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![From Policy Takers to Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States
of settlements across the country in ques- sence of barriers to trade.14
tion.11” However, the observation seems
less relevant for the new Member States Competitiveness
where the spatial distribution of economic
activity often was decided by the central A related distinction as made above regard-
planning authority (see, for instance, chap- ing β-convergence and σ-convergence can
ters 6 and 7). also be made with respect to “competitive-
ness”. As pointed out by Ronald L. Mar-
While economists still struggle with the tin,15 there is no clear link between micro-
problem of explaining the concept of eco- economic and macroeconomic competitive-
nomic growth, there is agreement that ness. If the economy consists of firms that
growth is conditional on what is often re- are competitive in their own markets, but
ferred to as “technological progress”, that the output produced represents low added
is to say, improvements in the production value per worker, the economy as a whole
process that enhance productivity. In other will not be competitive. In fact, Paul Krug-
words, supply side factors that improve the man goes so far as to say that the search for
production process improve a country’s (or macroeconomic competitiveness is a “dan-
region’s) long term growth. However, the gerous obsession”, and that
phrase “technological progress” should be
interpreted in the widest sense. It could im- [i]t is simply not the case that the world’s
ply, for example, both methods of produc- leading nations are to any important degree
in economic competition with each other, or
tion and effects from individual or corpo- that any of their major economic problems
rate networks.12 Similarly, economists have can be attributed to failures to compete on
come some way in their search for an en- world markets.16
vironment that facilitates a maximum out-
come from different growth factors. Above If there is any distinction to be made be-
all, empirical studies13 point at factors such tween macroeconomic and regional com-
as investments in physical and human capi- petitiveness, furthermore, the latter should
tal (education and research) in the context arguably be the primary concern with re-
of a stable political environment, institu- spect to European regional policy. Unfortu-
tions such as property rights, and the ab- nately, as Martin concludes,
[t]here is no single theoretical perspective
11
that captures the full complexity of the no-
COM (2004b), p. 149. tion of ‘regional competitiveness’. The
12
Eliasson and Westerlund (2003). overview of both theoretical and empirical
13
In the sensitivity analyses carried out by Levine literature confirms the […] notion that com-
and Renelt (1992), only three out of 50 variables
survived the tests; initial GDP per capita, physical
investments as a share of GDP and human capital. 14
Barriers in the sense discussed here include barri-
A similar, though less strict, analysis by Sala- ers to goods, services, labour and capital. Arguably
í-Martin (1997), gave 22 out of 58 statistically (and sometimes forgotten), the integration process,
significant variables, among others the three men- which have removed numerous obstacles, may in
tioned variables and institutional circumstances fact have played the prominent role where conver-
such as a country’s geographic position. This sug- gence between countries and between regions has
gests that regional policy in remote areas may ben- been observed.
efit from a focus on reallocation, rather than active 15
Martin (2003).
measures that aim to promote economic growth. 16
Krugman (1994), p. 30.
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![2 Cohesion Policy: Retrospect and prospect
petitiveness is a difficult and often confus- dations that would result in an increased
ing term – especially so at the regional level. competitiveness with regard to this “fourth
The term ‘competitiveness’ often raises more
questions than answers, perhaps one reason
category” remains to be solved.
why the term has only relatively recently
infiltrated the language of macro-economic Cohesion
theory and regional economics alike.17
The third concept, and the ultimate aim of
The concept of competitiveness rather be- European regional policy, “cohesion”, is
comes a question of outcome and, as such, one which can be given a multitude of in-
Martin argues that some lessons can be terpretations. As a starting point, the Com-
learned from the empirical exercise car- mission’s view on cohesion, here provided
ried out in his report. Above all, the report by Hall et al., distinguishes,
stresses that regional policy makers should
adopt measures that take into account the between inequalities between countries, and
stage of development in a particular region. particularly between the so called Cohesion
Four (Greece, Ireland, Portugal and Spain)
That is to say, “there is no ‘one-size-fits-all and the rest of the Union; inequalities be-
policy’.18” Martin uses a trisected typology tween regions within the EU; and inequali-
divided into “Regions as production sites” ties between individuals (“social cohesion”).
(lower to medium income levels), “Regions […] Greater cohesion implies that incomes,
as sources of increasing returns” (high and employment, and economic opportunities
grow faster for groups in weaker areas with
sustainable income levels) and “Regions as low incomes than for groups in richer areas
hubs of knowledge” (mainly major cities with high incomes.20
and capitals, with relatively high wages),
with different priorities depending on the An advantage of this definition is the exclu-
type of region.19 sion of non-economic factors: cohesion is
improved when lagging regions, on all lev-
Even though the typology and policy rec- els in the Union, catch up with non-lagging
ommendation make sense on many levels, regions. That is to say, they converge in the
the aftertaste of this discussion is a bit sour, traditional sense by growing faster.
and for two reasons. Not only, firstly, is it
difficult to define regional competitiveness, However, there are at least three drawbacks
but, secondly, insights as to the factors that related to this line of reasoning:
would promote competitiveness in regions 1. As noted—and the essential point from
that do not qualify for any of the three above much research on economic growth—it
categories, such as the least developed re- is not at all clear whether the promotion
gions in the CEECMS, is lacking. Thus, of regional convergence within Mem-
the problem of finding policy recommen- ber States (or within the Union) with
any certainty will promote economic
17
Martin (2003), p. 7-1 (170). and social cohesion between the Mem-
18
Martin (2003), p. 7-5 (174). ber States’ (or the Union’s) regions
19
Martin (2003). In the first category policy mak- and/or between the Member States, and
ers should emphasise economic governance, in- vice versa.
ternationalisation and accessibility; in the second
2. The definition provided by Hall et al.
category innovation and entrepreneurship; and, in
the third category, more or less all four mentioned
20
factors should be promoted. Hall et al. (2001), p. 5.
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![2 Cohesion Policy: Retrospect and prospect
pean regional policy should maximise the tempt at summing up the added value of the
added value of the Structural Funds, par- Structural Funds. The point of departure
ticularly outside Objective 1 assistance. for their definition is that added value is
According to one Commission document, “something which has been enabled [with],
regional policy is justified “when the ac- or which could not have been done [with-
tions of member States are not sufficient out], […] Community assistance.27”
(the criterion of need) and when benefits
are generated for the entire Union (effec- The concept of added value is in the report
tiveness criterion).24” classified into five different categories. The
first category, Cohesion added value, is
All of the EU15 Member States have ex- perhaps the most obvious category; it is the
pressed appreciation of at least some of added value that comes from the reduction
the effects the Structural Funds have had of economic and social disparities in the
in their respective countries. For example, Union. We will discuss in some detail the
it has been pointed out that the ECP has successfulness of the ECP in this respect in
improved strategic planning, development the next section.
and evaluation at the regional level; that it
has facilitated more cooperation between Political added value concerns the visibil-
regions and Member States; that it has, in ity on several levels in the Member States’
many cases, both improved regional cohe- societies. Allegedly, support from the
sion and increased local and regional em- Structural Funds has increased the support
ployment; that it has made the EU more for European integration. However, while
visible in the respective Member States; regional beneficiaries may have become
and that it has brought added value from its more positive in their attitudes toward
role as a bridge between richer and poorer both the political and the economic inte-
regions in the Union.25 gration process, scepticism against further
integration has remained or even increased
As pointed out by the IQ-net, a network of in some of the regions and countries that
analysts and practitioners engaged in pro- have received least support from the Struc-
gramme management authorities across tural Funds. Increasing assistance from the
Europe, Structural Funds to these Member States
would be difficult since they are among
[a]dded value is not a simple concept. It at- the richest in the EU. Thus, political added
tempts to capture both the quantitative impact value may certainly be considered a posi-
and qualitative effects of the European Com-
munity contribution to regional development tive side-effect of the ECP in supported ar-
through the Structural Funds, for example eas; but any such gains should be weighed
with respect to the ‘Community method’ for about similar to losses made in other areas.
implementing programmes. As such, it en-
tails considerable subjectivity.26 Policy added value stems from the strate-
gic improvements made as regards regional
The IQ-net has nevertheless made an at-
27
Bachtler and Taylor (2003), p. 7. One should per-
24
COM (2004e), p. 1. haps go so far as to say that added value is some-
25
Bachtler and Taylor (2003). thing which has been enabled with, and could not
26
Bachtler and Taylor (2003), p. 1. have been done without, Community assistance.
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![From Policy Takers to Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States
policymaking. However, there is some adds significant value in comparison to
disagreement as to whether the Structural domestic initiatives.32” However, this lat-
Funds have altered policy priorities for the ter view mainly concerns the effects of the
better or the worse. The UK government Structural Funds in the UK regions, rather
in particular has expressed concern of the than in the Union as a whole.
latter.28 The argument is that the temptation
to receive financial support from the ECP To sum up the perceived added value of the
may lead to policy distortions if national or Structural Funds in the respective Member
regional funds are diverted to co-financing States, the positive effects concern above
projects that would otherwise receive low all cooperation, learning, strategic planning
priority. and implementation efficiency. The “de-
tracted value” of the Structural Funds, on
Another form of added value comes from the other hand, is allegedly related to distor-
the partnership principle. This operational tions to national policy priorities; excessive
added value gives foremost a better qual- bureaucracy and costly management and
ity to regional interventions. The spoke in implementation; and poor coordination be-
the wheel seems to be the sheer amount of tween supranational, national and regional
bureaucracy involved, which is both costly levels. Even though it is fair to say that the
and demanding. Again, the mentioned po- net contributors for rather obvious reasons
sition paper from the UK Treasury has ex- are less positive in their attitudes toward
pressed concern of a deficient coordination the ECP than are the beneficiaries, judging
of the assistance at the regional, national by its proposal the Commission seems to
and supranational level.29 have listened to the complaints voiced by
the former group of countries.
Finally, learning added value is the en-
couragement of “[a]nalysis, reflection and
learning […] through regulatory require- 2.2 The impact of the policies in
ments placed on programmes to monitor EU15
and evaluate their activities.30”
The ECP has arguably made a number of
The EU Member States differ somewhat positive contributions in the EU. As noted,
in their views on the added value of the all of the EU15 Member States have ex-
Structural Funds. The Greek government pressed appreciation of at least some of the
maintains the view that “the added value effects the policy has had in their respective
of regional cohesion policies has already countries, even though there remain unre-
proven to be highly significant.31” The UK solved issues where the ECP may actually
government, by contrast, has criticised the have had a negative effect. As noted, there
Structural Funds for their “lack of flexibil- has been a long-standing concern of the
ity” and goes so far as to claim that “it is burden imposed on recipients through the
not clear that the use of Structural Funds specific conditionality of the ECP. Moreo-
ver, there are many signs that the ECP suf-
28
fers from goal congestion, in that it strives
UK Treasury (2003)
29
UK Treasury (2003)
30
Bachtler and Taylor (2003), p. 40.
31 32
Cited in Bachtler and Taylor (2003), p. 4. UK Treasury (2003), p. 19.
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![From Policy Takers to Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States
ion, the authors claim that,38 ent students of European regional policy,
examining particularly the effects on indus-
[i]n practice, […] there is simply not enough try location from integration. These surpris-
relevant regional GDP data for statistical pro- ingly few papers tend to moderate the con-
cedures to distinguish the effects of cohesion
policies in the absence of data on other re- clusions on whether the ECP has been suc-
gional characteristics, such as initial income, cessful in its objectives. Midelfart-Knarvik
human capital, local industrial structures, and Overman examine whether assistance
quality of local administration, the peripheral from the Structural Funds has facilitated
nature of the region, and of random influenc- structural change and whether the EU has
es. The net result is that it is not possible to
establish conclusively what the relative per- been successful in improving the function-
formance of these regions would have been ing of state aid in its Member States.42 Their
in the absence of EU cohesion policy and results indicate that the assistance has in
other policies.39 fact acted counter to the first point, even
though the Commission has been success-
The same report also examined the empiri- ful on the latter. They find that the ECP has
cal outcome of the ECP. The poor data qual- not been able to prevent regional polariza-
ity notwithstanding, the authors concluded tion, i.e. the ECP has been unsuccessful in
that the ECP had played some role in boost- delivering economic and social cohesion.
ing growth in the regions that had received Furthermore, the most direct result of EU
funding, but that, expenditure has been the distortion of the
location of R&D industries by attracting
during the catching-up process, increasing re- them into areas without the proper endow-
gional disparities within the poorer countries ment of high-skilled workers.43
may also emerge. However, this phenom-
enon may be mitigated by national growth
and could be eased by national rather than The authors also argue that there is still a
EU policies (such as social transfer schemes, motive for a European regional policy. If
labour market and wage policy, etc).40 the aim is to improve the situation of peo-
ple in the poorest regions in the EU, the
The recommendation from this report was ECP should employ a strategy with three
to focus on low-income countries (rather objectives. First, it should try to focus sup-
than low income regions), and it goes on port so that the poorer countries are helped
to suggest that the future regional policy in changing endowments and specialise
in this respect should have two objectives. according to their comparative advantage.
First, it should promote institution-build- Second, the policy should seek to ease this
ing, thus improving the administrative ca- comparative advantage dispersion by re-
pacity in Member States and, second, sus-
42
tain “high investment rates in human and Midelfart-Knarvik and Overman (2002). Articles
92 – 93 (Aids granted by States) of the EEC Treaty
physical capital.41” empower the Commission to supervise state aid in
the EU Member States. The purpose is to realise
There has also been research by independ- the full potential of the common market and pre-
vent Member States from giving aid that counteract
38
For a critique of the Commission’s assertions in these forces.
43
the cohesion reports; see also Tarschys (2003). Midelfart-Knarvik and Overman (2002). Ireland
39
Sapir et al. (2003), p. 60. is a good case in point, where the ECP seems to
40
Sapir et al. (2003), p. 146. have had an additional effect due to Ireland’s large
41
Sapir et al. (2003), p. 146 – 147. investments in education.
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![2 Cohesion Policy: Retrospect and prospect
moving factor price distortions. Third, la- any one company as new plants were estab-
bour mobility should be encouraged so that lished.45
the end result is an efficient location of both
firms and production factors. Regional initiatives in Italy, by contrast,
have been “half-hearted”, given too little
A report from Centre for Economic Policy time, suffered from a lack of consistency
Research (CEPR),44 carried out in 2000, ex- and have not had the same concentration
amines the cases of Ireland and Italy (the on specific sectors as in Ireland.46
Mezzogiorno region). The historic outcome
of regional policy in the two countries has The approach the CEPR report recom-
differed significantly: where regional poli- mends to meet the effects of deeper inte-
cy has succeeded in Ireland, it has been a gration should, among other things, invest
failure in Italy. What makes the compari- in schooling and lifelong learning; create
son interesting is the relative uniformity of an entrepreneurship friendly tax and regu-
current regional interventions in the two latory system; endorse labour market poli-
countries. As noted in the CEPR report, one cies that allow wages to adjust according to
aspect of Structural Policy is the copying of productivity trends; welcome international
behaviour at the national level. The Italian investments; and remove barriers to capital
approach has changed over time to increas- and labour movements.47
ingly resemble Irish policies.
In sum, the ECP seems to have promoted
According to the authors of this report, the cohesion in the least developed regions,
success of Ireland owes to the promotion but at a high cost given the meagre results.
of two sectors: electronics and pharma- There is also disagreement as to the size
ceuticals. The CEPR report argues that the of the effects, as it is difficult to trace the
concept that made the Irish government’s specific effects of funding due among other
investments less of a gamble was the fact things to poor data quality. Moreover, the
that it chose to concentrate on these sec- ECP may have had negative effects in that
tors after industries had already been estab- it has not been an effective means of pro-
lished. Thus, moting an optimal localisation of R&D in-
dustries.
[e]lectronics may not have been an obvi-
ously good bet for Ireland before the Intel
and Microsoft investments arrived, but once
they had done so, Ireland was well advised
45
to promote them for all it was worth. Success Braunerhjelm et al. (2000), p. 89. The massive
was facilitated by their willingness, along FDI inflow from the US is to a large extent ex-
with other global companies, to assist ac- plained by the close ties between the two countries.
46
tively in the promotion of further investment Braunerhjelm et al. (2000).
47
in the Irish electronics sector. This they did Braunerhjelm et al. (2000). Indeed, examples
in the interests of developing the electron- of lingering protectionism are not difficult to find.
ics agglomeration, while ensuring that there One example is the Services Directive, which in
was not excessive poaching of labour from certain Member States has come under heavy fire.
Another much debated element of protectionist be-
haviour among EU15 Member States concerns the
restrictions on labour migration from the CEECMS
imposed in all but three of the EU15 Member
44
Braunerhjelm et al. (2000). States.
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![From Policy Takers to Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States
Even though there is broad support for as our study is concerned, that there is an
the Convergence objective, some Member unfortunate absence of a policy to “accom-
States have proposed that resources allo- pany future developments of the new Mem-
cated to it should be increased. Unsurpris- ber States.76” The main argument, to which
ingly, a number of Member States have this study, as we will see, concurs, is that
questioned the Competitiveness objective “the actions eligible for the convergence
and a few Member States have even asked objective are identical for both old and new
for its elimination. In line with the recom- Member States, although the needs are dif-
mendations from the Sapir report,74 fur- ferent.77” The extent to which the needs dif-
thermore, some Member States have asked fer will become clear in the next chapter.
for support being concentrated on the least
developed Member States—i.e. national as
opposed to regional convergence—rather
than on the least developed regions. Thus,
the main dividing lines seem to be the
amount of resources that should be devoted
to the respective objectives, whether sup-
port should focus on regions or countries
and whether aid should be directed to all
regions or just to regions in the new Mem-
ber States.
The Commissin’s proposal has also raised
concerns among students of European re-
gional policy. One evaluation75—while
taking a generally positive attitude to the
proposal with respect to reducing regional
disparities, strengthening competitiveness
and combating spatial and territorial imbal-
ances—has questioned whether some of
the objectives of the ECP will be reached.
The author argues that the improvement of
general welfare would be hampered by the
“[r]emoval of transversal priorities, such as
equal opportunities, …”; that the elimina-
tion of Community initiative programmes
would act counter to the aim of increas-
ing the sense of European belonging; that
“making eligibility rules national” will 76
Jouen et al. (2005), pp. 30 – 31. The report also
stop subsidiarity at the national level and warns that the new implementation system will
thus hinder a modernisation of European fail to address regional problems in a differentiated
way and that, despite the mentioned simplifica-
governance; and, most importantly so far
tions; there will be a multiplication of actors in-
volved in financial management of the funds.
77
74
Sapir et al. (2003). Jouen et al. (2005), p. 31. See also the section on
75
Jouen et al. (2005). competitiveness.
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![From Policy Takers to Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States
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![6 The Czech Republic and Cohesion Policy
Ministry of Transport, not dated, ISPA v sektoru dopravy [Internet]. Ministry of Transport,
not dated [cited 24 February 2005]. Available from http://www.mdcr.cz/cz/index03.htm
Myrdal, G., 1957, Economic Theory and Underdeveloped Regions, London: Duckworth
National Development Plan (Národní rozvojový plán), 2003, Ministry for Regional
Development,
North, D. C., 1990, Institutions, Institutional Change and Economic Performance,
Cambridge: Cambridge University Press
Pravda, Ondřej, 2002, Phare v oblasti hospodářské a sociální soudržnosti v letech 2000-
2004 [Internet]. Integrace, 18 March 2002 [cited 13 February 2005]. Available from http://
www.integrace.cz/integrace/clanek.asp?id=477
Rawlins, D., 2003, Future of the EU regional policy, The Department of Trade and
Industry, UK Government, http://www.dti.gov.uk/europe/pdfs/psfrce.pdf
Sapir, A., et al., 2003, An Agenda for a Growing Europe – Making the EU Economic
System Deliver, Report of an Independent High-Level Study Group established on the
initiative of the President of the European Commission, Brussels
Tsoukalis, L., 1997, The New European Economy Revisited, New York, Oxford University
Press
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www.strukturalni-fondy.cz/index.php?show=000008001001005003
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www.hospodarskastrategie.org – information on new Economic Growth Strategy
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![9 From Policy Takers to Policy Makers
This multidimensional structure of the pol- accommodate both the new and old Mem-
icy itself has led to a congestion of goals, bership.41 With the Eastern Enlargement,
that is to say there are many instruments for however, new Member States were more or
many objectives.39 Normally, maximum ef- less faced with a fait accompli and a very
ficiency is considered too be attained when entangled one at that.
there is one instrument for one goal. Obvi-
ously, this can never be achieved in a politi- 9.5.2 The goal congestion leads to
cal context as complicated as the EU. But policy taking—fund maximisation as
the Commission is aware of the problem an objective
and views its proposal for 2007 – 2013 as
“a simplified and more transparent frame- The five Country Studies must clearly be
work”40 that would lead to increased effi- seen against the backdrop described in the
ciency in the cohesion policy. The proposal preceding sections. The participating in-
states: “The pursuit of the priority themes stitutes have, to a considerable extent, fo-
would be organised around a simplified cused on different dimensions of the pro-
and more transparent framework with the posed ECP. Some discuss obstacles raised
future generation of programmes grouped by modalities and procedures, others fo-
under three headings: convergence; region- cus on difficulties to get access to avail-
al competitiveness and employment; terri- able funds and in utilising them, yet other
torial co-operation.” themes are the conditionalities, notably the
co-financing requirements, and the design
After this courageous statement of inten- of the operational programmes: should they
tion, obviously politics kicked in. Figure be “horizontal” or perhaps rather “region-
9.1, which utilises the original wording of al”? The various objectives, themes and
the proposal, shows that the goal conges- priorities proposed are, somehow, taken for
tion is very far from being eliminated. It is granted: one or two studies discuss at great
not easy to orient oneself among these ob- length how to use the allocated ECP-funds
jectives, key themes, headings, priorities, with much less emphasis on what the funds
focus, responses and key principles. The should be used for. With some exceptions,
modalities for financing the policy from the attitude is one of policy taking rather
three different funds is yet another dimen- than policy making. This has pointedly been
sion which is not included in the schematic summed up by one of the studies as a strat-
presentation in figure 9.1. egy of “making sure that no money is lost”.
One study concludes with great insight: “In-
Despite the ambitious attempts to simplify tegration strategy has been largely replaced
the ECP system we seem to have ended by concentrating on the highest possible ab-
up with a proposal that is at least as multi- sorption of potential EU funds… […] This,
faceted as the old one. This in itself is the however, means that objectives and instru-
result of a long development process, prac- ments have been confused. EU transfers are
tically since the initiation of the European a vital factor of successful Membership and
Union where every enlargement has led sustainable modernisation. However, at the
to modifications of the system in order to end of the day, they are instruments and not
41
39
Sapir et al. (2003), section 1.3 et passim. Tarschys (2003), section 2 “The political archeol-
40
Commission, section 2 ogy of structural policy”
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From Policy Takers to Policy Makers.: Adapting EU Cohesion Policy to the Needs of the New Member States
- 1. From Policy Takers to Policy Makers Adapting EU Cohesion Policy to the Needs of the New Member States
- 2. From Policy Takersto Policy Makers Adapting EU Cohesion Policy to the Needs of the New Member States
- 3. CONTENTS 1 BACKGROUND ANDOBJECTIVES 5 1.1 Enlargement and Cohesion: the issues 5 1.2 Objective and framework 7 REFERENCES 10 2 COHESION POLICY—RETROSPECT AND PROSPECT 11 2.1 Regional policy in the EU—need, logic and rationale 11 2.2 The impact of the policies in EU15 18 2.3 The present and future European Cohesion Policy 22 REFERENCES 29 3 REGIONAL DEVELOPMENTS IN THE NEW MEMBERS AND CANDIDATE COUNTRIES OF THE EUROPEAN UNION 33 3.1 Introduction 33 3.2 Economic growth and regional disparities in the NMS 33 3.3 Economic structure and regional disparities 39 3.4 Employment rates and employment growth 43 3.5 Distribution of FDI and infrastructural facilities across the regions 47 3.6 Problem regions 51 3.7 Summary and conclusions 53 REFERENCES 56 4 POLAND AND COHESION POLICY 59 4.1 Introduction 59 4.2 Lessons learned and future implications from the pre-accession instruments 60 4.3 Controversial accession negotiation issues 62 4.4 Polish problems linked to the conditionality of the Structural Funds 63 4.5 What should be done? 70 REFERENCES 85 5 HUNGARY AND COHESION POLICY 89 5.1 Introduction 89 5.2 Experiences and background of the use of pre-accession funds 89 5.3 Past and present problems and challenges 92 5.4 The need for a re-structuring of the budget 93 5.5 Regional policy challenges and problems of the regional classification 95 5.6 Involving potential participants: the private sector and the municipalities 101 5.7 The need for a new budget line: trans-border infrastructure and environment in the NMS 102 5.8 Hungarian interests—some summary remarks 103 REFERENCES 108
- 4. 6 THE CZECHREPUBLIC AND COHESION POLICY 109 6.1 Introduction 109 6.2 Pre-accession funds 110 6.3 EU regional policy in negotiation process 117 6.4 Czech stance towards new EC regulation drafts on regional policy 118 6.5 Priorities of the Czech government for 2007 - 2013 121 6.6 Expert view on situation in the Czech Republic 125 6.7 Conclusions 134 REFERENCES 136 7 SLOVAKIA AND COHESION POLICY 141 7.1 Introduction 141 7.2 The experience of Slovakia with pre-accession support 142 7.3 Cohesion Policy in the accession negotiations 145 7.4 Selected problems, barriers and obstacles related to Cohesion Policy in Slovakia 147 7.5 A Slovak perspective 153 7.6 Conclusions 161 REFERENCES 162 8 LATVIA AND COHESION POLICY 163 8.1 Introduction 163 8.2 Latvia’s experience with pre-accession support 164 8.3 Issues relating to Cohesion Policy in the accession negotiation process 165 8.4 Problems with current Cohesion Policy 166 8.5 Latvia’s development and structural policy: actual vs optimal? 167 8.6 A Latvian perspective on the Commission’s 2007 – 2013 proposal 171 8.7 Conclusions 174 REFERENCES 177 9 FROM POLICY TAKERS TO POLICY MAKERS 179 9.1 The stage set 179 9.2 Summary of national contributions 181 9.3 The starting position 184 9.4 The system adapted: country preferences revealed 192 9.5 The conclusions: a simplified and growth oriented ECP for the NMS 198 REFERENCES 205
- 5. 1 Background andobjectives 1 BACKGROUND AND OBJECTIVES Daniel Tarschys and Jonas Eriksson* 1.1 Enlargement and cohesion: the issues 1.1.1 Introduction The accession of Cyprus, Czech Republic, Historically, every national campaign for Estonia, Hungary, Latvia, Lithuania, Malta, membership has contained an element of Poland, Slovakia and Slovenia to the EU on “over-sell” which is likely to generate some 1 May 2004 represents an impressive his- disenchantment in the aftermath of acces- toric achievement but also an unprecedent- sion. In this situation, there is inevitably ed challenge. a strong interest in the size of the specific cash flows between the EU and its member The enlargement is first and foremost a states. The immediate success of the ac- political process, breaking down barri- cession and the dexterity of national nego- ers in Europe and paving the way for an tiators are gauged by their ability to “bring “ever closer union” between its peoples. It home the bacon”. With agricultural policy is fuelled by the yearning for peace, secu- virtually locked for the next ten years, a rity and stability. But enlargement is also lot of attention is paid to Cohesion Policy an economic process, and the prospects which every Member State, old and new, for growing prosperity have always been tends to examine with an eye to its own net a powerful motive for entry into the Un- position. ion. Throughout the new Member States (NMS) there are high expectations as to the Easy to measure, the cash flows offer ap- material returns of the step just taken. This parently precise quantitative indicators of presents a dilemma to policy-makers who the impact of EU membership. Other se- are very much aware that many of the ef- quels are more intangible, or more long- fects of memberships are mainly structural term, or more difficult to attribute to the and long-term but who also feel the pres- very accession. Many consequences of Eu- sure of their electorates to deliver short- ropean integration are linked to institution- term results. al and legal changes, increased mobility and the benefits of expanding markets and foreign investments. All of these develop- * ments need to be taken into account when Daniel Tarschys is Professor of Political Sci- it comes to assessing whether we attain the ence at Stockholm University and Jonas Eriksson is assistant researcher at the Swedish Institute for goal set in 2003, when the European Coun- European Policy Studies cil stated that “making a success of enlarge- 5
- 6. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States ment remains the key priority for the years Financial Framework will have important to come.1” consequences regarding both revenues and expenditures; and for new as well as old Enlargement has led to significantly greater Member States. Taking into account that disparities within the EU. Even though eco- EU25 has an additional number of lagging nomic growth on average has been stronger regions and at the same time a lower ag- in the Central and East European Countries gregate per capita income than EU15, the (CEEC) over the last decade—implying stage is set for an active debate on the fu- that there is some economic convergence— ture of the European Cohesion Policy. GDP per capita differences between new and old Member States are still substantial. In the views of one study,3 there are mainly This situation will be even more accentu- three aspects that underline the need for a ated by the likely accession of Bulgaria and Cohesion Policy reform. First, the enlarge- Romania in 2007, the very year that the ment brought with it a doubling of the so- next Financial Framework will come into cio-economic disparities and decreased the force. average EU GDP per capita by 12.5 per- cent.4 At the same time, the economic and In February 2004, three months before the social problems remain in the regions that enlargement, the European Commission now face a scaling down of assistance from (henceforth the Commission) presented its the Structural Funds. Second, the progress proposal for the Financial Framework for made in the Lisbon Strategy,5 as described the years 2007 – 2013. This proposal was in detail in the Kok Report,6 has thus far accompanied by the Third Cohesion Report, been a disappointment. Third, a number of which outlined the Commission’s proposal institutional changes are underway, most for the future European Structural and Co- importantly the new Constitutional Treaty, hesion Policy (ECP).2 The budget proposal with a shift of emphasis for the ECP to- implies an increase of the EU budget by 31 wards territorial cohesion. percent by 2013 compared to 2006, while the proposed new guidelines for Cohesion A fourth aspect may be added which will Policy shift the focus of EU regional poli- constitute the point of departure for this cy in important areas. The implications of the two documents and the positions of the 3 Bachtler and Wishlade (2004). respective Member States in the Financial 4 COM (2004b). Framework and ECP reform debate will be 5 The Lisbon Strategy is a common effort that was discussed below. Needless to say, the fu- initiated at the Lisbon European Council in 2000, ture Cohesion Policy and the 2007 – 2013 which aims at “making EU the most dynamic and competitive knowledge-based economy in the 1 CEU (2003), p. 7. World by the year 2010”. 6 2 We will use the term Structural Policy and Cohe- Kok et al. (2004). The report concluded that sion Policy interchangeably throughout this study, although external events had been unfavourable without making any distinction as regards the to growth in the EU Member States, the Member meaning of the two concepts. However, the study States themselves were also responsible for the predominantly addresses the contents of the new slow progress by failing to act on the Lisbon Strat- budget post, Sustainable Development, in the Com- egy. The report also called for greater involvement mission’s proposal for the 2007 – 2013 Financial of the regional and local levels. See also COM Framework, in particular the post “Cohesion for (2005a) for the mid-term review of the Lisbon growth and employment” (see chapter 2). Strategy. 6
- 7. 1 Background andobjectives study. When the new Member States nego- ply extending the present system to the tiated their terms of accession, their influ- new Member States, especially the CEEC ence over the European Cohesion Policy Member States (CEECMS). By focusing was limited. What was open to discussion on five of the CEECMS, this collaborative was mainly a set of modalities for adjust- project involving researchers from two old ment and phasing-in, but there was no room and five new Member States will attempt to for questioning the principal parameters of give new insights into the expected effects the policy package. The candidates met a of the ECP in its current shape and form on ready-made model which had evolved from the respective CEECMS economies. It will earlier stages in European integration. also suggest possible modifications of the present policy with a view of making it bet- In fact, several different stages. While some ter adapted to the needs of the new Member elements in the present Cohesion Policy States. may be traced back to the very first decades of European integration, its most signifi- cant parts were developed in the 1980s in 1.2 Objective and framework conjunction with the key decisions on the internal market and the monetary union. The ECP purports to make a genuine and Other important provisions were added in positive contribution to cohesion in the EU. connection with previous accessions, start- As we will see below, however, it has to ing with the UK and Ireland and continuing be recognised that although the ECP may with the entry of first Spain and Portugal and come to play a crucial role in EU27, un- then Austria, Finland and Sweden. Further resolved issues remain in both its structure elements were added with the perspective and in the formulation of its objectives. As of Eastern enlargement, particularly the al- noted, the new Member States landed in a location absorption cap of four percent of a policy framework formulated and decided Member States’ GDP.7 Even though the ab- long before they could assert any influence sorption cap applies in all Member States, on its foundations. With the insight that re- it is “only likely to bite in the new Member gional disparities widened after the enlarge- States.8” ment, it begs the question: how is an opti- mal European Cohesion Policy designed in While it is easy to grasp the importance the perspective of the new Member States? of formulating a successful ECP in the perspective of the new Member States, it The present collaborative project seeks to is essential that the ECP promotes growth disentangle this complex problem. In addi- rather than alters the natural growth path tion to the Swedish Institute for European expected from countries with initially low Policy Studies (SIEPS) and the Vienna In- GDP per capita levels. Taking into ac- stitute for International Economic Studies count the historic evolution and outcome (WIIW), five renowned research institutes of the ECP, there is every reason to care- in Czech Republic (EUROPEUM Institute fully evaluate the consequences of sim- for European Policy), Hungary (Institute for World Economics of the Hungarian 7 For a survey of the evolution of EU Structural Academy of Sciences, IWE), Latvia (Baltic Policy, see Tarschys (2003). International Centre for Economic Policy 8 Bachtler and Wishlade (2004), p. 23. Studies, BICEPS), Poland (Center for So- 7
- 8. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States cial and Economic Research, CASE) and were based on well founded considera- Slovakia (Institute of Slovak and World tions of how to optimally design Cohesion Economy of Slovak Academy of Sciences, Policy from each country’s point of view. ISWE SAS) have agreed to address a com- Hence the second objective is to single out mon set of questions. The problem formula- and describe which questions and contro- tion has been designed so that the first three versies arose in the accession negotiations questions give a natural introduction to the with various. last, and most important, question of how a future European Cohesion Policy should Third, several governments have com- be designed to best suit the new Member plained that the conditionality of the policy States. may influence national policies. In par- ticular, the method of “matching funding” First, it is reasonable to assume that some may cause modification of policy objec- implications of the effects of the European tives and, topped up with the amount of red Cohesion Policy on the new Member States tape involved in European regional policy, can be derived from the experience of the give rise to budgetary strain.9 Regardless of use of the pre-accession instruments. Even whether this is a serious problem, the pros though the pre-accession assistance dif- and cons of the present framework have fers from the ECP in important aspects, the to be evaluated and balanced against the similarities between them increased as ac- need for assistance, on the one hand, and cession drew nearer. The experience of the the principle of additionality and the need pre-accession support can also serve to in- for evaluation and monitoring, on the other. dicate possible future problems of Cohesion The objective is thus to examine whether Policy in the new Member States, in terms the policy in its current shape causes prob- of its benefits and drawbacks regarding im- lems as regards its design. plementation. The first objective of the na- tional contributions is therefore to describe This brings us to the essential problem to what experience the particular country has be examined in this study: the future of had of the pre-accession EU assistance. the European Cohesion Policy in the new Member States. The institutes have worked A second indication of how the Cohesion along the lines of a scenario where the coun- Policy can be improved may be derived try under scrutiny may dispose freely of the from the various positions and wishes ex- sum foreseen for it in the Commission’s pressed in the accession process. The entry 2007 – 2013 Financial Framework. Given of the ten new Member States crowned a its own priorities for national development, long period of arduous negotiations about how would these resources be used? the terms of their accession, closing chapter after chapter in an extensive catalogue of requirements. Even though there may have 9 Assistance from the Structural Funds and the Co- existed many differences of opinions in hesion Fund must be co-financed by the Member each and every candidate country, articulat- States. The idea behind this so called “additional- ity” is that EU regional policy should complement, ed in a variety of domestic political prom- rather than reduce, a Member State’s own regional ises—e.g. due to the influence of internal policy efforts. This presents the new Member pressure groups—a reasonable assumption States with a specific problem, an issue that we will is that the consolidated official positions return to on numerous occasions in this study. 8
- 9. 1 Background andobjectives This opens up several matters to consider. In chapters 4 to 8, the respective institutes First of all, an examination of which pri- respond to the problem formulation outlined orities will prevail has to be undertaken. in the beginning of the first chapter. Chap- Second, consideration must be given to ter 4 examines the case of Poland, chapter relations between different targets and am- 5 Hungary, chapter 6 the Czech Republic, bitions. Though the European Cohesion chapter 7 Slovakia and chapter 8 Latvia. Policy is sometimes presented as a single- objective policy intended to promote “cohe- Finally, the ninth chapter summarises and sion”, it has in effect a much more complex analyses the main findings of the respective goal structure and the relationship between country studies. On the basis of the results, its multiple objectives may be construed in the chapter will aim at drawing certain con- several different ways. To offer but one ex- clusions for the future of European Struc- ample: while some measures may promote tural and Cohesion Policy. both growth and intra-national conver- gence, others (such as investments in trans- port infrastructure close to the capital) may promote national growth while also leading to greater inter-regional disparities, at least in the short run. Given the specific needs of the respective countries examined; how should the system be designed in order to function optimally from each Member States’ point of view? This will be the main focus of this study. 1.2.1 Basic outline of the study The next chapter gives a brief account of the outcome the ECP; describes and dis- cusses the causes that underlie the need for a European regional policy; and provides an overview of the present reform debate. The third chapter provides an overview of the development of regional disparities, as regards levels and growth in income lev- els, economic structural developments, the role of agriculture, industrial restructuring, development of the services sector and de- velopments of regional clusters, the role of Foreign Direct Investment (FDI), and the relative dynamics of productivity growth and industrial structural change. 9
- 10. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States References Bachtler, J., and Wishlade, F., 2004, Searching for Consensus: The Debate on Reforming EU Cohesion Policy, European Policies Research Paper, European Policies Research Cen- tre, University of Strathclyde, November 2004. Council of the European Union, 2003, Multiannual Strategic Programme of the Council 2006 – 2006, Brussels, 8 December 2003, POLGEN 85. European Commission, 2004b, A New Partnership for Cohesion: Convergence, Competi- tiveness, Cooperation, Third Report on Economic and Social Cohesion, February 2004. European Commission, 2005a, Working Together for Growth and Jobs: A New Start for the Lisbon Strategy, Communication to the spring European Council, Brussels, February 2005. Kok, W., et al., 2004, Facing the Challenge: The Lisbon Strategy for Growth and Employ- ment, Report from the High Level Group chaired by Wim Kok, November 2004. Tarschys, D., 2003a, Reinventing Cohesion: The Future of European Structural Policy, Sieps report 2003:17, Stockholm 2003. 10
- 11. 2 Cohesion Policy:Retrospect and prospect 2 COHESION POLICY: RETROSPECT AND PROSPECT Jonas Eriksson 2.1 Regional policy in the EU – need, logic and rationale The economic and social differences and pending on how they are measured. For ex- the territorial imbalances prevailing in the ample, the indicator used as a basis for as- Union today are seemingly sufficient rea- sistance from the Structural Funds is GDP sons for a European regional policy. How- per capita in Purchasing Power Standards ever, a number of aspects should be consid- (PPS). Further distinctions are however de- ered before we accept this argument, all of sirable. One might argue that the optimal which will be dealt with in the remainder of indicator should not only take into account this section. the cost of living in the various regions, but also taxes, transfers and public expendi- First of all, we need to get a better picture tures, as well as private capital flows.1 Emi- of what is meant by economic and social grants often come to the aid of relatives in disparities. The European Cohesion Policy impoverished areas by sending them part predominantly addresses issues of econom- of their salaries earned in richer areas and ic efficiency, income levels and employ- remittances make up a considerable part of ment, but the choice of indicators to use the resources available for consumption in for measuring regional inequalities is by no some regions (and extra-EU countries).2 means an obvious one. Second, there is a need to show what constitutes the optimal However, although gaps within the EU may level—regional, national or supranation- be exaggerated, it is certainly clear that al—from which to conduct and implement significant regional disparities exist and specific factors of regional policy. Finally, that the disparities have been further pro- and most importantly, sending money into a nounced, to say the least, after the most re- region may have adverse effects. Obvious- cent enlargement. The accession of Bulgaria ly, the Structural Policy should not strive and Romania—and the possible future ac- toward goals that either offset each other or cession of Croatia, other Balkan countries are incompatible with one another. and Turkey—will not improve the picture. The second chapter, which delves deeper into the economic and social situation in 2.1.1 Regional disparities in the Union 1 Tarschys (2003a). 2 Unsurprisingly, these arguments have been Troublesome as they might appear in re- brought forward by EUROCITIES, a network of ported statistics, disparities between re- the larger European cities; see for example Häupl gions may be understated or overstated de- (2003). 11
- 12. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States the EU25, provides ample evidence of the listed factors are present in the Union today, extent of the problem. the endeavour to reduce regional disparities is arguably justified. The determinants of regional disparities have been studied from many angles and by scholars in several disciplines. The ap- 2.1.2 The C’s: Convergence, Com- proaches to it span a wide spectrum from petitiveness and Cohesion exclusively economic to predominantly cultural. As regards the economic deter- Although the concept of “economic and so- minants, it is possible to single out at least cial cohesion” is mentioned in the Treaty four basic, but intertwining, elements.3 of Rome, it was more or less forgotten un- 1. There might be a lack of development til refreshed and put in use by the Delors in many regions as a consequence of Commission in the 1980s. As such, “co- the existence of large agricultural sec- hesion” is intertwined with the concept of tors and the lack of an industrialisation “convergence”. Allegedly, the ECP will process with large scale industries. boost growth and employment, i.e. pro- 2. Less developed areas tend to be geo- mote convergence between regions, which graphically remote and, accordingly, in turn will lead to greater cohesion in the transportation costs are high. Union. 3. As new regions emerge, agents of in- dustries meet competition they are una- It has to be recognised, however, that the ble to counter and therefore experience connection between growth and the reduc- a loss of competitiveness. tion of real income disparities is complex. 4. Economic integration may result in the Taking into account that the ECP accord- agglomeration of industries, further ing to the Commission’s proposal should reinforcing the lack of development not only reduce income disparities, but also when removal of barriers leads to eco- promote employment, sustainable develop- nomic concentration in border areas. ment and, most notably, increase the EU’s competitiveness, further complications are There are also factors that that add to the added to the equation. We will therefore de- problem indirectly, such as the ageing vote some space to discuss, in turn, conver- population in the EU and, particularly in gence, competitiveness and cohesion. Our the CEECMS, the marked slowdown of discussion should not be seen as an attempt the population growth. The CEECMS are to exhaust the issue, but one needs to be forecasted to experience negative popula- aware of the pitfalls of the phrases invoked tion growth in the future.4 Since major cit- in the discussion on the future ECP. ies and capitals tend to attract the younger and better educated part of the population, Convergence it may further accentuate regional polariza- tion. Thus, as it is clear that all of the above By convergence, according to the standard neo-classical model, we mean a process 3 Begg (2003). of higher growth in countries with com- 4 See, for example, forecasts from the U.S. Census paratively lower capital to labour ratios, Bureau (2004). i.e. countries that have a lower GDP per 12
- 13. 2 Cohesion Policy:Retrospect and prospect capita level should grow faster than richer Arguments that emanate from new econom- countries. This is in the economic literature ic geography further add to the complex- known as “β-convergence”.5 However, the ity of the regional policy domain. In these relationship between β-convergence and the models, economies of scale are a source of dispersion of real per capita incomes, or “σ- concentration of production. If transport convergence”, is less than clear-cut: it can costs (real transport costs or artificial trans- be shown that β-convergence is a necessary port costs such as customs or other costs for but not sufficient condition for σ-conver- crossing a border) are high, each country gence, i.e. there may be β-convergence but will only produce enough to serve its own no σ-convergence.6 market. If costs fall, the gains from econo- mies of scale can be realised by concentrat- Moreover, different theoretical models ing the production. It will be most profit- produce very different results. According able to concentrate production to the largest to one theory,7 initial regional imbalances market, since this minimises total transport may be enhanced by the integration proc- costs—and wages may therefore be higher. ess. The idea is that regions with a highly However, if transportation costs continue skilled labour force tend to attract more to fall, it is less important to produce in R&D investments, while such investments the large market and a wage difference be- in turn attract skilled labour. Highly skilled tween countries will not be sustainable. In workers therefore tend to move away from the first case, a lowering of transportation less productive areas.8 In the celebrated costs through integration may lead to diver- Heckscher-Ohlin-Samuelson models, by gence in real incomes between countries; in contrast, the integration process will cause the second case to convergence.10 convergence through an equalisation of factor returns when barriers to trade are re- The Commission’s Third Report on Eco- moved.9 nomic and Social Cohesion recognises that there may be a trade-off between national 5 This is also called absolute convergence. and regional convergence in the first stages 6 A similar distinction can also be made as regards of catching up, especially because of ag- the concept of “competitiveness”: “a nation or re- glomeration effects. A telling example is gion may be composed of highly competitive firms Ireland, which has experienced high na- in the microeconomic sense but if these firms are tional growth and a strong concentration engaged in activities that create low value-added per worker then it will not make the economy com- of economic activities in Dublin, whilst petitive in the macro-economic sense.” See Martin regional disparities in the three other “co- (2003), p. 2 – 34 (40). See also below. hesion countries” have largely remained at 7 This is called “circular and cumulative causa- the same levels. In fact, according to a one tion”; see Myrdahl (1957). report, Ireland, together with Finland, has 8 Myrdahl therefore recommended active regional policies to promote “spread effects”, for example shown most divergence among the EU15 through FDI or development funds; see Martin Member States between 1980 and 2001. (2003). The third cohesion report points out, how- 9 It should be noted that this equalisation rests on ever, that “the extent to which a trade-off of the assumptions of constant returns to scale, no this kind exists depends in part on the spa- market distortions and perfect mobility of produc- tion factors; see, for example, Markusen et al. tial distribution of economic activity and (1995). Convergence may also result from the “the life-cycle of the product” model; see Molle (2001). 10 See for example Krugman and Venables (1995). 13
- 14. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States of settlements across the country in ques- sence of barriers to trade.14 tion.11” However, the observation seems less relevant for the new Member States Competitiveness where the spatial distribution of economic activity often was decided by the central A related distinction as made above regard- planning authority (see, for instance, chap- ing β-convergence and σ-convergence can ters 6 and 7). also be made with respect to “competitive- ness”. As pointed out by Ronald L. Mar- While economists still struggle with the tin,15 there is no clear link between micro- problem of explaining the concept of eco- economic and macroeconomic competitive- nomic growth, there is agreement that ness. If the economy consists of firms that growth is conditional on what is often re- are competitive in their own markets, but ferred to as “technological progress”, that the output produced represents low added is to say, improvements in the production value per worker, the economy as a whole process that enhance productivity. In other will not be competitive. In fact, Paul Krug- words, supply side factors that improve the man goes so far as to say that the search for production process improve a country’s (or macroeconomic competitiveness is a “dan- region’s) long term growth. However, the gerous obsession”, and that phrase “technological progress” should be interpreted in the widest sense. It could im- [i]t is simply not the case that the world’s ply, for example, both methods of produc- leading nations are to any important degree in economic competition with each other, or tion and effects from individual or corpo- that any of their major economic problems rate networks.12 Similarly, economists have can be attributed to failures to compete on come some way in their search for an en- world markets.16 vironment that facilitates a maximum out- come from different growth factors. Above If there is any distinction to be made be- all, empirical studies13 point at factors such tween macroeconomic and regional com- as investments in physical and human capi- petitiveness, furthermore, the latter should tal (education and research) in the context arguably be the primary concern with re- of a stable political environment, institu- spect to European regional policy. Unfortu- tions such as property rights, and the ab- nately, as Martin concludes, [t]here is no single theoretical perspective 11 that captures the full complexity of the no- COM (2004b), p. 149. tion of ‘regional competitiveness’. The 12 Eliasson and Westerlund (2003). overview of both theoretical and empirical 13 In the sensitivity analyses carried out by Levine literature confirms the […] notion that com- and Renelt (1992), only three out of 50 variables survived the tests; initial GDP per capita, physical investments as a share of GDP and human capital. 14 Barriers in the sense discussed here include barri- A similar, though less strict, analysis by Sala- ers to goods, services, labour and capital. Arguably í-Martin (1997), gave 22 out of 58 statistically (and sometimes forgotten), the integration process, significant variables, among others the three men- which have removed numerous obstacles, may in tioned variables and institutional circumstances fact have played the prominent role where conver- such as a country’s geographic position. This sug- gence between countries and between regions has gests that regional policy in remote areas may ben- been observed. efit from a focus on reallocation, rather than active 15 Martin (2003). measures that aim to promote economic growth. 16 Krugman (1994), p. 30. 14
- 15. 2 Cohesion Policy:Retrospect and prospect petitiveness is a difficult and often confus- dations that would result in an increased ing term – especially so at the regional level. competitiveness with regard to this “fourth The term ‘competitiveness’ often raises more questions than answers, perhaps one reason category” remains to be solved. why the term has only relatively recently infiltrated the language of macro-economic Cohesion theory and regional economics alike.17 The third concept, and the ultimate aim of The concept of competitiveness rather be- European regional policy, “cohesion”, is comes a question of outcome and, as such, one which can be given a multitude of in- Martin argues that some lessons can be terpretations. As a starting point, the Com- learned from the empirical exercise car- mission’s view on cohesion, here provided ried out in his report. Above all, the report by Hall et al., distinguishes, stresses that regional policy makers should adopt measures that take into account the between inequalities between countries, and stage of development in a particular region. particularly between the so called Cohesion Four (Greece, Ireland, Portugal and Spain) That is to say, “there is no ‘one-size-fits-all and the rest of the Union; inequalities be- policy’.18” Martin uses a trisected typology tween regions within the EU; and inequali- divided into “Regions as production sites” ties between individuals (“social cohesion”). (lower to medium income levels), “Regions […] Greater cohesion implies that incomes, as sources of increasing returns” (high and employment, and economic opportunities grow faster for groups in weaker areas with sustainable income levels) and “Regions as low incomes than for groups in richer areas hubs of knowledge” (mainly major cities with high incomes.20 and capitals, with relatively high wages), with different priorities depending on the An advantage of this definition is the exclu- type of region.19 sion of non-economic factors: cohesion is improved when lagging regions, on all lev- Even though the typology and policy rec- els in the Union, catch up with non-lagging ommendation make sense on many levels, regions. That is to say, they converge in the the aftertaste of this discussion is a bit sour, traditional sense by growing faster. and for two reasons. Not only, firstly, is it difficult to define regional competitiveness, However, there are at least three drawbacks but, secondly, insights as to the factors that related to this line of reasoning: would promote competitiveness in regions 1. As noted—and the essential point from that do not qualify for any of the three above much research on economic growth—it categories, such as the least developed re- is not at all clear whether the promotion gions in the CEECMS, is lacking. Thus, of regional convergence within Mem- the problem of finding policy recommen- ber States (or within the Union) with any certainty will promote economic 17 Martin (2003), p. 7-1 (170). and social cohesion between the Mem- 18 Martin (2003), p. 7-5 (174). ber States’ (or the Union’s) regions 19 Martin (2003). In the first category policy mak- and/or between the Member States, and ers should emphasise economic governance, in- vice versa. ternationalisation and accessibility; in the second 2. The definition provided by Hall et al. category innovation and entrepreneurship; and, in the third category, more or less all four mentioned 20 factors should be promoted. Hall et al. (2001), p. 5. 15
- 16. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States may be too narrow, in that it leaves out clusion that the ECP has failed to promote important aspects of the European inte- economic and social cohesion in the EU. gration process. We return to this point Tendencies to even further divergence may below. have been counteracted. Furthermore, con- 3. Convergence may also be attained by a vergence has in fact taken place between decline in growth in higher developed the EU Member States and—although to a areas and less developed regions may much lesser extent—between the Union re- in that sense still “grow faster”. gions. However, the role and the success of the ECP in this respect are unclear. An alternative way of conceptualizing co- hesion is to divide it into the four catego- What the discussion boils down to—with ries economic, social, political and cultural special attention paid to the fast-growing cohesion.21 The point of departure is the CEECMS, where we today are witness- idea that these four categories will capture ing emerging growth poles and increased the essence of what creates, constitutes and regional disparities, that is to say, an indi- maintains a political community such as cation of β-convergence without σ-conver- the nation state, or indeed, the European gence—is that the link between conver- Union. It can be argued that none will work gence, competitiveness and cohesion is not without the other. That is to say, to achieve self-evident. The supposition that the three the goals of economic and social cohesion, concepts are mutually supportive is highly both political and cultural cohesion are of questionable, especially in the short run. the essence—and while economic growth can create the need for social measures, political and cultural cohesion should be 2.1.3 Rationale for policy: European viewed as a precondition for economic de- added value velopment.22 This perception of cohesion may also be more in line with the perceived As argued by Midelfart-Knarvik and Over- benefits (or “added value”) of the Structur- man, there is justification for regional pol- al Funds as they are interpreted by the EU icy when market forces move an economy Member States and programme manage- in a “direction that is not desirable in terms ment authorities, a point to which we will of either efficiency or welfare.23” Thus, the return in the next section. polarization at the regional level in the EU arguably justifies active intervention. Not- Even though the regional tension within withstanding the evidence of marked re- Member States, with few exceptions, has gional disparities, however, a rationale for a been accentuated in later years, implying regional policy on the European level can- that we have in fact moved farther away not be found in this fact alone. A European from cohesion in some parts of the Union, regional policy should at the very least pro- it would be presumptuous to draw the con- duce an outcome that transcends that which can be accomplished at the national level. 21 Tarschys (2003a). 22 The list of characteristics in which the four con- Both the Commission and the EU Member cepts intertwine is long; see Tarschys (2003a). The report also argues that far too little attention has States share the view that the future Euro- been paid to political and cultural cohesion, par- ticularly the latter. 23 Midelfart-Knarvik and Overman (2002), p. 349. 16
