Problems of Post-CMEA Trade and Payments

The demise of the CMEA trading system in 1991 and the shift to convertible currency settlements and world market prices was expected to bring about a severe contraction of intra-group trade, coupled with large imbalances in trade between Eastern Europe and the former Soviet Union. The observed trade collapse in 1991 was exacerbated by deep domestic recession and political unrest in the region. To alleviate the costs of transition and to preserve existing trade links in Eastern Europe, the idea of a Central European Payments Union has been put forward, modelled on the successful archetype of the European Payments Union. But the present situation in Eastern Europe is different in many important respects from that of Western Europe in the late 1940s. Moreover, the observed trade decline is to a large extent a `natural' outcome of the elimination of the preferential and highly distortionary trading system of the CMEA. Therefore, the payments union does not seem to be the `first-best' solution. Instead, a comprehensive programme of external financial and technical assistance is needed to allow for the smooth restructuring of production and trade in post-CMEA countries, and to minimize losses from the abrupt cuts in mutual trade.