DP705 Making Sense of the Soviet Trade Shock in Eastern Europe: A Framework and Some Estimates
East European countries have experienced sharp declines in real GDP since 1990. One of the reasons for this decline is the Soviet trade shock caused by the collapse of the CMEA and of traditional export markets in the Soviet Union. This paper is an attempt to quantify the magnitude of this external shock. A conceptual framework is developed to show that the shock has three distinct elements: (a) a terms-of-trade deterioration; (b) a market-loss effect; and (c) a removal-of-import-subsidy effect. Combining these three effects and adding Keynesian multiplier effects, the conclusion is that the Soviet trade shock accounts for all of the decline in Hungarian GDP, about 60% of the decline in Czechoslovakia, and between one-quarter and one-third of the decline in Poland.