- 17. 2 Cohesion Policy:Retrospect and prospect pean regional policy should maximise the tempt at summing up the added value of the added value of the Structural Funds, par- Structural Funds. The point of departure ticularly outside Objective 1 assistance. for their definition is that added value is According to one Commission document, “something which has been enabled [with], regional policy is justified “when the ac- or which could not have been done [with- tions of member States are not sufficient out], […] Community assistance.27” (the criterion of need) and when benefits are generated for the entire Union (effec- The concept of added value is in the report tiveness criterion).24” classified into five different categories. The first category, Cohesion added value, is All of the EU15 Member States have ex- perhaps the most obvious category; it is the pressed appreciation of at least some of added value that comes from the reduction the effects the Structural Funds have had of economic and social disparities in the in their respective countries. For example, Union. We will discuss in some detail the it has been pointed out that the ECP has successfulness of the ECP in this respect in improved strategic planning, development the next section. and evaluation at the regional level; that it has facilitated more cooperation between Political added value concerns the visibil- regions and Member States; that it has, in ity on several levels in the Member States’ many cases, both improved regional cohe- societies. Allegedly, support from the sion and increased local and regional em- Structural Funds has increased the support ployment; that it has made the EU more for European integration. However, while visible in the respective Member States; regional beneficiaries may have become and that it has brought added value from its more positive in their attitudes toward role as a bridge between richer and poorer both the political and the economic inte- regions in the Union.25 gration process, scepticism against further integration has remained or even increased As pointed out by the IQ-net, a network of in some of the regions and countries that analysts and practitioners engaged in pro- have received least support from the Struc- gramme management authorities across tural Funds. Increasing assistance from the Europe, Structural Funds to these Member States would be difficult since they are among [a]dded value is not a simple concept. It at- the richest in the EU. Thus, political added tempts to capture both the quantitative impact value may certainly be considered a posi- and qualitative effects of the European Com- munity contribution to regional development tive side-effect of the ECP in supported ar- through the Structural Funds, for example eas; but any such gains should be weighed with respect to the ‘Community method’ for about similar to losses made in other areas. implementing programmes. As such, it en- tails considerable subjectivity.26 Policy added value stems from the strate- gic improvements made as regards regional The IQ-net has nevertheless made an at- 27 Bachtler and Taylor (2003), p. 7. One should per- 24 COM (2004e), p. 1. haps go so far as to say that added value is some- 25 Bachtler and Taylor (2003). thing which has been enabled with, and could not 26 Bachtler and Taylor (2003), p. 1. have been done without, Community assistance. 17
- 18. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States policymaking. However, there is some adds significant value in comparison to disagreement as to whether the Structural domestic initiatives.32” However, this lat- Funds have altered policy priorities for the ter view mainly concerns the effects of the better or the worse. The UK government Structural Funds in the UK regions, rather in particular has expressed concern of the than in the Union as a whole. latter.28 The argument is that the temptation to receive financial support from the ECP To sum up the perceived added value of the may lead to policy distortions if national or Structural Funds in the respective Member regional funds are diverted to co-financing States, the positive effects concern above projects that would otherwise receive low all cooperation, learning, strategic planning priority. and implementation efficiency. The “de- tracted value” of the Structural Funds, on Another form of added value comes from the other hand, is allegedly related to distor- the partnership principle. This operational tions to national policy priorities; excessive added value gives foremost a better qual- bureaucracy and costly management and ity to regional interventions. The spoke in implementation; and poor coordination be- the wheel seems to be the sheer amount of tween supranational, national and regional bureaucracy involved, which is both costly levels. Even though it is fair to say that the and demanding. Again, the mentioned po- net contributors for rather obvious reasons sition paper from the UK Treasury has ex- are less positive in their attitudes toward pressed concern of a deficient coordination the ECP than are the beneficiaries, judging of the assistance at the regional, national by its proposal the Commission seems to and supranational level.29 have listened to the complaints voiced by the former group of countries. Finally, learning added value is the en- couragement of “[a]nalysis, reflection and learning […] through regulatory require- 2.2 The impact of the policies in ments placed on programmes to monitor EU15 and evaluate their activities.30” The ECP has arguably made a number of The EU Member States differ somewhat positive contributions in the EU. As noted, in their views on the added value of the all of the EU15 Member States have ex- Structural Funds. The Greek government pressed appreciation of at least some of the maintains the view that “the added value effects the policy has had in their respective of regional cohesion policies has already countries, even though there remain unre- proven to be highly significant.31” The UK solved issues where the ECP may actually government, by contrast, has criticised the have had a negative effect. As noted, there Structural Funds for their “lack of flexibil- has been a long-standing concern of the ity” and goes so far as to claim that “it is burden imposed on recipients through the not clear that the use of Structural Funds specific conditionality of the ECP. Moreo- ver, there are many signs that the ECP suf- 28 fers from goal congestion, in that it strives UK Treasury (2003) 29 UK Treasury (2003) 30 Bachtler and Taylor (2003), p. 40. 31 32 Cited in Bachtler and Taylor (2003), p. 4. UK Treasury (2003), p. 19. 18
- 19. 2 Cohesion Policy:Retrospect and prospect towards fulfilling too many objectives.33 small part due to Structural and Cohesion This approach makes it difficult to evaluate Funds assistance. According to the Com- and pin down the real effects of the policy. mission’s simulations, “GDP in real terms As Wim Kok has said of the Lisbon Proc- in 1999 was some 2.2% higher in Greece ess: “Lisbon is about everything and thus than it otherwise would have been, while in about nothing.34” Spain the figure was 1.4%, in Ireland 2.8% and in Portugal, 4.7%.36” An issue that has already been touched upon is the paradox that may result from regional As regards Objective 1 assistance, which interventions. The gains expected from a represents the bulk of the support from the deepening of the integration are principally Structural Funds, the Commission claims related to a) structural change and a more that the assistance is likely to lead to anoth- efficient allocation of resources and b) the er 700,000 jobs created and that the faster accumulation of additional resources.35 The growth witnessed in the Objective 1 regions role of the ECP has been to aid regions in bears a positive relationship with structural the Member States manage the transition aid. In the case of the Objective 1 regions process when such structural change have in Germany and Italy, however, the report occurred. However, regional measures may concludes that “growth seems to have been also have unintended consequences, such depressed by low growth in the rest of the as the distortion of local markets. In other country.37” words, the ECP may upset economic incen- tives, alter desired outcomes and produce There are, however, obvious drawbacks suboptimal results. with these reports. The micro perspective employed in the studies conducted by im- Notwithstanding the allegations of policy plementing authorities and organisations alterations, excessive bureaucracy and prevents the authors from discovering ef- goal congestion, empirical evidence on the fects of the policy that cannot be ascer- outcome of the ECP is mixed. On the one tained by examining specific sectors, areas hand, indication of its results is witnessed or projects. For example, if the employment by those most affected by it. Reports by level increases in an area as a consequence implementing authorities and organisa- of funding, a serious examination of the ef- tions that are involved in the programming fects will have to take into account crowd- impress upon us the great success of the ing out from higher wages. Structural Funds. These reports are com- plemented by evaluations carried out by The problem with the Commission’s re- the Commission, above all the cohesion re- ports is rather one of credibility: one would ports. The Third Report on Economic and like to express caution to those taking the Social Cohesion concludes that GDP per estimates reported above at face value. For capita growth was higher in the Cohesion example, in the Sapir report, in which a Four (Greece, Ireland, Portugal and Spain) high-level study group under Professor An- than the EU average, and that this was in no dré Sapir tries to lay down the lines for fu- ture growth promoting policies in the Un- 33 Tarschys (2003b). 34 36 Kok et al. (2004). COM (2004b), p. 148. 35 37 See Midelfart-Knarvik and Overman (2002). COM (2004b), p. 148. 19
- 20. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States ion, the authors claim that,38 ent students of European regional policy, examining particularly the effects on indus- [i]n practice, […] there is simply not enough try location from integration. These surpris- relevant regional GDP data for statistical pro- ingly few papers tend to moderate the con- cedures to distinguish the effects of cohesion policies in the absence of data on other re- clusions on whether the ECP has been suc- gional characteristics, such as initial income, cessful in its objectives. Midelfart-Knarvik human capital, local industrial structures, and Overman examine whether assistance quality of local administration, the peripheral from the Structural Funds has facilitated nature of the region, and of random influenc- structural change and whether the EU has es. The net result is that it is not possible to establish conclusively what the relative per- been successful in improving the function- formance of these regions would have been ing of state aid in its Member States.42 Their in the absence of EU cohesion policy and results indicate that the assistance has in other policies.39 fact acted counter to the first point, even though the Commission has been success- The same report also examined the empiri- ful on the latter. They find that the ECP has cal outcome of the ECP. The poor data qual- not been able to prevent regional polariza- ity notwithstanding, the authors concluded tion, i.e. the ECP has been unsuccessful in that the ECP had played some role in boost- delivering economic and social cohesion. ing growth in the regions that had received Furthermore, the most direct result of EU funding, but that, expenditure has been the distortion of the location of R&D industries by attracting during the catching-up process, increasing re- them into areas without the proper endow- gional disparities within the poorer countries ment of high-skilled workers.43 may also emerge. However, this phenom- enon may be mitigated by national growth and could be eased by national rather than The authors also argue that there is still a EU policies (such as social transfer schemes, motive for a European regional policy. If labour market and wage policy, etc).40 the aim is to improve the situation of peo- ple in the poorest regions in the EU, the The recommendation from this report was ECP should employ a strategy with three to focus on low-income countries (rather objectives. First, it should try to focus sup- than low income regions), and it goes on port so that the poorer countries are helped to suggest that the future regional policy in changing endowments and specialise in this respect should have two objectives. according to their comparative advantage. First, it should promote institution-build- Second, the policy should seek to ease this ing, thus improving the administrative ca- comparative advantage dispersion by re- pacity in Member States and, second, sus- 42 tain “high investment rates in human and Midelfart-Knarvik and Overman (2002). Articles 92 – 93 (Aids granted by States) of the EEC Treaty physical capital.41” empower the Commission to supervise state aid in the EU Member States. The purpose is to realise There has also been research by independ- the full potential of the common market and pre- vent Member States from giving aid that counteract 38 For a critique of the Commission’s assertions in these forces. 43 the cohesion reports; see also Tarschys (2003). Midelfart-Knarvik and Overman (2002). Ireland 39 Sapir et al. (2003), p. 60. is a good case in point, where the ECP seems to 40 Sapir et al. (2003), p. 146. have had an additional effect due to Ireland’s large 41 Sapir et al. (2003), p. 146 – 147. investments in education. 20
- 21. 2 Cohesion Policy:Retrospect and prospect moving factor price distortions. Third, la- any one company as new plants were estab- bour mobility should be encouraged so that lished.45 the end result is an efficient location of both firms and production factors. Regional initiatives in Italy, by contrast, have been “half-hearted”, given too little A report from Centre for Economic Policy time, suffered from a lack of consistency Research (CEPR),44 carried out in 2000, ex- and have not had the same concentration amines the cases of Ireland and Italy (the on specific sectors as in Ireland.46 Mezzogiorno region). The historic outcome of regional policy in the two countries has The approach the CEPR report recom- differed significantly: where regional poli- mends to meet the effects of deeper inte- cy has succeeded in Ireland, it has been a gration should, among other things, invest failure in Italy. What makes the compari- in schooling and lifelong learning; create son interesting is the relative uniformity of an entrepreneurship friendly tax and regu- current regional interventions in the two latory system; endorse labour market poli- countries. As noted in the CEPR report, one cies that allow wages to adjust according to aspect of Structural Policy is the copying of productivity trends; welcome international behaviour at the national level. The Italian investments; and remove barriers to capital approach has changed over time to increas- and labour movements.47 ingly resemble Irish policies. In sum, the ECP seems to have promoted According to the authors of this report, the cohesion in the least developed regions, success of Ireland owes to the promotion but at a high cost given the meagre results. of two sectors: electronics and pharma- There is also disagreement as to the size ceuticals. The CEPR report argues that the of the effects, as it is difficult to trace the concept that made the Irish government’s specific effects of funding due among other investments less of a gamble was the fact things to poor data quality. Moreover, the that it chose to concentrate on these sec- ECP may have had negative effects in that tors after industries had already been estab- it has not been an effective means of pro- lished. Thus, moting an optimal localisation of R&D in- dustries. [e]lectronics may not have been an obvi- ously good bet for Ireland before the Intel and Microsoft investments arrived, but once they had done so, Ireland was well advised 45 to promote them for all it was worth. Success Braunerhjelm et al. (2000), p. 89. The massive was facilitated by their willingness, along FDI inflow from the US is to a large extent ex- with other global companies, to assist ac- plained by the close ties between the two countries. 46 tively in the promotion of further investment Braunerhjelm et al. (2000). 47 in the Irish electronics sector. This they did Braunerhjelm et al. (2000). Indeed, examples in the interests of developing the electron- of lingering protectionism are not difficult to find. ics agglomeration, while ensuring that there One example is the Services Directive, which in was not excessive poaching of labour from certain Member States has come under heavy fire. Another much debated element of protectionist be- haviour among EU15 Member States concerns the restrictions on labour migration from the CEECMS imposed in all but three of the EU15 Member 44 Braunerhjelm et al. (2000). States. 21
- 22. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States 2.3 The present and future these countries, except France,48 is that the European Cohesion Policy proposed budget ceiling goes hand in hand with a reform of the ECP. A middle position in the debate is taken by Finland, Ireland 2.3.1 The debate on the 2007 and Italy, which seek a less restrictive ap- – 2013 Financial Framework proach. Italy in particular is becoming one of the largest contributors to the EU budget Even though this study focuses on the cur- and, given its current economic situation, rent and future ECP, the debate and negoti- is cautious on budget issues. The Italian ations on the 2007 – 2013 Financial Frame- government maintains the view that both work will have implications for Cohesion lagging and non-lagging regions should be Policy. The Common Agricultural Policy eligible for assistance from the Structural (CAP)—which takes up nearly half of the Funds.49 Union’s budget—is more or less non-nego- tiable so far as the Financial Framework is In its proposal for the next Financial Frame- concerned. Any major budget change, ac- work, the Commission has reduced the cordingly, is likely to affect the ECP. number of budget headings to five. The first Table 2.1 Financial Framework overview (€ million in 2004 prices) 2006 2007 2008 2009 2010 2011 2012 2013 1. Sustainable growth 47 582 59 675 62 795 65 800 68 235 70 660 73 715 76 785 Share of total appropriations for commitments 0.394 0.447 0.453 0.460 0.465 0.470 0.478 0.485 1a. Competitiveness for growth and employment 8 791 12 105 14 390 16 680 18 965 21 250 23 540 25 825 1b. Cohesion for growth and employment 38 791 47 570 48 405 49 120 49 270 49 410 50 175 50 960 2. Sustainable management and protection of natural resources (incl. CAP) 56 015 57 180 57 900 58 115 57 980 57 850 57 805 57 805 Share of total appropriations for commitments 0.464 0.428 0.417 0.406 0.395 0.385 0.375 0.365 3. Citizenship, freedom, security and justice 1 381 1 630 2 015 2 330 2 645 2 970 3 295 3 620 Share of total appropriations for commitments 0.011 0.012 0.015 0.016 0.018 0.020 0.021 0.023 4. The EU as a global partner 11 232 11 400 12 175 12 945 13 720 14 495 15 115 15 740 Share of total appropriations for commitments 0.093 0.085 0.088 0.090 0.094 0.097 0.098 0.099 5. Administration 3 436 3 675 3 815 3 950 4 090 4 225 4 365 4 500 Share of total appropriations for commitments 0.028 0.028 0.028 0.028 0.028 0.028 0.028 0.028 Total appropriations for commitments 120 688 133 560 138 700 143 140 146 670 150 200 154 315 158 450 Source: COM (2004a) The Commission—supported foremost by heading in Table 2.1, Sustainable growth, Belgium, Greece, Hungary, Lithuania, Por- encompasses Cohesion Policy (Cohesion tugal and Spain—has taken an expansionis- for growth and employment) and EU fund- tic view as regards the Financial Framework, 48 proposing an increase in the total budget by The French government has expressed its caution against a radical reform of the Cohesion Policy and 31 percent in 2013 compared to 2006 (see therefore places itself in the “intermediate posi- table 2.1). The opposite view is taken by tion” with Finland, Ireland and Italy. A common Austria, France, Germany, the Netherlands, view among the “group of six” is that a budget Sweden and the UK. This “group of six”, all exceeding one percent of GNI will increasingly of them among the richer Member States, deprive the new Member States of assistance, due to the four percent absorption cap. This argument has jointly proposed a budget ceiling of one notwithstanding, the reasons for wanting a reform percent of Gross National Income (GNI). vary; see Bachtler and Wishlade (2004). The lowest common denominator among 49 See Bachtler and Wishlade (2004). 22
- 23. 2 Cohesion Policy:Retrospect and prospect Table 2.2 Absorption limits, Berlin formula allocations and current allocations (€ million in 2004 prices) 4% absorption Share of Regional convergence* Share of Annual allocation Share of limits total (%) Berlin formula total (%) 2000/04 – 06 total (%) EU25 463 566.6 100.00 380 481.3 100.00 42 126.3 100.00 EU15 440 572.5 95.04 82 996.4 21.81 33 411.1 79.31 NMS10 22 994.0 4.96 297 485.0 78.19 8 715.2 20.69 Cyprus 612.3 0.13 0.0 0.00 40.5 0.10 Czech Republic 4 159.9 0.90 32 688.6 8.59 934.6 2.22 Estonia 428.4 0.09 3 938.6 1.04 248.1 0.59 Hungary 3 993.0 0.86 34 250.4 9.00 1 142.9 2.71 Latvia 480.8 0.10 12 474.2 3.28 415.9 0.99 Lithuania 899.9 0.19 17 242.9 4.53 548.4 1.30 Malta 210.5 0.05 0.0 0.00 31.7 0.08 Poland 9 330.8 2.01 170 727.5 44.87 4 564.1 10.83 Slovenia 1 255.3 0.27 3 096.3 0.81 162.6 0.39 Slovak Republic 1 623.3 0.35 23 066.5 6.06 626.3 1.49 Austria 10 516.7 2.27 0.0 0.00 291.5 0.69 Belgium 12 669.9 2.73 0.0 0.00 321.4 0.76 Denmark 8 862.4 1.91 0.0 0.00 129.6 0.31 Germany 98 195.2 21.18 10 806.4 2.84 4 699.4 11.16 Greece 7 680.7 1.66 12 623.1 3.32 3 923.9 9.31 Finland 6 731.0 1.45 0.0 0.00 334.4 0.79 France 72 977.9 15.74 2 963.8 0.78 2 471.2 5.87 Ireland 6 617.2 1.43 0.0 0.00 599.8 1.42 Italy 61 402.1 13.25 21 364.1 5.62 4674 11.10 Luxembourg 1 120.8 0.24 0.0 0.00 14.5 0.03 Netherlands 20 683.3 4.46 0.0 0.00 508.3 1.21 Portugal 6 170.8 1.33 16 828.2 4.42 3 599.4 8.54 Spain 36 928.8 7.97 17 605.8 4.63 8 878.8 21.08 Sweden 12 652.4 2.73 0.0 0.00 350.6 0.83 UK 77 363.1 16.69 804.9 0.21 2 614.3 6.21 * Regional Convergence and Employment objective (former Objective 1) Source: Bachtler & Wishlade (2004) and own calculations ing for implementing the Lisbon Strategy more than a third to CAP, and the residual, (Competitiveness for growth and employ- about 15 percent, for the remaining posts. ment). The total financial resources under 1b are €336.3 billion in 2004 prices, or 0.41 The respective Member States’ allocations percent of EU27 GNI.50 resulting from the Commission’s proposal are not easy to derive. An attempt has nev- Cohesion Policy in the Commission’s pro- ertheless been undertaken by the European posal (1b) will increase by ca 23 percent Policy Research Centre (EPRC).51 Part of in 2007 and ca 31 percent in 2013, com- the difficulty in deriving the estimates lies pared to 2006. By contrast, CAP, which is in the fact that the Commission has not included under the second heading, will in- been explicit as to the method used in its crease by only ca 2 percent by 2007 and ca calculations, while part of it lies in the fact 3 percent by 2013, compared to 2006. In that an application of the Berlin formula52 other words, this post will basically remain produces results that are incompatible with fixed throughout the period 2007 – 2013. Thus, the division of resources in the Com- 51 Bachtler and Wishlade (2004). mission’s proposal is roughly almost a half 52 The Berlin formula determines the annual to Cohesion (and competitiveness) Policy, amount of aid in eligible regions and is calculated as (regional GDP per capita - Community average) × regional disparity coefficient × national prosper- 50 An additional €8.6 billion is planned to cover ity coefficient + € 100 per person unemployed in for the new Solidarity Fund and the Commission’s excess of the Convergence region average; see administrative expenditure. Bachtler and Wishlade (2004), p. 26. 23
- 24. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States Table 2.3 Budget-adjusted estimates for 2007 – 2013 (2004 prices) Convergence objective Share of Annual Convergence Cohesion Fund estimates Share of Cohesion Fund annual allocations 2007 - 2013 (€Mn) total (%) objective per capita (€) 2007 - 2013 (€Mn) total (%) per capita allocations (€) EU25 165 721.0 100.00 195.5 54 873.0 100.00 67.0 EU15 82 021.0 49.49 217.1 6 055.0 11.03 40.7 NMS10 83 700.0 50.51 173.2 48 818.0 88.97 93.3 Cyprus 0.0 0.00 0.0 308.7 0.56 62.9 Czech Republic 9 197.2 5.55 145.0 5 376.3 9.80 75.1 Estonia 1 108.2 0.67 116.1 1 775.0 3.23 185.9 Hungary 9 636.7 5.82 187.1 6 392.5 11.65 89.6 Latvia 3 509.7 2.12 212.9 2 964.7 5.40 179.8 Lithuania 4 851.4 2.93 199.1 3 498.5 6.38 143.6 Malta 0.0 0.00 0.0 128.6 0.23 46.8 Poland 48 035.7 28.99 177.6 24 007.1 43.75 88.8 Slovenia 871.2 0.53 62.5 1 086.8 1.98 77.9 Slovak Republic 9 790.0 5.91 193.9 3 279.8 5.98 87.1 Austria 0.0 0.00 2.3 0.0 0.00 0.0 Belgium 0.0 0.00 2.7 0.0 0.00 0.0 Denmark 0.0 0.00 1.9 0.0 0.00 0.0 Germany 10 679.4 6.44 21.2 0.0 0.00 0.0 Greece 12 474.8 7.53 1.7 3 027.5 5.52 39.5 Finland 0.0 0.00 1.5 0.0 0.00 0.0 France 2 928.9 1.77 15.7 0.0 0.00 0.0 Ireland 0.0 0.00 1.4 0.0 0.00 0.0 Italy 21 113.1 12.74 13.2 0.0 0.00 0.0 Luxembourg 0.0 0.00 0.2 0.0 0.00 0.0 Netherlands 0.0 0.00 4.5 0.0 0.00 0.0 Portugal 16 630.4 10.04 1.3 3 027.5 5.52 42.0 Spain 17 398.9 10.50 8.0 0.0 0.00 0.0 Sweden 0.0 0.00 2.7 0.0 0.00 0.0 UK 795.5 0.48 16.7 0.0 0.00 0.0 Source: Bachtler & Wishlade (2004) and own calculations both the four percent absorption cap and State,54 the fourth column the annual allo- the overall Financial Framework as set out cations according to the Convergence ob- in the Commission’s proposal of July 2004. jective and the penultimate column shows Hence the Berlin formula can only be ap- the annual 2004 – 2006 allocations. plied to the EU15 Member States. Clearly, the absorption cap, rather than the The calculations carried out by the EPRC Berlin formula, will determine the Conver- have been reproduced in Table 2.2 and Ta- gence objective allocations in the CEEC- ble 2.3. It is important to note that these cal- MS.55 culations should be interpreted as estimates and not as the actual allocations. Apart from The respective Member States’ allocations the problem of deriving the estimates, the 54 Total 2007 – 2013 allocations were divided by data used in the Commission’s calculations seven in the cases of absorption limits and the Con- were probably more recent and the EPRC vergence priority. The calculations were carried out calculations do not include Bulgaria or Ro- under the assumption that the CEECMS will grow mania.53 The second column in table table at an annual rate of 4.1 percent, while the EU15 2.2, “4% absorption limits”, shows each Member States will grow at 2.2 percent annually. 55 COM (2004f). Note that the absorption cap also Member State’s annual GDP in purchas- applies for both the Cohesion Fund and the rural ing power standards (PPS-GDP) multiplied development and fisheries instruments. The cap- by 0.04, i.e. the maximum amount of as- ping of assistance from the Structural Funds is sistance that can be given to each Member mainly motivated by a) the respective Member States’ ability to make effective use of assistance and b) the ability to absorb the assistance given the 53 Bachtler and Wishlade (2004). principle of additionality. 24
- 25. 2 Cohesion Policy:Retrospect and prospect in the EPRC calculations have been de- Convergence and Employment objective rived by applying the Berlin formula on the (78.54 percent of Cohesion for Growth EU15 Member States, followed by a mul- and Employment, post 1b in table 1.1, or € tiplication of the respective allocations to 264.1 billion, replacing Objective 1; hence- the new Member States by a factor of 0.28. forth Convergence objective); a Regional The results are displayed in table 1.3, along Competitiveness and Employment objective with calculations for the national conver- (17.22 percent of post 1b, or € 57.9 billion, gence objective (Cohesion Fund). replacing Objectives 2 and 3; henceforth Competitiveness objective); and a Europe- Two aspects in particular from the EPRC an Territorial Cooperation objective (3.94 exercise are worth commenting on. First, percent of post 1b, or € 13.2 billion; hence- the average per capita allocations are much forth Territorial objective), respectively.58 lower in the CEECMS compared to EU15. The three objectives will be supported by Were the size of the regional gaps to be the financial resources of the European considered, regional assistance to the new Regional Development Fund (ERDF), the Member States would be a great deal larger European Social Fund (ESF) and the Cohe- than in the Commission’s proposal. On the sion Fund. other hand, the absorption capacity must also be considered, although it is likely to Regions eligible for assistance under the increase over time. Second, a number of Convergence objective would as previ- countries will lose much of the support they ously be those with a GDP per capita level were given under the 2000 – 2006 Finan- below 75 percent of the Community aver- cial Framework.56 age. However, the Commission has pro- posed that temporary resources (85 percent in 2007 and then phased out by steps of 5 2.3.2 The debate on the future ECP percent) are made available from the Struc- tural Funds for regions in the EU15 that In its proposal for the future Cohesion would have received support had the base Policy, the Commission has replaced the for calculation been the EU15 rather than former three objectives57 with a Regional the EU25. The aim of the Convergence objective is to “promote growth-enhanc- 56 ing conditions and factors leading to real Member States with phase-out (“statistical ef- fect”) regions in the Commission’s proposal are convergence. Strategies should plan for the Belgium, Germany, Greece, Spain, Italy, Malta, development of long-term competitiveness Portugal and the UK. The only CEECMS to re- and employment.59” ceive Competitiveness and Employment allocations are Czech Republic and Slovak Republic. 57 The programmes under this objective would The bulk of the present ECP assistance is chan- nelled through the Objectives 1, 2 and 3. Objective be supported by the resources of all three 1 supports development in the less prosperous re- funds, where support from the Cohesion gions; Objective 2 supports the revitalising of areas Fund, as before, would be given to Mem- faced with structural difficulties that lead to high ber States with a Gross National Product unemployment; and Objective 3 supports the im- (GNP) below 90 percent of the Commu- provement of education, training and employment policies and systems in regions not eligible under Objective 1 assistance; see, for example, http://eu- 58 COM (2004b). ropa.eu.int/comm/regional_policy/index_en.htm. 59 COM (2004c). 25
- 26. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States nity average (i.e. Greece, Portugal and all pean Employment Strategy (EES).65 ten new Member States). According to the Commission’s proposal, the Cohesion Fund The Territorial objective, building on the will be an integrated part of the multi-an- INTERREG programme, would promote nual programming of the Structural Funds. the sustainable development of the EU ter- It will also have a specific conditionality ritory (and beyond). It would support cross- attached to it, insofar as assistance is con- border cooperation actions, for regions lo- ditioned on the convergence programmes cated on internal borders or certain external and constraints on excessive deficits.60 Pro- borders; contribute to the cross-border el- grammes supported by the Cohesion Fund ements of the future European neighbour- would focus on transport and environmen- hood and partnership Instrument and Instru- tal infrastructures61 and institution building, ment for Pre-accession Assistance (IPA). It strengthening the capacity to manage sup- would benefit from transnational coopera- port from the Structural Funds.62 tion actions and cooperation and exchange networks. The Competitiveness objective aims at improving the competitiveness and attrac- In response to criticism regarding problems tiveness of the regions. The regions eligi- encountered with the management of the ble for support would be those “currently funds, the proposal also implies a number eligible for Objective 1 not fulfilling the of simplifications, which deserve to be criteria for the convergence priority even in mentioned here.66 Priorities for Cohesion the absence of the statistical effect of en- Policy would in the future be given in an largement63” and “all other regions of the overall strategic document, adopted by the Union covered neither by the convergence Council, and in national framework docu- programmes nor by the ‘phasing in’ sup- ments worked out by the Member States, port…64” The Competitiveness objective based on the Commission’s proposal. The would be funded equally by the ERDF and documents would then serve as a basis for the ESF and interventions supported by the specific national and regional programmes. ERDF would be based on innovation and knowledge based economy; the environ- Furthermore, the so-called programme ment and risk prevention; and accessibility complements and management by measure of services of general economic interest, would be abolished, the number of funds while interventions supported by the ESF reduced from the current six to three (i.e. would become more in tune with the Euro- the ERDF, the ESF and the Cohesion Fund will remain in place) and a mono-fund 60 See especially chapter 5, where the authors dis- approach introduced (one fund per pro- cuss the possibility of extending this kind of condi- gramme). There would also be a number of tionality to other areas of the ECP. 61 This particular focus has caused, and will prob- ably continue to cause, problems, especially in 65 COM (2004c). The EES was launched in 1997, Hungary; see chapter 5. as a coordinated effort at the EU level to increase 62 COM (2004g). As we will see, strengthening employment in the Union. Since 2002, the EES has institutions and the administrative capacity in the become a key component in the Lisbon Strategy. new Member States will be crucial in the years to 66 It should also be mentioned—as pointed out by come. Bachtler and Wishlade (2004)—that the system 63 COM (2004c), p. 5. has to be in place before it has been proven to be a 64 COM (2004c), p. 5. simplification. 26
- 27. 2 Cohesion Policy:Retrospect and prospect simplifications as regards financial manage- and cohesion raises an interesting question. ment and control, such as the elimination of In the words of one evaluation, “the ob- “on-the-spot” audits (save for “exceptional jective of competitiveness can exacerbate circumstances”) and payments operated at regional and social inequalities, by target- the level of priorities rather than at the level ing efforts on zones of excellence where of measures (which excludes private co- projects achieve greater returns.70” While funding).67 However, the principle of addi- this may certainly be the short run effect, tionality would still apply for the Structural the approach of targeting such “zones of ex- Funds and the n + 2 rule would not only cellence” may actually be the best long run remain but also be extended to the Cohe- solution to achieve economic and social co- sion Fund. As we will see in subsequent hesion.71 The emergence of a core-periph- chapters, they may both have serious future ery pattern in many new Member States consequences for the new Member States. implies that regional disparities are likely to increase even further in the short run. If, One particular aspect of the three objectives however, this is counteracted by supporting is interesting to note: the overlapping of the the periphery at the expense of the centre, Lisbon Strategy and programmes under the overall national economic growth may well Competitiveness objective is according to be hampered. Commission estimates around 80 percent, whilst the Lisbon Strategy overlapping with Judging by the position papers from the the Convergence objective is only about respective Member States’ governments72 30 percent. The overlapping with the Ter- and a paper prepared by the Dutch Presi- ritorial objective is almost complete.68 The dency in December 2004,73 a number of Commission has thus decided to use differ- features in the Commission’s proposal have ent overall instruments in different Union received widespread support. There seems regions, where the more developed regions to be agreement on the linking of the ECP would benefit from a higher degree of em- and the Lisbon and Gothenburg agendas; phasis on areas where the growth potential the attempts at simplifying the regulation is high. At first glance, this makes sense. It of the Structural Funds; and the three new is not wise to implement measures that aim objectives and their content. In particular, at making a region more competitive on there was general agreement on the impor- basis of the existing industrial structure if tance of concentrating support to the least in fact a structural change is what is really developed areas of the Union. needed—and vice versa.69 70 However, this particular aspect of the Com- Jouen et al. (2005), p. 9. 71 mission’s proposal still causes some con- It should also be pointed out, however, that the success of such measures has in the past been cern and, in particular, the merging of the questionable; see Midelfart-Knarvik and Overman concepts of convergence, competitiveness (2002).. 72 The position papers can be downloaded from the 67 COM (2004c), p. 8. DG Regional Policy homepage on, http://europa. 68 Jouen et al. (2005). eu.int/comm/regional_policy/debate/reflex_en.htm. 69 There need not be an incongruity here: if an old See also Bachtler and Wishlade (2004) and Jouen industrial structure “dies out” to pave the way for et al. (2005) for summaries of the Member States’ new (successful) industries, competitiveness in the different positions in the debate. region is also likely to increase. 73 CEU (2004). 27
- 28. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States Even though there is broad support for as our study is concerned, that there is an the Convergence objective, some Member unfortunate absence of a policy to “accom- States have proposed that resources allo- pany future developments of the new Mem- cated to it should be increased. Unsurpris- ber States.76” The main argument, to which ingly, a number of Member States have this study, as we will see, concurs, is that questioned the Competitiveness objective “the actions eligible for the convergence and a few Member States have even asked objective are identical for both old and new for its elimination. In line with the recom- Member States, although the needs are dif- mendations from the Sapir report,74 fur- ferent.77” The extent to which the needs dif- thermore, some Member States have asked fer will become clear in the next chapter. for support being concentrated on the least developed Member States—i.e. national as opposed to regional convergence—rather than on the least developed regions. Thus, the main dividing lines seem to be the amount of resources that should be devoted to the respective objectives, whether sup- port should focus on regions or countries and whether aid should be directed to all regions or just to regions in the new Mem- ber States. The Commissin’s proposal has also raised concerns among students of European re- gional policy. One evaluation75—while taking a generally positive attitude to the proposal with respect to reducing regional disparities, strengthening competitiveness and combating spatial and territorial imbal- ances—has questioned whether some of the objectives of the ECP will be reached. The author argues that the improvement of general welfare would be hampered by the “[r]emoval of transversal priorities, such as equal opportunities, …”; that the elimina- tion of Community initiative programmes would act counter to the aim of increas- ing the sense of European belonging; that “making eligibility rules national” will 76 Jouen et al. (2005), pp. 30 – 31. The report also stop subsidiarity at the national level and warns that the new implementation system will thus hinder a modernisation of European fail to address regional problems in a differentiated way and that, despite the mentioned simplifica- governance; and, most importantly so far tions; there will be a multiplication of actors in- volved in financial management of the funds. 77 74 Sapir et al. (2003). Jouen et al. (2005), p. 31. See also the section on 75 Jouen et al. (2005). competitiveness. 28
- 29. 2 Cohesion Policy:Retrospect and prospect References Bachtler, J., and Taylor, S., 2003, The Added Value of the Structural Funds: A Regional Perspective, IQ-Net Report on the Reform of the Structural Funds, European Policies Re- search Centre, University of Strathclyde, June 2003. Bachtler, J., and Wishlade, F., 2004, Searching for Consensus: The Debate on Reforming EU Cohesion Policy, European Policies Research Paper, European Policies Research Cen- tre, University of Strathclyde, November 2004. Begg, I., 2003, Complementing EMU: Rethinking Cohesion Policy, Oxford Review of Eco- nomic Policy, Vol. 19, No. 1 2003. Braunerhjelm, P., et al., 2000, Integration and the Regions of Europe: How the Right Poli- cies Can Prevent Polarization, Monitoring European Integration 10, Centre for Economic Policy Research. Council of the European Union, 2003, Multiannual Strategic Programme of the Council 2006 – 2006, Brussels, 8 December 2003, POLGEN 85. Council of the European Union, 2004, 16105/04 CADREFIN 163 Brussels, 14 December 2004. Eliasson, K., and Westerlund, O., 2003, Regionala tillväxtindikatorer – teoretiska aspekter, begrepp och empiriska illustrationer, Swedish Institute for Growth Policy Studies (ITPS) Working Paper, A2003:004. European Commission, 2000, SAPARD: Special Pre-Accession Assistance For Agriculture and Rural Development, DG Agriculture, December 2000. European Commission, 2003, Manging th Territorial Dimension of EU Policies After En- largement, Territorial and Urban sub-committee, October 2003. European Commission, 2004a, Building Our Common Future – Policy Challenges and Budgetary Means of the Enlarged Union 2007 – 2013, 101 final. European Commission, 2004b, A New Partnership for Cohesion: Convergence, Competi- tiveness, Cooperation, Third Report on Economic and Social Cohesion, February 2004. European Commission, 2004c, Laying Down General Provisions on the European Re- gional Development Fund, the European Social Fund and the Cohesion Fund, Proposal for a Council Regulation, 492 final. European Commission, 2004d, Cohesion Policy: the 2007 Watershed, DG Regional Policy, factsheet, July 2004. 29
- 30. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States European Commission, 2004e, Subject: The Value Added of Cohesion Policy, Working document of the Commission Services, Fiche no. 23, September 2004. European Commission, 2004f, Capping of Resources, Working paper of the Commission services, Fiche no. 27, October 2004. European Commission, 2004g, Proposal for a Council Regulation Establishing a Cohesion Fund, 494 Final, July 2004. European Commission, 2005a, Working Together for Growth and Jobs: A New Start for the Lisbon Strategy, Communication to the spring European Council, Brussels, February 2005. European Commission, 2005b, Strategic Objectives 2005 – 2009. Europe 20120: A Part- nership for European Renewal: Prosperity, Solidarity and Security. Communication from the President, Brussels, January 2005, COM(2005) 12 final. European Parliament, 2004, Draft Report on the Third Progress Report on Economic and Social Cohesion, Committee on Regional Policy, Transport and Tourism, February 2004. Hall, R., et al., 2001, Competitiveness and Cohesion in EU Policies, Oxford, Oxford Uni- versity Press. Häupl, M., 2003, The Future of Cohesion Policy, statement by the Mayor of Vienna on 17 February 2003. Jones, C., I., 2002, Introduction to Economic Growth, Second edition, w.w. Norton and Company, New York. Jouen., M., et al., (2005), Adaptation of Cohesion Policy to the Enlarged Europe and the Lisbon and Gothenburg Objectives, a study requested by the European Parliament’s Com- mittee on Regional Development, January 2005. Kok, W., et al., 2004, Facing the Challenge: The Lisbon Strategy for Growth and Employ- ment, Report from the High Level Group chaired by Wim Kok, November 2004. Krugman, P., 1998, What’s New About the New Economic Geography? Oxford Review of Economic Policy, Vol. 14, No. 2, pp. 7 – 17, Krugman, P., and Venables, A., 1995, Globalization and the Inequality of Nations, NBER Working Paper, No. 5098, April 1995. Leonardi, R., 1995, Convergence, Cohesion and Integration in the European Union, Mac- millan Press Ltd, London. 30
- 31. 2 Cohesion Policy:Retrospect and prospect Levine, R., and Renelt, D., 1992, A Sensitivity Analysis of Cross-Country Growth Regres- sions, American Economic Review, 82, pp. 942 – 963. Markusen, J., R., et al., 1995, International Trade: Theory and Evidence, McGraw Hill Inc., Singapore. Martin, R., L., 2003, A Study On Regional Factors of Competitiveness, Cambridge Econo- metrics, November 2003. Midelfart-Knarvik, K. H., and Overman, H. G., 2002, Delocation and European Integra- tion: Is Structural Spending Justified?, Economic Policy, pp. 323 – 359, October 2002. Molle, W., 2001, The Economics of European Integration: Theory, Practice, Policy, Fourth Edition, Ashgate Publishing Limited, Aldershot. Myrdahl, G., 1957, Economic Theory and Underdeveloped Regions, Duckworth, London, 1957. Sala-í-Martin, X., 1997, I Just Ran Two Million Regressions., American Economic Review, 87, Papers and Proceedings, 942-963. Sapir, A., et al., 2003, An Agenda for a Growing Europe: Making the EU Economic System Deliver, Report of an Independent High-Level Study Group, Brussels, July 2003. Solow, R., 1956, A Contribution to the Theory of Economic Growth, Quarterly Journal of Economics, Vol. 70, No. 1, pp. 65 – 94, February 1956. Tarschys, D., 2003a, Reinventing Cohesion: The Future of European Structural Policy, Sieps report 2003:17, Stockholm 2003. Tarschys, D., 2003b, Goal congestion. Multi-Purpose Governance in the European Union, in E.O. Eriksen, J.E. Fossum and A.J. Menéndez (eds.) The Chartering of Europe, pp 161- 178. Nomos Verlagsgesellschaft, Baden-Baden. UK government, 2003, A Modern Regional Policy for the United Kingdom, HM Treasury, Department of Trade and Industry and Office of the Deputy Prime Minister, United King- dom, March 2003. Internet sources U.S. Census Bureau, 2004, International Data Base, Population projections, http://www. census.gov/ipc/www/idbconf.html European Commission, DG Regional Policy, Inforegio, http://europa.eu.int/comm/region- al_policy/debate/reflex_en.htm 31
- 32. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States 32
- 33. 4 Poland andCohesion Policy 4 POLAND AND COHESION POLICY Magdalena Kaniewska and Katarzyna Zawalińska* 4.1 Introduction When the European Union was enlarged as spelled out in the current National De- on 1 May 2004, it also gained an additional velopment Plan (NDP) for the years 2004 large Member State and a major player on – 2006. While the new NDP, which covers the European policy arena. Poland will by the next Financial Framework 2007 – 2013, virtue of its size play a dominant role in fu- has improved on several issues, problem- ture European policies, but it is equally true atic issues remain. that Poland will have to adapt in the years to come, among other things by switching We argue that the future ECP should strive from having been a policy taker to becom- towards addressing a number of basic chal- ing a policy maker in its own right. lenges that Poland faces in the process of in- tegration into the EU. To mention but a few, As we will see in this and the subsequent regional policy should focus on the upgrad- chapters, there are a number of features in ing of human capital, improving environ- both the current ECP and in the Commis- mental standards, help transform Poland to sion’s proposal for the future ECP that will a knowledge based economy through R&D create problems in the NMS. Other features initiatives and aid in the implementation of may be unique to Poland or to a limited institutional reforms. number of NMS. The one issue that can perhaps be singled out as the most urgent is We also propose to create a Common Eu- the budgetary strain stemming from the si- ropean Education Policy, that is to say, that multaneous process of co-financing Cohe- domestic education policy should be rein- sion Policy initiatives, in order to comply forced by a education policy that is coor- with the so-called principle of additionality, dinated at the supranational level and that and at the same time fulfilling the Maastrich that policy should be carried out within the convergence criteria. There is a clear risk framework of Structural Policy. For the new that many NMS, including Poland, will be Financial Framework, we propose to reduce forced to return funds to the EU budget. the financing of some of the horizontal pro- grammes that deal with the policy related to However, the problems are not restricted to the development of human and social capi- the ECP per se. We also identify a number tal and small and medium sized enterprises of weaknesses in the Polish approach to- and shift funds to actions that stimulate pri- wards EU regional policy, particularly mary and secondary education. * The authors are researchers at Center for Social and Economic Studies, CASE, in Warsaw. 59
- 34. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States 4.2 Lessons learned and future without the existence of positive effects. implications from the pre- accession instruments The projects financed from the pre-acces- sion funds were accepted on the basis of the fulfilment of formal requirements, rath- The primary goal of pre-accession support er than on the justification of their strate- was to prepare Poland for a smooth inte- gic and operational goals. Again, as focus gration into the EU. At the time, cohesion laid on the ability to absorb all funds avail- as such was seen as a secondary goal, even able, this practically meant that all projects though it was a goal expected to gain im- that qualified were granted support, with- portance in the future. The most vital task out any distinction between projects that was rather to learn the logic of Structural might have brought higher (or lower) de- Policy and to begin implementing the ac- velopment. However, there was never re- quis. The EU pre-accession programmes ally a risk that a project was not needed: introduced an administrative organisation the Polish infrastructure was so underde- and a financial discipline that was new to veloped that each euro invested with some Poland. Polish public administration and probability brought some return (unless the Polish policy-makers were totally focused projects overlapped or contradicted). So, all on learning the new rules, such as planning, in all, we may conclude that Commission implementing, monitoring an evaluating officials, quite naturally, had much more the programmes, which implied that they impact on the content of the pre-accession were not in a position to contribute to it or programmes than did Polish officials, who adjust it to the particular needs in Poland: more or less acted as consultants. In fact, they were all policy takers at that time. this could be viewed as a natural introduc- tion to a more active future participation in Since the most pending need before acces- the decision process. sion was to learn the EU’s policies, there were no reflections or thoughts on possible Once the implementation of the pre- changes, or how to adjust the Cohesion Pol- accession funds started in Poland, specific icy. Rather, concerns were geared toward problems appeared due to a sometimes the ability to absorb the resources offered inadequate Polish institutional capac- by the funds. At first, therefore, it was quite ity, insufficient human capital and under- natural that “simple” projects dominated developed organisational structures. In or- Polish propositions, i.e. goals tended not der to avoid these problems in the future, to be diversified and although they made the recommendations that resulted from the absorption easy, they did not necessarily ex-post evaluations of the PHARE, ISPA bring the highest possible development in and SAPARD programmes, illustrated be- the areas where they were implemented. low, should be taken into account. We can Good examples are provided by some of the generalise them as follows:1 infrastructure projects, which allowed Po- 1. There is room for simplification of pro- land to focus major amounts of funds into cedures without loosing rigour. For ex- one large investment, which, however, did ample, business plans and application not necessarily improve entrepreneurship. To name but one example, a new highway 1 See AGROTEC (2003); NIK (2003a and b); and may cause increased traffic at a certain area EMS (2003). 60
- 35. 4 Poland andCohesion Policy forms could be simplified substantially ARD, “youth proofing” should be used while still being based on sound eco- as a criterion in the ranking procedure nomic indicators. Otherwise, chances of project selection. are that the rate of uptake will be slow. 5. A common problem for all of the pre- Furthermore, complexity indirectly accession funds was delays in start- benefits larger and wealthier benefici- ing-up. This problem could possibly aries, who can afford to pay for advice be avoided or at least diminished if the and help. A simplified procedure will programmes were designed in careful also allow for a reduction of both the relation to the resources that were avail- amount of controlling needed and the able to implement them. The common number of errors to deal with. problem of an accumulated workload 2. Since infrastructure projects usually could be addressed by shortening the have a high uptake but not always assure lapses between calls for proposals. On a positive impact, it is advisable to in- the other hand, introduction of some troduce stronger economic assessments standards for the number of applica- for these projects. A proven “good val- tions checked per person per week or ue for money” and a positive long-term month (e.g. 60 projects per person per impact from the infrastructure projects month) would allow for planning the should be primary and compulsory re- sufficient human resources needed to quirements. deal with the accumulated workload. 3. Since it was observed that smaller 6. It seems important to differentiate the projects had difficulties in compet- rates of subsidies in the projects in ing with larger projects, a good prac- order to give higher priority (higher tice would be to have separate project subsidies) to disadvantaged areas and schemes directed to small projects groups of people and to “public good” (firms). It would guarantee that a cer- types of investments, as well as those tain amount of the funds would be re- creating positive externalities (e.g. served for small and medium sized en- knowledge and technology). This can terprises (SMEs), which are believed be introduced by specifying accurate to be “engines of growth” in develop- conditions for qualification of partici- ing countries. It would also allow for pants. simplification of the procedures up to 7. Pre-accession trans-border cooperation a certain level of the budget. Different proved to be a very efficient tool of types of calls for proposals could also development in the form of economic be considered. exchange (trans-border trade), cultural 4. In some of the structural projects it exchange and tourist and environmen- seems reasonable to introduce an age tal cooperation. Especially in the case limit (requirement) into the qualifica- of environmental cooperation, country tion procedure. This is especially im- borders lower the efficiency of envi- portant in the fields or regions where ronmental protection since the envi- young people are particularly disad- ronment itself is not limited by borders. vantaged. A good example is the rural In that sense the cooperation is a good labour market in Poland, where em- example of the value added at the EU ployment opportunities are in short level of these programmes. There are supply. Therefore, as advised in SAP- also positive externalities from learn- 61
- 36. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States ing good practices and exchanging ide- had a favourable geographical position ly- as with more advanced “neighbours”, ing in the centre of Europe and separating at the level of local administration, en- the Baltic countries from the EU15 Mem- trepreneurs and citizens in the regions. ber States. Besides, during the final nego- Therefore, it would be advisable to tiations the financial issues became much further promote the trans-border initia- more important for Poland than it was in tives, especially in the case of activities the case of the pre-accession programmes. that generate externalities, both posi- The funds that now were to be negotiated tive and negative. In the case of posi- were no longer non-refundable, but would tive externalities, cooperation should be a part of Poland’s contribution to the EU be based on higher exchange and inte- budget. gration (e.g. in the case of transfer of knowledge and of innovations), while Then, unsurprisingly, in the final stages of in the case of negative externalities, co- negotiations some controversies appeared, operation should focus on more effec- even though in the case of Structural Policy tive common prevention (e.g. crime, they were not very contentious—as com- etc). Incentives should be created to pared, for example, to agricultural issues, encourage local governments to create which were discussed until the very last a good legal basis for such cooperation minute of the summit—and were closed for all local societies. quite quickly and long before the final summit. The negotiations in the field of To conclude, it seems that the pre-acces- “Regional policy and coordination of the sion programmes revealed a need for better Structural Funds” were opened on 6 April implementation of the pre-accession pro- 2000 and closed on 1 October 2002.2 Con- grammes rather than the need for a change troversies were mainly related to financial of their design—although the latter is usual- issues, rather than to the content of Euro- ly less problematic. The recommendations pean regional policy. suggested above may contribute to elimi- nating some these problems in the future. First, Poland claimed that the absorption of the Structural Funds would be difficult for the country (as the pre-accession pro- grammes revealed), so the negotiated funds 4.3 Controversial accession might not be fully utilised. Therefore, Po- negotiation issues land proposed that its contribution to the EU budget should be gradually phased-in, The Polish approach to the Structural Funds reaching 100 percent over a 5-year period, and the Cohesion Policy has been chang- in order to avoid the possibility of becom- ing with advancements in integration and ing a net contributor to the EU budget dur- by the learning process initiated by the pre- ing the first years as an EU Member State. accession aid. Until the final stage of nego- The EU did not agree: the argument was tiations, Poland had a clear view on what that Poland had already gained much pre- was beneficial for it and it also had more accession aid and with this aid taken into political power to execute its position, account, there should not be a problem of for the simple reason that Poland was the 2 largest country among the candidates and RM (2002). 62
- 37. 4 Poland andCohesion Policy Poland becoming a net contributor. It was Table 4.1 Shares in Structural Policy however expected that Poland would not be Negotiated by Poland (% of total funds devoted to NMS) able to fully utilise the allocated share of Fund/Objective Negotiated shares the Structural Funds from the start. Cohesion Fund 45 – 52% Objective 1 57.60% Second, the Polish negotiation proposition INTERREG 48.70% EQUAL 53.10% was to shift some funds from rural develop- URBAN and LEADER according to NDP ment—partly financed from the Structural Source: RM (2002) Funds—to direct payments to farmers; up to 25 percent instead of the suggested 20 congruence with specific Polish goals, but percent in the first year of accession. The rather financial and absorption issues. The justification provided by Polish officials Polish government probably followed the was that a low pace in the phasing-in of logic that overall funds must first be secured direct payments and the rural funds were and only then, as a second step, could talks supposed to partly compensate for the shift. on their distribution start. Notably, this se- It was obviously against the EU’s policy vi- quence of events has also been adopted by sion and the direction of the CAP reform, the EU. First the budget is given an expend- which was favouring the opposite direction, iture (or appropriations) limit and then dis- i.e. to shift some of the agricultural support tributional issues are raised. Should the op- to the support of underdeveloped rural re- posite sequence be implemented—that is to gions. The Commission agreed to the pro- say, if all countries started their negotiations posal, but only as a temporary solution. by making individual claims on the budget, according to their specific needs—it would Third, Poland was in favour of a higher mean that Member States had incentives to share of the Cohesion Fund within structur- maximise their claims. This would in turn al support because of its more absorbable mean a risk of costs sky-rocketing, no mat- form, having more favourable co-financing ter how tough the negotiation constraints. A conditions, quicker procedures, etc. than good case in point was the Common Agri- other funds. Eventually, Poland obtained cultural Policy (CAP), which substantially €1 billion more for poor regions than ini- increased the EU budget even before any tially proposed by the EU. limits on the CAP budget had been imple- mented. Poland also negotiated the territorial divi- sion of the country into NUTS units since the division affects the eligibility criteria 4.4 Polish problems linked to the of the objectives. All in all, the whole of conditionality of the Structural Poland was classified eligible for Objective Funds 1 support (but excluded from Objective 2 and 3) and it also qualified for INTERREG, EQUAL, URBAN and LEADER (see Ta- It was only after Poland had had experience ble 4.1). of the rules of the Structural Funds that it gained insight into their full meaning: it It is thus clear that the debate during the thus became clear which conditions were accession negotiations did not concern the favourable with respect to Polish limitations priorities of the ECP or, for that matter, its and preferences and which were not. Some 63
- 38. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States problems resulted from economic and in- The absorption cap of 4 percent of a coun- stitutional differences between Poland and try’s GDP for Cohesion Policy, taking into OMS, differences such as a different level account co-financing abilities and institu- of development, specific economic needs tional capacity, seems from the outset to related to an unfinished economic trans- still bring quite enough resources to Poland formation, institutional drawbacks, etc. We from the EU budget.4 However, it would be may divide Polish problems linked to the harmful if this cap were to apply for both conditionality of the Structural Funds into rural development and the fishery policies. at least three categories: First, it would in practice imply a trade- 1. problems related to the budgetary en- off between the goal of cohesion on the velope and the resources of Cohesion one hand and the rural development goals Policy; on the other. As they are both crucial, they 2. problems related to the new ECP pri- should not be substituted with each other. orities; and, According to the Polish National Develop- 3. problems related to the general provi- ment Plan, the scheme would mean that at sion of the Structural Funds, such as most 3.55 percent of GDP would be devot- concentration, partnership, program- ed to Cohesion Policy and up to 0.45 per- ming, co-financing, etc.3 cent to rural development and fishery.5 This implies a decline in funds devoted to Cohe- sion Policy as such and a room for manipu- 4.4.1 Conditionality linked to lation with rural development and fishery budgetary envelope and resources funds (because of the trade-off). Second, it seems quite illogical (or the logic is hidden) In the debate on the size of the overall EU that rural development funding is elimi- budget, Poland does not in theory perceive nated from the Structural Funds and at the any problems, unless the size of the re- same time included into the calculations of duced budget affects the transfer of funds the Cohesion Funds’ absorption level. for important priorities. However, there is a real threat that the small budget option of 1 percent or less of EU GNI would crowd 4.4.2 Conditionality linked to out priorities—although not necessarily the priorities for the new European most important priorities—that are repre- Cohesion Policy sented by stronger lobbies in Poland. This comment stems from a general observa- As mentioned, the Commission has pro- tion of political processes, which show that posed to exclude rural development and budget capping is never a linear process. fishing industry restructuring from the Co- The higher the shortage of funds compared hesion Policy framework. Although it may to the needs; the higher the discrimination. be perceived as a step towards management Therefore, in order to reserve a sufficient simplification, which in general is desira- amount of funds for important develop- ble, this step has in fact far-reaching con- mental goals and to avoid crowding out, the sequences for the scope of Cohesion Policy 1 percent option is too meagre. and the hierarchy of priorities supported by 3 4 Some of them are already expressed in the pro- Grosse and Olbrycht (2004). posed National Development Plan for 2007 – 2013. 5 MG (2005). 64
- 39. 4 Poland andCohesion Policy it. That is to say, the benefits from simply- ment, than centralised management. fying policy may be outweighed by the cost of giving up important goals. As a matter of However, we have to keep in mind that it fact, it weakens the political significance of would require a reform on both European the new ECP and strengthens agricultural and Polish levels. The EU would have to policy, which is already dominating the EU adjust to deal with 16 representatives of re- budget. gional administrations—instead of one cen- tral administration—while Poland would Poland is a very rural country and most of have to complete a reform of public financ- its structural problems are concentrated es and build a solid regional administration there. We agree with Grosse and Olbrycht structure with well trained civil servants. when they conclude that taking funds in- Although a step in the right direction, it will tended for the development of rural areas take time and require strategic planning. out of regional policy—rather than bringing them closer together—will not contribute The Commission’s proposal to strengthen to structural improvements in the country.6 the priority of competitiveness within the Nevertheless, the Polish government does framework of sustainable development is not officially reject the proposal to exclude very much in line with Polish development rural development from Cohesion Policy, needs, as Poland suffers from high unem- since it probably expects the EU to com- ployment and an unfinished restructuring promise in areas deemed more important of the economy. Therefore, the creation by the Polish government. of new objectives, such as the Competi- tiveness objective and territorial coopera- However, there is an inconsistency in the tion programmes based on the Lisbon and Polish strategy: on the one hand it is sup- Gothenburg priorities, seems beneficial to porting the idea of a single fund, but, on Poland. the other, it forces through 16 regional pro- grammes.7 We believe that both the single However, it appears that OMS, with few fund approach and the exclusion of rural exceptions,9 are to be sole beneficiaries of development from Cohesion Policy will be this new objective. Although it seems pos- non-beneficial to Poland. We rather support sible to realise some of the activities that the idea of creating decentralised Opera- are aimed at raising the level of economic tional Programmes, since they would give competitiveness and innovativeness under more power to the regions to decide about the Convergence objective (which is direct- their own development. Even the Commis- ed mainly toward NMS), experience clearly sion admits8 that regionalised management shows that the financing of these priorities is a more effective way of building regional will be marginalised within this objective,10 competitiveness and increasing employ- as it mainly focuses on infrastructure and 6 See Grosse and Olbrycht (2004) 9 The regions of Prague and Bratislava are the only 7 Poland insists on the proposition to include 16 regions eligible for support under this objective regional operational programmes into structural according to the calculations of Bachtler and policy organisation framework, 50% of the total SF Wishlade; see Bachtler and Wishlade (2004). See would be spent on these programmes. So far there also chapter 1, where some of their calculations was no EU acceptance for this change. have been reproduced. 8 10 See COM (2004b) Grosse and Olbrycht (2004). 65
- 40. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States environmental issues. So if Poland wants port) and renewable sources of energy is to build an economy based on knowledge also very much in line with Polish needs. and advanced technologies as well as to de- As pointed out by Kaniewska, increasing velop its human resources—which should the level of available technical infrastruc- be viewed as absolutely crucial for creating ture in agglomerations in Poland adds to a competitive economy with well function- positive external effects and makes the ef- ing institutions—it should be either a) in fective markets larger.12 Therefore, regional favour of a higher participation of the NMS actions should aim at upgrading the existing in the new Competitiveness objective, or, transport infrastructure, including public b) try to find ways of realising these goals transport in the dominant urban areas. The by the resources available through the Co- public transport constitute the driving force hesion Fund. of local development and fast railways net- work around the cities should be consid- As for the first option, it could be done sim- ered an important priority, as it increases ply by switching from the current qualify- the shuttle migration and thus makes local ing condition—which says that the Com- labour markets more flexible. Second, Po- petitiveness objective is intended only “to land has a potential to become a significant assist all the areas not covered by the Con- producer of renewable energy, especially vergence objective” and thus “the current biomass, since it is a major producer of Objective 1 regions no longer be eligible as wood, straw, oil and alcohol in Europe.13 In a result of their economic progress11”—to addition, extending the priorities within the conditions based on comparative advan- Cohesion Fund to include local transport tages in the Member States’ product and would increase flexibility of measures, such labour markets. Thus, the higher the op- as the possibility of combining the trans- portunity to utilise comparative advantage European infrastructure with the transport through the funds, the more eligible should infrastructure of agglomerations. the country be for participation in the pro- gramme. At the same time, the introduction of this priority implies an increase in local govern- As for the second option, we have to con- ments’ decision power and financial auton- clude that the possibilities are limited since omy, because the scale of the agglomeration the efficiency goals (interpreted as “the uti- projects is local and would not require inter- lisation of comparative advantages”) are regional actions. Self-governments would not always in line with the cohesion ob- thus be able to programme and finance the jectives (interpreted as “achieving higher policy themselves. So far the programming equality”). Only in cases where those two in the area of transportation within the Co- do not contradict can we say that the Cohe- hesion Fund has been much centralised and sion Fund could realise the policy of higher this proposition would be beneficial from competitiveness (and in certain cases the both the viewpoint of Polish development employment objectives). priorities, as well as from an institution building perspective. However, there is a The proposition of including priorities re- risk that the expected increase in the share lated to urban areas (including public trans- 12 Kaniewska (2003). 11 13 COM (2005). Council of Ministries (2000). 66
