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Pollay Roe"arch

International Trade

WPS 1 179

This paper -a product of the Intemational Trade Division, International Economics Department -is
part of a larger effort in the departnent to analyze the transition from central planning to market-based
economies. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington,
DC 20433. Please contact Pauline Kokila, room S7-040, extension 33716 (September 1993, 38

Empirical ,tudies have paid little attention to the economic chaos and vacillating macroeconomic
supply-side forces behind the export perfor- reforn, registered drops in both exports and
mance of the Central and Eastern European imports.
countries of Bulgaria, Czechoslovakia, Hungary,
Poland, and Romania (CEE-5) in OECD markets Kaminski suggests that differences among
after the collapse of central planning. Czechoslovakia, Hungary, and Poland (CEE-3)

had little to do with previous trends in export

Kaminski examines export developments in performance, extemal economic factors, and
these countries in 1980-91, focusing on how earlier attempts at trade reform. The expansion
transformation programs affected trade. QECD of exports in 1990-92 represented a dramatic
markets now receive three-fourths of CEE-5 reversal of trends prevalent in the prior two
exports. Sustaining this market penetration is decades. The surge in exports is explained for countries making the transition to neither by the length of time experimenting with
market-based economies. Kaminski provides foreign trade under central planning nor by
insight into the impact of wansformation-cum- earlier trends in competitiveness in OECD
product of the Intemational n programs on export performance. markets.
These insights are relevant to former centrally
planned economies that have yet to restore The driving force of export growth was
macroeconomic equilibrium and to liberalize manufactures, some of them redirected from
prices. CMEA markets, primarily to Germany. The

severing of links that used to bind the economies

Kaminski examines the export performance of the CIMEA had a less destructive impact on
of the CEE-5 before and after the collapse of the foreign trade performance of the CEE-3 than
central planning. He fmds a close link-between one might have expected.
export performance and the decision to move
quickly to a market-based economy. Countries The fact tha exports to the CMEA fell at the
that removed administrative controls on prices, same time that exports elsewhere (often of the
devalued currency, introduced unified exchange same products) increased suggests a causal
rates, and liberalized trade also expanded ex- relationship.
ports. Bulgaria and Romania, crippled by macro

'Me Policy ReserchWorkingPaperSeoesdisseniinates the fadings of wosk under way in theBank. Anobjectiveofthe series
is to get these findings out quickly, even if presentations are less tha fully polished. 'Me findings, interpretatiores and
conclusions in these papers do not necessarily represent ofrficialBank policy.

Produced by the Policy Research Disseniination Center

How the Market Transition Affected Export Performance
in the Central European Economies


Dartlomiej Kaminski*
international Trade Division
International Economics Department, World Bank
and the University of Maryland, College Park

I wish to acknowledge the helpful comments from Ronald Duncan, Vikram
Nehru, Alexander Yeats, and participants of the division seminar on foreign
trade and the market transition in Central Europe. I would like to thank
vargaret Callan for her invaluable editorial assistance.

Table of Contents

1. Introduction .1................................................

II. Limits to Changes in Foreign Trade Regimes under Central Planning . ................ 3

m. CEE-5 Exports to the OECD in the 1980's: The Initial Breakdown and Gromwng Marginalization S

A. An Overview of Major Tendencies in Export Performance .S

B. Two Distinct Phases: Breakdown and Precarious Recovery .... ...... ...... 8

IV. The Export Upswing: in Defiance of Past Trends .... ............... 11

A. Chalenging the Projections .................................... 11

B. Rfor Makea Difference ............................ .. . .12

C. Genmany: Locomotive of CEE-5 Export Growth ....................... 13

V. The Reversal in CEE-3 Export Performance: Some Preliminary Hypotheses .... ....... 16

A. The Collapse of the CMEA .................................... 17

B. The Redirtion of former CMEA Sales to the OECD? ................... 21

C. Impact of the Switch from a Supply- to a Demand-Constrained Economy .... .... 25

VI. Is the Export Expansion to the OECD Sustainable? ............ ............... 30

VI. Conclusion .32
Refe.ces .34
Statiical Appendx .37


Share of CEE-5 in Total Imports of OECD, by Major Product Categories, i980-89 ........ 6

Growth Rates of (A) CEE-5 Exports to the OECD, by commodity groups, and (B) Change in Shares
of CEE-5 Exports in OECD Imports, by commodity groups (1981-89) .1

Ratios of CEE-5 Export Growth Rates to OECD Import Growth Rates, by Product Categories, 198183
to 1990-91 .10

The Role of Manufactures in the OECD Export Growth of CEE-3, 1989 to 1991 .13

T'e Role of Germany in the Export Growth of CEE-5 in 1990 and 1991 .. . ......... 14

Share of the CEE-5 in German Imports, by Major Product Categories, in 1989 and 1991, and the
Percent Change in Share between 1989 and 1991 .15

Ratio of CX1'EA Exports to OECD Exports, 1987-91 .20

Changes in Value of CEE-4 Exports to FSU, CEE-4, and OECD, 1990 and 1991, (million US$)20

Changing Orientation of Hungarian and Polish Exports of Power Generating Equipment Exports
(SITC. 71) from the FSU to the EC between 1985 and 1991 (million US$) .24

A Summary of Convertibility and Foreign Trade Regimes in the CEE-3 (end of 1991) ..... 29

Assessing the export impace of the transformation of the post-communist countries is difficult. For
the CEE-5 (Central European Economies:Bulgaria, Czechoslovakia, Hungary, Poland, and Romania)
attributingchangein export performance to a change in a particular policy variable is extremely complicated.
First, all variables have been in a state of flux; next, in some casws too short a time bas elapsed to make any
generalizations;and finally, the quality of trade data is poor as national s4tistical offices have not kept pace
with the expansion of the private sector and the move to a new customs system. Predicting the economie
responsesto a stabilization package in "socialist economiesin traasition" is a problem, too, since more than
90 percent of industrial outputcame from the state-owned sector, and organizationalstructureswere designed
to facilitate administrativemanagementby the state rather than to respond to market signals.

In addition to its organizational legacies, central planningalso left a legacy of productionand
investmeut patterns heavily distortedby the misallocation of resources. Development strategies wt-re inward-
oriented, with one exception-investment decisionsin the smaller CPEs(centrally planned economies)were
largely directed by the import requirements of the FSU (the former Soviet Union). The mismatch between
the CPEs' production structure and demand in international markets resulted in their declining competitiveness
in markets for manufactures. Consequently, although transformation programs may bring about thc necessary
changesin incentives and make enterprisesresponsive w external business opportunities,Cheircapacity to
ccmpete internationallywill be limited for some time because of outdated technologies. It is puzzling,
therefore,to consider why manufactures were the driving force behind the export expansion to OECD markets
from countries which implemented radical transformation programs.

The disintegration of the CMEA (Council for Mutual Economic Assistance') inflicted a severe shock
on all CMEA member economies, including the FSU which "..was hurt more than it gained" (ECE 1992:104).
The sudden switch from the soft transferable ruble (fR) to the hard currency settlement mechanism,
accompaniedby the fall in Soviet oil output, changed dramatically the external position of the former CMEA
economies. Sectors that had been developed to serve the intra-CMEA division of labor have faced a major
contractionin demand for their products. These sectors, together with those established for political rather
thac economic reasons,accountedfor a considerable portion of the industrial output of the former CMEA
region. This paper addresses the question of the extent to which the contraction in intra-CMEA trade resulted
in the switching o-exportsfrom the CMEA toward the OECD.

The size of the export sector in overall economic activity has significantly increasedin only the three
most reformed countries (CEE-3)--the FCSK (the former Czechoslovakia),Hungary and Poland. This

I The CMEA was officially dissolved at its 46th general meeting on June 28, 1991. Its memb .Bincluded
Bulgaria, Cuba, Czechoslovakia, GermanDemocraticRepublic, Hungary, Mongolia, Poland, Romania, Soviet
Union and Vietnam.


increased share has been due to both the continued contraction of GDP (and an even larger contraction in

industrial output) and the expansion of exports to the OECD. Available evidence suggests that the export

expansi,a in OECD markets was to some extent propeLled by redirection of sales from the CMEA. The

decline in the value of intra-CMEA exports was in absolute terms equal to the increase in exports to the

OECD,especially in the case of the most reformed CEE-3 economies.

The sustainability of the change in the trade pattem is unsure. For the short term, the export
expansion appears to be sustainable--thedrop in domestic demand, the improved acuess to OECD markets,
the liberalization of foreign trade regimes, and the move toward convertibility of domestic currencies have
provideda strong stimulus to firms -i look for external markets for their products. Medium- to long-term
prospects, however, remain uncertain. The fall in investment and industrial output so far has not been
reversed-- not one country in Central Europe has shown signs of recovery, with the possible exception of
Hungary and Poland in 1992. With the general contracticn in investment a-id the cor-tinued ambivalence in
the situation of SOEs (state-owned enterprises), there is a danger that even so-far successful export-oriented
SOEs may refrain from investments. Further constraints to investment include the poorly developed banking
sector,the lack of iustitutional infrastructure supporting foreign trade, and ambiguities in property rights and
in the organizational status of many SOEs. Moreover, the shift of resources to the ex sectormay be less
than it would be with profit-oriented firms.2 If SOEs use export proceeds to increase wages rather than
profits, a likely development in labor-managed SOEs, their future competitiveness may be jeopardized. In
the longer run, a sustained export performance and integration with the world economy will depend on many
factors including macroeconomic policies, exchange rate policy, foreign direct investment inflows antd
domesticsavings, as well as on the development of an institutional environment enhancing microeconomic

This paper addresses the question of the impact of the marke: transition on the export performance
of Central Eumpean economies by taking a broad look at developments both in the foreign trade regimes of
the CEE-5 and their export performance in OECD markets. It begins by assessing where these economies
are in terms of institutional change in their foreign trade regimes. It then provides an overview of export
performance of the CEE-S in OECD markets in the 1980-91 period, specifically addressing the issue of the
impact of moving to a market economy. It shows that an increase in penetration of OECD market vas driven
by the change in domestic economic systems rather than by external factors such as the breakdown of the
CMEA or the emergence of cooperative economic relations between the CEE-5 and OECD economies.
Following the collapse of central planning, OECD governments introduced measures improving market access

2 Withoute 4etailed analys' -capital investments disaggregatedto the level of firms, it is impossible
to assess the extent to wzmich of exports keeps on being regenerated.

the strue.,


for the CEE-5. It is argued,however,thatOSP (GeneralSystemof Preferences)statusgrantedby the EC
to Hungary and Poland(effectivein 1990),increasedEC quotasfor textiles and clothingor MFN statusin
the UnitedStatesdo not providea fuilexplanationof theincreasein exports. Theexportperformanceof the
Central European"troika'--theFCSK, Hungar, dnd Polard--wasparticularlyimpressivein the 1990-91
period,whena long-termtrendof progressive mnaginalizationin OECDmarkets,especiallyfor manufactured
goods,wasreversed. Is this thebeginningof a new trendto expandingintegrationwiththe world economy;
This questionis addressedonlytangentially;moreresearchis neededon the anatomyof the exportupswing
followingthecollapseof centralplanning.

