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NEW EU MEMBERS OF CENTRAL AND
EASTERN EUROPE
Opening of Economies
Tibor Palánkai
Emeritus Professor
Corvinus University of Budapest
Master Course
2014
Prof. Palánkai Tibor
Concept of Opening
Distinction between structural and institutional openness:
Structural openness relates to high share of foreign trade in
GDP and role of FDIs (small countries).
Hungary, as a small country, with about 40% of the foreign
trade in its GDP, structurally was an open economy
(now 70%).
Institutional (policy) closed character meant protectionist
and discriminatory trade policy, non-convertibility of
national currency, and exclusion of foreign capital.
The main measures of opening, therefore, arose mostly in
policy terms.
Impacts of Reforms in Hungary
Only certain and minor modifications of the foreign trade
and currency monopoly.
In Hungary, after 1968, the export rights were extended
directly to producers, market-conform tariff system was
introduced (1973 – GATT membership) and more
realistic (unified) exchange rates were applied (1981
IMF and World Bank membership).
The real and radical market opening was implemented only
after 1986-89.
In non-reforming countries this measures only following
1990.
Discriminations
Before, former Soviet block countries. Now
terrorist states.
• Centrally Planned Economies – CPEs and State
Trading Countries – STCs – protectionists and
discriminative. Countermeasures justified.
• Plan target equal with quota.
• Artificial prices and exchange rates, subsidies
equal with tariffs.
• Special tariffs, quota and dumping measures.
COCOM
Coordination Committee for Multilateral Export
Controls. 1949 – Paris (NATO, Australia, Ireland,
Japan (some neutral countries Austria included).
• About high-tech products and technologies.
• Two lists: (1) prohibited products (mostly military
products) and licensed products.
• (2) Strategic products and „dual use” (military
and civil) products and technologies.
• Depending on detent or tensions.
Opening as „Negative Integration”
Opening (liberalisation) meant:
• Liberalisation of foreign trade,
• Re-creation of convertibility of national
currencies,
• Elimination of obstacles before foreign direct
investments, liberalisation of capital markets.
Trade Liberalisation
1. The complete elimination of the "monopoly of
foreign trade" - the extension of foreign trade
rights to all economic agents.
2. In Hungary, in 1988, the 41 large foreign trade
state companies controlled 81% of foreign
trade, and about 300 other traded abroad.
By 1992, about 15,000 companies conducted
foreign trade on permanent basis, and further
50,000 occasionally.
Trade Liberalisation
2. Import liberalised by abolishment of licensing. In
Hungary, in 1988, import fully licensed.
By 1993, import licensing fell to 3-4%, to similar level as in
industrialised countries (only drugs or weapons etc.
under control).
By 1993, 78% of domestic production was exposed to
import competition.
Quantitative quotas were eliminated (except for some
products - alcohol).
Similar measures in other countries.
Trade Liberalisation
3. Tariff reductions. The average tariff level in
Hungary reduced from 32% to 24% after joining
GATT in 1973.
By 1991, the Tokyo round, the Hungarian tariff
level was cut to 13% (Tokyo Round etc.)
By early 2000s, average Hungarian industrial tariff
level was 6,8% (EU average 3,6%), about 85%
of the import liberalised due to free trade
agreements (EU, EFTA, CEFTA, bilateral
treaties etc.).
Trade Liberalisation
4. Drastic reduction of subsidies.
Under the planning system, the high subsidies
distorted the profitability and competitiveness of
export.
Subsidy cuts created real import competition and
helped restructuring of economy.
In Hungary, subsidies were cut from 13% in 1989
to 1% in GDP in 1996.
Similar measures in other countries.
Evaluation of Trade Opening
The trade liberalization by early 1990s, was
substantial. In 1988, CEE, including Hungary,
was 100% protected. In 1992, the general level
of protection no more than 25%.
By around 1992-93 CEE EU candidates converged
with OECD averages, and their protection level
corresponded to the countries likeArgentina,
Turkey, Israel or Chile).
By early 2000s, CEEcs have become open
economies.
Criticism of Trade Opening
Sudden and radical elimination of subsidies gave not
enough time for adjustment of those producers with
viable capacities, but coping with transitory problems.
Some felt, that "big bang" liberalizations were ill-advised,
by unilateral and hurried "over-liberalization", substantial
bargaining were lost in trade negotiations with West. In
spite of Western trade concessions, structurally better
deals were missed for sensitive products (agriculture).
The possibility of "tariffication" of some of the QRs or
administrative licensing was missed.
Issue of non-tariff barriers was neglected. OECD tariffs
were only 2,9%, but 57,4% of import from Hungary was
covered by non-tariff measures, while CEE markets
remained unprotected.
Criticism of Trade Opening
Historically, trade liberalizations usually implemented under
recovery and favorable world market conditions. In CEE,
they were introduced under extreme and extraordinary
conditions.
Opening measures were accompanied by deepening
recession, cuts in budgetary subsidies, revaluation of
currencies in real terms, shortage of export financing by
banks, high real interest rates, fall of investments and
shrinking domestic and external demand. Result:
collapse of whole sectors in undesirable proportions.
