The framework for trade in Eastern Europe has disintegrated. It was decisively rejected by the governments of Eastern Europe and by the U.S.S.R., for somewhat different reasons. All of the governments favor trading arrangements that emulate those in the rest of the world. Trade should take place between individual enterprises, not be monopolized by governmental entities. Trade should be conducted at world prices, and payments made in convertible currencies (which means that imbalances would normally be settled in those currencies). Agreement was reached in principle on these objectives in January 1990 at the Sofia meeting of the Council on Mutual Economic Assistance (CMEA), and the U.S.S.R. sought to implement the arrangements fully by the beginning of 1991. There is concern in Eastern Europe, however, and among Western observers, about the costs of moving quickly to the new regime.
A shift to trade at world prices will worsen Eastern Europe’s terms of trade and drive it into current account deficit with the U.S.S.R. Under the new regime, moreover, a deficit with the U.S.S.R. will have to be settled in convertible currencies, which will be difficult. The countries of Eastern Europe cannot readily earn or borrow more in the West. In fact, they must spend more in the West to buy capital goods for economic modernization.
Some of the countries of Eastern Europe have made short-term bargains with the U.S.S.R. to finance their prospective current account deficits. Thus, Czechoslovakia and Hungary expect to draw down balances built up when they were running current account surpluses. The balances are denominated in transferable rubles (TR) but will be converted to U.S. dollars at exchange rates reported to approximate $0.90 = TR 1. (They will thus receive fewer dollars than they would have obtained at the official exchange rate prevailing when they acquired the balances but more than they would obtain at recent cross rates.)
Some observers believe, however, that longer-term arrangements are needed. These might be modeled on the European Payments Union (EPU), which helped Western Europe to move from bilateral trade before 1950 to current account convertibility in 1958. The suggestion has been made by a number of individuals and organizations, including the Economic Commission for Europe, in its Economic Survey of Europe 1989–90.1
The analogy is intriguing but may be deeply flawed. There are large differences between the postwar situation in Western Europe and the present situation in Eastern Europe. They are reviewed in this paper, which reaches the conclusion that an Eastern European Payments Union (EEPU) is not a good way to manage the transition to the new trading and payments regime.
An EEPU that excluded the U.S.S.R. might not be very useful, as there may be far less scope for trade expansion in Eastern Europe than there was in Western Europe after World War II. Trade and payments have been conducted bilaterally in the CMEA area, but that has not been the principal reason for the low level of trade among the countries involved. In Western Europe, by contrast, bilateral payments arrangements depressed trade significantly in the late 1940s, and the multilateralization achieved through the EPU fostered liberalization, regionally and globally.
An EEPU that included the U.S.S.R. would not work well, because the U.S.S.R. would be a “structural creditor” in the years ahead and would have to lend to Eastern Europe through the EEPU. The EPU had structural creditors too, but Marshall Plan money was used to indemnify them for the dollars they sacrificed by lending to their partners. The same point can be made more vividly. Because the United States was not a member of the EPU, the “dollar shortage” faced by Western Europe was financed outside the EPU. If the U.S.S.R. were a member of an EEPU, the “ruble shortage” facing Eastern Europe would be financed automatically within the EEPU.
This paper has four parts. The first describes the old framework for trade and payments among the CMEA countries and the actual trade pattern. The next part reviews the main objections to that framework viewed from the perspectives of the U.S.S.R. and of the Eastern European countries—Bulgaria, Czechoslovakia, Hungary, Poland, and Romania—denoted here as the CMEA5. It also examines the outlook for CMEA trade, focusing on the effects of shifting to world prices and using convertible currencies. The third part of the paper describes the EPU and assesses its contribution. The final part shows how an EEPU might work, with and without the U.S.S.R. It is, on balance, critical of proposals to create an EEPU, but it stresses the need for balance of payments financing to help the CMEA5 adjust to the impending shift in their terms of trade and the switch to convertible currency payments.
Bofinger, Peter, “A Multilateral Payments Union for Eastern Europe?” CEPR Discussion Paper No. 458 (London: Centre for Economic Policy Research, 1990).
Daviddi, Renzo, and Efisio Espa, “The Economics of Ruble Convertibility: New Scenarios for the Soviet Monetary Economy,” Banca Nazionale del Lavoro Quarterly Review, No. 171 (December 1989).
de Vries, Margaret G., “The Fund and the EPU,” in The International Monetary Fund, 1945–1969; Volume II: Analysis, ed. by Margaret G. de Vries and J. Keith Horsefield (Washington: International Monetary Fund, 1969).
Ethier, Wilfred J., “Proposal for an Eastern European Payments Union” (unpublished; Philadelphia: University of Pennsylvania, May 1990).
Hardt, John P., “The Soviet Economy in Crisis and Transformation” (unpublished; Brussels: NATO Economic Colloquium, April 1990).
Lavigne, Marie, “Economic Relations Between Eastern Europe and the USSR: Bilateral Ties vs. Multilateral Cooperation” (unpublished; Brussels: NATO Economic Colloquium, April 1990).
