metadata: authors: 0: author: Kaminski, Bartlomiej
1: author: DEC
count: Europe and Central Asia
docna: 0: docna: How the market transition affected export
            performance in the Central European economies
docty: Policy Research Working Paper
subtopic: Construction Industry,State Owned Enterprise Reform,Public Sector Administrative & Civil
            Service Reform,Currencies and Exchange Rates,International Trade and Trade Rules,Energy and Mining,Democratic Government,Economics and Finance of Public
            Institution Development,Public Sector Administrative and Civil
            Service Reform,De Facto Governments
teratopic: International Economics and Trade
abstracts: cdata!: Empirical studies have paid little
            attention to the supply-side forces behind the export
            performance of the Central and Eastern European countries of
            Bulgaria, Czechoslovakia, Hungary, Poland, and Romania
            (CEE-5) in OECD markets after the collapse of central
            planning. The author examines export developments in these
            countries in 1980-91, focusing on how transformation
            programs affected trade. OECD markets now receive
            three-fourths of CEE-5 exports. Sustaining this market
            penetration is crucial for countries making the transition
            to market-based economies. The author provides insight into
            the impact of transformation-cum-stabilization programs on
            export performance. These insights are relevant to former
            centrally planned economies that have yet to restore
            marcoeconomic equilibrium and to liberalize prices. The
            author examines the export performance of the CEE-5 before
            and after the collapse of central planning. He finds a close
            link between export performance and the decision to move
            quickly to a market-based economy. Countries that removed
            administrative controls on prices, devalued currency,
            introduced unified exchange rates, and liberalized trade
            also expanded exports. Bulgaria and Romania, crippled by
            macroeconomic chaos and vacillating macroeconomic reform,
            registered drops in both exports and imports. The author
            suggests that differences among Czechoslovakia, Hungary, and
            Poland (CEE-3) had little to do with previous trends in
            export performance, external economic factors, and earlier
            attempts at trade reform. The expansion of exports in
            1990-92 represented a dramatic reversal of trends prevalent
            in the prior two decades. The surge in exports is explained
            neither by the length of time experimenting with foreign
            trade under central planning nor by earlier trends in
            competitiveness in OECD markets. The driving force of export
            growth was manufactures, some of them redirected from CMEA
            markets, primarily to Germany. The severing of links that
            used to bind the economies of the CMEA had a less
            destructive impact on the foreign trade performance of the
            CEE-3 than one might have expected. The fact that exports to
            the CMEA fell at the same time that exports elsewhere (often
            of the same products) increased suggests a causal relationship.
repnme: repnme: How the market transition affected export
            performance in the Central European economies
display_title: How the market transition affected
            export performance in the Central European economies
listing_relative_url: /research/1993/09/698853/market-transition-affected-export-performance-central-european-economies
topicv3: Transport Equipment m1326014 1812,State Owned Enterprises m1326323 721,Trade m1326924 698,Exchange Rate Policy m1327143 1124,Iron m1503514 2931
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: International Economics and Trade
origu: UNKNOWN
no_of_pages: 45
model_extractions: <!-- Start of picture text --> Pollay Roe"arch<br><!-- End of picture text --> <!-- Start of picture text --> International Trade<br><!-- End of picture text --> 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 supply-side forces behind the export performance of the Central and Eastern European countries of Bulgaria, Czechoslovakia, Hungary, Poland, and Romania (CEE-5) in OECD markets after the collapse of central planning.

Kaminski examines export developments in these countries in 1980-91, focusing on how transformation programs affected trade. QECD markets now receive three-fourths of CEE-5 exports. Sustaining this market penetration is cru.al for countries making the transition to market-based economies. Kaminski provides insight into the impact of wansformation-cumstabilization programs on export performance. These insights are relevant to former centrally planned economies that have yet to restore macroeconomic equilibrium and to liberalize prices.

Kaminski examines the export performance of the CEE-5 before and after the collapse of central planning. He fmds a close link-between export performance and the decision to move quickly to a market-based economy. Countries that removed administrative controls on prices, devalued currency, introduced unified exchange rates, and liberalized trade also expanded exports. Bulgaria and Romania, crippled by macroeconomic chaos and vacillating macroeconomic reforn, registered drops in both exports and imports.

Kaminski suggests that differences among Czechoslovakia, Hungary, and Poland (CEE-3) had little to do with previous trends in export performance, extemal economic factors, and earlier attempts at trade reform. The expansion of exports in 1990-92 represented a dramatic reversal of trends prevalent in the prior two decades. The surge in exports is explained neither by the length of time experimenting with foreign trade under central planning nor by earlier trends in competitiveness in OECD markets.

The driving force of export growth was manufactures, some of them redirected from CMEA markets, primarily to Germany. The severing of links that used to bind the economies of the CIMEA had a less destructive impact on the foreign trade performance of the CEE-3 than one might have expected.

The fact tha exports to the CMEA fell at the same time that exports elsewhere (often of the same products) increased suggests a causal relationship.

'Me Policy ReserchWorking PaperSeoes disseniinates the fadings of wosk under way in theBank. Anobjectiveof the 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 ofrficial Bank 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.|Intro|duction<br>.1................................................|
|---|---|---|
|II.|Limi|ts to Changes in Foreign Trade Regimes under Central Planning .<br>................<br>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 ....<br>......<br>......<br>8|
|IV.|The|Export Upswing: in Defiance of Past Trends ....<br>...............<br>11|
||A.|Chalenging the Projections ....................................<br>11|
||B.|Rfor<br>Make a Difference ............................<br>..<br>. .12|
||C.|Genmany: Locomotive of CEE-5 Export Growth .......................<br>13|
|V.|The|Reversal in CEE-3 Export Performance: Some Preliminary Hypotheses ....<br>.......<br>16|
||A.|The Collapse of the CMEA ....................................<br>17|
||B.|The Redirtion of former CMEA Sales to the OECD? ...................<br>21|
||C.|Impact of the Switch from a Supply- to a Demand-Constrained Economy ....<br>....<br>25|
|VI.|Is the|Export Expansion to the OECD Sustainable? ............<br>...............<br>30|
|VI.|Conc|lusion .32|
|Refe.|ces<br>.3|4|
|Statii|cal App|endx .37|
# Tables

|1.|Share of CEE-5 in Total Imports of OECD, by Major Product Categories, i980-89 ........<br>6|
|---|---|
|2.|Growth Rates of (A) CEE-5 Exports to the OECD, by commodity groups, and (B) Change in Shares<br>of CEE-5 Exports in OECD Imports, by commodity groups (1981-89)<br>_.1_|
|3.|Ratios of CEE-5 Export Growth Rates to OECD Import Growth Rates, by Product Categories, 1981-<br>83 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 .. .<br>.........<br>14|
|6.|Share of the CEE-5 in German Imports, by Major Product Categories, in 1989 and 1991, and the<br>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$)20|
|9.|Changing Orientation of Hungarian and Polish Exports of Power Generating Equipment Exports<br>(SITC. 71) from the FSU to the EC between 1985 and 1991 (million US$) .24|
|10.|A Summary of Convertibility and Foreign Trade Regimes in the CEE-3 (end of 1991) .....<br>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) attributing change in 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 responses to a stabilization package in "socialist economies in traasition" is a problem, too, since more than 90 percent of industrial output came from the state-owned sector, and organizational structures were designed to facilitate administrative management by the state rather than to respond to market signals.

