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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
pages).


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
cru.al 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

by


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


Tables

1.
Share of CEE-5 in Total Imports of OECD, by Major Product Categories, i980-89 ........ 6


2.
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

3.
Ratios of CEE-5 Export Growth Rates to OECD Import Growth Rates, by Product Categories, 198183
to 1990-91 .10

4.
The Role of Manufactures in the OECD Export Growth of CEE-3, 1989 to 1991 .13

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


6.
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

7.
Ratio of CX1'EA Exports to OECD Exports, 1987-91 .20

8.
Changes in Value of CEE-4 Exports to FSU, CEE-4, and OECD, 1990 and 1991, (million US$)20

9.
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

10.
A Summary of Convertibility and Foreign Trade Regimes in the CEE-3 (end of 1991) ..... 29


1. INTRODUCTION
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.


2


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
efficiency.

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.,


3


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.

II. LIMITSTO CHANGES IN FOREIGNTRADEREGIMESUNDERCENTRALfLANNING
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
whichpenalizethem'(Nuti1991:50).

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

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

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


4


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).


5


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.

1a. CEE-S EXPORTS TO THE OECD IN THE 1980s: THE INITJAL BREAKDOW'N AND GROWING
MARGINAUZATION

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.


6


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.


7


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

1980s.'

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.

resource-intemsive

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

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