2 December 1993 estimates are based on the classification of Combined Nomenclature of the European Union.
At the same time, the exchange system was liberalized and the exchange rate set to a competitive level. The multiple exchange rates were unified in January 1990, and many restrictions on the availability of foreign exchange were eliminated during 1990–91. Most important, the parallel market was legalized in March 1989, with residents being allowed to transact freely in this so-called kantor market where the exchange rate is determined flexibly by market conditions, resulting de facto in full currency convertibility for this segment of the market.
In 1991, the trade liberalization strategy had to be revised to support the budget and the balance of payments. The former had been weakened by the unexpectedly large drop in recorded output and the consequent decline in the traditional mainstay of the revenue base, taxes on state enterprises. At the same time, transfer payments increased rapidly as the social safety net had been put into place. Not unlike other countries where broad-based domestic taxes had not yet been put in to place, Poland resorted to raising fiscal revenues by taxing external trade. The external accounts had weakened because of the collapse of trade within the former Council for Mutual Economic Assistance (CMEA). First, from January 1, 1991, trade was undertaken at world market prices and settled in hard currencies. The price shock resulted in a deterioration in Poland’s interregional terms of trade of about 30 percent in 1991, with the price of critical petroleum imports from the Baltic countries, Russia, and other countries of the former Soviet Union estimated to have increased 118 percent. Second, the decline in trade was subsequently magnified as Poland’s CMEA partners implemented parallel reform efforts. Though Poland was fortunate to have been the CMEA country with the smallest concentration of trade to the former CMEA—accounting for about a third of its total trade in 1989—trade with the CMEA countries (convertible and transferable ruble exports plus imports) fell precipitously and accounted for below 10 percent of total trade in 1994, with Russia accounting for over half of this remainder.
To compensate for these two unforseen factors—the fiscal difficulties and the weakening of the external sector, the tariff suspension was withdrawn in August 1991—and the average unweighted most-favored-nation (MFN) tariff rose to 18.4 percent (13 percent on a 1991 trade-weighted basis)—and was followed by the implementation of an across-the-board 6 percent import surcharge in December 1992, from which only alcoholic beverages, tobacco products, fuels, and automobiles were exempted.
The liberalization of Poland’s trade system was not unilateral. Poland was fortunate in that the European Union (EU), to assist the transformation process, improved access to its markets. Previously, Polish export products faced the many restrictions that the EU applied to countries that it classified to be state-trading companies. In September 1989, a bilateral trade and cooperation agreement eliminated many nontariff barriers and granted MFN status. A few months later, in January 1990, most countries granted the more favorable Generalized System of Preferences (GSP) treatment for some goods. In December 1991, the EC opened further its markets to Poland, when Association Agreements with Poland, Hungary, and Czechoslovakia were signed. These agreements aim to establish free trade areas within a ten-year period and progressive economic integration with the EU through a wide range of economic and financial reforms (e.g., regarding the movement of capital and labor, the rules of competition, and the harmonization of economic and financial laws to community legislation).
The agreement contains provisions for immediate and progressive trade liberalization that are asymmetric in nature; the agreed trade liberalization would be introduced over five years by the EU and over seven years by Poland. From March, 1992, most tariff and all quantitative restrictions imposed by the EU on industrial goods (except cars) were eliminated, resulting in immediate free trade for about 50 percent of Polish exports and for about 70 percent of Polish industrial products by the end of 1994. Trade in so-called special products (cars, chemicals, furniture products, and cement) and textiles, coal, and steel, and agricultural products are covered by special protocols that provide liberalization over a longer period. 1 In addition, the Association Agreement contains safeguard provisions, which permit the implementation of protectionist measures in several cases; for example, infant industries, industries undergoing restructuring, and industries facing important social problems and requiring compensation for anticompetitive practices or subsidies. Furthermore, antidumping actions are permitted in accordance with the GATT articles.
In June 1983, in response to criticism of the remaining restrictive aspects of its Association Agreements with the Czech Republic, Hungary, Poland, and Slovakia—especially the reproach that under the agreement the EU is opening access most slowly to markets in which the Central European Free Trade Association (CEFTA) countries have the highest export potential—the European Council at its Copenhagen meeting decided unilaterally to accelerate the implementation of the Association Agreements both for industrial and agricultural goods. As a result, all tariffs on industrial goods were eliminated as of January 1, 1995 (with the exception of textiles and steel products). At the time of the Copenhagen meeting, the EU explicitly accepted that the ultimate objective of the Association Agreements was these countries’ accession to the EU.