The reform of foreign trade regimes beganwell before thc collapse of the CEE-5 communist
governmentsin 1989 and 1990. In fact, foreigntrade was an area wheremuchpolicyexperimentationhad
taken place in the 1980s. Thegeneralapproachtaken bv communistreformersincludedlinkingdomestic
pricesto internationalprices;estab)lishing andinternationalmarkets,bypassing

direct links betweenent*erprises
thetraditionalforeigntradeorganizations;establishinga larger numbero! intermediaries witha less restricted
tradingprofile;.M.*ducingcurrencyauctioaIs;and reducing thenumberof exchange ratesand devaluing them
to more realsticlevels. Whilethesemear: es contributed to a proliferation of marketing expertiseat the level

of enterprises andprovidedincentivesto boost exports,theyfailedto introduce"... market clearingat single
priceswithoutex p( i andadhocsubsidiesandlevies,yieldinga profit whichis retainedby enterprisesor losses

Thus, no matter how radicalthe reform measureswere, foreigntraderegimesundercentralplanning
remaineda sourceof enormousdistort.Jnsand inefficiencies, insulatingdomesticproducersfromthe impactof
changesin relativepricesin worldmarketsand falling shortof makingforeigntradean effective conveyorof

as importrestrictions,administrativeallocationof raw materialsand foreign exchange,and price controls;the
dismantlingof administrative mechanismsdesignedtoencourageexportsanddiscourag-imports;andtheelimination
of 'soft-budgets'forenterprises(sothatinefficientproducerswouldbe penalized). However,thesechangeswere

Beforethecollapseof communism,the decentraLzation

of foreigntraderegimesmademostprogressin
HungaryandPoland-theywerebothhighlyindebtedto the Westandwerethe first to seek to orient theireconomies

awayfromtheCMEA(HillmanandSchnytzer,1992:253).Withthe decline of theSovietcapabilityto sustain intra-
CMEAtrade in the late 1980s,other CEE-5countriesundertookforeigntrade reformsbut these were less
comprehensivethanthoseof Hungary andPoland. Foreignuadereformssharedtwosetsof featres. Thefirst


set included allowing SOEs to conduct foreign trade, thus eroding the state monopoly cf foreign trade. For instance,
in 1986 the Hungarian government adopted the principle of 'parallel' tra,. licenses. Trade licenses were no longer
granted exclusively to domimant exporters and importers. They were made available to all firms and covered most
products. As a result, the number of firms operating in internatioral markets dramatically increased by the end of
the 1980s.3 In Polamd, significant steps to dismantle the state monopoly of foreign trade were undertaken in the
early 1980s when the authorities liberal; zed conditions to obtain foreign trade licenses. Between 1982 and 1985, the
number of SOEs empowered to conduct foreign trade opemtion- it4reased from 109 to 361. By the end of the
1980s, the smate monopoly was abrogated (Olechowski and Oles, 1991:156 and 158).

The second set of features of foreign trade reforms included creating :ncentives for SOEs to expand exports
through hard currency retention schemes and exchange rate policy. The latter consisted essentially of a series of
devaluations towards more realistic rates. Between1980 and 1985, the Polish real exchange rate depreciated by
30 percent, and the Hungarian rate by 11 percent (Roe and Roy, 1989:6). The exchange rate policy had a more
significant impact on export pcformance once SOEs were allowed to retain some portion of their foreign exchange
earnings. Polish exporters who were allowed to retain 25-30 percent of their foreign exchanve earnings responded
to a substantial devaluation of the Polish zloty in late 1987 by increasing sxports-the 17.4 percent increase in
convertible currency exports in 1988 was attributable to the devaluation (Winiecki, 1991). Retention schemes
amounted to limited convertibility. In Hungary -2)89 import liberalization package comprising about 35 percent
(subsequently extended in 1990 to include 65-70 percent) of Hungary's hard-crrency imports, combined withjointventures
laws allowing profit repatriation abroad, introduced a limited convertibility to Hungarian currency.

While these cnanges in the foreign trade regimes reduced the insulation of enterprises from iuternatioral
markets, almost full protection of SCEs from international competition was retained.4 Not even in Hungary or
Poland did the trade regime offer any clue as to whether domestically-profitable operasions had a positive or negative
value added at world prices. Nonetheiess, as we shall see, the export performan(*e of Hungary and Poland in OECD
markets was significantly better than that of other CEE-5 economies, suggesting the existence of a positive link
between foreign trade reforms and export performance.

In other CEE-5 countries, with the exception of Romania, there was also a lot of activity in foreigL trade
policy but little that was effective. The currency was devalued in the FCSK (by 19 percent in 1989) and in Bulgaria
(by a factor of 12 in 1989!). Bulgarian exporters were allowed to retain 60 percent of their export earnings.
Auctions of foreign currency were organized in Bulgaria and the FCSK. These measures had a more limited impact
on foreign trade than similar measures in Hungary and Poland for o'ie major reason: SOEs in Bulgaria and the

3 For a review, see Mizsei (1991:15-20).

4 For a brief discussion of the Polish foreign trade regime in the late 1980s, see World Bank, Poland:
Economic Mmnagement for A New Era (1990).


FCSK wem much more adminiive units of the state than their coun parts in Hungary and Poland. Even so,
SOEs in all CEE-5 economics operated in an administrative environment devoid of competition, market clearing
prices, freedom of entry, and a final penalty fa: poor performance, i.e., bankruptcy. For all, foreign trade
equalizationschemesprovided a buffer between domestic producers and world prices.

The major lesson that can be drawn from these attempted reforms of fcreign trade regimes under central
plarning is that their impact on export performance and competitiveness was limited while an administrative
economic system remained. With the colLpse of the communist regimes it became politically possible to dismantle
cntral planning (or whatever was left of it) and establish an economic system based on market-clearing prices and
competition among autonomous economic units. However, the results of the collapse of communism varied with
the pace of 'system replacement" pursued in different CEE-5 countries. Hungary followed a 'shock minimization'
approach, Poland and the FCSK adopted radical programs in January 1990 and 1991 respectively, and two
latecomers, Bulgaria and Romania, began introducing reform measures throughout 1991 and early 1992. As we
shaU see, the (Ufferent paces reflected to some degree earlier expressed attitudes towards reform.


This section provides background for the assessment of export perforn_... of the CEE-5 economies
following the collapse of communism. Since the objective is to identify major trends in their ompetitive position
between 1980 and 1989, aud to assess the degree to which their export performance in 1990-91 represented a break
with the past, the analysis in this section is limited to the following broad commodity categories: foods and feeds
(..ITC Rev.2. 0+1+22+4); raw materials (SITC Rev.2. 2-22-27-28); mineral fuels (SlTC Rev.2. 3); ores and
metals (SlTC Rev.2. 27+28+68); and manufactures (SITC. Rev. 2. 5+6+7+8-68). In order to minimize well-
known problems conceniing the qua,ity or statistical information from this region, the analysis of CEE-¶ expore
performance in OECD markets is based on import data of OECD countries. The analysis covers European and
North American OECD members and Japan.'

A. An Overviow of Major Tendencies in Exort Performance
No matter how vigorously the various communist governments pursued reform policies the foreign trade
performance of individual countries revealed disturbing similarities. First, despite govemments' efforts to reverse
declining competitiveness evident in the 1970s (Pozmaski, 1988), the competitive position of all CEE-5 countris
in OECD markets dropped significantly further in the 1980s. The competitive position of all CEE-5 economies,

5 The analysis does not cover all OECD members. It includes ten members of the European Communities
(i.e., excluding Greece and Portugal), all members of the European Free Trade Association (Austria, Finland,
Iceland, Norway, Sweden and Switzerland), North America (USA and Canada), and Japan.


as measured by annual changes in their shares in total imports of OECD countries, fell each year in the 1980s
excopt in 1984.6 Their averaga annual export growth rate was 2.9 percent while the average for all OECD imports
was 5.6 pement in 1981-89. As can be seen from Table 1, the CaE-Sshare in total OECD imports fell from 1.1
percentin 1980 to 0.9 percent in 1989: In 1989 the region's tolal xp"rts to the CECD stood at three quarters of
their 1980 level.

Table : Shiare of CEE-5 in Totat lIports of OCE, by Major Pros.ct Categories, 1980-89

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 190 1991

Foods and Feeds 1.5 1.3 1.3 1.3 1.3 1.4 1.4 1.4 1.4 1.6 1.6 1.6
mlnerat Fuels 1.0 0.8 0.8 1.0 1.3 1.3 1.6 1.6 1.5 1.3 0.9 0.8
Ores & Nonferrous Motals 1.4 1.2 1.3 1.1 1.4 1.4 1.3 1.3 1.4 1.2 1.3 i.7
RawMaterials 1.8 1.7 ;.7 1.7 1.7 1.8 1.9 1.7 1.6 1.4 1.5 1.5
Manufactures 1.1 1.0 0.9 0.8 0.8 0.8 0.7 0.7 0.7 0.7 0.8 0.9

Total lports 1.15 0.99 0.95 0.95 1.02 0.98 0.95 0.94 0.90 0.88 0.91 1.8c

data base.

Source: Derived from the United Nations CONTRADE

The shares of Bulgaria, the FCSK and Poland in total OECD imports reached their peak in 190, and
Roma¢ peak was in 1984 (at the height of Ceaucescu's policy of paying off the external debt, which
eventually destroyed the Romanian economy). lungary, which revived its reform effort afterjoining the 12u
and the World Bank in 1982, failed to noticeably improve its competitve position between 1980 and 1989.
The two Balkan countries experienced the largest deterioration in export performance in the 1980s: in 1989
Bulgaria's share stood at 57.3 percent and Romania's at 58.8 percent of their respective peak performance
years. A smaller loss of OECD market share was experienced by the FCSK, whose share in 1939 was 80.5
percent of its 1980 level, and Poland, whose 1989 share was 69.6 percent of its 1980 level.'

The second disturbing trend for the CEE-5 economies was the growing marginalization of CEE-5
suppliersin OECD markets in the 1980s. This was manifest not only in falling shares in OECD imports but
also in large annual fluctuations in their exports, revealing their high vulnerability to swings in OECD business
cycles, especially during periods of recession. The cyclical contraction in OECD import demand for CEE-5
products tended to be larger than for exports from other countries with two notable exceptions: ores and
nonferrous metals and mineral fuels. The considerable annr fluctuations in CEE-5 exports to the OECD in


the 1980s also testified to their lack of long-term commercial contact. The range of variation was smaUler for

6 This temporary improvementwas mainly due to a one-time increase in Romanian exportsacross aU major
product categories. However, subsequent years witnessed a dramatic contraction in Romanan exports.

7 Some countries fared slightly better in EC markets: the decline in the EC import share of Czecho-
Slovakia, Poland and Romania was lower than for other OECD markets.


exports to the EC than to other OECD parrners, although the latter's share in CEE-5 exports increased in the


Lhe third cause of concern for the CEE-5 was that the region's comparative advantage rtnmained in
food and natural resource-intensive products,as revealed iu its exports to OECD markets (see Table 3).
Further, its position as a marginal supplier of resource-intensive products became increasingly apparent
throughoutthe 1980s, reflecting the rapidly expanding technological gap between East and West. The region's
competitive position iriproved in mineral fuels only. In other markets, the CEE-5 lost shares to more
cowpetiuve suppliers. Although the average rate of growth of shares of the CEE-5 in OECD imports of ores
and nonferrous metals and raw materials fell in the 1981-89 period, the contraction was smaller than in total
imports, revealing these countries' continued specialization in low value-added, production.


The key points evident from the data in Table 2 are that while CEE-S exports to the OECD grewv
acoss most commodity groups, their shares of OECD markets tended to decline, and that this fal in market
snare was greatest in manufactures (in 1V89, manufactures' share was 62.6 percent of its peak level in 1980).
Hungary's distinctive decline in manufactures' exports to the OECD was part of a gene !' shift away from
manufactures in both OECD market shares and export revenue composition.

Otherinteresting points to en. . from Table 2 are the growing importance of agricultural products
in the export revenues of the FCSK and Poland, of raw materials in the export revenues of Bulgaria, and of
ores and nonferrous metals for Romsana. Also notable is the fact that Pola-d's and Bulgaria's shares of
OECD markets for ores and nonferrous ietals displayed a negative trend throughout the 1980s.

Tabte 2:
Growth Ratesof (A) CEE-5Exports to the ECD, bycomodityrop Wd (B) Chanes in Share
of CEE-5Exports in OECOImports, by commodity grops (1981-1989, percent)

CEE-5 Bulcaria Czechoslovakia Hungary Poland Romania

(A) t8) (A) (9) (A) CB) (A) CB) (A) (B) (A) (C)
Foodsand Feeds 2.1 -0.5 2.6 -2.2 4.8 3.8 -0.2 1.2 4.5 2.7 -5.8 -8.6
"ineral Fuels -3.9 4,8 -4.1 1.3 -5.1 3.5 3.4 8.9 -3.5 5.7 -1.5 8.0
Orea&NonferrousMetals 0.4 -0.5 1.3 -4.9 3.5 2.9 2.8 4.9 -1.7 -3.4 17.4 15.6
Raw Materials 6.2 -1.5 10.3 4.2 -1.4 -2.0 1.8 3.6 -2.9 -5.3 -5.8 -11.2
Manufactures 1.4 -5.0 1.0 -8.3 0.8 -5.0 -0.1 -3.3 2.4 -4.8 2.5 -5.8

Source: See Table 1.

s ]EC-10'sshare fell from around 70 percent in the 1980-83 period to an average of 68 percent in the 198489
period. The share of EC-10 increased slightly for only two countries between the two periods: Czechoslovakia
(from 67.2 percent to 68.4 perceut) and Poland (from 68.5 percent to 70.3 percet). These increases were too small
to offset the reorientation of Hungary's exports (from 68.3 percent to 63 percent) and Romia's exports (from 72
percent to 68 percent) (Calculated from the UN COMTRADE data base).


