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Trade and Payments in Eastern European Economic Reform

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Disciplines
  • Economics

Abstract

Microsoft Word - Trade and Payments in Eastern European Reform.doc 1 Trade and Payments in Eastern European Economic Reform Sven W. Arndt Introduction What is the appropriate exchange rate regime for the emerging economies of Eastern Europe? Would a given regime suit all of them equally? Is there a regime that is as appropriate for the transition as for the long run? What are the relative merits of fixed and flexible rates in this context and what, if any, is the role of capital controls?1 These are some of the questions facing policymakers in Eastern Europe. Transforming an economy from a centrally planned to market-driven regime is in part an exercise in “getting prices right,” and one of the more important prices is the real exchange rate. The real exchange rate fluctuates even when the nominal rate is fixed, because it is influenced by changes in aggregate economic conditions at home and abroad. The real exchange rate may be viewed as the relative price between tradable and nontradable goods and services. As such it is particularly useful in understanding certain features of adjustment during economic transition. As Eastern Europe’s economies are opened to world trade the tradables/nontradables mix in national output is altered, a process in which the real exchange rate plays a key role. Moreover, as the economy becomes integrated into the global market, capital is reallocated from sectors and industries that were important in a closed, centrally planned economy to sectors and industries reflecting comparative advantage. Capital reallocation takes the form of depreciation and disinvestment in declining industries and investment and capital accumulation in expanding industries. In the present context, restructuring is usefully viewed as a two-stage process. Stage one is characterized by an increase in investment outlays and in the demand for capital goods and construction services; stage two is descri

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