In addition to its organizationa **l** egacies, central planning also left a legacy of production and investmeut patterns heavily distorted by the misallocation of resources. Development strategies wt-re inwardoriented, with one exception-investment decisions in 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 changes in incentives and make enterprises responsive w external business opportunities, Cheir capacity to ccmpete internationally will 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, accompanied by 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 contraction in demand for their products. These sectors, together with those established for political rather thac economic reasons, accounted for 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- exports from the CMEA toward the OECD.

The size of the export sector in overall economic activity has significantly increased in 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 _.B_ included Bulgaria, Cuba, Czechoslovakia, German Democratic Republic, 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--the drop in domestic demand, the improved acuess to OECD markets, the liberalization of foreign trade regimes, and the move toward convertibility of domestic currencies have provided a 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 sector may be less than it would be with profit-oriented firms.<sup>2</sup> 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 domestic savings, 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 Without e<sup>4</sup> etailed analys' - capital investments disaggregated to the level of firms, it is impossible to assess the extent to wzmict **h** e strue., of exports keeps on being regenerated.
3 for the CEE-5. It is argued, however, that<sup>OSP (General System of Preferences) status granted by the EC</sup> to Hungary and Poland (effective in 1990), increased<sup>EC quotas for textiles and clothing or MFN status in</sup> the United States do not provide a fuil explanation<sup>of the increase in exports. The export performance of the</sup> Central European "troika'--the FCSK, Hungar,<sup>dnd Polard--was particularly impressive in the 1990-91</sup> period, when a long-term trend of progressive<sup>mnaginalization</sup> in OECD markets, especially for manufactured goods, was reversed. Is this the beginning of<sup>a new trend to expanding integration with the world economy;</sup> This question is addressed only tangentially;<sup>more research is needed on the anatomy of the export upswing</sup> following the collapse of central planning.

# II. LIMITS TO CHANGES IN FOREIGN TRADE<sup>REGIMES UNDER CENTRAL fLANNING</sup>

The reform of foreign trade regimes began well<sup>before thc collapse of the CEE-5 communist</sup> governments in 1989 and 1990. In fact, foreign<sup>trade was an area where much policy experimentation had</sup> taken place in the 1980s. The general approach<sup>taken bv communist reformers included linking domestic</sup> prices to international prices; estab)lishing direct links between ent*erprises and international markets, bypassing the traditional foreign trade organizations; establishing<sup>a larger number o! intermediaries with a less restricted</sup> trading profile; .M.*ducing currency auctioaIs;<sup>and reducing the number of exchange rates and devaluing them</sup> to more realstic levels. While these mear: es contributed<sup>to a proliferation of marketing expertise at the level</sup> of enterprises and provided incentives to boost<sup>exports, they failed to introduce "... market clearing at single</sup> prices without _ex p(_ i and _ad hoc_ subsidies and levies,<sup>yielding a profit which is retained by enterprises or losses</sup> which penalize them'(Nuti 1991:50).

Thus, no matter how radical the reform measures<sup>were, foreign trade regimes under central planning</sup> remained a source of enormous distort.Jns<sup>and inefficiencies,</sup> insulating domestic producers from the impact<sup>of</sup> changes in relative prices in world markets<sup>and falling short of making foreign trade an effective conveyor of</sup> international efficiency standards. What was needed to achieve<sup>this end was: the removal of anti-export biases such</sup> as import restrictions, administrative allocation of raw materials and foreign exchange,<sup>and price controls; the</sup> dismantling of administrative mechanisms designed to encourag **e** xports and discourag- imports;<sup>and the elimination</sup> of 'soft-budgets' for enterprises (so that inefficient<sup>producers would be penalized). However, these changes were</sup> not possible without abandoning central planning. Before the collapse of communism, the decentraLzation of foreign trade regimes made most progress<sup>in</sup> Hungary and Poland-they were both highly indebted<sup>to the West and were the first to seek to orient their economies</sup> away from the CMEA (Hillman and Schnytzer,<sup>1992:253). With the decline of the Soviet capability to sustain intra-</sup> CMEA trade in the late 1980s, other CEE-5<sup>countries undertook foreign trade reforms but these were less</sup> comprehensive than those of Hungary and Poland. Foreign uade<sup>reforms shared two sets of featres. The first</sup>
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.<sup>3</sup> 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. Between 1980 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.<sup>4</sup> 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 equalization schemes provided 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 wellknown 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-S_ share in total OECD imports fell from 1.1 percent in 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<br>mlnerat Fuels<br>Ores & NonferrousMotals<br>Raw**Materials**|1.5<br>1.0<br> 1.4<br>**1.8**|1.3<br>0.8<br>1.2<br> <br>**1.7**|1.3<br>0.8<br> 1.3<br>;.7<br>|1.3<br>1.0<br>1.1<br>**1.7**|1.3<br>1.3<br>1.4<br> <br>1.7<br>|1.4<br>1.3<br>1.4<br>**1.8**|1.4<br>1.6<br>1.3<br> <br>**1.9**|1.4<br>1.6<br>1.3<br> <br>1.7|1.4<br>1.5<br>1.4<br>1.6<br>|1.6<br>1.3<br>1.2<br>1.4<br>|1.6<br>0.9<br>1.3<br>1.5<br>|1.6<br>0.8<br>i.7<br>1.5<br>|
|Manufactures|**1.1**|<br>**1.0**|0.9|**0.8**|0.8|**0.8**|**0.7**|<br>**0.7**|<br>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**|

Source: Derived from the United Nations CONTRADE data base.

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 suppliers in 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 improvement was mainly due to a one-time increase in Romanian exports across 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 CzechoSlovakia, 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 throughout the 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, resource-intemsive 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.

