The accession to the European Union represents a unique historical chance and an existential necessity, which, from the standpoint of national and state interests, has no reasonable alternative. The elaboration of an initial study on the economic and social contexts of Slovakia's accession to the EU is an organic part of the successful endeavour to catch up with the first group of candidate countries. It was elaborated by the Institute of Slovak and World Economy of the Slovak Academy of Sciences on the basis of Governmental Resolution No. 248 of 13 March 2002. A section of the Institute's capacity paid attention to research on theoretical issues and the actual course of the integration process in the EU, as well as certain implications related to Slovakia, already in the previous years.

The preparation of the present study, however, required that the focus of analytical attention be shifted to a relatively comprehensive national economic assessment of the relevant economic and social aspects of Slovakia's accession to the EU, identification of its strengths and weaknesses from this standpoint and the approximate quantification of the anticipated effects and costs. To meet this demanding goal, it was necessary to substantially extend the subject of exploration to include a number of new issues; update the results of previous researches; collect and, in accordance with the chosen methodological approach, recast and synthesise information from individual ministries' background documentation; involve the necessary scope of external authors and institutions in the elaboration of a number of topics; incorporate the results of researches on the readiness and expectations of the enterprise sphere; and, to take into account information acquired through talks with representatives of the Association of Industrial Unions, Slovak Chamber of Commerce and Industry, Confederation of Trade Unions and the Confederation of Employer Unions and Associations, as well as from the discussion at the seminar on the preliminary results of the study being prepared. The basic goal of the present study was to elaborate relatively comprehensive scientific arguments on economic and social contexts explaining the existential necessity of Slovakia's political and strategic direction to the EU. At the same time, it attempts to provide a balanced view of both the benefits and risks.

On the one hand, it identifies certain potential problems and probable, in particular initial time limited risks, the reduction or elimination of which will require attention already in the preparatory period. On the other hand, it explains a wide range of benefits, the rational utilisation of which will give a guarantee of clear long-term advantageousness of Slovakia's integration to the EU. The following partial goals, focused on specific advancement in knowledge and applicability in the economic, political, as well as general social pre-accession practice, were subordinated to the aforementioned basic goal:
· unveil the existing disparities in Slovakia's economy compared with the EU at the macroeconomic, sectoral and branch levels and explain the key importance of increasing competitiveness;
· on this basis, simulate the relevant scenarios of possible developments in the Slovak economy and their social implications as regards approximation to the EU;
· approximately quantify the anticipated costs and benefits of Slovakia's accession or non-accession to the EU in aggregate, sectoral and cross-sectional structure;
· identify the priorities of the accession process and extend the arguments for the need for transition periods;
· characterise the readiness of the Slovak enterprise sphere for the adaptation to the conditions of Slovakia's integration to the EU;
· for the purposes of updating the medium-term economic policy, provide ideas for mitigating integration risks and creating suitable conditions for the utilisation of the benefits of integration;
· provide the initial integration orientation for the elaboration of sectoral, branch and regional policies and concepts;
· encourage entrepreneurs and turn their attention to the swift organic incorporation of integration contexts and conditions of the adaptation strategy;
· provide objective arguments to make the expectations of the public and social partners more realistic as regards Slovakia's accession to the EU. The experience from the preparation and course of the seminar on the preliminary results of this study, and above all the nature of several opinions and positions presented in the mass media in connection with this, demonstrated that besides the above goals it should help fulfil several specific goals. The results of the study should significantly help overcome the low and insufficient availability of information and the consequential unrealistically optimistic and overly pessimistic expectations.

Also related to this is the somewhat wide-spread presumption that a large scope of problems and difficulties in our economy and, in particular, the demanding nature of their resolution are or will be connected with and brought about by the integration into the EU. In this context, the study is designed to show that amid sharpened global competition we will have to cope with a major section of the problems anyway and the integration process is something that can facilitate and speed up the necessary adaptation to globalisation. If we prepare for accession to the EU effectively and make use of the chances and possibilities related to it efficiently, the integration into the single economic area will act as a catalyst of the effective adaptation of our economy. In this respect, the study also pursues a certain mobilisation goal to help overcome the passive wait-and-see opinions and attitudes and increase motivation so that all structural parts of our economy, at every level, make the best use of the time remaining before Slovakia accedes to the EU and thus improve our readiness to make use of the advantages and manage the risks of integration. Certain facts should be underlined concerning the concept of the present study and the expressive value of its conclusions.

Even though the authors could use experience from similar foreign works, in a number of respects the preparation of this study has a pioneering nature. Not only is this the first work of this kind in our country, its preparation also had to build upon significantly different conditions as regards the specific situation and state of the Slovak economy, as well as the relatively small scientific capacity available, scope and quality of background information, availability of certain specific data, as well as the short amount of time due to the tight deadline set. As regards understanding the expressive value of the study, it needs to be pointed out that it is conditional upon a number of factors, the most important of them being the fact that the accession process and integration into EU structures has the nature of "docking" to a moving target. This means that the results of the authors' effort to quantify the costs and benefits from perspectives as relevant as possible cannot be interpreted as "hard" data. Quantifications, even if acquired through model simulations and calculations, provide only the basic idea of the possible directions of the relevant processes, while the actual data on the real course of the processes can and typically will, to a varying extent, oscillate within a certain interval depending on the developments and changes in specific conditions in both the EU and our economy.
This is the reason why regular updates of studies on economic and social contexts of accession to and existence in the EU are necessary. The full version of the study prepared (393 pages) is divided into two basic sections. The first presents an analysis of the initial economic and social position of Slovakia at the current stage of the process of preparation for accession to the EU. The second, core section of the study provides a relatively comprehensive identification of specific benefits and risks related to Slovakia's accession to the EU. The study also includes this Summary, which synthesises the most important conclusions and formulates economic policy recommendations. It can be found in the submitted paper. The authors realise that the present study could not give exhaustive answers to all relevant questions and a number of issues remain open. In the next round of work, still prior to the expected date of accession to the EU, it will be necessary to not only update, but also improve and enhance the study as regards methodology and content. For this reason, we appreciate the comments from our opponents and the ideas brought forth at the seminar, which we have already applied in this version of the Summary. Slovakia's economic and social position on the EU's doorstep
Macroeconomic and institutional framework of accession to the EU