- 41. 4 Poland andCohesion Policy of the Cohesion Fund in financing Cohe- many delays and constraints in Poland, so sion Policy14 may lead to a centralisation of there is a postulate to focus management management. Therefore, the advice would and the provision of the funds more on the be to use more regional initiatives within results rather than on advancing the proce- the framework of the Cohesion Fund. dures.16 In this context, the Commission’s proposal to include the principle of propor- Table 4.2 Structural Funds and Cohesion Fund (% of the total funds devoted to Cohesion Policy) tionality—which would make requirements Financial Framework Financial Framework toward programming, monitoring and eval- 2000 – 2006 2007 – 2013 Structural Funds 91.54 81.3 uation of programmes proportional to their Cohesion Fund 8.45 18.7 size, thus reducing the red tape in small Source: Bachtler and Wishlade (2004) projects—should be viewed as a positive However, problems will arise if too much element in the proposed ECP reform. priority is given to transport infrastructure investments.15 First, it may strengthen the Another problem concerns the proposal political and programme-management role related to the n + 2 principle, which has of the central authority at the expense of applied so far to the Structural Funds and territorial self-governments. Second, as ex- is now proposed by the Commission to be periences with ISPA have shown, the Polish extended to the Cohesion Fund. Hence the administration has had difficulties with the financial resources assigned for a given management of such projects when they year must be absorbed by the country in have been too large. Third, it is clear from question within the next three years. This the evaluation of the pre-accession funds may become a problem in Poland, at least that the effectiveness of these investments during the first years after accession, be- differed significantly across the country— cause of a less experienced administration e.g. the building of a road may not neces- (as revealed during the implementation of sarily boost development (the Greek expe- the pre-accession programmes). We can rience too serves as a good example of this therefore expect to see a situation where a insight). large proportion of granted resources will not be used in the required spending period. Although the unexploited funds would not 4.4.3 Conditionality linked to the be wasted, but rather transferred back to general provision of the Structural the EU budget and distributed differently, Funds the fact is that they would not be used by Poland and it is therefore in the interest of Generally, it seems important to simplify Poland not to extend the n + 2 rule to the the provision of the funds wherever possi- Cohesion Fund, at least in the early stages ble, while at the same time preserving their of its membership. main principles of assuring efficiency and effectiveness of policy. There is a general Some problems may also appear due to the perception that the procedures and centrali- proposal to exclude VAT from eligible ex- sation of the management system caused penditures in projects co-financed through both the ERDF and the Cohesion Fund (al- 14 See Bachtler and Wishlade (2004). though it would still be eligible expendi- 15 As pointed out by Grosse and Olbrycht (2003b) 16 and mentioned alongside the pre-accession funds. Grosse and Olbrycht (2003c). 67
- 42. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States tures in ESF projects). The proposition to to its public finances.18 This has at least two exempt VAT from the country’s own contri- consequences: first it may result in prob- bution makes the co-financing requirements lems co-financing the programmes (at the for the beneficiary country harder to fulfil, required level up to 25%) and, second, even since the domestic contribution will rise if the funds are set aside for co-financing, dramatically. For beneficiaries that are part there may be little or no resources left for of public administration but who are not the realisation of a domestic regional poli- VAT payers, such as local governments and cy. So, on the one hand, there is a threat that universities, the domestic contribution for domestic policy will be marginalised—that the realisation of projects from the ERDF is to say, that the ECP will be prioritised will increase from the current share of 33.3 at the expense of domestic policy—but, on percent of the EU funds to 62.7 percent the other hand, the situation may cause a and, in the case of the Cohesion Fund, from positive pressure on Poland to make the 17.6 percent to 43.5 percent. The problem programmes financed within the EU policy may also arise in some cases for beneficiar- consistent and synergic with those planned ies who are VAT payers.17 The old system within the scope of domestic policy. is therefore more beneficial for Poland than the proposed system. The principle of partnership, introduced within the Structural Policy framework, is Furthermore, it is in the interest of Poland a useful tool for reducing the problem of to postulate a higher flexibility in the alloca- asymmetric information among different tion of the funds. One step towards achiev- agents involved in the regional development ing this objective would be to let the funds process. Unfortunately, the law on public- allocated to the country be transferable. private partnership has not yet been intro- The flow between funds within a country duced in Poland. The current law proposal would go from operational programmes (or seems to be quite unfavourable to private regional programmes) that do not use up the entrepreneurs. This threatens the involve- funds to programmes that need more fund- ment of the private sector in projects and ing. It would create a positive incentive if their contribution, as a consequence, may the funds were allocated more efficiently, become negligible. The other aspect of the rather than to focus on absorption capac- partnership principle, which concerns the ity, which is the case when there is a threat relationship between local and central lev- of unused funds being returned to the EU els of administration, is the strong centrali- budget. The Commission’s proposal to start sation of decision making and finances for management and allocation of the funds at regional programmes, caused by the delay the level of priorities rather than measures of the public finances reform and amplified is a good step towards higher flexibility. by the government’s much stronger posi- tion at all stages when negotiatiing with The concept of matching funding represents local representatives. It may result both another challenge. However, the problem 18 lies mostly on the Polish side, as the coun- To name but two telling examples: the central try has an alarming situation with respect budget deficit amounts to almost 5 percent of GDP, which is above the 3 percent threshold that applies for Member States that wish to join the Euro, and the decentralisation of public finances has not been 17 MG (2005). carried out yet. 68
- 43. 4 Poland andCohesion Policy in conflicts of interests and sector policy Poland would able to absorb such projects domination, rather than the predominance given the current state of human capital. So of regional/horizontal perspectives. all in all, a mix of basic infrastructure and innovative projects seems optimal, with a The principle of concentration of funds also tendency of increasing the share of the lat- seems to be a good proposal, but should in ter over time. the Polish case give much more support to priorities related to development of an ad- Another challenge linked to the provision of vanced economy and of entrepreneurship, the Structural Funds is long term planning. rather than the transport and environmental An examination of the projects submitted infrastructure (as has been the case so far). within pre-accession programmes shows They ought to be based on a domestic strat- that many potential beneficiaries lacked egy of structural economic development administrative imagination and long-term and a domestic regional development poli- planning skills. In particular, there was a cy. While the plan should take into account deficiency with respect to sequential think- the evolving ECP, it must nevertheless con- ing abilities and strategic planning. Local sider Polish strategic interests, which so far strategies, often developed just for show, seem to be missing. Concentration causes were not helpful in specifying development selection bias towards larger projects and priorities and creating good business plans. crowding out of smaller and more demand- The practice of filling out PHARE project ing projects (related to entrepreneurship, applications showed that the wish to spend knowledge, etc.). This is because invest- the EU’s funds, for whatever purpose, rath- ment in infrastructure is less troublesome er than use them sensibly and for the ben- for public administration than investments efit of local interests, was more important in innovation programmes, which to some than their real impact.20 extent makes it easier to utilise a greater share of the EU’s resources. The National Development Plan (NDP) for 2004 – 2006 also shows a lack of visions However, as shown by the experience and strategic planning as regards develop- gained in other parts of the world, the im- ment policy and has been widely criticised pact of investments on economic develop- for the lack of long-term targets. Besides, ment is limited, while investments in pro- despite proper definitions of Polish needs, duction based on advanced technologies there is no clear list of priorities of develop- are much more effective for stimulating lo- ment goals. The document only provides an cal economic network resources. Besides, institutional framework for regional spend- it can be expected that large infrastructure ing financed through the Structural Funds development contracts will be won by more and the Cohesion Fund, but gives no clear competitive EU enterprises.19 However, guidance as to how these goals should be despite the fact that innovations and tech- achieved. nologies are the driving forces of a higher development, it is not certain to what extent A lot of attention is given to two specific sec- tors of the economy: public infrastructures 19 This proved to be the case with most contracts (mainly roads) and environmental infra- on projects that were conducted within the frame- 20 work of PHARE; see Grosse (2003a). Grosse and Olbrycht (2003a). 69
- 44. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States structures improvement; it is, however, not financial flows; secondly, for countries that clearly justified why they are perceived as have recently experienced a liberalisation top priorities. It gives yet again the impres- process, the territorial divergence may in- sion that absorption is the priority, which crease in the early stages when the econo- would explain the focus on large, “easy-to- my faces strong international competition. absorb”, projects. Furthermore, despite the As transaction costs diminishes over time obvious importance of small and medium and adequate economic reforms are imple- sized enterprises (SME), clearly defined mented, regional disparities are expected to priorities are lacking. In general, there is decrease. In this case, the efforts should fo- little evidence of a national development cus on overall economic growth and leave strategy in the NDP, such as actions that aside territorial imbalances, as they can be stimulate economic growth in the medium seen as temporary or at least influenced by and long term: it rather looks like a shop- forces outside the scope of structural poli- ping list. cy, e.g. tax policies. The new NDP for 2007 – 2013 has retained It also means a graduate re-nationalisation similar deficiencies as regards priorities and of regional policy compared to its current the setting of long term targets, even though shape and form, which should be linked to improvements are visible. The recommen- national priorities and managed on the na- dation from this experience is to call for the tional rather than the European level. There initiation of all types of learning schemes are still room for actions coordinated “from that would solve these problems, exam- Brussels” when a particular Member State ples of which could be training provided cannot manage some of its regional prob- by the Commission, setting up networks of lems alone, or when they are making others experts between OMS and NMS, as well worse off. Concerning the general aim of as between the Commission and NMS, to the regional policy, even though national communicate advice and experience. rather than regional convergence seems to be a reasonable approach to us, the ques- tion remain as to which factors stimulate growth and should be prioritised within a 4.5 What should be done? growth-oriented Structural Policy. This is true regardless of whether Structural Policy According to some countries propositions, is managed on regional, national or supra- priorities within the Structural Policy frame- national level. work should be given to regions lagging behind, and in particular, the objective of To answer these questions we start with the cohesion policy should change from reduc- official proposals made by the Polish gov- ing disparities between regions to reducing ernment. They have been presented in many disparities between countries, allowing the documents on economic strategies, but the countries to reduce territorial imbalances most important document is the NDP. The themselves. first draft of the NDP for the period 2007 – 201321 was approved by the Cabinet in In general, this sounds reasonable as, first- January 2005 and subsequently put forth ly, it prioritise Central and Eastern Euro- 21 pean Countries (CEECs) with respect to MG (2005). 70
- 45. 4 Poland andCohesion Policy for further public discussion. In contrast Table 4.3 Financing the Operational Programmes within NDP for 2007 - 2013 (€ million) to the previous Plan for 2004 – 2006, the Horizontal Programmes/Operational Funds document proclaims a diversified and com- Programmes Total* from EU plex set of programmes and actions that tar- Regional Development and Rural Restructuring 65446.1 33542.0 get social and economic reforms. Some of 16 Regional Operational Programmes 39200.0 21000 the activities have to be covered under the OP Regional Cohesion 8994.7 4271.0 OP Trans-border Cooperation 469.3 352.0 ECP’s financial scheme, but the majority of OP Rural Area Development 14641.1 6772.0 policy actions are designed to be financed OP Fishery Sector Restructuring 2141.1 1147.0 solely from domestic sources (central or lo- Technical Infrastructure 36456.6 17787.1 OP Road Infrastructure 27091.5 13013.3 cal government financing). OP Railway Infrastructure 6171.1 4328.3 OP Power Infrastructure 3194.0 445.5 Natural Resources 10120.0 5715.0 The fundamental questions, from the point OP Environment 10120.0 5715.0 of view of directions and targets, set out in Investments in Enterprises 15120.4 7564.5 OP Development and Modernisation 9193.1 4657.0 the NDP, are: OP Research, Hi-tech Technology, Information Society 5927.3 2907.5 • how to reinforce competitiveness and Human and Social Capital 10951.9 5963.9 maintain social, economic and territo- OP Education and Training 5489.3 2767.0 OP Employment and Social Integration 4689.3 2767.0 rial cohesion priorities; OP Citizenship 773.2 429.9 • how to sustain high rate of economic Technical Aid 594.0 445.5 growth; OP Technical Aid 594.0 445.5 138689.0 71018.0 • how to transform the regions in eco- Programmes forTarget 1a) Regions 3466.7 2600.0 nomic and social decline into the Total 152155.7 73618 * Funds from EU + domestic co-financing + domestic financing of other growth poles; programmes + private funds. • what kind of institutional changes Source: MG (2005) should be implemented in order to make Poland a citizenship country with come.22 In this paper, we would like to fo- self-governmental base; cus on a number of other aspects of devel- • how to redefine economic and social opment, which we consider to be the basic priorities into goals and strategies challenges facing Poland in the process of which are much more knowledge and integration into the EU:23 information oriented. • to improve human capital through ba- sic education (primary and secondary The above issues are very broadly defined education), life-long learning oppor- and need to be followed by more strict and tunities for workers, and social related detailed strategies (see Table 4.3 for a de- initiatives; tailed distribution of financial means for • to improve environmental standards; operational programmes). • to improve transport networks; • to build a knowledge based economy Unfortunately, we do not see clear answers through R&D initiatives; to the above problems in the NDP, which • to implement institutional reforms and lacks a transparent vision on the develop- to restructure the budget. ment prospects for Poland. Grosse showed that the NDP lacks a definition of nation- al priorities and suggested that building a 22 Grosse (2005). knowledge based economy should become 23 We return to the question of the knowledge the principal strategic goal for the years to based economy below. 71
- 46. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States At first glance there are similarities with man capital and growth.24 Numerous stud- the priorities defined in the NDP. Howev- ies have focused on positive externalities er, there are also differences in the details, from education and its importance in social which we would like to address here. Some capital formation.25 of the strategic target areas are closely linked to the orientation of the ECP, such as The existence of externalities calls for pub- environmental and transport policies, but lic financing in the education sector, as others, like institutional reforms, are also private agents choose a level of education related to a wider EU policy framework, that is regarded as lower than the socially since they are crucial for improving the optimal level. While it can be regarded as ECP’s effectiveness in Poland. obvious that public financing or co-financ- ing of educational services needs to take We also provide novel insights with regard place on the national level, we would like to policy on human capital formation, in to stress the necessity of supra-national co- particular a proposal for a “Common Eu- ordination of educational services in the ropean Education Policy”. From the view- EU, especially at the primary and second- point of Lisbon Strategy targets, there is a ary levels. We start with a short presenta- need to set priorities for the EU as a whole tion of the characteristics of the education in areas in which there is a role for supra- sector in Poland, and, to some extent, in national authorities to supply European other NMS. public goods—and education is arguably one of the most important public goods. The research conducted by Barry revealed Financing education should then be chan- that educational attainment—the percent- nelled through the Structural Funds in or- age of persons with at least upper second- der to increase the European Added Value ary, tertiary B (diploma level), or tertiary A and reduce market failures in the provision (degree level)—of the population aged 25 of educational services in the EU. – 34 in the late 1990s in Poland was below the OECD average.26 The general opinion that Poles have an insufficient command of 4.5.1 Upgrading skills through foreign languages, such as English, French education or German, seems to us to be true. This is partly explained by the fact that Russian One of the main factors that influence re- was the only obligatory foreign language gional, as well as national, competitiveness taught in most primary and secondary in attracting direct investments is the level schools until the late 1980s. As other stud- of skills of the average worker. The higher ies have shown,27 foreign language skills the educational level in a region, the high- among young Europeans are low: in 2000, er the expected labour productivity in the one and a half foreign languages were eyes of potential investors. That is to say, the localisation decisions of R&D intensive 24 See, for example, Mankiw et al. (1992). industries are strongly linked to the edu- 25 See Temple (2000) or McMahon (2004) for a cational level. Furthermore, the literature review of the literature. 26 on economic growth shows a positive and Barry (2003). 27 significant relation between education, hu- See EC COM (2004). 72
- 47. 4 Poland andCohesion Policy taught per student, but the target set at the to catch up with other European countries Barcelona summit in March 2000 was for 2 and to draw the benefits from integration foreign languages per student. and the world division of labour. A survey conducted by World Bank revealed that the Furthermore, the situation in NMS is worse levels of public expenditure on education than in OMS, as indicated by the overall remained broadly stable in 1995 – 2000 in results of students from NMS, which were the NMS. In 2000 it ranged from roughly much below the OMS average in 2000. 3.1 percent of GDP in Romania, to 6.5 per- PISA studies28 have revealed that 23.2 per- cent of GDP in Estonia and Latvia.30 Bul- cent of students below 15 years of age in garia, Romania, the Czech Republic and Poland showed the lowest level of generic Slovakia experienced particularly severe skills, compared to the EU average of 17.2 declines in this period. percent (in Bulgaria and Romania it was more than 40, in Latvia 30.1, in Hungary However, growth in public expenditure for 22.7 and in the Czech Republic 17.5 per- education in Poland is relatively high (the cent).29 growth in education expenditures has been 36.5 percent since 1995). Unfortunately, When human capital is low, it causes se- this moderate education sector rise is not ac- vere constraints on development prospects, companied by a rise in efficiency and qual- particularly in the case of regions that are ity of education, since a major share of the located outside agglomerations. Limited increase can be attained to a rise in wages. access to education in rural Poland un- The authors of a report on rural education in dermines social cohesion. In the cities the Poland proposed a significant reallocation situation is the opposite; a higher level of of resources within the education sector, as foreign language courses in schools (i.e. well as new public spending over the next 5 more lessons), better access to private edu- to 10 years.31 Indeed, because of the already cational services and higher aspirations of high fiscal burden on Polish taxpayers, they inhabitants, increases the gap in human were convinced that over the long term the capital level between core (the cities) and improvement of Polish education must rely periphery. principally on a better use of existing ex- penditures, in particular the reallocation of There is no doubt that Poland and other resources and also moderation with respect post-communist countries will have to in- to the new spending proposals. crease their investments in education (as a share of GDP) and upgrade skills in order According to the authors of the World Bank 28 report, decentralisation has had a crucial and OECD (2000). 29 often negative effect on the resources avail- Reforming the educational system has been proposed as one of the basic priorities in Joint able at the local level for education.32 The Assessment Papers signed by all Visegrad small size of local governments is leading Countries in years 2000 – 2001.The Visegrad to mismanagement, as there is less potential Countries are the Czech Republic, Hungary, Poland for economies of scale and synergy effects. and Slovakia. The name stems from the Visegrad agreement, taken in Visegrad, Hungary, in 1991, 30 in which the then three (Czechoslovakia, Hungary Funck (2002). 31 and Poland) countries agreed to coordinate their Golinowska et al. (2001) 32 policies with a view to apply for EU membership. Funck (2002). 73
- 48. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States The system also maintains large local dif- ligation to finance basic education—that ferences in access to educational services, poses a problem to self-governments in the since relatively wealthier local authorities CEECs: any attempts at increasing the flex- can finance basic education more gener- ibility of teachers’ employment status and ously than authorities in poorer areas. efficiency of staff management are ham- There is greater dispersion in student assess- pered by a powerful union, The Union of ment results for CEECs than for the OECD Polish Teachers (Związek Nauczycielstwa average and the differences are much more Polskiego). A reduction in the number of linked to inter-school than to intra-school redundant teachers, at all levels, would variation. The greater between-school dif- improve the efficiency of the system. The ferences may be attributed to the decentral- student/teacher ratio in basic education is isation policy within the education sector in low in all the CEECs; in Poland it was 15.4 all the CEECs. School attendance is falling percent in 1997, while the OECD average gradually in rural areas, where families can- the same year was 17.1 percent. However, not afford to cover the costs of transport if the downsizing of staff is problematic. it is not covered by the local communities. As the share of the schooling-aged popu- The problem is especially pronounced in lation is expected to decrease even further the case of secondary and post-secondary in the future, while at the same time the education, since remoteness of schools is teachers’ unsatisfactory employment situa- often a constraint for students and their tion can be expected to remain unchanged, families. As a result, post-secondary edu- major inefficiencies within the system will cation institutions are often under pressure be maintained and the financial situation to operate on a week-end basis and it is in of local education administration will de- these cases unrealistic to maintain a satis- teriorate. The process of establishing a re- factory educational quality. The authors of gional-level management for schools—i.e. another report estimated that young people management on a higher level than the ex- from rural areas constituted about 10 per- isting local level—in order to capture the cent of daily course students at state univer- efficiency gains from economies of scale is sities and about 6 – 7 percent of evening and now highly recommended. The system of weekend course studies—so the number of per student financing, which allows the al- young people from rural areas who decide location to be easily transferred to students to continue their studies at the university who attend schools in other regions, may level is not enough to meet the needs.33 As also be a reasonable solution. The authors the Commission pays considerable atten- of the World Bank report concluded that it tion to the quality of university studies as a was necessary to reorient education so that factor of regional development, we expect it would meet global knowledge needs, on that further actions must be planned and top of an institutional and management re- implemented to ensure equal access to uni- form.34 versities for all candidates. In Poland, where the decentralisation of ed- It is not only the financing of education— ucation was only part of a broader reform of where local authorities are under the ob- the education system, mainly implemented 33 34 FRPR (2002). Funck (2002). 74
- 49. 4 Poland andCohesion Policy by Mr Buzek’s right-wing cabinet, the re- ing of primary and secondary education form of the education system, as in other services. The central financing of teachers’ CEECs, can be seen as a partial success. salaries and school utilities should be main- Local education authorities had to intro- tained and only part of the expenditures duce some unpopular changes, such as the should remain under the purview of local closing-down of many local schools that government. It would help reduce national were dispersed in the rural areas and where differences in education level, but without a the class size was below minimum, but oth- common policy on the supra-national level er rationalisations of the system have still it would not eliminate the uneven situation not been carried out by the central govern- with respect to human capital endowments ment. between OMS and NMS. In our view, even if we assume a steady growth of expendi- The school rationalisation programme has ture on education in NMS, national policies to this day been limited to the consolidation fail to tackle the education sector problems process. A small reduction in employment correctly. has also taken place. Furthermore, the edu- cation path has been changed, new institu- In sum, we strongly recommend that do- tions have settled and others have been mod- mestic education policy should be rein- ified. Children are obliged to start school at forced by a common education policy and the age of 6, which is one year earlier than that that common education policy should before, follow a one-year preparatory “0- be carried out within the framework of Co- class”, then six-year primary school, three- hesion Policy, with similar financial priori- year gymnasium and three-year secondary ties as in environment or regional policy. school, completed by a Matura exam. The For the new Financial Framework, we pro- system contains an external examination pose to reduce the financing of some of the at the entrance of each stage of the educa- horizontal programmes that deal with the tion—pupils must pass the exam to enter policy related to the development of human primary school, gymnasium and secondary and social capital and small and medium school. When secondary school graduates sized enterprises and shift funds to actions holding the Matura certification decide to that stimulate primary and secondary edu- continue their education at the university cation. level, they must pass the exams and fulfil other requirements demanded by the uni- One of the questions which need to be versities. The system is under modification answered is how we should deal with the in order to introduce the commonly accept- external effects produced within the edu- ed Matura certification, which will replace cation sector. Furthermore, since local au- the examination procedure for entering any thorities consider spending on education as institution of the higher education. an investment in human capital, they ex- pect a high rate of return from these invest- The main difficulty in the education sector ments in the medium term. The probability that governments in the CEECs are strug- of attracting new investors into the region, gling with is the increase in differences be- especially R&D intensive FDI, increases, tween schools, especially the gap between since the region becomes better endowed schools in urban and metropolitan areas. with high quality workers. However, until We therefore opt for a universal financ- a critical mass of well educated workers in 75
- 50. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States a specific region is reached, the region will high standards in providing education as a not welcome new investments, resulting in universal service in all regions. an outflow of workers. This phenomenon is called the backwash effect. The problems described above are not con- fined to the national level alone—that is to The labour force will be looking for em- say, to labour flows within a country—they ployment at another location, whether it is apply to the European level as well, since another region within a country, or, when they concern the labour flows within the barriers to international migration fall, EU. Thus, supranational action on the Eu- abroad. The region will be vulnerable to ropean level should be implemented and a the process of negative circular causation, common education policy established with- even if an internationally comparable level in the Cohesion Policy schedule. It seems of the region’s own resources is spent on to us to be a very convincing argument public education. Local governments may that common action in education should be then be pushed to limit public spending on financed “from Brussels” and that an im- education and reallocate expenditures to migration policy, which may improve the less “mobile” assets, such as transport or mobility of workers, should be coordinated public health care infrastructures. with the education policies of each Mem- ber State. A European immigration policy, On the other hand, a region with a high which should be viewed as crucial to em- inflow ratio will benefit from an educated ployment policies, is almost neglected so labour force that is well endowed with hu- far as the European agenda is concerned. man capital. At the same time, the inflow In the words of Professor Tito Boeri, im- region or country benefits from the external migration policy is “a great absentee in Lis- effects generated by the newcomers. As the bon”.35 market cannot estimate education costs and the overall external effects of education, it In order to improve the effectiveness of will not be able to deal with it properly. In public spending on education, strict stand- this sense, the inflow region will not be able ards in education as well as in life-long to compensate the outflow region for either learning procedures and requirements must its education investments or for its own ex- be established. Countries lagging behind ternal effects benefits. Therefore, the gov- in keeping high standards would benefit ernment, or another central agency, must from equalisation grants managed under a intervene. common education policy. To assure higher efficiency of the programmes, the coopera- The policies to be implemented must also tion between central and local government eliminate the free rider problem, which in managing the education sector must be widens national educational differences, much closer than it is now. and the prisoner dilemma. The latter keeps basic educational expenditure on a low lev- Conversely, local governments should be el in the entire country, since no region will freer in choosing the best model of encour- voluntarily supply a public good. We must aging the entrepreneurs to provide life-long remember that education is a public good learning opportunities in a region. As life- and that the government, or the self-gov- 35 ernment, is under the obligation to ensure Boeri (2005). 76
- 51. 4 Poland andCohesion Policy long learning is not vulnerable to the nega- poorer member states are unable to tar- tive backwash effect, there is no room for get their regional problems themselves, actions (national or supranational) under a thus the EU has to provide the neces- common policy of all Member States. In- sary resources; creasing labour productivity through life- • the “external effect” argument—solu- long education should be both directly and tion solving the regional problems (such indirectly subsidised by national govern- as environmental and social problems) ments. Policy actions in this field include: in one Member State will benefit the tax incentives on training for both employ- Union as a whole; ers providing training and for workers or • the “effect of integration” argument— unemployed taking part in training; subsi- when benefits from integration are not dies to public libraries; and tax exemption evenly spread across the EU, a redistri- on subscriptions to professional papers. In- bution mechanism is required to mini- terventions on the European level are not mise the inequalities; needed. According to Lindley,36 generic • the “effect of coordination of other skills usually relate to: policies” argument—similarly to the • communication—literacy; argument above, some countries ben- • application of number—numeracy; efit relatively less from other policies • problem solving; (in particular from CAP and transport • working with others; policy oriented towards the Trans-Eu- • improving own learning and perform- ropean Transport Networks) and there- ance; fore the relative losers should be com- • knowledge of information technol- pensated by EU regional policy tools. ogy—computer literacy. This line of reasoning, i.e. complementing As these skills should be acquired during national and European education policis, is regular basic education (in primary and similar to Lindley’s argument. The authors secondary schools), we believe continuous of this study are deeply convinced that if education would be much more effective if education policy were to be given a supra- students had a sound basic education, so the national perspective—the European Educa- priority should be given to the latter, rather tion Policy, within the ECP framework and than to life-long learning. with its own funds (the “Education Fund”) and supranational coordination—it would There are, however, convincing arguments provide better European Added Value than for managing basic education on a suprana- were management of education to remain tional level, as structural problems in this solely under national jurisdiction, since a field call for international coordination. common coordinated policy would elimi- Martin provides a number of arguments nate some of the market failures. If status for pursuing a two-level regional policy, quo is to be retained it will result in further namely the European and national regional distortion of the labour markets in the EU. policy:37 In sum, similarities between environmental • the “financial targeting” argument—the problems and education problems, which in our view do exist, suggest that both should 36 Lindley (2003). be treated from a similar supranational 37 Martin (1998b). viewpoint and with similar financial tools. 77
- 52. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States The Polish government is rather pragmati- from central or local budget financing. In cally oriented on any aspect of the ECP and Poland, almost one-third of civil society there is no room for a more fundamental organisations’ income comes from public discussion on priorities. In the NDP for funds, while the rest comes from a growing 2007 – 2013, problems related to education amount of contributions and private dona- are almost neglected, but the disparities tions. Nevertheless, a number of the small with respect to access to education, in all NGOs that operate in the field of social CEECs, provide a good argument for hav- welfare are faced with substantial financial ing a broader discussion on the future of the difficulties, despite using available finan- domestic education policy, which should cial, material and organisational resources take place among theoreticians and practi- very efficiently. Several examples exist of tioners. We recommend that the idea of an organisations that have been very success- education policy, managed from both the ful in providing non-governmental safety national and supranational levels, is given nets for the very poor.38 The possibility of consideration in the discussion. obtaining grants makes the pressure on cen- tral budget financing less constrained. 4.5.2 Upgrading human capital through social related initiatives 4.5.3 Upgrading environmental standards In general, enhancing human capital with- in the framework of regional activities is The NMS are obliged to comply with a limited to programmes aimed at combat- number of environment related directives ing unemployment and social exclusion, in order to improve the quality of the en- since—marginal programmes notwith- vironment in their respective countries. standing—not all levels of education fall The rough haft of Cohesion Fund measures into the scope of Cohesion Policy. The and to some extent the Structural Funds experience with pre-accession aid showed (for compliance with the sanitary stand- that discrepancies in targets to be achieved ards in agricultural production and food between EC and Polish authorities seemed processing) will be transferred directly to to be the greatest in the field of social poli- the regions under clearly defined programs. cy. Social problems vary between Member However, the cost of improving environ- States, as there were different opinions on mental protection standards is a consider- how to solve some of the most important able financial burden for central and lo- problems. In other words, there are differ- cal authorities alike. Having said that, the ences in both priorities and in opinions as to benefits from such investments usually the methods that will achieve specific goals. overpass the costs. The World Bank report That is why social policy should be planned revealed that the benefit-to-cost ratio was and managed under a domestic policy. usually greater than 1, although not always and not for all NMS.39 Poland has generally We see, however, some room for Commu- nity initiatives. Community grants could be 38 Reflecting Polish tradition, social aid obtained by the most successful NGOs in organisations tend to be linked to the Catholic the field of social exclusion in order to make Church; see World Bank (2004). 39 the social organisations more independent Funck (2002). 78
- 53. 4 Poland andCohesion Policy experienced a high benefit-to-cost ratio, road density. A lack of major modernisation but a number of improvements with respect and maintenance investments in the past, a to the implementation of the directives on rapid increase in domestic motorisation and waste management should be introduced. a heavy international trucking resulted in higher transportation costs, as transport is The problem of co-financing is experienced slow and unsafe, and congestion on some by all NMS, including Poland, and further roads. Rail transport also causes obstacles difficulties can be expected until other en- to rapid growth and development, since vironmental funds can be established on almost half of the network only fits a low the same basis as the previous funds (funds standard of transportation, i.e. a maximum receive payments from pollution fees and speed of 60 km per hour. charges), as their consistency with the EU institutions are not always clear. From the Concerning the peripherality of the regions, perspective of the World Bank and IMF, Schuermann and Talaat showed that trans- outside-budgetary earmarked funds in en- port infrastructure plays an important role vironmental financing are not encourag- in calculations of peripherality, where pe- ing. These institutions have almost always ripherality is measured as the travel costs asked for the eco-fund to be part of the con- between two points within the overall re- solidated budget.40 gion, weighted by the purchasing power that each point represents.41 According to Additional institutional changes are crucial their paper, the most peripheral regions at for improving the efficiency of environ- present are the Baltic countries, northern mental funding—the consolidation of small Sweden and Finland, Bulgaria and Roma- ecological funds is but one example—and nia. Hungary, Slovenia, the Czech Republic the privatisation of polluting industries in and Slovakia, and the southwest corner of CEECs are recommended. The obligation Poland are no more peripheral than Ireland, that each individual environment related in- Portugal or Spain and less peripheral than vestment should be subjected to a thorough Greece. cost-to-benefit analysis should be institu- tionally implemented. Under the present While deteriorated conditions of the trans- system, such analyses are very often only a port infrastructure call for major invest- recommendation. ments in order to support local develop- ment and growth, attempts at expanding the motorway network too rapidly and to 4.5.4 Upgrading transport standards that are not always economically networks justified have already diverted funds away from maintenance and development, ac- The quality of the road network in Poland cording to the World Bank report.42 is slightly below the CEEC average. The length of roads with European standards The construction of the highway network in for axle loads (11.5 t/axle) amounts to 637 Poland, employing both the Cohesion Fund km, which represents 3.5 percent of the 41 Schuermann and Talaat (2000), cited in Barry 40 See Funck (2002) for additional policy recom- (2003). 42 mendations. Funck (2002). 79
- 54. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States and the Structural Funds, takes up a major regional growth.44 None of the other infra- part of the financial budget for the upgrad- structure investments had a similar impact ing of the transportation system. With re- on regional growth in the EU. The same spect to the financing of such investment relation was tested for data on Polish re- projects, road and highway construction gions during the period of 1989 – 1998.45 may not necessarily lead to regional de- The empirical results confirmed a positive velopment: it may even cause an economic and statistically significant causal relation- slowdown if construction is financed by ship between telecommunications endow- an increase in tax charges. Regional and ments and regional income.46 However, industrial mismanagement can lead to fur- the impact of transportation endowments, ther economic deterioration, which seems as represented by the public road network to have been the case in Italy in the 1980s, density, on income in Polish regions was when regional divergence—the North- not significant and revealed that the role South dualism—deepened.43 played by the transportation infrastructure in promoting national and regional growth Transport costs play a crucial role in in- is ambiguous.47 fluencing industrial location because they constitute a large share of total costs. It is The survey conducted by the World Bank usually assumed that there exists a positive revealed that most of the CEECs continue relationship between transport infrastruc- to finance their motorway expansion pro- ture and regional development and growth. 44 However, the causation of this relation is Martin (1998b). 45 not defined and higher productivity from Cieślik and Kaniewska (2004). 46 transport investments are in many cases The authors proposed that regional income likely to be overestimated. While higher differences could be reduced as a result of government attempts to assure common access to infrastructure investments drive faster telecommunication services across the country, growth, higher development is related to a possibly by means of adopting universal service higher rate of spending on infrastructure. regulations, or sharing the cost of network expansion in the least developed regions. These Martin, using data on infrastructure spend- actions could be complemented by instituting special programmes for the development of ing in the EU during the 1980s and 1990s access to advanced telecommunication services drawn from a project conducted by Biehl, in the least developed regions similar to those demonstrated a high and positive impact implemented earlier in the cohesion countries in of telecommunications endowments on the 1980s and 1990s with the financing scheme under the Structural Funds arrangements. However, given the rather low effectiveness of 43 Cellini and Scorcu (1995). The infrastructure the these programmes and the legal problems investments are considered to lead to a crowding- of the enforcement of universal service out effect when public investments are financed obligations, we think now that a liberalisation of from taxes. In Italy regional policies failed and the telecommunication market is a much more caused even further increase in income differences effective and less costly policy. The improvement between northern and southern regions in the in access to telecommunication services in Poland, 1980s. Cellini and Scorcu tested the relationship especially in rural areas, was a result of a reduction between public spending on infrastructure and of monopolistic power in this sector, and strong economic growth in the 1970s and 1980s in Italy competition on the cellular phones market. 47 and showed that there was a negative correlation Whether it had a negative or positive impact between the variables. depended on the equation specification. 80
- 55. 4 Poland andCohesion Policy grammes by public resources, since the technologically advanced. public-private partnership in this sector has failed. This failure has in turn been the re- Grosse has proposed that Poland should sult of a very weak institutional framework, build a “knowledge based economy” and an almost nonexistent regulatory capacity strengthen competitiveness by aiming for and local financial market opportunities and a rapid growth in R&D, upgrading educa- a risky and unstable economic situation.48 tion and orient policy towards supporting This is especially the case in Hungary and enterprises in technologically advanced Poland, where road network building poses sectors, as well as institutional building in severe financial constrains on the central these fields.50 The Scandinavian countries budget and worsens the budget deficit. Thus, provide a good example of how to become the continuation of the programme calls for successful in this respect, as they caught up prudent economic evaluation, including with the most R&D advanced countries in traffic projection, impact on environment a relatively short period of time. (with the use of costs/benefit analysis), and analysis of the European Added Value of a However, since the human capital and aver- specific infrastructure investment.49 age worker skills endowment is very low in Poland, we assume that such a strategy could only be considered as a long term 4.5.5 Building the knowledge based target. The average level of budgetary and economy – investments in R&D non-budgetary spending on R&D in Poland has been falling gradually from the begin- A detailed analysis of the NDP suggests that ning of the 1990s and is roughly 0.7 per- the Polish government has not been able to cent per annum the last 12 years, far below produce a clearly defined growth oriented the EU average. The aim to increase R&D strategy for Poland. Since economic growth funds up to 1.5 percent of GDP in 2006, and competitiveness of the cohesion coun- which is the strategy for the next Financial tries Portugal and Ireland depended on Framework,51 seems unrealistic. The fall- a strategy of attracting FDI inflows, this ing trend in R&D spending and low com- strategy could also prove to be successful petitiveness of basic research areas have in the case of the Polish economy. Ireland resulted in a low number of submitted pat- succeeded in attracting FDI in high tech- ents and deterioration of terms of trade in nology industries, but most of the FDI in R&D intensive industries. Since Poland is Portugal flowed into sectors that were not a net-importer of high technology intensive products, a radical decision should be taken 48 to change the existing situation. Funck (2002). 49 The Polish Ministry of Transport is going to expand the road network to the eastern In the area of Cohesion Policy in the current undeveloped part of Poland. We think that such Financial Framework, roughly 9 percent of investments do not guarantee high EAV, as weak the funds are dedicated to support sectors economic justification of these investment (road related to High Technology (HT). Poland traffic is dramatically reduced going east of will not build its comparative advantage in Warsaw, its prospects are uncertain as trade with post-soviet countries pose many doubts) and high 50 environmental costs give high cost-to-benefit ratios Grosse (2005). 51 for both Poles and other EU citizens. MG (2005) 81
- 56. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States HT with such a modest financing. However, their future efforts related to creating this novel the R&D policy presented in the NDP rep- instrument of European research policy will be steadfastly supported by the Ministry.52 resents a departure from the Commission’s official statement on R&D policy. The offi- The Polish government wants to increase the cial explanation to the rejection of the EU’s Polish participation in the EU Framework R&D policy is provided on the website of Programme. It proposes to make a number the Polish Ministry of Science and Educa- of simplifications with respect to applica- tion, where one can read that: tion procedures and reductions in project The Polish delegation, in accordance with an size, in order to build an effective public- unequivocal instruction from the Government, private partnership in the R&D area and in- did not support the draft conclusions only be- volve more research institutions. However, cause they were not supplemented by a brief we presume that the discrepancy between reference that Poland had proposed to ensure equal chances of participating in framework the Polish and the Commission’s views is programs for all EU member states. The Polish of a non-financial nature. Even though the opposition to potential inequality of chances is Polish government has confirmed its strong in some statements interpreted as opposition to support for basic research in the new Euro- the proposed strengthening of basic research in pean research policy, basic research is not Europe and to the establishment of the European Research Council (ERC). Taking the above into even mentioned in the NDP. Priority has consideration, I would like to offer the follow- instead been given to commercialised re- ing explanation: 1. Poland has repeatedly high- search53 since, according to the document, lighted the insufficient adjustment of the current only close cooperation between research instruments of European science policy to the institutions and industry can give optimal capabilities of the new member states. The work on the new framework programme provides an results. Certain research fields, such as in- opportunity to introduce systemic changes, and formation technology, must therefore be that was the origin of the Polish proposal to in- given precedence. sert the provision on guaranteeing equitable op- portunity for all member states. Since the pro- This line of reasoning seems to us to be in- posal was rejected and thus did not make its way to the draft conclusions (which constitute gen- correct. Research in general and basic re- eral guidelines for the Commission) at a crucial search in particular is subject to a high risk moment in shaping the future research policy of of failure: since we cannot programme the the Union, Poland could not accept the docu- outcome, the correct strategy would be to ment as a common position of all the member diversify risk by supporting all basic re- states (Council conclusions are adopted unani- mously). 2. Poland supported the theses of the search areas and with the financial tools Netherlands Presidency that became the draft provided by the ECP and the European conclusions. In particular, Poland has actively R&D Policy; not only a few fields chosen and consistently backed from the beginning the for some bureaucratic reason. We are con- expansion of framework programs to include vinced that supporting basic research is a basic research, accommodating also social sci- ences and the humanities. We have also sup- key factor in building future competitive- ported the concept of establishing the ERC, as it is in agreement with the Polish long-standing 52 Please provide reference to the web page and practice of promoting the best researchers and add it to the list of references at the end... allocating funds based on the criterion of scien- 53 It maintains also the post-socialist system tific excellence. Representatives of the Minister of state-owned institutions with central budget of Scientific Research and Information Technol- financing. The system has proven to be ineffective, ogy were co-authors of the ERC concept, and but changes are difficult to implement. 82
- 57. 4 Poland andCohesion Policy ness based on R&D. However, the consid- to the EU budget and to other European and erable differences between the views of international organisations and the Maas- the Polish authorities on the one hand and tricht convergence criteria, the government the Commission’s priorities concerning the has postponed the public finance decentral- EU’s support for research and development isation process. on the other, implies that consensus will not be reached. However, the Polish government is deter- mined to continue the institutional reforms, which aims at strengthening the self-gov- 4.5.6 Macroeconomic and ernmental level of administration. The institutional reforms: reducing idea to implement 16 regional programs central budget deficit and that correspond to 16 administrative units decentralising public finances of NUTS II size and managed by local governments within the Structural Policy As pointed out by Barry, the Irish success framework, was the result of a conviction in attracting export-oriented FDI was a that cooperation between central govern- combined result of both infrastructure and ment and regional self-governments would education investments, financed through be the most successful form of governing in Structural Funds channels and a favourable Poland. Thus, further decentralisation of the macroeconomic environment, above all a administration, fair division of competen- low corporation tax, fiscal consolidation cies between central and local government and flexible labour market conditions.54 In and decentralisation of public finance, in order to increase the effectiveness of Struc- order to provide local authorities with the tural Funds investments, Ireland has intro- necessary financial tools to conduct their duced a set of evaluation procedures that policies, is the task for central and local au- has helped change the way the administra- thorities. tion approaches public expenditure—from a bureaucratic perspective to a more rigor- Poland has proposed to manage, among ous economic evaluation. other operational sectoral programmes (see Table 4.3), 16 regional programs within The Polish government is focusing on the Structural Policy framework with the macroeconomic reforms and sees budget aim of reinforcing regional authorities, as restructuring as a major challenge. The horizontal programming and management budget deficit has structural and permanent are supposed to favour regional economic imbalance on the expenditure side, above development. The general opinion is that all caused by social expenditures. The de- sectoral management softens budget disci- mographic trends—with an ageing popula- pline, since the government is under per- tion, low birth rate, high emigration ratio manent pressure from sectoral lobbies, po- of young people and the highest unemploy- litical parties and other interest groups that ment rate in the EU—put the budget under corrupt public administration representa- serious pressure. In order to cope with the tives. This is especially true for industries accession challenges, such as co-financing with a state-owned dominance, such as coal and pre-financing procedures, contribution mining, railways, power industry, roads and public health care system. Thus, further in- 54 Barry (2003). stitutional reforms are essential in the proc- 83
- 58. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States ess of transforming the Polish economy. The authors of this chapter are convinced that the only way to strengthen local gov- ernments in a situation of permanent budget deficit and predominance of the EU cohe- sion policy over domestic regional policy is a graduate increase of Structural Funds managed from the regional level, from ap- proximately 30% to 50% of all financial sources devoted to structural actions within NDP programming. 84
- 59. 4 Poland andCohesion Policy REFERENCES AGROTEC, et al., 2003, Mid-Term Evaluation of the SAPARD Programme in Poland for the Implementation Period 2000-2003 (PL-7-05/00), Ref.: EUROPEAID/11803/D/ SV/PL, final report, prepared by AGROTEC SpA, IERiGŻ and ASA for the European Commission. Bachtler, J., and Wishlade, F., 2004, Searching for Consensus: The Debate on Reforming EU Cohesion Policy, European Policies Research Paper, European Policies Research Centre, University of Strathclyde, Glasgow, November 2004. Barry, F., 2003, European Union Regional Aid and Irish Economic Development, in Funck, B., and Pizzati, L., (eds.), European Integration, Regional Policy and Growth, The World Bank, Washington, 135 – 152. Boeri, T., 2005, The Perspectives of the Lisbon Strategy, presentation at a CASE conference in Warsaw on 9 April 2005. Cellini, R., and Scorcu, A. E., 1995, How many Italies?, Working Papers, Universita di Bologna, Dipartamento di Scienze Economiche. Cieślik, A., and Kaniewska, M., 2004, Telecommunications infrastructure and regional economic development: the case of Poland, Regional Studies, vol. 38, 713 – 725. Council of Ministries, 2000, Development Strategy Of Renewable Energy Sector, Report for the Council of Ministries, 5 September, Warsaw. European Commission, 2004b, A New Partnership for Cohesion: Convergence, Competitiveness, Cooperation, Third Report on Economic and Social Cohesion, Brussels, February 2004. European Commission, 2005, Adaptation of Cohesion Policy to the Enlarged Europe and the Lisbon and Gothenburg Objectives, Structural and Cohesion Policy Unit at DG-Internal Policies, IP/B/REGI/ST/2004-008. European Commission and European Council, 2004, Education and Training 2010, Report of European Commission and European Council, 6905/04, Educ 43. EMS, 2003, The Independent Interim Evaluation and Monitoring Services of PHARE— Country: Poland, Report prepared by the EMS consortium contracted under the PHARE programme, for European Commission, Enlargement Directorate-General, Brussels. Jouen., M., et al., 2005, Adaptation of Cohesion Policy to the Enlarged Europe and the Lisbon and Gothenburg Objectives, a study requested by the European Parliament’s 85
- 60. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States Committee on Regional Development, January 2005. Faini, R., 1996, Increasing Returns, Migrations and Convergence, Journal of Development Economics, vol.49, 121 – 136 Funck, B., (ed.), 2002, Expenditure Policies toward EU Accession, World Bank Technical Paper No533, Washington Fundacja na Rzecz Polskiego Rolnictwa, FRPR, 2002, Polska Wieś 2002, Warszawa Golinowska, S., Herczyński, J., Levitas, A., (eds.), 2001, Improving rural education in Poland, Report prepared for the Warsaw Delegation of the EC by the CASE Foundation Grosse, T. G., 2005a, Assessment of SAPARD Delivery in Poland, Analyses & Opinions No 30, Institute of Public Affairs, Warsaw. Grosse, T. G., 2005b, Assessment of the National Development Plan for 2007 – 2013, Analyses & Opinions No 31, Institute of Public Affairs, Warsaw. Grosse, T. G., 2004, Narodowy Plan Rozwoju 2007 – 2013—Czy możliwa jest regionalizacja zarządzania?, Analyses & Opinions No 28, Institute of Public Affairs, Warsaw Grosse, T. G., and Olbrycht, J., 2004, Third Cohesion Report of the European Commission—Conclusions for Poland, Analyses & Opinions No 23, Institute of Public Affairs, Warsaw Grosse, T. G., and Olbrycht, J., 2003a, Preparing for the Absorption of the Structural Funds in Poland. Critical Overview and Recommendations, Analyses & Opinions No 7, Institute of Public Affairs, Warsaw. Grosse, T. G., and Olbrycht, J., 2003b, Debate on the New EU Cohesion Policy: Recommendations for the Polish Position, Analyses & Opinions No 10, Institute of Public Affairs, Warsaw. Grosse, T. G., and Olbrycht, J., 2003c, Ocena stanowiska polskiego rządu w sprawie nowej polityki spójności UE”, Analyses & Opinions No 15, Institute of Public Affairs, Warsaw. Kaniewska, M., 2003, European and National Regional Policy. Look at the European and Polish Experience Through Theoretical Framework. An Attempt to Assess EU Regional Policy Reform Concepts, in Szczygielski, K., (ed.), Policy Makers or Policy Takers? Visegrad Countries Joining the EU – Selected Studies, CASE, Warsaw, 29 – 55. Lindley, R. M., 2003, Knowledge-Based Economies: The European Employment Debate in a New Context, in Rodrigues, M.J., (ed.), The New Knowledge Economy in Europe, 86
- 61. 4 Poland andCohesion Policy Edward Elgar, 95 – 145. Mankiw, G., Romer, D., and Weil, D., 1992, A Contribution to the Empirics of Economic Growth, Quarterly Journal of Economics, vol.107, 407 – 437. Martin, P., 1998a, Can Regional Policies Affect Growth and Geography in Europe?, World Economy, vol. 21, 757 – 774. Martin, R., 1998b, Regional Policy in the EU—Economic Foundations and Reality, Centre for European Policy Studies, Brussels. McMahon, W.W., 2004, The Social and External Benefits of Education, in Johnes, G., and J. Johnes (eds.), International Handbook on the Economics of Education, Edward Elgar, 211 – 259. Ministerstwo Gospodarki, 2005, National Development Plan for Poland: 2007 – 2013, Document accepted by the Council of Ministries, 11 January, Warsaw. NIK, 2003a, Informacja o wynikach kontroli pozyskiwania i wykorzystania środków finansowaych z funduszu PHARE, Report of the Polish Supreme Chamber of Control (NIK), Department of Public Administration, December, Warsaw. NIK, 2003b, Informacja o wynikach kontroli przygotowania jednostek sektora publicznego do wykorzystania pomocy finansowej Unii Europejskiej w ramach programu ISPA w obszarze ochrony środowiska w latach 1999-I półrocze 2002, Report of the Polish Supreme Chamber of Control (NIK), Department of agriculture, environment and site planning, April, Warsaw RM, 2002, Rezultaty negocjacji o członkostwie Rzeczpospolitej Polskiej w Unii Europejskiej, Report of the Council of Ministries, 17 December, Warsaw. Schuermann, C., and Talaat, A., 2000, Towards a European Peripherality Index, Report for EC DGXVI Regional Policy. Temple, J., 2000, Growth Effects of Education and Social Capital on Growth, Occasional Papers, Center for Educational Research and Innovation, OECD. UKIE, 2004, Mapa pomocy Unii Europejskiej udzielonej Polsce w ramach programu Phare 1990-2003, ISPA 2000-2003 oraz SAPARD, Department of International Affairs, UKIE, Warsaw. World Bank, 2004, Poland: Growth, Employment and Living Standards in Pre-Accession Poland, Report No 28233-POL, Washington. 87
- 62. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States 88
- 63. 5 Hungary andCohesion Policy 5 HUNGARY AND COHESION POLICY András Inotai and Tamás Szemlér* 5.1 Introduction The Structural and Cohesion Policy has ditionality, section 5.4 describes the chal- for decades been one of the most impor- lenges to Hungarian regional policy, while tant fields in the European integration section 5.5 deals with the possibility of in- process. This policy area has always been volvement of the private sector actors into influenced by major changes, especially structural development projects. In section by enlargements of the European Com- 5.6 we present arguments for a new budget munity/European Union. New members line covering trans-border infrastructure have always meant new challenges in one and environment in the new member states. way or another and Structural Policy was Finally, in section 5.7, we conclude and supposed to meet these challenges. This is summarise the most important Hungarian also—even more than any time before— interests related to the European Cohesion true for the enlargement in 2004, when ten Policy. new members, among them eight Central and Eastern European countries joined the European Union. 5.2 Experiences and background of the use of pre-accession funds New members have their own specificities and, consequently, new needs vis-à-vis Co- In this section, we briefly summarise the hesion Policy. The present paper aims at experiences of Hungary with pre-acces- describing and explaining the needs of one sion EU support—SAPARD, PHARE and of them, Hungary. The paper is structured ISPA—and we also try to provide back- into seven main sections. ground information in order to help the reader to better understand the situation In section 5.1 we summarise the Hungar- in the given field in Hungary. The order in ian experiences with the pre-accession which we present the experiences with the funds. In section 5.2 we discuss the most pre-accession funds does not correspond important past and present problems and to the chronological order—PHARE being challenges related to Cohesion Policy in the first among them—but enables us to get Hungary. These problems are discussed in step by step closer to the very heart of the more detail in the following sections: sec- topic of this paper, namely the European tion 5.3 is devoted to the question of ad- Structural and Cohesion Policy. * The authors are researchers at the Institute for World Economics of the Hungarian Academy of Sciences 89