Other interesting 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 throughou **t** he 1980s.

Tabte 2: Growth Rates of **(A)** CEE-5 Exports to the ECD, by comodity **rop** **_Wd (B)_ Chanes** in **Share of** CEE-5 **Exports** in OECO Imports, by commodity grops **(1981-1989, percent)**

||CE<br>(A)|E-5<br> <br>t8)|Bulc<br> <br>(A)|aria<br> <br>(9)|Czecho<br> <br>(A)|slovak<br> <br>CB)|ia Hu<br> <br>(A)|ngary<br> <br>CB)|Pol<br> <br>(A)|and<br> <br>(B)|Rom<br>(A)|ania<br>(C)|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|Foodsand Feeds<br>"ineral<br>Fuels<br>Orea&Nonferrous<br>Metals<br>Raw Materials<br>Manufactures|2.1<br>-3.9<br>0.4<br>6.2<br>1.4|-0.5<br>4,8<br>-0.5<br>-1.5<br>-5.0|2.6<br> -4.1<br> <br>1.3<br>10.3<br> <br>1.0|-2.<br>1.3<br>-4.<br>4.2<br>-8.|2 4.8<br> <br>-5.1<br>9 3.5<br>-1.4<br>3 0.8|3.8<br>3.5<br>2.9<br>-2.0<br>-5.0|-0.2<br>3.4<br>2.8<br>1.8<br>-0.1|<br>1.2<br>8.9<br> <br>4.9<br> <br>3.6<br>-3.3|<br>4.5<br>-3.5<br>-1.7<br>-2.9<br> <br>2.4|2.7<br>5.7<br>-3.4<br>-5.3<br>-4.8|<br>-5.8<br>-1.5<br> <br>17.4<br> <br>-5.8<br> <br>2.5|-8.6<br>8.0<br>15.6<br>-11.2<br>-5.8|

Source: See Table 1.

**s** ]EC-10's share 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 percen **t** o 68.4 perceut) and Poland (from 68.5 percen **t** o 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 percen **t** o 68 percent) (Calculated from the UN COMTRADE data base).
8 The decline was particularly surprising in the case of the Central European troika.<sup>9</sup> The FCSK, once a renowned exporter of machino tools and other high quality industrial products, became increasingly specialized in agricultural products and ores and nonferrous metals. Poland, thanks to Western credits, had a relatively modern industrial base on the eve of the 1980s, but experienced the second largest loss among the CEE-5 in share of OECD markets for manufactured products. Hence its investment drive in the 1970s had no discernible impact on its international competitive position. Hungary, a country much praised for its reform efforts in the 1980s, tended to shift away from manufactures and food products to minerals and raw materials, although its relative competitive position feli the least among the CEE-5 in the 1981-89 period.

# B. Two Distinct Phases: Breakdown and Precarious Recovery

An examination of the CEE-5 OECD export performance in the 1980s suggests the existence of two distinct periods. The first, between 1980 and 1983, can be called a "breakdown" period; the contraction in OECD import demand resulted in a much larger fall in exports from the CEF-5. The second, between 1984 and 1989, can be described as a period of stagnation and "progressive marginalization" of the CEE-5 region in OECD markets. Despite the expanding import demand in OECD countries, especially for manufactured products, communist governments' efforts to boost exports produced -Ited results.

The first period coincided with OECD recession and with deterioration in East-West political relations. Total OECD imports fell at an annual average rate of around 4 percent in the 1981-84 period, reaching their lowest point in 1982 when they fell by 6.2 percent. However, the fail in CEE-5 exports was significantly larger than the decline in OECD import demand overall.'° The latter fell by around 12 percent in aggregate over this period, while CEE-5 exports declined by nearly 30 percent.

As can be seen from Table 3, during 1981-83 all exports with the exception of mineral fuels contracted much more than OECD imports. The most affected were manufactures: the ratio of the average annual (negative) growth rate of CEE-5 exports to the OECD import (negative) growth rate was 7.12. There were only a few bright spots: all CEE-5 economies recorded a lower fall in exports of mineral fuels (as a result, their market shares for fuels increased); Czechoslovak exports of agricultural products increased; Hungary substantially expanded its exports of raw materials and mineral fuels; and Romania increased Its exports of ores and nonferrous metals. Bulgaria's and especially Poland's exports collapsed in all product 9 The worst performer was Bulgaria, whose share in 1989 in total OECD imports of manufactured goods was 5'.3 percent lower than in the peak year of 1980. Romana's share dropped by 41 percent in comparison with its peak year in 1980, Poland's by 40.4 percent, Czechoslovakia's by 27 percent, and Hungary's by 28.3 perment.

10 For this reason, the data for 1983 or 1984 is used as the base in the inter-temporal comparative analysis.
9 categories except 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-5_ exports 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 adversarial in 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.
10 Poland increased their **share** in CEE-5 exports of manufactures, with Poland registering the largest increase.'<sup>2</sup> 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 **dominance** as 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 OECD Import Growth Rates by Produt Cateories, 1981-83 to 1990-91**

|1981-83|1984-89|1990-91|1981-83|1984-89|<br>1990-91|
|---|---|---|---|---|---|
|CEE-5||iBult|aria|||
|Foods<br>and Feeds<br>2.35*<br>Mineral<br>Fuels<br>0.74*<br>Ores<br>and Non-Ferrous<br>Netals 1.46*<br>Raw Materials<br>1.31*<br>Manufactures<br>7.12*<br>Total Exports<br>2.31*|<br>1.42<br> <br>-0.30*<br> <br>1.19<br> <br>0.70<br> <br>0.80<br> <br>0.88|<br>1.14<br> <br>-0.98<br> <br>-4.07*<br> <br>-0.77*<br> <br>2.72<br>1.87|2.15*<br>0.20*<br> <br>2.26*<br> <br>1.03^<br>9.28*<br>2.46*|0.82<br>1.67*<br>1.02*<br>1.68<br>0.56<br>0.43|.73<br> <br>(-3.89)<br> <br>-15.98*<br>4.44*<br>2.30<br>1.54|
|Czechoslovakia||Hurm|a|||
|Foods and Feeds<br>"<br>Mineral Fuels<br>V|1.47<br>0.04*|0.85<br>(-0.73)|1.40*<br>-1.74*|1.31<br>-1.97*|1.42<br>0.60|
|Ores and Non-Ferrous Metals<br>0.44*<br>Raw Materials<br>1.00*<br>Manufactures<br>4.18*|1.11<br>0.66<br>0.63|-17.20*<br>3.25*<br>3.80|0.73*<br>-0.31*<br>5.12*|1.51<br>0.97<br>0.86|-0.51*<br>-4.53*<br>2.97|
|Total Exports<br>1.48*|0.76|2.92|1.31*|1.09|2.37|
|Poland||Roman|ia|||
|Foods and Feeds<br>2.68*|1.88|1.26|5.14*|0.32|0.91|
|Mineral Fuets<br>0.53*|-0.09*|1.14|0.10*|-1.16*|(-4.13)|
|Ores and Non-Ferrous Metals<br>**1.83'**|0.98|-6.95*|-1.31*|2.42|11.61*|
|RawMaterials<br>2.00'|0.62|-6.11*|2.42'|0.44|11.39*|
|Manufactures<br>13.52*|1.23|4.10|4.36*|0.63|(-1.11)|
|Total Exports<br>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.
11 The picture 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 central planning; (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 notable in the early 1980s, was not reversed; (iv) their exports were extremely vulnerable to changes in OECD import demand; (v) the commodity composition of 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 performance in the OECD. Against this dismal ovexali picture, the export performance of the two most reformed CPEs, Hungary and Poland, was significantly better.

