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VI. Panel Discussion

Author(s):
International Monetary Fund
Published Date:
August 1997
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1. Andràs Inotai, Institute of World Economics, Budapest

I would like to summarize my remarks in seven points, which I hope will provoke an interesting discussion.

First, the impact of the opening up of Eastern and Central Europe on Western Europe and on the world depends largely on the efforts of the transforming economies. However, there are at least three areas in which the international economy should be supporting this process of transformation. First, West European markets need to be opened to provide the transforming economies with access. Second, there needs to be a predictable anchor economy for these countries, which is certainly the European Union. And third, at least in the medium term, substantial net financial transfers are needed, particularly in the first and most painful years of economic and political transformation.

My second point concerns foreign trade. We have concentrated here on Europe, and in our discussion of the competitiveness of the Central and East European countries have always used the European framework. But the European countries, including Western Europe, are not necessarily competitive on a global scale. According to recent studies, the Central European countries are competing mainly with the European Union and with Far Eastern countries. This remark has some structural implications. The Central European countries are not necessarily competing in the so-called sensitive goods sectors; rather, they are competing in the other sectors where they have a comparative advantage. Just one example: in 1989, exports of machinery from the four Visegrad countries—the Czech Republic, Hungary, Poland, and the Slovak Republic—to Germany accounted for 40 percent of total machinery exports to Germany from the European Union’s Mediterranean members (Greece, Portugal, and Spain). In 1993, the Visegrad countries outpaced the Mediterranean countries in machinery exports to Germany by 20 percent—a very clear indication of where the comparative advantages are.

My third point concerns the marked differences among West European markets. The overall level of German imports is about 70 percent higher than that of France. However, in terms of the Visegrad countries, the difference is one to five in favor of Germany; in terms of so-called technology-intensive goods (Standard Industrial Trade Classification (SITC 7)), the difference is one to ten. Such differences have implications not only for the present but for the future, and not only for Central and Eastern Europe but also for the European Union.

My fourth point relates to foreign direct investment. First, there are two different forms of foreign direct investment in Central and Eastern Europe: investment in domestic markets, and international subcontracting. In a simplified way, it can be said that U.S., Austrian, German, and some Italian investments involve subcontracting; others are mainly looking for markets. In 1993, 10 percent of Germany’s foreign direct investment was in Central and Eastern Europe, mainly the Visegrad countries. Assuming that these investments are mainly subcontracting, they will have a positive impact on the general competitiveness of both the Central European and the German economies. The question is to what extent this growing German competitiveness can be absorbed by the present pattern of the European Union. This is a question for the next couple of years.

My fifth point: what are the comparative advantages of (primarily) Central, but also of Eastern, Europe, which have to be taken into account in outlining a long-term strategy for cooperation? One is geographic proximity, which will play an important role, both for economic and security reasons. Second, a key issue the Central and Eastern European countries should address is the extent to which they will be able to change the prevailing social welfare state. The European Union Association Agreements are not necessarily in favor of dismantling some of the social achievements of the Central and East European countries. Third, there is the problem of the high level of education in the region. To what extent will the future pattern of intra-industry trade reflect this educational level? To what extent will the Central Europeans have to downgrade their production pattern, or will they be able to upgrade it to the level of education and knowledge they have accumulated over decades? The last issue here involves the consequences of the opening up of Central and Eastern Europe, which is unique in the sense that it has occurred at a time when markets—both external and domestic—are collapsing.

The sixth point concerns the future. What are the Western policy options? In trade, there is still a high degree of protectionism, which brings with it a high degree of risk. Central and Eastern Europe can compete on market terms in the global agricultural market. However, these economies are not able to compete with high West European subsidies; they cannot enter a subsidization competition. Perhaps the West Europeans do not want to see increases in the levels of subsidization in the region, but how else can these countries protect their agricultural sectors? With Western Europe subsidizing 46 percent of its agriculture, and with Central and East European countries subsidizing only 8-12 percent, agricultural products from the region will be completely priced out of the market in a few years. When these countries try to enter the European Union at the end of the century, there will not be any negotiations on agriculture, because agriculture in the area will have disappeared. Agricultural exports from the European Union to Central and Eastern Europe should not be subsidized.

