Eastern Europe
Trade Restructuring

Recent discussion of developments in the East European economies has focused on the impact of the severe recessions most of them are currently experiencing and their relatively slow supply-side responses to structural reform. Researchers from several countries of Eastern Europe gathered at a workshop on `Industrial Restructuring and Trade Reorientation in Eastern Europe', held in Cambridge on 1/3 December. The workshop, which formed part of CEPR's research programme on Economic Transformation in Eastern Europe, was organized by Michael Landesmann, Senior Research Officer at the Department of Applied Economics (DAE), Cambridge University, and financial support was provided by the Commission of the European Communities under its ACE programme.
Michael Landesmann and István Székely (DAE, Cambridge) opened the workshop with their paper, `Projections of East-West European Trade Integration', which presented several long-term scenarios of the East European economies' integration into the trade flows of the European Community. They assumed that in the very long-run say by 2010 these economies will hold shares of EC markets similar to those of the Southern and smaller West European economies. They also took account of the projected size of their export sector, the relative backwardness of different industries (as revealed by quality indicators such as the `price gaps' between East European exports and comparable goods traded within the Community), the relative speeds of their reform processes and the stages of development each of them will have reached. The authors also reported shorter-run estimates of the reorientation of export capacities from East-East to East-West trade and the growth of new export capacities during 1989-95. Finally, they considered the export growth rates that would be required for the former CMEA countries to increase their overall share in EC trade from 5% to about 15% over 15-20 years.
The ensuing discussion focused on the usefulness of the quality measures in analysing long-term comparative advantage, in projecting the speed and extent of the shorter-term trade reorientation, and in indicating different sectors' attractiveness to foreign direct investment.
In a paper on `The Effects of Costs and Subsidies on Trade Reorientation in Hungary, 1981-90', László Halpern (Hungarian Academy of Sciences, Budapest) reported a detailed analysis of balance sheet data for 500 Hungarian enterprises. He classified the firms into groups with high and low export orientations (both total and to Western markets), and by their size classes and profitability. His results indicated that relative costs and subsidies played an increasing role in the reorientation of exports away from rouble markets over the 1980s. This is significant because at the beginning of the 1980s subsidies were intended to compensate firms for their total losses, and their later elimination improved firms' cost responsiveness only for non-rouble exports. Surprisingly, export-oriented firms did not increase the shares of dollar exports in their sales during 1989-90. Such firms' above-average profitability can now be attributed not only to their consistent high profitability in terms of domestic sales but also to their increased profitability in terms of dollar exports.
Participants noted the dramatic increase in the share of `medium-sized' enterprises those with assets between 100 million and 1 billion forints and a fall in that of large enterprises between 1989 and 1990. Medium-sized firms' share of non-rouble exports rose from 17.6% in 1989 to 55.1% in 1990; while their share in rouble exports went from 19.5% to 52.6%; large enterprises' shares fell from 82.3% to 44% of non-rouble and from 80.1% to 45.7% of rouble exports. There has also been a sharp reduction in `subsidy-to-sales' ratios over the past three years. Participants suggested conducting similar studies using comparable enterprise data sets from Bulgaria and Czechoslovakia.
Witold Orlowski (University of Lódz and Bureau of European Integration, Warsaw) presented his joint paper with Lucja Tomaszewicz, `Structural Change in the Polish Economy, 1991-2000: A Simulation Analysis', which developed a macro-econometric model of the transition using a mixture of estimation and calibration methods. He emphasized the need for statistical information on the interactions of real and financial flows, close examination of income and wealth distri bution and separate assessments of the performance of state and private enterprises. Orlowski discussed the results of four simulations: fast progress towards trade liberalization with a revaluation of the zloty in 1992-5; active interventionist policies with interest rate cuts and increased public spending; fast privatization and elimination of subsidies (which still accounted for 31% of the state budget in 1989); and continued agricultural protectionism.
Participants welcomed the model as a useful means of elucidating the impacts of macroeconomic policy choices on the real economy and on sectoral price, income and expenditure relationships; but they felt that further development was needed to capture fully the effects of industrial restructuring and trade reorientation.
In the first of three case-studies of recent developments in individual East European economies, Leszek Jasinsky (Foreign Trade Research Institute, Warsaw) discussed the development of Poland's foreign trade and production structures over the last two years. He noted the doubling of the European Community's share in exports and imports between 1988 and 1990, while the share of the former CMEA countries fell by about half and the share of the former Soviet Union now amounts to only some 17% of total Polish trade. The most significant changes in the structure of industrial production were the decline of electrical engineering and the (possibly temporary) strengthening of the energy sector. The private sector now accounts for some 20% of exports, 50% of imports, 75% of retail trade and about 20% of manufacturing production.
Alena Nesporova (Czechoslovak Academy of Sciences, Prague) presented an overview of the deep recession into which the Czechoslovak economy has fallen during 1991. By the third quarter of 1991, industrial production had fallen from its 1990 level by about 25%, private consumption and investment by about 30%, imports from the former CMEA economies by 33% and those from the West by 23% (by volume). Exports to the former CMEA members fell by 23% and those to the developed market economies by about 5%. Unemployment had reached 4% in the Czech part of the republic and 10.3% in the Slovak part by October 1991; and foreign direct investment amounted to only some $800 million for 1991. Nesporova also discussed the recession's impact on industrial structure and made a preliminary assessment of the relative contributions of the collapse of intra-CMEA trade and the government's adherence to restrictive monetary and fiscal policies to the fall in production.
Rumen Dobrinski (Institute for Strategic Business Studies, Sofia) presented a detailed review of the impact on the Bulgarian economy of suspending payments of foreign debt in March 1990. The ratio of gross debt to convertible currency exports had reached 227% in 1989 ($9 billion), while foreign currency reserves had dwindled to $1.4 billion. Following the suspension of debt payments, total imports slumped by 21%, and imports from developed market economies by 32%; while industrial production which is heavily dependent on imports of intermediate goods from the West fell by about 16%. Dobrinski then assessed the effects of the February 1991 macroeconomic stabilization programme and described the sequencing of reforms. In the three months following liberalization, prices rose by 400%; and industrial production fell by a further 25%, real incomes by 40% and foreign trade by about 50% in 1991. Unemployment has risen to some 8% of the working population, investment is paralysed and capacity is severely underutilized. Dobrinski concluded that the depth of the recession in Bulgaria and its large macroeconomic imbalances are likely to make its transition process both lengthy and very painful.