The deregulation of world trade, by removing quota and lowering import tariffs inline with the Most Favoured Nation principles set by the WTO has contributed to the increase in world trade. On this basis there is a general consensus that trade liberalisation can be an engine for revitalising economic growth. A most obvious example is the importation of machinery and technology that can be used to produce more efficiently. Moreover domestic producers may find new export markets which enables them to invest in new larger scale production equipment which may reduce the production costs per unit of product. On the other hand trade liberalisation can bring new foreign consumer products on the market which may out compete existing producers and divert domestic savings towards consumption. This effect has been strong during the initial phases of trade liberalisation in Eastern Europe. Trade liberalisation thus can bring positive and negative effects. The balance of exports and imports is the trade surplus (or deficit), it is called the current account. Transition economies typically have a trade deficit as a lot of consumer and investment goods are imported. This will lead to an accumulation of foreign debt that will have to be repaid in the future. The higher productive capacity (once exported) that results from the importation of capital goods may be sufficient to repay such a debt. Trade regulations (quotas, import duties), the exchange rate (the amount of foreign currency a unit of domestic currency can buy) and the type of exchange rate regime (fixed or floating) are the most important instrument a government has to influence the current account.
Macro economic policy issues in transition countries
Key policy issues in economic reform in transition
In transition countries these challenges of course also exists, but the main challenge is how to use the macro economic policy tools to promote economic growth.
In this context one needs to look at a number of issues:
- What is the vision behind the economic reform process?
- What is the desired initial strategy: a shock therapy or a gradual reform process
- How to use monetary policy, exchange rate policy and fiscal policy to minimise the expected destabilisation caused by the initial shocks of economic liberalisation?
- How to mobilise the investment finance needed for economic growth and further reforms
- How to create a macro economic management framework, which can maintain a stable economic environment.
The need for a vision
GDP declines which were deeper and longer than one might have expected on the basis of macro economic insights. When one compares the experience of the different countries, one conclusion can be drawn. In the countries for which the EU opened the perspective of becoming EU Members, the transition process was shorter, the reforms were deeper, and the economic growth performance has since been better than for other countries which had to find their own road towards a market economy. This suggests that a country which starts on a reform path needs to articulate the type and depth of reforms it wants to pursue. In this respect NK has several options to choose from. A strong state which pursues good policies could help the DPRK – like China and Vietnam to follow a reform path which would result in less GDP loss/capita, and which takes less years to generate positive GDP growth than was the case for many transition countries in Central and Eastern Europe. This suggests that a country which starts on a reform path needs to articulate the type and depth of reforms it wants to pursue. In this respect NK has several options to choose from. A strong state which pursues good policies could help the DPRK – like China and Vietnam to follow a reform path which would result in less GDP loss/capita, and which takes less years to generate positive GDP growth than was the case for many transition countries in Central and Eastern Europe.