In terms of employment, all of Europe is facing double-digit unemployment, and there is no sign, despite the recovery, that these figures will change dramatically in the near future. How can Europeans live with double-digit unemployment rates? How can the political pressures in both parts of Europe be resisted? The real challenge is not figuring out how to replace unskilled Western workers with unskilled Eastern workers. I am firmly convinced that unskilled labor is an absolute loser all over Europe, regardless of whether it is Western or Eastern. The real competition is going on in the field of skilled labor, and the real advantages of Central and Eastern Europe are in this field. The wage gap between engineers from the Visegrad countries and engineers from Germany is much higher than it is between unskilled textile workers. The challenge to Western Europe is unprecedented and certainly does not fit into the traditional pattern.

Seventh, one of the most important challenges for Central and Eastern Europe in the coming years is the so-called modernization deficit. At the beginning of the modernization period, a country imports much more than it is able to export. If investments are rational and efficient, then the economy can be expected to increase its exports in a couple of years to compensate for the higher imports. The problem is what can be done in the meantime. In this arena, Western support is definitely needed, and this support is one of the main reasons why Central European countries are looking for membership in the European Union. It is an absolutely erroneous approach for the European Union to try as it does to separate the economic anchor, which Central and Eastern Europe expects from it, from the security anchor, which Western Europe expects from the East. Any long-term security in Europe depends heavily on successful economic modernization and involves financing that modernization. It is much easier to finance modernization than to finance long-term instabilities.

I will finish with three short remarks. First, I think the West should give up its “bloc mentality,” because the differences among Central and Eastern European countries are greater than among some Central European countries and the European OECD countries. Second, more attention has to be given to microeconomic developments, which have been forgotten in the last several years. Without an understanding of these developments, it is difficult to understand why foreign capital is going to some countries and not to others that appear to enjoy greater macroeconomic stability. Third, what are the Central European countries’ strategies for getting involved in the international division of labor? What kind of economic strategies do they need in order to preserve their comparative advantages and become part of the international subcontracting network? For in fact a country can become part of this network on the level of Albania or on the level of Austria. All Central and East European countries need to develop a medium-term economic strategy to respond to these questions. With well-defined Western cooperation, the results could be much better and the failure rate much lower—something that is in the interest not only of Central and Eastern Europe but also of Europe as a whole, and of the global economy.

2. Eduard Hochreiter, Senior Advisor and Chief, Foreign Research Division, Oesterreichische

I have been asked to discuss the issue of what the opening of the East implies for monetary policy in the West. I will address three specific questions: first, whether there is anything monetary policy can do to aid the transition; second, whether the opening up will influence monetary policy in the West; and third, the possible risks that are involved. What I do not intend to do is to discuss moving toward European Monetary Union or to look at the exchange rate regimes in reforming countries.

In order to arrive at policy conclusions, I have the following hypotheses in mind.

  • Western Europe is in transition. If this is true, the capital stock should become obsolete earlier than initially anticipated. If it does, new and possibly more investment is needed—and, some would argue, a higher investment/GDP ratio as well. How can this investment be financed? Can sufficient savings be mobilized, or will there be pressure to ease monetary policy? In other words, do these developments point to additional monetary shocks?
  • Eastern Europe is in transition. My hypothesis is somewhat controversial, and I approach the issue from a different angle from that of Andràs Inotai. My hypothesis is as follows: in view of the accumulated foreign debt levels, no policies in the reforming countries are likely to lead to sizable overall net capital flows—that is, to sizable current account deficits. There are, of course, differences among countries (for example, between the Czech Republic and Estonia), but still, overall current accounts will not show very large deficits. Hence, no sizable additional monetary shocks for Western Europe are to be expected from economic developments in the East.

However, what I do expect is that there will be new and additional uncertainty about future economic developments that could negatively influence both the Eastern and Western economies. Monetary policy faces a major challenge in this context. It is of the utmost importance that the authorities give clear signals of economic stability and thereby get expectations on the right path. Everything possible must be done to avoid uncertainty about the future stance of monetary policy. In other words, everything possible must be done to ensure that no new endogenous monetary shocks are produced by the monetary authorities themselves. Any political pressure to markedly ease monetary policy must be resisted. It is important to remember Milton Friedman, who said that monetary policy is powerless in the long term but can be very destructive in the short run. Thus, my first major policy conclusion is that stability-oriented monetary policy is as important as ever. While I do not want to enter into a discussion of which strategy is best suited to achieving stability, speaking from the Austrian perspective (that of a small, open economy), I give preference to an exchange rate target over a money supply, inflation, or nominal growth target.

