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Economic integration is the most noteworthy development in international economic policy at the end of this century. Enthusiasm for the European Union has been infectuous. Yet, there are many aspects for the EU that still remain obscure and which warrant further careful scrutiny. The subject of this book is the examination of the inherent economic and political inefficiencies in the transition process of Central and East European countries which are apt to slow down its pace, divert it from its proper course and, in some cases, even endanger its sustainability. The authors of the contributions in this book, economists and political scientists, investigate the applicability of the hyperthesis of mutual benefits resulting from countries in transition becoming open to international trade and investment.





Economic integration is the most noteworthy development in international economic policy at the end of this century. Enthusiasm for the European Union (EU) has been infectious. This has led to lengthy discussions for integration issues which overwhelmingly and understandably focused on its effects on the levels and competition of interregional trade and their consequences for national development. Yet, there are many aspects of the EU and its consequences that still remain obscure and which warrant further careful scrutiny. The major challenges for Europe at the turn of the century are Economic and Monetary Union (EMU) and the integration of the Central and Eastern European Countries (CEECs) within the EU.
Nicholas C. Baltas, George D. Demopoulos, Joseph Hassid

Historical Background of a Monetary Union


1. The Financial History of the Ionian Islands in the 19th Century: Lessons from the Past?

The financial history of the Ionian Islands in the 19th century is an interesting case study for reasons which, in a sense, prove relevant to contemporary issues such as the constructive role of institutions and monetary unification. The financial history of these islands in the 19th century is characterised by two major developments: first, the establishment of the Ionian Bank in 1839 and, second, the political and monetary union of the islands with the Kingdom of Greece in 1864. The purpose of this essay is to analyse these developments, both in historical perspective and in connection with what economists can say about some current issues.
Panayotis Korliras

Transitional Economics: Theoretical and Institutional Issues


2. Rents as Distractions: Why the Exit from Transition is Prolonged

The notions of rent and rent-seeking have a substantial contribution to make in offering a theoretical and analytical framework for understanding events and behavior in the transition. The theory of rent-seeking behavior reveals how economic incentives combined with political discretion and unclear property rights attract individuals’ attention to unproductive activities directed at contesting available rents. This paper provides a review of rent-seeking theory with a directed focus on the role of rents and rent-seeking incentives in the transition. We indicate how rents and rent-seeking can be endemic to an economy in transition, and how recognition of rent-seeking incentives enhances understanding of the reasons why the transition to market economy is an extended process..
Alan Gelb, Arye L. Hillman, Heinrich W. Ursprung

3. Transformation Process Five Years On: Behavioural Adaptation and Institutional Change in Poland

The successful transformation of the former centrally planned economies is decisive for establishing democracy in the countries of the ‘Eastern Bloc’ after the breakdown of communism. Poland was the first country to embark on reforms. This paper describes the development of the Polish effort to handle evolving problems. Budgetary situations occurring during conversion and their effects on the economy are examined. In order to overcome budgetary constraints, new government revenue sources have to be found. The main source can only be additional taxes. In the Polish case, the tax system should be remodeled and might be supplemented by a value added tax. Simulations based on the Kramer and Neneman model provide the data needed for analyzing the distributional effects of various proposals for tax reforms. An important result is that income distribution will become more unequal during transformation. Another topic to be considered is limiting excessive transfers to private households and firms. However, reform of the tax and transfer system has to be accompanied by improved privatization. The introduction of a negative income tax appears as a possible remedy for reforming encrusted societies. Since social assets are often at the top of the political agenda, any government activities in this area have to be evaluated on public choice theory criteria.
Hans-Georg Petersen

Transitional Economics: Macroeconomic and Monetary Policy


4. Macroeconomic Stability and the Transition Process

In 1994, after several years of recession experienced by all economies in transition, a significant number of countries recorded positive rates of growth. This shows that growth can be restored after the completion of the early phase of transition and after making the necessary adjustments.
The speed of further transition in the Central European countries in transition (CITs), which started with the efforts to achieve macroeconomic stability and, ultimately, the restoration of sustainable growth are directly related to the introduction of key microeconomic measures, especially the privatization and restructuring of enterprises, the financial rehabilitation of banks and the re-orientation of the government’s role. This process is a transformation of an administered system to a market-based one and cannot be carried out by merely adjusting or improving on the existing system.
Nebojsa Savic

5. Macroeconomic Stability and How to Avoid the Frequent Use of Stabilization Therapies

All successful economic reforms start with a major stabilization effort. The basic monetary and fiscal theory of high inflation and sharp stabilization seems to apply more generally (budget deficits and money creation must be brought under control) and, to the extent that differences exist between groups of countries, these stem from problems in the ability to control the budget or the amount of credit or wage policy. The general lesson to be learned is that often macroeconomic adjustment cannot be achieved without at least some simultaneous structural reform and that the policy reform package has to place even greater emphasis on setting up institutions and rules of behaviour for the micro units. In order to diminish the costs of the reforms, the optimal sequencing of the reform measures is desirable. Countries that have experienced protracted high inflation need to achieve not only fiscal reconstruction by thorough budget balancing but also a far reaching institutional reconstruction that involves a financial system capable of providing efficient intermediation and a regulatory and trade regime that helps allocate resources in ways that maximize productivity. The efficacy of the financial system is a key determinant of the success of any economic transformation process.
Goran Pitic

