Trade, Integration and Transformation in Eastern Europe

By van Brabant, Jozef M. | Journal of International Affairs, Summer 1994 | Go to article overview

Trade, Integration and Transformation in Eastern Europe


van Brabant, Jozef M., Journal of International Affairs


With the annus mirabilis, the countries of Eastern Europe, and in some respects the East more generally(2) an to dismantle most vestiges of communist rule, including the one-party state and its planned economy and administration. One critical variable was the desire of the new political leaders, particularly in the smaller Eastern countries, to "return to Europe." This essentially meant integrating their economies - and societies more generally - into the concert of the evolving European Union (E.U.), formerly the European Community (E.C.). Despite the E.U.'s inherently discriminatory nature in relations with nonmember countries, Eastern policy makers have viewed it largely as a gateway through which they can merge their economies more fully with the world, both organizationally in terms of fuller, more constructive participation in multilateral organizations and through trade, finance and capital and labor mobility. This paper addresses the basic foreign-sector issues at stake and how various countries have sought to open up their economies.(3) I begin by reviewing the nature of trade for these countries under planning, including their links within the Council for Mutual Economic Assistance (CMEA). Next I summarize plans developed by policy makers with the advice of outside experts for reforming the foreign trade and exchange regimes, the policy measures embraced since 1989 and their results. I describe the strategy adopted in the planned economies in transition (PETs) for achieving export-led growth and explore whether the E.U. could lead them out of the recession. Because I am skeptical that this will succeed, I consider alternative trading relationships the PETS might cultivate, including those within Eastern Europe. The paper ends with some policy recommendations.

THE LEGACIES OF PLANNING UNDER COMMUNISM

In studying the present transition strategies and the feasible alternatives, it is of paramount importance to be aware of the initial conditions in individual PETs. I shall touch briefly only on three: (1) the experience with centralized planning in the one-party state; (2) the failed attempts to improve economic performance through administrative reforms and their legacies; and (3) the lack of clearcut, lasting results of regional integration within the CMEA context.

To grasp what is required to make domestic and external liberalization anchored to a convertible currency with a low-protection regime useful to the restructuring under way, the critical features of centrally planned economies and their obdurate legacies must be crystal clear.(4) After the Second World War, Eastern European countries sought to develop fairly autarkic industrialized economies. They insulated themselves as much as possible from foreign competition through special instruments and institutions. These included: (1) the monopoly of foreign trade and payments, which insulated home economic agents against any competition from abroad; (2) bilateral trade and payments agreements, which permitted administrative control over foreign economic relations; (3) price equalization with considerable segmentation of consumer from producer markets and of both from CMEA as well as world markets, which was required for policy autonomy; and (4) the formulation of economic decisions on a range of grounds, including non-economic ones, regardless of prevailing (and expected changes in) comparative advantages. In all this, prices and exchange rates, which were at best only remotely linked to trade prices, were largely notional. As a result, trade decisions were not as a rule reached on the basis of real economic scarcity indicators, trade did not form a coherent component of the planned economy, and a built-in bias tended to compress trade below levels normal for countries of comparable size and wealth.

Second, for more than 40 years the planned economies sought to buttress their domestic economic regimes by relying mainly on economic cooperation within the CMEA; this also enabled them to pursue more politically and strategically motivated ambitions. …

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