The CMEA trade agreements and their effect on Eastern European foreign trade, 1960-1990

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THE CHEA TRADE AGREEMENTS

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EASTERN EUROPEAN FOREIGN TRADE,

1360 - 1 3 3 0

A THESIS

SUBMITTED TO THE DEPARTMENT OF MANAGEMEN’

AND GRADUATE SCHOOL OF BUSINESS

ADMINISTRATION OF BILKEHT UNIUERSITV

IN PARTIAL FULLFILKEKT OF THE REQUIREMENTS

FOR THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

CORtNA S

OICA

JUNE, 1 3 3 2

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I c e r t i f y that I have read this thesis and in my opinion it is fully a d e q u a t e in scope and quality, as a thesis for the d e g r e e of M a s t e r of Business A d m i n i s t r a t i o n .

Yrd.Doc.Dr. FATMA TAŞKIN

I c e r t i f y that I have read this t h esis and in my opinion it is fully a d e q u a t e in scope and quality, as a thesis for the d e g r e e of M a s t e r of Business A d m i n i s t r a t i o n .

I c e r ti f y that I have read this t h e s i s and in my opinion it is fully a d e q u a t e in scope and quality, as a thesis for the d e g r e e of M aster of Busi n e s s A d m i n i s t r a t i o n . ' Y f — Do c.d/ . g o k h a n c a p o g l u A p p r o v e d by the Gr a d u a t e School of B u s i n e s s A d m i n i s t r a t i o n Q Prof.D?-i S U B I D E Y TOGAN

A B S T R A C T

T H E CMEA T R ADE A G R E E M E N T S A N D T H E I R EFFECT ON E A S T E R N E U R O P E A N F O R E I G N TRADE,

1960 - 1990 By

C O R I N A S T O I C A M . B . A .

Supervisor: Yrd.Doc.Dr, FA T M A TAŞKIN June, 1992

The aim of this thesis is to e x a m i n e the c h a r a c t e r i s t i c s of f o r eign trade in E a s t e r n E u r o p e a n countries, before and after the p o litical and e conomical c h a n g e s in 1989.

The exp o r t p e r f o r m a n c e d u r i n g 1 9 7 0 - 1 9 8 8 of four selected C M E A co u n t r i e s , C z e c h o s l o v a k i a , Hungary, Poland, and Romania, is a n a l y z e d t h r o u g h the C o n s t a n t M a r k e t Sh a r e Method.

Special a t t e ntion is paid to the CMEA Trade Agreements, and their e f f e c t s on E a s t e r n E u r o p e a n trade flows.

KEY WORDS: Council of Mutual E c o nomic A s s i s t a n c e (CMEA), " v a l u t a “ currency. C o n s t a n t M a r k e t Share Analysis, Product Pattern, M a r k e t Pattern, G r o w t h in Demand, C o m p e t i t i v e n e s s Factor, e c o n o m i c reforms.

ÖZET

Karşılıklı Ekonomi Yardırr КцгиТгз Ticaret Anlaşmaları ve

Doğu Avrura Eıp Ticaret Üzerindeki Etkileri, 1960-1990.

Corina Stoica

M . B . A .

Tez Yöneticisi: Yrd. Бос. Dr. Fatn’a Taşkın Haziran 1992

Eu tezin a ^ a c ı , Doğu Avrupa ülkelerinin, ]989 daki politik ve ekonomik değişimlerden önce ve sonraki dış ticaret özelliklerini incelemektir.

Seçilmiş dört KEYK ülkesi, Çekoslovakya, Macaristan, Polonya ve Romanya'nın 1970-1988 yılları arasındaki

ihracat performansı. Sabit Pazar Hisse Metod üyla analiz edilmi ştir.

KEYK

ANAHTAR KELİMELER t Karşılıklı Ekonomi Yardım Kurulu (KEYK), "valuta" sürümü, Sabit Pazar Hisse Analizi, tjrün Kalıbı, Pazar Kalıbı, Talep artışı, Yeterlilik Faktörü, Ekonomi Reform.ları.

ACKNOWLEDGEMENTS

I g r a t e f u l l y a c k n o w l e d g e the c o m pe t e n t and patient s u p e r v i s i o n of Professor F A T M A TAŞKIN, t h r o u g h o u t the preparation of this thesis.

I have also benefitted from the helpful s u g g e s t i o n s given by P r o f e s s o r BAHRİ YILMAZ and P r o f e s s o r G Ö K H A N CAPOGLU, to whom I w o u l d like to express my g r a titude.

TABLE OF CONTENTS

C H A P T E R N0,1, Introduction

PAGE

C H A P T E R N0,2.

H istory and C h a r a c t e r i s t i c s of the CMEA Trade Agreements.

2 . 1 . Bilateral C l e a r i n g 2 . 2 . Prices

2 . 3 . Trade balances and e x c h a n g e rates 2 . 4 . The impact of the CMEA rules

8 10 10 12 14 C H A P T E R N0,3.

E v olution of F o r e i g n T r ade of the Europ e a n C e n t r a l l y P l a nned E conomies; 1960-1988. 3 . 1 . G rowth of trade 3 . 2 . Geographical d i s t r i b u t i o n of trade 3 . 3 . C o m m odity d i s t r i b u t i o n of trade 18 18 22 24 C H A P T E R N0.4. An An a l y s i s of e x p o r t p e r fo r m a n c e of C z e choslovakia, Hungary, Poland, and R o m ania between 1970-1988, using the CNSA.

E c o n o m i c reform, the coll a p s e of C N E A and their impact on Eastern Eu r o p e a n F o r e i g n Trade. 5 . 1 . N e c e s s a r y c o n d i t i o n s for econo m i c transition CHAPTER N0,5, 45 45

5 . 2 , The c o l lapse of the CMEA a g r e e m e n t s and its e f f e c t s on the foreign trade 5 . 3 . C o u n t r i e s e x p er i e n c e s

5 . 3 . 1 . The ’’s h o c k ” treatment: Poland

5 . 3 . 2 . R e f o r m in the making: C z e c h o s l o v a k i a and H u n g a r y 5 . 3 . 3 . Late starter: R o m ania

48 51 51 55 59 C H A P T E R N0.6. Cone 1u s i o n s - 63 S E L E C T E D B I B L I O G R A P H Y 66 A P P E N D I X C H S A - M e t h o d o l o g y and Data. 68

LIST OF TABLES

T A B L E S PAGE

T A BLE N0.1.

