Trade Policy in Transition Economies
Integration with the international economy is an essential element of the transition from central planning to a market system. Price distortions, so common under central planning, could be maintained only through formidable trade and foreign exchange controls that divorced the domestic from the international market. Dismantling these barriers promotes efficient domestic resource allocation. International prices pose a competitive challenge to domestic producers and signal needed structural changes. Trade policy reform allows the link between domestic and international prices and markets and is thus a key determinant of the pace and scope of the structural change necessitated by the transition.
The main output of this project in 1996 was a report summarizing trade performance and the experience with trade policy reform in the countries of the former Soviet Union. The report, based on eight country studies and other analyses, recommends strategies for increasing their integration with the international economy--strategies that entail actions by the countries as well as by their main trading partners, the OECD countries.
The report concluded that ineffective trade and payment policies in the countries of the former Soviet Union have been at the root of the decline in their trade, which has been linked to the contraction in output. Their heavy economic interdependence has intensified the problem.
Countries that have reformed slowly have often maintained that their strategy will reduce the high cost of transition. But the slow adjustment strategy typically has backfired--those that have reformed the fastest have also arrested their output decline the fastest.
In fiscal 1997 the main output was a paper on customs unions in the Commonwealth of Independent States (CIS). A number of the states in the CIS are considering implementing a customs union. The analysis shows that, although preferential trade areas in the CIS may have served a useful purpose in the past as a transitional device, the time for customs unions and free trade areas in the CIS is over. Integrating with the world economy should be the highest priority now, and customs unions will retard that integration.
Also in fiscal 1997 work was done on the issue of accession to the World Trade Organization (WTO) by the transition economies. This work emphasized that WTO accession provides a unique opportunity for the acceding country to "lock in" a trade policy that is beneficial to that country, providing it adopts a less than minimalist approach in its accession offer.
The findings and recommendations of the country studies have been communicated to the governments in the context of policy dialogue with the Bank on international trade reform, supported in many cases by Bank lending. The customs union paper has been discussed with and distributed to representatives of a number of transition economies that have requested advice on the subject. And the analysis of issues relating to accession to the WTO was presented at two three-day conferences in Vienna, Austria (January 30February 5, 1997), held by the Economic Development Institute for 18 of the transition economies of Central and Eastern Europe and the former Soviet Union.
Responsibility: International Economics Department, International Trade Division--David Tarr (dtarr@worldbank.org) and Bernard Hoekman; and Europe and Central Asia, Country Department III, Office of the Director--Constantine Michalopoulos.
Completion date: June 1998.
Reports:
Michalopoulos, Constantine, and David Tarr. 1996. Trade Performance and Policy in the New Independent States. Directions in Development Series. Washington, DC: World Bank. (Also published in Russian.)
_____. 1997. "Customs Unions in the Commonwealth of Independent States." Post-Soviet Geography and Economics. (Also published as Policy Research Working Paper 1786. World Bank, Europe and Central Asia, Country Department III, and International Economics Department, Washington, DC.
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