Eastern Europe
Foreign trade

The economies of Czechoslovakia, Hungary and Poland have opened up dramatically with Eastern Europe's transition. Their trade with the West has expanded rapidly while that with the East has collapsed with the demise of the CMEA and the loss of Soviet markets. All three countries have demonopolized trade regimes in which licensing and quotas play very small roles. Exchange controls have virtually disappeared for current account transactions; their exchange rates are `realistic' and their tariffs relatively low.

In Discussion Paper No. 676, Research Fellow Dani Rodrik argues that this has led to a substantial expansion in private activity in trade, especially in imports. All three countries signed Association Agreements with the EC in December 1991. The cumulative decline in the dollar value of exports to the former CMEA since the beginning of 1990 is approximately 80-90%, which has been offset in part by increased trade with the West. Rodrik notes, however, that most enterprises have been unable to shift sales from Eastern to Western markets: there have been sharp reductions in products previously exported to the East and sharp increases in products previously exported to the West, with no real reorientation of trade structure. Successful redirection of Eastern exports to the West would have led to convergence in the composition of exports to the two areas, but the opposite has occurred.

Rodrik reports that the switch to dollar pricing at the beginning of 1991 and the collapse of Soviet trade have reduced income by at least $2.2 billion in Poland, $2.0 billion in Hungary and $3.4 billion in Czechoslovakia, amounting to 7-8% of GDP in Czechoslovakia and Hungary and 3% in Poland. Currency devaluations and severely reduced domestic demand have led to higher levels of exports to the West than many predicted, given the well-known problems of product quality and rigidities in enterprise behaviour, although there is little evidence that trade liberalization has assisted price discipline or the restructuring of domestic industry. Inflation has remained persistent in Poland, despite its openness; the sharp devaluations that accompanied the trade liberalizations may have reduced the pressure of external competition.

Foreign Trade in Eastern Europe's Transition: Early Results
Dani Rodrik

Discussion Paper No. 676, June 1992 (IT)