At a lunchtime meeting on 1 June, held to mark the launch of Open Economies: Structural Adjustment and Agriculture (see box), Ian Goldin and Richard Portes discussed recent research on structural adjustment in developing countries and Eastern Europe. Goldin is Head of Programme and Principal Economist at the OECD Development Centre; Portes is Director of the Centre for Economic Policy Research and Professor of Economics at Birkbeck College, London. The views expressed by the speakers were their own, however, not those of the OECD nor of CEPR, which takes no institutional policy positions.

Goldin noted that the reform process in developing countries and Eastern Europe seeks to shift resources to more productive uses by changing their relative prices and incentive structures to exploit their comparative advantages. Openness to world markets is a key aim of their adjustment process and has become the criteria for international assistance, but its potential benefits are being undermined by the lack of reciprocity by richer countries. Protectionist and other trade-distorting policies are detrimental to countries entering international markets, where distorted prices send misleading signals to countries attempting to identify their comparative advantage and best investment opportunities. Many of them enjoy comparative advantage in the agricultural sector, whose development is critical to their future growth, employment generation and equitable income distributions.

Goldin noted that structural adjustment programmes dominate the policy debate in developing countries and Eastern Europe, but their international and intersectoral dimensions remain poorly understood. He considered the relation and sequencing of domestic and international reforms, the uneven impact of adjustment on different sectors and income groups, its effects on infrastructure and investment, the global effects of adjustment, and the `fallacy of composition' whereby the simultaneous application by many countries of policies designed for one country acting alone can undermine the desired outcome for all.

Goldin then noted some of the volume's main findings. Once labour markets and different economic sectors are included in analyses of sequencing of reforms, liberalizing capital markets first may be preferable, under some circumstances, to the tariff-first `conventional wisdom'. Economy-wide analysis of the proposed North American Free Trade Area indicates that this will entail not only substantial overall income gains but also negative consequences for Mexicans in rural areas that will require compensation schemes. Intertemporal economy-wide models show that agriculture typically adjusts more rapidly than other sectors in LDCs, while both the costs and benefits of adjustment tend to be concentrated in the rural sector. Trade and other economic reforms may reduce the overall revenues of tropical commodity exporters; in particular, reductions to export taxes may reduce the revenues from and growth of exports from sub-Saharan Africa. The combination of trade reforms that involve reductions in export taxes and other economic reforms in tropical commodity exporting countries may reduce their overall export revenues. If both traditional and non-traditional exports increase but their total revenues decline with the fall in world prices, it is the poor, typically sub-Saharan countries that will suffer the greatest terms-of-trade losses. A case may therefore be made, on redistributive and transitional grounds, for a greater share of the costs of reform to fall on the better-off countries.

Goldin then reported some results of his more recent study with Dominique van der Mensbrugghe on global modelling, which indicated total annual costs of existing trade barriers in excess of $475 billion. Partial reform as envisaged in the Uruguay Round would yield annual benefits of some $195 billion, of which around $90 billion would accrue to the developing and East European economies about double the total level of official development assistance. The most distorted countries stand to gain the most from liberalization, with the distribution of its benefits among East European and developing countries depending on their trade profiles. Food importers are expected to pay more as cereal subsidies in OECD countries are reduced, but the overall effects of liberalization will depend on their abilities to pass on higher world prices to domestic producers and to exploit the opportunities arising from the easing of protectionism in other sectors.
Goldin concluded by emphasizing the need for a commitment to liberalization across different economic sectors and internationally if countries are to exploit their comparative advantages. Protectionism in richer countries is undermining the transition in developing countries and in Eastern Europe, whose remarkable achievements in opening their economies may be frustrated by protectionist tendencies and a lack of reciprocity on the part of the OECD economies.

Focusing on the current reforms in Eastern Europe, Richard Portes maintained that recent analyses had overemphasized macroeconomic concerns such as the attainment of stability and convertibility at the expense of the major structural changes these economies require. Eastern Europe's agricultural sector has been neglected and its privatization will be difficult. That should not be the top priority: there is considerable resistance to such measures in Russia, while Hungary successfully implemented reform in this sector from the 1960s onwards without extensive privatization. Throughout Eastern Europe, this sector now faces a deterioration in its terms of trade with the industrial sector comparable to the Soviet Union's `scissors crisis' of the 1920s.

Portes warned that an excessively abrupt opening to imports may prevent enterprises that have the potential to be competitive on world markets from having enough time to undertake the restructuring they require; he suggested that during the transition a uniform but non-negligible tariff on their imports may serve them better than full free trade. Eastern Europe has a clear comparative advantage in agricultural products, whose proper exploitation will induce a fall in world prices that can only hasten the welcome break-down of the European Community's Common Agricultural Policy. Winters and Hamilton (Economic Policy, 14) have found that these economies may enjoy comparative advantage in the long run in medium-technology goods; in the short run, however, their development requires that they be granted immediate access to Community markets for `sensitive' sectors including textiles and steel. Portes therefore criticized the European Community's recent Association Agreements with Czechoslovakia, Hungary and Poland, in so far as they include far too many restrictions and very broadly defined anti-dumping and safeguard provisions that may easily be abused to block imports of many such sensitive products.