The External Sector, the State and Development in Eastern Europe

Abstract

The countries of Central and Eastern Europe have displayed widely disparate trade performance since the beginning of the transition. The Czech Republic and Hungary have had some success moving into the production and export of more technologically-sophisticated, higher value-added goods, while Bulgaria and Slovakia have continued to specialize, sometimes increasingly, in low-skill, low-value-added goods. Poland and Romania are intermediate cases. In Poland, different parts of the economy show each of these tendencies. In Romania, performance is very different in different periods - significantly better after 1994 than before. In accounting for these patterns, our analysis points to the importance of direct foreign investment (DFI) and outward processing trade. DFI has been an engine of technological and organization learning, but it has been significant only in the Czech Republic, Hungary and, most recently, Poland. Outward-processing trade (OPT) is widely spread and helps to explain the strong export performance of the region. The technological and organizational implications of OPT are, however, less obviously favourable: in particular, it does not encourage the development of differentiated, price-insensitive export products that offer countries insulation from foreign competition.