One of the fundamental (Copenhagen) criteria that must be met by countries integrating into the EU is the creation of a functioning market economy. The first sign of it is the achievement of lasting economic growth (GDP growth) at a level that confirms the country's sufficient competitiveness and ability to gradually eliminate its economic lagging behind the current EU member states (ability to deal with the convergence task). The economic convergence of Slovakia to the EU cannot be reduced to the extension of economic activities or production in their current form and at any rate. The decisive part of Slovakia's convergence task is to carry out qualitative changes in production and the structure of production of goods and services on the basis of structural changes in the systemic and institutional framework. Only then will it be possible to ensure that per capita GDP in Slovakia approaches that of the EU-15 at about the same pace as the economic performance of Western Europe approached the performance of the USA after World War II.

Developments in transition economies and their comparison with economic development in EU countries prove that steadiness of growth is an indispensable condition for ensuring permanent growth at a pace sufficient to resolve the convergence task. This in turn (as experience shows) is largely conditional upon maintaining the economy in a state of balance, which requires both responsible economic policy, and, in Slovakia and in other transition countries, in particular the full completion of reforms. By underlining the importance of maintaining macroeconomic stability for the achievement of a long-term high-rate economic growth (and thus the convergence of the Slovak economy to EU countries), the requirement of balance should not be made superior to the need to increase economic performance. Even more so if this involved achieving the balance at any cost, even at the cost of restricting development resources and results. The causality works in both directions in the relationship between stability and growth.
The reason why emphasis was placed on just one of its sides, in particular on the direction of impulses flowing from balance to growth, is that Slovakia, endeavouring to accede to the EU, has a transition economy with strong imbalance creating factors and a poorly effective balance creating mechanism. Overall, it can be said that the purpose of the relationship between growth and balance, rid of any bias, is undoubtedly economic growth ensuring the gradual modernisation of the Slovak economy as a basis for the economic convergence of Slovakia to EU countries understood in terms of quality.

The cycles of weaker and stronger macroeconomic balance are typical even for countries that joined the EU in the previous rounds of enlargement. However, it cannot be confirmed whether EU accession in itself has clearly contributed to the (de)stabilisation of macroeconomic development in the short- or medium run. It is not the integration itself, but rather the current internal characteristics of the functioning of the Slovak economy that are the main risk factors threatening its stability. The chronic inclination toward imbalance caused by the insufficient level of competitiveness has been, on a number of occasions, eliminated only temporarily through various packages of stabilisation measures. The high intermediate consumption and import intensity embedded in production makes the economy vulnerable. This is further amplified by the inclination of public finance to reproduce deficits and debts. Even after several attempts to achieve macroeconomic stabilisation, we cannot say it has an enduringly satisfactory state.

The final stage of preparations for accession to the EU must therefore be a phase of prudent fiscal policy combined with an effort to reform the problematic areas of the public sector. Along with the elimination of other deformations of the market environment, this should lead to the creation of conditions enabling the Slovak economy to behave as a standard market economy and thus eliminate the specific transformation factors affecting the cycles of balance fluctuation. The maintenance of permanently high amount of investments in the Slovak economy can be regarded as its comparative advantage helping to preserve the long-term high-rate GDP growth. Compared with other transition economies, the investment intensity of economic growth in Slovakia reached a satisfactory level on the whole. It was also lower than the average in the EU-15 and in its south wing. In 1993-2000 Slovakia's accumulation resources were extended by foreign resources to a greater extent than in other transitive economies.

This on the one hand strengthened Slovakia's investment potential, but on the other hand endangered its macroeconomic stability, because, in particular before 1998 inclusively, loans (to a substantial extent state-guaranteed loans) prevailed over foreign direct investment in foreign resources. One serious issue is the impact of EU accession on developments in the labour market. The analysis of trends present in it indicates that forces already exist in the Slovak transforming economy, which, in the medium run (after the current downturn of the world economy is overcome), i.e. by the time of Slovakia's potential accession to the EU, will be able to make a more permanent turn in the so far negative development in employment and unemployment. Fiscal policy was marked by imbalance in public finance in the monitored period. In 1996-1998 this was a result of the exaggerated effort to support economic growth directly and in 1999-2001 this was a result of the expenditure on the restructuring of the banking sector, while reforms in the healthcare, social security and education sectors progressed inadequately. The developments in public finance in 2002 show that its reform has not reached a state that would ensure its enduring positive impact on macroeconomic stability. Even though the lagging behind of institutional reforms (typical for the stages of transformation that have taken place so far) has made it possible to achieve short-term positive results in monetary developments, this was at the cost of greater long-term problems and decrease in the Slovak crown's exchange rate.
It has thus turned out that nominal convergence will not become realistically achievable until all structural changes necessary for the Slovak economy to become a standard functioning market economy have been carried out. The experience from the transformation of smaller open economies indicates that if Slovakia's pro-integration direction is to be successful, a more long-term stabilisation of monetary balance will be required, which, in the small Slovak economy (sensitive to external influences) requires a significant degree of flexibility and swift adaptation to external influences. From the monetary standpoint, this will involve ensuring a pace of economic growth that will encourage stable and steady monetary development.

