Trade, Trade Policy, and Foreign-Exchange Regimes Under Transition: Russia and the Dutch Disease

Abstract

Closed economies, especially highly industrialized ones, have much to gain in efficiency, in production, and in welfare from opening themselves up to world markets and free trade. This basic principle has manifested itself in recent decades through the vigorous export-led growth witnessed in a significant number of industrializing countries. It is even more appropriate for economies in transition: in addition to correcting their structural distortions and directing them toward true comparative-advantage trade patterns, opening up also introduces the principles of market economy to their domestic markets. Yet the generally radical liberalization of the trade regime and the almost full convertibility of the local currency in many formerly socialist countries were unable to prevent the initial downward trend in production. This has been partly explained by the large extent and bulkiness of the needed changes, by the high transaction (transition) costs, and by the lack of the time and resources necessary for appropriate restructuring. On the other hand, successful reorientation of trade toward the West was highly correlated with successful internal transition and with resumed economic growth (World Bank, 1996b; EBRD, 1996, EBRD, 1997, EBRD, 1998). Among the former socialist countries, Russia stands out as the largest country, the one most in need of restructuring, and the country with the most particular structure of comparative advantage arising from its vast natural resources.