Economic Integration of Central and Eastern Europe in the World Market:

An Asian Perspective

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An Address before the Trade Policy Panel,

WTCA, General Assembly ,

October 10, 1991, Budapest, Hungary.

 

 

At the outset, I would like to thank our Hungarian hosts for their unfailing courtesy and excellent preparations.  I have had the pleasure of visiting Budapest before, and so I have been greatly looking forward to this return visit.  In my personal experience, few cities can compare with this great capital in terms of culture, architecture, and cuisine -- not to mention the hospitality of the people.

We all know that Hungary, setting the pace for economic and political reform long before the dramatic events of the past two years, has been playing a leading role in the on-going economic transformation from the planned to market system in Central and Eastern Europe.  The economic reform undoubtedly would make the post-communist economies in the region to play an increasingly important role in the international economic system in the years to come.

As you see in your program, I was called in to this seminar to present an Asian perspective of the economic integration of Central and Eastern Europe into the world economy.  However, allow me to make my remarks mainly on the basis of South Korea's recent experience of economic exchanges with countries in Central and Eastern Europe.  As you know, Korea's burgeoning relations with Eastern Europe are a very recent development.  At the time of the 1988 Seoul Olympics, we had no formal diplomatic ties with any country in the region.  Hungary was the first with which Korea normalized diplomatic relations in 1989 and that proved to be the breakthrough for initiation of diplomatic ties with most of other countries in Central and Eastern Europe.  Thus, Korea's economic relation with Eastern Europe is relatively new, yet it may provide some insight into the problems of economic integration of post-communist economies into the world market system.

At this early stage of economic relations, Korean-East European trade has shown impressive growth.  With the USSR alone, Korea's trade volume increased from $390 million in 1988 to $600 million in 1989 and $888 million last year.  With non-Soviet Eastern Europe, the figures are $215 million in 1988 and $388 million the next year and a projected total of $754 million for 1990.

However, there are significant differences between the pattern of our trade with the Soviet Union and with non-Soviet Eastern Europe.  In our trade with the Soviets, we mainly import raw materials and export industrial equipment and some consumer goods.  In resource-poor Korea, Soviet raw materials find a ready market, and we have adequate financing available.  The demand for Korean manufactured goods is potentially very great in the Soviet Union, but shortages of foreign exchange there keep effective demand well below its potential.

By contrast, non-Soviet Eastern Europe has proportionately far fewer raw materials available for export, and manufactured goods are at a competitive disadvantage in world markets, Korea included.  Accordingly, our trade with the whole of that region is less than two-thirds that of our trade with the Soviet Union alone, and we sell much more to Eastern Europe than we buy.  In 1989 and 1990, Korea recorded surpluses in its trade with non-Soviet Eastern Europe equivalent to 39% and 43% respectively, of total trade volume.

There has been considerable discussion in the Korean business press about joint ventures between Korean and Eastern European firms.  But to date, not much has been accomplished along this line.  The most attractive prospect would seem to be natural resources development in Soviet Siberia.  This would be so formidable a project that Korea would probably want to participate in collaboration with Japanese and Western companies. But the Japanese have so far given little indication of their intentions and the West Europeans and Americans are currently much more interested in joint venture prospects in non-Soviet Eastern Europe.  In addition, we still cannot be certain which authorities to deal with -- the Soviet or the Russian.  Thus we may have to wait for some time before conditions are ripe for launching ambitious multinational development projects in Siberia.  On a much more modest scale, however, Korean firms have expressed interest in construction projects in Eastern Europe, especially factories and tourism facilities.  Just recently, for example, plans were unveiled by Lucky-Goldstar to construct a petrochemical complex in the St. Petersburg area and by Daewoo to build a tourist hotel in Moscow.  Both proposals are await informal Soviet government approval.

Economic integration may be defined variously, but its central meaning is that the countries concerned will become to be abide by common standards and common rules of game in conducting business across national or regional boundaries.  As such, it would bring about economic benefits to all participants in terms of higher economic growth and income, because economic integration will facilitate mutual expansion of trade, investment, and other economic activities among countries involved in the integration. Economic integration of post-communist economies into the world market system, therefore, presupposes a pervasive institutional reform toward a market economy in those countries. It is indeed a formidable task which cannot be carried out overnight.  But it remains true that the success of the economic integration depends more than anything else on the progress of institutional reform in the post-communist countries.  In particular, reforms in the areas of international trade, finance, and investment needs to be carried out as quickly as possible in order to facilitate economic exchanges between the reforming countries and the rest of the world, which in turn would speed up  their economic recovery.  Such reforms would also make it possible for the Soviet Union and East European countries to participate and play an important role in multilateral organizations such as the IBRD, the ADB, and eventually the IMF and the GATT.  The adoption of currency convertibility under the IMF and the observance of the GATT rule in international trade would go very far in removing institutional barriers inhibiting free flow of goods and services between Eastern Europe and the rest of the world.