For these reasons, the endeavour to achieve early monetary integration by joining the single currency system cannot be considered realistic until the decisive transformation tasks are completed. One of the key prerequisites for Slovakia's accession to the EU is the creation of an institutional structure corresponding with that of EU member states. The main area of the present institutional reforms is the harmonisation of Slovakia's legal system with that of the EU (the adoption of the acquis communautaire). The purpose of the acquis is the creation of an institutional framework suitable for the effective execution of economic, social, administrative and other activities. Slovakia has managed to catch up with other candidate countries relatively fast as regards the closing of negotiating chapters. One part of institutional reforms is the reinforcement of law enforceability, which is not only determined by formal institutions (the mechanisms of judiciary's and prosecution's operation), but also informal institutions. The ongoing reform of the judiciary, focused on improvements in judges' work and reduction of the time necessary for resolving individual cases, should help reach progress in formal institutions. Change in informal institutions, which involves value orientations and behavioural patterns, is of a more long-term nature. The strengthening of institutions and mechanisms related to the effective and controllable management of EC funds remains to be an important task in the field of institutional reforms. Initial level of the Slovak economy's competitiveness

The key priority for candidate countries in the preparation for accession to the EU is the real convergence of economy. The identification of the problems of real convergence is usually examined from the standpoint of the achieved level of the economy's competitiveness, which is generally considered as a fairly exhaustive and functional manifestation of the real economy.
Even the Copenhagen criteria, which, inter alia, emphasise the importance of the ability to cope with competitive pressures and market forces within the EU, are based on it. Being an EU membership candidate, the Slovak Republic is also facing the task of meeting the above criterion, because the level of the Slovak economy's competitiveness (compared with developed countries) is as yet relatively low in general. In gross domestic product (GDP), measured by per capita purchasing power parities (PPPs), Slovakia reaches only 49% of the EU average. From among Central European candidate countries, this indicator is lower only in Poland. Another manifestation of low competitiveness is the trade balance deficit. In the 1994-1999 period, Slovakia, again together with Poland, had the highest deficit as a share of GDP (-7.2%). The low competitiveness is further confirmed by the fact that compared with other candidate countries the Slovak economy has the lowest share of domestic production in domestic demand (consumption and investments).

The most serious fact, however, is that the main risks to the Slovak economy's competitiveness on the doorstep to the EU are caused by the considerable lagging behind in productivity. It only reaches roughly a half of the EU average (GDP per employee using the US$ / PPPs) and only about 20% when calculated using the current exchange rate. Other Central European candidate countries (except Poland) have a relatively higher level of productivity. At the same time, the low comparative level of productivity caused that the rise in prices in 1994-1999 was reflected in the depreciation of the exchange rate, although only partially because by 1998 the exchange rate was fixed. Therefore no rapid increase in the comparative price level or decrease in exchange rate deviation occurred, which are other important indicators of the level of an economy's competitiveness. This is why at the end of 2000 the price level in Slovakia reached only 36% of the EU average and Exchange Rate Deviation Index (ERDI) was at about 3.0. Levels reached in other candidate countries at the end of the 90s are significantly more favourable: the comparative price level (CPL) in the Czech Republic reached 39%, in Hungary 43%, in Poland 48% and in Slovenia as much as 65% of the EU-15 average. CPL in Spain, Portugal and Greece in the year of accession oscillated between 50-70% of the then European Community average.

Even though the decisive cause of the low CPL is poor labour productivity, which reflects the low level of Slovakia's competitiveness in terms of quality, especially in the manufacturing, the relatively low inflation rate maintained in the 1994-1999 period also played a certain role in this. While the average inflation rate in Slovakia in this period was at the level of 8.7%, Hungary and Poland recorded inflation as high as 18%. Slovenia, despite considerably high inflation at the beginning of the 90s and even before, still recorded inflation of 9% in 1994 to 1999. Difficult sales conditions in the world markets also play a role in the low comparative price level. A considerable section of product markets is controlled by multinational corporations, which are in most cases brand name companies with good tradition and reputation (goodwill). Success in these markets is only possible by becoming a part of these companies, mainly in the form of joint ventures, or accepting considerable price concessions in the form of price discounts.

Moreover, producers from candidate countries must usually cope with buyers' distrust, mainly in the case of final products, because they come from the former Eastern bloc, which is automatically associated with low quality, i.e. risky business. This unflattering reputation of new unknown companies and brands from candidate countries is unfairly generalised and usually results in price discounts as a compensation for these disadvantages
In addition, there is the factor of internal corporate prices set in a non-market manner for exports. These prices can be lower than market prices thanks to the redistribution processes inside these corporations. Besides the obvious macroeconomic dimension, the international competitiveness of an economy also needs to be monitored at the lower aggregate level - at the level of sectors or homogenous product groups. The structure of Slovak exports has improved substantially in recent years, in particular by reducing the group of raw material, energy and capital intensive commodities in favour of science and research intensive commodities, generally called sophisticated. Their share reached approximately 44% in 2000 and became much closer to that in economically advanced EU countries, as well as in the Czech Republic, Hungary and Slovenia. Slovakia records relatively higher competitiveness for less processed products (raw material, energy, capital and labour intensive commodities) compared with science and research intensive commodities, the share of which in exports has increased.
Compared with other candidate countries, Slovakia has the highest competitive advantages in the EU market for raw material, energy and capital intensive goods, while Poland and Slovenia have a better position in labour intensive goods. As regards science and research intensive goods, from among candidate countries, Hungary, Slovenia and the Czech Republic are among serious competitors of Slovakia in EU markets. The low qualitative competitiveness is still reflected in unfavourable absolute terms of trade. Export unit values in 2000 were still lower than import unit values (i.e. in comparison with foreign economies), even though some improvements had occurred. The highest disparity has been recorded in energy and capital intensive commodities (basically goods with a low degree of processing), which is also evidence of their highest competitiveness through prices. It is pleasing that export and import unit values of sophisticated products became much closer in 2000.