# IV. THE EXPORT UPSWING: IN DEFIANCE OF PAST TRENDS

The extrapolation of export trends characteristic of the 1984-89 period would yield the following predictions for the CEE-S in the 1990s: the region's share in OECD exports would continue slipping, especially in manufactures; their export profile would continue moving to agricultural products and nonrenewable natural resources; 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-5_** exports 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/production patterns and international markets would give extra credibility to the forecast of no significant improvement 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
12 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 result of 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-5 manufactures 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 1).

# 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
13 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.-<sup>3</sup> 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 **Rlot** of Nuwmfactures in the OECD Export Growth of CEE-3, 1989 to **1991**

||Valu<br>(mill<br>1989|e<br>.<br>US$)<br> <br>1990|<br>1991|Increas<br>(mill.<br>U<br> <br>1989-90|e<br>in value<br> <br>SS)<br>1990-91|Share of Manuf<br>lncrease in To<br>(in percent)<br> <br>1989-90|actures<br>in<br>tal Exports<br>1990-91|
|---|---|---|---|---|---|---|---|
|Czechoslovakia<br>TotalExports<br>Exports of Manufactures|3924<br>2545|45S5<br>3218|6270<br>4788|661<br>673|1685<br>1570|---<br>-<br>102|--<br>-<br>93|
|Hunaarv<br>Total Exports<br>Exports<br>of Manul<br>res|4359<br>2420|5511<br>3347|6451<br>4035|<br>1152<br>927|940<br>686|----<br>81|....<br>73|
|TotalExport<br>Exports of Manufactures|5879<br>2771|8436<br>4390|9546<br>5388|2557<br>1619|1110<br>998|----<br>63|....<br>90|
|Total CEE-<br>Total Exports<br>Exports of Manufactures|14162<br>7736|18531<br>10955|22268<br>14210|<br>4369<br>3219|3737<br>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-S_ Exoort Growth

During the export growth of 1990-91, the geographic pattern of CEE-S exports changed, with a movemen **t** owards European markets in general and Germany in particular. The shift of _CEE-5_ exports 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_ 13 For a detailed analysis, see Kaminsli, 1993:7-8.
14 total exports 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)--excluding Germany, 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 increased between 1989 and 1990 by almost 50 percent--from 34 percent to 49 percent.

**Table** 5: The **Role** of **Gow** n the Export **Grewth** of CEE-5 in 1990 **nd** 1991

**A. Share of** Gerenwy **in OED aid** EC-10 **Ixqorts** from the CEE-5 **(in** percent)

||Bulgar|ia|Czec|hosto|vakia<br>|Hunaar|v|
|---|---|---|---|---|---|---|---|
|1989|1990|1991|1989|1990|1991<br>1989|1990|1991|
|OECD<br>23<br>EC-10<br>32|27<br>35|33<br>42|34<br>43|37<br>51|49<br>33<br>63<br>55|37<br>55|40<br>58|
||Polan|d|R|nia||||
|1989|1990|1991|1989|1990|1991<br>1989|1990|1991|
|OECD<br>32<br>EC-1O<br>46|38<br>50|52<br>58|14<br>20|28<br>37|36<br>33<br>42<br>47|37<br>52|45<br>59|
|**B.**<br>Ainnul Increases<br>in Va|lue of|lcowts fro|m CEE<br>u|ntries<br>|<br>**(mitt.**USS)|||

||Bulg|aria|Czefhg|sloakfe|<br>Hu|naarv|
|---|---|---|---|---|---|---|
||**1990**|**1991**|**1990**|1991|**1990**|1991|
|Germany<br>EC-9(Germany<br>excluded)<br>OtherOECD|72<br>76<br>19|76<br>-10<br>.9|355<br>196<br>110|1388<br>240<br>58|598<br>306<br>249|553<br>197<br>190|
|Memorandum:<br>Share of the increase in<br>OECDimports absorbed by Germany<br>(in ercent)|43|134|54|82|52|59|
|p|Po|ts|R|omania||CEE-3|
||1990|1991|1990|1991|1990|1991|
|Germany<br>EC-9(Germany<br>excluded)<br>Other OECD|1320<br>928<br>308|1147<br>8<br>-4|-127<br>-658<br>-312|40<br>-186<br>-240|2273<br>1431<br>667|3088<br>445<br>203|
|Hemorandu: Share of the increase in<br>OECDpgorts absorbed byGermany<br>(in percent)|52|103|--|--|52|83|

Source: See Table 1 Although Germany 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
15 markets absorbed about _54_ percent of the increase in exports from the FCSK in 1990, and 82 percent of tbis increase in 1991. As a result, the share of Germany in Czechoslovak exports increased by 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 grew by more than US$1 billion. Germany's share in OECD exports of the troika increased from 33 percent in 1989 to 45 percent in 1991.