6. Problems of Transition in the Monetary Sector: The Bulgarian Experience

The development of the reforms in Bulgaria in controversial. Most of the new private companies don’t have enough capital and their access to credit is difficult. Though foreign companies have entered the Bulgarian market, the flow of foreign investments is still comparatively low. Privatization in the public sector has been very slow up to now.
Economic growth in 1994 and 1995 was modest. However, the uncompleted structural reform, the increasing losses of the government enterprises and loss of confidence in the banking system, created conditions for financial crisis and for a significant decrease in production in 1996. The budget deficit and the rate of inflation have risen and the lev is greatly depreciated.
Fiscal and monetary policies are important elements of macroeconomic stabilization policy. In Bulgaria, the policies followed by the authorities have signally failed to prove successful. Stabilization of the banking system is also a major and urgent priority.
In the beginning of 1997, Bulgaria is on the edge o hyperinflation. Fortunately enough, the political crisis, which started in December 1996, has been resolved and parliamentary elections are expected to take place in April 1997. The IMF has made a proposal for the introduction of a Currency Board in Bulgaria, expected to come into effect in the beginning of Summer.
Mileti Mladenov

Competition Policy, Internal Market and Trade Policies in the CEECs


7. Competition Policy and Integration: Levelling or Tilling the Playing Field?

In the early years of the Common Market, competition rules played a vital role in promoting the integration of the west European economy. Now, the EU is calling on the Central and East European Countries (CEECs) to harmonise competition laws much more tightly than has been required for founder or newly acceding member states, such as Greece, even after accession. The Europe Agreements indicated the general obligation and the recent White Paper spelled it out in more depth. The justification is that the Internal Market acquis is implicitly enforced by the European Court of Justice for member states but has to be made explicit in the case of Europe Agreement partners, who do not have obligations of harmonisation under the Rome Treaty. But the asymmetry requires the CEECs to accept all the rules of the Internal Market before accession, with the rest of the acquis communautaire after accession.
The fundamental question is how far the CEE’s must harmonise their rules before wholly free trade is possible. Although the EU is asymmetrically abolishing conventional measures of protection, it retains contingent protection on industrial goods as well as agricultural protection. Some have argued that once the CEECs adopt competition rules akin to those in the EU, it will be possible to abolish all anti-dumping duties as the competition rules can then be used to deal with “unfair competition”. This paper argues that the alignment of competition laws should be part of an accession strategy, not a condition for free trade in industrial goods.
Peter Holmes

8. The Operation of the Internal Market and Approximation to Internal Market Legislation by CEECs

The consolidation and development of the single market are at the heart of the activities of the Community and are major priorities for the Commission. The Single Market, created to promote the competitiveness of European business and therefore the well-being of the citizens of the Union, remains a top priority for the Union. This has of course important implications for the Central and Eastern European countries (CEECs).
In this context, this paper provides background information on the key characteristics of the operation of the single market, explains its importance and describes how the dismantling of barriers was handled. It refers, in particular, to the 1992 single market programme as set out in the 1985 White Paper, constituting the most ambitious and comprehensive supply-side programme ever launched. It then gives some preliminary but clear evidence on the question — “has the single market made any difference ?”. It continues by discussing issues of implementation of the single market legislation. It focuses on the enforcement of single market legislation and in particular on administrative co-operation and sanctions. The ensuing discussion on improving the business environment contains references to direct taxation, to information for SMEs and to the Economic and Monetary Union. A brief account of the Single Market Review explains what is the nature and coverage of the first ever exhaustive survey of the impact and effectiveness of the single market measures. Then, the paper goes on to explain that one of the major priorities for the future is the preparation for the integration of Central and Eastern European countries into the single market. It refers, in particular, to the approximation of single market legislation, to the cornerstone of the accession strategy, to the relevant White Paper of the Commission and to the follow-up. It concludes with some preliminary ideas related to the economic impact of enlargement for discussion.
Alexander Spachis

9. Integration, Trade Policies, Factor Movements and the European Competitive Order: Problems of CEEC-Accession to the EU

The aim of the Europe Agreements is to prepare the CEECs for eventual accession to the EU. At present, they are essentially confined to liberalization of commodity trade, although many barriers remain for sensitive products, and as a consequence, factor price equalization via trade is severely hindered. Immigration into the EU is still under national jurisdiction and practically excluded. The only remaining transmission channels — capital movements and technology transfers — suffer from insufficient financial markets and other unsolved transition problems in most CEECs.
This situation is analyzed in terms of an extended Heckscher-Ohlin model, allowing for transaction costs, which may be different for trade, migration, and capital movements.
Hans-Jürgen Vosgerau

Sectoral Issues in the Integration of CEECs into the EU


10. Inward Investment and the Need for Industrial Strategy in Central and Eastern Europe

The aim of this paper is to establish the almost self-evident, yet often neglected, idea that the objectives of governments and firms need not always coincide. It does so in the context of Foreign Direct Investment (FDI) by Transnational Corporations (TNCs) in Central and Eastern European Countries (CEECs). The paper then goes on to argue for the need for an industrial strategy by CEECs toward FDI.
Christos Pitelis, Roger Sugden, Rachael Thomas

11. Agricultural Issues in the Integration of the CEECs in the EU

The major challenge for Europe at the turn of the century is the integration of the CEECs and, perhaps unexpectedly, agricultural issues play a major role. The discussion has focused up to now on the impact of enlargement on the CAP. This paper reviews available evidence and critically assesses the agricultural issues in the process of establishing a wider, integrated Europe. The twin objective of transition and integration requires changes of a massive scale, something that is not fully realized in the CEECs. In a pre-accession strategy, the main issue is alignment with the internal market as the most important step towards membership. CEEC agricultural policies should reinforce the emergence of markets and institutions and, here, a new role for the state is required. Finally, the paper claims that integration will be facilitated by reinforcing intra-CEEC cooperation with the creation of a free trade area by expanding the existing CEFTA, instead of the present bilateralism of the Association Agreements.
George J. Mergos


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