World and Eastern Euor o p e a n F o r e i g n Trade, 1961-1988. TABLE N0.2. E a s t e r n E u r o p e M arket Sh a r e in World Trade, 1960-1987. T A B L E N0.3. E a s t e r n Eu r o p e a n Terms of Trade, 1970-1988. 19 20 21 T A B L E N0.4. E a s t e r n E u r o p e a n E x p o r t s and I m p o r t s by Main Directions, 1970-1988. TA B L E N0.5. E a s t e r n E u r o p e C o m m o d i t y S t r u c t u r e of Trade by Directions, 1960-1987. TA B L E A

The C o n t r i b u t i o n of Demand and

"Competitiveness*' F a c tors to the G r o w t h in E x p o r t s from C z e c h o s l o v a k i a , H u n g a r y , Poland, and Romania, 1970-1988.

T A B L E B

The C o n t r i b u t i o n of Demand F a c t o r s and " C o m p e t i t i v e n e s s " to the I n c r e a s e in Total E x p orts, 1970-1988. T AB L E N0.6. E a s t e r n Eu r o p e a n Fall in Output, 1990-1992. T A B L E N0.7. E a s t e r n E u r o p e a n Foreign Trade, 198 8 - 1 9 9 0 . T A B L E N0.8.

E a s t e r n E u r o p e a n Net Material P r o d u c t and C o n s u m p t i o n , 1989-1990. 23 24-25 34 38 49 50 50

I N T R O D U C T I O N

A f t e r m o r e than 45 years of c o m m u n i s t regimes, the E a s t e r n E u r o p e a n c o u n t r i e s face n o w a d a y s the d i f f i c u l t task of t r a n s f o r m i n g their over c e n t r a l i z e d e c o n o m i e s into more open, m a r k e t o r i e n t e d ones.

The p u r p o s e of this paper is to exa m i n e the characteristics of foreign trade in E a s te r n E u r o p e a n c ountries, b e f o r e and after the r e v o l u t i o n a r y c h a n g e s in 1989. E v e n t h o u g h b e f o r e 1989 the foreign trade of these c o u nt r i e s was d o m i n a t e d by C N E A t rade agreements, after 1989 the i n t ra - C M E A trade lost its i m p o r t a n c e . The process c u l m i n a t e d in 1990 with the d i s i n t e g r a t i o n of the CMEA t rade agreements. Overall, the p r o p e r t i e s of the pre-1989 trade c o n d i t i o n s and s p e c i f i c a l l y the r e a s o n s for c h a n g e s in e x p o r t s are analyzed.

A p a r t i c u l a r attention will be paid to four of the e x ­ s o c i a l i s t countries, n amely C z e c h o s l o v a k i a , Hungary, Poland, and R o m a n i a . The selection was d o n e based of the e c o n o m i c s i m i l a r i t i e s of these c o u n t r i e s b e f o r e 1989, as well as c o n s i d e r i n g the p a r t i c u l a r i t i e s of e c o n o m i c re f o r m s after 1989 in e a c h of the a b ove mentioned count r i e s

-CHAPTER N0,1,

This thesis presents the h i s t o r y and characteristics of the C H E A trade agreements. P r o p e r t i e s of the bilateral c l e ar i n g a g r e e m e n t s , prices, trade balances, and e x c h a n g e rates w i t h i n the

C M E A is p r e s ented in the s e c o n d section. This will be f o l lo w e d in the third s e c tion by an o v e r v i e w of the foreign trade in E a s t e r n E u r o p e a n countries, between 1960-1988. A n alysis will be f o c u s e d on the g r o w t h of trade, g e o g r ap h i c a l and c o m m o d i t y c o m p o s i t i o n of trade. The f o u r t h c h a p t e r c o n t a i n s an e x a m i n a t i o n of the e x p o r t p e r f o r m a n c e through the c o n s t a n t m a r k e t share a n a l y s i s for C z e c h o s l o v a k i a , Hungary, Poland, and Romania, d u r i n g 1 9 60-1988. The fifth c h a p t e r foc u s e s on the c h a r a c t e r i s t i c s of e c o n o m i c ref o r m s and their impact on the f o r eign trade. A p a r t from the d i f f i c u l t i e s faced in i m p l e m e n t i n g economic reforms, th e s e countries' foreign trade w a s n e g a t i v e l y affected by d o m es t i c and i n t e r n a t i o n a 1 recession, as well as by the CMEA d i s a g g r e g a t i o n .

A l t o g e t h e r it b e c o m e s c l e a r that the t r a n s f o r m a t i o n of the c e n t r a l l y planned into d e c e n t r a l i z e d m a r k e t e c o n o m i e s is a task of en o r m o u s d i f f i c u l t y . It i n v o l v e s a c o m p l e x s e r i e s of political, e c o nomic and social factors. The a n a l y s i s of the foreign trade in several E a s t E u r op e a n c o u nt r i e s p u r s u e d here is a i m i n g to open a way for f u r ther and perhaps m o r e d e t a i l e d s t u d i e s on these e conomies.

H I S T O R Y AND C H A R A C T E R I S T I C S OF THE C M E A TRADE A G R E E M E N T S

For the European planned e c o nomies, the process of r e c a s t i n g trade patt e r n s began in 1947 with the initiation of b i l a teral a g r e e m e n t s b e t ween the S o v i e t Union and most Eas t e r n E u r o p e a n countries. The c r e at i o n of a s e p a r a t e s o cialist mar k e t took on a more formal c h a r a c t e r w i t h the creation of the Cou n c i l of Mutual Ec o n o m i c A s s i s t a n c e (CMEA) in 1949.

T h i s i n s t i t u t u i o n has g o v e r n e d t h e s e countries' regional t r ade and paym e n t s a r r a n g e m e n t s for the past 40 years. F o u n d e d in 1949, it included B u lgaria, Cuba, C z e c h o s l o v a k i a , the G e r m a n D e m o c r a t i c Republic, Hung a r y , Mongolia, Poland, Romania, the U . S . S . R . , and Vietnam. Y u g o s l a v i a w a s an a s s o c i a t e member, w h i l e a n u m b e r of other c o u n t r i e s s u c h as Afganistán, Angola, E t h i o p i a , Finland, Iraq, Mexico, Mo z a m b i q u e , Nicaragua, Yemen, m a i n t a i n e d a looser " o b s e r v e r status".

M a c i e j e w s k i and Nuti (1985) e x p l a i n the t h r e e main f e a t u r e s w h i c h g a v e CMEA i n t e g r a t i o n its u n i q u e c h a r a c t e r as:

t the i n t e g r a t i o n was c h i e f l y c o n c e r n e d w i t h the c o o r d i n a t i o n of central plans of individual countries, e s p e c i a l l y on m a t t e r s of trade;

* the interna t i o n a l s o c i a l i s t d i v i s i o n of labor required

that i n t e g r a t i o n was of an i n f r a e e c t o r a 1 r a t h e r than s e c toral nature, to avoid p o l a r i s a t i o n between i n d u s t r i a 1ized c o u n t r i e s and those p r o d u c i n g raw materials;

^ de facto Sovi e t hege m o n y implied a c e r t a i n d e g r e e of

(1)

political i n t e g r a t i o n .