The next question I want to address is how the potential for monetary shocks emerging from the West itself can be minimized. To tackle this issue, I look at the West European (European Union) investment-savings balance and ask if there is much scope to use foreign savings to finance the East European transition. To give an impression of the quantities involved, I would point out that the current account deficit of 0.5 percent of the GDP of the European Union implies net capital inflows into Europe of some $35–$40 billion. Such an amount, however, would supplement West European savings by only 0.5 percent of GDP. Hence, my conclusion is that we should not expect net capital flows to raise the total amount of savings available in Western Europe. This in turn means that predominantly West European savings have to finance the transition, and here I want to go back to what I said before: the first major contribution Western Europe can make to the East European transition in the medium term is to continue with a stability-oriented monetary policy. The second major contribution it can make is to continue fiscal restraint and (accelerated) budget consolidation, because only in this way can enough savings be generated to prevent obstructing the transition in the reforming countries.

In my remaining time, I would like to philosophize a bit. According to a newspaper report, human knowledge nowadays is doubling every five years. Therefore, we all have to accelerate our own learning in order not to fall behind. We all have to work hard and postpone consumption in order to make room for more physical and human investment. So my final conclusion is that what we really need now is a new pioneer society in Western Europe willing to forgo consumption today.

3. Val Koromzay, Deputy Director, Country Studies and Economic Prospects, OECD

Let me make four points and raise one question concerning policy issues for the West related to integration with Central and Eastern Europe. The first point, which really takes off from Andreas Inotai’s last point, is that there is a lot going on in the transformation process that is not economic but touches on deeper issues on which I am not an expert—security issues in particular. I think that when the transition process started, what the East wanted more than anything—and perhaps still wants—was security. These countries wanted the security umbrella of the West, and in some sense they were ready in the beginning to give up everything to get it. In opening up their economies, they thought that they could throw themselves into the arms of the West and be welcomed. And indeed, in the beginning they were warmly received. It is worth remembering that the opening up process was also a security issue from the point of view of the West. At the beginning, the so-called Partners in Transition (PIT) countries1 were living in a kind of hiatus with a very uncertain Soviet Union, and it looked like a good moment to change the situation. Comparing the Western response at that point to the response a year later at the opening up of the second tier—the Balkan economies—when the Soviet Union itself was undergoing a profound transformation, it is clear that the West had rather lost interest in the security dimension in Eastern Europe. But I think to understand some of the conflicts that are now emerging it has to be remembered what the East has wanted from the beginning. They had totally unrealistic expectations about what the West would deliver, but the West certainly gave strong signals and moved very quickly in the beginning. Since then there has been a period of reassessment, which is still going on.

My second point is that integration is not just a European issue. It may seem to be in terms of who is present at this conference, but the Organization for Economic Cooperation and Development (OECD), which I represent, does not see things quite that way. It is interesting that one of the strong advocates for granting early OECD membership to the PIT countries has been the United States. It has been suggested that the United States is in favor of allowing the PIT countries to join the OECD because the Americans do not want to give these countries membership in NATO. There may be some truth to this assertion, but I think it is a bit unfair. The United States does have a global outlook and considers that it has legitimate economic interests at stake here. So the issue is not entirely a European matter. Of course, it is true that the economics of the situation in Central and Eastern Europe and in Europe itself are much less important to the United States than what is going on in Asia. So in the end, perhaps, integration may wind up being a European issue, for better or worse. Certainly the transforming countries should think about whether attaching themselves to the European Union is really an adequate strategy by itself. My next point concerns membership in the OECD. The PIT countries have all applied for OECD membership, and the membership process as it is now emerging is fairly fast, at least compared with the issue of membership in the European Union. Membership essentially depends on the position that these countries are prepared to take with respect to a certain number of OECD codes, the most important of which are the codes on the liberalization of capital movements and invisible transactions and on the associated national treatment instrument. These are codes which, if accepted without reservations, go extremely far; indeed, all OECD countries maintain some reservations. However, countries can enter the OECD with a great many reservations on certain codes, but also with the expectation that over time these reservations will be removed. The question really is how high the barrier to membership should be set. This question is an interesting intellectual issue that will be answered not by the OECD Secretariat but through negotiations between the PIT countries and the OECD member countries. How rapidly and to what degree should these countries be asked to liberalize their capital accounts and various areas of invisible transactions, such as insurance and banking?