The main Polish exports facing EU barriers following the implementation of the agreement, according to the Polish authorities, are agricultural products, with the main constraints being minimum prices and variable levies. However, the alleged frequent resort to, and the future potential reliance on, the safeguard clauses and antidumping action are also considered as barriers to trade expansion as well as a deterrent to foreign direct investment (chemicals, steel products, and cement). The recent trade statistics have not indicated that exports in sensitive areas—especially for industrial products—have grown significantly less rapidly than the nonsensitive exports. The main exceptions appear to be the coal, chemical, and agricultural sectors—where the slower growth may also be explained by excess supply in the EU. Finally, the Association Agreement could also impede foreign direct investment through its “rules-of-origin” clause. It requires that at least 60 percent of the value of a product be created in Poland for it to be eligible for the favorable treatment permitted under the agreement.
Similar agreements were concluded between Poland and the European Free Trade Association (EFTA) and with Czechoslovakia and Hungary. The agreement with EFTA parallels in many ways the EC Association Agreement; there is an asymmetric implementation of liberalization and the agreement contains safeguard clauses similar to those in the EU agreement. It could, however, be considered more liberal overall than the EC agreement as tariffs and QRs are eliminated for a larger group of industrial goods (except textiles and metallurgical products, mainly steel) and fish products have completely free trade. The CEFTA is also similar but involves symmetric trade liberalization, with the liberalization of trade in “sensitive” products (textiles, steel, and agriculture) undertaken over eight years and in “normal” goods over three to four years.
Poland is about to conclude the ratification of the GATT agreement of the Uruguay Round, and it will become effective on July 1, 1995 with Poland’s accession to the World Trade Organization (WTO). Poland is also continuing to negotiate a reaccession protocol with the GATT. It has presented to the GATT a tariff schedule that it would be prepared to bind; the major remaining stumbling block to the conclusion of the negotiations is apparently the bilateral negotiations with two major industrial countries. The implementation of the Uruguay Round will have both positive and negative effects on Polish trade in the short run; on the positive side of the ledger, are the potential liberalization of trade in agriculture and textiles and the more stringent guidelines for the use of antidumping actions; on the negative side, is the reduction in the Multifiber Arrangement (MFA) tariffs on non-EU members, which will erode Poland’s margin of preference obtained from the Association Agreement.
In contrast to the move by the EU to open access further to their markets at the time of the Copenhagen meeting, Poland introduced a somewhat more protective trade regime, especially toward agriculture. Poland raised the effective level of protection in July 1993 by (1) revising the tariff structure, resulting in lower duties on imported raw materials and semifinished products and higher ones on finished products and those products produced in Poland, and (2) increasing recourse to preferential (low or duty-free) tariff quotas for inputs. In June 1994, the government introduced variable import levies on several agricultural products, which, however, will be replaced with tariffs on July 1, 1995 as part of the Uruguay agreement. Such protectionism reflects Poland’s political environment, in which the agricultural lobby has significant pull, the Poles’ mimicking the methods developed to protect agriculture in the industrial countries of the world, and the Poles’ belief that they need bargaining chips in future negotiations; in sum, they are behaving like most other industrial countries in protecting their agriculture.
Has the “big-bang” reform program been a success in Poland? Without a doubt, the answer is yes. Inflation has fallen from an annual rate of over 600 percent in 1989, to below 30 percent in 1994 (Figure 1), growth has recovered quickly after dropping some 20 percent in the first two years of the program, and the recovery is in its third year with real GDP growth conservatively estimated at 6 percent in 1994. The critical role of the tradable sector is indicated by the growth of industrial production, which can be considered a crude proxy for the production of tradables (Figure 2), and the similarly astonishing growth in exports. Convertible currency trade (the sum of exports and imports) between 1989 and 1994 has almost tripled; this is equivalent to an increase of over 27.5 percentage points of GDP, from 16.9 percent to 44.5 percent of GDP (purchasing power parity basis with 1991 as base). The corresponding data for total trade (including transferable ruble trade and trade under bilateral agreements) shows an increase of 20.5 percentage points of GDP, indicating not only a reorientation, but an expansion, of trade. 2
The dramatic increase in trade with non-CMEA countries has resulted in the EU becoming Poland’s largest trading partner, accounting for about 60 percent of total trade in 1994, with the share to Germany being about one third (excluding unrecorded trade for which the bulk is cross-border trade with Germany). Just as impressive—reflecting the competitiveness of Polish exports—exports have managed to penetrate non-CMEA trading partners’ markets by 8 percent during 1993 and 15 percent in 1994, the year export growth was least affected by the reorientation-of-trade effect.
It is interesting to note that trade with industrial countries, excluding those with which Poland has signed regional trade agreements (United States, Japan, and Canada), does not appear to have been affected by the creation of this regional trading bloc, as both exports and imports to these countries have increased at a faster pace than to the regional partners during 1991–93.