The c r e a t i o n of the C M E A was s u b s e q u e n t l y r e i n f o r c e d t h r ough l o n g - t e r m bilateral trade and p a y m e n t a g r e e m e n t s w hi c h w e r e linked to national d e v e l o p m e n t p l a n s of e a c h individual country. Th e s e a g r e e m e n t s covered i s s u e s such as the c o m m o d i t i e s one c o u n t r y was to export to a n o t h e r s o c i a l i s t one, terms of delivery, type of payment. U s u a l l y these bilateral a g r e e m e n t s w e r e l o n g - t e r m a r r a n g e m e n t s and had a d o m i n a t i n g e f f e c t on trade pattern between CMEA c o u n t r i e s .

Tr a d e among v a r i o u s C M E A me m b e r s has t r a d i t i o n a l l y been g o v e r n e d by a c o m p l e x set of rules that have e v o l v e d since late 1940s. This set i n c l u d e s the bilateral c l e a r i n g s y s t e m (for planning, i m p l e menting, and settling b i l a t e r a l t r a n s a c t i o n s ) as well as the p r i c i n g system. The rules are u n l i k e those of any of the f a m i l i a r c o n c e p t s of regional e c o no m i c i n t e g r a t i o n , s u c h as c u s t o m s unions, free trade areas, or c o m m o n m a r k e t s . In the rest of the chapter, bilateral clearing system, pricing system,

(1) N e l l O j S . S . , ’’Som e Recent D e v e l o p m e n t s in E.C. - East E u r o p e a n E c o n o m i c R e l a t i o n s , ” Journal of W o r l d Trade, V o l . 24, No.l, F e b r u a r y 1990, pp,5-7.

e x c h a n g e rate, and the m a c r o e c o n o m i c b a l a n c e s under C M E A a r e B u m m a r i z e d

-2 . 1 -BILATERAL C L E A R I N G

In essence, the C M E A was a c o m m o n set of rules for p l a nn i n g and i m p l e m e n t i n g bilateral trade a g r e e m e n t s , as well as s e t tl i n g bilateral tr a n s a c t i o n accounts. B i l a t e r a l trade between the m e m b e r c o u n t r i e s was b roken down into a number of s u b - b a l a n c e s w h i c h were to be c l e a r e d i n d e p e n d e n t l y of one another. A s u r p l u s in one s u b b a l a n c e c o uld not be used to settle a d e f i c i t in another. As a result, the C M E A 's c o m m o n a c c o u n t i n g c u r r e n c y - the t r a n s f e r a b l e r u b l e - l a c k e d both c u r r e n c y c o n v e r t i b i l i t y and " c o m m o d i t y c o n v e r t i b i l i t y " , a long w i t h o t h e r functions n o r m a l l y a s s o c i a t e d with m o n e y .

This rigid f r a m e w o r k m e a n s that g o v e r n m e n t s had to plan the siz e and c o m p o s i t i o n of mutual t r ade in great detail , c l o s e l y m o n i t o r i n g actual a c t i v i t y to m i n i m i z e the a c c u m u l a t i o n of u n p l a n n e d imbalances.

2 . 2 . P R I C E S

A g r e e m e n t on prices was e x p l i c i t l y or i m p l i c i t l y i n c l u d e d in the bilateral treaties. F r o m 1949, until 1975 the C M E A c o m m o d i t y prices were c o m p u t e d as a s i m p l e a v e r a g e of pri c e s of all the C M E A c o u n t r i e s over the p r e v i o u s five past years-

In 1975, the " B u c h a r e s t formula" was i n t r o d u c e d and this was a f i v e - y e a r moving a v e r a g e of w o rld m a r k e t prices, c o n v e r t e d

t h r o u g h the official C M E A e x c h a n g e rate into t r a n s f e r a b l e roubles. It served as basis for d e t e r m i n i n g external prices and g e n e r a t e d u n a m b i g u o u s r e f e r e n c e price for p u b l i c l y quoted basic c o m m o d i t i e s . However, pr o d u c t s p e c i f i c a t i o n s rarely m a t c h e d in m a n u f a c t u r e d goods and often i n t e r n a t i o n a 1 price i n f o r m a t i o n used in c a l c u l a t i o n s was e i t h e r a rbitrary, or of poor quality, or w a s outdated. The pricing rule thus o p e r a t e d e s s e n t i a l l y as a s t a r t i n g p o s ition for a bilateral h a g g l i n g w i t h agreed t r a n s f e r p r i c e s often dif f e r i n g s u b s t a n t i a l l y both from r eference b a s i s and between d i f f e r e n t pairs of c o u n t r i e s .

One of the main p r o b l e m wit h this t r a d i n g system was that d o m e s t i c r e l a t i v e prices in one c o u n t r y - d e t er m i n e d largely by d i s t r i b u t i o n a l or political c o n s i d e r a t i o n s r a t h e r than m a r k e t forces ~ inter a c t e d with v e r y d i f f e r e n t sets of relative p r i c e s in o t h e r C M E A countries, and in the c o m p e t i t i v e world m a r ket. The potential for large profits and losses resulted from these n o n e c o n o m i c d i f f e r e n c e s between r e l a t i v e price systems. T h e r e w e r e a t t e m p t s to n e u t r a l i z e these, through a “p r i c e e q u a l i z a t i o n “ mechanism, w h i c h used a v a r i e t y of means, s u c h as taxes and subsidies, and d i f f e r e n t i a l e x c h a n g e rates. F o r e x a m p l e for v a r i o u s c o m m o d i t y groups, e x i s t e d d i f fe r e n t e x c h a n g e rates, a c c o r d i n g to the i m p or t a n c e a t t ac h e d to the e x p o r t / i m p o r t of that s p ecific c o m m o d i t y group.

2 . 3 . T R A D E - B A L A N C E S A N D E X C H A N G E RATES

U n der the traditional central planning, from w h i c h the CMEA reg i m e has been derived, the t r ade balance w a s m a i n t a i n e d by g o v e r n m e n t s c o n t r olling all tran s a c t i o n s at the m i c r o level. Concern for ex post balances was reinforced by the fact that unpl a n n e d s u r p l u s e s were highly u n d e s i r a b l e for the c r e d i t o r country, b ecause the lack of c u r r e n c y or c o m m o d i t y c o n v e r t i b i 1ity turned them into i n v o l u n t a r y trade credits. T h e main i n s t r u m e n t s of control, therefore, w e r e export and i m p o r t q u o t a s and licences, of t e n applied at the firm level. In this framework, the e x c h a n g e rates did n ot-and w e r e not supposed to — p r o v i d e a m a r k e t signal .