Need for institutional change is not, of course, confined to the planned economies: market economies also have some institutional barriers which might have been inherited from the era of the Cold War.  For instance, the MFN treatment is still subject to legal restriction in certain countries, while some extra red tapes are involved in other countries in doing trade with socialist countries.  It is to be hoped that market economies in Asia review their current standing with legal and administrative practices toward socialist countries and take measures to minimize institutional barriers against trade and investment with the reforming countries.

Economic integration requires concerted effort of all parties involved.  Asian businessmen for that matter certainly have a role to play.  First of all, they have to understand that the reform process is in no way an easy task and show patience over some difficulties which they are currently experiencing in conducting business with the reforming countries.  Nor should they be caught by an illusion that the capitalist system is the only standard  by which to judge the worth and performance of different economic systems.

One of the major difficulties faced by Asian businessmen in economic exchange with East European counterparts is found in the inadequate or lack of information on the products, companies, trade and custom regulations and procedures, and payment systems. Unfamiliarity with barter trade, counter purchase and buy-back practiced in socialist countries is another type of problem for Asian businessmen.  These difficulties could be ameliorated by broader exchange of information and frequent personal contacts between the two parties.  In this regard Asian business organizations, WTC in particular, are well advised to make greater efforts to facilitate exchange of business information between Eastern Europe and the rest of the world including Asia through its NETWORK system or other means available through the WTCA.  In addition, Asian business organizations can take initiatives to forge links with their counterparts in Eastern Europe and assist other social organizations such as trade unions, press associations and cultural groups, to do the same in the interest of promoting mutual understanding.

In spite of the institutional barriers, trade between Eastern Europe and some countries in Asia such as Korea has been growing at a high pitch in the past few years.  What is surprising is the fact that trade between Japan and Eastern Europe recorded virtually no growth between 1988 and 1990. According to statistics compiled by the Japan Custom Association, Japanese exports to the Soviet Union somewhat increased from $3.1 billion in 1988 to $3.5 billion in 1990, while Japanese exports to non-Soviet Eastern Europe slightly decreased from $776 million to $745 million between the same years.  Japanese imports from those countries did not increase either.  More specifically, Japanese imports from the Soviet Union increased from $2.7 billion to $3.3 billion, but imports from Eastern Europe decreased from $692 million to $659 million.  Japanese investment in Soviet Union and Eastern Europe has so far been negligible and no investment at all has been made in Eastern Europe since 1989, as reported by the Finance Ministry of Japan.  This means that one of the largest markets and financial sources in Asia remains untapped by Central and Eastern Europe for their economic development.

Apart from the political impediment such as Northern Territories issue between Japan and the Soviet Union, one of the major reasons for this modest performance in economic exchange between Japan and Eastern Europe is found in the political instability in the Soviet Union, Yugoslavia and others that make Japanese corporate planners to take an attitude of "wait and see."  However, it remains true that there is a great potential for economic exchange for mutual benefit between Asia and Eastern Europe that could be realized by joint efforts of business communities in the two regions, assuming that political stability is restored and economic reform makes progress in the years ahead.

In an effort for greater economic cooperation, massive financial support from the advanced industrial countries will be required if the transition from the planned to market economy is to be successfully accomplished.  Therefore, it seems almost inevitable and desirable that Japan will follow Germany's example in making large-scale financial commitments to post-communist economic reconstruction.  Even Asian NIEs have a role to play in this direction as exemplified by South Korea's $3 billion loans to the Soviet Union.

In conclusion, Asian business community is looking forward to seeing rapid progress in economic reforms in Eastern Europe and full integration of its economy into the world economic system based on free exchange of goods, services and people for common economic prosperity.  Asian business community, for its part, can contribute to this end by better understanding of the need and problems of the reforming countries through exchange of information and personal contacts, by expanding trade and investment to assist economic reforms and growth, and by making capital, technology and managerial know-how available to those reforming countries.  Let me conclude my remarks by stressing that political and economic reforms in the socialist countries provide us with a great and historic opportunity for integration of Central and East European economies into a single world market system, which will realize the enormous economic potential for promoting common economic prosperity throughout the world.     

Thank you.