External Economic Relations and Integration into the World Economy
External Debt Exchange Rates Investment Comparative Advantages Legal, Fiscal and Institutional Reform
External DebtA 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.
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.
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 AdvantagesIt 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 ReformAnother 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.