In fact, here a p p e a r s an i m p o r t a n t d i f f e r e n c e b e t w e e n c e n t r a l l y planned e c o n o m i e s and the free m a r k e t ones , as far as the foreign trade s u b s y s t e m is concerned. T h e two g r o u p of c o u n t r i e s used the e x c h a n g e rates and c u r r e n c i e s d i f f e r e n t l y in e x p r e s s i n g their foreign trade. For the C M E A countries, the e x c h a n g e rates refer to s o - c a l l e d " v a l u t a “ c u rrency, not d i r e c t l y r e l ated to the domestic currency. This s y s t e m w a s only used in the trade w i t h the world. B a s i cally the v a l u e of e x p o r t s and i mports were published in “valuta" c u r r e n c y only, w h i c h w a s c o m p a r a b l e w i t h foreign prices of the rest of the world, but w i t h o u t being di r e c t l y c o m p a t i b l e with o t h e r i n d i c a t o r s of d o m e s t i c activity, s u c h as NhP (net material product), c o nsumption, etc., e x p r e s s e d in domestic p r i c e s of the country.

The s y s t e m of ’’valuta" c u r r e n c y i n t ro d u c e d some kind of insulation of domes t i c prices from the w o r l d market prices. Imported or e x p o r t e d goods having the same d o l l a r price, may have had d i f f e r e n t d o m e s t i c prices in the do m e s t i c markets, and vice- versa. This was due to v a r i a b l e s u b s i d y and taxation rates applied to d i f f e r e n t items in foreign trade. Thus, in order to be able to e x p o r t them, some goods w h ich did not meet the i n t e r n a t i o n a 1 p r o d u c t i o n cost, were s u b s i d i z e d from the national b u d g e t .

H u n g a r y in 1976, and Pol a n d in 1982 i n t r o d u c e d a direct c o n n e c t i o n b e t w e e n world and d o m e s t i c p rices . They abolished the "valuta" c u r r e n c y s y stem and i n t r o d u c e d d i r e c t e x c h a n g e rates for their d o m e s t i c currency. This was the res u l t of an increased o p e n n e s s of t h e s e g o v e r n m e n t s t o w a r d s d e v e l o p e d market economies.

A n o t h e r c h a r a c t e r i s t i c of the C H E A f oreign trade consisted in the fact that the i n t r a - C H E A t r ade used to be expressed in terms of t r a n s f e r a b l e r o u b l e · T h e r e e x i s t e d a transferable r o u b l e / d o l 1ar e x c h a n g e rate (in 1985 a b o u t 0.7 rouble per dollar). The r a tes were e s t a b l i s h e d a n n u a l l y by the International Bank for E c o n o m i c C o o p e r a t i o n in Moscow. The rates did not obey the a r b i t r a g e co n d i t i o n s . As a r e sult the d o l l a r value of foreign trade c a l c u l a t e d from roubles us i n g the d i r e c t r o uble/dollar e x c h a n g e r a t e d i f f e r e d c o n s i d e r a b l y from the same dollar value obtained t h r o u g h initial c o n v e r s i o n from r o u b l e s to domestic c u r r e n c i e s and then from this to dollars. At the beginning of

19805, Poland and Hungary have set direct exch a n g e rates of their do m e s t i c c u r r e n c i e s for the rouble and the d o l l a r at the same time, and stopped using " v a l u t a ” currency.

The i ntra-CHEA prices c h a nged according to a p attern d i f f e r e n t from that of the world prices. The price a d j u s t m e n t s wer e much slower and with c o n s i d e r a b l e delay c o m pared to world prices. This was mainly due to the specific type of price setting.

2 . 4 . IMPACT OF THE CMEA R U L E S

Even though there is a c o n tr o v e r s y in c o r r e c t l y a s s es s i n g the gains from trade, the p r e v a i l i n g view is that over the last two d ecades the terms of trade had on balance been hig h l y u n f a v o u r a b l e for the S o v i e t Union — an outcome that is often inte r p r e t e d as "hidden subsidy" to the rest of the c o u n t r i e s

(2)

m e m b e r s of CMEA. This has resulted in part from c o m m o d i t y pattern of trade, wh i c h sh o w s that Soviet Un i o n was s e l ling m o s t l y "hard" (easily e x p o r t a b l e to the rest of the world) raw materials, in e x c hange for mostly "soft" ( e s entially

(3) u n c o m p e t i t i v e by i n ternational standards) m a n u f a c t u r e s . In addition, under CMEA p r i cing system, raw m a t e r i a l s have tended to be " u n d e r p r i c e d " , w h i l e man u f a c t u r e s have tended to be " o v e r p r i c e d ".

(2) Schrenk, M., "Whither COMECON?," F i n a n c e and D e v e l opment. Septe m b e r 1990, pp.28-31.

This resulted in s h o r t - t e r m g a ins for the G D R , C z e c h o s l o v a k i a , Hungary, Poland, and Romania, notably because their main e x p o r t s towards U.S.S.R. c o nsisted of m a n u f a c t u r e s . None the less, this e x a c e r b a t e d alr e a d y e x i s t i n g d i s tortions of

the price structures, f o s t ering d e l us i o n s of cost competitiveness. This has been a major force behind the growing structural problems in a d y n a m i c perspective. Bilateral treaties implemented under tight g o v e r n m e n t control have c r e ated s u p p l y monopolies - e s p e c i a l l y if s p e c i a 1ization a g r ee m e n t s a s signed production to one of the c o u n t r i e s -and p roduct d e v el o p m e n t has been d i s c o u r a g e d .

The e x p o r t i n d u s t r i e s have been locked into an uneco n o m i c o u t p u t structure, and o u t m o d e d p r o duct and pro c e s s technologies w h i c h have i n c r e a s i n g l y m a d e them u n c o m p e t i t i v e by world m arket s t a n d a r d s . As a result. E a s t e r n E u r o p e a n c o u n t r i e s faced severe c o n s t r a i n t s when it came to e x p o r t i n g to the w o rld market. The lack of e x p o r t m a r k e t i n g and k n o w - h o w made m a t t e r s worse.

The E u r o p e a n planned e c o n o m i e s have also s o u g h t to benefit from the i n ternational d i v i s i o n of labor. S p e c i a l i z a t i o n in c e r t a i n p r i o r i t y s e c tors has been a s p e c i f i c aim of ChEA integration. R e c e n t s tudies c o n d u c t e d by the E c o n o m i c Commi s s i o n for Europe, att e m p t e d to d e t e r m i n e w h e t h e r or not this s p e c i a l i z a t i o n has been r e f l e c t e d in the i n t r a - i n d u s t r y trade of these c o u n tries. The d e v e l o p m e n t of i n t r a - i n d u s t r y trade in m a n u f a c t u r e s , r e p r e s e n t s a t w o -way trade in similar, if

differ e n t i a t e d , goods. The f i n di n g s show that the i n t r a - i n d u s t r y trade in the European c e n t r a l l y planned economies was less i n t e n s i v e than that of d e v e l o p e d market economies. V a r i o u s st u d i e s have shown that i n t r a — in d u s t r y trade accounts for a high s h a r e - 607. to over 807. - of the trade in m a n u f a c t u r e s of the i n d u s t r i a l i z e d countries (Hav r y l y s h y n and C i v a n , 1983).

