Trade Adjustment in Eastern Europe During Transition: The Determined, Sophisticated and Proximate

Abstract

The transition from plan to market-driven economies of Central, Eastern and Southern Europe implied a major shift in their trade orientation. While before reform almost all trade took place within CMEA, in the mid-1990s trade relations are dominated by the OECD countries. This rapid change raises two questions: To what extent is the trade adjustment already accomplished? In case of a negative response, what factors account for observed differences in speed and pattern of this process among countries? From a comparison between actual and estimated potential trade flows in each year for 1988 to 1995, the econometric results suggest that the trade adjustment is far from being completed. Significant differences between countries can be explained by differences in the scope and speed of economic reform (such as liberalisation and macroeconomic stabilisation), differences in transactions costs (such as proximity to the West and previous market presence), and by differences in the demand and supply structure (such as economies of scale and differentiated trade structure). The results suggest a head-start for determined, sophisticated and proximate transition economies.