van Brabant, J.M., Adjustment, Structural Change and Economic Efficiency: Aspects of Monetary Cooperation in Eastern Europe (Cambridge: Cambridge University Press, 1987).
Daviddi, R., and E. Espa, “The Economics of Rouble Convertibility: New Scenarios for the Soviet Monetary Economy,” Banca Nazionale del Lavoro Quarterly Review, December 1989.
de Vries, M.G., “The Fund and the EPU,” in M.G. de Vries and J.K. Horsefield, eds., The International Monetary Fund, 1945-1969; Volume II: Analysis (Washington: International Monetary Fund, 1969).
Lavigne, M., “Economic Relations Between Eastern Europe and the USSR: Bilateral Ties vs. Multilateral Cooperation” (manuscript), April 1990.
Schrenk, M. (1990a), “The CMEA System of Trade and Payments: Today and Tomorrow,” World Bank Strategic Planning and Review Department (Washington: World Bank, 1990).
Schrenk, M. (1990b), “Future of the CMEA,” World Bank Country Economies Department, Socialist Economies in Transition, April 1990.
Wolf, T.A., “Market-Oriented Reform of Foreign Trade in Planned Economies,” IMF Working Paper, WP/90/28 (Washington: International Monetary Fund, 1990).
The author is a Professor of Economics and Director of the International Finance Section at Princeton University and was a consultant in the European Department when this paper was prepared. The author is indebted to the staff of the European Department, especially to Thomas Wolf, for advice and comments on earlier drafts, and to papers by Peter Bofinger (1990) and Constantine Michalopoulos (1990), which examine the same subject. The views expressed here are the author’s sole responsibility and do not necessarily represent those of the International Monetary Fund.
The German Democratic Republic (GDR) is excluded from most of the discussion and, where possible, the data, because it now uses a convertible currency and would not be a candidate for membership in an EEPU. When the GDR is included, reference will be made to the CMEA6.
For more on the CMEA system, see Wolf (1988), Schrenk (1990a) and the sources cited in those works. The CMEA sponsored other forms of economic cooperation, but they lie beyond the scope of this paper (and more efforts of this sort are not likely to occur).
Bilateral balancing was carried even further. Attempts were made to balance trade in certain types of goods, to conserve scarce supplies for domestic use or for export to Western countries in exchange for convertible currencies. Furthermore, separate accounts and exchange rates were used for commercial and noncommercial transactions. For a detailed account of the CMEA payments system, see Brabant (1987).
The economic statistics of the CMEA countries are not as reliable as those of many other countries, because prices are not very meaningful. This caveat applies with particular force to comparisons like those in Table 1, but must also be borne in mind when reading other tables in this paper. Trade data are particularly hard to compare, because each CMEA country uses a different exchange rate between the TR and the dollar.
Output and trade data from PlanEcon Report, Vol. V, 1989, 27-28, 36-37, and 42-43.
The USSR was not alone in using bilateral arrangements to maximize bargaining power. Kaplan and Schleiminger (1989, chs. 3-4) note that the United Kingdom opposed the creation of the EPU partly because it wanted to promote the international use of sterling but also because its bilateral payments arrangements gave it more bargaining power.
It is worth remembering that the early GATT rounds of tariff cuts involved product-by-product bargaining, and it was conducted bilaterally; “principal suppliers” of particular commodities swapped concessions with each other, then extended those concessions to the other participants via the most favored nation clause.
Two tables are needed because Czechoslovakia, Hungary, and Poland use the Standard International Trade Classification (SITC) to organize their trade statistics, but Bulgaria and Romania have not yet shifted to it.
For a well-balanced comparison between Western Europe in 1950 and Eastern Europe in 1990, see ECE (1990), pp. 1-9 ff.
The corresponding changes in domestic prices will differ from country to country. In Hungary, for example, petroleum products have been taxed to keep their domestic prices close to world prices, and a higher price for imported oil is thus likely to result in tax cuts, not higher energy prices. (In that case, however, higher import prices will also reduce tax revenues and exacerbate the budgetary problem.)
The Marrese-Wittenberg calculations also allow one to compute ratios of Hungary’s terms of trade with the USSR and Poland to its terms of trade with the market economies. In 1987, its terms of trade with the USSR were 12.5 percent better than its terms of trade with the market economies, and its terms of trade with Poland were virtually the same as its terms of trade with the market economies. Since 1987, however, the forint has depreciated more sharply in terms of the dollar than in terms of the TR, and Hungary’s terms of trade with the USSR have probably improved relative to its terms of trade with the market economies.