Radical and rapid opening had high costs, but they could
not be entirely saved, they greatly contributed to
successful restructuring and improvement
competitiveness of these economies.
Convertibility of national currencies
The convertibility - a currency is freely exchangeable for
other currencies (till 1970s for gold)
Distinction of convertibility by economic agents involved:
domestic ones (companies, institutions, physical persons
etc.), and foreigners or external ones.
Transactions: current or capital accounts convertibility.
De facto and de jure convertibility are also often
distinguished.
Types of Convertibility
IMF definition - freedom of current account transactions
(trade of goods and services, tourism, current
transactions, transfer of capital incomes, interests,
dividends or profits - for domestic and foreign users as
well).
Convertibility criteria extended to capital accounts (OECD),
particularly liberalising of direct foreign investments.
EU – internal market – liberalisation of all capital
transactions - full convertibility
Convertibility under Central Planning
Central planning in CEE was connected with nonconvertibility.
• Exchanges were monopolised by Central Bank.
• It was illegal to hold and trade of foreign currencies.
• Agents were obliged for compulsory conversion, if they
acquired foreign currency.
• Acquisition to foreign currency was strictly controlled and
limited (tourist quota).
• Exchange rates were artificially fixed.
• Most countries applied multiple or dual exchange rates
(trade and tourist).
Convertibility and the Reforms
In Hungary and Poland, the exchange rate as an „active”
economic policy tool after 1973.
It meant, first, anti-inflationary revaluations (following 1973
oil price explosions) and from 1980s, devaluations for
import (energy) savings and improving export
competitiveness.
The overvalued tourist rates served as a certain taxation of
foreign tourists, because of the subsidized food or
services, in all countries.
Unified exchange rates were introduced in Hungary, in
1981 and in Poland, in 1982.
Convertibility as part of transformation
For domestic companies, for import of goods
(since 1989) and services (1993) forint became
de facto convertible.
Most radical convertibility in Poland related to the
shock therapy from January 1 1990, but services
were included only after 1994.
The Czech- Slovak krone became convertible for
companies in 1991.
Tourist quota increased gradually, and abolished
by October 1, 1995, in the Czech Republic, and
by January 1 of 1996, in Hungary.
Convertibility as part of transformation
Two-tier banks systems re-established, separation
of commercial banks from Central Bank, which
should be responsible for monetary policy.
In Poland, commercial banks have been trading
foreign currencies since 1989, in Hungary, only
after July 1, 1992. In other CEEcs, the intrabank currency market was introduced mostly
after 1991.
Convertibility as part of transformation
Profit repatriation of foreign investments and joint ventures
allowed since 1986, in Hungary, and in Poland, in 1991.
The reinvestment of profits of foreign companies were
encouraged by tax preferences.
Direct investments abroad were possible for CEE
companies only with licence.
Foreign companies were free to invest and withdraw their
investments in every country.
The investment guarantees were given in laws and by the
Europe Agreements.
Exchange Rate Policies
Diverging exchange rate policies:
 Free floating (most countries).
 Managed floating (H. between 1989-1995).
 Crawling Peg (P. after 1990, and H. between 19952001).
 Floating in band (H. since 2001, unilaterally imitating
ERM, since 2008 free floating).
 After 2004, joining ERM2. (Baltics, Slovenia, Slovakia).
State of Convertibility
By 1995-96, the convertibility of national currencies has
been achieved in most of the CEEcs, (West -1958).
For „full” convertibility, by abolishing all limitations on
capital, in Hungary and in Czech Republic by 2001.
NMs full convertibility from 2004, as they joined the single
market no derogations for capital markets).
Most of them committed for early adhesion to the Eurozone (from 2007-2014).
SL joined euro-zone in 2007, MT and CY in 2008, SK in
2009, EE in 2011, LV from 2014.
Lack of Capital Markets in CMEA
Under the "socialist system" the international flow
of capital was rejected on ideological grounds
(considered as ‘exploitation”).
CMEA lacked capital market and had a poor credit
system (only trade-related credits). Among other
factors, this led to acute shortages of capital.
Opening for FDIs
In 1989, the foreign companies' treatment was put
on equal basis with the Hungarian ones
("national treatment"), and their operation was
fully liberalised (100% share allowed in joint
ventures).
Practically, by early 1990s, full opening for direct
capital investments in CEEcs.
Former central planning was abolished,
institutional and legal frameworks for FDIs were
created.
Full capital market liberalization was implemented
by early 2000s, related to EU adhesions.
Attraction of Foreign Capital
Former reform countries in advantage, but great
differences among countries:
• Poor infrastructure, particularly in
communication and transport, as deterring
factors.
• The weakness of internal capital markets, as an
obstacle for foreign investments.
• High interest rates (15-20% higher than in
Western Europe) increased the capital
costs,financing enterprises from the local capital
markets.
Attraction of Foreign Capital
• The legal-bureaucratic regulations not totally
eliminated, the frequent changes in laws.
• Serious problems arose concerning the
interpretations of legal regulations.
• In many countries, the social-political
instabilities.
• Associations to EU helped, but not enough.
• FDIs strategic role in integration of CEE into the
global world economy.
END
Thank you
Prof. Palánkai Tibor