I think the tide of intellectual opinion is shifting on this point. I believe the International Monetary Fund, in its own thinking about policy, used to draw rather a clear distinction between current account convertibility (which had to be achieved as rapidly as possible) and capital account convertibility (which could be left in abeyance). This type of thinking, however, is changing, and soon the prevailing view may be that the capital account should be liberalized fairly rapidly. Perhaps for this reason, the West wants the PIT countries to become OECD members, since membership will create a certain amount of pressure to move more quickly in this area than otherwise. I think this kind of pressure is probably good, but there are also issues with respect to the capital account. The question is one that OECD governments are really going to have to think about over the next year, and it is going to become an interesting policy question.

My third point concerns the current thinking about the costs and benefits of integration. Much has already been said on this subject in the meeting today. The tiling that puzzles me still is the concern about factor price equalization. This topic came up time and again in internal OECD discussions in the context of the major study on employment and unemployment that the OECD has been engaged in for two years (the results are now out). There is a feeling that the opening up of the East is going to be extraordinarily disruptive. But as it turns out, the evidence does not warrant giving this issue such importance, at least in terms of the numbers. The conclusions are that it is moderately—and I would say moderately rather than dramatically—beneficial to Western Europe for Central and Eastern Europe to open up. The associated short-term transition costs should not be as great as they are perceived to be, but this perception seems to be a fact of life, and all the studies the OECD undertakes will not change it. The only explanation I have for this perception is that the European economy, already under very serious pressure, with a high level of structural unemployment, is seen as not delivering adjustment at the necessary speed, and somehow a rather small incremental pressure becomes too much to bear. The pressure has got to be small, I think, compared with the major adjustment pressure that the Asian economies are exerting on the world economy. This point can be taken a bit farther. While it is true that the direction of trade of the Asian economies is centered more on the United States than on Europe and that there has been a problem in the United States with the demand for unskilled workers, the studies are clear that this development has not been driven primarily by imports from low-wage countries but by technology and other factors. Every attempt to assign a clear role to trade or to competition from the Asian countries suggests that these factors are not the major part of the story. But maybe in the context of Europe, where the system is already under pressure, the incremental pressure from Central and Eastern Europe appears to be the straw that breaks the camel’s back. Perhaps this perception explains the very unfortunate activist trade responses—safeguarding and so on—that are undermining and slowing down the process of trade liberalization.

My final point concerns the dynamism of the process of integration. On this point I would make the following observation. There are already substantial areas of similarity between Western and Eastern Europe, of which I would like to cite three. First, there is high unemployment in both areas. In the West, there is high structural unemployment; in the East there is for the moment what I will call transformational unemployment, but I fear it will soon become structural unemployment. Second, there is a real budget deficit problem in both regions. There are tax thresholds that prevent raising substantial amounts of additional revenue as a percentage of GDP, while social commitments are extraordinarily high, both in the West and in the East. Therefore, one sees a continuing painful struggle to manage structural budget deficits. And third, there is the demographic problem—the increasing age of the population, which contributes to the second difficulty but which is also a problem in its own right, and one that is going to influence both West and East. My fundamental thesis, which I think rejoins Mr. Inotai’s very first point, is that how Western and Eastern Europe solve these problems is much more important to the future evolution of European integration and its economic consequences than the question of how the mechanisms of integration are actually handled.

