DP1580 | The New Geography of Eastern European Trade

Publication Date

27/03/1997

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Abstract

This paper estimates the cost of the disintegration of the former Council for Mutual Economic Assistance (CMEA). It asks whether the reorientation of trade flows towards Western markets has been large enough to compensate for the huge destruction of trade flows between former CMEA countries. Given the severe recession and the reduction in export and import capacities, the answer to this question is not obvious. Furthermore, particular features of CMEA functioning imply that the decrease in regional trade flows is not necessarily welfare-increasing. Two gravity equations are estimated on a panel of 14 years to give a picture of CMEA trade before and after the disintegration. Trade reorientation from 1990 onwards and the penetration of foreign markets are assessed, and two conclusions emerge. First, despite the collapse of eastern trade, the increasing volume of trade flows with the West has not been large enough to compensate for the loss of regional markets. This is increasing, however, thanks to commercial policies which favour trade cooperation and liberalization. The contrast here between the 1990s and the 1920s, when a similar episode ? the disintegration of the former Austro-Hungarian Empire ? occurred, is striking. The second conclusion stresses the weakness of the regional market in the East, and the perverse effect of hub and spoke bilateralism, reinforced by the Europe Agreements. Similar regional eastern agreements have been signed as a result. They aim to limit the diverting effect of hub and spoke trade and to exploit the important potential seen to lie in the further development of eastern trade.