STUDIES OF ECONOMIES IN TRANSFORMATION - 15Go 4 AqCiI jq Foreign Trade in the Transition The International Environment and Domestic Policy Public Disclosure Authorized Bartlomiej Kaminski, Zhen Kun Wang, and L. Alan Winters 20 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized THE WORLD BANK RECENT STUDIES OF ECONOMIES IN TRANSFORMATION No. 1 Country Department III, Europe and Central Asia Region, Food and Agricultural Policy Reforms in the Former USSR: An Agendafor the Transition No. 2 Michalopoulos and Tarr, Trade and Payments Arrangementsfor States of the Former USSR No. 3 Country Department III, Europe and Central Asia Region, StatisticalHandbook: States of the Former USSR No. 4 Barr, Income Transfersand the Social Safety Net in Russia No. 5 Country Department III, Europe and Central Asia Region, Foreign Direct Investment in the States of the Former USSR No. 6 Wallich, Fiscal Decentralization:Intergovernmental Relations in Russia No. 7 Michalopoulos, Trade Issues in the New IndependentStates No. 8 The World Bank, StatisticalHandbook 1993: States of the Former USSR No. 9 Holt, Transport Strategiesfor the Russian Federation No. 10 Fong, The Role of Women in Rebuildingthe Russian Economy No. 11 de Melo and Ofer, PrivateService Firms in a Transitional Economy:Findings of a Survey in St. Petersburg No. 12 Chu and Grais, MacroeconomicConsequences of Energy SupplyShocks in Ukraine No. 13 Michalopoulos and Tarr, Trade in the New IndependentStates No. 14 The World Bank, StatisticalHandbook 1994: States of the Forner USSR No. 15 The World Bank, Russia : Creating Private Enterprisesand Efficient Markets No. 16 Lieberman, Ewing, Mejstrick, Mukherjee, and Rahuja, Mass Privatizationin Central and Eastern Europe and the Former SovietUnion: A Comparative Analysis No. 17 Le Houerou, InvestmentPolicy in Russia No. 18 Belkindas and Ivanova, ForeignTrade Statisticsin the USSR and SuccessorStates No. 19 The World Bank, StatisticalHandbook 1995: States of the Former USSR STUDIESOF ECONOMIESIN TRANSFORMATION Foreign Trade in the Transition The InternationalEnvironment and DomesticPolicy Bartlomiej Kaminski, Zhen Kun Wang, and L. Alan Winters 20 The World Bank Washington,D.C. Copyright © 1996 The International Bank for Reconstruction and Development/THE WORLDBANK 1818 H Street, N.W, Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing April 1996 Papers in the Studies of Economies in Transformation series present the results of policy analysis and research on the states of the former USSR. The papers have been prepared by World Bank staff and consultants and issued by the World Bank's Europe and Central Asia Department III under the supervision of Constantine Michalopoulos. In light of the worldwide interest in the problems and prospects of these countries, dissemination of these findings is encouraged for discussion and comment. 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Bartlomiej Kaminski is Director of the Center for the Study of Post-Communist Societies at the University of Maryland and a consultant to the International Trade Division in the International Economics Department of the World Bank. Zhen Kun Wang is a consultant working on the World Bank's World DevelopmentReport and was for- merly a consultant to the Transition Economics Division in the Policy Research Department of the World Bank. L. Alan Winters is Division Chief of the Intemational Trade Division in the Intemational Economics Department of the World Bank. ISSN: 1014-997X Library of Congress Cataloging-in-Publication Data Kaminski, Bartlomiej, 1944- Foreign trade in the transition: the international environment and domestic policy / Bartlomiej Kaminski, Zhen Kun Wang, and L. Alan Winters. p. cm - (Studies of economies in transformation, ISSN 1014-997X; 20) Includes bibliographical references. (p. ). ISBN 0-8213-3611-8 1. Europe, Eastem-Commercial policy. 2. Europe, Eastern- Economic policy-1989- 3. Former Soviet republics-Commercial policy. 4. Former Soviet republics-Economic policy. 5. Intemational trade. 1. Wang, Zhen Kun, 1963- . 11. Winters, L. Alan. III. Title IV. Series: Studies of economies in transformation ; paper no. 20. HF1532.7.K36 1996 382' .3' 0947-dc2O 96-14513 CIP Contents Foreword v Preface vii 1. Introduction 1 2. The Collapse of Central Planning and the CMEA 5 The Trade Legacy 6 ForeignTrade Under Central Planning 6 The Unravelingof the CMEA 8 The TradeAdjustmentProblem Facing the NIS 9 The Trade Potential of Transition Economics: Inherited Distortions 10 3. Shifting Patterns of Foreign Trade 15 Export Performancein OECD Markets in the 1980s 16 Shifting Patterns, 1988-94 17 An Index of Export Performance 22 Changes in Imports 25 iv FOREIGNTRADE IN THE TRANsrnON 4. Changesin MarketAccess 27 Incomplete Normalization of Relations 28 Preferential Market Access 31 The Significanceof Improved Market Access 32 5. Policy and TradePerformance 37 Exogenous FactorsAccounting for Differencesin Trade Reorientation 37 Trade PolicyReform 38 Fast VersusSlow Reformers 39 Useof Export Controls 41 Changes in Domestic Institutional and Policy Settings 42 Settingsof Good and Poor Trade Performners 42 6. The Impact of Transitionon Developing Countries' Trde 47 Trade Displacement in EU markets 48 Primary Commodities Markets 50 7. Condusion 55 Notes 57 References 59 Foreword Despite a common legacyof central planning, transi- tion economies have differed widely in their foreign trade performance. The dissolution of the Council for Mutual Economic Assistance and the demise of the Soviet Union required them to reorient their trade suddenly and dramat- ically,and the extent to which they succeeded in doing so has varied considerably. This study provides strong evi- dence that the vigorous implementation of economic reforms aimed at macroeconomic stability and openness to international trade is the single most important variable explaining differences in the pace of trade reorientation. The countries which made the strongest progress in mov- ing to a market-based economic system have been precise- ly those which have most successfullyreoriented their for- eign trade in line with comparative advantage and eco- nomic opportunities. The link between domestic policy and export perfor- mance has been long suspected, but has not previously been carefully documented. Given that the World Bank has supported and advised countries in their efforts at transformation and that it has consistently argued the vi FOREIGNTRADE IN THETRANsmoN case for an open trade regime, it is appropriate on a close collaboration with staff in the that this evidence be widely disseminated. The Europe and Central Asia Regional Vice- research reported here was undertaken by Presidency.In view of its relevanceto the latter's economists in the Bank's Development operational work, I am pleased to indcludeit in Economics Vice-Presidency, but it was based this series. Johannes Linn Vice President Europe and Central Asia Preface This paper started as one of a series of overviewarticles initiated by the Transition Economics Division of the World Bank's Policy Research Department to review and assessthe growing body of evidenceon the determinants of a successfultransition. It was intended to survey the inter- action between international trade and trade policy on the one hand and progress in transition on the other. It had long been recognizedthat sound economic policy played a crucial role in both development and transition, but the extent to which this factor appeared to dominate the deter- mination of trade performance was a surprise. As this pic- ture began to emerge from the survey,the objective of this paper evolved beyond a reviewof the literature into a more substantial research exercisedesigned to test the proposi- tion and document more systematically the evidence