Report: Intervention Slowing Recovery

The governments of the former Soviet Union must reduce their direct involvement in international trade if their industries are to revive and their respective economies are to achieve recovery, a new report from the World Bank says.

"Governments need to stop directing what, how much, and at what price commodities should be traded," says the report, entitled "Trade in the New Independent States," which analyzes the external trade situation of the former Soviet states and makes a number of policy recommendations.

Instead, the World Bank argues, the role of governments "is to provide a policy and regulatory environment conducive to trade and to help establish the financial and institutional infrastructure that would facilitate enterprise-to-enterprise trade."

The former Soviet Union's exports to the rest of the world declined 46 percent between 1990 and the end of 1993, from $105 billion to $58 billion. Imports shrank even more, by 63 percent, from $121 billion to $45 billion. Trade between the former Soviet states fell by at least 65 percent over the same period, the report says.

Part of this decline has been exaggerated, the report says, citing "strong evidence of high levels of unrecorded 'illegal' exports, underinvoicing and transshipments to the rest of the world -- mostly transshipments of Russian goods through the Baltic states."

A significant portion of imports also go unrecorded because they are brought in by "shuttles" -- shoppers who bring back large quantities of food and consumer goods from abroad.

The shrinkage in trade also reflects the overvaluation of the ruble's official exchange rate in 1990, argue the report's editors, Constantine Michalopoulos and David Tarr.

And, they argue, the slump in trade is not an entirely negative phenomenon "since previous trade patterns among these countries had not been based on comparative cost or locational advantage."

Nevertheless, a significant decline in trade volumes has undoubtedly taken place, which is worrisome because it has contributed to the collapse of production and incomes in former Soviet states.

A portion of the blame for the collapse in trade is laid at the door of the Soviet system, which presided over declining output throughout the 1980s and fostered an industrial sector that was unable to compete on international markets. The transfer of Eastern Europe's Comecon bloc to convertible currency trade at world market prices after the fall of the Berlin Wall in 1989 also dealt a hard blow to the former Soviet Union.

Trade barriers erected by industrialized countries have prevented some countries of the former Soviet Union from finding alternative markets. Russia, Ukraine, Belarus, Kazakhstan, Tajikistan and Georgia have all been the object of some sort of anti-dumping action on a variety of commodities, ranging from aluminum to ferro-silicon and uranium.

But the report suggests that Russian membership in the World Trade Organization would make it more difficult for trading partners to discriminate against Moscow and would also help the government resist internal protectionist pressures. WTO chief Peter Sutherland is due to visit Moscow on Thursday for talks with Prime Minister Viktor Chernomyrdin.

The effect of restricted access to Western markets, however, has been minimal compared to the damage wrought by payments problems between the former Soviet states themselves and rapid rises in the cost of energy and raw materials.

The rising price of Russian oil from 1991 onward, and Russia's position as the major supplier of energy to the other republics, led the other countries of the former Soviet Union to run up large debts with Moscow.

"Liberalization of energy prices dealt the energy importers among these countries a more severe terms-of-trade shock than that sustained by energy importers when oil prices soared in 1973," the report says.

Failure to develop an adequate interstate payment system worsened the debt problem and trade between the former Soviet republics shrank considerably, with exports falling from $321 billion in 1990 to just $35 billion in 1993.

To compensate for the lack of legal infrastructure and a slow clearing system, enterprises have resorted to cash transactions or more often to barter when trading with another former republic, something "fundamentally incompatible with the development of a market economy."

"Major losses of resources are associated with barter-based trade, and enterprises' flexibility in searching out new and expanding markets is being significantly impaired by this practice," the report says.

Instead, the report says, achieving currency convertibility is the key to smoothing over payment problems and should be the goal of all the former Soviet states. In the absence of convertibility, trade between them should be denominated in a convertible currency, such as the U.S. dollar.

Furthermore, a system of commercial trade financing, insurance and contract enforcement should replace the role that is still imperfectly exercised by the state, the report says.

The state's role in the management of trading should also be eliminated, the authors argue, and Russia is having some success in this area. In 1993, some 40 percent of Russia's exports to countries outside the former Soviet Union took place through centralized trading by government agencies. It is expected that this figure dropped to 20 percent in 1994.

Russia has also gradually reduced its restrictions on exports, recently abolishing most export quotas. With the exception of the Baltic states, most former Soviet states have placed stringent curbs on exports -- including licenses, quotas, export taxes and compulsory sale of hard currency earnings to the state.The report says that such artificial trade restrictions have distorted the economy and reduced its efficiency. In 1993, they were estimated to have cost Russia alone the equivalent of at least 20 percent to 25 percent of its gross domestic product.

And while Russia in 1994 enjoyed a trade surplus of $20 billion, the report warned that the country's current account balance could soon fall into debt if the significant share of Russia's imports -- particularly of food and consumer goods -- that currently go unrecorded appear in the nation's accounts.

This prospect should spur Russia to diversify its export base -- 70 percent of which consists of a raw materials -- but this requires reviving the country's decayed industry and is itself contingent on macroeconomic stabilization. Achieving stabilization in 1995 will, in turn, depend heavily on Russia's trade reforms.