- 64. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States 5.2.1 SAPARD and the Hungarian than 200,000 applications for financial sup- agriculture port have been submitted in Hungary (in several cases inadequately filled-out and The main controversial issue in connection sometimes even in duplicates), which had with the pre-accession funds was related to to be evaluated by an institution that was SAPARD, where the establishment and the clearly understaffed for the a task. In con- accreditation of the national agency suf- trast, there were only 18,000 applications fered a long delay. Unfortunately, internal in the Czech Republic (with a similar popu- political debates overshadowed the estab- lation size) and 12,000 in Slovakia, which lishment of the National SAPARD Agency is mainly due to the fact that the ownership and this slowed down the process of prepa- structure of agriculture did not undergo the ration. As a result, in the first two years of ideology-driven and past-oriented transfor- SAPARD, Hungary was able to access 0 mation experienced in Hungary. percent of its potential share (€38 million a year in 1999 prices), while in the third The problems surrounding SAPARD (and year, after essential steps had been taken by in the first year of membership) are rooted the new government, the share of absorbed in the general structural problems of the transfers grew to 40 percent. Hungarian agriculture. The performance level of the related institutions is just the However, the improvement did not result in tip of the iceberg. EU funds (also available a rapid catching up in using funds available for rural development) can be helpful in the for the country. The institutional system, rapid and future-oriented restructuring proc- although finally in principle correspond- ess. The key barrier, however, remains the ing to the requirements of the Commission, irresponsible behaviour of some domestic was not able to deal with support claims political actors and the outdated and partly of farmers in the second half of 2004. The consciously contaminated mentality on the slowness of the process resulted in mani- part of the farmers, most of them with no festations of agricultural producers, partly chance of attaining competitiveness. also backed by some political parties and movements. In brief, in the early spring of 2005 it seems that the institutions and the 5.2.2 PHARE: from multi-objective communication devoted to facilitate the use aid to preparation for membership of EU transfers in the field of agriculture are still unsatisfactory. This has, of course, At its start, PHARE support was focusing long-term explanations as well. on providing the financial framework for Hungary’s solvency, due to the high level While the Polish agriculture despite expec- of external indebtedness at the moment of tations to the contrary seems to have ben- systemic change. Later, in the first half of efited from membership in the CAP, the the 1990s, it was aimed at offering techni- Hungarian agriculture had to face a serious cal support in the privatisation process, with crisis, not so much on the production level the establishment of market-economy insti- as on the political level. Beyond the politi- tutions and legal background and the train- cal and institutional problems the fragment- ing of public administration. The amount ed ownership structure can also be made re- of money channelled into the real restruc- sponsible for the evolving situation. More turing and regenerating the growth proc- 90
- 65. 5 Hungary andCohesion Policy ess, if any at all, was minimal. All PHARE environment projects concentrated on water resources were planned on an annual base, and waste water management, water supply which deprived this instrument the possi- and waste management, while in the field bility of becoming a meaningful factor of of transport infrastructure, the development sustainable transformation. Moreover, ad- of main international railway lines and the ditional international financial resources enhancement of the load-bearing capacity (e.g. World Bank credits) were not allowed of main roads have been financed. to be combined with PHARE money. One negative experience in Hungary with The situation changed substantially in the ISPA was the EU’s reluctance to co-finance second half of the 1990s, mainly by means major highway projects and instead prefer of a prolonging of the planning period and railway modernisation. This approach was by facilitating the support to multi-annual based on Western European experience but projects. Also, as a result of internal restruc- not on the reality in NMS. One can only turing of the PHARE resources, more mon- speculate about the background to this posi- ey became available for key economic de- tion (environmental lobbies, fear of compe- velopment objectives (e.g. infrastructure). tition from NMS, etc.). To tell the full truth, The change in the PHARE strategy since the 1998 – 2002 Hungarian government 1998—concentrating on issues directly re- aggravated the problem by denying public lated to EU-accession—has substantially procurement for highway construction, ac- improved effectiveness and also the rate of cording to EU competition rules. use of PHARE funding in Hungary. The use of PHARE support in Hungary from 1998 This experience was an important step in is shown in Table 5.1. the learning process in the phase of prepa- ration for membership. It made clear that Table 5.1 PHARE resources EU regulations had to be respected, and and local co-financing absorbed by Hungary 1998 – 2003 that there were no alternative “individual (€ million) solutions”. For most of Hungarian ISPA Programming PHARE Local projects—which, with accession, have been year and CBC co-inancing Total transformed into Cohesion Fund projects— 1998 93 134.7 227.7 no institutional problems arose. The total 1999 128.6 96.5 225.1 2000 119.7 96.5 216.2 value of Cohesion Fund projects—includ- 2001 108.8 69.7 178.5 ing new projects—for the period 2004 2002 120.7 78.3 199 – 2006 is roughly €1 billion. 2003 120.7 73.6* 194.3 TOTAL 691.5 549.3 1240.8 * Indicative figure The story of the use of ISPA in Hungary is Source: http:www.nfh.hu/ a clear proof of two issues: 1. EU support can be highly successful if 5.2.3 ISPA: preparing for the it really concentrates on key economic Cohesion Fund development priorities of Hungary;1 1 In the case of ISPA, Hungary was able to The modernisation of transport and environmental infrastructure is clearly an important part of these cover its envelope entirely with projects priorities. We will return to a specific aspect of (the average yearly amount of potential EU it—the need for developing trans-border infrastruc- support was €88 million in 1999 prices): ture in the new Member States—in section 4.7. 91
- 66. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States 2. in such a case, the absorption capacity was approved until 2006, not least because of the country is very high. the Commission would have had capacity problems if it had had to work with dozens Therefore, when estimating the “absorp- of new and inexperienced regions. An addi- tion capacity” of a country (or region), the tional motive for the Commission to agree nature of the project may have crucial im- with the national approach until 2006 was portance, let alone the bureaucratic hurdles that it really wanted to have a quick suc- on the EU side, which should also be ex- cess with the absorption of the available re- amined, for the “absorption capacity”. The sources in the first and really critical years EU’s “absorption” capacity—or adjustment of membership (also due to the low level capacity, i.e. the definition of key areas in of resources, the bureaucratic procedures, the NMS to be supported and the bureau- etc.). cratic procedures—definitely have a (nega- tive) impact on the absorption capacity in In light of the debate on the 2007 – 2013 Fi- the NMS. nancial Framework as well as of the prob- lems related to the NUTS II level in Hungary (see point 5.5.2 for details), it is especially 5.3 Past and present problems interesting to see whether this situation will and challenges change after 2006. Until now, most Opera- tional Programmes were regional and, in Structural and Cohesion Policy—and es- fact, the National Development Plan was pecially the financial instruments available also in many cases called National Region- for the new members for it—was one of the al Development Plan. Such an approach— most debated issues during the accession an approach focusing on the regions—was negotiations. After accession, challenges expected to apply also for the new Member related to the use of available support came States after 2006. But in the recent debates to the foreground. on the future Cohesion Policy the question often asked is whether it would be better to focus on the national level rather than con- 5.3.1 Debates during the accession tinuing with the present practice.2 negotiations Potential effects on efficiency of the pol- During the accession negotiations, the most icy are under heavy discussion. From an important debates concerning Cohesion administrative point of view, the interests Policy in the period 2004 – 2006 were of mentioned on the EU side for the period financial nature and were therefore dealt 2004 – 2006 will probably persist; with the with as part of the final financial package. prospect of further countries joining the EU, these arguments will become, in fact, Like many other new Member States, even stronger. For the new Member States, Hungary was very much interested in the this approach can have different effects. possibility of elaborating Operational Pro- Hungary is surely one of the members in grammes on the national level instead of which an expressed focusing on the region- regional operational programmes, due to 2 The suggestion was also present at the first pro- missing traditions and administrative ca- posal of the European Commission for the 2007 pacity at NUTS II level. This approach – 2013 Financial Framework (COM 2004). 92
- 67. 5 Hungary andCohesion Policy al level is hardly conceivable in the present paradoxically, it will be the presence (and circumstances. It means that for Hungary, availability) of the EU resources that will the relatively centralised structure of Op- force the Hungarian budget to be funda- erational Programmes would be—from mentally restructured in the first period of a purely administrative point of view—a the new budgetary framework.3 better solution, regarding the present (under)development of the sub-national en- For the next financial period, the following tities. This, of course, does not mean that issues must be tackled in this respect: it is the best conceivable solution. With a 1. continued restructuring of the budget well elaborated regional policy, with clear in order to meet co-financing and addi- responsibilities on the different levels as tionality criteria; well as with a reinforcement of the potential 2. strengthening human, administrative (finances, human resources) of the regions, and financial capacity of NUTS II re- the specific problems of the regions could gions; probably be tackled more efficiently. 3. involving the private sector into devel- opment projects more intensively, as Similarly to other new Member States, well as strengthening cooperation with Hungary was interested in a higher share of municipalities. the Cohesion Fund within Structural Policy transfers. One reason is the already men- We discuss these three issues in the subse- tioned weakness on the regional level, an- quent sections (sections 5.4, 5.5 and 5.6) of other one is the relative overall underdevel- the chapter. opment level of the country, making coun- try-level infrastructure development meas- ures necessary, and the third reason is the 5.4 The need for re-structuring more favourable co-financing regulation of the budget the Cohesion Fund. We can also note that ISPA provided a good model for the use of Re-structuring the budget is an important Cohesion Fund support and the experiences task to be done in order to be able to absorb with ISPA (mentioned under section 5.2.3.) potential EU structural and cohesion sup- can make it easier to use than Structural port.4 In this respect, however, the present Funds transfers. situation is characterised by poor circum- stances for a substantial reform, influenc- ing short and medium term prospects. 5.3.2 Challenges after accession The restructuring of the national budget will allow Hungary to fulfil co-financing and additionality requirements until the end of 2006. With probably much larger 3 A comparison can be made with respect to the amounts of transfers, the task will be more experience of Portugal in 1992 – 1993. 4 It is important to note here that restructuring the difficult—but not unfeasible—from 2007. budget is necessary for other reasons as well. The We should seriously consider the addition- regulations of the Cohesion Policy (notably addi- al pressure on the Hungarian budget due to tionality) can play the positive role of a catalyst in enhanced EU resource flows. Seemingly this respect. 93
- 68. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States 5.4.1 Lacking solid background for tures covers interest payment); reform 4. there has not been an honest dialogue with the population, how reforms would One of the key challenges not only of ab- affect the society, and why reforms are sorbing EU resources efficiently, but also of necessary and, at the end of the day, a a successful Hungarian membership in the positive-sum game; enlarged integration process, comes from 5. resistance in large part of the society, the situation and structure of the budget. mainly generated by demagogy and There is widespread professional consen- populism, and in the interest of narrow- sus concerning the need of fundamental minded party politics, is evident (see reforms, both on the revenue and the ex- the story of the partial privatization of penditure side of the budget. Unfortunately, the absolutely outdated, run-down and the years of sustainable and high growth capital-poor health sector); and, last but following 1997 were not utilised as a way not least, to start this process. Just the opposite, the 6. the critical (and in this case, relevant) previous 1998 – 2002 government did not mass of consensus between government start any major reform (in turn, even the and opposition is farther away than at rules of the game of the previously initiated any time in the past. pension reform were changed). The current government became hostage of its (partly populist) promises, which could hardly 5.4.2 Short and medium term have had a positive impact on budgetary re- prospects forms. However, they may have increased the pressure on urgent reforms. Still, there Short term budgetary corrections are of no are substantial barriers or question marks help or may even backfire. Generally those concerning the timing and viability of such expenditure items will fall victim of the reforms: “corrections” where no organized social 1. within one year, Hungary will have par- protests are expected, where the lobbying liamentary elections, a rather unfavour- activity is low and where there is a lack of able external condition for starting key “demonstration effects” from represented reforms at his particular moment (even interest (i.e. no strikes, no occupation of if they were urgent); roads, etc.). As a result, the only reserves 2. there is no well-elaborated reform pack- of the country for a sustainable and future- age (benefits and costs, the distribution oriented growth, i.e. expenses in human of both elements in time and across resource development, have regularly been business and social sectors) in the gov- curtailed (education, research and develop- ernment’s pocket; ment and partly also health care). The Hun- 3. as a fundamental precondition of sus- garian budget, as that of other major Cen- tainable long-term reforms, the mutual tral European countries, faces a threefold confidence and cooperation between and “overlapping” challenge: the fiscal and the monetary authorities 1. to restructure the budget for its internal is missing (the interest rate policy of the unsustainability and reduce the current National Bank of Hungary is partly re- GDP-related budget deficit from above sponsible for the level of budget deficit, 5 percent to 3 percent in a few years; since a large part of budgetary expendi- 2. to keep on (or start) financing future- 94
- 69. 5 Hungary andCohesion Policy oriented factors of sustainable com- sources between the Structural Funds and petitiveness, including the catching-up the Cohesion Fund enlarges the room for process to more developed EU Member manoeuvre in this respect. States; 3. to cope with the criteria of EMU mem- Such an approach would exercise external bership and the introduction of the Euro pressure on Hungary in order to meet the still in this decade (in 2010, according Maastricht criteria, especially those con- to the current official Hungarian posi- cerning public deficit and debt ratios meas- tion). ured as a percentage of GDP. Such a pres- sure is in the long-term interest of the coun- Most probably, major budgetary reforms try, even if the steps to be taken in the short need a clear sequencing, since not all areas run in some cases can be painful. However, can be addressed at the same time and with the resulting loosening of co-financing re- the same level of intensity, such as educa- quirements could ease this situation, help tion, health, regional, institutions and tax the use of Structural and Cohesion Funds policy, to mention but a few of the most transfers as well as meeting the Maastricht important fields. Moreover, some “holy criteria (a lower rate of co-financing means cows” should be revisited, including the less burden on the national budget). 30 percent national contribution for direct payments to the farmers. This figure is not 5.5 Regional policy challenges carved in stone, it could be even lower if economic conditions allowed. In fact, it and problems of the regional could be lower, looking at the requirements classification of competitiveness of the Hungarian agri- culture, but the issue is an eminently politi- In this section we present the main features cal one. of territorial inequalities and regional devel- opment in Hungary. Heritage can provide In this situation, a loosening of the co-fi- help in understanding actual problems with nancing restrictions could, of course, be regional classification in general and one of advantageous for Hungary (although as the most debated concrete issues—the fu- stated under section 5.3.1, the task is fea- ture of Central Hungary—in particular.6 sible according to present regulations as well). However, it would not mean “un- conditionality”. An interesting alternative 5.5.1 Regional policy challenges would be to enhance macroeconomic sta- bility requirements while loosening co-fi- In order to understand the regional devel- nancing regulations. The roots to this idea opment in Hungary after 1990, it is neces- were present in the original objective of the sary to know the situation before the be- Cohesion Fund; and this approach could be ginning of transformation. The territorial broadened to all Structural Policy instru- changes in the country during the 20th cen- ments.5 The possibility to shift financial re- tury have influenced the regional develop- 5 ment considerably: these changes (after the Weise (2005—to be published) tackles the pos- sibility of using macroeconomic stability criteria as 6 an additional requirement for providing structural For more details on Hungarian regional policy, and cohesion support for the recipients. see Horváth–Illés (1997) and Horváth (1999). 95
- 70. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States First World War, then reconfirmed after the problems is a precondition. Second World War) meant the end of their organic links for several territories near the During the time of the centrally planned new borders of Hungary. As a result, these economy, the economic policy (concen- territories have become peripheral, and a trating on industrialisation, especially on centre – periphery problem has emerged: heavy industry), could not find solutions to due to its population and its importance as the long-run regional problems. Regional an economic centre, Budapest has become development based on centralised direct the only outstanding centre of the country. methods and often for reasons of political nature, not leaving space for local initia- Emerging regions, as the result of a de- tives, proved to be unsuccessful in the long- cade-long sustainable development fol- run, as was clearly shown by the economic lowing 1867, became separated from Hun- problems already before the beginning of gary (Bratislava, Kosice, Cluj, Subotica, the transformation process. This kind of de- Timisoara, Brasov, even Zagreb), and, as velopment policy was not able to cope with a result, bottom-up regional develop- the double challenge of fighting overall un- ment and “regionalisation” came to a halt, derdevelopment and regional inequalities. or was even reversed. The new borders were drawn without taking into account Regional economic inequalities remained the physical infrastructure, consciously (and in some cases have become even more planned and developed for the needs of a accentuated) in the 1990s. For the begin- large empire (major railways and road con- ning of the 2000s, in terms of GDP/head, nections happened to belong to the neigh- the data characterising the most developed bouring countries). Key centres of human region (Central Hungary) was more than resource building (universities, technical the double of that of the least developed schools) were separated from Hungary regions (Northern Hungary and Northern (university of Kolozsvár mainly had to be Great Plain).7 The centre–periphery prob- relocated to Szeged, geological and mining lem have been aggravated in the first years high schools of Slovakia to Miskolc, etc.). of market economy: the poorer and also Finally, the rationale of division of labour infrastructurally underdeveloped territories in a rapidly growing and catching-up “mar- were not able to compete with the econom- ket economy” was not only questioned but ic possibilities offered by Budapest. destroyed. Autarchic, inward-looking de- velopment with high economic, social and Foreign direct investment, playing a key political costs had to be the consequence. role in the economic modernisation of It is the EU membership that offers a new Hungary, looking for the best investment opportunity to link together what belongs possibilities, also contributed to the in- together (in the words of Willy Brandt, “es crease in regional inequalities. Beyond the wächst zusammen, was zusammengehört”). centre–periphery problem, East–West dif- Moreover, EU membership is expected to ferences have become stronger. Especially reduce the one-sided (heavy-weight) de- territories lying along the Vienna–Budapest velopment of the “centre” and mitigate the axis or near the Austrian border have expe- contradictions between the “centre and the rienced a rapid development, partly due to periphery”. Evidently, a reasonable and future-oriented solution to the agricultural 7 See chapter 2 for empirical data. 96
- 71. 5 Hungary andCohesion Policy the interest of foreign capital. Among other lids”); factors—relatively well developed or rap- 3. those who became “entrepreneurs” idly developing infrastructure, availability (one-person businesses), having no oth- of qualified and cheap labour force—the er choice to have a job—whether their neighbourhood of the EU market was an activity is/was sustainable or not. important motivation. The appropriate labour market policy has Under market economy circumstances new to be diversified, since these groups have problems that were unknown in the previ- different motivation to stay in or give up ous decades of centrally planned economy their current position. There is, however, no have surged as well. The most important doubt, that at least the partial reintegration one is unemployment, where—according of this “idle” workforce is a basic condition to difference in regional development—re- of increasing the Hungarian absorption ca- gional inequalities are considerable. Most pacity both of EU resources and of Hungar- of the territories severely hit by unemploy- ian instruments. ment are in Northern Hungary and in the Northern Great Plain region. The problem Beyond persisting or even increasing re- is aggravated there by the fact that the ac- gional inequalities, (relative) overall un- tivity rate of the population is much lower derdevelopment has also remained a major than the already very low national average. problem, especially in light of the prospects Labour market inequalities are reflected in of EU accession. National and regional de- the regional differences in wages as well. velopment policy (as in most countries in According to official figures, Hungary has Central and Eastern Europe) has to deal the lowest level of registered unemployment with both problems. among all new member countries. Its figure of slightly over 6 per cent is much better The changes since the beginning of the than the EU average and is in the range of 1990s pushed regional policy to the fore- the old EU countries with the best perform- ground in Hungary. This is reflected by ance in this context. At the same time, Hun- several changes presented in Table 5.2 (see gary indicates the lowest level of economic next page). These changes—especially af- activity of the working age population, ac- ter 1996, with the adoption of the Law on cording to OECD figures. There are about Regional Development and Land-use Plan- 1 million persons in the age group between ning (XXI/1996)—meant important steps 18 and 65 that have practically disappeared in the direction of being compatible with in the first decade of transformation. The EU requirements. question of how these people can be inte- grated into the official labour market is a Despite the considerable development ac- crucial economic and social policy issue. In knowledged by the EU itself, in a number principle, there are three major groups to be of aspects—way of financing, scales of di- addressed: rect financing, dominant element of the im- 1. those who have returned to household plementation, dominant favoured sectors— activities; the degree of EU-compatibility remained 2. those who decided to benefit from—in low. Beyond this, some practical questions, Hungarian terms—generous early re- in particular concerning the (re-)definition tirement schemes (including “inva- of the borders, competencies and resources 97
- 72. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States Table 5.2 Transitions of Hungarian regional policy at the end of the 20th century Bureaucratic Transitory Decentralised Degree of EU- The policy’s (1985 – 1990) (1991 – 1995) (1996–) compatibility Aim Equalisation Equalisation Restructuring Medium Moderation of the negative Object Underdevelopment Underdevelopment Medium effects of the market Target group Underdeveloped region Underdeveloped settlement Problem region High Earmarked provision for Regional Development and Regional Development Fund, regional development, Tools Medium Organisation Fund, planning projects additional resources, programming Way of financing Centralised Centralised Decentralised Low Form of incentive Automatic Discretionary Discretionary Medium Dominant element of the Local government of the County council Regional Development Council Low implementation settlement Effect on developments Isolated Isolated Integrative Medium Manufacturing, business Dominant favoured sectors Industry Infrastructure (gas, telephone) Low services, innovations Population concerned 4% 17% 29% Medium Scales of direct financing 0,05% of GDP 0,2% of GDP 0,3 – 0,5% of GDP Low Source: Horváth–Illés (1997), p. 95 and Horváth (1999), p. 112. of the NUTS II units, are to be solved as gions consist of 3 (in the case of Central well. Hungary, 2) counties (NUTS III units), and why region borders coincide with county borders: statistics can be obtained relative- 5.5.2 The problem of NUTS II ly easily by aggregating county statistics. It regions also means that reflections on the internal cohesion of the regions to be created did The definition of regions in Hungary has not have an important role in their formula- caused different problems on different lev- tion (the case is just the opposite in Poland: els. The 20 NUTS III regions correspond to there the objective was to set up organic the counties (+ the capital); this definition regions, but, as a result of the boundaries has a long tradition in the country. The def- of the 16 NUTS II units, statistics are hard inition of the 7 NUTS II regions—having to produce backwards). There were debates no historical traditions—has been a much concerning Northern Hungary and more difficult task. NUTS III and NUTS Northern Great Plain, but for today, the II regions are presented in Figure 5.1 (see only big debate is on Central Hungary next page). The distribution of competen- (we discuss the issue in section 5.5.3). cies is a difficult task on both levels. The introduction of a new intermediary NUTS II regions were first defined in 1998 level of public administration—the NUTS by the National Territorial Development II regions—is “suspicious” both from the Concept. The regions created were the so- point of view of the central public adminis- called territorial-statistical regions, as the tration, which is the strongest actor in terri- first objective of their creation was to pro- torial development and the counties, which duce EU-compatible statistics at NUTS II fear to lose even the competencies they level. This is the main reason why the re- have now. No wonder that until now the 98
- 73. 5 Hungary andCohesion Policy Figure 5.1 Hungary - NUTS II boost the economy of and NUTS III regions Borsod-Abaúj- the bordering Hun- Zemplen Szabolcs- garian regions; Nógrád Szatmár- the effects will Bereg Györ- Heves probably be Komárom- Moson-Sopron Esztergom Hajdú- different at differ- Budapest Bihar ent borders, but also Pest Jász-Nagykun- Vas Veszprém Szolnok according to counties Fejér within a given NUTS II region. The Northern Zala Bács- Békés Great Plain and the South- Tolna Kiskun ern Great Plain regions will Somogy Csongrád remain—until the EU-acces- sion of Rumania—without inter- Baranya nal EU-borders; this can contribute to accentuate even more the already exist- ing regional differences.8 NUTS II regions have remained pure ter- ritorial-statistical units. Although some ad- The fact that all Hungarian regions bor- ministrative bodies have been set up at the der neighbouring countries, should call new regional level, their competencies and attention to the high priority of cross-bor- the financial instruments available for them der cooperation, i.e. how national devel- remain very limited. For the next Financial opment plans related to the given region Framework, it is crucial to change this situ- can, from the very beginning, be combined ation—it is even more important than the with similar national development plans to question of the borders of Central Hungary, be elaborated for the given regions in the mentioned above. neighbouring countries. In this context, it is extremely important to look at the develop- The 7 NUTS II regions have a common ment level of neighbouring (cross-border) feature that they all have external borders. regions, since it substantially influences the Not taking into account Central Hungary, growth capacity of the whole area and de- these borders are relatively long. However, fines the best way of allocating resources. as the NUTS II regions created in 1998 are At first glance, three different patterns can not a result of a traditional regionalisation be outlined: process, the effects of the borders can be 1. developed regions on both side of the very different in different counties within a border (development level can be simi- given NUTS II region. Of course, it is not 8 In this case, relatively underdeveloped Hungarian irrelevant what kind of external borders regions will cooperate with relatively well-devel- the regions have. Before 1 May 2004, only oped (but in absolute terms even less developed) Western Transdanubia had a common bor- Romanian regions. In such cases, the importance der with the EU. With the accession of Hun- of EU support is more crucial than in general, and gary, the situation changed: the Hungarian the tasks of the regions are more difficult as well: first of all, absorption capacity has to be developed – Austrian, the Hungarian – Slovene and the in these regions in order to give them chance to Hungarian–Slovak borders have become realise the multiplier effects of development pro- internal EU borders. This will probably grammes 99
- 74. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States lar or different, but still “developed” as difficult. For the future of Central Hungary, compared to other regions of the given three basic scenarios can be imagined. country); 2. bordering of developed and less-devel- Scenario 1: Central Hungary, including Bu- oped region; dapest, loses its position as an Objective 1 3. underdeveloped regions on both sides region after 2006 (due both to growth and of the border. statistical effects). As a consequence, big intra-regional differences remain, the un- These patterns can be complemented by derdeveloped environment of Budapest the growth factor (high- or low-growth also hinders the development of the capi- developed or underdeveloped regions). As tal and disparities remain or become even a result, an interesting matrix can be cre- stronger, not only between Budapest and ated for further consideration of the poten- Central Hungary, but between rural Central tial implications for regional development, Hungary and other Hungarian regions that cross-border cooperation and “best practice will keep utilising EU resources. In this instruments”. scenario, three positive solutions are con- ceivable: a) long phasing-out period for the whole 5.5.3 The dilemma of Central region after 2007; Hungary b) creating a special category (there is interest in such an option in some old In the case of Central Hungary, the main member countries, facing similar prob- reason of the debate is that Budapest “dis- lems); torts” the indicators of this region. In 2003, c) use a mixed structure of regional fund GDP per capita in Central Hungary was plus R&D, human resource, etc. bas- about 90 per cent of the EU average. The kets. capital itself was far over this level, while the county Pest—being part of Central Hun- Scenario 2: taking out Budapest from Cen- gary—was still well under the 75% thresh- tral Hungary, making it a NUTS II region old that, without Budapest, would make it of its own. In this case, Budapest does not eligible for support under Objective 1 of benefit from Objective 1, but the remainder the Structural Funds after 2006. of the present Central Hungary will benefit from it for a long period (provided EU rules Leaving Central Hungary as it is could remain the same). The solutions to the con- lead to the loss of a considerable amount sequences of such a situation could be the of Structural Funds transfers for the county following: Pest after 2006. There are some possible a) rapid development of the regions around solutions to this problem; the most prob- Budapest, with indirect but important able one is to make Budapest—or Buda- multiplier effects for the capital; pest with its agglomeration—a NUTS II b) decreasing intraregional cleavages; region, and to add the county Pest to an al- c) new sources for the development of Bu- ready existing NUTS II region (probably to dapest (see Prague); Northern Hungary). However, the question d) Budapest may have a lower growth path has for long been the subject of political de- in the first years (it has to be sold politi- bates and it makes the solution even more cally); 100
- 75. 5 Hungary andCohesion Policy e) stronger reliance on additional money information on these possibilities. In order for Budapest (EIB loans to urban trans- to have up-to-date information, they should portation and housing rehabilitation); strengthen their contacts with regional and f) designing Cohesion Fund money to in- central authorities. They should continu- volve Budapest (environment, partly ously follow actual announcements and physical infrastructure). tenders and disseminate information about them to the potentially interested local part- Scenario 3: taking out Budapest, and bring ners.9 the rest of Central Hungary into another Hungarian region. It is theoretically possi- The grade of involvement of the private ble, but the economic rationale for such a sector in development projects is generally solution would be hard to explain. hard to predict.10 In Hungary, as in many other countries, public-private partnership According to the latest Commission sur- (PPP) has become a very fashionable no- vey, two of the four regions in the enlarged tion. However, there are also debates about EU with the highest growth prospects are the possible extra costs of such solutions: located in Hungary (Central Hungary and opponents say that, in the long run, invest- Central Transdanubia). It means that what ments may be more costly for the state (and matters is not only the current level of in- thus for the citizens) this way. On the other come per head, but also the growth poten- hand, it has to be seen that private sources tial of the selected regions. must play a key role in assuring the nec- essary own contribution to the (partly) 5.6 Involving potential EU-funded development programmes; if this contribution is not assured, part of the participants: the private sector potential EU financing may be lost—costs and the municipalities and benefits of the PPP construction must also be regarded in this respect. The basic principles of EU structural poli- cies—concentration of financial resources, The Hungarian government is conscious of programming, partnership, additionality this and supports PPP in a number of fields, and efficiency—have to be applied in the where investment requires a high amount whole process of national regional policy- of financial resources. A special field where making. A key issue is to get the most po- PPPs can play an important role is the ac- tential actors to become involved. celerated construction of physical infra- structure. In order to be able to realise the It is very important to emphasise that while potential gains from its favourable geo- most of the rules of the game are centrally graphical location, Hungary needs a mod- decided—on EU or on Member State lev- ern and well-functioning transport network, el—local initiative is crucial from the point and rapid modernisation and development of view of the successful use of the pos- is inconceivable without the involvement sibilities provided by EU transfers. The at- of private capital. titude of local governments can be decisive in this respect. Local governments as well 9 For more details, see Szemlér (2001) as NGOs can encourage local initiatives by 10 Szemlér (2004) provides some empirical evi- collecting, disseminating and explaining dence from the former GDR. 101
- 76. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States 5.7 The need for a new budget the Eastern border of the EU has to be line: trans-border infrastructure drawn: geographic, political and cultur- al considerations may imply different and environment in the NMS frontiers. 2. All North-East and Central European Infrastructure development is a key is- new members (eight together) have sue in Hungary, with special emphasis on common continental borders. transport infrastructure. Given its specific geographical situation—at the crossroads The above two conditions, with substan- between East and West, and also North and tial and still not recognized relevance for South—Hungary needs a highly developed the future of Europe, urgently need a re- infrastructure in order to be able to realise visiting of the basic principles of the EU the potential gains from its location. These budget. Thus, the budget should immedi- gains, of course, could be felt in the whole ately create a new item, called “financing enlarged EU. of trans-border infrastructure and environ- mental projects in Central-East-South-East It is also important, especially from the Europe”.11 Such an approach would have a last argument of the previous paragraph, number of advantages: that infrastructure development in the new 1. it would be a clear political message to Member States is coordinated: from the EU not-yet-member countries that they are point of view, gains can be realised if actions not forgotten, just the opposite, may do not end at national borders. Hungary is participate in some of the projects; therefore interested in an overall Central 2. it would avoid inefficient use of EU and Eastern European transport infrastruc- transfers for national prestige projects ture development priority of structural op- that have little to do with the priority erations. The region desperately needs not of trans-border infrastructure develop- only the extension of West-East routes, but ment; the creation of genuine “arteries” for itself, 3. it would, within a very short period, ex- both in North-South and Southwest-North- ert a positive growth-enhancing impact east directions. on business, both domestic, regional and all-European, since just the Hun- garian case demonstrates that there is a Beyond a number of other “special” fea- close correlation between the geograph- tures, the EU’s enlargement to the East ic concentration and spread of business (and the Southeast) has two strategic impli- activities and the development of physi- cations rooted in the geographic conditions cal infrastructure (mainly highways); of Europe. 4. perhaps most importantly for the EU 1. The most recent (and coming) enlarge- budget, this approach seems to offer the ment did not result in EU reaching its only instrument that could prevent nar- geographic boundaries to the East (all row-minded and selfish “bargaining” previous enlargements, with the ex- in the negotiation process of the 2007 ception of Austria and Denmark, wid- – 2013 budget. Any meaningful reori- ened the Union’s map up to the clear geographic frontiers of the continent). 11 For further details on this idea, see Inotai Moreover, we really do not know where (2004a). 102
- 77. 5 Hungary andCohesion Policy entation of the resource flow from old sion Funds, that would alleviate the co- to new beneficiaries needs a separate financing pressure on the budget of the objective, for its nature and contents, NMS. This trans-border infrastructure mainly available for new members; and, objective would fall into the category of finally, Cohesion Fund; 5. such an approach would serve the inter- 2. the money available under this heading est of most net contributing countries, of the EU budget would not form part of since they are, due to their geographic the 4 percent capping of EU resources position or economic orientation, inter- available for the NMS. ested in better business conditions in the new Member States (Austria, Ger- many, Netherlands and Sweden, as well 5.8 Hungarian interests—some as Finland and Denmark). summary remarks It has to be emphasised that the inclusion EU membership brings with it a number of of a new objective would not necessarily tasks, both on the side of the new Member imply a bigger budget and, therefore, more States and of the EU. Of course, the Hun- financial contribution by the current net garian domestic tasks have to be addressed contributors: adequately. In this context, it is vitally im- 1. the money for the new objective should portant to develop a comprehensive Hun- come partly from the national entitle- garian EU strategy that would clearly iden- ments available for the new Member tify our basic strategic development pat- States; tern.12 They may not fully harmonize with 2. it would be helpful in breaking the the Commission’s priorities, but could offer deadlock and resistance of the old bene- a good basis for further discussions on the ficiaries, and making possible major re- basic objectives of the expected resource grouping of financial resources (this is transfer. Most probably, the EU would not one of the main arguments of those who be able to develop any special program for do not seem ready to pay more than 1 Hungary (or for any other NMS), but the per cent); EU-created packages could be somewhat 3. it would ensure higher efficiency and softened and special Hungarian priorities quicker return, not least for private busi- (either concerning areas to be financed, or, ness; not less importantly, just the sequencing of 4. the net contributors would be the main the projects) built into the EU-packages. We beneficiaries in getting orders for de- should also focus more on the success sto- signing, construction, technology de- ries (e.g. FDI inflow, exceeding by far the liveries related to the implementation earlier estimations of absorption capacity) of physical infrastructure and environ- in order to prove that the absorption capac- mental projects. ity of Hungary is higher than believed.13 There are two more aspects for further con- 12 The issue is at the centre of earlier and current sideration: research at the Institute for World Economics of the 1. by implementing the above mentioned Hungarian Academy of Sciences. Similar conclu- concept, an important shift could be sions have been drawn by Inotai (2004b) and Inotai produced between Structural and Cohe- and Szemlér (2004). 103
- 78. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States 5.8.1 Steps to be taken by the EU resources. Moreover, it would take into account the “equal treatment” principle, The EU could improve the conditions of since 4 percent for Spain and 4 per- having access to the resources and, not less cent for Poland would in the aggregate importantly, to enhance the efficiency and be completely different figures, which speed of using such resources, in many could hardly be explained on the basis ways: of development levels; 1. by skipping the 4 percent ceiling on an- 3. by changing the rules of co-financing, nual transfers; as has been shown earli- i.e. reducing its share in the structural er, the absorption capacity is influenced funds and/or regroup part of the struc- not only by domestic but by external tural funds-financed projects into the factors as well. Hungary, together with cohesion fund; some other countries in the region, e.g. 4. by concentrating, as a common work the Czech Republic and Slovakia, dem- between EU and Hungarian experts, onstrated that it had a high absorption on such projects that promise not only capacity once it started to host foreign efficient and quick return, but generate direct investment. FDI inflows have multiplier effects across the economy. In reached more than 4 percent of GDP in this context, a study of previous experi- selected years of the nineties. Including ence would be very useful, since Hun- reinvested earnings, in itself a clear sign gary and most other NMS can hardly be of confidence and sufficient absorption compared with other net beneficiaries. capacity in a “maturing transformation The presence or lack of multiplier ef- economy”, FDI contribution, even to- fects depends on factors such as popula- day, is likely to be around 4 percent of tion density, FDI, economic transforma- GDP. Moreover, it produces 50 per cent tion and competitiveness, educational of the Hungarian GDP, controls about level of the society, the state of physi- 75 per cent of total exports, plays a key cal infrastructure, telecommunications, role in technological advancement and cooperation within regional and central ensures several hundreds of thousands authorities, etc. Efficient absorption ca- of jobs; pacity can be interpreted in two differ- 2. by keeping the 4 per cent ceiling but, ent ways. First, the efficient absorption at the same time, reducing the ceiling of the resources available within the for more developed net beneficiaries framework of one single project. Sec- (some of them did not use more than ond, and more importantly, in the mul- 1 to 2 per cent of GNI in a year), such tiplier (spillover) impact of the project. a step could enhance the manoeuvring We would strongly prefer the second room of the overall budget and at the scenario, whenever possible; same time facilitate redistribution of 5. by defining the new objectives in a way that would not exclude any NMS that 13 A very clear sign of the absorption capacity is is automatically benefiting from the that most firms with FDI coming into the country regional fund, from other programmes re-invested their profit sin Hungary. This means (e.g. research and development, innova- a high level of confidence of the investors in the Hungarian economy, and this is the point where tive capacity-building, etc.). The access long-term investments differ from the presence of to other financial resources involved into “footloose” capital. other objectives is a must also in order 104
- 79. 5 Hungary andCohesion Policy to reach the Lisbon goals. Some of the and public servants working in them, NMS are better off in this context than instead of firing professionals in each some of the OMS. Therefore, it would new electoral period. be not only unjust but detrimental to the 3. There have already been identified inter- future development of Europe if they esting local and regional initiatives that remained deprived of such sources. Ac- would not have been possible a decade cess of NMS to EU resources aimed at ago. In fact, money, or even the hope achieving the Lisbon goals is important for money, is a very important integra- for additional reasons as well: equal tive factor. Let us hope that a large part footing in an enlarged community and of the society is able, ready and willing ensuring the rapid generation of multi- to learn and, sooner or later, discover its plier effects in the economy; own interests (enlightened self-interest 6. by stressing the importance of cross- behaviour). Western Hungarian coun- country projects (mainly physical in- ties that a decade ago did everything to frastructure and environment), so that establish unique (closed) contacts with the priority of this effort is adequately neighbouring Austrian regions and used reflected in the new 2007 – 2013 Finan- most of their energy to prevent the other cial Framework. county from doing anything, have learnt that they could achieve much more if they developed a common position. 5.8.2 Steps to be taken by Hungary Also, there are encouraging examples of local initiatives in small regions (e.g. For a successful integration, of course, local water treatment projects, human there is much to do on the Hungarian side resource building, etc.). Here, the main as well. The most important issues can be bottleneck is the rather limited co-fi- summarised in the following: nancing capacity of the municipalities. 1. Domestic absorption capacity needs: 4. An additional budgetary constraint may a) constant improvement in the public emerge once it turns out that successful administration (on governmental, re- projects will need additional (although gional and local levels alike); provisional) financing. Namely, at the b) speeding up the process of applica- beginning of the implementation of tion, evaluation and payment; the project some money will be made c) strengthening the monitoring and available from EU sources. The second controlling functions; slice of financing is expected to come d) make the whole process more trans- from national co-financing. Later, an- parent and free public servants from other part of EU money may become the widespread fear getting into un- available. However, the total amount of justified and artificially created scan- EU contribution will be disbursed after dals and being accused of maltreat- finalising the project, and sometimes ment or misuse of money. with a substantial time gap (1 to 2 years, 2. Most importantly, a new political cul- which is needed for final controlling of ture is needed, based on cooperation the financial items, etc.). However, the as opposed to conflicts, on transparen- project leader and the participants (sub- cy and not “assumptions” and scandal contractors) can hardly be asked to wait mentality, on the stability of institutions for their money for such a long period. 105
- 80. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States Most potential participants in Hungary gary does not have a strategy. Integra- are and will remain undercapitalised, tion strategy has been largely replaced they do not dispose of huge financial by concentrating on the highest pos- resources in order to pre-finance their sible absorption of potential EU funds services or activities. As the number and (about €20 billion for the next seven- financial volume of successful projects year budgetary period). This, however, tends to increase, which represents a means that objectives and instruments positive development, more and more have been confused. EU transfers are money may be needed to overcome the a vital factor of successful member- liquidity gap. It should be investigated ship and sustainable modernisation. to what extent the disbursement rules of However, at the end of the day, they are the EU funds can be changed in order to instruments and not objectives in them- shorten the transitional period and miti- selves. A one-sided concentration on gate the liquidity pressure (and, ceteris money may backfire for two reasons. paribus, the budgetary constraints) in First, if the money is not available or, the NMS. for different reasons, becomes available 5. Communication policies have to be only with a delay, potential beneficiar- substantially improved and an active ies will turn against the administration dialogue has to be established, not only and, more likely, against the govern- between those who have already ap- ment. Second, such an approach may plied for or those who belong to the foster the image of Hungary in the old potential applicants for EU resources, member countries in general, and in the but in the society as such. Not only the net contributing countries in particu- potential amount of money (following lar, as Hungary being in it only for the 2007) has to be publicised (which, in it- money (which, of course, is far from the self, is a high-risk undertaking; see the truth!). Consequently, a comprehensive next paragraph), but the conditions of integration strategy is badly needed, be- having access to the resources and the cause, obligation the applicant is assuming a) Hungary’s successful membership in when signing the project. Wrongly or the EU needs the definition of inter- deficiently filled-out application docu- ests, the seeking for strategic or tac- ments, loose accounting, “innovative tical alliances in the enlarged com- bookkeeping” and incorrect bills, all of munity and the implementation or them widely spread and in part deeply protection of basic interests; rooted in past practices, have to be aban- b) the EU consists of much more than doned. If the local, regional or central just budget—more importantly, sev- government and/or EU authorities iden- eral high-priority and high-intensity tify such cases, it should not be taken as areas are not covered by the objec- a good chance to blame the government tives of the budget as defined by the or the EU and defend “poor Hungarian/ Commission (justice and home af- Slovak/Czech, etc. (so-called) entrepre- fairs, common foreign and security neurs”. policy, where fundamental Hungar- 6. Finally, the current Hungarian strategy ian interests are at stake); towards EU funds has to be fundamen- c) Hungary has to define its longer- tally revised, since, quite frankly, Hun- term place and role both in the rap- 106
- 81. 5 Hungary andCohesion Policy idly changing global environment and within the enlarged/enlarging EU—only by using this as a funda- ment can the country’s room for ma- noeuvre be determined (most prob- ably along different scenarios) and the main objectives that the country would like to achieve with the finan- cial support of the EU be defined; d) it is not ruled out that these objec- tives will largely coincide with the basic objectives formulated by the Commission and with those that will become the pillars of the coming EU budget—however, differences in priorities may not be a priori ex- cluded, either concerning the areas, the instruments, the timeframe or the sequencing of different policy goals and means; e) automatic acceptance of the EU-de- fined goals is a consequence of the lack of a national strategy, and may generate serious consequences both for Hungary the EU and for the image of the EU in a Member State. Even assuming the (not unlikely) fact that, at the end of the day, Hungary (and other countries) has to subscribe to the priorities of the Commission and could hardly change them (the trans- border infrastructure objective could and should be an exception), the ne- gotiations on the modalities of EU transfers after 2007 and the compo- sition of the Second National Devel- opment Plan should (have) start(ed) from a different approach. At least some special high-priority interests of Hungary could (have) be(en) in- cluded into the package at an early stage of preparing the final docu- ment. 107
- 82. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States References European Commission, 2004, Communication from the Commission to the Council and the European Parliament: Building our common Future – Policy challenges and Budgetary means of the Enlarged Union 2007–2013, Brussels, 10 February 2004. Horváth, G., 1999, Regional and cohesion policy in Hungary, in, Brusis, M., Central and Eastern Europe on the Way into the European Union: Regional Policy-Making in Bulgaria, the Czech Republic, Estonia, Hungary, Poland and Slovakia, Center for Applied Policy Re- search, Munich. Horváth, G., and Illés, I., 1997, Regionális fejlődés és politika. A gazdasági és szociális kohéz- ió erősítésének feladatai Magyarországon az Európai Unióhoz való csatlakozás időszakában (Regional development and policy. The tasks of strengthening economic and social cohesion in Hungary in the period of EU-accession), Európai Tükör Műhelytanulmányok, No. 16, Budapest. Inotai, A., 2004a, New and strong interest group from the “East”?, in, Europäische Rund- schau, 2004 Special Edition (Europe of the 25), pp. 81 – 92. Inotai, A., 2004b, Az Európai Unió költségvetése és Magyarország: elvárások, érdekek, hazai teendők és befolyásolási lehetőségek (The EU budget and Hungary: expectations, interests, domestic tasks and chances to influence), in: Szemlér, T., (ed.), EU-költségvetés 2007–2013: érdekek és álláspontok (EU Budget 2007–2013: interests and positions), MTA Világgazdasági Kutatóintézet (Institute for World Economics of the Hungarian Academy of Sciences), Budapest, pp. 261 – 297. Inotai, A., and Szemlér, T., 2004, Részt vállalni a jövőből. Az új közép- és kelet-európai tagországok és az EU 2007–2013 közötti közös költségvetése – érdekek és együttműködési lehetőségek (Taking part of the future. The new Central and Eastern European member states and the EU budget 2007–2013 – Interests and chances of co-operation), in, Európai Tükör, 2004, November, pp. 20 – 37. Szemlér, T., 2001, Regional development, pre-accession and structural funds: Main trends and possible actions, in, Gerstenberger, W., (Hrsg.), Außenhandel, Wachstum und Produk- tivität – Fragen im Vorfeld der EU-Erweiterung, Ifo Institut für Wirtschaftsforschung, Nied- erlassung Dresden, 2001, pp. 81 – 109. Szemlér, T., 2004, Az EU strukturális alapjainak felhasználásából adódó tapasztalatok el- emzése az egykori NDK példáján (The use of EU Structural Funds: analysis of the experi- ences in the former GDR), in, Külgazdaság, 2004. június, pp. 22 – 40. Weise, Christian (2005—to be published) 108
- 83. 6 The CzechRepublic and Cohesion Policy 6 THE CZECH REPUBLIC AND COHESION POLICY Radomir Špok (ed.), Zuzana Kasáková, Tomáš Pubrle and Pavel Karásek* 6.1 Introduction In this chapter we examine the European neglected or at least received less attention, Cohesion Policy (ECP) with a view of they have improved the institutional and adapting some of its aspects so that they administrative quality and they have also become more in line with the particular made possible the utilisation of the Struc- needs of the Czech Republic. We claim tural Funds and the Cohesion Fund once that the role of European regional policy, in the Czech Republic joined the EU. creating the right conditions for economic growth, should not be underestimated. In this chapter we argue that a successful ECP should primarily focus on the en- The challenges the Czech Republic is faced hancement of a good entrepreneurial en- with ranges from structural unemployment vironment and the promotion of economic to an unsatisfactory state of transport infra- growth based on innovation, R&D and new structure. Many of the problems visible to- technologies. This economic growth, fur- day can, to a great extent, be said to be the thermore, should be anchored in the devel- legacy of the former Communist regime. opment of human resources. The major income redistribution that this regime undertook, together with a centrally The chapter is divided as follows: in the planed relocation of industries, led on the next section we examine the pre-acces- one hand to narrower regional disparities sion instruments, PHARE and ISPA, with in the Czech Republic than in the former respect to their respective strentghs and EU15, but, on the other hand, laid the foun- weaknesses. In section 6.3 we look briefly dations for the structural problems we still at controversies in the membership nego- see today in some parts of the country. tiations. Section 6.4 looks at various as- pects of the Commission’s proposal for a The Czech Republic has benefited, on new Cohesion Policy, which is followed many levels, from being an EU Member by a discussion on Czech priorities for the State, both from having access to the inter- period 2007 - 2013. Before concluding the nal market and from the ECP. At the same chapter we provide, in section 6.6, the read- time, it has also benefited from the pre-ac- er with the expert’s views on how European cession assistance. Above all, the pre-acces- regional policy should be conducted in the sion programmes made it possible to invest future and which priorities should prevail. in areas which otherwise would have been * The authors are researchers at EUROPEUM Institute for European Policy in Prague. 109
- 84. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States 6.2 The Czech Republic and the 6.2.1 PHARE pre-accession instruments The Czech Republic joined PHARE as early This section will attempt to assess the impact as 1990, at that time still part of Czechoslo- of the two pre-accession funds PHARE and vakia.2 After the dissolution of the federa- ISPA—leaving out the third major instru- tion, both the Czech Republic and Slovakia ment, SAPARD—on the Czech Republic. became, without delay, participants of the However, in order to evaluate PHARE and PHARE programme. Like Slovakia, the over- ISPA, we must first establish the goals of all experience with pre-accession support the programmes or, rather, what the Czech in Czech Republic has been positive, even Republic wanted to achieve with these pro- though there have been stumbling blocks. grammes. The first aim of the Czech Republic was of Administration of PHARE course to use as much of the financial re- sources offered by the EU as possible. By The adoption of the Accession Partnership utilising these resources, furthermore, the in 1998 led to a more decentralised admin- Czech Republic could invest in sectors and istration of PHARE, which emphasised regions that would otherwise have been the demand for enhancement and formali- left out of the main objectives of the Czech sation of Czech institutions. A position of government, such as border regions and National Aid Coordinator was established, certain large infrastructure projects. An- with responsibility for the coordination of other important and basic aim of the Czech preparation, implementation and monitor- Republic with the pre-accession funds was ing of all EU aid programmes. This post of course to prepare for the future accession was assigned to the deputy of Minister of to the EU. Finance—the Centre for Foreign Assist- ance was set up to administrate his agenda. Hence we shall focus on how the aims and In addition, another deputy Minister of Fi- priorities of PHARE and ISPA were ful- nance was designated National Authorizing filled; how successfully they were imple- Officer, responsible for the management mented through different types of projects; of all financial allocations coming from and how important these programmes were the EU and after 2000 also all financial for the transformation of the Czech Repub- resources intended for co-funding of the lic in its endeavour to join the European EU’s aid programmes. The National Fund Union.1 was created at the Ministry of Finance as an administrative instrument of the National Authorizing Officer.3 Moreover, specialised implementation agencies were established—mostly within 1 The sources used in this chapter are mainly of- Czech ministries—in order to administrate ficial documents of the Czech government or projects in particular areas. governmental web sites and the European Com- mission’s Regular Reports on Czech Republic’s 2 Progress Towards Accession. Other publications Pravda (2002). 3 and journal articles were also consulted. CFA, not dated b, p. 20. 110
- 85. 6 The CzechRepublic and Cohesion Policy • The Central Financing and Contract- of PHARE became decentralised, but all ing Unit (Ministry of Finance) imple- projects still had to undergo ex-ante moni- ments institution building projects. toring by the European Commission or by • The National Educational Fund (Min- the Delegation of European Commission in istry of Labour and Social Affairs) the Czech Republic. In order to accelerate is responsible for human resource the process of approving projects, the Eu- projects. ropean Commission decided to introduce • The Centre for Regional Development the so called Extended Decentralisation (Ministry of Local Development) ad- Implementation System, which – according ministrates investment projects in the to the Commission’s 2001 Report – should area of economic and social cohesion have been fully operational in 2002.8 and cross-border cooperation. • Czechinvest (Ministry of Industry However, the Czech Republic was unable and Trade) manages projects in the to secure satisfactory administrative bodies field of business development includ- even by the time of its accession to the EU ing business infrastructure. and thus the Commission refused to grant • The Civil Society Development its accreditation. Therefore, the flow of fi- Foundation is responsible for the nancial resources from PHARE was sus- grants supporting NGO activity.4 pended in August 2004, but restored only four months later in December 2004 when The European Commission described the the shortcomings had been dealt with.9 implementation of PHARE as “generally satisfactory” in its 2000 Regular Report. However, it also criticised the functioning Types of programmes of the National Fund, in particular that it had been slow in handling requests and distrib- The PHARE programme consists of several uting the funds.5 Although the implementa- types of programmes. The most important tion of Phare had improved in time for the in terms of financial allocations is the Na- next report, the Commission recommended tional Programme. Then there is the Cross- in the years that followed the Czech Repub- border Cooperation Programme, which is lic to improve the capacity of public ad- the counterpart of EU’s Community initia- ministration by providing “adequate human tive Interreg. The administration of these resources and efficient and effective organi- programmes is decentralized. sational structures for all relevant bodies.6” Conversely, Multi-country Programmes Even though the improvement of public are proposed directly by the Commission, institutions became a permanent and im- although some of them are implemented portant priority of the PHARE programmes by the individual participating countries. after 1997,7 project implementation was These programmes involve areas common was still not optimal. The Accession Part- to all (or nearly all) countries participating nerships had meant that the implementation in PHARE, such as consumer protection, 4 mutual recognition of academic degrees, MLD (2004a). 5 COM (2000), p. 12. 6 COM (2001), p. 12. 8 COM (2001), p. 11. 7 CFA (2001), pp. 8 – 10; CFA (2003), pp. 6 – 7. 9 EurActiv (2004a); EurActiv (2004b). 111
- 86. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States intellectual property protection, transport The institution building projects were fo- network modernisation, social policy and cused on six priority areas: finance, justice, work safety, and many other programmes. home affairs, agriculture, environment, and Since the financial allocations for Mul- economic and social cohesion.13 The prior- ti-country Programmes are given for all ity status of institution building was also participating countries altogether, it is not stressed by the introduction of a new project possible to derive the exact monetary con- type, twinning, which supplemented exist- tribution to the Czech Republic. The Multi- ing projects such as consulting, training country Programmes, implemented directly and studies. Under the twinning projects, by the Czech Republic during the 1990s, different bodies of public administration represented less than 4 percent of the total in the Czech Republic accepted long- or PHARE allocations to the Czech Repub- short-term advisors from the EU15 Mem- lic.10 We therefore find it more meaningful ber States in order to benefit from their to focus on the former two decentralized knowledge, experiences and contacts, thus programmes. improving the preparedness for the acces- sion to the EU.14 National Programmes Between 1998 and 2001 more than 60 twin- ning projects were carried out in the Czech During the first phase of PHARE, the aim Republic, half of them in cooperation with of the support under the National Pro- Germany and Great Britain, the other half grammes was to promote certain sectors with the Netherlands, Spain, France, Aus- in their transformation to market economy. tria, Denmark, Finland, Italy, Sweden and When the multi-annual indicative plans Ireland. There were problems reported with were introduced in 1994, each candidate respect to communication between the vis- country became responsible for determin- iting consultants and hosting institutions. ing its own long term priorities. The areas This was partly caused by lack of helpful- prioritised in the Czech Republic were pub- ness on the Czech side and partly by the fact lic administration, agriculture, civil society that the quality of the consultants was not and democratisation, education, infrastruc- always satisfactory.15 The twinning projects ture, environment and nuclear safety, pri- were applied in a number of areas, such as vate sector, social affairs, employment and legal business environment, pension re- healthcare. The adoption of the Accession form, public procurement, integrated pollu- Partnership in 1998 meant that almost a tion prevention and control, phyto-sanitary third of the allocations under the National administration, healthcare and work safety Programmes were assigned to institution and the combating of organised crime.16 building projects and the remainder to in- vestment projects.11 In 2002, the National The aim of the investment section of the Programme was even divided into two National Programmes was primarily to fos- parts, where the first part was entirely de- ter economic and social cohesion, which voted to institution building.12 included projects in the area of support for 13 CFA (2003), p. 4. 10 14 DEC (2001), p. 8 and 13. CFA (2001), 13. 11 15 CFAa, not dated. CFA (2002), pp. 6 – 7. 12 16 CFAc, not dated, p. 7. COM (2001), p. 13; COM (2002), p. 17. 112