4. Richard Portes, Director, Center for Economic Policy Research

I would like to pick up on a couple of points related to those the preceding panelists have discussed. In thinking about this panel, I looked back at a 1990 Center for Economic Policy Research (CEPR) publication, by a group that includes Charles Wyplosz, which is called “The Economic Impact of the East.” The study deals with the impact of the opening up of Eastern Europe on Western Europe, and in particular on what was then the European Community. It looks at three dimensions—the macroeconomic impact, trade, and (somewhat in relation to both) foreign direct investment. On the macroeconomic side, it focuses on Germany—and indeed, the first major impact of the East on Western Europe was pressure on the exchange rate mechanism of the European Monetary System. Initially, the macroeconomic impact was largely an intra-German impact, but its effects on the rest of the system were also considerable.

In terms of the second point, trade, there was a great deal of discussion in that 1990 document about the issues discussed at this seminar—in particular, the comparative advantages of the Central and East European countries. I notice that Andreas Inotai emphasized the East’s comparative advantage in terms of skilled, highly trained workers, and I tend to agree with his assessment. And finally, the third point involves foreign direct investment. Again, the early assessments, and not just that CEPR report, implicitly or explicitly assumed a much higher level of capital flows than has actually occurred. In the four-year period 1990-93, total Western investment in Central and Eastern Europe was $15 billion. That sum contrasts with the far larger amounts that have flowed into Latin America in the last few years.

Thus, the projections made in 1990 have proved to be wildly overstated, and it is perhaps useful to reflect on why that is the case. Here I find a contrast between what Mr. Inotai and Eduard Hochreiter have said. Mr. Inotai seems to be saying that those initial forecasts or assumptions have to be realized, so there must be a period of very substantial capital flows to the East. Mr. Hochreiter disagrees, noting that the debt levels are already high in many cases, so a very substantial capital flow cannot really be expected. I am not convinced by the debt argument, however. It seems to me that foreign direct and portfolio investment are quite different things from debt. While Hungary cannot afford to take on any more debt and ought to be granted relief on a substantial part of what it has already, the purchasing by Western individuals or firms of shares in newly privatized East European firms does not present any problems at all. If the East Europeans want to be like Chile and let foreign investors buy up most of their industry, they can choose to do so of their own volition.

The discussion of the European Union response (from Brussels and from the Presidency) has centered around a pre-accession strategy for the East Europeans. There has been very little discussion of a pre-accession strategy for the European Union countries, and that point, it seems to me, is what ought to be considered. Earlier considerations of that issue were in part framed by the “widening versus deepening” debate. One way of trying to reconcile that conflict has been expressed by those who, like myself, argue that widening will require deepening and that the two are complements rather than substitutes. This issue is a complicated one that I would not want to push too far, but it does raise some important questions. If the European Union wishes to widen in the fairly near term, it has to do something about the Common Agricultural Policy, the structural and cohesion funds, and so on. Whether one interprets that point of view as arguing for deepening or for making the system shallower is open to discussion. What is not open to discussion is that these considerations have got to be taken seriously.

Finally, there is the focus on Europe relative to the rest of the world. Japan is quite interested in what is going on in Central and Eastern Europe, partly because it sees various analogies to what can be expected to happen in Russia and China, with which the Japanese are much more concerned. There can be no doubt that although there is a limited amount of Japanese investment in Central and Eastern Europe, Japan’s major concern is with its closer and bigger neighbors. As for the United States, somebody said yesterday that the difference between Bulgarian debt and Polish debt was that the former was heavily bank denominated and commercial, while the Polish debt was mainly Paris Club government debt. The real difference, of course, is that Dan Rostenkowski is of Polish origin and that initially Washington was much more concerned about finding a solution to and dealing with the Polish debt problem (and getting debt reduction for Poland) than it was about Bulgaria. That is a pity, because Bulgaria and of course Hungary need assistance just as much as (if not more than) Poland, but at least during the key period, Washington was more interested in Poland.

I think that issue raises a broader one, with which I will finish: will the United States push the European Union hard on the issue of letting the Eastern European countries in? I do not think the administration has given clear signals on that question yet. There is no doubt that in its reactions to what has been happening in the East, the United States has so far focused on Russia and now will be focusing, although to a lesser extent, on Ukraine. Still, it may well be that the United States can exert some influence in the course of the debate on the future of the European Union.

5. Alexandre Swoboda, Director, Graduate Institute of International Studies, Geneva

In my remarks for this final panel, and in accord with the rough division of labor agreed on, I thought that I could best contribute by broadening the context of our discussions to the transformation of the world rather than of just the East European economies. I will also briefly consider why the West concentrates so much on Eastern Europe.