The decline wasparticularlysurprisingin the caseof the Central Europeantroika.9 TheFCSK,once

a renowned exporter of machinotools and other high quality industrialproducts, became increasingly

specializedin agricultural productsand oresand nonferrous metals. Poland,thanksto Western credits,had

a relativelymodernindustrialbase on the eveof the 1980s,but experiencedthe secondlargestloss among

the CEE-5 in share of OECD markets for manufacturedproducts. Henceits investmentdrivein the 1970s

had no discernibleimpacton its internationalcompetitiveposition. Hungary,a country muchpraisedfor its

reformeffortsin the 1980s,tendedto shift awayfrommanufacturesand food productsto mineralsand raw

materials,althoughits relativecompetitivepositionfeli the least amongthe CEE-5in the 1981-89 period.

B. TwoDistinctPhases:Breakdownand PrecariousRecovery
An examinationof the CEE-5OECDexportperformancein the 1980s suggests the existenceof two

distinctperiods. The first, between1980and 1983, can be calleda "breakdown"period;the contractionin

OECDimportdemandresultedin a muchlargerfallin exports fromthe CEF-5. The second, between1984

and 1989,canbe described as a period of stagnation and "progressivemarginalization"of the CEE-5region

in OECDmarkets. Despitethe expandingimportdemandin OECD countries,especiallyfor manufactured

products,communistgovernments'effortsto boostexportsproduced -Ited results.

Thefirst period coincidedwithOECDrecessionandwithdeteriorationin East-West politicalrelations.
TotalOECDimportsfell at an annualaveragerateof around 4 percent in the 1981-84period, reachingtheir
lowestpointin 1982whentheyfell by 6.2 percent. However,the fail in CEE-5 exportswas significantly
largerthanthedeclinein OECDimportdemandoverall.'° The latter fellby around 12 percent in aggregate
over this period, whileCEE-5exports declined by nearly30 percent.

As can be seen from Table 3, during 1981-83all exports with the exceptionof mineralfuels
contractedmuchmorethanOECDimports. The mostaffected were manufactures:the ratio of the average
annual(negative)growthrateof CEE-5exportsto the OECDimport(negative)growthratewas7.12. There
were only a few brightspots:all CEE-5 economiesrecordeda lowerfall in exportsof mineral fuels(as a
result, their market sharesfor fuels increased); Czechoslovakexports of agriculturalproductsincreased;
Hungarysubstantiallyexpandedits exportsof raw materialsand mineral fuels; and RomaniaincreasedIts
exportsof ores and nonferrousmetals. Bulgaria'sand especiallyPoland'sexportscollapsedin all product

9 The worstperformerwasBulgaria,whoseshare in 1989in totalOECDimportsofmanufacturedgoods
was5'.3 percentlowerthanin thepeakyear of 1980.Romana'sshare dropped by41percentin comparison with
its peak yearin 1980, Poland'sby40.4percent,Czechoslovakia'sby 27 percent,andHungary'sby 28.3perment.

10For this reason,the data for 1983or 1984 isusedasthe base in the inter-temporalcomparativeanalysis.

categoriesexcept for mineral fuels.
While the fail in CEE-S exports to the OECD in the early 1980s was attributed to the recession in the
OECD and the deterioration in East-West political relations," in the second half of the 1980s East-West
relations ceased to be an active constraint on commercial relations. Yet CEE-S exports did not recover.
By the end of the 1980s, despite domestic political pressures to expand exports to obtain much-needed
hard currency, CEE-5 exporters failed to recapture the losses in market shares that they had suffered during
the breakdown period. As can be seen from Table 3, the growth in the total exports of CEE-5 feil behind that
of total OECD import demand on average by around 12 percent annually, mainly because of poor performance
in manufactures exports. The CEE-S region improved its position in OECD markets vis-a-vis other
competitors in food, mineral fuels and metals, with the highest ratio being for mineral fuels; OECD Import
demand was falling at an annual average rate of 3.2 percent, while exports from the CEE-5 were increasing
by 1 percent per annum. Agricultural and ores/nonferrous metals exports also increased at rates higher than
the growth in import demand. Both of these product categories had registered a significant loss in OECD
market shares during the breakdown period, but both subsequently regained their 1980 market share. Hungary
and Poland increased their presence in OECD markets, while Bulgaria's and Romania's shares fell
zipitously in the second period. The FCSK also experienced a loss in market share, though a sma. ass
than the two Ralkan countries.
Hungary's and Poland's export performance stands out. Their efforts to reform their trading regimes
and expand their trade links with the OECD, both precipitated by sign!ficant sovereign debt accrued in the
1970s, were impressive by CEE-5 standards, though not by the standards of other exporters. While their
shares in total CEE-5exports fell during the breakdown period, it increased significantly in the second period-
from 49 percent in 1983 to 56 percent in 1989. Poland retained its position as the largest CEE-5 exporter
to the OECD (32 percent in 1989), while Hungary became the second largest exporter (24 percent in 1989);
the shares of the FCSK and Romania feil from 23 to 21 percent and 23 to 19 percent, respectively, between
1983 and 1989.
The move toward the status of a supplier of nonrenewable, natural resource-intensive products was
most pronounced for the FCSK and the Ralkan countries and least for Hungary and Poland. Hungary and

11 Relations were especiaUy adversarialin the early 1980s following the Soviet invasion of Afghanistan
in December 1979 and the imposition of martial law in Poland in December of 1981. One of the largest declines
was in Polish exports during the Solidarity period in 1981. Polish exports, which accounted for about 35 percent
of the CEE-5 total, fell by 35 percent in 1981.


Poland increased their sharein CEE-5 exports of manufactures, with Poland registering the largest increase.'2
Poland took Hungary's position as the largest exporter of agricultural producs: its share rose from 35 percent
in 1984 to 41 percent in 1989, while Hungary's share fell from 37 percent to 35 percent. The FCSK
Increased its dominanceas the largest exporter of raw materials and increased its share in all product
categories except manufactures. Romaia's share declined steeply in all product categories except ores and
nonferrous metals. So did Bulgaria's share, with the exception of raw materials.

TabLe 3: Ratios of CEE-S Export Groith Rates to OECDImport Growth Rates by

ProdutCateories, 1981-83 to 1990-91

1981-83 1984-89 1990-91 1981-83 1984-89 1990-91

CEE-5 iBultaria
Foods and Feeds 2.35* 1.42 1.14 2.15* 0.82 .73
MineralFuels 0.74*
Ores and Non-Ferrous Netals 1.46*
Raw Materials 1.31* 0.70 -0.77* 1.03^ 1.68 4.44*
Manufactures 7.12* 0.80 2.72 9.28* 0.56 2.30
Total Exports 2.31* 0.88 1.87 2.46* 0.43 1.54
Czechoslovakia Hurma
Foods and Feeds " 1.47 0.85 1.40* 1.31 1.42
Mineral Fuels V 0.04* (-0.73) -1.74* -1.97* 0.60
Ores and Non-Ferrous Metals 0.44* 1.11 -17.20* 0.73* 1.51 -0.51*
Raw Materials 1.00* 0.66 3.25* -0.31* 0.97 -4.53*
Manufactures 4.18* 0.63 3.80 5.12* 0.86 2.97
Total Exports 1.48* 0.76 2.92 1.31* 1.09 2.37
Poland Romania
Foods and Feeds 2.68* 1.88 1.26 5.14* 0.32 0.91
Mineral Fuets
Ores and Non-Ferrous Metals
Raw Materials 2.00' 0.62 -6.11* 2.42' 0.44 11.39*
Manufactures 13.52* 1.23 4.10 4.36* 0.63 (-1.11)
Total Exports 3.64* 1.12 3.09 1.56* 0.67 (-2.56)

Note: * denotes negative growth rates in OECD imports;

(-) denotes a negative growth rate of CEE-5 exports.

Source: Se; Table 1.

The regional composition of CEE-5 aggregate exports to OECD economies remained relatively stable
throughout the 1980s. The shares going to the EC-10 (68 percent) and the EFTA (18 percent) declined
slightly between the two periods, while the shares going to other OECD counteies increased slightly. These
changes were the result of the redirection of exports away from Europe by Hungary and Romania.

12 Poland's share rose from 21 to 27 perceat between 1984 and 1989, whilo Hungary's share increased
from 21 to 24 percent. The FCSK, which remained the second largest exporter of manufactures in the CEE-S
region in the 1984-89 period, registered a fall from 26 to 25 percent.


Thepicture that emerges from this analysis can be summa'zed as foilows: (i) the export performance
of the CEE-S was very unimpressive in the 1980s despite efforts lt reforming foreign trade regimes under
centralplanning; (ii) the decline in their competitive position in OECD markets, already observed in the
1970s, continued through the 1980s; (iii) the contraction in their prmence in OECD markets, particularly
notablein the early 1980s, was not reversed; (iv) their exports were extremely vulnerable to changes in OECD
import demand; (v) the commodity compositionof exports shifted toward low value-added, resource-intensive
products; and (vi) the role of OECD countries other than the EC-10 and ETrA remained marginal for the
CEE-5 except for Romania. The symptoms of a deep structural crisis wvte clearly visible in their export
performancein the OECD. Against this dismal ovexali picture, the export performance of the two most
reformedCPEs,HungaryandPoland,was significantly better.

The extrapolation of export trends characteristic of the 1984-89 period would yield the following
predictionsfor the CEE-S in the 1990s: the region's share in OECD exports would continue slipping,
especiallyin manufactures; their export profile would continue moving to agricultural products and
nonrenewablenaturalresources; Poland's and Hungary's positit. ,nong the CEE-5 would continue improving
although at an uneven pace; the FCSK's relative position would continue declining, albeit at a slower rate than
that of Bulgaria and Romania; the weight of the latter two countries in CEE-5exports and OECD imports
would continue shrinling; and the reliance on EC-10 markets would slowly increase. In addition, the
contraction in investment activity throughout the region in the 1980s and the poor match between its
investment/productionpatterns and international markets would give extra credibility to the forecast of no
significantimprovement in export performance in the 1990s. With these expectations, the designers of the
Polish stabilization-cum-adjustment

program assumed only a slight increase of hard currency exports
(Kolodko,1991:13). Yet 1990, the first year after the collapse of communist regimes, proved to be a turning
point in the region's export performance in the OECD, initiaily especially because of Polish export expansion.
Appendix Table 1 summarizes information on the export upswing in 1990 and 1991.

A. Challenging the Proiections
The developments in CEE-5 export performance in the period immediately following the collapse of
central planning defied some and confirmed other aspects of predictions based on trends dominant in the
1980s. While the 1990 and 1991 improvement in the relative position of Hungary and Poland, both among
CEE-S exporters and in OECD markets, and the deterioration of the export performance of the two Balkan


countries came as no surprise, the pace at which exports of Bulgaria and Romania fell in 1990 and those of

Hungary and Poland rose defied all predictions. Between 1984-89 and 1990-91, the share of Bulgaria and

Romania in CEE-5 exports fell from 28 percent to below 14 percent, mostly because of the collapse of exports

of oil and manufactured products. At the same time, the share of Hungary and Poland in total CEE-5 exports

to the OECD increased from around 51 percent in the 1984-89 period to 64 percent in the 1990-91 period,

mainly because of the expansion of manufactured exports.

Contrary to expectations, the share of the region in total OECD import demand increased in both 1990
and 1991 thanks to export expansion by the Central European troika whose share in CEE-5 exports increased
from an average of 72 percent in the 1984-89 period to 80 percent in 1991. The increase was mainly the
resultof the reversal of two trends-stagnating Czechoslovak exports and decliilng regional competitiveness
in manufactures. The FCSK's exports soared in 1991 (see column b of Appendix Table 1), and the share of
CEE-5manufactures in OECD imports increased in both 1990 and 1991. Since the shares in OECD markets
for raw materials and especially for foods and feeds and ores and nonferrous metals also increased, while that
for mineral fuels and raw materials contracted, the region's export profile continued to be characterized by
a heavy reliance on natural resource-intensive products, though it has been somewhat attenuated (see Table

B. Reforms Make a Difference
The developments in CEE-5 export performance in the 1990-91 period sharpened the differences
between the most reformed economies of the Central European troika (the CEE-3) and the Balkan countries
(Bulgaria and Romania). The latter group was not only marginalized vis-a-vis the CEE-3 in OECD markets,
but its export profile shifted towards low value-added products.