- 87. 6 The CzechRepublic and Cohesion Policy small and medium sized enterprises (SMEs), part of the PHARE resources to co-finance employment policy, protection of human their participation in these programmes. rights and minorities, human resources de- Until 2002, almost €29 million were uti- velopment and business infrastructure.17 lised this way. The Czech Republic has The European Commission particularly ap- since 1997 participated in three educational preciated the role of PHARE in the Czech programmes (Socrates, Leonardo da Vinci, Republic in developing civil society and in- and Youth) and it has also participated in tegrating the Roma community, supporting programmes in the field of culture, ener- the reform of the judicial system, improv- getics, SMEs, finance, information system ing the business environment, supporting development, equal opportunities for men the fight against organised crime and fight and women, and healthcare.20 against drugs, and improving the function- ing of the internal market through support for various regulatory bodies.18 Cross-border Cooperation As for the overall distribution of the re- The average annual allocation for the Na- sources of the PHARE National Pro- tional Programmes after 1990 was ap- grammes among particular sectors during proximately €60 million. This amount was 1993 – 2001 in the Czech Republic, the increased after 2000 to more than €90 mil- largest share was allocated to transport lion.21 As noted, the National Programmes (€71 million), followed by regional devel- were not the only section under the total opment (€54.4 million), employment, hu- PHARE budget with a decentralised ad- man resources, social policy, and education ministration. The second significant com- (€47.6 million), and technical assistance, ponent was the Cross-border Cooperation public administration reform, standards, programme. This programme was launched statistics, legislation, industrial property, in 1994 and represented about 50 percent of and telecommunications (€38.8 million). the PHARE resources in the period 1995 – Significant resources were also aimed at 1999. It was thus the largest single PHARE support of business, export and foreign di- programme. By 1999, a total of €179 mil- rect investment, agriculture, finance, bank- lion was allocated to CBC, while only in ing and customs, home affairs, support of 1999 this sum amounted to €45 million. The NGOs and minorities, justice, energetics, CBC programme underwent a 25 percent and healthcare. Preparing the Czech Re- decrease after the year 2000, with an annu- public for the EU’s Structural Funds fol- al allocation of €19 million (€10 million for lowing its accession was also an important the Czech – German border, €4 million for measure with a €9.9 million allocation.19 the Czech – Austrian, border and €5 million for the Czech – Slovak border).22 Even though the CEECs could not make use of the Structural Funds until after joining When the Cross-border Cooperation was the EU, there were a number of programmes launched, it only concerned the Czech that were open to the candidate countries. – German border, which in 1994 was the Furthermore, they were also allowed to use 20 CFA not dated c, p. 11; and d, pp. 8 – 10. 21 17 CFA (2002), pp. 8 – 13. CFA not dated c, p. 5. 22 18 COM (2002), p. 14. DEC (2001), 8; CFA not dated c, p. 7; MLD 19 CFA (2002), pp. 4 – 5. (2004b); and COM (1999), p. 7. 113
- 88. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States only Czech border with an EU Mem- number of smaller projects, but subse- ber State. When Austria joined the EU in quently changed with the introduction of 1995, the CBC programme was extended ISPA in 2000 to favour instead a small to the Czech – Austrian border. In 1999 the number of large infrastructure projects. At Cross-border Cooperation programme was the same time, grant schemes were also in- introduced also on the borders between the troduced, first tested in the two pilot NUTS Candidate Countries. The Czech Republic II regions Moravskoslezsko and Severo- has thus cooperated with Poland under this západ. The most successful fund was the programme since 1999. There was also a Small Projects Fund, which was launched one-off cooperation with Slovakia in the in 1996 and supported small non-invest- same year.23 However, the Czech Republic ment projects27 based on cooperation be- also cooperated with Poland and Slovakia tween municipalities, schools, and NGOs under two trilateral cross-border coopera- in the area of culture, education and tour- tion programmes (Czech Republic – Ger- ism. Its achievement was primarily facili- many – Poland and Czech Republic – Aus- tated by a successful decentralisation of tria – Slovakia) in 1995 and 1996.24 the CBC programme and well-functioning regional implementation bodies. It also led The primary aim of the CBC PHARE pro- to the creation of other funds that supported gramme was to support the economic de- small investment projects, such as the For- velopment of the regions disadvantaged ests Revitalization Fund, the Countryside by their border position. This was to be Renovation Fund, and the Small Infrastruc- achieved by supporting competitiveness ture Projects Fund.28 of Czech businesses, improving infrastruc- ture, dealing with common problems such Although the tangible outcomes of the as environmental degradation and fostering CBC PHARE infrastructure projects could cooperation between residents in neigh- be seen in form of roads, sewage systems bouring regions.25 or sewerage plants, these projects some- times failed to demonstrate a direct cross- The process of decentralising the CBC pro- border impact. This fact was also criticised gramme started in 1996, which further en- in the 2000 assessment reports by the As- hanced cooperation and contacts between sociation of European Border Regions.29 people and institutions in the border regions. The problem was solved in the following The CBC PHARE programme converged years, especially by the means of the grant towards the Community Initiative INTER- scheme of the Small Projects Funds, which REG after 2000 with respect to its rules, focused on a people-to-people approach. methods and administrative procedures, in Nearly half of these funds were as early as order to prepare the candidate countries for 1995 – 1999 allocated to cross-border cul- INTERREG participation after accession.26 tural exchanges.30 However, it is still ques- tionable whether the aim of overcoming The CBC originally supported a large cultural differences and rooted prejudices 27 Amounts allocated ranged between €1,000 and 23 MLD (2004b). €50,000. 24 28 CFA (2001), p. 15. Horáček (2002); MLD (2004b). 25 29 MLD (2004b); CFA (2001), p. 14. AEBR (2000a), p. 9; AEBR (2000b), p. 12. 26 30 MLD (2004b); MLD (2005). AEBR (2000a), p. 13; AEBR (2000b), p. 16. 114
- 89. 6 The CzechRepublic and Cohesion Policy was achieved, since support for EU Mem- social strata.33 bership in the 2003 referendum was below average in nearly 85 percent of Czech dis- 6.2.2 ISPA tricts bordering Germany and Austria.31 Since ISPA supports large infrastructure projects with a budget exceeding €5 mil- Flood relief lion, particularly thorough and elaborate preparation are required. Although there In 1997 and 2002 the Czech Republic was were special programmes under PHARE for affected by huge floods. The European Un- the preparation of ISPA projects, the Czech ion reacted partly by reallocating a share of Republic was able to obtain not even the the PHARE budget to support the immedi- average allocation from the possible range ate and effective reconstruction of the im- in the years 2000 and 2001.34 This changed pacted areas. In 1997, more than €9.13 mil- quite dramatically in 2002, however, when lion were provided for small infrastructure the Czech Republic’s allocation equalled projects that were administered through the €80.5 million, which was nearly 90 percent Small Infrastructure Projects Fund. Sup- of the maximum achievable allocation.35 port was limited by a maximum contribu- tion of €0.3 million, or 75 percent of total We have already mentioned that the proc- expenses. In total, the fund co-financed ess of project documentation approval was 195 projects. Another €0.5 million were set rather lengthy, which subsequently put pres- aside for civil society development, con- sure on the actual implementation of the centrating on restoring economic and social projects. This was in no small part due to activities in the affected areas. The 63 sup- the approval procedures of the Delegation ported projects included such activities as of European Commission, but there were houses reconstruction, water barriers con- also serious shortcomings on the Czech struction or psychological assistance for side. The most important factor was the in- people directly stricken by the floods.32 ability to guarantee sufficient co-funding of the projects. The EU contribution should In 2002, the total amount of the European ideally be 75 percent of total eligible costs, Union’s relief for the Czech Republic was but the typical EU contribution was not that €182.51 million, out of which €11.5 mil- high and there were also substantial ineli- lion were reallocations from the PHARE gible costs. Thus, the average EU contri- programme. In order to accelerate the con- bution amounted to 50 – 60 percent of the tracting process, special simplified proce- overall costs, requiring sizeable resources dures were adopted. Again, most of these to be provided by the Czech side.36 resources (€10.5 million) were aimed at the reconstruction of the transport and envi- The above mentioned obstacles occurred ronmental infrastructure. The remaining €1 million were aimed at supporting the NGOs 33 CFA (2003), pp. 16 – 18. 34 that helped restore the living conditions of COM (2002), p. 16. The Czech Republic could affected people, especially from the lower obtain between €57.2 and €83.2 million; see (MLD 2004c). 35 MLD (2004c). 31 36 CSO (2003). CFA (2002), pp. 17 – 18; CFA (2003), p. 10; 32 CFA (2001), p. 16. MLD (2004c). 115
- 90. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States much more often in the area of environmen- water treatment on catchments of two riv- tal projects. This led to a slight imbalance ers, Dyje and Bečva. Each was supported between the allocations for the transport and with more than €30 million.41 environmental project. Actually, 55 percent of the ISPA allocations were used under the In 2002, €30 million were reallocated in re- transport branch and the remainder under sponse to the floods in Southern and North- the environmental branch.37 Since the ac- ern Bohemia. This sum was again divided cession of the Czech Republic to the EU, equally between transport and environmen- all ISPA projects were transformed to the tal projects. For this special case, the pos- Cohesion Fund.38 sible ISPA contribution was increased to 85 percent and simplified approval procedures The projects in the area of transport all were adopted. The projects were aimed at aimed at improving the connection between reconstruction of damaged transport in- the Czech Republic and its EU neighbours frastructure, sewage systems, or sewage through the Trans-European Networks disposal plants, and water supply restora- (TEN). In total, ten projects were approved tion.42 and supported by the EU. Three of them were directed at railways modernisation, four were implemented in the area of roads 6.2.3 Conclusions modernisation and highway construction. Furthermore, there were two projects of Under the PHARE programme, more than technical assistance and one pilot project. €1 billion were allocated to the Czech re- These projects were supported by €260 mil- public prior to its accession to the EU. The lion from ISPA, while the biggest project total ISPA allocation in 2000 - 2003 exceed- (the modernisation of the railway line be- ed €500 million.43 The various branches in tween Zábřeh and Krasíkov) amounted to the Czech Republic was indeed successful €72.8 million from ISPA.39 in contracting and implementing these re- sources. In both the PHARE and ISPA pro- As noted in the introductory chapter, there grammes, more than 95 percent were, or were three main target areas under the en- are expected to be, contracted. The reason vironmental part of ISPA: securing quantity for not contracting the entire allocation was and quality of water, air quality and climate that the least expensive offer was usually protection, and waste treatment.40 Altogeth- chosen during the selective procedure. Al- er, 15 projects were supported in the Czech though some projects were cancelled and Republic, although one was later cancelled the contribution had to be reimbursed, more and the ISPA contribution had to be reim- than 95 percent of the contracted resources bursed. The largest supported environmen- were actually paid out.44 tal project was the renovation of the city incinerator in Brno, which obtained €47.3 Thus, we can conclude that the Czech Re- million from ISPA. Two other projects with public took full advantage of the assist- large contributions were aimed at waste ance offered by the European Union. We 37 41 EU Information Centre with DEC (2003), p. 5. ME, not dated; MLD (2004c). 38 42 MT, not dated. MLD (2004c). 39 43 MT, not dated. CFA, not dated b, p. 2; DG Regio (2004), p. 12. 40 44 MLD (2004c). DEC (2001), p. 11. CFA (2002), pp. 34 – 35. 116
- 91. 6 The CzechRepublic and Cohesion Policy can also claim that the pre-accession funds transition periods in this chapter.45 inspired and supported investment in sec- tors and regions that would otherwise have With regard to the pre-accession instru- been omitted, or at least much more mod- ments in previous years, the Czech Repub- estly addressed. In this regard, we can for lic had created the administration system in example mention the success of the CBC accordance with EU regulations. Although PHARE programme or the amounts in- both the pace and the quality of these ad- vested in transport and environmental in- ministration and monitoring structures frastructure. were often criticised by the Commission, the public administration in the end man- Furthermore, the pre-accession funds con- aged to guarantee that the entire process tributed partially to the success of Czech ac- of preparation and implementation system cession to the EU. In other words, this par- was granted accreditation. ticular aim of both PHARE and ISPA was fulfilled. These facts imply that the Czech During the negotiations the Czech Repub- Republic is prepared for participation in lic faced a specific problem which called both the Structural Funds and the Cohesion for immediate handling. Due to the strong Fund. However, there are still some imper- tradition of state centralism in the country, fections, as the suspension of the PHARE a reform of regional self-governance was fund in 2004 suggests. This particular situ- postponed46 several times in the 1990s, ation shows that ongoing reforms and con- which significantly influenced the prepa- stant endeavour is needed if the Czech Re- ration of public administration on the ter- public is to be as successful within the EU ritorial level. Since regional authorities regional policy framework as it was before (including elected assemblies and regional it became an EU Member State. councils) started working only in the begin- ning of 2001, not being fully involved in the 6.3 EU Regional Policy in the pre-accession instruments, they could not negotiation process gain sufficient administrative experience as regards EU programmes and projects. Per- The negotiations on the accession of the haps this is the reason for the initial mis- Czech Republic to the EU were officially trust on behalf of the Commission towards initiated in March 1998. One of 31 nego- regional operational programmes in the tiated chapters consisted of EU regional Czech Republic. policy and structural instruments coordina- tion. From the very beginning, the Czech Based on the National Development Plan, government declared its preparedness to six sectoral and seven regional operational fully adopt and implement the whole acquis programmes were proposed by the Czech communautaire in the field of EU Structur- government under objective 1 (excluding al and Cohesion Policy. The Czech govern- ment did not expect any serious obstacles 45 Position document of Czech Republic to the in this field during the negotiations and Chapter 21. 46 was convinced that the respective laws and Constitutional law on the creation of territorial self-governance was approved at the end of 1997 rules would come in effect in time for the and came into effect on 1 January 2000. The first date of Czech accession to the EU. Thus, elections for regional assemblies took place in No- the Czech government did not request any vember 2000. 117
- 92. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States Prague). The Commission was however re- we will discuss the most important topics, luctant to “inflate” the programming docu- which are either emphasised by the Czech ments, which led to a substantial reduction government or should not be neglected. of operational programmes – in the end one joint regional operational programme and It is essential to ensure sufficient flexibil- four sectoral operational programmes, have ity of regional interventions in order to re- been approved. In light of weaker admin- spond adequately to the needs of regions or istration capacity at regional authorities, states. It would be beneficial to bring ac- a more centralised (national) control over tivities supported within the Competitive- the Cohesion Policy can be seen as a bet- ness objective47 into the Convergence ob- ter conception. The government can thus jective. With regard to the Cohesion Fund, easily enforce national priorities; manage- it is desirable to allow for a flexible use of ment is less complicated and cost savings resources for projects in both the supported can also constitute a significant factor for areas of transport and environment. this approach. However, representatives of individual regions should be involved as The proposed reorganisation of the rural much as possible in constituting the con- development policy—from the ECP to the tent of Cohesion Policy, including the set- Common Agricultural Policy (CAP)—is ting of priorities and measures in the Czech regarded as a significant step that will sub- Republic. stantially influence the future rural devel- opment. The priority is to prevent possible In order to conclude this part it is important overlaps or the existence of gaps in cover- to note that no serious controversial issues ing problematic areas. appeared during the negotiation process. However, there were several opinion clash- According to the Czech government, life- es between the Czech government and the long education should be explicitly set as Commission regarding the preparation of one of the priorities supported by the Eu- the programming documents. ropean Social Fund for both the Conver- gence and Competitiveness objectives. It 6.4 Czech stance toward new also wants to create a more precise defini- EC regulation drafts on regional tion of horizontal themes necessary for the policy programming documents. To name but one example, a reference to the information so- Generally speaking, the Czech government ciety is today missing. considers the proposed structure of Struc- tural Policy objectives – Convergence, Concerning the territorial aspects of the Co- Competitiveness and Territorial cooperation hesion Policy, it is disputable whether the – as sufficient and holds the view that these proposal aiming also at the support for the objectives support the achievement of all NUTS I regions under the Regional Com- partial tasks of the least developed regions petitiveness and Employment objective and states in compliance with Lisbon and should be remained. It is seen a certain dis- Gothenburg objectives. However, there are unity in NUTS levels which the program- a number of aspects in the Commission’s ming documents would be tailored for. proposal that representatives of the Czech Republic should modify. In this chapter 47 See chapter 1. 118
- 93. 6 The CzechRepublic and Cohesion Policy The Czech government favours the empha- within the objective European Territorial sis on the urban dimension of the ECP. It is Co-operation in favour of cross-border co- certainly in line with the current political operation. debate on the deterioration of large prefab- ricated blocks of flats located especially on the city suburbs. The threat of lower living 6.4.2 Mono-fund v. Cross-financing standards for inhabitants in these quarters, which could easily cause social-pathologi- According to the Commission’s proposal, cal phenomena (higher criminality, drugs each operational programme should be fi- distribution etc.), explains this pro-urban nanced by a single Fund (a so-called mono- stance. In this context the government in- fund system). The only exception to this tends to increase the role of the cities and rule would be operational programmes fi- to clarify their involvement into the imple- nancing environment and transport togeth- mentation and preparation of individual op- er where the Cohesion Fund and the ERDF erational programmes. may be used simultaneously. This simpli- fication is welcome, since it can signifi- cantly reduce bureaucracy and save costs. 6.4.1 Proposed costs for EU However, the mono-fund approach seems Structural and Cohesion Policy in many respects to complicate rather than to simplify matters. As noted in the first chapter, the Commis- sion has proposed a total of €336.1 bil- According to the proposal, the flexibility lion to finance the ECP in the years 2007 for cross-financing would have a ceiling of – 2013. Regarding the ongoing negotia- 5 percent as a general rule, implying that tions, the figures in the Commission’s pro- each fund in each operational programme posal should not be considered as definite. could fund up to 5 percent of its budget ac- It is doubtful if such allocation should not tions that usually fall under the scope of be set after a clear methodology and cal- the other fund. The Czech government has culation of indicative allocation for each expressed a desire to raise this ceiling by member state and objectives are presented. several percents in order to secure synergy The Commission’s proposal should be re- between the ESF and the ERDF. For exam- garded as a good base for further negotia- ple, human resources development requires tions, but the Czech government considers both infrastructure investments and train- the proposed share of resources for regions ing. and countries lagging behind not being op- timal and the amount of resources devoted to transitional periods as very generous. We 6.4.3 Eligibility rules on VAT do indeed agree with this position. Under the current eligibility provisions, The relation between the ERDF and the Eu- non-reimbursable VAT is eligible for financ- ropean neighbourhood and partnership in- ing from the Structural Funds and the Cohe- strument, from which roughly a third of the sion Fund. In the draft for new regulations countries will receive funding, is regarded this would be changed, since VAT would as unclear. Therefore, the Czech Repub- no longer be eligible for financing from the lic might require substantial reallocation ERDF and the Cohesion Fund in all cases, 119
- 94. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States regardless of whether it is reimbursable or 6.4.5 Maximum level of co-funding not (although the provisions on eligibility of VAT for financing from the ESF would Should the Commission’s proposal be remain unchanged). Since some of the final adopted, it would mean that some islands, recipients, especially municipalities, do not mountain areas and sparsely populated ar- have to be VAT payers (i.e. they are not en- eas would be faced with a higher rate of titled to get VAT re-funded) this rule threat- Community co-funding, such as the out- ens to negatively influence the absorption ermost regions as well as regions that no capacity of those beneficiaries. The Czech longer have external EU borders (compared government should therefore try to main- with the situation on 30 April 2004). There tain the current rules on eligibility of VAT is a possibility to increase this level up to for the next programming period. 85 percent compared with a maximum 80 percent for cohesion countries. Moreover, the latter level is expected to be used only 6.4.4 Operational Programmes in exceptional and duly justified cases. We are convinced that such differences neglect Another debatable question concerns the the specificities of the new Member States. creation of a special operational programme In regards to lower level of economic de- to be used a national reserve. The Commis- velopment, higher convergence gap and sion has proposed that each member state less developed infrastructure, the Czech should create a national contingency re- government should require the same level serve, amounting to 1 percent of the annual (i.e. 85 percent) of financing for conver- contribution from the Structural Funds for gence regions in cohesion countries as for the Convergence objective and 3 percent remote regions. for the Competitiveness objective, in order to cover for expenses of unexpected cri- There is substantial disagreement with the ses. The proposed special operational pro- proposal for the higher rate of co-funding gramme should help to respond sufficiently under the Competitiveness objective. The to such crises. On the other hand, unexpect- Commission’s draft lacks a unified defini- ed crises logically imply unexpected risks, tion of mountain regions due to different which can be hardly covered by specific approaches within each member state. operational programmes. It is quite strange that Commission’s draft The draft for regulation also lacks the defi- requires co-funding to be related to the total nition of a precise period for the fulfilment eligible costs and not only to public costs. of the Commission’s obligations concerning Such an approach would exclude the op- the procedure of the submitting, approving portunity to involve private resources into and revising of programming documents. It financing and thus reduce the strain on pub- is unclear why the Commission should have lic budgets. the right to adjust operational programmes by its own initiative. In compliance with the principle of subsidiarity we are convinced that the Commission should only have the power to express non-binding recommen- dations for the Member States. 120
- 95. 6 The CzechRepublic and Cohesion Policy 6.5 Priorities of the Czech the current transfers from the Structural government in 2007 - 2013 Funds to the Czech Republic (€2.3 billion in the 2004 – 2006 period). Moreover, if we On 1 March 2005 the Czech government add national co-funding (approximately 25 approved the priorities of the Economic and percent of total funding), we conclude our Social Cohesion Policy for the 2007 – 2013 estimations at €5.4 billion per year, which period.48 The priorities are as follows: represents more than six times the volume • enterprising; of the financial resources in 2005. • human resources and tertiary schools (including universities); There are some problems which negative- • innovations and knowledge-based ly influence the absorption capacity in the economy; Czech Republic. First, problems are appar- • infrastructure (including environ- ent on the side of the final beneficiaries. In mental infrastructure); particular, the smaller municipalities may • regional disparities reduce (horizon- face obstacles, both on administrative and tal theme). financial levels. Smaller municipalities do not have enough experience to meet all the The Ministry for Regional Development requirements set by the respective regula- in the Czech Republic has been given the tions and rules and, at the same time, they task of updating the current National De- are often not so financially strong to pre- velopment Plan (NDP) by 30 September finance and co-finance the projects. On the 2005 and to prepare the National Strategic other hand, exclusion of smaller communes Reference Framework for the 2007 – 2013 and the limitations of final beneficiaries period by 30 November 2005. could lead to a lower overall absorption ca- pacity. According to a survey organised by this ministry, the needs of individual ministries Second, the Czech government has to clear expressed in costs, potentially funded from away duplicities with respect to national de- the Structural Funds, exceed €6.7 billion velopment priorities. Thus far, the National per year. These figures (and the absorption Development Plan has been perceived as capacity arising thereof) seem to be over- a tool through which additional funds can estimated.49 Bearing in mind the capping flow from the EU budget to the Czech Re- principle of 4 percent, a maximum estima- public. Apart from the NDP, there are still tion of transfers corresponds to €4.2 billion many other national funds supporting many per year. This amount significantly exceeds areas and identifying many other priorities than those defined in NDP. Such duplicity 48 Government resolution no 245 on progress in and overlapping of funds has to be dealt preparation of the Czech Republic for EU Struc- tural funds and Cohesion fund in budget period with proper.50 Approximately €1.34 billion 2007 – 2013. per year, which would probably be needed 49 Many ministries included into these figures all for co-funding, represents around 5 percent investments and development projects that they of the state budget. Regarding the current wanted to implement, regardless of the main rules of EU Structural Policy. In other words, some needs concerned typically national projects with- 50 out any European added value (investments to the This topic is further developed in the next sec- Czech judiciary system). tion: “How to set priorities”. 121
- 96. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States general government deficit51 and the neces- The above mentioned priorities arise from sity to comply with Maastricht fiscal crite- the Economic Growth Strategy, which is ria, the Czech Republic cannot afford on the one of the most important strategic docu- one hand to further deepen budget deficits ments and it is currently being prepared and on the other use in an inefficient way and developed by an expert team led by the resources available from the Structural the Czech deputy Prime Minister Martin Funds; that would simply not be politically Jahn. This document seems to be the first sustainable. attempt in the Czech Republic to formulate a coherent and clear mid- and long-term The Czech government will have to real- strategy for economic growth. Each of the ise that the NDP and the National Strate- five chapters (human resources, research gic Reference Framework should be based and development, infrastructure, financial on long-term goals combined with clearly sources, institutional environment; see Ta- defined priorities and strategies. In compli- ble 6.1) is further divided into several ob- ance with the principle of additionality, a jectives, which will be measured and moni- national development policy has to walk tored in detail. hand in hand with the rules of the ECP. In- terventions carried out in the framework of Table 6.1 Chapters and the topics this policy will be financed both from pub- Chapters Topics* lic budgets and the Structural Funds. Quality of human capital Quantity of human capital Human Resources Labour market and employment Last but not least, in preparing the new oper- Human resources for modern society ational programmes the Czech government Public private partnership in R&D innovation should focus on defining crucial priorities. From R&D to innovation R&D As regards the current budget period, the National innovation policy Involvement of regions to innovation policy Czech Republic has been criticised by the Transport infrastructure Commission for having too many priori- Telecommunication infrastructure Infrastructure ties and measures in the individual opera- Environmental limits Investment sources tional programmes. Such an approach natu- rally leads to a conflict with the principle EU Structural Funds and Cohesion Fund Foreign direct investment of concentration. The impact of individual Financial sources Public private partnership projects, as well as the overall outcome of Public and alternative sources the operational programmes, will not be as Taxes strong if too many priorities are built into Institutional Legislative environment environment Public services quality the policy formulation. The Czech govern- Stimulation tools ment should therefore avoid this approach * Only selected objectives (sources: working material – Euro 11/2005, and define less priorities and measures. A p.29) less voluminous approach would better in- fluence the situation in particular areas. This ambitious document is expected to fight at least two crucial battles. First, sometime in May or June 2005 it has to be 51 The general government deficit consists of cen- approved by the Czech government, which tral government deficit, which forms the most sig- nificant part of the overall deficit, local government could be paralysed by the conflicts inside deficit and non-budgetary funds and state agencies the coalition government. A second and balance. probably more dramatic battle will take 122
- 97. 6 The CzechRepublic and Cohesion Policy place after the general elections in the sum- lay significantly reduced the time frame in mer of 2006. The civil democrats (ODS), which the concerned actors could prepare currently the strongest opposition party, for and develop priorities and measures as are predicted to win. Despite the fact that set out by the NDP. the Economic Growth Strategy is an excel- lently elaborated document, there is doubt In the current programming period, EU whether the ODS—which have scored subsidies are distributed through five Op- political points mainly by criticising the erational Programmes for the Objective 1 coalition government—will be courageous (Industry and Enterprise, Human Resources enough to adopt a document prepared by Development, Infrastructure, Rural Devel- their political opponents. Another question opment and Multi-Functional Agriculture which deserves to be raised is whether a and the Joint Regional Operational Pro- new government will have enough time to grammes); two Single Programming Docu- modify the programming documents, espe- ments for Objective 2 and Objective 3 and cially the operational programmes that are the Community Initiatives Equal and Inter- to be prepared for the next budget period. reg. Projects under the Cohesion Fund for We are convinced that it will not. the areas of transport and the environment are prepared on the NUTS I level. 6.5.1 How to set priorities However, the number of priorities has re- mained high and in order use effectively the The question of how to optimally use the financial resources available through the resources available through the Structural EU funds, more emphasis should be placed Funds and Cohesion Fund has been dis- on the principle of concentration. The sup- cussed in the Czech Republic since 1998. ported priorities should be further reduced The Czech administration has been pre- and more specified since this approach can paring for the Structural Funds primarily help to set up clear strategies and targets. through PHARE, which enabled responsi- The focus should be put on long-term con- ble officers to administer and monitor indi- cepts and targets, especially on human re- vidual PHARE programmes. sources development, research, enterprise and infrastructure. The first draft of the National Development Plan—a complex and far-reaching strate- As we have already indicated, one of the gic document—was prepared in 1999. The potential problems is the overlapping of Czech government had to tackle the prob- priorities. The government should clearly lem of a high number of priorities identi- divide the priorities into those that are to be fied first in the NDP and then in operational supported under the ECP and those that are programmes. As noted, the Czech Repub- to be covered only by national sources. The lic has been criticised for not being able to explicit definition of such priorities could limit the number of prioritised problems prevent the government from using nation- to be solved through the ECP and were al finances on programmes similar to those consequently forced to reduce the number co-financed by Structural Funds resources. of operational programmes. The changes It should thus concentrate on areas which were incorporated into the final version of cannot be supported from EU sources but the NDP only in February 2003 and the de- which are important from the national per- 123
- 98. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States spective. public expenditures. Together with quasi- mandatory expenditures (i.e. the army and public administration salaries) it represents 6.5.2 How to assure co-financing about 81.4 percent of total expenditure. The problem of setting ECP priorities is A public finance reform was implemented in closely related to the economic situation of 2003 in order to improve the fiscal position the country. In order to receive funding, the of the Czech Republic. The main task of the government must ensure co-financing from reform was to ensure a gradual reduction national sources (state budget, state funds, in the budgetary deficit and a slowdown of and regional or municipalities’ budgets). the growth of public debt. The government Naturally, it would be a great advantage if has committed itself to a general govern- the Czech government was able to ensure ment deficit that will not exceed 4 percent sufficient national finances for co-financing of GDP by 2006 and a year later it should and thus use as much financial resources not be higher than 3.5 percent of GDP. In from the EU budget as possible. comparison with the level of general gov- ernment deficit in 2004, this represents an For the years 2004 – 2006, the Czech Re- annual reduction of 0.7 percentage points. public allocation from the Structural Funds The government (late 2004) plans to cut ex- and the Cohesion Fund is about €2.8 bil- penditure by €6.7 billion (CZK 200 billion) lion. For the next programming period it during the 2005 – 2007 period and to raise is estimated that the Czech Republic could an additional €2.3 billion (CZK 70 billion) get about €26.4 billion from the Structural in tax revenue. Funds and it therefore has to provide co- financing from national public resources Within the framework of the public finance in the area of €8.9 billion. Additionally, reform the question of public private part- almost €13.4 billion is allocated from the nership (PPP) has been vigorously debated. Cohesion Fund and thus about €2.3 bil- The adoption and development of the PPP lion would be required for co-funding. In principle could significantly contribute to comparison with the current (reduced) pro- the required level of co-funding. The gov- gramming period, the amount of financial ernment approved this approach in January transfers will thus grow substantially. This 2004 and the first pilot projects have al- in turn implies much stricter requirements ready been started. However, no legislation in order to assure co-funding from national has been adopted so far in this area. public sources. In the current programming period co- Czech public finances are characterised by funding is possible also from private sourc- a growing general government deficit and a es. However, this condition is not included relatively low but rapidly increasing public into the Commission’s proposal for the debt. The state budget is afflicted by perma- next programming period. This could cause nent deficits driven mainly by high manda- problems for the government to guarantee tory expenditures. Mandatory expenditures sufficient financial sources for the co-fund- (e.g. social transfers, debt service, state ing requirement. Additionally, it would be contributions to the health insurance sys- convenient to maintain this feature in light tem, etc.) represent 55 percent of overall of the importance to enhance public private 124
- 99. 6 The CzechRepublic and Cohesion Policy partnership. Therefore, the Czech govern- hope of narrowing regional disparities and ment needs to push the idea of involving securing balanced regional development, private sources in order to make it part of the Communist regime chose to engage in the new ECP. major income redistribution and centrally planed relocation of industries, resulting in, The Czech government should also focus for example, strong concentration of min- on mistake-free administration of individu- ing and heavy engineering industries in al operational programmes. It has recently certain regions (especially in North-West come under strong criticism due to chang- and Moravia-Silesia). ing rules and conditions during the prepara- tory phase of projects, such that the appli- Even though the redistribution efforts led to cants were sometimes unable to adapt to narrower regional disparities in the Czech modified rules in time. The unsatisfactory Republic than in the former EU15,52 the state of the knowledge and lack of experi- approach laid strong and undeniable foun- ence of civil servants in several cases com- dations for the structural problems we see plicated the process of preparing individual today in some parts of the country. The past projects. era stands as an important example of what Tsoukalis calls “the risk of government fail- In order to receive money from the Struc- ure”.53 Despite major progress in the Czech tural Funds it is also important to be able Republic during the past fifteen years of to develop quality projects. Despite the use putting right the wrongs of the past regime, of financial sources within the PHARE pro- the legacy of the former system still mirrors gramme, the applicants in many cases had itself in the country’s structural problems. poor or no experience of how to prepare projects and fill out application forms. From a macroeconomic point of view, eco- nomic growth in the Czech Republic is It seems that both civil servants responsi- higher than in the former EU15. However, ble for the Structural Funds and potential in comparison with the other CEECMS, the applicants have gone through a learning Czech Republic rates as average, if not be- process. Experience, skills and knowledge low average (see Graph 6.1, next page). As gained from the current programming pe- a relatively small, open and trade-depend- riod could fundamentally contribute to a ent economy, the Czech Republic and its more efficient use of the funds. future growth perspectives are to a large extent dependent on the performance of the European economy, especially that of Ger- 6.6 Expert view on situation in many.54 Czech Republic The challenges faced by the Czech Repub- We would like to begin our discussion lic, ranging from structural unemployment, of the issues that are important for sus- unsatisfactory state of transport infrastruc- tained future economic growth by listing ture and environment, to low mobility of some of the most urgent challenges the the labour force, to mention but a few, can 52 As measured in terms of unemployment and GDP still be, to a great extent, assigned to the per capita levels. legacy of the centrally planned economy 53 Tsoukalis (1997). under the former Communist regime. In the 54 We return to this issue below. 125
- 100. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States Graph 6.1 Annual GNI growth at market prices (%) 8.00 7.00 Annual GNI growth (%) 6.00 5.00 4.00 3.00 2.00 1.00 0.00 -1.00 -2.00 1996 1997 1998 1999 2000 2001 2002 2003 2004 CZ PL SK DE UK Source: Eurostat and own calculations Czech Republic is faced with. Even though 2005 (CSO). Despite the fact that the em- the following list does not give an exhaus- ployment rate is relatively high and the un- tive picture (see the National Development employment rate is close to the EU average, Plan) it should however provide the reader the Czech labour market displays a number with an elementary view of the current situ- of structural shortcomings. First, there are ation of the country. marked regional disparities with respect to unemployment. The unemployment rate in structurally weak regions is more than four 6.6.1 Public finances times higher than in Prague and in some areas exceeds 25 percent. This is particu- The most critical question with respect to larly the case in the northern regions, where Czech economic policy is the question of structural unemployment has become a public finances. As noted, the general gov- chronic problem with many negative con- ernment deficit has been rising in recent sequences, not only for the unemployed years and public debt has increased rapidly. but also for the welfare system. Second, the Rising deficits and high mandatory spend- share of long-term unemployed can be re- ing result in a situation where there is lit- garded as high, reaching 37 percent of the tle room for “productive public spending”. total number of unemployed in 2002. The Especially worrying in this regard are the increase in the number of long-term unem- possible consequences of this situation, ployed is a major negative phenomenon. should the issue receive less attention than Third, youth unemployment (people under it rightly deserves. 25 years old) is very high. In 2002, the av- erage share of people under 25 registered as unemployed was almost 17 percent of 6.6.2. Labour market and regional the total number of unemployed. Here, too, disparities there were substantial regional disparities. The structural shortcomings in the Czech The unemployment rate in the Czech Re- labour market mirror a low occupational public reached 9.65 percent in February flexibility and a low geographical mobility 126
- 101. 6 The CzechRepublic and Cohesion Policy of the labour force. 6.6.4 Secondary and tertiary sectors It is interesting to consider the composi- tion of the unemployed, particularly with The most acute challenges of the secondary respect to their educational background. and tertiary sectors are arguably the rela- Graph 6.2 (data form CSO, 2004) clearly tively low value added of the production shows that job seekers without “arbiture” in the secondary sector; the relatively low make up nearly a half of the total number of export ability of SMEs; insufficient invest- unemployed, regardless of their age. ment resources; and insufficient develop- ment and transfer of new technologies, as Graph 6.2: Educational structure of unemployed in the Czech Republic well as a lower level of productivity than (2004, 3rd quarter) needed. 60 50 40 6.6.5 Transport infrastructure, 30 technical infrastructure and 20 environment 10 0 The qualitative characteristics of the trans- Basic education Higher education without arbiture Higher education with arbiture University education port infrastructure network do not corre- Unemployed, total Unemployed, 15 - 24 years of age spond to the conditions of the former EU15. This has a negative effect on the environ- ment, the development of entrepreneurial 6.6.3 Employment composition activities and on the mobility of the labour force, especially in regions with structural In comparison with the former EU15 the problems. Some parts of the transport in- employment in the secondary sector55 re- frastructure embodied in the TENs can be mains relatively high in relation to the ter- regarded as unsatisfactory from the point of tiary sector.56 We should be able to expect view of both current requirements and fu- that the continuing structural changes in the ture needs. The quality and quantity of the secondary sector (where a large proportion technical infrastructure is also being tested is still made up of industry) may release to its limits in many parts of the country. more workers, creating additional pressure The above together with unsuitable waste on the tertiary sector. It can be argued that industry, high energy demands of the in- the absorption capacity of this sector is al- dustry and households in general, past en- most exhausted, due to its level of satura- vironmental legacy as well as the low ratio tion. of renewable energy resources, present a great challenge to the environmental situa- tion of the country. 55 The secondary sector represents the part of the economy that is devoted to the processing of basic materials extracted by the primary sector. 56 The tertiary sector represents the part of the economy that is devoted to service activities. 127
- 102. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States 6.6.6 In the “middle” of the debate competitiveness.60” To reach these objec- tives the Czech Republic has set itself three Without prejudice to the fact that this paper specific objectives, namely: focuses on the future of European Cohe- 1. creating conditions for business envi- sion policy from the point of view of the ronment; new Member States, what must not be dis- 2. increasing labour market flexibility; regarded is the fact that the Czech Repub- 3. improving the quality of infrastructure. lic and its future growth perspectives are closely tied to the performance of the Euro- These objectives are then developed into pean economy as such. This does not nec- the following priority axes: essarily imply that what is good for Europe • increasing the competitiveness of in- is a priori good for the Czech Republic, but dustry and business services; it does imply that the economic develop- • development of transport infrastruc- ments in Europe will have a strong impact ture; on the Czech economy. A general view that • human resource development; takes this into account must be put forth be- • protection and improvement of the fore we can adequately discuss the future environment; Cohesion Policy. • rural development and multi-func- tional agriculture; In particular, we would like reiterate the • development of tourism. conclusions of the Sapir report, which stat- ed that “the EU system has failed to deliver The rationale behind the strategy for the a satisfactory growth performance.57” The shortened period 2004 – 2006, but no doubt report points out that “growth must become also for the longer term, is to “develop a Europe’s number one priority58” and that range of key interventions in a limited growth is pivotal in achieving the econom- number of core areas which will support ic, social and environmental objectives of the strengthening of the competitiveness of the enlarged Union and crucial in helping the Czech economy by creating the condi- to fulfil the Union’s political objectives. To tions for higher productivity growth while a great extent the same can be said about the addressing structural problems in the labour Czech Republic. The most important docu- market.61” ments in this regard, the National Develop- ment Plan and the CSF, seem to recognise If the above is the goal of the Czech Re- this fact. The National Development Plan public, it is important to note its position in states that the “long term aim of the Czech the so-called post-Berlin debate, that is to Republic is to reach sustainable growth, say, to the debate regarding the reform of which will enable continuous convergence the European Structural and Cohesion Pol- towards the economic level reaching the icy. First of all the Czech government fully EU average.59” The global objective of the supports the policy’s goals embodied in the Czech Republic in this regard is then de- Treaty and wants to see a continuation of the fined as “sustainable development based on Cohesion Policy in the future. In this sense 57 Sapir et al. (2003), p. I. 58 60 Sapir et al. (2003), p. I. NDP (2003), p. 117. 59 61 NDP (2003), p. 117. CSF (not dated), p. 6. 128
- 103. 6 The CzechRepublic and Cohesion Policy it can be argued that the Czech government parts. leans towards the values of social market 1. The philosophy of the policy (or the un- economy as defined by the Commission in derlying principles). As stated previous- 1996,62 that is to say, towards the objective ly, the general view is strongly leaning of creating a system of European liberal de- towards solidarity and, which will be- mocracy capable of regulating markets, re- come clear later, also arguably towards distributing resources and shaping partner- the New Growth Theory. Particularly ship among public and private actors in the the need for retention of the principle of European arena.63 One could argue that this concentration, or, so to speak, a philos- view is to a certain extent coloured by the ophy of “positive discrimination” (con- fact that the Czech government has been centrating funds into the least developed dominated by the Social Democratic Party regions), is frequently signposted. since 1998. However, were the system en- 2. The objectives of the policy. On the lev- tirely left to the mechanisms and logic of el of objectives of the Cohesion policy the market forces, there is arguably a grain an intrinsic link is made to the Lisbon of truth to the argument that it would take Strategy. The need to support the in- too long to secure a socially desirable equi- novation processes in the economy is librium. strongly emphasised, including support The Czech position in the post-Berlin de- for the implementation of information bate closely corresponds to the goals and technology, thus enhancing competi- objectives of the country’s National Devel- tiveness. Furthermore, it has been sug- opment Plan. What is interesting to note gested that the Cohesion Policy should is that the Czech Republic does not take a primarily take into account the goals of clear stand in the ECP debate. Arguably, the sustainable territorial development, ad- Czech Republic, while agreeing with the aptation of human resources to labour need of retention of the Cohesion Policy on market conditions and infrastructure the one hand, seems to support certain at- development. Obviously, a strong link tributes of what has been called a re-nation- to the Czech National Development alisation of the Cohesion Policy. It will be- Plan can be detected here. Moreover, it come clear that the Czech government does is arguably fundamental that the Cohe- not protest in principle to a certain level of sion Policy instruments regarding em- open method of co-ordination (OMC), also ployment and social integration should titled a “framework for devolved regional be developed on the basis of the nation- policy” by the UK,64 or what Austria titles al action plans and not the other way the “light governance approach”.65 The around. This represents a clear move Czech position should be divided into three towards the notion of proportionality. 62 3. The delivery principles. Here too we This model “seeks to combine a system of economic organisation based on market forces, can see a move towards proportional- freedom of opportunity and enterprise with a com- ity. First of all, a definition and clarifi- mitment to values of internal solidarity and mutual cation of the role, relations and powers support which ensures open access for all members between the European Union, Member of society to services of general benefit and protec- States and individual regions are be- tion” (COM 1996, p. 13). 63 Hooghe and Marks (2001). lieved to be key issues. It can be also ar- 64 Rawlins (2003) gued that the need for a certain level of 65 Austria (2003) OMC is proposed in many ways, shapes 129
- 104. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States and forms, as the need for decentralisa- create a single fund in the future. tion in the enlarged Union is viewed as acute. It is further suggested that dif- ferent levels of co-funding should be 6.6.7 Sustainable development used and that more developed Member based on competitiveness States should be capable of providing more national resources for their under- As noted, the problem of the public finances developed regions than poorer Member in the Czech Republic is the most critical is- States.66 In addition, more emphasis on sue as regards its economic policy. The cur- OMC is implied with respect to the use rent situation may have far-reaching conse- of Structural Funds and the Cohesion quences and the reform of public finances Fund in the Member States receiving should be the number one priority; not only assistance from both, as it is suggested for the government, but for the whole po- that the ration between the above instru- litical spectrum. The imminent question to ments should be decided on the basis ponder is whether the European Cohesion of the priorities of the given Member Policy can play a valuable role and provide State. Joining a long cue of countries, added value in this regard. the Czech Republic has made it cleat that a simplification of the regulation Clearly, the large government deficits and of the Structural Funds and the Cohe- public debt must be stabilised. Furthermore, sion Fund is desirable. In this regard the cuts may also have to be made in mandatory Czech Republic does not shy away from expenditures. The current situation seems to suggesting directions. For example, it “strangle” what the National Development has pointed at the need to simplify ad- Plan calls a “productive public spending”.67 ministration and implementation proce- On the other hand, the result of a reform dures, reduce the number of program- that has not been meticulously planned ming documents, and the need to find may be equally disheartening. A cut in the a solution to the demanding financial national budget could endanger the applica- management, or to at least provide a tion of the National Development Plan and clearer definition for recognising costs. put into question the Czech ability to co-fi- Finally, the Czech Republic proposes to nance assistance from the Structural Funds and the Cohesion Fund. It can therefore be 66 This view arguably correlates with that of Ger- argued that in the long term, public finances many, Netherlands, Austria, Sweden, Denmark and can be improved through five intrinsically the UK. Nevertheless, the proposals supported by linked directions (or priorities). Further- the above Member States would with some cer- more, it can be argued that, although it may tainty mean a decrease in funds for the ECP, which not be apparent, the ECP has a fundamental is clear from the UK position (the UK government stresses the necessity of a fair budgetary deal for role to play. the UK taxpayer; see UK, 2003b) and Sweden (who views the 0.45% threshold of the EU GDP on Let us therefore return for a moment to the the Structural Funds budget as unacceptably high; Sapir report. The argument put forward by see Sweden, 2003, p. 1). Interestingly, the Czech Sapir, stating that economic growth should government has stated that the volume of EU funds for the Cohesion Policy should be sufficient to al- be viewed as means of achieving the eco- low for the goals of the new ECP to be fulfilled, but do not provide any further details. 67 NDP (2003). 130
- 105. 6 The CzechRepublic and Cohesion Policy nomic, social and environmental objec- The public sector tives, should be understood as an underlying principle of the Czech Republic’s economic What seems to be fundamental as regards and structural priorities. Furthermore, it is the situation with the public finances, bear- clear from the Czech position regarding the ing in mind the need to secure “productive post-Berlin debate that the country hopes to public spending”, is the need to reform the choose an approach that does not promote public sector. Institutional failure undoubt- “growth at any cost”. Rather, it should pro- edly contributes to the weakening of posi- mote sustainable growth based on competi- tive motivation of economically active enti- tiveness,68 conscious of the fact that market ties. The competitiveness of an economy— failures do exist and should be (to a certain and, indeed, the quality of the development extent) addressed. While by no means de- of the whole society—is conditioned on the nying the global and specific objectives of quality of its institutions, which helps to Figure 6.1: Renegotiated priorities create the basic framework for the activities of the Czech Republic - Sustainable of the different spheres of society.69 Institu- Development Based on Competitiveness tion building, institution capacity and insti- tution learning have played and continue to ENVIRONMENT play a crucial role in the risk of government failure.70 If it is argued that, on the basis of Public sector the quality of institutions, “the prospects for effective use of structural funds in the Infrastructure Entrepreneurial environment Development of human (then) accession countries are limited71”, (SMEs) resources then this line of reasoning implies that the quality of institutions in the new Member Innovation, R&D States (including the Czech Republic) is far from satisfactory. This problem has been the National Development Plan, Figure 6.1 recognised by the Commission.72 Accord- attempts to “renegotiate” the priorities and ing to the proposal for the future ECP, the objectives into a form that could be seen to Commission wants the “adaptation of pub- be intrinsically linked to the short as well lic administration to change through ad- as the medium term needs of the Czech Re- ministrative and capacity building.73” This public. Notwithstanding applicability and still seems to be an important place for the logic, it can be argued that some parts of Cohesion Policy. the NDP have been designed to fit with the Cohesion policy’s objectives and could be The policy can help in what can be para- approached, at least from the Czech point phrased as the “adaptive efficiency” of the of view, through different ways and means. public institutions.74 From a practical point What springs to mind is for example prior- ity axes 5 and 6, titled Multi-functional Ag- 69 This view is supported by inter alia Sapir et al. riculture and Development of Tourism. (2003); Ederveen, de Groot and Nahuis (2002); and Bailey and De Propris (2000). 70 Tsoukalis (1997). 71 Ederveen, de Groot and Nahuis (2002), p. 17. 72 COM (2002), p. 2. 73 COM (2003), p. xli. 74 68 NPP (2003). North (1990), Cortright (2001). 131
- 106. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States of view, the primary focus should lean to- in human capital, drive economic growth wards personnel and process audits of the and that an economy that “rewards” inno- public sector. Furthermore, IT and lan- vators will grow faster. Similarly, the need guage proficiency must not be forgotten. does not only stem from the goals of the Arguably, more use of information tech- Lisbon strategy. Arguably, the underlying nology, e-government and the creation of need is also more basic, but equally valu- “one contact points” are also fundamental. able. The Czech Republic does not possess In addition, continued institution learning75 many natural resources. The only way for based on the exchange of experience and the country to secure growth is through a OMC should not be underestimated. Even continuing reorientation towards a knowl- though it is a long term goal, increased ef- edge based economy while trying to in- fectiveness of public institutions is arguably crease the value added of its output. This a pillar pre-requisite for a well functioning can only be secured through focusing on society and economy, as these institutions the above objectives. In this regard a much can be said to “draw the rules of the game”. stronger connection must be established The above contribution should—in the between the private sector and educational sense of Sapir’s proposals76—be conducted institutions. Thus, education could take on on the basis of an increased conditionality a more practical and project oriented form approach, through the “output logic” (goals and structure. The content of education, es- reached) rather that “input logic” (money pecially in industry orientated schools and spent). Finally, it should be underlined that universities, should focus on broadening what is generally needed is a more proactive the practical skills of its students, ranging approach from the public sector towards from project management, teamwork and those who have the potential to become the communication skills to the implementa- beneficiaries of the Structural Funds. What tion of solutions in industrial environment we mean by this is that one should attempt and the involvement in real problem solv- to go beyond information campaigns and ing. The opening of departments in educa- follow them up with what could be called tion institutions from other EU Member a qualitative, rather than quantitative, ap- States should be actively supported. proach. It is thus important to engage in a dialogue prior to the application stage. It is important to note that there may be a possible risk related to innovation, R&D and technology, which is the so-called Innovation, R&D, technology and hu- “cumulative gravitation mechanism”. The man resources development cumulative gravitation mechanism results in regional growth clusters, which Hitiris, The need to support innovation, R&D, on the basis of Gunnar Myrdal’s work,77 technology and the need for a continued titles “poles of development”, causing “in- development of human resources do not tra-country polarisation”.78 In other words, only stem from the premises of the New already developed regions continue to Growth Theory, which claims that knowl- grow at the expense of relatively backward edge and innovation, as well as investment regions, which are experiencing cumula- 75 77 On all levels: state, region and municipality. Myrdal (1957). 76 78 Sapir et al. (2003), p.148 Hitiris (2003), p. 222. 132
- 107. 6 The CzechRepublic and Cohesion Policy tive economic decline and become further Infrastructure and environment handicapped. The implication of this line of reasoning is that funds should be directed Both transport and technical infrastructure to regions that need to undergo structural play a pillar role for the future develop- change. In practical terms, investments ment of the country; for many different and should foster or attempt to lay the founda- intrinsically linked reasons. Not only will tions for the creation of new growth poles the quality of the infrastructure help to in- and their potential spread effects, rather tensify economic activities, it will also help than be directed towards the current growth to promote greater mobility of the labour poles (e.g. Prague), potentially magnifying force (especially in a relatively small coun- what Gunnar Myrdal79 called “backwash try as the Czech Republic). At the same effects”. This indicates in turn a need for time the quality of infrastructure has an im- further enforcement of innovation centres mense impact on the environment. For ex- through venture funds and PPP. The plan ample, the unsatisfactory state of the Czech by the Czech Ministry of Industry to es- transport infrastructure, in every sense of tablish a special venture capital fund there- the word, shows that there is a clear link fore seems particularly promising.80 It goes to the state of the environment. This link without saying that the promotion of inno- has been further accentuated after the ac- vation centres in the structurally weakest cession of the Czech Republic to the EU, as regions must be accompanied by with in- the transit transport has risen by 50 percent vestments in human capital and infrastruc- since May 2004. ture. Projects based on the OMC approach, aiming at knowledge and experience ex- The TENs cannot be the only priority with change by creating the so called “flexible respect to transport infrastructure in the fu- education system”81 should be increasingly ture. The creation of a quality transport in- encouraged. An attempt at promoting the frastructure to and within structurally weak mentioned “output logic” should be strong- regions must also be regarded as an im- ly emphasised. Some of the indicators of mensely important priority. Furthermore, success could, for example, be the follow- trans-border infrastructure in and between ing: the border regions must be supported. As • Output value added regards the technical infrastructure, waste • Increase of export output (composi- policy and energy consumption are arguably tion of export output) the key elements. For example, Structural • The ration of high-tech sector em- Funds in conjunction with private capital ployment might successfully cooperate to revitalise • The number of unemployed per one ageing housing stocks, which has proved job offer to be unsatisfactory with respect to energy consumption. This approach could secure energy savings of as much as 10 percent of total household consumption. Once again, the need for “output logic” and increased conditionality is apparent. It can be argued 79 Myrdal (1957). that the “output logic” approach can secure 80 Bautzova and Hrstkova (2005). the value added of the Structural Funds and 81 NDP (2003), p. 123. the Cohesion Fund. 133
