation from the State budget, but will not prohibit such measures. Nevertheless, it is assumed that Poland may have to give up the past scheme of credit subsidies, which has been in operation since 1994, merely because of the constraints on the State budget associated with the macroeconomic convergence conditions. Second, already in the pre-accession years, starting from 2001, the industry may benefit from the capital

59 In 1996 the budgetary expenditure on the CAP in the dairy sector amounted to 3775 Mio ECU, i.e. 33.3 ECU per ton of farm milk. This sum corresponds to 11.4% of the farm milk price, or to about 6% of milk industry revenues, i.e. 6% of the price of an ‘average‘ dairy product (assuming that farm milk, on average, accounts for about 50% of the price). Considering that contributions to the EU budget are, in general, proportional to the GNPs of the member states and that Poland’s GNP amounted to about 1.4% of the EU-15 GNP in 1995, it follows that Poland’s contribution to the EU’s expenditure on the dairy regime of CAP, per unit of output, would lie below 0.2% of the price of an ‘average‘ dairy product. The exact future contribution will depend on the following effects: (i) Poland’s economic convergence that would increase Poland’s share of the EU’s GNP, (ii) the impact of Poland’s accession on the EU’s expenditure on the CAP in the dairy sector, (iii) changes in EU dairy policy (Agenda 2000) and (iv) development in world market prices.

60 For example, one important obligation is to guarantee workers’ representation in all undertakings where there are no trade unions. This and other provisions may sustain the existing bias in the bargaining between workers and employers in favour of the former.

4 Dynamic Comparative Advantages – Effects of Integration with the EU 94 subsidies within the SAPARD⁶¹ programme. The scheme is to be financed both by the EU budget transfers (in 75%) and by the Polish budget (in 25% - both central and regional) contributions. As far as the agro-food processing is concerned, the SAPARD is aimed specifically at the improvement in sanitary and hygienic conditions in the dairy and meat sector. In such a case, the Euro-social level of capital costs will differ from that based on the projected economy-wide social interest rate by the (per unit) value of subsidy financed by the EU budget (less the part of this subsidy that will stem from Poland’s contribution to the EU budget after accession to the EU). The private level of capital cost will in turn differ from the Euro-social one by the amount of SAPARD subsidies co-financed from the domestic budget (per unit of capital costs). It is assumed that the Euro-social level of capital costs will diverge from the level implied by the economy-wide interest rate by the capital cost reduction equivalent to a 3% decline in this economy-wide interest rate (i.e. decline from 8% to 5%). In turn, the level of private capital cost will diverge from the Euro-social level by the capital cost equivalent to a 1% reduction in the interest rate below the level assumed for the Euro-social level (i.e. from 5%

to 4%).⁶²

Future farm milk prices for DRC analysis are derived as equivalents of projected butter and SMP prices. Euro-social prices of these two products will be used to derive Euro-social prices of farm milk using the projected processing margins, i.e. margins resulting from changes in input prices and, in the scenario assuming technical change, in factor productivity. Moreover, it is also assumed that for a certain time after accession, milk prices paid to farmers, i.e. private milk prices will only achieve 95%

of their Euro-social level. This is merely a working assumption, however, supported by some important rationales. First, there is the experience from the New German states where significantly lower milk prices (than expected) were paid for several years after accession to the CAP. Second, given the possibility of an increase in the concentration of the milk processing industry and an increase in the share of non-co-operative firms, the bargaining position of farmers may decline in the near future, which may adversely affect milk prices. Third, milk (and beef) belong to products which are expected to significantly ‘benefit’ from the changes in relative prices that are to follow after the

61 SAPARD (the Special Accession Programme for Agriculture and Rural Development) aims at helping candidate countries deal with the problems of the structural adjustment in their agricultural sectors and rural areas, as well as in the implementation of the acquis communautaire concerning the CAP and related legislation. SAPARD was to come into effect on January 1, 2000, and is budgeted until the end of 2006 (EU Commission, 1999).

4 Dynamic Comparative Advantages – Effects of Integration with the EU 95 adoption of the CAP. This may enhance farmers’ readiness to ‘accept’ lower milk prices, at least for certain time period. Since this assumption may have serious consequences for the projected private profitability, the analysis will be complemented by a sensitivity analysis of projected private profitability (PCR) to the degree of price transmission between SMP and butter and farm milk.

For tradable cost elements, the Euro-social prices will substitute for the social prices in the same way as in tradable outputs, given the common custom system on these commodities. For many of these tradables, including the specialised materials and machinery, the EU is a net exporter and the major supplier on the world market (DRI Europe, 1996). For these goods the Euro-social prices equal the internal EU prices (and in most cases Poland’s present social prices). For mineral oils, which constitute an important element of energy costs in the dairy industry, the Euro-social values result from the obligatory minimum levels of the excise tax, which Poland will have to conform with. The Euro-social values are, however, calculated by excluding from the after-tax price levels the value of these excise taxes, because they are payable to the national budget.

Accounting Matrix for Projected Efficiency

The projected private and social values can be presented in a PAM framework (Table 4.2).

Table 4.2. Policy Analysis Matrix for projected efficiency.

Costs Revenues

Tradables Farm Milk Labour Capital Profits

Private values A B C D E F

Euro-social values G H I J K L

Effects of sovereign Polish

polices and market failures A-G B-H C-I D-J E-K F-L

Source: author’s compilation based on Pearson et al. (1987).