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wpl44WI' Policy Research WORKI9NG PAPERS Internatloral Trade InternationalEconomics Department The WorldBank June 1993 WPS 1144 Public Disclosure Authorized The ForeignTrade Dimension of the MarketTransition in Poland Public Disclosure Authorized The SurprisingExport Performance and Its Sustainability Public Disclosure Authorized BartlomiejKaminski Contraryto expectations,the driving force behind the export upswingwere manufactures- not rawmaterials, mineral fuels, Public Disclosure Authorized or agriculturalproducts. PolicyResearch Wor3dngPapers disseminatethe findings of work in progress and encourage the exchangeof ideas amongBank staffand all others interested in developrnentissues. Thesepapers. distributed by theResearch Advisory Staff. carry thenamesofthe authors, reflect onlytheirviews,andshouldbeused and citedaccordingly.Thefindings,intefpretations.andconclusions aretheauthors'own.Tleyshould not be aunbuted to the World Bank, its Board of Directors, its management, or any of its member countries. Policy Research| InternationalTrade| WPS 114a This paper - a product of the International Trade Division, International Economics Department - is a revised version of a paper presented at the conference "Transition to Democracy in Poland," organized by the Hoover Institution on War, Revolution, and Peace, Stanford University, Califomia, in November 1992. Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Pleasc contact Pauline Kokila, room S7-040, extension 33716 (June 1993, 27 pages). To the extent that foreign trade has been dis- expectations, the driving force behind the export cussed in the debate about the transformation of upswing were manufactures - not raw materi- former centrally planned economies, discussion als, mineral fuels, or agricultural products. has focused on what should be done to minimize Exports expanded because of the efforts of state- the costs of external adjustment through man- owned enterprises to export more in metallurgy, aged foreign trade and exchange rate policies. electro-engineering, and chemical and light Little attention has been paid to the "supply- industries. side" forces behind export expansion. Evidence on the relationship between Kaminski addresses questions that have been Poland's export performance in the West (espe- ignored: What product categories were the cially trade with the European Comm=unity)and driving force behind he expansior. of exports to the collapse of the CMEA seems to suggest that the OECD? To what extent were exports from the fall in Polish exports to the CMEA was the CMEA reoriented to the West? What was the smaller than expected. The redirection of Polish factor content of exports to the OECD? Was exports from the CMEA fueled only limited export expansion accompanied by a shift in export expansio . to the West. relative comparative advantage? Will the Central European economies preserve their recent gains The developments in Polish trade during the in OECD markets? first two years of the transformation program suggest that attempts to recreate the CMEA He finds that developments from the begin- arrangements in some new guise would have ning of the transformation program represent a unnecessarily weakened incentives to restructure dramatic acceleration of the trends in exports the economy with its comparative advantage. observed between 1984 and 1989. Contrary to The Policy Research Working PaperSeriesdisseminates the findings of work under way in theBank. Anobjectiveof the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy. Produced by the Policy Research Dissemination Center uTiLE FOREIGN TRADE DIMENSION OF THE MARKET TIRANSMON IN POLAND: TEE SURPRISING EXPORT PERFORMANCE AND ITSUSTAINABIL,TY" by Bartloinej Kaminska IntemationalTrade Division, The World Bank,Washington and the Universityof Maryland,College Park 0/ rTherevised version of a paper prosented at the conferenco Transition to Democracv in Poland, organized by The Hoover Institution on War, Revolution and Peace, Stanford University, Stanford, 23-24 November 1992 **/ I wish to acknowledge helpful coaments from Ronald Duncan, Andrzes Olechowski, Jacek Tomorowicz and Alexander Yeats. TABLE OF CONTENTS I* IntroductLon ............ .................... 1 II* The Export Boom durfrg the Initial Stage of the Market TransLtLon ** *. 2 11.1. Upsetting the Trends Improved Competitiveness in OZCD sarkets . 2 11.2. Manufactures: The Driving force behLnd the Uxport Expansion [email protected]@ ooo.. 5 11.3. Changes in RelatLve Factor IntensLties of Exports to the West oo9....o o..ooo...... 9 III. The Collapse of External Links Distorting Trade Patterns: The FSU and the CIA.. .o.oooooo..oo..o.. 13 IV. Is the Export Expansion to the West SustaLnable? o.... ... 