Poland's Membership in the European Union: An Analysis with a Dynamic Computable General Equilibrium (CGE) Model

This paper presents a dynamic Computable General Equilibrium (CGE) model for Poland's integration into the European Union (EU) that allows for quantification of income and welfare effects stemming from tariff reduction, border-cost reduction, reduction of technical barriers to trade and increased EU-transfers. For all channels, long-run income increases substantially compared with the reference scenario. The welfare effects are also positive, but much smaller because the welfare measure takes into account the time path of consumption throughout the adjustment period. Typical welfare effects are estimated at less than 1 percent of total consumption over time discounted to the beginning of the adjustment period. This low figure reflects the compression of consumption early in the adjustment period that finances the investment needed to build up the capital stock to support higher output and consumption farther into the future. The paper presents also sensitivity analyses for the CGE model concerning different specifications of the adjustment cost parameters, the intertemporal elasticity of substitution, the Armington substitution elasticity and the rate of time preference. The overall result of the examination of Poland's membership in the EU with the dynamic CGE model draws attention to the fact, that income growth effects as such are not necessarily welfare gains, since growth requires investment and therefore foregone consumption.