Internal Liberalization as a Barrier To Export-led Recovery in Central European Countries Preparing For EU Accession

Abstract

In spite of an hitherto unprecedented record of external liberalization in Central European economies contributions of exports to real growth have recently been rather unspectacular, especially when compared to the experience of OECD countries lacking a comparable degree of external liberalization. To explain this apparent puzzle, this paper links two trends observable in transition economies, i.e., continuous resource reallocation and trend real exchange rate appreciation. This link is warranted by the following chain of arguments: (1) The higher the extent of transition-specific reallocation of employment in the economy following internal liberalization, the higher the real appreciation. (2) The higher the real appreciation, the lower the export sector real growth contribution. Combining (1) and (2) yields the result: An extensive transition-specific reallocation of resources from former excess supply sectors, such as industry and agriculture (i.e., mostly tradables production), to former excess demand sectors, specifically market services (i.e., mostly non-tradables production), acts as a barrier to export-led recovery from the transition recession.

Recalling that standard trade liberalization programs in non-transition countries are associated with resource flows into the exactly opposite direction, i.e. from the production of non-tradable goods to tradables production, the argument presented appears quite intuitive.