Moreover, Germany's share in 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 Romanian exports 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 (43.4 percent to 61.5 percent) and agricultural products (55.8 percent to 69.6 percent); for Hungary, agricultural products (37.1 percent to 47.2 percent) and manufactures (56 percent to 62.4 percent); for Poland, mineral fuels (32.5 percent to 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

||BU<br>1959|LGARI<br>1991|A<br>Change<br>in perce|CZ<br> <br>1989<br>nt|ECHOS<br>1991|LOVAKIA<br>Change<br>in perce|<br>HU<br> <br>1989<br>nt|NGARY<br>1991|Change<br>in percent|
|---|---|---|---|---|---|---|---|---|---|
|Foods and Feeds<br>RawMaterials<br>Ores 2 Non-Ferrous Metals<br>MineralFuels<br>Manufactures<br>Total all c_oditfes|0.14<br>0.08<br>0.06<br>0.02<br>0.05<br>0.07|0.18<br>0.11<br>0.24<br>0.02<br>0.07<br>0.08|36<br>46<br>309<br>-5<br>21<br>28|0.46<br>1.02<br>0.36<br>0.99<br>0.43<br>0.49|0.52<br>0.87<br>0.92<br>0.60<br>0.84<br>0.79|13<br>-15<br>153<br>-40<br>94<br>60|1 01<br>0.58<br>047<br>0.32<br>0.49<br>0.53|1.31<br>0.67<br>0.52<br>0.26<br>0.63<br>0.66|29<br>16<br>11<br>-18<br>30<br>25|
||P|OLAND||R_|OANIA||CE-|3||
|Foods and Feeds<br>Raw Materials<br>Ores L Non-Ferrous Metals<br>Mineral Fuels<br>Manufactures<br>Totataltcoidities|1.38<br>0.85<br>1.96<br>0.80<br>0.49<br>0.71|1.50<br>1.44<br>3.94<br>1.16<br>0.92<br> <br>1.13|9<br>70<br>101<br>44<br>87<br>59|0.15<br>0.31<br>0.46<br>0.03<br>0.36<br>0.30|<br>0.12<br>0.10<br>0.12<br>0.03<br>0.22<br> <br>0.19|-21<br>-66<br>-75<br>10<br>-37<br>-38|2.85<br>2.45<br>2.79<br>2.10<br>1.41<br>1.73|3.32<br>2.98<br>5.38<br>2.01<br>2.39<br>2.58|17<br>22<br>93<br>-4<br>69<br>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.
16 As can be seen from Table 6, the troika's share in total German imports increased by almost 50 percent, mainly thanks to exports of manuifactures. The FCSK's share in German imports of manufactured products almost doubled, Poland's share increased by 87 percent, and Hungary's by 30 percent. Bulgaria. whose exports to the OECD stagnated in the 1989-91 period, increased its share in German markets by 28 percent. The major item in the manufactures export drive to Germany was mac.inery and transport equipment. Czechoslovak exports of machinery and transport equipment (SITC. 7) to Germany increased by _56S_ percent (from $101 million to $663 million) and to other EC-10 countries (excluding Germany) by 36 percent (from $256 million to $347 million); Polish machinery and transport equipment exports to Germany increased by 254 percent (from $131 million to $464 million) and to other EC-10 countries by 4 percent (from $340 to $347 million); and Hungarian exports of machinery and transport equipment to Germany increased by 146 percent (from $229 million to $564 million) and to other EC-10 countries by 55 percent (from $128 to $199 million). These exports were previously absorbed mainly by the FSU.

The expansion of trade with unified Germany was apparently not related to commercia **l** inks inherited from the GDR's membership in the CMEA. Except for contracts between the former GDR and the FSU, all ties between the GDR and other CMEA members were severed and orders canceled. The dismantling of the CMEA soft p _nts mechanism at the end of 1990 precipitated the collapse of trade between the former GDR and the CEE.5; CEE-5 importers were no longer willing to spend scarce foreign exchange on goods produced in firms of the former GDR.

The 1990 and 1991 export drive to Germany allowed producers from the CEE-3 to regain market shares they lost in the OECD countries during the 1980s. Hungary regained its 1980 peak share in OECD imports in 1989, and the FCSK did so in 1992. Despite its impressive growth in 1990 and 1991, Poland's share in 1991 was still slightly lower than it was in 1980.

# V. THE REVERSAL IN CEE-3 EXPORT PERFORMANCE: SOME PREL1MINARY HYPOTHESES

As argued earlier, the reversal in CEE-3 export performance trends in OECD markets cannot be attributed to a better match between CEE-3 investment strategies and imrport demand in international markets, because increased exports came from productive capacities created under central planning. Neither can it be explained by a sudden upsurge of OECD import demand, because CBE-3 producers outperformed other suppliers and significantly increased their market shares. No massive transfer of state-owned assets to the private sector took place in 1990 and 1991, so the improvement cannot be attributed to privately-owned firms, more responsive to market signals. Therefore, ono should look for explanations in reforms influencing the behavior of economic actors, changes in external opportunities, and incentives to export. The objective of this section is to identify links between domestic and external cicumstances, on the one hand, and export
17 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.<sup>14</sup> The major changes in domestic circumstances were the liberalization of prices and restrictive monetary and 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 introduction of 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.'<sup>6</sup> (it was irrelevant for Romania which had had GSP status,

> 14 As long as the CMEA-TR settlements mechanism existed, 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 currency debt). 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 output in 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 granted unilaterally by industrial countries exclude major textile and clothing products in which the CEE-5 have comparative advantage (Erzan, Holmes and Safadi, 1992:26), EC quotas for imports from 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-World Bank SMART (Software for Market Analysis and Restrictions on Trade) data base.
18 albeit with many special restrictions, since 1971, Schumacher and Mobius, 1992:2). The elimination of quantitative restrictions maintained by the EC against Poland improved its market access.'<sup>7</sup> Barriers to the CEE-3 economies' traditionally competitive exports, iron, steel, textiles, clothing and agricultural products, remained in effect in 1991, although they were not binding.18 Ihe European Association Agreements signed with the CEE-3 in December 1991 were also not relevant for the 1990-91 period, because their provisions were to be phased in over the 10 years beginning in 1992.'9 Finally, the granting of MFN status by the United States did not have a signif atn imnpact; Hungary had MFN status throughout the period under consideration, while Bulgaria and the FCSK obtained it in 1991; Poland's MFN status in the United States was restored in 1989, but its trade with the United States accounted for less than 5 percent of its total trade; and Romania's MFN status was suspended in 1988, but its exports were already collapsing for domestic reasons. Hence, among possible external factors accounting for shifts in trade patterns and imnroved export performance in OECD markets, the collapse of the CMEA was the'most reltvant event in the 1990-91 period, overshadowing the disappearance of East-West political divisions in Europe.