But first a preliminary remark. I have been struck by one feature of this conference—its rather “Eurocentric” character (although this panel should partly correct this imbalance and has to some extent already done so). If I may say so, the conference has turned out to be not just “Eurocentric” but “EU-centric.” Coming from Switzerland, I guess I have to object to Europe being identified with the (former) Community or the European Union. More to the point, this concentration on the European Union has its drawbacks. For instance, sensitive sectors are defined on purely political rather than on economic grounds, and by the EU countries at that. And the discussion has sometimes tended to look at comparative advantage on a bilateral rather than a multilateral basis, comparing two individual countries or one country and one regional entity. The rest of the world economy is all too often ignored. In a global economic context, however, the term “economies in transition” applies to countries far beyond Central and Eastern Europe. China, with more than 1 billion people, and India, with more than 800 million, are economies in transition. Hopefully, Western Europe is also an economy in transition, as is the world.

Three aspects of the contemporary transformation of the world economy seem to me particularly relevant. The first and perhaps most important is the dramatic decrease in “transport costs” associated with the revolution in telecommunications and information systems. This change has led not only to the increasing integration and globalization of financial and capital markets but also to a greater integration of goods, services, and factor markets. Both types of integration have taken place irrespective of particular “integration agreements.” Increased trade in goods should lead to some increased pressure for factor price equalization. Trade in services, with their high labor content, should lead to further integration of labor markets, at least in some sectors. In the context of the production and export of services embodying highly skilled labor, it may be that one of the basic changes under way is a loss of monopoly power in the production or export of highly skilled human capital, which is now available in Eastern Europe and is being created in India, China, and other Asian countries, to name but a few. The existence of a widely distributed and mobile pool of skilled labor will help facilitate the already rapid spread of technology.

A second aspect of the transformation of the world economy is the gradual shift of economic power to new regions, Asia in particular. In the future, the “competitive threat” to Europe or the “West” will come much more from Asia than from Eastern and Central Europe. If anything, Eastern and Western Europe will have a common stake in the transformation of the world economy and in maintaining open borders worldwide. Third, and closely related, are the demographic aspects of the transformation at a global level. One reason for the shifting global distribution of economic power is a combination of relatively high population growth and per capita income growth in a number of countries, most notably Asia. Another relevant aspect of demography is the changing age structure of the population, which will probably be the major problem for Western Europe in 15 to 20 years, as shrinking younger generations resist paying for expanding older generations. More liberal and better structured immigration policies may offer a partial solution to this problem.

In short, the topic of this conference needs to be inscribed in the broader context of the transformation of the world economy. The second major question I want to take up, then, is why this seminar has concentrated on the relationship between the European Union and Central and Eastern Europe. The reason, I think, is not so much economic as political: West Europeans feel they share a cultural heritage and a political bond with the countries in transition in Eastern and Central Europe. If this political bond is taken seriously, however, the title of this conference should not be “The Impact of the Opening Up of Eastern Europe” but “The Impact of the Opening Up of Western to Eastern Europe.” In fact, an opening of the West is what should be happening. Instead, somewhat amazingly, the West is interested in the opening up of the East—that is, in seeing Eastern markets opening up rather than opening up its own. The short-run economic effects in either direction may be fairly small, even if the long-run effects are likely to be large. There are political concerns: if the West does not open up, the long-run political consequences may be dire, but if it does, the short-run political consequences (in terms of the reactions of agriculture and other “sensitive” sectors) may be inconvenient. The political cycle is unfortunately short run.