C a l c u l a t i o n s for C z e c h o s l o v a k i a ' s total trade for instance, y i eld an intra-trade c o e f f i c i e n t of 567. in 1977 (Drabek and Greenway, 1984). The same s o u r c e r e p orts that Poland's intra-(4) trade c o e f f i c i e n t rose from 29X in 1967 to only 377. in 1978.

As regards the trade of E a s t e r n E u r o p e a n c o u n t r i e s with the West, the ECE S e c r e t a r i a t 's c a l c u l a t i o n s also yield relatively low i n t r a - t r a d e coe f f i c i e n t s (ranging from 107. to 507.). The i n t r a - t r a d e coe f f i c i e n t s of all E u r o p e a n planned e c o n o m i e s inc r e a s e d to various e x t e n t s in the 1960s. However, since the first half of the 1970s these c o e f f i c i e n t s have remained roughly unchanged. Only H u ngary's c o e f f i c i e n t has i n c r e a s e d in the 1980s, a l t h o u g h much of the rise r e p r e s e n t e d a re c o v e r y from the d e c l i n e in the 1970s. Other s t u d i e s (e .g .B r a b a n t , 1988 ; C r a n e and Skoller, 1988), focusing on C M E A and applying d i f fe r e n t measures, have conc l u d e d that s p e c i a l i z a t i o n a g r e e m e n t s have not had great s u c c e s s in increasing e c o n o m i c i n t e g r a t i o n .

(4) Drabek, Z. and G reenway, D., “E c o n o m i c Integration and I n t r a - 1 n d u s t r y Trade: the EEC and the CMEA C o m p a r e d , “ Basel. 1984, p p . 444-469.

In sum, the Eastern E u r o p e a n c o u n t r i e s m u s t contend now with a u n i q u e set of c h a l l e n g e s a r i s i n g from the c o m plex r e l a t i o n s they have built up with one a n o t h e r ove r the past 40 years. The c h a l l e n g e is to p r o g r e s s i v e l y throw out the e l e m e n t s of the C M E A regime that made it so i n e f f i c i e n t and inflexible, t r a n s f o r m i n g it into a more a d v a n t a g e o u s one for all participants.

The next section will co v e r the trade d e v e l o p m e n t s within the E a s t e r n European countries, dur i n g 1960-1988. Special a t t e n t i o n will be given to four s e l ected E a s t E u r o p e a n countries, r e s p e c t i v e l y Czechoslovakia, Hungary, Poland, and Romania. They were c h o s e n c o n s i dering a s eries of f a c t o r s such as: their g e o g r a p h i c a l proximity, their econ o m i c r e l a t i o n s h i p with the Soviet Union, as well as their s i m ilar c h a r a c t e r i s t i c s in the foreign trade development.

E V O L U T I O N OF F O R E I G N T R A D E OF THE EU R O P E A N C E N T R A L L Y P L A N N E D E C O N O M I E S i. 1960-1988

3 . 1 . G R O W T H OF TRADE

1 9 6 0 - 1 9 8 8 period was c h a r a c t e r i z e d by a decline in the g r o w t h of trade volumes of the E a s t e r n European countries. In 1960-1970, E a s t e r n European trade g r e w at about same rates as world trade: 8 . 5 — 10*/.. During the first half of 1970s, the g r o w t h of w o r l d trade slowed down to 5 . 8 ’/. per annumm. However, the e f f e c t of the slowdown was not felt in the Eastern Europe trade w h i c h c o n t i n u e d to grow about 8"/. d u r i n g the first half of the 1970s. In the second half of the 1970s the impact of the d e c l i n e in the g r o w t h rate of world trade lead to a similar slowdown of the E as t e r n E u r o p e trade. This s l o w d o w n was more pronounced in the i m p orts of Eastern E u r o p e a n c o untries, w i t h a much slower g r o w t h rate of imports co m p a r e d to e x p o r t s (2.8*/. as compared to 6.57. for exports). D u ring the s e c o n d half of the 1980s when the s i g n s of reco v e r y in the world trade we r e observed, the East E u r o p e a n countries' trade g r o w t h c o n t i n u e d to lag behind the w orld trade g r o w t h rate (Table no.l.).

W O R L D AND EASTERN EURO P E F O R E I G N T R A D E ,1961-1988; FIVE-YEAR A V E R A G E R A T E S OF C H A N G E P E R C E N T A G E S TABLE NO. 1 World T rade G ro w t h Rate Grow t h Rate of E a s t e r n Europe E x p orts G r o w t h Rate of E a s t e r n E urope Imports Total To To Socialist Non - Socia 1 ist Total From Fr o m Socialist Non-Social ist 6 1 - 6 5 8.5 9.0 8.1 10.6 9.1 . 8.3 10.9 6 6 - 7 0 8.5 8.5 8.5 8.7 10.9 10.8 11.2 71 - 7 5 5.8 8.3 9.4 6.3 8.6 7.9 9.7 76-80 5.8 6 .5 6.6 6.2 2.8 2.6 3.3 8 1 - 8 5 2.6 4.9 4.9 4.9 0.5 1.5 -1.1 85-87 4.2 2.1 3.4 -0.1 3.6 4.3 2-2

Source: E c o n o m i c Commission for Europe, Common Data Base.

The r e l a t i v e importance of the E u r o p e a n Cen t r a l l y Planned E c o n o m i e s in world trade c o n t i n u e d to i n c r e a s e until 1982-1983. But t h e r e a f t e r their share in wo r l d trade declined.

During 1960-1987, E a s tern E u r o p e ' s s h a r e of the w o r l d im p o r t s rose during 1960-1980 from 2.497. in 1960 to 4.217. in 1980. S t a r t i n g with 1985, the g r o u p ' s m a r k e t share of w o r l d imp o r t s s t a r t e d to decline due to a s l o w e r g r o w t h rate in the E a s t e r n E u r o p e a n imports, c o m pa r e d to the g r o w t h rate of w o r l d t r a d e .

E a s t e r n Europe's share of w o r l d e x p orts followed the same p attern as the imports. Thus, from 1960 until 1900 it c o n s t a n t l y rose, from 2.577. in 1960 to 3.997. in 1980. Starting with 1985, their share declined to 3.467. and 3.127. in 1985 and 1987, owing to the slowing down growth of its e x p o r t volumes (Table no.2.).

