Economic Transition in Russia and the New States of Eurasia

By Bartlomiej Kaminski | Go to book overview

Conclusion

Some newly independent states have made greater strides than others in integrating into the international economy. An examination of various factors affecting this process leads to the following conclusion: without going through a vigorous stabilization cum liberalization program, a country will be unable to exploit opportunities offered by international markets. The degree of achieved integration is shown to depend almost entirely on, first, the progress achieved in liberalizing the domestic economic system and, second, the liberalization of a country's external sector, including foreign trade and the exchange rate regime.

The shift toward a second generation of the transition can be regarded as a necessary condition in accelerating reintegration into the world economy, whereas those conditions related to distance and market access are only secondary. While most OECD governments were slow to normalize commercial relations with the newly independent states, and none has as yet been admitted to the World Trade Organization, neither membership nor better market access would matter for economies with administrative controls over foreign trade. Such controls have prevented potential domestic exporters from even attempting to penetrate international markets. Similarly, the combination of undervalued domestic currencies (as revealed in ridiculously low wage rates) and limited access to foreign currency has suppressed imports, and possibly even exports.

One may criticize Western governments for their fainthearted response to the collapse of communism in terms of market access. One may also complain about international investors not pouring money into the newly independent states. However, neither of these explains the pace of integration into the world economy, as both tend to be reactive. Earlier concessions offered to the Baltic states were not just the product of pressures from the Scandinavian lobby. They resulted from their governments' determination to move forward quickly with a liberal economic agenda. Except for natural resources, foreign investment flows are unlikely to set in motion the virtuous circle of FDI inflows unless there is a credible domestic commitment to undo the vestiges of central planning and visible progress in establishing a business-friendly environment.

It is intuitively obvious that location matters. Its impact goes beyond transportation costs, although as this analysis shows, these may be formidable obstacles. Since over the period from 1991 to 1993 none of the Asian newly independent states moved to the second generation, only time will tell whether their landlocked location is an insurmountable barrier to a quick integration into international markets. Yet, this analysis does provide strong empirical support to expect that those countries that have launched stabilization and liberalization programs (e.g., Kyrgyzstan in 1994, Armenia and Georgia in 1995) and stay the reform course will also make significant progress in establishing beneficial links with international markets.

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