- 108. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States Entrepreneurial environment tural problems in the labour market82”, also seems to be the right course to take. Nev- The support of entrepreneurial environ- ertheless, major challenges lay ahead. The ment and of SMEs must be viewed as es- problem of how one should create the con- sential. The development and expansion of ditions for higher productivity is the most SMEs have a great impact on the overall fundamental challenge of all and there is no stability and performance of the economy. simple solution to this problem. Furthermore, SMEs poses a great level of adaptability regarding market demands, European regional policy has an immense and has proven to be an important engine role to play in helping to create the right in the creation of new employment oppor- conditions for economic growth. The sup- tunities. In this regard the emphasis must port of entrepreneurial environment and of be put on the enhancement of a good en- SMEs must be viewed as essential. In this trepreneurial environment, an environment regard the emphasis must be put on the en- where legislation and the concerned public hancement of a good entrepreneurial envi- administration motivates rather than de- ronment, an environment where legislation motivates entrepreneurship, that is to say, and the concerned public administration an environment where the playing field is motivates rather than de-motivates entre- levelled and just. To this end the Structural preneurship; an environment where the Funds can, in the future, play an immensely playing field is levelled and just. But this important role. As Figure 1 suggests, the must not be the sole focus of the policy. If enhancement of a good entrepreneurial en- economic growth is to be sustained, espe- vironment, as well as the support of SMEs, cially in the Czech Republic, it has to be should be a key priority, but only as a part based on innovation, R&D and new tech- of intrinsically linked and mutually sup- nologies. First and foremost, it must be an portive activities and priorities. economic growth that is anchored in the development of human resources. To this 6.7 Conclusions end, what is arguably needed is more “out- put logic” in the whole policy rationale and It is important to note and underline that the more OMC approach with regards to the Czech Republic undoubtedly has benefited priority setting. from its year-long membership in the Eu- ropean Union—and on many levels. With From a broader point of view, it is certain relatively strong growth and exports, low that EU regional policy has its place in to- inflation and low interest rates, the coun- day’s Europe. The post-Berlin debate made try has the potential to sustain its promising it clear that some of the fundamental issues, growth path. In addition, the general course namely those centring on the philosophy, set by the National Development Plan, scale and spread of the policy, may be a which seeks to “develop a range of key in- source of severe tensions when the future terventions in a limited number of core ar- ECP is up for its final deliberation in the eas which will support the strengthening of Council. After nearly half a century of Eu- the competitiveness of the Czech economy ropean integration the respective Member by creating the conditions for higher pro- States’ governments seem to be deeply en- ductivity growth while addressing struc- 82 CSF (200?), p. 6. 134
- 109. 6 The CzechRepublic and Cohesion Policy trenched in positions that can only be titled juste retour. Thus, the time has come when we ought to reflect on the past and begin to debate the underlying and fundamental question of the European integration: Is the European Union a Union of Member States or a Union of peoples? Such a debate would in turn undoubtedly reflect on the future European regional policy. 135
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- 112. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States European Union Information Centre with Delegation of European Commission in the Czech Republic, 2003, Finanční zdroje EU poskytnuté České republice před vstupem do Evropské unie v letech 1990-2003. Prague: Delegation of European Commission in the Czech Republic. EurActiv, 2004a, Program Phare 2003 RLZ pozastaven [Internet]. EurActiv, 8 November 2004 [cited 13 February 2005]. Available from http://www.euractiv.cz/ ?a=show&cid=776&sid=27&pid=27 EurActiv, 2004b, ČR může opět čerpat dotace z programu Phare [Internet]. EurActiv, 9 December 2004 [cited 13 February 2005]. Available from http://www.euractiv.cz/ ?a=show&cid=891&sid=27&pid=27 Government resolution no. 245 on progress in preparation of the Czech Republic for EU Structural funds and Cohesion fund in budget period 2007 – 2013 Hitiris, T., 2003, European Union Economics, 5th ed. England: Pearson Education Limited Hooghe, L., and Marks, G., 2001, Multi-Level Governance and European Integration, USA: Rowman & Littlefield Publishers, Inc. Horáček, Jiří, 2002, Podpora přeshraniční spolupráce – CBC Phare [Internet]. Integrace, 18 March 2002 [cited 13 February 2005]. Available from http://www.integrace.cz/integrace/clanek.asp?id=478 Ministry of Environment, not dated, Seznam schválených projektů ISPA [Internet]. Ministry of Environment, not dated [cited 24 February 2005]. Available from http://www.env.cz/AIS/web-pub.nsf/$pid/MZPVBF4K4R73/$FILE/OIF- seznam_schvalenych_projektu_ISPA-20040505.xls Ministry of Local Development, 2004a, Phare [Internet]. Ministry of Local Development, 10 May 2004 [cited 7 February 2005]. Available from http://www.strukturalni-fondy.cz/index.php?show=000010001 Ministry of Local Development, 2004b, CBC Phare 1994-1999 [Internet]. Ministry of Local Development, 12 May 2004 [cited 7 February 2005]. Available from http://www.strukturalni-fondy.cz/index.php?show=000010001000000 Ministry of Local Development, 2004c, Informace of vývoji předvstupního nástroje ISPA [Internet]. Ministry of Local Development, 12 January 2004 [cited 13 February 2005]. Available from http://www.strukturalni-fondy.cz/index.php?show=000010001000001 Ministry of Local Development, 2005, CBC Phare 2000-2006 [Internet]. Ministry of Local Development, 26 January 2005 [cited 7 February 2005]. Available from http://www.strukturalni-fondy.cz/index.php?show=000010001000001 138
- 113. 6 The CzechRepublic and Cohesion Policy Ministry of Transport, not dated, ISPA v sektoru dopravy [Internet]. Ministry of Transport, not dated [cited 24 February 2005]. Available from http://www.mdcr.cz/cz/index03.htm Myrdal, G., 1957, Economic Theory and Underdeveloped Regions, London: Duckworth National Development Plan (Národní rozvojový plán), 2003, Ministry for Regional Development, North, D. C., 1990, Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University Press Pravda, Ondřej, 2002, Phare v oblasti hospodářské a sociální soudržnosti v letech 2000- 2004 [Internet]. Integrace, 18 March 2002 [cited 13 February 2005]. Available from http:// www.integrace.cz/integrace/clanek.asp?id=477 Rawlins, D., 2003, Future of the EU regional policy, The Department of Trade and Industry, UK Government, http://www.dti.gov.uk/europe/pdfs/psfrce.pdf Sapir, A., et al., 2003, An Agenda for a Growing Europe – Making the EU Economic System Deliver, Report of an Independent High-Level Study Group established on the initiative of the President of the European Commission, Brussels Tsoukalis, L., 1997, The New European Economy Revisited, New York, Oxford University Press Internet sources www.europa.eu.int www.strukturalni-fondy.cz/index.php?show=000008001001005003 www.strukturalni-fondy.cz/upload/1074592072communitysupportframework.pdf www.hospodarskastrategie.org – information on new Economic Growth Strategy 139
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- 115. 7 Slovakia andCohesion Policy 7 SLOVAKIA AND COHESION POLICY Karol Frank, Veronika Hvozdíková and Vladimír Kvetan* 7.1 Introduction Regional development in the European Un- sion of the circulation of foreign currencies ion is constantly changing and it is a proc- in the economy; and a depreciation of the ess that poses a number of challenges to the Czechoslovak Koruna of more than 80 per- new Member States. Most of them have cent. Furthermore, the basic goals of struc- undergone an economic transition that has tural policy were also specified. represented a tremendous challenge, unpar- alleled in their modern history. European With the formation of Slovak Republic on integration and the Cohesion Policy com- 1 January 1993,2 the process of building the bined are therefore seen as a possibility to necessary institutional framework for an accelerate and successfully catch-up with independent state took off. However, lack the market economies of the EU15. of experience, insufficient human capital, various structural problems, controversies Slovakia began its transition process in as regards the transition method, inade- 1991 as a part of the Czech and Slovak Fed- quate administrative capacities, a low level erative Republic (ČSFR). The new federal of law enforcement and other problems se- government, formed after the collapse of riously hampered this process. the Communist regime, started to prepare for a legislative, economic and administra- During 1994 – 1998 Slovakia underwent tive reform in the beginning of 1990.1 By the so called “Own way of transition” as a the end of 1990, the economic reform was reaction to the federal transition strategy, presented to the public. The main tasks of which it opposed. In 1995 Slovakia applied this reform were fast and massive privatisa- for EU membership. Although becoming a tion; price liberalisation and liberalisation part of the European integration was one of foreign economic relationships; macr- of the most important priorities of the gov- oeconomic balance; and the establishment 2 of a social security system. The reform also The unsolvable situation as to the competencies carried with it a restrictive monetary and between national and federal levels was one of the crucial factors that led to the split. Another impor- fiscal policy regime; a mechanism of in- tant reason was the different impacts of the transi- ternal convertibility of the currency; exclu- tion process on the social situation on the national level. Conversion of heavy military industry, deep structural problems of the Slovak industry and the * The authors are researchers at the Institute of so-called “radical” way of transition had a severe Slovak and World Economy of Slovak Academy of impact on the economical and social situation in Sciences (ISWE SAS). entire regions. The necessity of a deeper social thus 1 Morvay (2005). consideration became an important topic. 141
- 116. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States ernment, the actual outcome was quite the 7.2 The experience of Slovakia opposite. At the Luxemburg Summit in De- with pre-accession support cember 1997, the European Council decid- ed not to open accession negotiations with The pre-accession instruments have played Slovakia. The main arguments provided in an important role in the integration process. Luxemburg were the instability of constitu- The availability of pre-accession assistance tional institutions and the democratic defi- for economic development (PHARE), for cit. environment and transport (ISPA) and for agricultural and rural development (SAP- After the 1998 parliamentary election a ARD) has paved the way for the substan- new government with a different policy ori- tial increase in funding that has taken place entation (as compared to the 1994 – 1998 since accession in 2004. government) brought with it a change in the Slovakia – EU relations. Slovakia was per- The management of the pre-accession sup- sistent in its efforts to fulfil the Copenhagen port is based on the idea of Decentralized criteria, which eventually paid off as it led Implementation System (DIS). Financial to an invitation to open accession negotia- management was assigned by the so-called tions in December 1999 in Helsinki. National Fund (NF), founded by the gov- ernment resolutions Nr. 856, (2.12.1998). After 1999 Slovakia underwent a substan- The NF was integrated into the Section of tial shift in economic policy and political European Matters within the Ministry of development and has since implemented Finance in March 2003. Based on the gov- substantial economic reforms, including ernment resolution Nr. 133 (5.2.2002), the reforms of the tax-, pension-, healthcare-, NF is authorised to perform payments from welfare- and social security systems. Al- the Cohesion Fund and it is also responsi- though the reforms have created the neces- ble for financial management of this fund. sary conditions for overall macroeconomic The NF is also has the responsibility for the stability, substantial regional disparities accounting of all the financial sources from still exist in Slovakia.3 the Commission—pre-accession as well as post-accession. The financial management Our contribution would like to present a of EU resources and the designation of co- Slovak perspective to the discussion about funding from national resources has been the future ECP and present our vision of the responsibility of the National Author- this policy on the premise that it should izing Offices (NAO). The NF was a part form a forceful regional policy in the EU in of the DIS together with the Implementa- general and in Slovakia in particular. tion Agencies (IA). The IA:s have been responsible for announcing and executing public procurements. They have also been responsible for its progress, the contracting procedure, cooperation with final grant re- ceivers and for payments and professional realization of investment support projects and other projects. 3 See Chapter 2 for further references. 142
- 117. 7 Slovakia andCohesion Policy 7.2.1 PHARE The largest infrastructure projects were re- lated to the highway network development At the present time, four PHARE Imple- (Bratislava – bypass Mierová), while the menting Agencies are in operation.4 The most tangible projects based on Cross-bor- PHARE support was based of Financial der Cooperation (CBC) was the construction Memorandums 1998 – 2002. The pivotal of the bridge over the Danube River (con- fields for the use of PHARE support have necting Štúrovo in Slovakia with Ostrihom been the pre-accession activities and in- in Hungary). The PHARE communitarian frastructure building. The key objective of programs were mostly oriented towards the PHARE support has been to enact and research (the 5th Framework Programme), strengthen transparency in the process of education and culture. Only a small share gaining and using the resources to avoid was used to supporting SMEs. One of the dispersion of funds. Significant progress weaknesses in the utilisation of the funds in the fields of programming, coordination was timing, because a lot of sources were and improving administrative capabilities contracted at a very late stage in the proc- has been achieved in recent years. ess, which was mainly due to problems in public procurement. The Central Financing and Contracting Unit (CFCU) has proven to be effective in handling the financial administration of 7.2.2 ISPA PHARE’s “Institution-Building” projects. CFCU was the main consumer of the ISPA projects were carried out by several PHARE funds in the years 1999 – 2003 implementation agencies: (nearly 75 percent of PHARE resources). • Implementation Agency of Envi- ronmental Investment Projects of The Regional Development Support Agen- Ministry of Environment (IA EIP); cy was responsible mostly for implement- • Implementation agency of Slovak ing Cross-Border Cooperation programs, Railroads (IA ŽSR); building the infrastructure for Roma com- • Implementation agency of Slovak munities and also for most of the econom- Road Governing (IA SSC). ic and social cohesion projects. The main problem of IA RDA was mainly to do with a There were substantial difficulties as re- relatively low rate of contracting. Enormous gards ISPA environment projects in Slova- efforts have been made to strengthen the kia. It took two years to start the environ- administrative capacity within the Agency, mental projects, mostly because of a lack but progress is still needed in management of suitable environmental projects. In 2002 capabilities and in project implementation the number of projects in force allowed in order to pave the way for an optimal uti- Slovakia to obtain more than its average al- lisation of future cohesion assistance. location. The programming improvements have also been matched by a steady im- provement in implementation. 4 The Central Financing and Contracting Unit (CFCU), the Slovak Post-Privatization Fund, the National Agency for Development of SMEs Almost all funding of environment projects (NADSME) and the Regional Development Sup- have been channelled to investments in the port Agency. heavy water sector. The active involvement 143
- 118. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States of regions and municipalities—water com- Ministries for the private sector shortly af- panies were crucial for the technical and ter they have gained sufficient experience. environmental preparation of the 18 ISPA drinking water and waste water projects. Only one project non water sector project 7.2.3 SAPARD was launched in air protection in 2003. Slovakia obtained accreditation based on The transport sector was already perform- the SAPARD programme in only 5 objec- ing well from the start. The main explana- tives on 15 April 2002. tion for this is mainly a good preparation • No. 1 - Investments to agriculture of infrastructure projects in the years 1996 enterprises – 1998. During these years, substantial in- • No. 2 – Improvement of manufacturing frastructure construction, financed by gov- and marketability of agriculture and ernment expenditures, took place. In 1998 fish products the government changed and so did the at- • No. 4a – Diversification activities titude towards government investments in in rural area and non-infrastructure transport infrastructure. The necessity to investment reduce the budget deficit led to a decrease • No. 5 – Forestry in the number of government investment • No. 7 – Land adjustments. projects. After the introduction of ISPA, however, “old projects” could be used to Accreditation for the remainder of the ob- obtain “new” resources. jectives (3, 4b, 6, 8, 9) was obtained on 14 August 2003. The most important impact of ISPA pro- grammes as regards the rail sector was the The most significant problems with respect renovation of a substantial part of the impor- to the implementation of projects concerned tant international TINA/TEN corridor V.a the poor accessibility to free resources, between Bratislava and Žilina. Concerning difficult conditions for basic industry and roads, the financing of the city motorway unfortunate changes in climate (floods in between Vienna and the Riverport Bridge 2002, freezing spring and dry summer in (bypass in Bratislava) closed an important 2003). Insufficient compensation for these strategic gap, while linking the TINA/TEN climate changes affected the number of pro- corridors V.a and VI. posed projects mostly in the objective No. 1 Investments to agriculture enterprises. As regards the implementation agencies, which were established in the relevant ministries, administrative staff increased. 7.2.4 Main achievements of the While the increase was higher than the pre-accession support Commission’s recommendations, the low salaries made it difficult to recruit staff The pre-accession assistance for economic with adequate knowledge, experience and development (PHARE), environmental and background and the substantial turnover transport (ISPA), and agricultural and ru- have continued to pose a threat to efficient ral development (SAPARD) has paved the programming and sound implementation. way for the increase in funding from the In particular, young staff has often left the Structural Funds, essentially in the same 144
- 119. 7 Slovakia andCohesion Policy sectors, in 2004 – 2006. Some of the posi- 7.3 Cohesion Policy in the tive achievements to date—bearing in mind accession negotiations that programmes are still being implement- ed and results are still coming in—are the Slovakia started accession negotiations in improvements as to the administrative ca- March 2000, two years later than the other pacity and the increase in experience that Visegrad Countries. The delay was mainly the pre-accession instruments brought with due to political reasons and it meant that them. They will be vital ingredients in the Slovakia was placed in a disadvantageous utilisation of the Structural Funds and they position in the negotiation process from the will hopefully help Slovak institutions very beginning. The main problems related overcome the obstacles that we describe to negotiations were mostly of internal na- later in the text. ture. Slovakia had not elaborated a coher- ent regional policy strategy that could have Regarding the absorption capacity, Slova- served as a basis for the negotiations. Also, kia has so far been able to draw approxi- the preparation and drafting of the National mately 95 percent of the resources avail- Development Plan was both inadequate able through the PHARE and SAPARD and delayed. programmes and 120 percent of the re- sources available through ISPA.5 The case In addition to these complications, there of ISPA proved that it was possible through were also other internal problems. Above special effort to draw support at the end of all, uncertainty about the territorial and the programming period, despite contract- administrative division of Slovakia; nego- ing problems. However, the overdrawing tiators with poor experience who did not of ISPA support owed more to huge trans- have all the relevant information; struggles portation infrastructure projects than to a over competence between regional bodies, radical qualitative change in managing and central government and municipalities; and contracting. the obligation to press the schedule in the negotiation process, produced an outcome Having said that, there has been no evalu- that was not optimal. In many cases Slova- ation of the pre-accession instruments by kia accepted statements and proposals from either government officials or independent the Commission and, from our point view, researchers and it is therefore not possible applied quite passive an approach during to state with any certainty their real eco- the negotiations that concerned Slovakian nomic impact on overall economic devel- economic priorities. Examples of specific opment.6 restrictions that discriminated the efforts and requirements of Slovak applicants were certain restrictions in agricultural and rural development, where the food sector was excluded from EU funding (eligible applicants for the Sectoral Operational Pro- 5 The figures reported here are estimates made at gramme Agriculture and rural development the end of 2004 by the Ministry of Construction were only agrarian-processing subjects and Regional Development of the Slovak Republic. 6 Even though the government obtained recom- in accordance with the rules of the ECP). mendation from the Commission to evaluate the Some very important industries in Slovak economic impacts of pre accession funds. regions were also excluded from support 145
- 120. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States (such as mining and the steel industry).7 countries. The low-water mark for ISPA projects in Slovakia was reached in 2001, The Ministry of Environment had from the when only one environmental project was very beginning serious problems exploiting accepted and Slovakia lost approximately the ISPA financial limit for environmental €20 million worth of ISPA resources as a projects. As late as 2000, none of the en- consequence. Despite the initial problems, vironmental projects submitted to Brussels however, the situation changed in the fol- had been accepted, six of them because they lowing years and Slovakia has since been lacked the necessary documentation (such able to utilise the ISPA resources to approx- as the lack of a financial plan). The Minis- imately 120 percent, as measured over the try of Environment was unable to provide entire pre-accession period. in time the basic information on ISPA cri- teria to the municipalities. Moreover, there As regards the positive features of the nego- has been no tradition of large environment tiation process, the opening of negotiation infrastructure projects in Slovakia. In the chapter 21, “Regional policy and coordina- year 2000 Slovakia lost ISPA environmen- tion of structural instruments”, at the end tal support worth of €4 million, money that of March 2000 had a very positive effect on was instead transferred to Slovenia. the formation of legislation related to the implementation of EU regional policy in The described problems are mainly ex- Slovakia. At the end of 2001 the Act on the plained by the nature of ISPA, as its priori- Regional Development Support, the Act on ties are centred on projects in large agglom- Financial Control and Internal Audit, the erations. For instance, in the field of water Act on the State Statistics and the Act on sewage purification, the recommended the State Treasury, were adopted. At the costs for ISPA projects are a maximum of same time, the National Monitoring Com- €500 per capita. However, since environ- mittee was established and in January 2002 mental liabilities in Slovakia are the great- the ex-ante evaluation of the SR National est in the field of canalization and sewage Development Plan by independent experts plants building—especially in small settle- was completed and submitted to DG Regio ments and villages—projects have often and DG Enlargement. The legislative steps exceeded the maximum recommended per for the implementation of European re- capita cost. Even though the Slovak del- gional policy invoked by the accession ne- egacy on several occasions has asked for a gotiations served as a base for the accession more flexible approach due to the specific process. Negotiations on chapter 21 were conditions of the country, the rules of ISPA preliminarily closed in July 2002, which has remained the same for all participating meant that Slovakia fulfilled the basic leg- 7 islative conditions of the ECP. The National Development Plan of the SR (NDP SR) for the period 2004 – 2006 introduces four programming documents, one Operational Pro- gramme (OP Basic Infrastructure) and three Sec- toral Operational Programmes (SOP Industry and Services, SOP Human Resources and SOP Agri- culture and Rural Development) for Objective 1. As regards Objectives 2 and 3, NDP SR determines one Single Programming Document (SPD) for each of them. 146
- 121. 7 Slovakia andCohesion Policy 7.4 Selected problems, barriers 7.4.2 Decentralization of public and obstacles related to administration Cohesion Policy in Slovakia Administrative capacities with the appro- This section is thematically divided into two priate competence at the local and regional contiguous parts. The first part describes levels are essential to correctly prepare for the situation with respect to regional policy, support from the Structural Funds and the public administration and management of Cohesion Fund. Furthermore, they need the regions at the time when pre-accession to be sufficiently equipped so that they are support was launched. The second part out- able to prepare and implement develop- lines some concrete provisions of the ECP ment projects in partnership with national that has created considerable obstacles in bodies. Like the other CEECMS, Slovakia EU-funding in Slovakia, with a special em- has been characterized by a high level of phasis on the problems in lagging regions. centralisation and, as a consequence, there has been a total absence of an integrated re- gional policy from the very beginning of its 7.4.1 Background - Regional existence as an autonomous country. The division of Slovakia basic principles of an integrated regional policy were defined in 1991, but the first A special situation emerged in the early Integrated plan of regional development— stages of Slovakia’s EU membership, a which was necessary to enable the country situation that was caused by an ongoing re- to apply for pre-accession support—was gional reform and which carried with it a adopted by Parliament only in 1999. The complete change of the regional structure National plan of regional development re- in Slovakia. The three Slovakian regions quired for programming of post-accession (Western, Central and Eastern Slovakia) support was adopted in 2001, the very year were revoked and the country was instead when the decentralisation of the public ad- divided according to a new territorial archi- ministration was initiated. However, the tecture. The result was a new self-govern- municipalities obtained competence for re- ment structure,8 where the newly formed gional planning only in 20029 and they still municipalities required new regional of- did not have enough time for developing fices, new administrative capacities and the necessary administrative capacities im- new management. However, due to a lack plementing the Principle of Partnership.10 of managament experience in the regions in the new offices, along with a weak partner- In addition to insufficient experience with ship between these offices and national au- programming and planning at the regional thorities, the new agenda have continued to and local levels, there were also delays be a source of substantial delays and prob- when the methodology of regional plan- lems with respect to EU funding. ning for municipalities were prepared and released. This did not exactly strengthen 9 The process of competences transfer from the national level to the new self-governing territorial 8 Since 2002 Slovakia is territorially divided into 8 units was planned for the period 2002 – 2004. 10 upper-tier territorial units, so-called VÚC. Vojteková (2004). 147
- 122. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States the partnership between national and lo- the financial tasks are still rather central- cal levels in creating a strategy of regional ised, serious questions have arisen after the development. The methodology manual for launch of the fiscal decentralization proc- elaborating the Plan of regional economic ess, especially regarding the cooperation and social development was prepared and between regional (VÚC) and local levels adopted only in 2004. (municipalities). The experience of the municipalities in the Trenčín region (VÚC 7.4.3 Fiscal decentralisation Trenčín) serves as a good example. In ac- cordance with the decentralisation process, The document that introduced the princi- the responsibility for preparing the Eco- ples of fiscal decentralization in Slovakia, nomic and social development plan14 falls Conception of Decentralization and Mod- on the municipalities on the local level, but ernization of Public Administration, was the financial resources are allocated to the prepared within the framework of the proc- VÚCs. Unfortunately, the VÚCs do not ess of the above mentioned regional reform perform this duty in a satisfying way. The in Slovakia. The document (Conception) financial coordination between local and determined two phases of fiscal decentrali- regional levels is thus rather deficient. sation11 and outlined the new legislation on budgetary principles for regional gov- The delay in implementing the decentralisa- ernance.12 However, the launch of the fis- tion reform caused problems as regards the cal decentralisation, primarily planned for preparation of regional structures (mostly 2004, has been delayed one year. at the municipality level) for the process of EU Funds exploitation in the period of 2004 Although the new legislation was adopted – 2006. Without fiscal decentralisation and in 2001,13 regional governance bodies still the completion of the public administration dispose of limited possibilities for putting reform, formation of public resources on the their competence into practice. As men- local and regional level necessary for sup- tioned, moreover, the fiscal decentralisa- porting the socio-economic development of tion has been initiated only in 2005. Since regions is impossible. Thus, an initiator and coordinator of endogenous development of 11 During the transition period 2002 – 2003 the the regions is absent.15 activities of VÚCs and municipalities had to be financed by grants from the State Budget 12 The list of taxes in the competence of regional 7.4.4 Delays in preparation of governance bodies, the structure and principles of strategic documents sources redistribution, principles of financial man- agement, budgetary process of municipalities, etc. In addition to the above mentioned caveats, 13 A portion of the competencies regarding regional development has been moved from the national the insufficient administrative capacity— level to the competence of VÚCs, such as prepar- such as problems in inter-ministerial co- ing regional development plans and programmes; ordination, long-lasting lags in legislative participating in the preparation of the National De- adaptation and other problems—delayed velopment Plan; approving and implementing the Cross-border Cooperation programmes; monitoring 14 This document represents an important strategy the socio-economic development of the regions; for exploiting future EU funds and also serves a ensuring that the financial resources for overcom- base for elaborating the development plan on the ing regional disparities are adequate; coordinating national level. the activities of municipalities, etc. 15 Benč et al. (2004). 148
- 123. 7 Slovakia andCohesion Policy the preparation, coordination and adoption mentation types16 and the simplification of the necessary strategic Cohesion Policy and unification of rules in the next period documentation. As noted previously, the 2007 – 2013 will be very welcome. first national plan for regional development for pre-accession support was adopted in 1999, for post-accession funding in 2001, 7.4.6 Administrative and capacity but the actual National Development Plan building only in March 2003. Individual ministries were late in preparing the grant schemes The huge administrative and human capac- for smaller projects and compared to neigh- ity problem was observed in both the state bouring countries they were approximately authorities and in the regional and local a year behind schedule. Consequently, the public bodies and agencies, as well as on delayed process of documentation and leg- the side of the applicants. It is indeed hard to islative preparation hindered accreditation build an appropriate administrative capac- of the implementation agencies. However, ity when the experience of such processes the lag observed during the pre-accession is lacking and finances to motivate already period was adjusted at the final phase of trained personnel are absent. A noticeable preparation for the Structural Funds. Af- fluctuation of ministerial human resources ter the Commission had adopted the basic can therefore be observed in Slovakia. Also, documents required for initiating Structural poor coordination between ministries at the Funds exploiting in December 2003, Slo- beginning of the process caused additional vakia launched the first call for a Local In- administrative confusion. frastructure priority (Operational program Basic Infrastructure) on 19 January 2004 (it The administrative requirements in project was a second call from all acceding coun- preparation represent great obstacles for tries). potential applicants. In general terms, one might conclude that; the smaller the project, the greater the abundance of administration. 7.4.5 Obscurity and complexity of In other words, the cost-benefit ratio will be strategic documentation excessively high in smaller projects, since administrative costs will not be matched by The National Development Plan that was the benefits drawn from the projects, espe- adopted in 2003 was designed in too com- cially when they are compared with larger plicated a way and even though it was re- projects. Administration thus represents a duced from an initial 11 operational pro- substantial barrier for small entrepreneurs. grammes to 4 in the final concept (Basic The question is whether the principle of nfrastructure, Industry and Services, Agri- proportionality in the new ECP will help culture and Human Resources) it remained solve this problem. The idea of propor- quite obscure. Also, the structure of other tionality with regard to audit controls and documents in their final form has often been administrative requirements is definitely a unintelligible for the applicants, which has 16 lead to formal mistakes in project prepa- Regional, Sectoral Operational Programmes for Objective 1, Single Programming Documents ration. The reduction of elementary docu- for Objective 2 transformed into Operational Pro- gramme for each Objective; no programme com- plement. 149
- 124. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States positive feature in the Commission’s pro- time, the decentralisation of the evaluation posal, but the principle is extended only to a process is underway in some sectors and limited number of programmes and admin- this will further complicate matters. Since istrative requirements. In our opinion, the the regional self-governances try to solve proportionality should to be extended to a the problem by inviting external evaluators larger number of programmes and projects. without the right to get any payment for it, One example concerns management costs the inexpert composition of the regional in accepted projects, which could either be committees together with the unwillingness reimbursable or, possibly, included into eli- of external evaluators will weaken whole gible costs. Also, the reform of the evalua- process. tion process—whereby in the first stage of the evaluation process no complete project proposal will be required—may be very 7.4.9 The co-funding criterion helpful with respect to Slovak conditions. Co-funding implies serious pressure on the state budget. For example, in this 7.4.7 Experiences with year alone, €373.8 million will have to be programming and regional planning drummed up for financing Slovakia’s EU membership, while an additional €249.2 The lack of necessary experience to suc- million is required to cover the “matching cessfully prepare and implement projects, funding”. The lion’s share of the resources along with almost no previous experience is spent on public sector projects. Most of of regional planning (due to the Slovakian these projects are co-financed according to history of being a centralised economy), re- the 80:20 model, where 80 percent is cov- sulted in a situation where Slovak applicants ered by resources from the EU budget, 15 were not only offhanded, but where some of percent by the state budget and only 5 per- them did not even understand the principle cent should be covered by the resources of of EU funding. Some of the projects at the municipalities.17 This represents a way to beginning of the pre-accession period were give preference to large public projects. prepared with the sole aim of gaining finan- Smaller applicants from the commercial cial support; there were neither any estima- sphere do not enjoy this privilege and in tion as to the real impact of the project on most cases their demand for resources from the region, nor where there considerations the state budget is refused. of whether the projects had even the slight- est chance of becoming profitable. The financial weakness of many applicants in lagging regions, the prevalent distrust of 7.4.8 System of project evaluation banks and the fact that contributions from EU funds only comes in the form of reim- The evaluation processes carried out in Slo- bursements for already paid invoices and vak agencies were demanding, not only in bills, the principle of co-funding per se rep- terms of exhausting the administrative ca- 17 pacities, but also because of the poor quality Note that the 80:20 model refers to projects supported by resources from the Cohesion Fund, of the experts in the evaluation committees. whereas the state budget has to cover for a quarter Consequently, the lack of specialists slowed of the costs in projects financed by the resources of down the evaluation process. At the present the European Regional Development Fund. 150
- 125. 7 Slovakia andCohesion Policy resents a tremendous obstacle, especially seen in the automobile industry in south- for small and medium enterprises and sole- western Slovakia (Volkswagen, PSA Peu- proprietors. In the updated evaluation of geot, Citroen and their suppliers) with the the Convergence programme of Slovakia future cross-connection to north-western in February 2005, the Commission warned Hungary (Audi and Ford); in the consumer Slovakia that it would probably not be able electronics industry in the Prešov region in to deplete the whole amount of the Struc- the eastern Slovakia (Embraco, Whirpool, tural Funds resources allocated for the pe- Alcatel and their suppliers); and in the pre- riod 2004 – 2006 and for that reason will pared silicate zone in the south of central ease the pressure on the state budget. How- Slovakia. The role of the government and ever, from the year 2007 and onwards the regional self-governance bodies has been situation may change and the pressure on to identify potential clusters and to support the state budget may therefore increase. them actively, e.g. by the strengthening of investment impulses through sub-suppliers programmes, by supporting R&D, by sup- 7.4.10 Privileged position of large porting cooperation between universities public projects and industrial sector and by developing the local infrastructures. Such activities can There are several reasons why in the Slo- be co-funded by EU resources, which may vakian context large public projects and give rise to an acceleration of the mentioned industrial parks are in a better position. processes.18 To name but a few examples of The Slovak government decided early on large public projects and industrial parks to support such projects, mostly because of that have been co-funded by EU resources, the social and economic impact in the re- there is the Industrial park Spišská Nová ves spective regions. Being one of the criteria and Humenné; the Highway by-pass Mier- for measuring the success of a project, the ová – Viedenská cesta in Bratislava; the In- impact can be much more predictable and dustrial Park Snina; the Industrial park Žiar visible, as regards the benefit of the sector nad Hronom and the business incubators in or target group, in such projects. A second Banská Bystrica and Martin. reason has to do with the fact that adminis- tration is much more efficient in large scale A fourth reason for preferring large scale projects. Moreover, it is easer for the public projects is the so-called liquidity rule. The finance administrators to assign financial small economic entities in Slovakia had resources to large industrial parks and thus grown accustomed to the support of fading- satisfy the responsibility taken for the de- out or “dying” industrial sectors and busi- velopment of rural regions. The question nesses. With EU funding the situation has is whether this strategy has been the right changed. The Slovak entrepreneurs meet one. a support that is directed toward profitable businesses. The applicants have to prove The government’s strategy of attracting that they have stable and sufficient financial foreign direct investment (FDI) and con- resources to ensure the continuity of their centrating them into new industrial zones activities throughout the project and, if nec- has also been evident in areas which did essary, to take part in financing. They also not involve EU funding. The formation of large industrial clusters can for example be 18 Šikula et al. (2003). 151
- 126. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States have to show that they have fulfilled the one could lessen this problem would per- obligations of social security contributions haps be a new evaluation process structure, and taxes. However, taking into considera- where the first evaluation step would be tion indebtedness and undercapitalization given immediately after a strategy and im- of many businesses and municipalities, pact proposal, leaving out the necessity for this particular rule represents a serious ob- elaborating a final version of a project. stacle for many applicants from the poorer regions, since they simply cannot fulfil the 7.4.12 Formal requirements of EU liquidity criterion. funding process 7.4.11 Ineligible costs The submission of proposals has proven to be a problematic process. Many of the Another barrier for smaller businesses is projects are refused because of formal mis- the rule of ineligible costs. Among the most takes.19 In addition, other formal require- disputed are the cases of VAT and admin- ments necessary for EU funding may also istration/management costs. If the appli- aggravate the process. Applicants have to cants are able to ensure financial resources open a special account for the financial for co-funding (co-funding by 50 percent flows from the EU budget and there are in is not an exemption) they may be not able some cases a special requirement for a dou- to cover, additionally, VAT by themselves. ble-entry accounting. Furthermore, there The administration costs for the prepara- are also meticulous requirements on the tion of a project represent a special problem project budget. in the Slovakian context. Most entities are not able to prepare successful projects (be- 7.4.13 Actual task – cause of the weak programming experience in Slovakia in the past) and they are fur- implementation thermore dependent on support from pri- vate actors. The costs involved in preparing A new challenge has been caused by the projects are seen as excessively high and parallel use of the pre-accession instru- so is the requirement for administrative ca- ments and the Structural Funds. During the pacity. This fact discourages not only small period 2004 – 2005 there are still many pre- businesses but also many cities and villages accession projects in the implementation from undertaking the necessary steps for phase and at the same time the Structural using the EU funds. They are aware, first, Funds projects are already up and running. that every single project cannot be accept- We have seen that the institutional and ad- ed and, second, that it is not possible to re- ministrative capacities were deficient dur- ceive reimbursements for excessively high ing the pre-accession period and this im- management costs (since they are ineligi- 19 ble costs). This usually turns off potential With respect to, for example, the organisational budget, statutes and/or the articles of association, applicants. As noted above, since admin- annual reports and accounts, official registration istration costs are much the same for the certificate and the financial plan. However, the preparation of larger and smaller projects document that has most often been missing is the alike, larger projects, as a consequence, are bank account report, or some form of statement in a better position. A solution as to how that proves the ability to co-finance a project. 152
- 127. 7 Slovakia andCohesion Policy plies that the problem has been further ag- Strategy of Slovakia until 2010 (Lisbon gravated. Preparing and implementing two strategy for Slovakia). For fulfilling of the system-different programs at the same time basic objective of the Strategy—increasing is very time consuming and leads to seri- competitiveness of the Slovak economy— ous administrative pressure. The duplicity the strategy defines four priority develop- of rules, documents and programming is ment areas with their main objectives, out- confusing for both the involved authorities lined in Table 7.1. 20 and implementation bodies and for the ap- plicants. Moreover, an insufficient evalu- Table 7.1 Lisbon Strategy for Slovakia ation process in the previous period and a Priority Main objectives poor expert quality, together with inflexible Modern educational policy Human resources and institutional structures, also complicate the education Achieving high employment rate Coping with demographic changes implementation process. Information literacy Effective e-government and modern on-line Information society public services Wide internet accessibility 7.5 A Slovak perspective High efficiency of law enforcement A high-quality physical infrastructure and services in the network industries Business environment Public institutions as a partner rather than 7.5.1 Priorities of Slovakia in a burden Effective access to capital market for all 2007 – 2013 enterprises Education and support of expert scientists At the present time, the preparation for the Research comparable with international Science, R&D, standard and appropriately interconnected utilisation of the Structural Funds in the innovations with the business sector next financial perspective (2007 – 2013) is Effective public support of business activities aimed at research and innovations already underway. In accordance with the Source: Slovakia (2004) Commission’s proposal for new regulations of the Structural Funds, Slovakia will elabo- rate a National Strategic Reference Frame- The second strategic document at the na- work, which represents the integration of tional level—National-Economic strategy the Community priorities, on the one hand, of Slovakia for the period 2005-2015—was and the national and regional priorities of elaborated by the Ministry of Economy. Slovakia, on the other. This document has not yet been adopted but will represent (together with the previ- The basic scope for preparing the National ous document) the base for developing the Strategic Reference Framework and other future strategy in the field of regional and documents for the next financial perspective economic development in Slovakia. The will be provided mainly by the mentioned priorities defined in the national-economic proposals for regulations of the Structural strategy are in compliance with those de- Funds, by the philosophy of the new ECP scribed in the Lisbon strategy for Slovakia. designed in the third cohesion report and Moreover, the document emphasises that by the existing strategic and conceptual the only way to ensure long-term competi- documents of Slovakia. One of the strategic tiveness in Slovakia is to create favourable documents was prepared by the Ministry of Finance with the title Competitiveness 20 Slovakia (2004a). 153
- 128. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States conditions for development of the so-called related sectors; knowledge economy. The strategy defines • transparent economic environment its strategic objective as providing the high- and support of e-commerce and e- est possible economic growth in the context government and e-learning; of sustainable development. • prevent “digital isolation” of specific social groups and regions. The most important objectives and princi- 3. Business environment ples in the macroeconomic and fiscal area 4. Science, research and development are defined by three strategic objectives: The role of the government in this process • strengthening the functioning of is to define the strategic objective, content, the market economy, minimising principles and principles for each area and interventions; to coordinate and implement them. • reducing the public finance deficit; • transparent and neutral tax policy. The third conceptual document that will have a strategic position in preparing the The structural reforms that have already National Strategic Reference Framework been implemented in Slovakia (pension, for the 2007 – 2013 period is Conception of tax, healthcare and social system reforms) Territorial Development of Slovakia. The have made Slovakia an attractive location document establishes the main priorities for FDI. The main advantages are the fa- for the present policy of territorial develop- vourable conditions for industrial produc- ment as follows:21 tion (particularly the automobile indus- • supporting economic development try). However, Slovakia can count on this and strengthening competitiveness advantage only for a short period of time, and efficiency; since the key to sustaining the present posi- • supporting a balanced regional de- tive economic trends lie in the ability to in- velopment, including rural develop- crease the sophistication of the production. ment; Hence economic growth must be based on • ensuring equal access to infrastruc- the ability of Slovak citizens to work with tures; new information, create new knowledge • protecting the environment and the and effectively exploit them in real life. natural and cultural heritage; The four key areas outlined in the National • supporting cohesion and integration; economic strategy, which are viewed as es- • maintaining the sustainability of sential in order to meet the objective of a development. sustained economic growth, are, 1. Strategy related to human resources de- We can compare the priorities designed for velopment and education: the future development in Slovakia in the • a modern education policy; represented three strategic documents with • a high rate of employment; the main objectives and priorities defined in • reverse the negative demographic the present official documents—especially tendencies. in the actual National development plan for 2. Information society: the period 2002 – 2004. • development of the knowledge-based economy; • support for innovative processes in 21 Slovakia (2001). 154
- 129. 7 Slovakia andCohesion Policy renovating local infrastructure; Table 7.2 National Development Plan • agriculture and rural development: NDP increasing the efficiency of agricultural Strategic Specific and aquacultural production, objective objective Priority modernising the processing of Growth of agricultural and fisheries products competitiveness of industrial production and improving the quality of life of To support, by 1. COMPETITIVENESS and services, and the rural population. respecting the prin- development of ciple of balanced growth potential sustainable devel- opment equally Employment When comparing the strategic documents across the regions, growth based that have been prepared to design the future such GDP growth on qualified and that the Slovak flexible workforce 2. EMPLOYMENT economic development in Slovakia with Republic by 2006 under conditions of the present National Development Plan, achieves a level improving labour exceeding 50% of market efficiency one can observe a noticeable shift towards the GDP per capita knowledge economy, information society, average in the EU Growth of efficiency countries. of agricultural research and innovations and the inclusion 3. AGRICULTURE AND production and RURAL DEVELOPMENT of sustainable development. From our point quality of life of the rural population of view, the strategic documents are in full compliance with the needs of the Slovak The strategy for 2004 – 2006 focuses on economy. However, the implementation of four development priorities: increasing these strategic objectives represents a sub- competitiveness, promoting employment stantial challenge. creation, fostering balanced regional de- velopment and agricultural and rural devel- The strategies and priorities seek to promote opment (see Table 7.2). It is implemented a competitive and sustainable knowledge through four operational programmes:22 economy by including the objectives of the • industry and services: supporting the Lisbon and Gothenburg agendas into the development of industrial production, national strategic documentation. The con- creating a better integration of vergence between Slovak and EU strategic research and development into priorities becomes clear when we compare industrial production, improving the above documents with the priorities energy efficiency and promoting outlined in the third cohesion report. tourism; Although the priorities of Slovakia and • human resources: increasing those of the Cohesion Policy show notice- labour market flexibility, reducing able approaching—and we agree with most unemployment and reducing the of them—there are still some comments risk of social exclusion of the most given by the Slovak representatives, intro- vulnerable groups, in particular the duced in the Draft statement of the Slovak Roma community; republic on the Proposal for a Council reg- • basic infrastructure: fostering a ulation laying down general provisions on balanced regional development by the EU funds, which will be presented in improving transport accessibility, the section below. In this statement Slova- improving the environment and kia stresses the importance of the develop- ment of the transport infrastructure and the 22 Slovakia (2003). enhancement of the transport infrastructure 155
- 130. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States system, the support of investments in the flexible approach towards the limit on TEN-T networks and local infrastructures structural operations and proposes to use and investments in information society de- up-to-date macroeconomic data separately velopment. Slovakia supports the projects for each member state (mainly exchange oriented towards reducing long-term un- rates and GDP growth data). employment and the integration of cross– border labour markets. Support of these A more flexible approach should according projects could lead to faster integration of to the draft statement be based on: the long-term unemployed into the labour • The exemption of specific market and help reduce the high unemploy- expenditures from the 4 percent rule, ment in Slovakia, especially in regions that for example territorial cooperation are still affected by structural problems. On and financial allocation for rural the other hand, the Commission has rec- development. Some of these ommended a reduction of the strategic pri- expenditures are currently part of the orities to three, at the most four, priorities. EAGGF guidance section. The main (and correct) idea behind this is • The use of up-to-date economic to concentrate resources on areas that are growth rates for each new member the most relevant to the main objective, that state, instead of an average for the is to say, to reduce regional disparities. As group of ten new members (EU-10), noted, the priorities were reduced 15 to 4. taking into account the exchange rate development in each member state. • A dynamic development of absorption capacities and levels of co-financing 7.5.2 Controversial issues in the in the respective countries. proposals on the new regulations for the EU Funds from a Slovak Slovakia strongly supports that changes in perspective operational programmes be realised ret- roactively in relation to commitments (at The new Cohesion Policy is currently dis- the end of the n + 1 year) and not on the cussed in Slovakia. Draft Statement of the 30 September of year n. The main idea be- Slovak Republic on the Proposal for a Coun- hind this proposal is simple. In some cases, cil Regulation Laying Down general provi- it is hard to predict the future development sions … COM (2004) 492 final, constitutes as regards the implementation of operation- a negotiation framework and provides the al programmes with respect to the n + 2 rule. priorities of Slovakia with respect to Cohe- This modification would allow more effec- sion Policy in the years 2007 – 2013. The tive and flexible utilisation of the Structural most relevant proposals are summarised Funds and it would have a positive impact below. This document is not yet adopted, on the Slovak absorption capacity. but it provides a complex view on the most controversial issues of the Commission’s The responsibilities of the Commission proposal from a Slovak perspective. and the Member States—in terms of time schedule—when adopting the operational Considering the fact that there is a low programmes should be precisely specified. probability of the 4 percent absorption cap The current situation leads to a prolonga- being abolished, Slovakia supports a more tion of the time the Commission needs 156
- 131. 7 Slovakia andCohesion Policy for adopting individual operational pro- programmes. An application of this rule grammes (according to experience made would lead to a doubling of the regional in Slovakia). The Commission’s proposal programmes and in turn imply more ad- fails to take into account the precise time ministrative pressure in Slovakia. Hence schedule for adoption after the operational we are unable to see in what way this pro- programme has been submitted to the Com- posal constitutes a simplification. The rule mission. There are several precisely defined has its advantages only at the level of sec- schedules for the EU Member States, but toral operational programmes. In case this the responsibilities of the Commission are proposal is not accepted, the Slovak stance only vaguely specified.23 will be to an increase of the upper limit for cross-funding in the ERDF and the Euro- According to the Commission’s proposal, pean Social Fund (ESF). furthermore, expenditures would be eligi- ble for reimbursement from the Funds if it There is also controversy regarding the cre- has actually been incurred by the benefici- ation of a National Contingency Reserve ary for an operation carried out between (NCR).24 This new proposal does not show 1 January 2007 and 31 December 2015. any sign of flexibility or simplification. The Operations that are co-financed do not have intention of the Commission to cover for to be completed before the starting date unforeseen local or sectoral crises linked for eligibility. Slovakia strongly disagrees to economic and social restructuring, or to with the proposed deadline for eligible consequences of trade opening, is tied to the expenditures. The complexity of the long- creation of an additional special operation- term planning needed to realise Cohesion al programme with a 1 percent allocation Fund infrastructure projects may prove to for the Objective 1 and 3 percent for Ob- be unsuitable for Slovakia. The application jective 2. These allocations are part of the of the n + 2 rule should be excluded from 4 percent capping calculation. However, if the rules of the Cohesion Fund, as in the no crises occur, there is a high probability present financial perspective, in order to that the reserve remains unexploited. Con- improve the absorption capacity of Slova- sequently, the country in question will lose kia. Higher contributions from the Cohe- the financial resources of this contingency sion Fund at constant national budgetary reserve. The question of how one creates a constraints could result in a severe and un- special operational programme to an unex- fortunate pressure on Slovakia’s absorption pected event is quite unclear and it will in capacity. our opinion only lead to more red tape. One of the most criticised principles of The proposal to include action in order to the new Cohesion Policy is the “one pro- strengthen the administrative efficiency gramme – one fund principle” (mono-fund in the Member States that are eligible for approach). It seems rather unpractical that support under the Convergence objective individual programmes would only be represents an element of discrimination. given support from one fund, which is es- The need to increase the administrative ef- pecially true for the regional operational ficiency should logically result from a con- 23 The Commission shall adopt each operational 24 programme as soon as possible after its formal sub- See also chapter 6, section 6.4.4, on Operational mission by the Member State; see COM (2004). Programmes in the Czech Republic. 157
- 132. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States sideration of the administrative conditions age EU GDP per capita level. Increasing of each Member State separately, not from the limit will lead to supporting regions the criterion of economic development. that may not need it and it will also imply a decrease as to the amount that can be al- Operational programmes related to territo- located to the poorest regions. A lowering rial cooperation should be created on the of the limit, on the other hand, will restrict NUTS III level. For Slovakia, there are four the use the funds in regions that already operational programmes to be designed have made efforts to prepare themselves with participation of the following regions: for Structural Funds support. Furthermore, 1. Košický, Banskobystrický, Nitriansky, one should also take into account that only Trnavský a Bratislavský kraj for Member States with a PPS GDP per capita operational programme Slovakia – lower than 100 percent of EU25 PPS GDP Hungary, per capita can acquire the support. This 2. Prešovský, Žilinský kraj for operational mechanism will decrease the redistribution programme Slovakia – Poland, (recirculation) of funds between more de- 3. Žilinský, Trenčiansky, Trnavský kraj veloped countries. Consequently, Member for operational programme Slovakia States’ contributions to regional policy will – Czech republic, not rise. 4. Bratislavský, Trnavský kraj for operational programme Slovakia – Austria. 7.5.4 The Cohesion Fund Trans-national support, network support The completion of the transport infrastruc- and information exchange will be part of ture is a key priority in the Slovak regions. the regional operational programmes and As noted in an official document, of the Operational programme under Eu- ropean territorial cooperation. The respec- The quality of Slovakia’s basic infrastructure tive programmes of economic and social varies across the country. Regions to the east are poorly-served compared to the more de- development on the regional level will be veloped centres of economic activity closer in accordance with the three levels of pro- to the capital, Bratislava, in the extreme west gramming. It is also necessary to solve the of the country. The geographic position of the problem of urban areas within the scope of country in Europe confirms the importance of National strategic reference framework, or its transport infrastructure in the Europe-wide transport network. The main cross border in future regional operational programmes. routes, both road and rail, have been desig- nated as TENs routes, all of which are a prior- ity for upgrading. In the road transport sec- 7.5.3 Position on the new European tor an ambitious motorway network has been Cohesion Policy designed for the TENs routes, with approxi- mately 50% already completed, supported in Concerning the question of the criteria for the pre-accession phase by ISPA. However alongside the high priority of completing the qualifying for Structural Funds support TENs routes, particularly the “Northern corri- under the Objective 1, we propose to keep dor” D route; there is a need to upgrade certain the present limit of 75% GDP per capita in other primary routes of national importance to PPS in NUTS II regions. This should help expressway standard to ensure efficient intra- lagging regions converge toward the aver- regional access, and in particular to facilitate 158
- 133. 7 Slovakia andCohesion Policy regional development, especially through of sources between developed countries. growth pole linkage. The challenge therefore Despite initial doubts that Slovakia would is to complete the motorway network on the TENs routes with support from the Cohesion not be able to use all the resources avail- Fund and continue upgrading to expressway able through the ISPA instrument, those standard the other key routes. The topography resources were overdrawn and as a result of the country with its mountainous terrain in became part of the Cohesion Fund resourc- the centre of the country means the comple- es for the period 2004 – 2006, in order to tion of the whole network will require heavy investment.25 cover for ISPA obligations. Slovakia has al- ready contracted 91 percent of the amount that remained in the Cohesion Fund (€408 Due to a substantial need for investment in million) in the 9 projects that were accept- the transport infrastructure, the rate of inter- ed by the Commission at the end of 2004.26 vention from the Cohesion Fund has had to Out of these 9 projects, 7 of them are envi- be decreased (e.g., in railroad project from ronmental projects (water sector) and two 85 percent to 75 percent) because of the lack are transport infrastructure projects (1 rail- of resources for other potential projects. If road transportation project and 1 express- the 50:50 rule could be modified, more re- way project transferred from ISPA to the sources would be available for the transport Cohesion Fund). The numerical imbalance projects that are needed Slovakia. was caused by the high costs and long- We believe that the effects of the Cohe- term character of the transport projects. If sion Fund will remain even after the acces- the principle of 50:50 between transport sion of new countries. The Cohesion Fund and environmental projects is preserved, a should hereafter offer financial support to smaller number of transport projects will projects in the field of environment and to be accepted. the Trans-European networks of transport and technical infrastructure. We propose to We propose to keep the present allocation keep the 50:50 proportion, but we also pro- of general structural operation resources pose to allow for more flexibility so that the for the new Member States also in the pe- 50:50 rule is allowed to change in legitimate riod 2007 – 2013. This means the share of and substantiated cases. The possibility of a resources offered, i.e. a third from the Co- nonparallel draw could for example be tied hesion Fund and two thirds from the Struc- to a division in the road and the railroad tural Funds, should remain. transport infrastructures respectively. We also hold the position that the present conditions for a country’s eligibility for 7.5.5 Management Cohesion Fund support (a GDP per capita lower than 90% of the EU average) and The process of implementing projects sup- the existence of programmes leading to ported by the resources from the Structural economic convergence should remain. Funds needs more flexibility and less ad- The definition signifies a real example of ministration. While the controlling and an- solidarity between developed and lagging ticorruption mechanisms should remain in Member States. At the same time there is place, the process should be significantly no present useless mutual redistribution decentralized with adequate connection of 25 26 Slovakia (2004). Slovakia (2005). 159