T A B L E NO, 2

E A S T E R N E U ROPE'S M A R K E T S H A R E IN WORLD TRADE, 1 9 6 0 - 1 9 8 7 ( P ERCENTAGES) C o n s t a n t 1980 prices 1960 1965 1970 1975 1980 1985 1987 E x p o r t s 2.57 2.89 3.31 3.83 3.99 3.46 3.12 Imports 2.49 2.95 3 . 8 8 4. 5 9 4.21 3.71 3. 6 0

S ou r c e : ECE Common Data B a s e

T h e factors u n d e r l y i n g t h e s e long term d e v e l o p m e n t s are dive r s e . One factor is the r e l a t i v e l y easy access to external f i n a n c e in the 1970s. In the 1980s the s i t u ation reversed itself w i t h a series of economic shocks, and the d o w n t u r n in the world trade. Interest rates increased, a d j u s t m e n t s had to be made with g r o w i n g indebtedness, as f i n a n c i n g o p p o r t u n i t i e s declined. All of these seve r e l y impinged upon the Eastern E u r o p e a n countries' a b i l i t y to sustain imports, as it can be seen from the slower g r o w t h rate of imports.

A n o t h e r factor is the worsening of the terms of trade of the E a s t e r n Eu r o p e a n c o u n t r i e s during 1970-1988, with respect to the world. Fo c u s i n g now on the four se l e c t e d countries, table no.3 re p o r t s the d e v e l o p m e n t s in the terms of trade of Czechoslovakia, Hungary, Poland, and Romania. The d e c li n e was more pronounced af t e r 1980, for all countries. D uring 197 0 - 1 9 8 8 period, with the e x c e p t i o n of Poland, all these c o u n t r i e s e x p e r ienced a steady d e c l i n e in their terms of trade till mid 1980s. In the second half of 1980s, the terms of trade showed a slight improvement. In P o l a n d terms of trade improved in mid '70s and worsened in early

'80s w i t h some s i gns of recovery si n c e 1985 onward.

L o s s e s in the terms of trade of E a s t e r n European c o untries w i t h respect to the rest of the world, lead to restrictions on f e a s i b l e import volumes, and re s u l t e d in a reduction of the import g r o w t h rate of these countries, e s p e c i a l l y since 1985. D e c r e a s i n g terms of trade during 1 9 7 0 - 1 9 8 0 implied a faster g r o w t h of e x p o r t s as co m p a r e d to imports. During 1980-1988, when terms of trade improved, a slow e r g r o w t h of exports was r e g i s t e r e d when c o m p a r e d to imports. T A BLE NO. 3 E A S T E R N EURO P E T E R M S OF TRADE, 1 9 7 0 - 1 9 8 8 (1980=100) C ou n t r y 1970 1975 1980 1985 1987 1988 Czec h o s 1ovak ia 122 110 100 85 86 90 H u n g a r y 125 103 100 92 89 91 Pol and 100 105 100 94 99 101 R om a n i a 106 103 100 91 88 90

The trade w i t h socialist c o u n t r i e s d o m i n a t e d the external trade of the E u r o p e a n cen t r a l l y planned e c o n o m i e s since early 1950s. R e c e n t data indicate that this s i t ua t i o n has not changed s i g n i f i c a n t l y during 1 9 70-1988 (Table no.4.). The share of East E u r o p e a n exports dest i n e d for the s o c i a l i s t c o u n t r i e s remained during this period at more than 507. of total exports.

During 1970-1988, Eastern E u ropean imports o r i g i nating in the s o c i a l i s t c o u n t r i e s was permanently a b o v e 50X. The percentage i n c r e a s e d in 1985 to 637., after having d e c li n e d between 1970-1980 from 63 to 547. This was partially due to the fact that during 1 9 7 5 - 1 9 8 0 the im p o r t s from the n o n - s o c i a l i s t g r o u p has stagnated a round 4 4 — 467 of total imports.

Trade with the industrialized e c o n o m i e s (Western European count r i e s , USA, Canada, and Japan), g r e w from 277 in 1970 to 347 in 1988 for exports, wh i l e imports from t h e s e countries r e p r e s e n t e d 297 in 1970 and 347. in 1988. The tendency, both for East Euro p e a n e x p o r t s and imports was, d u r i n g 1970-1988, to i n c r e a s e the trade flow towards n o n - s o c i a l i s t economies, and to r educe trade wi t h the socialist c o u n t i r e s (Table no.4.).

E A S T E R N E U R O P E A N E X P O R T S BY M A I N D I R E C T I O N S 1 9 7 0 - 1 9 B B , P E R C E N T A G E S TABLE N0.4. R e g i o n 1970 1975 1980 1985 1987 1988 S o c i a l i s t 64 61 55 57 54 53 Non-Social ist of which: Industrial 36 39 45 43 46 47 . 27 27 31 29 33 34 O t h e r s 9 12 14 14 13 13 E A S T E R N E U R O P E A N IMPORTS B Y M A I N D I R E C T I O N S 1970-198B, P E R C E N T A G E S R e g i o n 1970 1975 1980 1985 1987 1988 S o c i a l i s t 63 56 54 63 55 53 N o n -Social ist of which: Industrial 37 44 46 37 45 45 29 36 33 26 34 36 O t h e r s B 8 13 11 11 11 S o u r c e ; E C E S e c r e t a r i a t C o m m o n D a t a Base. C o u n t r y group i n g s ; S o c i a l i s t ; E a s te r n E u r o p e a n member c o u n t r i e s of CMEA, and Sovi e t Union; N o n - S o c i a l i s t : 1 . Industr i a l i z e d - EEC count r i e s , USA, Canada, Japan; 2 . O t h e r s — All r e maining non - s o c i a l i s t countries.

When the c o m m odity c o m p o s i t i o n of t r a d e in Eastern E u r o p e a n c o u n t r i e s is analyzed, in s p i t e of the large increases in i n dustrial o u t p u t and the i n t e n t i o n s of planners, the c o m p o s i t i o n of t r a d e (calculated at 1900 prices) has n o t c h a n g e d much in the past d e c a d e e specially in trade w i t h the n o n - s o c i a l i s t c o u n t r i e s (T ab l e no - 5. ).

