World Bank Document

Public Disclosure Authorized TransitionEconomnicsDivision * PolicyResearchDepartmnent *TheWorldBan A Program for Trade Recovery in the New Independent St'ates by ConstantineMichalopoulos anldDavid G. Tarr Public Disclosure Authorized 11lfifteen states established inthe tured extensive use of export controls control oftrade in key commnodities,and j economic space of the formner "to keep goods at home." Exports, pri- surrender of foreign exchange at be- Soviet Union (FSUJ)have expe- marily of fuel, raw material, and food, low-market exchange rates. rienced substantial declinesin trade and have been restricted, with the aim of econonuc growth since regammiginde- keeping domestic prices low, and hence Before 1994 most new states had im- pendenice.Their heavyeconumc theountns poblen inter-fea haveMostF softenedSUthe impact rofprice liber- posed few fonmalconxtrols on imports. d0ependence,with its roots in the cen- alizationi bothl on enterprises and con- The problem so far, however, has b'een tralized state planning systemnof the sumers. Export restrictions have in- toolittlecompetitionfromimnportsrather SovietUnion, has intensifiedthe decline cluded licenses and quotas, taxes, thantoo much, because overvalued for- in trade and output. In 1993 total trade monopsony purchases by,state trading, eign currency rates hiked up import amnongthe fifteen countries (interstate organizations and these organizations' prices, even in the absence of formal Public Disclosure Authorized trade) declined to a third of its 1990 ..... ; level,whiletheirtotaltradewiththe rest oftheworld'dropped to 46 percentcom- What's inside.. Latestreport of the EuropeanEconomiic pared with 1990.,Gross domestic prod- AvertingaNewDebtCrisis inRussia Commi~ssionarguesthatforeigninvestors uct over the same period dropped by 30 In Russia,a loomingarrears crisiscan be are not leading the transitionprocess. to 50 percent (see table on page 4). tackledwithproperpolicieg7includingac- (page12) celeratedbankuptcyprocedures.(page 5) New market-based mechanism for RestructuringRussianEnterprises China stands inh3i0th psition ina allocating resources were slow to Support of cash privatization,tangible Euromoney'scountry risk table.It is fol- emerge in most countries. 'Ihe institu- controlrights, land reform,competition, lowvedbyteCzech republic, Hungary, and tional infrastructure for the conduct of and social asset transfer could speedup Slovenia.(page 13) trade was and remnainsdeficient and all the process of restructuringin Russia too often continues to be dominated by (pg )Mlsoe fTasto pg 5 statetradingorganizations.- Exp ortshave SurveyofCzech Public Opinion WorldBank/IMFAgenda(page 19) Public Disclosure Authorized also suff~eredfrom the overall disloca- TheCzechpubicconsidersshorttermeco- tion resultmigfrom the breakup of cen- nomicprospectswith reservation,but most ConferenceDiary(page22) tral plaming and declining supplies of believetheeconomywillimproveoverthe some key products (for example, oil in nextfiveyears(page 10) 'NewBooksandWorkingPapers Russia). Quotationof the Month:"No Massive (ae4 Ineffectiv*adepolices wosened ShiftofForeign Fundsfrom Developing BibliographyofSelectedArticles thffeprobkm postlSUcoutiesworened CountriestoEasternEuropeandtheFSUI(page 27) The World Bank/PRDTE import restraints. hi 1992, real wages- reformers, on the other. hand,. such as were due less to the introduction of measuredatthe undervaluedlocal rate- Georgia,Ukraine, and Uzbekistan,have market forces and more to other fac- reached only about $10-$20 a month in not arrestedtheir output declineand still tors: many FSU countries, and were just face most of their adjustment costs in slightly higher in 1994 in many states. the future. The performance of other Payments problems, with economic (The local exchange rate became un- countries,such as Kyrgyzstan,Moldova, agents either unwilling or unable to dervalued because of the strong de- and Russia; fell in between the two ex- use the banking system to pay for mand for foreign currencies-as resi- tremes. imported goods and services, may dents sought a store of value other than well have been the nost serious im- domestic currencies-andalsobecause Although supply-side problens bear pedimentto interstatetrade.This prob- hard currency supplies tapered off, not most of the responsibilityfor the de- lemculminatedin1992 duringtheperiod least as a result.ofthe export restraints.) cline in trade over the pastfew years, of the common ruble zone. Russia was most countries face potentially sig- the only country entitled to print ruble Appreciating Currencies niflcant barriers in the OECD mar- notes, but all fifteen states couldexpand kets, especiallyintheformofnontariff the aggregate money~supply as their Russiathrough 1993, and Uzbekistanto and contingent