Trade in Eastern Europe and the Former Soviet Union is Boosting Prosperity, but 'Behind-the-Border' Reforms Need to be Accelerated

			> Harry Broadman (World Bank Economic Adviser and Lead Author)
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			World Bank Websites > Trade Report

WASHINGTON DC, January 31, 2006 — Most countries in Eastern Europe and the Former Soviet Union are benefiting from their reintegration into the world trading system, but to take full advantage of greater liberalization, they must push ahead more strongly on domestic reforms, according to a new World Bank study released today.

The study warns that without such reforms, two trading blocs will continue to emerge: one faster-reforming, richer group of countries with ties to Western Europe, and a second, slower-reforming, poorer group focused on Russia.

From Disintegration to Reintegration: Eastern Europe and the Former Soviet Union in International Trade analyzes the evolution of trade in 27 transition countries since the fall of Communism. It finds that most of the region's countries are better integrated into the global economy today than at any time since the Russian Revolution. Over the past 10 years, exports have tripled, imports have increased two and one-half times, and trade has grown at a faster pace than any other region worldwide.

The study finds that open trade is a potent driver of development in the region, as elsewhere in the world. However some of the region's countries have better capitalized on trade than others. The most prosperous ones are finding ways to leverage international integration into faster growth by matching liberalizing trade reforms with complementary 'behind-the-border' structural and institutional reforms. Poland and Hungary, for example, have been instituting measures to promote competition between enterprises, improve governance, and encourage foreign direct investment to link domestic firms into global production networks.

But the region is also comprised of countries at the other end of the spectrum, for example, Belarus and Uzbekistan. Their trade regimes remain relatively closed and they have yet to pursue fundamental 'behind-the-border' market reforms: the state still occupies substantial ownership positions in key businesses, services sectors remain closed to competition, and the infrastructure and institutions for trade facilitation are largely undeveloped. Their populations are decidedly poorer.

"There is an emerging bipolarity in the Region. One group tends toward trade with the advanced countries of Western Europe and enjoys relatively high incomes. The other group is considerably poorer and is tending to pull back towards a Russia-centric sphere. Most of it economies are still dominated by commodity trade, and they risk missing out on participating in the modern international division of labor," said Harry Broadman, Economic Adviser and lead author of the study.

However, given the diversity among countries in the region, the boundaries of the two blocs are soft. Russia and Ukraine, for example, are more integrated into the global economy than many of their neighbors in the Russia-centric bloc. Meanwhile, many of the countries in Southeastern Europe form a 'middle ground' between the two poles, according to the study. Indeed, countries such as Croatia, Romania, and Bulgaria, which although they have adopted liberal trade policies, have been slower to encourage greater competition in domestic markets, strengthen governance and implement other trade-related structural reforms. While imports and exports for these countries have been growing, there has been less increase in productivity and national incomes.

According to the study, a two-bloc region is not inevitable. But concrete actions will be necessary to arrest—and potentially reverse—its further development. Categorizing countries into three groups — the new EU member states, Southeastern Europe, and the rest of the former Soviet Union – the study makes specific recommendations for reforms in both trade policy and 'behind-the-border' regimes.

"Virtually all the countries in the Region still need to pursue further trade policy reforms, such as reducing tariffs, lowering disincentives to export, pursuing WTO accession, and rationalizing the myriad of existing regional trade agreements. But the bigger and largely unfinished trade agenda concerns behind-the-border reforms. Success here means unleashing domestic businesses to compete with one another, instituting strong incentives for governance, enhancing trade facilitation infrastructure, and opening up services to international trade and investment." said Broadman.

While much of the needed reforms rest on the shoulders of the countries in the region, the study finds that rich nations will need to improve market access in certain products and services and remove the 'non-market' designation applied to transition countries in anti-dumping cases. More assistance from donor countries in strengthening trade-related institutions, especially for the low income, poorer performing countries, is also highlighted in the study's recommendations.