The collapse of Romania's exports in 1990 and 1991 reflected the acceleration of a tendency that
began in the mid-1980s. In 1991, the value of Romanian exports to the OECD was almost 50 percent lower
than in 1987. By comparison, Czechoslovak, Hungarian and Polish exports expanded at double digit growth
rates in 1990 and 1991. Contary to expecaions, the driving force of the troika export boom in OECD
markets was manufactures. Their share in OECD manufactures import demand, though still insignificant,
increased by 41 percent from an average of 0.5 percent in 1984-89 to 0.7 percent in 1990-91.

As Table 4 shows, manufactures accounted for 80 percent of the increase in the value of total exports
of the CEE-3 between 1989 and 1991. Exports of manufactures accounted for more than 100 percent of the
increase in Czechoslovak exports in 1990 and for 96 percent of the increase for 1990 and 1991 together. A
detailed account of manufactured goods' success stories in OECD markets has not been developed so far.
However, a summary examination of Polish data suggests that important items in the Polish export drive


included garments, cinemicals (organic and inorganic, polymerization products, wood- and resin-based
chemical products), paper and products of paper, textile yams, non-metallic mineral manufactures (cement,
lime, fabricated construction materials, mineral manufactures, glassware, pottery), iron and steel products (pig
iron, ingots, rails), manufactres of metal (hangars, household equipment of base metals), specialized
machinery (machine tools), mechanical handling equipment (cranes, works trucks), household type electrical
and non-electrical equipment, non-motorized trailer and other vehicles, and ships and boats.-3 At first
glance, it seems that no major shift in revealed comparative advantage for manufactures occurred in the 198991
period as compared with the 1984-89 period.

Table 4: The Rlotof Nuwmfactures in the OECDExport Growth of CEE-3, 1989 to 1991

Value Increasein value Share of Manufactures in
(mill. US$) (mill.USS) lncrease in Total Exports
(in percent)

1989 1990 1991 1989-90 1990-91 1989-90 1990-91
Total Exports
Exports of Manufactures
Total Exports
Exportsof Manul res

TotalExport 5879 8436 9546 2557 1110 ----....
Exports of Manufactures 2771 4390 5388 1619 998 63 90

Total CEE-
Total Exports 14162 18531 22268 4369 3737

Exports of Manufactures 7736 10955 14210 3219 3255 74 80

SOURCE:See Table I

The increase in CEE-3 exports is truly astounding considering their export performance and
investment policies in the 1980s, the fact that SOEs were mainly responsible for the increased exports of
manufactures, and also that the CEE-3 did not have export supporting institutions similar to Hermes in
Germany or Ex-Im Bank in the United States. More detailed analysis is warranted.

C. Germany: Locomotive of CEE-SExoort Growth
During the export growth of 1990-91, the geographic pattern of CEE-S exports changed, with a
movement towards European markets in general and Germany in particular. The shift of CEE-5exports to
the EC-10 began in the late 1980s and was amplified in the 1990-91 period; the share of the EC-10 in CE-S

13For a detailed analysis, see Kaminsli, 1993:7-8.


totalexports increased from 68 percent in 1984-89 to 73 percent in 990 and to 77 percent in 1991. The main
engine of CEE-5 export growth was Germany (see Table S)--excludingGermany, the EC markets for Central
European products stagnated in 1991. The share of Germany in CEE-S exports to the EC-10 substantially
increased for all countries except Hungary, and the share of Germany in total OECD imports from the CEE-S
increasedbetween 1989 and 1990 by almost 50 percent--from 34 percent to 49 percent.

Table 5: TheRole of Gow nthe Export Grewth of CEE-5 in 1990 nd 1991

A. Share of Gerenwyin OED aid EC-10Ixqorts from the CEE-5(in percent)
Bulgaria Czechostovakia Hunaarv
1989 1990 1991 1989 1990 1991 1989 1990 1991
OECD 23 27 33 34 37 49 33 37 40
EC-10 32 35 42 43 51 63 55 55 58
Poland R nia
1989 1990 1991 1989 1990 1991 1989 1990 1991
OECD 32 38 52 14 28 36 33 37 45
EC-1O 46 50 58 20 37 42 47 52 59
B. Ainnul Increases in Value of lcowts from CEE untries(mitt. USS)

Bulgaria Czefhgsloakfe Hunaarv

1990 1991 1990 1991 1990 1991

Germany 72 76 355 1388 598 553
EC-9 (Germanyexcluded) 76 -10 196 240 306 197
OtherOECD 19 .9 110 58 249 190

Memorandum:Share of the increase in
OECDimports absorbed by Germany 43 134 54 82 52 59

(in percent)

Pots Romania CEE-3

1990 1991 1990 1991 1990 1991

Germany 1320 1147 -127 40 2273 3088
EC-9 (Germanyexcluded) 928 8 -658 -186 1431 445
Other OECD 308 -4 -312 -240 667 203

Hemorandu: Share of the increase in
OECD pgorts absorbed by Germany 52 103 ----52 83
(in percent)

Source: See Table 1

AlthoughGermany has been traditionally the largest OECD trading partAer of Central Europe, its

significance increased for each of the CEE-5 economies in 1990 and 1991. The share of Germany in OECD

imports from Romania surged from 14 percent in 1989 to 52 percent in 1991, mainly because exports to

Germany fell less than to other partners in 1990 and they actually increased in 1991. For Bulgaria, the

increase in sales to German firms more than offset the contraction of other OECD markets in 1991. German


markets absorbed about54percent of the increase in exports from the FCSK in 1990, and 82 percent of tbis
increasein 1991. As a result, the share of Germany in Czechoslovak exportsincreasedby 15 percentage
points between 1989 and 1991. The German share in Hungarian exports to the OECD was slightly lower than
that of other CEE-5 countries, but Germany took three quarters of the increase in Hungarian exports to the
EC in 1991. Poland reoriented its exports to Germany in a dramatic fashion in 1991: its exports in current
prices to EFTA, North America and Japan contracted, to other EC-9 countries stagnated,but to Germany
grewby more than US$1 billion. Germany's share in OECD exports of the troika increased from33 percent
in 1989 to 45 percent in 1991.

Moreover, Germany's sharein CEE-5 exports to the EC-10 increased significantly in nearly all major
product categories. The only exceptions were ores and nonferrous metals for Czechoslovak, Hungarian and
Romanianexports and raw materials for Hungarian and Rom; .al exports. The largest increases in
Germany's share in exports to the EC were: for Bulgara, mineral fuels (from 7.5 percent in 1989 to 62.2
percent in 1991) and raw materials (18.3 percent to 36 percent); for the FCSK, manufactures (43.4percent
to 61.5 percent) and agricultural products (55.8 percent to 69.6 percent); for Hungary, agricultural products

(37.1percent to 47.2 percent) and manufactures (56 percent to 62.4 percent); for Poland, mineral fuels (32.5
percentto 54.5 percent) and manufactures (46.5 percent to 59.7 percent); and for Rom.; i, mineral fuels (0.7
percent to 5.6 percent) and agricultural products (40.1 percent to 52.9 perc&-at).
Table 6: Share of the CEE-5 in Gern lmports, by Major Product Categories, in 1989 an1 1991, and the Percent

Chag in Share betwn 1989 an 1991
1959 1991 Change 1989
in percent
1991 Change 1989
in percent
1991 Changein percent
Foodsand Feeds 0.14 0.18 36 0.46 0.52 13 1 01 1.31 29
RawMaterials 0.08 0.11 46 1.02 0.87 -15 0.58 0.67 16
Ores 2 Non-Ferrous Metals 0.06 0.24 309 0.36 0.92 153 047 0.52 11
Mineral Fuels 0.02 0.02 -5 0.99 0.60 -40 0.32 0.26 -18
Manufactures 0.05 0.07 21 0.43 0.84 94 0.49 0.63 30
Total all c_oditfes 0.07 0.08 28 0.49 0.79 60 0.53 0.66 25
Foods and Feeds 1.38 1.50 9 0.15 0.12 -21 2.85 3.32 17
Raw Materials 0.85 1.44 70 0.31 0.10 -66 2.45 2.98 22
Ores L Non-Ferrous Metals 1.96 3.94 101 0.46 0.12 -75 2.79 5.38 93
Mineral Fuels 0.80 1.16 44 0.03 0.03 10 2.10 2.01 -4
Manufactures 0.49 0.92 87 0.36 0.22 -37 1.41 2.39 69
Totat altcoidities 0.71 1.13 59 0.30 0.19 -38 1.73 2.58 49

Source: See Table 1.

As a result of the export expansion between 1989 and 1991, the competitve position of the CEE-S,
except for Romania (whose share fell in all product categories except for its traditional exports of oil),
improved considerably in German markets for all major product categories with the exception of mineral fuels.


As can be seen from Table6, the troika's share in total Germanimportsincreasedby almost 50 percent,

mainlythanksto exportsof manuifactures. The FCSK'sshare in Germanimportsof manufactured products

almost doubled,Poland's share increasedby 87 percent, and Hungary'sby 30 percent. Bulgaria.whose

exportsto the OECDstagnatedin the 1989-91period,increasedits sharein German marketsby 28 percent.

Themajoritemin the manufacturesexportdriveto Germany was mac.inery and transport equipment.

Czechoslovakexportsof machinery and transport equipment(SITC.7) to Germanyincreasedby 56Spercent

(from$101millionto $663million)andto other EC-10countries(excludingGermany)by 36 percent(from

$256millionto $347 million); Polishmachineryand transportequipmentexportsto Germanyincreasedby

254 percent (from $131millionto $464 million)and to other EC-10countriesby 4 percent (from$340to

$347 million);and Hungarianexportsof machinery and transportequipmentto Germany increasedby 146

percent(from $229 millionto $564million)andto other EC-10countriesby 55 percent(from $128 to $199

million). Theseexportswerepreviouslyabsorbedmainlyby the FSU.

Theexpansionof trade withunifiedGermanywas apparently not relatedto commercial linksinherited

fromthe GDR's membershipin the CMEA. Exceptfor contractsbetweentheformerGDRand the FSU, all

tiesbetweentheGDRand otherCMEAmemberswereseveredand orderscanceled. The dismantlingof the

CMEAsoft p _nts mechanismat the end of 1990precipitatedthe collapse of trade betweenthe former

GDRand the CEE.5; CEE-5importerswere no longer willingto spend scarceforeignexchangeon goods

producedin firms of the formerGDR.

The 1990 and 1991export driveto Germany allowedproducersfrom the CEE-3to regain market
sharesthey lost in the OECDcountriesduringthe 1980s. Hungaryregainedits 1980peakshare in OECD
importsin 1989, and the FCSK did so in 1992. Despiteits impressivegrowthin 1990and 1991, Poland's
sharein 1991 was stillslightlylowerthanit wasin 1980.

As argued earlier, the reversalin CEE-3exportperformancetrends in OECDmarketscannotbe
attributedto a better matchbetweenCEE-3investmentstrategiesandimrportdemandin internationalmarkets,
becauseincreasedexportscamefrom productive capacitiescreatedundercentralplanning. Neithercan it be
explainedby a sudden upsurgeof OECDimportdemand,becauseCBE-3producersoutperformedother
suppliersand significantly increasedtheir marketshares. No massive transferof state-owned assetsto the
privatesectortook place in 1990and 1991, so theimprovementcannotbe attributedto privately-ownedfirms,
more responsiveto marketsignals. Therefore,ono shouldlookfor explanationsin reforms influencingthe
behaviorof economicactors,changesin externalopportunities,and incentivesto export. The objective of
this sectionis to identify linksbetweendomesticand externalcicumstances,on the one hand, and export


performance in OECD markets, on the other. The results are tenuous at best, however, as all policy variables

were in a state of flux during the initial stages of the transition from central planning.