- 134. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States top-down and bottom-up approaches. It 7.5.7 Cross-border Cooperation should be also more oriented towards the and Community Initiatives activation of internal regional resources. We consider as a key question the trans- Similar to other Member States, Slova- parent demarcation of competencies on kia has had positive experiences from the particular levels of regional policy govern- Cross-border Cooperation programme. Not ance, as well as interactions of these levels only do we therefore support a continua- (supranational, national, regional and the tion of cooperation based on the Commu- municipality levels). nity Initiative Programme INTERREG, we would also like to see it strengthened financially. At the same time we would like 7.5.6 Financial framework to point out that an evaluation of the suc- cessfulness of other Community Initiatives, Since the European regional policy con- such as EQUAL, LEADER and URBAN, stitutes approximately one third of the to- would be welcome. Actions based on these tal EU budget, the decision on the 2007 programmes could be included into the – 2010 Financial Framework has to be per- framework of priority targets supported ceived in a wider sense and in relation to by the Structural Funds and contribute to a the financial resources of other Community general simplification. policies. Regional policy in EU is the tool for convergence between the economies of The enlargement of the Union meant that EU’s Member States. On the other hand, the eastern external EU border were moved the principle of additionality may have a to the boundary of new Member States and negative impact on public finances and in- countries of Balkan, Ukraine, Belarus and directly influence the new Member States’ Russia. These borders represent an impor- path towards joining the euro. EMU mem- tant part of EU surface frontiers and prob- bership will thus be threatened, or at least ably also the future frontiers of the Schen- postponed, due to the fact that the general gen Area. Under these circumstances it government deficit according to the Con- is necessary to emphasise the need for a vergence Criteria should not exceed 3 per- coordination of the present cross-border cent of a country’s GDP. cooperation tools (PHARE CBC, TACIS, MEDA, CARDS a INTERREG) at external At the same time we may assume that it boundaries and to introduce one common is not necessary to shift the current level tool (NEIGHBOURHOOD). (0.45% GDP EU) for the financing of struc- tural operations; it is necessary to keep and fully use this limit. The enlargement of the Union meant that EU GDP increased in ab- solute terms, which in turn meant that the resources available for the ECP also in- creased. 160
- 135. 7 Slovakia andCohesion Policy 7.6 Conclusions emerged. The first problem was caused by the domestic situation with respect to re- The new European Cohesion Policy is gional policy and the preparedness for the faced with a tremendous challenge, which implementation of the ECP principles, e.g. at the same time should be seen as an op- problems related to the regional division portunity: to increase the support of lagging of Slovakia, decentralisation of public ad- regions and to assist in the effort of reduc- ministration, fiscal decentralisation, delays ing regional disparities in Slovakia. in the preparation of strategic documents, administrative and capacity building and The pre-accession support created the lack of the necessary experience to suc- necessary foundations for these efforts, cessfully handle projects preparation and especially regarding the administrative implementation. There was also lack of rel- capacities and, to some extent, economic evant information as to the principles of EU development. It is difficult to measure the funding. The second barrier was built in the real effects of the pre-accession support in concrete provisions of the European Cohe- Slovakia, since no extensive evaluation has sion Policy as regards the difficulties in the been made either by national authorities or less developed regions in Slovakia. by independent researchers. At present, the necessary preparation for the Slovakia started its accession negotiations implementation of Cohesion Policy during in March 2000, which was two years later the next Financial Framework (2007-2013) than the the other Visegrad countries. This is already underway. We may assume that put Slovakia in a difficult position from the most of the priorities of the Slovak govern- very start in the membership negotiations. ment, as formulated in preliminary state- Slovakia accepted, in many cases, statements ments and official strategic documents, are and proposals from the Commission without in accordance with the Lisbon and Gothen- any substantial objections and the Slovak burg objectives. We can see also a positive government officials, from our point view, trend with respect to Slovak priorities, on applied quite passive an approach during the one hand, and the priorities of the ECP, these negotiations. This, along with other on the other. In our opinion, this conver- domestic factors, influenced in a substantial gence can be seen as a favourable condi- way the shaping of the Slovak negotiation tion for an optimal regional development in position and resulted in an outcome in several Slovakia. areas that were not optimal. Negotiation chapter No. 21 on Regional policy was preliminarily closed in July 2002, which meant that Slovakia fulfilled the basic, mostly legislative, conditions necessary to conclude the accession negotiations. Although the legislative preparations for the EU membership and the question of Cohesion Policy in Slovakia were success- fully completed, practical problems and barriers of two different kinds have since 161
- 136. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States References Benč, V., et al., 2004, Monitoring of the SR Integration Into the EU – 2003, SFPA and Friedrich Ebert Stiftung, 76. European Commission (COM), 2004, Laying Down General Provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund, Proposal for a Council Regulation, 492 final. Morvay, K., 2005, Economic Transition – The Experience of Slovakia, Slovak Academy of Sciences. Šikula et al. (2003). Economic and Social Context of Slovakia’s Integration Into the EU, (Institute of Slovak and World Economy, Slovak Academy of Sciences, 2003) 136 Slovakia, 2001, Conception of Territorial Development of Slovakia, the Ministry of Construction and Regional Development of the SR, official document, Bratislava 2001. Slovakia, 2003, National Development Plan 2002-2004, The Ministry of Construction and Regional Development of the SR, official document, Bratislava, March 2003. Slovakia, 2004, Competitiveness Strategy of Slovakia Until 2010 (Lisbon strategy for Slovakia), The Ministry of Finance of the SR, official document, December 2004. Slovakia, 2005, Report on the Stage of Project Adjustment in the European Commission That Were Accepted by the Government of the SR In the Year 2004, official material of the Ministry of Construction and Regional Development of SR, 2005. Slovakia, 2004 Draft Statement of the Slovak republic on the Proposal for a Council regulation laying down general provisions on the EU funds, official document. Vojteková, Z., 2004, Is Slovakia Prepared for Effective Exploitation of Resources From the EU Structural Funds?, Letters of SFPA , Slovak Foreign Policy Association. 162
- 137. 8 Latvia andCohesion Policy 8 LATVIA AND COHESION POLICY Alf Vanags and Julia Pobyarzina* 8.1 Introduction For Latvia the road to the European Union EU context: (and beyond) has been and continues to be • Latvia is currently the poorest country a major learning process. Unlike most other in the EU in terms of GDP per capita new member states and candidate countries • In discussions of regional policy the Latvia, as a former Soviet republic, had no whole of Latvia is a NUTS II region experience of operating as a nation state af- – this perspective hides the fact that at ter 1940. This meant that at the start of the NUTS III level Latvia has severe re- 1990s neither its politicians nor administra- gional disparities, containing some of tors had experience of operating in the in- the poorest regions of the EU at this ternational arena – international relations, level (see Table 8.1 below) including the EU accession process, was • At the same time, Latvia has the high- very much a learning-by-doing experience. est real GDP growth in the EU25. This Mistakes were made, and disappointments was 8.5 percent in 2004 and cumula- were endured – most notably when Latvia tively is up by more than 60 percent was excluded from the so-called Luxem- since 1996 bourg group, the six countries initially cho- • Latvia is one of the EU’s smallest sen as the ‘first-wave’ of countries to com- countries with a population of 2.35 mence accession negotiations. million.1 These facts serve to define the heart of This learning process is very much evident Latvia’s problems and also the constraints in the experience of Latvia with the both it faces in the EU arena. the pre-accession funds, the Structural Funds for the 2004 – 2006 programming The remainder of the chapter is ordered period and also now in the negotiations for as follows: the next section offers a short the 2007 – 2013 programming period. This overview of Latvia’s experience with pre- will come out in the discussion below. accession funds; this is followed by sec- tions on issues relating to Cohesion Policy As a background to this chapter it is worth in the accession negotiation process and noting some basic facts about Latvia in the problems linked to the conditionality built into EU Structural Policy. There follows * a forward looking part of the chapter that Alf Vanags is Director of Baltic International considers what Latvian development and Centre for Economic Policy Studies, BICEPS, Riga, and Julia Pobyarzina is research assistant at BICEPS. 1 Central Statistical Bureau (2005) 163
- 138. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States structural policies look like on the basis cial measures for Latgale and Zemgale— the current system of rules and also of how Latvia’s two poorest regions. an unconstrained scenario might look. The concluding section examines Latvia’s inter- The 2003 PHARE Programme was the last ests in the outcome of the negotiations on PHARE support for Latvia and funds were the Commission’s proposals for the 2007 allocated to the following: – 2013 programming period • the National Programme; • Cross-border Cooperation in the Baltic Sea Region; 8.2 Latvia’s experience with pre- • the Nuclear Safety Programme. accession support The National Programme continues to ad- Latvia like every candidate country has had dress key political issues, such as the in- access to the three pre-accession funds— tegration of society, civil society and anti- PHARE, ISPA and SAPARD, whose aim corruption measures. It has also provided was to facilitate the integration of the ac- support for the strengthening of the ad- cession countries into the EU and to pre- ministration with a view to EU accession. pare them for future use of the EU Struc- Priorities have included improvement of tural Funds. In Latvia the Ministry of Fi- the capabilities of the Justice and Home nance was the main institution responsible Affairs ministries, especially in the areas for implementing and administering EU of border management, free movement of pre-accession funds. goods, company law, agriculture, social af- fairs, employment, public health, energy, customs union and public finance manage- 8.2.1 PHARE ment as well as in regional policy matters including European Regional Development In the early years the main aim of PHARE (ERDF) and of the European Social Fund was to support transition to democracy (ESF) type actions concerning economic and to a market economy. However, as of and social cohesion. Since the 2003 budget 1998 when it was clear that relatively early was the last PHARE support for Latvia. EU enlargement was on the cards the pro- there was a need to ensure continuity of gramme was exclusively reserved for EU institution building support for issues not accession preparation. As of 2000, most of covered by the Structural Funds. Accord- the PHARE resources supported an ongo- ingly, a “Transition Facility” has been set ing process of “Institution Building” by up, which will continue to co-finance in- which the Latvian public administration stitution-building actions until the budget and its institutions were strengthened. The year 2006. aim was to put Latvia in a position where it could effectively apply and enforce the ac- quis. A smaller part of the PHARE funding 8.2.2 ISPA was devoted to strengthening “Economic and Social Cohesion” in Latvia. The eco- ISPA started as of the year 2000 and can nomic and social cohesion measures were be regarded as a forerunner of the Cohe- clearly an attempt to address Latvia’s spe- sion Fund. It has financed major environ- cific regional problems in the form of spe- ment and transport infrastructure projects. 164
- 139. 8 Latvia andCohesion Policy In Latvia, the priorities for environment hensive impact analysis which has not yet infrastructure development concern the been undertaken. However, an important following: drinking water and wastewater goal of the pre-accession funds has been to treatment and waste management. The up- prepare Latvia for the use of the Structural grading of the Via Baltica (Road Corridor Funds and, arguably, this goal has not been I) and of the East-West railway link are fully achieved. The main problem has been transport priorities. a too individual attitude to each project and rather loose terms and deadlines for submit- ting projects. This has negatively affected 8.2.3 SAPARD the discipline of submitters and as a result there are ISPA projects that may remain un- SAPARD was set up in 2000 to assist can- finished for some time. SAPARD has had didate countries in preparations for the im- the strictest terms and deadlines, and this plementation of the Common Agricultural has significantly increased the speed with Policy and for addressing in sustainable which projects have been approved and way agricultural and rural sector problems. funds disbursed. As a result SAPARD went Revenue generating investments (mostly beyond its original financial limits and projects proposed by enterprises) require Latvia already has used more than 100 per- 50% co-financing from the project owner. cent of the allocated funds.. The agreed goals have been: • development of sustainable agricul- ture; 8.3 Issues relating to Structural • integrated rural developments and im- Policy in the accession provement of the environment. negotiation process Projects financed have included: In Latvia the whole accession negotiation • investment in agricultural holdings; process, including decisions on the amount • improvement of agricultural and fisher- of pre-accession funds allocated to Latvia, ies product processing; has appeared as a rather unilateral decision • marketing, development and diversifi- – prosperous EU member countries simply cation of economic activities providing decided how much money they could af- alternative income, including tourism; ford (or perhaps more accurately wished) • improvement of general infrastructure; to contribute to the acceding countries and • environmentally friendly agricultural then implemented these wishes without any methods. meaningful consultation with the recipient countries. Latvia was in an especially dif- ficult position to be pro-active—it had been 8.2.4 Impact of the pre-accession excluded from the Luxembourg group of funds first wave accession countries which meant that it was psychologically and politically In general the pre-accession funds have important for Latvia to catch up and join contributed much to the Latvian econo- the EU together with the first wave coun- my and have generated many successful tries. Accordingly Latvia did not press for projects. Their full quantitative effect on increases in the amount of pre-accession the Latvian economy requires a compre- funds. Therefore it got only €1.2 billion in- 165
- 140. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States stead of the maximum 1.6 billion which it then became the Single Programming had grounds to receive. Thus, this compli- Document (SPD) was fraught with difficul- ance cost Latvia €400 million. ties. As mentioned in the introduction, for Latvia developing the SPD was a learning In addition, there were disputes about pri- process, and early versions of the SPD were orities. In the first stages of the accession severely criticised by the Commission on process the European Commission already various grounds such that it was merely a wished to define in detail how the pre-ac- ‘shopping list’ or that there was insufficient cession funds should be implemented and foundation for what the Latvian side was administered. However, Latvian civil-serv- proposing. A number of disagreements of ants did not have sufficient knowledge, or substance emerged. Sometimes the Com- experience to be able to take a strong posi- mision was unwilling to take into account tion on these issues. Thus, in order to speed the Latvian legal system, its political pref- up the accession process and generally erences and various historical issues. For comply with the wishes of the Commis- example, the Commision tried to promote sion, the necessary documents were signed projects concerning minority and national- and the obligations were undertaken. Only ity issues in Latvia. This was not accept- when the funds came on stream, did Latvian able politically, because what was proposed civil servants understand that they may not was in conflict with the main statutes of the be in a position to meet all the contracted leading political parties. This led to active obligations and emotional negotiation between repre- sentatives of Latvia and the Commision. A further issue of conflict was the twinning programme which was introduced in the Furthermore, some of the economic areas later stages of institution building. Argu- that the EC sought to become priorities in ably, the European Commission used the Latvia were inconsistent with the priorities potential new member countries to experi- as perceived by Latvian civil servants. For ment—changing conditions and rules for example, the Commision wanted to empha- receiving funds. That was a factor behind size tourism and social issues, but home of- relative failure of the twinning programme. ficials took the view that some other areas Also, the twinners saw that the needs and were more important and financing them conditions (including the economy) in new would lead to more sustainable develop- member countries were very different from ment. those in their home countries. Thus, the twinners found that their experience was The generous time allowed for planning not easily and effectively transferred to and programming of the priorities within Latvia. the pre-accession financing framework was very favourable for Latvia and contributed to improving decisions on priorities. How- 8.4 Problems with current ever, there were rather strict conditions Cohesion Policy about the areas, where funds can and can- not be invested. Moreover, these conditions The negotiation process between the Com- did not always consider the particular char- mission and the Latvian civil service on the acteristics of the Latvian economy. For ex- current National Development Plan which ample, Latvia had to work hard to convince 166
- 141. 8 Latvia andCohesion Policy the commission that its healthcare system 8.5 Latvia`s development and needed urgent attention. The arguments Cohesion Policy: actual vs worked, and as a consequence, Latvia is the optimal? only country in the Baltics to receive sup- port for its healthcare system. This support has enabled a start to be made on health 8.5.1 Cohesion Policy under sector capacity building. current rules Here could also be mentioned the problem The National Development Plan for the of “rent-seeking” generated by the Struc- next programming period is currently in tural Funds. It is rather clear that for busi- the process of preparation so we do not yet ness ventures support from the Structural know how it will look. However, the ex- Funds eg the Rural Development Fund or pectation is that the priorities for the next the ERDF can make business ventures sup- period (2007 – 2013) will not differ much ported by the funds very profitable—even from those defined for the existing financial projects that would be hardly viable com- period. After all, the current SDP is for the mercially can be privately very profitable. three year period 2004 – 2006 and it cannot If evaluation of projects is confined to en- be expected that Latvia’s structural prob- suring that projects satisfy the technical eli- lems will have changed radically in that gibility requirements then this generates a period. significant incentive to commit resources to ensure successful application. This can Figure 8.1 The priorities of Latvian result in considerable socially unproductive National Development Plan and activity. available financing distribution for 2004 – 2006 Finally, there is a potential “success prob- Fisheries; Tecnical assistance; lem”. In recent years Latvia has experienced 4% 3% the fastest growth in Europe, with real GDP up by more than 60 percent since 1996. If this trend continues then Latvia could well reach the 75 percent of the EU average per Rural areas; 15% capita threshold in a measurable number of Infrastructure; years and will no longer qualify for support 25% under Cohesion country rules. The danger Human resources; 21% is that after the Latvian economy no longer receives the positive external shocks gen- Entrepreneurs hip; erated by the Structural Funds, which can 25% be viewed as a kind of financial doping, it may no longer be able to maintain the same growth rates. Perhaps Latvia could adopt the Irish ‘solution’ and divide the country Figure 8.1 shows the current allocation of into two regions one of which remains an all EU Structural funds among priorities Objective 1 region. together with domestic co-financing funds. The biggest share of financing is devoted to infrastructure which receives 32 percent 167
- 142. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States of total available funds. This is followed by Figure 8.2 Survey “What kind of natio- entrepreneurship which receives 25 percent nal development would you favour?” with human resource development in third Question: Would you like that government spends more funds on every of the mentioned areas? place with 21 percent. Motorway repair 91 9 . Science 88 12 Primary and secondary education 86 14 Thus Latvia has adopted a position some- Health protection 78 22 where between the so-called Greek model Environment protection Higher education 76 74 24 26 in which support for business and infra- Public transportation system 73 27 Improvement of demographic situation 67 33 structure is emphasised and the Irish model Police and rights protection system 66 34 where human resource development is giv- Employment 66 34 Social care 64 36 en a more prominent role. Equal opportunities policy 62 38 Tourism 56 44 Culture and arts 54 46 It is of interest to see how these priori- Adult education 51 49 Public information 50 50 ties compare with what the Latvian public Enterpreneurship 50 50 thinks. Although we do not have large scale Agriculture and agricultural development Army and military protection 14 50 86 50 surveys on this the Soros Foundation of 0 50 100 Latvia conducted an online survey on the yes no Source: http://www.politika.lv Latvian public policy portal www.politika. lv at the beginning of 2005. This exercise investment in science is necessary for suc- was done in order to inform the working cessful development of Latvia. Next comes group responsible for elaboration of the funding of primary and secondary education National Development Plan for the next with 86 percent positive responses. Most financial period (2007 – 2013).2 Thus the respondents would also allow increased fi- survey can be seen a redressing the widely nancing for health and environment protec- criticised lack of consultation with NGOs tion, as well as for higher education, public in the 2004 – 2006 exercise. transport and measures to improve the de- mographic situation. Figure 8.2 represents the opinion of re- spondents on which sectors of the Latvian There are some interesting divergences be- economy should receive additional financ- tween public opinion and official priorities ing (there was an assumption that such ac- For example, in practice support for entre- tion might increase the tax burden). preneurship receives 25 percent of available funds, but public opinion views it somewhat It is clear that the first priority of the public neutrally with half of the respondents opt- is infrastructure and in particular, motorway ing for increased financing and half are of repair, with 91 percent of respondents stat- the opinion that entrepreneurship is already ing that the government should pay more financed enough. However, education and attention to this issue and increase financ- science that is rated highly in the survey ing. Here it seems that the policy makers actually receives just 5 percent of available and public are singing in tune. Structural Funds The second priority is science—88 percent Although a key aim of EU structural policy of respondents believe that an increase in is to promote income convergence this re- lates to the EU level i.e. country level or at 2 Soros Foundation – Latvia (2005b) least NUTS II level. Lower level regional 168
- 143. 8 Latvia andCohesion Policy disparities are left to member states. The In the current Latvian priorities (2004 problem for Latvia is that there are particu- – 2006) the regional dimension was added larly severe regional disparities within the as something of an afterthought and there country. These are illustrated in Table 8.1 is very little in the SPD that explicitly ad- (Tables 8.2 and 8.3 show the same for Esto- dresses regional issues. Rather it has been nia and Lithuania) left to agents themselves e.g. municipalities or businesses to make project applications. Table 8.1 Regional income This led to fears that partly because of co- disparities in Latvia 2002 financing requirements and partly because % of country % of EU25 of inadequate capacity to prepare projects, Latvia 100 38.9 the less developed regions the would be un- Riga 181.7 70.8 able to get a “fair share” of projects. These Kurzeme 82.9 32.3 Pieriga 65.7 25.6 fears seem to have been realised. Accord- Vidzeme 57.9 22.5 ing to the first information on implemented Zemgale 55.7 21.7 structural fund projects published in March Latgale 48.4 18.8 2005, of 178 accepted projects Riga and the Note: These are indices of real income per capita at PPS by planning region Riga region (including Jurmala) received 99 projects worth a total of nearly €24 million, whereas Latgale, Latvia’s poorest region, Table 8.2 Regional income has had approved just 7 projects worth €2 disparities in Estonia 2002 million. If such an outcome is repeated in % of country % of EU25 the future, including in the next program- Estonia 100 46.6 ming period, then far from promoting con- Põhja-Eesti 153.2 71.4 vergence the Structural Funds may even Lääne-Eesti 72.6 33.8 exacerbate internal regional disparities. Kesk-Eesti 70.2 32.7 Lõuna-Eesti 66.6 31.1 Kirde-Eesti 58.6 27.3 Note: These are indices of real income per capita at 8.6.1 An unconstrained scenario PPS by planning region What would represent an optimal scenario for 2007 – 2013 from the point of view of Table 8.3 Regional income Latvia? A quick and cheap answer would disparities in Lithuania 2002 be unlimited funding without conditional- % of country % of EU25 ity. Unlimited funding is of course not fea- Lithuania 100 42.4 sible though as will be argued below the 4 Vilniaus 143.3 60.7 percent cap penalises the poorest countries. Klaipedos 108.5 46.0 Kauno 94.2 39.9 However, conditionality is another matter. Panevezio 86.6 36.7 The main form of conditionality comes in Telsiu 83.6 35.4 the shape of various co-financing require- Utenos 82.7 35.1 ments. In general the point of member state Alytaus 77.2 32.7 Siauliu 74.0 31.4 co-financing is that by having a financial Marijampoles 66.5 28.2 stake in the project there are incentives to Taurages 57.8 24.5 deliver a good project. However, there are Note: These are indices of real income per capita at PPS by county some problems with co-financing issues in Latvia. Firstly, the applicants for many ESF 169
- 144. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States and ERDF projects are expected to be lo- general, unless some specific sectoral mar- cal authorities and in Latvia there are more ket failure can be identified policies that than 500 local authorities, many of them select particular sectors should be avoided. rather small – 70% have a population of Thus if one believes that the market is not less then 2000.3 This means that they have generating enough “knowledge based” ac- very limited scope for co-financing. In an tivity the correct approach is to implement ideal scenario there would be incentives for horizontal rather than sectoral remedies. local authorities to merge, as has been the wish of the central government for some Another approach to defining a good struc- time. However, in practice issues such as tural policy is to consider the experience the promotion of territorial reform are out- of other countries. This is the approach of side the scope of structural policy. Alasejeva, who has looked at the histori- cal examples of Greece, Portugal and Ire- There is also the problem that a small and land.4 The experience of Greece and Por- relatively poor country such as Latvia can- tugal shows that it is a mistake to treat the not afford on its own to implement some Structural Funds money as a free lunch. By large projects, which do not qualify under contrast Ireland was able to achieve a long EU requirements. For example, a current term positive effect from the EU Structural problem is market failure in the build- Funds by concentrating on developing hu- ing sector, where there are no projects for man resources. building public sector housing. A number of factors such as the problem of what to do European funds have two main effects. First with the tenants of denationalised houses they represent a boost to economic activity together with recent developments in real through demand side and secondly they can estate market suggest that public housing improve productive capacity through sup- projects are rather desirable and socially ply side effects. Demand side effects occur justifiable. automatically with the appearance of EU Structural Funds. Thus implementing large What can one say in general about an op- infrastructure projects using EU funds, timal Structural Funds policy for Latvia? automatically increases demand for build- One route is to try to identify regional ing sector services. But the demand effects comparative advantages and support sec- are transitory and they disappear together tors that have such advantages. Another is with Structural Funds. However, if the in- to identify particular sectors—“high-value frastructure project is a good one it can be added” or “knowledge based” are popular expected to contribute to increased produc- buzzwords. Such approaches are entirely tive capacity in the future. misconceived. Production according to re- gional comparative advantage will emerge However, a subsidy to business has a sup- quite automatically in a market economy ply effect while the subsidy is in place but unless governments intervene to obstruct it. vanishes when the subsidy is removed. On High value added is an entirely non-opera- the other hand resources devoted to hu- tional concept and is there any activity that man resource development i.e. increases in is in some sense not knowledge based? In skills and human capital in general, allow 3 4 Central Statistical Bureau of Latvia (2005). Alasejeva (2003). 170
- 145. 8 Latvia andCohesion Policy the economy to develop faster also in the 8.6 A Latvian perspective on future without additional subsidies. the Commission’s 2007 – 2013 proposal The question is how to create the right mix between demand or supply side ef- fects? Alasejeva reports that for the Irish 8.6.1 Co-financing requirement economy the total impact of the funds has been between 2.7 percent and 3.5 percent One important issue is precisely that in the of GDP.5 From this overall effect demand new proposal the eligible private expendi- oriented part constituted 1.9 percent. That tures for projects will be cut in half—this means that the supply effects were almost effectively cuts the implicit subsidy in half. as big as the demand effects. Moreover the Motivating this decision is presumably supply effects persist over future years. the view that current levels of support for the private sector are more than generous Ireland has differed from Greece, Portu- enough However, the Latvian government gal and Spain in its priorities for the use view is that private funds as a source of of EU funds. Around third of all available co-financing play important role as a guar- EU money in Ireland has been devoted to antor of the success of structural projects. the development of human resources. In Involvement of private financial funds as a the other countries less than one fourth of source of co-financing structural projects is available funds were devoted to this prior- regarded as powerful instrument to motivate ity, but more was invested in physical in- entrepreneurs to contribute more to plan- frastructure. ning and monitoring of structural projects because they risk their own money in ad- From Ireland’s experience it can be con- dition to money from the Structural Funds. cluded that the most effective investments Therefore, the new co-financing limitation are in those areas that can give highest sup- is regarded as unfavourable for the effec- ply effects. In Ireland’s case investment tiveness of structural projects. in human resources has been a key factor with higher labour quality at all the levels At the same time the Commision wants 25 increasing productivity in all sectors ie in percent of the costs of structural projects both existing industries and in new ones, to come from national co-financing (gov- including the high-tech industries that are ernment and municipalities` budgets). much sought-after in Latvia. In a poor country such as Latvia it is dif- ficult to generate such resources from the public sector. Latvia cannot exceed the ceiling for government budget deficit to qualify for membership of the Exchange Rate Mechanism 2 (ERM2) and generally needs to maintain satisfactory macroeco- nomic indicators. Thus, the government faces a dilemma, on the one hand it wants to and is asked to invest more, but on the hand it needs to practice fiscal prudence 5 Alasejeva (2003). 171
- 146. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States and to maintain economic stability. As a The current financial period is the first possible solution of this problem the Com- when so called Berlin Method and 4 per- mision suggests public private partnership cent cap GDP criteria applies to amount of (PPP) as a way to replace government fi- aid from Structural Funds allocated to re- nancing. However, PPP is really a method cipient countries. This Method states that of substituting government financing by maximum total amount of aid from all 4 private. The Commision position has cre- Structural Funds and the Cohesion fund ated incomprehension and confusion in the each country can receive is 4 percent of Ministry of Finance of Latvia about which its GDP. There was no need to apply such direction to orientate to On the one hand method before the enlargement because the the Commision suggests the use of PPP, but amounts of money to be reallocated were on the other hand structural and cohesion not so big and the poor countries were not funds are trying to reduce private initiative. as poor as is Latvia now. However, now it If it is clear that co-financing is not possible is obvious that the demand for Structural then a whole department in the Ministry of Funds significantly exceeds supply and Finance, created to increase and to attract the Berlin Method is supposed to solve the private co-financing, should be closed and problem of allocation of resources. a new information centre should be created to stimulate PPP. The main official position However, from the Latvian perspective this of Latvia is that it is necessary to keep pri- approach seems to be somewhat unfair. This vate co-financing and to maintain current system fundamentally discriminates against rules. poorer countries (with lower GDP) relative to richer countries (with higher GDP). 8.6.2 The 4 percent cap First, the amount of financial assistance per capita Latvia receives seems low taking into The main goal of the Structural Funds as account macroeconomic conditions and the proposed by the Commision is conver- level of development of Latvia in compari- gence between the member countries and son with other recipient countries. Latvia cohesion within the union. Convergence as one of the poorest countries in the EU according to neoclassical growth theory (if not even the poorest if we look at GDP may be defined as a long-term process of per capita), receives less aid per capita than higher growth in countries with low capi- countries that are much more wealthy and tal to labour ratios, in other words, coun- economically developed. tries that have a low GDP per capita level should increase growth rates to “catch up” Figure 8.3 (next page) shows the distri- with richer countries. Such a development bution of total structural aid per capita in should lead to an increase in the level of the next (2007 – 2013) financial period6 economic cohesion within the Union. one can see that Latvia is not last in the However, the existing method of allocation amount of aid available per capita for all of Structural Funds is not fully compatible 6 with GDP per capita levels within the cohe- The data on total amount of aid per capita in each country for period 2007-2013 used in analysis sion and convergence framework. comes from the latest analysis in the University of Strathclyde in Glasgow, Scotland, and was provided by Ministry of Finance of Latvia. 172
- 147. 8 Latvia andCohesion Policy Figure 7.3 Total aid per capita for each Member State in Portugal, with twice as the 2007 – 2013 Financial Framework (€) big a GDP per capita as 1 000 Latvia has in 2004, is expected to receive from 800 the Structural Funds more than twice as much 600 as Latvia or 339 percent of EU average. 400 Figure 8.4 shows GDP 200 per capita against the amount of aid given. The 0 differences between old ia La n er a Sl nia Po ia F i ia ze F d A d C d Sw u s in c Be om Sl um th y ry Es ta te epu e Ir ia G al en e H any U h R anc K bli ec G ani Li Ital ai n an an and new member states ak tv tr en ug al r ga ed la Sp to gd re yp i us m el nl M lg ov u ov rt r un Po are quite substantial. d c ni C From the diagram one Source: University of Strathclyde, Glasgow, Scotland. can notice that GDP cap- member countries, but is nevertheless be- ping criteria distributes Structural Funds hind Greece, Portugal and Spain which are in a way that is inconsistent with GDP per much richer. capita and, thus, need. There is some nega- tive correlation between the variables—the However, it important to look at the need for correlation coefficient is equal to –0.55. aid for each country. For example, Latvian However, it is not large enough to define GDP per capita is only around 43 percent of a strong relationship between the variables. the EU average, but Greece, which is much Such allocation of funds obviously dis- more developed and prosperous, has this criminates against the new member coun- measure around 83 percent. However at the tries and does not provide aid according to same time Greece receives much more aid need. Countries are substantially different than Latvia does. Portugal, Spain, and Italy in their levels of development, for example are other examples. the standard deviation in GDP per capita at PPS for all member countries in 2004 A different picture appears when we take constituted 41 percent of the EU average. into consideration GDP per capita at PPS Using the GDP capping method with such 7 for each country (2004 data). This is shown initial differences will lead to even larger in Figure 8.4 (next page). disparities in the long run. Thus, it can be argued that this method is inconsistent with Latvian GDP at PPS per capita in 2004 was the main goal proposed by the EU, namely only 43 percent of EU average and actually convergence. from Figure 4 it is obviously the smallest in the whole Union. The total aid per one per- Second, there is a difference in the con- son granted to Latvia exceeds EU average ditions for Latvian contributions into the by 61 percent. However, at the same time EU budget and the aid it receives. Latvia contributes to the EU budget according to 7 The data on GDP per capita at PPS was provided its existing GDP, which grows at a rate of by SIEPS; around 8 percent annually. However, the 173
- 148. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States Figure 7.4 Disparities in per capita aid intensity. Correlation of total aid per capita for period 2007 – 2013 and GDP per capita at PPS in 2004 in existing Member States (€) Total aid per capita, EUR Portugal 800 Greece 600 Spain 400 LATVIA Italy Lithuania Hungary Germany Estonia Slovakia Poland France Czech Republic 200 UK Belgium Slovenia Ireland Finland Austria Sweden Luxembourg Denmark 0 Netherlands 0 10000 20000 30000 40000 50000 GDP per capita at PPS, EUR Source: University of Strathclyde, Glasgow, Scotland; Ministry of Finance of Latvia; SIEPS. amount of Structural Funds Latvia quali- for EC is based on Eurostat official sta- fies for in the existing financial period was tistics (latest available are for year 2003) calculated using the assumption of only 4 and divides countries into “old” (with 2 percent annual GDP growth for developing percent GDP growth) and “new”(with countries (like Latvia) and 2 percent of an- 4 percent GDP growth). However, real nual GDP growth for developed countries. existing indicators for 2004 look much Thus it seems that Latvia receives aid that better then those assumed by the Com- is inconsistent with its contributions. The mision, with a Latvian GDP growth at a Latvian Minister of Foreign affairs Artis rate around 8 percent annually (instead Pabriks has agreed with the Ministers For- of 4). Thus, our contributions to the eign Affairs of Lithuania and Estonia that EU budget are calculated according to the Baltic countries receive too little for- our existing GDP (with annual growth eign aid and that aid is not proportional to around 8 percent), however our recep- their contributions to the EU budget. Pos- tion of aid from Structural Funds is cal- sible solutions to this problem may be: culated from approximated GDP (with 1. Theoretical calculations should be re- assumed annual growth of 4 percent); placed with real economic indicators 2. Put emphasis on environment protec- to match contributions with aid. The tion and infrastructure projects that may amount of aid each country is eligible benefit not only Latvia, but also other 174
- 149. 8 Latvia andCohesion Policy countries. Such an emphasis would authority for the use of structural aid is the make other countries more interested Ministry of Finance of Latvia, which co- in financing such programmes and may ordinates both types of projects and guar- persuade contributors to exclude envi- antees synergy. There is a plan that in the ronmental and infrastructure projects future Latvian Ministry of Welfare should from 4 percent of GDP limitation; deal with social projects and the Ministry 3. Cancel the 4 percent of GDP regula- of Finance with regional and infrastructure tion. Latvia is not yet ready for such projects. However, the Ministry of Finance a move because of political considera- of Latvia believes that there is a big share tions. Countries, which benefit from the of projects in each sector that “overlap” existing system, will lose a lot if it is with each other. As a result of the proposed cancelled. division the necessary synergy achieved by the Ministry of Finance between all “over- The limitation of financial aid with 4 per- lapping” projects will be lost. Coherent cent of GDP per year is motivated by the projects will be difficult to manage because Commision as the maximum amount coun- there will not be one common institution try is able to spend and absorb and not harm responsible for administering and imple- its economic stability. This is mainly a po- menting such projects. litical argument. There are no theoretical or empirical findings which justify such a The the Commision suggests that one measure. Furthermore, there is evidence should fix a cross-financing level that will that investment in richer countries (which state maximum volumes of cross-financ- can be classified as structural investments) ing for each foundation. For the Regional very often exceeds this limitation. For ex- Development Fund it suggests a 5% ceil- ample, the UK that has always invested ing from overall budget devoted to social more that 4 percent of GDP in the projects projects, for the Regional Social Fund the that could have qualified as structural and suggested ceiling is 10 percent devoted to has not faced any economic problems re- infrastructure. However, actual level of garding these investments and overall sta- cross-financing in both types of investment bility. substantially exceeds these measures. Thus, such a rule creates the risk of losing this synergy between the two types of projects 8.6.3 Cross-financing with corresponding losses in efficiency. The the Commision suggests a mono-fund A possible solution is to accept the mono- approach, which states that every type of fund approach, but the ceilings for cross-fi- programme should be financed from a nancing for each fund should be increased. different fund and that every type of pro- Based on the experience of the Ministry gramme is under the authority of a differ- of Finance, the ceiling for cross-financ- ent ministry. It is planned that in the future ing should be raised to 20 percent for each there will be 2 managing authorities: a Re- budget. Thus, without rejecting the mono- gional Development Fund, which will deal fund approach it will be possible to main- with infrastructure projects and a Regional tain the necessary synergy and the level of Social Fund, which will deal with soft in- cross-financing. vestments. Currently the only managing 175
- 150. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States However, larger and more developed coun- 2007, this may create a one-year period of tries where administration of Structural slow down unfavourable to the stability of Funds is less centralised, in many cases do the Latvian economy. not understand such a problem and the ne- cessity for synergy in a small country like 8.7 Conclusions Latvia. Thus, they do not support an in- crease in maximum level of cross- financ- For Latvia the new programming period ing. However, their position does not seem from 2007 to 2013 represents an opportu- to be constructive because a higher level of nity to build and improve on what has been cross-financing does not create an obliga- achieved in the current period. What has to tion to use its full potential and at the same date been achieved includes the demonstra- time it allows it where it is needed. Cur- tion that Latvia does have the capacity to rently the Ministry of Finance is engaged administer the funds as well as to absorb in negotiations concerning an increase in them. Judgement on the quality of imple- cross-financing levels. Even other countries mented projects awaits detailed evaluation. that are indifferent on this issue, support the Commision in its view in order to speed the The most important problem in the current progress of negotiations. period appears to be that the priorities of the funds have insufficiently addressed the If the small countries are not be able to problem of internal convergence i.e. re- achieve an increase in the maximum ceil- gional disparities. Indeed lack of resources ing for “overlapping” structural projects, and capacity in disadvantaged regions may they will be constrained to use the govern- mean that the Riga region will receive a ment budget to maintain the necessary level disproportionate share of Structural Funds of synergy. Such an implication may cause with the consequence that regional dispari- fiscal strain with possible harm macroeco- ties may actually worsen. This is an issue nomic stability. that urgently needs to be addressed for 2007 – 2013. 8.6.4 The n + 2 rule This rule states that the Commission must automatically decommit any part of a com- mitment for which it has not received an acceptable payment application by the end of the second year following the year of commitment. The application of this “n + 2” rule forces Latvia to increase the speed of Structural Funds` administration in Latvia. According to estimates of the Ministry of Finance, if Latvia continues to use funds with the same speed, then money supposed to be used up to the year 2007 might be already spent by the end of 2006. Since Latvia will not have any access to additional financial means before January 176
- 151. 8 Latvia andCohesion Policy REFERENCES Alasejeva, J., “Īrijas skola: kā vislabāk izmantot ES naudu?” (2003) URL: http://www.politika.lv/index.php?id=108926&lang=lv; Brizga, J., “Who will plan development of Latvia`s development in the next EU budget?” (2004), URL: http://www.politika.lv/index.php?id=110342&lang=lv; Central Statistical Bureau of Latvia, Latvia. Statistics in brief. 2005, Publication of Central Statistical Bureau of Latvia, Riga, (2005:2); Cigane, L., “Valstiskās redzes pārbaude”, (2003) URL: http://www.politika.lv/index.php?id=108924&lang=lv; Ministry of Economics Republic of Latvia, Economic development of Latvia, State Land Service of the Republic of Latvia, (2004); Ministry of Finance of Latvia, “National Development Plan (Single Programming Docu- ment 2004-2006 project)”, Ministry of Finance of Latvia, Riga, (2003); Soros Foundation – Latvia, “Pirmais gads strukturālo fondu apgūšanā (First year in admin- istration of Structural Funds)” public discussion materials, (2005a) URL: http://www.poli- tika.lv/index.php?id=110550&lang=lv ; Soros Foundation – Latvia, public survey’s “Kādu nacionālo attīstību atbalstītu jūs?” re- sults (2005b), URL: http://www.politika.lv/index.php?id=110343&lang=lv; Internet sources: 1. European Structural funds official website in Latvia, “Informative report about Latvia’s readiness to acquire European Structural Funds”, URL: http://www.esfondi.lv/page. php?id=414; 2. European Structural funds official website in Latvia, “Pre-accession funds in Latvia (PHARE, ISPA, SAPARD and other)”, URL: http://www.esfondi.lv/page.php?id=6; 3. European Union Information Centre of Saeima, “What Latvia has gained being Euro- pean Union member country?”, URL: http://www.eiroinfo.lv/pages/ESIC/content_list. jsp?category_id=110 177
- 152. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States 178
- 153. 9 From PolicyTakers to Policy Makers 9 FROM POLICY TAKERS TO POLICY MAKERS Bengt O. Karlsson* 9.1 The stage set The basic goal of this study was to inves- some of the more important aspects, which tigate some of the past experience of pre- were fully covered in chapters 1 and 2. accession support and European structural and cohesion policy in new Member States We have discussed at great length the as well as issues that might have transpired present proposal by the European Commis- during the accession negotiations. Further, sion for a new ECP to be included in the we wanted to study how the present system Financial Perspective for the period 2007 of conditionalities on the ECP would affect – 2013.1 In addition to the opposing posi- the future development in those States and, tions of net payers and net receivers, there lastly, to get some ideas on how a more lib- is so far also a lack of consensus on the eral system, in which the NMS had a freer proposed structure of the objectives of the hand in managing available support funds structural and cohesion funds. The Conver- and in defining priorities would differ from gence objective is generally endorsed and present proposals. On the basis of informa- several NMS wish to see a larger share of tion from 5 national case studies an attempt the funds under this objective whereas the would be made to suggest an outline of a Competitiveness objective does not have new framework for the ECP which might the same support. The third objective, Ter- in a better way correspond to the needs and ritorial cooperation, is, perhaps, somewhat objectives of the Member States. Four spe- vague but met with interest. Some coun- cific questions, corresponding to those is- tries wish resources to be allocated to the sues, were put to the participating research least developed Member States rather than institutes. to the least developed regions.2 The Country Studies, each one of which That standpoints differ may to some extent has been devoted a special chapter, must be reflect the fact that the NMS had very little read against the backdrop not only of the influence over the design of the ECP during actual situation with respect to income dif- the accession negotiations. Basically the ferences between countries and regions but system was already in place. It had been also of the present system of ECA and the developed by and for the OMS and been proposed changes that are presently under modified to accommodate new Member negotiation. This section 9.1 reviews briefly States at every earlier accession.3 What the 1 * The author is an independent researcher, formely Se chapter 2, section 2.3. 2 at UNIDO in Vienna and the Swedish Ministry of See chapter 2, section 2.3.2. 3 Finance in Stockholm. See Tarschys (2003), chapter 2. 179
- 154. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States candidate countries in the Eastern enlarge- where rising GDP is mainly due to increases ment round could influence was only some in productivity rather than employment.7 modalities for adjustment and phasing-in and, to a certain extent, the amount of funds It can be argued that the regional differenc- to be allocated.4 Accordingly, it is a relevant es are somewhat exaggerated: differences question to ask how structural and cohesion in cost of living are taken into account, policy in the NMS has been affected by the but only at national level. Further adjust- conditionality inherent in the system and ment could be made for taxes, transfers and what would happen if this conditionality public expenditure, maybe also for private would be relaxed. capital flows.8 A hypothetical measure of divergence expressed in terms of equality Ample empirical evidence of the regional of consumption might show considerably imbalances in the new Member States is smaller regional divergences than we nor- presented in chapter 3. The regional diver- mally assume.9 gence was already at the outset generally larger than in the OMS, yet it is clear that In the period under consideration the proc- regional imbalances have increased consid- ess of convergence between countries did erably5 between 1995 and 2002 mainly due take off in an impressive manner.10 During to the expansion of the capital city regions the period 1995 – 2004 the growth rate of When excluding the capital city regions, the eastern European NMS surpassed that the regional differences seem to have re- of the OMS by 1.7 percentage points an- mained basically at the same level as be- nually. In certain countries, notably the fore the start of the integration process in Baltics, the growth differential was even the Czech Republic, Latvia and Slovakia higher. We might say that increased na- but increased in other NMS even if not so tional convergence was accompanied by strongly as when the capital cities are in- strongly increasing regional differences cluded. Furthermore, there are big and in- within countries—leaving the casual con- creasing differences between regions due nection aside for the moment. to their sectoral structure, educational level and ability to attract foreign investment. We have discussed in chapter 2 the defini- Those differences do not always show up tions of the concepts convergence, compet- in the employment records since the agri- itiveness and cohesion as well as their pos- cultural sector, at least in some countries, sible overlapping and potential goal con- serves as a “sponge” that can absorb su- flicts. There is enough empirical evidence11 perfluous labour in subsistence farming. as well as theoretical studies12 to demon- Employment has generally developed more 7 favourably in so called forward looking in- Chapter 3, p (8) 8 For a discussion of various measures of human re- dustry regions6 but not as strongly as their sources development and international competitive- GDP. This might reflect the well-observed ness where the NMS generally come out better than phenomenon of jobless growth in the NMS when measured by GNI statistics, however adjusted, see Karlsson (2002), section 9.2 4 9 Chapter 1, section 1.1.1. Tarschys (2003) p. 39. Data from France, UK and 5 Except in Bulgaria and Slovenia. Sweden tell a compelling tale in this respect. 6 10 See chapter 3 for a definition of this term—those See chapter 3. 11 regions have a large share of various engineering reference 12 industries. reference 180
- 155. 9 From PolicyTakers to Policy Makers strate the reality of such conflicts, actual or discern two fields of tension of great con- potential. As has been amply shown in the sequence: one between the conditionalities Sapir report, there is very likely a conflict of a system originally designed for EU 15 between achieving regional convergence and the national constraints of the NMS, within a country and economic growth. We the other between the Lisbon objectives may look at this as a possible conflict be- of growth and competitiveness and the re- tween the objectives of Lisbon and Gothen- gional divergences within a country. In ad- burg on the one hand and the convergence dition, the deficient capacity to manage and goal on the other. The creation of growth administer support funds transcends those centres or industrial clusters is one of the fields of tension in the NMS, albeit to a main engines for growth.13 As we have varying degree. This capacity is sometimes seen from chapter 3, the expansion of the further hampered by remnants of old politi- capital city regions in all NMS may well be cal structures. an expression of this fact. The Sapir report States explicitly that “It is obviously pos- Against this somewhat troubled back- sible that, during the catching-up process, ground, we will now proceed to sum up increasing regional disparities within the what the national contributions have to say poorer countries may also emerge. How- about their past experience of ECP and their ever, this phenomenon may be mitigated thoughts about the future policy, on the one by national growth and could be eased by hand if present conditionalities prevail, on national rather than EU policies (such as the other if they were to be given a freer social transfer schemes, labour market and hand in forming the implementation of the wage policy, etc).“ This is also one of the ECP in line with their own priorities. reasons why the Sapir report recommends an ECP that is directed towards countries rather than towards regions. The Commis- 9.2 Summary of national sion recognises this conflict in the Third contributions Report on Economic and Social Cohesion but wards it off by saying that the trade-off will depend on “the spatial distribution of 9.2.1 Experience drawn from the economic activity and of settlements”.14 pre-accession support While groping for an optimal design of the The refocusing of the PHARE programme ECP for NMS we can, then, immediately and the creation of the ISPA and SAPARD 13 programmes in 1997/98, made important The concept of industrial clusters is mainly con- financial support available to the candi- nected with the work of Michael Porter. See the seminal work in Porter (1990). For an updated bibli- date countries for preparing the accession. ography and references to European conditions; see Whereas SAPARD aims at rural develop- Kethels (2004). ment, PHARE supports institution building 14 As noted in chapter 2, this observation seems less and cohesion and ISPA large scale environ- relevant for the NMS where the spatial distribution ment and infrastructure projects. Although of economic activity often was decided by the cen- tral planning authority. See, for instance, the Czech 2003 was the last programming year for the Country Study, section 6.6. NMS, pre-accession support is still very 181
- 156. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States much a living issue: contracting continues that otherwise would have been neglected. in 2005 and payments until 2006.15 In the The Czech Country Study also says that course of the present study, it seemed rea- the programmes made a contribution to the sonable to assume that the experience from success of the accession negotiations but the pre-accession support would throw admits that the first aim was to secure as some light on the possibilities as well as on much financial resources as possible. The the difficulties that the NMS would face, strongest reaction comes from the Polish once included in the ECP. Country Study which emphasises that the domestic authorities could not influence All Country Studies generally make a fa- content and priorities of the programmes— vourable assessment of the implementation they were consulted rather than playing an of the pre-accession programmes, although active role. All in all this led to a situation to a varying degree and with several modi- where the main concern became not to lose fications. The Latvian Country Study says any of the funds available from the EU. that the main goal to prepare for the use of the Structural Funds has not been fully The lack of national influence on the pre-ac- achieved and the Polish study indicates that cession programmes is also stressed in the the programmes were inadequate even if the Latvian Country Study and certainly in the funds somehow contributed to the economy. Hungarian contribution. The latter makes a Other Country Studies show a much more favourable overall assessment but empha- positive attitude towards the pre-accession sises the problems caused by discrepancies programmes. It is a common experience between the EC and the national authori- that the various programmes have revealed ties: sectoral priorities were seen quite dif- a large number of institutional, manage- ferently and bureaucratic hurdles made the rial and administrative shortcomings on use of funds difficult. A special feature in the receiving side—shortcomings that, the Hungarian Country Study relates to perhaps, have not yet been fully overcome agriculture and the SAPARD programme: but which must be addressed in the near- through fortunate circumstances Hunga- est future. Several instances of unfinished ry had succeeded to build up a relatively projects and of having to return funds are successful agricultural sector. The system reported. The Slovak Country Study claims change meant that well functioning coop- that pre-accession support has increased eratives were broken up and the SAPARD administrative capacity and experience programme had to serve, instead, a frag- which, in their words, hopefully will help mented sector with a large number of small to overcome the obstacles to the use of ECP landholders. These problems remain for the funds that still exist. The Czech contribu- future, according to the Country Studies. tion goes even further and States that the Czech Republic has taken full advantage of The Country Studies do not reveal any the pre-assistance support and succeeded to striking differences between the three pro- stimulate investments in sectors or regions grammes except that one Country Study 15 (Latvia) mentions SAPARD as the most The Slovak Country Study expresses concern successful programme, this in contrast to that the simultaneous implementation of projects financed by preaccession funds and the preparation others. There seems to be some satisfaction for the funding through regular ECP funds might also with the infrastructural investments fi- create institutional and administrative difficulties. nanced under ISPA. The Hungarian Coun- 182
- 157. 9 From PolicyTakers to Policy Makers try Study states that the experience gained position vis-à-vis the Commission. from ISPA is a good model for the use of the Cohesion Fund—probably also with Obviously the flip side of all this is that respect to tackling the bureaucratic and crucial bottlenecks have been identified other hurdles from the side of the Com- and even to some extent eliminated and mission that the Country Studies elaborates that work on reform and new structures has on. The attitude towards the environmental started. But it is difficult to get rid of the projects is more ambiguous even if in Slo- notion that the positive assessment of the vakia important improvements in the waste pre-accession programmes to a large ex- water treatment sector seem to have been tent is based on the fact that considerable achieved. financial resources thereby have flown into the country. The uncertainty remains as to There does seem to be a certain inconsist- whether the pre-accession support really ency in the Country Studies (with the ex- has been able prepare the NMS for a suc- ception of Hungary) between the overall cessful participation in the ECP. A first, assessment of the pre-accession support tentative, conclusion would be that also in and the identified problems and obstacles. the coming years much resources will have When all is said and done, the general as- to be concentrated on continued adminis- sessment is positive, except, perhaps, in the trative and legislative reform, coupled with Polish Study but even there available funds strong measures for training and education seems to have been absorbed. This must be at several levels.16 contrasted with the overwhelming number of problems, shortcomings and failures that have been identified: particularly the Slovak 9.2.2 Controversial issues in the Country Study contributes an impressive accession negotiations list. The Polish Study also lists a number of difficulties but they appear to be different In the design of the study it was assumed, in nature and mainly concern the mode of as outlined in chapter 1, that the various na- implementation (procedures must be sim- tional positions and requests would provide plified, more emphasis should be placed a good indication of how each country per- on SMEs and on the participation of young ceived that an optimal future ECP should people etc.) With some exception, Country be formulated. Accordingly, the cooperat- Studies seem to indicate that most of those ing partners were asked to outline the di- problems have not yet been resolved and vergences that might have appeared in the will remain as policy obstacles for a consid- negotiation process between the national erable period of time. Adequate legislation positions and the position of the EC. is not in place, managerial and administra- tive capacities are lacking, project identifi- Country Studies show clearly, however, cation and preparation deficient and costly. that the divergent views—and they exist- At least in some countries, internal political ed—arose along quite different lines and problems and pressure from special inter- did not so much relate to the very objec- ests make reforms difficult or impossible. tives of structural policy or to the optimal All this is compounded by a certain unease about the proverbial Brussels bureaucracy 16 For a concurring assessment , albeit with a slightly and a feeling of being in a weak negotiating more positive slant, see Richter (2005), section 7. 183
- 158. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States use of funds. Instead, purely operational the side of the Commission and to unilat- issues were in focus, at least according to eral changes in the planning structure. An the Country Studies. In two cases, Hungary example in the same vein, but with differ- and Poland, overall financial issues were ent result, is given by Hungary: national particularly contentious. Both countries de- negotiators were finally allowed to elabo- manded larger allocations than those pro- rate Operational Programmes at the nation- posed by the EC. In Poland’s case, concerns al rather than at the regional level which about a slow inflow of funds during the first greatly enhanced the absorption capacity. years of membership led to a request for a The Hungarian concern is now whether this phasing in of the payments to the EU budg- will be allowed to continue over the next et—something which was promptly re- planning period. jected by the EC. (Poland, however, gained certain other financial concessions, largely, Again, very little guidance for the design it appears, as last-minute compensations or of an optimal ECP for the future seems to a way out of a negotiation deadlock.) In all be given by the reports on the negotiation countries, with the possible exception of process in the Country Studies. It can of Hungary, a weak negotiation position, unfa- course be inferred that a strengthening of miliarity with procedures, a fragile admin- the administrative and managerial capacity istrative structure and, perhaps, a general on the receiving side will be an essential lack of negotiation capacity were perceived prerequisite for a successful ECP. Like- as the main obstacles to a more successful wise, that the use of and access to the struc- outcome of the process. Several countries, tural funds should be as unbureaucratic and however, seem to have pressed for a larger easy as possible, with as few conditions as share of the Cohesion Fund because of its possible for the receivers. But those are ex- simpler procedures of administration. In tremely general conclusions and give little one or two cases the negotiators were also advice on how an ECP should be designed successful in this respect. to best suit the NMS, given the overall ob- jectives of that policy. For this we have to Latvia may have been an exception, at least turn to the inventory of the main challenges according to the Country Study , where for the future given in the Country Studies sectoral and thematic priorities were at as well as to their own look at the proposals the centre of attention and sometimes led currently on the negotiation table. to “emotional negotiations between rep- resentatives of Latvia and the EC” in the words of the Country Study . 9.3 The starting position A special—and important—aspect of the As this is written, NMS have had experi- shortcomings relates to the decentralisation ence of pre-accession support at least since of government and public finances. In some 1998. They have successfully concluded cases, a rather artificial regional structure the accession negotiations in which the was imposed on a country which had had amount and composition of the structural no experience of decentralised decision- support funds for the period 2004 – 2006 making for many decades. Brave attempts were agreed and they have started the proc- to apply this structure to the required plan- ess of implementation. Together with all ning process sometimes led to distrust from other Member States, they are in the mid- 184