The last issue I want to broach concerns capital transfers, capital shortages, high interest rates, and appropriate policy responses. These issues should again be seen in a global context. If the focus is on flows from Western to Eastern Europe in isolation from what is happening elsewhere, there need be no great worry about capital shortage, whatever that may mean—perhaps high real interest rates and insufficient investment. Flows would most probably be sufficient and forthcoming. But a global perspective is appropriate, if only because capital markets are already quite integrated and are becoming more so. What is the appropriate policy response? The one response to be avoided at all costs is that of the United States, which makes the current accounts of other countries targets of policy. It is sheer folly to argue that the Japanese should reduce their current account surplus simply in order to decrease the current account deficit of the United States. Again, this stance takes a bilateral view of a multilateral world. It is a very dangerous point of view, first, because if the Japanese do succeed by, for instance, spending their way out of their current account surplus, the effect on the U.S. current account deficit will be small. The deficit will not change much unless saving increases relative to investment in the United States, and I do not see how profligacy on the part of Japan is going to have a major effect on that. Second, the result would be, in effect, to ask the United States to find financing for its current account deficit somewhere else in the world, at the expense of the developing economies or the economies in transition. There is a general equilibrium problem, but there is also a common stake, and I think in this area one has to be extremely careful.

I would like to conclude by saying simply that it is time that Western Europe and the United States—in fact, all industrial countries—practice what they preach. They tell the world to adopt market economies, to open up, to liberalize, to trust markets, but do not exactly do so themselves. It is important to start, however, because the basic choice today at a global level, which is reflected in the Western-Eastern Europe discussion, is between protectionist, including regional, arrangements that will help protect relative income at the cost of a low rate of growth for the world economy (and probably a decline in absolute income); and the adoption of open policies and adaptation to structural change. That second approach probably means that the relative income of the West in the world economy will decline. After all, industrial economies have low population growth and relatively low per capita growth compared with the economies in transition. It is quite normal that in relative terms, there should be an adverse terms of trade or income change, but combined with an open stance, that change will be accompanied by high growth in the world economy and an increase in absolute income. Of course, there will be serious adjustment problems, but I think it is worth investing in adjustment rather than resisting it.

Seminar on Western Europe in Transition

The Impact of the Opening Up of Eastern Europe and the Former Soviet Union

Banca d’Italia

International Monetary Fund

Oesterreichische Nationalbank

Trieste, October 10-11, 1994

PROGRAM

Monday, October 10
9:00 a.m.Welcoming Remarks and Introduction to the seminar

Rudolf Klier, Deputy Chief Executive Director, Austrian National Bank Carlo Santini, Central Manager for Central Banking Operations, Bank of Italy Patrick de Fontenay, Director, IMF Institute
GENERAL ISSUES
Chair: Carlo Santini
9:30 a.m.Issues and Preliminary Conclusions: Lessons from the NAFTA Debate Robert Z. Lawrence, J.F. Kennedy School of Government, Harvard University
10:30 a.m.Coffee Break
10:45 a.m.Macroeconomic Effects on Western Europe of the Opening Up of Eastern Europe: Some Simulation Results
Leonardo Bartolini and Steven Symansky, Research Department, International Monetary Fund
Discussant: Robert Holzmann, University of Saarland
General discussion
1:00 p.m.Luncheon hosted by the Bank of Italy
SECTORAL AND EMPLOYMENT ASPECTS
Chair: Rudolf Klier
2:30 p.m.Sectoral and Employment Effects of the Opening Up of Eastern Europe

Peter Dittus, Bank for International Settlements and P.S. Andersen, Reserve Bank of Australia
3:45 p.m.Coffee break
4:00 p.m.Trade and European Labor Markets
Charles Wyplosz, The European Institute for Business Administration
Discussant: Richard Jackman, London School of Economics
CAPITAL MARKET ASPECTS
Chair: Patrick de Fontenay
5:00 p.m.Capital Flows in Europe: The Effect of the Opening Up of Eastern Europe
Ms. Ratna Sahay, Research Department, International Monetary Fund
Discussant: Dr. Giorgio Gomel, Department of Studies, Bank of Italy
General Discussion
7:30 p.m.Dinner hosted by the Bank of Italy
Tuesday, October 11
CASE STUDIES
Chair: Patrick de Fontenay
9:00 a.m.Implications of the Opening Up of Eastern Europe for Italy’s Foreign Trade Structure and Performance
Alessandro Giustiniani and Valeria Rolli, Research Department, Bank of Italy
Discussant: Dr. Eduard Hochreiter, Austrian National Bank
10:00 a.m.Coffee break
10:15 a.m.Impact of the Opening Up of Eastern Europe on Austria
H. Schebesch, Economic Division, Austrian National Bank, and Andreas Wörgötter, Institute of Advanced Studies, Vienna
Discussant: Dr. Stanley Black, University of N. Carolina
11:15 a.m.The Implications of the Opening Up of Eastern Europe for Germany, Portugal, and Switzerland
Hari Vittas and Paolo Mauro, European I Department, International Monetary Fund
Discussants: Heinz Handler, General Director, Economic Ministry, Austria, and Georg Winckler, University of Vienna
1:00 p.m.Luncheon hosted by the Bank of Italy
PANEL DISCUSSION
Chair: Richard Portes
2.45 p.m.Policy Implications for Western Europe of the Opening Up of Eastern Europe
Andràs Inotai, Institute of World Economics, Budapest
Rudolf Klier, Deputy Chief Executive Director, Austrian National Bank
Val Koromzay, Deputy Director, Country Studies and Economic Prospects, OECD
Richard Portes, Director, Center for Economic Policy Research
Alexandre Swoboda, Director, Graduate Institute of International Studies, Geneva
4:15 p.m.End of seminar