The major external factor was the collapse of the CMEA, wl- '*h increased the proportion of aggregate

output no longer demanded in CMEA markets. Goods previously exported to the CMEA became available

for domestic consumption and/or export to other trading partners; in the extreme, production capacities for

unwanted goods would be shut down.14 The major changes in domestic circumstances were the liberalization

of prices and restrictive monetaryand fiscal policies, together with the introduction of changes in the incentive

structures for SOEs (which remained dominant economic actors during the initial stage of the transition).

These measures produced a shift from a supply- to a demand-constrained economy, to borrow an apt phrase

from Janos Kornai, and led to a dramatic change in the domestic demand structure--a very significant

contraction of demand for some products and some increases for others. The net result, however, was a fall

in aggregate domestic demand.'5 The combination of these changes with the introductionof limited current

account convertibility and liberalization of the foreign trade regime provided incentives to domestic firms to

look for markets abroad.

A. The Collapse of the CMEA
For the period under discussion, the collapse of the CMEA was the only external event with
potentally significant implications for Central European exports to the OECD. Although the change in the
polidcal status of the region vis-a-vis the West clearly had a positive impact on its export performance in 1990
and 1991, this cannot explain the dramatic shift in export patterns. The region's access to OECD markets
did not improve dramadcally, although the extension of GSP (Generalized System of Preferences) treatment
to Central European countries played some role.'6 (it was irrelevant for Romania which had had GSP status,

14 As long as the CMEA-TR settlements mechanismexisted, there was also another temporary option: a
government might subsidize its domestic producers by running a trade surplus in TRs, thereby subsidizing another
country (or reducing its non-convertible currencydebt). This option was pursued by the Polish government in 1990,
mainly in its trade with the FSU.

15 For a summary of factors contributing to the fall in aggregate outputin Central and Eastern Europe,
see Blejer ard Gelb (1992:1-3).

16 The EC granted GSP to Hungary and Poland in 1990, and to Czecho-Slovakia and Bulgaria on January
1, 1991. Although all GSP schemes grantedunilaterallyby industrial countries exclude major textile and clothing
productsin which the CEE-5 have comparative advantage(Erzan, Holmes and Safadi, 1992:26),EC quotas for
importsfrom the CEE-5 were significantly raised. In addition, thanks to the GSP status, the simple average tariff
on CEE-5 imports significantly declined from around 8 percent in 1988 to 1 percent in 1991. Calculated from the
UNCTAD-WorldBankSMART (Software for Market Analysis and Restrictions on Trade) data base.


albeitwith many special restrictions, since 1971, Schumacherand Mobius, 1992:2). The elimination of

quantitativerestrictionsmaintainedby the EC againstPolandimprovedits marketaccess.'7

Barriersto the
CEE-3economies'traditionallycompetitiveexports,iron, steel, textiles, clothingand agriculturalproducts,

remainedin effectin 1991, althoughtheywerenot binding.1Ihe European AssociationAgreementssigned

with the CEE-3 in December 1991werealso not relevant for the 1990-91 period,becausetheir provisions

were to be phasedin over the 10 years beginningin 1992.'9 Finally,the grantingof MFN status by the

UnitedStatesdid not have a signif atn imnpact; Hungaryhad MFN status throughoutthe period under

consideration,while Bulgaria and the FCSKobtainedit in 1991;Poland'sMFN status in the UnitedStates

was restoredin 1989,but its tradewiththe United States accounted forless than5 percent of its totaltrade;

and Romania'sMFN status was suspendedin 1988, but its exports were alreadycollapsingfor domestic

reasons. Hence,amongpossibleexternalfactorsaccountingfor shifts in tradepatternsand imnrovedexport

performancein OECD markets, thecollapseof the CMEA wasthe'mostreltvanteventin the 1990-91 period,

overshadowingthedisappearanceof East-Westpoliticaldivisionsin Europe.

The problemof adjustment to changing conditionswithinthe CMEAemergedmuchearlierthanin
1990. The officialdissolutionof the CMEA was the result,not the cause, of the rapidly decliningSoviet
capabilityto sustain "soft"settlementsin intra-CMEAtrade. Thanksto the falling oil price in intra-CMEA
trade, most CEE-5countriesbeganto run trade surpluseswiththe FSUin non-convertible TRs in 1988. As
a result, trade-relateddebts to the FSUaccumulatedby CMEA partners between1975and 1987 were "...
suddenlywipedout by 1988" (Lavigne,1990:36). The erosion of Soviet abilityto pay for imports forced
other CMEAgovernmentsto introduce variousmeasuresrestrainingexportsto the FSU and encouraging

exports to hard-currencymarkets. With the collapse of the Sovietability to maintainTR payments
arrangementsin 199(, CMEAmembersbegan switchingfrom TRs to hard currenciesin their internal
transactions,whicheventuallyled to the formal dissolutionof the CMEA internalsettlementsmechanismon

17 Thisdecisioncoincidedwiththeintroductionof the EconomicTransformationProgramon January 1,
1990. In addition, thenon-specificquantitativerestrictionsweresuspendeduntilDecember31, 1991.

18 Bilateralquotasimposedby the ECon imports fromCentral/EasternEurope were notveryrestrictive,

and their numberhad declinedalreadybetween1985and 1989.For instance, the numberof Multi-Fiber
Arrangement(MFA)quotasfellfrom71 in 1985 to 54 in 1989, and around30 percentof themhad a quota
utilizationratelowerthan90 percent (SeeErzanandHolmes,1992).Theimportanceof quotas for other products
wasalso limited becausethey were rarelyutilized(Rodrick1992:28).

19 Sincethe free trade provisionsof 'Europe Agreements"becameeffectiveon March 1, 1992, theCEE-3

has obtained duty-freeaccessto EC marketsfora wide range of manufactures. For instance, importsof more than
50 percentof Polish manufacturedgoodsare not subjectto barriers (Nogaj,1992). For a discussionof the


January 1, 1991.A

The level of vulnerability to the collapse of CMEA trade was not uniform among the CEE-5, and the

extent of the shock from the collapse of CMEA trade was also less abrupt than official statistics might suggest.

Since the 1960s, CEE-5 trade with the OECD had tended to increase faster than CMEA trade, despite

declining international competitivenessin manufactures. In the 1980s, the quality of CEE-5 manufacturesand

their international competitiveness was lower than it was in the 1970s (Poznanski, 1988:46-52). The declining

international competitiveness of CEE-5 manufactures forced them to offer industrial products at heavily

discounted prices, which in turn implied a substantial devaluation of the TR relative to the US dollar. The

revalued trade figures suggest a long-term trend of declining shares of the CMEA in CEE-5 total exports.

Between 1970 and 1990, this share fell from 76 percent to 54 percent for Bulgaria, from 64 percent to 37

percent for the FCSK, from 62 percent to 31 percent for Hungary, from 60 percent to 39 percent for

Poland,2" and from 50 percent to 24 percent for Romania.' Hence, although the CMEA and the FSU were

the major trading partners of the CEE-5, a significant redirection of trade to the non-CMEA markets occurred

prior to 1990. Still, the CLE-5 countries were extremely vulnerable to economic developments in the FSU

as the FSU was their single largest trading partner. The Soviet portion of intra-European CMEA trade was

around 70 percent between 1987 and 1990 and 74 percent in 1991, despite the contraction in Soviet imports

and exports.23

Table 7 shows ratios of CMEA (excluding the former GDR and non-European members) exports to

OECD exports for the CEE-4 (excluding Bulgaria24). The changes in ratios over the 1987-91 period show

that efforts to orient trade away from the CMEA were quite successful and that a dramatic realignment of

-7 By the end of 1990, around 50 percent of CMEA trade was conducted in hard currency, though the
proportion varied for individual countries (Rosati, 1992).

21 The share of the former CMEA in Poland's exports (in current prices) fell to 16.9 percent of the total
in 1991, with the FSU accounting for 11 percent, and Czechoslovakia for 4.7 percent.

22 For revalued estimates of trade of the CEE-5 and the FSU, see Pohl and Sorsa (1992).

23 Calculatedfrom data in IMF Direction of Trade Statistics Yearbook, 1992. Non-European members
of the CMEA included Cuba, Mongolia and Vietnam. The figures do not include Bulgaria, for which no data on
the trade with the Soviet Union are available in the IMF statistics, or the German Democratic Republic, which
ceased to exist as a state.

24 Bulgaria's trade was more oriented toward the FSU than the other CEE-5. The ratios were as follows:
1988 -5.3; 1989 -5.1; 1990 -3.6; 1991 -2.0. Because these data are derived from other sources, they are not
included in Table 7. The tendency is the same as for other countries, although the decline was mainly the result
of the collapse of CMEA exports (they fell from US$4.8 bill. in 1988 to US$2.0 bill. in 1991), and stagnating
exports to the West (their value rose slightly from US$900 million to US$1 billion in 1991).


exportpatternshas taken place since 1987.

Table 7: Ratio of CMEA Exporta to OECD Exports, 1967-91


Czechostnvakia Hungary Poland t.mania
Standard CEE-3

1987 2.20 1.18 0.82 0.95 0.54 1.33

1988 2.04 0.99 0.91 1.13 0.45 1.25

1989 1.73 0.78 0.81 1.06 0.38 1.06

1990 1.01 0.49 0.64 0.85 0.20 0.68

1991 0.56 0.41 0.51 0.58 0.07 0.49

Source: IMF,Direction of Trade Stgtistics Yearbook,1992.

Table 8 provides additionalinformationrelatingto the switch from CMEA to OECD markets. It

presents the annual changes in the value of exports of the CEE-3 and Romania in 1990 and 1991, as well as

between1987 and 1991 (the period over which the value of intra-CMEAexports was falling), to the FSU,

Table 8: Changes in Value of CEE-4 Exports to FSUJ CEE-4. and OECD, 1990 and 1991 (million US S)

Czechostovakia Hungary Poland

1990 1991 TotaL 1990 1991 Total 1990 1991 Total 1990 1991 Total
1988-91 1988-91 1988-91 1991-88

FSU -1398 -898 -2910 -482 194 -1001 78 335 1081 -1025 -572 -1309
CEE-4 -745 -232 -1007 -243 -236 -598 498 -834 -67 -632 -310 -1164
OECD 661 1685 2910 1152 940 2856 2557 1110 4845 -1097 -387 -1791
TOTAL -1481 556 -1007 427 898 1257 3133 611 5859 -2754 -1269 -4264
Memorandum:FSII: Balance of Trade
FSU: -152 +1054 -442 -485 -1282 -1410 +687 -57

Source: IMF, Directionof Trade Statistics Yearbook, 1992

to othcr European CMEAmembers, and to OECD countries (EC, EFTA, North Americaand Japan). Two
points are worth noting. First, the increase in exports of the CEE-3 economies to the OECD more than offset
the fail in exports to former CMEAmarkets.25 Second, there were significant differencesin export
performanceamong the CEE-5 economies.Poland stands out. Its exports to the FSU increased in both 1990
and 1991, while exports from other countries fell, and the annual increases in 1990 and 1991 followed
expansion in both 1988 and 1989. The overall increase between 1987 and 1991 was slightly aboveUS$1
billion. It should be noted that while the data on intra-CMEA trade until 1990 suffered from problems related


25 Althoughtheamountsoffset each other, the terms of trade and budgetary implicationsare different.
The collapse of intra-CMEA tradeand the switch to world prices contributedto government budget deficits in the
CEE-5,as a study on Hungary demonstrates (Abel,Hillmanand Tanr, 1992).


to convertingruble-denominatedtrade flowsinto US dollars,' litis was not the case in 1991 when around
98 percentof all transactions were carried out in hard currency(UN ECE, 1992:85). In consequence, the
data for 1991providea statistically less distorted imageof the realigmnent in export patterns.

B. The Redirectionof T'ormer CMEA Salesto the OECQ
Thissectionaddressestheextent of diversionof exports from the CMEAto the OECD. While more
researchIs needed, somepreliminaryobservationsconcerningthereorientationofexports can be derived from
examiningchangesin Poland's exportsin 1990and 1991(i.e., when an almost completeswitch to hard
currency settlementsin intra-CMEA trade occurred), and in Hungarian and Polish exports of selected
manufacturesto the FSU and the EC.