This is possibly caused above all by companies with foreign participation, such as Volkswagen and others. Analyses of the competitiveness of the Slovak economy carried out so far have confirmed the hypothesis that labour productivity is the decisive determinant for increasing competitiveness. This means that the key problem of increasing the Slovak economy's competitiveness lies in the reduction of the lagging behind in labour productivity, combined with an increase in the share of value added in gross production. In 1997, for tradable goods (in industry) Slovakia reached only 32% of the labour productivity level in selected developed EU countries, when using value added as a measure. This was a result of the substantially higher productivity when using gross production as a measure (49%) and, contrarily, substantially lower value added rate (23% compared with 36%). Slovenia and the Czech Republic have the most favourable relation in this respect, when reaching a relatively higher value added rate, along with higher productivity when measured by gross production. As the trends in advanced economies show, the road to increasing labour productivity in the production of tradable goods goes above all through the international intrasectoral micro-specialisation. It is as yet insufficiently developed in the Slovak manufacturing, mainly in sophisticated productions, where it is most typical. As a result of changes in intrasectoral micro-specialisation, the nature of foreign trade relations is also changing. The weight of intersectoral foreign trade is declining and the importance of intrasectoral trade is rising.

Despite the fact that trade liberalisation was included in the Europe Agreement, it has not brought about any significant rise in intrasectoral trade between Slovakia and the EU in the recent past and intersectoral trade thus continues to prevail. In connection with low labour productivity and low value added rate in the Slovak industry compared with the EU average, Slovakia also records low per employee wages. In 1997, Slovak nominal monthly wages per employee in the production of tradable goods reached only 10.3% of the level in advanced EU countries, 11.1% of the level in Austria, 9.1% of the level in Germany, and 17% of the level in Spain. Obviously, real wages per employee (measured by PPPs) were higher. Yet they were still only 28% of the level in selected EU countries. The relatively low level of per employee wages in the Slovak industry is also reflected in the unit labour costs, which are lower than in other candidate countries, except Hungary. This again confirms that Slovakia succeeds in world tradable goods markets mostly thanks to competitive prices, in which low wages play an important role. Structure of the Slovak economy

The sectoral structure of the Slovak economy has changed substantially since 1989 and its proportions have become more similar to the proportions typical for EU member states; the differences found by a comparison with selected EU countries are no greater than those existing within the EU. However, if we divide the structure of production and services into more detailed layers, the lower share of modern technology and knowledge intensive activities is apparent, not only in comparison with developed EU countries, but also for instance in comparison with Hungary. The lower volume of foreign direct investment in the Slovak manufacturing with the other V 4 countries - in particular in the form of green field investments - has clearly led to a slower pace of qualitative structural changes in Slovakia. It can be expected that Slovakia's accession to the EU will bring positive changes in this respect. Slovakia achieves roughly a half of the EU labour productivity (which is several points less than in the Czech Republic and Hungary, but more than in Poland). In individual sectors, these relations are quite varied (compared with Austria). The highest relative level of labour productivity is in agriculture, which is mostly a result of the different size structure of agricultural companies in Austria and Slovakia, as well as the sharp decline in employment in the Slovak agriculture.
On the contrary, the worst results are currently in the construction sector; both international and national indicators suggest that overcoming the negative tendencies in the development of labour productivity in this sector will require more flexible adaptation of construction enterprises to the demand for construction work. Slovakia achieves a relatively high level of labour productivity in the service sector, both in international comparison and intersectoral comparison within Slovakia. What is particularly important is that labour productivity in this sector is increasing along with the increase in employment. Still, an international comparison of a more detailed structure of the service sector shows that most dynamically developing services in modern economies (financial services, research, and the whole spectrum of business services) are less developed in Slovakia.

Their share in employment reaches only half of the level in developed economies. The insufficient development of this group of services clearly indicates that Slovakia lags behind developed economies in an area that creates the necessary background for increasing the success of the export sector in quality competition. The estimated relations between labour productivity in Slovakia and Austria in industry, as well as the manufacturing, are less favourable for Slovakia than for the Czech Republic and Hungary. Labour productivity in the Slovak manufacturing in 1999 reached around 40% of that in Austria. Increasing the industry's labour productivity will probably be very difficult, since it does not depend solely on the producers themselves, but also on the conditions in foreign markets. Due to the low level of wages and unit labour costs in the manufacturing (roughly a quarter of that in Austria) and a great excess of supply over demand in the labour market, producers are not motivated towards technological innovation. Moreover, with the continuous limited access to credit resources, producers are restricted by the extent of their own resources. In this respect, we see the improved financial situation in manufacturing enterprises in the past three years and the decline in the share of non-profitable enterprises in its output and employment as a positive signal. Changes in the structure of manufacturing production carried out during transformation indicate that it is gradually becoming more similar to the structure typical for developed EU countries. It differs from the structure in less developed EU countries, on the one hand, by the lower share of consumer goods and foodstuffs production and, on the other hand, by the considerably higher share of production of investment goods.

This means that the key problem of the Slovak manufacturing is no longer its structure at the level of sectors, but above all the slow introduction of new technology and knowledge intensive productions within individual sectors, without which faster increase in qualitative competitiveness is not possible. A number of positive trends can be seen in the developments in Slovakia's foreign trade in industrial goods. In the structure of its exports, the share of human capital intensive goods has risen to 46% (compared with 33% in 1994) and the share of raw material intensive goods has fallen to 23% (from 38% in 1994). Certain progress has been achieved in the relation between import and export unit values. While in 1994 only 23% of total exports of industrial goods was in the group of goods (at the SITC three digit level) with unit values higher in exports than in imports, in 2001 it was as much as 42%; in quality competition (higher unit values in exports than in imports, along with a positive trade balance) 17% was successful in 1994 and as much as 34% in 2001. The share of successful items in price competition (lower unit values in exports than in imports and a positive trade balance) decreased from 63% in 1994 to 36% in 2001. The position of Slovak enterprises is also gradually changing with respect to reached foreign trade prices in the EU market - the difference between export prices in the Slovak manufacturing and the EU average improved by about 10 percentage points between 1995 and 1999 and is considerably more favourable than in the Czech Republic and Poland.
Benefits and risks of Slovakia's accession to the EU
Integration effects

In general, the integration effects are associated above all with the benefits of the customs union. These are effects arising from the removal of trade barriers, which expands the market and is a precondition for the further development of trade. The process of preparation for membership in the EU Customs Union did not start until the Europe Agreement between the European Union and the Slovak Republic was concluded and gradually implemented. Through the gradual implementation of the Europe Agreement over the period of 10 years, i.e. by the end of 2000, a free-trade zone in industrial products was created. This has considerably contributed to the sizeable increase in the volume of mutual trade. At present, almost 60% of Slovakia's exports go to the EU and 50% of its imports come from the EU. Therefore, it is not expected that the adoption of the Common Customs Tariff will have a major impact on increase in the trade volume between Slovakia and the current EU Member States.