- 159. 9 From PolicyTakers to Policy Makers dle of a new negotiation process: this time system that is perceived as particular obsta- to agree on the financial framework for the cles for the NMS. period 2007 – 2013 including the amounts to be allocated as well as the objectives and goals of the structural and cohesion 9.3.1 Urgent domestic issues support. In this section 9.3 we try to draw some conclusions from the previous expe- Need for improved strategy and rience of the NMS, as it has transpired not planning only from the preceding section but also from some of the other parts of the analysis The Country Studies, unanimously,17 stress made in the Country Studies. Section 9.3.3, the need for a elaborating a better long- in particular, attempts to formulate some term strategy for the national structural and of the problems that the future ECP would cohesion policy and for the use of support meet if problems and issues, identified in funds from the Union. The Hungarian and the Country Studies, were not given suffi- Polish Country Studies clearly state that the cient attention in the formulation of the pol- present strategy mainly has been limited to icy for the upcoming period. Those prob- ensure that no funds are lost. In other words, lems and issues relate both to the ability of to make sure that available support pos- the NMS themselves to reap the benefits of sibilities are used to the utmost. The same the ECP and to the various components of can quite easily be inferred from the other the ECP system. Country Studies as well as a clear aware- ness of the inadequacy of this situation. Even if all Member States share the goal of The Slovak Country Study points out that an increased cohesion within the EU, the their strategic documents have been late, financial interests of the net payers and the particularly in comparison with neighbour- net receivers create natural areas of friction. ing countries. Even if this has now been Whatever the final outcome, it is neverthe- corrected, the documents are often, in the less obvious that financial resources will words of the Country Study, obscure and be limited and that available funds must be difficult to understand for the potential us- used in an optimal way in order to further ers—not the least for those that may apply growth and cohesion. To create the condi- for funds. According to the Czech Country tions for this to happen is now the imme- Study, improved planning documents are diate common task for all Members States under way but have little chance of survival as well as for Commission and Parliament. given the political situation in the country. How well prepared, then, are the NMS in this situation, after almost a decade of ex- Some Country Studies make the point that perience? And are there inherent obstacles national priorities and EU priorities are inherent in the proposed system which will confused or overlapping. Necessary budget make it difficult for the receivers to use restraint may lead to cuts being made in the funds in the way it is intended by the EU? wrong areas (for instance education—Hun- The Country Studies give some indications, gary). Countries should see the ECP sup- albeit in a somewhat disparate fashion. We ported priorities as long-term investment, will start by looking at the national issues as identified by the Country Studies and 17 The Latvian Study does not mention this explic- then identify some legacy of the previous itly. 185
- 160. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States necessary for growth and convergence, the Hungarian Country Study and Slovakia which should not be affected by short-term laments that it is sometimes difficult to get budget considerations. Budget cuts should understanding even for the basic principles be made in areas outside the development of cooperation within EU. Much of the plan- plan (the Czech Republic). ning work is in the hands of municipalities, without much experience and hampered by Some Country Studies underline that the lack of cooperation with regional authori- national development plans lack strategy ties. The Country Studies of Poland and and vision and rather have the character of Hungary emphasise the need to encourage a “shopping list” (The Polish Study). The local initiatives and initiative for promoting Hungarian Country Study makes a particu- SMEs but have to admit that the capacity to larly interesting point: the relatively primi- do so is largely lacking. The Slovak Study tive strategy that has been prevailing and points out that the fiscal decentralisation which mainly consists of ensuring that all has not been implemented which means possible support funds are taken advantage that the regions have no financial resources of so that no money is lost (which, never- to stimulate endogenous growth. Slovakia theless, has happened in several countries has tried to use unpaid external advisors for and instances), risks creating the opinion project preparation but found that very dif- that the NMS are in the European game just ficult—lack of financial incentives seldom for the money. The Hungarian Study warns leads to a good job, apart from special cases for a confusion between instruments and where a more idealistic attitude might pre- objectives and points to the necessity of de- vail. fining a sustainable long-term strategy for the Member country in the European con- Particularly in Hungary, Poland and Slova- text instead of just aiming at “the highest kia the above issues have been aggravated possible absorption of potential EU funds.” through regional reforms which have been Well thought out national strategies may or less than optimal. The Hungarian Coun- may not coincide with the EC strategies but try Study is most outspoken on this point: will at any rate form a sound basis for nego- The NUTS II regions have been created tiations and for making the case in Brussels by artificially grouping NUTS III regions and vis-à-vis the net payers. (termed “counties” in the Country Study) together but they have no or little politi- Lack of administrative and managerial cal relevance or administrative capacity. capacity A special problem concerns the region of Central Hungary which includes the capital It is clear from the Country Studies that city: a huge rural hinterland of Budapest is there are still great shortcomings when it excluded from Objective 1 assistance be- comes to the ability of national authorities cause of the weight of the wealthy capital to act as effective counterparts in the ECP, city. The Country Study argues in favour of despite intensive training and institution a split of this region in two, one of which building activities. The highly centralised would be the capital city. There is a some- system of the centrally planned economies what similar situation in Slovakia: the three was obviously not conducive to building up administrative areas which existed under regional and local capacities. Reforms also the old regime have been split up in 8 re- have to address the political culture says gions of doubtful relevance and with glar- 186
- 161. 9 From PolicyTakers to Policy Makers ing shortcomings in capacity, facilities and parties, particularly from industries which experience. The decentralisation of public are still dominated by state ownership. The administration and fiscal policy is painful Polish Country Study is convinced that and hampered by lack of cooperation be- management of the structural funds at the tween the central and regional levels of au- regional level is the only way to strengthen thority.18 local government in a situation of a perma- nent budget deficit and thereby ensure that In the Hungarian Country Study the lessons EU cohesion policy will take predominance seem clear: the experience from the pre-ac- over domestic interests. cession period shows that an efficient use of available resources could only be se- Co-financing requirements in a period cured when planning and decision-making of structural budget deficits. is made centrally. Operational Programmes were elaborated on the national level due All Country Studies point to the obvious to the missing tradition and administrative conflict between the need to reduce the capacities at the NUTS II level. According budget deficit and the co-financing require- to the Country Study the national approach ments. It would appear that this is perhaps has permitted quick access to and absorp- the largest problem relating to the present tion of resources during the first critical European Structural and Cohesion Policy. years of Membership. The Country Study But the assessment of the situation—as argues for a continuation of this approach well as of what needs to be done for the and rather worries at the thought that the future, varies from country to country. Operational Programmes would have to be regionalised after 2006. The Polish Country The Hungarian Country Study states ex- Study, on the other hand, presents quite a plicitly that future co-financing require- different point of view and argues strongly ments will be met but that a restructuring of in favour of the official position which is to the budget still would be necessary to com- organise the national cohesion policy in 16 ply with the ERM-criteria and allow for regional programmes, corresponding to the an introduction of the Euro by 2010. Both NUTS II regions, against the EC proposal expenditure and revenue reforms would be to work mainly with sectoral programmes. necessary; for political reasons opportuni- The Polish approach would require a con- ties of such reforms have been missed in siderable amount of further decentralisa- the past. Like the Czech Country Study, the tion of administration and public finance Hungarian one point out that it is necessary in order to provide the regional and local to see the resources used for co-financing of authorities with the necessary instruments. EU-supported projects as long-term growth Sectoral programmes, in the eyes of the oriented investments which should not be Polish Country Study, would be subject to curtailed by short-term considerations. pressure from sectoral lobbies and political Also the Polish Country Study emphasises the positive role that the co-financing re- 18 This is certainly also an effect of an old way of quirements could play in pushing necessary thinking and is a part of the political “culture”. budget reforms. Those issues can probably only be resolved through the passing of time and generations. This should be borne in mind when taking the central decisions on Nevertheless, a general tenor in the Coun- the implementation of the ECP. try Studies is the need to change or relax 187
- 162. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States the co-financing requirements. The Slovak 9.3.2 Removal of obstacles in the Country Study mentions that Slovakia has present and proposed system been warned by the Commission that it might not be able to use all the funds al- located for the period 2004 – 2006. The The proposal by the European Commission Country Study relates this to co-financing for the ECP 2007 – 2013 was described in problems but also to the EU disbursement detail in chapter 2.20 The Commission has procedures which sometimes are consid- replaced the former “objectives” with 3 ered as very inadequate because of the li- new priorities: Cohesion for Growth and quidity pressure that can arise between the Employment, Regional Competitiveness end of a project and the final disbursement and Employment and European Territorial of EU funds. Cooperation. “Cohesion policy in all its di- mensions must be seen as an integral part Several Country Studies point out that it is of the Lisbon strategy”21 and also integrate at the lower levels of administration, region- the Gothenburg objectives. The Commis- al and municipal ones, that the co-financing sion has proposed a considerable increase problems become really acute, often due in the amount of resources for ECP, distrib- to disastrous financial and budgetary cir- uted on three funds. A general aim has been cumstances. The Slovakian Country Study to simplify the system among other things mentions that this leads to a preference for by having each operational programme fi- larger projects at higher levels where the nanced mainly from one of the three funds, situation might be easier to handle.19 The with limited possibilities of “cross-financ- Latvian Country Study takes a particularly ing.” Furthermore, support for rural devel- pessimistic view of the co-financing possi- opment and restructuring of fisheries in- bilities at the local level and points out what dustry have been transferred to the heading it finds to be an inconsistency: on the one Common Agricultural Policy. hand private financing is no longer eligible for EU contributions to the same extent as The proposal is presently under negotiation. before, on the other hand the EU encour- Although a broad generalisation, it may be ages so called public-private partnerships fair to say that negotiations so far have been as a way of overcoming the difficulties with focused on the total amount of funds for co-financing. ECP and on the criteria for allocation be- tween countries, in particular between the A recurrent theme in the Country Studies is OMS and the NMS. We shall revert to those the disbursement procedures of EU funds: fundamental issues later. Here we will take since payments are made very late in the up some features of the proposal which at project cycle, particularly smaller entities present seem to have a lower priority in the (municipalities and enterprises) fall into a negotiation process but which nevertheless liquidity trap. This has also a negative im- are fundamental for the receiving countries. pact on their willingness and ability to par- The Country Studies show clearly that not ticipate in future ECP-financed projects. the least the experience of the pre-acces- sion support has led the NMS to identify a 20 See section 2.3 in chapter 2. 21 19 See chapter 7, section 7.4. COM (2004), section 2. 188
- 163. 9 From PolicyTakers to Policy Makers number of issues related to the system itself ing system. Yet, as the Hungarian Country which they consider as obstacles for an ef- Study says, “local initiative is crucial from ficient use of funds in the present system. A the point of view of the successful use of discussion of those obstacles will indicate the possibilities of EU transfers.” some answers to the third question on our study outline: whether the ECP in its cur- One step in the direction of simplification is rent shape, including the proposed changes, the introduction of the proportionality prin- causes problems due to its design. ciple according to which the complexity of the system of monitoring will be weighted against the size of the project. This is ex- Simplification of procedures plicitly welcomed in the Polish and the Slovak Country Studies even if the latter There is an inherent conflict between the means that the principle should be applied aim to decentralise management and im- to more programmes and areas than has plementation of ECP-funded projects on been proposed by the Commission. the one hand and the required formalities for project preparation, proposals and reim- bursement on the other. Whereas this may More flexibility in the use of available be little more than an annoyance in OMS, funds it can become a real obstacle in the NMS. The Slovak Country Study bears witness For the receiving countries the ability to to this when it enumerates the documenta- make maximum use of allocated or avail- tion that has to be attached to a project pro- able fund is obviously much at heart. The posal: detailed budget of the organisation, Country Studies contain a plethora of pro- articles of association, annual report, ac- posals and ideas of how to eliminate some counts, official registration certificate, and of the obstacles in this respect; obstacles a bank statement which certifies the ability which are easily perceived as exaggerated to co-finance the project. A special account or “bureaucratic” but which may be differ- has to be opened for EU financial sources ently assessed by net payers or by the Com- and very strict requirements are imposed as mission. to accounting, budgeting and monitoring. “Many of the projects are refused because Some of those observations relate to the of formal mistakes”, says the Slovak Coun- method of assessing the project costs that try Study . are eligible for EU-financing. It was stressed above that small entities have difficulties to The matter is not made easier by the nature participate actively because of the liquidity of the EU disbursement and reimbursement squeeze caused by the EU reimbursement procedures. Normally, funds are being paid rules. This problem is compounded by the out very late in the project cycle with final fact that costs for project preparation are payment sometimes one or two years after not eligible for EU-financing. The Slovak the finalisation of the project when all for- Country Study tells a compelling tale about mal requirements have been met. Obviously having tried to have unpaid volunteer ex- this can lead to a severe liquidity crisis for perts help in preparing project proposals but, small enterprises or municipalities which obviously, without much success. Likewise also have difficulties to access the bank- the new proposal of excluding VAT from 189
- 164. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States EU-financing will have a negative impact 9.3.3 Conclusion: Status quo ante according to the Polish, Czech and Slovak bellum? Country Studies since it will substantially increase the domestic contribution. The review of the Country Studies made The alleged simplification of funding proce- above gives the impression of a situa- dures—that each programmes in principle tion where the New Member States, eager would be financed from one fund only with to make the best possible use of the new limited possibilities of “cross-financing”— sources of finance that the EU Membership has generally got a negative reception in the has put at their disposal, are in the middle of Country Studies. Rather than simplifying, an embarrassing two-front conflict. On the this proposal complicates matters, says the one hand they face rules, formalities and Czech Country Study. The Latvian Coun- detailed regulations imposed by Brussels, try Study discusses the problem at length on the other hand they suffer from a grave from the particular perspective of synergy deficiency in the domestic ability to absorb between projects financed under different those funds and to manage and implement objectives in a small country like Latvia, the corresponding projects. The question for instance between social and regional we had originally formulated for this part projects. One way out would be, according of the study can be summarised as: What to the Latvian Study, to greatly increase the will the future ECP look like in the NMS if amount of permitted cross-financing but present conditionalities will be retained in basically, it is expressed, the establishment the next financial framework? Even though of the mono-financing rule shows a lack of we have not received a direct answer to this understanding for the special circumstances question in the respective contributions, it in a country like Latvia. is not all too hard to find the answers that are implied in the Country Studies as they A more foreseeable reaction is the criticism have reviewed the shortcomings both in the of the strict application of the so called n + 2 national system and in the current ECP pro- rule22 as well as a general wish to soften the posal. Our conclusions as to the answer to co-financing requirements whereby the re- the question posed are, then, as follows: quired budget restraint in view of the Maas- 1. If there are no internal and EU-reforms, tricht criteria is a frequently used argument. ECP will continue to limp along, par- The Czech as well as the Slovak Country ticularly in the first part of the period. Study also express their opposition to the The main concern of NMS will be to proposal of earmarking some of the funds ensure as much funds as possible with for a National Contingency Reserve. little strategic planning. The main con- cern of EC will be to make sure that funds are not squandered (continued actuarial control). 2. Among other things this might cement the opinion, both in the EU 15 and the 22 NMS that the EU mainly serves as a This abbreviation refers to the so called “sunset clause” according to which funds get decommitted source of financing. This will be abso- if not claimed at the latest two years after the com- lutely contrary to the idea of increased mitment year. cohesion in Europe. An unchanged ECP 190
- 165. 9 From PolicyTakers to Policy Makers would therefore be counterproductive country and that that is good. Also the with respect to improving cohesion. Czech Study replies in same vein.) 3. There is a severe incongruity between However, in many (all?) NMS the po- the convergence criteria for budget def- litical situation is unstable and special icits (ERM) and co-financing require- interests and old political culture could ments. This will also hamper ECP— delay reform process.25 It is difficult to there will be more cases of NMS re- see which tendency will gain the upper turning funds to EC or being included hand. in the Growth Adjustment Fund.23 8. All in all, it is not very likely that a 4. The problems mentioned might even significant increase in regional con- make the discussion on the 4 percent vergence will take place, at least not in cap rather theoretical—countries may the first part of the period, since the old not even be able to use funds up to that problems to a large extent remain. (See limit. again chapter 3). This is not to say that 5. The difficulties connected with the for- convergence at the EU level, between malities and the inflexibility of the sys- countries, would not happen—there are tem are mainly felt on the regional and growth centres and production capac- local levels. At the same time a contin- ity in all the NMS and probably good ued decentralisation or regionalisation chances to attract FDI. If anything, this is a central feature of the ECP. There is might further increase the regional di- a risk that this may aggravate the prob- vergences within the countries. This lems for the NMS to make full use of could be mitigated through an effective available funds, particularly at the be- transfer system but that would, in its ginning of the financial period. turn, affect the competitiveness of the 6. All in all, the situation might give net growth regions in a negative way. payers good arguments for wanting to be restrictive since ECP funds may be considered as a sub-optimal way of us- ing scarce funds.24 7. Many problems and issues have been well identified and good experience gained since 1998. Reform work has started. It is quite possible that this process will continue and even accel- erate in which case the problems dis- 25 cussed may be at least partly resolved This is sometimes masked as a discontent with some time into the next financial plan- the willingness of the EU to take “historical facts” and “special circumstances” into account. But the ning period. (The Hungarian Country Copenhagen criteria are clear (relatively speaking) Study says explicitly that EU policy and cannot be modified on such grounds. We might will enforce budgetary reform in the compare with the current discussion with Turkey where there are, obviously, very critical “historical 23 The Growth Adjustment Fund under Heading 1a facts” and “special circumstances” that are at odds in the proposal for new Financial Perspective will with the basic community values but where the po- be partly finance by non-utilised ECP funds. sition of the EU is, and should be, absolutely firm. 24 A similar point is made by Richter (2005), section They same must go for minority rights and similar 7, p 112 issues. 191
- 166. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States 9.4 The system adapted: Country of the structural policy resources should be preferences revealed allocated to the Cohesion Fund. The rea- sons for this are easy to understand: This fund is mainly earmarked for the NMS,27 its In this section the preferences and priori- handling and implementation is easier than ties for the future ECP, as they have been for the other programmes, generally good expressed in the five Country Studies, will experience has been gained from the ISPA be described. Since those priorities have programmes and, last but certainly not been identified by independent researchers, least, co-financing requirements are lower. they may or may not coincide with those Another reason for the emphasis on the co- expressed by their governments in the of- hesion fund is that it lends itself to larger ficial negotiations. In the concluding sec- projects in transport infrastructure as well tion, 9.5, we will try to summarise the main as the environmental area. conclusions for the future ECP that can be drawn on the basis of the studies but we The assessment of the large transport in- will also contrast those with the approach frastructure projects seems to vary a bit that the actual negotiation work seems to between the Country Studies. The Polish be taking. Study warns that large transport infrastruc- ture investments may be difficult to man- age and lead to centralisation. They stress 9.4.1 Objectives and themes the need for good local or regional trans- port systems as does the Slovak Country The objectives and themes proposed by the Study. The Hungarian Study has another Commission generally find acceptance in view: here the field of tension is between the Country Studies. The embracement of the Commission’s insisting on transport the Lisbon and Gothenburg objectives is by rail and the national needs which are also welcome: it provides the NMS with a rather to develop the highway system. (See strategy for transforming their economies, the reasoning on “highway density” in the dominated by agriculture or basic industries NMS vs. the OMS in section 3.4.2 of chap- into what is generally labelled as “Knowl- ter 3.) This reflects an interesting difference edge Based Economies.”26 of views: environmental and energy con- cerns in the OMS have led to a general ac- This being said emphasis on the various ob- ceptance of the need of a transfer from road jectives and priorities seems to vary. A gen- to rail which is not necessarily the priority eral theme seems to be that a larger share 27 This, of course, is one of the main negotiation 26 This moniker has become a catch-all that gener- points right now: the Country Studies generally ally seems to indicate a highly developed industrial carefully avoid discussing this issue although it or post-industrial economy but with very little strin- would be very much in the interest of the NMS if gency in definition or clear ideas of the strategies this principle would be accepted, particularly if the required to reach this goal. We might well ask the overall size of the EU budget were to be curtailed question: should the whole of Europe become a along the wishes of some of the net payers. With a “knowledge based economy”? Well, maybe, but in reduced budget and important ECP money being si- what time perspective? By focusing on the concept phoned off to OMS, the situation of the NMS could of ‘knowledge base’ there is an apparent risk that become precarious. So far, NMS have, nevertheless, more mundane development strategies will get less been unwilling to side openly with the net payers on attention than they would deserve. this particular issue. 192
- 167. 9 From PolicyTakers to Policy Makers of the NMS where the road network to a The Latvian Country Study identifies cer- large extent is underdeveloped or dilapidat- tain large priority projects, mainly in the ed. The question that can be asked is now housing sector, which need to be realised whether the “western” view represents an but which do not qualify under the EU re- enlightened long-term sustainable devel- quirements. opment strategy or whether it is a question of impressing certain values on countries where conditions are different? 9.4.2 National or regional management of the ECP? The Gothenburg objective of environmen- tal sustainability gets of course the obliga- One of the major, and principally most im- tory reverence in most Country Studies. It portant, conclusions of the Sapir report was is somewhat concretised in the Czech and that “There is a solid argument for the new Slovak ones, where the need to focus on the EU convergence policy to focus on coun- waste water treatment is emphasised along tries, rather than on regions, using national with a report on the good progress made GDP per capita (measured in Purchasing under the pre-accession arrangement (The Power Parity) as an eligibility criterion. Slovak Country Study). The Polish Study However, individual countries may decide emphasises the need for upgrading environ- to delegate implementation and monitoring mental standards but underlines the need of this policy to their regions.” This recom- for thorough cost/benefit studies as well as mendation was not accepted by the Com- the difficulties to coordinate with other in- mission. Furthermore, while the principle stitutions (the World Bank and IMF). of national management of the ECP had been tolerated during the 2004 – 2006 peri- The objective of regional competitiveness od, the proposal for 2007 – 2014 is aimed at and employment is an interesting one be- transferring the responsibility for the man- cause it is, among other things, defined as agement and implementation of the ECP to helping “regions and the regional authori- the regional level. ties to anticipate and promote economic change in industrial, urban and rural areas Against this background, it is interesting by strengthening their competitiveness and to note a majority of the Country Studies attractiveness” and also to support “poli- have more or less indicated that they would cies aiming at full employment, quality and see advantages of a national approach. The productivity at work, and social inclusion.” Hungarian Country Study is most outspo- Unfortunately this objective excludes most ken. It puts the question whether focusing of the regions that qualify for the conver- on the national level could not be a better gence objective. It is obvious that countries solution than the one presently being pro- would like to have greater access also to posed. “Focusing on the regional level is funds under this objective. The Hungarian hardly conceivable under the present cir- Country Study is of the opinion that auto- cumstances”, says the study, with reference matic exclusion from this objective would to the underdeveloped regional and sub-re- work against the Lisbon objectives and the gional administrative structures. Despite its Czech Country Study goes so far as to sug- heavy insistence on a number of regional gest a merger of the Convergence and the programmes, also the Polish Country Study Regional Competitiveness objectives. indicates acceptance of the “country ap- 193
- 168. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States proach” saying that priority should be giv- As was mentioned above, the conflict be- en to growth since the regional imbalances tween the needs to implement budgetary can be seen as temporary and will decrease reforms and restructuring of public ex- over time when adequate economic re- penditure in order to meet the Maastricht forms have been implemented. The Slovak criteria and the co-financing requirements study emphasises that the public adminis- transcends all the Country Studies. Where- tration reform and the fiscal and adminis- as the Country Studies of Hungary and Po- trative decentralisation has not yet reached land admit that they would be in a position the stage necessary for supporting the so- to meet the requirements also in the future cio-economic development of the regions. despite the “alarming” (Poland) budgetary The Czech Country Study emphasises the situation, they, as well as the other studies, need of clearly defining horizontal themes, advocate a loosening of the co-financing an idea which is mainly compatible with a regulations. This could take the form either national approach to ECP. It also explicitly of moving more resources to the cohesion endorses the recommendations of the Sapir fund or by allowing private financing to be report even if that would lead to a “certain counted as national co-financing or by oth- re-nationalisation of cohesion policy.28” erwise changing the proposed rules for esti- mating the requirements (see above). 9.4.3 The amount of funds and the A more dynamic proposal is contained in co-financing issue. the Hungarian Country Study which sug- gests a direct coupling between the macro- There is not much discussion in the Coun- economic criteria and the co-financing re- try Studies of the total amount of funds to quirements. The larger the extent to which be allocated for ECP in the Financial Per- a country would meet the Maastricht cri- spective 2007 – 2013. The Slovak Country teria, the easier would be the co-financing Study says that they would be happy with requirements. maintaining what they see as the present allocation, which represents 0.45 percent All Country Studies, except the Czech of GNI. The Polish Study states that they study, discuss the so called 4 percent cap. could accept an overall budget of 1 percent The most common approach is to propose of GNI provided that this didn’t mean that that certain areas should be excluded from funds for ECP would be “crowded out”. the cap: environmental and infrastruc- The Czech Country Study believes that this ture investments says the Latvian Country would be the case, however, and expresses Study, territorial co-operation and rural a mild dissatisfaction with the assessment development says the Slovak Study while method: the total amount of the ECP allo- the Polish one opts for both rural develop- cation should be decided through a bottom- ment and development of fishery industries up approach and estimated according to the to be excluded.29 The Latvian Study argues objectives of each new Member state. that the rule is unfair towards poorer coun- 29 It would seem that both the Slovak and the Polish Country Studies have a good point: it seems illogi- cal to transfer the rural development funds to from 28 Chapter 6, The Czech Republic and Cohesion ECP to CAP but still count them against the 4 per- Policy, section 6.6.6 cent cap on structural funds! 194
- 169. 9 From PolicyTakers to Policy Makers tries where the needs are correspondingly of the consideration in the Czech Study is larger. National divergence will thus be that a much stronger connex between the maintained, argues the study, which admits private sector and the educational institu- that a complete cancelling of the 4 percent tions must be established.30 There should be cap rule is impossible for political reasons. a focus on practical skills, including project The Latvian as well as the Slovak Country management, teamwork and communica- Study argue on favour of using more real- tion skills as well as problem solving and istic GDP growth data when estimating fu- implementation of solutions in an industrial ture allocations. environment. To this effect educational in- stitutions from other Member States should be encouraged to establish departments 9.4.4 ECP priorities as defined in within the Czech Republic. the Country Studies Human resources and education is one of the four priority areas defined in the “Competi- Development of human resources tiveness Strategy of Slovakia until 2010”. The intention is to increase the flexibility All country studies unanimously stress the on the labour market, to reduce unemploy- overwhelming need to develop domestic ment and the risk of exclusion of the most human resources through education and vulnerable groups. The Roma community training at different levels. This is no doubt is explicitly mentioned. the strongest tenor through all the studies even if the proposals vary in detail and con- The Polish Country Study discusses the cretisation. theme of human resources, education and training at great length.31 After stating The Latvian Country Study points to human the necessity to improve human capital resource development as an investment through improved primary and secondary which will not distort markets and will al- education, life-long learning and social low the economy to grow faster also in the initiatives, the study goes on to discuss future without additional subsidies. The shortcomings in and proposals for reform Hungarian Country Study blames, at least of the educational system. Differences in partly, the “educational level of the society” access to educational opportunities and in for the lack of multiplier effects and absorp- their quality between rural and urban areas tion capacity and emphasises the need to would increase regional divergences since strengthen the human capacity at the NUTS regions with a better educated popula- II regions which, as we have seen above, tion has a greater growth potential, among remain mainly a statistical construction. other things because they are more attrac- The Czech Country Study notes that almost tive for foreign investors. Those regional half of the total number of unemployed are differences would worsen rather than im- job seekers without secondary education prove because of the secondary and multi- and that it is necessary to adapt the human 30 See chapter 6, The Czech Republic and Cohe- resources to the labour market conditions sion Policy, section 6.6.7, subsection on Innovation, and infrastructure development. The neces- R&D and Technology. sity to improve IT and language skills in 31 See chapter 4, Poland and Cohesion Policy, sec- the public sector is mentioned. But the core tions 4.5.1 and 4.5.2 195
- 170. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States plier effects. Financing remains the great- item pro memoriam should, nevertheless, est constraint on improving the educational be entered on the agenda for the design of system. The study supports a certain cen- the future ECP. tralisation of the system. The authors also point to the risk of a backwash effect (or brain drain) and emphasise that life-long Research and Development learning procedures are less susceptible to such negative effects. The Polish Country All country studies have endorsed the Lis- Study explicitly recommends that the ECP bon objectives and expressed their inten- framework should be strengthened with a tion to move towards a “knowledge based Common Education Policy objective with economy”34 and the need to focus on in- the same priority and financial resources as vestment in research and development in environmental or regional policy. this perspective. The Polish Country Study regrets that its Government does not ac- The issue of social exclusion, which is men- tively support basic research (apparently, it tioned under objective of regional competi- is not even mentioned in the development tiveness and employment32 in the Commis- plan for 2007 – 2013) but puts all empha- sion’s proposal, has to some extent been sis on applied, “commercial”, research with successfully handled by NGOs in Poland. the argument that only close cooperation Since those NGOs to a large extent are de- between research and industry can give pendent on government subsidies they have optimal results. Information technology is been hit by budget cuts. The Polish Country thus given a clear preference. The Country Study sees those NGOs as a suitable agents Study argues that there must be a balance for ECP financed projects under this objec- between basic and applied research and that tive.33 all opportunities to receive ECP support for both should be exhausted. One item which is not discussed under this heading in the Country Studies, but which, The link between industry and research is nevertheless, belongs in the field of Human also stressed in the Czech Country Study. Resources, is what we might call political This study appears very conscious of the culture. This concept is discussed in the risk that the creation of high technology Hungarian Country Study but permeates growth poles may aggravate regional im- implicitly the discussion of administrative balances. The backwash effect that was and managerial capability as well as the mentioned above is also discussed. The Slo- absorption, implementation and monitor- vak Country Study points to the formida- ing capacity in most of the other contribu- ble challenge of the national strategy plan, tions. We do not think that this is the place which advocates a shift towards a knowl- to define and discuss this particular issue edge-based economy and an information except by noting that most Eastern Euro- society with emphasis on research and in- pean Member States have a heavy heritage novation. The Strategy document wants to from previous regimes in this respect. An achieve this through education and support of scientists, internationally competitive re- 32 COM (2004), section 2.2 search in cooperation with industry and ef- 33 See chapter 4, Poland and Cohesion Policy, sec- 34 tion 4.5.2 See our reservations, expressed in footnote 26. 196
- 171. 9 From PolicyTakers to Policy Makers fective public support of business activities ion—they could even participate in some aimed at research and innovations. of the projects. Financing should, at least partly, come from other national fund allo- cations and the projects under this objec- Cross-border cooperation tive would have a considerable European Added Value37 which would benefit also the Both the Slovak and the Hungarian Coun- net payer countries. According to the Hun- try Studies underscore the importance of garian proposal, this objective would fall cross-border cooperation and projects. For under the Cohesion Fund, thus easing the Slovakia this would be an instrument for co-financing burden for the NMS. combating long-term unemployment and it is the cross-country integration of labour markets that is in the centre of interest. The Regional convergence as a priority? Hungarian Country Study goes much fur- ther and proposes a new objective for the Regional convergence is an established ECP, namely Cross-border infrastructure part of the EU policy and goes way back and environment protection for the NMS.35 to the Treaty of Rome. It must, in this qual- Hungary and all the Eastern European ity, always be at the heart of the common Member States, will need a highly devel- structural and cohesion policy of the Un- oped infrastructure in order to reap full ion, irrespective of how particular objec- benefit from their geographical location. tives are formulated and specific instru- But it is important that those investments ments designed. Against this background, it be coordinated between the NMS. Trans- is striking that only the Czech contribution port arteries should not be confined only to explicitly mentions regional convergence the east-west direction but also within and as a priority for the future and, even there, between the NMS, thus also in the north- it is set in the context of increasing occu- south direction.36 According to the Hungar- pational and geographical mobility of the ian Country Study a new European policy labour force. Whether this is due to a tacit objective could help to prevent national feeling of the self-evidence of this objective prestige projects and have a great and ex- or to a genuine preference for emphasising pedient impact on growth. Such an objec- horizontal, growth stimulating, themes as tive could become an instrument for avoid- development of human resources, research ing what the study calls “narrow-minded and development, institution building and and selfish bargaining”. In the opinion of even trans-border cooperation, we have to the Hungarian study the introduction of this leave unsaid for the moment. objective would also send a political mes- sage to the not-yet-Member countries that they are not being neglected by the Un- 35 Chapter 5, Hungary and Cohesion Policy, section 5.7, The need for a new budget line: Trans-border infrastructure and environment in the NMS. 36 Given the rather westward location of the Czech Republic those expressions should be seen meta- 37 phorically rather than as exact geographical signs of See Tarschys (2005) for an in depth analysis of direction… this concept. 197
- 172. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States 9.5 The conclusions: a simplified 9.5.1 Too many goals for the and growth oriented ECP for the cohesion policy? NMS In a study from 2003, D. Tarschys dis- cusses the omnipresence and multifinality So far, this chapter has summed up the ex- of Structural Policy. Structural policy has periences of five NMS of their participation been present among other things in the pol- in the various forms of European Cohesion icy areas transport, environment, research, Policy, both before and after accession employment, agriculture, competition, ur- (Section 9.2). We have tried to identify the ban affairs and even peace. Structural pol- dangers and risks for the future that are im- icy has also been very rich in goals, for in- minent if the present system remains un- Figure 9.1 Goal congestion in the changed, even taking the proposed reforms proposal for European Cohesion Policy into account (Section 9.3). Finally we have summed up what the Country Studies have • Cohesion policy needs to incorporate Lisbon and identified as the most urgent priorities for Gothenburg objectives • Core list of key themes for operational the ECP if current structures and condi- programs tionalities were relaxed: section 9.4 shows • Priority (?) themes and operational programs to that those priorities to a significant extent be organized under three headings (objectives) deviate from those of the current propos- • ERDF financed programs under three priority al which is being negotiated between all themes • ESF-financed programs under four policy member states. We underline, once more, priorities that this is the result of an analysis made • Territorial co-operation focus on integrated by independent experts which may or may programmes not be identical with the official positions • Integrated response to territorial characteristics of the governments in question. • Key principles of cohesion policy In this section we go one step further and stance, the well-known 7 objectives,38 later try to list certain elements that could be “simplified” to 3 objectives and 4 Commu- discussed for inclusion in a revised ECP nity Initiatives. Transcending this structure framework, better suited to the particu- of goals and policies, according to Tar- lar needs of the New Eastern European schys, are 3 “layers of purposes”, the first Member States. It should be stressed that one of which is the compensatory motive whereas those elements are derived from (structural funds used as a resource to “buy the five Country Studies, the participating out” countries in a negotiation situation), institutes are not individually responsible the second motive relating to convergence for this summary assessment of the present and cohesion and a third one which relates ECP or for the suggestions for a reformula- to institutional and attitudinal side-ef- tion. We offer these proposals, however, as fects. The latter motive includes institution an input to the discussion of the cohesion and capacity building as well as involving policy in the new member state which we greater parts of the society in the European are convinced will continue for a long pe- integration project. riod to come. 38 Objective 5 was split into two sub-objectives. 198
- 173. 9 From PolicyTakers to Policy Makers This multidimensional structure of the pol- accommodate both the new and old Mem- icy itself has led to a congestion of goals, bership.41 With the Eastern Enlargement, that is to say there are many instruments for however, new Member States were more or many objectives.39 Normally, maximum ef- less faced with a fait accompli and a very ficiency is considered too be attained when entangled one at that. there is one instrument for one goal. Obvi- ously, this can never be achieved in a politi- 9.5.2 The goal congestion leads to cal context as complicated as the EU. But policy taking—fund maximisation as the Commission is aware of the problem an objective and views its proposal for 2007 – 2013 as “a simplified and more transparent frame- The five Country Studies must clearly be work”40 that would lead to increased effi- seen against the backdrop described in the ciency in the cohesion policy. The proposal preceding sections. The participating in- states: “The pursuit of the priority themes stitutes have, to a considerable extent, fo- would be organised around a simplified cused on different dimensions of the pro- and more transparent framework with the posed ECP. Some discuss obstacles raised future generation of programmes grouped by modalities and procedures, others fo- under three headings: convergence; region- cus on difficulties to get access to avail- al competitiveness and employment; terri- able funds and in utilising them, yet other torial co-operation.” themes are the conditionalities, notably the co-financing requirements, and the design After this courageous statement of inten- of the operational programmes: should they tion, obviously politics kicked in. Figure be “horizontal” or perhaps rather “region- 9.1, which utilises the original wording of al”? The various objectives, themes and the proposal, shows that the goal conges- priorities proposed are, somehow, taken for tion is very far from being eliminated. It is granted: one or two studies discuss at great not easy to orient oneself among these ob- length how to use the allocated ECP-funds jectives, key themes, headings, priorities, with much less emphasis on what the funds focus, responses and key principles. The should be used for. With some exceptions, modalities for financing the policy from the attitude is one of policy taking rather three different funds is yet another dimen- than policy making. This has pointedly been sion which is not included in the schematic summed up by one of the studies as a strat- presentation in figure 9.1. egy of “making sure that no money is lost”. One study concludes with great insight: “In- Despite the ambitious attempts to simplify tegration strategy has been largely replaced the ECP system we seem to have ended by concentrating on the highest possible ab- up with a proposal that is at least as multi- sorption of potential EU funds… […] This, faceted as the old one. This in itself is the however, means that objectives and instru- result of a long development process, prac- ments have been confused. EU transfers are tically since the initiation of the European a vital factor of successful Membership and Union where every enlargement has led sustainable modernisation. However, at the to modifications of the system in order to end of the day, they are instruments and not 41 39 Sapir et al. (2003), section 1.3 et passim. Tarschys (2003), section 2 “The political archeol- 40 Commission, section 2 ogy of structural policy” 199
- 174. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States objectives in themselves.42” 9.5.3 Focus on the neediest countries. More national control of It can easily be derived from the Country the cohesion policy Studies that the omnipresence and multifi- nality, to borrow the terms of Tarschys, of Some of the receiving countries, and some the European Structural and Cohesion Pol- of the net payers, favour a national approach icy are largely responsible for this attitude to the cohesion policy instead of a regional in the receiving countries. All through the one. A couple of Country Studies express Country Studies the call for simplification that a cohesion policy focusing on the poor- and flexibility is strong and impossible to est countries, instead of the poorest regions, ignore. We can also draw this conclusion a would be acceptable. This is also one of the contrario from the sections of the Country recommendations of the Sapir report which Studies that discuss priorities for the future points out that individual countries could which could be implemented if current con- delegate the responsibility for programme ditions and conditionalities were relaxed. implementation to regions wherever possi- The goals of strengthening human resourc- ble.43 From the Country Studies we can, for es, increasing the level of Research and De- instance, infer that this might not be a good velopment, continued institution building, idea in Hungary with its artificial NUTS II particularly at the regional level, and cross- classification but on the other hand be ex- border cooperation appear as overall and actly in line with the intentions in Poland, common objectives. These are sub-goals of both as expressed by the government and in the overall objective to achieve growth ac- the opinion of the experts. cording to the Lisbon principles and would accelerate the process of national conver- A strong caveat appears, nevertheless, also gence within the EU. The results should in the studies that speak favourable of a pos- be achieved through more national control sible national approach: since the strongest over policy and resources. advocates for such an approach are to be found among countries that also encourage To achieve a true simplification of the heavy budget restrictions, there may be a goal structure of the ECP is probably im- risk that it will be used as an excuse for re- possible, at least in the short and medium ducing the resources allocated to structural term, due to the great number of interests policy in the NMS. involved and the character of policy formu- lation by bargaining. If this is so, the aim of all concerned must instead be to allow 43 for maximum flexibility and concentration “There is a solid argument for the new EU con- vergence policy to focus on countries, rather than on within the existing policy structure. regions, using national GDP per capita (PPS) as an eligibility criterion. However, individual countries may decide to delegate implementation and moni- toring of this policy to their regions. It is obviously possible that, during the catching-up process, in- creasing regional disparities within the poorer coun- tries may also emerge. However, this phenomenon may be mitigated by national growth and could be 42 Chapter 5, Hungary and Cohesion Policy, section eased by national rather than EU policies” (Sapir et 5.8.2, point 6 al., 2003, section 11.4.1). 200
- 175. 9 From PolicyTakers to Policy Makers A policy that focuses on income divergenc- On the other hand, in the short run a con- es between the Member States rather than siderable and rapid lift in managerial, ad- between the regions would seem to satisfy ministrative and technical levels is required net payers at the same time as it would give in order to ensure an optimal use of the the receiving countries an increased control resources made available through the ECP and influence over the cohesion policy. It and other EU-programmes. It may be left would also be on line with various theoreti- to the responsibility of the Member coun- cal considerations44 and with the conclusion tries to find the right mix between basic and of the Sapir report. higher education, life-long learning and vo- cational training, presumably monitored by It seems somewhat prejudiced to label a the Commission. policy focusing on national growth as “re- nationalisation”, as has sometimes been In the Commission’s proposal for a Finan- done. An old term from development eco- cial Perspective 2007 – 2013, education and nomics “redistribution with growth” im- training is mainly covered by Heading 1a mediately springs to mind. But it would be “Competitiveness and growth of employ- the responsibility of the individual Member ment” which is allocated around 10 percent States to take the measures for internal re- of the EU budget according to the proposal. distribution—measures that surely would The possibilities to finance human resource be different from country to country de- development through the ECP are limited pending on the special circumstances. The to projects financed by the ESF and subject wish for such flexibility is also something to higher co-financing requirements than that very clearly emerges from most Coun- the Cohesion Fund. Part of the ESF is also try Studies. used for the Regional Competitiveness Ob- jective and hence out of reach for those re- As was shown in chapter 3, all NMS gions that qualify for Cohesion assistance. have some specific problem regions cre- The Country Studies bear overwhelming ated mainly by historical causes. A special evidence that a re-orientation of the ECP so ECP programme for those problem regions that Human Resource Development would might be considered. become a major priority would be a sub- stantial step towards meeting the Lisbon 9.5.4 Human resource objectives as well as towards national con- development and institution vergence. building—the overriding priorities The other theme which clearly emerges The development of human resources takes from the studies is Research and Devel- pride of place in most Country Studies. opment. It is important that a balance be- There are two different aspects to this. On tween basic and applied research be found. the one hand, such a development is one of Research and Development are covered the most important factors for long-term under Heading 1a in the present proposal. growth, welfare and European Cohesion. Other items under this heading are, in ad- dition to education and training, promotion 44 For a review of current theoretical as well as pol- of the competitiveness of enterprises, EU icy making discussion see Richter (2005), section networks and management of change. It is 1, p. 24 ff. not considered as a part of the Cohesion 201
- 176. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States Policy. Whereas the actual existence of institutions and regulations in the new Member States Some net payers strongly insist on the co- can be measured relatively easy, their in- called “excellence” criterion for support to trinsic quality and efficiency is much harder R&D projects, that is to say funds should to assess. This transpired very clearly from not be allocated as national envelopes but the strategy papers and screening reports be used where their impact is the greatest. that were issued before the accession.45 The While this may seem like a reasonable ap- Country Studies confirm that those prob- proach, it might mean, together with oth- lems remain important obstacles for cohe- er considerations mentioned above, that sion even if much progress has been made, the scope for Research and Development particularly through the pre-accession sup- projects, particularly with respect to basic port. Institution building and development research, may become very limited and of human resources therefore remain per- unevenly distributed between the member haps the most important condition for the states. success of the future ECP in the NMS. Institution building is already one of the 9.5.5 Cooperation and coordination main objectives of the ECP. Perhaps the between the new Member States most telling conclusion from the experi- ence from the pre-accession support is European Added Value has become a that by no means is this phase over in the guiding principle for deciding which pro- new Member States. Even if considerable grammes or projects should be supported progress has been made and there are many by EU resources. This can in a sense be successful projects to report, it is clear that seen as the mirror image of the subsidiarity the administrative and managerial capacity, principle, but whereas that principle de- particularly at regional and local levels still fines in a negative way what should not be leaves a lot to wish for. This could become done at the European level, the European a major obstacle for a successful imple- Added Value concept defines, in a posi- mentation of the future ECP. tive way, what could or should be done at that level.46 Intuitively, one would feel that The Sapir report recommends the ECP to the proposal for cross-border cooperation, continue the institution building activities. particularly when it comes to coordinating They go hand in hand with education and the construction of transport networks in training, particularly short-term efforts to the NMS would be well qualified accord- improve managerial and administrative ca- ing to this criterion. Some Country Studies pabilities at the regional and local levels. also echo this observation. A proposal has It is not mentioned in the Country Studies, been made for setting-up of a new commu- but the obvious difficulties for small en- nity priority for cross-border infrastructure trepreneurs to participate in the ECP due and environment protection investments, to formal requirements at all stages of the 45 project cycle would make support to Cham- For a discussion of the risks of an erosion of the bers of Commerce and Entrepreneurial As- Union connected with the enlargement, see Karls- son (2002), section 9.3. sociations and other service organs an area 46 A recent Sieps study entitled…. (full reference) it of high priority in the institution building. will probably take up another two lines, so I insert them here 202
- 177. 9 From PolicyTakers to Policy Makers targeted explicitly at the Central European 9.5.7 An adaptation of the ECP region. In the words of another study, those to the needs of the New Member investments would be more efficient than States national infrastructure programmes which are often designed and implemented in line A re-definition and re-orientation of the with narrow national (domestic policy or ECP along the lines that emerge as desira- simply prestige driven) interests.47 ble from the Country Studies and which we have tried to summarise and concretise in 9.5.6 Simplification and more this chapter would go a long way towards flexibility meeting the stated ECP objectives of merg- ing the Lisbon, Gothenburg and Cohesion We let the wealth of proposals and observa- objectives. We also believe, and that is per- tions concerning simplifications and other haps the most important thing, that it would changes in the system stand as they have greatly facilitate for the NMS to move from been voiced in the Country Studies. Many being policy takers to becoming active par- of them are expressions of a natural desire ticipants in and developers of the true Eu- to obtain as much funds as possible at as ropean Cohesion Process. EU transfers are easy conditions as possible. But many oth- a vital factor of successful membership and ers indicate a genuine dissatisfaction with sustainable modernisation, says one Coun- what is felt to be unnecessary bureaucracy try Study and continues to underline that and mistrust on the part of the Commission each Member state must define its longer and also a perceived lack of understand- term role in the rapidly changing global ing for the special conditions of the New environment and within the enlarged and Eastern European Member States. There is enlarging EU. Only so can the main objec- an obvious goal conflict between the need tives be defined for which financial support to progress towards the ERM criteria on from the Union should be sought. the one hand and the co-financing require- ments on the other.48 There are no easy However, to formulate the essential pri- ways out of this dilemma except to say that orities that have emerged from the Coun- the situation calls for maximum flexibility. try Studies as ECP objectives in their own It provides yet another argument for taking right, might require a fundamental restruc- a national approach to the future ECP and turing of the present goal and implementa- to the extent possible leave it to the receiv- tion structures. A focus on human resource ing countries to decentralise and delegate development, institution building and re- the responsibilities for regional implemen- search and development might require a tation of the ECP. regrouping of items between headings in the current Commission proposal as well as—and this is obvious—a shift in the dis- tribution of available resources between different objectives. Basic questions such 47 See Richter (2005), Chapter 6, page 101 as well as whether the focus should be on national as chapter 4 above, Hungary and Cohesion Policy, or regional convergence or the relation be- section 4.7 tween co-financing requirements and mac- 48 For an overview of the various co-financing re- roeconomic stabilisation may find answers quirements, see Richter (2005), chapter 1, p. 9 ff. 203
- 178. From Policy Takersto Policy Makers: Adapting EU Cohesion Policy to the Needs of the New Member States that differ from those presently given. based on the experience of a number of member states and on the opinion of inde- As this is being written, the ambitions of pendent country experts, may play a role in the Presidency of the European Council are the deliberations.NB to reach an agreement on the new financial framework before the end of June, 2005. Finally: Our conclusions also open up a The question might well be asked if a pro- much wider question: how should we real- found discussion of the fundamentals of the ly conceptualise cohesion at the European Cohesion Policy makes sense at this stage? level? In chapter 2 we discussed an attempt to widen the perspective of the concept A recent study49 (May 2005) gives us an from the strict economic and social aspects overview of the negotiation positions of a to include also a political and a cultural di- number of Member States, based on what mension.50 We do not have to touch here is officially known. As pointed out in that on the politically so sensitive issue of the study, the bulk of the negotiation docu- deepest purpose of the international coop- ments are not available to the public or eration within the framework of the Euro- for research purposes. But it would, in all pean Union but can refer to the Charter of likelihood, be fair to characterise the ne- Fundamental Rights, which, according to gotiations at this very late stage as being a recent Sieps study51 “was a quality leap fully focussed on the amount of funds, the in the direction of converting the union methods for allocation of funds between into a community of values. ’Die Union ist countries (for instance the so called “Ber- nicht nur Wirtschaft und Währung, sondern lin method”), the periods and eligibility for auch Werte’—that was how this idea was phasing out regions from cohesion support expressed in German, with better allitera- and, certainly not the least, the existence, tion than any other language could offer.” abolishment or modification of the 4 percent Maybe the future Cohesion Policy should cap on cohesion support. We may safely as- contribute more to this community of val- sume that the basic principles and purposes ues by giving more weight to the political of European Cohesion Policy will need to and above all cultural dimensions of Euro- be discussed also after an agreement on the pean Cohesion. Were this to be achieved, overall Financial Perspective for the period much else would follow. 2007 – 2014. We might add another, more short-term consideration. Should a financial agree- ment be delayed, the question of the inflow of resources to the NMS and of their net positions may become an acute problem. We can assume that this would lead to a re- newed discussion of the ECP system and strong demands for immediate simplifica- 50 tions and more flexibility. In such a sce- ref chapter 1 51 Tarschys (2005). nario, the conclusions of the present study, NB It is obvious that these paragraphs will have to be continuously reformulated in pace with the nego- 49 Richter (2005). See in particular chapter 6. tiation an publication processes. 204
- 179. 9 From PolicyTakers to Policy Makers REFERENCES European Commission, 2004, Proposal For a Council Regulation Laying Down General Provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund, 492 final, Brussels 2004 Karlsson, B., 2002, What Price Enlargement? Implications of an Expanded EU, The Expert Group on Public Finance (ESO), Ds 2002:52, Stockholm. Kethels, 2004, European Clusters, in, Structural Change in Europe 3 – Innovative City and Business Regions, Hagbarth Publications. Porter, M., 1990, The Competitiveness of Nations, Free Press, New York. Richter, S., 2005, Scenarios for the Financial Redistribution across Member States in the European Union in 2007 – 2013, The Vienna Institute for International Economic Studies (WIIW), Research Report 317, Vienna 2005-05-17. Sapir, A., et al. 2006, An Agenda for a Growing Europe, Report of an Independent High- Level Study Group established on the initiative of the President of the European Commis- sion, July 2003. Tarschys, D. Reinventing Cohesion. The Future of European Structural Policy. Swedish Institute for European Policy Studies, 2003:17, Stockholm 2003. Tarschys, D. The Enigma of European Added Value, Swedish Institute for European Policy Studies, Stockholm 2005, forthcoming. 205