Althoughcountriesexperiencesvariedaccordingto theirformer involvement inspecializationschemes
withinthe CMEA, wewouldarguethatthe pattern of change in Hungary'sand Poland's tade hasbeenshared
by other former CMEAmembers. Their econc ies were under broadlysimilar administrative economic
systems,theyall pursued similarinward-orienteddevelopmentstrategies,andtheyall were part of theradial
patternof industrial specializationorganizedaroundtheFSU. Further,withinthe CMEA tradingarea, they
all sought to minimize exportsof hard currency earnersand maximi; z: ports of goods whichcouldnot be
sold in internationalmarkets.

Accordingto conventionalwisdom,CEE-5exportsof manufactured goodsto the CMEA, especially
to the FSU, consisted of 'soft" goodsnoncompetitivein worldmarketsbecauseof high productioncosts and
low quality (Marrese and Vanous,1983). Sincein the short term the quality could not be significantly
improved,the only means available to producers of soft goods to sell themin international marketswasto
offer themat heavily discounted prices. However,thereweretwo obstacles to this course of action. Frst,
the trade-off betweenlowpricesand productqualitywaslimited:even huge price cutsmaynot have attracted
customers. Second, by 1991 producersin the CEE-3 performedin a new environment where financial
performancebecamelinkedto sales revenues. Sotheycouldno longer ignore worldprices. For these two
reasons,thecapacityof SOEs to competethroughpricediscountswas eroded. Therefore,onewouldexpect
a very limitedredirectionof exports of manufactures fromthe CMEAto the OECD.

Thisexpectationis borne out by Rodrick(1992)whousedthe change in the product composition of
industrialexportsby area in 1985 and 1990 as a proxymeasureof the extent of the switchin exportsby
Poland(and Hungary) followingthe radical opening of the economyin January1990. The composition of

26 For a coacise discussion of the majorproblemsinvolved,see Chapter 2 in EconomicBulletnfio
Europe Vol. 42/90,pp. 29-31.


CEE-5exports to the CMEA and to the OECD was traditionally strongly dissimilar, the former having a large

component of capital equipment and electrical engineering equipment, with the latter being dominated by raw

materials and energy. Rodrick concludes that "... there is no evidence that the overall increase in trade with

the West was fueled by redirecting Eastern sales to the West, or indeed that the latter played any role at all

in the former" (Rodrick, 1992:18).

While some developments in 1991, after the switch to convertible settlements in the former intra-
CMEA trade, seem to support Rodrick's conclusion, a different picture emerges when taldng 1985 as a frame
of reference and focusing on the electdcal engineering industry. For example, in support of Rodrick, in 1991,
as compared with 1990, the product composition of Polish exports to former CMEA countries became
significantly more similar to the product composition of its exports to other destinations.' Faced with
convertiblecurrency constraints after the termination of the TR-payments mechanism, importers from the
formerCMEA slashed soft goods in favor of hard goods, independently of their origin. Indicative of this
switch was the increase in imports of the same products which had been successfully marketed in the OECD
by Polish firms.

Comparison of Polish industrial exports to the CMEA and the EC in 1985 and 1991, however,

-gests that the industrial product structure of exports to the EC shifted towards that of the CMW For
instance, the share in Polish exports of the electrical engineering sector almost doubled, from 11.3 percent
in 1985 to 22 percent, as its exports (in current prices) to the EC increased almost five-fold, while its share
of exports to the CMEA fell from 63.8 percent to 45.3 percent. Products of the electrical engineeringsector-
machine tools, heating and cooling equipmew, mechanical handling equipment, etc.28--were among
manufactures which contributed most to the export expansion in the EC. Without a detailed analysis at the
micro-level, it is impossible to tell whether the SOEs dominant in TR trade were also those who managed to
increaseexports to other markets.

The redirection of exports of power generating equipment from the CMEA to the EC is illustated
in Table 10. Power generating equipment, the main product category of the electrical engineering sector,
accounted for a significant share of Hungarian and Polish industrial exports to the FSU. (Exports to other
CMEA countries are not taken into account because the share of "hard for soft goods' tansactions was much

27 Tle index of dimqatybetween the two stuctures (which asumes I for fill dmilarity and 0 for
complete dissimilaity) rose from 0.715 in 1990 to 0.896 in 1991. The index for 1991 was calculated for te same
breakdownused by Rodrick (1992:18 and 46). In addition, I calculated the index of similarity betwee product
compositionsof exports to the former European CMEA and the ECE: the index rose from 0.621 in 1990 to 0.819
in 1991. For a more detailed analysis, see Kaminski (1993).

2S For an extensive discussion, see Ksminsli (1993).


smaller in their mutual trade than in their trade with the FSU.) The change in export patterns of the two
countries displays some similarities: Hungarian exports to the FSU peaked in 1987, while Polish exports
peaked in 1988; in the 1985-91 period the valueof Hungarian exports to the EC increased almost five times,
while Polish exports increased almost 3.5 times; the largest increase in Hungary's and Poland's exports to the
EC, whichoccurred in 1990, coincidedwith the largest fall in exports to the FSU (the EC absorbed57 percent
of the fail in Hungarian exports to the FSU and 106 percent of the fall ir Polish exports to the FSU); as a
result, the ratio of Hungaian exports to the FSU to exports to the EC fell precipitously from 7.3 in 1985 to

0.41 in 1991, while tho ratio for Poland decreased from 7.0 in 1985 to 0.38.
The degree of redirection of Hungarian and Polish exports of power generating equipment from the
CMEA to the EC may be inferred from two indexes: first, the ratio of the increase in the value of exports
to the EC to the decrease in the value of exports to the FSU between the peak year of exports to the FSU and
1991; second, the ratio of the total annual changes in the value of exports to the two partners in the 1985-91
period. These ratios are: 49 and 66 percent for Hungary; and, 33 and 45 percent for Poland. They suggest
that the scope of redirection was larger for Hungary (between one half and two thirds of the fall in FSU
imports compensatedby the increasein EC imports) thanfor Poland (between one third and close to one half).
These measures should be ti d with extreme caution, however, because of the use of different implicit
crossrates between the TR and the US doiar in the period under consideration." For instance, in 1990 the
crossrates used in both Hungary and Poland significantlyincreased, thus depressing the dollar valueof exports
to the FSU. Thus, the value of earlier exports to the FSU was probablyoversated, and so was the contaction
in 1990. As a result, the scope of redirection of Hungarian and Polish exports of power generating equipment
to the EC might have been actually larger than indicated by these two measures."

This "transformation"of soft goods into hard goods was possible thanks to EC demand (which could
not be met earlier because of obligationsvis-a-vis the CMEA partners), greater concern for quality control,
low wages, subsidies (as OECD producers often complains'), or a combination of the above.2 But the

29 For an extensive discussionof statistical problemsinvolved,see EconomicBulletinfor Europe, Vol43,

30 Whileno data are available in the UN COMTRADEdata base for Czecho-Slovalda,mirror sistics
show a very considerableincreasein exportsof SITC.Rev1.71to the EC from US$167millionin 1989to US$396
millionin 1991. It is clear that reorientationplayedan importantrole in the increase.

31 West European producers of steel are particularly vocal in criticizing CEE-5 steel makers for
undercuttingpricesthroughsubsidies(Ostry, 1993:12). Clearly,energy-intensiveexportswere subsidizedthroughcental co=iiolsover prices of oil and electricity in 1990. In 1991 this was not the case, however.


experienceof the former east Germany's exports suggests that among these factors low wages are crucial.
Although east Oerman industry was regarded as the most technologically sophisticated within the CMEA, no
redirection of exports has so far occurred despite the generous export auarantees provided by the Gennan
govermment. Total exports contracted In 1991 by 53 percent and had it not been for export guarantees to the
FSU, the decline would have been much more sigDificant.33 This situation can be attributed mainly to loss
of competitiveness triggered by large increases in east German wages (in 1991 they were around 70 percent
of the Westem level). As Dornbusch and Wolf (1992:239) observe: "The eastern German productivity level
resembles Mexico's or Korea's, while the wage level matches that of the United States and is ten times greater
than that of the neighboring Czech and Slovak Federal Republic. " A competitive disadvantage, the result
of much lower productivity in east German industries and much higher unit wage costs, could not be ofriset
by quality advantages.


Table 9: ChOni,nOrientation of HunarianmidPotish Experts of Poier 6fnlettfng

Equit Exports (SITC. 71) frm the FSU to the EC betwsam

1985 and 1991 (mittion USS)

Years FSU
HwugaryEC Subtotal Share of EC FSU
EC Subtotat Share of EC
(In percent) (in percent)
1985 518 71 589 12 759 108 864 12
1986 500 100 600 17 619 120 740 16
1987 549 121 670 18 559 154 713 22
1988 468 154 622 25 722 194 916 21
1989 434 176 609 29 653 235 888 26
1990 294 257 550 47 524 370 894 41
1991 133 325 458 71 147 386 533 73

data base, as reported by Hungary and Poland. Source: The United Nations CO4TRADE

Thus, one may conclude that the troika export expansion was to some extent propelled by redirecdon

of sales from the CMEA to the EC.35 The improvement in competitiveness may be precarious, however.

The loss of momentum in Polish exports of electrical engineering products in 1991 may indicate that

32 One caveat should be made: without a detailed analysis at the firms level, it is also impossible to asss
waiether exports diverted from the FSU were profitable or represented 'distress sales," i.e., at prices below

3 See Focus Germany, Deutsche Bank Research, March 1992

34 Accordingto the Institute for Economic Researchin Halle, the unit wage cost was around 70 percent
higher than in west Germany. As the authors of a report emphasize, this situation is hurting east German

because it is not '... neutralized with quality advantages' (Pocus Germanv. Deutsche Bank
Research,March 1992:4).

35 Richter (1992) draws a similar conclusion fromthe analysis of change in Hungarian trade patterns.


improvementwas partly due to subsidizedenergyprices in 1990. An enterprise-level assessmentof

redirectionoftradewouldshedsomelighton thepotentialforexportgrowthin thenearfuture. Theavailable

evidenceindicatesthat enterpriseswhich had specializedsolely in exports to the FSU and otherCMEA

countriesdid not havemuchsuccessin redirecting theirexportsto othermarkets. For instance,thedriving

forcebehindPoland'sexportexpansionin 1990weretheSOEswhichhad earlierexposureto Westernclients

and whosepreviousinvolvementin intra-CMEAtrade was not significant,as a recentWorldBankstudy


C. Im;act of the Switch from a Supply-to a Demand-ConstrainedEconomy
The analysisin SectionsIII and IV of this study shows the dramaticdifferencein foreigntrade

performancebetweenthe mostreformedCentralEuropeantroikaand the BaLlancountries. It suggeststhat

countrieswhichdecontrolledpricesas wellas liberalizingtheirtrade regime,bringingexchangeratescloser

to market-based levels,and introducingunifiedexchangerates,succeededin increasingexportsto theOECD.

No matterhowliberalthe trade regimeor how strongor weakthedomesticcurrency,improvementin export

performancewas the result of a shift from administrativerationingto market clearingprices--i.e., to the

transitionfroma supply- to a demand-constrainedeconomy.Despitethe liberalization of the.. .-eigntrade

regimes,BulgariaandRomaniawerecrippledby macroeconomicchaosandwaveringmicroeconomicreforms

and registeredfallsin exports.

By theend of 1991, externaltraderegimeshad been dramaticallyliberalizedin CEE-3 countries.'
Theyhad alladoptedcurrencyconvertibility,followinga similar setof stepsincludinglegalization(orquasi-
legalization)of blackmarketactivities,liberalizationof domestic pricesand unificationof exchange rates.
Theyhadall introducedtariffs,rulesof customsvaluationand anti-dumpingprocedureswhichwere moreor

lesscompatiblewith GATr standards. Andin all CEE-3countriesfirms coulddecidewhat theywantedto
importand/or export,andtheyhad therightto buyforeigncurrencyat the officialexchangerate in orderto
importgoodsor servicesfromabroad. As a result, tariffsand exchangeratesbecameeffectivetradepolicy

37 Table 10 summarizesthe institutionalfeaturesof theconvertibilityand foreigntraderegimes
of theCEE-3as at the end of 1991.

36 IroniCally,theonlyproductsfor which quantitativerestrions wereinitiallymaintainedwerethose
subjectto quotas, VERs,etc.imposedonthemby theEC, the United Statesandothertradingpartners(Rodrick,

37 Theirimpacton firms'behaviormaybe weakenedby theextentto whichSOEsoperateundera soft-
budgetconstraint.Thisis stillthecaseformanySOEsin allpost-communist

economies,especiallyfor the large
oneswhich,becauseof size, bavestrongpoliticalclout.


