Evidence of European Trade and Investment U-Shaping Industrial Output in Bulgaria, Hungary, Poland and Romania

Industrial output in Central and Eastern Europe evolved in a U-Shape during the first seven years of transition. The literature explains the initial collapse of industrial output as an inefficient outcome driven by supply side distortions that constrain the transition process. We show that the U-Shape experience of industrial sectors is an outcome driven by an intra-sector change, induced by investment demand shocks, in the market orientation of production away from products traditionally sold into the CMEA market and towards products traditionally sold into the EU market. This revisionist view has important implications for policy formation