As regards territorial application, for Slovakia the introduction of the Common Customs Tariff will basically mean continuation of the current situation, since it will relate to the same group of countries, for which Slovakia already applies conventional customs duties. From the standpoint of the customs duties, the introduction of the Common Customs Tariff will lead to a rise in certain Slovak conventional customs duties (mainly for agricultural commodities), however, since this will concern only a small group of countries, with a 4.3% share in Slovak imports, this fact is not of great importance. The accession to the European Union will also mean the adoption of all EU preferential tariff regimes. Since their territorial scope is greater than that of Slovak preferential regimes, their adoption will result in wider application of preferential tariffs by Slovakia than at present.

In addition to CEFTA, EFTA, the Baltic States and countries of the generalized system of preferences, to which Slovakia provides special preferential tariffs already, it will have to also provide preferential tariffs to a numerous group of developing countries from Africa, the Caribbean and Pacific, as well as Mediterranean developing countries. Nevertheless, there is little probability that the adoption of EU preferential regimes will have a major impact on mutual trade between Slovakia and the countries that they cover. Overall, it can be said that Slovakia's accession to the EU and the related adoption of the EU's common trade policy should not have a major impact on Slovakia's foreign trade with countries of the future EU and third countries, nor its commodity structure. As regards EU non-tariff measures, most commonly used are agreements on voluntary export restraints, which cover almost 14% of the EU's mutual trade exchange, which is approx. 6% of imports of all countries. As for commodities, the highest protection by means of quotas, another form of non-tariff measures, is provided for textile and agricultural commodities.

These are continuously updated in accordance with the results of GATT/WTO negotiations and bilateral agreements. This concerns commodities that are also sensitive for Slovakia's trade exchange. In EU practice, extensive non-tariff measures are used for the protection of consumers, the environment, plants and animals. They are to a major extent already contained in the Slovak legislation, especially as far as international agreements are concerned. Important non-tariff measures at the governmental level include technical barriers, different VAT rates and excise duties. Unlike in the EU, Slovak non-tariff measures have had only a negligible impact on Slovakia's foreign trade in recent years.

In 1997-2001, the value of imports of goods subject to safeguards was at the level of 0.2%. For this reason, it can be expected that the adoption of the EU system of non-tariff measures will result in a slightly higher protection of the Slovak economy. Slovakia's integration into the EU will have a decisive impact on qualitative competitiveness, which can be measured in particular by growth in productivity and price levels, and by shifts in the sectoral structure of the economy and structure of the manufacturing. More intensive inflow of foreign direct investment (FDI) to the Slovak economy is how the integration into the EU can help the most to ensure productivity growth, which is the key factor of a substantial increase in competitiveness. It can be expected that the EU single market will provide more opportunities for Slovakia in the field of foreign direct investment inflow by advancing the processes of intrasectoral micro-specialisation aimed at greater utilisation of economies of scale, as well as by deepening the process of product differentiation in the EU and imitation in Slovakia.

Both of these processes will mean the deepening of the process of international redistribution of production within the enlarged EU, which is closely related to direct investment abroad. This should lead to the gradual alignment of the volume of FDI in Slovakia with the volume usual in EU countries, where per capita FDI volume is substantially higher than in Slovakia at present (approx. US$ 800 in Slovakia). The EU average is around US$ 3,000. When estimating the volume of FDI after accession to the EU, we built upon the premise that by around 2008 Slovakia could approach the per capita FDI volume in the Czech Republic, which reached US$ 2,300 in 2000. The estimated productivity growth is therefore based on the hypothesis that the FDI inflow to the Slovak economy will be more intensive after accession to the EU and the presumption that domestic investors' investments will become substantially more effective. The key purpose of both forms of investment should be major modernisation of technologies and intensification of product innovation, which should then be reflected in significant productivity growth. According to model calculations, taking into account the above estimate of the developments in the FDI volume, productivity in Slovakia could grow at the average annual pace of 3.7% in 2004-2008, compared with 2.5% in 2001-2003.
If productivity grows as expected, the exchange rate deviation could fall from the level of 2.7 in 2001 to 2.0 at the end of 2008, which would be a considerable improvement compared with its stagnation, or rather increase, in the last decade. The comparative price level could become substantially closer to the EU average, from current 36% to around 46% in 2006 and 49.7% in 2008. This convergence should be mainly the result of increased domestic prices, but thanks to the rise in productivity, also the slight appreciation of the exchange rate. Wages should increase together with the rise in comparative price level, which should mean an apparent shift from the low wages model, which provides little support for technology modernisation and product innovation, to the higher wages - higher quality model. At the same time, this should ensure that the transition to the expected faster rise in prices will be carried out while the population's living standard and real wages will be rising (average annual rise of 2.7% is expected in 2004-2006).

