Colloquium 1995 Summary of Discussions

Panel IV External Economic Relations and Integration into the World Economy External Debt Exchange Rates Investment Comparative Advantages Legal, Fiscal and Institutional Reform The debate very much turned around the question of which measures and policies might permit transition countries to service and reduce foreign debts, to attract foreign and national investment and to balance the current account deficits. The very fruitful and constructive discussion developed some interesting recommendations for CEE policy makers, although some disagreement about which approach might be the most promising was registered. The participants also discussed potential security risks in external trade relations, such as possible trade wars, interest conflicts, etc, and how best to minimise those risks. External Debt A solution for the heavy external debt burden was seen as one of the most urgent problems by many speakers. Different situations in the size and nature of debt in the various countries were pointed out. Therefore, no common, unified solution seemed appropriate. Russia, for example, faces other problems than Hungary, which never decided to reschedule any of its $20 billion inherited debts, despite recommendations by IFIs to do so. Hungary was rewarded, though, by considerable capital inflows, which otherwise might have ceased. Through servicing their debts, countries sustain their credit worthiness. If, on the other hand, the inherited debt burden is unbearable for the national economy, as is the case for Russia, the authorities have to seek a solution with their creditors, mostly through the two Paris- and London-based clubs, representing respectively governments and commercial banks. A proposal has been worked out and most speakers were optimistic about its outcome. As was the case in Poland last year this could also have positive effects on Russia's credit worthiness. Export potentials in Russia are very promising. Therefore it might be possible in the future to repay the debts. Other participants underlined the importance of the efficient use of credits, considering the appropriate utilisation of foreign loans more important than the question of servicing these debts. Exchange Rates As mentioned before in the case of foreign debts, exchange rate problems also vary from country to country. Estonia, for example, decided to choose the so-called currency board system, which was judged as appropriate by one panelist. The Hungarian system consists of a crawling peg, where the national currency is automatically devalued daily by 0.06 percent against a basket of the ECU and the American dollar. Still, as was emphasised by the speakers, neither system is necessarily applicable to other countries. In general all transition economies have problems with revaluation of their currencies, thus negatively influencing their exports. They should, therefore, aim for mechanisms of deliberate devaluation, as in the example of Hungary. Investment Most speakers mentioned the lack of investment, foreign and national, as a major shortcoming of the economic reform process. The example of Russia shows that most joint ventures have not received sufficient financial transfers from the West. Instead, one participant argued, Western companies only transfer technological equipment, marketing experience and management capacity, which they then count as capital transfers. On the other hand, less than 15 percent of investments in Russia actually work and only 5 percent have proven to be profitable. Another participant underlined that, in most cases, experience has shown that transfer of technology and intellectual capacity are indispensable for the success of a project. Credit ratings by powerful neutral agencies often determine not only the amount of foreign investment a country receives, but also the access possibilities to financial and capital markets. In fact, the influence of the five biggest credit ranking agencies on foreign investor behaviour, nowadays, is probably much higher than that of IMF and World Bank together. A few speakers complained about the lack of transparency in these ratings, which do not show clearly whether short-term indicators, such as inflation or budget deficit, are decisive or long-term factors, such as the progress of restructuring. A comparison was also drawn to criteria for accession to the EU laid out during the Copenhagen summit last year.

Comparative Advantages It was said that Western industries would probably have enough capacity to produce most industrial goods needed in CEE countries. Lower labour and production costs, however, constitute a non-negligible advantage for CEE industries, thus allowing optimistic expectations for the export sector of these economies. Low productivity and export restrictions, though, limit the foreign trade activity. CEE entrepreneurs are often not well enough informed about their opportunities and clearly lack experience in trade with Western economies. The division of labour might also play a decisive role on the way to accession to the EU. In this respect, some countries are already more advanced than others. Poland, for example, for a long time had strong external economic relations with non-CEE countries. Others will in the future have to compete with South-East Asian countries for lower production costs. Legal, Fiscal and Institutional Reform Another major obstacle to effective foreign trade, that came up during the discussion, was the lack of a sufficient legal, fiscal and institutional framework. As long as this framework is not provided for by transition countries, investment and capital flows will be very restricted. Especially urgent is the establishment of a functioning capital market, capable of attracting portfolio investment. Access to financial markets becomes crucial when current account deficits need to be balanced. Apart from the Czech Republic and Bulgaria all CEE states show a deficit in their current accounts, whereas only the Czech Republic and Poland have credit rankings that would enable them to finance those deficits on foreign capital markets.