Determining Factors of Trade Specialization and Growth of a Small Economy in Transition: Impacts of the EU Opening-up on Czech Exports and Imports

Benacek, V. & Visek, J.A. (2003). Determining Factors of Trade Specialization and Growth of a Small Economy in Transition: Impacts of the EU Opening-up on Czech Exports and Imports. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-03-001

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Abstract

In this paper we discuss and estimate the factors of growth and structural adjustment in small open economies in transition. Our theoretical considerations are empirically tested on Czech exports and imports in exchanges with two regions: the European Union and the rest of world. By using the export and import functions, we estimated the determining factors of trade intensities relative to the changes in aggregate demand, competitiveness, factor endowments and policy measures. It was of our special interest to analyze the outcome of the massive liberalization of trade with the EU during 1990-99. We worked with the commodity breakdown into 61 industries.

The factors acting universally in all four of our tests were the aggregate demand of the destination countries and the structure of the foreign direct investment, representing the human capital. The competitiveness of Czech imports was based generally on quality, while Czech exports to the EU competed in prices. Factor endowments, tariffs and subsidies had also their specific role in shaping the Czech specialization pattern. The appreciation of real exchange rate had only a marginal net effect on the trade balance. Further structural adjustments can be expected not only in further deepening of the Czech export commodity specialization but, due to spillovers of both exports and imports, also in the domestic production for domestic market. The intensive structural and growth incentives associated with the EU accession will bring about pressures for a new wave of restructuring of enterprises, further reallocation of existing resources and a provision of production factors that become the constraints to growth.

It is the nature of transition economies that their development, associated with fast growth and convergence to the EU GDP per capita average, will remain for a long time subjected to periodical (though attenuating) waves of adjustments. The economic volatility caused by adjustments to external shocks will be for long more intensive in transition economies than in stabilized economies. The core of fundamental adjustments rests in the changing conditions for the specialization in trade between accession and the EU incumbent countries. The degree of resistance of enterprises to pressures for restructuring coming from the trade potential is therefore reflected in the proneness of the economies in transition to macroeconomic instability (slow growth, budget deficit, structural unemployment and external imbalance). These politically sensitive developments are closely related to decision-making on a choice of macroeconomic and structural policies.

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