Slovakia's integration to the EU could have a further positive effect on the rise in comparative price level and rise in productivity in that the phenomenon of price discounts provided to EU buyers for the so-called goods imported from the east could be reduced or gradually fully eliminated. The problem of eliminating differences in price levels is concentrated on the area of tradable goods. Within this area, it mostly concerns foodstuffs, clothing and shoes, and household equipment. However, as regards the convergence of the overall price level to that in the EU, due to price deregulations we must expected further, gradual rises in prices for those goods and services that are still cheaper than in the EU (fuel, energy, rent, healthcare, education, culture, etc.). From the consumer's standpoint, the prices of foodstuffs are of a decisive importance. The majority of compared consumer prices of foodstuffs in Slovakia are in the interval of 50-80% of the level in Germany. Certain types of foodstuffs (e.g. bread, potatoes) are substantially cheaper (20-30% of German prices), while other types (certain dairy products, vegetable oils) have already exceeded consumer prices in Germany. According to model calculations, by the time of accession consumer prices of foodstuffs should increase by a further 6% (annual average), right after accession in 2004 they could increase by a further 8% and in 2005 and 2006 by 8.9%. The average annual rise in these prices should decrease to around 6.8% by 2008.

The rise in these prices after accession should not, however, create downward pressure on the population's living standard, since, with the expected growth in productivity, nominal wages per employee should simultaneously rise by 9.6% in 2004-2006. As for the sectoral structure of economy, although the effect of Slovakia's integration into the EU in the period before 2008 should be reflected in increased value added based on a further increase in the primary sector's productivity, it will also result in a decrease in its share in the Slovak economy's total value added. On the other hand, the secondary sector's overall share in the total value added could rise, especially due to a substantial increase in value added from gross production based on the high effectiveness of investments. This applies above all to the manufacturing. The rise in the secondary sector's share should leave the share of the service sector basically unchanged, even though the rate of value added and labour productivity might substantially increase here.

Sectors such as manufacture of machinery, electrical and transport equipment, as well as the manufacture of chemical and pulp-paper products should gain greater importance in the structure of the manufacturing. Rubber industry, manufacture of non-metallic mineral products and the food industry will probably retain their current share. The share of metal, textile, clothing, and leather production, and simple wood processing in the total value added will probably decrease (even though it will continue to grow in absolute terms). These estimated trends could provide a certain idea and simultaneously be a challenge for the enterprise sector, where a considerable level of healthy emotional attitude should be manifested. We also used the CGE (Computable General Equilibrium) model to estimate the impacts of integration on the developments in the sectorally divided structure of economy. According to this model calculation, it appears that in domestic production the greatest rise in production will be achieved by the manufacturing (excluding chemical and food industry). Agricultural and food production and market services will also rise, although less significantly. The volume of the production of chemical raw materials and products, and construction production will remain unchanged after accession to the EU. A certain decrease will probably occur in the production of non-market services and in electricity, gas and hot water supply. According to the above methodology, Slovakia's foreign trade with the EU should increase due to deepening of production specialisation and co-operation and as a result of the economy's higher competitiveness.
The removal of customs barriers, especially as regards agricultural and other "sensitive" products, will also play a role. The abolishment of customs tariffs on imports from the EU will on the other hand cause a decline in the prices of imports and subsequently an increase in their volume. According to the calculations of the overall effect on GDP growth of changes in the area of taxes and infrastructure investments within the framework of the acquis following accession to the EU, an additional growth of around 1%, accompanied with a tendency toward the appreciation of the Slovak crown's exchange rate, has been estimated. From the standpoint of the effective adaptation of Slovak enterprises to the competitive pressures in the EU, the 2000 Lisbon European Council, which specified education, science and research and innovation potential as the most effective factors for increasing the competitiveness of EU countries in the increasingly globalised market, was of great importance. Slovakia seriously lags behind in this area.

Expenditure on education as a share of GDP in Slovakia is more than a third lower than in the EU. Even though the educational level of the Slovak population in productive age is only slightly under the average of small EU countries, this is not true of the proportion of population with university degree, which reaches only 8.7% in this age group, compared with 24% in small EU countries. In the middle of 2003, every school leaver in the EU will be computer literate. Despite the Infovek programme adopted, of the 3340 schools in Slovakia only 540 have Internet access. Expenditure on research as a percentage of GDP is 0.37% in the EU and only 0.07% in Slovakia, despite the fact that students' participation in research is generally considered as the basic condition for the development of their creative and innovative capabilities. Research and development expenditure per hundred thousand inhabitants is roughly 6 times greater in the EU than in Slovakia. Its share in GDP in Slovakia is 0.68%, while it is 1.86 % in the EU. There is also a low level of expenditure on the enterprise sector's innovation activities. This is a result of preferring imports of modern technology with the aim of reducing the risk of developing it in the domestic environment, as well as a result of the lack of funding. The share of innovative enterprises in the total number of enterprises in the manufacturing is 3 times higher in the EU than in Slovakia.

Good financial standing is one of the internal building blocks for a company's development and one of the conditions for swift adaptation to the conditions of the EU Single Market. An analysis of the results of a survey in selected enterprises shows that, as regards financial standing, approximately a quarter of large industrial enterprises are not competitive. The trend toward growing indebtedness and worsening liquidity is typical for them. Low indebtedness indicates higher growth in wages and labour productivity. Investing in human resources is more difficult for companies facing problematic financial situation. Insufficient interest of employees in increasing qualifications is typical for the most indebted companies. Financial standing also influences innovation policy. The majority of the most indebted companies have no strategic plan for innovations and reach insufficient technological level. Price competition is typical for the group of the most indebted companies. The decline of their share in the relevant market is accompanied with deterioration of the companies' financial position. It has been confirmed that sectors with better financial standing sell their production in foreign markets more effectively, i.e. with better terms of trade.