Marrese, Michael, and Lauren Wittenberg, “Implicit Trade Subsidies within the CMEA: A Hungarian Perspective” (unpublished; Evanston, Illinois: North-western University, January 1990).
Michalopoulos, Constantine, “Payments Arrangements in Eastern Europe in the Post-CMEA Era” (unpublished; Washington: World Bank, 1990).
Schrenk, Martin, “The CMEA System of Trade and Payments: Today and Tomorrow,” Discussion Paper No. 5, World Bank Strategic Planning and Review Department (Washington: World Bank, 1990).
van Brabant, Joseph M., Adjustment, Structural Change and Economic Efficiency: Aspects of Monetary Cooperation in Eastern Europe (Cambridge: Cambridge University Press, 1987).
van Brabant, Joseph M., “Convertibility in Eastern Europe Through a Payments Union” (unpublished; Washington: Institute for International Economics, September 1990).
Wolf, Thomas A., “Market-Oriented Reform of Foreign Trade in Planned Economies,” IMF Working Paper WP/90/28 (Washington: International Monetary Fund, 1990).
Peter B. Kenen is Walker Professor of Economics and International Finance and Director of the International Finance Section at Princeton University. He holds degrees from Columbia and Harvard Universities. This paper was prepared while he was a consultant in the European Department. He is indebted to colleagues in the European Department, especially to Thomas Wolf, for advice and comments, and to papers by Peter Bofinger (1990) and Constantine Michalopoulos (1990), which examine the same subject.
For more on the CMEA system, see Wolf (1988), Schrenk (1990), and the sources cited in those works. The CMEA sponsored other forms of economic cooperation, but they lie beyond the scope of this paper.
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 van 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 the comparisons in Table 1 but must also be borne in mind when reading other tables in this paper. Trade data are extremely hard to compare, because the CMEA countries use different exchange rates between the TR and the dollar.
Trade data are from Economic Commission for Europe (1990a, chap. 2, p. 5); they are based on a common exchange rate ($0.50 per ruble) for the five countries. The actual figures are $845 for Bulgaria, $770 for Czechoslovakia, $850 for Hungary, $345 for Poland, and $250 for Romania. The figures for the other countries listed in Table 1 are much higher, at $1,715 for Portugal, $1,335 for Greece, and $1,735 for Spain (International Monetary Fund (1990)).
Output and trade data from PlanEcon Report, Vol. V (1989, pp. 27–28, 36–37, and 42–43).
The shares shown in Table 2 are smaller than those shown in several recent publications; see, for example, World Bank (1990b), where the 1988 figures range from 81 percent of total Bulgarian exports to 41 percent of total Polish exports. That is because those publications use official exchange rates and because they include trade with the German Democratic Republic.
The U.S.S.R. was not alone in using bilateral arrangements to maximize bargaining power. Kaplan and Schleiminger (1989, chaps. 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 rounds of tariff cuts under the General Agreement on Tariffs and Trade used bilateral bargaining on a product-byproduct basis; “principal suppliers” of particular commodities swapped concessions with each other, then extended them to other countries 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 Economic Commission for Europe (1990b, 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 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 reduce tax revenues and magnify the budgetary problem.)
The Marrese-Wittenberg calculations can also be used to compare Hungary’s terms of trade with the U.S.S.R. and Poland to its terms of trade with the market economies. In 1987, its terms of trade with the U.S.S.R. were 12.5 percent better than with the market economies, and its terms of trade with Poland were virtually the same as 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 U.S.S.R. 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 8 is likewise too high.
The figures in Tables 7 and 8 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 on the SITC basis:
|Terms of trade (percent)||−35.5||−39.3||−25.0|
|Trade balance (US$ billion)||−3.9||−2.2||−1.6|
|Terms of trade (percent)||−35.5||−39.3||−25.0|
|Trade balance (US$ 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 7.
It should be noted, however, that cuts in Soviet oil exports of the sort that occurred in 1990 will not reduce the balance of payments problems of the CMEA5. Those countries have to buy more oil on the world market, and they are reporting reductions in their exports to the U.S.S.R., which has cut back its imports because of its own balance of payments problem.
Instances of this sort occurred in 1989; see Economic Commission for Europe (1990b, 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 debtor) might seek to reduce its imports rather than raise its exports. All of these possibilities distort trade, but some 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.)
I owe this important point to John Williamson.
The liberalization of trade with the dollar area deserves particular attention. Most discussions of the EPU (for example, Triffin (1957, pp. 203 ff)) say that the United States accepted more discrimination against it as the price it was willing to pay for European integration—one of the main objectives of the Marshall Plan. An intensification of discrimination did occur 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 IMF 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 IMF 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 proposals such as those of Daviddi and Espa (1989) that were drafted before the Sofia meeting of the CMEA.
In the case of Czechoslovakia, service exports to the whole CMEA area (including the German Democratic Republic) 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 large allowance for omitting services. But 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 3.