In the arena of domestic transformationpolicies the timing of their launching and their scope varied
among the CEE-5. The differences in institutional circumstancesin Hungary, Poland and the FCSK set the


in January 1990, and the FCSK in January 1991. The transition to a market economy in Hungary was more

gradual, and a specific date cannot be given.39 Bulgaria made significant strides in this direction throughout

1991, while Romania was still in an "institutional vacuum" in mid-1992. The two Balkan countries offer some

indicationsas to the impact of the loss of central macroeconomiccontrols on export performance in a shortage

economy: this inevitably leads to the collapse of exports no matter how liberal a trade regime may become.4

On the other hand, the impressive gains made by the FCSK, Hungary and Poland in OECD markets

demonstratedthe strong link between radical economic reforms and export performance. For the FCSK and

Poland, the link is striking when the dates of implementing the economic transformation programs are
juxtaposed with their export growth statistics. During the first year of the transformation programs, Poland
increased its exports to the OECD by 43 percent and the FCSK by 37 percent.

Tlhe major domestic changes which encouraged exports on the basis of comparative advantage for the
CEE-3 countries included the contraction in domestic economic activities as a result of restrictive monetary
and fiscal policies, th :3exaliztion of prices, and the granting of significant autonomy to SOEs. These
reformswere undertaken by the troika countries in 1990 and 1991. Another factor which had a bearing on
their export performance was earlier commercial links between SOEs and the OECD.

Even though all CEE-3 economies carried out these reforms in general terms, differences of detail
existed. These stemmed largely from the differences in economic conditions preceding the collapse of the
communist regimes. Hungary, with many market institutions already in place before the collapse of
communism,was able to continue its evolutionary path; the FCSK, which had a relatively balanced and

troika apart from Bulgaria and Romania.Poland moved from a supply- to a demand-wconstrained

38 Having gone through a different political cycle following the collapse of communist regimes, Bulgaria
and Romania began transforming their economic systems only in 1991. In both countries, the first free elections
held in 1990 brought about the victory of former communist parties. The former communist party lost its majority
in the Bulgarian parliament in the second elections in the faull of 1991, and, as a result, the reform process has
acquireda greater degree of political credibility.

39 In September 1990 the Hungarian govemnment program, speling

adopteda three-year transformation
out the major measures that would reduce direct government interventionin the economy, expand the role of the
private sector, further liberalize prices, and provide a gradual adjustment of the finncial sector to the market rules


of the game.'

40 This is not a new finding. Neither is this phenomenon currently limited to Bulgaria and Romnuia. The
link was amply illustrated by the Polish experience during the Solidarity period in 1981 (Poland's share in OECD
imports dropped by 31.4 percent). The current fall in the foreign trade of former Soviet republics is in part related
to the same phenomenon.


centralizedeconomy, did not need very restrictive stabilization policies (some would argue that the policies
chosen were unnecessarily restrictive, see Blejer and Gelb, 1992); while Poland, which suffered from severe
domesticimbalances exacerbated by the significant autonomy given to SOEs, required radical stabilization

Reactions by CEE-3 firms to policy changes were not expected to be 'normal" market reactions, given
the institutional fluidity within these countries and the limited role of the private sector in the initial phases
of the transformation process. Yet the response to the breakdown of the state monopoly of foreign trade and
the introduction of current account convertibility was a dramatic increase in the number of firms involved in
foreign trade activity, a seemingly normal reaction. The link between imports, domestic aggregate demand
and the real exchange rate, which barely existed under central planning, was established under the economic
transformationmeasures. Import decisions became responsive to price relationships between domestic and
foreign goods.

However,some responses may strike one as perverse, i.e., non-textbook responses. For instance,
a simple comparison of monthly real exchange rates with monthly convertible currency exports suggests that
the appreciation of the Polish zloty was not accompanied by a contraction of exports in 1990.4 Similarly,
neither in the FCSK noi.' in Hungary did the significant reciation of their currencies throughout 1991 trigger
a fail in exports. On the contrary, exports increased significantly at a time of increasing domestic costs and
fallingforeign prices.42 The initially low sensitivity of SOE managements to profit considerations can be
explained by the fact that these pressures were somewhat attenuated by govermnent subsidies of SOEs,4 as
well as by expectations that 'things will soon become ab-normal again." Also, many SOEs held very

41 A regression with monthly convertible currency imports as the dependent vanable and aggregate
expendituresand the real exchange rate as independent variables (accounting for a seasonal variation) for the 198889
and 1990-91 periods yields the following results: weak relationships between imports and the real exchange rate
and domestic expenditures for the period before the 'big bang' of 1990, and strong ones for the 1990-91 period
(Michalek, 1992).

42Althoughall CEE-3 govemments devaluedtheir domestic currenciesin 1990 and 1991, the devaluations
tended to be less than the inflation rates, thus leading to a revaluation in real terms. The 'big bangs' in Czecho-
Slovakia and Poland were accompaniedby a significant depreciationin the real exchange rates, subsequently eroded
by inflation. The devaluation-inflation

gap was particularly acute in Poland throughout most of 1990 and until May
1991 (Winiecki, 1991), and in Hungary in 1991 (Denton, 1992). The gap was much less severe in CzechoSlovakia,
wheremonthly inflation rates peaked in early 1991 (Rodrick, 1992).

43 The degree and modes of subsidization varied across countries. But during the initial stage of the
transformation,they all had one thing in common, namely, since most state-controLled

prices were below world
market levels, export of these products or of products with a high content of mnputs subject to price controls was
in fa-t -absidized. This was the case for exports of energy-intensive goods.


significantstocks of raw materials and intermediate products,"they had accumulated stocks of convertible
currencies under the export earnings retention scheme (used in Bulgaria and Poland), and they had easy access
to credits and subsidies. Under these circumstances, the restraints on money supply affected the liquidity
position of households and private firmse5 but not that of SOEs cushioned by the "old" system. Another
considerationis that the dwindling domestic demand might have pushed some SOEs to engage in discounting
prices below full production costs. These 'distress sales," also experienced by private firms in market
economies during an economic downturn, may have contributed to the weaker sensitivity of SOEs to the
exchange rate policy.

It is impossible to link specific policy variables with export performance in the circumstances peculiar
to each country. There are too many variables, and they were Ph"mging too rapidly throughout the 1990-91
period. Yet two broad sets of circumstances were shared bv exporters in the CEE-3. First, the shift to a
demand-constrainedeconomy was accompanied by a fall in aggregate output and domestic demand. We have
no reliable data on the developments in domestic absorption, but the downturn in domestic demand as proxied
by the Net Material Product (NMP) and industrial output was quite significant. During the first year of the
transformation program in the FCSK, the NMP fell by 20 percent and industrial output by 23 percent. In
Hungary, the NMP was 11 percent lower and in Poland 23 percent lower in 1 than in 1989, while
industrialoutput was 23 percent and 33 percent lower, respectively.'

It is interesting to note the correlation between the contraction in domestic aggregate activity and the
growth of exports to OECD markets (measured by the increase in the share of OECD imports). The
relationship is somewhat obscured by the Czechoslovak performance:the FCSK's increase in OECD import
share in 1991 was smaller than Poland's, but the fatl in industrial output and national income during the first
year of the transition program (by 16 percent and 22 percent, respectively) was slightly larger then in Poland
(13 percent and 23 percent, respectively). This slight difference between the Polish and Czechoslovak cases
might have been due to several factors: the above-mentioned alleged macroeconomic overkill at the outset of
the transformation program in the FCSK; greater dependence of the FCSK on trade with the FSU; and

" Because of the unreliability of supplies and persistent excess demand for their products, the SOEs tended
to maintain high inventories of inputs rather than of finished products. For an extensive analysis, see Kaminsi

45 A comparison of real changes in households' and SOEs' deposits suggests that this was the case in
Polandin 1990. It may be worth adding that this situation continuedin 1991 (for more discussion on this point,
see Winiecki, 1990:765-790).

46 See Tables 3.2.3 and 3.2.6 in UN, ECE 1992.


Tabte 10: A Sumry of Convertibility and Foreign Trade Regimesin the CEE-3(end of 1991)

Institution Exchange Pegged Access to Convertible Export Tariffs Licensing & Irportresponsible Rate Currency Currency Markets Measures Quotasfor setting Regimeexchangerate


Council of Fixed

Currency Purchaseunlimited. No taxes and subsidies. Average around Noquantitative


basket (DM Firms can buy CC Around 201of exports 51. A tenporary controls. Feu

National Bank accounts for in banks. subject to lIcersing import surcharge import Licensessets the 45.5X) Individuals (covers weapons, essen-of 151. Around covering weapons,exchangerate entitled to tial inputs and VERs). 96X is GATT- drugs, etc.

within +/-10X

S175per year. bound.

of the official


Planning Crawling Currency Purchase unlimited. Subsidies

on some Average around Licenses cover

Committee of basket Firms

can buy CC in agricultural products. 13X. but other around 101 ofCouncil of (50 USS, banks for foreign Restrictions related charges (5-6X total imports.
Ministers. 501 ECU) trade transactions. to OECDnontariff ad valorem). 1001 advanceNational Bank Individuals entitled restrictions. ifport depositsets the to S50 per year.


exchange rate


of the central


. . . .......................

. ....

.... .. .. .. .. . .............

.. . ... .... .. ... .....

.... . .......



Council of Downward Currency Full convertibility No taxes and subsidies.

Average around No restric

of Ministers crawl basket for current account Export quotas

related 14X. All procedu-tions except

(pre-transactions. to OECDrestrictions

res in line with for alcoholic

announced) and selected

inputs. GATTarticles. beverages.

Sources: Jan J. Michalek, The Opening-Up of the Polish Economy, PPRGDiscussion Paper #11, University of Warsaw,December 1991; Dani


Foreign Trade in Eastern Europess Transition: Early Results,

NBER, mimeo, January 1992; and Gazeta Bankowa, No. 44, 11.03-11.09.1991.


initialy, the less-developed commerciallinks of Czechoslovak SOFs with OECD importers. (The last factor
was due to the stringent monopoly of foreign trade in the FCSK in the 1980s, see Section 11). Hungary,
which adopted the most cautious approach, experienced the lowest decline in GDP, and had the lowest
increase in OECD market share among the CEE-3. These relationships between export expansion and the
contraction in aggregate economic activity point to the domestic demand slump as an important determinant
of export performance.

Thesecond set of circumstances shared by the CEE-3 economieswas that the emergence of a domestic
demand constraint combined with the liberalizationof trading regimes created an environment where the
incentives to export were strong. Faced with the collapse of consumer demand and devaluation, export
expansion became one of the few options available for preventing too drastic a fall In output. Because of the
cessation of the CMEA soft payments mechanism, the insolvency of Soviet importers, and the faU in import
demandin the former CMEA economies, the only avenue was to expand exports to markets other than the
FSU and the CMEA. Surprisingly, given the dominance of SOEs and the obsolete capital stocks in the CEE-5
economies, SOEs from the most reformed CEE-3 economies responded to these challenges, showing very
impressive export performance. Enterprises with established links with OECD importers and marketing
expertise were clearly in a better position to advantageof this situation.

The primary force behind the impressive export performance of the CEE-3 was the restructuring of
their domestic economic systems involving the liberalization of prices and the hardening of budget constraints
for SOEs. The reforms made the SOEs more responsive to market signals. By establishing more trnsprn
links between their performance and their financial situation, the reform measures subjected SOEs to a tighter
budget constraint. At the same time, the significant liberalization in trade policy exposed the SOEs to foreign
competition. As the experience of different CEE-5 economies demonstates (see section II), however,
liberalization of the foreign trade regime has no significant impact on export performance if the economy
remains a supply-constrained economy, that is, if the shift to market-clearing prices is not made. In fact, the
experience of Bulgaria and Romania in the 1990-91 period shows that a hybrid of quasi-markets and quasi-
administrative controls has a disastrous impact on export performance. Thus the key to improved export
performance is the shift to a demand-constrained economy accompanied by liberalization of the foreign trade

There are still too many unknowns to be able to give an unequivocal assessment of whether the
improved export performance experienced in the first year of the transformation programs in the FCSK and
Poland is sustainable. Although the increase in exports to OECD markets was quite dramatic, it does not


necessarilyimplya dramatic change in the CEE-3 economies'competitivenessand export potential. Their

industrialbase, inherited from centralplanning,hasremainedunchangedand will not be transformed unless

an upswingin output and capitalformationtakes place. The improvementin exports was impressivebut only

against the background of the dismal performancein the 1980s. Still, the export boom, driven by

manufactures,wasan unexpected outcomeof the transformationand represented a turnound in CEE-3 export

performancein OECD markets.