A critical issue in assessing the impact of the reform effort is the extent to which the recent export developments reflect trade diversion—which by definition should be of limited duration—or trade creation. There is significant evidence that Poland has experienced a substantial amount of trade creation.
First, though the current structure of exports, for the main, still reflects the inheritance from the old CMEA trade regime, it also contains evidence that the structure of trade is shifting toward new products. Accepting the limitations of the data, it appears that the composition of trade is shifting away from low-quality products shipped to the captive market of the east toward products that are competitive in Western markets. This is brought out in a comparison of the composition of exports prior to the reform with the current one, which reveals that the current structure of exports parallels the one that existed between Poland and the industrial countries prior to the reform. Interestingly, trade with the former socialist countries (for the most part consisting of the CMEA countries, the most important being Russia) has shifted toward agricultural products from industrial products.
Second, the top exports through the end of 1994 contained further encouraging signs, as many nontraditional products were also high on the list, such as cars (mostly the Cinquecento automobiles produced by a joint venture with Fiat), garments, and furniture, besides traditional exports such as coal, iron and steel, refined copper products, wood products, and ships. This is also supported by Germany’s customs data, which indicate a surge of new types of products from Poland, 3,500 in 1993 versus 1,500 in 1992, with the most common new items consisting of such high-quality products as instruments, measuring equipment, and chemical and wood products. In addition, an analysis by factor intensity also indicates that capital intensive, technologically advanced, and high-skilled-labor exports have increased their share of total recorded exports by over 3 percentage points between 1991–94.
Third, the private sector has increased its share of both exports and imports, from 4.9 percent and 14.4 percent in 1990 to 51.1 and 65.8 percent, respectively, in 1994. 3 Fourth, customs figures grossly underestimate total trade as they fail to capture much of the booming border trade; that is, day-trippers moving in both directions. This is supported by the fact that net purchases of foreign exchange by Polish commercial banks from kantors amounted to DM 3 billion in 1993 and that these kantors are concentrated near the German border. If one adds net purchases and sales from the kantor market to exports—as a proxy for unrecorded trade—exports would increase by 3.7 percentage points of GDP in 1994.
The structure of trade, however, reveals the potential limitations to sustained growth. An admittedly rudimentary classification of exports by their factor intensity reveals that during 1991–94, the share of unskilled-labor-intensive products (e.g., textiles) increased by almost 10 percentage points. If the relative expansion of such exports has been motivated by the recent decline of real wages, future growth prospects could be hampered by the unlikely continuation of wage compression. In fact, wages in the economy increased by about 3 percent in real terms in 1994. In addition, natural-resource-intensive exports continue to represent the largest share of exports, an estimated 50 percent in 1991 and 1992. Such exports are traditionally low-value goods that are sensitive to the business cycle in partner countries, a premise supported by the close to 10 percentage point drop in the export share of such goods in 1993 (most likely in the first half of the year) in response to the economic slowdown in Europe, and especially Germany, and the subsequent reversal in late 1993 and 1994.
The lessons I would draw from the Polish experience are that structural reform can be introduced at the same time as a stabilization program. The Fund’s staple advice on the importance of a quick liberalization of the trade and payments system is still valid for countries in transition and can quickly lead to export-led growth. Nevertheless, the role of EU Association Agreements should not be underestimated. The implementation of the Uruguay Round, however, should reduce the need for such reciprocity in trade liberalization for other countries that are planning trade liberalization in the future.
It is difficult to choose the initial level of protection. Poland had to raise its tariff rates from the initial levels. However, the system should be transparent, that is, tariff-based, have very limited, if any, recourse to quantitative restrictions, and have a clear and credible timetable for future liberalization.
There is always a political aspect to trade reform. Thus, a window of opportunity should not be missed to clean up the trade system to the extent possible. As interest groups become more entrenched, it becomes harder to pursue reform.
For textiles and clothing, duties will be phased out over six years and quotas dismantled before 1998. For steel and coal, duties will be eliminated over five years and QRs immediately for steel and after one year for coal. For agriculture, the liberalization process is more opaque. Some products are excluded from the agreement altogether (e.g., cereals). For others, levy reductions of 30-100 percent will be phased over five years, and QRs will be progressively increased by 10-20 percent a year from the initial (often low) base over five years.
Caution must be exercised in interpreting the value of trade in transferable rubles, as export and import unit prices were not market determined. In this paper, transactions in transferable rubles are converted into U.S. dollars using the transferable ruble-zloty cross-commercial rates.
The lower share of the private sector in exports relative to imports most likely reflects the large unrecorded net export growth, the large share of industrial goods in exports—which are produced by state-owned enterprises—and the existence of state-owned trading companies, which still intermediate for small private firms unfamiliar with export markets.