19 V. ConclusLon o....oo.o.......ooo......o.....oooo......o.....o......o.... 23 B:liography . .. ....... .* * oo ..ooooo** * * o*ooo* oo 26 LIST OF TABLES 1. Export Performance of Poland in OECD Markets, by Product Categories, 1980-91 perlod .o.o...... e.o.. .. ..... .. oo.. .... .ooo. 5 2. PolLsh Manufactured Products Exports to the NC ia 1990 and 1991 and their Relatlve Factor IntensLtLes *oo ooooo.......*..*..* 8 3. The ComposLtion of Polish Exports to the 3C-10 According to Different Factor Intensities and Revealod Comparative Advantage indices, Averages for the 1980-83, 1984-89, and 1990-91 p rLods.................................... 12 4. Changlng Polish Export OrientatLon from the C1EA to the OECD, 1988 to 1991 ......................................... is 5. Composition of PolLsh Exports to the CEA and the NC ia 1985, 1989, 1990 and 1991 ......... ............ ***...*. 16 CHARTS 1. Poland's CompetLtLve PositLon ln O0CD Markets, 1980 ............ 6 I. INTRODUCTION The period followingthe implementationof the transformation-cum-stabilizationprogram in 1990witnessed a dramatic opening of the Polish economyto market forces accompaniedby a rapid growth in exports, especiadly to the West. The reorientation of Polish trade occurred in the face of cbanges in extemal and domestic circumstanceswhich were not particularly favorable to an improvementin export performance. Externally, the CMEA (Councilfor Mutual lconomic Assistance),Poland's major tradingfocus, was diaintegrating. Ihtr-CMEA trade, accountingfor around half of Polish trade, had been falling since 1986, and the survival of the organmian was uncertain in 1990. Its demise in 1991 came unexpectedlyquickly,' leading to a fail in CMEA import demand for Polish products and to a deteriorationin the terms-of-tradevis-a-vis the FSU (former Soviet Union). The end of the Cold War changed Poland's political status in the West. However, its access to Western markets did not improve enough in the 1990-91 penod to explain the export upsmnng. Hence, the most sigificant external developmentsrelevant to Polish foreign trade durng the first two years were the demise of the FSU and of the CMEA. Domestically,the transformationfrom an administrativeeconomic system involveda simultaneouschne in mareconomic policies and in their microeconomic foundadons. The mroeconomic stabilizaton program wa carried out in an institutionalenvironment dominated by SOEs(state-owned enterprises), resembling administrative units rather than fall-fledgedfirms with unambiguouslydefined property rights. Their organizationalstructures were designed to facilitateadministrative management by the state. In addition to the organizationallegacies, ther was a legacy of production and investment heavily distorted by the misallocationof resources and the economic stagnationin the 1980s. As a result, the capacity of SOEs to competeinternationally wa aso limitedbecause of outdated technologies. Yet they expanded their exports to highly competitiveWesten markets. An intriguingquestion is whether the export upswing to the West, defying the previous trends, is a short- term phenomenon. The paper addressesthis questionby comparingthe export performance in the 1980swith that in the 1990-91period,i.e., when some major systemicconstraints of central planningwere effectivelyremoved and I The CMEA was officially dissolvedat its 46th General Session held in Moscow on June 28, 1991. Its membersincluded Bulgaria, Cuba, Czechoslovakia,the GermanDemocratic Republic, Hungary, Mongolia,Polad, Romania, the Soviet Union, and Vietnam. 2 a supply-constrainedeconomy was replacedby a demand-constrainedeconomy. It begins with an attemptto identify the supply-side' sources accountablefor the suddenimprovement in exportperfo0rance. It shows that the increa in penetrationof OECD marketswas not a reversal but the dramaticacceleration of treads observed in the 1984-89 period; that it was driven by manufacturedgoods, mainlycharactedzed by a high unilled labor content; and that it was triggered by domesticdevelopments rather than by extemal factors such as the collapseof the CMEA or more cooperativeeconomic relations betweenPoland and OECD countries. In its concludingcection, the paper disce prospects for sustaining the new pattern of exports. II. THE EXPORT BOOM DURING THE INITIAL STAGE OFTM MARKETTRANSMTION Polish export performancein Western markets followingthe implementationof the stabilizationprogram was a bright spot in an otherwise bleak picure of growing unemployment,expanding budget deficits, perient inflation, and falling aggregate output. The expansion defied