The problem of adjustmen **t** o changing conditions within the CMEA emerged much earlier than in 1990. The official dissolution of the CMEA was the result, not the cause, of the rapidly declining Soviet capability to sustain "soft" settlements in intra-CMEA trade. Thanks to the falling oil price in intra-CMEA trade, most CEE-5 countries began to run trade surpluses with the FSU in non-convertible TRs in 1988. As a result, trade-related debts to the FSU accumulated by CMEA partners between 1975 and 1987 were "... suddenly wiped out by 1988" (Lavigne, 1990:36). The erosion of Soviet ability to pay for imports forced other CMEA governments to introduce various measures restraining exports to the FSU and encouraging exports to hard-currency markets. With the collapse of the Soviet ability to maintain TR payments arrangements in 199(, CMEA members began switching from TRs to hard currencies in their internal transactions, which eventually led to the formal dissolution of the CMEA internal settlements mechanism on 17 This decision coincided with the introduction of the Economic Transformation Program on January 1, 1990. In addition, the non-specific quantitative restrictions were suspended until December 31, 1991.

18 Bilateral quotas imposed by the EC on imports from Central/Eastern Europe were not very restrictive, and their number had declined already between 1985 and 1989. For instance, the number of Multi-Fiber Arrangement (MFA) quotas fell from 71 in 1985 to 54 in 1989, and around 30 percent of them had a quota utilization rate lower than 90 percent (See Erzan and Holmes, 1992). The importance of quotas for other products was also limited because they were rarely utilized (Rodrick 1992:28).

19 Since the free trade provisions of 'Europe Agreements" became effective on March 1, 1992, the CEE-3 has obtained duty-free access to EC markets for a wide range of manufactures. For instance, imports of more than 50 percent of Polish manufactured goods are not subject to barriers (Nogaj, 1992). For a discussion of the Agreements, see Pohl and Sorsa, 1992.
19 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 competitiveness in manufactures. In the 1980s, the quality of CEE-5 manufactures and 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,<sup>2</sup> " 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 Calculated from 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).
20 export patterns has taken place since 1987.

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

||Czechostnvakia|Hungary|Poland|t.mania|Nemorandu<br>Standard<br>deviation|ts:<br> <br>CEE-3<br>|
|---|---|---|---|---|---|---|
|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 additional information relating to 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 between 1987 and 1991 (the period over which the value of intra-CMEA exports 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)

||Czec|hostovaki|a|Hu|ngary||Po|land|||Romania||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
||1990|1991|TotaL<br>1988-91|1990|1991|Total<br>1988-91|1990|1991<br>|Total<br>1988-91|1990|1991|Total<br>1991-88|
|FSU<br>CEE-4<br>OECD<br>TOTAL|-1398<br>-745<br>661<br>-1481|<br>-898<br>-232<br>1685<br>556|-2910<br>-1007<br>2910<br>-1007|-482<br>-243<br>1152<br>427|194<br>-236<br>940<br>898|-1001<br>-598<br> <br>2856<br> <br>1257|78<br>498<br>2557<br>3133|335<br>-834<br>1110<br>611|1081<br> <br>-67<br>4845<br>5859|-1025<br>-632<br>-1097<br>-2754|<br>-572<br> <br>-310<br> <br>-387<br>-1269|-1309<br> <br>-1164<br> <br>-1791<br>-4264|
|Memor|andum: FSI|I:<br>Bala|nce of Tra|de|||||||||
|FSU:|-152|+1054||-442|-485||-1282|-1410||+687|-57||

Source: IMF, Direction of Trade Statistics Yearbook, 1992 to othcr European CMEA members, and to OECD countries (EC, EFTA, North America and 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 CMEA markets.25 Second, there were significant differences in export performance among 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 above US$1 billion. It should be noted that while the data on intra-CMEA trade until 1990 suffered from problems related A 25 Although the amounts offset each other, the terms of trade and budgetary implications are different. The collapse of intra-CMEA trade and the switch to world prices contributed to government budget deficits in the CEE-5, as a study on Hungary demonstrates (Abel, Hillman and Tanr, 1992).
21 to converting ruble-denominated trade flows into US dollars,' litis was not the case in 1991 when<sup>around</sup> 98 percent of all transactions were carried out in hard currency<sup>(UN ECE, 1992:85). In consequence, the</sup> data for 1991 provide a statistically less distorted image of the realigmnent<sup>in export patterns.</sup>

# B. The Redirection of T'ormer CMEA Sales to the OECQ

This section addresses the extent of diversion of exports from<sup>the CMEA to the OECD. While more</sup> research Is needed, some preliminary observations concerning the<sup>reorientation of exports can be derived from</sup> examining changes in Poland's exports in 1990 and 1991 (i.e.,<sup>when an almost complete switch to hard</sup> currency settlements in intra-CMEA trade occurred), and in Hungarian<sup>and Polish exports of selected</sup> manufactures to the FSU and the EC.

Although countries experiences varied according to their former involvement<sup>in specialization schemes</sup> within the CMEA, we would argue that the pattern of change in Hungary's<sup>and Poland's tade has been shared</sup> by other former CMEA members. Their econc ies were under broadly<sup>similar administrative economic</sup> systems, they all pursued similar inward-oriente **d** evelopment strategies,<sup>and they all were part of the radial</sup> pattern of industrial specialization organized around the FSU. Further, within<sup>the CMEA trading area, they</sup> all sought to minimize exports of hard currency earners and maximi; z:<sup>ports of goods which could not be</sup> sold in international markets.

According to conventional wisdom, CEE-5 exports of manufactured<sup>goods to the CMEA, especially</sup> to the FSU, consisted of 'soft" goods noncompetitive in world markets because of high production costs and low quality (Marrese and Vanous, 1983). Since in the short term<sup>the quality could not be significantly</sup> improved, the only means available to producers of soft goods to sell<sup>them in international markets was to</sup> offer them at heavily discounted prices. However, there were two obstacles<sup>to this course of action. Frst,</sup> the trade-off between low prices and product quality was limited:<sup>even huge price cuts may not have attracted</sup> customers. Second, by 1991 producers in the CEE-3 performed<sup>in a new environment where financial</sup> performance became linked to sales revenues. So they could no<sup>longer ignore world prices. For these two</sup> reasons, the capacity of SOEs to compete through price discounts<sup>was eroded. Therefore, one would expect</sup> a very limited redirection of exports of manufactures from the<sup>CMEA to the OECD.</sup> This expectation is borne out by Rodrick (1992) who used<sup>the change in the product composition of</sup> industrial exports by area in 1985 and 1990 as a proxy measure<sup>of the extent of the switch in exports by</sup> Poland (and Hungary) following the radical opening of the economy in January 1990.<sup>The composition of</sup> 26 For a coacise discussion of the major problems involved,<sup>see Chapter 2 in Economic Bulletn fio</sup> Europe Vol. 42/90, pp. 29-31.
22 _CEE-5_ exports 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 intraCMEA 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 convertible currency constraints after the termination of the TR-payments mechanism, importers from the former CMEA 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 engineering sectormachine tools, heating and cooling equipmew, mechanical handling equipment, etc.<sup>28</sup> --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 increase exports 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 _dimqaty_ between 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 breakdown used by Rodrick (1992:18 and 46). In addition, I calculated the index of similarity betwee product compositions of 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).
23 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 value of 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, which occurred in 1990, coincided with the largest fall in exports to the FSU (the EC absorbed 57 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 compensated by the increase in EC imports) than for 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 significantly increased, thus depressing the dollar value of exports to the FSU. Thus, the value of earlier exports to the FSU was probably oversated, 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 obligations vis-a-vis the CMEA partners), greater concern for quality control, low wages, subsidies (as OECD producers often complains'), or a combination of the above.<sup>2</sup> But the 29 For an extensive discussion of statistical problems involved, see Economic Bulletin for Europe, Vol 43, pp.59-62.