3.3.COMMODITY COMPOSITION OF TRADE

TABLE N0,5. E A S T E R N EUROPE C O M M O D I T Y S T R U C T U R E OF TRADE BY DIRECTION, 1 9 6 0 - 1 9 8 7 (1980 PRICES) (PERCENTAGES) E A S T E R N E U R O P E A N COUNTRIES: T R A D E W I T H S O C I A L I S T COU N T R I E S EXPORTS IMPORTS (1) (2) (3) (4) (5) (1) (2) (3) (4) (5) 1960 40.7 13.1 24.7 9.2 12.2 23.1 19.8 38 . 4 13.9 4.9 1965 4 5 . 5 10.3 21.7 9.7 12.7 2 8 . 7 2 0 . 6 3 7 . 5 8.5 4.7 1970 47.6 9.7 18.4 10.4 13.9 28-7 2 4 . 8 32 . 7 8.2 5.6 1975 52.4 3.1 18.7 10.4 13.7 35.7 2 5 . 5 2 7 . 6 4.8 6.4 1980 54.2 3.1 18.7 10-4 13.7 35.7 2 5 . 5 27. 6 4.8 6.4 1987 59.2 3.1 15.9 8.1 13-7 36. 9 2 8 . 0 2 3 . 5 3.7 8.0

(CONTINUED) E A S T E R N E U R O P E COUNTRIES: TRADE W I T H N O N - S O C I A L I S T C O U N T R I E S 1960 11.1 18.7 32.7 25.6 11.9 12.3 5.5 58.4 20.9 2.9 1965 10 . 2 21.7 31.4 22.6 14.2 18-1 6.3 53.6 19.2 2 -8 1970 13.8 21.2 31.6 19.9 13.4 24.1 10.2 48.7 12.3 4.7 1975 19. 9 19.1 29.6 16.0 15-4 30.0 9.0 46.9 10.1 3 .9 1980 2 1 . 2 21.1 30.6 11.7 15.3 19-2 16.2 42 . 5 17.5 4.6 1987 19.2 2 0 . 0 34.3 12.5 14.0 2 0 . 2 13.4 4 3 . 9 15.0 7.4 Source: E c o n o m i c C ommission for E u r o p e C o m m o n D a t a Base

Note: (1)- M a c h i n e r y and Equipment; (2)-Fuels and Energy; (3)-Other p r o d u c t i o n inputs; (4)- F o o d s t u f f s ; ( 5 ) - I n d u s t r i a 1 C o n s u m e r G o o d s .

During 1960-1987, ex p o r t s of m a c h i n e r y and equipment, and industrial c o n s u m e r goods towards the n o n - s o c i a l i s t c o u n t r i e s have i n c r e a s e d stea d i l y from 11.17. in 1960 to a b o u t 217. in 1980 and, r e s p e c t i v e l y from 11.97. in 1960 to a b o u t 157. in 1980, w i t h the shares of both c o m m o d i t i e s d e c l i n i n g s i n c e 1985, m e a s u r e d at 1980 prices. F u e l s have c o n s i s t e n t l y r e p r e s e n t e d around 207. of total exports, and during 1980s, f o o ds t u f f s a n o t h e r 1 1 - 1 2 7 of total e x p o r t s towards n o n - s o c i a 1ist c o u n t r i e s . Moreover, a portion of ’’o t h e r production" inputs ( t y p i c a l l y raw m a t e r i a l s ) r e p r e s e n t e d o v e r 307. of n o n - s o c i a l i s t e x p o r t s (Table no.5.).

E a s t e r n E u r o p e a n imports from the n o n - s o c i a l i s t area w e r e

d o m i n a t e d by manufactures. M a c h i n e r y and e q u i p m e n t a c c o u n t e d for a bout 207. of total i m p orts in 1987, down from about 3 07 in the mid ~ 1 9 7 0 s , while the sh a r e of c o n s u m e r goods has i n c r e a s e d to 77 in 1987 as compared to 2.97 in 1960. Over 407 of i m p o r t s from n o n - s o c i a l i s t cou n t r i e s is r e p r e s e n t e d by " other i n d u s t r i a l inputs" The most i m portant item imported w e r e the s e m i ­ m a n u f a c t u r e s . During the 1980s, f o o ds t u f f s and fuel r e p r e s e n t e d o t her i m p o r t a n t comm o d i t i e s to be imported. The latter r e f l e c t e d in part, c r u d e-oil p urchases from O P E C for re f i n i n g and r e - ex p o r t to m a i n l y W estern E u r o p e a n markets. F o o d s t u f f s p e r c e n t a g e d e c l i n e d from 20.97 in 1960 to 157 in 1987. F u e l s and e n e r g y i m p orts we n t up from 5.57 in 1960 to 16.27 in 1980, d e c l i n i n g thereafter, to reach 13.47 in 1987 (Table no.5.).

The m a j o r flow of E a s t e r n E u r o p e a n f o r e i g n trade was or i e n t e d t o w a r d s the s o c i a l i s t countries. T h e m a n u f a c t u r e s c o m p o n e n t of Eas t e r n E u r o p e a n e x p o r t s to the s o c i a l i s t c o u n t r i e s

(largely the Soviet Union) has i n c r e a s e d s t e a d i l y from 4 0 . 7 7 in 1960 to 59.27 in 1987. This raise in the share of m a c h i n e r y and e q u i p m e n t d eliveries, was d u e to the boom in S o v i e t i m p o r t s w h i c h was m a d e p o s s i b l e by f a v o u r a b l e terms of trade in the o t h e r East Euro p e a n c o u n tries. The p r o p o r t i o n of c o n s u m e r g o o d s in e x p o r t s has r e mained r elatively u n c h a n g e d duri n g 1960- 1 9 8 7 , at around 12-147. F o o d s t u f f s exp o r t s i n c r e a s e d to 10.47 in 1980, from 8.57 in 1960, and d e c l i n e d to 8.17 in 1987. Fuels and e n e r g y e x p o r t s marked a heavy decline, from 13.17 in 1960, to o n l y 3.17 in 1987.

Imports into Eastern E u r o p e from the s o c i a l i s t area, m a i n l y the S oviet Union, reflect a lower share of m a n u f a c t u r e s than do its e x p or t s to that area. M a c h i n e r y and e q u ip m e n t i m p o r t s increased fro m 2 3 . IX in i960 to 36.97. in 1987. The c o m b i n e d shares of m a c h i n e r y and e q u i p m e n t and c o n s u m e r goods hav e re p r e s e n t e d on l y 457. of imports in 1987, as c o m p a r e d to 737. of e x p o r t s in the same year. The sh a r e of all m a n u f a c t u r e s w as likely to be h igher because of the large c o m p o n e n t of s e m i ­ m a n u f a c t u r e s in ’’other pr o d u c t i o n inputs" ( 2 3 . 5X in 1987). The share of fuel i m p orts has been c o m p a r a t i v e 1y high and rising from 19.87. in 196 0 to 28X in 1987, w h i l e f o o d s t u f f s e x p o r t s d e c l i n e d from 13.97. in 1960 to 3.77. in 1987 (Table no.5.).

The e v o l u t i o n of the sh a r e of the E u r o p e a n planned e c o n o m i e s in W e s tern m a r k e t s for m a n u f a c t u r e s d e s e r v e s spe c i a l a t t e n t i o n . The i m p o r t a n c e of these m a r k e t s a r i s e s d u e to two reasons: First, the m a r k e t c o ns t i t u t e s the main s o u r c e of c o n v e r t i b l e c u r r e n c y . Second, the g r o w t h of the m a r k e t has been r e l a t i v e l y rapid d uring 1960-1987, providing o p p o r t u n i t i e s to expand sales.

