As the Central and East European countries (CEECs) reoriented their trade to the West during 1988–91, they focused almost entirely on the developed countries – and principally on those of the European Union. In Discussion Paper No. 1003, László Halpern compares changes in this trade with North–South trade within the EU. While the export structures of East and South showed little change, the shares of chemical products and machinery in their imports fell dramatically, in contrast with those of electrical goods, textiles and clothing, and motor vehicles. The concentration of imports declined slightly for both groups; for exports, the East's concentration fell below that of the South. The South displays greater specialization in agricultural goods and in textiles and clothing, while the East specializes more in ores and metals, chemical products and machinery.

Revealed comparative advantage can be misleading for transforming economies, however, since it reflects a mixture of inherited and emerging capacities, so Halpern also considers the effects of relative labour costs, human capital endowments, and foreign direct investment (FDI). Average labour costs are much lower in the CEECs than in EU member countries, but levels of educational attainment are very similar. Whether the CEECs can exploit this advantage to restructure their productive capacities will depend critically on the size of capital flows into their more competitive sectors. If FDI continues to rise and is accompanied by efficient privatization, their participation in trade will increasingly be driven by product differentiation, and country-specific specialization will continue to develop on the basis of natural endowments. If FDI slows, however, inherited productive capacities will play a greater role, so low-level, low-quality, processed products and those with high inputs of natural resources will dominate exports. By trading these for R&D-intensive investment and high-tech consumer goods, the CEECs will remain trapped in their former position in the international division of labour, as a widening technological gap with the West takes the place of massive Soviet demand in discouraging innovation and technical development.

Comparative Advantage and Likely Trade Pattern of the CEECs
László Halpern

Discussion Paper No. 1003, September 1994 (IT)