> 30 While no data are available in the UN COMTRADE data base for Czecho-Slovalda, mirror sistics show a very considerable increase in exports of SITC.Rev 1.71 to the EC from US$167 million in 1989 to US$396 million in 1991. It is clear that reorientation played an important role in the increase.

> 31 West European producers of steel are particularly vocal in criticizing CEE-5 steel makers for undercutting prices through subsidies (Ostry, 1993:12). Clearly, energy-intensive exports were subsidized through cental co=iiols over prices of oil and electricity in 1990. In 1991 this was not the case, however.
24 experience of 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.3 '

**Table** 9: ChOni,n Orientation of Hunarian **mid** Potish Experts of Poier **6fnlettfng Equit** Exports (SITC. **71)** frm the FSU to the EC betwsam **1985 and 1991** (mittion **USS)**

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

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

Thus, one may conclude that the troika export expansion was to some extent propelled by redirecdon of sales from the CMEA to the EC.3<sup>5</sup> 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 production costs.

3 See Focus Germany, Deutsche Bank Research, March 1992 34 According to the Institute for Economic Research in 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 w"mpetitiveness because it is not '... neutralized with quality advantages' (Pocus Germanv. Deutsche Bank Research, March 1992:4).

35 Richter (1992) draws a similar conclusion from the analysis of change in Hungarian trade patterns.
25 improvement was partly due to subsidized energy prices in 1990. An enterprise-level assessment of redirection of trade would shed some light on the potential for export growth in the near future. The available evidence indicates that enterprises which had specialized solely in exports to the FSU and other CMEA countries did not have much success in redirecting their exports to other markets. For instance, the driving force behind Poland's export expansion in 1990 were the SOEs which had earlier exposure to Western clients and whose previous involvement in intra-CMEA trade was not significant, as a recent World Bank study forcefully argues (Mueller, 1991).

# C. Im;act of the Switch from a Supply- to a Demand-Constrained Economy

The analysis in Sections III and IV of this study shows the dramatic difference in foreign trade performance between the most reformed Central European troika and the BaLlan countries. It suggests that countries which decontrolled prices as well as liberalizing their trade regime, bringing exchange rates closer to market-based levels, and introducing unified exchange rates, succeeded in increasing exports to the OECD. No matter how liberal the trade regime or how strong or weak the domestic currency, improvement in export performance was the result of a shift from administrative rationing to market clearing prices--i.e., to the transition from a supply- to a demand-constrained economy. Despite the liberalization of the.. .- eign trade regimes, Bulgaria and Romania were crippled by macroeconomic chaos and wavering microeconomic reforms and registered falls in exports.

By the end of 1991, external trade regimes had been dramatically liberalized in CEE-3 countries.' They had all adopted currency convertibility, following a similar set of steps including legalization (or quasilegalization) of black market activities, liberalization of domestic prices and unification of exchange rates. They had all introduced tariffs, rules of customs valuation and anti-dumping procedures which were more or less compatible with GATr standards. And in all CEE-3 countries firms could decide what they wanted to import and/or export, and they had the right to buy foreign currency at the official exchange rate in order to import goods or services from abroad. As a result, tariffs and exchange rates became effective trade policy instruments.37 Table 10 summarizes the institutional features of the convertibility and foreign trade regimes of the CEE-3 as at the end of 1991.

> 36 IroniCally, the only products for which quantitative restrions were initially maintained were those subject to quotas, VERs, etc. imposed on them by the EC, the United States and other trading partners (Rodrick, 1992). 37 Their impact on firms' behavior may be weakened by the extent to which SOEs operate under a softbudget constraint. This is still the case for many SOEs in all post-communist economies, especially for the large ones which, because of size, bave strong political clout.
26 In the arena of domestic transformation policies the timing of their launching and their scope varied among the CEE-5. The differences in institutional circumstances in Hungary, Poland and the FCSK set the 38 troika apart from Bulgaria and Romania. Poland moved from a supply- to a demand-wconstrained economy 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 indications as to the impact of the loss of central macroeconomic controls 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 demonstrated the 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 reforms were undertaken by the troika countries in 1990 and 1991. Another factor which had a bearing on their export performance was earlier commercia **l** inks 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 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 acquired a greater degree of political credibility.

39 In September 1990 the Hungarian govemnment adopted a three-year transformation program, speling out the major measures that would reduce direct government intervention in 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.'m 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.
27 centralized economy, 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 domestic imbalances exacerbated by the significant autonomy given to SOEs, required radical stabilization policies.

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 transformation measures. 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 falling foreign prices.<sup>42</sup> 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 expenditures and 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). **42** Although all CEE-3 govemments devalued their domesti **c** urrencies in 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 CzechoSlovakia and Poland were accompanied by a significant depreciation in 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,where monthly 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.
28 significant stocks 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 consideration is 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 throughou **t** he 1990-91 period. Yet two broad sets of circumstances were shared bv exporters in the CEE-3. First, the shift to a demand-constrained economy 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 industrial output 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 (l991:Ch.2). 45 A comparison of real changes in households' and SOEs' deposits suggests that this was the case in Poland in 1990. It may be worth adding that this situation continued in 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.
29 Tabte 10: A Sumry of Convertibility