restraints. While sales central banks were able to create ruble date, subsidizedimports extensively In of fuel and raw materialswhich ac- credits at will. In the absence of mon- Ukraine foreign exchange has been al- count for-the bulk of FSU exports- etary coordination among the central located at below-market rates to pre- encountet few problems with:'rnarket banks, governments were not particu- ferred importers. As a result, there was access, nontariff barriers have slowed larly interested in exports to the ruble less (or more expensive) foreign ex- trade in- agriculture, food products, zone. They would earn rubles, which change available for those who wanted leather, textiles, chemicals, and metals. would be credited to their account- to import competitive goods and ser- Antidumipigactions,introducedinitially somethingtheir central banks could do vices. From late 1993, as exchange against.Sovietenterprises, were carried anyway. And they had too many rubles markets gained strength and new cur- over to the new iependent states. In already.Goverments quicdy responded rencies were introduced, foreign ex- addition:new procedures were initiated by imposing export licensing require- change became more available. The in 1992and 1993againstBelarus,Geor- ments on interstatetrade,which usually appreciation of local currencies (in real gia, Kazakhstan,ARussia,Tajildstan, and were more severe than restrictions on terms) in some states prodded domestic Ukraininrelationto avarietyofprod- their trade outside the FSU. enterprises to seek protection from in- ucts inludingaluminum, ferro-silicon, ternational competition. Several coun- anduranum. Risky Ruble Trade tries, including Latvia, Lithuania, and Russia, respondedto such pressures in Trade amongthe republicsofthe Soviet The payments situation deteriorated early 1994 with new,stricter regimes of Union was too high and should have furtherafterJuly1992.Russiabeganto import tariffs or with plans to impose delined, once countries gained inde- accumulate large bilateral trade sur- new, higher tariffs. pendenceand started to introduce mar- pluses against the new independent ket reforns. Russia had the lowest de- states. To avoid unlimitedfinancing of On the basis of case studies in eight pendence on trade with the other these trade surpluses and stem the out- countries-Estonia, Kyrgyzstan,Latvia, republics: in 1990 its share of interstate flow of goods, Russia's central bank Lithuania,Moldova, Russia, Ukraineand traderepresented 61 percent in total imposedcreditlimitsonotherFS.Ucoun- Uzbekistan-we can conclude that the f tra while for the other countries. But the system was still plagued countries that have been the most suc- tnes, such trade in 1990 amounted to by huge uncertainties and long delays cessful in reorientingtradeand stabiliz- between 82 percent and -93 percent of (transfer payments took on average ing the downward spiral in trade and total trade. Thishigh leveloftrade inter- about three months). output are those that reformedthe fast- d was the result of highly est (such as the Baltics). They intro- concentrated production and arbitrary By late 1993 all countries except duced new currencies, began to stabi- specialization.Centralplanningdecisions Tajikistanhadintroducedtheirowncur- lize their economies, and introduced forged trade links that often had little rencies. The new independentstates no relatively liberal trade. regimes as early relevance to comnparativeadvantages `longer had to worry about worthless as end-1992. By mid-1994 their output or location advantages. But declinesin trade surpluses. Commercial baniks and trade declines bottomed out. Slow interstatetrade followingindependence throughout Russia and Ukraine- 2 November-December1994 Transition through their growingnetwork of corre- Furthermore, many countries were fac- 1973 OPEC oil shock.)Energy import- spondent accounts-provided reason- inga serious foreign exchange shortage ers attempted,to mitigate the terms of ably fast turnaround on payments. But and were unwillingto use the ruble for trade losses by making special arrange- even as this networkfacilitated trade in denominationor settlementof interstate ments in bilateral agreements with ex- 1993 and early 1994, new problems trade transactions. As a result, barter porting countriesto supply oil and other emerged. continuedto be the favored instrument raw materials at less than world prices. of trade among most of the new states. The new currencies, with the exception Country Strategies of the Baltic currencies (and possibly Interstate trade was also hampered the Russian ruble),werenot convertible by major terms of trade adjustments, Countries reacted to the interstate trade and could not be used in trade. Denorni- which took

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