A v a i l a b l e dat a i n dicate that the s h a r e s in W e s t e r n m a r k e t s of all E a s t e r n Eu r o p e a n c o u nt r i e s and the U S S R have i n c r e a s e d from 1.527. to 1.967. between 1960-1975, by 1987 the a g g r e g a t e share of the area in total W e s tern imp o r t s of m a n u f a c t u r e s had fallen to 1.227.. This d e c l i n e was w i d e s p r e a d and a f f e c t e d e v e r y sing l e m e m b e r of the group w i t h o u t e x c e p t i o n

A m o r e d e t a i l e d analysis of the e x p o r t p e r f o r m a n c e of four s e l e c t e d E a s t e r n European c o u n t r i e s , can be seen in the ne x t chapter. T he a n a l y s i s will be based on the c o n s t a n t market s h a r e method, and will explain the e x p o r t pe r f o r m a n c e of C z e c h o s l o v a k i a , Hungary, Poland, and Romania, d u r i n g 1970-1980.

C H A P T E R N0,4,

AN A NA L Y S I S OF E X P O R T P E R F O R M A N C E OF C Z E C H O S L O V A K I A , HUNGARY, POLAND, A N D ROMANIA. B E T W E E N 1970-1986. U S I N G THE C M S A

The main p u r pose of this ch a p t e r is to a n a l y z e the e x p o r t p e r f o r m a n c e of C z e c h o s l o v a k i a , Hungary, Poland, and R o m a n i a during 1970-1988, using the c o n s t a n t mar k e t s h a r e method. T h e s e c o u n t r i e s wer e se l e c t e d based on their s i m i l a r i t i e s such as their geographical proximity, tr a d e r e l a t i o n s h i p w i t h i n the CMEA, as well as on their p a r t i c u l a r i t i e s , e s p e c i a l l y w i t h regard to their d e g r e e of ’’o p e n n e s s “ with the rest of the world.

The C o n s t a n t M a r k e t Share A n a l y s i s is a st a t i s t i c a l technique, aimed at the q u a n t i f i c a t i o n of s t r u c t u r a l a d v a n t a g e s or d i s a d v a n t a g e s i n h e r e n t in the g e o g r a p h i c a l a n d / o r c o m m o d i t y co m p o s i t i o n of a c o u n t r y ' s exports. T he m e t h o d c o n si s t s of es t i m a t i n g the d e m a n d and “c o m p e t i t i v e n e s s ” c o m p o n e n t s of e x p o r t growth. It has been w i d e l y used in the a n a l y s i s of foreign t r ade s i n c e it was first s u g g e s t e d in 1951 by T y s z y n s k i .

The a p p r o a c h c o n s i s t s in p a r t i t i o n i n g a g i v e n c h a n g e in a c o u n t r y ' s e x p o r t s into structural dema n d c o m p o n e n t s and a comp o n e n t d e s c r i b e d as the “c o m p e t i t i v e n e s s “ factor. The d e m a n d c o m p o n e n t is f u r t h e r d i v i d e d into a p r o duct p a t t e r n effect, a market pattern effect, and a g r o w t h of d e m a n d e f f ect. Th e y are c a l c u l a t e d on the a s s u m p t i o n that the period e x p o r t s h a r e s remain c o n s t a n t .

To e s t i m a t e the demand components, a three step p r o c e d u r e is used :

1- The e x p o r t increase that would have occurred if the c o u n t r y ' s e x p o r t s increased at the same rate as total f o r e i g n demand (world trade) is calculated. The export in c r e a s e thus obtained is c o ns i d e r e d as the demand g r o w t h e f f e c t ;

2. The e x p o r t increase that w o u l d have occu r r e d if the c o u n t r y ' s exp o r t of each com m o d i t y i n c r e a s e d at the same rate as the foreign d e m a n d for these c o m m o d i t i e s is c a l culated.

The d i f f e r e n c e between this i n c r e a s e and the one due to the demand g r o w t h e f f e c t gives the e f f e c t of the product p a t t e r n of d e mand growth. It will be p o s i t i v e (negative) when the c o u n t r y ' s e x p o r t s are c o n c e n t r a t e d in p r o d u c t s for w h i c h f o r e i g n demand g r o w s faster (slower) than the average;

3. The e x p o r t g r o w t h that wo u l d have o c c u r r e d if the c o u n t r y ' s e x p o r t s of each product to e a c h importing c o u nt r y g r o w n at the same rate as ea c h c o u n t r y ' s i m p orts of the s a m e c o m m o d i t i e s is computed. The d i f f e r e n c e between this h y p o t h e t i c a l export i n c r e a s e and the e f fect of the p r o d u c t pattern g i v e s the effect of the c o u n t r y pattern of g r o w t h in d e m a n d for ea c h product. It will be p o s itive (negative) when a c o u n t r y p r i m a r i l y exports to fast (slow) growing importers;

The d i f f e r e n c e between the actual e x p o r t i n c r e a s e and the sum of these d emand effects p r o v i d e s the c h a n g e in e x p o r t s a t tributed to "competitiveness''.

W h i l e i n t e r p r e t i n g the results of the c o n s t a n t market s h a r e a n a l y s i s a t t e n t i o n should be paid to its limitations. First, it is based on an identity, the c o m p e t i t i v e n e s s c o m p onent being d e t e r m i n e d as a r e s i d u a l . This c o m p l i c a t e s the i n t e r p r e t a t i o n of the ’‘c o m p e t i t i v e n e s s " effect because, altho u g h some d e m a n d e f f e c t s can be removed, the residual is still a f fected by some d e m a n d as well as supply factors. Second, the method has no s t o c h a s t i c basis and cannot be used to mak e p r o b a b i l i t y s t a t e m e n t s about future export performance. Therefore, the a n a l y s i s apply only to the specific period for w h i c h the a n a ly s i s was c a r r i e d out.

D e s p i t e these limitations, the c o n s t a n t market s h a r e a n alysis, by d e c o m p o s i n g a c o u n t r y ' s e x port g r o w t h into the a p p r o x i m a t e e f f e c t s of d i f f e r e n t factors, can point to t h ose a r e a s w h e r e the e x p l a n a t i o n s of e x p o r t p e r f o r m a n c e are likely to be found. It also provides a broad and c o n s i s t e n t framework in w h i c h the p e r f o r m a n c e of a number of c o m p eting s u p p l i e r s to a given m a r k e t can be ex a m i n e d and compared.

At the first stage of the analysis, cha n g e s in the va l u e of e x p o r t s are split down into two co m p o n e n t s : the total demand and a residual which is, the "competitive" c o m p o n e n t of each c o u n t r y e x p o r t growth. The p e r c e n t a g e c o n t r i b u t i o n of these two factors, for C z e c h o s l o v a k i a , Hungary, Poland, and R o m ania between 1970- 1988 are shown in table A.