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practically impossible. The planners, therefore, have to make various rational "shortcuts" such as shadow pricing for larger product groups. While these may avoid "white elephants" among expo-ts, they cannot prevent microdistortions on the product level.

To suggest that profitability plays a role in export decisions, however, implies that internationally competitive prices reflect internationally competitive costs. For reasons mentioned above, the assessment of manufacturing costs in the CPEs is extremely difficult. Nevertheless, the indications are that manufacturing costs in Eastern Europe and the Soviet Union are not very favorable and, consequently, that the international competitiveness of their exports of manufactures is by and large very poor. Even though real wages in the CPEs are low in comparison to developed countries, and in at least some of them they have been falling, as we argue further below, these cost advantages vis-a-vis developed countries are being lost to many less developed countries (LDCs). This reflects high degree of substitutability between exports of the CPEs and those of LDCs (Poznanski (1986)]. This in turn implies highly similar export structures of the CPEs and LDCs and, ceteris paribus, high values for export demand elasticities.4/ The evidence about low international competitiveness of East European exports of manufactured goods due to relatively high production costs comes primarily from two sources--extremely poor total factor productivity (TFP) performance combined with high domestic resource costs (DRCs), and from relatively high unit labor costs. The TFP indicator is a good proxy for changes in manufacturing costs since improvement in TFP implies a reduction in the unit costs of production. This is a particularly valuable feature of the indicator in view of limited availability of data on unit labor costs and serious difficulties of their interpretation. Unfortunately, studies of TFP and DRCs have been so far conducted only for a few socialist countries (see, e.g., Nishimizu and Page, 1986). A recent World Bank study of industrial performance in Hungary has found that a majority of manufacturing sectors had DRCs clustered around the value of one, and only few were unambiguously competitive (World Bank, 1988). Moreover, several industries which were found potentially competitive showed a low or even negative TFP performance, which suggest they would lose their competitive edge if the trend were to continue.5/ The picture emerging from the sketchy evidence of relative unit labor costs is also highly unfavorable for the CPEs. Recent official estimates of the average real wage in Hungary, by all accounts a "middle-income CPE," were put by the Government to amount in 1988 to only $160 a month before taxes and $127-$129 a month after deduction of taxes and social security and pension benefits. According to the same source, this corresponded to the average

- 4/ The comparison is made here between CPEs and LDCs other than NICs, whose exports are more quality-competitive.

- 5/ The calculations of DRCs are sensitive to the quality of data. For example, if an adjustment were to be made for differences between CMEA and world prices, the DRC cutoff point for internationally competitive activities would have to be correspondingly adjusted and the picture would be even bleaker. The picture may be even bleaker for other CPEs. Some observers believe that DRCs for Hungary may be more favourable than in other socialist countries.