The argumentin supportof seeingthe export expansionas only a temporary phenomenonis as

follows. The major constrainton the trade performanceof the CEE-3 in the 1980swas on the supplyside.

The removal of this constraint,by replacing an administrative economicsystemby a marcet-based one,

reducedwaste in the use of resources. The fall in consumption ledto a temporary increasein exportoffers.

The mainsourceof expanded exportswasnot diversionfrom formerCMEAmarketsbut the contractionof

domesticdemand,resultingin distressexports. Expansionof exportswillbe possible onlyso long as there

is a further compression in domestic demand accompanied by devaluations of domestic currency to ensure

profitabilityof exports.

However,thereare groundsfor sketchinga more optimisticscenario. First, the troikaeconomies

continuedtheir exportexpansionin 1992. For instance,duringthe first six ithsof 1992, the thirdyear

of the transformationprogram,Polishexportsin current pricesincreasedby 12.5 percent(CPO, 1992:1),

whilethe valueof Hungarianexportsincreasedby 14 percentfor the first sevenmonthsof 1992" More

significantly,the increasein Polishexportstook place againsta background of stagnant (not contacting)


Second,the export upswingtookplacein an institutionalenvironmentwhosefullexport potential is
yetto be tapped. Twoinstitutionalconstraintsremain. The first relatesto the dominance of the state-owned
sector. Duringthe initialstage of the transformation,the exportpushcamefrom SOEs withorganizational
structuresinheritedfrom central planning. Privatizationof SOEs, usuallypreceded by organizational
restructuringto make state-owned assets more attractive to potentialinvestors,is likely to increase their
capacityto competein international markets.

Thesecondinstitutionalconstraintto export growth relatesto the absence of organizations providing
informationand credits for export-orientedactivities. Whilethe absenceof export-promoting infrastructure
was not particularlyrelevantfor large SOEswith an earlier presencein OECD markets, it may hamper
exportsby newly-established private firms. The problemis that they are usuallysmalland seldom have
informationcapabilitiesfor identifyingexportopportunities. In addition,sincethey lackcapital,theytend

47 See Transition.The NewsletteraboutReformingEconomies,The WorldBank, Vol. 3, No. 8,
September1992,p. 11.


to trade with geographically close countries, as the experience of small Hungarian and Polish fims

illustrates."' Their share in exports, though increasing, remains lower than their share in aggregate output.

In brief, privatization and organizational restructuringof SOEs together with the development of infrastructure

facilitadng access to foreign markets may provide strong stimuli to exports.

More mesearch is needed on the following issues to provide an answer to the question of the

sustainability of export growth following the introduction of radical transformation programs:

First, the extent to which SOEs successful in marketing their products in the OECD have been
affectedby the decLine in investment activity. The evidence is scarce but there are some indications that
export-oriented enterprises face a fimancialsqueeze,'9 and that export performance has not been reflected in
higher profitability. If this is so, it is doubtfiul that export-oriented SOEs have invested in upgrading their
production capacities, which will add to the difficulties of privatizing SOEs.

Second, the supply side of the export upswing. Among the questions relevant to the sustainability
issue are: what manufactured goods contributed to the export drive of the CEE-3, to what extent did revealed
comparative advantages change during the recent export drive, and did exports originate mainly from
productive capacities of more recent vintage?

bird, the characteristics of the major CEE-3 export markets, that is, whether these OECD markle:
are stagnating, contracting, or expanding?
Fmially, the impact of rising foreign direct investment in the CEE-350 by OECD firms on the
internationalcompetitivenessof the troika.

This paper provides analysis to support the following findings. Furst, the decision to move quicldy
to a market-based economy was closely linked with export performance. This is illustrated by the dramatic
difference between the export performance of the most reformed Central European troika and that of the

4s Accordingto the Hungarian Ministry for International Economic Relations, the growth of small and
medium-sizedfinns engaged in exports was one of the factors accounting for the fall in trade with developing
countries (see 'Hungary: Foreign Trade,' Oxford Analvtica, 27 August 1992). Polish private firms also export
mainly to EC markets (see CPO-1992 and MWGZ-1992).

49 For instance, the Hungarian minister of international economic relations, Bela Kadar, noted that SOEs
facing bankruptcy exported products worth around US$1 billion in 1991. See Radio Free Europe -Daily Report,
June 30, 1992. In 1991 the Polish staowned industrial sector recorded significant losses, but it is unclear whether
the SOEs heavily involved in exports were profitable.

50 For a statistical survey of foreign investment in Central and Eastern Europe, see East Eurnean
Investment,June 1992:14-25.


Balkan countries. Countries which liberalized their trade regimes, devalued currencies, introduced unified

exchange rates, and removed administrativecontrolsover prices succeededin increasingexports to the OECD.

Roimania,crippled by macroeconomicchaos and vacillating microeconomicreforms, registered falls in both

exports and imports.

Second, developments in export performance following the implementation of comprehensive

transformation programs seem to have had little to do with previous trends in export performance, external

economicfactors and earlier attempts at trade regime reforms. Pre-transformationexport performanceoffered

no clues as to what actually occurred--theexport expansion in the 1990-92period was a dramatic reversal of

trends prevailing over the previous two decades. Similarly, the degree to which the administrative economic

system was modified before the collapse of communismturned out to be of less consequencefor foreigntrade

than was generally anticipated. The FCSK, which was not at the forefront of reform efforts under centrai

planning and had not sought to expand commercial relations with the OECD, recorded export growth as

impressive as Poland's. Thus, neither the length of the "adjustment period" to market institutionsand less

rigidly controlled foreign trade nor earlier trends in compe'titiveness in OECD markets explain the increase

in exports.

Third, the differences an,. ng the troika in export growth to the OECD were positivelycorrelated with
the size of contractioDin GDP rather than with exchange rate policies. Hungary experienced the lowest
decline in GDP, but simultaneouslyexperiencedthe lowestincrease in OECDmarket share amongthe CEE-3.
The devaluation-inflationgap in the CEE-3 had no significantimpacton exports. The domesticdemandslump
associated with the transformationwas the most importantdeterminant of export performance.

Fourth, the severance of links that used to bind economiesof the CMEA had a less destructiveimpact
on foreign trade performance than oniamight expect. Although relationshipsbetween intra-CMEA trade and
trade with the OECD are still obscure, the simultaneity of the fall in exports to the CMEA and the increase
in exports to the West suggests a connection. These developm_ntsgive an interestingtwist to East Europeans'
description of the CMEA as a "council for mutual exchange of inefficiencies."



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Appendix Table 1: Suwmry Characteristics of the Export Performanceofthe CEE-5in the OECDin

1983-89and 1990-91.

Rates of Export AverageShare in OECD

Index of CEE-5 Ratio of CEE-5 CommodityCoqposition of Country Shares in

Growth to OECD Imports Exports to OECD

Export Index to CEE-5Exports X Change Total CEE-5Exports

X Change Iworts (value) OEC)Imaort Index Average in in Share Average


In Share 1989 1991 1989 1991


1990 1991 '84-89 '90-91(d/c-I)'83=100 '89=100 '83-100 '89=100) '84-89 '90-91 CiIh-1)'84-89 '90-91 (nl/mI)

(a) (b) (c) (d) (e) (f) (g) (h) Ci) (j) (k) (l)
(m) Cn) (o)
TotalExports 19 16 0.95 0.97 2 169

137 93 115 100 100 ------------
FoedsandFeeds 18 6 1.41 1.63 16 192 126 121 102 15 16 6MireralFuels -12 -14 1.44 0.84 -CI 99 75 130 60 20

9 -54 ... ... ...

Ores andNon-Ferrous 8 20 1.33 1.52

14 196 129 107 139 6 6 2 ... ... --

RawMateriats 10 -6 1.67 1.54 -7 150 104

84 110 6 5 -23

Manufactures 29 25 0.74 0.86 16 197

161 85 134

51 62 22 ------...

Total Exports 22 6 0.04 0.04 -5 129

71 109 100 100 ---4 4 -6

Foodsand Feeds 25

12 0.11 0.13 17 145 .40 91 114
27 31 15 8 8 1


-26 -79 0.05 0.01 -72 46 154 61

12 15 4 -77 3 1 -54

Ores and Non-Ferrous 9 100 0.04 0.05 40 151 218 83 235 4

5 29 3 3 19

Raw Materials -10 -16 0.05 0.05 0 249 76 140

80 5 4 -13 3 4 6

Manufactures 37

9 0.03 0.03 4 159 149 69 123 47
55 18 4 4 -10

Total Exports 17 37 0.20 0.22 14 157 160

86 134 100 100 ---21 23 11

Foodsand Feeds 9 9 0.15 0.18 16

192 119 121 97

8 8 -3 11 11 1


-14 -6 0.19 0.14 -28 95 81

125 64 13 7 -48 13 16 23

OresandNon-Ferrous -1 120 0.13 0.22 68 195 216 107 232

3 4 28 10 14 6

RawMaterials 3 -22 0.65

0.52 -20 146 80
82 85 12 7 -38 39 33 -14

Manufactures 27 49

0.19 0.23 22 170 188 74 156 64
73 15 26 27 4


Appendix Table 1 (cont.):


of the Export Performanceof

the CEE-5in the OECDin 1983-89and 1990-91

Rates of Export AverageShare in OECD

Index of CEE-5

Growth to OECD Imports Ratio of CEE-5 CommodityCoqpositfon of Country Shares in

Exports to OECD Export Index to

X Change Imvorts (value)
CEE-5Exports I Change Total CEE-5Exports
in Share
OECDImport Index Average in Share Average Changein

1989 1991

1989 1991

1990 1991 '84-89 '90-91 (d/c-1) share

'83=100 '89=100 '83=100 '89=100) '84-89

(a) (b) (c) (d) te) '90-91 (i/h-i) '84-89 '90-91 (n/m-l)
(f) (g) (h)
(i) (J) (k)
(L) (m) (n) (o)
TotalExports 27

17 0.20 0.25 21
191 148


FoodsandFeeds 11 20
124 100 100 ---22 25 9

0.50 0.57
16 182 133 115

NineralFuels 108 25 22 -10 35

4 12 35 0

0.14 0.12 -16 131
117 172 92

OresandNon-Ferrous 10 5 -46 10

24 -21 0.26 0.32 14 44

21 234

99 129 106

RawMaterials 6 5 -8 20

14 13 0.33 21 8

0.38 16 173 128
Manufactures 38 97 136 6 5 -20 20 24 27

21 0.16 0.21 31
203 167

88 138 53 62 16

22 25 13

TotalExports 44

13 0.28 0.37 31
193 162

FoodssndFeeds 137 100 100 ---

35 -8 0.56 0.72
106 30 38 29

28 234 124 148

MineralFuels 101 20 20 -8 40

25 5 0.44 0.43 44 11

-2 98 132 129 105

OresandNon-Ferrous 25 22 21 12 -42 31 52 68

0.68 0.87
28 166 153

91 164

RawMaterials 11 10 -12 51

33 3 0.49 57 12

0.55 11 142
Manufactures 58
137 80 145 6 4 -29 29 35 20

23 0.17 0.28 63
270 194

117 161 41

54 33 24 33 40

Total Exports

-31 -16 0.23 0.09 -60 141 58

Foods nd Feeds 77 49 100 100 ---

-57 77 0.09 0.04 -62 24 10 -60

109 76

Mineral Fuels -47 -65 0.62 0.14 -77 102
69 62 4 4 -8 7 2 -67

19 134 15

Ores and Non-Ferrous -62 -18 0.23 0.07 36 16 -56 43 17 -61

-68 299 31

164 34 5 3

RawMaterials -39 -27 -31 17 5 -72

0.15 0.05 -67 118
67 47

Manufactures 2 2 -29 9

-18 -4 0.18 0.10 -47 168 3 -63

7,3 65 52 75

-42 24 11 -53


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