**and** Foreign Trade Regimes **in** the CEE-3 (end **of** 1991)

|Institution<br>responsible<br>for setting<br>exchange rate|Exchange<br>Rate<br>Regime|Pegged<br>Currency|Access to Convertible<br>Currency Markets|Export<br>Measures|Tariffs|Licensing & Irport<br>Quotas|
|---|---|---|---|---|---|---|
|Czechoslovakia|||||||
|Council of<br>Ministers.<br>NationalBank<br>sets the<br>exchange rate<br>within +/-10X<br>of the official<br>rate.|Fixed|Currency<br>basket (DM<br>accounts for<br>45.5X)|Purchase unlimited.<br>Firms can buy CC<br>in banks.<br>Individuals<br>entitled<br>to<br>S175 per year.|No taxes and subsidies.<br>Around201of exports<br>subject to lIcersing<br>(covers weapons, essen-<br>tial<br>inputs and VERs).|Average around<br>**_51._**A tenporary<br>import surcharge<br>of 151. Around<br>96X is GATT-<br>bound.|No quantitative<br>controls.<br>Feu<br>import Licenses<br>covering weapons,<br>drugs, etc.|
|Hungsr|||||||
|Planning<br>Committee of<br>Council of<br>Ministers.<br>National<br>Bank<br>sets the<br>exchange rate<br>withfn+/-S5<br>of the central<br>rate.<br>. . .<br>.......................<br>Poland|Crawling<br>(<br>. ....|Currency<br>basket<br>50<br>USS,<br>501ECU)<br>....<br>..<br>..<br>..<br>..|Purchase unlimited.<br>Firms can buy CC in<br>banks for foreign<br>trade transactions.<br>Individuals<br>entitled<br>to S50 per year.<br>. .............<br>..<br>. ...<br>....<br>..<br>...|Subsidies on some<br>agricultural<br>products.<br>Restrictions<br>related<br>to OECD nontariff<br>restrictions.<br>.....<br>....<br>. .......<br>.............|Average around<br>13X. but other<br>charges (5-6X<br>advalorem).<br>.........|Licenses cover<br>around101of<br>total<br>imports.<br>1001 advance<br>ifport<br>deposit<br>required.|
|Council of<br>of Ministers|Downward<br>crawl|Currency<br>basket<br>(pre-<br>announced)|Full convertibility<br>for current<br>account<br>transactions.|No taxes and subsidies.<br>Export quotas related<br>to OECD restrictions<br>and selected<br>inputs.|Average around<br>14X. All procedu-<br>resin line with<br>GATT articles.|No restric-<br>tions<br>except<br>for alcoholic<br>beverages.|

Sources: Jan J. Michalek, The Opening-Up of the Polish Economy, PPRG Discussion Paper #11, University of Warsaw, December 1991; Dani Rodrick, Foreign Trade in Eastern Europess Transition: Early Results, NBER, mimeo, January 1992; and Gazeta Bankowa, No. 44, 11.03-11.09.1991.
30 initialy, the less-developed commercia **l** inks 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.

The second set of circumstance **s** hared by the CEE-3 economies was that the emergence of a domestic demand constraint combined with the liberalization of 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 demand in 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 advantage of 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 quasiadministrative 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 regime.

# VI. IS THE EXPORT EXPANSION TO THE OECD SUSTAINABLE?

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
31 necessarily imply a dramatic change in the CEE-3 economies' competitiveness and export potential. Their industrial base, inherited from central planning, has remained unchanged and will not be transformed unless an upswing in output and capital formation takes place. The improvement in exports was impressive but only against the background of the dismal performance in the 1980s. Still, the export boom, driven by manufactures, was an unexpected outcome of the transformation and represented a turnound in CEE-3 export performance in OECD markets.

The argument in support of seeing the export expansion as only a temporary phenomenon is as follows. The major constraint on the trade performance of the CEE-3 in the 1980s was on the supply side. The removal of this constraint, by replacing an administrative economic system by a marcet-based one, reduced waste in the use of resources. The fall in consumption led to a temporary increase in export offers. The main source of expanded exports was not diversion from former CMEA markets but the contraction of domestic demand, resulting in distress exports. Expansion of exports will be possible only so long as there is a further compression in domestic demand accompanied by devaluations of domestic currency to ensure profitability of exports.

However, there are grounds for sketching a more optimistic scenario. First, the troika economies continued their export expansion in 1992. For instance, during the first six iths of 1992, the third year of the transformation program, Polish exports in current prices increased by 12.5 percent (CPO, 1992:1), while the value of Hungarian exports increased by 14 percent for the first seven months of 1992" More significantly, the increase in Polish exports took place against a background of stagnant (not contacting) domestic demand.

Second, the export upswing took place in an institutional environment whose full export potential is yet to be tapped. Two institutional constraints remain. The first relates to the dominance of the state-owned sector. During the initial stage of the transformation, the export push came from SOEs with organizational structures inherited from central planning. Privatization of SOEs, usually preceded by organizational restructuring to make state-owned assets more attractive to potential investors, is likely to increase their capacity to compete in international markets.

The second institutional constrain **t** o export growth relates to the absence of organizations providing information and credits for export-oriented activities. While the absence of export-promoting infrastructure was not particularly relevant for large SOEs with an earlier presence in OECD markets, it may hamper exports by newly-established private firms. The problem is that they are usually small and seldom have information capabilities for identifying export opportunities. In addition, since they lack capital, they tend

> 47 See Transition. The Newsletter about Reforming Economies, The World Bank, Vol. 3, No. 8, September 1992, p. 11.
32 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 restructuring of 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 affected by the decLine in investment activity. The evidence is scarce but there are some indications that export-oriented enterprises face a fimancial squeeze,'<sup>9</sup> 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 international competitiveness of the troika.

# VII. CONCLUSION

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 According to the Hungarian Ministry for International Economic Relations, the growth of small and medium-sized finns 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.
33 Balkan countries. Countries which liberalized their trade regimes, devalued currencies, introduced unified exchange rates, and removed administrative controls over prices succeeded in increasing exports to the OECD. Roimania, crippled by macroeconomic chaos and vacillating microeconomic reforms, 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 economic factors and earlier attempts at trade regime reforms. Pre-transformation export performance offered no clues as to what actually occurred--the export expansion in the 1990-92 period 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 communism turned out to be of less consequence for foreign trade 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 institutions and 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 positively correlated with the size of contractioD in GDP rather than with exchange rate policies. Hungary experienced the lowest decline in GDP, but simultaneously experienced the lowest increase in OECD market share among the CEE-3. The devaluation-inflation gap in the CEE-3 had no significant impact on exports. The domestic demand slump associated with the transformation was the most important determinant of export performance.

Fourth, the severance of links that used to bind economies of the CMEA had a less destructive impact on foreign trade performance than onia might expect. Although relationships between 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_nts give an interesting twist to East Europeans' description of the CMEA as a "council for mutual exchange of inefficiencies."