Seminar on Western Europe in Transition

The Impact of the Opening Up of Eastern Europe and the Former Soviet Union

Banca d’Italia

International Monetary Fund

Oesterreichische Nationalbank

Trieste, October 10-11, 1994

LIST OF PARTICIPANTS

Rita ANSELMIBanca d’Italia
Leonardo BARTOLINIInternational Monetary Fund
Stanley BLACKUniversity of North Carolina
Carlo BOFFITOBanca Commerciale Italiana
Carlo A. BOLLINOInstituto Stodi Programmazione Economica
Vitor A. BRINQUETE BENTOBanco do Portugal
Anne BRUNILABank of Finland
Werner CLEMENTUniversity of Vienna
Carlo CORICELLIUniversità di Siena
Patrick DE FONTENAYIMF Institute
Peter DITTOSBank for International Settlements
Jozef DROFENIKMinistry of Economic Relations and Development, Slovenia
Christian EUGENEBanque de France
Manfred FLUCHOesterreichische Nationalbank
Alessandro GIUSTINIANIBanca d’Italia
Giorgio GOMELBanca d’Italia
Heinz HANDLEREconomic Ministry, Austria
Paul HILBERSDe Nederlandsche Bank
Eduard HOCHREITEROesterreichische Nationalbank
Robert HOLZMANUniversity of Saarland
Andràs INOTAIInstitute of World Economics
Richard JACKMANLondon School of Economics
Jorn KLAERDanmarks Nationalbank
Rudolf KULEROesterreichische Nationalbank
Val KOROMZAYOrganization for Economic Cooperation and Development
Bogomir KOSBank of Slovenia
Giulio LANCIOTTIInternational Monetary Fund
Robert Z. LAWRENCEHarvard University
Jozef MAKUCHInstitute for Monetary and Financial Studies, Slovakia
Ruggero MANCIATISIMEST
Alistair MCGIVENBank of England
Mieczyslaw NOGAYMinistry of Foreign Economic Relations, Poland
Panayiotis MOMFERATOSBank of Greece
Tadeusz PARYSNational Bank of Poland
David PERETZU.K. Treasury
Richart PORTESCentre for Economic Policy Research, London
Valeria ROLLIBanca d’Italia
Tanel ROSSBank of Estonia
Ratna SAHAYInternational Monetary Fund
Agostino P. SANGUINETTIBanca d’Italia
Javier SANTILLANBanco de España
Carlo SANTINIBanca d’Italia
Helene SCHEBESCHOesterreichische Nationalbank
Alexandre SWOBODAThe Graduate Institute of International Studies
Guntis VALUJEVSBank of Latvia
Hari VITTASInternational Monetary Fund
William WALKERIMF Institute
Ewald WALTERSKIRCHENOesterreichische Institut fur Wirtschaftsforschung
Caroline WILLEKEDeutsche Bundesbank
Georg WINCKLERUniversity of Vienna
Andreas WÖRGÖTTERInstitute of Advanced Studies
Charles WYPLOSZThe European Institute for Business Administration
1The Partners in Transition are the Czech Republic, Hungary, Poland, and the Slovak Republic. These countries have specific programs in cooperation with the OECD.

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