Eastern Europe
Soviet trade

Eastern Europe's recession has been much greater than was predicted at the start of its transition to the market. In Discussion Paper No. 705, Research Fellow Dani Rodrik focuses on the effect of the collapse of the CMEA and the loss of Soviet markets on the enterprise sectors in Czechoslovakia, Hungary and Poland. During 1990-91, their trade with the rest of Eastern Europe and the Soviet Union declined by some 60-80%, and the 1991 transition to dollar pricing implied terms-of-trade deteriorations of some 35-50%. Rodrik starts from the postulate that the multiple exchange rate system used to link the transferable rouble and the dollar was formally equivalent to a set of domestic import-subsidy/export-tax schemes. Then the effects of the CMEA's collapse and the abolition of the transferable rouble may be broken into two components: the move to spot prices, which represented a genuine terms-of-trade shock; and the removal of import subsidies and export taxes, which should represent an efficiency gain. There is also a `market- loss' effect from the reduction in the volume of manufactured goods exported at a premium to the Soviet Union.

Rodrik develops a formal model to calculate the real income loss from of the trade shock that incorporates a Keynesian multiplier to estimate the full income and output loss. His empirical results indicate that the Soviet trade shock accounts for the entire GDP decline in Hungary, about 60% of the decline in Czechoslovakia, and between one-quarter and one-third of the decline in Poland. He warns, however, that these calculations are based on incomplete and in some cases extrapolated data and should therefore be viewed with caution.

Making Sense of the Soviet Trade Shock in Eastern Europe: A Framework and Some Estimates
Dani Rodrik

Discussion Paper No. 705, July 1992 (IT)