The Czechoslovak figure may be too high. Czechoslovakia’s cross rate between the TR and the dollar was higher in 1989 than those of some other countries. Hence, the dollar prices implicit in its trade statistics may have been closer to world prices and should be adjusted by smaller amounts than those used in this paper. If this is true, of course, the current-account deficit in Table 9 is likewise too high.
The figures in Tables 8 and 9 are not very sensitive to small changes in the assumptions about the prospective price changes. The computations were repeated on more pessimistic assumptions: that energy prices rise by 250 percent, the prices of other raw materials rise by 200 percent, and the prices of chemicals rise by 100 percent, while the prices of machinery and transport equipment fall by 30 percent and the prices of other manufactures fall by 15 percent (rather than being unchanged). Here are the terms-of-trade and trade-balance changes for the countries that report trade data on the SITC basis:
|Terms of trade (percent)||-35.5||-39.3||-25.0|
|Trade balance ($ billion)||-3.9||-2.2||-1.6|
|Terms of trade (percent)||-35.5||-39.3||-25.0|
|Trade balance ($ billion)||-3.9||-2.2||-1.6|
The terms of trade deteriorate more sharply and the trade-balance effects are bigger, but the changes are not very different from those in Table 8.
It should be noted, however, that cuts in Soviet exports of the sort that occurred in July 1990 will not reduce the balance-of-payments problems facing the CMEA5. Those countries will have to buy more oil on the world market, so that their total imports will not fall, and they will experience reductions in their exports if the USSR cuts back its imports because of its own balance-of-payments problem.
Instances of this sort occurred in 1989; see ECE (1990), p. 3-70, and Lavigne (1990), p. 14. It should be noted that bilateralism can induce many forms of discrimination. A country that anticipates a surplus with one of its partners (or is a cumulative creditor under a bilateral payments arrangement) might seek to raise its imports rather than reduce its exports; conversely, a country that anticipates a deficit with one of its partners (or is a cumulative debtor) might seek to reduce its imports rather than raise its exports. All of these possibilities distort trade, but some of them do not reduce it. The trade-reducing tendencies may dominate, however, when countries face excess domestic demand or current-account deficits with the outside world. It is hard for deficit countries to increase their exports and thus hard for surplus countries to increase their imports.
This point is stressed by Tew (1988), who describes the global economy of the 1950s as a “binary world” comprising the dollar area and the EPU area. (Japan did not belong to either but was not a major trading country in the early 1950s.)
Some of the credits were reversed automatically, as members shifted from deficit to surplus; some of them were amortized under arrangements negotiated periodically, when the EPU agreement was renewed.
The liberalization of trade with the dollar area deserves particular attention. Most discussions of the EPU (e.g., Triffin, 1957, pp. 203 ff) say that the United States accepted more discrimination against it as the price it had to pay for the closer integration of Western Europe--one of the main objectives of the Marshall Plan. An intensification of discrimination occurred in the early years of the EPU, when liberalization within Europe took place more rapidly than liberalization with the dollar area. The latter was more dramatic in the end, however, and reduced discrimination against the United States.
The Fund itself did not have much influence on European policies in the early years of the EPU, partly because it had decided that countries receiving Marshall Plan aid should draw on the Fund only in “exceptional circumstances” so that its resources would be available intact after the Marshall Plan had ended. On relations between the IMF and the EPU, see de Vries (1969).
This point must be borne in mind when appraising proposes such as those of Daviddi and Espa (1989) that were drafted before the Sofia meeting of the CMEA.
Ethier (1990) proposes an interesting variant on the conventional arrangement outlined in the text. His scheme would be open-ended in two respects: (1) new members could be added without affecting the formal rights and obligations of existing members; (2) members could use it to clear their payments with nonmembers, but net balances with nonmembers would be excluded from the credit-granting aspect of the plan. Each member’s obligation to make convertible-currency payments to the union would depend on its deficit with the union, defined to include its deficit or surplus with nonmembers covered by the clearings through the union. Suppose that Czechoslovakia, Hungary, and Poland formed a union and used it to clear their deficits and surpluses with the USSR, as well as their mutual deficits and surpluses. In the particular instance discussed in the text, the outcome would be more attractive to Czechoslovakia, which has a large deficit with the USSR, and less attractive to Hungary and Poland, which would have to pay convertible currencies to the union because of Czechoslovakia’s deficit with the USSR.
In the case of Czechoslovakia, service exports to the whole CMEA area (including the GDR) amounted to 14 percent of merchandise exports in 1988, and service imports amounted to 5 percent of merchandise imports. Thus, the 20 percent figure used instead of the 15 percent EPU figure may make an overly generous allowance for the omission of services. It should be noted, however, that the 20 percent figure makes no allowance for the effects of shifting trade to world prices. The underlying trade statistics are those that were used to construct Table 4.