In certain cases, we find the way companies see themselves as regards competitiveness disputable. For instance, a half of the most indebted companies consider themselves competitive. Companies with worse financial standing dominate in positive expectations of future conditions for access to loans. With the continuously low transparency of the majority of enterprises, these expectations are irrational. Enterprises with a high share of debts will be more vulnerable when the conditions become tighter on their markets. This poses risks for the future. Only companies with excellent financial standing will be able to make use of the advantages arising from the decline in interest rates and the new access to the capital market. The practice of companies preferring the high concentration of ownership, whereby creating a barrier to the acquisition of financial resources on the capital market, is to their disadvantage. The overall readiness of the enterprise sphere to enter the EU Single Market is inadequate. This conclusion arose from surveys carried out by experts from the Association of European Chambers of Commerce and Industry - Eurochambres - in ten candidate countries. According to them, almost a half of Slovak companies have yet to start preparations for entering the EU Single Market.
Despite this, as many as 64% of Slovak companies are optimistic about their future prospects in the Single Market. These conclusions were also confirmed in a survey of the Institute of Slovak and World Economy of the SAS. 30-40% of the total number of surveyed companies expect improvement and 40-60% continuation of the current situation. They expect substantial improvement in the possibilities of gaining access to investment resources and operational credits and better access to the capital market. It is apparent that, to a great extent, these unrealistic expectations and the underestimation of the importance of preparation result from the insufficient availability of information to companies about the areas in which they will have to adapt to the conditions in the EU, including the implementation of EU standards and regulations. These characteristics can present a relatively great risk in that the presumptions on which the integration effects are based will not be sufficiently fulfilled. Enterprises will be the element of the Slovak economy that will have the greatest impact on how quickly the gap between Slovakia's and the EU's competitiveness is reduced and on progress in the real convergence to the EU. Budgetary effects

Important effects of Slovakia's accession to the EU are associated with budgetary effects, which will be influenced by the application of the principle of cohesion, provision of structural assistance, co-financing of assistance, payment of a contribution to the EU common budget, payment of a larger section of import duty revenues to the EU budget, new position of the state budget in respect of agriculture, and so forth. The revenue side of the state budget will be influenced particularly by the process of tax harmonisation, which will concern mainly indirect taxes, i.e. value added tax and excise duties, but will also be reflected in the area of direct taxes. The key goal of tax harmonisation is to significantly restrict tax competition between member states. The role of VAT revenues for member states' budgets varies - the EU average for the standard VAT rate is around 21% and 5-10% for the reduced rate. Therefore, for the time being the European Union's goal will not be to completely unify the VAT rates, which should be neutral in principle, but to achieve a narrow VAT range (15-25%). This naturally means that compared with the current rates in Slovakia (10% and 23%), the average of these rates should increase by around 5 percentage points after accession to the EU.

This is a relatively high increase that will be reflected in state budget revenues, but will simultaneously cause a rise in the price level. This means that the VAT harmonisation will result in higher state budget revenues and a higher price level, which will thus be partially brought into line with the EU average. The rise in prices will have a negative impact on consumers, therefore its optimal timing should be considered. This rise in prices will be probably reflected in development in nominal wages, pensions, social benefits, and so forth. Another area where harmonisation is expected is excise duties, the amount of which should increase by around 20%. The effects of excise duties harmonisation will be similar to the effects of VAT harmonisation. In the area of direct taxes, the tax burden on both natural persons and legal entities should be gradually reduced, which can be reflected in a certain decline in tax revenues. The aggregate effect of the future tax harmonisation (rise in revenues from indirect taxes and decline in revenues from direct taxes) should be beneficial for the Slovak state budget as well as for the co-financing of structural projects. However, the decrease in direct taxes can be a stimulus for the development of the economy's supply side (introduction of modern technologies, product innovations, etc.). An important benefit of Slovakia's accession to the EU will be the EU's assistance provided via structural funds and the Cohesion Fund.
In the preparatory period, the EU provides assistance to candidate countries from the so-called pre-accession funds, in particular PHARE, ISPA and SAPARD. Following accession to the EU, Slovakia will participate in EU structural funds and the Cohesion Fund. The key structural fund, from which assistance is provided to EU regions that lag behind (regions with GDP lower than 75% of EU average) is the European Regional Development Fund (ERDF). An important principle for the operation of this fund is the principle of additionality (co-financing), which means that assistance from the ERDF is only an additional resource to the resources of national governments for the financing of a given project. Another structural fund is the European Social Fund (ESF), from which assistance can be obtained for the development of human resources, especially initiatives related to training and education. The European Agricultural Guidance and Guarantee Fund (EAGGF), which helps implement the common agricultural policy, also plays an important role in the system of structural funds.

This fund has a guarantee section (as much as 95% of expenditure related to market regulation) and guidance section (5% of expenditure to support active structural changes in agriculture). The Financial Instrument for Fisheries Guidance (FIFG) helps restructure the EU fishery industry. In a narrower sense, we should add the Cohesion Fund (CF) to the above four structural funds. This fund serves to mitigate the economic differences between individual member states and was designed for Ireland, Spain, Portugal and Greece, whose per capita GDP at the time this fund was established was lower than 90% of the EU average. Funding for large projects in the field of transport infrastructure and infrastructure promoting the quality of the environment can be acquired from this fund. The following three factors are the criteria for the distribution of resources from the Cohesion Fund: size of population, GDP per capita and the land area of a given country. EU directives specify 3 basic goals, which should guide the provision of assistance from structural funds in 2000-2006. Objective 1: The development and structural adjustment of regions whose development is lagging behind

Objective 2: The development of regions in economic and social conversion difficulties
Objective 3: The development of human resources. Structural funds will not become a source of funding for Slovakia until accession to the EU. The total amount of pre-accession assistance for Slovakia in 2001-2004 could reach €414-614 million, which is SKK 18-27 billion. Based on the signed Financing Memoranda, which also include funds from the previous years, Slovakia should acquire SKK 9.4 billion from EU pre-accession funds in 2002 alone. Co-financing in 2002 would require the allocation of SKK 4.8 billion from state budget expenditure. Following accession to the EU, Slovakia will make use of the resources from EU structural funds and the Cohesion Fund. These receipts should not exceed 4% of GDP. The experience from other countries shows that Slovakia's capacity to absorb transfers from the EU will increase only gradually. The study estimates that in the 2004-2008 period Slovakia could realistically absorb funding from EU structural funds amounting to approx. SKK 12-18 billion annually (€0.3-0.4 billion), i.e. approx. 1.1% of GDP. This would require that in the above period Slovakia annually allocate around SKK 15-20 billion in the state budget to co-finance the relevant projects.
However, to maintain even this lower financial and budgetary absorption capacity, intensified activity of competent authorities and institutions, in particular in the area of preparation of quality and synergy-oriented projects, will be necessary. The EC has meanwhile specified the procedure for the calculation of contributions from the new member states, which, according to preliminary estimates of the Slovak Finance Ministry, should reach around SKK 13 billion in 2004 (i.e. around 1.1% of GDP). The final amount of the contribution will be determined at the December EU summit. As regards transfers of import duty revenues, from the standpoint of the effects of Slovakia's accession to the EU, the fact that Slovakia will have to transfer 75% of its annual import duty revenues to the EU Common Budget will be important. Even though the prevailing section of the current revenues from Slovak imports will disappear after Slovakia's accession to the EU, import duty revenues from imports to the enlarged EU passing the Slovak-Ukrainian border will be acquired.

