Trade, integration and transformation in Eastern Europe.

Authorvan Brabant, Jozef M.
PositionContemporary Issues in World Trade

With the annus mirabilis, the countries of Eastern Europe, and in some respects the East more generally(2) an to dismantle most vestiges of communist rule, including the one-party state and its planned economy and administration. One critical variable was the desire of the new political leaders, particularly in the smaller Eastern countries, to "return to Europe." This essentially meant integrating their economies - and societies more generally - into the concert of the evolving European Union (E.U.), formerly the European Community (E.C.). Despite the E.U.'s inherently discriminatory nature in relations with nonmember countries, Eastern policy makers have viewed it largely as a gateway through which they can merge their economies more fully with the world, both organizationally in terms of fuller, more constructive participation in multilateral organizations and through trade, finance and capital and labor mobility. This paper addresses the basic foreign-sector issues at stake and how various countries have sought to open up their economies.(3) I begin by reviewing the nature of trade for these countries under planning, including their links within the Council for Mutual Economic Assistance (CMEA). Next I summarize plans developed by policy makers with the advice of outside experts for reforming the foreign trade and exchange regimes, the policy measures embraced since 1989 and their results. I describe the strategy adopted in the planned economies in transition (PETs) for achieving export-led growth and explore whether the E.U. could lead them out of the recession. Because I am skeptical that this will succeed, I consider alternative trading relationships the PETS might cultivate, including those within Eastern Europe. The paper ends with some policy recommendations.

THE LEGACIES OF PLANNING UNDER COMMUNISM

In studying the present transition strategies and the feasible alternatives, it is of paramount importance to be aware of the initial conditions in individual PETs. I shall touch briefly only on three: (1) the experience with centralized planning in the one-party state; (2) the failed attempts to improve economic performance through administrative reforms and their legacies; and (3) the lack of clearcut, lasting results of regional integration within the CMEA context.

To grasp what is required to make domestic and external liberalization anchored to a convertible currency with a low-protection regime useful to the restructuring under way, the critical features of centrally planned economies and their obdurate legacies must be crystal clear.(4) After the Second World War, Eastern European countries sought to develop fairly autarkic industrialized economies. They insulated themselves as much as possible from foreign competition through special instruments and institutions. These included: (1) the monopoly of foreign trade and payments, which insulated home economic agents against any competition from abroad; (2) bilateral trade and payments agreements, which permitted administrative control over foreign economic relations; (3) price equalization with considerable segmentation of consumer from producer markets and of both from CMEA as well as world markets, which was required for policy autonomy; and (4) the formulation of economic decisions on a range of grounds, including non-economic ones, regardless of prevailing (and expected changes in) comparative advantages. In all this, prices and exchange rates, which were at best only remotely linked to trade prices, were largely notional. As a result, trade decisions were not as a rule reached on the basis of real economic scarcity indicators, trade did not form a coherent component of the planned economy, and a built-in bias tended to compress trade below levels normal for countries of comparable size and wealth.

Second, for more than 40 years the planned economies sought to buttress their domestic economic regimes by relying mainly on economic cooperation within the CMEA; this also enabled them to pursue more politically and strategically motivated ambitions. The relevant institutional framework was fashioned to facilitate domestic and regional development objectives. This strengthened the desire for national policy autonomy, mostly through autonomous planning, with an advanced type of market reservation anchored to the transferable ruble (TR)(5) and the trade, price and payment regimes that it supported, in spite of agreements to pursue so-called socialist economic integration. This was otherwise a misnomer, since whatever the CMEA members aimed at, voluntarily or under Soviet tutelage, was hardly socialist, economic or integrated: Each member maintained highly segregated markets at home and abroad, and national plans were insufficiently dovetailed to achieve optimal results under CMEA-wide constraints. Rather, the CMEA was for many years an instrument through which the former Soviet Union could exercise less blatant forms of hegemony in the region. The price it was willing to pay for this privilege was usually subsumed, rather simplistically, under the notion of implicit subsidies - that is, the difference between the low Soviet export price to the CMEA (and/or the high Soviet import price for products from the CMEA) and prevailing world prices. These resulted from the Soviet Union's willingness - in the sense that it had for years voluntarily agreed to such commercial ties - to import manufactures from the rest of the CMEA in volumes and at prices that they would not have fetched in world markets, in exchange for raw materials and especially fuels at prices nominally well below current world prices for most years after about 1973.

Thus CMEA trade - as well as that with other countries - was not based on genuine comparative advantages. But trade in the CMEA became structured more rationally over time, just like other trade ties, if only because exporters and importers who felt themselves to be subsidizing CMEA partners imposed constraints on the volume of goods available for export at "low" prices or on the volume of imports procured at "high" prices. Goods were traded at prices that reflected neither domestic costs, however factored, nor real scarcities abroad, and costs were as a rule not directly passed on to domestic agents. Eastern markets were captive, especially for goods built within the context of intergovernmental specialization agreements - mainly in support of machine building and chemicals - and of jointly financed investment projects, principally to shore up the exchange of Soviet fuels and raw materials for manufactures from the smaller countries. The resulting patterns of trade were adapted to economies that were sheltered from internal and external competition, that had leaders reluctant to engage in widespread redistribution of incomes within the region on any scale remotely comparable to what they felt was essential inside their own economies and that had their economic priorities set by the political and bureaucratic powers in place.

In spite of the built-in defects and drawbacks of CMEA relations, the TR regimes did support moderately buoyant trade for many decades. The system began to totter - and in the end collapsed - when the former Soviet Union, the key supplier of fuels and raw materials, ran into unanticipated perestroika teething problems that could not be remedied without radical economic transformation. The ramifications of having been embedded in the CMEA for so long are profound, if only because when the transition began neither macro- nor most microeconomic decision makers were aware of real comparative advantages, and the fixed economic structures in place are not suited to vibrant competition. These discrepancies between the existing (human and material) capital stock and the one that can be used profitably must be corrected at the earliest opportunity, even if at a very high sociopolitical and economic cost.

Finally, the experiments with administrative reforms conducted in the various countries, even when prematurely reversed, as happened so often, invariably left significant traces that have left an imprint on transition policies. Some of these experiences should facilitate the transition to the market, however. Countries that had a significant presence in Western markets and that had entrusted this trade to producers themselves, that implemented alternatives to administrative foreign-exchange allocation, and that tried to realign domestic prices with some broad world trends through a more realistic exchange rate have, on balance, found it easier to liberalize their domestic and external economic relations. Eastern economies that eschewed such modifications for the sake of attaining domestic policy autonomy through rigid market segmentation at virtually any cost have found reform more difficult. Macroeconomic stability also facilitated liberalization. Finally, countries without domestic ethnic or regional tensions have found it easier to proceed with far-reaching societal transformations than countries in which the very coherence of the national economy, and indeed polity, is at issue. Such factors must be taken into account when planning the speed, comprehensiveness, sequence, sectoralism and intensity of reform.(6)

THE ADVISED BLUEPRINT FOR TRANSFORMATION

The aims of the transition were loud and clear from the very beginning: establishing political pluralism similar to Western Europe's and dismantling the remains of administrative planning in favor of market-based decision making and speedy integration into the world economy. In some PETS that had not previously experimented seriously with economic decentralization, the dismantling of central planning was bound to be rather painful. In others, overcoming the legacies of administrative planning and bureaucratic bargaining under communist rule posed vexing problems. This was particularly true if they insisted on rapidly opening their economies to global...

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