Based on these differences, Slovakia's total import duty revenues following accession to the EU will fall from SKK 3.6 billion in 2001 to around 0.5 billion in 2004. Following Slovakia's accession to the EU, major changes will also occur in state budget support of agriculture as a result of the adoption of the Common Agricultural Policy (CAP). The essence of these changes will be the new arrangement of agricultural subsidies. In view of the need to get closer to the lower world prices of agricultural products and the necessity to simultaneously approach EU standards, the European Commission proposed that direct payments to candidate countries in 2004-2006 be substantially lower than the level of payments in the Union (25%, 30% and 35%). Nevertheless, all candidate countries refused this stance of the EC. In the negotiating process, the Slovak Republic raised the request to align the commodity support with the existing level. If the Slovak agriculture is to meet the demand for foodstuffs in its effective commodity structure, an increase in certain production quotas should also be requested in the negotiating process. According to rough calculations, the overall effect of Slovakia's accession to the EU from the standpoint of the above key items of public finance appears to be positive.

Risks that could reduce this positive impact include the inadequate utilisation of resources from EU structural funds, which would disrupt the balance between receipts from and payments to the EU, and the potential foreign debt caused by the acquisition of extra-budgetary resources for the financing of projects related to the implementation of EU standards and regulations. Economic policy recommendations

To fulfil the Copenhagen criteria, which require the creation of a functioning market economy, it is necessary to maintain macroeconomic stability (balance) as an essential condition for sustainable economic growth at a high pace. The elements of imbalance, typical for the developments in the Slovak economy in 2002, will not be eliminated by market forces and should be eliminated at the very beginning of the next political cycle (at the turn of 2002/2003). In the forthcoming period, the economic policy should focus less on suppressing the effects of imbalance and more on the effort to reform the problematic segments of the public sector and eliminate other sources of imbalance. It is not advisable to postpone the removal of the remaining price deformations until accession to the EU. In the interest of approaching the conditions of functioning of a standard market economy and in view of the expected equalisation of price levels between Slovakia and EU countries after its enlargement, it would be suitable to eliminate these deformations still in the pre-accession phase.

The substantial growth in the Slovak economy's qualitative competitiveness should be considered as a priority of the medium and long-term economic policy in the preparatory phase of Slovakia's accession to the EU, as well as after accession. At the same time, competitiveness should not be narrowed down to foreign trade, even though that is where it is eventually manifested. It should be seen particularly as an indicator of the qualitative performance of the whole economy. Therefore, much greater attention should now be paid to the inflow of foreign direct investment (FDI), which, in the current stage of preparation for accession to the EU, should be regarded as the determinant of how quickly Slovakia will overcome the technological and innovation gap, and the lag in real productivity and overall qualitative competitiveness of the Slovak economy. From this standpoint, it is necessary to substantially improve the overall approach of the government and individual enterprises to the FDI issue. Attention needs to be paid above all to the preparation of FDI, especially with respect to the active search for foreign investors, orientation of enterprises on international production co-operation and the improvement of investment conditions.
When acquiring foreign direct investment, efforts should be made to increase the share of FDI with a greater proportion of the so-called higher technology, especially in manufacturing with a sophisticated type of production, and place emphasis on the participation of domestic subcontractors, including research and development services. An intensive inflow of FDI should bring a substantial growth in productivity, but it has to be assured that by increasing its market share, conditions are being created for a rise in employment. The enterprise sector in particular should endeavour to assure this. Price increases should respect the real circumstances, especially social acceptability. If prices increased to the level in neighbouring EU member states faster than the possibilities for pay rises made possible by increased labour productivity, then real wages and the population's living standard might decline.

On the contrary, if we succumbed to wage pressures and wages increased faster than productivity, the competitiveness of enterprises would deteriorate, resulting in redundancies in enterprises and rise in unemployment. It is also necessary to overcome the instability of regional policy institutions, which are manifested by the absence of a regional development planning system with a good legislative, institutional and financial basis, and, subsequently, in the low utilisation of financial resources from EU pre-accession and structural funds. In this respect, a national regional development planning and guidance system needs to be build, able to convincingly show the knowledge of its own needs based on elaborated concepts and, at the same time, effectively utilise structural assistance, so that the synergy effect is achieved. This requires the completion of the institutional framework in such a way that no parallel institutional structures for the use of own and external funding develop. Since there is the threat of a lack of quality projects, a pragmatic solution would be to concentrate the capacity of already functioning implementing units on the preparation of a smaller number of large, investment intensive projects, oriented mainly on the restructuring and development of regions' production potential, improvement of their accessibility and the completion of the technical infrastructure in their territories. In view of the difficulties in the acquisition of budgetary finance for the co-financing of structural operations carried out with assistance from pre-accession funds and, after accession to the European Union, structural funds, the Government (Ministry of Finance of the SR) needs to elaborate a realistic long-term system of co-financing.

The optimal use of resources from structural funds requires greater attention to the preparation of the relevant projects, training of the responsible staff at the relevant levels (especially within self-governing regions) and permanent attention to strict financial control.

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Slovak republic accesion to the EU